Ignacio Sanchez Galan interview: Scotland to remain in position of power

OUTSIDE the air-conditioned comfort of the Guggenheim, the temperature in Bilbao is soaring to a very pleasant, if slightly unseasonable, 27°C but the sunlight bouncing off the silver curves of the Frank Gehry-designed building seems to make things even hotter.

The Basque capital has redefined itself in the past 20 years from a grim industrial city into a popular tourist destination with one of the world's top museums at its heart. It is the eve of a Spanish bank holiday and this early taste of summer brings plenty of tourists onto the streets alongside locals taking advantage of the opportunity to forget a harsh winter by Spanish standards. Ignacio Sanchez Galan, however, has a different view.

"It was a great winter, lots of wind and rain; very good for us but bad for other people," jokes the chairman of Iberdrola, the parent company of ScottishPower. It was a great winter for the Spanish utility's water-starved reservoirs and plentiful wind farms. The gushing rivers and speeding turbines helped boost Iberdrola's profits in difficult times by 21%.

But it will take more than a few wisecracks to charm the pack of 200 Spanish journalists waiting inside a theatre at the Guggenheim. They are here for a press conference led by Galan ahead of Iberdrola's AGM in its spiritual home of Bilbao. Galan's charm will be tested as they grill him on efforts by Florentino Perez, the former Real Madrid president, chairman of construction firm ACS and investor in Iberdrola, who wants a seat on the board.

No one asks about the sharp increase in profit, ScottishPower, its takeover of US-based Energy East or the growing success at its renewables arm, which was floated separately and is the seventh-biggest Spanish company by market capitalisation.

Galan takes it all in his stride, only showing irritation when one reporter asks about his remuneration. His response is along the lines of the board think he's worth it. Confidence is not in short supply.

Now, as the second anniversary of Iberdrola's bold merger with ScottishPower approaches, Galan allows a little time for reflection. The Spanish firm flew under the radar to snap up a prize asset for 11.6bn from under the noses of German and French rivals and it now claims to be the fifth-largest utility in the world. If ScottishPower has been good for Iberdrola then Galan makes it clear he believes Iberdrola has been good for ScottishPower.

"In the two years since we merged, we have changed from the days when more than 90% of revenues came from Spain, but we have also invested 1.8bn in the UK in the last two years, mainly in Scotland, with 1.1bn of that in 2008 alone," he said.

"We made the necessary investment in Longannet (coal-fired power station] to keep it open, and without this investment it would be forced to import low-sulphur coal from Russia and South Africa. Instead we have signed a seven-year contract with Scottish Coal worth 700m that secures 7,000 jobs. And in addition we paid 450m in taxes in the UK last year."

Now Galan wants Scotland to be at the heart of a new phase of Iberdrola's growth, carbon capture and storage (CCS). It is one of three bidders in a British Government competition to build the first CCS system. If successful they will liquefy CO2 produced at Longannet and transport it by pipeline to an aquifer in the North Sea with the capacity to hold all of Europe's carbon for the next 600 years. It is a joint venture with Marathon Oil and Norwegian firm Aker.

Galan pledged that, if successful, Scotland would become the group's centre of excellence for this technology. "The British Government wants to have this plant in operation by 2014 and ours is the only one which complies with that requirement," he said. "The only place in the group for all our technologies in coal will be Scotland. We will not make another thing in any other country."

Iberdrola is thought to be in pole position because by using Longannet it can start in 2014 if, as expected, the final decision is made at the end of this year or early next year. The other bidders would have to wait until 2020 as they would have to build new stations.

Galan said the investment in Scotland would start straight after the decision and be "hundreds of millions of pounds". He uses it as an example of how energy companies can drive new economic growth.

"Traditionally utilities were not seen in a good manner (for economic growth]," he said. "No one cared that we were a tremendous engine for the economy, but now politicians can see that this is real, not speculative.

"You cannot automate the building of a power plant. It is the first time that politicians are asking us to help them and we are ready to do so."

But Galan is a clever politician himself, and by placing power companies at the heart of economic recovery he is putting gentle pressure on those governments for some payback.

"To raise money to invest in infrastructure we need to be sure of a reasonable rate of return, and in the United States that is happening," he said. "They are taking a lot of measures. The interconnection between Canada and Maine would have a normal return on equity of 10% to 11%. In the UK it is much lower. The federal authorities chose to increase the rate to around 13%. It means we can automatically raise money.

"We do not have the money in a box – we have to go to the markets. We require an attractive framework."

What he doesn't explain is that the only way to do that would be to increase prices for consumers, even though the rise would be small. In the main he feels the Government in the UK is receptive. Spain, unlike the UK, is a heavily regulated market and at the press conference Galan shows a slide which demonstrates that, unlike other Spanish rivals, it is less dependent on the regulated markets and has substantially more energy from renewables.

That, he says, is why it will have opportunities to grow while having the comfort of cashflow from the regulated markets. More than 57% of its income now comes from outside Spain.

As someone who knows his way around the delicate political relationships between the Basques and the rest of Spain, he is at pains to praise both the British and Scottish Governments, even though they have different views on new nuclear power stations.

Iberdrola is in the frame to build new nuclear power stations in the UK but Galan professes himself comfortable with the Scottish Government's anti-nuclear position.

"Energy companies do not make energy policy; that is for governments to decide and we are happy to follow that," he said. "We are not going to build sites in Scotland."

When I first met him two years ago he had successfully neutered the SNP's opposition to its takeover of ScottishPower, and when Europe's biggest wind farm, the 300MW site at Whitelee outside Glasgow, is formally opened at the end of May, First Minister Alex Salmond will be there.

The loss of a Scottish plc in 2007 was felt badly, but at the time of the merger Galan committed to ensuring the Scottish company would be managed locally. "I strongly believe in the local model; global things with local people, and that is what we have done," said Galan. "The ScottishPower board is no longer mainly Spanish. We have Sir Tom Farmer and Gus Macdonald and on our main board we also have Samantha Barber (Scottish Business in the Community]."

The amount of investment the industry needs as a whole in the UK over the next 10 years could be as much as 100bn, ensuring that the UK will become an even more integral part of the Iberdrola empire.

Galan reassured investors that the company was in a strong position and was "tremendously capitalised", pointing out it enjoys a solid credit rating and has more than ?9bn in liquidity, covering its financing and investment needs for the next two years.

The Spanish economy, however, is in as much if not more trouble than the rest of the developed world. Its heavy reliance on the construction sector has hit hard. Although Iberdrola is more exposed to industry in Spain, in the UK the overwhelming majority of its customers are residential.

Because of that "great" winter, ironically Iberdrola is producing more energy in an environment where the demand is much less, but Galan maintains that it is still in a very strong position overall.

"We are perceived as a secure company with good cashflow generation thanks to our regulated markets, but it is crucial to keep our 'A' rating," said Galan. "Our financial needs are covered for the next two years – more expensive but covered."

Back in Scotland, the colours of Iberdrola are replacing the old logo on its vehicles as the Spanish firm brings its Scottish subsidiary closer to the bosom of its family while still allowing it a lot of freedom to make its own decisions.

In the year before the merger, ScottishPower, damaged by the outcome of its flawed PacifiCorp purchase in the US, was like wounded prey waiting to be put out of its misery. But by the end of this year, if it wins the carbon capture competition, ScottishPower could be the heart of Iberdrola's global centre for a new technology.