Santander | The new government in Spain is good news for the gas and electricity markets, given that: 1) it is probable that it will respect the regulatory periods; 2) it appears more focused on the spirit of the law (“fair returns”) than on the application of methodologies (differential over 10 year bonds) which have shown they don´t produce reasonable results; and 3) it has the intention of reinforcing the role of the CNMC as an independent regulator.
Nevertheless, the regulator doesn´t seem particularly generous. Recently it proposed a new rate of nominal return before tax of 5.47% for transportation and distribution of electricity and generation outside the Spanish peninsula for the regulatory period 2025-30, equivalent to a post tax return (average cost weighing capital) of 4.1% and said that the companies should not obtain returns above their capital costs.
We calculate that after 2020 and 2021, respectively, it will be slightly above the CNMC´s 5.47%. However, the CNMC´s proposal is a non-binding consultation which will probably receive numerous counter-proposals, and the new team in the Ministry of Energy seems inclined to leave other regulated returns intact (eg renewable energies).
- Enagás (underweight, OP 20.78 Euros): We maintain our cautious view of the company dur to the lack of clarity which surrounds the future of a factor with significant impact on its intrinsic value, “the compensation for continuity of supply”. Although a change in the regulation of the gas network to replicate that of the electricity network (REE) would be good news, given that it would end the uncertainty surrounding the compensation for continuity of supply, regulatory changes are never without risk and, therefore, we prefer to be conservative. We prefer to lose the upside potential of this regulatory revision to being exposed to the downside risks.
- Spanish Electricity Network (REE) (Maintain: OP €18,70). We are lowering our recommendation of Buy to Maintain. Since our last report, its share price has risen 20% and we believe that its good prospects (permitted returns above expectations, possibility of an increase in investment due to the “super-cycle of renewable energy”) have already been built into the price. A reinforced regulator CNMC is not good news for a potential extension of the useful life of assets prior to 1998.
- National Energy Networks (REN) (Maintain, OP €2,56). We are lowering our recommendation to Maintain. Although qualitatively we like REN´s strategic plan (focused on costs and national operations), quantitatively, its objective of generation of free cash flow is below our expectations (larger non-monetary appropriations). We have reduced our objective price from 2.73 to 2.56 euros. This, combined with its stock market appreciation of 10% since our last report, leaves us without margin for further rises.
