EDP Renováveis Management Discusses 1H 2010 Results - Earnings Call Transcript

Aug.28.10 | About: EDP Renováveis (EDPR)

EDP Renováveis SA (EDPR) 1H 2010 Earnings Call July 28, 2010 9:00 AM ET

Executives

Luis Guerra Nunes – Chairman

Ana Maria Fernandes – Chief Executive Officer

Rui Lopes Teixeira – Chief Financial Officer

Rui Antunes – Head, IR

Analysts

Alberto Gandolfi – UBS

Allen Wells – Morgan Stanley

Laura Trines – BPI

Rupesh Madlani – Barclays Capital

Javier Suárez – Uncredit

Didier Laurens – Société Générale

Michael McNamara – Jefferies

Chris Rogers – Analyst

Raymond Fernandez – Bascom

Operator

Good afternoon, ladies and gentlemen. And welcome to the EDP Renováveis 2010 First Half Results Conference Call. At this time, all participants are in a listen-only mode until we conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

Just to remind you this conference call is being recorded. I would now like to hand over to your Chairperson, Guerra Nunes, who is sitting here. Please begin. I will be standing-by.

Luis Guerra Nunes

Good afternoon, ladies and gentlemen. Welcome to EDP Renováveis First Half 2010 Results Conference Call. As usual, I’m here with Ana Maria Fernandes, our CEO; and Rui Lopes Teixeira, our CFO and Rui Antunes, the Head of IR. We will start usually a briefing about the highlights of the period then the performance of the period and we will end with some conclusion. So I’ll now hand over to Ana.

Ana Maria Fernandes

Hello, everybody, and once again here we are. Once again, I would like to highlight the performance of EDP Renováveis in this very hard environment, but I think that we all as a team as we may able to achieve certain very important goal and one that is very important for our investors and shareholders and stakeholders. In general, it’s certainly value creation that we continue to deliver as usual.

Value creation has been supported in delivering -- continuing to deliver sustainable growth. Once again, improve that we have execution, very good execution capacity. We are meeting the target although, of course, we present very particular profile -- particularly invest in renewals is very particular to us in executing our construction plan, which we are delivering. You will see on numbers on construction capacity, on construction projects. And also we’ve been able to deliver a strong growth in EBITDA on the back of this superior operating performance.

We achieved this by once again using our core competences then looking, again, showing them various geographies where we are and in the we again -- once again say that we presented top-sector load factors as we’ll see also the numbers. At the same time, we’ve done an extensive work in reducing and optimizing CapEx costs and on technology selection in order to maximize the output of our returns.

All this, at the same time, maintaining portfolio risk that we want to be controlled detecting one of our threat so far and this has been once again achieved by using hedging short and long-term in the best way possible, and by diversifying investments and using our expensive pipeline to balance between growth profitability and risk.

So based on these pillars, we were able to deliver strong operating results. As the capacity grew year-on-year more than 1 gig, the output increase was 32% year-on-year increase. Based on the back of quality assets, we were always very demanding on the assets and this is previous results.

Our assets as we consider is top-class delivered an average of 31%, average load factor year-on-year. We believe that in Europe we were able to deliver 29%, so more 4 percentage points. Unfortunately, in the U.S. as we not so much of the room, we have reduced as, let say, less 4 percentage points, that’s when compensation together in terms of volume.

So capacity, delivered, quality, assets and low-risk portfolio with limited market exposure, as always we have a target in terms of risk exposures and before this can be seen because we maintain a high percentage of the portfolio, fixed prices or limited exposure to market, in this case 81%. And so, the average portfolio as the prices didn’t really get excited, maintained itself in terms of prices more as such year-on-year.

So in terms of operating performance, I would say group performance of our portfolio and in terms of financial performance, another 3% -- 30% year-on-year on gross profit, we’ve been delivering this consistently to the market, showing stronger, stable and continuing output growth in electricity output growth in a particular company.

On the back of this 27% more only on EBITDA, being the BITDA margin one of the highest in the sector 74%, so we maintained this performance and this on the basis of a solid margin and the right spending strategy that is our net debt is still 32% of enterprise value, 1 billion of it related to assets under construction and we maintained high percentage of 94% of long-term fixed rate loans, 10 years. So balance sheet discipline and good operational results.

And with this, I leave you with Rui Antunes, back to explain more details how we achieved these numbers. Thank you very much.

Rui Antunes

Okay. Thank you, Ana. Let me explain now in detail EDPR first half performance. So on the next slide, on slide seven, on the last 12 months, our installed capacity increased more than 1,000 megawatts of which 441 megawatts were in Europe and close to 600 megawatts in United States, which represents a year-on-year growth of 22%.

In the first half, we added 174 EBITDA megawatts plus the 42 megawatts through Eólicas de Portugal consortium, which is executive consortium that in our accounts. In the periods, a total of 260 megawatts were added in 2009 year-end installed base. As of June, in terms of under construction and we already had 1.3 gigawatts, which means that we continue on track to deliver strong growth by the year end.

Throughout 2010, we expect to sell between 1 to 1.1 gigawatts at EBITDA consolidated revenue or between 1.1 to 1.2 gigawatts in gross terms including the all installed capacity.

And moving to the next slide regarding the load factors, we continue to deliver top quality load factors in all geographies vis-à-vis load factor average in Europe, load factors increased 4 points to 29% following a strong and higher than expected new resources. These also -- especially felt in the first three months of 2010 in all EBITDA regions -- European regions.

Load factors in Portugal continue to achieve outstanding results 31% in the first six months. In Spain, load factor was 28% in the periods while in the rest of Europe, the load factor was 25%.

On the other hand, load factors in United State declined 4 points decreasing from the strong 36% achieved in the last year to 31% in the first six months of 2010. We should say that, this performance can be low as expected and historical load factor, and this explains by the world means across the country in the period, which is also something that happened to the rest of the industry.

Overall, EDPR’s average load factor reached 31%, while the [stable] load factor year-on-year and then in the line, the benefits of our diversified portfolio and it continues to be one of the highest in sector concerning the quality of our assets.

And as a result of the 31% the load factor in our installed capacity, electricity output presented the strong 32% growth, accelerating in the second quarter vis-à-vis the first quarter performance.

Breaking these rules by platform, its notorious the performance of European assets, the 18% increase in installed capacity, one is 4 percentage points increase in the load factor. That was sound 50% growth at the electricity the output.

In the United States, the 28% increase in installed capacity was partially offset by the 4 percentage points dropped in the load factor due to the reasons already explained. But it is important to say that the electricity output in U.S. already resisted an installation in the second quarter and the volumes in the first six months of 2010, already 20% higher in comparison with the same period of the last year.

And looking to the next slide regarding prices, and EDPR’s integrated portfolio management continues to demonstrate positive results as we can see, on the back of the clear risk management strategy to control the exposure to market volatility and the results of the diversification of the portfolio of the average EDPR electricity price continues to demonstrate a recurring stability every quarter around €69 per megawatt hour.

In the first half of the year, you can see that more than 80% of the production was sold under very predictable and totaled prices, and we can see on the rights, that Europe and U.S. assets had the decent price performance but more offset by the portfolio effect.

In detail, in Europe first and then in United States, prices in Europe decreased 8% vis-à-vis first half of 2009 less explained by the lower selling price in Spain. In Spain, the realized good price declined close to 30% in the EDPR hedging strategy, which we already previously announced, was able to mitigate these effects because of this final price, the final selling price of EDPR only declined by 13%.

And in terms of hedging, you can see that’s for the second half of 2010 and for 2011, EDPR (inaudible) respect of its production at an average price of €44 per megawatt hour for the second half of 2010 and €43 for 2011.

In the second half of 2010, we expect 90% of the volumes to be production by hedges of course and while in 2011, we expect the level of this production to be more than 75%. And these -- because of our production, it clearly demonstrates the high visibility that we have on our Spanish revenues for the next 18 months.

In the other regions, Portugal and rest of Europe, it’s was to say that we continue to demonstrate price stability as (inaudible) which is not going to affect the return, especial mention for Poland where I just start to sell electricity and the electricity was sold at prices above €100 per megawatt hour.

Moving to the United States, and prices advanced 3% on average year-on-year and this expand by 100 improvement or the strong recovery of the merchant prices across the regions where EDPR is present and 184 megawatt in the Iowa state in the major markets and 500 megawatts in the Illinois and Indiana which are in PGM market.

On the other hand, what has expand this positive performance in price is improvement of the PPA prices which has improved 7% on year-on-year and reflect higher prices achieved on the latest contracts that EDPR closed later -- in the last 12 months.

And going to the financial performance, we again see operating performance was very strong in terms of production rise and stability in load factors and prices. And in terms of financial performance, EDPR continues to reflect this stronger operating performance into strong at the topline at EBITDA level.

Gross profit increased 30% while EBITDA rose 27%. And net profit in the period was €43 million but it was due to higher depreciation financial charges. But looking to the funds from operations and the performance of the funds from operations we can see that the company really gave the solid 15% growth.

And going to detail in the P&L line item, gross profit increased by 30% in the period which is completely line with the electricity output growth and the performance of EDPR were strong and the gross profit advance in 27% even the new capacity installed in the last 12 months and the higher load factor in the first half, which more than compensated the negative impact on the average price.

And in the U.S., the gross profit increased 20% in the period, although affected by a lower resource especially in the first month of the year and towards the side, I think the second quarter spend along and the gross profit as already accelerated in United States and advanced 47% year-on-year.

And moving to EBITDA and to the next slide, you need to see that the EBITDA fully reflect gross profit performance and over the non-drivers previously explained it and consider that EBITDA increased 27% in line with the gross profit performance. But also on the maintenance of a high efficiency levels aligned in the EBITDA margin of 74%.

It did appear Europe was able to maintain a strong EBITDA margin around 81% while the U.S. drop from 76% but as previously explained U.S. was expected by the load factor below EBITDA historical average. And EBITs or the operating profit climbed 14% year-on-year. Such performance reflects the EBITDA growth balanced for the higher depreciation charges in the period.

Depreciation increased from €142 million to €197 million on the back of higher operating capacity. And we already also benefiting from the cash grants in the U.S. investments. Even though the depreciation have increased with regard to EBITDA, EBIT in the second quarter standalone outpaced year-on-year growth registered in the first quarter, EBIT in the second quarter as you can see advanced more than 27% year-on-year.

In terms of the financial costs in the next slide, some reasons that trying to increase in the net financials, net financial costs from €44 million to €89 million. And firstly, net interest costs after capitalization increased to €30 million and such increase is related to the increase of the net debt from the ongoing growth problem to the fact that around 50% of the interests are in dollars and also it is reflecting slight increase of EDPR’s average customer effect to 5%.

We continue to highlight that EDPR and called a very strict discipline and more concerns the exposure to interest rate and refinancing it. Our 5% cost of debt reflect the financial agreements gross of which 96% of the debt is contracted and the long-term fixed rate loans for 10 years, we did this in order to match the operating cash flow duration with the financial costs.

The second impact on the financial costs is the related bad debt equity partnership liabilities, given that the bad debt equity deals closing relate in the last 12 months, the cost associate with this process had a slight increase from England, but clearly remind that this is non-cash cost of EBITDA.

And lastly, financial costs were also affected by the Forex that we felt in the first half of 2010, mainly with regards our investments in non-euro currency, which led to an increase of €30 million related to negative Forex. It’s important to say, that these differences are constant cost net effect therefore in the company’s cash flow generation.

And in terms of funds from operations in cash flow generation, you can see on the next slide, that in the first half of 2010, the funds from operation, the operating performance after interest, taxes and adjusted by the non-current results increase a solid 15%, which reflect the continued execution on growth of EDPR.

Such capability of the company, generates its own funds continuous to increase quarter-after-quarter and it is important to note that the cash flow generation has been increasing despite the funds are ongoing with problem and this is (inaudible) the need of new debt along the quarters.

And capital expenditure, CapEx in the first half amounted to €834 million of which €641 was slowly dedicated to the current assets under contraction are currently building 1.3 gigawatts of capacity, diversify to stable specific strategic region, and see that more than 450 megawatts are spending in Portugal, 239 megawatts in Central and Eastern Europe and 500 megawatts in U.S., we also have 70 megawatts in Brazil and currently, we are also starting the construction of the additional capacity in Poland as well, so increase in the annual construction capacity in the rest of Europe.

Cash flow for ’10 is being reflected on the net debt, net debt increased around €600 million, which one of 60% is related to the CapEx spending and related to the ongoing risk problem. But it was to say that €228 million are related to -- solely related to the Forex translation effect on the dollar denominated debt.

Debt in dollars represent 46% of the EDPR’s gross profit and is important to highlight that U.S. dollar appreciated 15% at the beginning of the year and in the beginning of the year U.S. dollar was at $1.44 per euro and we entered the period with $1.23 per euro and by (inaudible)

So the net debt also estimate with due to the fast growth of the company and because of the net debt and you can see this from the right side of slide that part of the net debt in our balance sheet is related to assets that started operations recently and close to €1 billion are solely related to us with the current fee and a construction.

This growth really shows that in the first years of growth our net debt does not truly match our EBITDA generation capabilities and does not truly match our installed capacity figures, so in terms of comparison net debt and to the ratios that use to be we need to take this in consideration.

And with that, I will now pass towards our CFO, Rui Lopes Teixeira and for the business outlook and conclusion.

Rui Lopes Teixeira

Thank you very much, Rui. I believe that I have been conveying to the market that the value of EDPR is more (inaudible) and can be seen as the some of the parts of develop our assets management as well as the dollar that can be capture on our actual development. So with the next two slides I just like to describe that once again.

So I believe that we currently have first of fall a premium value and what is that the value and management as we pretty much are watching the shareholder value for that installed portfolio.

Secondly, I believe that there is a value of each asset to be captured on assets under development, investment will be siege in conjunction it will be a flexible growth profile.

And finally, I also believe that we currently have visibility to what is the regulatory is going to work that supports our business profile both for the assets already installed as well as the asset to be build and given a clearly the long-term stability or the long visibility and towards the value creation of different part.

So just to highlight the quality assets that we currently have, but yeah, as I said in my perspective are generating premium value shareholders and our average year lifetime of the portfolio is 2.1 years old, a relatively young portfolio.

We do have liabilities going to 30 up to 40 years and/or in some cases even owning the land which means that they usually beyond what is currently a convention and in the market in terms of how their terminal value will as far is considered.

I believe that we have been always being demonstrated the premium net capacity factors or load factors reaching 27% in Europe or 34% in U.S. are long-term expected. And the risk profile of this company is one of the strategy pillars and we are committed to maintain a low risk profile, currently we have more than 80% of our volumes with a limited exposure to spot prices or to price volatility.

And finally, again, as part of this low risk profile, we also locked-in our cost of capital at the moment when we could tried to invest to locking in long-term funding at the fixed cost that is we don’t pay not a liquidity risk nor interest rate risk.

And this -- the combination of all this variables and provides you with visibility to say that, if we just took the assets that we have installed and currently under construction adding up to 6.6 gig of EBITDA contribution capacity.

This installed capacity at the clear speed should be generating in the range of 17.5 megawatt hours, again as I said, with the very limited risk profile at more than 80% with no merchant exposure, should no merchant exposure. And therefore this installed capacity should be generating an EBITDA in the range of €875 up to €925 million, I am sorry, per year.

So at the current market capitalization that we have -- the value stock has and this represent a discount more than 15% yield on free cash flow for these assets under management. So here I believe this speaks for itself, the quality of assets that we have currently are already installed.

Now moving to the, let’s say, short-term growth, meaning 2011 and 2012, definitely the turbine supply, the sourcing for this three years is due to provide a competitive advantage to EDPR in overall.

And I also -- I’ve said this as many of you that we have very big combination of three building block or three value drivers for this sourcing in those two years, either first combination of lower CapEx per megawatt, with a higher wind farm productivity, therefore lowering our CapEx per megawatt hour, which is basically what we want as we sell energy, we don’t sell capacity, we sell megawatt hours.

And combining these two greater flexibility which is currently key to accommodate the risk profile of our business growth I mean the pipeline risk, portfolio risk and so and so forth, and marketing environment as a whole. The flexibility is so important and contribute significantly speed to the value, the overall value of our sourcing strategy for these three years.

But if you just take a look the impact of the first two drivers and you took a look of the potential or expecting increase in terms of profitability measured but internal rate of return.

In European markets, in all these markets we are price takers, so as we speak everything else will be meaningful. This would represent an increase profitability of EDPR’s new assets, more than 100 to 200 bps of the product level that they are.

In United States or any other markets, where, we are not such price taker as we pursue to close to PPA, and those PPA are based on competitive bidding processes and either they have the profitability would remain as same as it today, actually we could increase slightly but more than anything it will -- it is providing EDPR, we have competitive advantage to negotiate this long-term contract to sell the outlook capacity of our evolving partner.

And finally, the few words on legislation, I will not bother you too much of detail with the different uptick on recent legislation for both Romania or even Spain. But I would like here to differentiate at least two many issues.

First of all, EDPR does not define growth plans based on what need to be a future regulation. We know that there is an ongoing discussion mainly in U.S. market, this discussion has not yet came into any conclusion, it is the important market for EDPR. But the fact that currently there is no visibility on when and how that standard regulation would exist, is not effecting immediately our plans for the future. It does effect, however, the perception in the market that to some extent that would be a positive movement in the short-term for new PPAs to be in contractive if this federal legislation would then completed.

If we look to the existing regulation and this is on -- based on which we are currently foreseeing our growth for the next -- for the short-term. I would also like to say that, I believe that we do have a visible and supportive regulation in the different market and two main ways of materializing are revenue stream through this regulation.

One is either through private or bilateral contracts, the court and the legal framework, examples would be PPAs in U.S. those are bilateral contracts. Poland again should be GCPAs, Portugal grant this contracts that we have with distribution companies and these contracts, although they may be defined upstream by some countrywide regulation, ultimately there are contracts that’s being with two parties and therefore, there is a private rolling or there is a some legislation governing private contracts and there is counter-party research doing.

Which is of course different from what we have as other way to materialize the revenue stream which is for example through legislation on administrative settlement which would be Spain with Royal Decree or even Romania, it will be just as a recent law that was approved and published via international assets just four weeks ago.

And this makes it different because when one may being get that regulatory risk that the regulatory risk definitely have a lesser of a risk profile when we discuss private on our actual contract vis-à-vis when we discussed with legislative. But even if we discuss with legislative, and let me just take the Spanish stake the example and we all know about the discussion that were and negotiations that were held between the inspector and the Spanish Government and the Ministry of Industry.

I believe that at the end product of this negotiations is pretty much neutral and its basically what we expected was to provide a effective – expected to provide a reduction of 35% of the premium temporarily through December 2012 and then exchange to have a clarification that in this regulation apply for the existing assets and cannot be reviewed for the assets they are build under such regulation.

And when you take a look at the real impact, the material impact that they have, that we would have in our realized prices, we need to believe that the pool price is going to be at the levels of €60 per megawatt hour and above, just not having here, let say, cost of opportunity with this agreement and even in that case it would be a limited one, the example that we provide on this page 27, which show an impact of around €4 per megawatt hour, for the capacity under this regulatory regime, from the 1st of January 2013 onward it will vanish and go back to the original settlement.

Which means that, even though we have these negotiations going through with the government, the outcome was neutral positive or let say neutral and that show, the robustness of the existing regulation and the robustness of the risk profile on our long-term perspective when we invest in these highly regulated assets.

For just to finalize, definitely I believe that EDPR is in the past who had delivered minimal and profitable growth, we do maintain a low risk business model, growth has currently being translating in the first half of 2009 through a stronger portfolio performance, 30% growth our electricity output, 27% growth on EBITDA level by the first half 2010.

I know that it will be challenging for us that the net profit level to reach year end 2010 with a double-digit growth. However, we are still looking ahead for the three years period, looking at 2012 to maintain an ongoing output in the growth and therefore to deliver 30% compounded annual growth on EBITDA level and double-digit growth at profit level as well on these three years period.

Solid profitability, again, load factors in the first half 2010 shown to be above industry average and the EBITDA margin at very high level, 74% EBITDA margin and as I said, if we take a look to what is the short-term growth prospects of EDPR, we do believe that there an expected increase of 100 to 200 basis points of our projects profitability in markets where we are price takers.

And finally, as a third driver of value this company, the low risk profile that we have been committed and delivering, maintaining more than 80% of our portfolio, the production of our portfolio with the low risk exposure and also maintaining and capturing actually a higher optionality and flexibility to ensure that we adapt the growth base of this company to be a different market environment.

I will now hand over to Rui Antunes. Thank you very much.

Rui Antunes

Okay. Thank you, Rui, and I think we can start the Q&A session, operator please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question comes from the line of Alberto Gandolfi from UBS. Please go ahead.

Alberto Gandolfi – UBS

Yeah. Hi. Good afternoon, and apologies for the background noise. I have one question if I may. I was noticing that the net income in the second quarter was mostly eroded away by fixed cost and I know you haven’t commented on some non-current taxes and too, so I was wondering if you can elaborate on those, because as far I could work out, they were mostly relating to Forex. As well you get some benefits from the EBITDA level, so I was trying to see if there’s something more than that.

But primarily, could you please comment on where is your work-in-progress at the moment and can you talk about the dynamics of the work-in-progress within the quarter? So how many assets have you added at the end of it, which do not contribute to your earnings, but it contribute from the beginning of the third quarter onwards? And maybe, let me ask you a follow up. We see that the full year net income [activity] consensus is about €130 million – €133 million? Do you still recall [reporting] that in light of these results do you find it challenging? Thanks a lot.

Luis Guerra Nunes

Okay. Thank you, Alberto. Comments on the non-current financial costs, mainly, we have a string €30 million of negative price, it consists. It is mostly related to our investments in non-euro currency and mainly in Poland and Romania. As you all know, we are investing in U.S. in these countries for debt in euros and the asset are in local currency. We have a strong devaluation from the zloty and from the Romanian Leu in the second quarter of the year ago a strong volatility in the currency market. And after that devaluation was around 10% and then we had an impact -- an accounting impact on our financial costs in this quarter.

In July, you can see also the Forex are changing again, but we don’t depend on the Forex to say, the Forex – and it’s got to be a be X or Y, what can we say is that in terms of, especially in Poland, we are about to close and is our strategy to close local financing for this market. So that’s in zlotys. Once we close that debt in zlotys we will no longer be having the Forex – and the Forex difference as we had the natural hedge.

And different thing in Romania because in Romania we had more than two-thirds of the revenue still into the euro as you know, as the green certificate – two green certificates that will be collected in Romania are scheduled at the beginning of the year. And it seems that most of our topline is more exposed to the euro currency rather to the Romanian Leu. We mostly keep our debt in this country in euros.

In terms of work-in-progress, basically there are some assets that are not fully generating EBITDA or only generating one month or two months of EBITDA. And you can – you can consider these assets – the assets that’s been installed from the beginning of the year, okay. This is part of work-in-progress if you also to have a normalized EBITDA. These are in work-in-progress, is basically what we have, done via the construction – the 1.3 gigawatts and in terms of the net debt it represents roughly €1 billion. So it’s 1.3 gigawatts, it’s already affected on our net sales. We are not having cash flow from this project yet. Also, we need to look at – in terms of financial expenses over financial expenses related to this construction, are also being capitalized.

In terms of the full year consensus in terms of EBITDA, yeah, we are very comfortable with the consensus that we are seeing and we could grow debt that most of the analysts are foreseeing. In terms of the net profit, it is going to be very challenging for us to deliver the growth at this line -- at the bottom line.

Alberto Gandolfi – UBS

Okay. Yeah.

Luis Guerra Nunes

Check next question, please.

Operator

The next question comes from the line of Allen Wells from Morgan Stanley. Go ahead.

Allen Wells – Morgan Stanley

Hi. Good afternoon, guys. A couple of quick questions, just on pricing and there, and I wondered if you could to provide a bit of an update on how you’re potentially looking at the Spanish power prices in 2011? And given the regulatory changes in price, will you be looking to do any hedging at all there or pull there or pull up the 28% – pay the 24% derive on hedge?

And second question is just on the U.S. market, obviously 27% of the U.S. capacity to merchant as a number of projects that have being going in the construction, PPAs. Can you provide a bit of an update on how that market is developing over the last three to four months? And then if you potentially see any opportunity to get those deals closed in the near-term? Thank you.

Rui Lopes Teixeira

Okay. It’s Rui Teixeira here. Related to the (inaudible) in Spain, already we mentioned in the year 2011, so we’ve already worked in our – worked out for more than half of our capacity under the regulatory regime or under the previous regulatory regime sustained at the levels of roughly speaking $43 – $44 megawatt per hour and right now we are looking to potentially further hedging additional position in this market.

Again, and I would like to repeat this all or the assets under the previous regulatory regime because we have seen the regime, already protected by or indirect, so ultimately we will never do 100% of hedging so from this perspective we’d actually be opening a risk provision – not following a risk provisions we are locking a 100% of our production.

On the U.S. market, we currently maintain the negotiations for closing PPAs. We haven’t signed any otherwise we would be announcing that of course. Right now, the time of process is basically in the hands of the (inaudible) government, more and more is coming to the hands of the [PC], the regulatory commissions or the regulatory bodies. And they are taking significant amount of time to review the terms and conditions and to compare those PPAs, those prices – their own estimate of long-term of forward currency.

So (inaudible) and this is a buyer’s market for utilities right now, as well as by the other [PCs], so what I can tell you that I haven’t seen any particular improvement or acceleration how long these processes are taking over the past three months.

Allen Wells – Morgan Stanley

Okay. Thanks, guys.

Operator

The next question comes from the line of [Laura Trines] from BPI. Please go ahead.

Laura Trines – BPI

Yeah. Hi. Good afternoon. Three questions if I may. The first one follow up on the PPA, you’ve mentioned in your Investor Day around US$54 for PPAs and then you have a slide here number 12, we’ve seen an improvement in price system in PPAs, whether you maintained $54 average for the full year as you estimated.

And then one question on the average cost of debte, if you could give us an idea of the drivers behind the increase in average cost of debt whether this is related with the financing you mentioned in Poland and Romania and whether you could give us an idea of what would be the cost excluding this item?

And finally on Spain, you have been making some tenders in Spain for capacity. Are there (inaudible), we have no renovations settled yet. If you could give us what are your expectations there and additionally where you could have – certainly have the impact of that in terms of tendering costs in your OpEx? Thank you.

Luis Guerra Nunes

Okay. Regarding the first question on the PPA and what we expect for the average of the year. I believe there is the $54 figures that we have today and if we don’t close in the additional PPA that will impact the figure which would be the one that we should be considering for the full year as well.

Rui Lopes Teixeira

Hi. It’s Rui Teixeira here. The cost of debt, currently we have, as we talk the debt of EBITDA is 95% at the fixed rate. So the increasing cost related to – the average cost will add to the new contract that we are closing as a wire spread than have in the past, although competitive for the next 11-12 years but still have wider spread then it had in the past.

It’s not yet impacted by the cost of debt for Poland or for Romania and with regards to local currency. So what we try to speak here, of course that we do have that already contracted. That was used for the construction of the Margonin farm Poland and it has been used for the construction of the two wind farm that we have in Romania. Once in that debt is Leu denominated.

Once, we – and should be in the same line of the overall portfolio. Once, we lock-in a spending in local currency and we should be about to close the Polish share one then that cost will be – whatever cost it is it will be impacting the portfolio.

Finally, regarding tenders in Spain. I’m not sure if I completely understood your question, but two comments here. I believe that you asked about impacting OpEx from tendering costs, I mean, non-material. I mean, there is no specific OpEx item for the bidding new tenders and of course the cost related to the tender, is actually the cost related with the pipeline development. So nothing new, in the sense that, of course we will be developing our pipeline and making sure that the projects are ready, that in the case we are awarded with that capacity and we will be building the project.

Concerning, the expectations, I mean, I believe that the also these discussions we have with the government concerning the existing regulation, also have demonstrated that – first of all, I mean, we are not expecting any increase in terms of the average profitability for the new regulation, something that I have always told to the market. It’s been consistent with Spanish sector we’re getting towards the part of the curve where the incremental profitability should not exist, I mean, should not require more incentive that’s currently exist for the new additions. We should expect a marginal decrease in terms of the new – profitability from the new regulation whatever there is.

And secondly, we’ve also shown that overall I think that was spend the room for improvement in terms of all the process was handled, particularly with – to the media. It shows us that, again, the Spanish government is committed to support the weak sector and we’re committed to achieve its target.

So having said that, we are getting – we are being awarded, we have being awarded in two tenders already as to the U.S. and [subordinates]. We are participating two tenders, (inaudible) and the Croatia, especially in the last one – the NCF load factor is one of the highest – is not the highest in Spain. So even we can see they are very conservative case scenarios or the regulation in Spain, I believe there will be projects that most likely would fall into the investment decision at EDPR Capital allocation.

Rui Antunes

Next question, please.

Operator

The next question comes from the line of Rupesh Madlani with Barclays Capital. Please go ahead.

Rupesh Madlani – Barclays Capital

Good afternoon. Three questions, please. First, could you comment on what percentage of your wind farm assets where you actually owning the sites?

And second, if you could comment on, do any of your funding agreement show uptick in the parent company, I can see any provisions for the parent company to revise the rates that you’ve agreed?

And third, thinking about how some of your peers, also (inaudible) or it was all renewable some of these guys have move towards solar as a way of deploying capital and achieving attractive [IRRs]. Is that something you would consider doing some of these other ends?

Luis Guerra Nunes

Okay. So talking about the first one. The site or the land if you want, in Romania is mostly not all owned by EDPR. It’s more of a simplicity of the Romanian legislation concerning and land leases. And I would say that most of the land in the area other countries where we are, more than 90% sure would be on land leases and average ranging from 30 to 40 years.

Concerning, the parent company contracts, no. The answer is no. There is no provision to change or to revise the rate for the long-term debt. That currently is signed. So once we sign a contract for 10 years debt, the rate is locked-in for 10 years and is spread for that project or is spread for EPDR, I’m sorry. That spread effects EDPR cost of debt if EDPR was in the market at that moment, so there is no provision to change debt for existing contract and for the existing rates.

Finally, I’m not sure if I understand your question on the – the third question that I understood it was something to do with allocating capital to solar technologies.

Rupesh Madlani – Barclays Capital

Yeah, yeah.

Luis Guerra Nunes

Okay.

Rupesh Madlani – Barclays Capital

Would you consider those in solar projects, if an operating environment for wind remained difficult, for example, United States which has looked to build solar projects this day?

Luis Guerra Nunes

Okay. Understood. So, looking to these whole technologies, as we speak we are not foreseeing any investment in solar as far 2010 from now until the end of 2012. Because technology that we have been forming up both on the solar and thermal, [CSP] as well as PV. And actually on the development side, that PV development is much more like would be the wind farm development.

However, currently our perspective is that we do have sufficient pipeline in wind farms, in wind project from which we can pursue an optimization of capital allocation. And therefore we still have various factors, I mean, actually, more than we are planning to build attractive projects on the pipeline and that which we’ll do that capital allocation. So the answer is until we have 2012 we are not pursuing at this moment, we are not pursuing investment in solar technology.

Rupesh Madlani – Barclays Capital

Okay. Thank you.

Operator

The next question comes from the Javier Suárez from Unicredit. Please go ahead.

Javier Suárez – Uncredit

Hi. Good afternoon. This is Javier Suárez of Unicredit. Three questions, the first one is on the slide number 24, you have given an estimated EBITDA, on average that goes from €875 to €925 million. Is that an assumption for the year 2011? And a question relating to this – which is the assumption behind this number in terms of prices getting zero fund state on load factors for Europe, (inaudible) sometimes.

Second question is on the guidance that you have – you had just given for the year 2010, and you have said that you feel comfortable with the EBITDA consensus, but you believe that the net income is challenging. Do you think that, the question is, what do you think that the market taking wrong, and on why the consensus that you are saying that should be revised downward?

And then the third question is on the slide number 12 on the U.S. markets, merchant prices in America has gone up by 24% year-on-year. Can you give us explanation of this value creation and also your expectation for the full year 2010? Many thanks.

Luis Guerra Nunes

Okay. Thank you. Very thank you. Well, in the forecast at the beginning its not the guidance for 2011, is also something that we represented just today, is considering the capacity that we said, of the capacity that we will have or that is under construction, if when this capacity starts to deliver recurrent cash flows, recurrent EBITDA as you know in the first month of the operation of the wind farm and wind farm is not delivering yet full capacity, so imagine that these will give full capacity for one full year the 6.6 gigawatts. We believe that the 17.5 kilowatt hour, the assumption for to reach the thermal power in terms load factor, is our average load factors that we have. So the 24% in U.S. and the 27% in Europe and in terms of prices to reach to an EBITDA of €875 to €925 are the prices that we have today, we are not considering any type of recovery in terms of prices.

Now, in terms of the consensus then what the analyst should do, we will (inaudible), we already told that, its going to be challenging, for us very challenging, for us to reach that kind of levels that the leading point in terms of growth, it’s a big challenge in terms of growth and I believe the mostly come for itself.

And in terms of the U.S. market, I’m not sure prices, and outside, that’s by the end of the year we should have merchant prices and around what we are foreseeing in the beginning of this year by the time that represents our positive line year end results, which should be something outside to $38, more close to $40 per megawatt hour.

And the prices evolution in the U.S. market region was particularly fine is much shrink to the gas prices, gas prices were at in the first quarter of this year, by April and May gas prices came down and this had an impact on the merchant prices in the major market and in the PGM market and currently, we are seeing prices stabilizing already along $36, $37, $38 per megawatt hour that we have seen in June and because this price pressure.

Javier Suárez – Uncredit

Better quarter. Many thanks.

Luis Guerra Nunes

Thank you.

Rui Antunes

Next question please.

Operator

Next question comes from the line of Didier Laurens with Société Générale. Please go ahead.

Didier Laurens – Société Générale

Good afternoon, gentlemen. Good afternoon. It’s Didier Laurens. I have two or three questions. The first one is about the average costs of debt. I assume the 5% is excluding the tax equity partnerships, if we include the tax equity partnership could we have an idea of the average cost of debt.

Then the second question is, I’m bit surprise regarding the personal costs, it seems like in Q2 the personal costs were around €10 million, that versus Q2 2009 and down 30% below Q1, just to better understand what happened beyond those personal costs.

And regarding EBITDA or EBITDA margin on the quarterly basis, it seems that Q2 2010 EBITDA margin in Europe is down 3% versus Q2 ’09. I just want to better understand what happen, it seems like it’s not related to load factor, I just want to be sure that there is a still room for profitability improvement going forward? Thank you very much.

Rui Lopes Teixeira

Hi, Didier. It’s Rui Teixeira here. So considering the first question as you said and our average cost of debt right now is 5%, and exactly I don’t consider it to be a debt because as you know there is no maturity defined on debt (inaudible) in equity type of regiment. I can recall that while in the past for instance we had about for that existing portfolio between 5% to 6% yields in 2007 and ’08 went up to approximately 7% and 7.5% and currently we are going within tax equity. So the latest tax equity that we find since, I would say, 2009, early 2009, like early 2009 will be margin range of 8%. So I think this would provide you to figure that looking at this in terms of yields related to tax equity transaction.

In terms of the EBITDA margin in the Europe, EBITDA margin second quarter, it is mostly related to the load factor EBITDA. We can see in the second quarter standalone load factors were bit below our average factor, the average and prices were -- price performance was bit better than in the first quarter. So this is entirely related to the load factor figure, and as you know that, EBIT is the one of the most important drivers of our business.

And in terms of personal costs, let me take a look and I’ll contact to you, okay.

Didier Laurens – Société Générale

Okay. Thank you. The question was because if we go to the reported, the judgment you issued this morning. I was just asking the question because if the load factor for Q2 ’09 and Q2 ‘010 was around 23%, so it was just question, 3 percentage points might reflect load factor something a little bit big change, that’s why I asked the question.

Rui Lopes Teixeira

Okay. You can know that I can explain you but as you can see as well the price in the second 2009 was better in Spain than being the second quarter 2010. So that if you are comparing at this stage those two basis, is also one thing that you need to take in consideration on that.

Didier Laurens – Société Générale

Okay. Thank you.

Rui Antunes

Okay. Thank you very much.

Operator

(Operator Instructions) The next question comes from the line of Michael McNamara from Jefferies. Go ahead.

Michael McNamara – Jefferies

Hi. This is Michael here. Just a quick question. In your report, you’ve given, you’ve changed the wording of your guidance slightly, you previously talked about installing 1.2 gigawatt of new capacity in 2010. You now talked about adding 1 to 1.9 EBITDA gigawatts or 1 to 1.2 gross gigawatts. Could you indicate, this is change from your – is this awarding issue or you are actually going to basically trying to build less wind farms than you were in the first quarter? Thank you.

Luis Guerra Nunes

Michael, no, no, it’s not a change from the target. It’s basically, if you look, you need to look EBITDA megawatt or the megawatt that we consolidate to EBITDA megawatts and the gross megawatts. The difference when you look in terms of EBIT megawatt in the period is beyond it real capacity, so the consortium where we have 40% stake, this consortium is equity consolidated and does not contribute to our EBITDA in 2012.

But since after the assets treating of the consortium, we fully own the assets and we fully consolidate at EBITDA megawatts, you need to consider this to the added capacity. So when you say, we are going to install 1000 to 1.1 gigawatts in one year EBITDA terms, okay, does not consider the capacity from this consortium. In gross terms it has been the targets that we previously announced yesterday as EBITDA 1 or previously announcing only yesterday is that the gross range is going to between 1.1 to 1.2, okay. Is it clear?

Michael McNamara – Jefferies

Yeah. And one other quick follow-up. You indicated that the change in the interest rate, your consolidated interest rate went from 4.9% to 5%. Could you give us some guidance on what the cost of new debt was in the second quarter and perhaps give us comparable, so that first quarter 2010 and perhaps something for 2009 as well, except for the new debt?

Rui Lopes Teixeira

Okay. The spreads, the latest spreads on the latest financial agreements with operating company were around 250 or north of 250 basis points, on top of the 10 year mix swaps.

Michael McNamara – Jefferies

Okay.

Rui Lopes Teixeira

Basically, we like this for the future financial agreements for the time being.

Michael McNamara – Jefferies

Okay. Thank you.

Operator

The next question comes from the line of Chris Rogers, (inaudible). Please go ahead.

Chris Rogers – Analyst

Yeah. Good afternoon, everybody. And two questions. Firstly, coming back to the issue with the guidance and just to confirm that guidance, excuse me, the consensus EBITDA, you’re happy with but the net income, you think is a bit high. Do you think that is because of one-off factors or just the market over estimate the relationship between net income and EBITDA going forward as well?

And secondly, you’ve defined the large framework agreement with Vestas recently, just wanted to get a sense of whether you had any other investments contracts on the negotiation at the moment and what the timing on those might be? Thank you.

Luis Guerra Nunes

In terms of consortiums and the way we, as we already said, EBITDA were -- are perfectly fine, it is going to be more than 30% year-on-year growth and each going to be fully respect, the growth and expectation that the company is pursuing to produce that.

And in terms of net profit, of course, you need consider some of the one-offs that happened in the first half of the year, and you will also need to consider some position impacts from further Forex business. You can always consider that 50% of our interests are in dollars, so if the dollar appreciates there is a negative impact, if the dollar depreciate there is a positive impact and I believe the market move too upward, okay.

Chris Rogers – Analyst

Okay.

Luis Guerra Nunes

In terms of the other question.

Rui Lopes Teixeira

Hi. It is Rui Lopes Teixeira. And no there is no ongoing further discussions with our investors for new supplier part from what we had that we have announced couple months ago.

Chris Rogers – Analyst

Okay. Thank you very much.

Operator

Our next question comes from the line of Raymond Fernandez, [Bascom]. Go ahead.

Raymond Fernandez – Bascom

Hi. And couple questions. One relative to the discussion that the CFO had on valuation and I’m sure on, I guess it’s pretty simple to demonstrate that EDPR is trading at out of this ground and that has been the place that we’ve heard for more than a year plus.

Although, I guess the company is going to continue investing as usual and trying to show that there is value in the company while it is when there, when do you rewrap or whether this, anything that you should do in the medium-term, perhaps reducing CapEx and just showing more cash for generation whether that passes your mind or at the moment it is completely out of the question. And also in your view what are the drivers behind this discount some people may at least talk because of the downgrade to your system made, because of the lack of energy bill regulatory issues and so on. So just your opinion on some of the issues?

The second, I missed some of that, when you were discussion to this year, Rui Lopes Teixeira was discussing about EBITDA growth for the next few years the target. Can you make some comments about the net income growth as well. I didn’t understand whether you would also be double-digit or what comments you made about net income because your line wasn’t good. So I would like to ask about that?

And finally just, again, sorry to get with the guidance, but Rui Antunes when he talked about net profit, I just want ensure that he said he is going to be challenging to deliver growth or whether he says it is challenging to deliver the growth implicit in consensus because we know the consensus figure is higher than €140 million of net income in the last year? Thank a lot for your patience’s.

Rui Lopes Teixeira

Hey. Hi, Raymond. It’s Rui Lopes Teixeira here. So few words on the market valuation and we’ll get right now EDPR, top five is impacted by definitely the sovereign rate discussion, matter of fact the Southern European countries, so being stock obviously in the Portuguese Stock Exchange and Euronext stock exchange and DSI 20 E Index. It turn less universal concern from the investors community towards that market regardless of the exposure that EDPR has to the Portuguese market, Portuguese speaking countries so definitely I would say this is one key issue.

The key issue was as I also mentioned via I mean the way, the process was handled in what regards the discussion in Spain about the regulatory changes that at the end of the day we are pretty neutral so nothing really change for the better of the assets, but still the way the process were handle, generated a lot of uncertainty and concerns with the investors and therefore this was affected the company.

And thirdly, I also believe it is related a some consensus appreciation because the fact that we are moving to the U.S. market, there was a very high expectation deals in the early part of 2009, so as I said exactly one year ago, driven by laws being approved at the sub-committee of the senate as well as house of representative it for a federal legislation. Then afterwards there was, in one hand there has been some frustration because of the no -- actually no at the federal level was approved, together with a fact which is all the markets, merchant markets becoming depressed and lower consumption in United States than that utilities. Although still having to achieve the same RPFs in terms of percentage, if you have a lower consumption just regard with the demand for overall asset terms for EBITDA capacity.

So I will try to say this are – the factors that are still contributing having the best and but are still contributing for needs the recognition of the full value of what I believe EDPR assets currently have, not only the one, but definitely also the short-term growth and not we are being talking about long-term growth.

Related to my comment on the timeframe from now to 2012, yeah, I did say that, we are expecting to achieve EBITDA growth at around 30%, as well as a double-digit growth at the net profit or net income expected. And finally relates to your last question. I’ll ask Rui Antunes?

Rui Antunes

Just to clarify, churn is going to be challenged – is going to be challenging to deliver growth (inaudible) 2010, okay.

Raymond Fernandez – Bascom

Appreciate your answer. Thanks a lot.

Rui Lopes Teixeira

Yeah.

Rui Antunes

Okay. Thank you very much and for all of you I think we don’t have further questions. I’d like to thank you for attending EDPR’s first half 2010 results conference call. We are going to and also take care and I say good-bye. Thank you very much. Have nice holiday.

Ana Maria Machado Fernandes

Thank you.

Operator

Ladies and gentlemen, thank you for participation. This concludes today’s conference. You may now disconnect your line. Have a good day.

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