Iberdrola S.A. (OTCPK:IBDRY) Q3 2015 Earnings Conference Call October 21, 2015 3:30 AM ET
Executives
Ignacio Galan - Chairman and Chief Executive Officer
Jose Sainz - Chief Financial Officer
Francisco Martinez Corcoles - Business Chief Executive Officer
Operator
Good morning, ladies and gentlemen. First of all we would like to offer a warm welcome to all of you who have joined us this morning. We're delighted that you are able to be with us for the presentation of our 2015 nine months results. Welcome to the future.
The presentation will as usual follow our customary format. Firstly, we will begin with an overview of the results and the main developments during the period given by the two management that usually we have with us. Our Chairman and CEO, Mr. Ignacio Galan; the CFO, Mr. Jose Sainz; and finally Mr. Francisco Martinez Corcoles, our Business CEO. Afterwards we will move on to the Q&A session.
We would also like to point out that we are only to take questions submitted via the web. So please ask your question only through our webpage www.iberdrola.es. We expect that the event will last no more than 60 minutes, hoping that you find the presentation both useful and informative.
Now, without further ado, I will hand over to our Chairman and CEO, Mr. Ignacio Galan. Thank you very much again. Please, Mr. Chairman.
Ignacio Galan
Good morning everyone and thank you very much for attending the usual presentation we are holding today through our webcast. Our businesses have continued showing a strong performance along the first month of the year, especially in networks and renewables.
Gross margin is up 7.3% up to €9.5 billion driven by 12.1% increase in networks and 19.3% growth in renewables. More over we’ve controlled net operating expenses, which are only 0.2% lower excluding if takes the impact. As a consequence, EBITDA has grown 5.8% to €5.4 billion. Operating cash flow totals €4.3 billion, growing 9.1%, while investments are increased by 6.7% to €2.1 billion of which 61% are litigated to growth.
Bottom line recurring net profit has increased 8.5% to €1.7 billion and net profit reaches €1.9 billion, growing 7.8%. EBITDA increase is mainly due to the solid performance of all our regulated activities, which has grown 15.5% and accounts for 75% of total EBITDA to the positive evolution of our international activity, which a 16.2% increase versus 2.1% decline in Spain country in which still we have not reach the result prior of the crisis in 2008.
By businesses, network recorded 10.5% growth showing a positive evolution in all regions, thanks to higher asset base, which increased 10% in our UK transmission and distribution activity, 3% in the United States and 6% in Brazil driven by our investment. These higher up will lead to further improvement results in the future.
The renewable businesses continued to show a very good performance with EBITDA have been increased by almost 23%. Thanks, to a strong output especially in United Kingdom, which our West of Duddon Sands offshore windfarm, excellent availability and resource expectation. However, in United States wind output was lower than usual due to the impact of that [manual].
On the other hand our regulated generation in Mexico is growing is strongly with the 38.5% greater in EBITDA due to our increased activity within private customers. Finally, liberalised activities in Spain and UK reflect a negative evolution, with a decrease in EBITDA 14.3%. The reason behind Spain reduction is a lower production and higher cost and taxes compared to the last year history in our results.
Meanwhile the situation in UK is affected by three main factors. The increase in government obligation the raise of carbon tax in the production implementation to all our new financial integration system reach us require extraordinary cost to successfully maintain our client base and even increasing despite the problem detected during this phase.
For the present situation we have established the system and we are not expecting new extra cost in 2016. The result had improved our cash flow generation capacity to almost double-digit growth, operating cash flow has increased 9.1% to €4.3 billion and exceeding investment of growth all businesses. These investments had increased by 6.7% to €2.1 billion, on which 61% are allocated to grow project and massively to regulated activities.
I will now proceed to describe the main growth project underway. In offshore we have beginning - under construction in Germany, which is plan investment of €1.35 billion and we expect the commissioning for 2017. We are also starting the construction of East Anglia with a CapEx of €3.6 billion to recommission in 2019.
Finally we are progressing on the development of Saint-Brieuc in France which I plan investment of €2.6 million and unexpected commission date by 2022. These three projects together with West of Duddon Sands already in operation 1,800 megawatts of offshore installed capacity in our group. Onshore we will also follows a positive trend with two new projects to be started in UK, which are to the four already under construction.
United State we are currently building four windfarm, which have 100% of future production covered under PPA's, decided to our Brazil and Mexico windfarm under construction result in overall additional onshore capacity or more than 1,200 megawatts. To be commissioning between 2016 and 2017.
In Spain after there was a memorandum that Royal Decree published last week established new auction for the wind power that we are analyzing. In Mexico, during this last quarter we have awarded two new projects we regulated our long-term contracts. One combined cycle, and one co-generation plant to be added to the four plants already under construction.
Altogether, they will add up to 1,600 megawatt to the operation before the end of 2018. Altogether our installed power in this country will reach more than 7,000 megawatts are the update. The increasing generation through intermittent renewable sources to require a storage capacity to stock energy surplus and supply heat to the system when is needed
Iberdrola approach to these needs east to invest in a storage technology in which pumping is a much more efficient and larger scale solution in other more fashionable and highly advertised technologies. We have just finished the construction of Portugal and in Spain the largest of these kind in Europe with 1,800 megawatt of the stories capacity and now in Portugal we had a starting the construction of a new pumping and storage plant on the Támega river with 1,200 megawatt capacity expected to be commissioned in 2023.
Altogether, will amount to close 6,000 megawatts of pumping capacity in between Spain, UK and Portugal providing efficient energy supply at peak hours for several million or households. In networks as a result of our agreement with Ofgem in the United Kingdom realty running transmission RIIO-ED1 in distribution are in progress. With a combined topics of nearly €9 billion for the next 6 years to 8 years.
In United State we are negotiating several growth opportunities in transmission network in Maine and New York. This project will address reliability and congestion issues and we will provide additional transmission capacity for renewables. In a Spain also we have launched the set of new product to cover the potential demand self-consumption and benefit from our markets.
For instance is Smart Solar is a full for self-consumption solar instillation for wholesale holds and companies are plans to A tu medida Taylor made plans these another product had resulted an increase of our customer base. Also in Iberdrola we are aware or the difficulties encountered by some low income household and we are working to offer them our support ensuring power supply to their homes in collaboration with different local and regional public administration.
In relation to the merger of UIL Holdings and Iberdrola U.S.A we have received all the federal approvals. The remaining state authorization are in progress after making all the corresponding filings both Massachusetts and Connecticut we have already reached a settlement with the corresponding authorities.
The process for the list in New York stock exchange is also on track and we expect to close the transaction before the year end after the approval of real General Assembly. With respect to our financial position we continue improving our main financial ratios.
Regarding the FFO our retained cash flow to net debt ratios we achieved 2016 target define or our last U.S. Investor Day in 2014. And our leverage has been reduced also to 41.1%. To benefit from lower internal rate we have continued our active liability management with a positive impact in our net financial expense is down by 8.4%.
These results allow us to reiterate our commitment to maintain our annual shareholder remuneration of at least open $0.20 per year. The Board of Directors approved yesterday the implementation of a new edition of the scrip dividend program corresponding to the interim shareholder remuneration for the fiscal year 2015. The warranty purchase price for the free allocation rights will be of at least €0.125 payable in January 2016.
Additionally, as usual we expect to distributed complementary dividend in July suggest the approval of annual meeting in April. Also we will continue making share buybacks to compensate the negative effect of our scrip program maintaining the number of shares at 6.24 billion shares.
Finally, I would like to reaffirm our guidance for 2015. The growth in networks and renewables together with our operational efficiency and positive financial performance will lead to an increase in EBITDA and recorded net profit compared with 2014.
All in all we expect to reach a year in advance. The outlook set for 2016 during our February 2014 Investor Day. Therefore, these results before our strong track record or value creation for our shareholders, driven by three main pillars Growth, Financial Strength and Sustainable Dividend.
Thank you very much for the attention and I will [indiscernible] the call to Pepe Sainz, who will present the Group financial results with further detail. Thank you very much.
Jose Sainz
Thank you, Chairman. And good morning to everybody. As already commented in previous quarters as of January IFRIC 21 and 30 effects changing the timing of the recognition of certain payment of Levies during the year.
Nine months 2014 figures have been restated for comparison purposes as you can see in the slide. These does not affect the annual financial statements only the quarterly results. Nine-month results as a stated by the Chairman continued to show a strong operating performance. EBITDA grew 5.8% and recorded net profit 8.5%, while operating cash flow was up 9.1% to €4.3 billion.
Average FX rates helped with €1 representing 17.8% and the bond 10.4% more than compensating the real evaluation of 13.1% on an average terms. Revenues grew 6.7% to €23.7 billion while procurements rose 6.3% to €14.2 billion due to higher costs in a worse production mix and price of sale to rising especially in the UK. Gross margin increased 7.3% to €9.5 billion as revenues grew more than procurements.
Net operating expenses excluding negative FX impact fell 0.2%, but including it they were up 7.6% to €2.7 billion. Personal expenses grew 9.1% and 2.5% excluding the FX impact. Net external services were up 6.1% decreasing 3% excluding the FX impact affected by non-recurring impacts including €104 million positive non-recurring impact due to favorable legal rulings in Spain. Partially offset by almost €60 million derived from higher non-recurring IT system costs in the UK and costs related to the UIL deal.
Levies grew by 13.2% to €1,372 million mainly affected by the FX impact €83 million and €111 favorable Court ruling accounted in 2014. Partially mitigated by a €48 million positive Court ruling accounted for in the first half of 2015 and lower ECO costs in the UK. Analyzing the different businesses and starting by networks it's reported EBITDA was up 10.5% to €2,684 million with gross margin growing in all countries.
Net operating expenses rose 13.9% including non-recurring items and accounting reclassifications in the U.S., Spain accounts for 41% of the networks EBITDA, the UK 31%, the U.S. 21%, and Brazil 7%, by the way Brazil accounts for around 3% of the total EBITDA of the group.
In Spain networks EBITDA grew 1.4% to €1,113 million including the negative impact of €40 million positive settlements accounted for in Q3 2014 related to 2012 and 2013 investments. In the UK EBITDA was up 1.1% to £597 million as a result of 0.8% increase in the gross margin due to a higher asset based but decreasing versus previous quarters affected by the profiling of the RIIO-ED1 applicable from April 1. There is 0.2% decrease in net operating expenses.
In the U.S. EBITDA by 10.7% down to US$642 million affected by net operating expenses increase related to accounting reclassifications that increase expenses versus the precision but does not have an impact in the final P&L and an additional maintenance cost. As we said in June on favorable IFRS versus U.S. GAAP impacts are decreasing, but still lower the EBITDA in IFRS by US$94 million of which more than US$80 million our taxes to be partially compensated in Q4.
Finally Elektro grew 163% to R$614 million us the first nine months in 2015 have not recorded any negative drought impacts. While in the first months of 2014 we included R$298 million of negative impact. These differences will be reversed in Q4 as last year with had a R$441 million positive impact recognizing in [indiscernible] drought impacts. EBITDA growth in Elektro is also helped by the tariff reviews now we had in almost 2014 and 2015.
Generation and supply EBITDA fell 7.4% to €1,735 million driven by lower results in Spain, in the UK, and in the U.S. that recorded extraordinary positive gas impacts in last year. While Mexico increase its contribution. Levies also added to the worst performance of the Syria by increasing 9.1%.
In Spain EBITDA reach €1,180 million with a 6.8 decreasing gross margin due to the 10% lower output an increased procurement costs due to increased thermal weight of the production mix. Also gas business had a non-recurrent negative comparison versus 2014. Levies are up net €64 million basically due to the already mentioned CO2 allowances accounted for in 2014 compensated by the positive Court ruling in 2015.
In the UK EBITDA rates £182 million, wholesale and generation business gross margin decreased by 22% due to higher costs with the carbon tax growing from £9 to £18 from April 1 onwards.
Retail business gross margin decreased by 2%, higher volumes in gas with 10% increase in the month do not compensate the 17% lower gross margin in retail power due first to the increase in non-related energy costs play the rocks under transmission and distribution charges. And in addition to that the difficulties in the deployment of a new retail IT system that increased net operating expenses by £32 million. Despite this we have been able to maintain a relatively stable number of customers.
In Mexico EBITDA grew 11.5% to $379 million due to the renegotiation of all contracts with the negative impact last year of $66 million. Renewables EBITDA increased by 22.7% to €1,126 million driven by the recovery in Spain and the positive performance in the UK. The U.S. and Spain have been the largest EBITDA contributors in renewables with 32% and 31% followed by the UK with new offshore capacity in operation with 27% share.
Gross margin increased 19.3% and net operating expresses rose by 12.7%, 6.6 percentage points below. In Spain, the EBITDA reached €353 million, 13.9% more with a 5.5% lower output compensated by the recovery in prices. In the UK, EBITDA reached £219 million up 60% with 30% higher output due to weather conditions on West of Duddon Sands for windfarm on positive contribution.
In the U.S., EBITDA was $396 million, 16% down with a 7% decrease in output due to climate conditions in the west, but in windfarm 200 megawatt in Texas in operation since Q2 will help us to improve our performance in the next months. Latin American EBITDA was €45 million with higher output in Mexico and Brazil offset by the evaluation of the real and lower prices in Mexico.
In the rest of the world, EBITDA reached €70 million underpinned by a better load factor that increased production by 13%. EBITDA grew 1.1% to €3,027 million, amortizations rose €234 million driven by the exchange rate impact of €161 million. The new operating capacity and renewable business and the new retail IT systems in the UK. Provisions grew €32 million also affected by FX and non-recurring bad provisions in the UK related to the difficulties in the implementation of the above-mentioned retail system. Problems that we expect will disappear in 2016 as the Chairman has stated.
Net financial expenses fell 8.4% to €748 million thanks to the €82 million improvement in debt related costs driven by our cost improvement of 38 basis points from 4.48% to 4.10%. The €96 million gross capital gains from the sale of our stake in EdP accounted for in 2014 has been almost mitigated by several non-recurring positive impacts including the proceeds of the sale of Euskaltel, reversal of several contingencies and interest of legal claims and the favorable evolution on FX hedges especially due to the real.
Recurring net profit increased 8.5% to €1,673 million and reported net profit 7.8% to €1,919 million. Corporate tax rate decreased to 18.1% mainly as a consequence of the reversal of a tax provision in Spain accounted for in Q2, 2015 to added €220 million and also due to a lower corporate tax in Spain from 30% to 28% which is sustainable. Those partially compensating the €251 million of lower contribution due to non-recurring results and extraordinary positive equity contribution accounted for in 2014.
Passing to the financing, our leverage ratio continue to improve reaching 41% at the end of September 2015 versus 42.2% at the same time last year as our equity continue to increase while our debt decreased slightly. The €939 million FX impact, negative impact on our debt is more than compensated by the €1 billion positive impact due to the stronger cash flow generation and tariff deficit securitization.
Our equity increased €1.6 billion with a €1.1 billion positive FX impact and also fell by the €500 million of retained earnings less treasury stock. As a consequence all our financial ratios continued to strengthen as our net debt fall slightly while our EBITDA and cash flows are growing at high single-digit rates. Our net debt to EBITDA reaches 3.6 times. Our FFO net debt is at 22.2% over our 2016 target of 22%. And our retained cash flow net debt improved to 19.7% also above the 18.5% 2016 target.
So we have already reached out two out of the three financial ratio targets set for December 2016. The Group while maintaining a very comfortable liquidity position continues to adapt to the new financing scenario, improving financial costs and extending the maturity of our debt.
This year we have already negotiated €8.9 billion of debt and credit line as the Chairman has pointed out. At September 30, Iberdrola had available liquidity of €8.2 billion covering 27 months of financing needs, but we will continue monitoring the market, trying to take advantage of possible opportunities that help us to continue reducing our cost of debt and extending our average debt maturity. This is in line with the philosophy of the Group to build a long-term solid financial profile assuring a sustainable low financial cost for the future.
And to end this presentation just to tell you that in the Annex you have the calendar for the script dividend in January. Thank you very much.
Question-and-Answer Session
A - Francisco Martinez Corcoles
The first question has to do with the operation with EU - EA.
Unidentified Analyst
In Connecticut from the regulatory point of view when we expect the timing of the operation and if the counterparts or the addition of things given in this agreements are going to impact it in the profitability of the deal.
Ignacio Galan
So as I already mentioned I think the things are going on truck. So we have already got all the authorization of the federal authorities and now we have already reached settlement with authorities of Connecticut and Massachusetts. The filing has been presented in both states so here this has already happened and that's in the defensive now is on progress I think in the last few days even the local authority has already made positive comments about the transaction.
So we are expecting as I mentioned once will be completed all the New York Stock Exchange listed to complete the deal before the year end. So there are no changes in our expectation in the respect and related to the profitability of operation I think it continued being quite attractive for those parts. So I think is nothing changing in a major manner in this transaction.
Unidentified Analyst
Another additional question from Martin Young, Royal Bank of Canada is related in global basis to the United States, we can explain what our ambitions in the U.S. regulated activities as for as the closure of UIL deal and we are hungry for more acquisitions.
Ignacio Galan
Well, I think our philosophy always [indiscernible] country the main thing when we make a transaction, the main driver now is to integrate. I think we made the transaction of energies few years ago. I think we’ve been already integrating this company, now I can say is almost integrated I think the operation we had before on renewables and now it’s integrated fully with Iberdrola U.S.A.
So Iberdrola U.S.A gets its storage and network is really integrated under a single unit which is Iberdrola U.S.A. And now we have already in this process of integration with UIL so I think in the next periods our main drivers should be to integrate, integrate, integrate the existing companies with the new one. So I think it’s a big thing to be done.
And nevertheless I think we continue growing this country, I think we have ready, I have already announced this four windfarms we have in construction there are seven and more which are on the byline is expecting them to PTC’s extension and yes we have just completed transmission lining in Maine and we call them MPRP and they are another one we are starting another one announced as well Transco and there are another several ones, which are on the way. So I think we have a lot of organic things to be done together with - so I think should be the main driver for the near future.
Unidentified Analyst
The next question is related to dividends and is coming from Stefano Bezzato, Credit Suisse. Considering the 8% growth in net earnings reported in the first nine months of the year. Could you consider starting to raise a dividend from this 0.27 level already in relation to the 2015 results?
Ignacio Galan
So what I can announce now is what has been approved yesterday by the Board is we are going to pay a €0.125 per share in January 2016. We are already taking to pay the complement up to 0.27 in the shareholders meeting approved in July next year and that is our plan. If we have any changes on that one, we will have the opportunity to present to you all our vision and our target and our plan in our outlooks for the future in our Investor Day in February next year in London.
So I think if there are any changes I am sure that you will be the first one in knowing that long run, yes we’ll complete the plans and we are working at present and we’ll present to you later, in the beginning of next year. So I think for the time being is 0.215, which is going to be paid in January and a complementary, which is going to be paid in July up to 0.27 that is what the Board has already approved yesterday.
Unidentified Analyst
A question in Spanish from Alejandro related to the same question asking for a clarification to a statement. Alejandro said with these results could we give some visibility for the close of 2015, 2016 we relating to the guidance for 2015, 2016 if you can clarify what where you mean, when we say we are going to reach the perspective of 2016 one-year ahead of time. So in 2015 if you are going to reach an EBITDA €7.5 billion in net profit this comes from Javier Suarez from Mediobanca, Javier Garrido from JPMorgan and Carolina from Morgan Stanley.
Ignacio Galan
Well, I will answer this in Spanish and if you want I will translate into English, but what we can say at this point in time is that the profits we have for the first nine months has grown to 8% and this has been due basically to international growth. In the case of Spain we still have a drop of about 2% and this is something that I mentioned before because of higher costs, because of lower production and higher Levies.
And the results in Spain do not yet reached those that we had before the crisis, but what I could also state is that in these months we have made investments have totaling more than €2 billion and investments in excess of €2 billion which is about 7% more than what we did last year and we’ve more than 1000 new contracts with our workforce and we’ve given training courses to more than 600 graduate students and we’ve been - and nearly 4,000 Spanish suppliers we spent nearly €3.5 billion on them and this is the investment that the Group is making.
What does this growth mean? It means that our prospects for what we delivered on in 2014 is something we're bringing forward - because at that point in time if I’ve not mistaken we’re talking about EBITDA of about €6.6 billion and we said that we are expecting an average growth of about 4%. And if I multiply these figures this gives me a figure of about €7.1 billion of EBITDA for 2016.
As I said before is that this figure be exceeded in this fiscal year in 2015 and the same thing applies to the ratios as the CFO just pointed out, because we are talking about ratios that - we are talking about the different ratios and different impediments and we can say that some of them have already been reached in Q3 and we hope that the third one will also be reached in the fourth quarter and this is what can be said about that.
Unidentified Company Representative
Like to say in English for everybody is that our expectation is that in year 2014 when we present our plans for the next three years, we had already an EBIT underwriter €6.6 billion and we were saying that we will - a growth in average range of 4%, €6.6 billion and 4% growth increase and [indiscernible] roughly €7.1 billion and that is what we are expecting in EBITDA.
Internal ratios what we can say is that as I mentioned already the ratios of cash flow and the ratio has been already achieved in the third quarter. So I think we expect to continue these two and third one as we will to be achieved by the end of the year and with one year in advance. I think our numbers is what we promise we are delivering with one-year in advance. Due of the investment we are already making during this period which is starting providing result as well.
Yes, yes, well I think the financial as you are saying the number is 6.6 by 4% increase is 7,100 so what we are expecting is more than that, but I think is the number is more than 7,100 which is the number. So I think we are expecting to overpass this number clearly so it is a good point.
Unidentified Analyst
Okay, we are now moving to a set of questions to the Spanish generation business coming from Stefano Bezzato, Credit Suisse, Carolina Dores, Morgan Stanley, Javier Suarez, Mediobanca. The first one is how do you justify the €17 per megawatts hour gap between Spain and German power prices considered in that €10 megawatts hour of the gap can be explained with generation taxes what price the rest of the gap.
The second question is regarding the regulatory in Spain is covering to revise in the ratio market, when do you expect to review - these reviews going to be completed? And finally, if we are considering the shutdown of the closure of several plants, our several power plants or asset qualities of the economic recovery of the Spain [indiscernible] standby?
Ignacio Galan
So I think you’ll reply the first one related to prices.
Jose Sainz
Well, we track continuously the market prices and what I can say is that the actual ones are - do not differ two months from the one that we get from our simulation models. So I must - probably it’s not so simple us to say that we can justify 10 and there is a gap of seven because the German system is a thermal one with a high level of penetration of renewables, the Spanish one is a hydrothermal system with a lot of renewables to so the simulation of all these things are not so easier to just calculate the taxes.
So if you use such a type of simulation models and calculate the price is exposed, exactly for sure, but exposed. We find that the differences are no more than 1% and sometimes less or usually less than 1%. What does it mean? Probably that the wholesale markets are working properly in all the countries we are United Kingdom, Germany and Spain. And I think this basically will respond to the question of the prices.
Ignacio Galan
So I think related to this review of the regulator concerning the generation market, I think that didn't work. So I think is normal then the regulator revise and all kind of activities in the countries that we are present. I think we’ve to get review of this one in - in Britain is normal to be making in all the country where we are present. So I think that we have to be seen as a normal thing we have to be done.
Is there a litigation to revise you know all the rules are already being keep and maintained according with the best practice. So I think we are already absolutely fully collaborate with any doing their job because I think that's good for their - if transparency is good for the market performance is good for an economy which is already open like a Spanish economy.
So I think it will calm this analysis and who would collaborate when as we are doing already with returning the analysis they are making. Related to generation and closing of plants.
Ignacio Galan
Yes, as you know we asked for the closure permit for Caspian Sea and we finally we didn't close Caspian. This is because of several reasons. The first one was that the extremely short period or spun that the government gave us for the recognition of the plant. The second and main important is that the energy situation is changing. On Laguna, we have seen a light increase in the CCGT performance in some for instance, on the other hand we have potential regulation for [indiscernible] and this is not yet in place, but these can come in - in coming weeks or I would say months.
And on the fair hand we are seeing movements from the CO2. All the commodities are going down with a section of CO2 I mean the carbon is going up slightly, but it’s going up. So what is going to happen if finally after COP21 conference, carbon takes a more role, more foot on itsrole on the markets.
In these case probably all the CCGT’s that we have seen in this summer in the Spain will be needed. So it makes no sense at this time to go ahead and try to close our plant that can be, that is going to be needed for sure and that can be needed from the system stability in the coming months.
So that’s the reason why we decided not to do with [Caspian Sea] and that’s the reason why we are not proceeding with our plants.
Jose Sainz
Nevertheless, we have already closed six plants in the last four, five years. I think we closed few coal power plants and a few oil power plants as well. I think six all together. So I think we are not really not active in the sense I think those one which we consider then one not to be needed for the future. We are closing I think we did the same thing as well in Britain. So I think we are active, analyzing which is their needs in each - in real time which are the needs for the market in terms of our power generation.
Unidentified Analyst
Next question is coming from Carolina Dores, Morgan Stanley and is related to the distribution business in the Spain. Last summer the Ministry of Industry in Spain sent to the regulatory cost for distribution. When do you expect this process to be finalized? Can this still be approved this year and how do the standard look versus your expectation?
Ignacio Galan
Well, I think as far as I know all the things are has been completed, all this analysis for all part in both has been already announced and finished. And I think we're just expecting the final document from the Ministry to publish. So as far as we know I think that our expectationis that will consolidate the current remuneration of our activity. So I think we are not expecting surprises in this respect. So has been making a very professional manner on all theanalysis and we are not expecting any surprise on these respect.
Unidentified Analyst
Next set of questions is regarding the generation business in the UK. These questions are coming from José Javier Ruiz, Macquarie, Javier Suárez, Mediobanca, Pablo Cuadrado, HSBC. The first one is during Q3 you have recorded an EBITDA loss in the UK generation and supply businesses. Could you provide more details on what is driving the weak performance and the perspectives that you have for these businesses in the following quarter.
The second one is on December 8th; the second capacity auctions in the UK will take place, do you expect any increasing prices as considered in all the coal plant closure announcement in the UK?
Ignacio Galan
So you reply the first one and I’ll reply the second one.
Jose Sainz
You’ll reply one of the auctions?
Ignacio Galan
Auction I’ll reply now. The weak performance of the third quarter towards the previous one.
Francisco Martinez Corcoles
Yes, I think we should consider - the key point has been the retail business and is not so because the results of this year, but also because the classification or the accounting reclassification that we did last year as a one off. So the standing points are the incremental external service on cost on - put in place and all of our complaint providence with the new IT system for customer that fits the integrated system. This is the standing point and this has been all over the year affecting us this quarter and two previous one. And it’s going to getting down the next quarter and probably will disappear the next year.
So this is their standing or they continue to base load let’s say problem or difference in terms of result that we have got. And together with these we got all our things specially affecting retail margin that comes more from accounting activities or accounting decisions on the previous year than to the let say their main business and I’ll say that the main business has nothing special.
On the other hand all you know that the two intermediate quarters of the year Q2 and Q3 are extremely lower in compression with Q1 and Q3 and Q4 excuse me in the United Kingdom, because of the temperatures and all the movements of the markets. So Q4 is going to be completely different in terms of compression of the business with Q3 and all these one-off things that we have got are more or less [indiscernible] of the differences.
Ignacio Galan
All of it all I think as Francisco mentioning our expectation is in the result in generation retail in UK in 2015 will be slightly in terms of euros, is slightly better than it was previously. So I think we are expecting the certain of the negative impact we’ve been affected during these three quarters and most of them as he mentioned is going to disappear almost disappear.
So we have more customers and I think they are struggling because we are already suffering less consequence of the IT system is already been established and that will reduce and our expectation is that we’ll in euros improve our result compared to previous year.
And related to the second question of the auctions so I think we are seeing the British system is very good in many, many fields. So I think they are concerned about the need to distinguish between power and energy so which is one of my favorite things now to convince everybody.
So they are really making this one for this capacity auction, but they are putting together new and old power plants and nothing in the last ones I think it has been affected for certain ones that Dave says and they are going to make a new one, but that they are saying now is that they are going to make a new one where the production has been already been achieved in the auction.
So I don’t what this going to do, but what is clear is that the model for the new have to be different and the model for the existing one. So an action can be affected by someone else which is already dreaming to make by last year what is not made so they are going to sell the product and supplying the country.
So that’s why we’ll see what is in terms of that one when I guess is that probably they will use different approach for their old one and for the new one and I think that should be already as always a transparent upturn is which everybody will put their better prices. I cannot say what this is going to be because if I should know that one I should be more clever to do it so I think - but my feeling is and they are going to be a different treatment for building new ones then for the existing power plants.
Unidentified Analyst
Next question is related to Brazil and it’s given by Javier Suárez in Mediobanca. He likes to know an update on the CO2 recurring these three situation of the distribution companies in Brazil either possibility to pass through the higher cost and the higher rates to the final customer this final higher cost in generation?
Ignacio Galan
Well, on Brazil I mentioned the CFO represented 3% of our total EBITDA so I think is we are already of course interested in this country, this country as I used to say is not as bad as sometime and some people is saying no it’s not the with us I know the people were saying a few years ago about it.
I think our total EBITDA is representing 3% so saying that many, many things has been done in the country, they are truly and suffering a drop is true then they are already passing a crises which is already conducting then the growth of the country has declined tremendously is true then the situation is not as good as it was and already seen this is affected, but in our global account is not much affected in particularly because last year we suffer in our account because of the drop has been fully compensated across this year.
So I think our account now is already positive affected because they are already compensating the effect of the problem we suffer at the previous one. So I think in the government they have the mentality then they need then the companies have a good and bad performance, they need to continue already providing the service and providing the service and providing that in the country they are doing the necessary for improving the thing.
So I think they are increased heavily their rates and their tariff in most - in all our distribution companies and they are already looking solutions for compensating the power generation companies we have been suffered for the drop of the difference between the entities they have committed and then they are able to reply because of these lack of rain. So now they continue these on the respect, but I think is we are already seeing then the things are moving, but in our case I think they are moving positively that’s fine, they are moving negatively so we are going to change dramatically our result in the company.
Unidentified Analyst
Next question is Pablo Cuadrado, HSBC and it’s related to Mexico business. Recently you announced that you won an auction to build a new 850 megawatts facility project in Mexico, could you provide more details about the respect IRR that you are willing to making that project and common on value creation is Latin America project against increasing the competitive environment?
Ignacio Galan
So I don't know that particular project this one, but I think all together I can say as I mentioned before in this moment we have something like 5,500 megawatts in operation and there is another 1,600 in construction correct me the numbers if not precise. So all together roughly 7,000 megawatts and roughly that in mind is the return we have for really in that one is on the range of one plus 300 basis points. I think it’s a good business and healthy.
Our position in the country is very positive, we are well known, we are already - we have made some various solidity and uncertainty so we are really committing what we are delivering what we are committing and the expectation in this country and the things is going to continue and positive.
They have already made a reform and the reform which is lower we sell especially for those who present in the countries in the last 15, 16 years that certain opportunities for making already project for private people. So I think we are in this moment completing one in Monterrey so which is complete, all the power is already stored for the next 15 years. So I think I know the two or three we face already as well in the same position so I think for new market has been already opened apart to their market traditional what we have already facing with this regulation with CFE.
Unidentified Analyst
Next question is coming as well from Pablo Cuadrado and it’s related to debt. The cost of debt has increased almost 40 basis points in the last 12 months to 4.1%, where do you see that cost of debt performing taken into account your future and financial needs and do you think that sustain improvements is a still possible for the next 12 months?
Jose Sainz
Yes, we think so. We expect to close the year with net cost of around very close to 4% and hopefully by next year we will be below the 4%. As I mentioned we are looking for opportunities to reduce our debt cost and I think that we will be able to maintain our lower cost of debt for the future.
Unidentified Analyst
And the final question is related to Fashion Technology Laboratories and it’s even from Andrew Moulder of Creditsights. Mr. Galan just said that hydro pump at the storage was a more favorable option than other more fashionable and highly publicized technologies, which I take to refer to the type of batteries being developed by companies like [Tesla]. What is your view on these battery technology? It is a sustainable technology and is it something Iberdrola will be investing in?
Ignacio Galan
So, well perhaps and already yes something I probably didn’t know then I spent 16 years of my life as engineer, designing, manufacturing and selling batteries, industrial batteries particularly. So I think long-time ago when I was already a battery engineer and battery manufacture, and battery marketing, but I still have some reminds of that time. So I think batteries can be solution, no doubt, it can be a solution for system which isolated. So for areas where they are not to really connection, interconnection grids, no doubt.
So I think in certain the new technology is already helping. I think they are longer life, they are already less weight, they are more costly technologies, but this one particularly you all mentioned, but the thing is it can be solution and no doubt and this in certain areas can already represent already an advantage to where another system which can already imply like oil generators or whatever thing which is already in certain remote areas of Africa or America.
So saying that I think in the Western world what we have already very interconnected system. We are already putting massive as we are putting intermittent technologies for production of energy. So they are moments, which they are already in excess of offer I think we are already been in windy condition or very rainy condition or very sun condition in the demand is not such which cannot sort all this one, there are two ways for doing these.
One is increase interconnection, which I think European commission is in this moment, already promoting just to use these energy producing in one part of Europe to be - in all the part of the Europe, which I think that the solution another one is to store this energy and the third one is to stop the production. I think is when they are already floats, they are already in tremendous range traditionally well two years they open the doors of the dams for not - probably because the system is not able to absorb all the energy what the system can already make. I think they are very windy condition. So an option is to stop, not to continue to produce.
So I think why it was stopped, why not produce these resource that the god is already providing to us in this particular moment. So I think the way is to start and to start how in a most efficient manner. In a massy, most efficient manner, when I said massy. So I finis we are talking in pumping storage which we are talking about 1000 megawatt hours, 1000 megawatts we can produce billions of kilowatt hours.
So I think the another solution is required millions of batteries to be already located in millions of houses which I already for us - which I think is much more inefficient economically and as well to maintaining to sustain all those one. So saying that I fully, I think I cannot be against my principal, which I was already battery engineer in my beginning of my professional career.
So but I think that can be used for certain things in a very good manner same which is already happening with cars, so car is certain rechargeable cars with plugging systems and with battery I think clearly has already clear future and all the car makers already now making those ones, no doubt. So from there all each of us a battery in our kitchen is that to have a fridge I think - is a lot different.
So I think if the - another solution that should be fine in IRS what they are not already capabilities of interconnected, but there are areas with this fully interconnected. So let use the most, the cheapest and most massive efficient technology for making so and that is what we are asking making for one-time I think we completed last year with 1,100 megawatt represent equivalent or something less 600,000 batteries in the houses.
So I think we are talking about numbers which are absolutely huge. So and that's the point I think we make that one because it’s four to ten times cheaper system then another alternatives and in country by that one which is fully interconnected saying that I think you have already a remote house in a place which is not already in a kind of interconnection I think that is a great solution is that to put in already yes and generator old generator for the covering the moments in nights when they are not already signed they are not already win and they are no win.
Unidentified Company Representative
Okay this has been the last one for the time being. If there are more questions to come I would say that from the investor relation department will be delighted to answer all of them as usual. Now Mr. Chairman you can close when you wish it.
Ignacio Galan
So thank you very much for attending this one. We will be more than delighted to your [indiscernible] all you in our meeting in London for presenting the annual result and the outlook for the next future. Thank you very much for this meeting. Thank you.
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