Iberdrola, S.A. (IBE) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. We would like to offer a warm welcome to all of you who have joined us today for this webcast on the Mexico deal that was signed and announced yesterday. Let's hope it will be a good start to the Easter holiday for everybody. We have with us today Mr. Pepe Sainz, CFO; and Mr. David Mesonero, Global Head of Corporate Development, both of whom are very well known to all of you. David, by the way, is slightly far away from here in Madrid. I would like to stress that we will only accept questions submitted via the phone line. [Operator Instructions]. Hoping that this presentation will be useful and informative for all of you. Now without further ado, I would like to give the floor to Mr. Peter Sainz. Thank you very much again. Please, Pepe.

Hello. Good morning to all of you. Thank you for attending this brief call. Thank you, Ignacio. Let me do a brief summary of the deal. Basically, Iberdrola is selling in Mexico the plants that have a PPA with CFE, known as peers. 7,800 megawatts out of the 8,436 are assets of this kind. I have to remember everybody that they are under government concession, and they will start expiring from '27 onwards. Also, let me stress that Iberdrola keeps its presence in Mexico, basically through the assets linked to its private industrial customers and the PPAs associated with them. 1,200 megawatts of CCGTs, 1,059 megawatts of renewables and more than 200 megawatts of cogeneration are still part of the Iberdrola Group in Mexico. And in addition to this, we have a pipeline of 6 gigawatts of renewable developments. In general terms, so we maintain approximately 45% of the operating profit. Iberdrola maintains its commitment to Mexico as we expect to growing renewables and in our supply business with a much better relationship with the Mexican government. At the same time, we are improving our financial strength. We have done a very important step forward in an asset rotation, although we will continue to look for opportunities to create value for our shareholders. And also, this has a very important element in our ESG strategy. And this will accelerate our 2040 net-zero ambitions. So I think that this transaction is a very good transaction for both parties, for Mexican government, strategic objectives and for us. Let me now give the word to David Mesonero, that will give you more details on the transaction. Thank you, and I will be back later after David comments.

Thanks, Pepe. Good morning to all of you, and thanks for being here with us. Sorry for the potential [ abrupt ] connections, but I am still outside of the office. Let me explain to you, as Pepe was mentioning, the key terms of this transformational deal. This is the largest-ever deal done in Mexico in the energy space and it's the top five ever in LatAm. And of course, what is the rationale for Iberdrola? So if we move to Page #3, as announced yesterday, after our meeting with the President of Mexico, Iberdrola have signed an agreement with MIP, Mexican Infrastructure Partners, which is one of the largest infra funds in Mexico, with more than $4 billion under management, to sell 8.5 gigawatts for around $6 billion. This price can be adjusted and increased by final price adjustment until closing. MIP will finance the transaction with funds from Mexican public institutions. Approximately 40% of the transaction will be fund through equity from Fonadin, which is the National Infra Fund. And the rest 60% of resistance will be financed by local development banks. And later, private commercial banks will be incorporated. The portfolio is formed by 13 assets, 12 of them CCGTs with a total capacity of 8.4 gigawatts and 1 wind farm, La Venta, of 103 megawatts under a key scheme. So contracted with CFE as our CFO was explaining. Indeed, 7.4 gigawatts. So 87% of the total asset base are assets contracted with CFE and subject to government concessions. This transaction also permitted the derisking of Iberdrola Mexico. Four assets of perimeter of around 1.4 gigawatts are currently stopped due to open litigations with regulatory bodies. These projects are Monterey III and IV. Topo III and the former decogeneration plants transforming to a CCGT called Enertek [indiscernible]. Almost 5 gigawatts, so 60% of the total asset base that we are selling have been already more than 16 years in operation. And what is more important, as Pepe was mentioning, Iberdrola keeps, especially in Mexico, with almost 2.5 gigawatts and -- more than 1 gigawatt of renewal. And also, we have a fantastic path to grow, with more than 6 gigawatts of renewal pipeline. The remaining 1.2 gigawatts of CCGTs that are El Carmen and Dulces Nombres will allow us to secure energy to our private customers. Regarding transaction and the calendar, the next step is to close this PA in the next few weeks, receiving the letter of credit by the buyer and obtaining regulatory approvals from the typical -- the government bodies, like CFE, CRE and [indiscernible], which is the antitrust government body. Our common idea, both the buyer and the seller, is to close as soon as possible, being the longest of date, the 31st of December of this year. And after explaining this, I pass again to Pepe Sainz.

Thank you very much, David. As I was commenting, this deal fits perfectly with our strategy. Basically, through this deal, now we have an opportunity of recycling capital towards growth in new opportunities in the U.S.A. through IRA and in Europe, through the REPowerEU, increasing the exposure to A-rated geographies. At the same time, as David was mentioning, we will grow in Mexico in renewables and with private clients, something that we didn't had looked at it up to now, given the regulatory uncertainty we had in Mexico. Obviously, this improves our financial strength. And obviously, that improves strongly our ESG strategy. Let me give you briefly the financial impact of this deal. Gross cash proceeds or lower debt are around EUR 6 billion. We are giving back EUR 550 million of EBITDA. We maintain around 400 million of EBITDA. This has an impact on our net profit of around USD 90 million. But let me stress here that Iberdrola maintains our net profit target for 2025. And that in terms of 2023, obviously, although we don't have yet a capital gain number, this means we are expecting to have a significant capital gain for 2023. This improves our FFO over net debt about 50 basis points in our FFO over net debt ratio and 0.2x improvement on our net debt EBITDA ratio. So the new Iberdrola in Mexico, we have around 50% of our -- for our generation capacity will be renewable, as we have mentioned with a meaningful pipeline to foster growth in the country. As we were saying, 2,400 megawatts in operation, 6,000 megawatts of renewable pipeline contribution of USD 400 million in '23 EBITDA and maintaining our commercial activity and access to film capacity to ensure the supply to Mexican private customers and foster renewable growth. So to conclude, we think this is a win-win deal for both Mexican government and Iberdrola, reaffirms the group's strategy. We want to stress that Mexico remains our core market, and we still look for growth in Mexico with a greener mix of generation and focus in private clients with, at the same time, that Iberdrola strengthens its financial position. We think that this deal has been done an attractive valuation for Iberdrola. And we -- this is important in the decarbonization strategy of the group. And we have already achieved 90% of our asset rotation plan and partnership plan, but I insist we will still continue to look for opportunities to create value for our shareholders. Thank you very much, and we are open to questions.

The first question comes from the line of Alberto Gandolfi from Goldman Sachs.

First of all, congratulations on this move. My two questions are the following. The first one is, am I right in thinking that this was not in your plan in the last CMD? And what role the U.S. IRA played in maybe changing your mind and accelerating your strategy? It seems to me you are accelerating your strategy here. And is this part of a wider plan to reduce the exposure to emerging markets and redeploy capital towards the U.S. IRA and Europe IRA or REPowerEU? Have you hinted to it, but is this it? Or can we even expect more if there is more clarity, more tangible proof that Europe is actually replicating the U.S. IRA? And the second question is much shorter. Can you help us grasp and quantify the U.S. IRA opportunity for Iberdrola?

Okay. Well, thank you very much, Alberto. Well, basically, obviously, this deal gives us opportunities to accelerate growth in the U.S., given the IRA, probably, at some point, we will review our renewable plants in the U.S. So let me give the -- Avangrid the opportunity, at some point, to explain their probably new targets in the U.S. Obviously, in Europe, I mean, this deal improves our financial strategy, our financial strength. So we will be able probably to look to more opportunities, basically in Europe and in the U.S. But also let me stress our commitment to Mexico where new opportunities could open. And obviously, we continue to be very happy in Brazil. I think that this deal obviously gives us in the short-term opportunities in Europe and in the U.S. that could be very interesting, but still we are committed to Mexico and to Brazil. And we think that this also gives us opportunities for renewable developments in Mexico -- in a much better relationship with the Mexican government.

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

The first one would be on the $400 million EBITDA that you are retaining in Mexico. Can you give us an indication of how much is coming from renewables? And if you are expecting in that $400 million to continue to have any meaningful contribution from the commercial agreements that you are retaining with your private clients, which I understand you will signed deals with new owner of the assets to continue to supply to your private clients, if there is any meaningful contribution from that or is simply the asset-based profits, what makes the $400 million EBITDA I expect to retain? And then the second question is more -- is strategic. I mean, this looks like a great deal, clearly. But as you -- Pepe mentioned, you have already raised 90% of the expected proceeds for disposals. And you are looking at more deals while the acceleration of growth in renewables as we have seen in the last couple of years, taking time with permitting, with all sorts of bottlenecks in the value chain. So are you going to -- are you happy to exceed your disposal targets even if this takes some time to be deployed into capital? Or will you accommodate your disposals to -- in the pace of acceleration that you can actually deliver on renewables development? My question is simply is there a risk that we see some tying gap in both processes?

Okay. Well, thank you, Javier. Well, first of all, I have to say that we retain all our commercial agreements with our private clients. This is important. We do it through our combined cycle. You know that we maintain and we have some PPAs also that guarantees for all our clients in Mexico that we will maintain the agreements. Most -- obviously, most of the EBITDA is coming now from our supply business and our commercial activity. I don't have an exact disclosure, but I think that was very, very important for us, okay? So in that sense, we are maintaining absolutely our supply business in Mexico through renewables and combined cycles. Obviously, our combined cycles are working more times than renewables because more or less, we have the same amount. So a larger part of this EBITDA is coming from our combined cycles, plus our supply business. In terms of the second question, I mean we want to be very pragmatic. I think we've been mentioning that we see that there is good opportunities. Obviously, this allow us to look for opportunities for growing. And obviously, we could look to some more opportunities of inorganic growth, basically in A-rated countries, where we are present and we want to grow. We'll see about the time gap, but in any case, as the -- as we are saying, this operation is very dilutive in a very small scale, only about $90 million. I don't expect any gap in the short term, but further possibilities of growth for the medium and long term. okay? So as I was mentioning, Javier, we are not changing our net profit target for our 2025 year. And this will probably give us opportunities for growth for the '25-'30 period.

The next question comes from the line of Fernando Garcia from RBC.

I will stick to the two as well. First, I have to say that I was surprised by watching the video of the agreement this morning, in which [ regulatory ] operators look very friendly with Iberdrola. So my question here is, there are several regulatory problems opened between Iberdrola and Mexican regulators. So what can we expect now within this agreement? And then the second question is, if you can tell us what is the CapEx invested in the assets sold? And if you can provide some color about the returned [indiscernible] in these assets.

Okay. Well, I think that as David has very well explained, in terms of this regulatory problems that we had with the Mexican government, as most of them were in the assets that we have been transferred or sold to the Mexican government, all the regulatory problems go with the assets. So in this sense, we can say that we are almost free of any problem with the Mexican government. And I think this is a very important element in this deal. Second, I have to say also that I think that -- we think that we enter into a new phase of relationships with the Mexican government. The Mexican government was interested in buying especially this. I would call them concessions, and that will -- that was important for them. I think that from now on, obviously, that changes the relationship that we have had with the Mexican government for good, and that gives us opportunities in this country. In terms of other things, I think that we are right now in a very early moment. As you know, we have signed a memorandum of understanding. And so probably, we will be able to give you more color on this in the future regarding the CapEx, et cetera. Okay?

Before going to the next question, we have some details that are going to be provided by David. David, your time.

Yes, regarding the previous question about the EBITDA, the $400 million, more or less $150 million of the EBITDA are coming from CCGTs, 2/3 are from the normal operational CCGTs and EUR 50 million from the commercial side. As Pepe was saying, [indiscernible] impacted our commercial business there in Mexico. Then we have another $50 million approximately that comes from the cogeneration, and the rest up to 400 come from the renewables. So more or less, again, 150 from the CCGTs that will remain with the commercial activity, EUR 50 million from the cogeneration and EUR 200 million from renewables.

The next question comes from the line of Mark Freshney from Credit Suisse.

Firstly, on the remaining wind pipeline in Mexico, how much emphasis should we place on this? What is the likelihood that you would be able to convert any of those into spinning assets before the end of the decade? My second question is for both of you, Pepe and David. On the basis that you have a marginal euro to invest globally, where do you see the best IRRs in your sector currently?

Okay. Well, thank you for your question. Well, I think that now we have to wait -- after this deal, we have to wait to see what are the new policies of the Mexican government regarding renewables. The Mexican government has said that they want to invest in renewables. I think that there is a very important opportunity. Right now, in Mexico, as there is this nearshoring in the U.S. as they are trying to change China for Mexico, we know there are important plans for -- to develop industries in Mexico. And obviously, that needs energy. And obviously, we are willing to start investing there. So we have to wait a little bit to see what are the new -- what is the new policy after this deal of the Mexican government. And thereon, we will start to see what are the investment opportunities to be more specific. So we will see how this situation evolves in Mexico in the next months. And we have said, regarding the marginal euro that the U.S. is a country where we think that -- it's the country where most of our investments are being directed, obviously, there are new opportunities in other parts of the world. But as of to now, we have said or we think that the -- that the U.S. probably is the country that brings more opportunities for the medium and long term.

The next question comes from the line of Fernando Lafuente from Alantra Equities. The next question comes from the line of Javier Suarez from Mediobanca.

Two questions remaining. The first one is on your calculation for the 11x enterprise value to EBITDA. You can help us to reconcile that number. I guess the question here is in the numerator the debt that you are deconsolidating as a consequence of the disposal of this asset. And on the transaction and on the EBITDA that you are retaining, if I'm adding up the EBITDA of the assets that are -- that have been sold $550 million, plus the EBITDA that you are retaining EUR 400 million, the total is adding up to EUR 950 million, which is which is ahead of the numbers that we have seen in the last couple of years. Can you help us to reconcile these two numbers? That would be the question #1. And the second question is on the capital gain that has been mentioned during the call, to be a significant one in 2023. You can help us to understand if this capital gain is eligible for the dividend payment of 2023?

Well, Javier, this -- we will give you more detail on the numbers. But also taking into account that some of the assets were not working. Over 1,000 megawatts were not working last year. That should be included in part of the calculation. And second, obviously, we don't have yet a number for capital gains. So it is difficult to give you. I think that our dividend policy shouldn't change very much even if there is a significant capital gain. But I am the Chief Financial Officer, and this is a decision that has to be taken by the shareholder -- by the General Shareholders' Meeting and the Board, et cetera. My opinion is that it will not change very much from what we have been saying in this -- in our strategic plan.

The next question comes from the line of James Brand from Deutsche Bank.

Congratulations on the deal from me as well. I have one question remaining on the transaction, and then one I could -- I was hoping I could ask just on other aspects. So on the transaction, I very much get the feeling from how you answered some of the earlier questions that you'd be looking to reinvest the proceeds from this deal in other areas. But maybe you could just confirm, you gave a leverage target for 2025 to 3.4x. At the Capital Markets Day, is that still roughly the right kind of leverage that we should be thinking about in 2025? The first question. And then secondly, on the kind of other things. We, obviously, have the power market reform proposals from the European Commission. And in there, there were no proposals about extending price caps. I saw the Spanish government got approval to -- for the gas kind of mechanism for Power Gen through to the end of this year. But I was wondering whether you saw the European Commission proposals made it likely that after this year that these emergency measures didn't get extended? Or whether you saw Spain may try and extend them after the end of this year in spite of that not being a feature of the commission proposals?

Yes, I think that our leverage target shouldn't change as we are saying this deal gives us the capacity to invest also to do more deals. So hopefully, we will do them. And let me not comment on the market reform proposals of the European Union and Spain. I mean we are more focused on Mexican deal. And I think that probably this is not the moment, sorry, not to answer that question, but I think that right now, we are looking -- I mean probably this is not the most appropriate moment to discuss that. And obviously, we have -- I have other people in the company that is more entitled me in talking about the proposals of the -- of Europe in the market reform.

The next question comes from Jorge Guimaraes from JB Capital.

The first one is the detail on the earnings dilution. If you can elaborate on the amount of DNA that is being considered for your earnings dilution calculation? And the second is related to your 2025 net income objective. You say you are reiterating the EUR 5.2 billion to EUR 5.4 billion objective, but you are also saying that you are losing, roughly speaking, EUR 80 million. So where do you see other rates improving that compare site to the dilution from the Mexican deal?

Well, I think that as we were saying, the Mexican deal gives us the opportunity to reinvest in -- or to accelerate growth in other areas. I think there was a question before, I think once Alberto was asking, you know about our user strategy. Probably, we are going to accelerate growth in the U.S. And obviously, there -- we are analyzing some opportunities also of growth. Our M&A team is a very active team, and we are always looking to opportunities that could compensate this EUR 90 million. So in that sense, we are not changing that objective. And I think that we can -- I mean we are talking about EUR 90 million out of EUR 5.2 billion, EUR 5.4 billion. So this is not a very large number for a group like Iberdrola not to be able to compensate it.

The next question comes from Javier Garrido from JPMorgan.

Just a quick follow-up. Is there any understanding between Iberdrola and the Mexican government that Iberdrola will invest in the proceeds. Can this deal back into Mexico?

No, there is not any understanding. Obviously, what we have said to the to the Mexican authorities that we'll be very happy to start investing in Mexico after this agreement. And I think that they will welcome this, but we don't have any specific agreement on this.

Okay. This question from Javier Garrido has been the last one already done. And if there is anyone who has not been able to ask, please contact to the Investor Relations department, and we will be pleased to answer you. Pepe, when you can, you are able to...

Well, thank you very much to everybody. I think this is a very good deal for everybody. And I hope that you have some days of rest in this Semana Santa. Thank you.