Iberdrola US networks: solid growth visibility, but the ROE value-creation gap is narrowing

Overview

This report deeply analyzes Iberdrola’s regulated network business in the U.S., with a focus on RAB growth, allowed ROE, actual ROE, capex plans, the regulatory framework and IFRS vs US GAAP differences at the seven utility companies under Avangrid. The report argues that U.S. networks contribute substantial growth: in 2025, U.S. RAB was about $15.6bn, representing roughly 27% of group RAB; from 2026-31e U.S. network EBITDA is expected to grow at about 9% CAGR and to contribute about 14% of group EBITDA on average over the period. But after rates rose, allowed returns did not fully reflect the increase in capital costs, causing a pronounced narrowing of the value-creation spread.

Core views

The core views are: first, the U.S. grid remains an important growth platform for Iberdrola, and capex and RAB expansion can support mid-term EBITDA growth; second, reported GAAP ROE declined from 8.3% in 2021 to 6.6% in 2025, but after adjusting for regulated assets, work in progress, deferred revenue and tax rate, underlying ROE is about 8.5%-9.2%, which is more stable; third, what truly affects investment attractiveness is the spread between ROE and COE, which has narrowed from about 360 bps in 2020 to 70 bps in 2025; fourth, the transparency of the U.S. regulatory framework is lower than it appears, and actual returns depend more on rate-case negotiations, cost recognition and delayed recovery than on allowed ROE alone.

Analysis framework

The report uses asset split and return bridge analysis: first mapping Iberdrola’s U.S. network history, seven regulated subsidiaries, state-level and business-type RAB structure, then comparing allowed ROE, achieved regulated ROE, US GAAP ROE and adjusted ROE, and measuring value creation with ROE-COE and ROCE-WACC spreads. It then considers the rate cases for NYSEG, RG&E, CMP, UI, SCG, CNG and BGC, the regulatory environment, capex plans and U.S. customer affordability pressure to assess potential improvement in future returns.

Methodology notes

• utility regulatory return analysisROE-COE spread

  equity return versus cost of equity spread

  The report uses ROE minus COE to measure value creation for regulated assets. Iberdrola’s U.S. network spread fell from about 360 bps in 2020 to about 70 bps in 2025, indicating that investment incentives weakened as interest rates rose.

• utility asset valuationRAB growth analysis

  regulated asset base growth analysis

  The report uses RAB to measure the size of regulated assets, and combines capex, state-level asset distribution and business type to assess future revenue needs and EBITDA growth potential.

• accounting adjustment analysisUS GAAP adjusted ROE

  adjusted realized ROE

  The report argues that looking only at reported GAAP ROE can understate or distort underlying returns, requiring adjustments for storm-related regulated assets, deferred revenue, work in progress and tax normalization to better reflect true return on capital employed.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Iberdrola SA / IBE.SM

  Research subject

  Strengths

  U.S. network RAB and EBITDA are growing relatively quickly, the business has regulated-asset characteristics, and the long-term capex roadmap is clear.

  Weaknesses

  Target price is below current price, value-creation spread has narrowed, and realized ROE is below allowed ROE.

  Comparison

  Compared with other European integrated utilities, Iberdrola is relatively expensive, with 2026E P/E of about 21.3x, above Enel, Engie, Endesa and most peers.

  Risks

  Potentially not meeting expectations in regulatory rate cases, delayed cost recovery, rising rates, customer affordability pressure, and unfavorable state-level regulatory environments.

• Avangrid US regulated networks

  Core subsidiary and U.S. network platform

  Strengths

  Covers New York, Connecticut, Maine and Massachusetts, with power and gas distribution and transmission assets, serving about 10 million customers.

  Weaknesses

  Capital intensity is higher than rate base in rate cases, and there are approval and timing lags in recovering regulated assets.

  Comparison

  The FERC transmission framework is comparatively more supportive than state-level distribution and gas regulation; Connecticut’s regulatory environment is relatively weaker.

  Risks

  Outcomes of new rate cases for NYSEG, RG&E, CMP and BGC are uncertain; PURA and MPUC-type regulatory environments may cap returns.

Key data

• RatingMarket-PerformBernstein reiterates its rating on Iberdrola.
• Target price19.80 EURCompared with current price 21.76 EUR, implied downside is about 9%.
• U.S. network RAB in 2025about 15.6bn USDApproximately 27% of Iberdrola’s total RAB.
• U.S. network RAB in 2031eabout 30.6bn USDThe report expects U.S. network RAB CAGR of about 10% for 2026-31e.
• 2026-30e U.S. network EBITDA CAGRabout 9.3%The U.S. network is one of the group’s medium-term growth drivers.
• 2026-30e U.S. network capexabout 19bn USDAbout 21% of group capex over the same period.
• Reported GAAP ROE, 20256.6%Lower than 8.3% in 2021, indicating a decline in apparent returns.
• Adjusted ROE rangeabout 8.5%-9.2%More stable after adjusting for regulated assets, work in progress, deferred revenue and tax rate.
• ROE-COE spread360 bps in 2020; 70 bps in 2025Value creation has narrowed significantly and is the report’s main warning signal.
• Weighted-average base allowed ROE on RAB, 2025about 9.30%Below the 2025 U.S. electric and gas rate-case industry average of about 9.85%.

Impact & implications

For investors, the U.S. network business provides high mid-term visibility of capital spending and RAB growth, but that does not automatically translate into the same level of shareholder value creation. If regulators raise allowed returns, accelerate cost recovery, or improve cost recognition, Iberdrola's U.S. asset returns could improve; if customer affordability pressure continues to limit tariff increases, or if regulatory environments in Connecticut, Maine and similar states remain unfavorable, the ROE-COE spread may continue to come under pressure. As a result, the report supports a neutral rating rather than a more constructive rerating call.

Risks

• U.S. customer affordability pressure may limit regulators from approving large tariff increases.
• Allowed ROE does not fully reflect rising rates and changes in capital costs, leading to insufficient incentive for new investments.
• Regulatory asset recovery, storm costs and historical cost recovery usually require approvals and are subject to delays.
• State regulatory environments vary widely; Connecticut is assessed as below average, while Maine and New York also face cautious regulatory pressure.
• A reduction in FERC transmission ROE and related litigation outcomes may affect returns on transmission assets.
• If actual cost control or cost recognition falls short of expectations, adjusted ROE may be lower than report assumptions.

What to watch

• Whether NYSEG and RG&E rate cases approve requests for 10.0% ROE and a 48% equity ratio.
• Progress of CMP’s new rate case and the outcome of the New England transmission ROE litigation at FERC.
• Regulatory rehearings and cost-recovery outcomes in Connecticut and Massachusetts for BGC, SCG, CNG and UI.
• Whether U.S. network RAB grows as planned from about 15.6bn in 2025 to about 23.6bn in 2028e and about 30.6bn in 2031e.
• Whether adjusted ROE can stay in the about 8.0%-8.5% or 8.5%-9.2% range.
• Whether the ROE-COE spread improves from about 70 bps in 2025, or narrows further in a high-rate environment.