Morningstar | Spanish Watchdog Plans Sharp Remuneration Cut for Energy Networks; Endesa Still Overvalued
On July 5, the Spanish watchdog CNMC (national commission of markets and competition) proposed cuts in remuneration of energy networks much sharper than our and market's expectations. Companies affected have now one month to present their allegations. All in all, we do not change our estimates at this stage. Still, these proposals strengthen our cautious view on European regulated utilities due to upcoming significant returns cut against a backdrop of low interest rates. In Spain, Endesa remains overvalued.The CNMC proposes an average annual remuneration cut of 7%-8% for electricity distribution and transmission networks and 18%-22% for gas distribution and transport networks. These regulatory changes are set to be applied for a period of five years from 2020 to 2025 for electricity and from 2021 to 2026 for gas.
Should these cuts be eventually adopted, the most impacted companies under our coverage would be Red Electrica, Naturgy, and Endesa. For Red Electrica, the incumbent Spanish electricity transmission networks operator, we calculate an average dilutive impact of 10% on our 2020-23 EPS estimates and EUR 2.4 or 13% of our fair value estimate which we would reduce from EUR 17.8 to EUR 15.4 per share. The share price fall of EUR 0.7 on July 5 shows that the worst case scenario is not priced in. For Naturgy, the Spanish gas distribution leader, we calculate a dilutive impact of 8% on our 2021-23 adjusted EPS and our EUR 24.6 fair value estimate which would be lowered by EUR 2 to EUR 22.6 per share, in line with the current share price meaning that the worst case scenario is now priced in. For Endesa, whose Spanish electricity distribution networks account for 60% of the EBITDA, we calculate a 6% dilutive impact on our 2020-23 EPS estimates. Our EUR 19.5 fair value estimate would be reduced by EUR 1.5 or 8% to EUR 18 per share. Endesa's share price decreased by only EUR 0.35 per share on July 5 and remains significantly overvalued, in our view.
Red Electrica is engaged in the transmission of electrical energy, the operation of the system and the management of the transmission network in the Spanish electricity system. In addition, through its subsidiaries, Co. is engaged in the acquisition, holding and management of foreign securities, co-ordination of international exchanges, provision of telecommunications services for third parties, provision of consultancy, engineering and construction services outside the Spanish electricity system, securing of funds, carrying out of financial transactions and provision of financial services.
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