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UTILITY WEEK | 28TH APRIL - 4TH MAY 2017 | 17 Finance & Investment Analysis A s a major European renewables busi- ness, the Spanish-based Iberdrola would presumably not have wel- comed the vitriolic, and o-quoted, com- ments by president Trump about onshore windfarms – and especially not in its Scot- tish Power back yard. Nevertheless, Iberdrola, currently capi- talised at €43 billion (£36 billion) and with over 45GW of capacity – of which over a third is renewables – continues to progress and is now rewarding its shareholders with a spe- cial dividend. Since 2012, its share price has risen by an impressive 77 per cent, although it remains well below its heights of late 2007. Comparisons with its more illustrious EU peers are very revealing. Both leading Ger- man utilities, Eon and RWE, have seen their share prices decline by over 80 per cent since their peak almost a decade ago. And EDF, with its soaring debt, has seen its shares plunge by more than 90 per cent over the same period. Importantly, Iberdrola was quick off the mark with its heavy investment in renewable generation, perhaps a decade ahead of its competitors; neither RWE nor Eon, until very recently, operated significant renewable gen- eration capacity. Simultaneously, Iberdrola moved away from fossil-fuel generation earlier than most, although its gas plants still account for almost 30 per cent of its capacity. And its nuclear power exposure is far less evident than, say, EDF or, to a lesser extent, RWE. Aside from its high-profile renewables business, Iberdrola remains a major opera- tor of power networks, whose undoubted attractions to discerning long-term investors are considerable, as evidenced by the very aggressive bidding for National Grid's sur- plus gas distribution assets last year. Aside from its domestic network assets – and those in Scottish Power's and Manweb's supply areas – Iberdrola also owns various US power distribution networks, most nota- bly on the US East Coast. As its recent share price performance suggests, Iberdrola's financial performance has generally met investors' expectations. In 2016, earnings before interest, tax, depre- ciation and amortisation (Ebitda) exceeded €7.8 billion, an increase of 5.5 per cent on 2015. The sector contributions to this overall figure were revealing. The networks businesses accounted for 52 per cent of overall Ebitda compared with 19 per cent from renewable generation. In Spain, which – with the US – provides the lion's share of networks Ebitda, 2016 returns were boosted by the approved 2.5 per cent remuneration increase. Much of Iberdrola's remaining Ebitda derived from the liberalised generation and supply markets of Spain, where the economy is finally recovering. Spain accounted for 68 per cent of overall generation and supply Ebitda. In the UK, Ebitda returns were adversely affected by depressed generation prices and a lower Brexit-driven exchange rate, although the closure of the Longannet coal- fired plant did benefit the operating cost line. On the renewables front, Spain and the US accounted for 36 per cent apiece of the division's €1.5 billion Ebitda, with the UK's contribution falling to 17 per cent due to foreign exchange losses and adverse wind conditions. Further down the profit and loss account, major savings were reported in net operating expenses while interest costs also declined. Hence, 2016 net profit – at €2.7 billion – was up by almost 12 per cent on the 2015 figure. Importantly, operating cash flow rose by almost 7 per cent, a key element in ensur- ing that Iberdrola's net debt figure remained below €30 billion, as was the case at Decem- ber 2016. Furthermore, this cash flow sustains Iberdrola's formidable capital expenditure programme. Between 2016 and 2020, around €25 billion will be invested, a substantial part of which is earmarked for regulated power networks investment. Renewable generation – predominantly to finance offshore windfarms – will also take a large chunk of the investment budget. Building on its successful joint venture in the 389MW West of Duddon Sands project in the Irish Sea, Iberdrola will be focusing on deliv- ering the much larger East Anglia offshore windfarm – destined to be a UK shop win- dow for offshore wind investment. In mainland EU waters, the Wikinger windfarm off the island of Rugen in the Baltic Sea will be a key project as Germany seeks to replace the large output that will be sacrificed once all its nuclear plants are closed by 2022. Iberdrola is also the majority shareholder in the 496MW St Brieuc scheme off the Brittany coast, as France belatedly seeks to rack up its non-nuclear generation capacity. Solar power, which is now making major inroads in the southern parts of the US, is strongly advocated by Iberdrola: it has sev- eral solar investments in its domestic market. Looking forward, Iberdrola is forecasting (in a somewhat convoluted turn of phrase) "mid single-digit growth at Ebitda and net profit level" for 2017. In fact, the former is expected to grow at a similar level to last year. Beyond 2017, further growth is antici- pated, with a €10 billion Ebitda target by 2020, driven by the recovering Spanish econ- omy and Iberdrola's activities in key parts of the US power market. Even if its UK prospects are less robust, Iberdrola seems likely to expand its poten- tially attractive Brazilian operations. In short, Iberdrola's management has made many right calls over the past decade, and its shareholders are now benefiting accordingly. Nigel Hawkins, director, Nigel Hawkins Associates Iberdrola a stand out success Where many of its big European peers have had a torrid decade, Iberdrola has made smart calls on investment and its shareholders are reaping the benefit. Nigel Hawkins runs through the financials. 7.0 6.5 6.0 5.5 5.0 IBERDROLA SHARE PRICE, ONE YEAR (€) May 2016 Mar 2017