Europe
Utilities Electricity
10 December 2008
Utilities
Regulated Transmission in Italy
and Spain; rating/TP changes
Virginia Sanz De Madrid
Grosse
Research Analyst
(34) 913355898
virginia.sanz-de-madrid@db.com
Transmission: low sensitivity to deteriorating macro fundamentals
In the current environment of global GDP moving into recession, earnings
estimate downgrades, and many companies struggling to raise financing at
reasonable spreads, we believe the regulated gas and electricity companies
continue to be an interesting investment option, offering the prospect of both EPS
growth and sustainable yields.
Deutsche Bank AG/London
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may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Forecast change
Top picks
Red Electrica (REE.MC),EUR34.87 Buy
Enagas (ENAG.MC),EUR14.08 Buy
Snam Rete Gas (SRG.MI),EUR4.03 Hold
Terna S.p.A. (TRN.MI),EUR2.32 Hold
Companies featured
Red Electrica (REE.MC),EUR34.87 Buy
2007A 2008E 2009E
DB EPS (EUR) 1.73 2.06 2.56
P/E (x) 20.3 16.9 13.6
EV/EBITA (x) 15.4 14.4 12.4
Enagas (ENAG.MC),EUR14.08 Buy
2007A 2008E 2009E
DB EPS (EUR) 1.00 1.08 1.17
P/E (x) 18.3 13.0 12.1
EV/EBITA (x) 15.2 12.4 12.2
Snam Rete Gas (SRG.MI),EUR4.03 Hold
2007A 2008E 2009E
DB EPS (EUR) 0.25 0.28 0.29
P/E (x) 17.8 14.4 14.1
EV/EBITA (x) 14.3 14.3 14.0
Terna S.p.A. (TRN.MI),EUR2.32 Hold
2007A 2008E 2009E
DB EPS (EUR) 0.16 0.16 0.16
P/E (x) 16.2 14.9 14.9
EV/EBITA (x) 11.0 11.3 11.7
Global Markets Research Company
Transmission should be relatively safe in current macro outlook
Transmission in Spain and Italy benefits from regulatory stability and visibility over
the next three years. Snam is the exception, with a new regulatory phase starting
in October 2009. Companies should not have any major debt concerns or funding
needs over the next two years, except Enagas, which needs to refinance E 1bn in
2010. Management is working hard to keep cost of debt under control. In our
opinion, B/S soundness provides credibility to full delivery of Capex into 2012.
Spain preferred over Italy
We do not anticipate cuts to next-four-year spending, given capex is mostly
related to interconnections, resolving bottlenecks, covering peak demand and
meshing the grid for security of supply purposes, rather than capacity additions or
excessive demand growth expectations. Capex should lead to superior growth in
Spain, with 12-15% EPS CAGR into 2012E (capex equates to 70% of assets),
versus below 5% in Italy (4Y capex represents 30-45% of existing assets). Also
positive in a global recession environment is that in Spain revenues are
independent from annual demand evolution, while in Italy a 1% reduction in
demand implies a 0.7-0.8% reduction in EPS. Last, Spain has not clawed back on
opex savings achieved on top of the efficiency factor, versus 50% in Italy. Cost
savings should be a means for all corporates to deal with rising interest expenses.
TP downgrades for all; ratings unchanged except Snam from Buy to Hold
We have reviewed our fair valuation assessments for all of the mentioned
companies. The main change is a revision in WACC; cost of equity has gone up,
incorporating a higher risk premium, but we also updated our cost of debt. All in all
WACCs have increased 70bp post-tax nominal in Spain and 80bp in Italy.
Premiums to RABs on exiting assets have come down, while there is lower value
creation on growth capex included into our valuation. We have also provided
valuation for the stocks ex-growth, to see if there is any upside left from current
market prices. To summarise: REE: from E53.7 to E41.3, with E37 the valuation
ex-growth; Enagas: from E23.5. to E20, with E17.8 the valuation ex-growth,
Snam: from E4.75. to E4.5, with E4.0 the valuation ex growth, and Terna:
from E3 to E2.7, with E 2.4 the valuation ex-growth. We maintain Buys on
Enagas and REE, a Hold on Terna and downgrade Snam from Buy to Hold (see p5
for summary table and pp30-57 for details). For REE and Enagas, the upside
potential is attractive enough to justify a Buy, and the stocks trade below value exgrowth:
the key risk is stock overhang, which in a worst-case scenario could be
25% for Enagas and 10% for REE. We rate Terna Hold with Brazilian and valueeroding
M&A risk. We now rate Snam Hold, on the moderate upside and on
regulatory uncertainty in the review for 2009. This, however, may act as a future
catalyst if variables turn out to be better than expected. Both Italian names are

Table of Contents
Spain preferred over Italy ................................................................. 3
Transmission remains a relatively safe place to be ...................................................................3
Conclusion: we rate REE and Enagas Buy, Terna and Snam Hold ............................................5
Regulatory update............................................................................. 6
Spain ........................................................................................................................................6
Italy ..........................................................................................................................................7
Focus on capex ................................................................................ 10
Spain: capex driven by the National Infrastructure Plan 2008-16 ............................................10
Electricity infrastructure needs to cover this capacity growth ................................................10
Gas infrastructure spending in the period 2007-2016 .............................................................13
No reduction expected in transmission capex in Italy .............................................................14
Electricity sector capex ...........................................................................................................15
Gas infrastructure capex .........................................................................................................18
Demand sensitivity.......................................................................... 20
Spain: revenue formula not linked to annual demand evolution..............................................20
REE sensitivity to Demand......................................................................................................20
Enagas: sensitivity to demand ................................................................................................23
Italy: 30% revenues depend on volumes................................................................................25
Electricity demand ..................................................................................................................25
Gas demand...........................................................................................................................26
Financials in detail........................................................................... 27
Red Electrica ...........................................................................................................................27
Enagas ...................................................................................................................................27
Terna ......................................................................................................................................27
Snam Rete Gas .......................................................................................................................28
Red Electrica .................................................................................... 30
Enagas .............................................................................................. 36
Snam Rete Gas ................................................................................ 44
Terna S.p.A....................................................................................... 52