EDP Renovaveis SA (OTCPK:EDRVF) Q4 2018 Earnings Conference Call February 27, 2019 9:00 AM ET
Rui Antunes - Head, Investor Relations
João Manso Neto - Chief Executive Officer
Conference Call Participants
José Ruiz - Macquarie
Jorge Guimarães - Haitong
Sara Piccinini - Mediobanca
Good afternoon, ladies and gentlemen and welcome to EDPR 2018 Results Conference Call. I'm Rui Antunes, the Head of IR. I'm here with Mr. Manso Neto, the CEO of the company. We'll go through the results of the period and then we'll have a Q&A session for you to be able to ask questions to us.
So I'll hand over to Mr. João Manso Neto for the key highlights of the period
João Manso Neto
Thank you, Rui. So good afternoon, ladies and gentlemen. So it's a pleasure. Thank you very much for attending this meeting. So what's the main conclusions that I would like to share with you? We knew from the beginning that this was going to be a challenging year, namely because we had expect discontinuities in terms of the PTCs and in terms of the expected decrease in the number of green certificates in the Asian countries.
On top of that we had an unexpected impact, which had to do with an abnormal wind factor and also the foreign exchange. But I would say that, with our strategy, which is structural of increasing the growth and utilizing the sell down of part of the extra growth, we were able to keep a strong operating retained cash flow and on the other hand to increase the net profit, gearing more in terms of the tidal.
I would say the availability this year was still high, but lower than last year, because of the specific wind farm, 97%. The load factor was the problem with the 13% load factor which represented only 94% of the long-term average. And besides having this low load factor, plus the expected discontinuities in the foreign exchange, the net revenues were 7% below last year.
We kept -- we will keep the policy of not being exposed to market prices. So like we did this year, we kept the 93% of the revenues for next year as fixed and with the price of €54 per megawatt hour we feel is a stable one.
In terms of growth we continue to do -- have a very good performance on that. So operational results were affected by the reasons I told you. In terms of the growth, we think we improved -- we kept a solid record 826 megawatts build year-on-year. Already additional 674 under construction and more important than that on the bulk of that more than we had already exceeded the 2020 targets in terms of the PPAs of projects secured with PPAs. And the EBITDA was impacted by this 5%, by the normal results.
In terms of the self-funding business, it was a very -- rather successful year. We were able to -- because of the sell down policy to reach two years in advance our expectations in terms of our asset rotations and sell-downs, the increase in net debt and tax equity investment was €274 million because of the new investments in the foreign exchange.
But we -- as you know, we keep a very solid balance sheet. And in terms of cost of debt and tax equity costs, I think, the results are rather good. We were able to keep the same cost of debt of 4.1%, which is materially important when we added currencies with high interest states, namely Brazilian reals.
On the other hand, we were able last year to have -- to reach the lowest cost in terms of tax equity deals on the last 10 years today, with -- the average is 6.7, 20 basis points lower than last year, but more important, the debt -- there with the cost -- the average cost is decreasing. And as I told you is the lowest cost in the last 10 years.
All in all, difficult year in terms of the traditional day to day of the company. Low wind expected discontinuity, but with a strong balance sheet and reduction of interest cost and with the recurrence policy of more growth and -- but making the sale down as part of it, we were able to increase the net profit by 14%, which is the maximum that the company has obtained since the beginning.
According to our policy of having the best stable payout between -- on the long-term between 25% to 45%, we increased this year 17% the dividend to €0.07 per share, which is 17% more and which is both placed as of today on an average of 24% and in order to reach next year's 25% to 45%. So basically, the new policy, the new activity of the company which includes not only keeping the assets with us, but also having extended growth, part of it consolidated through sell downs. I would say that the objective of the company were basically reached and the free cash flow -- retained cash flow and the net profit are the main things that we would like to call attention to, but let's see more of the details.
Rui Antunes will now lead us in this area.
Okay. Thank you, Joao. We can move to page 7. Here we can start with the details in terms of installed capacity of the company. So by the end of the year, we reached a total capacity of 11.7 gigawatts. Throughout the year, we built 826 megawatts. And out of these 826 megawatts, we sold one project in the United States, 160 megawatts in total added capacity and that one was 665 megawatts. And more important that is also the capacity that is under construction 674 megawatts are under construction half of that is onshore and half of that is offshore.
Moving to page 8. Here we can see the load factor, performance of the load factor of the company in 2018. So here, we obtained results below the average. Average was supposed to be 6% higher than what we record so it's 94% of the average, 4% of the deviation it is explained by the wind resource and 2% of the deviation is explained by some lower availability in specific wind farms. You can see the graph on the right, we started the year very well in terms of wind resource then throughout the year, it's evident that there is a deviation and the last quarter was the poorest quarter in terms of deviation vis-à-vis the P50.
Moving to page 9. Here we have the growth in terms of electricity production, we increased the electricity production 3%. In terms of installed capacities would have given us a 6% increase was the average capacity growth. But given the lower load factor explained previously, the electricity output only increased by 3%. In Europe, it's a decline of 2% mainly due to the low wind resource, especially in the Eastern European countries. United States went up by 4% and in Brazil given the new wind farms that we have installed went up by 43%.
In page 10, in terms of electricity prices electricity selling prices reached €54 per megawatt hour it's a 9% decline when we compare it with last year but the €54 per megawatt hour is very stable price throughout the year 2018.
So you can see in every quarter we have reached more or less the €54 per megawatt hour. So it's something that was already expected by us given the -- some discontinuities that we're expecting given the ForEx as well that the average one that we reached last year.
And what explains this is mostly the change in regulation in Poland that have an impact on green certificate prices and the amount changing regulation in Romania, that was announced several years ago that from 2018 onwards will start to collect only half of the green certificates that we're collecting up to now.
And also some dilution on the price given that the new megawatts are much more competitive with a lower CapEx than the old ones higher load factors and external trample dilution on the price for the same target return that we target for every new project.
All in all, yes this explains a 9% decline and so minus 4% in Europe mostly given the Eastern European countries, minus 2% in North America given some dilution in new wind farms and minus 32% in Brazil.
Brazil is -- last year we have an extraordinary selling price in the last half -- on the second half of the year because we unwind one of the PPAs and sold to a very high market prices. And now it's more normalized.
Moving to page 11, in terms of revenues, so electricity production went up by 3% prices went down by 9% total revenues declined by 7%. Here we have positive contributions from the volume with higher capacity brought us more €107 million but the lower load factor took out of the company €69 million.
So the total volume impact is only €38 million a positive contribution. And the lower prices given the situation that I've explained in the previous slides took out €71 million in terms of contribution.
And also we have a very highly expected some wind farms reached the 10-year average age some wind farms in the United States reached a 10-year average age and they only received the PTCs for the first 10 years.
So there's a decline a clear discontinuity on those wind farms a decline of €51 million. And then we also have the ForEx impact that impacted €46 million it is a translation impact it's not investment risk that we have here it's just through translation from euros to dollars.
And overall this led to a decline of 7% of total revenues. Moving to the cost side on page 12, cost total cost went up by 6% and the core OpEx by 8% given that we keep installing megawatts every year we like to look at the unitary cost of the company.
So core OpEx per megawatt increased 2% year-on-year but if we exclude also the increased activity with the offshore business if we exclude those costs because most of those costs are cross charged to the SPVs that we don't control. If we exclude those costs out of the base, the evolution would have been flat. So flat core OpEx per megawatts on the recurring business.
Page 13 in terms of EBITDA. EBITDA of €1.3 billion a decline of 5%. This decline is explained by the decline in revenues given the discontinuities and the very low load factor that we have in 2018 and was offset by higher capital gains this year vis-à-vis the capital gains that we got last year. So the sell-down strategy is bearing its fruit. We’re able to crystallize value on the sale that we did of 500 megawatts that we did last year by the end of last year.
And we have a capital gain of €100 million. This is the NPV of all these transactions, so its €109 million for 500 megawatts it's the value generated that we could generate this immediately and we don't need to wait 30 years of operations to collect this. So it's the crystallization that goes directly to the accounts and will be very visible. So final 5% that's capital gains we were able to mitigate this week top line performance that was explained.
Page 14 on the net profit side. We totaled €330 million. As Mr. Manso Neto said, this is the highest net profit that the company reached in its history, so it's a 14% increase vis-à-vis the net profit that we reached last year that was already a very robust net profit. The solid execution of our strategy, so it's a strategy to keep in the future over the next year and the following years in -- is as I said is bearing fruits and not only at the EBITDA level but also at the financial results level that we have here some gains on the stakes that we sold in the offshore wind farms. Again we’re to crystallize already the value of some of those stakes. All-in-all a very good performance in terms of bottom line.
Page 15 in terms of cash flow generation. Retaining cash flow reached almost €1 billion, from €972 million. Last year it was -- we reached a very high level of retained cash flow given some extraordinary events that we got especially in U.S. wind farms. This year is lower it's 9% lower mostly given the -- or explained by the top line performance mostly due to the load factor that was achieved this year and the discontinuities that we have.
Nevertheless, almost €1billion of retained cash flow is a very high figure can clearly see that there are two sets of the value stream here. One set of value stream, which is the cash flow from normal operations for the projects on the ground installed projects and also cash flow extra value that we can generate from the sell-down activity. So it's going to be normal to have two streams of value for the company going on.
In terms of page 16, which we can see the net debt and tax equity liabilities of the company. It increased €274 million, so retained cash flow achieved the €972 million.
With this we paid most of the CapEx total cash investments reached €1.2 billion. We paid dividends to EDPR shareholders, but given that the CapEx that we keep accelerated the growth of the company that you see that this year already reached more than ahead in megawatts of installed capacity. And next year we are going to explain in the next slides we are going to increase this target. So cash investments are higher than retained cash flow and that explains why net debt and tax equity liability increased by €274 million.
Nevertheless, it is a solid balance sheet and we have been able to reduce interest costs and also being able to reduce tax equity cost in terms of the costs of the liability.
I'll now hand over to Mr. Manso to cover the execution of the business and the conclusions.
João Manso Neto
So thanks very much Rui for the explanation. So going to slide 18. So trying to put the numbers here as explained from the -- have been explaining from the beginning. We began with a difficult year and €90 million as we can see in the second -- the 1st and 4th column. And we began €93 million less than last year. PTCs expiring and green certificate issues in -- expected in Eastern Europe.
Besides that we have the foreign exchange which takes us -- would take us to a 9% decrease in EBITDA. After that notwithstanding the business performance with new capacity, the load factor extracted an additional €70 million. So, all-in-all, this 5% decrease in EBITDA, that, again, our business is not done this way and this is something that is very important.
Our business will be more and more putting -- growing more in order to be able to recycle to consolidate part of the gain. And then what happened last year is that we were able to generate about 200 million with sell down of 80% in three projects in North America and in the -- we're reducing our stake in two of the projects or three of the project, two in France and one in UK. And this is something that we must be used prepared to see year by year and because this is really part of the business.
As I've been telling you we have two alternatives and this is not new. One would be to grow less, another one is to grow more and consolidate. And clearly in the numbers that what we were able to do this year show clearly that this alternative of first finding good projects and afterwards being able to consolidate makes sense. So this plus an obsessive policy of reducing the costs either that -- from the debt and from the tax equity, all-in-all we were able to reach these two good results in terms of retained cash flow and in terms of net profit.
In terms of growth in page 20. It's clear we were able to on average we had promised to do about 700 per year. As you can see we are exceeding not only -- until 2018, we are slightly exceeding this number. For 2019, our expectation is to be 1 trillion.
I could speak more about the future prospects but I want because as you know EDP Group and within EDP Group, EDP Renewables Group will present the strategic update on the 12 March in about two weeks so we do not exchange that. But nevertheless what is clear is that in terms of the growth, we are -- we exceeded already what we have said that we'll do in 2020 and that 2019 is going to be a strong year with about one giga to be installed most of it in the U.S., but also in Europe.
So, as a conclusion difficulty in terms of the operating activity part of it expected, but part not expected which was a load factor. On -- but the -- that way we are conduct -- managing the business in which we will include the structural feature also and increase growth with the consolidation go well and with the reduction of interest cost will enable us to keep the -- these two metrics operating and retained cash flow plus net profit on there.
The growth is clear. We exceeded the 2020 and we expect that on the 12th of March, we, the EDP group, and in particular, for ourselves, we can be more explicit about our future plans.
So that's what we had to share with you. Now, we'll be at -- please be free to place the questions you may consider as you may want.
Thank you. [Operator Instructions] And your first question comes from the line of José Ruiz from Macquarie. Please go ahead.
Yes, good afternoon. Thanks for the presentation. You're saying you're pointing towards peak in terms of capacity additions in 2019. I was wondering if you will accompany this investment effort with more fund downs. And if you could share with us a little bit of a guidance in terms of capital gains for 2019? Basically the question is if you feel comfortable with a €1.4 billion EBITDA that concerns such as Bloomberg is showing today? Thank you.
João Manso Neto
As you know as we are -- first point the sell-downs are going to be recurrent and that's what I said and it will be recurrent year-by-year. This is part of our business plan. Regarding numbers that I think that as you understand, it's not the moment to refer to that, mainly because we will have on the 12th of March the presentation.
Thank you. Your next question comes from the line of Jorge Guimarães from Haitong. Please go ahead.
Good afternoon and thank you very much for taking my questions. I have three. Firstly, can you provide us with an outlook for the evolution of prices in Eastern Europe markets like Poland and Romania?
And secondly, there has been a lot of talk about solar developments in Portugal and given your large footprint in wind parks are you considering any project with hybridization of capacity? And if so what would be the CapEx per megawatt?
And thirdly, is it possible to provide us with a range of the value per megawatt of the sell-down in the U.S. that you -- the sell-down operations that you are doing in the U.S. in terms of EV per megawatt? Thank you very much.
Hi Jorge, it's Rui here. So, the EV per megawatt we did on the press release we did provide it so it's about €1.7 million per megawatt.
On the capital gain, you can see we have a headwind, so it's €109 million divided by the 500 megawatts get to under the sell-down transaction. So it's a substantial gain per megawatt that we obtained. So, this is -- of course, we need to see this case-by-case, but this is typical of the gain that we would have obtained if we kept the project for 30 years, but we are crystallizing that immediately.
João Manso Neto
Regarding the first question about the outlook for the prices in the lease in Eastern Europe. As in those as what has happened in those that you have to adhere to two things. One is the green power and there's brown power and the other one is the green certificate. Regarding the brown power what we're going to see is that those prices like in the other countries of Europe beginning in Iberia and in Germany or in Eastern, it's going to be followed a lot what is going to continue to happen with the coal price and the CO2 price and the gas prices. So, I would say the green -- the brown -- the prices of the brown power will have to do a lot with it. What you have seen the last, well, 12 to 18 months is a global trend in terms of growing and in case of Poland we have to do a lot, we think, with the CO2 increase.
But I'd stay here is nothing special regarding renewables. What we are seeing is more particular regards and so this has to do what the expectations we have. We are in this moment, I would say, that the prices that you see in the market in Poland and Romania are rather robust in this moment and they are -- they can be stable and they will unless there is an increase in the CO2 prices, but that's going to be the most mature thing.
In what concerns the price of the green certificate, what happened is that was an important increase. In Romania, the price is stable based on the floor, so it's no big issue. In what concerns Poland, what we saw is that with the policy of increasing gradually the allocation or the obligations -- the amounts of green certificates which are mandatory to be bought what we haven't seen is a gradual increase of the price which came from a low level of about PLN 20 to a level of about 150. I would say that price is over much higher than 100, I would say 120, 130, 150 price in terms of the green power of the green certificates in Poland, I would not be surprised if they were kept.
Finally, regarding solar. We are -- we estimate -- as you know there will be an auction in Portugal we are -- we intend to participate with the -- in the fixed tariff -- in the CFT modality model. I'm not sure if the hybrid that -- if the law will be already in place to enable the participation of hybrid projects. Nevertheless, you are right when you say that this is an opportunity we have namely the south of the country, several projects in which without need for interconnection we could double the megawatts installed if you put together with the wind. More or less, I would say, 80% to 85% of the power of capacity in terms of solar. It's a good market, I would say. I'm not expecting that to be possible to participating in auction this year, I may be wrong.
Nevertheless, this is a model that we have identified. I would not like to go into details about cost of investments, but in terms of the concept, in terms of opportunities, we have found that there are many places in which we can almost double the capacity with levels of curtailment below 5%.
Okay. Next one.
Thank you. [Operator Instructions] The next question comes from the line of Sara Piccinini from Mediobanca. Please go ahead.
Hi. Good afternoon. And thank you for taking my questions. I have three. The first one is, if you can provide an adjusted figure for EBITDA and net income that will be helpful. I calculated about 10 -- minus 10% of EBITDA adjusted and minus about 30% of net income, if you can please say, if this is correct and is in line with the trends that you have explained in the presentation?
The second question, I guess, it’s partly has been answered by the question of Haitong is on Spain. That the country has recently presented the national energy plan, I just would like to know from you, what is the opportunity that you see to invest in Spain? How would you participate like investing to PPAs given your track record that you have in the U.S.? And also what kind of technology would you choose? My understanding is that you are considering also to increase exposure to solar, is it -- is this statement correct?
And finally, the third question is on Poland. The price has been reported that you may invest in an offshore project with a possible partnership. Can you please provide more color on that? Or just on the country, would you still considering investing in the country having experienced regulatory changes? Thank you.
João Manso Neto
Let's see. I'm not speaking about the EBITDA adjusted. Let's see, if you are speaking about 2019, we are not going to disclose any numbers. If you are speaking about 2018, I would say that the recurrent are those, I would say that for us in our opinion, does not make sense to extract part of the recurrent business and just to calculate that. So because what I would like to share and to stress is that growing more and crystallizing part of the value fruit sell-downs is part of our structural business. And so for us, does not make sense to try to calculate the recurrent without this or that, it's part of the business.
Regarding Spain, we think Spain and Portugal, I think we should look at the Iberian market. Our main area of growth will be basically in terms of PPAs for us with exception of the solar auction in Portugal, which we see as an opportunity. What we expect is to grow more based on PPA.
Growing more in terms of the PPAs requires that we have a product which is more -- which fits better than the features of the demand of the clients. So we had to have projects. Normally the clients don't want a specific profile. They want either their profile or they want to a flat production. We think that in this context of expecting a very huge growth for solar, we think that wind for the moment is our -- unless we have an auction which have the images or have not that basis of what SAP risks. In terms of PPAs, we think that for the moment and until the moment in which we have other kinds of technologies which like batteries which can transform the profiles we think that wind should be our main growth area. So I would say, solar makes sense when we have a CfD or which guarantees us the watts. If it's to selling PPAs which is where we think where the more interesting market is, wind tends to be more important on that area.
Final in what concerns Poland, let's see. Poland is a country that in which the change of the regulation that they made at the end of the day was basically to replace the concept of substitution fee which in a certain way is understood -- understandable because the prices were at 20 or 40 and the substitution fee was at 300 which will not make sense.
So I think that Poland, in the sense that they moved in terms of regulation from a rather complex system with green certificates but perhaps good price. When they move from that to a very classical CfD, this coupled with the fact that Poland needs absolutely to have an increasing renewables mainly wind. I think Poland is a country where we are profitable to be there.
As you know we won projects in the last auction. We intend to profit off and onshore. We intend to participate the next one. And it's true that offshore can be an interesting market there because of economical and also because of permitting reason; this is a market where it makes sense. We have already two projects there and we are not for tomorrow, but we -- our intention is to put new to develop offshore in Poland. With whom that's something that in due time will be announced.
A – Rui Antunes
Thank you. There are no further questions at the moment. Please continue. Excuse me sir, there are no questions. I will hand back to you.
João Manso Neto
Okay. So thank you very much for being -- for the attendance. And so we'll expect to reunite on the 12th of March EDP Group and ourselves as we said we'll be able to disclose more about the future, but nevertheless there are things that were told today namely the importance of sell-down that will be -- and the growth will be part of our business. Thank you very much.