EDP Renováveis S A : EDPR Transcript 9M22 Presentation

Transcript - 9M22 Results Conference Call

EDPR

Wednesday, 26th October 2022 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 & Sustainability

Miguel Viana: Good afternoon, everyone. Thank you for attending EDPR's Nine Months 2022 Results Conference Call. We have here with us our CEO, Miguel Stilwell d'Andrade; and our CFO, Rui Teixeira, who will run you through the key highlights of our strategy execution and nine months 2022 results. We'll then move to Q&A in which we'll be taking your questions, and this call is expected to last one hour, so I'll give now the floor to our CEO, Miguel Stilwell d'Andrade.

Miguel Stilwell d'Andrade: Thank you, Miguel. Good afternoon everyone. I hope you are all doing well. It was a pleasure to speak to you. So, I'll kick off talking about basically updating on the strategy execution and if we move straight into the presentation. We go to slide four. We can see that our nine months performance for 2022 shows really a strong growth in EBITDA. It's up 62% year-on-year to around EUR1.5 billion and this has been very much supported by expansion of our asset base. So, we increased our installed capacity by 10% year-on-year and the generation overall increases around 14% year-on-year.

We also see a significant improvement in our average selling price of almost 30% year- on- year. So, supported by higher prices in most of the European markets and also some FX. Finally, asset rotation gained around EUR264 million including the transaction in Italy, which was closed in September. Net profit. Net profit increases 180%. So, year-on-year to EUR416 million, so very much impacted by the higher financial cost on the negative side due to higher interest rate. But obviously, it also has a positive upside from the EBITDA that I mentioned earlier. Increase of debt and Forex impact is partially mitigated by the asset rotation gains and we'll talk about that later on in the presentation.

In terms of the 2025 target, both growth and value. On one hand, we have gross investments reaching around EUR4.4 billion. So, this is more than doubling last year period and this reflects the ramp up of our investment plan with renewable projects under construction is reaching a historic record of 4.3 GWs over around 15 countries.

Regarding asset rotations, and if we look back to since 2021, we've already secured a total of nine transactions in six markets and this represented total proceeds of EUR3.4 billion. So

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over 40% of the EUR8 billion total asset rotation plan that we had for the business plan period.

Finally, we've secured until now almost 11 GWs of capacity for this period until 2025 and that represents around 55% of total target that we have for capacity additions. So again, moving for -- continuing to move forward on track with that.

Now let's dive into some of the key geographies and if we move to slide five, we can talk about the Inflation Reduction Act. I mentioned this before. So, last time we spoke, just before the summer, I think I mentioned at the time that we were not holding our breaths for this to come out. Well, fortunately, it did come out the day after we spoke, so there was started news on this, and this was finally approved during August. So, I'm sure all of you are aware of the legislation and aware of the impacts and we are just highlighting a couple of key points. First, it brings 10 years the stability for renewables tax credits and in fiscal incentives.

So, I think that will avoid the stop and go and the sort of hesitation also from the market in terms of investments. So, I think that's good. It gives us a long runway to be able to invest in the US over renewables. The IRA also extends PTCs and ITCs into new technologies, so with that, solar PTCs are also now eligible. This will provide better returns for some of the projects. In fact, most of the projects will be able to have some slight increase. The eligibility also depends on some labor and apprenticeship requirements but which we are comfortable that we will be able to meet. Regarding new technologies, the IRA also has a new tax credit for standalone storage, as well as an incentive for green hydrogen, which we think will also contribute strongly to the development of the technologies in the US. So, both storage and hydrogen, I think, get a good boost here, which will be positive, certainly for the US and I think for the market and for ourselves.

Finally, just an interesting point on the IRA. It introduces a new structure of the tax credits, so it adds a bonus rate to the base rate and there are essentially two types of bonus credit, one for domestic content for the US manufacturer content and another which is for projects located in certain disadvantaged communities mainly those that are dealing with the impact of the past and current fossil fuel extraction and pollution. So, for example coal plants that have been shut down in the surrounding areas. If we build a project, we will be able to get an additional bonus credit.

So, this is definitely positive for renewables growth prospects. I don't think there's any question about that in the US and as you know, the US is a key market for us. We are present in 14 states. We have a long track record, reaching all the way back to 2007. We have a significant pipeline of projects under development. And so, the approval with the IRA really provides a stable long-term framework to support the renewables project commercial activity going forward and I think we are well positioned to capture that growth in the US.

Let's move on to Europe. Now, Europe, you've also spoken about this in the past, but the renewables growth potential is definitely being reinforced by the repower EU ambitious targets. So, following the Kronos acquisition that we closed in October, EDPR has reinforced its presence also in these low-risk European markets, namely France and UK. We entered Germany and Netherlands. So now we're in 12 European markets. These markets represent around 90% and 82% of the EU market growth potential for solar PV and wind capacity,

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respectively. So clearly, we are all the major markets in Europe and enable to capture that potential growth.

Now, everything is not super rosy. There are obviously bottlenecks and I think we've addressed these very specifically in the last couple of calls and sort of when we talked also to investors and government officials. Things like the length of the permitting processes. I mean this has been a bottleneck. However, we are seeing some movement on this, some traction and trying to actually simplify. We have the Easter package in Germany. This is finally approved in July and so that's got several initiatives to reach the 60 GWs of renewables installed capacity until 2030. In Portugal, the simplex, again, exceptional measures to accelerate renewables like streamlining permit.

Another example is Italy. Energy decrease introduced measures to simplify procedures. So, these are positive steps I think to try and eliminate some of the bottlenecks. Obviously, these are only for a limited number of countries. I know that other countries are also working on additional measures which really is the key issue to be able to accelerate, but I'd say that over the next month or so, we should expect more news coming out of that to move forward with the project.

Let's move on to slide seven. So, talking about capacity additions. Since our Capital Markets Day back in February, we've increased by around 80% or almost 5 GWs the secured capacity until 2025. So, we're now at a 55% target of our 20 GWs that we had until 2025 and we continue to increase visibility and execution of the plan. So, we currently have almost 3 GWs of PPAs under negotiation. We continue to accelerate growth across all platforms. So, the 8 GWs installed and under construction. So, we're adding up to 40% of the 20 GWs target until 2025.

As you know, some short-term challenges that we've had in 2022 mainly in the US have moved or transferred some of the projects from 2022 to 2023. I think we've flagged that in previous calls and months and to mention just a couple, the key ones, one in the US got to do with the supply chain delays and the regulatory uncertainty, because of the anti- circumvention investigation and also the new gear of Forced Labor Prevention Act. So, this posed some challenges and it's postponed some additions to 2023. So, we have expected additions to be above 2 GWs in 2022. So, we've indicated 2 to 2.5. We should be above the

2. So, I think coming up to the end of the year relatively comfortable on that and we have 4.3 GWs of projects under construction, so that's 1.1 GW increase over the last quarter.

And I think this will contribute to capacity additions both in the fourth quarter of this year, but primarily to 2023. So, we are expecting more than 4 GWs to be added in 2023 of which 3 GWs are already under construction. I'd just like to highlight this because this means 2023 will be an intense period because as you know we had around 4 GWs of capacity on average being built. So, just with the projects that we have projected for 2023, it will be an intense year of construction, but I think it will also show really the ramp up and what we are able to do with the team that we have been reinforcing.

Also, in terms of the medium, long-term renewables growth opportunities. I think obviously these are reinforced by the REPowerEU and Inflation Reduction Act, so not just the '24, '25 periods but beyond as I say, we are clearly working already on projects even beyond the business plan period and I think that's something that it's good to -- I've been traveling

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around a bit to the different geographies and the team is already building up that pipeline for the post business plan period. We'll talk about that I'm sure at other points in time.

Ocean Winds. This has been really fantastic growth over the last year, year-to-year. Ocean Winds has now reached a portfolio of almost 15 GWs it's more than doubled, what we had at the beginning of 2021. We've had some important developments over the last couple of months. First Moray West up in Scotland as contiguous to Moray East, which is already operating. So, Moray West is already under construction. We expect that to probably be a 2024 project. We're coming in 2024. We also have a smaller floating project in France, which is expected to close its financial close in that same month and the equipment is also under construction. So again, will be -- we already had a project here in Portugal, a floating offshore. We'll now also have one in France.

In August, Ocean Winds was also awarded two new floating offshore projects in Scotland. So close to the Shetland Islands. That's more than 2 GWs of potential capacity. And in Poland, just this week, our 400-MW offshore project B&C-Wind obtained its environmental decision. So, I think that's also extremely positive. So total portfolio as of September of 2022 included 1.5 GWs of capacity in operation, 3.6 GWs of projects under development with long-term revenues contracted and almost 10 GWs of projects under development with other seabed or connection rights secured until Ocean Winds is clearly becoming a reference in the wind offshore sector.

So, let's move on to asset rotations. Clearly, asset rotation program continues to deliver value in 2022. We're talking about EUR3.4 billion of assets rotation proceeds secured over the last few years representing over 40% of our EUR8 billion target proceeds for 2025. I think it's important to highlight the following: You can see that quite clearly on the graph. We've sold less than what we were expecting. So 2 GWs below the 1.4-GW per year that we assume that the business plan, yet we have resulted in EUR1 billion of total gains in this period, so exceeding by EUR300 million per year, exceeding the target of the EUR300 million per year. So, we reached an average of around EUR500 million -- or EUR0.5 million per MW in terms of the multiple and clearly with a strong value creation. So, two times the guidance provided in the business plan. We're selling fewer MWs but obtained the same proceeds and much more gains per MW than what we had anticipated in the business plan. So, I think that's definitely good news.

And if we move on to slide 10. Just give you a little bit of detail on both the Italian portfolio and the Brazilian portfolio. So, in relation to the Italian portfolio, this was signed in July, closed in September, 172 MWs of wind capacity talking about a multiple of EUR2.4 million per MW. The total asset rotation gain per MW of around EUR1 million and the 65% gain over Capex. So definitely the higher energy prices were a significant valuation driver in this portfolio. So generated more than two times the thresholds of investment targets for the business plan. So, I think this is a great transaction and shows the value creation potential.

Regarding Brazilian portfolio. So that was signed now in October. We expect it to close before year-end. Again, we're talking about a multiple of EUR1.3 billion but still, we're expecting an asset rotation gain per MW of around EUR0.6 million and a 60% gain over Capex. I think it's important to note that this project had a very low, very competitive Capex per MW. Yes, we had a PPA price which gave us our returns of over 1.4 times IRR over

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WACC. So, again, with this transaction, the multiple gaps with multiple lower, but the gain is extremely good, and we're expecting to generate two times the investment targets for the business plan.

So, two good examples. As I say, signed one in July, one now in October. So, in the middle of the increase of interest rates, but showing that we have been able to create value with the projects that we are building and then. So, two good examples. And also, I think it shows in terms of diversification, both in terms of countries and technologies that we are able to create value from this.

Let's move on to talk a little bit about regulation in Europe. Here, just a couple of comments. Recognize that Europe has tried to create a transversal regulation. So trying to define a common tool kit, a common set of policies for the different European countries to react with the higher energy prices; however, what we're seeing in practice is that the different member States are all going out on their own and many of them are implementing their own policies, their own measures, obviously, aiming to provide stability for consumers essentially through either higher taxation for companies or through caps.

Europe defined a revenue cap at EUR180 per MW hour. But the member states have the possibility of establishing lower levels. And that's what some governments are doing.

Now, there are many differences between the different European countries, and I don't think it's worth going through all of them individually. But I would just highlight that definitely Romania and Poland, there are current legislative drafts on price caps and windfall taxes which do raise relevant concerns. We hope that there will be a more balanced final outcome towards the end of 2022. I think over the last a couple of days, we've seen some positive evolution because quite frankly what was coming out of both primarily Romania but also Poland to circumstance. We're certainly not even really compatible with the EU directives so included things like not a legislation did not incorporate some sample hedges in the calculations of the cap.

So, I think it's just worth highlighting that because we are seeing quite a lot of different regulatory production or work going on in the different countries and to just give you an overview of what's going on. We move on to slide 12 and just talking about energy prices, because obviously, that's also a key issue I think for everyone. So, over the first nine months, we had an increase in the average selling price of around 29% year-on-year, obviously impacted by the higher prices in Europe for those projects that were more exposed to merchants. We expect this level of prices per MW hour to be maintained until the end of the year so that would be our view or our guidance for this.

Regarding hedging strategy. We are optimizing it by reducing the volume of long-term contracts. We are around 90% in 2023 and then closer to 80% in '24, '25 period. As you know, we have a lot of it is still lot fixed or hedged but we are slightly increasing the exposure over this period. And so, I think that should allow us to benefit from a favorable repricing as the hedges rollover. Move on to slide 13 and just before I turn it over to Rui, just making a couple of comments on ESG and you've got here some of the key metrics. Maybe just going through a couple of them. So, 100% of the eligible Capex is aligned with the EU taxonomy.

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