EDP Renewables, S.A. (EDPR) Earnings Call Transcript

Hello and welcome to the EDPR 2019 Annual Results Call. My name is Val, and I will be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. João Manso Neto, CEO, to begin today's conference. Thank you.

Right. Hello. Before passing to João, I'll make a brief introduction. So Rui Antunes, the Head of IR. I'm here with the CEO of the company, João Manso Neto. So we have the 2019 results presentation. So welcome, everybody to this conference call. We are going to have this as usual. So I'll go through some highlights, some details of the 2019 results. Then I'll go briefly through the business plan execution, and we will open the call for Q&A. I'll now hand over to João Manso Neto for the introduction.

Okay. Thank you very much, Rui. So good afternoon, ladies and gentlemen. So it's a pleasure to be here, not only to be in contact with you, but also to present the results and the execution of the business plan of -- in 2019 -- as of -- the end of 2019. As you'll be able to see, I think the results were clearly good, not in terms of the financials in the short term, but also mainly what concerns the execution of the business plan in which we confirm our ability to deliver it on time and on value. So being more specifically, our business plan, as you know, has three -- basically, our strategy, three basic pillars: core key assets, selective and profitable growth and self-funding business. We delivered in all of them. In what counts as quality assets, we were able to increase the load factor to 32%, a more normal year. In what's constant -- the availability, we kept at 97%. In terms of revenues, it's important to see that notwithstanding the expected decrease of the PTCs, we are able to increase it, the revenue 7% because of capacity, because of the foreign exchange also helped, but because of those factors, but also because of the price recovery, which shows the importance of having a proper hedging policy. Notwithstanding our growth structure strategy, we were able to keep them flat -- the adjusted core OpEx per megawatt. And all of this is very important, we keep, and we continue to keep always our policy of having -- are not being exposed to market evolution. And so 95% for next year revenues are already fixed, and we are not exposed to the evolution of the price. I would say growth was one of the big paramounts of this year, we installed 888 megawatts built. As you know, we sold [ 11 first ] stakes on the context of the self-funding business. And besides the growth, what we've started, which is already in construction and the construction of almost 1,000 megawatts. Very important is that, as you know, we have our objective of building from '19 to '22, about 7 gigas. And what we have raised, securities, 77% -- 76% in the first year, and we think it's an interesting number when we compare with low 40s when we announced the business plan less than 1 year ago. From all of this revenue side cost control, EBITDA increased 27%, to be more comparable, 23%, excluding IFRS, because of the top line and because of the sell-downs. But again, operational results very strong. As a consequence of this, the net profit reached a record level of EUR 475 million against EUR 313 million last year. Again, sell top line, cost control and sold down were clear. As you know, with 1 of the pillars of our policy is keeping our strong balance sheet. And so the sell-downs, we did what we promised to the market, the EUR 4 billion in the 4 years, we did EUR 1 billion, part in U.S. and Europe, another part in Brazil, this and Europe. And so we did the EUR 1 billion of the sell-down. This, plus the tax equities, we were able to finance totally this -- and the cash flow, we were able to finance fully our investment plan. And in fact, we reduced the debt plus tax equity by EUR 240 million. Important to raise the point that the retained cash flow, meaning that the cash that we are able to generate before investments, were up 23% and -- which is excluding the sell-downs, which is a very strong number, almost EUR 1 billion, which sell-downs to more than EUR 1.3 billion, which shows our ability to raise cash almost EUR 953 million of the retained cash flow is a really strong number. In terms of cost of debt and tax equity, notwithstanding the fact that our debt is more and more in dollars in less and less in euros, we're able to have a slight reduction in terms of the cost of debt. And in terms of tax equity, we kept flat at 6.7%. So being this the minor guidelines. Now Rui will guide us to see the details. I will come back later on.

Thank you, João. So can jump to Page #7, where you can see the evolution of the installed capacity and what we have done in 2019. So 2019, we installed almost 900 megawatts in the year, 720 in the United States and 169 megawatts in Europe. Already under construction, 1-gigawatt for next years and even we already have under construction, some wind -- offshore wind farms that you already see here, the 330 megawatts, which represents our stakes in those wind farms. On the chart, you see the evolution of the total capacity of our portfolio, the consolidated capacity. That first to install, almost 900. We sold 1.15 gigawatts of capacity. This -- if you consider only the stake that we have in this portfolio, so the big 1 in Europe of 1,000 megawatts, so the stake that we have there is only 491 megawatts. So this has impact, yes, in consolidation terms, EBITDA terms, but the representation for the bottom line is different. It's only half of this. And also did some dismantling of repowering, already executed 1 replacement of this, which are to and from single issues. So interesting repowering process that are giving us much more profitability on those specific sites. So all in all, win with 1.4 gigawatts of capacity and already with 1-gigawatt of under construction for the next years. Page #8. In terms of wind resource and availability, load factor of the company reached 32% in the year, on the 12 months. This is a good recovery when we compare with last year. Last year, everybody knew that the wind conditions have been poor wind conditions, especially in the last 3 quarters, as you can see on the right on this chart. This year, the year started probably the same trend as last year but then we saw a strong recovery on the second quarter and the following quarters, and we end up with 32%. This is 97% of the average that we were expecting. Also, there are some availability losses, small that this number also was impacted by that. So you can see availability numbers of 96.8%. Nevertheless, it's high, it's almost 97%. But we expect this to continue to be and try to target these always above 97%. So specific small issues that did not have a meaningful impact on this performance. Page #9, in terms of electricity output, this jumped 6% when we compare with last year. Even taking consideration that in the middle of the year, we sold this 1-gigawatt portfolio to an investor. So really consolidated this -- the production and all the financial numbers of this portfolio from July onwards. So 6% more in over 3% more, including already the deconsolidation of the 1,000-megawatt portfolio. United States went up by 5%, and in Brazil by 42%. So it's -- I think it's a good evolution in terms of electricity production. In terms of growth, the drivers are more megawatts and a good recovery of the load factor when we compare with last year. Page #10, in terms of our average price, it stood at EUR 55 per megawatt hour, so 2% up vis-à-vis last year. There are 2 drivers behind -- main drivers behind this price recovery. We saw, and we already explained on this in previous quarters, saw recovery in Eastern Europe. It's in year 2018, reached the bottom and now prices have been recovering, speaking about Poland and Romania. Also the ForEx translation from dollars to euros favor this evolution, dollar is stronger and also pushed this, on the translation side, pushed this up. But if we look at individual prices, I think it's a good evolution. Taking consideration that we are installing new wind farms. And typically, the new wind farms, which are more productive, with a CapEx -- with a cheaper CapEx tend to have lower prices from the -- for the same profitability. So we are not seeing a dilution on the prices. It's a good indicator that what we are -- the new megawatts that we are installing, continue to be profitable megawatts for the fleets.

Thank you, [ Evan ]. In terms of revenues, total revenue's up 7%, ForEx plus 5%. In terms of drivers that explain this growth, they are the following: so we have a recovery of the load factor, more, EUR 50 million on revenues; we have new megawatts, so 888 megawatts, minus what we consolidate, the net effect is plus $10 million of revenues; we have a better selling prices, EUR 47 million of revenues more; we have the ForEx impact, which is EUR 39 million; and then we have the PTCs that expired for the wind farms that were installed 10 years ago. That had an impact, negative 1 of EUR 33 million. So it's a discontinuity effect that we see once these wind farms reach the 10-year life or 10-year age in terms of life. What to say here is that the new -- the wind farms that were installed in 2010, '11, '12, they benefited from the cash grant program that was in place by that time, and this discontinuity effect is not going to be seen, at least with this magnitude, over the next years. So starts some years from now, but with these magnitudes in 2020, '21, we are not going to see these type of numbers in terms of discontinuity. Page #12, moving to the OpEx side and the efficiency side. So in the reported numbers, costs went down but also, we know that, with the accounting, the new accounting standards, IFRS 16, this removed some costs out of the EBITDA part of the P&L from OpEx side to depreciation and to financial costs, and this were EUR 45 million. If we were to adjust to this change, costs would have gone up by 5%. Core OpEx would have gone up by 5% as well. But we like to measure this on unitary basis. We keep growing. The new megawatts bring new costs. And when you look on the unitary basis and on adjusted unitary basis, we see that there is a flat evolution when you compare last year. We know that we have a target to keep this going down by 1%, and this flat evolution is explained with also some upfront costs that we are having. The company is going to face strong growth over the coming years. We have many PPAs secured, many projects secured to be installed over the next years. And it's not really for us to have some upfront costs. First, we'd be able to execute on time and on budget everything that we already secured over the last 12 months. Page 13. EBITDA. So it is a record EBITDA for the company. It's almost EUR 1.65 billion of EBITDA, it's 27% above last year, even if we exclude the IFRS 16 is a good increase, above 20% of evolution. The drivers that you see here in the chart, you see revenues have gone up. It's a good evolution on the operating front of the company. Other income is where we include the capital gains from the sell-down strategy. This went up by EUR 208 million. So the capital guidance this year, we booked EUR 330 million of capital gains related to sell-down transactions. The first one, the portfolio of 1-gigawatt in Europe. The second one, the project that we sold in Brazil, the Babilonia wind farm, that was also included here, about EUR 87 million of capital gain. Last year, we booked EUR 109 million of capital guidance related to the portfolio that we sold in the United States. So the execution this year was quite solid in terms of the value that we're able to crystallize and capture, the NPV that we captured through the sale of these projects. Page 14. So the bridge between EBITDA and net profit. Net profit of EUR 475 million is plus 52% more than the net profit that we achieved last year that has been already a record year of net profit. So this year is even stronger, so EUR 475 million. When we make the bridge, we start with EBITDA, that had already a good -- a very strong evolution year-on-year. Depreciation and amortization, we have more depreciation than amortization due to the effects. We have more megawatts installed. And on average, and we know that we deconsolidated part of the 1,000-megawatts, but on average throughout the year, we have more megawatts installed. And we have the IFRS 16 that brings extra costs to this line. Financial results, it seems that there is a big jump on financial costs. Actually, last year, financial results included gains from the sell-down of stakes in the offshore business, gains of EUR 87 million. So this is explained, the big part of the swing, year-on-year swing. And on top of that, we also have the IFRS 16, brings more costs to this line as well, which is the unwinding of the liability that we have on the balance sheet. And also for ForEx translation, that's -- part of our debt is in dollars, and we bring more interest in dollars through years or are bringing more interest on the translation. Taxes. We have higher taxes because we have higher profits. Effective tax rate was at 12%. Bear in mind that most of the capital guidance in some places are exempt of taxes. In other places, they are helping us to reduce some net operating losses that we have on the balance sheet, and we are able to recover those losses faster than expected as well. So it has also a second good effect, which is that one. Minority's line went down, given that we sold that stake to the investor, that's where we have 49% of minorities. And it's natural for this to go down, next year, will go down again. So net profit EUR 475 million, EUR 160 million more than what we achieved last year. Cash flow, Page 15. And strong cash flow generation, almost EUR 1 billion of retained cash flow, 23% more than last year. And when we include capital gains here on this metric, this goes up to EUR 1,266 million of cash flow from our assets, which is a significant number of cash flow generation. And as you can see, when we flip to Page 16, this was more than enough to cover all the cash investment needs, partly enough to cover some small dividends that we pay and also some other cash outflows or translation effects from the ForEx. And net debt plus tax equity liability decreased by EUR 239 million when we compare with December 2018. So today, we have a total net debt of EUR 2.8 billion, total tax equity liability of EUR 1.3 billion. We believe that we have a strong balance sheet, and we can face comfortable -- or we can face the growth that we see for the next years, which is already meaningful with the project we already secured. I'll hand this section of the presentation -- and hand over to João Manso Neto for the business plan execution.

Okay. Thank you very much, Rui. So in terms of -- going to Page 18, you can see that it was really a strong year in terms of execution, and it is important to hear in this page to distinguish between what we don't control and what we control. So the noncontrollable stakes only represents an increase of 3% and the controlled stakes represent an increase of EBITDA from '18 to '19. So really a strong performance. But as I told in the beginning, more important of this is that we are totally in line with the business plan in terms of growing. So we have, in this moment, 11.4 gigas after -- so we are able to grow the flat evolution of the cost per megawatt are important because, as we've said, we deduced -- we have to prepare ourselves for growth, some upfront costs more people that we need to be prepared for the growth. And so there are costs that will have a very quick payback, but you have to assume that. So having it flat is very strong. And in terms of the sell-down, we have done 25% of what we expect to do until the year. But I would say that in terms of growth, we said what we did last year. I would say that in terms of growth, it was really a remarkable period. So we were able to guarantee, during '19, new 3.5 gigas of projects contracted, and so we have this 70, as you can see on the left side, and so we can see that in this moment, we have 76% contracts already secured for our objectives of 2022 and with additional 1.2 in terms of post-'22. And here, I would raise a bit few remarks. Firstly, the balance in terms of technology. So as you know, we were basically a wind industry in this moment, a wind operator in this moment, wind onshore. It's the main one. It's our core business, but only represents 75% solid with long-term PPAs '21 and offshore, which represents 4%. Which I would say that what we refer that a company like ours, if you want to be, and we want to be, a leader in renewables, we must be able to work in several technologies and be a market leader in all of them. And if you want -- and this is 1 point. Another one which I would like to call your attention is that our growth is not concentrated in 1 market. Of course, U.S. is the core market of 1.6 gigas of PPAs secured last year, which is a statement. But we did not just limit ourselves to grow in U.S. Brazil, we are, today, on the top 5 with new, not always, long-term PPAs. I would call your attention that we were #1 in Poland and Italy in the options. So again, which shows the quality of our pipeline that we were able to keep and to win profitable investments in those countries on an open market. So again, we don't need subsidy, what we want is to have long-term agreements, the contracted agreements. And on the other side, in terms of the geographies, we were able to increase our presence in Greece]. Today, we have about 1.20 gigas -- 1.20 megawatts already contracted long-term and to have more pipeline. And in Colombia, where we were able to guarantee pipeline of projects with PPAs of about 500. On top of this, as you know, we created, together with LG, a joint venture, which I would expect that will make us be one of the top leaders in the few years. And again, we are very confident of this. This year, in terms of offshore, there was strong milestone, which was the fact that we were able to win the 800-megawatts in Massachusetts and so our prospects are really very strong. As you know, everything was approved, the agreement was signed and we'll begin working on it. So summary. Again, very positive 2019 result either in terms of top line and in terms cost control and because the wind was normal, but also because we were able to have a proper management, which helps keep to use the price recovery flat -- control -- cost control, notwithstanding the growth situation. We are complying with the sell-down strategy, impressive growth of EBITDA on a comparable basis, 23% and a net profit of EUR 475 million. But more than that and over that very strong compliance with the business plan with 70 -- 7% capacity awards. So when 1 year ago, we -- less than 1 year ago, we presented the results, the objectives. We said that -- we knew that the objective were ambitious but realistic. And what we can say now is that we are totally confident that we'll be able to cope with this. So that's what we would like to convey to you. Now we'll be happy to answer any questions that you may have.

[Operator Instructions] The first question comes from the line of Alberto Gandolfi from Goldman Sachs.

I have 3. The first 1 is considering the competitive tension in wind onshore for now and solar. Could you tell us if you think the top-down market is growing faster than the number of new entrants? So I'm trying to gauge here where do you see returns in terms of IRR versus WACC? Have you seen stability? It looks like for the past 2 to 2.5 years kind of largely flattened out? Or do you see ongoing pressure? Maybe any color, quantitative color you can give around it and directional color would be highly appreciated. The second question is more on your offshore ambition. Given that there's a finite balance sheet headroom here. I was wondering, can you maybe elaborate a little bit more what is your ideal goal in terms of future project wins and what is the competitive pressure on returns we are seeing in this specific segment? And the last 1 is could you please talk about your hedging policies for basically output that is sold on the wholesale market? So even if we have a cap and a floor, for instance, in Spain, the recent reduction in power prices, when would we see that hurt in P&L and cash flow?

So let's see. Obviously, today, everybody likes to do renewables. It is obvious. However, we've been able to keep our policy of having, I would say 1.4x WACC in terms of project profitability, we keep with the same policy. How can we do it? I would say that we should be able to -- we are able to -- have been able to do it, and we expect to continue to do it, trying to do these things different from what many are doing, I see. We have to find places in which we can differentiate. In the case, let me give you a few examples. Case of Poland and Italy. Perhaps it's not target for many people, but there are places in which it's difficult to have permitted projects, very difficult. So as we knew that wind is more and more scarce within those countries, have been developing a pipeline which could be prepared to do this. So it was not because we did increase the price. In fact, in Italy, it is public information. We were -- we had the price over the leverage of the auctions. So we did not need to -- we have prepared ourselves in terms of creating pipelines, namely in places where the good, meaning the project, is scarce good. And this, the scarce good, this was clearly the case of Poland and Italy where the absence of very much -- many projects, authorized, is very important. In U.S., we are also -- we have a strong cluster in Indiana and Illinois, where it's difficult to obtain permits. So we have been -- in California, have been looking for places where the interconnection is a scarce good. Also, in the case of Colombia, we were able to have permitted projects in the country where it's very difficult to do it. So I would say that this ticket to keep the margins and in the context in which everybody likes renewables, the status of that and we only look, besides operational excellence, all this, and besides the scale -- besides all this, I would say that the most important asset is to be able to anticipate and to find projects in places where it's not plain vanilla to find a project. I would say that this is more the message that I would like to convey. Doing the things which are easy would not give you profitability. We have to continue to differentiate. And this has been our strategy, and we are keeping with our policy of having the 1.4x work as the benchmark. What concerns offshore? Our objective is to move, in 2025, to 5 to 7 gigas in operational constructions and the different development phase to 5 to 10. This is what we announced to the market, and this is where we are working. So we did not change our projects since -- our plans, since the moment in which we were -- we created a joint venture. And again, here, the secret is to be also differentiated is very important because of U.S. having leases is a scarce good. On the other hand, in our case, this partnership, I would say, that sooner than somebody -- many people expect, I do believe that the offshore, floating tends to be more and more important. Today, that is still expensive. But my view is that can be also factor differentiation. Again, we have also in offshore, you have to find places where the competition is not only on price, and that we believe that with this partnership with LG, we will be able to do it. Finally, in terms of hedges, I have expressed, always, the same opinion. The working on merchant -- on a merchant basis is not the proper way of doing it, so we should always look to long-term PPAs. As you know, our role is to go over 15 years as a PPA. Of course, so when you build a new project, of course, when the PPAs expire, we have to manage the position, and what we do clearly is to use and have, as you can see, for next year, 95% of all that is protected. So we had, on that 1 to 3 years tenure, our position, not be exposed to the market. And let's say, in this year was really -- this year, meaning '19, was the proof of this niche, if we have seen the forwards in the beginning of the year, the prices seem to go to the sky, and -- but you had hedged and fortunately, we did because the prices of the gas went strongly down. And so -- and this is not my business. I don't make the fact that -- the idea where we're going with the prices. What I should is to protect our position and say we'll keep our hedging position. Firstly, new build based on PPAs and frankly, this is very, very important. It is something that, for us, we have no doubt on that. Second, what's constant is the exposure, which is left because expires or because of some other reason, we should add on a long-term basis. If there is one thing that I would like to tell you is that as you can see, one of the reasons of the good results in terms of prices, where the evolution of the prices in Poland, and we, in fact, we have had already the position for next year. The price could seem to be very reasonable. And so we have sold most of the green certificates. So again, I'm not -- we are not market deals. We have to protect our positions. And the same in U.S. with the green certificates.

For Spain, yes.

I can give you the example in Spain. We hedged for 2020, 2.4-terawatt hour at about EUR 50 per megawatt hour. So it's -- besides this, we have the regulatory hedge, you know that this has kept enforced. So it's very well-protected taking consideration, current pool prices. We also already have a significant volume hedged for 2021 at about the same prices. So it's -- we did, in 2019, we did our homework. And yes, we made some hedges, 1 year, 2 years ahead and the protection is good.

Yes. It's good, always in PPAs.

The next question comes from the line of Sara Piccinini from Mediobanca.

The first 1 is on the PPA market, if you can please give us your view on the evolution of the PPAs in Europe and how far you think we are from replicating the experience of the U.S. So what are, in your view, the key factors and competitive advantages that will lead to sign up PPA contracts in Europe? That would be the first one. The second is on Spanish regulation, the platform supporting that probably the final Royal Decree may have some parameters that actually lowered the remuneration. So if you can please give an update? And what is your expectation about possible changes in the regulation? And finally, a clarification on what you said on Italy. So you said important is to differentiate? And also that you have been able to obtain permits more faster than the other. Did I understand it correctly? So you have been able to simplify the procedures for permits, and this is also a competitive advantage versus others?

So regarding the PPAs in Europe, I would say that still tends to increase. What main reason why is because the prices are low, because the wind and the store are very competitive, so we can't supply clients with green energy. So they can put on top of their adventures in terms of cost, they can -- the clients can show that they have green certificates. So it's a market which is evolving. The problem here is that very often, the clients want green, but they want a short-term one. So there is a growing interest in terms of PPAs. However, not always, the demand is for periods, which are compatible with our objective of protection. So we have to be, in our case, very -- not doing PPAs. But PPA, for me, PPA makes sense if and when it brings me the stability of returns, which we were able to do it. So we are active on this. We have done a few hundreds of PPAs, namely in Spain, with private clients, but always a long term. If I wanted to do short term, I could do whatever I want. But really, this is not a hedging, a real hedge should be on long term. So I expect that the PPAs will grow. However, I don't expect that it will grow, medium-term PPAs will not grow so quickly. As we have seen in U.S. and for, let's say, at least for 1 reason or 2, from 1 side, big companies in the U.S. much more than in Europe. On the other hand -- namely, on the other hand, there is -- there were the PDCs, which helps, of course, to promote the PPAs and to promote the big breadth differential. That's why I think that private PPAs are very important. We are on that market strongly, provided you have the price there. However, we can -- if Europe wants to develop PPAs, to develop renewables, it's not enough to have -- to come to rely on the private PPAs. So we continue to favor centralized tender offer with very clear rule how -- like we are seeing in several countries, as we spoke about Italy and Poland, where we're successful, but we can speak about France, which are a regular flow, and so I do favor that. My point here also is the following: PPAs, let's say, there are things which are easy, there are things which are more difficult. And the 1 thing that we are seeing more and more, and this is being widespread in basically all the European, and even in some American states, is wind is gaining or recovering, if you want, an advantage in terms of scarcity. So it's difficult, more and more, to have it. So a company which are able -- is able to anticipate the problems, create a pipeline of permitted products, has a lot of value. And when I gave you the example of Poland and Italy, it has executed that. Being the #1 in this country is because we had the product. In case of Italy was a specific -- not a specific, was a proof of debt. We won about more than 20% of the auction, with an average price over 6 years, with per megawatt-hour which was higher than the average of the auction, but my point here is that having projects in certain markets is really the most important thing. So others are the difficult things, but this is what we should specialize on, doing the not obvious thing.

Perfect. And on the regulation in Spain, if you can please give some more details than...

Sorry, sorry. I missed that question, sorry. So let me go to Spain. So the regulation in Spain was what was expected. And the only thing that I think you may refer to that is that wind adjusted factor that was considered is lower than what the previous period, but this was totally forecast because the -- observe the real, the actual -- I mean, the justice sector was lower than what was in the previous regulation. So in our models and our -- based in our business plan, we had already considered, not the historical ones, but the expectation. And so according to the expense regulation, from that point of view, it's fine. They adjust then the prices and the parameters with the right information. In this case, it's a decrease because they -- but on the other hand, they assume lower prices for the future, and that increases in the short-term the...

The incentive.

The incentive. So all in all, I would say that we are perfectly -- we were not surprised by the rule.

And just to clarify that, the return rate is the same on the proposal. On the proposal that they have submitted, the return rate is the same, sort of 7.4%.