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

Hello, and welcome to the YE '20 EDPR Results Presentation call. My name is Wrinkle, 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 to begin today's conference. Thank you.

Good afternoon, and welcome to all of you. It's a pleasure to be here for the first time as CEO EDP Renováveis, and I certainly hope and look forward to many more calls with you. I also hope that you're all well and safe. I have with me Rui Teixeira, the CFO of EDP Renováveis. So as we've announced recently to the market, we've made some changes in the corporate bodies at the EDPR and EDP level. So it's an honor to be here as CEO of both companies. And have Rui Teixeir here at my side as CFO of both companies as well. So we truly believe that this will bring an improved strategic alignment, and this will benefit the shareholders of both EDPR and EDP. In the first slide, it's precisely to talk about governance and talk about some of these changes. So these changes were defined with the purpose of moving to a leaner, more diverse, more independent corporate governance structure, which can foster efficiency and higher performance. So the EDPR Board will be reduced from 15 to 12 members. We will be bringing in an independent Chairman. Now at the AGM in April, the shareholders meeting in April, and we'll have only 2 executive members on that Board. But we'll also propose that the positions, so obviously, the position of the Chairman and CEO are held by different people, as I said, by bringing an independent Chairman. So I'll just be doing both roles on a temporary basis. In terms of the composition of the Board, we will be reinforcing it with a higher presence of independent directors who'll be bringing up from 40% to 50%. We will keep 100% of independent directors on the 2 Board committees, the Audit control and the related parties transaction committee and also the appointment of Remuneration and Corporate Governance Committee. Presence of Women on the Board will also be reinforced, increasing from 20% to 33%, as stated in last year's General Shareholders meeting proposal. And I also want to make a special mention of EDPR's commitment and my own to the best corporate governance practices. And a proof of such a commitment is that we'll also be proposing to attribute to specialization on corporate governance matters to Appointments, Remunerations and Corporate Governance committee. So incorporating this corporate governance issue within that committee. So let's talk about the management team. The Board of Directors will be supported in the day-to-day management of the company by a management team that will be formed by the 2 executive members, so the CEO and the CFO and also 3 COOs, which you already know well. As I said, the CEO and CFO are the same at EDP and EDPR to ensure this better strategic alignment. In terms of the management team's remuneration, namely the COOs, EDPR is aligned with the best practices and the remuneration policy is based on the strategic guidelines defined by the company, including ESG metrics. So that's a key principle that is implemented. So this experienced management team have more than 17 years of average experience in the sector. It's well-known in the market, it's highly motivated, and I can guarantee you that we have full confidence that we will continue to execute, and we have an ambitious plan for the future. Finally, on this slide, just to leave a note and a personal thank you to EDPR's management team for their work in 2020, in particular to João Manso Neto, recognizing his valuable contribution to the growth of the company with the many years and the achievements that EDP Renováveis has managed to show with a spirit and also to Rui Teixeira for his leadership in the recent months. So I think a personal thank you there for both of them. So let's move to Slide 8 and talk about the results. So I'd like to go through the highlights of the period and acknowledge and thank the teams of EDPR. And I think that's the first note I wanted to give. 2020 was a challenging year, but it definitely showed the best in our people and in the company. EDPR's main priority throughout this period has been to protect its employees' health, to ensure the business continuity and to support the local communities where we operate. So as a company, we've remained resilient, we've delivered on short and long-term objectives, and we've kept an active leadership in the sector of increasing global importance. Specifically in relation to our 2020 results and despite this troubled environment, I'm pleased to say that we delivered record results in 2020. The strategy of EDPR showed that it was in the right direction and that we operate a solid business model that was highly resilient, namely to the COVID-19 impact. So our strategy is clear and the 3 pillars to deliver superior value growth have also been proven, quality assets, selective and profitable growth and a self-funding business. On the assets operations side, in spite of the record results, the 2020 year has offered us load factor levels at our wind farms, which were affected both by a low wind resource and a decline in the availability levels, mainly due to external calls, namely curtailment and some specific wind farms, and Rui will talk about that in some later slides. As a result, the 2020 load factor reached 30%, which was below the 32% achieved in 2019. It's important to note that in spite of the lower wind speeds, we don't see a structural change in the wind profile. And 2020 was within the normal uncertainty levels that we have measured for the last 40 years of our wind farms. This is something that we continuously revise. And we have, as I say, a specific slide on that further in the deck. Revenues in the year achieved around EUR 1.7 billion, so minus 5% versus last year. But it was up 2%, if adjusted by the portfolios that were included in the asset rotation program in 2019 and then sold. The negative performance of the load factor had a total of around EUR 90 million and was offset partially by improved selling prices that benefited from a strong coverage and by new capacity installed over the last month. Needless to say that we have a comprehensive risk management strategy in place, providing strong revenue visibility. In 2020, just in Spain, where we were able to increase the hedging results by over EUR 100 million when compared with 2019, protecting the company from the sharp decline in pool prices. And for 2021, 94% of the revenues already fixed. On the OpEx side, we've been reinforcing our teams for us to be well prepared and equipped to face the expanded growth over the next few years. So as a result, the core OpEx per megawatt increased 1% when compared to 2019, but this is a necessary increase, which we expect to then have come down once the new capacity is installed and starts to deliver the economies of scale post ramp-up phase. And so we would expect to see a structural decline in the core OpEx per megawatt going forward. So let's talk about the growth pillar. In 2020, the company installed and added 1.6 gigawatts. So it wasn't an easy year for construction. The pandemic brought us many disruptions, mainly in the supply chain of equipment, and we've talked about that, I think, in previous calls. Around 500 megawatts of our planned capacity for the year was delayed into 2021, and it will be coming online over these month. The delay was more impactful in the U.S.. Many of the wind farms that have planned to commence operations in the first quarter of 2021 and some in the second quarter. So the delays have basically coming -- will be compensated now in the first half of 2021. So as we said in previous calls, the impact of the value of the assets as a consequence of the delays is not material given the approved extension of the production tax credits in the U.S. We basically have a delay of a couple of months, but it's not material in the context of the 30-year project. The important highlight of the year was the acquisition of Viesgo renewables. We were able to add around 500 megawatts of quality assets, and they're highly synergistic with our portfolio in Spain and Portugal. In the future, it's already visible that we're accelerating the growth of the company. We have 2.4 gigawatts of capacity under construction, and we'll talk about the future in more detail tomorrow, but just to give you that highlight. Coupled with the growth of the company, we've also been delivering on a proven asset rotation strategy. So in 2020, we successfully executed 3 transaction, crystallizing EUR 1.1 billion of value and benefiting from EUR 227 million of capital gains, EUR 227 million of capital gains, obviously. So together with this, in the offshore JV transaction, our projects that were sold to the new company have resulted in slightly over EUR 200 million of capital gains. This execution meant that overall, our EBITDA reached a record EUR 1.655 million in 2020, offsetting the poor load factors and the impact of the EBITDA the consolidation from the sales made last year. On the bottom line and also benefiting from lower financial costs on the back of a lower cost of debt, net profit increased 17% year-on-year to EUR 557 million. So let's move to Slide 9. So this slide, I think, is a great testimony to our strength and track record of executing on our strategic plan. So EDPR is a company that has constantly and consistently delivered on targets, especially on the growth side in the last couple of years. The capacity growth, our team did a remarkable job in 2020 in the first month of 2021, and we've been able to secure more capacity than the target that we had anticipated in our business plan 2019, 2022. So we had a target of around 7 gigawatts, and we've already secured 7.7 gigawatts as of today. More importantly, in 2022, we already have a 3 gigawatt base of growth as we were able to ramp up our development origination and construction efforts and that's a very strong indicator that we're ready to step up on growth ambitions. The strong performance was also evident on the financial figures, and EDPR was able to deliver EBITDA and net profit figures in 2020 already above 2022 and 2 years ahead of plan. So we're executing growth with good levels of profitability, and that demonstrates the quality of our assets. So this is the time to talk about the track record and the execution of our teams. Tomorrow, we'll be looking at the future and talking about the strategic update of the EDP group, and we'll be providing further insights on our ambitious growth plans going forward. I will come to that tomorrow. In the meantime, I'll hand over to Rui Teixeira to lead us through the details of the 2020 performance.

Thank you, Miguel. I will now deep dive into the 2020 performance drivers. So as Miguel stated, during 2020, despite the COVID-19 challenges and some supply chain disruptions, primarily in the second quarter, EDPR brought online 1.6 gigawatt capacity. This is a great effort from the team in U.S. with 0.8 gigas installed and from the European and Brazilian platform, with also a 0.8 gigas of installed capacity. Also a quick note for our operational floating offshore wind farm in the north of Portugal. I think one of the few -- very few floating projects at scale. We also concluded the sale of 0.8 gigas under our asset rotation strategy, that's ending the year with 12.2 gigas of capacity into our portfolio. So if you move to the next slide, in 2020, EDPR reached a 30% load factor, while still a strong load factor, it was 1 percentage point lower than 2019 and 80 percentage points versus our expected long-term average that we can share for the entire portfolio. I think in what concerns operational performance, it's important to highlight a very stable availability of our fleet at high 96.6%, pretty flat versus 2019's 96.8%. This figure reflects our operational excellence, the EDPR's proprietary soft performance O&M strategy and with a high standard of safety records of 1.9 frequency that's below our internal targets. And as you know, 2020 was also impacted by COVID-related events that ultimately, we were able to overcome. But I also want to convey that we strongly believe on our long-term wind forecasts. So while acknowledging that there is volatility in wind resource on an annual basis, this chart demonstrates that there is -- that we do keep our P50 scenario and basically wind resource conversions around this P50 scenario. So we took our 2020 fleet. We ran this fleet with the last 40 years of real wind conditions in different countries. And basically, as you can see, I mean, the slope is 0. So there is a convergence around the P50. So again, while we understand that on an annual basis, we will deviate from the central scenario. We are strongly convicted that our long-term estimates are correct, and therefore, we stand behind it. I would like to go now into our production. Our production dropped by 5% versus 2019. This is mostly due to the deconsolidation of the assets sold. If you were to exclude this effect, production would increase by 1% and with new capacity offsetting the reduced load factor experienced in the year. By 2020 year end, we generated 28.5 terawatt hours of clean electricity, affording 11 million tonnes -- I'm sorry, 18 million tonnes of CO2 emissions, 60% of which in U.S. and approximately 1% in Europe. So if you move to the next page, in what concerns price, our average selling price during 2020 was EUR 53 per megawatt hour, that's a 3% decrease year-on-year on the back of the asset sell down. I mean this -- if we are excluding the assets sell down, it would be only -- I mean, this would be a 1%. During the year, we benefited from a conservative hedging policy. That in the case of Spain allowed to a positive impact of EUR 110 million year-on-year. In Europe, average selling price increased by 4%, supported by the Spanish regulation and hedges. In North America, reduced 3%, mostly from new capacity additions at lower average selling prices. So if we move now to revenues. Combined, we reached EUR 1.7 billion revenues, that's EUR 93 million below 2019. For each contributed to EUR 118 million reduction due to the sell down, FX and load factor. And a positive impact from new additions of EUR 82 million plus price increase of EUR 53 million. If we move to the efficiency driver, the core OpEx per megawatt, relatively flat versus 2019, only 1% increase on a like-for-like basis. And this is the result of our commitment to drive efficiency through the organization, the implementation of a successful proprietary self performance O&M strategy. And on the other hand, preparing the company for the ramp-up in capacity that Miguel already shared in the beginning. So all in all, some very sound operational performance, which led us to an EBITDA of EUR 1.7 billion by the end of 2020 and natural for these results contribute a positive delta year-on-year of EUR 120 million capital gains that more than offset the minus EUR 102 million from the assets sold in the previous period. I would also like to highlight the balanced distribution of our EBITDA, approximately 50-50 between U.S. and Europe with a smaller contribution from Brazil. So reflecting a very balanced portfolio. So at the net profit level, we reached EUR 556 million, that's a 17% increase year-on-year. This is supported by a successful execution of our growth and sell-down strategy. But also a reduction of financing costs from lower debt year-on-year and actively managing our debt portfolio to reduce average cost. Some positive impact at tax level, also bringing our effective tax rate down to 11% in 2020. So a very strong strategic performance with a very strong reflection in our net profit. So moving on to net debt, strong cash flow generation in excess of EUR 1 billion, supported approximately 60% of the capital invested, including the acquisition of Viesgo's assets. By the year-end, we have a net debt increase of EUR 486 million, so to a stock of EUR 3.4 billion by December 31 and on -- to which we have EUR 1.1 billion in tax equity, which, as you know, it's creating value through the monetization of the PTCs and ITCs in the U.S. market. So with this, I think that we have shown that we have a very strong performance on a strategic level reflected in very good results, in a very important net profit. I would now open for Q&A that you may have, and thank you all for your time. Thank you.

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

Best of luck with the future and congratulations on the new role. I am very well aware that tomorrow you're going to give us a download of what you think is going to be the future for EDP, EDPR. Just a couple of quick ones. Have you changed your stance at all on the potential integration of EDPR into EDP? Or do you have a stance on that? And I know you may talk about it tomorrow, but it's hard to read why now management of the companies -- of both companies, the parent and the subsidiary, is the same, and particularly given the very strong pullback from the peaks. Is there anything you can tell us about that? And I appreciate that your hands are going to be quite tied. So you're not going to say much. But just to see where you stand, any thoughts would be highly appreciated. And the second question is, I mean, caught my eye, the fact that you talk about 2.4 gigawatts under construction, and you talk about explicitly in the slides acceleration. It looks like a very interesting teaser ahead of tomorrow. So I guess we will see tomorrow about how much you can accelerate. But my question is, how quickly can you convert the 2.4 gigawatt into actual capacity? So I'm trying to see how much is wind and how much is solar? Should we think 12? Should we think 18 months, should we think longer?

Okay. So thank you, Alberto. In relation to the first question, you yourself point out. So I won't be -- say much on this. I'll leave that for tomorrow. I think that's obviously one of the things we will discuss. But in any case, I mean, certainly, in the past, what we have said is we are quite comfortable with the current situation. And it's actually been a net positive to have EDPR listed. And so I will get that into more detail tomorrow, I promise. So I won't preempt that today, though. In relation to the 2.4 gigawatts under construction, well, that's expected to come online essentially over the next 12 months. So that's something which is well advanced. Some of those megawatts are actually coming from the last quarter of 2020 and coming into '21. And obviously, we also have the other projects that we are already estimating or already building out for 2021. I think it is worth noting, and that's probably something that you also have noticed that we are ramping up in terms of growth. And so we're talking about already reaching around 3 gigawatts of secured capacity to be built out in 2022. And so 2.4 expected this year, and we'll probably have another 3 gigawatt capacity already secured and which we expect to be installed in 2022. So hopefully that will give you some highlights or some feedback on that question.

We have a next question coming from the line of Meike Becker from Bernstein.

And I stay away from the strategic questions. One, on the Spanish auction results, if you could just sort of like comment on the pricing levels and the bidding behavior you have seen also on your own project, that would be great. And the second question is on the contracting level of your portfolio. If you can -- if you could break it down for us, how much is tariffs via auctions, PPAs? And perhaps even do you have inflation links in your PPAs? Whatever you can disclose would be appreciated.

So perhaps I'll take the first one, and then I'll pass it to Rui for the second one. I think in relation to the Spanish auction results, I mean, we were quite pleased with the results. And I think we've always advocated these type of auctions. We believe it gives long-term predictability to -- when we're building out projects. And so we understand that some people might like merchant. But personally, as a company, we've always been very strong on looking for either regulated or long-term contracted. And so we think that the Spanish model fits that. And so we're comfortable with that. In terms of the actual bidding results, so we were at around 140 megawatts. Again, middle of the pack. I think the numbers were reasonable in terms of pricing. I think it was a competitive auction, but certainly not at the same level that you saw, for example, in Portugal, where you saw numbers for a 15 year contract, which came down to the teens. I mean, here, the vast majority of the projects were in the mid-20s or even towards the upper end of the 20s. And so I think that's also something, which we felt quite comfortable with because it gives us a good return in line with our targets. So I think that's -- hopefully we'll continue to see that going forward. I think it was a rational auction. And so that's something we're comfortable with. Rui, if you want to take the second one?

Yes. Thank you very much, Miguel. So on an overall basis, we have 94% of our capacity under fixed contracts, so only 6%, which the merchant exposure, which we naturally hedge on an annual basis or short-term basis. So that we do not -- we do minimize the volatility on the -- on our profits. Now just going country by country. And of course, we can follow-up with some further details. In the U.S. is mostly PPAs, unit contingent, actually most of them above bar level. Of course, then we may have some different type of structures, but it's effectively most of it is PPA unit contingent. Then if you look into Europe, Portugal and France, those are feeding tariffs set by regulation and by law. Italy and Poland, currently having the CFTs, so contractual differences or tariffs out of the auction, the national wide auctions. As Miguel said, now also fixed remuneration in Spain from the new auction and previous to that, the capacity that we have installed and there are also regulatory scheme. So as I said in the beginning, all in all, around 94% of the capacity is under fixed contractual schemes.

Can you comment on inflation links, perhaps for some of the portfolio?

Yes, I'm sorry, I forgot to mention that. I'm sorry for that. So we do have some inflation adjustment in Europe, tends to be more of the case typically in some of the feeding tariffs. In the U.S., it's not typically inflation linked. Actually, there, in some cases, it's not allowed to have CPI. But basically, under the PTC component in the U.S., we do have an escalator adjustment. So the PTCs, as you know, they do have a escalator adjustment.

We have a next question coming from the line of Sara Piccinini from Mediobanca.

Congratulation for your new positions. I have 3. The first 1 is on Texas. Is there any impact on your facilities that are related to the cold wave? And how the contracts that you have there works, if there is any obligation that could negatively impact your results in 2021? The second is on Mexico. Recently, the government actually just the chamber of debt so far, but they are approving this tax law for renewables. So how this would you impact your projects that you have there and your future prospects for the country? And finally, we have seen a strong increase in the financial investments on your CapEx. So shall we consider these financial investments to remain at this level going forward? Or there is any specific reason behind this increase? If you can provide some clarity on this strong increase in financial investments.

Okay. Thank you, Sara. So in relation to taxes, and it's a great question, so I'm not going to go through in detail exactly what happened. Texas, I think you're all familiar with the extreme weather conditions caused by the deep pool of vortex, which appeared there. And also the impact it had on the electricity system that it had there, where it reached a real-time electricity cost of around $9,000 per megawatt hour. So fortunately, in relation to our own fleet, what I can say is that approximately 1 gigawatt of onshore capacity that we have in Texas, less than 10% will have been affected by these events, okay? The expected impact was offset, I think, by the rapid response from our teams. I think they kept the capacity producing as much as possible under safe conditions. And I would also say, and I would stress this point that the risk management strategy and the rapid response enabled us to have an expectation of the impact of the low tens of millions in the first quarter. So we're still trying to get the final number, which we'll have over the next couple of days or few weeks, but it's in the low 10s. So this was an unprecedented event. As you know, it was low temperatures. The last time they were recorded, I believe, was 122 years ago. So clearly, an outlier in terms of an event -- of an extreme weather event. But I think it does highlight the resilience of our portfolio in these types of situations. So despite it being something which is a complete outlier, the impact on us was relatively limited. And I think it also shows the fact that we have a low-risk portfolio. I think it really underlines that and what Rui was mentioning a little while ago, most of our contracts are PPAs, unit contingent and so the impact was limited. In relation to your second question, Mexico and future prospects, I mean we have some capacity in Mexico, and we continue to see potential for some additional capacity. Obviously, all is keeping within limited exposure, risk exposure to Mexico. In any case, we have seen several, let's say, news flow around potential changes in regulation. As of today, what we've also seen is that typically, those have then not moved forward. And so we continue to see moderate growth capacity in Mexico. And so that's something that we are keeping open in terms of options for additional capacity there. So I think I'd leave it at that. And obviously, we can talk a little bit more about it tomorrow when we talk about future growth in the different markets. But I probably turn over to Rui for the third question. Rui?