EDP Energias de Portugal S A : Transcript 9M22

EDP - ENERGIAS DE PORTUGAL

Friday, 28th October 2022 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. Thanks for attending EDP's Nine Months 2022 Results Conference Call. We have today with us our CEO, Miguel Stilwell de Andrade, and our CFO, Rui Teixeira, which will present you the main highlights of the nine months 2022 financial performance and update on strategy execution. 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're getting search from now onwards at our web page. This call should last close to 60 minutes.

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

Miguel Stilwell d'Andrade

Thank you, Miguel. Good morning, everyone. So, thank you for attending this results conference call. If we move into the presentation, to talk about the first nine months. I think the first thing to highlight is that we had a strong EBITDA performance in this period. So, we had an increase of around 21% to EUR3 billion. This is mainly, as a result of the wind

and solar capacity growth, good resource, so higher wind and solar and higher selling prices.

On the electricity networks, given inflation impact in the tariffs updates and the ForEx in Brazil, there was also a good increase there in EBITDA. We also had an increased thermal activity. And finally, but on a negative note, we had the hydro production continuing very low in the third quarter of 2022. With the hydro shortfall increasing to around 3.3 terawatt hours versus the expected for this period. At the net profit level, we had a 1% increase year- on-year to EUR518 million, so we saw an increase in financial costs, mostly due to Brazil, just given the interest rate hikes in FX. But this was more than compensated by the inflation impact on EBITDA from networks that I just mentioned.

Net profit was fully supported by our international operations with net profit in Portugal staying at negative EUR181 million in the nine months, strongly impacted by the hydro shortfall that I mentioned. Also, in the first nine months of the year, they were marked by good investment execution, ramping up with gross investments amounting to approximately EUR5.5 billion, out of which 96%, practically all of it, focused on renewables and electricity networks. As of September, we've a record 4.3 gigawatts of capacity under

Transcript - 9M22 Results Conference Call

construction in the 15 markets, and we're also investing in networks, namely with transmission growth in Brazil.

So, move on to the second slide, just to give you a note about the situation in Portugal and the 2023 electricity regulated tariffs proposal. As you know, that's typically comes out mid-October and then the final approval is in mid-December. In this case the regulator, ERSE, presented on the October 17, an increase of just 2.8% for 2023, which given the current market context and energy prices throughout Europe. I think shows that this is an extremely resilient system. So, it's a moderate increase in tariffs, any reduction in system debt.

So, as you know, the Portuguese system, so why is this happening. The Portuguese system has a high penetration of renewables. These are remunerated mostly through the feed-in tariff, a fixed feed-in tariff which is updated to inflation and that's around EUR90 per megawatt hour. So having these stable feed-in-tariffs, basically this used to be additional cost versus the wholesale price, it's now providing the surplus or discounts to the wholesale price, when the wholesale price is expected to be around EUR260 per megawatt hour for 2023.

So, the system is in effect buying at EUR90 per megawatt hour and then selling at EUR260, and so it generates tariff surplus to the Portuguese electricity consumers. This stability and the regulated prices for consumers is not being achieved at the expense of the increase in system debt, which as you can see has decreased this year already from EUR2.1 billion in 2020 to EUR1.4 billion in the end of September 2022. So, overall, I think this just shows it's the value of a system with a high penetration of renewables and a stable regulatory framework. We've actually talked about this as a case study for many policy makers throughout Europe, because it shows really the value of locking in these long-term contracts and the resilience that it gives to the system.

If we move on to the next slide, we can talk about networks, and networks in Portugal in particular. So, the proposal presented by us, also disclosures and update to the rate of returns for the Portuguese electricity networks. The regulated revenues should increase around 2% to EUR1.05 billion, based on a preliminary rate of return of around 5%. So, it's an increase of 33 basis points versus 2022. However, what I'd like to highlight is that this rate of return is indexed to the average 10-year Portuguese bond yield for the last 12 months, until September of 2023 next year. So, the preliminary rates of return of 5%, 5.03%, considers an average Portuguese bond yields of 1.4%. Well, taking into account that the average bond yields for the first 20 days of October was around 3.3%, this would result in a rate of return of 5.6%, as you can see on the graph on the right. So clearly room for upside in 2023 here.

Finally, it's also worth mentioning that the regulatory asset base and the Totex, our inflation updated based on the GDP deflator for 2023 was considered the average for the last 12 months and in June of 2022 of around 1.5%. For the 2024 tariffs, there'll be a clear upside since the IMF projected 7.8% GDP deflator for 2022.

Let's talk a little bit about Brazil. So here I'd like to talk about the positive macro trends we're seeing in Brazil. I had the opportunity to be there, with the team a couple of weeks ago and clearly seems to be counter cyclical to what we are observing in Europe and the U.S. The

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electricity wholesale price, the PLD, has declined to around BRL60 per megawatt hour, which will have a positive impact on final consumer tariffs and it reduces the regulatory pressure. As you know in Brazil, it's been raining a lot and that's obviously had an impact on the decrease in the wholesale price.

In relation to inflation, the Central Bank of Brazil has intervened in a very quick manner, and so that's the ramp up their interest rates, that's led to a slight slowdown. We've actually seen deflation in the third quarter of 2022. So, inflation seems to be under control, now in Brazil. If this decline in inflation is persistent then that would allow the Central Bank to start to cutting interest rates by the second half of 2023. So definitely counter-cyclical to what we're seeing in for example, the U.S. and in Europe.

On our presence in Brazil, we've seen a strong business execution with a total investment of EUR0.9 billion in the first nine months, focused on electricity networks and renewables, and this represents a 75% increase year-on-year. We're reducing our exposure to conventional generation as we committed to in the Strategic Plan, namely through the hydro-disposal completed in August. And we also, releveraged, we recapitalized the thermal plant, Pecem, which we announced in September. And that creates options to reach the goal of removing coal activity from the EDP Group revenue mix by the end of 2025. Overall, in euro terms EBITDA in Brazil increased 48% year-on-year and net profit increased 16% year-on-year.

Going on to Slide 8. I'm talking about renewable growth in both Europe and in the U.S. So, we've covered already quite extensively these two topics in the EDPR results call, just on Wednesday. But I'd just like to reinforce the unique long-term growth opportunity that we've because of the approval of the investment of the Inflation Reduction Act in the U.S. So that gives us 10 years of visibility on the renewable tax credits framework, and it allows us to really plan ahead and develop a good solid pipeline and set of projects.

Regarding the RepowerEU, the measures to foster renewable growth, we've already seen developments since some Member States, we have talked about Germany, Portugal, Italy, as examples where we're seeing simplification of some of the bottlenecks that exists to rolling out renewables. Also in Europe, just to mention that in the context of high prices is pushing European governments to take different price stabilization mechanisms and measures. And obviously, the idea is to provide stability of prices to consumers. In some cases, this is done through higher taxation of companies and other cases it's through caps. I think the important point in which we like to stress and value is that there should be an attempt and that's what the European Commission is doing, to try and create a transversal regulation. So, to avoid fragmentation and to avoid creating more regulatory instability and uncertainty in each of the European countries.

Now obviously there is increased political intervention risk, I think we're all seeing that. In the case of Romania and Poland, there have been some recent legislative drapes on price caps and windfall taxes, which have raised some concerns. We hope to see some more balanced final outcomes towards the end of 2022. In relation to Romania, I'd like to think that there would be positive developments there. Poland, I think is still out in terms of uncertainty. So, let's see what happens over the next couple of weeks.

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Let's go on to Slide 9 and talking about capacity additions. So, over the last 20 months since we presented the business plan, we've already increased the secured capacity for the 25 period to around 11 gigawatts, 10.8 gigawatts, which represent 55% of the target. We've 18.1 gigawatts already installed or under construction, which is around 40% of the 20-gigawatt capacity additions target. However, I think we've recognized there are short- term challenges that mean that, some projects have been transferred, quite a few projects have been transferred from 2022 to 2023. On one hand we have supply chain delays and the regulatory uncertainty in the U.S., which has created challenges for the import of solar panels in particular, and that's moved projects to 2023. So, now we're expecting overall globally additions slightly above 2 gigawatts in 2022.

On the other hand, we expected more than 4 gigawatts will be added in 2023, of which 3 gigawatts are already under construction, that's more than 4 gigawatts, we will then go and updating over the next year as to exactly what that number could be. We also see that the medium and long-term renewables growth opportunity for 2024 and 2025 and beyond, continues to be supported both by the RepowerEU and by the Inflation Reduction Act initiatives. So definitely good for the medium, long-term growth perspective.

If we move on to Slide 10. So, talking about asset rotation strategy, definitely continues to deliver value. We're talking about EUR3.4 billion of asset rotation proceeds for the 2021 to 2023 periods of 40% of our EUR8 billion target. We sold 2 gigawatts in this period 2021- 2022 so far, so below the 1.4 gigawatts per year average that we assumed in the business plan for 2021 to 2023, but we've already achieved with that EUR1 billion of total gain in this period, so an average of around half a billion per year. So, exceeding the target of the EUR300 million per year. So good execution there.

Overall, we expect a good performance in terms of value creation. We've shown this time and time again, gains per megawatt at around EUR0.5 million per megawatt which is more than two times the guidance provided in the business plan. So, we're selling fewer megawatts, but overachieving in terms of gains and in proceeds which is obviously a good place to be. And as you know, some of those portfolios have been sold very recently, both in Italy and in Brazil, showing that clear value creation.

Okay, let's talk about Iberia and 2023, and how we see since the electricity prices evolving and the hedging strategy. The first thing I'd like to highlight is that the generation the energy management businesses were penalized in this first nine months of the year, by the hydro shortfall. So, as you know, it's been very public, we've ended up with a short position in 2022 at a time when wholesale electricity prices were at all-time highs. The hydro shortfall, as I mentioned at the beginning of the call was around 3.3 terawatt hours below the long- term average in this period. And that resulted in over hedging, which caused higher sourcing costs on the energy management. As you know, the gas markets have also been quite volatile and gas prices were high in the third quarter of 2022. So, this implied an increase in the gas sourcing costs, since we have to buy gas in the spot market, given some slightly lower volumes from long-term contracts.

On the positive side, and I think that's what justifies that we ended up being in line with last year's net profit and above in terms of EBITDA. So, to mitigate the impact of the hydro shortfall in Iberia and given the energy crisis in Europe, thermal generation has increased around 5.6 terawatt hours year-on-year. So, for this period or for the next year 2023 to

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2025, we're optimizing EDP hedging strategy through a structural reduction of maximum hedged volumes, and so to reduce the over hedging risks that could happen.

As you can see on the graph, electricity forward prices remain high for this period '23, '24 and '25. And as such, we can expect an average selling price upside, in the following years as the hedges rollover and hedging strategy is optimized.

Finally, just before I turn it over to Rui. On ESG, we continue stepping up on the green leadership position. We've had fantastic performance across the different metrics and on the ESG rankings. So, in August we issued our first sustainability linked loan, in which the cost is impacted by two ESG KPIs: the reduction in greenhouse gas emissions and the percentage of renewables installed capacity.

Overall, the Green Bonds already represent 46% of EDP's outstanding bonds, with EUR2.3 billion of Green Bonds issued just in 2022. In terms of recognition by top tier institutions, so we maintained our position in the Top 10 weight of the S&P Global Clean Energy Index. I think that's important given the tighter requirements from that index, which ended up impacting other integrated utilities. And we've maintained in the top 5% in the FTSE4Good Index, with an improvement in this quarter, in September 2022.

So, I think these are some of the key issues to highlight, I mean, other things on the slides. But for the sake of time, I'll stop there and turn it over to Rui, and I'll be back again. Thanks.

Rui Teixeira

Thank you, Miguel. Good morning to you all.

So going into EDP's financial performance for the nine months, I'd like you to move to Slide 14, please. So recurring EBITDA increased 21%, year-on-year to about EUR3 billion in the nine months 2022. The recurring EBITDA for the wind and solar platform was up 62% supported by higher average installed capacity, of course, the strong recovery of wind resource that were in line with long-term average and improved average selling price.

In electricity networks recurring EBITDA increased by 20% year-on-year mainly driven by the growth in Brazilian networks and due to a positive annual tariff update and significant depreciation of the Brazilian real.

Just finally on an integrated basis, EBITDA from client solutions, energy management and hydro decreased 32%. This is of course penalized by the 3.3 terawatt hour hydro production shortfall, that Miguel already referred to. Combined with high electricity Iberian prices, that reached an average of EUR186 per megawatt hour in the nine months this year. This was partly mitigated by higher thermal generation in Iberia.

Good morning again, apparently there was a glitch here and we went offline. I think by the time I was ending on Slide 14. So now I'll move on to Slide 15. I was going to explain the wind and EBITDA, sorry, wind and solar EBITDA performance, a 62% increase year-on-year. As I was mentioning this is of course driven by the 10% growth in installed capacity in renewables, the fact that we have achieved and recovered on the resources side, on the wind resources aligned with long-term average and of course the contribution from higher selling prices of EUR66 per megawatt hour, that's a 29% higher versus last year.

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