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26 April 2019

The fate of two very differently run energy businesses

The results season is well under way, and FirstEnergy in the US and Iberdrola in Spain gives us the perfect opportunity to see that the energy business remains a rich business – but there are at least two very different ways, the right and wrong side of renewables, to go about taking your profits.

First Energy operates in both distribution and transmission, and did have a specialist subsidiary in nuclear that has gone bankrupt, as has all of its electricity generation businesses. It has effectively decided to become a more regulated business, and not dabble in the world of electricity generation any more. Its earnings per share are about 20% of this time last year, at $315 million, on revenues of $2.9 billion. A year earlier it recorded GAAP earnings of $1.2 billion on the same revenues.

No company is entirely useless, it can always serve as a bad example for others, and First Energy is a perfect example of this. Historically it switched out of coal into biomass with carbon capture, which was never really going to work. It downgraded its CO2 output somewhat, but its main generation business was nuclear where it has had to close 3 power stations at various points. It then switched to Gas Turbines as far back as 2010, but went one better installing the world’s largest compressed air generator (really a storage facility), which it can put to good use when it contracts with other renewable power providers. It’s past is full of run-ins with the US Environmental Agency for instance dumping toxic waste into local lakes. It is out of the generation business simply because it did not embrace renewables.

A year ago it had to issue $2.5 billion in new shares to remain liquid. But it remains promising a CAGR of 6% to 8% for the foreseeable future. And it says it achieved a 62% reduction in CO2 as of year-end 2018 and will drive on to 80% later in 2019. But if you no longer generate electricity then why do you produce any CO2. It has put plans to the court for both bankrupt firms and will honor all commitments, but then de-consolidate, so that its core business is separated.

It is halfway through an expensive refit of its transmission systems, hopefully to make them support renewables better, and in all the company is spending some $6 billion plus on capital initiatives over the next three years. But because it has 6 million electricity customers, it could still make a considerable amount of money at some point in the future.

Contrast this with Iberdrola, a company only formed in 1992 and ostensibly in the same business as First Energy back then. Today its subsidiaries include Scottish Power (Scotland), Avangrid (USA) and Elektro Holdings (Brazil), and others; and it has done this while quietly embracing renewable energy, especially wind.

In Q1 Iberdrola produced 17,000 GWh of renewables, of which 10,400 was offshore and onshore wind, and much of the rest was hydro; 6,400 GWh or so of nuclear power, 13,000 GHw of gas driven electricity, and a tiny amount remaining of coal. It has recently begun emphasizing mini-hydro and solar and we suspect that it will take solar in to overdrive as it gets cheaper. All it seems to have done is follow the subsidies in renewables and emphasized cheaper generation.

Initially as we looked at its business we thought we would see a falling away of gas, and a consistent rise in wind, but what we actually see if we did deeper are energy profiles that reflect the regulatory environment of the countries it trades in. In Spain, virtually no installed generation has changed since last year, but there have been peaks and troughs based on the mix, with renewals falling away a bit, and better Nuclear sales, and a little more gas; in the UK it has sold off the gas turbines and hydro; in the US it is inching ahead with wind and everything else is static, while in Mexico gas is the dominant force, everything else is rising, but in a pedestrian fashion, and solar is beginning to accelerate from a very low base; while in Brazil, its largest market, renewables and hydro are surging dramatically and in the rest of the world, because it did not inherit any fossil fuel services, it is all wind and solar.

Revenues were €10.14 billion for Q1, up 8.5% over this time last year, with profit up 15% to €963.9 million, and that’s in a comparison with last year’s figures where it sold off generation assets in the UK. Hindsight is a wonderful thing, but we suspect that even with hindsight, and a peek into the books of Iberdrola, First Energy would have done nothing different.

At the much smaller end of the scale we note in its quarterly bulletin, which does not include revenues, that Italy’s Enel Green Power added 695 MW of renewables capacity, and reduced thermal energy capacity by a mere 35 MW.  Its assets were static in its native Italy and Iberia, South America and Europe, but it managed to grow about 1 GW of wind in the USA and sell off 75% of its solar assets there. It only has minor assets in both Africa and Asia.