EDP Renováveis S A : EDPR Transcript 1H22 Presentation

Transcript - 1H22 Results Conference Call

EDPR

Wednesday, 27th July 2022 13:00 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

Miguel Viana: Good afternoon, everyone. So thank you for attending EDPR's first half 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 the first half 2022 results. We'll then move to Q&A, in which we will be taking your questions.

We know today is a busy results day. So we'll try to do this call in no more than one hour. I'll give now the floor to our CEO, Miguel Stilwell d'Andrade.

Miguel Stilwell d'Andrade: Thank you, Miguel. Good afternoon, everyone. So as Miguel said, I know it's a busy week, so I'll try and just talk you through the key highlights in the presentation and Rui as well, obviously, for the financial impact.

So I'd start off by going straight into the presentation on Slide 5, and essentially say EDP Renewables had a strong performance in the first half of 2022. Quite frankly, as you know, sometimes we have bad quarters, good quarters. This quarter and this semester is definitely a strong one. Strong growth in EBITDA up almost 50% to EUR980 million approximately, very much supported by the expansion of the asset base. We had installed capacity increasing 10% year-on-year. We had good, strong renewable resource mainly the stronger wind volumes, 2% above the long-term average for the portfolio and we also saw a significant improvement in the average selling price that increased 27% year-on- year with essentially higher realized market prices in Europe in general and a positive impact also from them the update of the Spanish regulatory framework and we'll maybe talk a bit about that later on. So it's a win-win.

Our net profit, it increased around 87% to EUR265 million, so reflecting the strong EBITDA performance. Focusing on growth towards the business plan targets and specifically the capacity additions. So since 2021, we've achieved additions of 3.2 GWs and we have a record of capacity under construction of 3.2 GWs by the end of June, but I think this is something worth highlighting that we've really been ramping up the under construction

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• or the projects under construction over this period. We have an additional 2.2 GWs of projects contracted and committed since the beginning of 2022 and we now have 10.6 GWs of secured capacity for the '21 to '25 period. So overall, with these -- let's say, these highlights or these achievements, we are moving closer and closer to the '21 or the '25 target of the 20 GWs of capacity additions. So overall, solid ramp-up of growth across all regions and technologies.

In terms of volume. So this quarter, we completed two asset rotation transactions, one in Spain and another one in Poland with a good average multiple of around EUR1.9 million per MW and a total of around EUR100 million of gain. We have another transaction signed expected to close by year end and there are other transactions under negotiation, which as we've indicated previously for the market, we expect would bring more than EUR300 million of asset rotation gains in 2022. On excellence, we continue to be recognized as a clear enabler of the energy transition, best-in-class, regarding the ESG performance and we've had several distinctions, if you want, throughout the first semester. I mean they are highlighted here on the slide and, obviously, happy to go into any of these that you want.

Moving forward to Slide 6. Let's talk a little bit about renewables growth. So, I think clearly one of the things that's been highlighted by all the market movements over the last -- well, over the last couple of months and particularly, I think by the tragedy of the war in Ukraine is that renewables is a strong answer, not just to decarbonization, but also to security of supply and affordability. I mean, the typical energy trilemma where it was normally more focused or renewals more focused on the decarbonization aspect. Clearly now, it's supporting all three axis of the typical energy trilemma. So we clearly think that is something that needs to be supported globally to ensure that we, particularly in Europe, that they are able to get this additional security of supply and affordability. Europe is in fact taking the lead and just to do a couple of highlights on the different regions, let's say, Europe, US, LATAM and APAC.

So in Europe, REPowerEU presented in May ambitious targets. For example, increasing the weight of renewables in energy consumption to 45%. So increased versus the Fit for 55, but the increase in ambition also requires execution. It can't just be about setting targets for the long run. So the member states now need to act to achieve these targets and there's also been some support and pushed by the European Commission regarding things like licensing and permitting, which I'll talk a little bit later on.

On the other hand, in the US, unfortunately, we see some lack of positive developments. The Build Back Better, as you know, back in December didn't move forward. There was also some -- or some expectation that it might move forward now before the summer.

That doesn't seem that it's going to happen. It's not moving forward at the Congress or Senate level and there's no visibility on the tax credit extensions for now. Although, this is something that typically comes later in the year.

On the positive side, some of the uncertainties around the import tariffs on solar panels have been reduced. This is something I've mentioned on the previous calls. So the anti- circumvention investigation. There is now a two-year tariff waiver which -- so we have at least visibility on that, which is important, but on the other hand, there's been some increase in the bureaucratic process of imports of solar PV equipment that may cause some delays

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to adapt to the new rules. So generally, as you know, we continue to believe the strong structural growth in the US, some short-term issues around, sort of basically, the solar side.

Moving on to LATAM. LATAM as you know, in Brazil, typically the regulated auctions in the C&I market continues to support growth. So we also had some recent auctions there that

• where we were successful in. And in Mexico, just to mention, I mean we only have 3% of our operational capacity there, but there is still some significant regulatory uncertainty for renewables, which is being addressed by the sector.

And last but not the least in APAC, we are seeing governments have more and more commitments to the decarbonization targets. Again, not just because of the decarbonization, but also because of energy security and affordability. Many parts of Southeast Asia, including China, are net energy importers. So obviously this gas price and energy prices in general are also having an impact there. So in Singapore for example, two RFPs were launched recently for projects to import up to 4 GWs of renewables up to 2035. In Vietnam, just to give another example, you have the Power Development Plan 8, which increases the 2030 renewables capacity targets versus the previous plan increases by around 40% for solar and almost triples for wind.

If we move to Slide 7, and just going a little bit more in depth on the REPower. I think what I'd mentioned here is, clearly, Europe is leading the way. So as I mentioned, the target increasing to 45% by 2030. Overall renewables in electricity sector expected to grow from 36% in 2020 to almost 70% by 2030. And so I think it's worth highlighting this last bullet here, which is very striking. The annual additions to ramp up for solar is around 3.5 times to 48 GWs per year and around 2.5 times for wind onshore to 36 GWs per year. So the total renewables installed capacity need to increase by 2.5 times by the end of the decade to reach more than 1.2 terawatts by 2030. So clearly a lot of ambition, but there also needs to be execution and we're convinced that more or less bumps in the road, but there is going to be this push to grow.

If we move on to Slide 8, an ambitious plan as I mentioned but it needs to be executed. And so just highlighting some key points that I think should be addressed and that we've been discussing at various levels, whether it's at the member state level or whether it's even if the European Commission level. There is definitely a need for faster permitting. This is something I think that we can all agree with. I can digitalize it, simplify it, standardize it, so clearly you need to also have more resources here. The plan, so the REPowerEU has mandated an average development time of two years, what currently easily exceeds three year. So clearly, there needs to be push here. I can tell you that we have been getting a lot of

• or having a lot of dialog with the different countries to see how to do this and I do see movement here and I do see sort of a willingness to try and increase or to accelerate the permitting.

Second, easier grid connection. Hybridization, repowering all of this requires fast-track permitting, but also the long-term grid planning and investment. So that needs to go hand in hand with the increase in the build out of renewables. So, Europe overall, we expect it to need an additional 85 GWs of interconnection capacity by 2030. Finally, last but not the least, again, regulation definitely important. Stable, adequate regulation to incentivize investments in the region. And so reduction in the market intervention and giving you

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visibility on auctions to promote the build out of renewables. So it's not just about setting the 2030 target, it's about setting almost annual targets over the next couple of years to make sure that we get to the 2030 target. So clearly strong measures, also a sense of urgency, driven by the macro context. Probably not -- we won't see a very short-term impact, but definitely mid-term outlook is positive and we think EDP renewables is very well positioned to capture this additional growth.

We move on to Slide 9, just to talk a little bit about where we are in terms of the capacity buildup. We already have more than 50% of the '25 target committed. So we've increased it by around 4.6 GWs. Now, this includes all capacity with long-term contracts or with Capex committed. So the 3.2 GWs already operational, 3.2 GWs that are under construction, and the rest that we've already secured typically with PPAs. We continue to have good visibility on the execution of the plan. We currently have more than 3 GWs of PPAs currently under negotiation and obviously we continue to follow also our investment criteria, which we've talked about in terms of IRR over WACC and also spreads over WACC. So what I'd say here is, we are confident on the execution. Even recently, we took a step back and looked at how things were progressing. And I can tell you that we are very confident on this. We continue to secure a different growth opportunity. So it's diversified in terms of platforms and technology and growing across the different regions. On the technology side, I mean we have a great track record on wind onshore. We are developing very quickly the wind offshore. I think the last six months have been very strong in wind offshore and for solar PV, we've been working on it for quite a few years. And so, we also continue to see good growth here in the various different markets and also in distributed solar, quite frankly, both in North America and in Southeast Asia, where we see that that is a technology, which has a lot of scope to grow.

Specifically on offshore, Ocean Winds, our partnership with ENGIE, 50-50. It is a major source of growth. So we currently have 12 GWs portfolio. So we've almost doubled the portfolio we had as of the Capital Markets Day back in February. I think it's important to highlight the development projects in France, the UK and Poland have inflation updated revenue secured. So we are well protected against inflation risk. This is a question we get asked quite frequently. Moray West, one of our projects in Scotland is under construction as of very recently, July. It's been awarded around 200 or 300 MW CFD contract at GBP0.47[ph] per MW hour as of 2022 prices and we have complementary corporate PPAs, let's say, for the full number of MWs of Moray West and then we also have a small merchant component of this.

Another point which I think is worth mentioning. As you know in ScotWind, with approximately 1 GW or the reference we gave to the market was 1 GW, was actually confirmed this month that it's actually 2 GW capacity potential. So, thanks to a UK grid reinforcement plan that was recently announced, we will be able to double the capacity coming out of the Caledonian project. As you know, Moray East, Moray West and Caledonian are all contiguous up in the Moray Firth and so I think that gives us quite a lot of, again, visibility, let's say, of growth in Scotland. Also, I think it's interesting to note. We have a floating offshore development project in South Korea with grid access already secured since the beginning of 2022 for 1.3 GWs of capacity. So that's something that will be seen, the development of that over the next couple of years. So just to summarize, Ocean Winds,

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1.5 GWs installed capacity, 3.5 GWs under development with long-term revenues contracted and 7 GWs under development projects with seabed or connection rights secured. So definitely a reference in the wind offshore sector.

Moving on to Slide 11, asset rotations, definitely being interesting market dynamics, but I'd say positive. We were asked lots of questions about whether the increase in interest rates was going to have an impact on asset prices. What we're seeing is that this has been more than offset by higher energy prices in most of the market. So we continue to see very high appetite from investors. We continue to see strong asset values because as I say and higher energy prices offsetting or more than offsetting interest rate increases, so we clearly expect to be above the EUR300 million capital gains. We've already closed two transactions this year. So, one was the 150 MWs Polish portfolio, closed at around EUR2 million per MW. The second transaction in June was a Spanish wind portfolio, 180 MWs at a multiple of EUR1.8 million, so gains from these total around EUR100 million. We already have 2.6 GW, EUR1 billion euros of assets rotation proceeds out of the total of 8[ph]. So I think that really shows that we are able to recycle capital to reinvest into accretive growth. We have other transactions under negotiations and hopefully we'll get visibility on that over the rest of the year. So we are reconfirming the assets rotation gains in 2022, barring any sort of accidents or some sort of unexpected issue that might come up.

On Slide 12, let's talk about average energy prices or selling prices. I think definitely this is something which we have benefited from in the first half, so an increase of around 27%. As I said, generally higher prices throughout Europe. We expect this level of average selling price per MW hours to be maintained until the end of the year. And although we have a high level of long-term contracted revenues, so close to 94% for 2022, we will still have some positive impact from the current environment. Going forward, as the hedges gradually rollover, we will be able to gradually reprice our renewables generation more in line with the current market environment. So merchant exposure as a percentage of total revenues should be on average around 16% in the period '23 to '25.

So we will clearly be reaching average selling prices above the assumptions in our strategic plan. Also, note that -- we've mentioned this on previous calls, but we are adjusting our hedging strategy to slightly increase exposure to the market on a more structural way and to avoid over-hedging situations in the case of low renewable resources and high merchant prices. I mean, just given the market context and what we expect over the next couple of years, it seems like the sensible thing to do. Overall, we expect a net positive short and medium-term impact from this gradual repricing on our renewable generation, even considering some negative short-term impacts from government intervention in electricity markets like Romania and Italy.

So last slide on my side, just before turning it over to Rui on ESG. A couple of quick comments here. First, obviously, 100% of our Capex to fully align with the EU taxonomy. I mean the core business of EDP Renewables is 100% focused on renewables. Regarding circularity, a waste recovery ratio of 77% in line with our commitments also of achieving the circular economy target in the business plan. On the social dimension, in something which I'm particularly happy, the percentage of female employees has increased to 33%, so a 2% increase versus last year. So I think that reinforces our commitment to diversity. Health and

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