EUR 850.00 For Business Accounts Only

Morningstar | Reduction of Weight of Regulated Activities Reduces Red Electrica's Earnings Visibility

Red Electrica's fully regulated electric transmission business has protected the company from the doldrums faced by most diversified European utilities since 2011. Since 2014, the beginning of the current regulatory period in Spain, Red Electrica has delivered 7% annual dividend growth while many other European utilities had to cut their dividends to protect their balance sheets.The Spanish regulatory regime will change in 2020 with the adoption of a remuneration scheme based on weighted average cost of capital for energy networks. That will drive a cut in current allowed returns, flat since 2013, from 6.5% to 5.6%. This regulatory change announced late 2018 was well received by investors since the continuation of the previous bond-linked regulatory scheme would have entailed a potentially sharper cut due to the low level of Spanish government bond yields.As it will see allowed returns cut, Red Electrica seeks to reduce the weight of regulated activities. Around 30% of its 2018-22 investment plan will be dedicated to liberalized activities, half of which is the acquisition of Spanish communications satellite operator Hispasat in 2019. Bottom line, increasing exposure to liberalized activities reduces the earnings visibility, driving a less favorable dividend policy. In its 2014-19 plan, the group delivered the 7% annual dividend growth that it initially pledged. Between 2020 and 2022, Red Electrica set a dividend floor of EUR 1 per share, lower than the EUR 1.05 dividend per share to be paid in 2019, implying a risk of a cut.Altogether, we expect 2.9% average annual growth in earnings per share over 2019-23 and annual dividend growth of 3% beyond 2019. The key earnings growth driver is the Hispasat acquisition, which will offset the regulatory returns cut in Spain.