EDP Energias de Portugal S A : Transcript 1H20

Company Participants

• Miguel Stilwell de Andrade, Interim Chief Executive Officer and Chief Financial Officer
• Miguel Viana, Head of Investor Relations

Miguel Viana: Good morning, ladies and gentlemen. Thanks for being with us today in the conference call on EDP's first half 2020 results, which at this time -- the results are being reported exceptionally right after the summer holidays period. We hope you managed to take some rest and recharge batteries. We'll begin with the main highlights on the results, and then we'll provide an update on the strategy execution. We'll then move to the Q&A session, in which we'll be taking your questions both by phone and via our web page, www.edp.com. The call is expected to last no more than 60 minutes.

I'll give now the floor to our interim CEO and also CFO, Miguel de Andrade.

Miguel Stilwell de Andrade: Hello, welcome, everyone -- everybody. Thanks for taking the call. And I hope you had a good summer break. I'm pleased to present a pretty solid set of results for EDP this morning. You all have seen they came out last night. And to take you through it. Maybe just before I go through some of the numbers, just to mention that COVID has definitely presented some challenges over these last few months. But I really think it also shows that the strong foundations of our business and the resilience and the robust response that has allowed us to continue to make progress on the execution of our strategic business plan.

We talk about the Viesgo acquisition in Spain, which we announced in July and that was a significant achievement for us, and it really allows us to grow in activities that we believe are fully aligned with the energy transition, namely networks and renewables. We also continue to see important regulatory developments and a growing public support for the green agenda technologies in our core markets in Europe and the U.S. I think that's come out also very intensely over the last couple of months, and while I think we've also felt the impact of the COVID pandemic, it's also been really a catalyst for progress in an area where we're very well positioned to generate additional value and more opportunities. So being out a couple of months, but I think it's also highlighted the strength of our business.

So let's go to the presentation in terms of the highlights for the first half. On this period, EBITDA fell 3% year-on-year to around EUR 1.9 billion. So on one hand, the EBITDA benefited from the recovery of the hydro in Iberia to close to the historic average in the first half of 2020. So compared to a very dry first half of 2019. So the hydro factor was approximately one. We also had very robust results in the Energy management segment and this was driven by our hedging

strategy in the energy markets. This benefited obviously from the significant decline in the energy prices and the increase in the energy markets volatility. However, we also saw some negative pressure on the EBITDA from the depreciation of the Brazilian real and the contraction of the electricity demand in some of our key markets. I mean, obviously, this affected both our supply operations in Iberia and also the performance in our distribution business in Brazil, where not unbundled, as you know, the supply and distribution are essentially the same thing.

In terms of recurring net profit, this increased by 8% to EUR509 million. This was exclusively driven by the Iberian business, had an increase of EUR120 million, so it almost doubled. So I think this is a really strong performance from the Iberian business this year. This more than compensated EDPR and EDP Brazil's lower contribution. In addition, we also saw the average cost of debt improved by 70 basis points to 3.3%. And this is essentially as we see more competitive refinancing costs when compared to our maturing debt.

Overall, the reported net profit decreased by 22%, so this is dragged by nonrecurring items in the first half of 2020. Essentially, key items here are the impairments in the coal assets following the closure or the anticipated closure of Sines Coal plant in 2021. We announced that in July and also the one-off cost of the hybrid bond repurchase, which we did in the first quarter of this year. Net debt, down 2% year-to-date to EUR14.1 billion. Obviously, this reflects in the first half of the payment of the annual dividend in the second quarter. This a recurring event every year. So there's more pressure on the second quarter. Also like to note that the net debt in June 2020 was flat versus June '19. And so as a result, the ratio of net debt-to-EBITDA was 3.7x in June 2020. Just slightly above the 3.6% in December '19 and clearly below the 4.1% shown last year year-to-date - - last year, June '19.

In terms of cash flow, recurring organic cash flow rose EUR0.3 billion to EUR1 billion. This is obviously supported by better performance and activities in which we don't have partners or minority interests and also the lower interest costs. So despite the COVID restrictions, and I think this is important to note, our expansion investments continue to move forward at a good pace, and they reached around EUR800 million, of which almost 90% was allocated to new renewable projects. And the remaining -- the expansion of the electricity networks in Brazil. We've also made good progress on the implementation of our strategy post June 2020. So as you know, we closed the agreement for the acquisition of Viesgo at a good valuation. This includes, as you know, the long-term partnership with Macquarie for electricity distribution business in Spain. It reinforces our regulated and long-term contracted risk profile. And we've had the opportunity to talk about this in detail in July. So I won't spend much time on this. Obviously, associated with this, we raised the EUR1 billion for the rights issue, representing around 8.5% increase in share capital. But I think this was well received by the markets. It's was critical to support the Viesgo acquisition. I'll touch a little bit more on this later on, but I think the general perception was very positive.

Finally, we also announced over the last month through asset rotation deals totaling EUR1.1 billion of enterprise value. So the first deal, which we announced in mid-August was 240 megawatts in Spain at an EV multiple of EUR2.1 million per megawatt. This is for a portfolio with an average age of 9 years. The second deal, which we announced this week, refers to 560 megawatts in the U.S. at a EV of $2.1 million per megawatt as of COD. So I just highlighted as of COD is the reference that we should use. Implicit valuations in these transactions did support the

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positive outlook that we've shared with you in the first quarter conference call. So I think just reinforcing this trend that we've had.

Let's move forward to the next slide. So on EBITDA, and the breakdown by business platform. So as I mentioned, consolidated EBITDA down 3% year on year, but would have been flat if we excluded the Forex impact, namely the Brazilian real, which depreciated 20% versus the euro. Within renewables and despite the 83% increase in our hydro production in Iberia, just 4% below historical average, the hydro -- the EBITDA had an 8% decline, mainly due to the decline in the wind and the solar. This in turn is explained by the winds resource in our global wind farms portfolio was 9% below long-term average.

The Average capacity in operation decreased by 6%, and this is essentially due to the asset rotation last year, 51% stake in a 1 gigawatt wind portfolio. So obviously, that has a relevant impact on EBITDA level, it was EUR87 million year-on-year impact on EBITDA. Obviously, at the net profit level, this is much less relevant since it's also plus minorities. Finally, the decrease in asset rotation gains by EUR74 million year-on-year. So in the first half of 2020, the asset rotation gains were EUR145 million, reflecting the valuation in the shareholding adjustments from the transfer of most of our offshore wind assets, the new 50-50 wind offshore joint venture with Engie as you know, is called Ocean Winds.

Turning to networks. The 7% fall in EBITDA is mostly related to the depreciation of the Brazilian real. In local currency, EBITDA from networks in Brazil grew 12%, supported by the expansion of the transmission activities, fully mitigating the 8% decline of electricity demand in our distribution areas. In Iberia, EBITDA evolution reflects the decline of regulated returns in Portugal to 4.9% roughly and in Spain to around 6%.

Finally, the improvements in client solutions in energy management, I think this is a strong improvement, it's fully driven by the positive hedging results in Iberia, partially offset by the 17% decline in EBITDA from supply in Iberia, mostly given the contraction in electricity supply volumes by 7%. This was most relevant in the B2B segments, where the decrease in volumes reaching 14% and was only partially mitigated by the 1.5% increment in the B2C segment.

Let's move forward to the next slide, on financing costs. So here, interest costs down 16% supported by 70 basis points decline in the average cost of net debt, as I mentioned, and a 6% decrease in the average debt. Now, this better performance is due to the more active debt management, as the rates of maturing debt were much higher than those for new financing we've got this year. But it's also -- to mention, it's also a significant reduction in the short-term rates in Brazil.

So as you can see here on the table on the right-hand side, we continue to have some short-term debt maturities with relatively high rates that will be maturing over the next quarter. So this should continue to support the downward trend on the average cost of debt over the next couple of years. This is something I think we've been flagging and you guys have also asked us about this for the last year or so. And I think we're seeing that flowing through now the P&L.

Let's move forward to the next slide, on recurrent net profit. So here the FX negative effects impacted EBITDA is obviously more diluted at the EBIT level, and even more at the net profit level. We typically fund our operations in the local currency. So below EBIT, there's a positive impact

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from lower net financing costs, and there's also lower minority interest both at EDPR and EDP Brazil. This is partially offset by a slight increase in effective income tax. So, overall recurring net profit, up 8% to EUR509 million. Reported net profit significantly impacted for the reasons I've already mentioned, so mainly coal and the repurchase of the hybrid bond.

So let's move now to strategy execution and just a few slides on this and a few key messages. Just quickly recapping what we've done since we announced our strategic update back in March 19. So

1. think we've really shown in this period basically a year-and-half that we've been front-loading the execution of this plan. So this has been really important, particularly given what's happened in the last couple of months with COVID, because we've managed to really lock in a lot of value creation and put us on the right path to extract value from growth opportunities that we've been developing now for a number of years.

Then renewables, as you know, 84% of the 7 gigawatt target for this period with long-term contracts. We're well positioned now for accelerated growth in Europe and in the US. Brazil delivering on the transmission project ahead of the regulatory schedule even taking into account the COVID restrictions. Viesgo, stronger presence in activities aligned with the energy transition in our core markets and I think also a significant number of synergies.

Regarding portfolio optimization, so we've already closed our grid more than 55% of the EUR4 billion proceeds related to the asset rotation. On top of that, we've announced a EUR2.7 billion of proceeds from two disposals in Iberia. So the six hydro plants in Portugal and the two CCGTs in the B2C supply portfolio. So overall, I think, we consider this proactive portfolio restructuring has been a major source of value creation.

On the balance sheet, obviously reinforced EUR1 billion of rights issue. as mentioned, reinforced the low operating risk profile with the increased weight for funds with the regulated activities.

On efficiency, fully on track to meet the targets in our strategic plan, OPEX decreasing 3% year-on- year in the first half of 2020. Obviously, part of that has to do with COVID, but it's also really allows us to accelerate some of these savings, given increased digitalization and also greater operational efficiency that we were redesigning during this period. So, I think, it's given us a boost in that respect as well.

On shareholder remuneration, so we're comfortable with the sustainability of our dividend policy, as you know, the EUR0.19 floor, target payout 75% to 85%. And we're completely committed to reinforcing our green positioning and accelerating our decarbonization. So as you know, that's a key part of our strategy and it will continue to be.

In the first half of 2020, 80% of our electricity production came from renewables and our CO2 emissions factor decreased by 57%. Obviously, this is very much supported by the 74% contraction in coal production. Our green position is also reinforced not only by the closure of coal, but also involvement in some of the energy transition projects, including -we're beginning to participate in the green hydrogen project in Portugal, we have some storage projects under analysis for Soto 3. And we also have some renewable projects that we intend to develop in Viesgo's coal sites, which are being decommissioned in the south of Spain. So, definitely green positioning is extremely important for us.

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