BUSINESS DEVELOPMENT ISSUES IN LATIN AMERICA Iberdrola Renovables SA Julio 2007 February 2008 1
Contents I. Iberdrola Group Numbers II. Iberdrola Renewables Growth Strategy III. Renewable countries IV. Some Data about Latin America V. One Example: The Case of Colombia VI. Conclusions 2
Iberdrola Group Numbers Financial Data Nine months 2007 (Billion euros) Operational Data Nine months of 2007 Total Assets 68.13 Installed capacity (MW) 41.001 Income Stock Market Value (30 October 2007) Net Profit (Profit year 2006: 1.660 M euros) 11.38 Energy Production (GWh) 86.800 51.44 Energy Sales (GWh) 115.508 Nº of Customers (Gas & Electricity) (millions) 24 1.61 Nº of Employees 26.375
Iberdrola Group Strategic Markets Iberdrola focusses in the Atlantic Region: Four strategic markets North America: 2º Wind energy producer (in US) 3º Gas storing (in US) United Kindom: 3rd Distribution Co Among the5 major retailers 1ª Wind energy producer Latin America: 1º Private generation Co Mexico 1º Distribution Co Brazil Spain: 1 º Utility 4
Iberdrola Group Production Numbers Coal 6% Production Mix 2006 Cogeneration 2% Oil 2% Hydro 14% Wind 9% GWh 83.009 Production Growth +10,8% 91.991-32% +15% Coal + Oil Combined Cycle Comb. Cycle 40% Nuclear 27% +18% 2005 2006 Emission Free * Hidráulica + Nuclear + Eólica Driven by Low Emission Technologies
Iberdrola Renovables Evolution Leader in Spain CORE 2007 Startegic Plan 2001-2006 2006 Stock market 2004-05 Acquisition of Scottish Power 2001 2003 Getting into European market Getting into US market 4.434 MW 7.342 MW 1.070 MW 2001 2006 2007 6
Iberdrola Renovables Near Future World Leader in Wind Energy Installed Wind Capacity 7.704 MW Pipeline 42.000 MW USA Res United Kindom 1,741 MW (26%) 364 MW (5%) 507 MW (7%) 4.214 MW (62%) Spain Rest 13.500 MW by 2010 USA 18% 16% 51% Spain 15% United Kindom
Iberdrola Renovables: Growth Strategy Medium Term Short term G r o w t h P o t e n t i a l + _ Asia Latin America Medit. S- E Low Interest USA Spain U.K. Poland France Canada Greece East Europe Germany Portugal Case-by- case oportunities _ Regulating frame / Infrastructures + 8
Renewable Countries: Clues for success Countries Installed Capacity (MW) In 2006 Ac Dec 2006 Feed-In Mechanism Certifictes Germany 1.773 20.200 Spain 1.572 11.600 Danmark 9 3.136 Italy 224 1.941 Netherlands 345 1.553 U.K. 616 1.958 Portugal 529 1.553 France 708 1.478 Sweden 27 519 Austria 146 965 Greece 173 746 Belgium 28 188 Total 6.150 45.837 More than 90% installed wind capacity in countries with feed-in tarif. High growth rates in countries with feed-in tarif No significant successes where certificates * Data as of Dec 2006 Feed-In tarif: key for success 9
Feed-in results in less cost for end user Bélgica Dinamarca Finlandia Italia España RU Prices for end user of wind energy are higher in countries with certificates Fuente: Communication from the Commission : The support of electricity from renewable energy sources, dic 2005 Due to higher risks, profitability required by investors under certificate schemes are higher. Final customer pays more at the end 10
Renewable Countries: MWs vs Mechanism Feed-in Tax Incentives Feed in Feed in Certificates Data as of dec 2006. 11
Renewable countries: average prices of wind energy in 2007 PAIS REGULACION /MWh - 2007 USA Certificates/Incentives 81 Spain Feed In (RD 436) 79 United Kindom Certificates 114 Greece Feed in/ Investment subsidees 90 Francia Feed in 82,5 Polonia Certificates 74 Brasil Feed in (PROINFA) 82 12
Latin America: some figures (aprox) LATAM MEXICO BRASIL REP DOM CHILE COLOMBIA PANAMA PERU ECUADOR ARGENTINA GUATEMALA COSTA RICA Installed (MW) 300.000 58.633 96.634 3.394 12.720 13.280 1.540 6.548 4.398 24.352 1.758 2.048 Generation mix 52%H 45%T 21%H 72%T 7%O 76%H 21%T 3%O 14%H 83%T 3% G 39%H 61%T 66%H 33% T 1%O 44%H 56%T 50%H 50%T 50%H 50%T 42%H 54%T 4%N 38%H 60%T 2% G 63%H 19%T 17% G Demand growth 5% 5,20% 4% 4,40% 5,50% 4,70% 5% 6,50% 6,20% 7% 7,00% 7% Rating (S&P) BBB+ BB+ B+ A+ BB BB+ BB+ CCC+ B+ BB BB Price range (Apr) 75-85 $/MWh 65-80 $/MWh 70-75 $/MWh 55-60 $/MWh 45-55 $/MWh 100-120 $/MWh 50-60 $/MWh 90-100 $/MWh 30-35 $/MWh110-120 $/MWh Electric market Liberalized Generation Lib Liberalized Liberalized Liberalized Liberalized Liberalized Liberalized Liberalized Liberalized Monopoliy ICE Types of contracts PPAs - Licts PPAs - Licts PPAs - SPOT PPAs - SPOT PPAs - SPOT PPAs PPAs - SPOT PPAs - SPOT PPAs - SPOT PPAs - SPOT Licitaciones Allowed parties CFE - Clients Distribution Cos Distribs - Clients Distribs - Clients Distribs - Clientes Distribution Co Distribs - Clientes Distribs - Clientes Gens-Dist-Clientes Distribs -- Grandes Cl ICE Applicable laws X Law 5/07 -Regl 2008 law 2008 Law 08 Law 2004 Law 2003 / Reg 2005 NA Types of support Incentive Feed in (-) Feed in Certificate Incentive Incentive Feed in Feed in Incentive Feed in (-) Wind Potential Capacity > 200.000 30.000 > 100.000 5.000 10.000 10.000 2.000 3.000 1.000 >100.000 3.000 5.000 Hours 2500-4000 4000 (Sur) 3000 (W) 3.000 (N) > 2.500 (S) 3000- (Norte-Este) 3.000 (C-N) 3.500 (Norte) 3.000 3.000 2.500 3.500 (S) 3.000 2500 (Centro) 3500 Wind share > 15.000 5000 10.000 400 700 600 150 600 250 1000 150 200 13
Latin America: Some facts from figures Huge undeveloped wind potential Generation mix base on Hydro + Thermal High rates of growth: concerns about availability in the future Wide ranges of prices. Some very low Ratings below investment grade: higher requirements Liberalized markets: energy competes per price In many countries renewable cannot compete w/o support Some interesting support initiatives but limited support, so far 14
Example of Colombia: Price history (1 Euro = 2.781 CO $ ------- 75 CO $ = 2,69 cents of euro) Source: Empresa Operadora del Mercado XM S.A.
Example of Colombia: Price forecast Black = MIX 1 (H + G) Red = MIX 2 (H + G + C) BLUE= MIX 3 (H + G + C + R) 65 60 55 US$/MWh 50 45 40 35 30 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22 Source : Estimates of generation costs, including the cargo por confiabilidad, under different generation mixes
Example of Colombia: Present Situation Profitability considering average investment and financing conditions together with Colombia electricity market conditions is in the range of 1% to 5% Operational Inputs : Average market values Commissioning : 2009 Investment : 2.200mUS$/MW Capacity Factor: 35-40% (above normal, considering the best resources of the country: Guajira) Electricity market price(*): 30 US$/MWh Other Income (*) ( cargo por confiabilidad, certificates ): 10-20$/MWh Depreciation: 20 years Corporate tax: 33% of EBIT Tax Incentives: Financial Inputs Tax credit up to 40% of the total investment during life cycle (*) Crecimiento anual = Inflación
Example of Colombia: Effect of some potential measures Possible measures to increase profitability to a prospective investor can be of two types, or combinations Additional Income (Certificates, CDMs, extras to market price, ) Total increase above the assumptions: +10 US $/MWh ----------- +300 bp above base case +20 US $/MWh ----------- +450 bp above base case +30 US $/MWh ----------- +630 bp above base case Mild financing schemes (effect on ROE) * Exemption period 3 years : +170 bp above base case (equity) 2 years: +100 bp above base case (equity) 1 year : + 50 bp above base case (equity) Lower Interest Rates 0,0%: +653 bp above base case (equity) 2,5%: +260 bp above base case (equity) 4,0%: +90 bp above base case (equity) * Return on equity has been calculated estimating no witholding tax and 100% of cash flows and reserves (after debt) converted to dividends Note: Base case Equity: 70% senior debt at an interest rate of 5% 18