EDP Renovaveis SA

ELI:EDPR

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the EDPR First Quarter 2019 Results Presentation Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 8th of May 2019. I would now like to hand the conference over to first speaker today, Mr. João Manso Neto (sic) [ Rui Antunes ]. Thank you. Please go ahead, sir.

[Rui Antunes]

Good afternoon, ladies and gentlemen. Welcome to EDPR's First Quarter 2019 Conference Call. Today, we'll have the presentation as usual. I have here the CEO of the company, Mr. Manso Neto, who'll start with highlights of the period. I'll go through the detail of the results. We'll have some short explanation of the business plan execution and then we can open for Q&A. I'll now hand over to Mr. Manso Neto for the first highlight.

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

Okay. Thank you very much, Rui. So thank you very much for your attendance to today's meeting. It's always a pleasure to be with you. So I would say that -- going directly to the presentation is that this quarter was negatively impacted by the wind resources. That's mainly because, from one side, we were below the average this quarter and we were over the average the last quarter. So both, in fact, as we'll see, will have an impact of over EUR 60 million. Besides that, we had expected decrease in PTCs of the 10-year [ trust ].So these 2 situations, one of expected, another one which is not controllable, the wind, and explain the fact that we have a flat or slightly negative reduction in 2% adjusted in EBITDA and a decrease in net profit. But this is the short-term situation that [ you can't control wind ] because if you look at the fundamentals, we see that all the performance the company continues to be very solid and in track with the previous plan. Most specifically, what we can see is that in terms of operational, we kept high level of availability of 97.3%. We kept a low-risk profile. 93% of the revenues are fixed. The -- notwithstanding we are increasing the weight of high-yield currencies, so higher than the euro. We practically kept the equity financial debt cost at 4.1%, so basically flat. And we [ asked ASCO ] to reduce the tax equity cost, which in the last transactions, as we explained in the last meeting, were the lowest [ forever ].In terms of the business plans, as you remember, we presented together, we developed the business plan for '19-'22 last March in London. And so we are keeping with our growth prospects. We installed mid last year 700 megawatts. We are have 7 -- about 684 in construction. For the 7 gigs that we want to build until 2022, more than 40% is already contracted. And in terms of the self-funding business, we had an expectation of selling about -- having the asset rotations of about EUR 4 billion. And we were able to make this quarter -- this meaning the second quarter, material transaction, which besides giving us important proceeds of EUR 800 million, basically as we see more in the [ pack ] later on, we will have -- it's strongly accretive, not only in the short term. Basically, it's rational from the point of view of value creation. So all in all, we see on EBITDA, notwithstanding very low wind resources this year, a decrease of -- from EUR 94 million to EUR 61 million of the net profit, remembering that the last net EUR 94 million of last year includes a sell-down of a offshore wind farm. So -- but now, we will see more of the details. Rui will tend to -- will follow -- will help out on that. And afterwards, I'll return in the end to see a discussion of the business plan.

[Rui Antunes]

So thank you, João. We now move to Page 7, starting with the details of -- operating details of first quarter results. So today, EDPR is 11.7 gigawatts of installed capacity. We installed, over the last 12 months, more than 860 megawatts. 160 megawatts were sold by -- in December 2018 with the conclusion of a sell-down transactions in the United States and the net year-on-year additions amounts to the 700 megawatts. Also, we have under construction almost 700 megawatts, half of it onshore and the other half already offshore, already have the U.K. offshore projects and under construction currently. So to say that year-on-year, on average, our capacity increased 6%, and that's the underlying growth of our assets of EDPR. Moving to Page 8. In terms of load factoring, I think the key highlights of the results -- especially when we compare with the first quarter 2018. First quarter 2018 load factor was very strong. It was 5% above average, above the P50. This quarter, we have a weak performance on the wind resource of 7% below average. We have 4 quarters that were below the average, the 3 -- last 3 quarters of last year and this first one. We see some recoveries here. We saw -- the worse one was the last quarter of 2018. Now it's recovering. And for example, April, already thought that April was a normal month for EDPR. That said, it looks like our 34%, 7% below average and 4 percentage points below last year. Page 9. Electricity output is lowering 4% when you compare to last year. So in terms of capacity additions, we have more output. But due to the big swing in the load factor performance, this took almost 1 terawatt hour of production, and that's led to a decrease of the load factor of the electricity production by 4%. This was -- especially into Portugal, France and in the Western, Central regions of the United States is where we saw the lowest wind resource. Brazil, okay. Spain, a bit lower. But nevertheless, Spain was more in line with -- or close to the average and the more normalized performance vis-à-vis the other countries. Page #10, moving to prices. Here the performance of the positive one. Average price increased by 3% when compared to last year. So we reached EUR 56 per megawatt hour of average price. This was mainly driven by a recovery of prices of -- in Eastern Europe, in Poland, where we saw recovery of pool prices and green certificate prices, and also in Romania that we saw recovery of the electricity prices as well and -- in that country. In U.S., it's also good news that we're able to increase the price in U.S. by 1% despite having wind farms with lower CapEx and higher load factors. Nevertheless, it's good to have an increase of price performance here of 1% and not having the impact of the mix from the new assets. I'll move now to Page #11. In terms of total revenues, revenues were down in 1% when compared last year. So we have here the big highlights. The negative one is the load factor. The swing of the load factor performance impacted, being EUR 64 million in the top line. So it's EUR 64 million of impact. The increasing the number of megawatts and the growth of -- from the new megawatts increased -- in terms of sales increase in EUR 38 million total revenues. Then when the average price, that the better performance [ gave us ] EUR 15 million, which was the recovery in Eastern Europe and good prices in North America. And then we have the ForEx that have -- EUR 14 million, which has been the strength of the dollar, which is stronger when we compare last year, and we still have some PTCs expiring from the wind farms that were installed in 2009. And these have an impact of minus EUR 11 million. So in all, EUR 521 million of revenues, decline of 1% or ex ForEx, a decline of 4% mainly due to the lower 10-year performance. Page #12. In terms of cost and efficiency, total costs went up by 1%. Core OpEx went up by 1% as well. Here we need to be comparable with last year. We need to adjust by the application of the IFRS 16. With the IFRS 16, we are recognizing the leases' commitments in the balance sheet. So these are leases we have with the lands where we install the turbines. So it's on the balance sheet on the asset side and on the liability side [ where we owe the ] commitment. And this operating cost now is being treated as an amortization or depreciation and as a financial cost. So we took EUR 11 million from operating cost, and this moves down to [ better ] lines. If we make this a comparable analysis, core OpEx would be up by 12%. If we make the core OpEx per megawatt installed, which is the unitary cost of the company and is where we measure the efficiency, on adjusted basis, this would be up by 1% only. And this is specifically due to certain online expenses that we have in the first quarter. In the last year, we have those online expenses spread throughout the year. So it's something that we see as in line with the execution that we expect for our business plans. Page #13. In terms of EBITDA, we see a flattish EBITDA when compared to last year, 1% up. If we adjust by the IFRS 16, it's 2% down. Nevertheless, with the big impact that we have in the load factor, we see it as a good performance, underlying performance, taking in consideration other metrics like improvement on prices, selling prices, and a stable performance on the cost side in terms of efficiency. Moving down to Page 14 and to the net profit. Total net profit totaled EUR 61 million. This is a decrease of EUR 33 million when we compare it to last year. We're [ in solid ] EBITDA, so it's performing better than last year. The depreciation, amortization, EUR 24 million, worse than last year due to the new capacity and also due to the impact of the IFRS 16. That's had an impact of [ EUR 24 million ]. EBIT is down by EUR 19 million. Financial results or financial expenses here is an increase of EUR 40 million. And from the EUR 40 million, EUR 15 million comes from the capital gain that we had last year with the sell-down of stake in the U.K. offshore project. In the first quarter of last year comes from the IFRS 16, which is about EUR 7 million here. And comes from -- also, we have some costs, higher costs with the derivatives that we have to cover our investment in dollars with the spread from the LIBOR and Euribor and have an impact here as well in this line. Taxes. It's -- are better in EUR 5 million. Effective tax rate is higher, yes, than last quarter. But also effective tax rates have an impact of the beginning of the sales, special tax in Portugal that were already booked the full year here, which amounts to EUR 3.5 million for the full year and is already included in the first quarter of 2019. So minorities line are better in EUR 22 million. Most of this is explained by the lower performance of some wind farms, especially in terms of the top line and the lower wind resource that these wind farms had. So all in all, EUR 61 million of net profit in first quarter. Page 15. In terms of cash flow generation, retained cash flow amounted to EUR 268 million. It's 6% lower than last year, mainly because of the -- what I have explained in terms of operating results and also due to the financial results that we have lowered capital gains. But nevertheless, it's a robust figure of almost EUR 300 million that we're having on single quarter. Moving to Page 16. In terms of balance sheet, we continue to see a solid balance sheet. There is an increase of EUR 550 million of net debt plus tax equity liability. Most of this increase is explained by strong cash investments that we have in the first quarter. This is still the payment of all the megawatts that were installed over the last 6 months that we have the cash impact in this quarter. So 3.5 -- EUR 3.6 billion of net debt, plus EUR 1.1 billion of tax equity liabilities. So I'll now hand over to João Manso Neto for the business plan execution.

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

So as we referred, this quarter was clearly affected by the short-term effect and lower wind resources. As you can see Page 18, basically it amounts to EUR 64 million, which if you have the PTCs and even if you adjust for the IFRS 16, we see an impact of EUR 60 million, which makes -- explains the difference. But I would say more importantly than this is, clearly, this is the story of the performance [ of this one ]. But I think that it's important, as we are together, that we could share with you if this fourth quarter in a row of low wind resources represent any trend. And so as you may understand, we make this kind of analysis systematically. And what we want to share with you is in Page 19 is what we did in a study to see if there is any trends in what concerns the evolution of the wind factor, the gross factor. What we did basically is simulating from 1994 to now that current fleet and to see if the winds changed. What we can see very clearly is that the conclusion is first, there is no trend. The trend that is flat, the movement is flat either in Europe or in U.S. So this is the first conclusion. But there are 2 other conclusions which are interesting. One is that the local volatility of the wind is about 2% deviation of only 2.5% to a 3% [ distribution ]. And the final one, which I think is interesting information is that it's confirmed no correlation, no material correlation between our geographies. That means that the correlation between P90 and P50 is 97%, which means practically no correlation. So this shows us that the one side, in our geographies, we don't see any trend in our -- in [ our models ]. On the other hand, it's confirmed the low volatility in the portfolio. Having said that, I would say short-term results are very -- something which will be -- [ this time ] next quarter will be completely different. What is important is how are we able to proceed so we can concentrate -- will concentrate our work in terms of implementing the business plan as we remind you in Page 20, which is a simple business plan in which we'll continue to be efficient in terms of operationals with high levels of availability, reduction core OpEx per megawatt, keeping a strong growth, which we expect 7 gigs of installed capacity up to 2022, which is that we refer 40% to already installed and with diversification in terms of geographies and in terms of technology, being wind onshore 70% but with a very important weight of solar and offshore. With all this, what is -- we referred in March, we expect a 6% per annum increase in EBITDA and 11% per annum increase in net profit. So how are we in this moment? As we reported, our track record in the past in terms of growth had been important. And maybe I will just remind you that our business -- previous business plan '16 to '20, we expected to have 3.5 gigs installed in 2020, and in'19, we had already 4 gigs guaranteed. So this is the past. But it's important that we have shown already that we are able to deliver. And for the future, we have more than 40% -- I think it's about 44% already guaranteed for -- until 2022. And what is interesting to see here, and you have on Page 21 some detail, is the important diversification in terms of geography, U.S. is important, but it's not only U.S. We have Brazil, have Europe. We have new countries, in the case of Greece, but also in terms of technology with solar with about 400 megawatt and offshore. So in terms of growth, we are at the beginning of the business plan with more than 40% already guaranteed. In terms of the anticipated sell-downs, we have spoken about EUR 4 billion until 2022, and we have already done the first transaction of EUR 800 million. And here what we wanted to share with you is basically not only the proceeds are important, EUR 800 million, but more important, 2 information. One is that the CapEx -- estimated capital gains will be about EUR 200 million, which represents about EUR 0.4 million per megawatt, which is an interesting metric. We keep serving -- giving the service operationally in industrial services, which is a change of [indiscernible] fee, which is a continuation of the -- fairly, from this stream of activity. And all in all, this transaction is not a short term one. It's not just we have proceeds. Of course not, it would not make sense. What we did with this transaction, we said we would deliver to the investor an IRR of between 4% to 5%, which compares with the investments, excluding Brazil, which is, sorry, 7% and 11%. So this transaction shows that not only are we able to -- you'll be able to reach completely the objective. But the way we do it and it's not just doing it for doing it, but has a strong rationale in terms -- not only in terms of consolidating of the gains but also in terms of compressing spread between what we have sold and what we are investing. So as a conclusion, the first quarter with strong operational results but negatively impacted by low wind. We don't -- second conclusion, we don't see any trend, but we do see a stabilization and a very -- a portfolio, which is not correlated. And so it's a natural stabilizer. And finally, we are perfectly on track in terms of executing the business plan and in terms of growth and in terms of the sell-downs. So this is what's basically what we'd like to share with you. Now we'll be delighted to answer to any questions.

[Operator]

[Operator Instructions] Your first question comes from the line of José Ruiz.

[José Javier Ruiz Fernandez, Analyst]

Yes. Just one question, a clarification on Slide #21. I mean I think -- it's the first time you disclosed the technologies by regions, and I'm missing solar in Europe. And my question is basically, given that most of your competitors are going into hybrid solutions, particularly in Iberia, do you have a view on that and why you haven't included solar in Europe?

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

Let's see, this is what we have already secured, meaning with a tariff or with long-term PPA. This is not our target. We do believe in solar also in Europe, and we are working strongly on that for the next options which may occur. I think in several countries mainly in Portugal, [ we believe ] and we have also other projects in U.S., in Brazil. So this is not our target. This is what we have already secured in May '19, meaning in just the beginning of the business plan. Regarding solar, so we do believe in solar [ here on this end of the island ] and also, when applicable, in terms of hybrid projects. So we have -- and hybrid is not only solar and winds. And the fact that we are in the group in which renewables also have a name, which is hydro, hydro and solar can, in many places, make sense. And so we are strongly supportive, and we are investing in solar. What I would like to tell you is that we think that solar as the other technology, but in mining solar do require a long-term agreement for about at least 15 years. And why? Because we think that the more solar we put, the less -- the bigger discounts. So the essence of our strategy will be to invest in solar but always based on long-term agreements.

[Operator]

Your next question comes from the line of Sara Piccinini.

[Sara Piccinini, Research Analyst]

The first one is on prices. The question is how do you see the evolution of prices in Europe and in U.S.? And in Europe, if you can quantify the contribution of higher prices in Eastern Europe for this year in terms of EBITDA. And in U.S., also if you can explain how did you increase the price by 1%. And did you renegotiate the PPA? And so just an indication of that. Then second question is on -- if you can provide an indication on the next auction. So where do you intend to participate? And last question, in Slide 22 you show the IRR of 7%-11% of new projects but excluding the Brazilian project. So why are you indicating that Brazilian projects have a different IRR? And is there any element to consider for a lower or higher IRR?

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

So regarding the prices, let's see, we think that in the short term, we see that -- we believe that the forward prices that you see in the different markets are the best estimation of debt. And so I would say that in the -- if you look at the 12, 24 months, I would say that the forward prices that you see in different markets tends to reflect our view. So we don't have fundamental difference regarding that. Regarding Eastern Europe, I think we have the numbers of what -- how much did they increase the price. It's about -- Rui, do you have the numbers?

[Rui Antunes]

So Eastern Europe, so Poland, price increased by 39% and Romania by 33%. So the price that you see in the first quarter '19, I think you can -- we don't see those prices changing much until the end the year because we see the forward prices. We make the -- also our hedges on the prices as well as I explained 93% of the total portfolio of EDPR is fixed. So we should see the same pricing trend in this region until the end of the year.

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

In fact, as you remember, the last time we spoke that when we spoke about the future, we were positive about the, namely, evolution of the prices in Poland and in fact, we are confirming. The green certificates prices were normally depressed. And now with increasing the local [ quarters ] and the stabilization, then you supply you green certificates -- the prices of the green certificate had to grow. And so obviously, we had most of the position at, more or less, the -- at present, we have preference. In the case of U.S., basically, it's some new information. We had new PPAs entering [indiscernible] and different. So this explains basically what happens. This and the -- some spots -- and some are short-term one. But basically, it was some new PPA. Some of them have lower prices, some of them come in at a higher price. In this quarter, the lower and the higher were there. In terms of auctions, let's see, we'll be prepared to participate in the different auctions. Portugal is clearly the case. Let's see, we don't know the rules yet but you can be sure there will be a tariff. We will be able to participate there. In the case of Spain, we need to have -- to know the rules as we have said several times. We like the [ simple things ] to see if these are the best way of doing it. Our expectation that in the future in Spain, also involves [ debt ]. And if it does, we will be able to participate. If not, we prefer to go to -- through direct bilateral agreements. Finally, the question about Brazil. It's just debt. Because Brazil has much higher yields, because cost of capital is much higher, it did not seem fair for a comparison, to compare the yield in Europe of 4% to 5% with 13% or 14% in Brazil. It's just that it would not make sense because the cost of capital is so different that it will not be a fair comparison. What we would like to -- we wanted to show is comparing what is comparable, meaning Europe and U.S. are one side in terms of new projects and the better -- the portfolio that we sold on the other. Putting Brazil in the middle will bring numbers between 7% and 14% or 15%, which don't make sense.

[Sara Piccinini, Research Analyst]

And sorry, just on this last one, just to clarify. This 7% to 11% IRR is -- are these projects where you already invested, where you identified opportunities? Or what investments are included in this 7% to 11%?

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

Basically, the ones that you see in Page 21.

[Rui Antunes]

Without Brazil, of course.

[Operator]

Your next question comes from the line of Mafalda Pombeiro.

[Jorge Guimarães, Analyst]

Jorge Guimarães here. I'm sorry I'm using the line of my colleague Mafalda because I have a technical problem with my own line. I had 3 questions. Firstly, can you elaborate on the expected evolution of financial cost for the year? Secondly, regarding the auctions in Portugal. Are -- is the solar capacity in Portugal included in the 200-megawatt solar objective? And the -- you mentioned that the rules are not known yet. So should we assume that this -- if the rules change versus your [ pricing ] now, you would be out of the auction? Or are you going to participate in the auction anyway? And finally, would like to have your view on the recent evolution of solar CapEx cost and if it's possible to, mainly in Spain, to build solar into [ selling it ] at merchant prices? Or you would always require PPAs or something like that?

[Rui Antunes]

Jorge, this is Rui. On the financial cost, the big change here was outside -- there are 2 big change. One was the capital when -- last year, that we see -- we did -- we do not have. And then we have the IFRS 16. So expect for the rest of the year to have the IFRS 16. So the number on the quarter is you can easily use it as a trend for the rest of the year. Then on the rest of the cost, the one that should be -- could be different into the rest of the year is the one related to the net debt. That's had a spike at the beginning of the year because we are paying a lot of CapEx that we did last year, a lot of investments or megawatts that were installed. Now we just expect to receive the EUR 800 million still this quarter on the second one. And so you can see that, again, the net debt going to the same levels -- more or less the same levels that we had when we ended last year. Net debt's the one. The -- in terms of cost of debt, the average cost of debt, we don't expect it to change much, to be around the 4%. So outside net debt, the answer to your question in terms of trends, we don't expect big or significant one-off impacts here until the end of the year.

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

Yes. And of course, as we cannot project the increase of financial cost until the end of the year because of what we said. Regarding the solar, so just perhaps I did not or we did not explain properly. But Page 21 are not the objectives, are what we have today as guaranteed. And so we have -- don't have anything here also in Portugal. So this is the first point. We don't have it here. What we have here in solar is 200 megawatts in U.S., 200 megawatts in Brazil, all of them supported by long-term private PPA. So -- and that's why -- your first question about if the rules are different. Let's see, if the rules -- if you think that the rules are okay, we'll participate. If the rules are not exactly what we'd expect, we'll see. But nevertheless, those numbers are not here. Everything that we may win in an auction in Portugal will be -- we'll add those numbers. And finally, about CapEx. Let's see the CapEx is going lower and lower. And this means that the levelized cost of solar, meaning the price which makes profitable a project in solar is decreasing. This is clear. This does not mean, in our opinion, in our opinion, that a merchant must invest. The merchant is the way of making profitable the solar one. And the reason is in Iberia, the idea is very clear. It's because as we expect, everybody expects a very strong increase in solar installation. That may mean that the hours in which the solar power is bigger, the price will be lower. So I would say that the more solar expectation, the more solar investment that you see in the Peninsula, in Iberia, the less -- the more risky it will be to invest in solar. And this is not a question of the CapEx being higher or lower. The problem is that if there is lots of injections of new power in solar power in a certain region like in Iberia, the realized price of the solar is going to be lower and lower. That's why we feel that the long-term pricing is what makes sense. Of course, the long-term price is going to be very competitive because the -- as this -- as we told you -- anyway, we strongly recognize then the OpEx costs are going down continuously.

[Operator]

Your next question comes from the line of Meike Becker.

[Meike Alina Becker, Research Analyst]

Meike Becker here. Question number one, what other new countries are you looking at outside of Greece and Colombia? Would you, for example, be interested in Italy if they restart the auctions? And question number two, how big is your pipeline all-in, including all the undeveloped projects at the moment?

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

Let's see, Italy is not a new country. We are already there in Italy. We have been very successful in auctions. And so Italy is a country which is interesting for us. We are building now. As you remember in the last auction that was held, we won about 15% of the auction. So we are a player in Italy. We'll tend to continue. Regarding new other countries, as you know, as our policy, these aren't announce things before doing them. So Greece, we are going there. We have projects in Colombia. And as our policy, I prefer never to announce things without having them on our hands. In terms of the pipeline, it's over 20 gigs of capacity.

[Operator]

There are no further question at this time. Please continue.

[João Manuel Manso Neto, Executive Vice Chairman & CEO]

Well, if there are no other questions, thank you very much for attendance.So referring to the conclusions, we are very confident of our ability to deliver the business plan. The operation is also solid and so are in terms of quality of what we do, in terms of growth and in terms of being able to make sell-downs accretive, we are totally confident on that. Thank you very much for your attendance.

[Rui Antunes]

Thank you.

[Operator]

Thank you. That does conclude their conference for today. Thank you all for joining. You may all disconnect.