Iberdrola, S.A. (OTCPK:IBDSF) Q3 2022 Earnings Conference Call October 26, 2022 3:30 AM ET
Company Participants
Ignacio Cuenca Arambarri – Director, Investor Relations & Communications
Ignacio Galan – Chairman & Chief Executive Officer
Pepe Sainz – Chief Financial Officer
Conference Call Participants
Ignacio Cuenca Arambarri
Gentlemen first of all we would like to offer a warm welcome to all of you who have joined us today for our 2022 Nine Months Results Presentation. As usual we will follow the normal format given in our presentation. We will begin with an overview of the results and the main development during the period given by the senior executive team that usually is with us; Mr. Ignacio Galan; Mr. Armando Martinez; and finally, Mr. Pepe Sainz.
Following this, we’ll move on to the Q&A session. I would also like to highlight that we are only going to take questions submitted via the web. So, please ask your question only through our web page, www.iberdrola.com.
In addition, we would like to beg you and focus your questions as far as possible on these sets or results of our next year operating and financial magnitude will be released as you probably already know on the 9th of November at our Capital Markets Day to be held in London.
Finally, we expect that today’s event will not last more than 45 minutes hoping that this presentation will be useful and informative to all of you.
Now, without further ado I would like to give the floor to Mr. Ignacio Galan. Thank you very much again. Please Mr. Galan.
Ignacio Galan
Good morning everyone and thank you very much for joining today’s conference call. I would like to start saying that as you know in yesterday Board meeting, we appointed Armando Martinez, our Group CEO. Armando who is here today with me as usual will continue in charge of business and countries of the group as he has already done over the last years as business CEO.
In the first nine months, net profit reached €3,104 million, up 29%, driven by strong operating performance in all countries except in Spain where net profit decreased by 14% due to the negative impact of gas prices on power market, driving higher costs that we did not pass to customers, and different regulatory measures implemented.
EBITDA reached €9,529 million, up 17%, thanks to the positive evolution in all geographies, except Spain as I mentioned. Reflected also in operating cash flow which increased by 28% to €8,200 million.
Investment reached €7600 million, up 14% for a total of €10.5 billion in the last 12 months. This strong increase in activity has resulted in 4,700 new hires and in the tax contribution of €7,800 million over the last year, showing again that our model produces more clear energy, less energy dependency, more jobs, and healthy public finance, responding to the social needs especially in situations like the current one.
We have also continued reinforcing even more our business and financial profile. Our liquidity of €24 billion and our strong financial position with FFO net debt above 24% allow us to face the current market situation from a solid position.
Driven by the set of results we are presenting today and the evolution expected in the last quarter, we are reaffirming our net profit guidance for 2022 at €4.0 billion to EUR4.2 billion and maintaining our commitment to an increased shareholder remuneration.
Yesterday the Board of Directors approved a 5.9% increase in interim shareholder dividend to €0.18 per share. As mentioned EBITDA was up by 17% to €9.5 billion, driven by a 22% increase in network business, which benefit for higher asset base in all geographies and tariff rise resulting for our stable regulatory frameworks, mainly in Brazil and United States.
Thanks to this evolution, networks already contributed 50% of group EBITDA. EBITDA in production and customer increased by 15% driven by 2,000 megawatts of new capacity installed year-on-year, which offset the lower renewable production in Spain due to very low hydro output and moderate wind factors. And the best evolution of energy margins, driven as I mentioned before by gas market dynamics affected of the Spain and UK.
Also our geographic diversification has allowed us to benefit from revaluation of US dollar and Brazilian real with a positive impact of more than €500 million on EBITDA.
Investment continued increasing over the third quarter to reach EUR7600 million year-to-date up 14%. Half of this figure was dedicated to renewables mainly offshore wind project in UK, the US, France, and Germany, as well as new wind and solar facilities in Spain, United States, and Australia.
Network investment increased by 10%, reaching a contribution of 40% of total group investment even, in a period of strong activity in offshore wind. The United States and Brazil contribute to 70% to network investment. Driven by all this, activity total investment reached €10,500 million in the last 12 months, as I mentioned as well.
Over the last quarter, we have achieved relevant milestone in our business and geographies. In Networks, AVANGRID completed the filing rate cases for the distribution licenses in New York, Maine, Connecticut and Massachusetts covering 80% of its total asset base. The usual process is currently ongoing with new tariff expected along 2023.
Regarding the NECEC project, following the decision from the Super Court of Justice, in Maine the trial court will make its final decision by mid-2023. In the U.K., conversation with Ofgem on their RIIO-ED2 framework had continued after the draft determination of June and we expect the positive final decision before the year end.
Also, in July, Ofgem has approved the proposed Eastern Link in HVDC transmission interconnection that will be developed by ScottishPower in a common joint project with National Grid. It is expected to start construction in 2024 and operational by 2027.
Also in the U.K., the government has published a new energy security strategy that will require additional investment in networks to reinforce resilience. In Brazil, we have already put in operation around 20% of the new transmission asset, awarding the auction held since 2017.
In production and customers 2,000 megawatt of offshore, onshore wind and solar awarded to ScottishPower round four are progressing as scheduled. We expect onshore wind and solar asset to be operational on 2023.
In Spain, we have reached an agreement with British Petroleum to deploy 11,000 fast charging points, for electric vehicles in Spain and Portugal. The deal includes an option to expand its scope to other geographies as well as to green hydrogen.
In United States, AVANGRID has signed an agreement with Sempra to their low-project linked to green hydrogen and green ammonia infrastructure in Texas. In Brazil, we have already put into operation 300 megawatts of new renewable capacity corresponding to Luzia Solar Project and Oitis Wind Farm. And in Iberdrola Energía Internacional has commissioned 100 megawatts in January in Portugal and Greece. Or in Australia, where our Port Augusta wind and solar hybrid facility is already operating and we have added a new 1000-megawatt wind projects to the Iberdrola Australia pipeline.
Iberdrola resilient business model is allowing us to maintain our activity and preserve our financial strength in the current energy and macro scenario thanks to our geographic diversification in countries like United States in which now driving a positive impact of exchange rates.
Also, our growth is based on networks and renewables with regulatory enragement or contracts that provide significant protection from any negative evolution of demand or inflation. We have 90% of our production in Spain sold, for 2023, 70% for 2024 and 50% for 2025. A limited exposure to gas in Europe, with only 14% of our total European output produced with combined cycles.
Our model is not based on speculative energy trading which minimize our exposure to volatility in wholesale energy markets. And thanks to our prudent procurement policy we have secured 100% of our needs, for 2022 of equipment, 90% for 2023 with price close of hedge.
Also, 75% of our debt is at fixed rates which elaborate the maturity of CGS and our liquidity position had reached €24 billion. Finally, our strong cash flow generation of €1,200 million with up 28% from previous year has led to an FFO and adjusted net debt ratio of 24.3%, as of September.
The current scenario also demands for all of us companies and individuals’ awareness and sensitivity. Based on our commitment to social responsibility, Iberdrola is contributing to reduce the impact of the crisis on families and industries in the short-term and also proposing and implementing structural solutions towards future crisis. Thanks to our zero emission generation portfolio we 1continue maintaining stable prices well below current spot market to our customers which is which as they renew the contracts are being affected by extra surcharges imposed by recent regulatory decisions in Spain.
We are also maximizing the availability in our generation fleet promoting a more efficient use of energy and focusing our attention to the most vulnerable customers. We continue increasing our investment up to €10.5 billion in the last 12 months in renewables and networks to provide energy self-sufficiency. Hiring 4,700 new employees and contributing with €7,800 million in taxes in the different countries where we are present. But we are also aware that leaving the current crisis behind will require joint action and consensus for public and private sector.
For this reason we have been playing an active role in the conversation with authorities. There is now almost full consensus the gas market dynamics are the origin of the energy price problem. And that the coordinated response at European level is necessary in the short term to preserve a single market. Using public funds to support vulnerable customers and boost economic and digital activity as it was done in the COVID crisis. And accelerating investment in networks and renewables to improve self-sufficiency reduce cost and promote economic activity avoiding a similar episodes in the future. That is what the repower package indicates.
Our two little subsidiaries Avangrid and Neoenergia are also presenting results showing a strong performance in both cases. Avangrid net profit increased by 35% to $734 million thanks to the positive impact of rate cases increased renewable production and the restructuring gain due to the agreement with CIP. Gross investment reached $2,108 million with two-thirds allocated to networks. In the first nine months Avangrid installed 475 megawatts on offshore wind and solar has already closed 100 megawatts under construction.
Additionally the company is progressing in the construction of 1600 megawatts of the offshore wind project in Vineyard Wind and Park City Wind of the coast of Massachusetts. In Brazil Neoenergia’s net profit increased by 15% to BRL3,782 million mainly driven by higher asset base in networks the impact of target reviews and the consolidation of Neoenergia Brasilia. Gross investment reached BRL7,449 million 7% more than last year with almost 80% allocated to networks and the rest of renewables.
I will now hand over to CFO Pepe Sainz who will present the group financial result in further detail.
Pepe Sainz
Thank you, Chairman. Good morning to everybody. As the Chairman has explained EBITDA was up to €9.5 billion net profit grew to €3.1 billion and while the FFO reached €8.2 billion. Our FX evolution has had a positive effect close to €570 million at the EBITDA level and €66 million at the net profit level as we were already hedged for the year in Q3. The dollar rose against the euro by an average of 12% the pound 2% and the real 17%. Revenues increased by €10 billion to €37.9 million and procurements grew by €8 billion reaching €23.2 billion. As a consequence gross margin rose by 16% to €14.6 billion and 9% excluding the FX impact.
Net operating expenses grew 20% to €3.8 billion. Excluding FX and nonrecurring effects mainly linked to the positive impact of asset rotation that we had in 2021 operating expenses grew by 7% two percentage points below gross margin growth on a recurring basis. Analyzing the results by business and starting by networks its EBITDA grew 21% to €4.8 billion and 12% excluding the FX impact with all geographies performing well except Spain where EBITDA fell 17% to €1 billion due to €206 million negative impact linked to an issue affecting the valuation of certain regulatory assets, we have appealed and we trust in the merit of our appeal.
In Brazil, EBITDA grew 20% to BRL 7.8 billion, driven by our increased asset base, positive impacts in distribution from tariff adjustments and operating efficiency with net operating expenses growing 12%, well below the 18% growth at the gross margin level.
In the US, IFRS EBITDA was 49% up to $1.6 billion, after a $550 million positive one-off recognized in the second quarter linked to a New York order that allows to accrue the recognition of certain regulatory assets into the group earnings providing a more stable EBITDA and aligning the IFRS and US GAAP accounting in revenue recognition from June onwards.
In addition, there is a recurring positive evolution of the business derived from the rate cases linked to higher investments and higher asset base. US GAAP EBITDA increased 12% to $1.3 billion, not accounting for the above-mentioned impact, which is only in IFRS.
Finally in the UK, EBITDA increased 3.3% to £677 million, thanks to our higher asset base. Energy production and customers business, EBITDA grew 15% to €4.7 billion and 10% excluding €186 million of FX impact.
In Spain, EBITDA was €2.3 billion, 12% up, a moderate growth despite the very high price environment that we have seen with spot prices increasing more than 138%, as a consequence of the group fixed price policy sales and lower renewable production. Once again, our results prove that Iberdrola is not taking advantage of the current higher prices environment.
In the US, EBITDA decreased 18% to $535 million due to the positive contribution of the Texas cold snap accounted in the first quarter of last year, partially compensated by a 5% higher output due to new installed capacity and better wind resources versus 2021. Excluding Texas cold snap impact, EBITDA would have rose slightly.
In the UK, the EBITDA grew 26% to £571 million, driven by higher wind output at better prices, compensating the high energy procurement at higher price than the SVT tariff. In Mexico, EBITDA grew 3.8% to $709 million. 2021 was negatively affected by the Texas cold snap and this has been partially compensated by lower thermal production in 2022.
In Brazil, EBITDA grew 39% to BRL 1.6 billion, driven by Termopernambuco combined cycle and 453 megawatts of average new renewable capacity in operation. Finally, in the rest of the world, EBITDA grew 20% to €318 million with higher contribution from both onshore and offshore business across different geographies.
Depreciation and amortization plus Provisions grew 14% to €3.9 billion and 8% excluding the FX impact. D&A grew 12% to €3.4 billion, mainly due to the higher network asset base activity and renewables growth. Excluding the FX impact, the growth was 5.9%.
Total provisions grew 36% to €435 million, 27% excluding the FX impact. Nevertheless, I would like to stress that the commercial debt ratios are still under control as bad debt increased 17% is below the billing increase. The ratio of bad debt provisions versus billing fell 12% to 0.96% and the overdue debt ratio of more than 90 days over billing ratio fell 11% to 5.82%.
September 2021 financial results included €145 million of positive one-offs. Excluding that, recurring net financial expenses grew €538 million to €1,379 million. Debt-related costs explained €396 million, €179 million due to a higher cost of debt, mainly due to Brazil that nevertheless is more than compensated at the EBITDA level by revenues indexed to inflation. Excluding the debt in Brazil, our cost of debt was up only two basis points to 2.89%. There is also a €92 million increase due to higher average net debt balance and the FX impact was €125 million linked to the US dollar and the Brazil appreciation. Non-debt-related costs increased €142 million, mainly linked to negative mark-to-market of FX hedges.
Iberdrola’s debt is well positioned for the rising inflation and interest rates as we have had a prudent approach in funding. Our debt excluding Brazil is 84% fixed including €5.2 billion in forward start swaps that we have at this moment. As you can see in the line our fixed debt structure is higher than our fixed debt revenue structure. Around 30% of our EBITDA is directly linked to inflation and another 20% indirectly.
Our strong cash flow as the Chairman has said, with our FFO of 28% in the period, compensates the growth in investments allowing the company to maintain debt under control. We have had a working capital active management that has allowed us to reduce negative impacts on this working capital and collateral needs, affected by high energy prices and regulatory measures that force us to fund taxes and suppliers. Collaterals only had an impact of €0.2 billion. The €44.3 billion does not include €700 million sale of 49% of Wikinger. Including it our debt would have been €43.6 billion.
As a consequence of this, our adjusted credit metrics continue to improve. Our adjusted net debt to EBITDA improved to 3.3 times. Our FFO over adjusted net debt rose almost one percentage point to 24.3%. Our retained cash flow adjusted net debt was up to 21.9% and our adjusted leverage ratio strengthened to 41.4%.
At present, we maintain an ample liquidity up to €24 billion, 27 months coverage of financial needs and 15 months in a stressed scenario including the possible PNM acquisition. Iberdrola has been able to close up to day transactions to cover 100% of our financial needs up to year end. In addition, our sources of financing continue to be highly diversified with access to all of them. Our average life of debt is six years.
Net profit grew 29% to €3.1 billion. Equity method includes €225 million of positive non-recurring impact as a result of the Vineyard Wind restructuring agreement reached with CIP. In addition, the negative one-off related to UK taxes recorded in 2021 together with the tax exception of CIP gain and other fixed fiscal effects favorably affects the evolution of our net profit. In the annex, you have the calendar from the interim dividend payment.
Now the Chairman will conclude the presentation. Thank you very much.
Ignacio Galan
Thank you, Pepe – so thank you, Pepe. To conclude this result show, once again the benefit of the model that the company has been implementing for the last two decades. That today is proving more value than ever. Based in our evolution up to September and our expectation until year end, we are reaffirming our net profit outlook to €4 billion to €4.2 billion. In production and customers, we will close the year with 2,500 megawatts of additional renewable capacity and we are seeing and expect some normalization of wind resource in the fourth quarter, although obviously, this will not fully revert the trends of the first nine months.
All our production for the fourth quarter is already solved. Our suppliers are closed with prices secured and we have minimal pressure to market volatility. In Networks, full year investment will reach €4,600 million with a stable tariff framework that protect our result for macro instability. On top of that, we will continue improving operational efficiency.
In terms of financing, 75% of our debt is at fixed rates. Our liquidity position of €24 billion allow us to cover 27 months of needs and we expect to continue having a positive impact of exchange rates, thanks to our geographic diversification. Taking into account, all these factors, the Board of Directors has approved an interim shareholder remuneration of €0.18 per share, with an increase of 5.8% payable on January 2023. This shows once again our commitment to sustainable growth in dividends. As usual, a supplementary dividend will be paid in July 2023.
To conclude, these results show that Iberdrola is in a good position to manage the current volatile situation, driving growth, maintaining financial solidity, contributing to alleviate the impact of the crisis of those which are more affected and investing to contribute to self-sufficient sustainable for Iberdrola system. We will give you detailed information of the company’s plans in our upcoming Capital Market Day that will be held on November 9th in London. You are all invited to attend in person virtually.
Thank you very much for your attention. Now, we are ready to answer any questions you may have. Thank you.
Question-and-Answer Session
A – Ignacio Cuenca Arambarri
The following professionals have asked the question that, I will be put into the top management in the next few minutes. From Credit Suisse, we welcome Mark Freshney and we see you soon to Stefano Bezzato, who moved recently to the buy side. Next is Alberto Gandolfi from Goldman Sachs; Arthur Sitbon from Morgan Stanley; from Jefferies, Ahmed Farman; Mediobanca, Javier Suarez; Fernando Garcia, Royal Bank of Canada; Deutsche Bank, James Brand; Jose Javier Ruiz, Barclays; JB Capital Markets, Jorge Guimaraes; and finally from Alantra, Fernando Lafuente. The first question is regarding the guidance. And the question is full year 2022 guidance includes any impact of Spanish 1.2% tax on revenues?
Ignacio Galan
The answer is yes. I think the main factors in our outlook is renewables. I mentioned, we have 2200 new megawatts installed. We expect normalization of load factors. We have production already sold as I mentioned as well close – a good price is close to €70 megawatt hour wholesale price. In networks, we have planned to invest as I mentioned as well €4.6 billion in 12 months. We have positive impact on FX and operating results, especially in Brazil and United States. And I think as – and that is the main reason. I think, we are not already – we are focusing networks. We are not speculative trading. So we are not already affected by collaterals or similar. We have high liquidity.
We have a fixed rate debt, as I mentioned as well. And that is the reason why we are maintaining that one. So that’s why we are already – we’re proposing the board is increasing dividend of €0.18, which is almost 6% increase towards previous year. But in this is already included, yes.
Ignacio Cuenca Arambarri
Next is given the spike on interest rates, do you think that the company has to reconsider its financial structure?
Ignacio Galan
Well, Pepe you can already maintain that one. I think when the things goes well has to be maintained. But nevertheless, Pepe you can already explain why we have to maintain that one in more detail.
Pepe Sainz
No I think that actually, I agree completely what the Chairman says. I mean, up to now it has worked quite well. And obviously, we are going to maintain this financial structure. That doesn’t mean that we can move a little bit more fixed floating depending on how we see the future of interest rates. But I think that we have had this strategy for the last year. And right now, this protects the balance sheet in cases of high raises of interest rates that we have as we are seeing right now.
Ignacio Cuenca Arambarri
The question says, why did you promote Armando Martinez from Business CEO to CEO position? Is this the beginning of a succession plan?
Ignacio Galan
Well, Martinez, this appointment is a sign of continuity. So I think it’s nothing new. I think it was planned a long time ago. And I think in his new position, he will continue to lead the group business. And I’m sure, he will do as well as he has been doing in the recent years. I think it’s a continuity. It’s not a revolution. So what we like is something, we was already planning. We see the opportunity of making precisely in this particular moment. So — but this is not — it was something that was already planned for a long time ago.
Ignacio Cuenca Arambarri
Next question, is regarding to that. What are your expectations of cost of debt for the next year compared to nine months 2022? Do you reiterate your net debt guidance of €44 billion by the end of 2022?
Ignacio Galan
Pepe?
Pepe Sainz
Well, in the next years we will tell you for the — in the Capital Markets Day. What I can tell you is that the cost of debt will be more or less, similar to the September level. So, in that sense there are not going to be many changes on that. And yes, we reiterate the guidance. I mean €44 billion €45 billion by the end of 2022, is where we are expecting to close.
Ignacio Cuenca Arambarri
Fifth question, is you show a slide with a decline in bad debt. How concerned are you about increases in the future? And what are you seeing in the previous cycles?
Ignacio Galan
So I think as I mentioned, we are taking measures not only to improve our position, but also to help our customers in a very complex situation, as I mentioned already during my presentation. I think examples, are for instance, we are providing payment flexibility for those with difficulties in payments. So — but I think Pepe, perhaps you can give further the details of all these things.
Pepe Sainz
Yes. Well, this is what we showed it is true that right now, we are being able to maintain the ratios under control. We have to be prudent, because obviously, this is something that we are monitoring. But right now, as you can see, we have seen a total decrease in the bad debt over provisions, over billing and the overdue debt 11% decrease over billing. But as I was mentioning, as the Chairman has mentioned, we are going to be very vigilant on these ratios to make sure that we are maintaining them under control.
Ignacio Cuenca Arambarri
European scenario. Next, can you please give us your latest views on the European debate on how to reform the energy system? I’m interested in Iberdrola views on one, effectiveness of a price cap for gas prices; two, view on how to finance that price cap; and third, proposal for the full reform of resistant since marginal system does not work any longer.
Ignacio Galan
So, well, I think I’m quite pleased that after several months talking about many things, the most of head of the state and government of different countries has already arrived to the point — initial point that the European Commission was mentioned in July last year, in the document that they make already the toolbox, which is the gas market dynamics, is the cause of the problem. It’s not electricity. Electricity, is the solution.
The gas market was a problem. I think we talk a lot about marginal system of electricity, but we are not talking much about the marginal system of the gas. And now, we are already talking what is the TTF I think for months, we not already heard what is TTF, the difference between the different European markets, which is in the case of Spain mid gas, which is not linking with the TTF. I think the prices of the gas is in certain contract, is linked to the oil price or the coal price or the electricity prices, nothing to see with the TTF.
But I think the marginal system of gas, is based in Europe, in TTF. Now, we are head of state are talking about how to reform the gas market, which is the cause of the problem. So, I think after these meetings now, is arriving to the solution is accelerating the electrification, to avoid new crisis.
And this requires several things. One, certain is to accelerating permits and to provide incentives to investment. If the ways — if it’s not already modifying the process of obtaining the permit, and instead of incentivating or penalizing the renewables, who is going to invest in Europe.
Towards that, we have seen already in the United States what they’re doing. The IRR what they are already providing is precisely certainty and incentives to invest already in United States, I think, in all sectors.
So in renewable, they are extending the PTCs for 10 years. So they gave visibility for 10 years in a way then we will know that whatever investment we will make during the next 10 years, we will obtain this 30% task credits. They are already defined already incentive for hydrogen.
Europe we are talking about 10 million tons of hydrogen, but the incentive in Europe is almost none compared with Americas. In America part of the PTCs, ITCs for investment in green hydrogen, which means green electricity for making already green hydrogen, they are giving $3 per kilo of hydrogen produced, which is — I think that is making that attractive. Same with electrification, providing certain helps for incentivating the electric transport.
So I think that’s my point. My point is, it’s good that now all the European or more European countries are understood. Then the problem is the not properly working market of gas, so the marginality of the gas base in TTF is not reflecting the reality of the cost of gas worldwide. So that is something they are already, in this moment, looking for modifying. That’s positive.
The second thing, they are understanding the only way to avoid future problems like that one or crisis like that one, is to accelerate the construction of more renewables and to diminish the external dependency and that means to provide incentive for making that.
And the last one is that, instead of making that one, they continue or they make — they penalizing those, we can already provide the solution, should be very difficult than Europe achieve the targets for the carbonization and the self-sufficiency then the head of the state are already in this moment targeting for the 2030.
Ignacio Cuenca Arambarri
Next question is, considering the spike in rates, do you plan to slow down CapEx in renewable? Probably this question will be answered in London on the 9th of November. And the second question regarding this thing is, do you think PPAs price will adjust to reflect to higher rates?
Ignacio Galan
So, I think, we’ve been for a long time already predicating then the best way to have already in a stable market is to increase and incentivate PPAs, bilateral agreements between vendors and buyers of electricity. So I think that is, for instance, what we have already in countries like the United States, with most of our electricity is sold already through PPAs.
Europe, now we are seeing an equivalent — the increase in the demand of PPAs globally. So — and these PPAs already are reflecting the new situation. I think, we have higher cost. The CapEx is increasing toward it was, the inflation is affecting as well to the equipment and to the labor, so and the rate of interest. But I think, it’s — and that is already very much extended in the global corporation.
There — one point important is that, for making these PPAs, we need already more regulatory certainty, how we can sign some agreement 20 years — for 20 years if we don’t know what is going to happen in the next 15 days. So we need already the certainty to avoid and to increase this one, this dependency of spot market to provide already these fixed prices.
Certain, the customer is — every time are more and more appetite for fixed prices. So — but I insist on that one. We need more stability, clarity and incentives to promote the PPAs in Europe as they are already doing in country like United States or Australia, which is the same thing as well.
Ignacio Cuenca Arambarri
Next question regarding renewables, onshore wind and solar. On one side we have higher raw material costs, higher cost of debt, supply chains issues and then there are indications that PPA prices are higher too. Overall, what does it mean for IRR or IRR to work spread on new onshore wind and solar projects?
Ignacio Galan
So, I think, we are analyzing case by case. I think that is — what you have mentioned is true. So certain, if the equipment is more expensive or the rate of interest is higher. So I think that is affecting the cost. But, I think, we are linked case-by-case to see what is the return we are already achieving on that one.
So, the fact I think we have access to different routes of market and I think from participating in auctions to bilateral agreement through VPAs already selling through our retail network. So, — but I will update all those things in the next Capital Market Day. But it’s certain that we are already very much prudent in the way of how we are already looking to the investment in case-by-case.
Ignacio Cuenca Arambarri
Next question, could you walk us through the main reason on your lower capacity addition targets for renewals in the U.S. for 2025? Any are returns going down there? I think that probably some information given by Avangrid in its Capital Market Day. So, we can answer now or move to the Q&A?
Ignacio Galan
I think that as you mentioned good — what is the question? Well, I think they will be answered on that one. I think globally I can tell you already the permit is a key limitation factor in all countries. So, I think in this moment we have a few thousand megawatts already as far as I remember pending of approvals in different states.
And — but nevertheless globally in the group, as I mentioned, I think we have already 14% more investment in these nine months than the previous year so — which I think we continue already in this one. In certain then we are already more focused in offshore technology, which is less megawatt much higher investment in high return as well. But we will provide all the details in the — on the 9th of November on this one.
Ignacio Cuenca Arambarri
Question number 10. What are your gas contract reference to?
Ignacio Galan
Our gas reference — so well I think — the first thing I have to say that we are not exposure to Russian gas. So, I think is we had already secured our power plant suppliers through forward market. We are not already perceiving risk of delivery. I think it’s most of our business we continue selling gas to our customers in the leverage market or to regulated tariff. And I think those ones are mostly related as far as I know.
So, I know very much in detail perhaps nothing you can already mention is not much — it’s not very important for us. So I think to the mid gas in the case of Spain I think it’s my feeling that is related to that but I think you can provide this information. But we are — my message is we have not already a contract of gas take or pay contracts.
So, I think we are buying the gas case-by-case when we need already for our combined cycle of gas. In the case of retail, I think we have signed agreements for that one which is linked to the price we are selling. So, we are already having some margin under one. Martinez is not already open position but at in position which are already hedged already with the contracts of to final customers on those ones.
Ignacio Cuenca Arambarri
This question probably will be answered as well in the Capital Markets Day, but I’m going to make it. How is higher cost of debt and WACC impacting farm-down valuations?
Ignacio Galan
So, what is the higher cost debt. So, you reply Pepe.
Pepe Sainz
I think that for the time being it is true that the higher debt and cost of capital will probably reduce a little bit their farm down valuations, but also it is true that there is a lot of money available capital that wants to deploy in the infra funds. And there is a lot of interest. We are seeing a lot of interest for the farm downs that we are analyzing. So we are still expecting good prices for these assets.
Ignacio Galan
I think perhaps in this point, I can give you as Pepe mentioned the example of the last transaction, which is already the minority stakes all in our wind farm in Germany, which is speaking when we rise something like €100 million for the 40% of this one, which I think is a minority one we are not already making any capital gain in our account. But it certainly has already a very, very good price comparison with investment with the CapEx we have already used for that one. And I think a similar thing we have seen on that one.
So our investment is important to say, our divestment is important to say that we are not contemplating already capital gains on that one. It’s a way of sharing the risk and already finding — helping to fund already especially these large projects.
Ignacio Cuenca Arambarri
Next question is regarding the UK situation. Is the macro environment of higher discount rates and weaker pound currency since the CFD was bid for the East Anglia 1 in May 2022 likely to change the business case and whether Iberdrola goes ahead with the project?
Ignacio Galan
Well, certain we will go ahead. I think the first one is certain is there. So in the case of East Anglia 3, it was already awarded this year. I think most of the — of all the equipment has already bought and has been already hedged on that one. So I think the risk there is minimal. I think even we have already secured the financing perhaps Pepe you can already give details on that one. So it’s a project, which is quite well let’s say secure in all the matters.
Related to the future one, I think we have the East Anglia 1 not 2. So what we were one other 1.4 gigawatts. I think we will certain if we go through to the next auctions certain we will apply the prices according with the cost at this time that we can reflect the reality of the market. So — but I think for those — for this one East Anglia 3, I think all the project is hedged with — in the moment we have already closed including the financial structure.
But Pepe you would like to add anything on that one please?
Pepe Sainz
No. Completely I agree from our financial.
Ignacio Galan
And rate of change including.
Pepe Sainz
Yes. That is what I was going to say. We have most of all the supplies hedged at the FX and the funding also is forward-hedged.
Ignacio Cuenca Arambarri
Next question has some personal comment of the analysts, but this time I’m going to do it. In response to irrational behavior by some European government, which in some cases can amount to its proposition would Iberdrola consider tilting CapEx towards Brazil and the US where returns are better and regulatory risk lower?
Ignacio Galan
Well, I think that question is going to be replied on the Investor Day on the 9th. You see what is our mix of our investment what we plan to invest more on this one. But uncertainty is not helping to the investment decision.
Ignacio Cuenca Arambarri
Next question is regarding to us, are Spanish gas customer moving to the regulated tariff financial impact on Iberdrola?
Ignacio Galan
So we are let’s say irrelevant in our gas business in Spain. I don’t know how many customers we have already on the regulated tariff, but is in the liberalized one, I think is very, very few. So I think certainly will have some one, but we are trying to minimize those effects. In any case, I think it’s going to be covered for what we are another one by the public funds on those ones. But I think it’s not a relevant number we have in this business.
Ignacio Cuenca Arambarri
Okay. Next question is, do you believe the Spanish government may introduce a 1.2% revenues tax? How can you legally fight it?
Ignacio Galan
Well, I think that is already now in the parliament. We don’t know what is going to happen, but we will see, if it finally is already applied, we will do as always we have already done to defend the interest of the shareholders, certainly we go to the court. I think that it goes against the European directives. The European directives is clearly stating then that is for a tax for extra profits which is not the case in the case of Spain. I think it’s talking about extra profit, I’m not talking about revenues. And I think our lawyers will work very, very well as always for already defending the interest of our shareholders so which is not new. But we see something which is not already in line with what is being addressed by the European Commission.
Saying that, I think we feel that we have to try everybody to do our best. I think we are doing our best. I think we are already paying €7.8 billion taxes in the country at present, which more than half is already paid in Spain. And my point is with this €3.7 billion and €3.8 billion we pay in Spain they are money for already helping a lot to those more vulnerable. So I think this one — extra thing on that one well I think I’m not seeing the reason why because we are very well paying on this taxation in this particular moment.
Ignacio Cuenca Arambarri
Next question is you are showing FFO debt ratio of 23.4% in your slides. Could you provide information on a like-for-like definition to the one-off S&P looks at? Are you comfortable with the 17% threshold that S&P looks out for your current credit rating?
Ignacio Galan
Pepe?
Pepe Sainz
Yeah. The equivalent that we have for S&P is 19.7%. There is this year a difference in the cash flow recognition. But let me point that S&P for the BBB+ the range that it gives is 20% to 17%. Today, we are at 19.7% improving from 19.3% of last year and we are in the top range of the range. So we are very, very comfortable with this ratio.
Ignacio Cuenca Arambarri
Last question regarding the gas sector or the gas industry in Spain. You seem to be discontinuing your gas supply activity in Spain. Is this view correct?
Ignacio Galan
So I think all you know that we sold a few years ago all our take-or-pay contracts of gas. So I think we have not already let’s say risk as other colleagues has already in collateral so similar because we have not this type of contracts. So gas for us is already in the case of Spain is minimal. And the gas as I was mentioned, we are using our combined cycle of gas we are already just buying when we need to ready for generating electricity. So — but I think we are as insistent as we are focused on electricity we are focusing renewable. We are focusing network. So that business is networks worldwide. And second is renewable and the gas is already in the case of Europe is very marginal activity.
Ignacio Cuenca Arambarri
Okay. Now please let me now give the floor to Mr. Galan to conclude this event.
Ignacio Galan
So thank you very much for taking part of this conference call. I would like to as always remind that our investor people Investor Relations will be available to further information you may require. In any case, I think it will be again invite you for attending our Investor Day Capital Market Day on the 9 of November in London and we can already share with you our projection for the next few years. So thank you very much and see you soon in London. Thank you.
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