EDP Energias de Portugal S A : Transcript 1H21

Company Participants

• Miguel Stilwell d' Andrade, Chief Executive Officer
• Rui Manuel Rodrigues Lopes Teixeira, Chief Financial Officer
• Miguel Viana, Head of Investor Relations

Miguel Viana: Good morning, ladies and gentlemen. Thank you for attending EDP's first half 2021 results conference call. We have today with us our CEO, Miguel Stilwell d' Andrade; and our CFO, Rui Teixeira, which will present you the main highlights of first half 2021 financial performance and then update on strategic execution. We'll then move to the Q&A session, in which we will be taking your questions both by phone and recent questions that you can insert from now onwards at our webpage. This call should take close to 60 minutes.

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

Miguel Stilwell d'Andrade: Thank you, Miguel. Good morning, everyone. And thanks for attending the call today. I hope you're all well. Before I move into the results, I just wanted to highlight I think it's really positive that we begin to see economic recovery and also the continued political support for the energy sector, so I think that's certainly a very good tailwind and we're very excited really about what lies ahead.

In terms of the first half results, a couple of key numbers which I think are worth highlighting. The first, we continued to accelerate the growth with growth investments increasing almost 30% year- on-year. So now around EUR1.6 billion, so that's clear indication of the ramp up in growth. We've also ramped up the renewables development in terms of megawatts, so we now have 3.6 gigawatts of capacity installed and under construction. Around 700 megawatts added year-to-date and 2.9 gigawatts was under construction as of June.

We also have full visibility on our asset rotation strategy for this year, which continues to really highlight the value and the quality of our projects both on wind and solar. As you know, we completed the asset rotation deal in the U.S, we had a capital gain of around EUR250,000 per megawatt, which is above our business plan assumption of around EUR200,000 per megawatt. We also recently announced the asset rotation deal in Portugal which combined with previous announcements amounted to a total of EUR1.9 billion of asset rotation proceeds at very attractive multiples. So altogether, approximately 25% of the 8 billion asset rotation targets that we've given until 2025. Recurring EBITDA excluding ForEx decreased around 1%, so reaching EUR1.7 billion approximately, and just to give you some highlights on the impacts on this, so the semester as you

know was penalized by below average wind resources also lower asset rotation gains versus last year in the renewables platform, but we also had a challenging quarter on the energy management division. We'll give little bit more information on that. And this was obviously impacted in the context of the strong increase in power prices in the wholesale market. So that translated into higher sourcing and production costs and had also some negative mark-to-market mainly on gas contracts.

Also, worth noting from an integrated risk management perspective, part of the negative performance is offset by the positive results in the hydro generation in Iberia as well as in the supply division. So, our diversified portfolio allowed us to partially mitigate these effects with some positives and some negatives. We had a very positive performance in the electricity network with recurring EBITDA increasing by 33%. And so bottom line recurring net profit reached EUR326 million and reported net profits of EUR343 million mainly impacted by non-recurring gain of EUR21 million booked in the first quarter in the supply division in Spain relating to the sale of the asset last year.

If we move on to Slide 4, so talking a little bit about growth. You can see we continued to accelerate the growth. We have 2.1 gigawatts of capacity added in the last 12 months, of which, 700 megawatts added in the year to date. And as I mentioned, 2.9 gigawatts under construction as of June. Secured capacity, we now have 6.7 gigawatts with the recent 200 megawatts we just signed this week, and also visibility on additional 3.7 gigawatts of PPAs in advanced stages of negotiation. So overall, strong short-term visibility on additional PPAs, and of course we will be participating in several auctions over the next couple of months, which total over 30 gigawatts of capacity to be awarded until year-end in our European markets.

We also continued to expand our footprint into new markets with high growth prospects and we recently entered Hungary, Chile, Vietnam, UK onshore market and also offshore in Poland. So on track with our commitment to deliver the 20 gigawatts by 2025. Move on to Slide 5. So 6.7 gigawatts of capacity secured now, almost two-thirds of our '21 to '23 targets addition. As I mentioned in the EDPR conference call, we've been able to secure this capacity at attractive returns in line with our disciplined investment criteria which you are all very familiar with. We secured capacity across all technologies and above our investment thresholds both from a return and risk perspective.

So all-in-all, spread over wacc for the 6.7 secured so far at 320 basis points. From a risk perspective, we continued to focus the investments on long-term contracted assets that have a contracted NPV above 60% of the total NPV of the project. And we use this as a proxy for the risk, because we're basically locking in upfront already a big chunk of the value of the project. So obviously having this type of project is key to the success of our asset rotation strategy, given the quality of the portfolio, and the type of assets that investors like to buy.

Go on to Slide 6, so here I'd just like to address some concerns that have been raised in the sector regarding CapEx cost inflation. Now as you know, we've already talked about this, but just like to reiterate that we are well protected from CapEx cost inflation. Our investment policy is to contract major equipment upfront at fixed price, so that when we take the investment decisions, we're doing it based on real time quotes requested from suppliers and then typically locking them in. So at every point in time, we're incorporating in our investment approvals most updated CapEx

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estimates. We then reflect this in the PPA or auction bids and are therefore passing through any CapEx cost inflation and keeping our return stable. We've covered this in detail on the EDPR call, but bottom-line overall our exposure is limited.

Go on to Slide 7. So, as I mentioned, after quotation, six months into the business plan and we already have around 1.9 billion secured. So, 25% of the overall target for the five years. So very solid execution by our teams. As you know, we like to frontend the business plan and we try to do most of this in the first couple of years. More importantly, I think it's a great performance in the multiples achieved, and as I said with a strong appetite from investors.

Overall, multiples achieved higher than average of EUR1.6 million per megawatt correspond roughly to EUR1.7 million per megawatt for winds and 1.25 million for solar. Obviously, there are CapEx differences in the cost per megawatts of wind and solar. We also recently completed an asset rotation deal of a wind portfolio in the U.S. of 405 megawatts, around 500 million of asset rotation proceeds which had a capital gain of about 100 million, you can see that there on the left hand side of the slide. So, summing up, we're on track to exceed our business plan targets and deliver capital gains north of the 300 million in 2021, and really excited to see the asset rotation has been very solid in the last couple of months.

Moving on to Slide 8, we're talking about policy. We see the policy environment still very supportive of the energy transition. I mean, just since Wednesday in the U.S. following Biden's American's jobs plan, the Senate has now passed a key milestone in infrastructure bill, and that includes additional support on investments in electricity grid of around $73 billion, which are critical for renewables growth. As you know, one of the key issues in the U.S. is having good transmission networks that we can connect renewal projects to, and so we think this is a very healthy sign which will be good news for the renewable sector in the U.S. In late June, we also had positive news from the IRS decision to extend the PTCs and the ITCs by around two years, so taking into consideration some delays related with the COVID situation, this is clearly positive for our investments in the U.S. with the planned commission over the next couple of years.

In Europe, as you know, the bids for 55 legislative package enhances again the widespread political support on decarbonization. It increases the renewables growth targets and mechanisms for the sector, includes reforms to EU emissions trading scheme. And I think it's also worth highlighting, increased guidance and financial support for contracting of renewables PPAs by SMEs. So, this is very much in line with the expectation of a growing PPA market in Europe. All of this, I think calls for strong fundamentals and unprecedented growth in renewables, as referenced this in the past, but if you look at the IEA, International Energy Agency, net zero roadmap is expected to represent 90% of electricity generation by 2050 by renewables. So then good news for the sector.

Slide 9, so talking about networks. The networks have been extremely resilient and I think we continue to deliver strong operational performance, I think the teams' done a great work here. Overall, distributed electricity increased 14%. There was a good economic recovery across all our geographies, but also given the acquisition of the Viesgo. In Portugal, we significantly ramped up the deployment of smart meters and we've got a share of now almost 60% in June. And I think, it's also important to note, network's platform has also been a very important driver of efficiency for cash recurring OpEx decreasing 5% on a like-for-like basis.

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The Viesgo integration on track, that's in this new collective labor agreements signed last month. This is the key milestone for the integration plan that allows us to move forward with significant part of the restructuring. So, also an important milestone to highlight. And in Brazil, the networks operations also showed very solid growth. So, we've talked about the acquisition of a transmission line in the state of Maranhão, and we were awarded the largest batch in the recent transmission auction, and that increases our overall transmission portfolio to eight lines. So, six of them in operations or in advanced stage of construction.

One point I wanted to highlight that in relation to transmission in Brazil, given that we see very interesting value creation in the development of these transmission lines, we're now considering the implementation of an asset rotation business model transmission in Brazil where we crystallize some of this value upfront and rotate the capital into new greenfield transmission projects that have been permitting or pre-construction phase. So, this is something that we're also working on and hope to give you some visibility in the next couple of months.

So, on Slide 10 and just a note about client solutions, and I think really some very interesting numbers. First, the penetration of value-added services continues to increase, so up 5% around 30% in the first half. Focus very much on service quality and leveraging our customer portfolio to increase the share of wallet, so proved to be a very successful strategy so far. And also, I think really interesting to highlight is solar DG really taking off, it's almost doubled the installed capacity of distributed solar, now at around 190 megawatts peak versus the first half of last year, both transactional and also as a service. And also in terms of mobility, public mobility and private charging points also relevantly increased. So, I think also worth highlighting these two numbers.

Finally, if we go to Slide 11 going to address that EDP has been working hard to adjust its business portfolio towards the energy transition across all divisions. And I just wanted to highlight three business divisions that represent today the bulk of our Iberian operations. The first one is hydro in Iberia. We have around 5.5 gigawatts, of which more than 40% was pumping capacity. As you know, this is a flexible renewable technology that would be critical for to complement the growth of other variable renewable technologies, namely solar. And as you'll recall, in December 2019, we agreed to deal with the consortium led by ENGIE for the disposal of the 1.7 gigawatts of hydro capacity for a total of 2.2 billion. So at that time, the forward power prices were significantly lower than today. I just highlight this point because I think that's important in terms of doing a read across for existing portfolio. We've also reinforced our presence in electricity network, so the second piece of the business. We now have a regulated asset base of EUR4.6 billion in Iberia now including the Viesgo acquisitions, which I've mentioned, the integration is going very well. So I think we continue to believe that the electricity networks will play a key role in the energy transition. Finally, we have a portfolio of 4 million clients in Iberia, and the strategy is to continue to increase the share of wallet for clients with the new services namely distributed solar where we see a very interesting growth opportunity. As you know, this business was more mature -- not more mature, but it's been growing in the past in Portugal, in Spain, it's more recent, and so there's a huge market opportunity really to explore there. And we are seeing that and the teams are doing a fantastic job in building out the businesses in distributed solar in Spain.

Overall, we believe the recent equity market performance of EDP, particularly, if you consider the relative market value of EDPR, and also implicit value EDP's Iberian business doesn't reflect the

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fundamental value of these operations, which I just talked about, and which are very well placed to benefit from the opportunities in the energy transition.

So I'll just leave that comment there, and I'll turn over to Rui Teixeira, then come back for closing remarks. Thank you.

Rui Manuel Rodrigues Lopes Teixeira: Thank you, Miguel. And good morning to you all. So, on EDP's performance for the first half 2021, I'd like you to move on to Slide 13, please. The recurring EBITDA decreased 6% to EUR1.7 billion, so that's EUR1,678 million by the first half of 2021. If you were to exclude the ForEx impact, actually the performance would be relatively flat versus year- on-year, so it would be a 1% drop.

So recurring EBITDA from the renewables platform was penalized by weaker wind resources, particularly in U.S. which was 6% below average. Brazil and Europe was good as represented in the results two days ago. -- impacting the first quarter of '21 results, of course, a negative impact that was concentrated in the first quarter. Lower asset rotation gains when compared to last year. I think it's important here to note that we booked in the first half 2020 offshore capital gains of EUR145 million versus what we are looking this year in the first half of EUR118 million. This performance in wind and solar was partially offset by the good performance that we have in hydro.

In the electricity networks, recurring EBITDA increased by 32%, of course these benefits from the integration of Viesgo, which had an EUR86 million EBITDA contribution, a strong demand across all regions and around improved financial -- sorry operational performance.

In Client Solutions & Energy Management platform, which was penalized by a sharp increase in energy prices in the wholesale market, particularly in the second quarter 2021, this imply a higher production and sourcing costs, but also negative mark-to-market impact on hedging contracts. Part of these results are mitigated by a stronger than expected performance in hydro in Iberia, with realized the price of EUR57 per megawatt hour that's above the hedge price of the base load production for '21 of EUR45 per megawatt hour. These also compares to an exceptional positive performance last year. If we move now to Page 14, EBITDA from EDPR declined 18% year-on-year to 654 million or 13% drop if you were to exclude the ForEx impact. Despite this the 10% increase of installed capacity supported naturally by the additions over the last 12 months. As I mentioned before, EBITDA was penalized by overall resources, so that overall 5% below average. The negative impact from the polar vortex in February, 35 million impact, and lower asset rotation gains when compared to last year, so that's a minus 27 million.

If we move now to Page 15 on the hydro, adjusted by the change in consolidation perimeter, hydro recurring EBITDA increased 22% to 353 million. In Iberia, our EBITDA increased by 58 million year-on-year, impacted by a 10% year-on-year increase in hydro production. Also, as I said before, realized price benefited from the context of higher pool prices, even though our expected output is hedged at EUR45 per megawatt hour. So, it also reflects the quality and the flexibility of our hydro portfolio. Results were also positively impact by the reversion of some hydro levies in Spain, following the recent court decision, which amounted to EUR47 million. Brazil, the hydro EBITDA increased 9% year-on-year. We know that there is a hydro crisis in Brazil, but we are experiencing of course. But performance was well supported by the hedging strategy in place with more energy

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