EDP Renováveis S A : EDPR Transcript 9M23 Presentation

Transcript - 9M23 Results Conference Call

EDPR

Tuesday, 31st October 2023 14:00 Hours UK time

Chaired by Miguel Stilwell d' Andrade

Company Participants

• Miguel Stilwell d'Andrade, Chief Executive Officer
• Rui Teixeira, Chief Financial Officer
• Miguel Viana, Head of Investor Relations & ESG

Other Participants

• Pedro Alves, Analyst
• Alberto Gandolfi, Analyst
• Javier Garrido, Analyst
• Manuel Palomo, Analyst
• Jenny Ping, Analyst

Miguel Viana: Good afternoon, everyone. Thank you for attending EDPR nine months 2023 Results conference call. Here we have with us our CEO, Miguel Stilwell Andrade; and our CFO, Rui Teixeira, will run you through the key highlights of our nine months 2023 execution and financial results. We'll then move to Q&A in which we'll be taking your questions, both by phone and the written questions that you can insert from now onwards in our conference webpage. This call should last no more than one hour.

I'll give now the floor to our CEO, Miguel Stilwell d'Andrade.

Miguel Stilwell d'Andrade: Thank you, Miguel. Good afternoon, everyone. So it's been a very eventful few months since we last spoke in July. And I think it's clear to everyone that the renewable sector has been impacted by some negative news flow, which is also ended up impacting EDP Renewables share performance.

So I really hope that this presentation today will provide some useful and important data points in information both in terms of the sector, how we're seeing it. And also in terms of EDPR, both operationally and financially.

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I think just to start off by the bottom line. Literally, I mean, we believe that the 12% increase on recurring net profit of EDPR in the first nine months of the year is an important data point.

There are things that are going quite well, very well. I mean if you look at the successful execution of two important asset rotation transactions both the Polish one and the Spanish one that was obviously, a very strong contribution to that result for the nine months.

Well, we had other positive developments in the period. And I think that's important to consider when we talk about the execution of our strategic plan until 2026.

The first one is perhaps just to mention that there have been important developments regarding government support to our sector, both in Europe and in the US and I'll comment on that in the next couple of slides.

But the second point is, that we've now around 9.3 GWs of renewable capacity secured for the business plan period that represents more than 55% of our target capacity for the period.

As an approved the average IRR minus WACC spread of more than 200 basis points for the projects approved in 2023 the average approved IRR minus WACC spread was around 120 basis points.

Now this is risk adjusted WACC incorporating the increases in the cost of capital over the last few months.

The important points and we've talked about this in previous calls, but is it both the PPAs and the centralized auctions if it can continue to show higher energy prices also that also later on in the slides. So this continues to be strongly supportive one target returns in the context of these higher interest rates. Capex has also evolved positively with significant reductions, particularly in solar and BOS. Regarding our asset rotation strategy, we've shown great execution with Yatra rotation gains above expectations. And we have around EUR0.4 billion of sales on a around 400 MWs. Regarding headwinds, so well, those were the positives I've just spoke about. Regarding the headwinds that we faced this year and that we've discussed also in previous calls.I mean we had essentially 2 issues very specific issues that we've talked about, one was the supply of solar panels in the USA. That's now operationally solved. The construction rate is ramping up in the US now with the supply chain cleared with the you agree Forest Labor Protection Act compliant modules going through customs. So it has impacted 2023. However, we have now clear line of sight to the project is being built in 2024 and we have the teams ramping that up to get that done. The other issue we had this year is Colombia. I mean, the situation remains challenging. We have still ongoing, we permitting efforts for the transmission line, the interconnection line, which is a key bottleneck for the project. Unfortunately, there is also continues to be a negative impact of significantly below average wind resources, particularly in the US as we indicated in previous calls, and this is very much correlated with the El Nino effect. We've already given visibility to that over the last couple of months and quarters. I mean this is implied only a 3% increase in renewable generation versus an 8% increase in the average installed capacity. The decline of the electricity market prices in Europe also had a 7% decline on the average selling price in line with what we previously highlighted in the first half results conference call in July.

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Overall bottom line as I mentioned the close to 400 million asset rotation gains achieved on the, the 2 transactions in Poland and Spain have more than compensated for the challenging operational context in the period until the net income is up 12% year-on-year. Now let's move forward to slide 5 and talk about government support and taking a step back and looking at the big picture. First, governments throughout the world continue implementing new initiatives that strengthen the structural push for the renewables build out and for accelerating this build out. The most recent update just as of last week as you'll have seen was the European wind power action plan or the wind package at 15 concrete actions to be implemented immediately to support the industry. And I'll just mention a couple of them, which I think are more relevant. There measures to improve and to simplify the design of the auctions including indexation to inflation which is extremely important, pre- qualification criteria and no negative bidding. So this is critical, namely, we also had issues like the decrease of caps, the cap levels of prices in places like France and Germany also that later on. We had just a widespread introduction of inflation updated prices and generally promoting the right incentives to long-term players in the sector. So I think this is definitely a positive.

In terms of permitting again something that the sector talks about a lot, there's been a reinforcement of the digitalization at the national level. We have the European guidelines really sort of reinforcing that for the different member states. We have seen work being done by the different member states to to accelerate this. There's also going to be a publication now November for an action plan on, action plan on grids addressing some of the bottlenecks. Particularly around grid reinforcement and expansion, again critical aspect for the scale up of renewables.

And finally, just regarding the wind manufacturers. There is an increasing the efforts to establish fair market standards and generally promote competitiveness in compliance. So again, obviously very important to ensure strong wind manufacturing sector supporting the industry growth. So the whole value change needs to be sustainable going forward.

On the right hand side, we have a couple of comments on the US. So, as you know when the IRA was published inflation reduction Act. There was some uncertainty on how some of the measures going to be implemented. The ITCs bonus guidance has now been published and that clarifies the key issues outstanding. It gives the sector clear rules of the game in terms of what our bonuses for the energy for areas with or projects built in energy communities and low-income communities.

Now the clarification came on the anti-circumvention tariffs again providing solar panel suppliers to the US with clear visibility of tax requirements. On the tax equity funding we see the market adapting to this as well. Now you can also you don't just need to have tax equity partners. You can also have transfer tax credit transfer ability between companies. So that's something we're also looking at for some of our projects. It's slightly different from the more traditional tax equity, but it could certainly be an interesting instrument as well for for financing the project.

And finally, maybe just regarding wind offshore just highlighting the importance of the recent pledges, the statements also the state governors from the fixed North East states and also from California, where we have one of our offshore projects. So clear support for the

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wind offshore industry growth. One good interesting data point, the recent auction results in New York are very encouraging, incorporating much higher prices around $150 per MW hour based on updated market conditions. And so we walked away from a PPA we had sort of in the mid '70s. So clearly the possibility to re-contracted at much higher prices going forward. So I think the wind offshore development in the US can still be effective technology to efficiently decarbonize the US power sector. I mean the ecosystem still needs to be further developed, it's not as mature as the European offshore industry. But I think what these level of prices more projects will start getting built, and so that ecosystem will develop naturally.

If we move forward to Slide 6, changing topic, but one which I know is top of mind for many investors obviously top of mind for ourselves. So here we wanted to highlight that we are keeping our clear investment framework. It's a selective and disciplined approach. I said at the beginning, we have 9.3 GWs secured representing around 55% of the total 26 target which 3 GWs secured correspond to the 2023, year-to-date. And in 2023, we've already approved around EUR3 billion of capital, quite well diversified of our main geographies and technologies with wind in LATAM having the highest project IRRs and European wind representing the highest share. And you can see that clearly on the graph on the, on both the left and the right-hand side of the slide.

Apart from the cost of capital, So I think this is an important point. Apart from the cost of capital, which obviously depends on interest rates to a certain extent. Key variables for the profitability or the PPA price and so the cash yields for the first years of the project and also the energy prices post PPA.Now this is a question we get asked a lot. So I'd be very clear. We model conservative assumptions. Some cases with discount rates or discount factor is higher than 50% in the solar prices versus the base load prices, particularly in markets with high solar PV penetration. So this is something we've talked about this. The solar adjustment factor that should be incorporated and when we're doing the analysis of projects and we've been doing that for a while. We were very early on beginning to talk about this effect and that's what we consider in our models.

2023 projects have shown increase in absolute returns while preserving risk levels with 16 years of average contracted period, leading to a contracted NPV of >60%. This is important because it means that a significant part of the NPV is locked in. On average, Nominal Equity Payback Period was 11 years and spreads of IRR over WACC of ~220 bps.

So I wanted to highlight also that all these returns exclude additional upsides from asset rotation transactions. So most of the transactions we do the asset rotations. we do we actually end up rotating the assets more quickly and the IRRs are substantially higher and will talk about that later on.

But so value creation is supported by the higher contracted energy prices more than offsetting the higher interest rate environment and higher inflation.

And if we move to slide 7. I'll just insist, a little bit more on energy prices that said, we continue to see strong energy prices they're supporting long-term revenues resulting from government organized auctions, increasingly inflation updated and through corporate PPAs where demand supply balance and higher inflation are supporting the increase of PPA prices.

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We've talked about that. So $60 per MW hour, $70 per MW hour 40 to 60 years per MW hour that type of range is much more common now whereas two years ago we were sort of in the -- in some cases EUR20 per MW hour to EUR30 per MW hour. So very significant increase in PPA prices between 2020 and 2023. in our portfolio. 70% increase on average in Europe and around the 50% increase in the US.

In terms of auctions, a couple of -- additional couple of data points, but in current prices were awarded in France, a EUR20 CFD at EUR85 per MW hour. We are -- we were awarded 43% of the total Italian auction, with a 20 year CFD at EUR65 per MW hour. And we were awarded a EUR15 CFD in the UK GBP71 per MW hour.

So I just wanted to highlight these are public numbers. And so we can point to them quite easily. But that gives you a sense for different European markets, some of the prices that we are seeing for this project.

In terms of merchant prices, over the last 3 months, forward electricity prices for 2024-2026

deliveries have also rebounded significantly, with a positive impact on our close to 14%

current exposure in 2024 and our close to 20% for 2025 and 2026.

We move forward to slide 8. And let's talk about Capex. We have equipment prices going down this trend is more striking in solar then in winds. Turbine prices are relatively stable but in solar. We clearly see the polysilicon prices coming back down to pre-pandemic levels.

They had a very strong rise back to a normalized level and we've seen module prices, which had been in the region €15 cts/W. This is already material in our recent contracts.

In the US solar module prices are still higher than the rest of the world due to the difficultly in the imports, the tariffs and just generally moving the manufacturing base back to the USA. As you'll recall we contracted around 1.8 GWp peak with First Solar for 2025 onwards. And so that will support us in our let's say solar panel supply in the US going forward.

In terms of construction also downward trend in European cost both for wind and solar after pickup, particularly with the balance of plant in early 2023. All in all, we're taking advantage of this market momentum and we managed to have competitive procurement for projects to be delivered in 2025. Already more than one GW and continuing to prioritize the highest -- standards in our contract. I think this is extremely important.

Traceability is a keyword, not just in the US that for all of our procurement. So 2024, we already have a diversified supply chain with a high focus on this traceability to reduce delivery delay risks.

Let's move to Slide 9 and talk about the asset-rotation transactions in more detail. So we spoke briefly about the two transition two transactions in Spain and Poland. Very attractive multiples. We are positively impacted by buyers incorporating both higher electricity prices and the value from additional hybridization and possible repowering, despite the higher cost of capital. Now I want to point out something which is important. These assets are quite recent in our portfolio.

We had COGs in 2023 for Brazil, fourth quarter 21 for Poland and offshore UK and we actually bought the assets in Spain, in the fourth quarter of 2020 so. Lot of relatively recent

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COD but the FIDs were mostly in 2019 when the cost of capital was very low. So when we get these multiples this is not a cost of capital arbitrage from investing at a time we're not, when there is a higher cost of capital and then selling when the cost of capital is lower. It's exactly the reverse. These were investment decisions that were taken when the cost of capital was lower we're selling them when the cost of capital is much higher and we're getting these multiples. Okay. So just to clarify that sometimes get the comment if there is a spread arbitrage what's happening here.

As we see in the graph, the asset rotation gains over invested capital achieved. It's a good proxy reference for cash on cash value creation. It's much higher for the 2023 deals and for the '21 and '22 deals. Matter of fact, after the asset rotation transactions that Chief project IRR is actually higher than 30%

Because you're basically concentrating all of the cash flows of the NPV in a much shorter timeframe until you get a much higher IRR from that asset rotation transaction and then you can redeploy that capital back into the business into new projects with higher returns.

Now, as we've stated in previous calls what we see is an increasing interest from strategic investors with a focus on renewable assets linked to ESG targets versus the usual financial institutions. We expect to end the year with more than EUR400 million of capital gains and proceeds of more than $1.5 billion to achieve the 25% of the target proceeds for the full business plan period again year-after-year transaction after transaction we show that we can deliver the proceeds and the value creation.

So, capacity execution is on track. We've got an expected addition of around 6.5 GWs between 2023 and 2024 evolving as I mentioned was the profitability spread of around 230 basis points. We expect to install the bulk of this year's new capacity around

1.7 GWs by the end of the year. That's typically what happens back loaded. It's a big effort when compared to previous years. In terms of organic growth, we're talking about more than 50 projects being built globally in various different markets.

As I've mentioned, one of the issues we had this year was important launches solar panels into the US this is solved as I mentioned, this is going to be installed in 2024 and it doesn't affect our long-term relationship with one of the biggest solar manufacturers worldwide.

So we already anticipated 2023 would be impacted, but the cost of these delays in the US but we also wanted to share some of the positives, the team has done in terms of renegotiating the PPAs. As a result of digital. So we've negotiated renegotiated 1.1 GW of PPAs in the wet than average increase in price of 12% so around $5 per MW hour and also pushed back on average about 7 months of postponed for the first energy delivery day to minimize penalties.

So what happened was in 2023 but substantially less than we would otherwise have had as a result of these delays. For 2024 we expect installations to be around 4 GWs, it could be more. But the Columbia project has proven challenging with the re-permitting process on the transmission line that's been enlarged now the permitting process to involve 130 communities in the consultation process. So we're assuming the 500MW will be delayed to post 2019.

Before, so that's already excluded from these 2024 numbers.

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All in all, doing a really strong effort in terms of organic growth in the whole company is totally dedicated to really all the engineering and construction of more than 5 GWs of assets. More than 50 projects to be installed this year and more than 70 next year. So, I think the whole team is fully engaged on making sure that this happens.

We move on to slide 11 and just talking briefly about offshore so the investments from 23% to 26% our mostly projects under construction in Europe with strong economics for all of them.

The investments from 2023 to 2026 are focused on projects under construction in Europe with strong economics for all of them. They have inflation linked revenues, fixed capex and CoD for 2025 and 2026. Important to mention that EDPR owns minority stakes and so is very well diversified and with strong risk assessments. So we've locked in the top line inflation inflation-linked, and we've locked in the costs, both Capex and financing at very attractive terms.

In terms of Under development, we have 9 projects totaling 10.5 GW with rights secured, and a total of 7.6 GW with low current devex of €0.2m /MW.

As an example, looking into OW 2 most advanced projects under development, B&C Wind in Poland has an inflation-linked tariff and not contracted capex yet. SouthCoast in the US, is a project with advanced permitting & interconnection and without revenues secured following the cancellation of the PPA with Massachusetts and without contracted Capex.

All in all, I think what's really important is that our investment decisions are based on this strict investment criteria with very short periods between fixing contracted revenues Capex and project financing terms. As I mentioned, the European projects are good examples of that.

Just finally talking about something, which is really top of mind for us for myself, fully for the whole team. Cash is king preservation of value is critical to increase the profitability and keep solid ratios and we just are very conscious that this inflationary environment is driving growth in terms of costs, but we are very focused on initiatives for driving efficiencies. So various different initiatives that we've been promoting over the last couple of months both on the Capex and O&M excellence programs.

We're adapting the cost structure to the company's growth pace. One note here is, in terms of our O&M structure, we have very strong structure 50% of our fleet is internal which means we have a strong negotiating power between outsourcing and in-sourcing O&M services and we can make sure we are arbitraging arbitraging that to get maximum value.

We have ongoing efficiency measures, which are expected to have a positive impact in 2024 accounts for more than EUR30 million of savings and we continue to work on additional initiatives. So being a leaner organization is absolutely critical issue for us to become a more efficient company and to continue to promote synergies taking advantage also of EDP renewables being part of the global EDP Group.

So we're extending also the global business services model which currently services EDP Group in both Europe and South America and we're expanding that service also to include or to serve EDPR in both North America and APAC. So we believe this will bring additional synergies and cost efficiency.

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In terms of digital transformation, the digital roadmap implementation is expected to bring 10 to 20% of efficiency through process optimization and automation.

So finally, just before I turn it over to Pete. Just talking more globally about the market environment for renewables capacity growth bottlenecks is it really strong public private support for the energy transition transition execution in the next decade.

I mean of course there short-term challenges but the underlying trend continues to be there. We're continuing to see that strengthen. Just looking at the recent International Energy Agency messages around big fossil fuels this decade looking at the growth in solar that all the different countries are predicted predicting the growth in onshore wind and offshore wind.

So really it's a question of being selective in growth and focusing on value creation and taking advantage of this really secular macro trends. In terms of interest rates. They are expected to be higher for longer. We fully incorporated that but on the other hand, we also think that we're close to peak judging from the recent European Central Bank and Fed comments.

In terms of returns absolute returns for new projects are close to historical peaks that we've seen over the last decades. And as you know investing now for for 15 years in renewables. I mean this is absolute IRRs are obviously driven by the, the cost of capital, higher demand for renewable energy and the scarcity of ready to build projects.

Energy prices, as I mentioned throughout --, in the presentation. We see this upward trend in PPA and auction prices as well as merchant prices both in Europe and in the US and as I mentioned post PPA prices our models include conservative assumptions discount factors, higher than 50% and solar prices versus baseload prices, particularly in markets with higher solar PV penetration, I know that's a concern, I just want to be very, very clear. We'd be modeling that since the very beginning.

In supply chain Capex visibility on supply increases expected to have a positive impact on the renewables Capex prices and so on one hand, we have this indexation of project revenues to inflation and increased auction caps.

We have decreasing in prices, for example for solar and relatively stable turbine prices. So I think that eliminates plenty of risks that, that we've seen over the last 12, 18 months.

And I'll just pause there and I'll turn it over to Rui to walk you through the first half results and then we'll come back for closing remarks. And then Q&A. Thank you.

Rui Teixeira: Thank you, Miguel and good afternoon to you. Now let's move into the nine months 2023 results. So, in slide 15, as we already anticipated in the in the last call, 2023 performance is impacted by some short- term headwinds -- the most significant ones are those related with the low wind generation reflecting an expected impact of around EUR0.2 billion in 2023 versus what we were estimating few months before of around EUR0.1 billion.

I mean we already explained this weather cycles affect quarterly results but we include these into our long-term projections. So we don't expect any impact on the asset valuation coming from this, this cycles.

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Also as we announced at the beginning of the year. Romania and Poland OpEx these are still having an impact in our accounts. For the nine months this year it represents about EUR71 million at EBITDA level still much lower than what was expected on the back of lower power prices in these two markets.

The impact is related mostly to the tax in Poland, which is due to in December this year and we have ongoing litigation against this poor implementation of the clawback mechanisms.

We have also incurred in costs with delays in US and Colombian totaling around EUR55 million in the nine months of the year and we have been working to limit the short-term impact mainly through successful PPA term renegotiation. So you asked is mostly secured, hybrid challenges still continue in Colombia as Miguel just explained. Also, as many of you that you already know, the Spanish government updated the reference price for the acquired assets. And with the being adjusted accordingly this is leading to an accounting impact of around 67 million in the nine months. Again this is a non-cash impact and also no impact the valuation nor the project returns. So we do expect these items to be fundamentally 2023 impact, although some could be here still in the beginning of 2024. I mean, for example, alinear, it doesn't care really about updates on December 31, but we fundamentally believe that these are 2023 impacts.

If we move now to Slide 16, we, we increase our generation by 3% year-on-year. This was driven by higher capacity in operation that to some extent mitigated the low wind volumes. Regarding the wind volumes Q3 reflecting below average wind resources, mainly driven by the US where gross capacity factors stood at 91% versus the P50 on the back of the El Nino pushing down the whole metrics for EDPR during the quarter. As you can see on the bottom hand right of the slide, a substantial blue area in USA with below average wind resource.

Now on EBITDA on Slide 17. Recurring EBITDA was EUR1.4 billion, that's minus 3% year-on- year, mainly driven by an increase of 6% year on year of installed capacity. That was really penalized by the low renewable resource. The lower averaging selling price minus 7% year- on-year with EU coming down from the abnormal peak prices that we saw in 2022.

Bond the other hand, a sustained increase of 8% in US. And of course the temporary headwinds in Europe and the Americas that I just explained.

Brazil, new capacity in operation contributing positively with a 30% year-on-year performance. APAC EBITDA was driven by new capacity in operation, along with a full contribution from Sunseap during the last 12 months versus the nine months 2022 solid contribution since February. The reduction of share of profits from associates was driven by the reduction of wholesale electricity prices in UK and the PPA cancellation penalty booked in Q2 that impact Ocean Winds books. And the asset rotation gains as explained by Miguel were higher than expected at around EUR0.4 billion.

So if we move now to Slide 18. As of September 2023 net debt was at EUR6.1 billion, that's EUR1.1 billion above December 2022 and this is driven by EDPR's organic cash flow, the asset rotation proceeds. These are not including the proceeds from the transaction in Poland.

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But in the meantime, they were received in October and the $1 billion capital increase which funded. The EUR2.7 billion of net expansion investments, including Capex and financial investments. So all in all, net debt over EBITDA ratio stood at 2.9 times.

But just looking a bit more into the debt structure. On slide 19, we are rebalancing our debt structure, reducing exposure to US dollar from the current 65% and broadly aligning it with our asset mix by market that's growing our US dollar denominated equity exposure.

This has been ongoing since June this year and we expect to concluded in December, 2024. This is important. Following this strategy, we expected to have interest rates or interest savings from lower US dollar refinancing needs in the period of 2024-2026 with a positive impact of around EUR100 million and these were not included into our business plan financials.

So if we look to the financial results on slide 20 those amounted to EUR257 million in the 9 months excluding forex and derivatives financial costs increased by 31%, a bit more than half coming from higher average gross debt and the rest from higher average cost of debt to 4.9% and this is mainly from the combination of.

One the higher relative weight of US dollars denominated debt, as I said, it will go down over time.

Two, the new long-term shareholder loans with the current ones mature.

Three in the short-term cost of funding in euros. So this is coming from the current accounts that we have DVB short term lines for cash management EDPR debt has 82% at fixed rates. And again, it's very important to mentioned in terms of financial liquidity. This is cash and committed credit lines, it does cover refinancing needs beyond 2026 and that more than 70% of our debt actually is maturing post 2026.

Now on slide 2021 on the net profit recurring net profit totaled EUR467 million, that's 20% increase year-on-year and this is explained by better financials, lower taxes due to asset rotation gains fiscal treatment and lower minorities and this offset the EBIT reduction.

Nonrecurring recurring net profit accounts for events including the PPA cancellation in Massachusetts that Miguel just mentioned on US offshore project from and Romania provision in depreciation and amortization related to the Tax clawback and this is amounting. This is a total of EUR12 million.

So I will hand over back to Miguel for closing remarks. Thank you.

Miguel Stilwell d'Andrade: Thank you Rui. So just the closing remarks to finalise before we turn over to the Q&A.

I'll just start off by saying, we're here to create value and we invest throughout the economic cycle. We invest in renewable projects and we're taking advantage of this macro trend. I mean it sounds simple to say but really focus here is on creating value between the projects that we are investing in each particular moment in time where we are creating a spread of value versus our cost of capital and then we also sell some of those projects to finance that growth and to capture that value creation.

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