IBERDROLA RENOVABLES (IBR.MC)

Transcription

1 Europe Spain Independent Power Producers & Energy Traders (GICS) Utilities (Citi) Company Focus 62 pages IBERDROLA RENOVABLES (IBR.MC) Our Top Pick Among Iberian Utilities We initiate coverage with a Buy/Medium Risk rating Our 3.65 target price implies a 12 month expected total return of 53%. We prefer Renewables vs Traditional Utilities in Iberia, with IBR our top pick within Renewables. Size and diversification are the main features 9.8GW in operation by the end 2008E, with fixed cost of debt and 54GW of broadly diversified pipeline give the company recurrent cash flow and flexibility to select the most profitable projects. Growth and pipeline for free Assuming very conservative assumptions we estimate a value of 3.14/share for up-and-running assets which enjoy stable regulations or PPAs, are not exposed to financial or regulatory risks, and generate recurrent cash flow. This implies that growth, authorizations, pipeline (54GW), experience and security of supply of turbines come for free. Even using our bear case valuation we estimate 25% upside. Initiation of coverage Buy/Medium Risk 1M Price (24 Nov 08) 2.41 Target price 3.65 Expected share price return 51.5% Expected dividend yield 1.7% Expected total return 53.1% Market Cap 10,180M US$13,147M Price Performance (RIC: IBR.MC, BB: IBR SM) Renewables sector deserves a premium Our reasons are the following: i) 2020 targets remain unchanged ii) no exposure to electricity demand decline, ii) low exposure to the downside on crude oil prices and iii) the investment cost scenario is likely to improve and we believe that turbines will no longer be the bottleneck of the industry; therefore returns should be positively affected. IBR deserves a premium to the sector We see no risk in IBR financing new projects as parent IBE is committed to support forward investments. IBR could also benefit from Energy East's taxable income base to partially mitigate a lack of Tax Equity Investors (TEI). Moreover, IBR has announced some Capex flexibility, meaning it could benefit from the new turbine market scenario. IBERDROLA RENOVABLES (EUR) Year to 31 Dec 2006A 2007A 2008E 2009E 2010E Sales ( M) na 1, , , ,580.5 Net Income ( M) na Diluted EPS ( ) na Diluted EPS (Old) ( ) na PE (x) na EV/EBITDA (x) na na DPS ( ) na Net Div Yield (%) na Manuel Palomo manuel.palomo@citi.com See Appendix A-1 for Analyst Certification and important disclosures. Citi Investment Research is a division of Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Customers of the Firm in the United States can receive independent third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at (for retail clients) or (for institutional clients) or can call (866) to request a copy of this research. 1 Ltd

2 For further data queries on Citi's full coverage universe please contact CIR Data Services Europe at or Fiscal year end 31-Dec E 2009E 2010E Valuation Ratios P/E adjusted (x) na EV/EBITDA adjusted (x) na na P/BV (x) na Dividend yield (%) na Per Share Data ( ) EPS adjusted na EPS reported na BVPS na DPS na Profit & Loss ( M) Net sales na 1,581 2,235 2,823 3,580 Operating expenses na -1,187-1,525-1,788-2,076 EBIT na ,036 1,504 Net interest expense na Non-operating/exceptionals na Pre-tax profit na ,107 Tax na Extraord./Min.Int./Pref.div. na Reported net income na Adjusted earnings na Adjusted EBITDA na 777 1,214 1,674 2,298 Growth Rates (%) Sales na na EBIT adjusted na na EBITDA adjusted na na EPS adjusted na na Cash Flow ( M) Operating cash flow na -1,832 1,506 1,252 1,796 Depreciation/amortization na Net working capital na -2, Investing cash flow na -2,231-3,218-3,449-4,042 Capital expenditure na -2,231-3,218-3,449-4,042 Acquisitions/disposals na Financing cash flow na 4, Borrowings na Dividends paid na Change in cash na 123-1,712-2,295-2,425 Balance Sheet ( M) Total assets na 17,655 18,877 22,011 25,675 Cash & cash equivalent na Accounts receivable na 1, ,139 1,555 Net fixed assets na 9,695 12,410 15,220 18,468 Total liabilities na 6,737 7,554 10,238 13,306 Accounts payable na Total Debt na 1,373 3,085 5,380 7,805 Shareholders' funds na 10,918 11,323 11,773 12,370 Profitability/Solvency Ratios (%) EBITDA margin adjusted na ROE adjusted na na ROIC adjusted na na Net debt to equity na Total debt to capital na

3 Contents Executive Summary 4 Recommendation and target 7 Valuation 8 Base case scenario ( 3.65) 10 Bear case scenario ( 3.00) 14 Bull case scenario ( 5.00) 15 Recommendation key questions 16 Valuation key assumptions 20 Peer Comparison 24 Peer differences and similarities 25 Risk analysis 27 Financial risk 27 Cost of capital 28 Execution risk 28 Investment cost inflation risk 30 Regulatory risk 30 Load factor sustainability 31 Electricity price risk 32 Company strategy 33 Financials 35 Iberdrola Renovables 40 Company Description 40 The History of IBR 40 Board Structure and Management 42 Overview of Assets 42 Pipeline classification and geographical split 43 APPENDIX Regulations 44 SPAIN Regulation 44 US Regulation 45 UK Regulation. 49 Other European countries: France, Belgium and Poland 50 IBERDROLA RENOVABLES 56 Company description 56 Investment strategy 56 Valuation 56 Risks 56 Appendix A

4 Executive Summary IBR is the world s renewable leader by volume of installed and operational assets, volume and quality of the pipeline, and it has a solid and clearly defined strategy based around an experienced team. IBR is number one in Spain and the UK, number two in the US market and has strong presence in other 16 countries. At the end of the 9M08 IBR fully owned 8.488GW net assets in operation plus 606MW in the US market in a PPA with Florida Power and Light (FPL). The company's current pipeline is 54GW with wide diversification and focus in the most attractive markets. Figure 1. IBR existing assets by Region (Dec 2008E - 9,800MW) Figure 2. IBR Pipeline by Region (Dec 2008E 54GW) UK 7% RoW 9% RoW 25% Spain 24% USA 34% Spain 50% UK 10% USA 41% The balance of assets will switch towards the US if credit market conditions allow it According to our estimates, IBR will install 2.2GW per annum, with more than 50% of those installations taking place in the US market. Therefore, we expect a significant switch from Europe towards the US market as can be seen in the graph below. Figure E EBITDA Split ( 1.214bn) Figure 4. IBR 2012E EBITDA Split ( 3.342bn) UK 8% RoW RoW 8% UK 10% Spain 9% 29% USA 23% Spain 61% USA 52% We initiate coverage of Iberdrola Renovables (IBR) with a Buy/Medium Risk (1M) rating and 3.65/share. The main reasons are: An attractive valuation: We obtain our target price ( 3.65/share) using a wind MW valuation per country on a DCF basis, according to each country s particular regulation, investment installation costs and historical load factors as main key drivers. 4

5 Figure 5. Valuation summary Division m /share % Weight Comment EV / EBITDA 09E Spain 8, Implicit EV/EBITDA09E of 11.5x 11.5 USA 6, Implicit EV/EBITDA09E of 11.6x 11.6 UK 2, Implicit EV/EBITDA09E of 11.7x 11.7 RoW 1, Implicit EV/EBITDA09E of 9.8x 9.8 Total Renwable business 19, Total Assets 19, Net Debt YE08E -3, Minorities Other Liabilities Equity Value 15, Adj. P/E09E of % of our fair value is explained by already operating assets: Assuming very conservative assumptions, our valuation suggests the market is not even paying for up-and-running assets. We estimate 3.14/share is the value of the existing assets, implying that growth, authorizations, pipeline (54GW), experience and security of supply of turbines are for free. Hugely oversold in the last months, we expect this negative trend to reverse: High multiples could be the reason for the overselling, but we believe the expected growth explains high multiples (29% CAGR EBITDA E). We also believe that IBR deserves a premium vs peers given it is the market leader and enjoys several competitive advantages (size, diversification and a taxable income base in the US market) Figure 6. IBR Stand Alone Performance Figure 7. IBR vs EDPR Performance 7.50 Spanish pool price increase Disappointing Q408 load factors EDPR IPO 90 Crude oil price fall & tougher credit conditions /12/ /01/ /02/ /03/ /04/ /05/ /06/ /07/2008 US presidential elections & 1 year PTC extension 13/08/ /09/ /10/ /11/ /06/ /06/ /07/ /07/ /07/ /08/ /08/2008 EDPR 09/09/ /09/2008 IBR 07/10/ /10/ /11/ /11/2008 Source: Datastream & Citi Investment Research Source: Datastream We see no financing risk. A framework contract with IBE and the existing taxable income base are good weapons to face financial risk: We think assets in operation cannot be considered under financial risk (their cost of debt is already fixed) and IBE has committed to provide financing future growth on standard market terms. Moreover, the lack of Tax Equity Investors could be partially compensated by Energy East which provides a taxable income base. 5

6 We think renewables targets are not in question: The EU s climate change strategy is to reduce emissions with renewables generation output representing a 20% by Within this scenario wind raises importance to become the dominant source reaching a 40.6% of renewable output by 2020, delivering 55TWh of electricity per year We see little downside risk: Even with very conservative assumptions such as: i) zero growth from the 1 st January 2009 and ii) a modification to the Spanish regulation that would force every Spanish asset (even the existing ones) to be under the fixed tariff in Spain (deriving a multiple of 1.38m/MW for Spanish assets vs base case 1.61m/MW); we derive a price of 3.00/share. At this level, 100% of the valuation would be explained by existing assets. Nevertheless we do not expect this worst case scenario to take place and our fair value is 3.65/share. And we see the potential for very interesting upside: The current market scenario is very challenging for renewable energy companies but we think IBR is well positioned to face it. Installation cost scenario is dramatically changing; we still cannot say this is a developers world, but it seems turbines will not be a bottleneck for the industry in coming years, as a result of credit conditions. Nevertheless, we maintain high installation costs on the basis of existing long term contracts with turbine suppliers. We think these contracts could be cancelled, postponed or renegotiated, positively affecting returns and valuations. Credit market scenario could improve at some point. Potential extra-capex reduction could come from the acquisition of distressed assets sold at a discount. However we consider none of these assumptions in our base case scenario. Extremely well positioned to face potential electricity demand decreases: Renewables output have priority to be consumed everywhere. This means a potential demand decrease due to current crisis should not affect their generation output at all. Very limited exposure to crude oil prices: There are countries with remuneration depending on fixed tariffs (most of them CPI inflated) or PPAs where assets in operation are not linked to the crude oil prices. In other countries, such as Spain, where there is a variable scheme, the downside is limited due to the existing floor and company s capability to move to the fixed tariff. Capex flexibility with very limited impact in short/medium term targets: IBR has announced the possibility of a 1.0bn Capex reduction if credit conditions get tougher. Assuming a Capex decrease taking place in USA (approximately 700MW p.a.), we calculate a negative impact in valuation of 1.3% with almost flat EBITDA figures for Well hedged vs other industry risks: We see no regulatory risk but, if the worst comes to the worst, diversification looks the best possible hedge. We see an uncertain turbine price scenario and IBR has announced 1.0bn flexibility with no impact on financial targets. We see no execution risk in IBR, with a positive track record one of is its main features. 6

7 IBR: The renewables world wide leader Iberdrola Renovables (IBR) is the worldwide leader in renewable energy technologies (mainly wind). The company enjoys the biggest installed base of renewable assets, number one in Spain (2008E 4,887MW) and in the UK (2008E 685MW); number 2 in the US market (2008E 3,344MW) and with presence in another 17countries (2008E 884MW). IBR also enjoys a huge pipeline (54GW after the Joint Venture with Gamesa) that could allow it to consolidate its current leadership in the sector. Recommendation and target We initiate coverage on IBR with a Buy/Medium Risk (1M) recommendation on valuation grounds among other factors. We derive a price of 3.65/share from our base case scenario. We obtain our target price using a wind MW valuation per country in a DCF basis, according to particular regulation in each country the company is exposed to, investment installation costs, particular costs of debt and historical and expected load factors as the main key drivers. Figure 8. Valuation summary of our BASE CASE SCENARIO Division m /share % Weight Comment EV / EBITDA 09E Spain 8, Implicit EV/EBITDA09E of 11.5x 11.5 USA 6, Implicit EV/EBITDA09E of 11.6x 11.6 USA Renewables 5, Implicit EV/EBITDA09E of 12.6x 12.6 USA others 1, Implicit EV/EBITDA09E of 8.9x 8.9 ENSTOR Mult 0,35 mll EUR/bcm fully owned 12.6 PPM energy management Mult EV/EBITDA09 6.5x 10.4 PPM Thermal Power Mult 0,35 EUR mll/mw 4.6 UK 2, Implicit EV/EBITDA09E of 11.7x 11.7 RoW 1, Implicit EV/EBITDA09E of 9.8x 9.8 Total Renwable business 19, Corporation 0 Other Financial Assets 0 Total Assets 19, Net Debt YE08E -3, Minorities Other Liabilities Equity Value 15, Our target price would represent an 2010E EV/EBITDA of 10.3x and a 20.2x P/E. The company is currently trading 2010E EV/EBITDA of 8.0x, and its main peer EDPR 2010E EV/EBITDA of 8.5x and we think IBR deserves a premium. IBR multiples may look aggressive but, in our opinion, should be more than justified by the security of the business (almost regulated and the fact that more than an 85% of the valuation is explained by operating assets). We should also take into account the company's expected growth (+33.9% CAGR EBITDA 07-12E) based on a yearly average installation of 2.2GW, and gross cash flow generation ( 1.65bn on average in the period 08-12E). 7

8 Valuation We see three stages according to the maturity of the assets: i) Up-and-running MW, ii) MW to be installed in a high visibility period and iii) Residual pipeline after the high visibility period The valuation of a renewable company presents many challenges. Therefore, we will face the valuation of IBR in three different stages depending on the maturity of the assets within each geographical area (Spain, UK, USA and Rest of the World). The mentioned stages are as follows: Up-and-running MW: We see no execution risk in 2008 installation figures in light of 9M08 released numbers (8,488MW fully owned plus 606MW in a PPA with Florida Power and Light), we consider up-and-running MW, those MW which will be contributing to the EBITDA from the 1 st of January 2009 (9,2GW fully owned plus the 0.6GW in a PPA with Florida Power and Light). The business has considerable geographical spread and, given the differences between countries in regulatory environments, wind resource qualities and investment costs. It is important, in our view, to take a look on a country-by-country basis. High visibility installation period: IBR, in the same way as similar companies, is likely to experience a substantial growth over the next few years (current installed base 9M08 8.5GW fully owned, expected installed base by GW fully owned). The ratio of installed assets to those in the development pipeline is below 1:5 (8.5GW vs 54GW). Therefore, we think it is important to take proper account of the costs and risk associated to capture the potential value from this growth opportunity. According to the detailed pipeline and extension detailed by IBR, we consider the high visibility period is comfortably Residual pipeline: After the abovementioned period there will be remaining pipeline, and we do think it should have a value. Nevertheless we have decided not to include it in our base case scenario, to present a conservative assumption which we think current market environment requires. Valuation scenarios common assumptions Our three scenarios have some common assumptions In order to reflect current market conditions we define three different scenarios. All of them have some common assumptions: Decreasing load factors in Spain and UK, starting from: Spain 24.4% USA 34.6% UK 27% RoW 25% Existing MW by the end of 2008 will be 9,2GW fully owned plus the 606MW in a PPA with Florida Power and Light Existing pipeline at the end of 2008 to face forward installations is 54GW 8

9 We only consider residual value of the MW beyond the useful life of the asset in Spain for old assets (residual value will represent a 6% of the valuation of old Spanish assets), since Spain is the only country where regulation ensures remuneration beyond the first 20 years of useful life and land concessions last for more than 20 years. We assume: 15 years of remaining useful life for old Spanish assets 19 years of remaining useful life for old UK assets 18 years of remaining useful life for old US assets 18 years of remaining useful life for old RoW assets 20 year useful life for new assets everywhere Wind investment cost scenario reflects increasing costs on the basis of long term bilateral contracts. Non-renewable assets valuation will not vary in any our three scenarios (EV 1.38bn). Figure 9. Valuation scenarios and target price Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Bear Market Base Case Bull Market 9

10 Base case scenario ( 3.65) Our base case scenario derives a price of 3.65/share We not only value the existing assets but also those on stream until We take into account current credit market conditions and a yearly average installation of 2.12GW in the period. We give no value at all to the residual pipeline from 2015 onwards. We derive a price of 3.65/share (Please see Figure 8), from which 86% of the valuation is explained by up-and-running assets, as can be see below. Figure 10. IBR Base case renewable assets valuation detail Valuation ( m) MW Mult/MW Mult/MW value creation /share % Weight % Weight Spain: Wind assets end of ,285 4,524 1,610 1, % Minihydro in end of ,624 1, % USA: Wind assets end of ,187 2,738 1,529 1, % Florida Power PPA % UK Wind farms end of , ,056 2, % RoW Wind farms end of , ,533 1, % Considering Gas assets Subtotal existing assets end of ,049 9, % 86.1% 2009 data Wind power Spain 09-15e 439 2,486 1, % Minihydro , % Solar ,128 2, % Biomass , % Wind power USA 09-15e 1,141 8,392 1, % Wind power UK 09-15e 728 1,681 2, % Wind power RoW 09-15e 103 2,396 1, % Considering Gas assets Subtotal 09-15e assets 2,653 15, % 13.9% Wind power Spain 2016e onwards 0 0 1, % Minihydro 2016 onwards 0 0 1, % Solar 2016 onwards 0 0 9,337 2, % Biomass 2016 onwrads 0 0 1, % Wind power USA 2016e onwards 0 0 1, % Wind power UK 2016e onwards onshore 0 0 2, % Wind power UK 2016e onwards offshore % Wind power RoW 2016e onwards 0 0 1, % Considering Gas assets Subtotal 08-16e assets % 0.0% IBR RENEWABLE TOTAL VALUATION 17,703 24, % Figure 11. IBR non-renewable assets valuation detail Other assets valuation split EV/EBITDA 09 USA others 1, % 8.9 ENSTOR Mult 0,35 mll EUR/bcm fully owned % PPM energy management Mult EV/EBITDA09 6.5x % PPM Thermal Power Mult 0,35 EUR mll/mw % * Valuation of non renewable assets is common for the three scenarios. 10

11 Valuation Spain EV 8.529bn (44.7%) We make a split by technology, with Wind the most representative ( 7.724bn) and then hydro ( 0.568bn), solar and biomass ( 0.238bn). More than 91% of Spanish valuation is supported by wind technology, so we will focus on it. Up-and-running assets valuation: We consider two groups of MW: i) the old ones (in operation before 2007 with 15 years useful life, 26.5% load factor) where we reach an EV of 1.642m/MW and the new ones (in operation from 2007 or year useful life, 25% load factor) where we reach an EV/MW of 1.46m/MW. Existing assets valuation is 7.285bn. The reason to include two different valuation groups is explained by load factor differentials as can be seen below. Old sites load factors are c. 200 bps above the new ones. Figure 12. Spanish historical load factor performance 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Enero 06 Marzo 06 Mayo 06 Julio 06 Septiembre 06 Noviembre 06 Enero 07 Marzo 07 Mayo 07 Julio 07 Septiembre 07 Noviembre 07 Enero 08 Marzo 08 Mayo 08 Julio 08 MW in operation before 2006 MW in operation from 2006 Source: CNE and Citi Investment Research High-visibility installation period: We consider the yearly value creation calculated from the EV value per MW reduced by expected installation cost. For those assets in operation from 2009 we assume 20 year useful life and a 24% load factor, being our estimated EV value per MW 1.539m/MW. Figure 13. IBR Spain Wind assets valuation detail ( 000 /MW) Until Yearly installed MW 4, Valuation 1,610 1,539 1,578 1,617 1,657 Cost of Investment 1,250 1,313 1,378 1,419 1,462 Value Creation O.D. 1, Total Value Creation 7, We expect returns to go down in coming years in Spain. It is a mature country in renewables, where we assume load factors will slightly decline and regulation will be modified by On the base of RD 661/2007, we do not assume retroactivity from that potential modification. 11

12 Valuation USA EV 6.970bn (36.5%) We make a split between renewable and non-renewable assets. Non renewable assets valuation is based on multiples (EV 1.38bn), and they would represent 7% of our IBR valuation (Please see Figure 11). Up-and-running assets valuation: We consider those assets in operation before the end of 2008 (2.738GW) with 18 year useful life, 34% load factor and better financing conditions (average WACC 6.80%) reaching an EV of 1.529m/MW. We also consider the 606MW under a PPA with Florida Power and Light ( 260m). Total existing renewable assets valuation is 4.446bn. High-visibility installation period: We consider the yearly value creation calculated from the EV value per MW reduced by expected installation cost. For those assets in operation from 2009 we assume 20 year useful life and a 34% load factor and an average WACC of 7.5%, being our estimated EV value per MW 1.569m/MW. Figure 14. IBR USA Wind assets valuation detail ( 000 /MW) Until Yearly installed MW 2,738 1,192 1,200 1,200 1,200 Valuation 1,529 1,569 1,608 1,648 1,689 Cost of Investment 1,320 1,386 1,455 1,499 1,544 Value Creation O.D. 1, Total Value Creation 4, * Excluding the 606MW under a PP with FPL We foresee returns at IRR levels of 9.5% for the projects to be viable in the coming future in the US market (remember IBR investment policy demands a 200bps spread over WACC to go ahead with any project). Otherwise we would expect IBR to refuse to accept the project. Therefore, we think the company will have to make an effort by selecting the most profitable projects. Due to the huge pipeline the company enjoys in the States (22.3GW end of 2008E), we do not vary our installation assumptions (1.2GW p.a.). We remain with flat load factors according to low renewable development in the States. Valuation UK EV 2.136bn (11.2%) Up-and-running assets valuation: We consider those assets in operation before the end of 2008 (685MW) with 19 year useful life and 27% load factor, reaching an EV of 2.056m/MW. Existing renewable assets valuation is 1.408bn. High-visibility installation period: We consider the yearly value creation calculated from the EV value per MW reduced by expected installation cost. We expect returns to remain at current levels due to the low maturity of renewables in the UK. We do not foresee modifications in current regulation. Our high visibility period valuation is 728m. 12

13 Figure 15. IBR UK Wind assets valuation detail ( 000 /MW) Until Yearly installed MW Valuation 2,056 2,097 2,139 2,181 2,225 Cost of Investment 1,450 1,523 1,599 1,647 1,696 Value Creation O.D. 2, Total Value Creation 1, Valuation RoW EV 1.451bn (7.6%) Up-and-running assets valuation: We consider those assets in operation before the end of 2008 (879MW) with 19 year useful life and 25% load factor, reaching an EV of 1.533m/MW. Existing renewable assets valuation is 1,348bn. High-visibility installation period: We consider the yearly value creation calculated from the EV value per MW reduced by expected installation cost. We are very conservative in expected returns for coming years as we think some countries within the RoW division could have higher priorities than investing in renewables if they are short of energy. Our high visibility period valuation is 103m. Figure 16. IBR RoW Wind assets valuation detail ( 000 /MW) Until Yearly installed MW Valuation 1,533 1,564 1,595 1,627 1,660 Cost of Investment 0 1,470 1,544 1,590 1,637 Value Creation O.D Total Value Creation 1, Conclusion We remark that existing assets would explain 86% of our IBR valuation is explained by assets into operation, with low exposure to crude oil prices, as we will explain afterwards, and with no exposure to potential electricity demand decline. The fact that valuation is mainly explained by existing assets is even more important if we consider that these are cash flow generators under stable regulations or long term bilateral contracts. 13

14 Bear case scenario ( 3.00) Our bear case scenario derives a price of 3.00/share Without changing financial conditions, we assume zero growth in our bear case scenario, this means no further installation but no further investment from 1/1/2009. We give no value at all to the assets which are to be installed in the period nor to the residual pipeline from We consider no variation in non renewable assets valuation. We would also like to highlight that if this scenario were to happen, we estimate the company would be FCF positive from 2009 ( 0.84bn on average in the period 09-12, considering 500m to be paid in 2010 for Gamesa assets acquisition and dividend distribution). Additionally, we assume every existing asset in Spain will be forced to be under the fixed tariff in Spain (deriving a multiple of 1.38m/MW for Spanish assets vs base case 1.61m/MW. We derive a price of 3.00/share, therefore 100% of the valuation would be explained by existing assets. And this represents 25% upside to current market price Figure 17. Bear case Free Cash flow ( m) 2009E 2010E 2011E 2012E Changes in Net Debt Figure 18. Bear case scenario valuation summary Division m /share % Weight Comment EV / EBITDA 09E Spain 7, Implicit EV/EBITDA09E of 9.8x 9.8 USA 5, Implicit EV/EBITDA09E of 10.0x 10.0 USA Renewables 4, Implicit EV/EBITDA09E of 10.4x 10.4 USA others 1, Implicit EV/EBITDA09E of 8.9x 8.9 ENSTOR Mult 0,35 mll EUR/bcm fully 12.6 owned PPM energy management Mult EV/EBITDA09 6.5x 10.4 PPM Thermal Power Mult 0,35 EUR mll/mw 4.6 UK 1, Implicit EV/EBITDA09E of 7.7x 7.7 RoW 1, Implicit EV/EBITDA09E of 9.5x 9.5 Total Renwable business 15, Corporation 0 Other Financial Assets 0 Total Assets 15, Net Debt YE08E* -2, Minorities Other Liabilities Equity Value 12, * Adjusted by 1.6GW under construction 0.4m/MW multiple 14

15 Bull case scenario ( 5.00) Our bull case scenario derives a price of 5.0/share Without changing our financial conditions, something difficult to understand as a bull case scenario, we value the existing assets, the assets that will be installed in the period and we take a conservative approach to the valuation of the remaining pipeline beyond 2015, considering a success ratio of pipeline installation of 25% (historical development has been 1/3 of total pipeline). We maintain financial conditions for the whole period. We also decrease the investment cost scenario by 300bps from 2009, something which in our opinion makes sense if we are considering reduction in world-wide installations and increasing competence in the wind turbine manufacturing sector. Our bull case scenario derives a 5.0/share value (107% upside to current market price). Figure 19. BULL case scenario valuation summary Division m /share % Weight Comment EV / EBITDA 09E Spain 9, Implicit EV/EBITDA09E of 13.1x 13.1 USA 9, Implicit EV/EBITDA09E of 16.1x 16.1 USA Renewables 8, Implicit EV/EBITDA09E of 18.6x 18.6 USA others 1, Implicit EV/EBITDA09E of 8.9x 8.9 ENSTOR Mult 0,35 mll EUR/bcm fully 12.6 owned PPM energy management Mult EV/EBITDA09 6.5x 10.4 PPM Thermal Power Mult 0,35 EUR mll/mw 4.6 UK 3, Implicit EV/EBITDA09E of 17.3x 17.3 RoW 2, Implicit EV/EBITDA09E of 15.1x 15.1 Total Renwable business 24, Corporation 0 Other Financial Assets 0 Total Assets 24, Net Debt YE08E* -3, Minorities Other Liabilities Equity Value 21, * Slight debt reduction due to 2009 cost assumptions 15

16 Recommendation key questions IBR has been oversold, in our opinion, on the basis of wrong assumptions such as excessive crude oil price dependency, electricity demand exposure, potential reductions in EU renewable targets, regulatory un-stability or financing problems for forward developments. We think it is important to value the up-and-running assets and the company as a whole from a conservative point of view given current market circumstances. Figure 20. IBR Stand Alone Performance Figure 21. Energy sub sectors performance YTD 7.50 Spanish pool price increase 20% 10% Share Price Performance YTD 6.00 Disappointing Q408 load factors EDPR IPO 0% -10% 4.50 Crude oil price fall & tougher credit conditions -20% -30% -40% -50% 3.00 US presidential elections & 1 year PTC extension -60% -70% -80% /12/ /01/ /02/ /03/ /04/ /05/ /06/ /07/ /08/ /09/ /10/ /11/2008 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Defensive Utilities Energy Utilities Renewables Utilities Oct-08 Nov-08 & Datastream & Datastream 1. Is IBR or any other renewable company exposed to oil prices? YES, but LIMITED. In order to tackle this question we will make a geographical split: Spain: Feed in tariff with two possibilities. 1. Pool + premium scheme (with a cap and a floor for those new MW) is exposed to crude-oil price as it influences pool prices. Remember the floor price is only 3% below the fixed tariff price 2. Fixed tariff. Variable scheme is dependant on crude oil prices as pool is related to it. Nevertheless, there is no link between a secure fixed tariff and the crude oil price. Note this is what we use in our bear case scenario. USA: There are two main possibilities: PPAs and Merchant. More than 90% of current assets in the States are under PPAs, their prices (updated on a CPI base) ensure project returns. We consider the remaining 10% (Merchant) to depend on crude-oil prices RoW: Some of the countries are on a fixed tariff (i.e. Portugal) and some on a variable scheme which could partially depend on the crude oil prices. 16

17 With regards to the variable schemes, if zero growth in these companies were to be considered, there could be an attractive upside coming from Renewable Energy Certificate price. Renewable energy companies have been hugely penalized due to crude-oil price fall as it can be seen below, without having enjoyed the rise. Something we consider unfair due to the limited exposure to this driver. Fgure 22. IBR and crude oil price performance Dec/07 Jan/08 Feb/08 Mar/08 Apr/08 May/08 Jun/08 Jul/08 Aug/08 Sep/08 Oct/08 Oil price IBR - shareprice Source: Datastream 2. Are renewable companies exposed to electricity demand? NO Renewable do not depend on demand growth We strongly believe Renewables output will not vary depending on the demand. In every country, the consumption of electricity generated by renewable energy sources is mandatory, reducing the amount of demanded energy to the rest of technologies (i.e. Spain). In addition, we must say that current renewable installed capacity in any country does not reach short term targets. This means, that if we consider zero growth for these companies the situation of the existing MW is very healthy and we do not expect any regulatory change. 17

18 3. Are renewable targets in question? We do not think so We do not expect renewable energy targets to be reduced. The EU s climate change strategy is to reduce emissions, with renewables generation output representing a 20% by Within this scenario wind raises importance to become the dominant source reaching a 40.6% of renewable output by 2020, delivering 55TWh of electricity per year. As we mentioned in our report EU climate change and energy package 11 th November, ( ) there has been little lobbying against the proposed renewable energy targets. In fact they are being quoted by politicians as a potential as a potential provider of jobs. We therefore expect headline and National Renewable Energy targets to remain intact In the USA, the one year PTC extension together with the presidential elections result leave us confident on further PTC extension, RPS approvals and the renewables industry development 4. Do they depend on credit markets and how could they be affected?? YES, slightly negative Credit market dependency could affect future growth but are unlikely to affect short term targets We are now in a difficult credit market situation but: IBE has committed to provide IBR with financing, on standard market terms. The cost of debt gets fixed once the year ends for those assets that have been installed If things get worse, IBR could reduce significantly its Capex 1bn p.a. without changing its financial commitments for 2010 If any bank is looking to finance a company project, we believe it would look for regulated income and stable cash flows, with renewables well positioned. Credit conditions could affect future growth but they should not hugely affect short term figures. If the company decides to lower investments, short term profit would be positively affected due to less financial expenses and lower depreciation figures. IBR could partially compensate the lack of TEI through Energy East's taxable income base. Our assumption is that the installation reduction would take place in the US market where TEI are not easily found. 1bn capex represent a 700MW per year reduction. Figure 23. Potential 1.0bn capex reduction to effect EBITDA impact New Old % change 0% -1% Valuation impact -1.3% 18

19 5. Is there a risk in the returns to the existing assets? No, we do not think so Existing assets enjoy favorable and stable regulations or PPAs that ensure current levels of profitability. Of course returns could vary in those countries where there is a variable tariff (i.e. Spain); nevertheless, there is a cap and a floor and in a 20 year project these variations should be non-significant. We do not contemplate retroactivity, because laws dictate so (i.e. spain RD 661/2007). Therefore we think the only risk is price performance. 6. Is there a risk in the returns to the new assets? Yes, there is The new assets face a difficult situation due to credit market circumstances (high cost of debt and financing difficulties). We expect small developers to be shrunk, but we are confident in those big developers with wide pipelines that provide the company with enough flexibility to select those projects with higher returns. Moreover, we would expect this situation to re-balance through lower investment costs with direct and positive impact in project s IRRs. 7. Will growth prospects be reduced?. How flexible is the company to reduce Capex? Current market circumstances make us think installation targets could be reduced/delayed if companies have enough flexibility. The difficult credit market situation makes it tougher to achieve enough attractive returns to have a spread above the 200bps above WACC (the company financial criteria for investments). To be able to modulate investments, companies need contracts flexibility. During IPO times renewable companies (partially forced by market requirements) decided to sign different long term contracts with manufacturers to ensure security of supply to face their installation commitments. Nowadays they may be thinking about reducing their capex due to financial conditions. We think IBR will be able to reduce contract volumes and even prices (though we do not include cost reductions in our figures) because of its pricing power. Therefore we could expect them to be able to reduce capex/mw with a positive impact on returns. 8. Which companies could be considered in their peer group? Transmission energy companies and other renewables energy companies In Renewable energy companies income is almost regulated, through regulated tariffs or PPAs, and these companies do not depend on electricity demand. Moreover, we think regulations should remain stable as they partially solve the energy independency and environmental issues. And we think potential is much higher in renewables both in terms of growth and returns, hence we think they deserve a premium (please see Peer comparison Figure 28) 19

20 Valuation key assumptions In our approach on a country-by-country basis we use key assumptions regarding the main drivers: Regulation: We expect no change in regulation We assume that the existing regulatory frameworks in each country where IBR operates remain largely stable as they are quite far from Governmental commitments as regards renewables. However in two of the countries we make particular assumptions: i) USA, where we believe PTCs will be extended in different time periods for the next decade in order to achieve those targets established in the RPS and if they disappear a similar incentive will replace them; and ii) Spain, where we consider a decrease in the remuneration level from 2012 after the announced revision that would take place in 2010 and will only apply to those assets in operation beyond Resource quality Not the best quality but high stability due to diversification Load factor (utilization rate of wind farm in a yearly period) is the main driver. As we are not able to analyze each particular wind farm, we use the IBE historical data for each country considering a slight decrease in the yearly estimated load factor, as we think the best sites are taken in first place. IBR is not above the sector average, and we do not discuss whether the company has the best assets or not (probably not), but due to their geographical diversification and asset base, we expect IBR load factors to be very stable. Figure 24. Load factor expected evolution 37.0% 35.0% 33.0% 31.0% 29.0% 27.0% 25.0% 23.0% 2009E 2010E 2011E 2012E 2013E 2014E 2015E Spain UK USA ROW Cost of investment We remain with a conservative scenario, but large upside could emerge from changing market conditions The industry has suffered from dramatic increases in recent years in the cost of turbines and associated equipment, but he current situation is significantly different. Present credit conditions have made investors reconsider companies financial capabilities, and subsequently their installation plans, with a negative and direct effect on turbines demand. 20

21 Therefore, we think pricing power is moving back to developers. However, as IBR has announced long term bilateral contracts with main suppliers and there is not enough colour about the flexibility of those contracts we prefer to remain conservative, and we consider a similar turbine price scenario until 2012 to the one that we were considering 6 months ago. In fact, potential renegotiations of long term turbine contracts could derive in lower prices paid, with a very important impact in the value creation explained as enterprise value reduced by the cost of investment with a very positive impact in valuations (as can be seen below), but we prefer to remain cautious. Figure 25. IBR expected investment cost per MW Imvestment cost 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E th/mw Spain 1, , , , , , , ,506.4 USA 1, , , , , , , ,590.7 UK 1, , , , , , , ,747.4 ROW 1, , , , , , , ,687.1 Weighted average 1, , , , , , , ,611.0 %change 3.9% 6.2% 2.8% 3.0% 0.9% 1.0% 1.0% In the future, the issue will be how flexible in volume and price are the existing agreements. We expect IBR to have a significant advantage at the time of renegotiations due to its size, and the relationship with Gamesa (IBE owns 25% of Gamesa) and other manufacturers that have a long term dependency on the biggest worldwide developer. Figure 26. IBR cost of investment and sector comparison E 2009E 2010E 2011E 2012E 2013E 2014E 2015E IBR EDPR ANA Sector Average 21

22 Cost of capital Credit conditions got tougher with significant negative impact in WACCs for new investments We consider there is a big difference between what it was for working assets (a secondary parameter) and what it represents for forward investments. The cost of debt will not vary for those assets which are up-and-running or will be installed before the end of 2008 because they enjoy a fixed cost of debt. The scenario hugely differs for those assets to be installed from 2009, they will face tougher conditions which could negatively affect expected installation targets. We consider for the new assets 6.25% WACC in Spain, 7.5% in the USA, 6.40% rest of Europe and 6.75% in the UK. But, is it fair to maintain these tough conditions forever? Maybe not, though we are doing so. Operation and Maintenance costs We expect O&M costs to be CPI inflated Costs involving operation and maintenance depend hugely on the country where the MW is located. Our assumptions for IBR in 2009 are /MW in Spain for 2009, $55.000/MW in USA, and c /MW in the UK and /MW rest of the world. Figure 27. O&M cost evolution per country th/mw h E 2009E 2010E 2011E 2012E 2013E 2014E 2015E Spain UK USA ROW Terminal value of the Wind farm We only apply the terminal value to the Spanish assets where land concession and regulation ensures more than 20 years We think wind farms have a terminal value, as in many cases concession rights for the exploitation of sites are for more than 50 years (99 years in the case of Spain). This provides the opportunity for the sites to be repowered once the initially installed turbines reach the end of their useful lives. With planning and grid connection such a cost of, and barrier to, entry, the ability to repower sites may provide material backend value. 22

23 Nevertheless, either the existence of the concession or the secure remuneration after 20 years are neccessary conditions for a terminal value to be considered. Spain is the only country where both conditions are met. In any case, we think no valuation can be easily explained by the remaining value of an asset after the first twenty years of useful life. So we assume replacement will cost 80% of the initial investment after 20 years. This gives us a terminal value of the investment up to a 5.4% in Spain, the only country where we use it (as a conservative principle). Spanish regulation is the only one that currently ensures a remuneration level for the whole asset life and concessions last for 99 years. 23

24 Peer Comparison In our peer comparison we consider renewable pure peers such as EDPR. We do not include Acciona because not even 50% of its valuation is represented by renewables. We include energy transmission companies as our view is that renewable energy companies are almost regulated with huge potential growth and stable regulatory frameworks. As in the case of transmission companies, their revenues do not depend on demand as they have priority among any other generation technology. Although it is true they have some exposure to crude oil prices, it is very limited and we believe the growth justifies a premium, as can be seen below. Figure 28. Peer comparison EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA EV/EBITDA CAGR EBITDA 2008E 2009E 2010E 2011E 2012E E REE % ENG % SRG % TRN % NG % IBR mkt price % IBR TP ( 3.65) % EDPR mkt price % EDPR (TP 7.0/sh) % Average ex-ibr & EDPR TP % P/E 08 P/E 09 P/E 10 P/E 11 P/E 12 CAGR Net Income E REE % ENG % SRG % TRN % NG % IBR mkt price % IBR TP ( 3.65) % EDPR mkt price % EDPR TP ( 7.0) % Average ex-ibr & EDPR TP % EV calculated with year end debt estimates, priced as of 24/11/08 In all the cases growth depends on forward investments, but we also have to bear in mind that IBR is expected to generate 0.84bn on average in the period 09-12, with 500m to be paid in 2010 for Gamesa assets acquisition and dividend distribution 24

25 Peer differences and similarities We compare IBR with EDPR, the company we consider to be IBR's purest peer as it has presence in the same markets with the exception of the UK, and their valuations are more than 90% explained by renewable business in both cases. Similarities Growth companies: Renewable companies are growth companies, they all show sound growth supported by high yearly installation targets. Iberian market is the pillar to expand from: More than 50% of their current installed base is in Iberia. And they both focus their growth in the US market. Pipeline diversification: Both companies have a diversified pipeline in stable markets (Iberia) and growth markets (USA, UK, Poland etc) with good resource quality and notable remunerations. Long term contracts turbine supply strategy: The security of supply has been one of the key concerns for wind developers. Both companies have securitized part of their supply through long term agreements with main suppliers (Vestas, Gamesa, GE, Enercom, Suzlon, etc). Differences Current installed base size: We think size does matter as it can provide economies of scale for the installed base. Taking into account the current market situation, cash flow generation could become an issue and a bigger installed base is an advantage. A broader installed base provides IBR with load factor stability. Pipeline volume and diversification: The bigger the pipeline is and the wider the diversification is, the better. Both features provide IBR with flexibility in terms of projects to be developed and returns to be achieved. Asset quality: In most countries the quality of the assets have a direct impact on returns and EDPR has showed higher load factors in Iberia. Turbine supply strategy: IBR has securitized (up to now) the supply for a longer period. Current turbine market conditions make us think that EDPR could have an advantage from 2010 when it is free of long term contracts. Nevertheless, it has been IBR that has showed more flexibility by announcing the possibility of a 1.0bn capex reduction at the 9M08 results. We think having a stake in one of the main suppliers is always an advantage. Taxable income base: IBR will enjoy a taxable income base provided by Energy East which will reduce the need of TEI. We consider this an advantage given difficulties in find TEI in the US market 25