Iberdrola Executive Insights: CapEx, Brazil

On Thursday, Iberdrola SA ADR (OTC:IBDRY.PK) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the executives shared with analysts and investors.


Manuel Palomo – Citigroup: Manuel Palomo from Citigroup. I also had several questions. The first is regarding CapEx. We are talking about CapEx control in the future and in view of what we’ve seen in Spanish distribution that maybe the line that will be followed, but on the other hand, in the press we’ve seen the possibility of investing in nuclear power plants in the U.K. and I would like to know what your opinion is on that. The second question regards the outlook for the liberalized business in Spain. We’ve seen that the first quarter was extremely dry. It has rained a lot in April. It’s raining in May. Do you foresee any improvements or will the possible drop in nuclear power be offset with the increase in hydro? Will you remain on a more or less constant level? Finally, a doubt regarding one of the slides you showed; 35, this is for the CFO. Talking about on a like-to-like basis, the net data will be below €30 billion in 2012. Could you give us some details on how much is considered in securitizations in that €30 billion or what is that major debt reduction based on?

Unidentified Company Speaker: Well, the CapEx, I explained the parameters. The parameters are predictability, return and execution period. There are a number of countries and markets, where we have certain frameworks and investment commitments regarding the predictability, return, short maturity period for those investments and that’s where we’re going to focus. In the U.K. we have investment commitments in the regulated business amounting to over €5 billion for the coming years. Why? Because we have predictability. There is an agreement with the regulator on the facilities we need to work on and what return that’s going to provide. The same in the U.S., we already have commitments with the regulator with agreed returns (both) for the construction of the line we’re working on, for the integration between Canada and Massachusetts and Maine as well as the distribution areas. So those are the priorities. What are not priorities? Well, those things that are not clearly predictable regarding the return and those that have a very long maturity and that brings me to the question on the British nuclear issue. There have been some comments in the press release there saying that we were indicating in buying the German project. That has been clearly denied. We haven’t even discussed it. We’re working on our project and we’re waiting to be given the necessary predictability to say yes or no or go ahead. But in any case, the decision won’t be taken before 2015. So we’re currently working. Yesterday, we were with the Ministry for Energy and Climate Change that opened offices in London and he again stated that in the next few weeks there will probably be a clearer framework, and based on the clarity, we’ll make a decision in one direction or the other, but there has been nothing decided right now apart from the work and the studies that are being carried out. Regarding the liberalized business in Spain, Pedro can you say something about this?

Jose Luis San Pedro – COO: Yes, in general the liberalized business, well, the question was about Spain but I’ll also refer a little bit to the U.K. and Mexico that it helps you offset the complicated situation in Spain. Mexico is stable. We’ve had a couple of atypical breakdowns, let’s say, that they’re not usual and we see a stable development of the business. The U.K. is performing very well through improvements in efficiency, especially in retail as a result of the integration, improvements in flexibility, in the generation equipment that’s making it possible to participate in the complementary market. This means that the business is doing well and is stable. Perhaps there are some delays in some cost related to efficiency that could make the results at the end of the year not so brilliant as in this quarter, but results are clearly going to improve compared to last year. In Spain, the key is hydro generation. We’ve done well this quarter because of the ruling of the Supreme Court that there was partially offset the resettlement of €50 million last year and the next three quarters have to be stable. Because it’s currently not raining, so there is no difference compared to an average year, let’s say, and the (unknown) quantities the last quarter is not a good year for Spain. It’s not a brilliant year for Spain. But we trust that the U.K. can offset it. It’s difficult to place bets on the future, but I think our objective will be to maintain or improve on the situation we’ve seen this quarter.

Manuel Palomo – Citigroup: Let’s say, if the rainfall in the last quarter helps, you have practically sold all the energy for the year at over €60 in Spain?

Jose Ignacio Sanchez Galan – Chairman and CEO: Yes, that’s right I sold practically all the energy that has been placed at a price of over €60. So there is no risk or unknown quantity regarding the earnings, but as usual there is a issue on being able to improve supply with lower cost energy or having to do it with high cost energy and therefore reducing the margin and we also have the potential upsides of the U.K. continuing, and I hope that we will to defend the castle.

Unidentified Company Speaker: Basically the analysis we’re performing now has to do with the year and as you know, this company generate something like €6 billion in cash flow by covering the same consolidation perimeter and because of the uncertainties we expect that we’re going to have an investment environment that’s going to be somewhat lower than what was reported last year and last year it €4 billion or so. So that means that at this point in time, we feel comfortable and we are waiting for the debt reduction to stand €30 billion. So that means that a significant chunk of the €7 billion of the tariff deficit will be securitized throughout the year and this is we’ll have to cover our own part of that of course, but I think that the situation of the group as regards their cash flow generation and investments in so and so forth is very solid and we’ll see how the debts will be reduced throughout the year. Any questions (indiscernible).


Unidentified Analyst: I have a couple of questions and the first one is, could you please update the situation in Brazil, because we received more news as regards the renegotiation in terms of the GM levels and could you please say something about the tariff revision that you expect for 2012 with the retroactive effects since August, 2012, if I’m not mistaken? Then could you give us some information because in the United States it has been said that the FERC towards the beginning of March has accepted it also to reduce the rent revision of transport assets. Do you think that there’s a risk for your assets in that country? That’s the question.

Unidentified Company Speaker: Well, in Brazil I have lots of new news, but I would like to refresh your memories. We started in Brazil 1997. We have been there for 15 years with the same partners with the Banco do Brasil and Previ. I think that this is a tremendously advantageous association because (La Compania Energia) is a company that has grown in the field of distribution and generation, and we would be delighted to carry on as we have been until now with our 40% or 39%. If it were not because of the international accounting rules change and what we are consolidating now a days in a proportional manner mean that with the new regulations we cannot consolidate this unless we have a majority share. So this is why we’ve been talking to our partners and we are still talking to them because we want to establish formulas that allows to do this. With our partners we’ve accepted these terms but they are not getting the approvals that are required from their managers to be able to carry this out. But in view of the time that has elapsed what we are doing now is looking into three alternatives or all kinds alternatives that will allow us to obtain or to achieve these objectives and I can say no more about this issue. Said in other words, we are starting things. We have been now focused on only one point, but we’ve opened up to other alternatives. We have opened up the spectrum and without forgetting any previous alternatives, I hope that I will be able to give you some news if it is possible.

Unidentified Analyst: Now regarding the second question, do you know anything about or could you saying something about that please? Well, the tariff revision in Brazil, yes.

Unidentified Company Speaker: The revision of Elektro has been carried up and this effects revenue since August 2011, if I’m not wrong. In 2012 we had no tariff revision. (Indiscernible) said what we started in 2013 or 2014 and I think that the first one is (indiscernible) said. So for the time being, the only tariff revision we’ve had has to do with Elektro. As regards to question on the United States, you know that the North American model, it’s a very open system. It’s a system in which any regulated activity, any of the stakeholders can ask for an opening of the case to analyze the remuneration terms of any of the activities we did last year and through that process we improve the terms. So, the stakeholders (NYSE:ARE) the regulator or any other body. So, the District Attorney of Massachusetts and something that doesn’t really affect them because the remuneration for transportation guys depends on the federal state and they consider that the remuneration program, not ours but that all of the distribution lines have in the States of New England, is excessively high. Well, this is nothing new because this has happened on previous occasions. But this has opened up a process. Sometimes they accept these proceed and sometimes they don’t. If, say, this is accepted by the court, you can justify why and those affected justify why not, and there is a debate with the regulator and in the end they draw certain conclusions. If those conclusions are satisfactory for all the parties involved, everybody is happy and if they’re not satisfactory the result of the Court of Justice in order to defend your case. I think that this is a very lengthy issue, and we’ll see what the outcome is like. It’s not the first time that this happens in the United States, and we’re rather used to this kind of approach. Because when you talk about the retroactivity approaches that don’t exist in other country, well, in the United States there is retroactivity whenever they want it because you have to justify regulated activities along the longer phase of reasonable remuneration, but if it’s not reasonable, you review the whole thing in one way or another, because we consider that the remuneration we had in the State of New York was not reasonable. We did the re-case, we did the tariff revision and as a consequence of that, they modified the terms, the terms that we have nowadays that we consider to be reasonable. So that’s the usual approach to this subject. So it’s something completely normal in a sector, which always guarantees reasonable retroactivity; in other words, it creates a value systematically.