Iberdrola, a Spanish electric utility company, has recently announced that it will launch the largest investment programme in Spanish history. The goal of the €75 billion investment plan that will cover the period from 2020 to 2025 is to lead the energy revolution that the world is facing. Additionally, as a demonstration of the group’s goal of achieving economic recovery, the programme will boost industrial development and employment in the countries where the firm competes.
This plan also represents the changing attitude of utility firms towards a model for long-term sustainable economic growth. Moreover, this strategy is a response to the changing needs from the environmental point of view, and investors’ preferences, who prioritize firms’ ESG policies.
Iberdrola, with over 170 years of history, is a Spanish multinational company that is specialized in the electric utility sector. The Bilbao-based group includes subsidiaries such as Scottish Power in the United Kingdom and Avangrid in the United States. The group has also a strong presence in Europe – especially in Spain, Italy and Germany – and in South America – primarily in Mexico and Brazil. Iberdrola has now become the largest producer of wind power in the world, and with a market capitalization of €72.59 B, it is among the leaders in the electric utility sector.
Iberdrola, despite being hit by the pandemic, has been able to improve its profitability. In fact, as of October 2020, the group has been able to increase its adjusted-EBITDA by 3.2%, despite revenues falling by 8.4% on a year-for-year basis to €24,248 M. Additionally, adjusted net profits rose 8.8% to €2,553 M, and the +20 bp increase in cash flow drove an improvement of financial ratios. Most importantly, investments, despite COVID-related restrictions, were up 23% to €6.638 M, and 51% of total investments were allocated to renewables.
The group has announced a 5-year €75 B plan to improve its positioning in the renewables sector of the economy. Iberdrola has also specified that 90% of the capital is set to make investments in consolidating its business model based on “more renewable energy, more networks, more storage and more intelligent solutions for its customers”. The remaining €7 B were used to acquire PNM Resources, an energy holding company based in Mexico. The firm has also specified that the average investment until 2022 will be equal to €10 B per year, while €13 B per year from 2023 to 2025.
However, the group has made it clear that shareholders will not be hurt financially by this strategy. In fact, the firm’s goal is to reach a €15 B EBITDA by 2025, representing a 50% increase from 2019. Additionally, net profits will grow by 6% annually reaching €5 B.
A natural question that may come to mind consists of where the capital is coming from, and if it comes from debt, whether the firm’s financial structure would be undermined. Iberdrola has stated that, despite raising debt to keep the pace of these investments over the next five years, the firm will be able to maintain a BBB+/Baa1 rating. In fact, the company will be able to generate higher cash flows, and since the firm’s portfolio is highly diversified, it has access to different markets. Moreover, the firm has adopted also an aggressive divestment policy in 2020, with a total of €4.6 B, and in the next 4 years, divestments will increase by an additional €3 B.
Value creation for shareholders and stakeholders
The firm is strongly committed to creating value for both its shareholders and stakeholders. First of all, the firm’s goal is to increase the share price by 4%, while maintaining a 65-75% dividend policy. Additionally, Iberdrola’s Chairman, Ignacio Galan, has stated that, with this plan, the firm is “advancing a model for long-term sustainable economic growth capable of meeting the current challenges of society”. In fact, Iberdrola is strongly committed to creating job opportunities, as 20,000 new employees will be hired. The firm will also improve the quality of working conditions by increasing the training hours of its employees (already 4 times above the European average). Furthermore, in line with ESG requirements, the firm is committed to gender equality. In fact, it aims at reducing the pay gap to 2% by 2025, while having a 30% female management (higher than the 20% current one).
Investments in renewables and geographical allocation
Investment in renewables will make up 51% of the total capital available for the plan. With this strategy, the firm will be able to double its current capacity and reach 60 Gigawatts by 2025, also boosting the offshore-wind power to 4 GW. Increasing capacity is the key for Iberdrola to improve its financial results, as the EBITDA to Megawatt ratio (a performance indicator used to evaluate efficiency) of this technology is 5 times the EBITDA to Megawatt ratio of solar photovoltaic, and 3 times the one of onshore-wind. Having said this, the firm will still invest in solar photovoltaic technologies and will strengthen its leadership in the onshore-wind and hydroelectric energy, increasing their capacity respectively to 26 GW and 14 GW by 2025. The firm’s prospective is even brighter (or greener) in the future. Iberdrola’s management believes that by 2030 it will have installed 95 MW of renewable capacity.
The firm investments are in states that have “climate ambitions” and 83% of the total funds will be concluded in A-rated countries. 21% of the capital will be allocated to Spain, where more than €7 B will go to renewables and €4.5 B to networks. The other two main countries that will benefit from this plan are definitely the United States and the United Kingdom, where €34 B will be allocated.
Network and Green Hydrogen Investments
Iberdrola still emphasizes the importance of improving electricity distribution in territories. With this objective in mind, the company will allocate €27 B to these networks, increasing the group’s assets base by 50%, to €47 B. These investments will allow the firm to amplify its customer base. The firm will be able to improve its service by installing 21 million smart meters, which will enable Iberdrola to offer innovative solutions to industrial and residential customers. Additionally, Iberdrola will provide services such as energy storage and heat pump, self-consumption and electric mobility. Consequently, Iberdrola will have 60 million supply contracts by 2025.
Another milestone of the projects is green hydrogen, which has become one of the key aspects of European recovery programmes. Thus, the firm will install 600 MW by 2025. This move can potentially revolutionize the supply chain, leading towards “environmental-friendly” manufacturing processes.
Furthermore, projections show that benefits from this strategic plan will be maintained in the future, as by 2030, the firm could have €60 B of regulated assets, with almost a 17% increase in its customer base, reaching 70 million contracts worldwide.
Environmental and social targets
In just 20 years, Iberdrola became the global leader in clean energy production, achieving considerable milestones such as:
- fourfold increase in renewable capacity
- EBITDA rose by 5 times, net profits 4 times, and market capitalization had a 6-time increase
- CO2 emissions were reduced by 75% while closing its coal plants
- Shareholder’s remuneration increased 3-times
Therefore, the group has established a unique leadership position that enables the firm to “tackle the global energy revolution” and to change the economies’ dynamics. Iberdrola is solely focused on investment in the European region (mainly in Spain, UK and Germany) and in countries such as Brazil, United States and Japan, which are highly committed to reducing emissions. The benefits of the democratic victory in the US Presidential election of 2020, as the new President Joe Biden, has announced that the United States will re-join the Paris Agreements, thus underlining the US commitment towards developing a sustainable economy. Moreover, the improvement of Iberdrola’s ESG pillars is a natural consequence of the firm’s plan. In fact, even though its CO2/kWh emissions are below by 2/3 compared to the European average, the goal of the company is to become carbon neutral by 2030, which would be an extremely impactful achievement in terms of sustainability (comparatively, GM plans to become carbon neutral by 2040). Moreover, Iberdrola is committed to planting 8 million trees by 2025, and 20 million by 2030, while cutting CO2 emissions by 86% by 2030. Finally, Iberdrola’s environmental policies will also involve its suppliers, as the firm will carry on operations mainly with companies that have adopted sustainability policies.
Iberdrola has definitely come a long way. The once local utility company has become the global leader in clean energy in just 20 years, and the strategic plan demonstrates that the firm has no intentions of relinquishing its throne. This plan demonstrates the importance of having a sustainable economy; a goal that lately has been targeted by many businesses. In fact, Blackrock has recently made a “blacklist” of 53 firms (including Exxon, Lufthansa, Chevron and Daimler) that have not yet adopted effective sustainable policies. Investors are increasingly giving importance to sustainability, and studies have found that firms that have strong ESG policies are traded with a premium on the market. Additionally, from the juridical point of view, in all governance codes worldwide, specific ESG requirements are necessary for listed firms. And in conclusion, consumers are shifting towards sustainable products and services. Iberdrola has realized the occurrence of this shift, and it has moved ahead to be sure of being on the cutting edge of the future sustainable economy.
Sources: 2020 Iberdrola’s Annual Report, Financial Times, FactSet, Reuters, Iberdrola’s Press Release, “Foundation of ESG Investing; How ESG Affects Equity Valuation, Risk, and Performance”, Guido Giese (2019).
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