Millennium investment banking
UTILITIES
13 February 2012
SPAIN
Iberdrola A story of networks and renewable energy
Buy (Low Risk)
TargetYE12(€): 5,90 2009
Financials Gross Profit (€ mn) EBITDA (€ mn) Net Income (€ mn) EPS (€) CEPS (€) Ratios RoIC (%) RoE (%) Net Debt / EBITDA (x) Net Debt / EV (%) Valuation P / E (x) EV / EBITDA (x) EV / EBIT (x) Dividend Yield (%)
We have initiated Iberdrola (IBE) coverage with a price target of €5.90 per share (YE12), thus leading to a Buy (Low Risk) recommendation. IBE is in our view a defensive stock, as the bulk of EBITDA comes from regulated and renewable businesses (more stable and low risk).
IBE is a Spanish utility company with a strong presence in the renewable energy and regulated business. Over the last decade, IBE has been building a story of growth by strongly betting on international expansion. There were two clear cycles of investment in the last decade. The first cycle (from 2001 to 2006) was based on the growth of renewable energies and generation and Spain, Mexico and Brazil were elected the main markets to invest. The second cycle of growth (beginning in 2007) was based on internationalization, with the acquisition of Energy East and Scottish Power being the major milestones and also on the strengthening of its worldwide leadership in renewable energies. This decade, IBE reinforced its internationalization path by buying Elektro (Brazil).
IBE is undoubtedly an example of an impressive growth story. The pace of earnings growth has been quite remarkable, with a gross margin CAGR 04-10 and an EBITDA CAGR 04-10 of approximately 17% in both cases. Growth has been financed not only with equity (through the issue of new shares), but also with debt. In spite of the increase in debt (CAGR 04-10 of approximately 15%), net profit has shown a strong increase (CAGR 04-10 of approximately 16%).
Recent measures taken by several utilities companies made it clear that deleveraging is a trend that is here to stay. In line with other utilities, we see IBE very focused on controlling its leverage ratios, as we consider that the company has been taken some important measures, namely the implementation of a flexible dividend policy (the shareholder could choose the payment of dividends in cash or shares), a lower capex plan (last year IBR cut investments by reducing the amount of investment in renewable business) and the improvement of the efficiency levels. The late developments under the securitization program of the Spanish tariff deficit have helped IBE to achieve a lower level of debt.
2010 2011E 2012E
10.788 11.645 12.069 12.751 6.815 7.528 7.701 8.175 2.824 2.871 2.895 3.071 0,44 0,44 0,49 0,50 0,83 0,90 0,96 0,98 8,0% 11,3% 4,3 43,3
8,1% 10,3% 3,9 43,0
7,9% 9,5% 4,2 53,7
8,2% 9,2% 3,6 51,3
15,1 9,9 14,9 5,0
13,1 9,1 14,2 5,8
9,6 7,8 12,1 7,1
9,2 7,0 10,8 7,3
Source: Millennium investment banking 130 120 110 100 90
Iberdrola PSI 20
Av. José Malhoa, 27 1099-010 Lisboa Telephone +351 21 721 8000 Facsimile + 351 21 721 8000
EDP IBEX Index
1/Dec/11
1/Jul/11
1/Feb/11
1/Sep/10
1/Apr/10
1/Jun/09
70
1/Nov/09
80
Vanda Mesquita, Eq. Analyst + 351 21 0037821 [email protected]
All prices are those of the end of the trading session unless otherwise indicated. For important Disclosure and Disclaimer go to the second last page.
Millennium investment banking Iberdrola
13 February
2012
Contents 3
Investment Case
6
Company Overview
21
4th Quarter Earnings
22
Valuation
36
Multiples
37
Financial Statements
40
Quartely data
42
Disclosures
2
Millennium investment banking Iberdrola
13 February
2012
Investment Case
Our recommendation: We have initiated Iberdrola (IBE) coverage with a price target of €5.90 per share (YE12), thus leading to a Buy (Low Risk) recommendation. IBE is in our view a defensive stock, as the bulk of EBITDA comes from regulated and renewable businesses (more stable and low risk). A worldwide company: IBE is a Spanish utility company with a strong presence in the renewable energy and regulated businesses. Over the last decade, IBE has been building a story of growth by strongly betting on international expansion. At the beginning of the last decade, IBE’s activities were mainly centralized in Spain. Nowadays, IBE is a completely different company with activities spread all over the world. IBE has a strong presence in Europe (Spain and the UK are the main countries), in the US and in Latin America as well. Expansion has been based not only on organic, but also on non-organic growth. There were two clear cycles of investment in the last decade. The first cycle (from 2001 to 2006) was based on the growth of renewable energies and generation and Spain, Mexico and Brazil were elected the main markets to invest. The second cycle of growth (beginning in 2007) was based on internationalization, with the acquisition of Energy East and Scottish Power being the major milestones and also on the strengthening of its worldwide leadership in renewable energies. This decade, IBE reinforced its internationalization path by buying Elektro (Brazil). IBE is undoubtedly an example of an impressive growth story. The pace of earnings growth has been quite remarkable, with a gross margin CAGR 04-10 and an EBITDA CAGR 04-10 of approximately 17% in both cases. Growth has been financed not only with equity (through the issue of new shares), but also with debt. In spite of the increase in debt (CAGR 04-10 of approximately 15%), net profit has shown a strong increase (CAGR 04-10 of approximately 16%).
Historical data
(in m€) Gross margin % YoY EBITDA % YoY Net profit % YoY Net debt (including tariff deficit) % YoY Net debt (ex-tariff deficit) % YoY Net Debt (ex-tariff deficit) to EBITDA
2004
2005
2006
2007
2008
2009
4.473,20
4.946,70 10,59% 3.377,60 15,97% 1.382,05 15,59% 12.221 14,50% 10.953 2,62% 3,2
5.800,30 17,26% 3.889,70 15,16% 1.660,00 20,11% 13.119 7,35% 12.547 14,55% 3,2
8.290,90 42,94% 5.538,31 42,38% 2.353,74 41,79% 20.470 56,03% 12.392 -1,24% 2,2
10.000,57 20,62% 6.412,54 15,79% 2.860,61 21,53% 28.393 38,71% 19.372 56,33% 3,0
10.788,00 7,87% 6.815,33 6,28% 2.824,00 -1,28% 29.191 2,81% 25.998 34,20% 3,8
2.912,60 1.195,63 10.673 10.673 3,7
2010 CAGR 04-10 11.645,20 7,95% 7.528,00 10,46% 2.871,10 1,67% 30.015 2,82% 24.894 -4,25% 3,3
17,29% 17,15% 15,72% 18,81% 15,16%
Source: Company data
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2012
Diversified activities: Bearing the last acquisitions and also the organic growth in mind, it is clear that the company is betting on renewable energy and regulated business. Therefore, it seems that IBE somewhat recognizes that liberalized activities are not very attractive, maybe due to its volatility. In fact, the good performance from renewable and liberalized businesses (more stable and less volatile businesses by nature) has been quite important to offset a worse performance from liberalized business weakened by lower demand and lower prices in some countries. Regulated activities include distribution and transmission activities are by far the most important IBE’s activities (51% of EBITDA at the 9M2011 EBITDA). IBE’s regulated activities are located in Spain, in the UK (Scottish Power), in the US (formerly Energy East) and in Brazil (Neoenergia and Elektro). Liberalized activities (31% of EBITDA at the 9M2011 EBITDA), comprise generation and supply activities. Unlike, regulated activities, earnings from this business are more volatile (more exposed to market risks). IBE’s liberalized activities are located in Spain, in the UK (Scottish Power) and in Mexico. Renewable business (19% of EBITDA at the 9M2011 EBITDA) includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. IBE is the world leader in the wind energy, with installed capacity spread across the globe. At the end of 2011, IBE had 13.690 MW of installed capacity, the bulk of it deployed in Spain and in the US. After a strong pace of new installations in the previous years (1.8GW on average per year from 2008 to 2010), the company reduced the rhythm of new deployments by lowering its goal of new installations to 2.1GW from 2011 to 2012. As far as expansion is concerned, IBE intends to broaden its activities in the UK and in the Rest of the World, as Spain and the UK are less attractive for business now. Broadly in line with the energy trends (investment of low-CO2 energies), we see IBE quite focused on continuing its path of growth in renewable energy. According to our expectations, EBITDA from renewable business will show the most dynamic growth (a mid single digit CAGR of almost 6.6%). EBITDA CAGR 10-20E
EBITDA CAGR 10-20E Regulated Business Liberalised Business Renewables Other business
% 3,4% 0,5% 6,6% 2,0%
Source: Millennium investment banking
Balanced financial structure: Recent measures taken by several utilities companies made it clear that deleveraging is a trend that is here to stay. In line with other utilities, we see IBE very focused on controlling its leverage ratios, as we consider that the company has been taken some important measures, namely the implementation of a flexible dividend policy (the shareholder could choose the payment of dividends in cash or shares), a lower capex plan (last year IBR cut investments by reducing the amount of investment in renewable business) and the improvement of the efficiency levels. The late developments under the securitization program of the Spanish tariff deficit have helped IBE to achieve a lower level of debt. As far as IBE’s credit rating is concerned, we see the company very focused on keeping its current single A rating (with a stable outlook given by all the agency ratings). We believe that the geographical diversification, the amount of cash flow generated, the wide range of financing possibilities and more recently the securitization of the Spanish tariff deficit have been crucial to keep the current rating. We see this rating as a clear advantage 4
Millennium investment banking Iberdrola
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2012
(comparing to some European peers, namely EDP, ENEL, RWE, Centrica and E.ON), because it helps to assure lower costs of financing. According to our expectations, EBITDA is more than enough to cover capex needs, dividends and net financial interest costs. Still according to our expectations (IBE does not give guidance), by 2015, net debt (before securitization) should almost be €20bn and net debt to EBITDA should converge to 2.2x, which is a level close to the typical ratios of the non-Iberian utility companies’ ratio. Leverage ratios
EBITDA Capex EBITDA - Capex EBITDA - Capex - Dividends* Net Financial costs Net Debt ** Net Debt/ EBITDA (x) Net Debt/ Equity(x) Net Debt/ Capital Employed (x) EBITDA/Financial costs (x)
2010
2011E
2012E
2013E
2014E
2015E CAGR 10-15E
7.528 -5.099 2.429 1.819 -989 29.460 3,9 1,0 0,5 4,7
7.701 -3.904 3.797 3.247 -1.011 32.090 4,2 1,0 0,5 5,2
8.175 -3.712 4.463 3.492 -1.145 29.233 3,6 0,9 0,4 5,1
8.577 -4.015 4.562 3.527 -1.015 26.657 3,1 0,7 0,4 5,9
8.918 -4.201 4.716 3.613 -890 23.998 2,7 0,6 0,3 6,7
9.270 -4.218 5.052 3.875 -743 20.488 2,2 0,5 0,3 7,8
4,3% 15,8% 16,3%
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). **Net debt before securitization (gross debt – cash – asset derivatives and others) excluding liability to tax equity partners Source: Millennium investment banking, Company Data
Main downside and upside risks of IBE's valuation: As far as main downside and upside risks are concerned, we identified the following ones: i.
Downside risks: 1) Solutions to eliminate the problem of Spanish Tariff Deficit might affect IBE’s earnings in the coming years; 2)Top line could be under pressure due to lower energy demand and low prices; 2) Deterioration of worldwide economy (mainly deterioration of the Spanish economy); 3) More delays in Spanish securitization could lead to higher debt levels for a long period of time; 4) Rising interest rates could lead to a slower reduction of net debt in the years to come;
ii.
Upside risks: 1) An increase of fossil fuels prices could lead to an increase of the pool price and turn renewable prices more competitive; 2) Better regulation in terms of renewable energies.
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2012
Company Overview IBE, a worldwide company: IBE is a Spanish utility company with a strong presence in the renewable energy and regulated business. Over the last decade, IBE has been building a story of growth by strongly betting on international expansion. At the beginning of the last decade, IBE’s activities were mainly centralized in Spain. Nowadays, IBE is a completely different company with activities spread all over the world. IBE has a strong presence in Europe (Spain and the UK are the main countries), in the US and in Latin America as well. Expansion has been based not only on organic, but also on non-organic growth. As far as non-organic growth is concerned, the company did key acquisitions, namely the purchases of Scottish Power (in the UK), Energy East (in the US) and Elektro (in Brazil). In 2007, the acquisition of Scottish Power was one of the major milestones in IBE’s history. Scottish Power is a Scottish company that integrates generation, transmission, and distribution and supply activities with operations in the UK and in the US market. This acquisition helped IBE to pursuit its international expansion and at the same time to enlarge the importance of regulated (low-risk activities) and renewable businesses (not only in the UK, but also in the US). This deal amounted to £11.6bn, 52.3% of which paid in a combination of cash and debt and the remaining amount through the issue of new IBE’s shares. Still in 2007, IBE and Energy East announced a friendly merger (93% of Energy East’s shareholders approved the merger). Energy East is an US company whose main activities were mainly focused on distribution and transmission activities. This acquisition helped IBE to strengthen its international expansions and to enlarge the weight of regulated businesses. Under this deal (closed in 2008), IBE paid €3.22bn to Energy East and assumed Energy East’s debt of €3bn. IBE did an Accelerated Book Building (ABB) by issuing shares to finance an amount close to €3.4bn related to this transaction. Later on, in 2011, IBE bought Elektro (a Brazilian electrical distribution company) for $2.4bn. This deal helped IBE to broaden the weight of regulated businesses and to enlarge its presence in Latin America (one of the most promising regions of the world). Concerning organic growth, IBE’s growth was mainly focused on renewable energies. IBE was the first electric utility in the world that strongly bet on the development of renewable and now is the world leader in the wind energy. In 2007, IBE decided to spin-off the wind activities and to launch an initial public offering (IPO). Through an IPO, IBE listed 20% of the share capital of its subsidiary and at the same time raised cash (approximately €4.5bn). This IPO, the second largest done in 2007, was the biggest Spanish IPO ever done so far. Later on (March 2011), IBE decided to launch a tender offer to buy back the shares that it had sold before, in order to control 100% of the company. This buy back was done through an exchange of shares (an exchange ratio of 0.3027 IBE share in exchange for each Iberdrola Renovables share) together with the payment of a special dividend (€1.20). IBE justified this deal saying that this integration would lead to synergies of €20mn per year from 2012 onwards and mentioning that Iberdrola Renovables’ shareholders would be in an advantageous position, because IBE is a bigger company that offers a higher dividend and more stability (IBE’s shares were less volatile). The deal amounted to €2.6 billion. 6
Millennium investment banking Iberdrola
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2012
Almost at the same time, in March 2011, IBE surprised the market, by announcing a rights issue (corresponding to a 6.17% increase of share capital), that was totally written by Qatar Holdings, with whom IBE set an agreement to develop business in the Middle East and other geographic areas. Under this deal new shares were issued at €5.633, meaning that capital raised from this operation amounted to €1.906mn. IBE is undoubtedly an example of an impressive growth story. The pace of earnings growth has been quite remarkable, with a gross margin CAGR 04-10 and an EBITDA CAGR 04-10 of approximately 17% in both cases. Growth has been financed not only with equity (through the issue of new shares), but also with debt. In spite of the increase in debt (CAGR 04-10 of approximately 15%), net profit has shown a strong increase (CAGR 04-10 of approximately 16%). Historical data
(in m€) Gross margin % YoY EBITDA % YoY Net profit % YoY Net debt (including tariff deficit) % YoY Net debt (ex-tariff deficit) % YoY Net Debt (ex-tariff deficit) to EBITDA
2004
2005
2006
2007
2008
2009
4.473,20
4.946,70 10,59% 3.377,60 15,97% 1.382,05 15,59% 12.221 14,50% 10.953 2,62% 3,2
5.800,30 17,26% 3.889,70 15,16% 1.660,00 20,11% 13.119 7,35% 12.547 14,55% 3,2
8.290,90 42,94% 5.538,31 42,38% 2.353,74 41,79% 20.470 56,03% 12.392 -1,24% 2,2
10.000,57 20,62% 6.412,54 15,79% 2.860,61 21,53% 28.393 38,71% 19.372 56,33% 3,0
10.788,00 7,87% 6.815,33 6,28% 2.824,00 -1,28% 29.191 2,81% 25.998 34,20% 3,8
2.912,60 1.195,63 10.673 10.673 3,7
2010 CAGR 04-10 11.645,20 7,95% 7.528,00 10,46% 2.871,10 1,67% 30.015 2,82% 24.894 -4,25% 3,3
17,29% 17,15% 15,72% 18,81% 15,16%
Source: Company data
The Group’s management model is based on two different areas of decision-making, namely one area is related to the Board of directors and the other formed by Chairman, CEO and management team. Ignacio Galán has been IBE’s CEO since the beginning of the last decade (May 2001). His kind of management has been clearly tailored towards international expansion. There were two clear cycles of investment in the last decade. The first cycle (from 2001 to 2006) was based on the growth of renewable energies and generation and Spain, Mexico and Brazil were elected the main markets to invest. The second cycle of growth (beginning in 2007) was based on internationalization, with the acquisition of Energy East and Scottish Power being the major milestones and also on the strengthening of its worldwide leadership in renewable energies. This decade, IBE reinforced its internationalization path by buying Elektro.
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Millennium investment banking Iberdrola
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2012
The industrial project IBE’s industrial “project assures long-term sustainable growth, based on a focus on core business, stable activities and growth (Networks and Renewables), on a balanced business portfolio, leadership in clean energies and focus on operational efficiency and financial soundness”. Diversified activities: In its last Investors’ day (March, 2011), IBE presented a new management model based on activities, instead of being based on regions. According to the company, the new management model will lead to significant efficiency improvements, as there is only one planning, one budget and one investment plan per business. In the coming future, the company should present a 5-year business plan for each business. New management model
Regulated Business *
Liberalized Business **
Renewables businesses ***
Spain UK USA Brazil Spain UK Mexico Several Countries
Source: Company data * Regulated business includes the Transmission and Distribution businesses ** Liberalized business includes the energy and sales business *** Renewable businesses include activities related to renewable energy (wind, mini-hydro, biomass, among others) and also gas trading and storage business in the US.
Old management model
Spain UK USA LATAM Renewables
Liberalized business Distribution Wholesale and Retail Networks Networks Mexico Brazil Several Countries
Source: Company data
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Millennium investment banking Iberdrola
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Bearing the last acquisitions (Scottish Power, Energy East and Elektro) and also the organic growth in mind, it is clear that the company is betting on renewable and regulated businesses. Therefore, it seems that IBE somewhat recognizes that liberalized activities are not very attractive, maybe due to its volatility. In fact, the good performance from these businesses (more stable and less volatile businesses by nature) has been quite important to offset a worse performance from liberalized business weakened by lower demand and lower prices in some countries. Other business, 0%
9M11 EBITDA breakdown
Corporate & Adjustments, 0
Renewables, 19%
Liberalised Business, 31%
Regulated Business, 51%
Source: Company data
Regulated activities include distribution and transmission activities and are by far the most important IBE’s activities (51% of EBITDA at the 9M2011 EBITDA). IBE’s regulated activities are located in Spain, in the UK (Scottish Power), in the US (formerly Energy East) and in Brazil (Neoenergia and Elektro). Liberalized activities (31% of EBITDA at the 9M2011 EBITDA), comprise generation and supply activities. One of IBE’s challenges is to match generation with supply. Unlike, regulated activities, earnings from this business are more volatile (more exposed to market risks). Under liberalized activities, the hedging policy (forward sales) is becoming more important, increasing the visibility of this business. IBE’s regulated activities are located in Spain, in the UK (Scottish Power) and in Mexico. Renewable business (19% of EBITDA at the 9M2011 EBITDA) includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. IBE is the world leader in the wind energy, with installed capacity spread across the globe. At the end of 2011, IBE had 13.690 MW of installed capacity, the bulk of it deployed in Spain and in the US. After a strong pace of new installations in the previous years (1.8GW on average per year from 2008 to 2010), the company reduced the rhythm of new deployments by lowering its goal of new installations to 2.1GW from 2011 to 2012. As far as expansion is concerned, IBE intends to broaden its activities in the UK and in the Rest of the World, as Spain and the US are less attractive for business now. Regarding the renewable business in Spain, recently the Spanish Government has announced that it has suspended subsidies for new renewable energy parks, as a way to control the tariff deficit. The Spanish Government stated that this suspension won’t affect nor renewable energy parks already installed neither the projects already approved. Moreover, the Government clarified that the weight of renewable is quite meaningful and that Spain is ahead of its goals in terms of clean energy. Regarding the renewable business in the US, as a reminder in February, 2009 the US Congress extended the Production Tax Credit (PTC’s) until the end of 2012 (this was the sixth consecutive time that PTCs were extended). Moreover, cash grant program is also coming to an end. This program (in which the company receives 30% of the initial capex) was applicable to the wind projects placed in service during 2009 and 2010, or 9
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which construction has began in 2009, 2010 and 2011 and commissioning occur before the end of 2012. Regarding subsidies in the US, we believe that the US congress will approve for the seventh consecutive time the extension of the PTC’s and that cash grants won’t be renewed due to budget restrictions. Still regarding this matter, IBE is developing activities to become a worldwide leader in off-shore energy. Offshore is regarded as the second generation of wind, as on-shore energy is entering in the maturity stage in some of the countries where the company operates. Offshore projects are by far more expensive than the onshore ones. However, some specialists expect that future upgrades and developments in this technology will lead to important savings. Albeit more costly vis-à-vis on-shore, the offshore wind farms benefits from superior load factors. In the beginning of 2009, the company announced that the Crown Estate, under the UK government's tender for offshore wind, known as UK Round 3, has selected IBR together with Vatenfall to develop an offshore wind farm with a capacity of 7.2GW in the North Sea. The aforementioned companies formed a 50/50 joint venture named East Anglia Offshore Wind Ltd. Vatenfall is a Swedish company specialized in offshore wind farms. In what regards the Round 2 (the previous tender), the company was selected to develop 500MW (West of Duddons projects). The company has other off shore projects in pipeline, namely in Germany and more recently in France.
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Energy wise, at the end 2011 IBE’s installed capacity and production was mostly based on low-CO2 technologies. Renewable, Gas Combined Cycle and Hydro accounted for almost 80% of the total installed capacity. Installed capacity by technology (MW) at YE11
Renewables
13.690
Cogeneration
1.177
Gas Combined Cycle
13.189
Fuel-oil
157
Coal
4.709
Nuclear
3.373
Hydro
9.731 0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Source: Company data
By countries, the bulk of the generation capacity is installed in Spain and in the UK.
Installed capacity (MW) by country at YE11
30.000 25.576 25.000 20.000 15.000 10.000
7.077
6.249
5.895
5.000 1.231 0 Spain
United Kindgom
United States
Latin America Rest of the world
Source: Company data
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With the exception of coal and nuclear, all the other technologies are used in almost countries in which IBE has business. Regarding renewable, IBE is the worldwide leader in on-shore wind energy.
Spain
Renewables
Gas Combined Cycle
Coal
Technologies by country at YE11
United Kindgom
Spain
United Kindgom
Spain
United Kindgom
United States
Latin America
United States
Latin America
Rest of the world
Hydro
Cogeneration
Spain
United Kindgom
Spain
United Kindgom
United States
Latin America
United States
Latin America
Nuclear
Spain
Source: Company data
Production wise, this energy mix has low generation costs per MWh (hydro, renewable and nuclear accounted for almost 49% of production), which is an advantage.
Production GWh at YE11
Renewables, Hydro, 12,22% 19,79% Cogeneration, 3,63%
Nuclear, 16,74%
Coal, 8,92% Gas Combined Cycle, 38,71%
Source: Company data
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Broadly in line with the energy trends (investment of low-CO2 energies), we see IBE quite focused on continuing its path of growth in renewable energy. According to our expectations, EBITDA from renewable business will show the most dynamic growth (a mid single digit CAGR of almost 6.6%) and will overcome EBITDA from liberalized activities by 2019.
EBITDA CAGR 10-20E
EBITDA CAGR 10-20E
%
Regulated Business Liberalised Business Renewables Other business
3,4% 0,5% 6,6% 2,0%
Source: Millennium investment banking
EBITDA breakdown (according to our expectations)
100%
1%
1%
1%
1%
1%
1%
1%
1%
1%
1%
1%
90%
19%
20%
21%
21%
22%
22%
23%
24%
25%
26%
27%
32%
30%
28%
27%
26%
26%
26%
25%
25%
25%
25%
48%
50%
51%
51%
51%
52%
51%
50%
50%
49%
49%
80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Regulated Business
Liberalised Business
Renewables
Other business
Source: Company data, Millennium investment banking
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Better balance sheet structure: Recent measures taken by several utilities companies made it clear that deleveraging is a trend that is here to stay. In line with other utilities, we see IBE very focused on controlling its leverage ratios, as we consider that the company has been taken some important measures, namely the implementation of a flexible dividend policy (the shareholder could choose the payment of dividends in cash or shares), a lower capex plan (last year IBR cut investments by reducing the amount of investment in renewable business) and the improvement of the efficiency levels. The late developments under the securitization program of the Spanish tariff deficit have helped IBE to achieve a lower level of debt. Dividends: Dividends wise, IBE has a special policy named “IBERDROLA Dividendo Flexible” (which is a policy based on Scrip Dividend). This policy based on Scrip Dividend allows IBE’s shareholders to choose one of the following options: • receive free IBE shares for an amount equivalent to the dividend without withholding tax; • receive an amount in cash without withholding tax by selling the rights on the market; • receive an amount in cash, with withholding tax, by selling the rights to IBE at a fixed guaranteed price. Under this dividend policy, if the shareholder does not announce his intention, the shareholder automatically receives ordinary shares by default. Scrip dividend allows IBE to broaden its equity through the issuance of new shares and at the same time to reduce the amount of financial interest. The dividends payment with the possibility of scrip dividend has been in place since 2009. Therefore, since this policy is quite recent, we do not have a historical data that allows us to create a pattern concerning the percentage paid in cash and the percentage paid through the issue of new shares. For instance, in December, 2010, IBE’s shareholders decided to receive 39.35% in cash and the remaining percentage in new shares. Later on, in July 2011, shareholders decided to receive a higher 68.2% in cash and the outstanding amount in new shares. In our valuation, we assume that IBE is going to pay 50% in cash and the other 50% in new shares. If shareholders decides to accept more shares (comparing to the values implied in our model), both financial costs and net debt will tend to be lower. Conversely, in the case of a higher acceptance of dividends paid in cash, financial costs and net debt will tend to stand at a higher level. As far as the payment of the dividend related to the fiscal year of 2011 is concerned, IBE had already paid its interim dividend. Cash payment (€0.146 per share) occurred on January, 20 (IBE paid €436mn in cash) and new ordinary shares started trading on January, 25 (IBE issued 90.3 millions of new shares).
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Investments and divestments: Investment wise, from 2010 to 2012, IBE plans to invest €15.8bn (an average of approximately €5.3bn per year). Excluding non-organic investment (namely the purchase of Elektro), IBE’s investment plan is reduced to €13.4bn (€7.6bn of which already invested at the end of the third quarter), with the bulk of the investment concentrated on regulated and renewable businesses. Around 70% of the 2010-2012 investment plan will be channeled to expansion, while the remaining percentage is directed to maintenance. Investment plan
6000
5.600
5.300
5000 4000 3000 2.200 2000 1000 300 0 Regulated
Renewables
Liberalized
Other
Source: Company data
Divestments have been playing an important role in IBE’s strategy. In 2010, the company sold Guatemala, Petroceltic, Gas USA, EDP (IBE reduced its stake in EDP by 2.7% to 6.79%), Neo Sky and other participations for approximately €1.5bn. Divestments from 2009 to 2010 amounted to €2.8bn. Still regarding investments, as previously mentioned IBE is investing mainly in renewable and in regulated assets. As far as renewable energies is concerned, in the coming years investments will be directed to the onshore wind and also to the development of off shore business. Concerning the regulated business, the company plans to invest more in distribution by expanding networks and providing new services. Please find hereafter a graph with capex according to our expectations: Capex plan (according to our expectations)
3.500 3.000 2.500 2.000 1.500 1.000 500 0 2010
2011E Regulated Business
2012E
2013E
Liberalised Business
2014E
2015E
Renewables
Source: Company data
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Millennium investment banking Iberdrola
13 February
2012
Efficiency levels: As far as operating costs are concerned, IBE aims to reduce Opex/ Gross Margin ratio from 31% to 28% in 2012. This achievement will be possible due to a strict cost control, but also to the rising weight of renewable energies in IBR’s energy mix (as wind is a technology less intensive in terms of operating costs).
29,6% 29,4%
29,5%
29,2% 29,2% 29,0% 29,0%
28,8%
28,8%
28,6%
28,7% 28,6% 28,6% 28,6% 28,6% 28,6%
28,4% 28,2%
2020E
2019E
2018E
2017E
2016E
2015E
2014E
2013E
2012E
28,0%
2011E
Opex/ Gross margin ratio (according to our expectations)
Source: Company data, Millennium investment banking
Spanish electricity tariff deficit: Spanish electricity tariff deficit was generated basically due to the wide gap between real costs and the tariff set by the government. The deficit has been putting pressure on the Spanish utilities integrated companies, as they are indeed the ultimate entities that have been financing deficit before the securitization occurs. Very briefly, in May 2009 the Spanish Government published a Royal Decree to substantially reduce the tariff deficit by 2013. This Decree brought positive measures for the sector, authorising the securitisation of the deficit at that time and preventing the creation of additional deficits from 2013 onwards. The securitization was consecutively postponed and, at the end of 2010, after a very long waiting period, CNMV finally approved it, bringing a new hope for the sector. The securitization of the Spanish tariff deficit is still underway, but it is not yet completed. Tariff deficit receivables recognized by law was €14.6bn by the end of 2009 and it is expected that additional values related to the subsequent years (from 2010 onwards) will be recognized by law before long. Under the bonds issue program, the Electricity Deficit Amortization Fund (Fade) sold €8.5bn through five bond issues during 2011, meaning that 38% of the program was already sold. The first three issues were in January, in February and in March, each one with an amount of €2bn. Later in May, there was another issue of €1bn and more recently, in September there was an issue of €1.5bn. The pace of the new issues was strongly influenced by the evolution of the Spanish sovereign yield, as these issues are guaranteed by the Kingdom of Spain. Additionally, last September, the Spanish Government authorized private placements, which has brought more flexibility to this process and has increased the amount sold (for instance in January private placements amounted to €447mn).
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Millennium investment banking Iberdrola
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2012
Following the election of this new government, there has been a strong discussion about the Spanish Tariff Deficit. The Industry, Energy and Tourism Minister has suggested that there should be a joint effort by the final consumers and by the companies to solve the tariff deficit problem. Recently, as previously mentioned, the Spanish Government announced that it decided to temporarily suspend the subsidies given to renewable technologies, as a way to reduce the tariff deficit. The Spanish Government said that it does not plan a levy on hydropower or nuclear plants. We believe that the presented measures are not enough to solve the problem and that the Spanish Government will be forced to announce further measures. According to IBE, special regime premiums represent an annual cost of €250 per customer per year, which is one of the highest costs in Europe. This situation was basically due to the high tariffs given to solar technology, when the technology was not in a mature phase. In fact, there is an unbalanced contribution of solar, as the cost of this technology represents 13% of the total costs, but in terms of energy produced it contributes with only 3%. Conversely, wind is a more balanced technology as it represents 17% of the cost and 16% of the energy produced. At 9M11, IBE’s receivables associated with Spanish tariff deficit amounted to €3.2bn (vis-a-vis €5.2bn at YE10, €3.6bn in YE09). Net Debt: Net debt wise, growth has been consistent with the increase of net profit (as previously mentioned). Net debt (excluding securitization) to EBITDA has been set in a range that goes from 2.2x to 3.8x. By YE10, Net debt to EBITDA stood at 3.3x. Adjusted net debt (before securitization) at 3Q11 stood at €31.5bn (vis-à-vis €29.4bn at YE10). Net Debt evolution
(in m€) Net debt (including tariff deficit) % YoY Net debt (ex-tariff deficit) % YoY Net Debt (ex-tariff deficit) to EBITDA
2004
2005
2006
2007
2008
2009
10.673
12.221 14,50% 10.953 2,62% 3,2
13.119 7,35% 12.547 14,55% 3,2
20.470 56,03% 12.392 -1,24% 2,2
28.393 38,71% 19.372 56,33% 3,0
29.191 2,81% 25.998 34,20% 3,8
10.673 3,7
2010 CAGR 04-10 30.015 2,82% 24.894 -4,25% 3,3
18,81% 15,16%
Sep-11 31.514 4,99% 28.310 13,72%
Source: Company data
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Millennium investment banking Iberdrola
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2012
At the end of the third quarter, main source of financing comes from bond emissions (63%) and bank credit lines (20.5%). Sources of financing at the end of the 3rd quarter
Bank Loans, 20,50% TEI, 1,60%
Project Finance, 4,80% EIB, 6,00%
Commercial paper, 4,20%
Market bonds, 63%
Source: Company data
Regarding bonds emissions, IBE raised €1.850mn through two different bond issues in 2010 (€750mn of 6-year bond in June, €500mn of 10-year bond in September and €600mn of 10-year bond in December). Last year, IBE raised €2.450mn through 4 bonds issue. The first issue was in January (€750mn 3-year bond with a spread of 175bp over mid swap), the second in March (€750mn 6-year bond with a spread of 143bp over mid swap), the third in July (€350mn 15-year bond with a spread of 205bp over UK gilts) and finally the last issue in October (€600mn 4-year bond with a spread of 290bps over mid swap). This January, IBE raised €400mn through the emission of a 5-year bond with a spread of 381 bps over German bonds and 250 million Swiss Francs through the emission of a 5-year bond with an annual coupon of 3%. As far as IBE’s credit rating is concerned, we see the company very focused on keeping its current single A rating (with a stable outlook given by all the agency ratings). We believe that the geographical diversification, the amount of cash flow generated, the wide range of financing possibilities and more recently the securitization of the Spanish tariff deficit have been crucial to keep the current rating. We see this rating as a clear advantage (comparing to some European peers, namely EDP, ENEL, RWE, Centrica and E.ON), because it helps to assure lower costs of financing.
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Millennium investment banking Iberdrola
13 February
2012
Concerning IBE’s debt profile, the average life of the loans is 6.4 years, with the bulk of the reimbursements expected to occur from 2016 onwards: IBE’s debt profile (in €)
18.795
20.000 18.000 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000
1.211
1.658
2011 - 4Q11
2012
2.694
3.820
3.543
2014
2015
0 2013
2006 and following years
Source: Company data
According to our expectations, EBITDA is more than enough to cover capex needs, dividends and net financial interest costs. Still according to our expectations (IBE does not give guidance), by 2015, net debt (before securitization) should almost be €20bn and net debt to EBITDA should converge to 2.2x, which is a level close to the typical ratios of the non-Iberian utility companies’ ratio. Leverage ratios
EBITDA Capex EBITDA - Capex EBITDA - Capex - Dividends* Net Financial costs Net Debt ** Net Debt/ EBITDA (x) Net Debt/ Equity(x) Net Debt/ Capital Employed (x) EBITDA/Financial costs (x)
2010
2011E
2012E
2013E
2014E
2015E CAGR 10-15E
7.528 -5.099 2.429 1.819 -989 29.460 3,9 1,0 0,5 4,7
7.701 -3.904 3.797 3.247 -1.011 32.090 4,2 1,0 0,5 5,2
8.175 -3.712 4.463 3.492 -1.145 29.233 3,6 0,9 0,4 5,1
8.577 -4.015 4.562 3.527 -1.015 26.657 3,1 0,7 0,4 5,9
8.918 -4.201 4.716 3.613 -890 23.998 2,7 0,6 0,3 6,7
9.270 -4.218 5.052 3.875 -743 20.488 2,2 0,5 0,3 7,8
4,3% 15,8% 16,3%
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). **Net debt before securitization (gross debt – cash – asset derivatives and others) excluding liability to tax equity partners Source: Millennium investment banking, Company Data
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Millennium investment banking Iberdrola
13 February
2012
IBE’s shareholder structure: IBE’s shareholder structure is a fragmented structure, with ACS as the main shareholder. IBE’s shareholder structure
Main shareholders ACS Kutxabank Qatar Investment Authority Banco Financiero de Ahorros Bancaja Inversiones Natixis Other investors
% 19,03% 5,49% 6,16% 5,41% 5,41% 5,03% 53,48%
Source: CNMV According to the newspapers, ACS intends to raise its stake in IBE (nowadays it owns 19% of it) and IBE’s management was said to have taken measures to stop ACS’s goal. ACS is a direct competitor and it does not have a position in the board. As a reminder, there were rumors that IBE’s management was said to have tried a merger with RWE at the beginning of the last year in order to dilute ACS’s stake in IBE. Also according to the newspapers, this merger was unsuccessful and it is believed to have dropped due to the worries about likely reactions from shareholders and Spanish and German governments. It was also rumored that the aim was to create a big player with a strong presence not only in renewable energies, but also in fossil fuel and nuclear energies. IBE denied all these rumors afterwards. Additionally, IBE’s management was said to have integrated IBR in IBE and to have opened its share capital to Qatar with the same purposes. In March 2011, IBE surprised the market, by announcing a rights issue (corresponding to a 6.17% increase of share capital), that was totally written by Qatar Holdings, with whom IBE set an agreement to develop business in the Middle East and other geographic areas. Under this deal new shares were issued at €5.633, meaning that capital raised from this operation amounted to €1.906mn. Main downside and upside risks of IBE's valuation: As far as main downside and upside risks are concerned, we identified the following ones: i.
Downside risks: 1) Solutions to eliminate the problem of Spanish Tariff Deficit might affect IBE’s earnings in the coming years; 2)Top line could be under pressure due to lower energy demand and low prices; 3) Deterioration of worldwide economy (mainly deterioration of the Spanish economy); 4) More delays in Spanish securitization could lead to higher debt levels for a long period of time; 5) Rising interest rates could lead to a slower reduction of net debt in the years to come;
ii.
Upside risks: 1) An increase of fossil fuels prices could lead to an increase of the pool price and turn renewable prices more competitive; 2) Better regulation in terms of renewable energies.
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Millennium investment banking Iberdrola
13 February
2012
4th Quarter Earnings IBE will release 4th quarter earnings on February, 23rd , before the markets opens. We expect EBITDA to post a growth of 8% YoY, with regulated activities being the most important contributor (EBITDA from these activities should account for 48% of the EBITDA for the quarter). Net profit should drop 6% YoY, as in the last quarter of the previous year the company recorded gains related to the divesture of non-recurring assets amounting to €184mn. If we were to exclude these gains, net profit should rise 22% YoY.
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Millennium investment banking Iberdrola
13 February
2012
Valuation We estimated IBE’s equity to be worth €5.90 per share (YE12), thus leading to a Buy (Low Risk) recommendation. We valued IBE using a Sum-of-the-Parts methodology, dividing the company in its main areas, namely Liberalized Business (Spain, UK and Mexico), Regulated Business (Spain, UK, US and Brazil), Renewables, Other businesses and Other investments. We used a DCF approach to value all the areas, excluding other businesses and other investments, in which we used a multiple approach and the market value for listed companies. Sum of the parts
€ million Regulated business Spain, including regulatory receivables UK US Brazil Liberalized business Spain UK Mexico Renewables Other businesses Other investments Total EV (YE12) Net Debt & Adjustments Net Debt Y11 inc. liability to tax equity partners Unfunded pension liabilities, net of taxes 2011 dividend to be paid in 2012 (in cash)* Minority interests Equity Value Number of oustanding shares (mn) Price Target YE12 (€) Last price (€) Upside/downside potential
Enterprise Valuation Weight in Value (100%) Method EV 32.356 45,8% 16.734 DCF 23,7% 6.437 DCF 9,1% 4.114 DCF 5,8% 5.071 DCF 7,2% 17.757 25,1% 10.335 DCF 14,6% 3.783 DCF 5,4% 3.639 DCF 5,2% 18.970 DCF 26,8% 317 Multiple EV/EBITDA 12 0,4% 1.253 See details on this page 1,8% 70.653 34.845 32.640 883 971 352 35.808 6.091 According to our forecast 5,90 4,65 27%
EV/EBITDA 2012
8,1 7,3 6,0 5,3 6,9 9,5 9,5 11,1
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). Source: Millennium investment banking Other investments
€ million EDP (6.79%) Gamesa (19,67%) Own shares Other participations
EV 558 148 161 385 1.253
Valuation Method Market Value Market Value Market Value Book Value at YE10 * Multiple PBV 12
Source: Millennium investment banking
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Millennium investment banking Iberdrola
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2012
WACC assumptions Our approach to WACC aims at capturing specific country risks. As far as cost of equity is concerned, we consider that risk free rate corresponds to the lowest 10-year sovereign risk of currency zone. IBE’s financial accounts are disclosed in Euros, therefore we consider the German 10-year Government yield bond (at a rounded 2.5%) as the risk free rate. Country risk premium results from the difference between the local Sovereign yield and the lowest 10-year sovereign risk of the euro currency zone multiplied by a volatility factor (ratio that relates equity with bonds volatility). As far as local Sovereign yield is concerned, we consider the yield of a 10-year local bond issue in EUR. However, if there is not an issue in EUR, we considered the yield of a 10-year local bond issue in USD, as 10-year German bonds and 10-year US bonds are set at a similar level. In the case of non-existing emissions, we consider that the Sovereign yield is strictly related to the country’s rating. Concerning the local Government yield, we consider the rates at which bonds are currently quoted. Therefore, under our approach, the cost of equity is equal to the sum of the risk free rate plus the addition of country risk premium and market risk premium multiplied by the levered beta. As far as the cost of debt before tax is concerned, we consider this to be the debt spread (long-term issuances) over the aforementioned risk free rates. Our new method of calculation of the cost of capital was deeply inspired in the approach of Damodaran1 to the Country risk premium.
1 Damodaran, Aswath, “Measuring Company Exposure to Country Risk: Theory and Practice”, Stern School of Business, Sept 2003
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Millennium investment banking Iberdrola
WACC assumptions Risk-free rate Country risk Premium Market risk premium Unlevered beta Levered beta Cost of Equity * Spread over risk-free Cost of debt Corporate tax rate After-tax cost of debt Leverage (D/EV) WACC Terminal Growth WACC-g
13 February
Liberalized business - Spain
Liberalized business - UK
Liberalized business - Mexico
Regulated business - Spain
Regulated business - UK
Regulated business - US
2,50% 5,00% 5,00% 0,60 0,88 11,30% 3,50% 6,00% 30,0% 4,20% 40,0% 8,46% nm nm
2,50% 1,00% 5,00% 0,60 0,89 7,83% 3,50% 6,00% 28,0% 4,32% 40,0% 6,42% nm nm
2,50% 1,50% 5,00% 0,60 0,88 8,22% 3,50% 6,00% 30,0% 4,20% 40,0% 6,61% nm nm
2,50% 5,00% 5,00% 0,40 1,05 13,03% 3,50% 6,00% 30,0% 4,20% 70,0% 6,85% 0,00% 6,85%
2,50% 1,00% 5,00% 0,40 1,09 9,04% 3,50% 6,00% 26,0% 4,44% 70,0% 5,82% 0,00% 5,82%
2,50% 0,00% 5,00% 0,40 1,01 7,53% 3,50% 6,00% 35,0% 3,90% 70,0% 4,99% 0,00% 4,99%
2012
Regulated Renewables business - Brazil 2,50% 2,00% 5,00% 0,50 1,27 11,39% 3,50% 6,00% 34,0% 3,96% 70,0% 6,19% 0,00% 6,19%
2,50% 5,00% 5,00% 0,50 0,85 11,00% 3,50% 6,00% 30,0% 4,20% 50,0% 7,60% nm nm
* Cost of equity is calculated as the sum of the risk free rate plus country risk premium and market risk premium, the latter two multiplied by the levered beta. Risk free rate is the lowest 10-year sovereign risk of each currency zone. Country risk premium results from the difference between the local Sovereign yield and the aforementioned risk free rates multiplied by a volatility factor (ratio that relates equity with bonds volatility). **Cost of debt before tax is the debt spread (long-term issuances) over the risk free rates of the lowest 10-year sovereign risk of each currency zone. Source: Millennium investment banking
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Millennium investment banking Iberdrola
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2012
Valuation Key Drivers
Regulated business: As previously mentioned, regulated activities are by far the most important IBE’s activities, representing 51% of 9M2011 EBITDA. IBE’s regulated activities are located in Spain, in the UK, in the US and in Brazil. Regulated activities include distribution and transmission activities. Since 1st January 2011, all IBE’s regulated businesses were integrated in a sole area. As previously mentioned, this process of integration aims to create synergies, to increase operational efficiency and to optimize structures. Valuation wise, regulated business is the most important contributor to our EV, representing 45.8% of it.
Spain: Concerning the regulated activities in Spain, remuneration is based on the necessary costs and certain efficiency parameters. There are essentially three components in the calculation of the remuneration, namely the remuneration for investment, the remuneration for operating and maintenance and finally the remuneration for all costs necessary to the exercise of distribution activities. Please find herewith the main assumptions to value this area:
CAGR 11E-20E for IBE’s regulated activities in Spain
•
We considered a 10-year DCF and calculated a terminal value for the business.
•
Regarding the revenues, we consider that the 2011 and 2012 regulated revenues are set according to the figures published in the IET/3586/2011. From 2013 onwards, we assume that revenues increase by 2% year.
•
Concerning operating costs, we consider a steady Opex/Gross margin ratio of 20% throughout our valuation (in line with the Opex/Gross margin ratio in 2010).
•
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2020E of 0.4% and 0.3% respectively.
in euros Gross margin EBITDA
CAGR 11E-20E 0,4% 0,3%
Source: Millennium investment banking
25
Millennium investment banking Iberdrola DCF for IBE’s regulated activities in Spain
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV EV/ EBITDA
13 February
2012
2011E
2012E
2013E
2014E
2015E
2020E
1.211 -363 374 -372
1.266 -380 390 -388
1.285 -385 396 -394
1.304 -391 402 -400
1.324 -397 408 -406
1.191 -357 440 -437
850
889 1,00 889 6.293 7.191 6,85% 13.484 8,1
902 0,94 844
916 0,88 802
929 0,82 762
837 0,59 493
Source: Millennium investment banking
IBE’s regulated activities in Spain
€ million Total EV Regulated activities Spain * Regulatory receivables (tariff deficit)
Valuation Method EV (100%)
Multiples / Comments
16.734 13.484 3.250
EV/EBITDA 8,1x
DCF YE12 estimate
Source: Millennium investment banking
UK: Regarding the regulated activities in the UK, remuneration is set according to a model based on the following concepts: regulatory asset base, WACC, allowances and quality incentives. Energy networks in the UK are carried out by three different companies of the IBE Group, namely SP Manweb, SP Distribution and SP Transmission. IBE is strengthening its network activities and intends to double its regulated asset base in the coming decade. In terms of transmission, the company plans to spend approximately £2.6bn until 2021 to build 11GW of additional wind connections, to increase network export capacity and also to modernize the network. This investment will be the larger investment that IBE will make in the UK. Please find herewith the main assumptions to value this area: •
We considered a 10-year DCF and calculated a terminal value for the business.
•
We assumed that gross margin evolves in line the Regulated Asset Value (RAV). Regarding RAV, we have available information for SP Manweb and Distribution until 2015 and for SP Transmission we have information until 2021. With respect to the years that we do not have available data, we assume that growth will converge to 2%.
•
We considered that Opex increases by a rhythm similar to the evolution of RAB per year.
•
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2020E of 5.6% and 6.1% respectively.
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Millennium investment banking Iberdrola
CAGR 11E-20E for IBE’s regulated activities in the UK
13 February
in euros
2012
CAGR 11E-20E
Gross margin EBITDA
5,6% 6,1%
Source: Millennium investment banking DCF for IBE’s regulated activities in the UK
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV EV/ EBITDA
2011E
2012E
2013E
2014E
2015E
2020E
652 -169 178 -378
696 -181 189 -394
814 -212 216 -748
908 -236 238 -808
1.009 -262 262 -712
1.119 -291 290 -712
282
310 1,00 309,95 2.001 4.436 5,82% 6.437 7,3
71 0,94 66,66
102 0,89 91,29
297 0,84 250,58
406 0,64 258,24
Source: Millennium investment banking
US: As previously mentioned IBE bought Energy East in 2008 in order to broaden its regulated activities in the US. Nowadays, after selling some of the companies in the US, IBE has four different companies, namely NYSEG (New York State Electric and Gas Corporation), RG&E (Rochester Gas & Electric), CMP (Central Maine Power) – Distribution and CMP (Central Maine Power) - Transmission. Concerning regulated activities in the US, remuneration is set in accordance with the legislation of each state and tariffs are reviewed from time to time. The main investment in the US is being channeled to the Maine transmission project, in which the company will spend $1.4bn from 2010 to 2014 to build transportation lines (800 Km). This project will support the development of renewable energies and will guarantee long-term reliability for customers by rising the capacity and efficiency of the transmission grid. Please find herewith the main assumptions to value this area:
•
We considered a 10-year DCF and calculated a terminal value for the business.
•
We assumed that gross margin evolves broadly in line with the Regulated Asset Base (we considered the Regulated Asset Base for the years 2011 and 2012 disclosed by IBE in its last Investor Day and considered an average growth of approximately 4% per year from 2013 onwards);
•
We assumed an EBITDA/ Gross margin of 46% (similar to the 2011 EBITDA/ Gross margin ratio).
•
Our valuation assumes a 10-year Gross Margin and EBITDA CAGR 2011E-2020E of 4.9% in both cases.
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Millennium investment banking Iberdrola
CAGR 11E-20E for IBE’s regulated activities in the US
13 February
in euros
2012
CAGR 11E-20E
Gross margin EBITDA
4,9% 4,9%
Source: Millennium investment banking DCF for IBE’s regulated activities in the US
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV EV/ EBITDA
2011E
2012E
2013E
2014E
2015E
2020E
412 -140 182 -617
512 -174 171 -635
504 -171 203 -812
496 -168 238 -857
487 -166 274 -906
608 -207 309 -385
-163
-126 1,00 -126,36 -305,66 4.419,68 4,99% 4.114 6,0
-276 0,95 -262,70
-292 0,91 -265,30
-311 0,86 -268,84
326 0,68 220,54
Source: Millennium investment banking
Brazil: As far as regulated activities in Brazil are concerned, it is clear that the company has been reinforcing its presence in Brazil, because IBE recognizes that it is one of the fastest growing countries in the world. Last year, as previously mentioned, IBE acquired 100% of Elektro and now the company is said to be in negotiations to increase its stake in Neoenergia from 39% to 75%. Neonergia is one of the most important Brazilian companies in the electrical sector. Focused on distribution activities (Neoenergia is the owner of distribution companies Coelba, Celpe and Cosern), the company is also investing in generation activities. Distribution wise, the company distributed 30.563 GWh in 2010 to its network of 9.1 million of customers. Generation wise, Neonergia’s installed capacity comprises hydro and thermal plant. In this decade, the company intends to almost triple its capacity by investing in Hydro and Wind plants. Elektro is the eighth biggest distributor in Brazil, ranking the third position in the State of São Paulo. The 30-year concession has begun in 1998 and will end in 2028. The concession covers an area of 120.000 km” and Elektro has approximately 5.7 of customers. Please find herewith the main assumptions to value this area:
•
We considered a 10-year DCF and calculated a terminal value for the business only for Neoenergia, as Elektro concession ends in 2028
•
Revenues wise, we assume that an inflation of 4.9% added by a real growth depending on the businesses (4% in 2011 and 2012 and 2% in distribution from 2013 onwards; 5% in generation);
•
We considered an EBITDA/Revenues margin of 28%.
•
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2020E of 2.9% in both cases.
28
Millennium investment banking Iberdrola CAGR 11E-20E for IBE’s regulated activities in Brazil
13 February
in euros
2012
CAGR 11E-20E
Gross margin EBITDA
2,9% 2,9%
Source: Millennium investment banking DCF for IBE’s regulated activities in Brazil
€ million
2011E
2012E
2013E
2014E
2015E
2020E
EBIT 686 Taxes -233 D&A 165 Capex -403 WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV (€mn) of which EV Neoenergia (39% stake) of which EV Elektro EV/ EBITDA (€mn)
776 -264 176 -427
789 -268 196 -473
786 -267 218 -524
786 -267 233 -556
906 -308 190 -397
261 1,00 261 2.795 2.276 6,19% 5.071 3.048 2.022 5,3
244 0,94 230
213 0,89 189
196 0,84 163
392 0,62 242
Source: Millennium investment banking
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Millennium investment banking Iberdrola
13 February
2012
Liberalized business: Liberalized business represents 31% of the 9M2011 EBITDA and includes not only generation (production of energy), but also supply (activity related to the selling of energy to liberalized customers) activities. Since 1st January 2011, all IBE’s liberalized businesses were integrated in a sole area. This process of integration aimed to create synergies, to increase operational efficiency and to optimize structures. Valuation wise, liberalized business representins 25.1% of our EV.
Spain (includes activities in Portugal): Spanish liberalized business includes liberalized generation and supply activities. Since 2009 the supply of electricity is fully deregulated, which means that prices are agreed between the final consumer and the supplier. Besides the cost of energy, prices include the Access Tariffs (such as transmission, distribution, renewable energy subsidies, past tariff deficits, amongst other costs). As far as generation activities are concerned, IBE’s energy mix is diversified and mostly based on low CO2 energies, namely on Hydro and Nuclear represents 61% of the portfolio, which means that almost half of the portfolio has very low generation costs per MWh: Please find herewith the main assumptions to value this area:
We used a 25-year DCF (from 2012 to 2036), as we assume that 25 years is the average of the useful life of the IBE’s generation assets. In Spain, IBE’s generation assets comprise CCGT (useful life of 35 years), conventional thermal plants from (25 to 50 years), nuclear plants (about 40 years) and hydro plants (30 to 75 years).
In terms of electricity, on the revenues side, we assumed a selling price of €55/MWh in 2012 (increasing by 2% per year). On the procurement side, we considered an average cost fuel of €14.2/MWh in 2012 (increasing by 2% per year) and that IBE continues to purchase the renewable production at a price of €46/MWh (increasing by 2% per year).
Production wise, we assumed a load factor of 20% in the case of CCGT, 22.5% in the case of Hydro, 80% in the case of Nuclear and 25% in the case of coal.
Concerning operating costs, we consider a steady Opex/Gross margin ratio of 29% throughout our valuation (vis-à-vis 31% in 2010, 36% in 2009 and 28% in 2008), slightly above the IBE’s target (28%).
As far as capex is concerned, we only considered the investment in new hydro plants in Spain. Concerning the Hydro plants in Portugal (Tâmega 1000MW), we did not include them in our valuation. Indeed, bearing the evolution of energy consumption in Portugal and also the current tough crisis in mind, we believe that it does not make sense to invest in hydro as the way it was planned in the past, unless the Portuguese economy recovers faster than initially expected in the medium term.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 1.5% and 1.4%, respectively and an EBITDA/Gross margin gradually decreasing in the coming two years and almost stabilizing afterwards.
30
Millennium investment banking Iberdrola CAGR 11E-36E for IBE’s liberalized activities in Spain
13 February
in euros
2012
CAGR 11E-36E
Gross margin EBITDA
1,5% 1,4%
Source: Millennium investment banking
EBITDA/ Gross margin
62,50% 61,50% 60,50% 59,50% 58,50% 57,50% 56,50% 55,50% 54,50% 53,50%
2034E
2032E
2030E
2028E
2026E
2024E
2022E
2020E
2018E
2016E
2014E
2012E
2010
2008
52,50%
Source: Millennium investment banking
DCF for IBE’s liberalized activities in Spain
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV EV/ EBITDA (€mn)
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
1.090 -327 525 -509
959 -288 540 -538
993 -298 540 -405
1.021 -306 540 -414
1.050 -315 540 -405
1.198 -359 540 -448
1.592 -478 457 -462
1.903 -571 380 -432
778
673 1,00 673 8,46% 10.335 6,9
830 0,92 765
841 0,85 715
869 0,78 681
931 0,52 486
1.109 0,23 257
1.280 0,14 182
Source: Millennium investment banking
31
Millennium investment banking Iberdrola
13 February
2012
UK: As far as generation activities are concerned, IBE’s energy mix in the UK is mostly based on thermal energy (coal and CCGT): Please find herewith the main assumptions to value this area:
CAGR 11E-36E for IBE’s liberalized activities in the UK
We used a 25-year DCF, as we assume that 25 years is the average of the useful life of the IBE’s generation assets. In UK, IBE’s generation assets comprise CCGT (useful life of 35 years), conventional thermal plants from (useful life from 25 to 50 years) and hydro plants (useful life from 30 to 75 years).
In terms of electricity, we estimate the gross margin, assuming a spark spread of £8/MWh and a dark spread of £4/MWh in 2012, assuming that both spreads rises by 2% per year.
Production wise, we considered throughout our valuation a load factor of 70% in the case of CCGT, 15% in the case of Hydro and 40% in the case of coal.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 1.9% and 1.6%, respectively.
in euros
CAGR 11E-36E
Gross margin EBITDA
1,9% 1,6%
Source: Millennium investment banking
DCF for IBE’s liberalized activities in the UK
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV (€mn) EV/ EBITDA (€mn)
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
37 -9 315 -116
84 -22 315 -119
92 -24 315 -119
96 -25 315 -119
100 -26 315 -119
122 -32 315 -119
169 -44 315 -119
202 -52 315 -119
225
257 1,00 257 6,42% 3.783 9,5
264 0,94 248
267 0,88 236
270 0,83 224
286 0,61 174
321 0,33 105
345 0,22 77
Source: Millennium investment banking
32
Millennium investment banking Iberdrola
13 February
2012
Mexico: As far as generation activities are concerned, IBE’s energy mix in Mexico is based on thermal energy. This business is very stable, as the bulk of the production is sold to CFE (Comission Federal de Electricidad) through Power Purchase Agreements (low-risk contracts). Please find herewith the main assumptions to value this area:
CAGR 11E-36E
We used a 25-year DCF, as we assume that 25 years is the average of the useful life of the IBE’s generation assets. In Mexico, IBE’s generation assets comprise CCGT (useful life of 35 years).
In terms of electricity, we estimate an average gross margin of price of $17.5/MWh in 2012.
Regarding production, we considered a load factor of 82.5%.
Concerning operating costs, we consider a steady Opex/Gross margin ratio of 25% throughout our valuation.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 0.8% in both cases.
in euros
CAGR 11E-36E
Gross margin EBITDA
0,8% 0,8%
Source: Millennium investment banking
DCF for IBE’s liberalized activities in Mexico
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV (€mn) EV/ EBITDA (€mn)
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
294 -88 60 -14
322 -97 60 -15
324 -97 60 -15
326 -98 60 -15
328 -98 60 -15
338 -101 60 -15
360 -108 60 -15
376 -113 60 -15
252
270 1,00 270,36 6,61% 3.639 9,5
272 0,94 254,74
273 0,88 240,04
274 0,83 226,21
281 0,60 168,29
297 0,32 93,68
308 0,22 66,18
Source: Millennium investment banking
33
Millennium investment banking Iberdrola
13 February
2012
Renewable business: Renewable business includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. As previously mentioned, last year IBE launched a tender offer to buy back the shares that it had sold before, in order to control 100% of the company. Renewable business (19% of 9M2011 EBITDA) includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. IBE is the world leader in the wind energy, with installed capacity spread across the globe. At the end of 2011, IBE had 13.690 MW of installed capacity, the bulk of it deployed in Spain and in the US. After a strong pace of new installations in the previous years (1.7GW on average per year from 2008 to 2010), the company reduced the rhythm of new deployments by lowering its goal of new installations to 2.1GW from 2011 to 2012. As far as expansion is concerned, IBE intends to broaden its activities in the UK and in the Rest of the World, as Spain and the UK are less attractive for business now. In the case of the US market, IBE said that if the PTCs (production tax credit) are not renewed; the company won’t invest more in the US market. In this market, we consider that IBE will deploy 100MW per year from 2012 onwards. Valuation wise, renewable business accounts for 26.8% of our EV. Please find herewith the main assumptions to value this area:
CAGR 11E-36E
We used a 25-year DCF, as we assume that 25 years is the average of the useful life of the IBE’s renewable assets. According to the experts, the useful life of an onshore wind farm could vary from 20 years to 25 years.
In terms of wind energy, we estimate an average gross margin of price of €70/MWh in 2012, considering that gross margin rises by 2% per year.
Regarding production, we considered a load factor of 23% in Spain, 30% in the US, 24% in the UK and 23% in ROW. New installations wise, we assume that the company will deploy 750MW in 2012 and 650MW deployed from 2013 onwards.
Concerning operating costs related to wind, we considered a steady Opex per MW of €40 thousand, increasing 2% per year.
Valuation wise, we did not include investments in off-shore business due to the lack of visibility over this business.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 4.4% and 4.6% respectively.
in euros Gross margin EBITDA
CAGR 11E-36E 4,4% 4,6%
Source: Millennium investment banking
34
Millennium investment banking Iberdrola DCF for IBE’s renewable businesses
13 February
2012
€ million
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV EV/ EBITDA
654 -196 854 -1.690
786 -236 921 -1.110
853 -256 982 -978
909 -273 1.046 -997
968 -290 1.113 -1.016
1.292 -387 1.478 -1.116
1.974 -592 2.106 0
2.218 -665 2.372 0
-378
361 1,00 360,57 7,60% 18.970,2 11,1
601 0,93 558,73
686 0,86 592,72
774 0,80 621,64
1.266 0,56 704,55
3.488 0,27 933,05
3.924 0,17 676,52
Source: Millennium investment banking
35
Millennium investment banking Iberdrola
13 February
2012
Multiples
Multiples Competitive Iberian Competitive EDP Endesa Iberdrola Gas Natural Non-Iberia Competitive EDF Centrica ENEL E.On AG Regulated Networks Red Electrica Corp. S.A. REN Enagas Iberdrola Iberdrola (MIB)
Last Mkt Cap EV / EBITDA Price (€) (€mn) 2011 2012 183.618 5,8 5,4 65.688 6,7 6,3 2,28 8.337 7,4 7,1 15,48 16.389 4,5 4,4 4,70 28.084 7,6 7,2 12,99 12.877 6,7 6,5 117.931 5,3 4,9 18,71 34.592 4,9 4,5 294,50 18.308 5,7 5,1 3,30 30.993 4,9 4,8 17,01 34.037 6,0 5,1 22.199 3,5 3,2 35,69 4.828 8,2 7,5 2,11 1.124 7,3 6,7 15,31 3.655 8,1 7,5 4,70 28.084 7,6 7,2 4,70 28.084 7,8 7,0
EV / EBIT 2011 2012 9,3 8,5 10,4 9,8 12,3 11,7 6,5 6,4 11,9 11,0 11,0 10,4 8,7 7,7 8,9 8,1 7,7 6,8 7,3 7,3 10,2 8,2 5,2 4,7 11,9 10,7 12,1 10,7 12,1 11,1 11,9 11,0 12,1 10,8
PBV 2011 2012 1,0 1,0 0,9 0,9 1,0 1,0 0,9 0,8 0,8 0,8 1,0 1,0 1,1 1,1 1,1 1,0 2,4 2,2 0,8 0,8 0,8 0,8 1,0 0,9 2,7 2,4 1,1 1,0 2,0 1,8 0,8 0,8 0,9 0,8
P/E 2011 2012 10,1 9,0 8,8 8,7 7,6 7,6 7,6 7,6 9,2 9,1 10,2 9,6 10,8 9,2 10,3 9,0 11,6 10,6 7,5 7,2 14,0 10,4 4,4 4,0 10,6 9,5 8,8 7,5 10,2 9,6 9,2 9,1 9,6 9,2
Net Debt/ EBITDA 2011 2012 2,5x 2,4x 3,3x 3,0x 4,5x 4,1x 1,6x 1,4x 3,8x 3,4x 3,6x 3,3x 2,1x 2,0x 2,2x 2,3x 1,0x 1,0x 2,6x 2,5x 2,0x 1,8x 1,8x 1,7x 4,1x 3,8x 4,9x 4,7x 3,9x 3,7x 3,8x 3,4x 4,2x 3,6x
Div. Yield 2011 2012 6,6% 6,9% 6,9% 7,1% 8,1% 8,8% 6,6% 6,7% 7,0% 7,0% 6,2% 6,5% 6,4% 6,8% 6,1% 6,5% 5,1% 5,7% 8,0% 8,2% 5,9% 6,5% 2,8% 3,1% 6,1% 6,8% 8,0% 8,1% 6,4% 7,2% 7,0% 7,0% 7,1% 7,3%
Source: Millennium investment banking, Facset
36
Millennium investment banking Iberdrola
13 February
2012
Financial Statements Income statement
€ million Gross profit Opex (includes taxes) EBITDA D&A EBIT Results from equity consolidated Financial income (expense) Results of non-current assets Pre-tax profit Income tax expense Minority interest Net profit Opex (excludes taxes) /Gross profit EBITDA/Gross profit margin EBIT/Gross profit margin
2008
2009
2010
2011E
2012E
2015E
10.001 -3.588 6.413 -2.151 4.262 73 -1.026 555 3.864 -895 -108 2.861 33% 64% 43%
10.788 -3.973 6.815 -2.306 4.509 32 -1.109 225 3.658 -719 -114 2.824 33% 63% 42%
11.645 -4.117 7.528 -2.698 4.830 27 -1.288 272 3.841 -899 -71 2.871 30% 65% 41%
12.069 -4.368 7.701 -2.768 4.933 39 -1.091 42 3.922 -902 -125 2.895 30% 64% 41%
12.751 -4.576 8.175 -2.876 5.299 39 -1.185 0 4.154 -955 -128 3.071 29% 64% 42%
14.267 -4.997 9.270 -3.320 5.950 42 -785 0 5.207 -1.198 -135 3.874 29% 65% 42%
CAGR 10-12E 4,6% 5,4% 4,2% 3,2% 4,7% 20,0% -4,1% -100,0% 4,0% 3,1% 34,2% 3,4% -0,2% -0,3% 0,0%
CAGR 10-15E 4,1% 4,0% 4,3% 4,2% 4,3% 8,8% -9,4% na 6,3% 5,9% 13,8% 6,2% -0,2% 0,1% 0,0%
Source: Millennium investment banking Operating performance Breakdown by business
€ million
2011E
2012E
2013E
2014E
2015E
Gross profit Regulated Business Spain UK US Brazil Liberalised Business Spain UK Mexico Renewables Other business Corporate&Adjustments EBITDA Regulated Business Spain UK US Brazil Liberalised Business Spain UK Mexico Renewables Other business Corporate&Adjustments
12.069 5.554 2.079 1.004 1.293 1.178 4.096 2.870 752 475 2.095 374 -51 7.701 3.860 1.585 830 594 851 2.320 1.614 351 354 1.508 49 -36
12.751 6.042 2.169 1.065 1.487 1.321 4.055 2.718 825 512 2.324 382 -52 8.175 4.176 1.656 885 683 952 2.279 1.499 398 382 1.706 50 -36
13.302 6.331 2.202 1.221 1.540 1.368 4.142 2.778 849 515 2.492 389 -53 8.577 4.403 1.681 1.030 707 985 2.324 1.533 407 384 1.835 51 -37
13.778 6.574 2.235 1.346 1.596 1.397 4.209 2.829 862 517 2.653 397 -54 8.918 4.590 1.706 1.146 733 1.004 2.358 1.561 411 386 1.956 52 -38
14.267 6.823 2.268 1.481 1.656 1.418 4.276 2.881 875 519 2.819 405 -55 9.270 4.783 1.732 1.271 761 1.019 2.392 1.590 415 388 2.080 53 -39
CAGR 10-12E 4,6% 6,7% 2,8% 4,8% -2,0% 34,1% 0,7% 2,9% -4,8% -0,8% 7,1% 2,0% 2,0% 4,2% 7,3% 3,1% 5,3% -2,0% 30,8% -3,2% 0,5% -14,5% -3,0% 8,3% 2,0% 2,0%
CAGR 10-15E 4,1% 5,2% 2,0% 8,8% 1,3% 14,0% 1,3% 2,3% -0,8% -0,1% 6,8% 2,0% 2,0% 4,2% 5,7% 2,1% 9,7% 1,3% 12,9% -0,3% 1,4% -5,3% -1,0% 7,4% 2,0% 2,0%
Source: Millennium investment banking
37
Millennium investment banking Iberdrola Balance sheet
13 February
2012
2008
2009
2010
2011E
2012E
2015E
CAGR 10-12E
CAGR 10-15E
Assets Intangible assets Tangible fixed assets Non current trends Deferred Taxes Non-Current receivables Total Non-Current Assets
17.871 43.787 6.554 3.242 338 71.791
18.042 47.018 2.686 3.142 487 71.375
18.223 50.621 2.636 3.488 479 75.447
19.500 51.757 2.846 4.500 500 79.102
19.500 52.593 2.885 4.500 500 79.978
19.500 55.510 3.008 4.500 500 83.018
3,4% 1,9% 4,6% 13,6% 2,2% 3,0%
1,4% 1,9% 2,7% 5,2% 0,9% 1,9%
Inventories Accounts receivables Current financial assets Nuclear fuel Cash and equivalents Total Current Assets Total Assets
2.331 6.145 3.189 294 2.087 14.045 85.836
2.151 6.266 6.197 287 1.091 15.992 87.367
1.971 6.977 6.924 280 2.102 18.254 93.701
2.043 5.986 5.750 325 2.102 16.205 95.308
2.158 6.324 5.000 325 2.102 15.909 95.887
2.415 7.076 3.000 325 2.102 14.918 97.936
4,6% -4,8% -15,0% 7,7% 0,0% -6,6% 1,2%
4,1% 0,3% -15,4% 3,0% 0,0% -4,0% 0,9%
25.708
29.030
31.664
32.446
34.828
43.278
4,9%
6,4%
Liabilities Deferred revenues Provisions Long-term capital instruments Long-term borrowings Total Non-Current Liabilities
3.088 3.544 798 40.022 47.452
4.065 3.462 671 39.932 48.130
4.463 3.643 652 41.539 50.297
5.000 3.643 550 44.467 53.660
5.000 3.643 550 42.153 51.346
5.000 3.643 550 34.614 43.807
5,8% 0,0% -8,2% 0,7% 1,0%
2,3% 0,0% -3,3% -3,6% -2,7%
Financial debt Trade creditors and other Total Current Liabilities Total Liabilities Total Equity and Liabilities
11.996 681 12.677 60.129 85.837
9.739 468 10.207 58.337 87.367
10.838 902 11.740 62.037 93.701
9.052 150 9.202 62.862 95.308
9.563 150 9.713 61.059 95.887
10.700 150 10.850 54.658 97.936
-6,1% -59,2% -9,0% -0,8% 1,2%
-0,3% -30,1% -1,6% -2,5% 0,9%
€ million
Total Equity
Source: Millennium investment banking
Cash flow statement
€ million Cash flow from operations Cash flow from investment Cash flow from financing
2009
2010
2011E
2012E
2013E
2014E
3.858 -4.817 -37
7.294 -7.132 849
3.942 -4.178 236
6.636 -2.962 -3.673
6.963 -3.515 -3.447
7.289 -3.701 -3.588
Accum Accum 10-12E 10-15E 7.718 17.871 39.841 -3.218 -14.272 -24.707 -4.500 -2.588 -14.123
2015E
Source: Millennium investment banking
38
Millennium investment banking Iberdrola Leverage ratios
EBITDA Capex EBITDA - Capex EBITDA - Capex - Dividends* Net Financial costs Net Debt ** Net Debt/ EBITDA (x) Net Debt/ Equity(x) Net Debt/ Capital Employed (x) EBITDA/Financial costs (x)
13 February
2012
2010
2011E
2012E
2013E
2014E
2015E CAGR 10-15E
7.528 -5.099 2.429 1.819 -989 29.460 3,9 1,0 0,5 4,7
7.701 -3.904 3.797 3.247 -1.011 32.090 4,2 1,0 0,5 5,2
8.175 -3.712 4.463 3.492 -1.145 29.233 3,6 0,9 0,4 5,1
8.577 -4.015 4.562 3.527 -1.015 26.657 3,1 0,7 0,4 5,9
8.918 -4.201 4.716 3.613 -890 23.998 2,7 0,6 0,3 6,7
9.270 -4.218 5.052 3.875 -743 20.488 2,2 0,5 0,3 7,8
4,3% 15,8% 16,3%
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). **Net debt before securitization (gross debt – cash – asset derivatives and others) excluding liability to tax equity partners Source: Millennium investment banking
Capex
€ million
2010
2011E
2012E
2013E
2014E
2015E
Capex Regulated Business Liberalised Business Renewables Other businesses
5.099 1.310 622 2.948 219
3.904 1.475 640 1.690 100
3.712 1.830 672 1.110 100
4.015 2.397 540 978 100
4.201 2.557 548 997 100
4.218 2.562 540 1.016 100
*The breakdown per business for the year 2010 was calculated by us Source: Millennium investment banking
39
Millennium investment banking Iberdrola
13 February
2012
Quartely Data P&L
€ million
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
Gross profit Operating costs (includes taxes) EBITDA D&A & Provisions EBIT Capital gains / (losses) Financial income (expense) Income from group and ass. comp. Pre-tax profit Income tax expense Minority interest Profit from disc. op. net of tax Net profit EBITDA margin EBIT margin
3.256 -1048 2.273 -670 1.603 21 -227 7 1405 -326 -64 0 1015 70% 49%
2.858 -1173 1.731 -708 1.024 0 -297 12 738 -168 -21 0 549 61% 36%
2.714 -1197 1.581 -692 888 21 -274 10 646 -59 -8 0 579 58% 33%
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
27% 23% 30% 32%
24% 25% 22% 21%
22% 26% 21% 18%
27% 26% 27% 29%
27% 23% 30% 32%
24% 25% 22% 21%
22% 26% 21% 18%
27% 26% 27% 29%
1% -6% 4% 4%
5% 7% 4% 6%
-1% 13% -8% -17%
9% 10% 8% 12%
6% 10% 4% 4%
5% 4% 6% 9%
9% 2% 13% 18%
3% 2% 4% 3%
10% -4% 16% 27%
-12% 12% -24% -36%
-5% 2% -9% -13%
19% 0% 34% 60%
7% -3% 12% 18%
-13% 5% -23% -33%
-2% 0% -3% -6%
14% 0% 24% 39%
3.241 -1198 2.116 -698 1.418 0 -294 10 1134 -350 -32 0 752 65% 44%
3.458 -1156 2.368 -700 1.668 0 -296 10 1382 -325 -32 0 1025 68% 48%
3.001 -1219 1.827 -710 1.117 0 -296 10 831 -195 -32 0 604 61% 37%
2.945 -1222 1.780 -730 1.050 0 -296 10 764 -180 -32 0 553 60% 36%
3.346 -1227 2.199 -736 1.463 0 -296 10 1177 -276 -32 0 868 66% 44%
Source: Company data, Millennium investment banking Seasonality
Weight in FY Gross Margin Opex EBITDA EBIT Growth Rates YoY Gross Margin Opex EBITDA EBIT Growth Rates QoQ Gross Margin Opex EBITDA EBIT
Source: Company data, Millennium investment banking
40
Millennium investment banking Iberdrola Gross profit Breakdown
13 February
2012
€ million
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
Gross Profit Regulated Spain UK US Brazil Liberalized Spain UK Mexico Interco Renewables Other business Corporate & Other adjustments
3.255 1.353 509 277 375 192 1.189 837 240 113 0 604 124 -15
2.858 1.317 504 235 272 305 965 695 159 110 0 507 83 -13
2.714 1.416 510 231 306 370 850 573 167 110 0 408 51 -11
3.241 1.468 555 261 340 310 1.093 764 186 142 0 578 116 -13
3.458 1.458 498 272 422 267 1.228 786 324 118 0 664 121 -14
3.001 1.416 497 251 323 344 984 693 164 128 0 524 88 -11
2.945 1.541 551 251 366 373 870 586 150 134 0 463 79 -9
3.346 1.626 623 291 376 336 973 653 187 133 0 673 93 -19
Source: Company data, Millennium investment banking EBITDA Breakdown
€ million
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
EBITDA Regulated Spain UK US Brazil Liberalized Spain UK Mexico Interco Renewables Other business Corporate & Other adjustments
2.273 984 399 219 225 140 779 541 149 90 0 453 56 2
1.731 908 381 193 110 224 511 391 33 87 0 332 11 -31
1.581 948 393 181 104 270 416 285 47 84 0 251 -9 -24
2.116 1.020 411 237 155 217 614 397 122 94 0 473 -9 18
2.368 1.006 366 219 226 195 813 504 218 91 0 512 49 -13
1.827 952 373 203 124 252 537 395 40 102 0 346 10 -18
1.780 1.056 434 198 156 268 429 295 37 98 0 300 8 -13
2.199 1.162 483 265 177 237 500 305 103 92 0 549 -18 7
Source: Company data, Millennium investment banking
41
Millennium investment banking Iberdrola
13 February
2012
DISCLOSURES
This report has been prepared on behalf of Millennium investment banking (Mib), a registered trademark of Banco Comercial Português, S.A. (Millennium bcp). Millennium bcp is regulated by Comissão de Mercado de Valores Mobiliários. A draft of the report was shown to the company. Neither the company was aware of the recommendation nor was it changed; Recommendations: Buy means more than 10% absolute return; Neutral means between 0% and +10% absolute return; Reduce means between -10% and 0% absolute return; Sell means less than -10% absolute return. Unless otherwise specified, the time frame for price targets included in this report is current year-end or next year-end. Risk is defined by the analyst’s view in a qualitative way. Usually we update our models and price targets in between 6 and 18 months. Millennium bcp prohibits its analysts and members of their households to own any shares of the companies covered by them. BCP group may have business relationships with the companies mentioned in this report. Millennium bcp, expects to receive or intends to seek compensations for investment banking services from the companies mentioned in this report. The views expressed above, accurately reflect personal views of the authors. They have not and will not receive any compensation for providing a specific recommendation or view in this report. There were not any agreements between the companies covered and the analysts regarding the recommendation. Analysts are paid in part based on the profitability of BCP group, which includes investment banking revenues. Iberdrola 3,35 6,19 5,96 5,72 5,49 5,25 5,02 4,78 4,55
Recommendation
Stock Price
Feb/12
Jan/12
Dec/11
Nov/11
Oct/11
Sep/11
Aug/11
Jul/11
Jun/11
May/11
Apr/11
Mar/11
Feb/11
Jan/11
Buy Neutral Reduce Sell (Unrated)
Price Target
DISCLAIMER This information is not an offer to sell or a solicitation to enter into any particular deal or contract. It consists of data compiled by or of opinions or estimates from Banco Comercial Português, S.A. and no representation or warranty is made as to its accuracy or completeness. This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damages that may, directly or indirectly, derive from it. Its reproduction is not allowed without permission from the BCP group. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they have been collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information / these opinions may be altered without prior notice and may differ or be contrary to opinions expressed by other business areas of BCP group as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results.
42
OFFICE LOCATIONS Millennium investment banking Av. José Malhoa, Lote 27 - 5 1099-010 Lisboa Portugal Telephone +351 21 003 7811 Fax
+351 21 003 7819 / 39
Equity Team Luis Feria (Head of Equities) Equity Research +351 21 115 6220 António Seladas, CFA (Head) Fundamental Analysis Alexandra Delgado, CFA (Telecoms and IT) João Flores (Media and Retail) João Mateus (Industrials and Utilities) Rita Silva (Banks) Vanda Mesquita (Utilities and Oil&Gas) Market Analysis Ramiro Loureiro Sónia Martins Telma Santos Publishing Sónia Primo Prime Brokerage +351 21 003 7855 Vitor Almeida (Head) Hugo Ferreira Pinto Paula Val Institutional Equity Sales +351 21 115 6279 Karsten Sommer (Head) Manuel Lança Lopes Equity Trading +351 21 003 7850 Paulo Cruz (Head) Diogo Palma Gonçalo Lima Jorge Caldeira Nuno Sousa Paulo Santos Pedro Cruz Pedro Ferreira Cruz Pedro Gonçalves Pedro Lalanda Rodrigo Roque Pinho Equity Derivatives +351 21 003 7890 Jorge Pina (Head) Ana Lagarelhos Diogo Justino Marco Barata Maria Cardoso Baptista, CFA
13 February 2012
SPAIN
Iberdrola A story of networks and renewable energy
Buy (Low Risk)
TargetYE12(€): 5,90 2009
Financials Gross Profit (€ mn) EBITDA (€ mn) Net Income (€ mn) EPS (€) CEPS (€) Ratios RoIC (%) RoE (%) Net Debt / EBITDA (x) Net Debt / EV (%) Valuation P / E (x) EV / EBITDA (x) EV / EBIT (x) Dividend Yield (%)
We have initiated Iberdrola (IBE) coverage with a price target of €5.90 per share (YE12), thus leading to a Buy (Low Risk) recommendation. IBE is in our view a defensive stock, as the bulk of EBITDA comes from regulated and renewable businesses (more stable and low risk).
IBE is a Spanish utility company with a strong presence in the renewable energy and regulated business. Over the last decade, IBE has been building a story of growth by strongly betting on international expansion. There were two clear cycles of investment in the last decade. The first cycle (from 2001 to 2006) was based on the growth of renewable energies and generation and Spain, Mexico and Brazil were elected the main markets to invest. The second cycle of growth (beginning in 2007) was based on internationalization, with the acquisition of Energy East and Scottish Power being the major milestones and also on the strengthening of its worldwide leadership in renewable energies. This decade, IBE reinforced its internationalization path by buying Elektro (Brazil).
IBE is undoubtedly an example of an impressive growth story. The pace of earnings growth has been quite remarkable, with a gross margin CAGR 04-10 and an EBITDA CAGR 04-10 of approximately 17% in both cases. Growth has been financed not only with equity (through the issue of new shares), but also with debt. In spite of the increase in debt (CAGR 04-10 of approximately 15%), net profit has shown a strong increase (CAGR 04-10 of approximately 16%).
Recent measures taken by several utilities companies made it clear that deleveraging is a trend that is here to stay. In line with other utilities, we see IBE very focused on controlling its leverage ratios, as we consider that the company has been taken some important measures, namely the implementation of a flexible dividend policy (the shareholder could choose the payment of dividends in cash or shares), a lower capex plan (last year IBR cut investments by reducing the amount of investment in renewable business) and the improvement of the efficiency levels. The late developments under the securitization program of the Spanish tariff deficit have helped IBE to achieve a lower level of debt.
2010 2011E 2012E
10.788 11.645 12.069 12.751 6.815 7.528 7.701 8.175 2.824 2.871 2.895 3.071 0,44 0,44 0,49 0,50 0,83 0,90 0,96 0,98 8,0% 11,3% 4,3 43,3
8,1% 10,3% 3,9 43,0
7,9% 9,5% 4,2 53,7
8,2% 9,2% 3,6 51,3
15,1 9,9 14,9 5,0
13,1 9,1 14,2 5,8
9,6 7,8 12,1 7,1
9,2 7,0 10,8 7,3
Source: Millennium investment banking 130 120 110 100 90
Iberdrola PSI 20
Av. José Malhoa, 27 1099-010 Lisboa Telephone +351 21 721 8000 Facsimile + 351 21 721 8000
EDP IBEX Index
1/Dec/11
1/Jul/11
1/Feb/11
1/Sep/10
1/Apr/10
1/Jun/09
70
1/Nov/09
80
Vanda Mesquita, Eq. Analyst + 351 21 0037821 [email protected]
All prices are those of the end of the trading session unless otherwise indicated. For important Disclosure and Disclaimer go to the second last page.
Millennium investment banking Iberdrola
13 February
2012
Contents 3
Investment Case
6
Company Overview
21
4th Quarter Earnings
22
Valuation
36
Multiples
37
Financial Statements
40
Quartely data
42
Disclosures
2
Millennium investment banking Iberdrola
13 February
2012
Investment Case
Our recommendation: We have initiated Iberdrola (IBE) coverage with a price target of €5.90 per share (YE12), thus leading to a Buy (Low Risk) recommendation. IBE is in our view a defensive stock, as the bulk of EBITDA comes from regulated and renewable businesses (more stable and low risk). A worldwide company: IBE is a Spanish utility company with a strong presence in the renewable energy and regulated businesses. Over the last decade, IBE has been building a story of growth by strongly betting on international expansion. At the beginning of the last decade, IBE’s activities were mainly centralized in Spain. Nowadays, IBE is a completely different company with activities spread all over the world. IBE has a strong presence in Europe (Spain and the UK are the main countries), in the US and in Latin America as well. Expansion has been based not only on organic, but also on non-organic growth. There were two clear cycles of investment in the last decade. The first cycle (from 2001 to 2006) was based on the growth of renewable energies and generation and Spain, Mexico and Brazil were elected the main markets to invest. The second cycle of growth (beginning in 2007) was based on internationalization, with the acquisition of Energy East and Scottish Power being the major milestones and also on the strengthening of its worldwide leadership in renewable energies. This decade, IBE reinforced its internationalization path by buying Elektro (Brazil). IBE is undoubtedly an example of an impressive growth story. The pace of earnings growth has been quite remarkable, with a gross margin CAGR 04-10 and an EBITDA CAGR 04-10 of approximately 17% in both cases. Growth has been financed not only with equity (through the issue of new shares), but also with debt. In spite of the increase in debt (CAGR 04-10 of approximately 15%), net profit has shown a strong increase (CAGR 04-10 of approximately 16%).
Historical data
(in m€) Gross margin % YoY EBITDA % YoY Net profit % YoY Net debt (including tariff deficit) % YoY Net debt (ex-tariff deficit) % YoY Net Debt (ex-tariff deficit) to EBITDA
2004
2005
2006
2007
2008
2009
4.473,20
4.946,70 10,59% 3.377,60 15,97% 1.382,05 15,59% 12.221 14,50% 10.953 2,62% 3,2
5.800,30 17,26% 3.889,70 15,16% 1.660,00 20,11% 13.119 7,35% 12.547 14,55% 3,2
8.290,90 42,94% 5.538,31 42,38% 2.353,74 41,79% 20.470 56,03% 12.392 -1,24% 2,2
10.000,57 20,62% 6.412,54 15,79% 2.860,61 21,53% 28.393 38,71% 19.372 56,33% 3,0
10.788,00 7,87% 6.815,33 6,28% 2.824,00 -1,28% 29.191 2,81% 25.998 34,20% 3,8
2.912,60 1.195,63 10.673 10.673 3,7
2010 CAGR 04-10 11.645,20 7,95% 7.528,00 10,46% 2.871,10 1,67% 30.015 2,82% 24.894 -4,25% 3,3
17,29% 17,15% 15,72% 18,81% 15,16%
Source: Company data
3
Millennium investment banking Iberdrola
13 February
2012
Diversified activities: Bearing the last acquisitions and also the organic growth in mind, it is clear that the company is betting on renewable energy and regulated business. Therefore, it seems that IBE somewhat recognizes that liberalized activities are not very attractive, maybe due to its volatility. In fact, the good performance from renewable and liberalized businesses (more stable and less volatile businesses by nature) has been quite important to offset a worse performance from liberalized business weakened by lower demand and lower prices in some countries. Regulated activities include distribution and transmission activities are by far the most important IBE’s activities (51% of EBITDA at the 9M2011 EBITDA). IBE’s regulated activities are located in Spain, in the UK (Scottish Power), in the US (formerly Energy East) and in Brazil (Neoenergia and Elektro). Liberalized activities (31% of EBITDA at the 9M2011 EBITDA), comprise generation and supply activities. Unlike, regulated activities, earnings from this business are more volatile (more exposed to market risks). IBE’s liberalized activities are located in Spain, in the UK (Scottish Power) and in Mexico. Renewable business (19% of EBITDA at the 9M2011 EBITDA) includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. IBE is the world leader in the wind energy, with installed capacity spread across the globe. At the end of 2011, IBE had 13.690 MW of installed capacity, the bulk of it deployed in Spain and in the US. After a strong pace of new installations in the previous years (1.8GW on average per year from 2008 to 2010), the company reduced the rhythm of new deployments by lowering its goal of new installations to 2.1GW from 2011 to 2012. As far as expansion is concerned, IBE intends to broaden its activities in the UK and in the Rest of the World, as Spain and the UK are less attractive for business now. Broadly in line with the energy trends (investment of low-CO2 energies), we see IBE quite focused on continuing its path of growth in renewable energy. According to our expectations, EBITDA from renewable business will show the most dynamic growth (a mid single digit CAGR of almost 6.6%). EBITDA CAGR 10-20E
EBITDA CAGR 10-20E Regulated Business Liberalised Business Renewables Other business
% 3,4% 0,5% 6,6% 2,0%
Source: Millennium investment banking
Balanced financial structure: Recent measures taken by several utilities companies made it clear that deleveraging is a trend that is here to stay. In line with other utilities, we see IBE very focused on controlling its leverage ratios, as we consider that the company has been taken some important measures, namely the implementation of a flexible dividend policy (the shareholder could choose the payment of dividends in cash or shares), a lower capex plan (last year IBR cut investments by reducing the amount of investment in renewable business) and the improvement of the efficiency levels. The late developments under the securitization program of the Spanish tariff deficit have helped IBE to achieve a lower level of debt. As far as IBE’s credit rating is concerned, we see the company very focused on keeping its current single A rating (with a stable outlook given by all the agency ratings). We believe that the geographical diversification, the amount of cash flow generated, the wide range of financing possibilities and more recently the securitization of the Spanish tariff deficit have been crucial to keep the current rating. We see this rating as a clear advantage 4
Millennium investment banking Iberdrola
13 February
2012
(comparing to some European peers, namely EDP, ENEL, RWE, Centrica and E.ON), because it helps to assure lower costs of financing. According to our expectations, EBITDA is more than enough to cover capex needs, dividends and net financial interest costs. Still according to our expectations (IBE does not give guidance), by 2015, net debt (before securitization) should almost be €20bn and net debt to EBITDA should converge to 2.2x, which is a level close to the typical ratios of the non-Iberian utility companies’ ratio. Leverage ratios
EBITDA Capex EBITDA - Capex EBITDA - Capex - Dividends* Net Financial costs Net Debt ** Net Debt/ EBITDA (x) Net Debt/ Equity(x) Net Debt/ Capital Employed (x) EBITDA/Financial costs (x)
2010
2011E
2012E
2013E
2014E
2015E CAGR 10-15E
7.528 -5.099 2.429 1.819 -989 29.460 3,9 1,0 0,5 4,7
7.701 -3.904 3.797 3.247 -1.011 32.090 4,2 1,0 0,5 5,2
8.175 -3.712 4.463 3.492 -1.145 29.233 3,6 0,9 0,4 5,1
8.577 -4.015 4.562 3.527 -1.015 26.657 3,1 0,7 0,4 5,9
8.918 -4.201 4.716 3.613 -890 23.998 2,7 0,6 0,3 6,7
9.270 -4.218 5.052 3.875 -743 20.488 2,2 0,5 0,3 7,8
4,3% 15,8% 16,3%
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). **Net debt before securitization (gross debt – cash – asset derivatives and others) excluding liability to tax equity partners Source: Millennium investment banking, Company Data
Main downside and upside risks of IBE's valuation: As far as main downside and upside risks are concerned, we identified the following ones: i.
Downside risks: 1) Solutions to eliminate the problem of Spanish Tariff Deficit might affect IBE’s earnings in the coming years; 2)Top line could be under pressure due to lower energy demand and low prices; 2) Deterioration of worldwide economy (mainly deterioration of the Spanish economy); 3) More delays in Spanish securitization could lead to higher debt levels for a long period of time; 4) Rising interest rates could lead to a slower reduction of net debt in the years to come;
ii.
Upside risks: 1) An increase of fossil fuels prices could lead to an increase of the pool price and turn renewable prices more competitive; 2) Better regulation in terms of renewable energies.
5
Millennium investment banking Iberdrola
13 February
2012
Company Overview IBE, a worldwide company: IBE is a Spanish utility company with a strong presence in the renewable energy and regulated business. Over the last decade, IBE has been building a story of growth by strongly betting on international expansion. At the beginning of the last decade, IBE’s activities were mainly centralized in Spain. Nowadays, IBE is a completely different company with activities spread all over the world. IBE has a strong presence in Europe (Spain and the UK are the main countries), in the US and in Latin America as well. Expansion has been based not only on organic, but also on non-organic growth. As far as non-organic growth is concerned, the company did key acquisitions, namely the purchases of Scottish Power (in the UK), Energy East (in the US) and Elektro (in Brazil). In 2007, the acquisition of Scottish Power was one of the major milestones in IBE’s history. Scottish Power is a Scottish company that integrates generation, transmission, and distribution and supply activities with operations in the UK and in the US market. This acquisition helped IBE to pursuit its international expansion and at the same time to enlarge the importance of regulated (low-risk activities) and renewable businesses (not only in the UK, but also in the US). This deal amounted to £11.6bn, 52.3% of which paid in a combination of cash and debt and the remaining amount through the issue of new IBE’s shares. Still in 2007, IBE and Energy East announced a friendly merger (93% of Energy East’s shareholders approved the merger). Energy East is an US company whose main activities were mainly focused on distribution and transmission activities. This acquisition helped IBE to strengthen its international expansions and to enlarge the weight of regulated businesses. Under this deal (closed in 2008), IBE paid €3.22bn to Energy East and assumed Energy East’s debt of €3bn. IBE did an Accelerated Book Building (ABB) by issuing shares to finance an amount close to €3.4bn related to this transaction. Later on, in 2011, IBE bought Elektro (a Brazilian electrical distribution company) for $2.4bn. This deal helped IBE to broaden the weight of regulated businesses and to enlarge its presence in Latin America (one of the most promising regions of the world). Concerning organic growth, IBE’s growth was mainly focused on renewable energies. IBE was the first electric utility in the world that strongly bet on the development of renewable and now is the world leader in the wind energy. In 2007, IBE decided to spin-off the wind activities and to launch an initial public offering (IPO). Through an IPO, IBE listed 20% of the share capital of its subsidiary and at the same time raised cash (approximately €4.5bn). This IPO, the second largest done in 2007, was the biggest Spanish IPO ever done so far. Later on (March 2011), IBE decided to launch a tender offer to buy back the shares that it had sold before, in order to control 100% of the company. This buy back was done through an exchange of shares (an exchange ratio of 0.3027 IBE share in exchange for each Iberdrola Renovables share) together with the payment of a special dividend (€1.20). IBE justified this deal saying that this integration would lead to synergies of €20mn per year from 2012 onwards and mentioning that Iberdrola Renovables’ shareholders would be in an advantageous position, because IBE is a bigger company that offers a higher dividend and more stability (IBE’s shares were less volatile). The deal amounted to €2.6 billion. 6
Millennium investment banking Iberdrola
13 February
2012
Almost at the same time, in March 2011, IBE surprised the market, by announcing a rights issue (corresponding to a 6.17% increase of share capital), that was totally written by Qatar Holdings, with whom IBE set an agreement to develop business in the Middle East and other geographic areas. Under this deal new shares were issued at €5.633, meaning that capital raised from this operation amounted to €1.906mn. IBE is undoubtedly an example of an impressive growth story. The pace of earnings growth has been quite remarkable, with a gross margin CAGR 04-10 and an EBITDA CAGR 04-10 of approximately 17% in both cases. Growth has been financed not only with equity (through the issue of new shares), but also with debt. In spite of the increase in debt (CAGR 04-10 of approximately 15%), net profit has shown a strong increase (CAGR 04-10 of approximately 16%). Historical data
(in m€) Gross margin % YoY EBITDA % YoY Net profit % YoY Net debt (including tariff deficit) % YoY Net debt (ex-tariff deficit) % YoY Net Debt (ex-tariff deficit) to EBITDA
2004
2005
2006
2007
2008
2009
4.473,20
4.946,70 10,59% 3.377,60 15,97% 1.382,05 15,59% 12.221 14,50% 10.953 2,62% 3,2
5.800,30 17,26% 3.889,70 15,16% 1.660,00 20,11% 13.119 7,35% 12.547 14,55% 3,2
8.290,90 42,94% 5.538,31 42,38% 2.353,74 41,79% 20.470 56,03% 12.392 -1,24% 2,2
10.000,57 20,62% 6.412,54 15,79% 2.860,61 21,53% 28.393 38,71% 19.372 56,33% 3,0
10.788,00 7,87% 6.815,33 6,28% 2.824,00 -1,28% 29.191 2,81% 25.998 34,20% 3,8
2.912,60 1.195,63 10.673 10.673 3,7
2010 CAGR 04-10 11.645,20 7,95% 7.528,00 10,46% 2.871,10 1,67% 30.015 2,82% 24.894 -4,25% 3,3
17,29% 17,15% 15,72% 18,81% 15,16%
Source: Company data
The Group’s management model is based on two different areas of decision-making, namely one area is related to the Board of directors and the other formed by Chairman, CEO and management team. Ignacio Galán has been IBE’s CEO since the beginning of the last decade (May 2001). His kind of management has been clearly tailored towards international expansion. There were two clear cycles of investment in the last decade. The first cycle (from 2001 to 2006) was based on the growth of renewable energies and generation and Spain, Mexico and Brazil were elected the main markets to invest. The second cycle of growth (beginning in 2007) was based on internationalization, with the acquisition of Energy East and Scottish Power being the major milestones and also on the strengthening of its worldwide leadership in renewable energies. This decade, IBE reinforced its internationalization path by buying Elektro.
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Millennium investment banking Iberdrola
13 February
2012
The industrial project IBE’s industrial “project assures long-term sustainable growth, based on a focus on core business, stable activities and growth (Networks and Renewables), on a balanced business portfolio, leadership in clean energies and focus on operational efficiency and financial soundness”. Diversified activities: In its last Investors’ day (March, 2011), IBE presented a new management model based on activities, instead of being based on regions. According to the company, the new management model will lead to significant efficiency improvements, as there is only one planning, one budget and one investment plan per business. In the coming future, the company should present a 5-year business plan for each business. New management model
Regulated Business *
Liberalized Business **
Renewables businesses ***
Spain UK USA Brazil Spain UK Mexico Several Countries
Source: Company data * Regulated business includes the Transmission and Distribution businesses ** Liberalized business includes the energy and sales business *** Renewable businesses include activities related to renewable energy (wind, mini-hydro, biomass, among others) and also gas trading and storage business in the US.
Old management model
Spain UK USA LATAM Renewables
Liberalized business Distribution Wholesale and Retail Networks Networks Mexico Brazil Several Countries
Source: Company data
8
Millennium investment banking Iberdrola
13 February
2012
Bearing the last acquisitions (Scottish Power, Energy East and Elektro) and also the organic growth in mind, it is clear that the company is betting on renewable and regulated businesses. Therefore, it seems that IBE somewhat recognizes that liberalized activities are not very attractive, maybe due to its volatility. In fact, the good performance from these businesses (more stable and less volatile businesses by nature) has been quite important to offset a worse performance from liberalized business weakened by lower demand and lower prices in some countries. Other business, 0%
9M11 EBITDA breakdown
Corporate & Adjustments, 0
Renewables, 19%
Liberalised Business, 31%
Regulated Business, 51%
Source: Company data
Regulated activities include distribution and transmission activities and are by far the most important IBE’s activities (51% of EBITDA at the 9M2011 EBITDA). IBE’s regulated activities are located in Spain, in the UK (Scottish Power), in the US (formerly Energy East) and in Brazil (Neoenergia and Elektro). Liberalized activities (31% of EBITDA at the 9M2011 EBITDA), comprise generation and supply activities. One of IBE’s challenges is to match generation with supply. Unlike, regulated activities, earnings from this business are more volatile (more exposed to market risks). Under liberalized activities, the hedging policy (forward sales) is becoming more important, increasing the visibility of this business. IBE’s regulated activities are located in Spain, in the UK (Scottish Power) and in Mexico. Renewable business (19% of EBITDA at the 9M2011 EBITDA) includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. IBE is the world leader in the wind energy, with installed capacity spread across the globe. At the end of 2011, IBE had 13.690 MW of installed capacity, the bulk of it deployed in Spain and in the US. After a strong pace of new installations in the previous years (1.8GW on average per year from 2008 to 2010), the company reduced the rhythm of new deployments by lowering its goal of new installations to 2.1GW from 2011 to 2012. As far as expansion is concerned, IBE intends to broaden its activities in the UK and in the Rest of the World, as Spain and the US are less attractive for business now. Regarding the renewable business in Spain, recently the Spanish Government has announced that it has suspended subsidies for new renewable energy parks, as a way to control the tariff deficit. The Spanish Government stated that this suspension won’t affect nor renewable energy parks already installed neither the projects already approved. Moreover, the Government clarified that the weight of renewable is quite meaningful and that Spain is ahead of its goals in terms of clean energy. Regarding the renewable business in the US, as a reminder in February, 2009 the US Congress extended the Production Tax Credit (PTC’s) until the end of 2012 (this was the sixth consecutive time that PTCs were extended). Moreover, cash grant program is also coming to an end. This program (in which the company receives 30% of the initial capex) was applicable to the wind projects placed in service during 2009 and 2010, or 9
Millennium investment banking Iberdrola
13 February
2012
which construction has began in 2009, 2010 and 2011 and commissioning occur before the end of 2012. Regarding subsidies in the US, we believe that the US congress will approve for the seventh consecutive time the extension of the PTC’s and that cash grants won’t be renewed due to budget restrictions. Still regarding this matter, IBE is developing activities to become a worldwide leader in off-shore energy. Offshore is regarded as the second generation of wind, as on-shore energy is entering in the maturity stage in some of the countries where the company operates. Offshore projects are by far more expensive than the onshore ones. However, some specialists expect that future upgrades and developments in this technology will lead to important savings. Albeit more costly vis-à-vis on-shore, the offshore wind farms benefits from superior load factors. In the beginning of 2009, the company announced that the Crown Estate, under the UK government's tender for offshore wind, known as UK Round 3, has selected IBR together with Vatenfall to develop an offshore wind farm with a capacity of 7.2GW in the North Sea. The aforementioned companies formed a 50/50 joint venture named East Anglia Offshore Wind Ltd. Vatenfall is a Swedish company specialized in offshore wind farms. In what regards the Round 2 (the previous tender), the company was selected to develop 500MW (West of Duddons projects). The company has other off shore projects in pipeline, namely in Germany and more recently in France.
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Millennium investment banking Iberdrola
13 February
2012
Energy wise, at the end 2011 IBE’s installed capacity and production was mostly based on low-CO2 technologies. Renewable, Gas Combined Cycle and Hydro accounted for almost 80% of the total installed capacity. Installed capacity by technology (MW) at YE11
Renewables
13.690
Cogeneration
1.177
Gas Combined Cycle
13.189
Fuel-oil
157
Coal
4.709
Nuclear
3.373
Hydro
9.731 0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Source: Company data
By countries, the bulk of the generation capacity is installed in Spain and in the UK.
Installed capacity (MW) by country at YE11
30.000 25.576 25.000 20.000 15.000 10.000
7.077
6.249
5.895
5.000 1.231 0 Spain
United Kindgom
United States
Latin America Rest of the world
Source: Company data
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Millennium investment banking Iberdrola
13 February
2012
With the exception of coal and nuclear, all the other technologies are used in almost countries in which IBE has business. Regarding renewable, IBE is the worldwide leader in on-shore wind energy.
Spain
Renewables
Gas Combined Cycle
Coal
Technologies by country at YE11
United Kindgom
Spain
United Kindgom
Spain
United Kindgom
United States
Latin America
United States
Latin America
Rest of the world
Hydro
Cogeneration
Spain
United Kindgom
Spain
United Kindgom
United States
Latin America
United States
Latin America
Nuclear
Spain
Source: Company data
Production wise, this energy mix has low generation costs per MWh (hydro, renewable and nuclear accounted for almost 49% of production), which is an advantage.
Production GWh at YE11
Renewables, Hydro, 12,22% 19,79% Cogeneration, 3,63%
Nuclear, 16,74%
Coal, 8,92% Gas Combined Cycle, 38,71%
Source: Company data
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Millennium investment banking Iberdrola
13 February
2012
Broadly in line with the energy trends (investment of low-CO2 energies), we see IBE quite focused on continuing its path of growth in renewable energy. According to our expectations, EBITDA from renewable business will show the most dynamic growth (a mid single digit CAGR of almost 6.6%) and will overcome EBITDA from liberalized activities by 2019.
EBITDA CAGR 10-20E
EBITDA CAGR 10-20E
%
Regulated Business Liberalised Business Renewables Other business
3,4% 0,5% 6,6% 2,0%
Source: Millennium investment banking
EBITDA breakdown (according to our expectations)
100%
1%
1%
1%
1%
1%
1%
1%
1%
1%
1%
1%
90%
19%
20%
21%
21%
22%
22%
23%
24%
25%
26%
27%
32%
30%
28%
27%
26%
26%
26%
25%
25%
25%
25%
48%
50%
51%
51%
51%
52%
51%
50%
50%
49%
49%
80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E Regulated Business
Liberalised Business
Renewables
Other business
Source: Company data, Millennium investment banking
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Millennium investment banking Iberdrola
13 February
2012
Better balance sheet structure: Recent measures taken by several utilities companies made it clear that deleveraging is a trend that is here to stay. In line with other utilities, we see IBE very focused on controlling its leverage ratios, as we consider that the company has been taken some important measures, namely the implementation of a flexible dividend policy (the shareholder could choose the payment of dividends in cash or shares), a lower capex plan (last year IBR cut investments by reducing the amount of investment in renewable business) and the improvement of the efficiency levels. The late developments under the securitization program of the Spanish tariff deficit have helped IBE to achieve a lower level of debt. Dividends: Dividends wise, IBE has a special policy named “IBERDROLA Dividendo Flexible” (which is a policy based on Scrip Dividend). This policy based on Scrip Dividend allows IBE’s shareholders to choose one of the following options: • receive free IBE shares for an amount equivalent to the dividend without withholding tax; • receive an amount in cash without withholding tax by selling the rights on the market; • receive an amount in cash, with withholding tax, by selling the rights to IBE at a fixed guaranteed price. Under this dividend policy, if the shareholder does not announce his intention, the shareholder automatically receives ordinary shares by default. Scrip dividend allows IBE to broaden its equity through the issuance of new shares and at the same time to reduce the amount of financial interest. The dividends payment with the possibility of scrip dividend has been in place since 2009. Therefore, since this policy is quite recent, we do not have a historical data that allows us to create a pattern concerning the percentage paid in cash and the percentage paid through the issue of new shares. For instance, in December, 2010, IBE’s shareholders decided to receive 39.35% in cash and the remaining percentage in new shares. Later on, in July 2011, shareholders decided to receive a higher 68.2% in cash and the outstanding amount in new shares. In our valuation, we assume that IBE is going to pay 50% in cash and the other 50% in new shares. If shareholders decides to accept more shares (comparing to the values implied in our model), both financial costs and net debt will tend to be lower. Conversely, in the case of a higher acceptance of dividends paid in cash, financial costs and net debt will tend to stand at a higher level. As far as the payment of the dividend related to the fiscal year of 2011 is concerned, IBE had already paid its interim dividend. Cash payment (€0.146 per share) occurred on January, 20 (IBE paid €436mn in cash) and new ordinary shares started trading on January, 25 (IBE issued 90.3 millions of new shares).
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Millennium investment banking Iberdrola
13 February
2012
Investments and divestments: Investment wise, from 2010 to 2012, IBE plans to invest €15.8bn (an average of approximately €5.3bn per year). Excluding non-organic investment (namely the purchase of Elektro), IBE’s investment plan is reduced to €13.4bn (€7.6bn of which already invested at the end of the third quarter), with the bulk of the investment concentrated on regulated and renewable businesses. Around 70% of the 2010-2012 investment plan will be channeled to expansion, while the remaining percentage is directed to maintenance. Investment plan
6000
5.600
5.300
5000 4000 3000 2.200 2000 1000 300 0 Regulated
Renewables
Liberalized
Other
Source: Company data
Divestments have been playing an important role in IBE’s strategy. In 2010, the company sold Guatemala, Petroceltic, Gas USA, EDP (IBE reduced its stake in EDP by 2.7% to 6.79%), Neo Sky and other participations for approximately €1.5bn. Divestments from 2009 to 2010 amounted to €2.8bn. Still regarding investments, as previously mentioned IBE is investing mainly in renewable and in regulated assets. As far as renewable energies is concerned, in the coming years investments will be directed to the onshore wind and also to the development of off shore business. Concerning the regulated business, the company plans to invest more in distribution by expanding networks and providing new services. Please find hereafter a graph with capex according to our expectations: Capex plan (according to our expectations)
3.500 3.000 2.500 2.000 1.500 1.000 500 0 2010
2011E Regulated Business
2012E
2013E
Liberalised Business
2014E
2015E
Renewables
Source: Company data
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Millennium investment banking Iberdrola
13 February
2012
Efficiency levels: As far as operating costs are concerned, IBE aims to reduce Opex/ Gross Margin ratio from 31% to 28% in 2012. This achievement will be possible due to a strict cost control, but also to the rising weight of renewable energies in IBR’s energy mix (as wind is a technology less intensive in terms of operating costs).
29,6% 29,4%
29,5%
29,2% 29,2% 29,0% 29,0%
28,8%
28,8%
28,6%
28,7% 28,6% 28,6% 28,6% 28,6% 28,6%
28,4% 28,2%
2020E
2019E
2018E
2017E
2016E
2015E
2014E
2013E
2012E
28,0%
2011E
Opex/ Gross margin ratio (according to our expectations)
Source: Company data, Millennium investment banking
Spanish electricity tariff deficit: Spanish electricity tariff deficit was generated basically due to the wide gap between real costs and the tariff set by the government. The deficit has been putting pressure on the Spanish utilities integrated companies, as they are indeed the ultimate entities that have been financing deficit before the securitization occurs. Very briefly, in May 2009 the Spanish Government published a Royal Decree to substantially reduce the tariff deficit by 2013. This Decree brought positive measures for the sector, authorising the securitisation of the deficit at that time and preventing the creation of additional deficits from 2013 onwards. The securitization was consecutively postponed and, at the end of 2010, after a very long waiting period, CNMV finally approved it, bringing a new hope for the sector. The securitization of the Spanish tariff deficit is still underway, but it is not yet completed. Tariff deficit receivables recognized by law was €14.6bn by the end of 2009 and it is expected that additional values related to the subsequent years (from 2010 onwards) will be recognized by law before long. Under the bonds issue program, the Electricity Deficit Amortization Fund (Fade) sold €8.5bn through five bond issues during 2011, meaning that 38% of the program was already sold. The first three issues were in January, in February and in March, each one with an amount of €2bn. Later in May, there was another issue of €1bn and more recently, in September there was an issue of €1.5bn. The pace of the new issues was strongly influenced by the evolution of the Spanish sovereign yield, as these issues are guaranteed by the Kingdom of Spain. Additionally, last September, the Spanish Government authorized private placements, which has brought more flexibility to this process and has increased the amount sold (for instance in January private placements amounted to €447mn).
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Millennium investment banking Iberdrola
13 February
2012
Following the election of this new government, there has been a strong discussion about the Spanish Tariff Deficit. The Industry, Energy and Tourism Minister has suggested that there should be a joint effort by the final consumers and by the companies to solve the tariff deficit problem. Recently, as previously mentioned, the Spanish Government announced that it decided to temporarily suspend the subsidies given to renewable technologies, as a way to reduce the tariff deficit. The Spanish Government said that it does not plan a levy on hydropower or nuclear plants. We believe that the presented measures are not enough to solve the problem and that the Spanish Government will be forced to announce further measures. According to IBE, special regime premiums represent an annual cost of €250 per customer per year, which is one of the highest costs in Europe. This situation was basically due to the high tariffs given to solar technology, when the technology was not in a mature phase. In fact, there is an unbalanced contribution of solar, as the cost of this technology represents 13% of the total costs, but in terms of energy produced it contributes with only 3%. Conversely, wind is a more balanced technology as it represents 17% of the cost and 16% of the energy produced. At 9M11, IBE’s receivables associated with Spanish tariff deficit amounted to €3.2bn (vis-a-vis €5.2bn at YE10, €3.6bn in YE09). Net Debt: Net debt wise, growth has been consistent with the increase of net profit (as previously mentioned). Net debt (excluding securitization) to EBITDA has been set in a range that goes from 2.2x to 3.8x. By YE10, Net debt to EBITDA stood at 3.3x. Adjusted net debt (before securitization) at 3Q11 stood at €31.5bn (vis-à-vis €29.4bn at YE10). Net Debt evolution
(in m€) Net debt (including tariff deficit) % YoY Net debt (ex-tariff deficit) % YoY Net Debt (ex-tariff deficit) to EBITDA
2004
2005
2006
2007
2008
2009
10.673
12.221 14,50% 10.953 2,62% 3,2
13.119 7,35% 12.547 14,55% 3,2
20.470 56,03% 12.392 -1,24% 2,2
28.393 38,71% 19.372 56,33% 3,0
29.191 2,81% 25.998 34,20% 3,8
10.673 3,7
2010 CAGR 04-10 30.015 2,82% 24.894 -4,25% 3,3
18,81% 15,16%
Sep-11 31.514 4,99% 28.310 13,72%
Source: Company data
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Millennium investment banking Iberdrola
13 February
2012
At the end of the third quarter, main source of financing comes from bond emissions (63%) and bank credit lines (20.5%). Sources of financing at the end of the 3rd quarter
Bank Loans, 20,50% TEI, 1,60%
Project Finance, 4,80% EIB, 6,00%
Commercial paper, 4,20%
Market bonds, 63%
Source: Company data
Regarding bonds emissions, IBE raised €1.850mn through two different bond issues in 2010 (€750mn of 6-year bond in June, €500mn of 10-year bond in September and €600mn of 10-year bond in December). Last year, IBE raised €2.450mn through 4 bonds issue. The first issue was in January (€750mn 3-year bond with a spread of 175bp over mid swap), the second in March (€750mn 6-year bond with a spread of 143bp over mid swap), the third in July (€350mn 15-year bond with a spread of 205bp over UK gilts) and finally the last issue in October (€600mn 4-year bond with a spread of 290bps over mid swap). This January, IBE raised €400mn through the emission of a 5-year bond with a spread of 381 bps over German bonds and 250 million Swiss Francs through the emission of a 5-year bond with an annual coupon of 3%. As far as IBE’s credit rating is concerned, we see the company very focused on keeping its current single A rating (with a stable outlook given by all the agency ratings). We believe that the geographical diversification, the amount of cash flow generated, the wide range of financing possibilities and more recently the securitization of the Spanish tariff deficit have been crucial to keep the current rating. We see this rating as a clear advantage (comparing to some European peers, namely EDP, ENEL, RWE, Centrica and E.ON), because it helps to assure lower costs of financing.
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Millennium investment banking Iberdrola
13 February
2012
Concerning IBE’s debt profile, the average life of the loans is 6.4 years, with the bulk of the reimbursements expected to occur from 2016 onwards: IBE’s debt profile (in €)
18.795
20.000 18.000 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000
1.211
1.658
2011 - 4Q11
2012
2.694
3.820
3.543
2014
2015
0 2013
2006 and following years
Source: Company data
According to our expectations, EBITDA is more than enough to cover capex needs, dividends and net financial interest costs. Still according to our expectations (IBE does not give guidance), by 2015, net debt (before securitization) should almost be €20bn and net debt to EBITDA should converge to 2.2x, which is a level close to the typical ratios of the non-Iberian utility companies’ ratio. Leverage ratios
EBITDA Capex EBITDA - Capex EBITDA - Capex - Dividends* Net Financial costs Net Debt ** Net Debt/ EBITDA (x) Net Debt/ Equity(x) Net Debt/ Capital Employed (x) EBITDA/Financial costs (x)
2010
2011E
2012E
2013E
2014E
2015E CAGR 10-15E
7.528 -5.099 2.429 1.819 -989 29.460 3,9 1,0 0,5 4,7
7.701 -3.904 3.797 3.247 -1.011 32.090 4,2 1,0 0,5 5,2
8.175 -3.712 4.463 3.492 -1.145 29.233 3,6 0,9 0,4 5,1
8.577 -4.015 4.562 3.527 -1.015 26.657 3,1 0,7 0,4 5,9
8.918 -4.201 4.716 3.613 -890 23.998 2,7 0,6 0,3 6,7
9.270 -4.218 5.052 3.875 -743 20.488 2,2 0,5 0,3 7,8
4,3% 15,8% 16,3%
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). **Net debt before securitization (gross debt – cash – asset derivatives and others) excluding liability to tax equity partners Source: Millennium investment banking, Company Data
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Millennium investment banking Iberdrola
13 February
2012
IBE’s shareholder structure: IBE’s shareholder structure is a fragmented structure, with ACS as the main shareholder. IBE’s shareholder structure
Main shareholders ACS Kutxabank Qatar Investment Authority Banco Financiero de Ahorros Bancaja Inversiones Natixis Other investors
% 19,03% 5,49% 6,16% 5,41% 5,41% 5,03% 53,48%
Source: CNMV According to the newspapers, ACS intends to raise its stake in IBE (nowadays it owns 19% of it) and IBE’s management was said to have taken measures to stop ACS’s goal. ACS is a direct competitor and it does not have a position in the board. As a reminder, there were rumors that IBE’s management was said to have tried a merger with RWE at the beginning of the last year in order to dilute ACS’s stake in IBE. Also according to the newspapers, this merger was unsuccessful and it is believed to have dropped due to the worries about likely reactions from shareholders and Spanish and German governments. It was also rumored that the aim was to create a big player with a strong presence not only in renewable energies, but also in fossil fuel and nuclear energies. IBE denied all these rumors afterwards. Additionally, IBE’s management was said to have integrated IBR in IBE and to have opened its share capital to Qatar with the same purposes. In March 2011, IBE surprised the market, by announcing a rights issue (corresponding to a 6.17% increase of share capital), that was totally written by Qatar Holdings, with whom IBE set an agreement to develop business in the Middle East and other geographic areas. Under this deal new shares were issued at €5.633, meaning that capital raised from this operation amounted to €1.906mn. Main downside and upside risks of IBE's valuation: As far as main downside and upside risks are concerned, we identified the following ones: i.
Downside risks: 1) Solutions to eliminate the problem of Spanish Tariff Deficit might affect IBE’s earnings in the coming years; 2)Top line could be under pressure due to lower energy demand and low prices; 3) Deterioration of worldwide economy (mainly deterioration of the Spanish economy); 4) More delays in Spanish securitization could lead to higher debt levels for a long period of time; 5) Rising interest rates could lead to a slower reduction of net debt in the years to come;
ii.
Upside risks: 1) An increase of fossil fuels prices could lead to an increase of the pool price and turn renewable prices more competitive; 2) Better regulation in terms of renewable energies.
20
Millennium investment banking Iberdrola
13 February
2012
4th Quarter Earnings IBE will release 4th quarter earnings on February, 23rd , before the markets opens. We expect EBITDA to post a growth of 8% YoY, with regulated activities being the most important contributor (EBITDA from these activities should account for 48% of the EBITDA for the quarter). Net profit should drop 6% YoY, as in the last quarter of the previous year the company recorded gains related to the divesture of non-recurring assets amounting to €184mn. If we were to exclude these gains, net profit should rise 22% YoY.
21
Millennium investment banking Iberdrola
13 February
2012
Valuation We estimated IBE’s equity to be worth €5.90 per share (YE12), thus leading to a Buy (Low Risk) recommendation. We valued IBE using a Sum-of-the-Parts methodology, dividing the company in its main areas, namely Liberalized Business (Spain, UK and Mexico), Regulated Business (Spain, UK, US and Brazil), Renewables, Other businesses and Other investments. We used a DCF approach to value all the areas, excluding other businesses and other investments, in which we used a multiple approach and the market value for listed companies. Sum of the parts
€ million Regulated business Spain, including regulatory receivables UK US Brazil Liberalized business Spain UK Mexico Renewables Other businesses Other investments Total EV (YE12) Net Debt & Adjustments Net Debt Y11 inc. liability to tax equity partners Unfunded pension liabilities, net of taxes 2011 dividend to be paid in 2012 (in cash)* Minority interests Equity Value Number of oustanding shares (mn) Price Target YE12 (€) Last price (€) Upside/downside potential
Enterprise Valuation Weight in Value (100%) Method EV 32.356 45,8% 16.734 DCF 23,7% 6.437 DCF 9,1% 4.114 DCF 5,8% 5.071 DCF 7,2% 17.757 25,1% 10.335 DCF 14,6% 3.783 DCF 5,4% 3.639 DCF 5,2% 18.970 DCF 26,8% 317 Multiple EV/EBITDA 12 0,4% 1.253 See details on this page 1,8% 70.653 34.845 32.640 883 971 352 35.808 6.091 According to our forecast 5,90 4,65 27%
EV/EBITDA 2012
8,1 7,3 6,0 5,3 6,9 9,5 9,5 11,1
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). Source: Millennium investment banking Other investments
€ million EDP (6.79%) Gamesa (19,67%) Own shares Other participations
EV 558 148 161 385 1.253
Valuation Method Market Value Market Value Market Value Book Value at YE10 * Multiple PBV 12
Source: Millennium investment banking
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Millennium investment banking Iberdrola
13 February
2012
WACC assumptions Our approach to WACC aims at capturing specific country risks. As far as cost of equity is concerned, we consider that risk free rate corresponds to the lowest 10-year sovereign risk of currency zone. IBE’s financial accounts are disclosed in Euros, therefore we consider the German 10-year Government yield bond (at a rounded 2.5%) as the risk free rate. Country risk premium results from the difference between the local Sovereign yield and the lowest 10-year sovereign risk of the euro currency zone multiplied by a volatility factor (ratio that relates equity with bonds volatility). As far as local Sovereign yield is concerned, we consider the yield of a 10-year local bond issue in EUR. However, if there is not an issue in EUR, we considered the yield of a 10-year local bond issue in USD, as 10-year German bonds and 10-year US bonds are set at a similar level. In the case of non-existing emissions, we consider that the Sovereign yield is strictly related to the country’s rating. Concerning the local Government yield, we consider the rates at which bonds are currently quoted. Therefore, under our approach, the cost of equity is equal to the sum of the risk free rate plus the addition of country risk premium and market risk premium multiplied by the levered beta. As far as the cost of debt before tax is concerned, we consider this to be the debt spread (long-term issuances) over the aforementioned risk free rates. Our new method of calculation of the cost of capital was deeply inspired in the approach of Damodaran1 to the Country risk premium.
1 Damodaran, Aswath, “Measuring Company Exposure to Country Risk: Theory and Practice”, Stern School of Business, Sept 2003
23
Millennium investment banking Iberdrola
WACC assumptions Risk-free rate Country risk Premium Market risk premium Unlevered beta Levered beta Cost of Equity * Spread over risk-free Cost of debt Corporate tax rate After-tax cost of debt Leverage (D/EV) WACC Terminal Growth WACC-g
13 February
Liberalized business - Spain
Liberalized business - UK
Liberalized business - Mexico
Regulated business - Spain
Regulated business - UK
Regulated business - US
2,50% 5,00% 5,00% 0,60 0,88 11,30% 3,50% 6,00% 30,0% 4,20% 40,0% 8,46% nm nm
2,50% 1,00% 5,00% 0,60 0,89 7,83% 3,50% 6,00% 28,0% 4,32% 40,0% 6,42% nm nm
2,50% 1,50% 5,00% 0,60 0,88 8,22% 3,50% 6,00% 30,0% 4,20% 40,0% 6,61% nm nm
2,50% 5,00% 5,00% 0,40 1,05 13,03% 3,50% 6,00% 30,0% 4,20% 70,0% 6,85% 0,00% 6,85%
2,50% 1,00% 5,00% 0,40 1,09 9,04% 3,50% 6,00% 26,0% 4,44% 70,0% 5,82% 0,00% 5,82%
2,50% 0,00% 5,00% 0,40 1,01 7,53% 3,50% 6,00% 35,0% 3,90% 70,0% 4,99% 0,00% 4,99%
2012
Regulated Renewables business - Brazil 2,50% 2,00% 5,00% 0,50 1,27 11,39% 3,50% 6,00% 34,0% 3,96% 70,0% 6,19% 0,00% 6,19%
2,50% 5,00% 5,00% 0,50 0,85 11,00% 3,50% 6,00% 30,0% 4,20% 50,0% 7,60% nm nm
* Cost of equity is calculated as the sum of the risk free rate plus country risk premium and market risk premium, the latter two multiplied by the levered beta. Risk free rate is the lowest 10-year sovereign risk of each currency zone. Country risk premium results from the difference between the local Sovereign yield and the aforementioned risk free rates multiplied by a volatility factor (ratio that relates equity with bonds volatility). **Cost of debt before tax is the debt spread (long-term issuances) over the risk free rates of the lowest 10-year sovereign risk of each currency zone. Source: Millennium investment banking
24
Millennium investment banking Iberdrola
13 February
2012
Valuation Key Drivers
Regulated business: As previously mentioned, regulated activities are by far the most important IBE’s activities, representing 51% of 9M2011 EBITDA. IBE’s regulated activities are located in Spain, in the UK, in the US and in Brazil. Regulated activities include distribution and transmission activities. Since 1st January 2011, all IBE’s regulated businesses were integrated in a sole area. As previously mentioned, this process of integration aims to create synergies, to increase operational efficiency and to optimize structures. Valuation wise, regulated business is the most important contributor to our EV, representing 45.8% of it.
Spain: Concerning the regulated activities in Spain, remuneration is based on the necessary costs and certain efficiency parameters. There are essentially three components in the calculation of the remuneration, namely the remuneration for investment, the remuneration for operating and maintenance and finally the remuneration for all costs necessary to the exercise of distribution activities. Please find herewith the main assumptions to value this area:
CAGR 11E-20E for IBE’s regulated activities in Spain
•
We considered a 10-year DCF and calculated a terminal value for the business.
•
Regarding the revenues, we consider that the 2011 and 2012 regulated revenues are set according to the figures published in the IET/3586/2011. From 2013 onwards, we assume that revenues increase by 2% year.
•
Concerning operating costs, we consider a steady Opex/Gross margin ratio of 20% throughout our valuation (in line with the Opex/Gross margin ratio in 2010).
•
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2020E of 0.4% and 0.3% respectively.
in euros Gross margin EBITDA
CAGR 11E-20E 0,4% 0,3%
Source: Millennium investment banking
25
Millennium investment banking Iberdrola DCF for IBE’s regulated activities in Spain
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV EV/ EBITDA
13 February
2012
2011E
2012E
2013E
2014E
2015E
2020E
1.211 -363 374 -372
1.266 -380 390 -388
1.285 -385 396 -394
1.304 -391 402 -400
1.324 -397 408 -406
1.191 -357 440 -437
850
889 1,00 889 6.293 7.191 6,85% 13.484 8,1
902 0,94 844
916 0,88 802
929 0,82 762
837 0,59 493
Source: Millennium investment banking
IBE’s regulated activities in Spain
€ million Total EV Regulated activities Spain * Regulatory receivables (tariff deficit)
Valuation Method EV (100%)
Multiples / Comments
16.734 13.484 3.250
EV/EBITDA 8,1x
DCF YE12 estimate
Source: Millennium investment banking
UK: Regarding the regulated activities in the UK, remuneration is set according to a model based on the following concepts: regulatory asset base, WACC, allowances and quality incentives. Energy networks in the UK are carried out by three different companies of the IBE Group, namely SP Manweb, SP Distribution and SP Transmission. IBE is strengthening its network activities and intends to double its regulated asset base in the coming decade. In terms of transmission, the company plans to spend approximately £2.6bn until 2021 to build 11GW of additional wind connections, to increase network export capacity and also to modernize the network. This investment will be the larger investment that IBE will make in the UK. Please find herewith the main assumptions to value this area: •
We considered a 10-year DCF and calculated a terminal value for the business.
•
We assumed that gross margin evolves in line the Regulated Asset Value (RAV). Regarding RAV, we have available information for SP Manweb and Distribution until 2015 and for SP Transmission we have information until 2021. With respect to the years that we do not have available data, we assume that growth will converge to 2%.
•
We considered that Opex increases by a rhythm similar to the evolution of RAB per year.
•
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2020E of 5.6% and 6.1% respectively.
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Millennium investment banking Iberdrola
CAGR 11E-20E for IBE’s regulated activities in the UK
13 February
in euros
2012
CAGR 11E-20E
Gross margin EBITDA
5,6% 6,1%
Source: Millennium investment banking DCF for IBE’s regulated activities in the UK
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV EV/ EBITDA
2011E
2012E
2013E
2014E
2015E
2020E
652 -169 178 -378
696 -181 189 -394
814 -212 216 -748
908 -236 238 -808
1.009 -262 262 -712
1.119 -291 290 -712
282
310 1,00 309,95 2.001 4.436 5,82% 6.437 7,3
71 0,94 66,66
102 0,89 91,29
297 0,84 250,58
406 0,64 258,24
Source: Millennium investment banking
US: As previously mentioned IBE bought Energy East in 2008 in order to broaden its regulated activities in the US. Nowadays, after selling some of the companies in the US, IBE has four different companies, namely NYSEG (New York State Electric and Gas Corporation), RG&E (Rochester Gas & Electric), CMP (Central Maine Power) – Distribution and CMP (Central Maine Power) - Transmission. Concerning regulated activities in the US, remuneration is set in accordance with the legislation of each state and tariffs are reviewed from time to time. The main investment in the US is being channeled to the Maine transmission project, in which the company will spend $1.4bn from 2010 to 2014 to build transportation lines (800 Km). This project will support the development of renewable energies and will guarantee long-term reliability for customers by rising the capacity and efficiency of the transmission grid. Please find herewith the main assumptions to value this area:
•
We considered a 10-year DCF and calculated a terminal value for the business.
•
We assumed that gross margin evolves broadly in line with the Regulated Asset Base (we considered the Regulated Asset Base for the years 2011 and 2012 disclosed by IBE in its last Investor Day and considered an average growth of approximately 4% per year from 2013 onwards);
•
We assumed an EBITDA/ Gross margin of 46% (similar to the 2011 EBITDA/ Gross margin ratio).
•
Our valuation assumes a 10-year Gross Margin and EBITDA CAGR 2011E-2020E of 4.9% in both cases.
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Millennium investment banking Iberdrola
CAGR 11E-20E for IBE’s regulated activities in the US
13 February
in euros
2012
CAGR 11E-20E
Gross margin EBITDA
4,9% 4,9%
Source: Millennium investment banking DCF for IBE’s regulated activities in the US
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV EV/ EBITDA
2011E
2012E
2013E
2014E
2015E
2020E
412 -140 182 -617
512 -174 171 -635
504 -171 203 -812
496 -168 238 -857
487 -166 274 -906
608 -207 309 -385
-163
-126 1,00 -126,36 -305,66 4.419,68 4,99% 4.114 6,0
-276 0,95 -262,70
-292 0,91 -265,30
-311 0,86 -268,84
326 0,68 220,54
Source: Millennium investment banking
Brazil: As far as regulated activities in Brazil are concerned, it is clear that the company has been reinforcing its presence in Brazil, because IBE recognizes that it is one of the fastest growing countries in the world. Last year, as previously mentioned, IBE acquired 100% of Elektro and now the company is said to be in negotiations to increase its stake in Neoenergia from 39% to 75%. Neonergia is one of the most important Brazilian companies in the electrical sector. Focused on distribution activities (Neoenergia is the owner of distribution companies Coelba, Celpe and Cosern), the company is also investing in generation activities. Distribution wise, the company distributed 30.563 GWh in 2010 to its network of 9.1 million of customers. Generation wise, Neonergia’s installed capacity comprises hydro and thermal plant. In this decade, the company intends to almost triple its capacity by investing in Hydro and Wind plants. Elektro is the eighth biggest distributor in Brazil, ranking the third position in the State of São Paulo. The 30-year concession has begun in 1998 and will end in 2028. The concession covers an area of 120.000 km” and Elektro has approximately 5.7 of customers. Please find herewith the main assumptions to value this area:
•
We considered a 10-year DCF and calculated a terminal value for the business only for Neoenergia, as Elektro concession ends in 2028
•
Revenues wise, we assume that an inflation of 4.9% added by a real growth depending on the businesses (4% in 2011 and 2012 and 2% in distribution from 2013 onwards; 5% in generation);
•
We considered an EBITDA/Revenues margin of 28%.
•
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2020E of 2.9% in both cases.
28
Millennium investment banking Iberdrola CAGR 11E-20E for IBE’s regulated activities in Brazil
13 February
in euros
2012
CAGR 11E-20E
Gross margin EBITDA
2,9% 2,9%
Source: Millennium investment banking DCF for IBE’s regulated activities in Brazil
€ million
2011E
2012E
2013E
2014E
2015E
2020E
EBIT 686 Taxes -233 D&A 165 Capex -403 WC FCF Discount factor Discounted cash flow (DCF) Explicit value Terminal value WACC EV (€mn) of which EV Neoenergia (39% stake) of which EV Elektro EV/ EBITDA (€mn)
776 -264 176 -427
789 -268 196 -473
786 -267 218 -524
786 -267 233 -556
906 -308 190 -397
261 1,00 261 2.795 2.276 6,19% 5.071 3.048 2.022 5,3
244 0,94 230
213 0,89 189
196 0,84 163
392 0,62 242
Source: Millennium investment banking
29
Millennium investment banking Iberdrola
13 February
2012
Liberalized business: Liberalized business represents 31% of the 9M2011 EBITDA and includes not only generation (production of energy), but also supply (activity related to the selling of energy to liberalized customers) activities. Since 1st January 2011, all IBE’s liberalized businesses were integrated in a sole area. This process of integration aimed to create synergies, to increase operational efficiency and to optimize structures. Valuation wise, liberalized business representins 25.1% of our EV.
Spain (includes activities in Portugal): Spanish liberalized business includes liberalized generation and supply activities. Since 2009 the supply of electricity is fully deregulated, which means that prices are agreed between the final consumer and the supplier. Besides the cost of energy, prices include the Access Tariffs (such as transmission, distribution, renewable energy subsidies, past tariff deficits, amongst other costs). As far as generation activities are concerned, IBE’s energy mix is diversified and mostly based on low CO2 energies, namely on Hydro and Nuclear represents 61% of the portfolio, which means that almost half of the portfolio has very low generation costs per MWh: Please find herewith the main assumptions to value this area:
We used a 25-year DCF (from 2012 to 2036), as we assume that 25 years is the average of the useful life of the IBE’s generation assets. In Spain, IBE’s generation assets comprise CCGT (useful life of 35 years), conventional thermal plants from (25 to 50 years), nuclear plants (about 40 years) and hydro plants (30 to 75 years).
In terms of electricity, on the revenues side, we assumed a selling price of €55/MWh in 2012 (increasing by 2% per year). On the procurement side, we considered an average cost fuel of €14.2/MWh in 2012 (increasing by 2% per year) and that IBE continues to purchase the renewable production at a price of €46/MWh (increasing by 2% per year).
Production wise, we assumed a load factor of 20% in the case of CCGT, 22.5% in the case of Hydro, 80% in the case of Nuclear and 25% in the case of coal.
Concerning operating costs, we consider a steady Opex/Gross margin ratio of 29% throughout our valuation (vis-à-vis 31% in 2010, 36% in 2009 and 28% in 2008), slightly above the IBE’s target (28%).
As far as capex is concerned, we only considered the investment in new hydro plants in Spain. Concerning the Hydro plants in Portugal (Tâmega 1000MW), we did not include them in our valuation. Indeed, bearing the evolution of energy consumption in Portugal and also the current tough crisis in mind, we believe that it does not make sense to invest in hydro as the way it was planned in the past, unless the Portuguese economy recovers faster than initially expected in the medium term.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 1.5% and 1.4%, respectively and an EBITDA/Gross margin gradually decreasing in the coming two years and almost stabilizing afterwards.
30
Millennium investment banking Iberdrola CAGR 11E-36E for IBE’s liberalized activities in Spain
13 February
in euros
2012
CAGR 11E-36E
Gross margin EBITDA
1,5% 1,4%
Source: Millennium investment banking
EBITDA/ Gross margin
62,50% 61,50% 60,50% 59,50% 58,50% 57,50% 56,50% 55,50% 54,50% 53,50%
2034E
2032E
2030E
2028E
2026E
2024E
2022E
2020E
2018E
2016E
2014E
2012E
2010
2008
52,50%
Source: Millennium investment banking
DCF for IBE’s liberalized activities in Spain
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV EV/ EBITDA (€mn)
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
1.090 -327 525 -509
959 -288 540 -538
993 -298 540 -405
1.021 -306 540 -414
1.050 -315 540 -405
1.198 -359 540 -448
1.592 -478 457 -462
1.903 -571 380 -432
778
673 1,00 673 8,46% 10.335 6,9
830 0,92 765
841 0,85 715
869 0,78 681
931 0,52 486
1.109 0,23 257
1.280 0,14 182
Source: Millennium investment banking
31
Millennium investment banking Iberdrola
13 February
2012
UK: As far as generation activities are concerned, IBE’s energy mix in the UK is mostly based on thermal energy (coal and CCGT): Please find herewith the main assumptions to value this area:
CAGR 11E-36E for IBE’s liberalized activities in the UK
We used a 25-year DCF, as we assume that 25 years is the average of the useful life of the IBE’s generation assets. In UK, IBE’s generation assets comprise CCGT (useful life of 35 years), conventional thermal plants from (useful life from 25 to 50 years) and hydro plants (useful life from 30 to 75 years).
In terms of electricity, we estimate the gross margin, assuming a spark spread of £8/MWh and a dark spread of £4/MWh in 2012, assuming that both spreads rises by 2% per year.
Production wise, we considered throughout our valuation a load factor of 70% in the case of CCGT, 15% in the case of Hydro and 40% in the case of coal.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 1.9% and 1.6%, respectively.
in euros
CAGR 11E-36E
Gross margin EBITDA
1,9% 1,6%
Source: Millennium investment banking
DCF for IBE’s liberalized activities in the UK
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV (€mn) EV/ EBITDA (€mn)
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
37 -9 315 -116
84 -22 315 -119
92 -24 315 -119
96 -25 315 -119
100 -26 315 -119
122 -32 315 -119
169 -44 315 -119
202 -52 315 -119
225
257 1,00 257 6,42% 3.783 9,5
264 0,94 248
267 0,88 236
270 0,83 224
286 0,61 174
321 0,33 105
345 0,22 77
Source: Millennium investment banking
32
Millennium investment banking Iberdrola
13 February
2012
Mexico: As far as generation activities are concerned, IBE’s energy mix in Mexico is based on thermal energy. This business is very stable, as the bulk of the production is sold to CFE (Comission Federal de Electricidad) through Power Purchase Agreements (low-risk contracts). Please find herewith the main assumptions to value this area:
CAGR 11E-36E
We used a 25-year DCF, as we assume that 25 years is the average of the useful life of the IBE’s generation assets. In Mexico, IBE’s generation assets comprise CCGT (useful life of 35 years).
In terms of electricity, we estimate an average gross margin of price of $17.5/MWh in 2012.
Regarding production, we considered a load factor of 82.5%.
Concerning operating costs, we consider a steady Opex/Gross margin ratio of 25% throughout our valuation.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 0.8% in both cases.
in euros
CAGR 11E-36E
Gross margin EBITDA
0,8% 0,8%
Source: Millennium investment banking
DCF for IBE’s liberalized activities in Mexico
€ million EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV (€mn) EV/ EBITDA (€mn)
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
294 -88 60 -14
322 -97 60 -15
324 -97 60 -15
326 -98 60 -15
328 -98 60 -15
338 -101 60 -15
360 -108 60 -15
376 -113 60 -15
252
270 1,00 270,36 6,61% 3.639 9,5
272 0,94 254,74
273 0,88 240,04
274 0,83 226,21
281 0,60 168,29
297 0,32 93,68
308 0,22 66,18
Source: Millennium investment banking
33
Millennium investment banking Iberdrola
13 February
2012
Renewable business: Renewable business includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. As previously mentioned, last year IBE launched a tender offer to buy back the shares that it had sold before, in order to control 100% of the company. Renewable business (19% of 9M2011 EBITDA) includes not only wind parks, but also energy from mini-hydro and Gas & Thermal technologies. IBE is the world leader in the wind energy, with installed capacity spread across the globe. At the end of 2011, IBE had 13.690 MW of installed capacity, the bulk of it deployed in Spain and in the US. After a strong pace of new installations in the previous years (1.7GW on average per year from 2008 to 2010), the company reduced the rhythm of new deployments by lowering its goal of new installations to 2.1GW from 2011 to 2012. As far as expansion is concerned, IBE intends to broaden its activities in the UK and in the Rest of the World, as Spain and the UK are less attractive for business now. In the case of the US market, IBE said that if the PTCs (production tax credit) are not renewed; the company won’t invest more in the US market. In this market, we consider that IBE will deploy 100MW per year from 2012 onwards. Valuation wise, renewable business accounts for 26.8% of our EV. Please find herewith the main assumptions to value this area:
CAGR 11E-36E
We used a 25-year DCF, as we assume that 25 years is the average of the useful life of the IBE’s renewable assets. According to the experts, the useful life of an onshore wind farm could vary from 20 years to 25 years.
In terms of wind energy, we estimate an average gross margin of price of €70/MWh in 2012, considering that gross margin rises by 2% per year.
Regarding production, we considered a load factor of 23% in Spain, 30% in the US, 24% in the UK and 23% in ROW. New installations wise, we assume that the company will deploy 750MW in 2012 and 650MW deployed from 2013 onwards.
Concerning operating costs related to wind, we considered a steady Opex per MW of €40 thousand, increasing 2% per year.
Valuation wise, we did not include investments in off-shore business due to the lack of visibility over this business.
Our valuation assumes a Gross Margin and EBITDA CAGR 2011E-2036E of 4.4% and 4.6% respectively.
in euros Gross margin EBITDA
CAGR 11E-36E 4,4% 4,6%
Source: Millennium investment banking
34
Millennium investment banking Iberdrola DCF for IBE’s renewable businesses
13 February
2012
€ million
2011E
2012E
2013E
2014E
2015E
2020E
2030E
2036E
EBIT Taxes D&A Capex WC FCF Discount factor Discounted cash flow (DCF) WACC EV EV/ EBITDA
654 -196 854 -1.690
786 -236 921 -1.110
853 -256 982 -978
909 -273 1.046 -997
968 -290 1.113 -1.016
1.292 -387 1.478 -1.116
1.974 -592 2.106 0
2.218 -665 2.372 0
-378
361 1,00 360,57 7,60% 18.970,2 11,1
601 0,93 558,73
686 0,86 592,72
774 0,80 621,64
1.266 0,56 704,55
3.488 0,27 933,05
3.924 0,17 676,52
Source: Millennium investment banking
35
Millennium investment banking Iberdrola
13 February
2012
Multiples
Multiples Competitive Iberian Competitive EDP Endesa Iberdrola Gas Natural Non-Iberia Competitive EDF Centrica ENEL E.On AG Regulated Networks Red Electrica Corp. S.A. REN Enagas Iberdrola Iberdrola (MIB)
Last Mkt Cap EV / EBITDA Price (€) (€mn) 2011 2012 183.618 5,8 5,4 65.688 6,7 6,3 2,28 8.337 7,4 7,1 15,48 16.389 4,5 4,4 4,70 28.084 7,6 7,2 12,99 12.877 6,7 6,5 117.931 5,3 4,9 18,71 34.592 4,9 4,5 294,50 18.308 5,7 5,1 3,30 30.993 4,9 4,8 17,01 34.037 6,0 5,1 22.199 3,5 3,2 35,69 4.828 8,2 7,5 2,11 1.124 7,3 6,7 15,31 3.655 8,1 7,5 4,70 28.084 7,6 7,2 4,70 28.084 7,8 7,0
EV / EBIT 2011 2012 9,3 8,5 10,4 9,8 12,3 11,7 6,5 6,4 11,9 11,0 11,0 10,4 8,7 7,7 8,9 8,1 7,7 6,8 7,3 7,3 10,2 8,2 5,2 4,7 11,9 10,7 12,1 10,7 12,1 11,1 11,9 11,0 12,1 10,8
PBV 2011 2012 1,0 1,0 0,9 0,9 1,0 1,0 0,9 0,8 0,8 0,8 1,0 1,0 1,1 1,1 1,1 1,0 2,4 2,2 0,8 0,8 0,8 0,8 1,0 0,9 2,7 2,4 1,1 1,0 2,0 1,8 0,8 0,8 0,9 0,8
P/E 2011 2012 10,1 9,0 8,8 8,7 7,6 7,6 7,6 7,6 9,2 9,1 10,2 9,6 10,8 9,2 10,3 9,0 11,6 10,6 7,5 7,2 14,0 10,4 4,4 4,0 10,6 9,5 8,8 7,5 10,2 9,6 9,2 9,1 9,6 9,2
Net Debt/ EBITDA 2011 2012 2,5x 2,4x 3,3x 3,0x 4,5x 4,1x 1,6x 1,4x 3,8x 3,4x 3,6x 3,3x 2,1x 2,0x 2,2x 2,3x 1,0x 1,0x 2,6x 2,5x 2,0x 1,8x 1,8x 1,7x 4,1x 3,8x 4,9x 4,7x 3,9x 3,7x 3,8x 3,4x 4,2x 3,6x
Div. Yield 2011 2012 6,6% 6,9% 6,9% 7,1% 8,1% 8,8% 6,6% 6,7% 7,0% 7,0% 6,2% 6,5% 6,4% 6,8% 6,1% 6,5% 5,1% 5,7% 8,0% 8,2% 5,9% 6,5% 2,8% 3,1% 6,1% 6,8% 8,0% 8,1% 6,4% 7,2% 7,0% 7,0% 7,1% 7,3%
Source: Millennium investment banking, Facset
36
Millennium investment banking Iberdrola
13 February
2012
Financial Statements Income statement
€ million Gross profit Opex (includes taxes) EBITDA D&A EBIT Results from equity consolidated Financial income (expense) Results of non-current assets Pre-tax profit Income tax expense Minority interest Net profit Opex (excludes taxes) /Gross profit EBITDA/Gross profit margin EBIT/Gross profit margin
2008
2009
2010
2011E
2012E
2015E
10.001 -3.588 6.413 -2.151 4.262 73 -1.026 555 3.864 -895 -108 2.861 33% 64% 43%
10.788 -3.973 6.815 -2.306 4.509 32 -1.109 225 3.658 -719 -114 2.824 33% 63% 42%
11.645 -4.117 7.528 -2.698 4.830 27 -1.288 272 3.841 -899 -71 2.871 30% 65% 41%
12.069 -4.368 7.701 -2.768 4.933 39 -1.091 42 3.922 -902 -125 2.895 30% 64% 41%
12.751 -4.576 8.175 -2.876 5.299 39 -1.185 0 4.154 -955 -128 3.071 29% 64% 42%
14.267 -4.997 9.270 -3.320 5.950 42 -785 0 5.207 -1.198 -135 3.874 29% 65% 42%
CAGR 10-12E 4,6% 5,4% 4,2% 3,2% 4,7% 20,0% -4,1% -100,0% 4,0% 3,1% 34,2% 3,4% -0,2% -0,3% 0,0%
CAGR 10-15E 4,1% 4,0% 4,3% 4,2% 4,3% 8,8% -9,4% na 6,3% 5,9% 13,8% 6,2% -0,2% 0,1% 0,0%
Source: Millennium investment banking Operating performance Breakdown by business
€ million
2011E
2012E
2013E
2014E
2015E
Gross profit Regulated Business Spain UK US Brazil Liberalised Business Spain UK Mexico Renewables Other business Corporate&Adjustments EBITDA Regulated Business Spain UK US Brazil Liberalised Business Spain UK Mexico Renewables Other business Corporate&Adjustments
12.069 5.554 2.079 1.004 1.293 1.178 4.096 2.870 752 475 2.095 374 -51 7.701 3.860 1.585 830 594 851 2.320 1.614 351 354 1.508 49 -36
12.751 6.042 2.169 1.065 1.487 1.321 4.055 2.718 825 512 2.324 382 -52 8.175 4.176 1.656 885 683 952 2.279 1.499 398 382 1.706 50 -36
13.302 6.331 2.202 1.221 1.540 1.368 4.142 2.778 849 515 2.492 389 -53 8.577 4.403 1.681 1.030 707 985 2.324 1.533 407 384 1.835 51 -37
13.778 6.574 2.235 1.346 1.596 1.397 4.209 2.829 862 517 2.653 397 -54 8.918 4.590 1.706 1.146 733 1.004 2.358 1.561 411 386 1.956 52 -38
14.267 6.823 2.268 1.481 1.656 1.418 4.276 2.881 875 519 2.819 405 -55 9.270 4.783 1.732 1.271 761 1.019 2.392 1.590 415 388 2.080 53 -39
CAGR 10-12E 4,6% 6,7% 2,8% 4,8% -2,0% 34,1% 0,7% 2,9% -4,8% -0,8% 7,1% 2,0% 2,0% 4,2% 7,3% 3,1% 5,3% -2,0% 30,8% -3,2% 0,5% -14,5% -3,0% 8,3% 2,0% 2,0%
CAGR 10-15E 4,1% 5,2% 2,0% 8,8% 1,3% 14,0% 1,3% 2,3% -0,8% -0,1% 6,8% 2,0% 2,0% 4,2% 5,7% 2,1% 9,7% 1,3% 12,9% -0,3% 1,4% -5,3% -1,0% 7,4% 2,0% 2,0%
Source: Millennium investment banking
37
Millennium investment banking Iberdrola Balance sheet
13 February
2012
2008
2009
2010
2011E
2012E
2015E
CAGR 10-12E
CAGR 10-15E
Assets Intangible assets Tangible fixed assets Non current trends Deferred Taxes Non-Current receivables Total Non-Current Assets
17.871 43.787 6.554 3.242 338 71.791
18.042 47.018 2.686 3.142 487 71.375
18.223 50.621 2.636 3.488 479 75.447
19.500 51.757 2.846 4.500 500 79.102
19.500 52.593 2.885 4.500 500 79.978
19.500 55.510 3.008 4.500 500 83.018
3,4% 1,9% 4,6% 13,6% 2,2% 3,0%
1,4% 1,9% 2,7% 5,2% 0,9% 1,9%
Inventories Accounts receivables Current financial assets Nuclear fuel Cash and equivalents Total Current Assets Total Assets
2.331 6.145 3.189 294 2.087 14.045 85.836
2.151 6.266 6.197 287 1.091 15.992 87.367
1.971 6.977 6.924 280 2.102 18.254 93.701
2.043 5.986 5.750 325 2.102 16.205 95.308
2.158 6.324 5.000 325 2.102 15.909 95.887
2.415 7.076 3.000 325 2.102 14.918 97.936
4,6% -4,8% -15,0% 7,7% 0,0% -6,6% 1,2%
4,1% 0,3% -15,4% 3,0% 0,0% -4,0% 0,9%
25.708
29.030
31.664
32.446
34.828
43.278
4,9%
6,4%
Liabilities Deferred revenues Provisions Long-term capital instruments Long-term borrowings Total Non-Current Liabilities
3.088 3.544 798 40.022 47.452
4.065 3.462 671 39.932 48.130
4.463 3.643 652 41.539 50.297
5.000 3.643 550 44.467 53.660
5.000 3.643 550 42.153 51.346
5.000 3.643 550 34.614 43.807
5,8% 0,0% -8,2% 0,7% 1,0%
2,3% 0,0% -3,3% -3,6% -2,7%
Financial debt Trade creditors and other Total Current Liabilities Total Liabilities Total Equity and Liabilities
11.996 681 12.677 60.129 85.837
9.739 468 10.207 58.337 87.367
10.838 902 11.740 62.037 93.701
9.052 150 9.202 62.862 95.308
9.563 150 9.713 61.059 95.887
10.700 150 10.850 54.658 97.936
-6,1% -59,2% -9,0% -0,8% 1,2%
-0,3% -30,1% -1,6% -2,5% 0,9%
€ million
Total Equity
Source: Millennium investment banking
Cash flow statement
€ million Cash flow from operations Cash flow from investment Cash flow from financing
2009
2010
2011E
2012E
2013E
2014E
3.858 -4.817 -37
7.294 -7.132 849
3.942 -4.178 236
6.636 -2.962 -3.673
6.963 -3.515 -3.447
7.289 -3.701 -3.588
Accum Accum 10-12E 10-15E 7.718 17.871 39.841 -3.218 -14.272 -24.707 -4.500 -2.588 -14.123
2015E
Source: Millennium investment banking
38
Millennium investment banking Iberdrola Leverage ratios
EBITDA Capex EBITDA - Capex EBITDA - Capex - Dividends* Net Financial costs Net Debt ** Net Debt/ EBITDA (x) Net Debt/ Equity(x) Net Debt/ Capital Employed (x) EBITDA/Financial costs (x)
13 February
2012
2010
2011E
2012E
2013E
2014E
2015E CAGR 10-15E
7.528 -5.099 2.429 1.819 -989 29.460 3,9 1,0 0,5 4,7
7.701 -3.904 3.797 3.247 -1.011 32.090 4,2 1,0 0,5 5,2
8.175 -3.712 4.463 3.492 -1.145 29.233 3,6 0,9 0,4 5,1
8.577 -4.015 4.562 3.527 -1.015 26.657 3,1 0,7 0,4 5,9
8.918 -4.201 4.716 3.613 -890 23.998 2,7 0,6 0,3 6,7
9.270 -4.218 5.052 3.875 -743 20.488 2,2 0,5 0,3 7,8
4,3% 15,8% 16,3%
* Dividends paid in cash. We assumed that dividends are paid in cash (50%) and issued in capital (50%). **Net debt before securitization (gross debt – cash – asset derivatives and others) excluding liability to tax equity partners Source: Millennium investment banking
Capex
€ million
2010
2011E
2012E
2013E
2014E
2015E
Capex Regulated Business Liberalised Business Renewables Other businesses
5.099 1.310 622 2.948 219
3.904 1.475 640 1.690 100
3.712 1.830 672 1.110 100
4.015 2.397 540 978 100
4.201 2.557 548 997 100
4.218 2.562 540 1.016 100
*The breakdown per business for the year 2010 was calculated by us Source: Millennium investment banking
39
Millennium investment banking Iberdrola
13 February
2012
Quartely Data P&L
€ million
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
Gross profit Operating costs (includes taxes) EBITDA D&A & Provisions EBIT Capital gains / (losses) Financial income (expense) Income from group and ass. comp. Pre-tax profit Income tax expense Minority interest Profit from disc. op. net of tax Net profit EBITDA margin EBIT margin
3.256 -1048 2.273 -670 1.603 21 -227 7 1405 -326 -64 0 1015 70% 49%
2.858 -1173 1.731 -708 1.024 0 -297 12 738 -168 -21 0 549 61% 36%
2.714 -1197 1.581 -692 888 21 -274 10 646 -59 -8 0 579 58% 33%
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
27% 23% 30% 32%
24% 25% 22% 21%
22% 26% 21% 18%
27% 26% 27% 29%
27% 23% 30% 32%
24% 25% 22% 21%
22% 26% 21% 18%
27% 26% 27% 29%
1% -6% 4% 4%
5% 7% 4% 6%
-1% 13% -8% -17%
9% 10% 8% 12%
6% 10% 4% 4%
5% 4% 6% 9%
9% 2% 13% 18%
3% 2% 4% 3%
10% -4% 16% 27%
-12% 12% -24% -36%
-5% 2% -9% -13%
19% 0% 34% 60%
7% -3% 12% 18%
-13% 5% -23% -33%
-2% 0% -3% -6%
14% 0% 24% 39%
3.241 -1198 2.116 -698 1.418 0 -294 10 1134 -350 -32 0 752 65% 44%
3.458 -1156 2.368 -700 1.668 0 -296 10 1382 -325 -32 0 1025 68% 48%
3.001 -1219 1.827 -710 1.117 0 -296 10 831 -195 -32 0 604 61% 37%
2.945 -1222 1.780 -730 1.050 0 -296 10 764 -180 -32 0 553 60% 36%
3.346 -1227 2.199 -736 1.463 0 -296 10 1177 -276 -32 0 868 66% 44%
Source: Company data, Millennium investment banking Seasonality
Weight in FY Gross Margin Opex EBITDA EBIT Growth Rates YoY Gross Margin Opex EBITDA EBIT Growth Rates QoQ Gross Margin Opex EBITDA EBIT
Source: Company data, Millennium investment banking
40
Millennium investment banking Iberdrola Gross profit Breakdown
13 February
2012
€ million
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
Gross Profit Regulated Spain UK US Brazil Liberalized Spain UK Mexico Interco Renewables Other business Corporate & Other adjustments
3.255 1.353 509 277 375 192 1.189 837 240 113 0 604 124 -15
2.858 1.317 504 235 272 305 965 695 159 110 0 507 83 -13
2.714 1.416 510 231 306 370 850 573 167 110 0 408 51 -11
3.241 1.468 555 261 340 310 1.093 764 186 142 0 578 116 -13
3.458 1.458 498 272 422 267 1.228 786 324 118 0 664 121 -14
3.001 1.416 497 251 323 344 984 693 164 128 0 524 88 -11
2.945 1.541 551 251 366 373 870 586 150 134 0 463 79 -9
3.346 1.626 623 291 376 336 973 653 187 133 0 673 93 -19
Source: Company data, Millennium investment banking EBITDA Breakdown
€ million
1Q11
2Q11
3Q11 4Q11E 1Q12E 2Q12E 3Q12E 4Q12E
EBITDA Regulated Spain UK US Brazil Liberalized Spain UK Mexico Interco Renewables Other business Corporate & Other adjustments
2.273 984 399 219 225 140 779 541 149 90 0 453 56 2
1.731 908 381 193 110 224 511 391 33 87 0 332 11 -31
1.581 948 393 181 104 270 416 285 47 84 0 251 -9 -24
2.116 1.020 411 237 155 217 614 397 122 94 0 473 -9 18
2.368 1.006 366 219 226 195 813 504 218 91 0 512 49 -13
1.827 952 373 203 124 252 537 395 40 102 0 346 10 -18
1.780 1.056 434 198 156 268 429 295 37 98 0 300 8 -13
2.199 1.162 483 265 177 237 500 305 103 92 0 549 -18 7
Source: Company data, Millennium investment banking
41
Millennium investment banking Iberdrola
13 February
2012
DISCLOSURES
This report has been prepared on behalf of Millennium investment banking (Mib), a registered trademark of Banco Comercial Português, S.A. (Millennium bcp). Millennium bcp is regulated by Comissão de Mercado de Valores Mobiliários. A draft of the report was shown to the company. Neither the company was aware of the recommendation nor was it changed; Recommendations: Buy means more than 10% absolute return; Neutral means between 0% and +10% absolute return; Reduce means between -10% and 0% absolute return; Sell means less than -10% absolute return. Unless otherwise specified, the time frame for price targets included in this report is current year-end or next year-end. Risk is defined by the analyst’s view in a qualitative way. Usually we update our models and price targets in between 6 and 18 months. Millennium bcp prohibits its analysts and members of their households to own any shares of the companies covered by them. BCP group may have business relationships with the companies mentioned in this report. Millennium bcp, expects to receive or intends to seek compensations for investment banking services from the companies mentioned in this report. The views expressed above, accurately reflect personal views of the authors. They have not and will not receive any compensation for providing a specific recommendation or view in this report. There were not any agreements between the companies covered and the analysts regarding the recommendation. Analysts are paid in part based on the profitability of BCP group, which includes investment banking revenues. Iberdrola 3,35 6,19 5,96 5,72 5,49 5,25 5,02 4,78 4,55
Recommendation
Stock Price
Feb/12
Jan/12
Dec/11
Nov/11
Oct/11
Sep/11
Aug/11
Jul/11
Jun/11
May/11
Apr/11
Mar/11
Feb/11
Jan/11
Buy Neutral Reduce Sell (Unrated)
Price Target
DISCLAIMER This information is not an offer to sell or a solicitation to enter into any particular deal or contract. It consists of data compiled by or of opinions or estimates from Banco Comercial Português, S.A. and no representation or warranty is made as to its accuracy or completeness. This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damages that may, directly or indirectly, derive from it. Its reproduction is not allowed without permission from the BCP group. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they have been collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information / these opinions may be altered without prior notice and may differ or be contrary to opinions expressed by other business areas of BCP group as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results.
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OFFICE LOCATIONS Millennium investment banking Av. José Malhoa, Lote 27 - 5 1099-010 Lisboa Portugal Telephone +351 21 003 7811 Fax
+351 21 003 7819 / 39
Equity Team Luis Feria (Head of Equities) Equity Research +351 21 115 6220 António Seladas, CFA (Head) Fundamental Analysis Alexandra Delgado, CFA (Telecoms and IT) João Flores (Media and Retail) João Mateus (Industrials and Utilities) Rita Silva (Banks) Vanda Mesquita (Utilities and Oil&Gas) Market Analysis Ramiro Loureiro Sónia Martins Telma Santos Publishing Sónia Primo Prime Brokerage +351 21 003 7855 Vitor Almeida (Head) Hugo Ferreira Pinto Paula Val Institutional Equity Sales +351 21 115 6279 Karsten Sommer (Head) Manuel Lança Lopes Equity Trading +351 21 003 7850 Paulo Cruz (Head) Diogo Palma Gonçalo Lima Jorge Caldeira Nuno Sousa Paulo Santos Pedro Cruz Pedro Ferreira Cruz Pedro Gonçalves Pedro Lalanda Rodrigo Roque Pinho Equity Derivatives +351 21 003 7890 Jorge Pina (Head) Ana Lagarelhos Diogo Justino Marco Barata Maria Cardoso Baptista, CFA
