IBERDROLA’s 9-Months Results Negatively Impacted by Increased Regulatory Costs

IBERDROLA’s 9-months results have been negatively impacted by increased regulatory costs in Spain and the UK as well as other factors which have led the Company to reduce shareholder remuneration. Positive business activity, including efficiency gains, have reduced the impact on Ebitda to a net €240 million.

These positive business developments plus improved efficiency also helped limit the reduction in net earnings to 3% to €2,775 million. Ebitda is down 4.1% to €5,542 million. Gross margin was up 1.8% to €9,459.2 million with growth in all sectors except Brazil. Operating cash flow (FFO) was €4.41 billion and exceeded investments of €2 ,167 million, of which €1,321 million were on networks, €580 million on renewables, €193 million on generation and supply and €73 million on other businesses and the corporation.

Another significant factor was a continuing increase in levies of 45% during the period to €1,267.6 million. Of this amount, €792 million correspond to Spain where this item doubled over the nine months. Of the €1.01 billion impact on Ebitda, a gross €503 million related to the recent energy reform approved in Spain. Of this amount, €363 million were for generation and supply, €79 million for networks and €61 million for renewables. This amount excludes considerations under Royal Decree Law 9/2013 on remuneration for renewables which is pending implementation.

As regards shareholder remuneration, the Company is setting the price for subscription rights under its next scrip dividend plan at a minimum of €0.125 each, payable in January 2014. The impact of regulatory costs has meant this price is 10% lower than that set at the same time last year.

IBERDROLA considers that the package of regulatory measures introduced in Spain does not contribute to ensuring the competitiveness of the system to the benefit of consumers, or slow the growth of the tariff deficit. The measures also fail to limit the growth of immature technologies such as solar, which only contribute 5% to total production, while accounting for 20% of the energy costs.

More than half the final electricity bill in Spain reflects costs unrelated to supply. The costs directly imputable to supplying electricity make up 44% – 29% for generation and 15% for transmission and distribution – while 56% are unrelated costs. Of this last percentage, 21% are renewables subsidies, with 8.5% corresponding to solar, 5.3% to wind and 7.2% to cogenerationand other sources.

Sustainability of shareholder remuneration policy

The sustainability of its shareholder remuneration policy is a priority for IBERDROLA, with the goal of achieving the maximum returns possible, while being sustainable and compatible with the objectives of financial strength. In this respect, it views a payout of between 65% and 75%, similar to other companies with a comparable profile, as compatible with sustainability and future growth of shareholder returns.

Thus, under its Iberdrola Flexible Dividend programme, the repurchase price for subscription rights under the next scrip dividend plan, payable in January 2014, is set at a minimum gross figure of €0.125 each. The Company is considering the option of amortizing Treasury stock to compensate the dilution associated with new shares.

This programme allows shareholders to opt between receiving new IBERDROLA shares without cost or commission, or obtain a cash dividend by selling their subscription rights at the price set by the Company under its buyback commitment or on the open market. Those who decide to sell their rights to the Company will be subject to a 21% witholding tax which does not apply if they sell to the market or subscribe new shares.

Balance sheet strength

IBERDROLA continued to make progress during the nine months in strengthening its balance sheet and realizing its 2012-2014 strategic outlook. At the end of September, Group net adjusted debt – excluding the €2,024 pending reimbursement from the tariff deficit – came to €26,526 million. Including the deficit amount, the debt stood at €28.55 billion.

The Company thus reduced debt by €3.31 billion over the past 12 months, meeting 50% of its objective of a €6 billion in the period 2012-2014. Gearing stood at 43.1% excluding the deficit, against 45.9% for the same period last year. Results from financial operations improved 10% to bring net financial expenditure at €879.7 million, fruit of steps that have reduced average debt by 6.8%, improved financial costs and developed a currency hedging programme which nearly offset negative exchange impacts.

IBERDROLA continued to improve its financial ratios, with funds from operations (FFO) to net debt standing at 22.1%, retained cash flow (RCF) to net debt at 18.8% and net debt to Ebitda reduced to times 3.5. These figures exclude the tariff deficit.

Key operating aspects of the period

 1. Networks business: growth in all areas except Brazil

Ebitda from networks came to €2,805.7 million in the period, a decline of 3.2% over the same period last year. This reflected a tariff revision and the drought in Brazil which brought a 27.8% drop in Ebitda from this country which was insufficient to compensate for a 4.5% improvement in the rest of the world.

Excluding the exchange rate effect, Ebitda from networks would have repeated performance in the first nine months of 2012 when it rose 0.6%. Gross margin was up 3% in the UK due to increased revenues resulting from a larger asset base following investments made there, and 3.4% in the US where the Maine transmission line project contributed to increased income while in Spain it held at +0.4%.

In Brazil, gross margin dropped 19.4%, despite a 5.9% increase in demand. The tariff revision had a €120 million negative impact while additional costs deriving from the drought came to €26 million.

2. Generation and retail: levies rose 67%

Ebitda from generation and supply was nearly 9% down at €1,531.6 million. A 6.1% rise in gross margin to €3,403.5 million was insufficient to compensate for a 67.3% rise in taxation to €810.9 million. Levies in Spain doubled to €625.6 million while taxes on generation in Spain came to €381 million.

In the UK, this business was affected by tight margins, aggravated by energy efficiency and environmental measures imposed by the regulator. As a consequence, generation and supply is now loss-making, and leaves the Company no option but to increase tariffs.

Net operating expenses in this business at Group level declined 6.4% due to cost reduction plans implemented mainly in Spain.

3. Renewables: ebitda rose 2.5%

Renewables business recorded a 2.5% increase in Ebitda to €1,211 million, of which 53% was from outside Spain where taxation increased by 3.5 times.

This positive performance was due mainly to a 6.4% increase in production and to cost control, which helped reduce net operating costs by 3.4%. Gross margin rose 5.4% to €1,759.2 million, while operating capacity came to 13,857 megawatts (MW), with new installed capacity compensating for divested assets.

Press release, October 23, 2013; Image: Iberdrola