Increasing Energy Prices Decreasing Enterprise Values?

Transcription

1 Increasing Energy Prices Decreasing Enterprise Values? Next Generation Utilities: How to design the value chain "1st Conference on Energy Economics and Technology", 21 April, 2006 Dresden University of Technology Jochen Gerber Arthur D. Little GmbH Gustav-Stresemann-Ring-1 D Wiesbaden Phone +49 (0) Fax +49 (0) Mobile +49 (0)

2 Introduction Objectives for today Latest News and Overview Challenges for Utilities and Hypotheses How to design the Value Chain 1

3 Introduction Our perspective We expect 5-7 pan-european "Utility Giants" to emerge, each focussing on power and gas, and with major roles for French and German Utilities EDF Has already spread its tentacles across Europe Wellpositioned to arbitrage power and gas E.ON Tries hard get a foothold in Spain, but also has clear ambitions to grow in Italy Suez / Endesa / ENEL Could another group emerge to challenge EDF s ability to conduct N- S and E-W arbitrage? RWE Of little significance in Southern Europe, and no obvious desire to be there 2

4 Introduction Latest News "Municipal Utililites" 2006 and 2007 will be "critical years" for the German municipal utilities and their public stakeholders Municipal Utilities and Communes " über 100 Städte in NRW stehen vor der Zahlungsunfähigkeit " FAZ, März 2006 " Düsseldorf will sich durch Verkauf von RWE-Anteilen entschulden.." TAM News, August 2005 " MVV plant Kauf von Stadtwerken " E&M, Januar 2006 " private Equity Firmen stehen bereit " Euroforum, Köln im Juli 2005 "Kommunen stehen vor dem finanziellen Aus" Spiegel, August 2005 "Liquiditätsprobleme bei Stadtwerken ab 2006 zu erwarten " Energie-Insider Herbst

5 Challenges for Utilities Overview industry trends & drivers ten drivers with high relevance for German Utilities Area Driver 1 2 Political Environment Demography & Economy Effect on grid use charges due to regulatory changes Increasing cost transparency through unbundling Increasing energy saving measurements Migration of residential customers 3 Market Competition & Customers Wholesale energy prices Intensity of competition Customer loyalty 4 Energy sourcing Company Strategy Efficiency savings Effects from other activities, e.g. water, incineration, 4

6 Challenges for Utilities Overview: Demographic challenges Example: The Ruhrgebiet has a high risk profile for enrgy consumption because of demographic and economic developments Arthur D. Little Utility Potential Map Regional market analysis Growth Risk Osnabrück Herne Bochum Witten Mainz Saarbrücken Baden Selected energy suppliers Source: ADL analysis 2005, VDN network structure, Prognos Zukunftsatlas 2004 and demographic data Berlin Institut, Rostock Neubrandenburg Zwickau Schwerin Chemnitz Erfurt Berlin Cottbus Halle Nürnberg Regensburg Ingolstadt München Bochum Herne Witten High likelihood of continuing decline in population, and in corresponding economic activity in the Bochum region This decline in energy usage may continue at the recent rate of 1% to 2% per year In the best case the population and energy usage may remain at current levels In the worst case, the drop in demand may reach 10% 5

7 Challenges for Utilities Overview: Demographic challenges Leipzig Example: A decrease in population of up to 20 % could result in significant contribution margin pressure in particular in the network area Leipzig: Current vs. Scenario 2015 illustrative Electricity category Network category Number of private customers 1 Electricity sales 2 [kwh/hh] Contribution margin 2 2 [ct/kwh] 271,063 2, ,510 2, Number of private customers 1 Electricity sales 2 [kwh/hh] Contribution margin 2 2 [ct/kwh] 271,063 2, ,510 2, EBIT 2 [m Euro] Percentage of change % Assumptions: Data for customer structure of SWL Decrease in population by 5% until 2015 in Leipzig Source: Berlin Institute for pop. and dev. Electricity sales per household decreasing until 2015 by an average of 1.2% per year Contribution margin unchanged EBIT 2 [m Euro] Percentage of change -33.3% Assumptions: Data for customer structure of SWL Decrease in population by 5% until 2015 in Leipzig Source: Berlin Institute for pop. and dev. Electricity sales per household decreasing until 2015 by an average of 1.2% per year Reduction of contribution margin by 20% until 2015 due to reduced fees for using network (network regulation) and mid-term unchanging costs Source: 1) SWL 2) Arthur D. Little investigations based among other things on average values from case examples 6

8 Hypotheses for Utilities Overview A number of mega trends will have a particular impact on the Stadtwerke sector over the next five years Complication Demographic changes & variable development are creating unattractive regions Wholesale energy price volatility will continue Financial stress on communities: -> will it generate opportunities for "new players" and new structures? Questions???? Stadtwerke quest for independence: -> will it open the way for new cooperation and partnership models? Profitability will become critical for Stadtwerke, requiring clear value enhancement strategies: -> how to design the value chain? -> Core vs. non-core activities? 7

9 Hypotheses for Utilities Private equity as New Players? Investors are very interested in the German Utility market and have raised over 1.5 billon of investment funds to focus on distribution MH/H Stadtwerkefonds Macquarie European Infrastructure Fonds Regulation and unbundling will offer substantial business opportunities Asset Swaps due to the restructuring of portfolios of incumbents, especially in the area of distribution Attractiveness is based on proven profitability sustainable business regulated business opportunities for "buy & build" strategies Cooperation with related industry player in discussion Investors as a catalyst: " buy, separate, new assembly and sell, or alternatively, long term investments as a pension fund" Quelle: Arthur D. Little Analyse 2005, 8

10 Hypotheses for Utilities Oppertunities for new structure? Since 2002 the amount and volume of M&A-deals has declined significantly Mio. Euro No. of Deals Source: ADL-Datenbank, Bundeskartellamt, Europäische Monopol- und Wettbewerbskommission, Electricity Association, CERNA-Studie, Thompson Datenbank?

11 Hypotheses for Utilities Decreasing Enterprice Values in the Future? with decreasing Enterprise Values 4,5 4 3,5 3 Sales-Multiple EV Offenbach SW Bielefeld SW Duisburg Börsendurchschnitt für Strom / Gas / Wasser Unternehmen Durchschnitt ausgewählter Transaktion Ausgewählte Transaktion 2,5 2 1,5 1 0,5 0 1,64 SW Kiel EV Hildesheim SW Kassel 2,12 SW Solingen ESWE Neckarwerke Stuttgart SW Düsseldorf I 1,38 SW Leipzig SW Dü. I / bereinigt! 0,9 SW Remscheid SW Meißen SW Bremen SW Gütersloh Verbundnetz Gas AG SW Lichtenstein ZVO Versorg. SW Dü. II GmbH 0,96 0,8 SW Dü. II/ bereinigt! SW Kiel KW MZ-WI AG Energie u. Wasser Lübeck EnBW/MVV Energie BVAG? 1,12 Definition Sales-Multiple: Enterprise Value / Sales (year of transaction) Source : ADL-Datenbank, Finance-Magazin, Thompson Datenbank, Dafne Datenbank, Geschäftsberichte, Pressedatenbank Genios 10

12 Hypotheses for Utilities New Cooperation? New consolidated regional utilities will be created in Germany, for example a "Rhein-Main Verbund ", leading to strong market positions Opportunities for New Cooperation Approach and Effects Rhein-Main Verbund "Netzverbund" of municipal utilities Cooperation for "Grid Management" w/o financial investments Target: Shared Services for Operatorship and "Regulation Management" Launch of "Competence Centers" New structure "Sozialisierung" of distribution costs 11

13 Hypotheses for Utilities New Cooperation? MVV and Mainova could form the nucleus of a new regional utility player based around the Ruhrgebiet Regional utility players in SW -Germany Mainova EVO AG Wiesbaden Frankfurt ESWE Offenbach Mainz SW M Darmstadt HEAG HSE MVV Mannheim Karlsruhe EnBW Rhein-Main Verbund Stuttgart Present top German utilities Turnover 2003 E.ON AG Mio. RWE AG Mio. Vattenfall Europe Mio. EnBW AG Mio. VNG AG Mio. EWE AG Mio. SW München GmbH Mio. GEW RheinEnergie AG Mio. MVV Energie AG Mio. Top utilities Germany post "Rhein-Main-Verbund" Turnover 2003 E.ON AG Mio. RWE AG Mio. Vattenfall Europe Mio. EnBW AG Mio. Rhein-Main-Verbund Mio. VNG AG Mio. EWE AG Mio. SW München GmbH Mio. GEW RheinEnergie AG Mio. Source: Annual reports A Rhein-Main Verbund would involve consolidation of the activities of MVV, ESWE, SwM, Mainova, EVO AG, HEAG HSE 12

14 How to design the value chain Overview Five hypotheses for "Next Generation Utilities" Hypothese 1: Innovation Hypothese 2: Focusing, open up, building networks Hypothese 3: Core-activities and new Roles Hypothese 4: Business Models Hypothese 5: Competition for key activities Innovations within utilities are mainly expected for processes and business models Municipal utilities will still exist in the future, but with fundamental changes in business models and value chain Utilities will focus on core-activities. New Roles can be defined There are significant benifits for players with an indepth understanding of available roles, e.g outsourcing-based business models There will be an intensive competition for activities with a high outsourcing potential 13

15 How to design the value chain Other industry segments Lessons learned from innovative companies in other industries: integrated value chains are replaced by networks of companies "Old" Structure Fragmentation/Balancing "Next Generation" Company Company A Competitor Consumer Aerospace Automotive Chemicals Driver Technology innovation Reduction of transaction costs Hyper-competition Facts De-verticalisation and renewed focusing Emergence of new business models Evolutionary change to achieve innovation, growth and increased value Success Factors High flexibility Mastering Complexity Willingness to generate added values with partners 14

16 How to design the value chain Roles in the Utility Business Focusing, unlocking the value chain and building networks will create new roles in the utility business illustrativ "Ultra Lean Utility" e.g. Nordic Utilities Focusing e.g. Yello "Pure Sales Organisation" "Old" Utility Cooperation high value added vertical integration Cooperation Unlocking Value Chain monolitic "Pure Grid Asset Owner" e.g. Private Equity Building networks e.g. Trianel "Power Generation Networker" 15

17 How to design the value chain Focus Distribution Example distribution: Management and owners of municipal utilities have to decide about the realisation of potential efficiency improvements illustrativ Asset Management Grid Services Value Chain Distribution New customer / Market reuquirements Technischwirtschaftliches Controlling Netzservice Neue Projekte Instandhaltung Zählerwesen.. Störungswesen... Energie-Management für Kunden Weiterentwicklung Realisation of efficiency savings, e.g. via outsourcing? Realisation of efficiency savings, e.g. via outsourcing? Future Development New customer / Market reuquirements Asset Management Technischwirtschaftliches Controlling Grid Services Netzservice Neue Projekte Instandhaltung Zählerwesen. Störungswesen. Energie-Management für Kunden Weiterentwicklung 0-30% low value added 40-60% medium value added % high value added 16

18 Summary Key Concerns Demographic changes and regulation will impact key business segments of Stadtwerke and could endanger stakeholder expectations Municipal Utilities Residential Customer "Classic" Municipal Utility Owner Decrease in population in some regions by 20% until 2015 Less customer in all segments Declining sales without optimized cost structure Increased contribution margin pressure Financial stress on communities due to the lack of profit transfers 17

19 Summary Opportunities nevertheless as key players in the area of innovation and sustainability German utilities face tremendous business opportunities Modular energy system: Energy City of the Future Energy Efficiency for Buildings Fuel Cells/ CHP High efficient Power Plants Optimized Distribution Off-Shore Production Gas Transport Windparks Biogas Power Plant Photovoltaics Energy Storage Biomass H-Production Optimized Traffic planning Source: Arthur D. Little, refering to International Gas Union Increased economic value by optimized energy systems Water Power Plant 18