Ignacio Galán is playing it safe. In Iberdrola’s updated three-year business plan, the veteran executive chairman of Europe’s largest utility has earmarked 36 billion euros of net investments by 2026. Most of the cash will go into upgrading and expanding ageing power grids, and about a third into the United States. Both are perceived as safer investment options than the renewable projects on which the $79 billion company has largely built its stock market fortune.
In the past decade, Iberdrola has trebled its market worth. That’s chiefly thanks to an early push into wind and solar projects. Even though Iberdrola has done a better job than peers weathering the Covid-19 pandemic and Europe’s 2022 energy shock, investors’ enthusiasm towards green power investments has cooled. Higher interest rates have made many projects less profitable, especially in offshore wind. Shares in Denmark’s Orsted have fallen about 70% from their January 2021 peak after multiple headaches.
That said, Iberdrola shares trade roughly where they stood at that point in time. Given that some of that is down to a pre-existing mix of US exposure and regulated assets, Galán’s new investment targets should cement the group’s appeal. He is allocating 60% of net capital expenditure, or 21.5 billion euros, to power grids. That’s up from 44% in a previous plan, or 16 billion euros. These networks need massive upgrades and changes as ditching fossil fuels requires more electricity. But as regulated businesses, grids also offer more predictable returns as investors receive a guaranteed rate over the lifetime of the asset.
The other key focus for Iberdrola is the United States. The Spanish company admittedly had to abandon its $8 billion takeover of US PNM Resources in January due to regulatory pushbacks. But its $2.5 billion offer to buy, opens new tab out the 18% of $14 billion US unit Avangrid it does not already own shows a steady commitment to that market. The generous subsidies President Joe Biden’s administration is handing out for both renewables and infrastructure make the investment worth it.
The International Energy Agency calculates US subsidies exceed, opens new tab those of other countries, and it has earmarked $50 billion just for electricity networks. Also, by 2035, the US may need investments of $1 trillion in distribution networks and up to $500 billion in transmission lines, according to an IMPAX Asset Management report.
Shareholders seem comfortable that Galán can hit the top end of his targeted range for 2026 EBITDA, of 16.5 billion euros to 17 billion euros. Apply a 2026 EBITDA multiple of 7, roughly in line with a Morgan Stanley-compiled average of rivals like Enel and EDP for that year, and Iberdrola should be worth around 120 billion euros, including debt – where it currently trades.
Galán’s strategy is not without risks of its own. Biden’s handouts are inflating construction costs, and presidential hopeful Donald Trump has threatened to axe some green tax credits. Still, with US power networks required to expand by two-thirds to handle surging electricity demand, the Iberdrola boss’s bets look reassuringly logical. — Reuters
Lisa Jucca
The author is a European business editor, Reuters Breakingviews.
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