EDP, S.A. (EDP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to EDP's 2019 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Miguel Viana, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen. Thank you for being with us today in the conference call for EDP's 2019 results. We'll begin with a brief introduction by our CEO, António Mexia; then our CFO, Miguel Stilwell de Andrade, will provide us an overview of results and the main developments of the period. And then we'll come back to our CEO for a more detailed analysis of the status of our strategic execution. Finally, we'll move to a Q&A session in which we will be taking your questions, both by phone and via our web page. We expect this call to last no more than between 60 and 75 minutes. I'll give now the floor to our CEO, António Mexia.

Thank you, Miguel. Thank you. Good morning, everybody. Thanks for being here attending our conference call on the results of 2019. On your Slide #4, just to highlight, I would like to start providing an overview of our performance. And first and foremost, I believe it's important to mention that we have achieved a sound performance in the first quarter, so since the last time we met, that supported the delivery of 2019 financial targets. In fact, during the first quarter, hydro volumes were 56% above our historical average, which allowed not only to increase hydro generation, but also to recover storage levels in our reservoirs. The high volatility of the energy markets in the quarter also led to good results on our energy management in Iberia. Additionally, in Brazil, we booked in this quarter, the asset rotation gain from the sale of Babilónia wind farm and continue registering a robust growth in networks. Lastly, another important remark worth mentioning is that interest costs started a downward trend and are expected to continue this path in the following periods. All in all, our EBITDA increased by 12% to 7.3 -- EUR 3.7 million -- EUR 3.7 billion with strong growth across all our 3 business platforms. A number that is clearly above the EUR 3.6 billion that we reported and were expected back in September. In line with our operational performance, our recurring net profit increased by 7% to EUR 854 million. I would also like to stress that our net debt-to-EBITDA was reduced from 4.0x to 3.6x, as of December '19, still not as much as expected, in line with our -- the levels committed. Regarding dividends, the Executive Board of Directors will propose at the Annual Shareholders Meeting next April the distribution of a dividend for the year of '19 in the amount of $0.19 per share, which represents a payout of 180 -- sorry, 81% on net recurrent income. So clearly, the floor is respected, the commitment is there and in the middle of the bracket that was proposed. Now I will pass to Miguel Stilwell for a more detailed analysis of our results and then come back to talk about strategy execution. Thank you.

Hi. Good morning, everyone, and thank you, António. So I'll start off talking about -- on Slide 5, talking about the hydro and the wind performance, which obviously impacted our business throughout the year. So in hydro, we had basically 2 periods. We have the first 9 months, which were particularly dry, as you know, and with weaker hydro resources. And that was a drag, I think, for most of the year, particularly the first quarter. And then we had the last quarter where, in particular, December, we had very strong hydro resources. So overall, for the last quarter, we had -- we were 56% above the historical average. So this basically allowed a recovery of the storage level in our reservoirs to above -- 0.4 terawatt hours above the historical average, which meant that we got a good start to the year also for 2020. Regarding wind resources, they were 3% below the long-term average in 2019, but still better than last year. And so overall, on the load factor from the wind farms improved from 30% in '18 to 32% in 2019. Moving on to Slide 6, talk about EBITDA. So EBITDA, as António mentioned, was up 12% to EUR 3.7 billion. All 3 platforms contributing to this growth, as you can see here on the right-hand side. So renewables rose by EUR 89 million, mostly driven by the results from the wind and the solar, which more than compensated the decline in the hydro in Iberia and Brazil. EBITDA from networks went up by EUR 160 million, which is pretty similar value closer to the increase in EBITDA from client solutions and energy management. The year-on-year boost from networks was mostly from Brazil. The client solutions, energy management was mostly in Iberia, that increase. So moving on, I'll give a little bit more detail after that on the detail of the EBITDA from the different activities. So moving on to Slide 7 and talking about the wind and solar EBITDA. It increases by 27%, an improvement of 6% in generation, together with a 2% increase also in the average selling price. We also accelerated the execution of our asset rotation strategies. We got total gains for the year of EUR 330 million, basically from 2 deals, 1 in Europe, which we'd already announced in the first semester results, EUR 226 million; and another now in this fourth quarter in Brazil, EUR 87 million. So this compares with gains of EUR 109 million in 2018 relating to the sale of our wind portfolio in the North America. So basically, we outperformed what we set out in our strategic plan regarding the capital gains on the -- this asset rotation. Moving on to the next slide. EBITDA from hydro. So here, the EBITDA from hydro reduced 29% year-on-year. So had -- both in Iberia and Brazil. In Iberia, the EBITDA went down 25%. It's relating to 2 things, basically, 27% decline in volumes, but also a 14% reduction in the hydro realized prices as a result of lower pool prices. However, this was mitigated by our hedging strategy. And so the net impact was substantially mitigated versus what would have been if we hadn't implemented this hedging strategy. In Brazil, the decline in EBITDA from hydro is, in great part, relating to the sale of the small hydro plants in the fourth quarter of '18, where we booked a gain of EUR 82 million, which obviously is not there in 2019. So moving on to the next slide, talking about regulated networks. So here, the EBITDA from networks increased 19% year-on-year, mainly driven by strong growth in Brazil. So here, the EBITDA increased 75%, basically driven by, firstly, the growth in the transmission activities. We're finally beginning to see this coming through in terms of the EBITDA, and it's a big part of our growth in networks in Brazil. A second piece that explains this growth is the revision of the regulated asset base of both of our distribution concessions. This is something we'd also talked about in the third quarter results. And finally, in the fourth quarter, there was also a change in the medical plan in Espírito Santo, which resulted in a gain also in the networks business. In Iberia, we had a reduction on the return on RAB in Portugal. It reflects, obviously, lower yields on the Portuguese Republic debt and so was to be expected. We also had a one-off cost relating to previous periods, basically sharing of capital gains relating to the sale of real estate of which that -- plus some adjustments, added up to approximately EUR 28 million. This was partly compensated by 4% OpEx reduction. So good performance there on efficiency in Iberia networks. Moving on to Slide 10, client solutions and energy management. So here, a very strong increase, 52% year-on-year. Strong growth in Iberia. Here, the results from the hedging strategy more than compensated the fall in the pool prices and the significant decrease in generation from our coal plants. In supply, we had an increase of EUR 93 million in EBITDA, mostly due to normalization of supply margins since 2018 was a particularly adverse year, as you know, in supply in Portugal. We'd already flagged that, I think, upfront and so that's why we were quite optimistic about in the strategic update regarding our supply business. But also, we had increased sales of services, the digitalization of processes, which brought the cost down, and just overall better quality of service. So all of this justifying the increase in the supply margins. In Brazil, the decline in results from thermal is explained basically by a gain in 2018 due to the downward revision of the availability level of our coal plant, Fridão. So I think we've also talked about on previous calls. Regarding supply and energy management in Brazil, the reduction in our results is due to lower supply volumes, which is also in turn relating to lower liquidity in the free market. And also some lower results from energy management year-on-year due to the improved energy context, so more [ ready ]. So let's move on to financial leverage or deleverage in this case. So our net debt-to-EBITDA is down to 3.6x, which I believe is a historic low at least over the last decade. This basically is a result mostly of the organic cash flow, which is up 20% year-on-year, supported by the strong EBITDA. We are increasing the pace of expansion investments amounting to EUR 2.1 billion, 70% of this is in renewables and roughly 30% networks. The EUR 1.2 billion of net expansion also reflects the EUR 1 billion of proceeds from the asset rotation. Half of the recurring organic cash flow goes to dividends. So very comfortable coverage. On top of that, the net debt is also impacted by 50 -- positively by 50% equity content of the EUR 1 billion hybrid bonds issued at the beginning of last year, as you know. However, this has been compensated -- or not, by other effects, namely regulatory receivables and an extraordinary pension fund contribution in 2019. So net-net, we end up at EUR 13.8 billion, as I say, at a net debt-to-EBITDA ratio, historic low. Just to remind you, if you didn't notice that, so the proceeds from the sale in Brazil were not received at the end of last year. They were received at the beginning of this year, so they will be reflected in the first quarter. So obviously, if that -- if we were to include that and do a [indiscernible] that would be closer. That plus regulatory receivables would be basically flat year-on-year. Moving on to Slide 12, interest-related costs. So they increased 2% to EUR 685 million. The fourth quarter already shows a downward trend. The year-on-year rise is basically a 10 basis points increase in the average cost of debt to 3.9%, which is impacted then by the issuance of a EUR 1 billion of hybrid bonds in '19. But then one of the things which impact quite a lot is the mix of debt in our portfolio. As we are investing more in the U.S. and in Brazil, obviously, the cost of debt in this currency is higher than the cost of debt in euros. So there's this shift in terms of the mix. Overall, we expect to see though the cost of debt coming down. Finally, moving on to net profit. So the reported net profit was penalized, as you know, and we flagged that in December when we talked about the impairments mainly in coal in Iberia. So our reported net profit in '19 ended up at EUR 512 million. It's also impacted by the Fridão provision, which we'd also flagged in our third quarter results. In Portugal, in particular, we had a net loss of EUR 98 million. So it's the second year in a row of net loss in Portugal. However, obviously, this is impacted by the very low hydro conditions. And a lot of these one-offs that I've talked about for the coal impairment in Fridão. Finally, recurring net profit. So excluding some of these one-off items, our recurring net profit was up 7% to EUR 854 million. EDP Renewables and EDP Brasil had record results this year. In Portugal, recurring net profit went down EUR 160 million, but that's, as I mentioned, mostly impacted by lower hydro production. Obviously, it continues to be impacted also by the high levies and taxes, but which were partially mitigated by the turnaround of results from the supply activities. So I think, overall, a solid set of results. So I'll pass the word back to António to give you an update on our strategic plan. Thanks.

Thank you, Miguel. I think it's a good moment to -- because we have presented the plan last year in March, I think it's a good moment to basically focus on what we have delivered and of what is basically, I think, the strong credibility of the path that we have established and strategy that we established between '19 and '22. As I mentioned, we presented our strategic plan, and these were -- that was based in 5 pillars: the accelerator and focused growth, the continuous portfolio optimization, efficient and digital enabled, solid balance sheet and low-risk profile, and attractive shareholder remuneration. So it's shared with you again in Slide 16, having an idea that we wanted to lead clear value creation in the energy transition due to the fact also that we were a kind of first-mover in this trend. So let's start with the first pillar on Slide 17. One of the key questions was, of course, is the company able to deliver what we committed for this plan? And I think the answer is clearly yes. In March, we presented a 4-year target of 7 gigas to be secured in the period through PPAs and other long-term contracts. During '19, we agreed 3 gigas of long-term contracts for our planned renewable additions up to '22 , reaching, as we speak, a total of 5.4 gigawatts secured, representing 76% of our target. So I believe that we can consider last year as a very intensive year with an unprecedent execution. Close to half of our 3 gigas of projects secured were in the U.S., a market that we like, and in which we have a strong position and we have all the conditions to strive. But it's also worth noting that we won important auctions in Poland, in Italy, and we have increased market positioning in Brazil, so #4 in the market, while entering into new geographies like Colombia and Greece. On the next slide, another, for me, a very important issue. So even if we believe that this growth is rather astonishing and yet another proof of several -- the PR guys already gave to the market of our strong track record on securing projects, it's also important to mention that we did it while preserving our strict investment criteria. So the key question is, are these people able to grow profitably and keeping what are those criteria that we present to the market? And in this slide, we show that we have analyzed EUR 9 billion of opportunities at top decision-making level, after all type of scrutiny of business units level and only 2/3 were approved and successful. The context was challenged, but we maintained our criteria selective in average terms, and we maintained our investment criteria both at return and risk level, as you see on the -- on the right part the -- those 4 ratios that are critical and the visibility, I think, it's strong in terms of the quality of delivery. Moving on to Slide 19. It means looking into the medium term. The future brings us several opportunities not only for the development of new assets and new technologies, like offshore wind or green hydrogen, but also for enhancing the value of the existing one through hybrid project storage and, as the time goes by, wind repowering. All the opportunity is supported by a decline in the cost of the several renewables technologies. Also, public support and renewables has been increasing, namely in the recent good news from the extension of PTCs in the U.S. with an additional year, or the green deal of the EUR 1 trillion launched by the European Commission with even more aggressive decarbonization targets. For EDP, clearly, this context is an opportunity, and we are ready for it, not only in the markets in which we are already present but also in new markets. Moving to an important element, wind offshore. As you all know, we established a 50%-50% JV with ENGIE, creating a top global player in wind offshore. A technology that is new and is capital-intensive. The JV current portfolio of 5.2 gigas is progressing, with 1.5 under construction and we expect to increase the size of the portfolio, between 2x and 3x until '25. Also, in late '19, we were awarded more than 800 megawatts PPA in Massachusetts, and we installed in Portugal the world's largest wind turbine in a floating platform. Going into Brazil. Let's start with networks. I think it's worth to highlight the recent regulatory views at EDP Espírito Santo and EDP São Paulo which had a very positive outcome, a net RAB growth of 36%, the maintenance of the return on RAB at 8 1% and I believe an astonishing outcome on investments haircut of less than 0.5%, the lowest in the industry and the lowest ever. So the best ever verified in the Brazilian industry. These regulatory reviews provide full visibility of returns up to '22 and '23. Going into the last -- the other part of Brazil. Regarding transmission, we have already executed 59% of our total investments of BRL 3.9 billion in 6 transmission lines, one line was already operating during the early year of 2019 and the second one is partly in operation since beginning of January 2020. We expect this strong growth pace to continue on that by '22. Transmission represents more than 50% of EDP Brazil's EBITDA. So it's clear that we are delivering our growth in transmission with execution ahead of schedule and a better-than-expected funding condition, clearly enhancing the equity returns of the project. Moving into client. The number of clients in Iberia, Slide 23, remained broadly stable in the period in which some of our peers have been experienced a decrease in their market shares. This is possible due, and the result, to our quality of service. But at this point, I would like to stress the 23% decrease in the number of complaints per 1,000 contracts that we had in Iberia, which clearly shows our full commitment to our clients. We are by far the #1 in terms of quality in our market. On top of that, we increased services penetration, digitalization and new client solutions. All in all, 2019, we're already above 2020 targets of more than EUR 60 million. Looking forward, this is a sustainable trend, and we still see room for moderate improvement in 2020. So well ahead of what we have foreseen in 2019 March. Second pillar. So how do you see after growth, how do we fund it? We also, as you know, the second question was continuous portfolio optimization. This is critical for us. So no taboos, crystallizing value, derisking the portfolio, it's a critical element for us. So we had a target of more than EUR 4 billion. And so far, we have already concluded 2 deals with proceeds more than EUR 1.1 billion at very attractive multiples. An EV megawatt of EUR 1.6 million for the European asset rotation deal and EUR 2.2 million for the deal in Brazil. For the 3 years ahead of us, we see a positive outlook, given the low interest rate context which was not anticipated at time of the plan last year, and an increasing appetite from investors for infrastructure and renewables assets. Therefore, we keep -- of course, we are very focused in looking for new opportunities, namely in U.S. and in Europe that we can expect for this year. Moving to Slide 25. We had a target of more than EUR 2 billion of asset disposals. As you know, we have agreed by year-end a EUR 2.2 billion disposal of 1.7 gigas of hydro portfolio in the north of Portugal with a multiple EV/EBITDA of 14.4x. This transaction also allowed for further steps in our derisking role with a decrease in market price exposure and concentration of hydro risk in a particular region of Portugal. On top of that, this was a sizable value crystallization of an important asset class of our portfolio that was, until now, clearly undervalued by the market. So the read-across, I think, it was an interesting element. I would like to highlight that the financial closing is expected in the second half, and everything is going according to plan. Moreover, as we have stated last March, and we have also reaffirmed over the last quarters, we have continued to look in parallel to 4 alternatives of complementary options to the larger size hydro disposal. These options may still be considered, namely regarding other Iberian assets or assets reshuffling opportunities in Brazil. Moving into the third pillar in Slide 26, efficient and digital. So if we see OpEx, we continue to see a strong performance on operating costs. OpEx on a like-for-like basis showed 1% nominal decline, supported by all our platforms. In Iberia, 2% reduction in adjusted OpEx. In Brazil, OpEx in local currency increased 3%, below average inflation in terms of nominal terms. And EDPR, adjusted core OpEx per megawatt, which excludes ForEx impacts and one-off effects, was flat year-on-year. Summing up, OpEx year-on-year evolution puts us on track to achieve our OpEx reduction targets of EUR 50 million in 2020. As you remember, EUR 100 million, 2022 after EUR 50 million in 2020, with an overall effect accumulated of EUR 300 million over the period. So well on track to this. Moving to Slide 27 and pillar number 4, solid balance sheet and low-risk profile. It's clear that we are delivering our commitment in terms of business risk and financial risk. On the business risk side, our contracted exposure was 79% in 2019, an increase of 4 percentage points compared to 2019 -- '18. So I think it's a clear sign of our commitment and a very good signal to our portfolio. On financial risk, deleveraging continues to be a priority, and we are moving forward to fulfill this target. Net debt over EBITDA decreased during 2019, as I mentioned, to 3.6x. I would like to highlight that it was the lowest since 2007, and we are on track to be below 3.2x in 2020, aiming to reach a solid investment grade. Moving to Slide 28. In terms of funding, the decline of marginal cost of funding, both in U.S. dollar and euros allowed issue debt at lower rates than the debt that is maturing. This will allow us to sustainably reduce our average cost of debt going forward. And in fact, our 3.9% average cost of debt in 2018 is even below our 4% assumption presented in the strategic update. Moving to Slide 29. Recurring organic cash flow has been increasing significantly, supported by EBITDA improvement, lower working capital needs and maintenance CapEx. We continue to see a moderate upside over the current basis for 2020. Taking into account 2019 results and our most updated view on 2020, in these 3 years, we expect to deliver more than 50% of sources of cash and net investment assumed in the plan and 100% of our debt reduction commitment. And I think it's clearly being ahead of the curve. Moving to Slide 30. Fifth pillar, attractive shareholder remuneration. I think that it's obvious that green is the spotlight nowadays. And that we have been, as you know, focused in being a green company even when green was not the trend. Decarbonization played and continues to play a crucial role for us. During '19, we managed to give a good performance both in terms of renewables generation and specific emissions despite weaker hydro resources in Portugal. And I would like to highlight that we were 1 among 87 global corporations that pledged to reduce emission and ensures global warming does not exceed 1.5 degrees centigrade up to 2050, assuming as well a commitment with net zero emissions by no later than 2050. We said we want to become coal-free before the end of the decade, and we are clearly moving in that target faster than expected, not only because of our willingness to do that, but also due to market conditions. As it's publicly that the Portuguese government intends to shut down Sines plant deal end of 2023, subject to some conditions. From EDP side, the operation for this still will be conditioned on achieving positive market -- margins. But I would like to highlight here on this slide that the coal production in Iberia decreased by 49% and represents less than 1% of our EBITDA of the total of the group. So less than 1% of the total of the group. Slide 31. Distinctive green positioning. I think that we have been very consistent. We have a distinctive story that is not only about decarbonization. We have years of experience in ESG and we have consistently been recognized by the main ESG rankings. Last year brought us again, with knowledge of our sound sustainable performance -- sustainable performance, with several important achievements, namely being ranked as #1 integrated utility for Dow Jones Sustainability Index in the world. In fact, 10 out of 11 years, we have been ranked #1 or #2 in this index from RobecoSAM. Additionally, we achieved other important recognitions this year and on past years among our peers, as you know and you can see on this slide, reinforcing both our achievements and continuous commitment to our ESG positioning. Moving to Slide 32, our last slide. Overall, 2019, we had several positive developments which have contributed to improve the visibility of our strategic plan execution. I think it's critical to highlight this. And I can share with you that we are now even more confident than 1 year ago, that we will deliver all the key targets, which we have committed in our 2019-'22 strategic plan, both for '20, '21 and '22. Thank you, and now we can move for the Q&A.

[Operator Instructions] We will now take our first question from Stefano Bezzato from Crédit Suisse.

Three questions from me. The first one on your sell-down plants. Can you remind us what's the assumption in terms of capital gains that you have for the EUR 3.7 billion of EBITDA target this year? The second question is on your Brazilian strategy also looking at recent statements from the local management about a possible disposal of hydro assets. Will it be -- do you envisage a process similar to the one that you launched in Portugal last year? And the third question. If you can just remind us, what is the current situation for a possible reduction in the energy tax in Portugal this year?

Thank you, Stefano. So sell-down plans. As you know, in 2019, the results were better than we expected with a figure that is above the EUR 300 million. In what concerns this year in terms of farming down in renewables, the figures will be clearly above what also was foreseen of EUR 200 million. So I think that we have -- we will have a good delivery in what concerns this outcome. Second, Brazil. Miguel said this -- and we have been working on this, of course, mentioned the asset reshuffling in Brazil. I think that it gives you also the feeling that in any geography, wherever we are, asset reshuffling and crystallizing value and moving to parts of the value chain that we consider more adjusted to our strategy, we have no problems in doing this. And it's clear that we have, in the recent past, have been focused more in distribution and clearly very first mover in transmission with fantastic results. So we don't exclude the kind of asset reshuffling in Brazil basis. And we will be looking to do this in 2020. In terms of a reduction of energy tax, as you know, the commitment was twofold. First, that 2/3 of the energy tax would be applied in the reduction of the tariff deficit and mainly that the tax -- the 0.85% that applies to the asset base to all the sites and not only for EDP will be reduced according to the reduction of the tariff deficit. So we expect, what, as the tariff deficit reduces 15%, we expect these taxes to be reduced by 15%. So going 15% below the 0.85%. This was included in the budget law that was approved in the parliament.

We can go to the next question, please.

Our next question comes from the line of Harry Wyburd from Bank of America.

Three from me, please. So just the first one is on earnings. If you look at what you just went through in the presentation, there's a lot of areas where things have clearly improved since March. So you mentioned cost of debt is looking much better, rates are much lower. You've got certainty on the hydro sale and you've got a very good multiple on that. You've got lower ongoing coal depreciation. You've got -- you've had a good regulatory reviews in Brazil. And of course, you've got a good base here now in 2019. So would it be fair to assume that you're more comfortable? I mean, I guess, you just reiterated the past guidance. Would it be fair to say you're much more comfortable about that guidance now? Or is there something that's gone the other way, a negative that we haven't seen that's leading you to not to raise your targets? Second question is on EDPR. I guess a lot has changed since you last launched an offer for the EDPR minorities. The earnings outlook, which you just mentioned, seems to be pretty good now which maybe means you could perhaps stomach a bit of dilution if you made an all-share offer there. So what's your thinking at the moment on the EDPR minority and the future of that in your strategy? And then just a final one, just very high level. I guess everybody is now looking at what could be a much more substantial outlook for renewables CapEx globally. You're one of the biggest global developers. If we were to think about a big leveling up in renewables CapEx in the business, what are the funding sources you could tap for that and what would be your order of preference? And I guess you've done some conventional asset sales already in the form of the hydro, but would you look at potentially rotating some other conventional assets in Iberia or? Would you look to perhaps expanding JVs, so you can bring in outside capital? Or is there a more radical source of funding you could turn to perhaps just to level up renewables CapEx if you suddenly see a much bigger opportunity in that area?

Yes. Thank you for interesting questions. First, guidance. I'd like to be clear that it just reinforces -- the performance just reinforces our guidance for 2020. As I mentioned, hydro disposal, we assumed the closing in the second half. We still assume, depending if, EUR 80 million in terms of EBITDA in the first half; or if it's higher, the full year will be EUR 150 million. We expect that 2020 assets rotation to be in the second half. We have good visibility on the hydro as -- in January, we have 1.03 load factors, so I think it's good. We have started -- regulatory uncertainties have been much more limited. So consensus was at 3.6%. I think that in terms of EBITDA, we feel now comfortable with 3.7%, basically all networks in Brazil, regulatory reviews, the gross in transmission and better outlook for the CESE in Iberia. In terms of earnings, our guidance is aligned with the consensus, that now GDP's recurring net profit guidance consider energy tax as a one-off. It also excludes the cost reliability management of our average. We have been doing liability management. This is a one-off, of course. It does not impact our guidance in terms of recurring, but just to remind this. We expect to have a higher average net debt in the first half. This is a seasonal effect just because of dividends and because of the disposal in the second half. And just to remind you also that the IFRS 16 was positive at EBITDA and negative -- slightly negative, around EUR 10 million in net profit. So overall, we feel comfortable with the guidance in recurring net profit and we have improved our guidance in terms of EBITDA. In terms of EDPR minorities, we -- as you know, we will not be integrating anything in cash. It's not a priority. But of course, we continuously evaluate any option to the extent it's aligned with our equity story. We evaluate any solution that must make sense in all terms for EDP shareholders. So we reiterate that we are not giving this a priority. We don't mind to have partners. We have been dealing well with those partners. So it's really not the focus. We -- at this moment, we are focused on delivering the pipeline. In terms of funding new projects. As you know, we are already tripling the development of our -- on a yearly basis of EDP renewables. We went from 700 megawatts a year to more than 2 gigas. So it shows that we have already accelerated. It doesn't mean that we cannot slightly move higher. But typically, we have proven, what, asset rotation is a critical element because it makes all the sense in terms of keeping the fleet young and crystallizing value and de-risking the portfolio. It does not mean that we will not be able to move asset -- other assets, reshuffling but we will be focused on also keeping EDP as a balanced company with energy transition, means renewables, means grids, means client solutions. And of course, I think that we, as we speak particularly, we have been doing this with profitable returns everywhere, including the very challenging renewables market. So I think that we want to keep this balance because it makes all the sense. It's a quite unique portfolio that we believe gives more value to our shareholders.

We can go to the next question, please.

Our next question comes from the line of Alberto Gandolfi -- my apologies, from Javier Garrido from JPMorgan.

I think there's only one of my questions pending, which is -- you can elaborate on the earnings profile of energy management. You had a very strong Q4, I assume that part of it is because of your ability to benefit from the collapse in spot prices. To which you can -- do you see that sustainable into 2020? And actually connected to this, you can elaborate on your views on gas prices and power prices seen in Iberia. Given the profile of decline in LNG prices that we have seen of late, what is your view about power prices? And are you making any change in your hedging policy associated to this?

Thank you, Javier. As you know, I have spreads had good results. For 2020, we have hedged spreads for nearly all of our expected production. Hydro nuclear output forward contracted at 55-megawatt hours, thermal spreads for contracted at mid-single digits. And I think that, just to stress, our prices and spreads are based on baseline with no service or taxes included. So it means that typically, I stress again, we always compare more to the full price and not what is typically other utilities presented this is the final price to the client. So I think that it's a good result. For 2021, we have already contracted forward 5 terawatt hours at base oil prices of slightly above 50. So we also, in 2021, we expect to have a 3.4 terawatt hours reduction on our merchant electricity production in Iberia following the disposal of our other portfolio that we did last December. And I would also highlight that the 13 terawatt hours of energy sold to residential supply clients in Iberia in '19, most of it is in Portugal. It's very low churn rate, so a very stable client base. It's less volatile than the wholesale energy market. So over 2019, we closed more contracts with SME clients for longer periods than the traditional 12 months. So I think it's good. And so I think it's answer to your questions.

Thank you. We can go to the next question, please.

Our next question comes from Alberto Gandolfi from Goldman Sachs.