Electricity North West Limited (IBE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to Iberdrola's presentation. I will now give the floor to Alvaro Simancas.

Hello. Good afternoon, everyone, and thank you for joining us today in such a short notice. We know it's Friday and the summer break is around the corner. The purpose of the call is to give you more detail on the recent acquisition of Electricity North West in the U.K. We have here with us Mr. David Mesonero, our Global Head of Corporate Development, who will be in charge of giving you more details on this transaction. We plan to go through the presentation that we have shared with you in advance. If you don't have it, you can already download on our corporate website. We know that we are in the middle of result season, so you might be exhausted. To this regard, we have designed the event to last no more than 30 minutes. After the presentation, we will move on to a live Q&A. Questions have to be submitted through the operator. Once the event is done, as always, any additional questions you may have can be directed to the IR team that will be delighted to answer. You can send them by e-mail to this address, [email protected]. Now without further ado, I leave the floor to Mr. David Mesonero. David, over to you.

Thanks, Alvaro. Good afternoon, all. Thank you for taking your time at the beginning of August to attend to our presentation of this very important transaction that we have recently announced and which is completely aligned with our strategy to invest in regulated electricity networks in our core countries. We have reached an agreement with the shareholders of Electricity North West, ENW, a high-profile U.K. power distribution company, to acquire an initial 85.6% stake in the company by GBP 1.7 billion, followed by a GBP 400 million capital increase to reach a final 88% stake. This capital increase will be used to deleverage ENW, and it will be done at the same price than the initial 85.6% shares acquisition. The remaining 12% will be held by KDM, a Japanese consortium led by Kansai Electric, the utility of Osaka, who is one of current ENW shareholders. 100% enterprise value for ENW reached GBP 4.2 billion, which implies an EV/RAV multiple of 1.44x. The U.K. electricity industry requires distribution and transmission network owners to make significant investments during the transition towards the government long-term net 0 targets. With a greater market presence, Iberdrola, in combination with EMW, we will better position to successfully navigate this process. This acquisition will allow us to accelerate our growth in regulated electricity networks in a high-growth and double A-rated market like the U.K. It is well aligned with Iberdrola's specific plan to further drive the energy transition and to contribute to the creation of a secure and sustainable energy future with networks at the heart of this plan. This transaction enables Iberdrola and ScottishPower with its nearby service territories to unlock potential operational and network performance improvements while benefiting from the implementation of best management practices. We will become U.K.'s second largest electricity transmission and distribution company with a total RAV of EUR 14 billion, becoming, together with the U.S., the group's largest country by RAV exposure to electricity networks. Beyond the operational merits and strategic rationale of this acquisition, it will be EPS accretive from year 1. It will create value without considering transaction efficiencies and will have no impact on our current rating, reaffirming our full commitment to the group's financial strength. This transaction is subject to customary approvals in the U.K., and we expect completion to occur in Q4 2024, so this year, and full control to be achieved during H1 2025. Now let's pass to the Page #5. To give you a little more color for ENW, it is 1 of the 14 distribution network operators in the U.K., covering the northwest of England from rural Cumbria to the Greater Manchester area. It is located between the 2 regions covered by ScottishPower distribution, SPD, in Scotland and ScottishPower Manweb, SPM, in Wales and England. We believe that this transaction will help us to unlock significant efficiencies that we will discuss in more detail later in the presentation. ENW is expected to reach a regulatory asset value of GBP 2.9 billion in March 2025, in line with RIIO-ED2 approved business plan. The RAV has grown at an 8% run over the last 6 years and serves 2.4 million points of supply, equivalent to approximately 5 million customers. ENW has 12,800 kilometers of overhead lines and 47,300 kilometers of underground lines. In addition to its operational size, ENW has been a top performer, being ranked in the top 3 in the main KPIs reported by Ofgem. From a financial perspective, the company is expected to contribute with an EBITDA of around GBP 400 million and a net income of around GBP 125 million in March 2025. As of March 2024, the company had a reported net debt position of GBP 2.2 billion. Moving to the Page 6. And as mentioned before, the agreement allows Iberdrola to reach an 88% stake in the company through the acquisition of existing shares for GBP 1.7 billion and the subscription of a GBP 400 million capital increase that will be used to repay debt. As commented earlier, this capital increase will be done at the same price than the 85.6% initial acquisition. Equitix, a U.K. infrastructure asset manager, and CNIC, a Chinese entity, are fully exiting, whilst KDM, a Japanese consortium led by the utility of Osaka, Kansai Electric, will partially exit and retain a 12% stake in ENW post capital increase. We have already signed a long-term shareholders' agreement with KDM, and we look forward to working constructively with them supporting the current local management and the long-term strategy of the company. Iberdrola has, as you know perfectly, a strong track record of working collaboratively with reputable partners on various long-term partnerships. We welcome Kansai as our first Japanese global partner, and we are totally confident that we will be able to pursue other opportunities around the world together. Moving to the next page, Page #7. This acquisition is fully aligned with Iberdrola announced 2024-2026 strategic plan of increasing exposure to electricity networks in one of its core markets. Being a regulated business, ENW has strengths and expands Iberdrola regulated profile, adding low-risk and predictable cash flow in a stable and proven regulatory environment. Iberdrola, through ScottishPower, is the operator of the narrowing north and south electricity distribution network, which will allow for improving operational efficiencies due to business proximity and strategic alignment. The U.K. is a core country for Iberdrola, where we are already envisaging underwriting a significant CapEx given the strong expected growth in network investments in the coming years. ENW will allow us to capture a larger share of that organic growth at no premium to RAV. We remain fully committed to our financial strength, and we will be able to fund this transaction with our own resources whilst maintaining enough headroom in our current rating. And furthermore, this acquisition will be EPS accretive from first year before considering transaction efficiencies. Moving to the Page #8. And in addition, with a strong transactional rationale commented before, despite being a competitive process and also, as anticipated by our Chairman last week, the acquisition has been agreed at a reasonable price. From a valuation perspective, the acquisition fits perfectly with Iberdrola's prudent financial investment strategy, guaranteeing EPS accretion and value creation for shareholders from year 1. 100% enterprise value for ENW reached GBP 4.2 billion. That implies an EV/RAV multiple of 1.44. The price paid reflects ENW's exciting growth prospects and outperformance for this and going forward, excluding any potential value creation derived from the implementation of future efficiencies. Iberdrola has been very disciplined in ensuring the right price is paid, particularly when comparing it with previous transactions involving other DNOs in the U.K. Passing to the pro forma figures in the Page #9. And as explained before, the acquisition of ENW will create the second largest transmission distribution company in the U.K. by regulatory asset value with a combined RAV of EUR 14 billion, only behind National Grid. We will also integrate more than 2.4 supply points into the group. Moreover, the acquisition will push Iberdrola consolidated RAV beyond EUR 50 billion with 30% of the RAV attributable to the U.K. This is fully aligned with Iberdrola's '26 strategic plan and accelerate its regulatory asset targets, improving geographical diversification and increasing the weight of electricity networks in Iberdrola's business mix. ENW is also expected to add GBP 400 million of EBITDA and GBP 125 million of net income to the Iberdrola's group. As commented before, Iberdrola will fully subscribe a GBP 400 million capital increase that will be dedicated to strengthening ENW's balance sheet position by repaying debt. In the medium term, Iberdrola will maintain a prudent financial policy with a strong commitment to maintain its current credit rating with agencies' thresholds. Passing to the next slide. This transaction enables Iberdrola and ScottishPower to enhance its network operations in the future. These enhancements and potential efficiencies have not been factored into our announced price. There are a broad number of areas from where these efficiencies can be obtained: operational efficiencies, procurement efficiencies, and of course, corporate and financial efficiencies. We have a long and successful track record integrating companies into our group, taking advantage of each company management best practices in the benefit of all our stakeholders. Moving to the last slide regarding time line. And just to finalize, from a process perspective, we expect the following milestones. We have signed the contractual agreements today, and the transaction remains conditional only to the approval from the U.K. government under the National Security and Investment Act, NSIA, as a result of ENW's energy sector activities. No other regulatory approvals are required for completion. We will file as soon as possible the request for NSIA approval by the U.K. Secretary of State for Business, Energy and Industrial Strategy. In parallel, we will request clearance from the Competition and Markets Authority. This is a voluntary and non-suspensory filing, meaning that completion can take place before clearance is obtained. We expect to fulfill the NSIA condition precedent, and hence, transaction closing during Q4 2024. Finally, full CMA clearance is expected in the first semester of 2025. Now I remain available to answer any questions you may have on this high-profile and transformational transaction. Thank you very much.

Thank you, David. Now we start for the Q&A. Please, operator, you can proceed.

[Operator Instructions] The first question comes from the line of Alberto Gandolfi.

Thank you for taking the time to explain the deal to us. Just sticking to 2 questions. The first one is, can you please tell us a bit more about the RAV CAGR you expect now from this new U.K. perimeter? And what's the duration of this RAV growth? So what is the visibility you have on growth? It seems to me there's a super cycle in power distribution. Can you elaborate growth now? And is it possible to talk about the potential upside case, one that actually sees electrification kicking in, one that is actually the power distribution grid becoming instrumental to connect, for instance, data centers? Maybe as part of the first question, if you can comment on any synergies we should think about. I'm using RAV growth as a proxy for profit growth. And if you can also maybe talk about synergies, more specifically quantitatively so we can gauge the earnings. And the second question is about the financing. Should we expect incremental asset rotation to fund the deal? Or is it asset rotation already included in the CMD you recently presented? And if it is asset rotation, can you please tell us, are you still looking at rotating minorities in renewables as it has been over the past few months speculated in the press?

Thank you, Alberto. Just starting from the second question regarding financing, it will be purely financed by cash available in our balance sheet. So we will not make any kind of capital increase or similar movement. We think that we have enough growth -- enough headroom for making this acquisition, especially after the Mexican disposal. Regarding other asset rotation, as I explained in London to all of you, of course, we have a target that is -- the target that we announced for the period is GBP 12 billion until 2026. Out of that, GBP 4 billion are still to be completed. But of course, as you know, we are working with Plan B and Plan C. Out of the GBP 4 billion, I would say that around 75%, 80% is totally identified and advanced. And hopefully, we can announce something additional partnerships before the year-end. So in that regard, we expect not to do something in addition or something beyond. And the plan that we have, we think that we can fulfill our expectations. Regarding the growth expected, you are very right. This is a very high-profile company with a RAV of approximately GBP 2.9 billion by March 2025, again, within the RIIO-ED2 total budget approved. In that regard, you must assume around GBP 300 million, GBP 400 million more of RAV on a yearly basis, okay? So it's a very incredible and -- growth. The company has [ suffered ] with more than 8% in a consistent way for the last few years. And in that regard, we think that the opportunities are still to come. Regarding data centers, it's important, as we explained in the Page number -- wait a second -- in the Page #8, that there is an unregulated business. It's what we call IDNO. It's a nonregulated DNO and this company has strong prospects. You mentioned data centers. You know that we are working on different opportunities regarding data centers. For the time being, much more focused on Spain. But definitively, this nonregulated business would be a good opportunity for us to explore those opportunities. And finally, regarding synergies, give us a few months to take the control of the company. What we can assure is that the synergies are going to be significant considering where they are based and considering the bargaining power that Iberdrola has from the financing perspective and from the procurement perspective. Thank you.

Our next question comes from the line of Manuel Palomo from BNP Paribas.

I will try to think about the operational [indiscernible] the operational efficiencies in a different manner. Could you give us any reference about any specific ratio comparing the recently acquired company, Electricity North West, and other assets that you have owned for a number of years in the U.K. that could somehow help us to even -- or have a view on what could be the efficiencies? That would be the first one. The second one. With this acquisition, your weight to the U.K., I mean it's significantly higher than it was before. I think that after the Spain, it is now then the largest country. Could you think about maybe reducing investment in other activities within the U.K. or maybe thinking about any kind of transaction just to -- not to increase much the weight to the U.K. or if you are happy or more than happy then in getting that weight?

Okay. Thank you, Manuel. Of course, regarding the first question, the operational efficiencies, you know that in the distribution and transmission businesses, it's not unusual that these efficiencies are not published yet. Please do consider also that we will have a partner together with us. So there are a few corporate, for example, corporate efficiencies that we need to discuss with them in detail. So in that regard, if you allow us, we will be a little more specific in the next few months and once we can take the control of the company. Also, please bear in mind that, as I was saying, even that we don't need the CMA approval, we will need to maintain the company as it is for the next few months just to make sure we receive the final okay from CMA. So the company will be ours, but we cannot implement all the efficiencies until CMA is giving us a feedback. So please be patient. Sorry for that, but we will come back to you within the next few months. And regarding other alternatives in the U.K., as I was saying, the U.K. is presenting massive opportunities. As you know, we have several onshore and offshore wind farms, some of them with partners, although with them are -- in which we are going to incorporate additional partners. So in that regard, I don't think that we will need to change the investment plan for the U.K. It's totally the opposite. The U.K. is a country where we feel very welcome with a stable and predictable regulation in both networks and renewables. So in that sense, we don't expect to reduce investments in the U.K. even we have acquired ENW.

Our next question comes from the line of Javier Garrido from JPMorgan.

Okay. So if I stick to 2 questions, the first one would be on the nonregulated business. You mentioned the potential for data center development in the future. But what is the current contribution to us of nonregulated business? And then the second question would be on the RAV growth CAGR. You have mentioned GBP 300 million to GBP 400 million annual growth. Should we assume that there is something that you can deliver now, I mean, starting from March 2025? Or is this growth potential beyond RIIO-ED2? I'm asking this because ENW has been growing but at a much slower pace, if I am correct, in the last few years. So I wanted to understand if the ramp-up of growth so far is going to be immediate or will require [ some time ] to materialize.

Thank you, Javier, for your questions. Regarding the nonregulated business, pleased do consider that more or less, we will have an impact on a yearly basis of around GBP 30 million to GBP 40 million, okay, from -- in terms of revenues, I am talking, okay? So it's something that we will be growing quite fast in the next few years, again, because of all the development of data centers, all the development of electric vehicles, charging points, et cetera, et cetera. So in the U.K., there is a specific regulation for IDNOs, and we -- one of the reasons to acquire ENW is exactly to enter with full speed in these adjacent businesses. Regarding the growth, to be honest, I don't reconcile what you said about the ENW has not been growing so much. As I was saying to Alberto previously, we are planning between GBP 300 million and GBP 400 million, quite a stable RAV increase in the next few years. Indeed, the budget for the RIIO-ED2 is already approved, and we will have total certainty until 2028. So we have 4 years in front of us with full certainty about the RAV evolution. Obviously, we are very welcome and very -- and we know very well Ofgem. So in that regard, we will -- once the 2028 is coming, we will start negotiating as we have done in the last few years. And regarding the growth, as I was mentioning, the CAGR from 2023 to 2028 is going to be also 8%. So not only it's going to be reduced, but considering that the base is increasing and if we maintain that 8% CAGR increase, it means that the CAGR will be growing at least an 8% also compared with the RAV that we have. So in that regard -- I'm sorry, and what we have is that this growth is going to be even slightly higher than what we had approved for our Manweb and SPD DNOs that we have, okay? Thank you.

Our next question comes from the line of Pedro Alves from CaixaBank.

Just on the EPS accretion from day 1 before synergies, I don't know if you can elaborate or give some guidance on the range of accretion that you are expecting and also on the spread of returns on invested capital over your cost of capital.

Thank you, Pedro. Yes, of course, we are -- as always, as you know us very well, we are quite conservative in how we calculate this EPS accretion. So considering all the debt that this company has, the price that we paid and not including synergies and efficiencies, the EPS will be -- accretion will be close to 1%.

Our next question comes from the line of Jorge Guimaraes from JB Capital.

I have just one question related to synergies. I understand you do not want to quantify them. But my question is, what is the risk that potential synergies are clawed back by the regulator in a future regulatory revision?

Thank you very much for the question. I think that the way in which the regulator is applying this -- the way they work is quite well known. So it means that you have the possibility or you have this ED2 -- RIIO-ED2 period where 50% of efficiencies above the budget plan will be for the customers and the other 50% can be captured by the company. So in that regard, obviously, what we will need to do is to continue making efforts and improving our efficiency. We will need to be more efficient. But -- and we have no clarity what is going to be the next regulatory period, how the regulator is going to apply this efficiency. But what we can advance is that the last regulatory period, we are quite satisfied with the outcome, even when we also surpassed ScottishPower, the budget that they approved for us. So in that regard, we expect that we are improving on a yearly basis and those efficiencies are going to be captured by us in 2028. And afterwards, let's see what are the discussions with the regulator.

Our next question comes from Deepa Venkateswaran from Bernstein.

I had 2 questions. One is I was looking at the Ofgem model, which is disclosed, and it seems like the RAV numbers, we would arrive to be slightly different and the premia that we're getting are slightly different. So I just wanted to clarify that, indeed, you are reflecting Ofgem's latest model because I think the premia I calculate is more like 55% based on '25 RAV and maybe 45% based on the '26 RAV. So I was a bit confused. And also the -- from the Ofgem model in this regulatory period, the nominal growth looks more like a 6% growth rather than 8%. So I was just wondering whether you're using a different starting point, or indeed, if you're assuming that there would be extra CapEx on top of what is included in the Ofgem model. So that was the first question. And secondly, obviously, this is a huge sign of confidence for the U.K. transmission distribution network. Would you expect for RIIO-T3 Ofgem to improve the allowed return for transmission based on -- compared to the early cost view that they provided a couple of weeks back?

Thank you, Deepa. So regarding the first question, it's totally right, the Ofgem model is public. Of course, if you divide the RAV that we're calculating for 2025, March 2025, it is 1.9, and you assume the total enterprise value of the company that will be 4.2 even though deducting the nonregulated business that could be -- if we want to be more specific. We want to do this KPI calculation. Should be deducted, but if we're not calculating, it's around 1.44x is what we disclosed. It's true that, obviously, this model needs to be reviewed after -- in the next regulatory approval. But what we are mentioning is pure math, okay? And regarding the new transmission topic, I think it's probably -- I will ask you to contact with the IR team in future calls because this is not the purpose of this call. I hope that you understand it.

Our next question comes from the line of Ahmed Farman from Jefferies.

Congratulations on the deal. I had just a few clarification questions. Maybe I can start with the synergies. I think you said 1% synergies, excluding any -- sorry, 1% EPS accretion, excluding any synergies. Can I just ask just -- is that financial year '25? Or is that financial year '26? Could you just help us understand it a little bit better given the timing that you have set out in terms of the closing of the deal? That's number one. Number two, I appreciate that you don't want to sort of go into too much into the synergies. But can you just talk a little bit broadly about the source? Because you mentioned 2 earlier. You said financing and procurement costs, if I got that correctly. Could you tell us exactly sort of like sort of what is the sort of the opportunity there? Is there any expensive debt to refinance? Anything specific that you can highlight would be very helpful. And just one final quick one. Where do you see the net debt for FY '25 for the business?

Regarding the first question, we said 2025, okay? The 1% is a 2025 impact. Regarding how we have calculated, I'm sorry I can't be a little more specific on financing efficiencies. This company is very, very well managed from a pure operational perspective. But of course, it was owned by operator. That would be mainly, financial investors mainly. So in that regard, the debt associated to this company is probably over -- has a gearing probably beyond what Iberdrola usually like. So in that regard, that's why in the -- as a first date, we do have capital increase of around GBP 400 million, reducing the gearing from 90s to 80s, okay? And we will continue incrementing the equity and reducing the debt. In that regard, we will finance much more in the future Iberdrola with equity unless with debt. And the debt that we can finance will be pure corporate debt of Iberdrola. So in order also to review the subordination. But regarding the pure efficiencies, assuming that we don't want to pay any kind of make whole, we will wait until the maturity of the different line, 3 lines, 4 lines, et cetera. So in that regard, what we think is that before 2029, that is more or less when a part of those 3 lines are going to expire. If we refinance, we have our current view that cost, we will be saving around 20 bps in a conservative scenario. So this is in an upsell the -- what we consider would be financing synergies. Regarding operational synergies, again, I cannot be more specific. But please do consider that the CapEx of this company is around 400 -- 300, 400 on a yearly basis and Iberdrola is investing EUR 13 billion, EUR 14 billion, EUR 15 billion on a yearly basis of euros. So in that regard, the suppliers, we have made a preliminary analysis of the suppliers. We have made a preliminary analysis of how they buy, et cetera. And of course, we see clear efficiencies, again, to be implemented in the next few years. And I don't know if the last question was...

The net debt of 2025.

The net debt of Iberdrola. I was mentioning this is a GBP 5 billion enterprise value company with GBP 400 million -- sorry, GBP 4.2 billion enterprise value with around GBP 400 million of EBITDA. So you can make your math.

In any case, we will communicate the guidance for 2025 later on through the year, as we always do.

Next question comes from the line of Andrew Moulder from Credit Suisse.

Yes, it's Andrew Moulder from CreditSights. Just had a couple of questions. On the capital increase, you just said you're going to reduce debt. I mean when I look at your -- at the ENW annual report, net debt to RAV at the regulated entity is only about 54%. So when you say you're reducing debt, are you talking about targeting the debt that's at the MidCo structure there? Could you just clarify that, please? And secondly, I'm not 100% clear on exactly what role the CMA plays in this transaction. You said you don't actually need their approval. But then you said you couldn't start disclosing synergies till you get some feedback from the CMA. So could you just please clarify some of the -- exactly what they need to say, exactly what you need to wait for from them? And finally, if I could just sneak in one more question. On the nonregulated business, the IDNO, what exactly is that? What does it serve? I mean is it serving an airport? Or is it serving an industrial park or something like that? Could you just clarify that, please?

Thank you, Andrew. So regarding the first question, regarding the capital increase and the debt, so the debt, again, as I was saying, is GBP 2.2 billion of debt by March 2024. The holding is around GBP 330 million, is what we will use the GBP 400 million to cancel the holding, so what we see at the top of the debt. Then we have some MidCo debt with around GBP 650 million. But again, the maturity is 4 to 5 years, and those are the typical that we will wait till the end, till the maturity to replace by corporate debt. Again, if we see that there is an opportunity to cancel that debt before because the cost of canceling plus the cost of corporate debt is lower than the current cost, we will do. But in a conservative scenario for you and conservative scenario for the time being, the interest rates have not been reduced, we prefer to give you that view. And then, of course, you have the pure OpCo debt that is around GBP 1.6 billion. So in that regard, the capital increase, again, is to replace the debt at the top, okay? Regarding the CMA, let me try a little more specific. So there is only one condition precedent that is the NSIA, okay? This is a typical condition precedent that if you are investing in the U.K. in energy, you need to receive the approval from them. Usually, it takes a couple of months. So we will be -- we think that we can be closing around October, this transaction, okay? Again, it's the unique CP, the unique condition precedent in the U.K. Then it doesn't mean because that the CMA is not going to look at this transaction. In the U.K., regulations, you can close the transaction, but you need the approval from the CMA to start implementing the typical change in the governance of the company, to give you an example. So in that regard, from acquiring the company, from closing the transaction to achieving the CMA, the capacity to influence in the company is limited. Of course, we have agreed on certain topics, on a budget, on [indiscernible] payments, et cetera, et cetera. Everything is agreed, and they cannot surpass the management -- the current management cannot surpass those limits. But we cannot, for example, change the CFO, just to give you an example. We don't want to change it. We like a lot the management, but it's just an example. So in that regard, we will not be able to implement all the efficiencies until at least the -- we achieved the CMA. The CMA, what we are considering according to our lawyers is that they will require us basically to maintain the reporting of ENW as a separate entity, which is fine because we have maintained SPD and we have maintained Manweb as separate entities for communication purposes. And regarding nonregulated, usually, this is related to domestic and industrial, commercial operations, EV charging points, electrification of the industry, et cetera, housing and construction, et cetera. So in that regard, what we want is to have the opportunities growing. For example, the airport of Manchester is an IDNO, but it's not part of ENW. They have their own distribution line internally. So in that regard, our clear idea is to grow in the domestic and industrial business and in the EV charging point at the very first -- as a first step. And potentially, of course, we are starting to look at the potential of data centers in the area, which is a very, very important and industrial area of the U.K., as you all know.

Thank you, David. I think we don't have no questions -- no more. Before the event finish, let me remind you that you will have a replay on our website. We thank David for his participation in the meeting, and I finally leave the floor to you for final remarks, David.

Thank you, Alvaro, and thank you to all of you for connecting to this call, where we have explained this strategic and transformational deal for Iberdrola and ScottishPower. I hope that you can rest a few days, and I wish you a great summer break. Thank you very much for connecting.