EDP Energias de Portugal S A : Transcript 1Q23

EDP - ENERGIAS DE PORTUGAL

Thursday, 5th May 2023 11:30 Hours Lisbon/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

Miguel Viana

Good morning ladies and gentlemen. Thank you for attending EDP's First Quarter 2023 Results Conference Call. We have today with us our CEO, Miguel Stilwell de Andrade, and our CFO, Rui Teixeira, which will present to you the main highlights of the first quarter of 2023 financial performance. We'll then move to the Q&A session in which we will be taking your questions both by phone or written questions that you can insert from now onwards at our webpage.

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

Miguel Stilwell d'Andrade

Thank you, Miguel. Good morning, everyone. Again, thank you for attending this results conference call. So, just we go into slide 3 and kick off the presentation. So, what I'd say is that what you can see on the slide is that the first quarter was marked by a very strong financial and operational performance. Mainly supported by the recovery of hydro conditions in Portugal. We had a very strong EBITDA of EUR1.4 billion mostly driven by the recovery of the hydro conditions in Portugal.

As I mentioned it resulted in a production of around 3.5 terawatt hours of 0.4 terawatt hours higher than expected for the quarter. Wind and solar EBITDA EUR0.1 billion higher year-on-year both driven by higher installed capacity, higher generation in the ramp-up of selling prices.

Electricity networks in Brazil also grew given inflation impact in the tariff updates and transmission expansion in Brazil. And we had improved energy management with a decrease in electricity and gas sourcing costs from the peak levels in 2022. Overall, going down to the bottom line, we get recurring net profit above EUR300 million, and this can be explained obviously by the EBITDA growth, which has been mitigated by an increase in financial costs and income taxes.

Transcript - 1Q23 Results Conference Call

Given the improved results in Portugal and Brazil, two countries that have an effective tax rate above portfolio average and no asset rotation gains in the first quarter of 2023. I know this is something that some of you commented in earlier this morning and basically, just to give you a highlight on that. Also, just to mention, two days ago, EDP paid a dividend of $0.19 per share. That represents a dividend payout ratio of around 86% so on 2022, recurring net profit.

If we move on to slide 4, as already mentioned hydro generation recovered from the very first or very weak first 9 months of 2022 and absolutely disastrous hydro in the first quarter of last year. So, on the left, you can see that we moved from a hydro shortfall of 2.6 terawatt hours in first quarter last year to 2.4 terawatt hours above expected in the first quarter of 2023, so quite a strong recovery here to more normalized levels.

Additionally, note that although February, March and April were dry months our reservoir levels remain high at around 80% of the maximum capacity which is higher than the historical average for this time of the year and it's considerably higher versus the 2022 abnormally low levels. This being said, good hydro generation levels in 2023 so far and high reservoir levels provide some comfort for the remainder of 2023. So, I think the fact that we're at these levels as of today already in May has set us up well for the rest of the year.

Moving on to slide 5. Once again, this showcases really the robustness of the Portuguese electricity system in terms of stable energy prices. So, as you know, Portugal has a significant weight of long-term contracted renewables in energy mix and it was able to maintain stable end user electricity prices during the European crisis, energy crisis of 2022. So, let's say good resilience, good robustness to the high electricity and gas wholesale prices. The Portuguese consumer, the domestic consumer was basically insulated from last year's escalation of prices and even this year as well. So, in general, we've been able to keep rather relatively stable and flat prices throughout this crisis. You can see that on the left, both residential and industrial segments had essentially price increases in the second semester of 2022 but very low according to the Eurostat data 2% for residential, 5% for industrials.

We also had some Eurostat data, which came out recently which showed that Portugal is actually become much more competitive in terms of the cost of energy versus the rest of Europe. This was all done without compromising financial stability and the Portuguese electricity system. So, let's just say system debt decreased by more than EUR2 billion over the last 2 years, so it's reduced in approximately half of this period. For 2023, the lower-than-expected wholesale prices in this first quarter implies some short-term negative deviations. This should be corrected very soon.

The Portuguese independent energy entity has already communicated its proposal to review the access tariffs starting from July 1, 2023 already taking into account this lower wholesale prices and so adjusting the access tariffs to take this into account.

We move on to slide 6. Wind and solar very much focused on execution as mentioned earlier this week, we've already contracted 1.5 gigawatts since the Capital Markets Day, mostly in Europe and in the US.

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Transcript - 1Q23 Results Conference Call

This leaves us with around 8.5 gigawatts of secured capacity about 50% of the capacity target for the business funds will start in '26 or in total 2026 and then of these 8.5 gigawatts, 5.7 are secured for '23 and '24, so around 75% of the target additions for this period were on track to deliver on our growth ambitions. Also, highlighting that we have 5 gigawatts of capacity under construction, of which we expect of solar around 3 gigawatts in 2023 and we continue to ramp up the capacity under construction over the next couple of months.

As I mentioned on Wednesday, we have about 0.9 gigawatts of solar PV installations in the US that are moving from 2023 to 2024 essentially related to the delay of solar modules from LONGI. I've mentioned this is unfortunately taking more time than expected to fulfill the Customs and Border Protection documentation requests. And I believe LONGI is working to get that done as soon as possible and in any case, we are assuming that is 0.9 and moving into 2024. However, we haven't been stopped obviously we've been adapting and diversifying our solar supply chain strategy to make sure that we can continue to deliver on the business plan. So, we secured 1.5 gigawatts with First Solar in the US for the post 2024 CODs and we're now working with more than 5 solar manufacturers for 2024 installations to guarantee we did not have similar setbacks in the future. All in all, we continued with good performance on securing new capacity to be installed and that gives us confidence on achieving the target as additions until 2026 despite some setbacks on the US solar additions in 2023.

We move on to slide 7 and let's talk about our Solar DG business. As of March, we had installed capacity of 0.8 gigawatts of which 0.3 were installed over the last 12 months. So very meaningful 66% capacity growth over this period. Since 2020, we've already secured 1.8 gigawatts of which 0.8 are installed, 0.4 are transactional, meaning that they are built and then transfer to the customer and 0.6 are under construction or secured to be added. We continue to be very confident on this technology's future prospects. Last week, we signed a framework agreement with Google and installed up to 500-megawatt AC in the local energy communities in the US. In Europe, DG is going through a high growth momentum with more than 100- megawatt AC of new DG capacity signed over the last two quarters. In Asia Pacific, we have around 120-megawatt hour AC of Solar DG under construction. So, in this region, we've already secured 40% of the additions for 2023 to 2026.

We'll move now to slide 8 and talking about interest rates. So, we continue to manage our exposure to interest rate risk. As of March, we have 73% of our debt with fixed interest rates and part of the debt with floating interest rates is matched by asset exposure to inflation in Brazil. Debt in Brazilian BRL represents around 15% of our total debt and the EBITDA from Brazil represents around 30% of the total, which clearly demonstrates that we are inflation hedged here. As I mentioned, in 2022, we closed around EUR2 billion of pre-hedge interest rate for '23 and '24 refinancing needs. So, we have EUR1 billion and $1 billion pre-hedged at around 1.8% and 2.6% respectively, very competitive prices versus than the current one so, reducing the interest rate risk for upcoming refinancing needs. Regarding expectations on asset rotation, we stick to the capital gains of around EUR0.3 billion given that the Clean

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Transcript - 1Q23 Results Conference Call

Energy and ESG Components of the assets more than compensate the move of interest rates over the last 2 years.

So, we're continuing to see demand. We're continuing to see the value there and I talked about that also as well. So overall, asset rotation transactions plan for '23 on track to deliver the expected returns.

Move on to slide 9, and just a quick word here on an update on the tender offer in EDP Brazil minorities. The auction is expected to happen in the third quarter. We've been working on this and already completed several milestones, and we expect the CVM approvals of the market, regulator in Brazil approval between May and June. As we mentioned in the Capital Markets Day presentation, the expected EUR1 billion of investment was already funded through the share capital increase that the EDP level carried out in March. So, we're very confident that the success of this transaction will be translated into a simplified corporate structure, and it's fully aligned with our strategy focused on renewables and electricity networks.

Moving on to slide 10, just before I pass over to Rui. Good performance in terms of emission reductions in the first quarter of 2023. We're fully committed to decarbonization with Scope 1 and 2 emissions intensity decreasing year-on-year by almost half. You can see this puts us on the right track to achieve our ambition of reducing those emissions by 95% in 2030 compared to 2020 levels. I'd also highlight that EDPs climate transition plan was submitted for advisory vote at the 2023 AGM and it was approved at 99.73%, which clearly shows the confidence that investors have in our ambition regarding net zero targets. Also supported by the normalization of hydro resources in Portugal and the subsequent decrease in thermal activity this year, renewables accounted for 88% of total generation, which is 10 percentage points increase year-on-year and the revenues from coal decreased 4 percentage points year-on-year to 4.7%. We also improved our alignment with EU taxonomy so, 67% alignment revenues. That's 14% higher year-on-year, and 97% alignment for the CapEx investments. Finally, just to reiterate our ambition to reduce the Scope 1 and 2 emissions, supported by being coal free by 2025 and 100% renewables by 2030. Focusing our investments and renewables and electricity grids. So, with that, I'll hand it over to Rui to give dive on the financials and then I'll come back for closing remarks. Thank you.

Rui Teixeira

Thank you, Miguel good morning to all. So, I'd like to go through the data EDPs financial performance in the first quarter. So, please go to page 12. Recurring EBITDA increased by two times year-on-year to above EUR1.4 billion in the first quarter of 2023. As we see it recurring EBITDA for renewables clients and energy management was up by EUR0.7 billion, mainly driven by the recovery of hydro in Portugal to normalized levels, improved energy management results due to lower electricity and gas sourcing costs and higher wind and solar EBITDA on the back of 11% increase generation, and 8% increase in average selling price.

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Moreover, in electricity networks, EBITDA increased by 5% year-on-year, driven by the growth in Brazilian networks due to the positive annual tariff updates and the growth in the transmission business.

Please note that in the first quarter in 2022, we were heavily penalized by the extreme drought together with the record high energy prices.

So, if we move now to slide 13, EBITDA for EDPR increased 14% year-on-year. That was the result of 5% growth in installed capacity to 14.8 gigawatts that, together with the good renewable resources, led to 11% increase in electricity generation. The generation was sold at an average selling price of EUR62.5 per megawatt hour, which is 8% higher year-on-year, and this was across all the different regional hubs with the year-on-year growth. Europe growing 21%, North America 14% and South America and APAC more than 6 times, mainly due to a strong delivery of organic growth in Brazil namely the commissioning of three large plants Boqueirão Jerusalem e Monte-Verde with a total of 0.6 gigawatts and the impact of Sunseap integration since February 2022. Also, please note that we have no results from asset rotation gains, neither in first quarter '22 nor in the first quarter of 2023.

So, now on Slide 14 from an integrated perspective, hydro clients and energy management was marked by an overturned in operating conditions following the extreme adverse First Quarter 2022. In Iberia results were positively impacted by the normalization of hydro resources with generation being 3.5 terawatt hours, which is more than double versus last year and approximately 0.4 terawatt hours above our expected production. This positive impact was mitigated by the decrease in thermal generation with coal and gas-fired power plants producing almost half of first quarter 2022 volumes. On energy management, there was a decrease in electricity and gas sourcing costs. This has mainly to do with the 58% decrease in electricity spot price in Iberia to an average of EUR96 per megawatt hour in the first quarter this year, and 47% decline in gas spot prices to an average of EUR52 per megawatt gas.

In Brazil, EBITDA slightly decreased by EUR2 million with better hydro conditions but lower volume from the sale of Mascarenhas hydropower plant in the 4th quarter last year.

So, now as we move into slide 15, just highlighting the year-on-year dynamics of integrated portfolio, the hydro clients and energy management has the negative EBITDA in the first quarter of 2022 mainly impacted by the negative EUR0.4 billion from the hydro simultaneously with these record high electricity prices that we observed in the first quarter last year. And the mark-to-market on gas hedging contracts that last year was not recognized through hedge accounting and that suffered from a sharp increase in the spread TTF to Henry Hub. In the first quarter of this year, we saw a strong rebound in Iberia.

So, we have lower electricity and gas sourcing costs, given the decrease in electricity and gas spot prices, normalization of hydro resources in Portugal versus the first quarter last year, and finally, a positive year-on-year comparison with no material negative impact from mark-to-market on energy contracts in the first quarter of this

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