In the last ten days, the utilities sector has been subjected to various jolts in Piazza Affari (the Ftse Italia All share utilities index -3,67% in one week): the market sold in the wake of the publication of the accounts and at the beginning of November the The sell off was triggered by a series of investment bank reports following Snam's quarterly report and after the resolution of the Energy, Gas and Water Sector Authority which set new criteria for remuneration for investment in methane storage.
The Energy Authority has published the new guidelines for the management of regulated gas storage activities in which the gain on the RAB (Regulated Asset Base) is reduced to 6,0% before taxes from the previous 6,7% . The regulator used 1,5% inflation for its calculations, a value very far from the real value. Hence the analysts, who in some passages have read a possible revision of the calculation mechanisms for all investments in the networks, at this point, feared that even the subsequent revisions of the tariff framework would have been decided on the basis of an inflation of the 1,5%, with very negative effects on the profits of utilities operating in these sectors. A change of course that has frightened and made many of the institutional investors present in the shareholding structure of Italian utilities flee. The clarification from the Authority arrived shortly after which assured that it will proceed with the reform of the methods for setting the rate of remuneration "in relation to the variables exposed to phenomena exogenous to the regulated sector", thus also including inflation, unlike what indicated in the resolution of 30 October 2014, 531/2014/R/gas. And the titles have partially rebounded, but the certainties about the rules are no longer what they used to be.
In any case, the sector also remains under pressure due to other factors: on the one hand, sales resumed in the wake of the publication of the accounts (although in some cases they beat expectations) and after the disappointing results of some giants (Gdf Suez, Rwe, E.On), on the other, the expectations of a weak economy, the drop in the price of oil and the fragmentation of the sector which prevent the full potential for growth from emerging.
THE RISKS OF A WEAK ECONOMY
WHEN WILL THE AGGREGATIONS?
A weak economy and "the sector's shift towards renewable energy generation" are depressing the profitability of Italian utilities, underlined a research by Vittoria Ferraris, director of utilities for the EMEA area of Standard & Poor's entitled "A weak economy and a fragmented market dim profit prospects” presented at a conference on the sector in Milan. In this context S&P expects that "the margins of companies operating in the liberalized segments of the energy industry in Italy will suffer from the most consistent margin erosion, not least as customers become increasingly price sensitive" while they will show greater resistance those operating in regulated markets (transport and broadcasting).
Not only. The growth potential of Italian utilities is further hampered by market fragmentation. In the report, S&P recalls how, with the exception of the big Eni, Enel and Edison, the market is mainly made up of a multitude of small regional operators.
For Ferraris, in this fragmented landscape, consolidation would help defend profitability. However, the start of a season of risk is held back, especially in multiutilities, by the presence of public shareholders unwilling to step aside, and by a scarce appetite for mergers and acquisitions. "It's a phenomenon that has been talked about for years - notes Ferraris - which seems to be a priority on the political agenda, but which is struggling to get going especially for companies that have a strong presence of public shareholders, in particular local public".
From this point of view, the Stability Law could give a jolt: it has launched incentives for mergers between former municipal companies with the aim of a drastic reduction in the number of companies operating in public services, announced several times by Prime Minister Matteo Renzi. The new provision allows mergers between municipal companies to lead to a lengthening of the duration of the concessions. "We believe that this article 43 should be seen as a first step in the right direction which is the reduction in the number of multiutilities to reduce overall costs by increasing the quality of service" underlines Mediobanca Securities which sees Hera and Acea as the first protagonists of a possible consolidation and awaits the details of the government measures by the end of the year.
The industry outlook for S&P “is characterized by low visibility, because the prospect of sustainable growth is receding, we have a certain uncertainty on the price trend, both in terms of gas and electricity. And there is always the possibility that geopolitical risks could flare up again, which for our market, heavily dependent on gas imports from non-European sources, is a fact that can generate instability”.
Overall, the sector has withstood the crisis well and is solid in comparison with Europe. The utilities sector in Italy, explains S&P, generates “35% of corporate issues in Italy and retains a very important cash generation potential. It has shown exceptional resistance to the crisis that has unfolded since 2009 until today".
While S&P also points out that downgrades have outpaced promotions over the past five years, reflecting worsening Italian debt ratings and utility credit market conditions, overall ratings are solidly in the 'BBB' range and holding up well. in comparison with the rest of the European sector. Outlooks are mostly stable: Italian utilities have shown that they are capable of having some strength in credit-related metrics, in what is considered a challenging environment.
