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

Hello, and welcome to the Deutsche Bank Depositary Receipts Virtual Investor Conference, dbVIC. My name is Zafar Aziz from the Deutsche Bank team. I'm pleased to announce that our next presentation will be from EDP from Portugal. Before I introduce our speaker [Operator Instructions] Also, all of today's presentations were recorded and can be accessed via the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome Catarina Novais, Senior Investor Relations Manager of EDP, which trades on the Portugal Stock Exchange under the symbol EDP and in the U.S. on the OTC markets as EDPFY. Over to you, Catarina.

Thanks, Zafar. Hello, everyone. Today, I will share a brief overview of EDP, a global energy company listed in Portugal that is actively driving the energy transition. So next slide. EDP is a multinational company, vertically integrated utility with more than 45 years of history. We are a global company organized in 5 regional hubs around the world, counting with more than 12,000 employees with more than 60 different nationalities. We are generating 56 terawatt hours of electricity, supplying electricity and gas over more than 9 million of customers. Here, you have our geographical footprint. We are organized into those 5 regional hubs around the world. Iberia, where we are based; rest of Europe; North America; South America; and APAC. And we are all the stages of the value chain from electricity generation, distribution, transmission and supply. Currently, we have 29 gigawatts of installed capacity, of which more than 90% is renewables, with the remaining portfolio being thermal, which we plan to phase out until 2030. I will mention more in detail this part later on in the presentation. Our networks. We have 387,000 kilometers of networks spread between Portugal, Spain and Brazil. On electricity supply, we serve around 9 million clients, as I said before, also Portugal, Spain and Brazil. Just to give you a sense of big numbers, but in the next few slides, I will also write more and go deep in each hub. All these activities culminated in a EUR 5 billion EBITDA in 2023, with a big bulk of it coming from Iberia, more than 50%, followed by Brazil, North America, rest of Europe and then APAC. So moving to the Slide 4, start with our main market, Iberia, where we have a significant presence. EDP operates in Iberia across all the business segments of the generation, supply networks and counting with 7,700 of employees. We manage more than 13 gigas of installed capacity divided between hydro, thermal, wind and solar with a target to phase out thermal generation by 2030. We supply around 29 terawatts of electricity per year to the 4.7 million clients in Iberia. On the Networks segment, we hold a sizable portfolio reinforced by the -- after the acquisition of Viesgo in Spain in 2020 and managing 4.9 billion of regulatory asset base with 288,000 kilometers of network land. Moving to the Slide 5 and now talking about our presence in rest of Europe. We have operations in 10 countries, being 100% renewable and counting with more than 2 gigas of renewable assets to those countries. Most of our installed capacity in this region is wind onshore, but we are growing on our solar distributor generation business, and we are investing in storage and amortization to increase flexibility while providing more reliable generation. In North America, EDP's operation have grown significantly over the past decade, EDP Renewables is now one of the largest wind and solar operators in the market operating in the U.S., Canada and Mexico. We have an installed capacity of 8.1 gigas, mostly wind. So around 6.6 are wind, and we are focused on centralized generation, complemented by solar DG and more recently by energy storage options. On Slide 7, we can see EDP activity in Latin America. It's primarily focused on Brazil, where we operate across all the stages of the value chain as in Iberia employing more than 3,000 people. Our installed capacity here is 100% renewable split between hydro and wind and solar. In this market, we also hold electricity networks, both distribution and transmission. So this is the only market where we operate transmission lines, counting with 3 lines in operation and other 2 in under construction. Finally, in Asia Pacific, EDP has a pan-regional presence with a focus on [indiscernible] networks growth. Singapore serves as the hub for our operations in the region, but we are present in 9 markets as Indonesia, Japan, Korea, among others. Our main focus here is solar DG. We have the rooftop solar. We have over the 2,700 buildings in Singapore, and our installed capacity is around 1 giga. So I have just gave an overview of each regional hub and our main business there, just making a summary. You can get an idea of our portfolio as a whole. EDP has a highly diversified portfolio structured around three main areas: integrated generation and business in Iberia. This is expected to represent 40% of our net income in 2024 based on a strong weight of flexible hydro, resilient client base and following integrated approach to manage the risk. So we have our clients, and we have our merchant hydro, which is mitigated that has a natural edge to mitigate the risk. And then we have our electricity networks portfolio in Portugal, Spain and Brazil. This is a highly regulated market, which provides stable low risk cash flow, and we continue to see strong growth on RAB and positive prospects and regulatory returns. Finally, our wind and solar subsidiary, EDP Renewables, with more than 85% of its capacity focused on low-risk markets in Europe and North America account with a high percentage of [ well ] contracted revenues. We already have a strong track record on renewables development with growth set to continue in the way the net income expected to increase over the next years. So here, you can see that in this May this year, we presented our updated target for '24, '26 to cope with the current market conditions, change in interest rates, change in power prices and new curbs for PPIs. We are focused on the capital optimization and robustness of our balance sheet, forecasting around EUR 70 billion to be invested during '24, '26 period with an increased relative weight of electricity networks, it will be around 80% of renewables, clients and energy management and 20% in electricity networks. So That's our previous plan, we are deferring investments post '26 and focusing on the higher return and most advanced projects in the pipeline. We increased our IRR work spreads targets above 250 basis points for the new investment plan versus the 200 basis point previous target. To keep the risk profile, we maintain and changed the contracted NPV above 60%. Net investment adjusted to the right part of the slide for disposals are forecasted to stay at EUR 9 billion for '26, supported by the EUR 7 billion of [indiscernible] program until 2026, which assumes that we are selling 45% of our capacity additions and hydro assets in Brazil, in line with the previous plan. So this collaboration of our -- of investment levels is based on updated outlook regarding capacity additions. So we are now targeting 10 gigas of renewable capacity in '24, '26. A big part of these gigas will come from core low risk, as I said, like North America and Europe, total to be around 85% of new additions and solar will play an important role to increase our portfolio diversification being the main technology to be added in this period, of around 60% of total additions. So our current portfolio is mostly wind. So we are planning to add more solar in order to have a more balanced portfolio in the end '26. Now on the right hand of the slide, we target additions, of course, are expected to comply with our target returns that I mentioned before. And we're going to little backwards to continue to see attractive projects with a good returns considering our investment criteria. We stress this over time. We are seeing our investment thesis play out. Over the last 6 months, we have seen a support of PPA prices impacting the IRR, not just in absolute terms, but also in terms of rate of our NPV that is contracted. We are looking -- we are talking about IRRs of 8%, 9% in Europe and U.S., respectively, and contracted NPV of more than 60%. Together with our appetite investment plan, we have also recently approved a strict investment criteria. So we are increasing our tax spread for our portfolio to at least 250 basis points as I said before, on spread of IRR work and keeping our strong focus on contracted cash yields. So how we are going to fund this plan? We forecast the gross investment of EUR 17 billion for the period and a total of EUR 2.5 billion of dividends to be paid between '24 and '26 resulting from our dividend policy, which remains unchanged. Dividend per share floor at EUR 0.905 in '24 and '25 and EUR 0.20 in '26. It is expected to be funded through the EUR 8 billion of organic cash flow, EUR 7 billion of asset rotation and around EUR 3 billion of tax equity proceeds coming from U.S. projects. And the rest is the additional hybrid issued the best fix. This funding plan allows us to maintain a solid credit ratios with FFO net debt expected at around 20% in '26, meeting our BBB threshold ratings by all the agencies, which as we stated many times, is a strategic goal for EDP. So our diversified portfolio, combined with a selective growth approach and increased efforts of efficiency result in EBITDA guidance for '26 in a range of EUR 5 billion to EUR 5.1 billion, implying a 3% growth from '22 to '26 and the net profit ranging from 1.2 to 1.3 in '26, implying a 10% growth between '22, '26, with this split between the areas. I would like to stress that this growth path is always done keeping the focus on leading the energy transition. And this is why our strategy is built under the key ESG targets. So for the following years, we want to be coal-free by 2025, all green by 2030, and Net Zero by 2040. And this -- and the progress we have been doing on this method is impressive. So you can see here the track record, in 2005, more than half of our generation drilled from coal. Since then, we have significantly increased our investment in renewables and progressively phased out coal. In '23, 87% of our total generation was from renewable source. And very soon, cogeneration will have no contribution to our generation, nor our revenues, with the final goal of being coal free by 2025. So we are well on track to reach this goal. We are not just selling our coal plants, but promoting a just transition to those plants. Starting with Brazil, we sold 80% of our coal plant in Brazil [indiscernible] We plan to convert that plant to other sources of fuel, namely natural gas, plants with hydrogen or BMS. At the same time, we keep the management of pilot green hydrogen project commissioned in December '22 in the Pecém complex, and we'll continue to access the potential to develop larger-scale renewables hydrogen projects in the region. Regarding our plants, coal plant in Spain, we are moving ahead with the conversion of the born new plant to gas by 2025 to ensure the security of the supply in this tourist region and have signed a 50-50 partnership with a major local industrial player to do that. In parallel, we are also developing hydrogen projects there. For the remaining plant in Spain, Soto 3 and Los Barrios. We have already formally requested authorization foreclosure for the electricity system operator. All in all, we are leading the energy transition, and we are executing our commitments to being coal-free to next year. Just to summarize. Our key targets and before going to Q&A, our strategic priorities for '24 to'26 are focused on four key pillars: accelerated and sustainable growth, 17 billion investment targets, aiming to install 3 gigas per year of renewables, reaching 23 gigawatts of wind and solar installed capacity by '26. ESG excellence and future-proof organization, EDP is focused on delivering value to shareholders through a sustainable business model in the long term. The priority will continue to be the commitment to the best ESG practices, ensuring strong financial returns, EDP's firmly commitment to the energy transition and we'll look towards being coal-free by 2025, all green 2030 and net zero by 2040. And the last two distinctive and resilient portfolio, EDP had a diverse and resilient portfolio with a lower risk profile and focus on geographical presence with a BBB rating, a target of 20% of FFO net debt in '26, and more than 80% of EBITDA coming from the high-rate markets such as Europe and North America. Less, creating the superior value of stakeholders. EDP is committed to deliver a growth trend on results targeting the 5 billion to 5.1 billion of EBITDA. And 1.2 to 1.3 net income by 2026 and it's attractive returns to the sustainable dividend policy targeting the dividend for EUR 0.20 per share in '26 and 60% to 70% payout ratio. And now I think we are ready to go to Q&A. Thank you.

I think I have already here some questions. What is your long -- so I can -- I will read the questions what is a long-term geopolitical risk exists? I lost just the question -- one second. Let's try to go. What is the long-term geopolitical risks with the China [ take orders ] 20% stake? How you assess the risks? So we don't see any risk to have our China [ take orders ] in our shareholders. So it's have been more than 10 years of having them in our shareholders. They are -- I think it doesn't have any issue by them, it seems to be a very key strategic player. We sold -- we had a partnership with them in some of the projects, wind and solar projects. We announced last year that we are going to buy back those projects. I think we see a long-term partnership with no risks involved. I try to go to the next one. How does EDP prioritize capital allocation between renewable energy projects and grid infrastructure and strategic investments? So EDP is focused on the wind and solar projects. And our 80% of our investment is for those project renewables. For networks, what we are going -- what we are doing is invest the maximum as we can in Spain, Portugal and Brazil, and we are participating in all the auctions that we have been having in Brazil, like transmission. And we are expecting to see the new rotor period in Portugal and Spain to see if it's -- we will be able to invest more in those business. When we get -- when we had the opportunity to invest more, we did, as I mentioned, with the acquisition of Viesgo in 2020. Can you talk about how do you approach cost control in areas such as energy procurement, maintenance and operational efficiencies? So we announced in the past months, some efficiency programs. So we bought our minorities in Brazil. So now we have our operations from EDP Brazil and EDP Renewables Brazil together in order to have synergies. We also have our procurement departments, global procurement departments in order to supply all the geographies in together. And I can give more examples, we also have our IR teams together, our finance departments together. So it's the way that we are going to be more centralized areas and have more efficiencies. So what should shareholders expect in terms of dividends and buybacks in 2025? So the dividends are the one that our dividend policy is unchanged. It's what I mentioned during the presentation. And there is no buybacks expected. What we have is our script dividend policy at EDPR level. I think is -- I have another one. So is our -- your energy generation options exclusively wind and solar? How do you see your presence in U.S. growing over the next several years? So we are -- our focus -- our investment is focused on renewables. So as I presented in our investment plan, we have mostly solar, but we also have wind onshore, wind offshore, storage and rooftop solar. We have some pilot projects of hydrogen, but most of it is those technologies. And I think we are done. I think I don't have any new question.