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

Good morning, ladies and gentlemen. Thank you for attending EDP's 2022 Results Conference Call. We have today with us our CEO, Miguel Stilwell de Andrade; and our CFO, Rui Teixeira, which will present to you the main highlights of 2022 financial performance. We'll then move to the Q&A session, in which we'll be taking your questions, both by phone or written questions that you can insert from now onwards at our web page. Please note that later this morning, so at 10:00 a.m. London Time will host our Capital Markets Day in which we'll update our business plan. So this call should be shorter than usual and focused on 2022 results and short-term outlook. I'll give now the floor to our CEO, Miguel Stilwell de Andrade.

Good morning. So thank you, Miguel. So once again, thank you very much for attending this results conference call. I know this morning, there's been a lot of news flow around some of the market announcements we did. So we will leave that for later, as Miguel mentioned. So for now, let's just focus on the 2022 results, which I think in themselves are worth going through in some detail. And as I said, then we can deal with the business plan topics in the next session. EDP had a very good financial performance in 2022. It delivered guidance in an adverse market environment with all the volatility that we've seen. And it had a particularly strong rebound in the fourth quarter of 2022. We had a strong EBITDA. So if you look at Slide 3, we had a strong EBITDA, which increased 21% year-on-year to EUR 4.5 billion, with the main moving parts being on one hand, wind and solar; on the back of capacity growth, good resources, higher selling price. The Electricity Networks in Brazil also had a good performance, mainly given the inflation impact on the tariff updates and also ForEx. And then in Iberia, we had higher thermal generation that compensated the weak hydro generation in 2022. So despite the very dry first 9 months of the year, the fourth quarter of 2022 was marked by a sharp recovery of hydro conditions, mainly in December, leading to a buildup of our hydro reservoirs. At the net profit level, we also delivered on our guidance with a 6% increase year-on-year to EUR 871 million. This increase in net profit is mainly explained by the EBITDA growth. It's mitigated by an increase in financial costs, mostly due to Brazil. That's the result of interest rate hikes and FX, but also by the increase in minorities on the back of good performance from EDPR. On net debt, I think this is definitely a strong performance. We saw an improvement in net debt versus guidance and versus the 9 months 2022, mainly on the back of strong recurring organic cash flow, and this was supported by the strong results in the fourth quarter. 2022 is also marked by solid investment execution. We had 56% ramp-up of net expansion investments of which 90% in renewables. Finally, and is typical for this time of the year for this call and for this proposal. We will be proposing to the shareholders meeting, a dividend of EUR 0.19 per share, so in line with the dividend policy that we defined for the '21-'25 period. If we move to Slide 4, you can see here, so this slide is mostly focused on the recovery of hydro production and also on the reservoir levels in the fourth quarter and the beginning of 2023. As you can see from the graph on the left, the period between the fourth quarter of '21 and the first 9 months of 2022 was an extremely dry period. In fact, and we've mentioned that several times over the last year, was the third driest of the last 90 years in Portugal. So the production shortfall and the increase in the average electricity spot prices led to a negative impact, as we've mentioned throughout the year. The positive news is that the fourth quarter was marked by a strong recovery in rainfall in Portugal, mainly in December with the hydro coefficient being 1.67, so above the average. The result of all this was a recovery of the hydro production as well as the buildup in hydro reservoirs. So if you look at the graph on the right, you can see that the hydro reservoirs in Portugal went from a historical low in November of 2022 to the historical highs in January 2023, which is the red line. So from the yellow line, '22 to the red line in '23. And that gives us good confidence for the performance of 2023. If we move to Slide 5, talking about the volatile gas markets, drought, mitigated by a higher thermal position. So to compensate the hydro shortfall in Iberia, we just mentioned, there was a need to increase the thermal generation in the period of peak gas prices. And so the thermal generation Iberia increased roughly 50% year-on-year to around almost 16 terawatt hours in 2022. Regarding gas, last year was characterized by a lot of volatility in the European gas markets. We've all seen that throughout the year. And this ended up negatively impacting EDP. So we've mentioned previously in previous presentations, we had a negative EUR 0.2 billion impact from mark-to-market on gas hedging contracts. This was mostly booked in the first half of '22. It will be almost fully reverted in 2023 and 2024. Also, EDP was penalized by the gas sourcing costs, which together with the increase in the spread of the TTF to the MIB Gas namely in the third quarter of 2022 resulted in a negative impact which is mitigated by the decline in the European gas prices in the last quarter of '22 and the beginning of '23. Putting all of this together, the first 9 months of 2022 were penalized by hydro shortfall, volatile European gas markets, but then this ended up being compensated by strong thermal generation throughout the year and a very strong fourth quarter of 2022, and that had the recovery of the hydro resource and the decline of the European gas prices which benefited our current position. Move on to Slide 6. So on Slide 6, talking about the investment execution. On wind and solar, we invested a record-breaking EUR 5.2 billion. We added 2.2 gigawatt capacity in 2022 and ended the year with around 4 gigawatts of capacity under construction, which gives us good confidence for the additions in 2023 and beyond. Additionally, in 2022, we entered Asia Pacific and Germany with the acquisitions of Sunseap and Kronos, respectively, and we continue developing our offshore wind portfolio through Ocean Winds. On networks, we remain committed to our investment goals with around EUR 0.7 billion invested in expansion in Brazil, namely with the acquisition of EDP Goias; and in Iberia, our investment remains very much focused on grids modernization, digitalization and efficiency around EUR 0.5 billion invested in EUR 22 million. Moving to asset rotation. So as we mentioned in the EDPR results conference call, we're able to achieve around EUR 0.4 billion in asset rotation gains in 2022. This is above the target that we had in the business plan, typically around EUR 300 million. And we only sold 1 gigawatt, which is below the 1.4 gigawatt per year average that we assumed in the business plan. So it meant that we had a higher average enterprise value to megawatt of around EUR 1.8 million for the 5 transactions and an average 34% of asset rotation gains over invested capital. So very attractive returns, more attractive returns than we expected and given the volatile environment that we had last year. So I think that was a great performance there. We've also continued to optimize our portfolio. And so we've also committed to the sale of the hydro plants in Brazil and Peru -- or one of the plants in Brazil and the plant that was being built in Peru. If we move to Slide 7, we can see here talking about the energy transition. I mean, we continue to be fully aligned with the energy transition. We stepped up on the green leadership position. So with the strong performance across the metrics. Just a couple of key highlights here. So our CapEx was 96% aligned with the EU taxonomy. So it's a slight increase versus 2021., just shows our commitment to investing in networks and renewables. 44% of our nominal debt came from sustainable sources, so EUR 2.2 billion of green bonds in 2022 and our first sustainability-linked loan of EUR 3.7 billion. Finally, in 2022, 74% of our generation came from renewable sources, which we believe is very positive, especially given that we faced one of the worst hydro crisis over the last 90 years. So as a result of all of this, EDP's performance was highlighted by top-tier institutions. We were #1 integrated utility in the S&P Dow Jones Sustainability Index for 2022. For the third year -- consecutive year were included in the Bloomberg Gender Equality Index. And we're also certified by the Top Employer Institute both at EDP and EDPR for the best practices in people management. Finally, just a word on our performance since the last Capital Markets Day. We've scaled up delivery on the back of a sound balance sheet. We have a truly global organization. During these 2 challenging years, we've been able to deliver on our commitments, scaling up the delivery and reinforcing this position. We doubled the lever of capacity additions. We have an average of 2.4 gigawatt added in '21-'22. And as I say, we've got 4 gigawatts under construction as we speak. We've clearly outperformed in the asset rotation strategy and achieved gains of EUR 0.5 billion per year. We continued strengthening our presence in the Network segment. So we had the successful integration of years ago. We captured the synergies there. We had good growth in the transmission lines in Brazil. And on the balance sheet, we reached a BBB rating, as you remember, back in '21, and have an FFO net debt above 20% since then. During this year, Moody's, Fitch and S&P, all reaffirmed their rating and the outlook. Regarding being a future-proof organization, we consolidated our global presence. We introduced the Asia Pacific hub. So we're now in 4 global hubs: Europe, North America, South America and Asia Pacific. And finally, on ESG excellence, our net 0 target by 2040 was approved by the SBTI, the science-based targets initiative, once again, supporting our commitment to green energy transition. So overall, I think, positive delivery over the last 2 years. I'll turn it over to Rui and then come back from just for some closing remarks. Thank you.

Thank you, Miguel, and good morning to you all. So now I would like to go into EDP's financial performance for 2022. So I'd like you to move please to the Slide 10. So here, we can see that our recurring EBITDA went up by 21% year-on-year brought by good performance across all business platforms. And we reached a number above EUR 4.5 billion in 2022. Our recurring EBITDA for the wind and solar platform was 23% up on the back of higher average installed capacity, a 10% increase in electricity generation and 21% increase in average selling price. On an integrated basis, EBITDA from Client Solutions, Energy Management and Hydro presented a very good recovery in the fourth quarter of 2022 with a 33% increase year-on-year, mainly driven by hydro recovery, particularly in December and by higher thermal generation. And finally, in Electricity Networks, recurring EBITDA increased by 12% year-on-year, driven by the growth in Brazilian networks due to the positive annual tariff updates and the significant appreciation of the Brazilian real. If we now go platform-by-platform on Slide 11, we can see that wind and solar EBITDA went up by 23% year-on-year. As I said, this is very positively impacted by the 9% growth in installed capacity, together with the recovery in renewable resources, which were 3 percentage points higher year-on-year, leading to a 10% increase in electricity generation. This electricity generation was then sold at an average selling price of EUR 65 per megawatt hour. That's a 21% above last year's. Finally, also on this platform, the 5 asset rotation deals that we closed in 2022 generated EUR 423 million in capital guidance. The year-on-year variation in asset rotation gains is just a consequence of the difference of the portfolio composition. But I would like to stress that the amount of capital gains booked is significantly above the EUR 0.3 billion target that we presented 2 years ago, once again demonstrating the high quality of the assets and successful execution of the strategy. Now moving to Slide 12 from an integrated perspective, Hydro and Client Solutions and Energy Management benefited from a very strong fourth quarter in 2022. The Hydro conditions recovering from the severe drought during the first 9 months of the year with recurring EBITDA increasing 33% to EUR 869 million. In Iberia, the results in 2022 were impacted by the drought with hydro resources in Portugal being 37% below the average. This was compensated by the increase in thermal generation. Additionally, the decline in gas and electricity prices in the last quarter of 2022 was also positive for energy management activities, namely by decreasing sourcing costs given the position. In Brazil, EBITDA increased 25% in euro terms on slightly better performance in local currency, coupled with the appreciation of the Brazilian real versus euro. Now moving to the networks platform on the next slide. And I think that we have been saying this throughout the year, we closed 2022 with a very strong performance, recurring EBITDA increasing 12% to EUR 1.5 billion. In Brazil, EBITDA rose almost EUR 200 million to EUR 615 million. As we mentioned throughout the year, Brazil was very positively impacted by the inflation update on the tariffs, the increase in electricity demand as a result of the recovery of the economic activity and growing number of customers, lower losses from the sale of electricity volumes surplus in the wholesale market, the integration and this is an earlier integration than expected of EDP Goias in EDP Brazil's transmission activities and favorable FX effects driven by the appreciation of the Brazilian real. In Iberia, EBITDA decreased 3%. If you remind in Spain, the year-on-year comparison is impacted by a positive impact from Lesividad, recovery in 2021. In Portugal, OpEx increased given the recovery in the economic activity post-COVID. So now if we move to financial costs on Slide 14. If we exclude ForEx differences in derivatives, adjusted net financial interest increased EUR 332 million or that's a 61% year-on-year increase, resulting in a 90 basis point increase in the average cost of debt. But I would like again highlight that this is mainly explained by Brazil, which more than doubled its financial costs to EUR 320 million, given the rise in cost of Brazilian reals denominated debt. But as you know, this is indexed to inflation and represents 14% of our total debt financing. The increase impacted by inflation and FX is more than compensated at EBITDA level after tariff readjustments. So if you see our average cost of debt in Brazilian reals increased from 10.8% to 13% in 2022. Also, the 20% increase in average gross debt with almost 34% of it coming from ForEx. So at the end, if we exclude Brazil, our financial costs go up by 20 basis points from 2.5% to 2.7%. On the next slide, we can see the increase in net debt, naturally the result of accelerating the net expansion investment, but supported by a very strong recurring organic cash flow. So it's a really strong balance sheet. Net expansion investments in total covered by the organic cash flow, as I mentioned, net debt reaching EUR 13.2 billion. Then the organic cash flow of EUR 2.1 billion, and of course, this is on the back of a very strong EBITDA performance. There is a EUR 0.5 billion of cash that is the anticipation of funds of regulatory receivables that will be -- that are used to mitigate the increase in electricity energy bills for regulated customers. This will be repaid to the system in 2023. So it was an earlier cash-in than expected. Acceleration of the expansion investments that amounted to EUR 3.1 billion following the growth in renewables and networks, of course, through also the acquisition of Sunseap, Kronos, EDP Goias and the investment in offshore through Ocean Winds. But on the other hand, we have a EUR 2 billion cash in of proceeds from the asset rotation. And that's why I mentioned before the net investment figure. Annual dividend payment that was made in April, and we do have here an impact of about EUR 0.4 billion from FX and other, of which EUR 0.3 billion are negative impact from effects of the exchange rate fluctuations due to the Brazilian reals and U.S. dollar appreciation. So finally, we continue committed to our current credit rating and maintain a sustainable level of leverage with a net debt over EBITDA of 3x and an FFO net debt ratio of around 20% in 2022. Just to finalize on the Slide 16. Our recurring net profit goes up by 6%. This amounts to EUR 871 million. And this was mainly impacted by, of course, the very strong EBITDA performance. The increase in financial costs in Brazil, driven by the FX and the higher cost of the Brazilian debt index inflation and also higher non-controlling interest on stronger performance, mostly from EDPR. But at the end of the day, it's, I think, a very strong number and a supportive number in terms of the business profile, particularly in a very, very challenging year. So with this, I will hand back to Miguel for closing remarks, and thank you all.

So thank you, Rui. So just before going to Q&A, just some closing remarks. First of all, as Rui already mentioned, solid financial performance in '22, recurring EBITDA up 21% year-on-year, recurring net profit up 6% year-on-year. So delivering on our guidance despite the adverse market context and all the uncertainty throughout the year. Secondly, renewables showed strong performance, higher installed capacity, higher generation, solid asset execution -- solid asset rotation execution and record capacity under construction. So highlights, I think, EDP's strong investment and provides good visibility on next year's additions. Third, the weak hydro generation volatile gas markets in the first 9 months were compensated by the thermal generation during the year and also recovery of hydro in the fourth quarter, and this allows us to face 2023 with a high level of hydro reservoirs. Fourth, dividend proposal of $0.19 per year, fully aligned with our '21 to '25 dividend policy. Finally, in the last comment, and this is important, although we don't typically provide guidance at this stage of the year for 2023, given the good start of the year, we believe we'll be clearly above the 2023 targets of the previous business plan of EUR 1 billion. So with that, I'll stop here, and we can now move to Q&A. Thank you.

[Operator Instructions]

We have the first question from Javier Garrido, JPMorgan.

Yes, I mean, I know you said you are not giving typically guidance at this stage, but you can please clarify about both EBITDA and financial costs. Starting with financial costs, there is a big swing in the other financial cost line. Would you be able to give us some visibility of how the, let's say, non-financial debt-related costs will be moving, particularly in '23. And then the second question also on EBIT and outlook depends on the EBITDA, it's been a very volatile year. You mentioned in your result statement, you have seen the EUR 0.2 billion of negative mark-to-market, which will reverse in '23/'24. But is there any other negative mark-to-market from previous years that should reverse in '23? I remember you have a big negative mark-to-market in the second half '21 also. Is there anything that should be reversed also in '23? And on the other hand, in your energy management business booking, any positive mark-to-market in your power positions and different to the negative mark-to-market in gas. So if you could provide some visibility on those items, it will be very welcome.

Javier, it's Rui here. So in terms of the financial costs. And I'm sorry, can you repeat -- were you asking me for guidance for '23 or just a question on the '22 financial costs because I didn't get it. I'm sorry.

Well, it's how you reiterate, it was not very clear. It's a combination of the 2, in the end to understand to which extent those other financial costs are one-offs or should be recurrent and therefore, what to expect in '23?

Okay. Understood. So I mean, yes, in 2022, we had some impacts from FX derivatives, which we don't consider it recurring. So at least I would exclude it from your numbers as you think about 2023. So in 2023, I think we should be above the EUR 900 million. But as I said, we are not considering any sort of FX impacts coming from these derivatives. What you saw here in Q4 was primarily coming from the renewables business and had to do with the different derivatives that we use for our net investment policy. On the mark-to-markets. So yes, you may remember that throughout the first half of 2022, we booked about EUR 200 billion of negative mark-to-markets in gas. We are expecting that in 2023, we'll recover about 2/3 of that through the P&L. And then from June onwards, we changed the accounting policy so that, that would be effectively be treated as a hedging accounting, which is effectively what they are -- those derivatives for. And therefore, since June, we are not booking any additional negative mark-to-markets from gas. But the ones that we booked in the first half, we expect around 2/3 to be unwind now -- during the 2023. And on the -- so we don't have any other negative mark-to-markets material ones that would be -- that we would unwind now into 2023. And on the Energy Management business, the power side, everything is pretty much the hedge accounting. So unless there was some sort of inefficiency that typically works on the margin in these contracts, we are not expecting any material mark-to-markets on the power side.

We have the next question on the phone from Enrico from Mediobanca.

First question, I understand you don't provide a guidance for '23. But if you can guide us a qualitative point of view on drivers, the evolution of the single pieces in the liberalized business in Iberia that you expect in '23? Hydro is expected to be significantly better than last year. If you can give us a hint of what you think about the evolution of the supply margins and the thermal power duration? And if you can give us some update on your hedging policy. Second question is regarding on debt. There was a very significant reduction in the fourth quarter. Finally, then that was significantly lower than the guidance. If you can also here give us some details on what happened and the reason why there was this significant gap with the guidance? And finally, if you can provide some color on what you expect in terms of evolution of cost of debt during 2023? Thank you.

So in relation to your first question on the guidance for 2023. So as I mentioned, I mean we don't typically talk about at this stage, but I did mention at the last point of the presentation, we are expecting to be clearly above what we had in the 2023 target in the previous business plan. The reasons for that are, we see good hydro conditions coming into the year. So as you know, this is typically the most important quarter from a hydro perspective. We have good gas sourcing costs. The Poland and Romania costs have gone down versus the expected. So that's something that we also mentioned on the EDPR conference call. In terms of the hedging policy, as you know, we've implemented a hedging policy where we are -- we don't fully cover all of the expected production so that we don't take on all the volume risks. We're at about 80%. And in terms of supply margins, I mean, we continue to see the supply margins, particularly in Iberia. So I'd say that there are several positive factors that we're seeing and which make us feel confident in relation to the 2023 numbers. I mean, obviously, given the usual qualifications that we'll see as the year goes on, and we'll talk about it in the future quarterly conference calls, obviously, but I'd say, at this point in time, we are feeling quite confident. In relation to the net debt, I mean, clearly, a couple of moving pieces. I don't know, Rui, if you want to take the net debt and the cost of debt.

I can do that, Miguel. Thank you very much. Hi, Enrico. So, net debt, well, 1 of the positive one was that anticipation of the regulatory receivables that we cashed it in 2022, and that will revert to the system in 2023. It's about EUR 500 million, and that's why I wanted to highlight that. But even if we exclude that, I mean the net debt would be EUR 13.7 billion. There, we had, of course, a normalization -- a bit more normalization of working capital throughout Q4, several initiatives internally to make sure that either we would be optimizing any sort of collaterals, but also very importantly, receivables. And also very important, the fact that we successfully closed some asset rotation transactions before the year-end, primarily in the U.S. So I think all-in-all, contributed to a robust balance sheet. Then, as I said, a bit more normalized working capital, but also structurally coming from strong EBITDA cash flow, the asset rotation. And in terms of cost of debt, I think towards 2023, we are seeing pretty much around what we are today, the 4.4%, maybe 4.5%. That's I think where we'll be lending.

So we have no more questions on the phone. And we have 1 of the questions on the web that was already answered around the gas derivatives. So I'll move to the other 1 that we have on the web from [indiscernible] of Bank of Canada. You understand we have to return the system to 0.5 regulatory working capital. And this -- the question is if this will have to be returned in '23, if that is correct, so it's a little bit here about regulation in Portugal?

Okay. So for -- just in relation to this point, I mean, I'll just first start off by highlighting, I think that the Portuguese electricity system has really shown a very strong resilience and robustness in these volatile times. And I think that's been a major -- or certainly a very positive factor over the last year. You've had the benefit of stable feed-in tariffs and renewables at around EUR 90 per megawatt hour, clearly below the market prices. And that's allowed the tariffs -- the access tariffs to basically make up for some, let's say, reductions to make up for some of the increases in the energy prices. So the Portuguese domestic consumers in Portugal have actually had a very stable outlook or very stable evolution of energy prices compared certainly to many other countries in Europe. So I think it's a good example even within Europe. I mean in relation to the question, yes, so it's a positive working capital item that impacted '22. It will be returned to the system over '23, and so it won't be there by the end of 2023. But for me, really, what's most important is that this resilience of the system in Portugal has been a source, I think, of strength. It's been a source of stability for the Portuguese consumers, but also for the operators in Portugal. And I think that's something that we continue to see also going forward.

So this was the only 1 question on the web. So we'll meet then you at 10:00 a.m. London time. Miguel, passing to you just to...

Just see you in a bit, and we'll talk about forward-looking projections, and we're very excited to talk to you about that. So see you in a bit. Thank you.