Edp Renewables Sa U/Adr

Good afternoon, everyone. Thank you for attending EDPR 2023 Results Conference Call. We have here with us our CEO, Miguel Espudo Andrade, and our CFO, Rita Scherer. We'll run you through the key highlights on the update on the execution of our strategic plan and the financial performance of the year. 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 your conference webpage. This call is expected to last close to 60 minutes. I'll give now the floor to our CEO, Miguel Sildenrath.

Thank you, Miguel. Good afternoon to everyone, and I think it's good that we can talk and update you on what's been happening in 2023 and also the company's update and outlook for the year. And I start off by saying that 2023 was a challenging year for the renewable sector in general, but also EDPR in particular. And I don't think there's any sugarcoating it, and I won't try to. I'll give you a balanced and realistic view of where I think the sector is and where EDPR is. As you know, we've been regularly briefing you on the year, and the fourth quarter didn't go particularly well either. There were several issues that negatively impacted us and that we've been working through and are continuing to work through, and I'll go through that in detail in the presentation. There are also some positives that I will highlight. So I would start off just by going Just before going to the bulk of the presentation, to slide four, just saying 2023, as I said, definitely challenging. Overall, for 2024, we do expect the underlying business to grow in 2024, you know, as much as above 20%. But assuming the capital gains in line with the business plan, that there would be a moderate growth in EBITDA overall. So moving forward to slide four, first, I think if you look at the capacity additions, we had a strong fourth quarter in 2023. We added 1.7 gigawatts of renewables, which is quite an impressive volume for a single quarter. And so we ended up the year with a total of 2.5 gigawatts of annual capacity additions. So this is what we've previously anticipated at the nine-month results release. Going forward for 24, we have very good visibility on the execution of our four-gigawatt targets. We already have 85% of this capacity currently under construction. And the last couple of months, we've seen also the normalization of the solar panel supply chain in the U.S. So, you know, we had a pretty adverse environment over most of 2023, and it seems to have normalized now. Regarding balance sheets, you know, in 2023, we reinforced our capital structure with a $1 billion equity raise, and we've also successfully implemented a new script dividend policy, which would be the second year. We just came out with – the news release for that this week. On asset rotation, I think it was a particularly strong year. Great execution by the teams and reflecting, I think, the value of the assets. And I remember this time last year when we were getting a lot of questions on the demand for asset rotation, if we could still keep it up. And yes, I mean, the answer was clearly in 2023, we had three great transactions, contributed a total of 1.7 billion of proceeds, 460 million of gains, and an average gain of 60% on invested capital. So again, a year on, I think we can look back and say it was a great year for asset rotation. And it's clearly above the 20 to 25% target return for asset rotations that we'd assumed in the strategic plan. We continue to see strong interest from investors. And in the beginning of 2024, we've already announced the closing of one transaction. We've signed another one. We expect them to close in first quarter of 2024. totaling a total of around $1.1 billion in terms of enterprise value. The 2030 was also marked by quite a few material headwinds, and we shared them over the last couple of quarters, and now we're actually showing the numbers impact. We had a well below average wind resource with a negative impact of around $200 million in the 2023 EBITDA, mostly penalized by the El Nino effect on the U.S. wind resource, I think, We flagged that already, I think, in the first quarter numbers of last year that that was beginning to happen. We had a cost associated with the delay on the transition line permitting in the wind project in Colombia. We had the bottlenecks on the solar panel supply chain in the U.S., and we had the counter-cyclical callback taxes in Europe. So, altogether, these headwinds represent about a $400 million negative impact on our 2020 EBITDA, and they seriously distort our underlying P&L. Finally, in late December, we announced an agreement for a transaction that comes to I think it will allow us to simplify the corporate structure. It's definitely earnings accreted from day one. So we bought back 49% of a one gigawatt portfolio of wind farms that we operate in Europe, around 570 million. The implicit enterprise value per megawatt multiple was around 1.2 times. And we expect the transaction to be closed in the second quarter of this year. So now I'll go deeper into these topics. And I'd start off just by taking a step back and looking at the big picture. First, we had some positive news coming out of the COP in December, essentially talking about tripling the renewables capacity between 2022 and 2030 to reach the one and a half degree target. And so that commitment was, let's say, signed by more than 130 national governments. We have the European Union coming together and also agreeing to triple that. So I think that broad tailwind continues to be there and we continue to see it you know, pushing the sector forward. Solar PV and wind is expected to account for 95% of global renewable expansion, and that's where we are placed, and we're well-placed to take advantage of that. You know, in general, the generation costs continue to be below both fossil and non-fossil fuel alternatives. There's also been upward revisions of the 23 to 27 targets for renewables in countries like Brazil, Germany, the U.S., so large economies where we're present. In the offshore, we also expect the upward price revision auction coming up in round six. You know, the price cap increased by 66%. And in the U.S., we're also seeing a significant increase in the pricing, including inflation updates over the construction stage. So we are seeing conditions improve materially for auctions, both onshore and offshore. We saw in 2023 also the approval by the FERC, so the Federal Energy Regulatory Commission, or rule to speed up the interconnection processes. As you know, that's one of the issues which is holding up a lot of projects for the sector. And that's the first major change to the interconnection requirements in two decades. So, you know, work is being done by the different regulators to try and get, you know, streamline the permitting and the licensing issues. And in Europe, I think, you know, the European Commission has also come out with a goal recommending the 90% greenhouse gas emissions rate. compared to 1990 of around 90%. So 90% reduction for 2040 compared to 1990. So things seem to be going in the right direction. The broad macro wins are there. Now it's really about execution. And so if we go on to the next slide, I think if we look back, we are continuing to scale up significantly versus what our growth rate was in the past. You know, as I say, over the decade 2010 to 2020, we're growing around 700 megawatts a year. We're now, you know, we just did 2.5 gigawatts. You know, that's still a significant increase versus what our historical growth is. And as I say, we are very confident on the 4 gigawatts for 2024. I mentioned to you 85% is on the construction. 15% is expected to start over the next few months. It's got a big weight of solar DG projects. that normally have an average construction time of around six months. I think it's important to say also that most of the solar panels have already been delivered to the project in the U.S., and so that gives us quite a high degree of confidence there. Let me move forward to the next slides on asset rotation. So here, as I mentioned, you know, very strong gains, around 60% gains on invested capital, three transactions, Spain, Poland, Brazil. I won't go through a lot of detail because I think We've already given information over the course of last year, so this is not news for most of you. I would just highlight that in the beginning of 24, we've already closed those two additional transactions, so around 500 megawatts, 1.1 billion enterprise value. As I said, the other transactions for 24 have already been launched, and we expect to get the gains and the proceeds to be at least in line with the strategic plan target. If we move over to slide eight, Just to give a highlight on the buyback of the 49%, I think it was a good opportunity that we had to take back 100% control. It gives us quite a bit of additional flexibility, simplifies the ownership structure. Its cash flow and earnings accrued at day one, and it gives us more flexibility for hybridization, retiring, and even on the energy management side. So we're expecting this for the second quarter, but as you can see, pretty healthy numbers, you know, double-digit cash yield and around 40 million expected contribution to net income. We move to supply chain. So, supply chain, definitely much stronger position, I think, than we were maybe nine months ago. We had to reconfigure the supply chain in the U.S. because, you know, we had a large dependency on laundry panels as a result of significant delays in the import of those panels. We went back and we reconfigured it to – so now we have nine different suppliers for the 2024 deliveries between the U.S. and Europe. They're all aligned with ESG audit requirements and traceability and the manufacturing origin. I think that's really something that's important is to make sure that we don't get caught up in any issues around UFLPA, so the UGRI Forced Labor Protection Act, or tariffs in the U.S. So some of these modules are already produced in the U.S., we've diversified the polysilicon including origins from the us germany malaysia so i think overall we're in a better place or a more resilient place now in relation to the supply chain and as i say if you see here on slide nine at the bottom you've got the 70 percent of the solar panels already delivered which is what i mentioned on the so in relation to the previous slide so that i think positions as well i think if you look at costs on the right hand side It's also important to see that the costs have been coming down for solar panel prices significantly. We've recently closed frame of agreements on about one gigawatt of solar panel volumes for late 24, early 25 deliveries, mostly in Europe. I think it's record low prices, so I think that also places as well for the growth there. If we move to slide 10, talking about risk and hedging and long-term contracted. As you know, we normally have a policy of being quite contracted and hedged going forward. That sometimes has a downside if prices spike, and we don't capture all that upside. But it also has an advantage, which is when prices fall, we also don't get as much impacted. So we've kept the high rates of long-term contracted and hedged electricity sales. You know, normally we target long-term contracts of at least 15 years maturity. and we try to lock in at least 60% of the cash flows for the investment, let's say, of the NPV with this contracted profile. Specifically in relation to 24, so 90% of the expected generation is already contracted or hedged, and in 25, 85%. Only 50% is related to European electricity markets, which is mainly Spain. The rest of the merchant exposure is mostly U.S. and Brazil, where electricity prices have you know, the volatility has been less significant. And I think it's also important to note that this residual exposure to the spot electricity prices is associated with the low-risk volume management of renewables generation and intermittency. So that, you know, obviously there can be blow more or less. In the case it blows less, you want to make sure you're not over-hedged. And so that is typically where we want to be. Regarding prices, they were above 80%. euros per megawatt hour for 2024, above 70 euros per megawatt hour in 2025. So significantly above the current forward prices. So that is part of the downside, but it's part of, let's say, in relation to a smaller volume. The average maturity portfolio of the long-term contract is around 13 years. So I think that provides quite a lot of stability to the revenues. We move forward to slide 11. So this is an important point that I think we've raised in a couple of calls and conferences, which is, I mean, we are investing over the economic cycles. And particularly when we look at the revenues that we are securing since 2022 for renewable projects to be delivered going forward for 24, 25 and beyond, we are investing in what we think are better conditions, higher PPA prices, assuming already a higher cost of capital And so, obviously, having also higher absolute returns. So, I think these will end up being pretty good projects. So, 61% of the projects have the secured capacity. The decisions were taken since 2022. So, as I say, taking advantage of these assumptions. These projects were approved at an average of, you know, over 1.4 times WACC. They will be entering operations from late 24 onwards. And so I think we might benefit from a slight improvement of market conditions if there's an easing of supply chain pressure or lower interest rates versus the 2033 peak levels. Overall, we continue to see attractive returns based on our investment criteria, not just within the portfolio of secure projects, but also projects under development that we haven't yet secured or commissioning in 25 and beyond. We go to slide 12. Well, this is a point which I think is important. Obviously, in a market where energy prices are reducing, at least on the merchant side, and where there have been delays, it's really important to be focused on efficiency and making sure that we are mitigating the impacts of the delays in the project. So on one hand, we've been making sure that we are focusing the growth. So around more than 90% of secure capacity for 24 to 26, We're expecting to come from 10 core markets and 60% from three core markets, which is basically the U.S., Spain, and Brazil. So leveraging there on the critical mass that we have in those markets. In terms of organization, we are leveraging on the EDP and EPR synergies, so particularly in terms of back office and some global functions to make sure that we're not duplicating teams or not duplicating functions. So I think that's allowing us to streamline, let's say, the the operations and the overheads and really make sure we are the leanest, most efficient company possible. On terms of cost efficiency, we are implementing a series of cost efficiency savings, including the lane of headcounts given slower growth. And so we are estimating savings of more than $30 million already in 2024 and growing. And on O&M, we're also seeing increased availability and also a leaner cost structure there. That's more on the efficiency and on the organizational front. On the technologies, hybrids, we continue to see quite a lot of potential for hybrids. So we've now reached 107 megawatts of operational wind and solar hybrid projects in Poland, Portugal, and Spain. We're the first ones to actually have hybrid projects in Portugal and in Spain. And we continue to work to materialize our one gigawatt of hybridization pipeline. So those are, let's say, quick wins that will have quite a lot of value. just because of the sharing of the infrastructure in terms of the interconnections and the access roads and so forth. In terms of storage, we've already installed 60 megawatts in the U.S. We have around 200 megawatts under construction also in the U.S., and we're working also on the pipeline in the U.K. And then in terms of solar GG, the generation and salt capacity both in APAC and in the U.S. has increased over 50% year on year. So we do have leverages or we do have synergies in them. this business line together with CDP to establish a global platform. And in terms of contracts, I mean, in many cases, these are relatively large contracts. So, in 2013, we closed the largest U.S. corporate sponsorship of distributed PV with Google. It was quite a highly publicized contract of around 500 megawatts, and that's something that we're working on to make real over the next couple of years. Finally, in this section, just another word on OW. So we currently have two gigawatts of wind offshore projects under construction in Europe and around 1.7 gigawatts of projects in advanced development stage in both Poland and in the U.S. Starting the under construction, we have three projects in France. I mean, they're progressing as planned. The CODs are expected in 2025, 2026. More West, our project in the U.K., has the foundation installation already underway. I mean, there's some amazing photographs online if you want to see them. The offshore substation platform is being installed. Regarding Poland and BC Wind, it's been approved, so we have the interconnection capacity increase of around 100 megawatts, which means that we have a project which could reach almost 500 megawatts in total. And finally, on South Coast winds, used to be called Mayflower Project. That's the project in the U.S. off Massachusetts. It's an advanced stage of permitting and interconnection. The revenue is not secured. As you know, we canceled the PPA last year, and that's part of the numbers last year. And we are analyzing the potential bid. It's the first multi-state PPA auction in the U.S., so it's the Rhode Island, Connecticut, and Massachusetts. That bid is expected, or let's say that bid PPA auction is expected around the end of March. So like both onshore but also for offshore, we do follow the strict investment criteria, namely in terms of target risks and returns. And we also obviously aim to minimize the timing between PPA contracting and FID. So it's obviously very important. I think we've seen that very clearly in the sector over the last year, the importance of trying to line up both revenues and costs to mitigate that potential disconnect in case there's a market disruption. So I'll stop there for now. I'll pass it over to Huy to go through the 2023 numbers, and then I'll come back for closing remarks. Thank you. Thank you, Miguel, and good afternoon to you all. I would like to take you through the 2023 results now. And maybe if we move just to slide 15, as we already anticipated in the previous presentations, 2023 operational performance has been heavily impacted by the El Nino weather event in North America. It impacted the region this year since April, more or less, leading to an annual renewable index deviation of minus 7% in the region. This compares to a plus 4% in 2022, so a big drop year on year. Obviously, these low wind volumes have a negative impact, a substantial one, close to 0.2 billion euros off the EPITAP. There are two important messages I would like to convey with the chart on the right-hand side of the slide. The first one is that El Nino is cyclical. It's a cyclical phenomenon. We are aware of it, and we already incorporate these sort of events in our long-term forecasts of our net operating hours. So it is captured in our PPP and PV estimations when we go for financial investment decisions for our projects. The second one is that our historical data shows that the slope of renewable resource deviation is zero. So there's no evidence that our portfolio is exposed to a declining wind speed. Obviously, we do have the short-term financial impact by the volatility, the normal volatility of wind, and particularly impacted by this type of phenomenon, weather phenomenon as the El Nino. But it doesn't mean that we have an upward trend of portfolio profitability. For 2024, we do expect a gradual recovery towards more normalized levels of wind resource. If we now move to slide 16, along with lower wind resources, EDPR performance in 2023 was also impacted by other headwinds that we have talked about several times, and those are mainly related with the delays of capacity in the U.S., and the Columbia and some windfall taxes, energy taxes in Europe. So, regarding the first one, U.S. solar project delays caused by the supply chain issues that Miguel already discussed impacted our EBITDA by about 50 million, 51 million years this year. For 2024, we do not expect additional costs from COD delays as around 70% of equipment has already been delivered for the year's installations. And the construction schedule foresees a gradual ramp-up of the U.S. solar capacity and generation volumes over 2024. Floodwaters in Europe have an impact of 106 million years at EBITDA level in 2023, effectively lower than what we initially expected in the beginning of the year. You may recall that we were estimating a potential 300 million years of impact, and this was on the back of lower prices throughout 2023. For 2024, Polish clawback has ended, so it will not be active in 2024. Romania will continue to have an impact. It's a non-cash impact after we unwind the hedges. So there will be an impact, but again, it will not be a cash one. The clawback pure impact, what we call the effective application of a fallback, will not be material at all, given where we are in terms of price conditions for 2024, or price forward curves for 2024. Spain, as you know, introduced the 7% tax on generation revenues, and this will imply around 15 million euros impact in 2024. But all in all, The big number, the 106 million that we have at EBITDA level is going to reduce materially as we move into 2034. Lastly, we have incurred costs with delays in Colombia. This amounts to about 50 million euros in 2023 P&L. This is related to the short position that we have, given that we have the delivery commitment, the energy delivery commitment, but we don't have the operating midfarm. We are in advanced stage of negotiation with the majority of the uptakers, aiming to reduce that short position. In parallel, we have been hedging an important portion of the generation that you are bound to deliver in 2024, and this would reduce the potential impact in 2024. As you've seen in our numbers, we've decided to book a non-cash impairment of 179 million euros, driven by the project delays and the Of course, we consider this as a non-recurring impact, and I'm sure we can provide you some more details if you ask so. Also, as Miguel already said, we expect to get transmission line environmental permit in the second half of 2024 and continue with construction to have these projects fully operational, I would say, by late 2025. On slide 17, recurring EBITDA was about 1.8 billion euros. That's a 14% drop year-on-year. This has a positive impact from the asset rotation gains, 460 million, which are very much above the target that we set for our business plan. And also the EBITDA growth or the evolution was driven by an increase in terms of 12% year-on-year installed capacity. But, of course, we had that negative impact from lower renewable resources. Also, lower average selling price, about minus 6% year-on-year, with Europe coming down from the abnormal peak prices in 2022. And this was partly compensated by the 8% increase in realized prices in the U.S., mainly coming from the new additions at higher prices. Also, some temporary headwinds in Europe and the Americas that I already explained. Also, to highlight, the reduction of share profits from associates. This is driven by the reduction of the wholesale prices in the UK versus, again, a very extraordinary level in 2022, and the PPA cancellation penalty that we booked back in Q2. So, all in all, this justifies the drop in EBITDA to 1.8 billion euros. On slide 18, the net expansion investments of 2.9 billion euros. I think it's an important number too, how it shows really that we carry on with the growth, even though we have these headwinds. By the end of the year, net debt was at 5.8 billion euros. That's an increase of around 0.9 billion versus December 2022. mainly driven by the growth effort with this overall 4.2 billion of expansion capex on a gross basis, partially offset by the asset rotation and also the tax equity proceeds. Maybe here I think it's important to highlight that 2024 started with a strong balance sheet position, obviously with the 1 billion additional asset rotation already executed and signed for the year. that are basically reducing the January debt to about, you know, to the levels of the 2022 year-end. We will have more proceeds from these asset rotation transactions through the year, along with a strong contribution from tax equity proceeds as the U.S. projects get to COD, and I expect here more than 1 billion euros contribution. If we now move to slide 19, Financial results amounted to $313 million in 2023, decreasing 30% versus 2022. There are some impacts here. Currency, as we have been rebalancing, as you know, on the net hedge investment, the US dollar exposure. Also, some reversion of the negative impact of Forex and derivatives back in 2022. as well as higher capitalized financial expenses in line with their current project timings. Average cost of debt increased to 4.8%, driven by a higher gross debt of around 1 billion euros year-on-year. And EDPR debt has 82% of the socket fixed rate. And it's important to mention that our financial liquidity, and that includes cash and committed credit lines, continues to cover refinancing needs beyond 2026. and that more than 70% of our debt matures post-2026. So if we now move to net profit, net profit totaled 513 million euros versus 671 million back in 2022, impacted by the top-line headwinds, partially compensated by the strong execution on the asset rotation side, as well as the improved financials. Non-recurrent accounted events of net profit were mainly the PPA cancellation in Massachusetts from Q2, and this is at the typical level, the impairment in Colombia this quarter, and the Romanian provision at the depreciation and amortization, and this is related to the tax fallback in Romania. Lastly, as announced yesterday to the market, the board of directors will propose in 2024 general shareholders meeting to continue with the script dividend program that we introduced last year for the results corresponding to the year 2023, providing, I would say, once again, with a flexible remuneration system for our shareholders that can opt between cash or shares. And with this, Miguel, I would hand back to you for closing remarks. Thank you. Thank you, Rui. So in relation to 2024 guidance, first I'd say that we reiterate the four gigawatt installations for 2024. 85% is already under construction, 100% secured with long-term revenues and the part is also beginning to progress. The second is to say that we start off with a strong balance sheet position and we have the capital increase. We have $2.4 billion of asset rotation proceeds executed and signed as of today. We've had another half a billion of tax equity proceeds also cashed in. And we will continue to execute significant volumes of asset rotation proceeds and tax equity during 2024. So I think that's a positive message and something that we continue to see in the market. Despite the 2024 strong expected installations, we do have a lower cumulative capacity added versus the business plan. So that leads us to estimate a lower volume of renewable generation in the year to around 40 to 42 terawatt hour range even so that's a year-on-year growth of around 15 or more than 15 percent and despite the high weights of the long-term contracted and hedged generation our portfolio there has been a material decline and i'm sure you've all seen that in the market over the last couple of months of electricity prices in europe as i mentioned earlier in the presentation so brazil in the us that there wasn't such a high increase there isn't such a there isn't also a decrease That leads us to estimate the average selling price for the global renewables generation portfolio as a whole from the 53 to 55 euros per megawatt hour. So we don't normally provide guidance at this point in terms of IPTA or net income, but let's say this is some sort of help to try and get a view on how we're seeing 2024 as of today. So as Ruiz mentioned, we do see some headwinds continue to and maintain in 2024, although obviously it's a lower size in 2030. We've been working through a lot of these issues, but we will continue to have some PPA costs in Colombia. We have non, but don't forget that we also have some of the hedges in Colombia, so this is not, it's not a straightforward calculation there. We have non-cash costs with hedges due to clawbacks in Romania, and also some residual El Nino effects in early 2024. We're assuming an El Nino of, let's say, just one year, And so that would come off sort of over the next two quarters. So in relation to guidance for 24, our recurring EBITDA showing a moderate year-on-year growth with a higher underlying contribution excluding capital gains. So we had a lower underlying in 23 and higher capital gains in 23, as you know. And in 24, we expect that the capital gains would be, let's say, in line with what we had in the business plan. And obviously, that means that the higher there will be a higher underlying contribution from the business to give us a moderate year-on-year growth for 24. So I'm not trying to sell you a big story. I'm just saying that I think we, you know, 23 is definitely a bad year in terms of the underline. Obviously, we have done a good contribution from the asset rotation. 24, we're seeing the underlying improve versus 23. Going forward, we will continue to grow. We will continue to invest. based on the investment criteria. I think we've always been very clear about that. We've been disciplined about that. We take relatively conservative projections in terms of energy prices for the future. You know, and we will be focusing on projects that give us those returns. So when prioritizing returns over volumes, that's something that I also wanted to leave that message that we are here to create value and we are here to grow, but making sure we're getting the returns that we want. And I'd stop there. And we can turn it over to Q&A and go in depth wherever you want. Thank you.

So, yes, I think the first question comes from Manuel Palomo from BNP. Manuel, please go ahead.