EDP Energias de Portugal SA (ELCPF) CEO António Mexia on Q1 2019 Results - Earnings Call Transcript

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Earning Call Audio

EDP Energias de Portugal SA (OTC:ELCPF) Q1 2019 Earnings Conference Call May 17, 2019 6:30 AM ET

Company Participants

Miguel Viana - Head, IR

António Mexia - CEO

Miguel Stilwell de Andrade - CFO

Conference Call Participants

Stefano Bezzato - Crédit Suisse

Jorge Guimarães - JB Capital Markets

José Ruiz - Macquarie

Alberto Gandolfi - Goldman Sachs

Miguel Viana

Hi. Good morning, ladies and gentlemen. We are here for the presentation of the first quarter 2019 results of EDP. And here with me today are our CEO, António Mexia; and our CFO, Miguel Stilwell de Andrade. We will go through the presentation, and then we will have a Q&A session at the end with live questions and also the possibility of asking questions through the web. Our call should take somewhere between 45 minutes and maximum of one hour.

I'll pass the floor to our CEO, António Mexia, for the start of the presentation.

António Mexia

Thank you, Miguel. Good morning, everybody. Thank you very much for attending this results conference call. I'm going to share with you the slides. In Slide 2, with the key highlights, I really would like to start by highlighting that this quarter, we are reporting for the first time under the new business segmentation, which we have recently presented to the market in our strategic update. These business segments are fully aligned with the challenges and the opportunities that we envisage with the ongoing energy transition and, of course, giving visibility about our goals in this energy -- leadership energy transition.

In the first quarter '19, our recurring EBITDA increased by 1% to €921 million. This EBITDA was particularly penalized by very low hydro volumes in Iberia, 48% below historical average and also low wind volumes across key geographies, which stood 7% short of the long-term average and usual figure. On the positive side, our installed capacity increased by 2%, exclusively through renewables addition, and in parallel, the renewables average selling price went up by 5%, partially compensating the lower renewables volumes in the period.

Additionally, our networks operations showed some growth, namely in Brazil, through the commissioning of our first transmission line in December last year and the increased demand in distribution. While in Iberia, we had a positive contribution from OpEx reduction by 3% year-on-year. Year-on-year comparison of net profit is also penalized by financial costs, mostly due to significant positive impact from mark-to-market of financial hedges last year. The average cost of debt stood at 4%, in line with the guidance in our strategic plan, which is 30% basis above first quarter last year, naturally following the increasing rates of our debt in U.S. dollars and in Brazilian real, in line with our significant expansion CapEx mainly in the U.S. and, of course, Brazilian markets.

Effective tax rate, which more volatile on a quarterly basis, was 27% in first quarter, significantly above what we have shown over the last couple of years and well above our expectations for the full year '19. I would also like to highlight that in the first quarter, we paid the full annual amount of CESE, the extraordinary energy tax in Portugal, which reduces our reported net profit results by €67 million to €100 million, with a net loss of €23 million in Portugal. So we see that outside, we would have the profit of well above €100 million and that it was penalized by these negative results in Portugal.

Thus, all in all, our recurring net profit stood at €167 million. Our net debt fell by 1% year-on-year to €13.7 billion. And when comparing to December, net debt increased 2 percentage essentially due to a slight €200 million increase of regulatory receivables in first quarter, which, in second quarter, should be more than offset by a significant reduction of those receivables in our balance sheet following the €600 million tariff deficit sale that we have just announced this week.

So clearly, on track to do what we have committed. Our recurring organic cash flow showed a significant 66% increase to €465 million in the first quarter, supporting by EBITDA growth and positive impact from working capital, while net expansion investment more than doubled versus last year to €858 million, following an acceleration of payments to fixed asset suppliers, reflecting the seasonable -- the sizable wind capacity commissioned by the year and last quarter of last year, especially, of course, in U.S.

Note also that IFRS 16 adoption implied an increase of €800 million at both other assets and other liabilities at our balance sheet, having also some minor impact on P&L, without any expected impact on our key credit rating metrics as Miguel Stilwell will explain to you in detail later. Finally, I would highlight that last Wednesday, we paid to our shareholders a $0.19 dividend per share referring to 2000, of course, 2018, fully aligned with our dividend policy on the plan of '19-'22 and representing a dividend yield of something above 6% at current price levels.

Going to Slide 3. As I mentioned already, the first quarter was very dry in Iberia, with hydro resources almost half the historical average in Portugal or close to 3 terawatts hour lower than historic -- this historical figure. As we have recently -- as we have seen recently, hydro production in Iberia has a significant volatility on a quarterly basis as it can be observed by 2018 performance, a year that showed rain flows just 5% above the historical average for the full year but resulting from a combination of extremely wet second and third quarters and a close normalized first quarter and a significantly dry fourth quarter. Note also that in April, and that's again supporting, there was already a significant normalization of hydro resources, which are much more in line with average.

Regarding our global wind portfolio. Wind resources stood 7%, as I mentioned, below long-term average, which compares to a windy first quarter in 2018 with -- where wind resources were 5% above long-term average. Overall, wind generation fell by 4% as weak wind resources were partially mitigated by the 6% capacity increase. As mentioned in EDPR's first quarter call, we have conducted a study on wind resources availability in our portfolio. And the conclusions are that there is no trend that there is low volatility of wind. Furthermore, there is little correlation in wind availability across our geographies. I think this is important.

Moving to Slide 4. As announced in our strategic update in March, our new segments are renewables, which includes wind, solar and hydropower production operations; second, electricity networks, comprising activities in Iberia and Brazil; and finally, client solution and energy management, which cover activities of supply, thermal generation and energy trading. Recurring EBITDA increased by 1% year-on-year or 2% if you exclude the impacts from Forex. Going into details. Let's see, first, renewables. EBITDA, down by 6%, propelled by lower hydro and wind resources in our key geographies, as mentioned, which, together, reduced our results by about €150 million year-on-year. About half of this impact was offset by higher selling price both in hydro and in wind. Additionally, the increase in renewables capacity and the suspension of generation tax in Iberia also mitigated the load factor effect.

In networks, EBITDA increased by 11% mainly driven by solid performance in Brazil, with the beginning of operations in our first transmission line and that 5% increase on electricity demand in our distribution areas. Finally, in client solution and energy management, EBITDA was 17% up, pushed by the turnaround of the supply operations in Portugal, supported by the normalization of the regulatory context after the adverse conditions that we faced in 2018. The sum of the increase in revenues from services to our clients in Iberia, which more than doubled, although still naturally from a small basis and a 5% increase in thermal generation in Iberia following the adverse hydro condition that I already mentioned.

Moving to Slide 5, and OpEx. We continued to see a strong performance on operating costs. Excluding Forex, operating costs showed a 1% nominal growth in a period in which the number of customers connected to our distribution grids rose by 1%, and our average installed capacity grew by 2%. Thus, if this growth effect was excluded, OpEx was down by 2% in nominal terms. In Iberia, OpEx fell by 3% in nominal and almost 4% in real terms, in line with the 4% reduction in average headcount. In Brazil, OpEx in local currency increased 2% or almost minus 2% in real terms considering the local inflation of 4% and a period of expansion of activity.

At EDPR, adjusted core OpEx per megawatt, excluding Forex and one-offs rose 1%, again, below weighted average inflation in the countries where we operate. Summing up basically, OpEx growth was below inflation in all our key geographies leading to reduction in real terms.

Moving to Slide 6. Our reported net profit declined 39% year-on-year to €100 million with, as I mentioned, Portugal posting a net loss of €23 million, heavily penalized by taxes and regulatory costs, in particularly, the energy taxes that represents in '19 a €17 million annual cost fully booked in the first quarter, in line with what happened in last year -- €67 million, sorry. Of course, the scarce hydro resources also impacted significantly our performance in Portugal since it's where we have most of our portfolio, while in Spain, reported net profit remained stable year-on-year.

EDPR net profit declined 35% year-on-year mainly impacted by the previously referred lower wind resources across all our geographies. Reported net profit in Brazil increased 28% year-on-year, propelled by the commissioning of the first transmission line and strong operational performance in distribution.

Moving to Slide 7. Following the strategic update, we are now fully focused on the delivery of our 2019-2022 business plan, which is based on the deployment of 7 gigas of renewables capacity and significant growth in our networks business, mainly in Brazil through greenfield transmission projects. In renewables, we have currently 3.1 of capacity -- 3.1 gigas of capacity secured, more than 40% of our 7 gigas target for the period and slightly above the 2.9 that we had communicated at the strategic update, following a recent addition of 200 megawatts of wind in U.S. to be commissioned in 2020.

Regarding development efforts of new renewables project, we are now focused on constructing wind capacity in U.S. to enter into production before 2020 year-end, still entitled with 100% of PTCs as well as contracting of corporate PPAs mainly in Brazil and also the preparation of our participation in some renewables auction in several European markets during '19. Regarding new capacity to be installed this year, we are on track to install 1.1 gigas of wind on short capacity, of which 0.9 in U.S. and Canada and 0.2 gigas in Europe.

Regarding the employment of our five greenfield transmission lines in Brazil, we have already stated the first one fully operational, commissioned, I'd also like to highlight once again, 20 months ahead of the schedule, and we are now at construction stage in two other lines in Maranhão and Santa Catarina. The remaining two lines are still on licensing phases, and one of those is expected to start construction in the second half of this year. All of these lines are now expected to be commissioned between second half of '20 and first half of '21, also ahead of the regulatory schedule.

Going to Slide 8. Regarding our strategy of crystallizing value upfront and leverage on strong market appetite for renewable assets, we are well on track to deliver the €4 billion assets rotation target announced for the period '19-'22. Last month, we announced the sale of a majority stake in a 997 megawatts wind farm portfolio in Spain, Portugal, France and Belgium, representing €0.8 billion of proceeds and an expected capital gain of €0.2 billion. Moreover, we will keep providing O&M services in these projects, reinforcing the recurring profile of our asset rotation strategy.

Looking forward, we continue to see strong demand from financial investors on this kind of assets, which support the ongoing analysis of some additional assets rotation deals for the next 12 months. Regarding the execution of the €2 billion disposal plan, also announced on our recent strategic update in London, the target is fully on track to be executed within the announced time frame of 12 to 18 months. I want to be very clear. Advisers are engaged, and we are working on the analysis in preparation of the different potential transactions, keeping our plan of reducing exposure to Iberia and merchant/thermal assets.

Moving to Slide 9. Overall, despite this quarter's adverse weather conditions, we gained significant step ahead regarding the delivery of our strategy. We have increased our wind and solar capacity by 6%. And in parallel, we have announced a sizable, as I've just mentioned, €800 million asset rotation deal with a material value crystallization component. Furthermore, we have reinforced our capital structure with an issue of €1 billion of hybrid green bond, and we continue to deliver efficiency improvements with the reduction of OpEx by 2% on a like-for-like basis, clearly below inflation, as I mentioned.

Finally, we have share growth, as usual, with a $0.19 per share dividend, which corresponds to the floor of the policy that we have announced in the strategic update. Thus, overall, we are performing well on what depends on us: controlling costs; crystallizing value; delivering new expense investments at attractive returns; and managing our portfolio on an efficient way. I would also like to finalize, mentioning that we are comfortable with our EBITDA 2019 consensus of around 3.5. This view includes the adverse impact from low hydro and wind volumes in first quarter and our current expectations on the impact from asset rotations in renewables, as you know already, €200 million gain from the recent deals, and it includes the impacts from IFRS of around €70 million in '19.

In net profit, with the information that we have today, we clearly believe that the consensus of net profit of around €800 million is achievable, depending, of course, on the hydro and wind conditions and assets rotation execution for the rest of the year, this last part we are very comfortable, of course; rain depends, of course, not on us, namely in the last quarter. So typically, we are focused on delivering the targets of the strategic update, and we are comfortable with year '19.

I will now pass to Miguel Stilwell for a more detailed analysis, and I will come back to the Q&A session. Thank you very much. Miguel?

Miguel Stilwell de Andrade

Thank you, António. So moving on then to a more detailed analysis of the different segments. Let's start by moving to Slide 11. Here, we can see the focus continues to be on renewable energy with a 2% increase in renewable installed capacity. But I would like to highlight that there was a 6% increase in wind and solar capacity, as António already mentioned. So with this in renewable energy, which is a weight of 74% of EDP's installed capacity and 69% of its generation mix despite the very dry quarter in Iberia and weak wind resources in our key geographies. So the renewables production was 18% lower than in the first quarter of 2018 due to the renewable resources cost that I had just mentioned.

Moving on to Slide 12. You can see that the EBITDA from wind and solar increased 1% year-on-year to €385 million, mainly negatively impacted by the 10% year-on-year decline in load factor since wind and solar resources were 7% below long-term average and 5% above average in the first quarter '18. So there's a delta swing between the first quarter '18 and first quarter '19.

Also note, the termination of some PTCs in some wind farms that are 10 years old in the U.S., which means that there was a 10% decrease in the PTC revenue. However, these effects on results were mitigated by the 6% expansion of wind and solar installed capacity as well as a 3% increase in the average selling price mainly due to price increases in North America and Eastern Europe.

Moving on to Slide 13. So talking about hydro. EBITDA decreased 16% year-on-year to €171 million, again strongly impacted by the very dry quarter in Iberia, in particular, Portugal. In Portugal, the hydro coefficient was 48% below the long-term average. And as a result, the hydro generation overall in Iberia declined 35% to 2.6 terawatt hours. On the other hand, as I mentioned, the average selling price of hydro generation in Iberia increased 20% from, prompted by the higher pool price and also higher realized prices from hydro plants due to increased opportunity cost.

In Brazil, EBITDA from hydro was flat in local currency but declined 6% in euros due to the Brazilian real depreciation. So note that our hedging strategy in Brazil allowed us to smooth our exposure to the GSF volatility, which increased from 113% in the first quarter '18 to 149% first quarter '19, reflecting the average seasonal weighting curve of the system’s physical guarantee, which allocates energy more to the second half of the year.

Moving on to Slide 14, and regulated networks. Here, EBITDA increased 11% to €243 million mainly due to the contribution from Brazil. In Brazil, the EBITDA from networks increased 30% or 39% in local currency. So this is the first quarter with a significant EBITDA contribution from the transmission activity, which stood at €10 billion as our first line become operational in December 2018.

In distribution, the improvement in results was mainly driven by the 5% demand growth in our concessionaires on higher temperatures and better economic context as well as due to the reduction of distribution losses. In Iberia, EBITDA from network advanced 4% year-on-year mostly driven by the 3% cost reduction.

Moving to Slide 15. So Slide 15 is about client solutions and energy management, which is we mentioned, as you know, activity for supply, energy management and thermal generation. So EBITDA globally from these operations increased 35% year-on-year to €116 million. Operations in Iberia improved as a result of the normalization of supply margins in Iberia as well as due to higher thermal generation, which, in turn, was driven by the dry quarter. Also, I'd like to highlight that there was lower regulatory cost due to the suspension of the generation taxes in Spain and Portugal in the first quarter.

In Brazil, EBITDA from these activities declined mainly due to lower volumes in the Level 1 supply market. In Pecém, as you know, the coal plant, the slight decline in results is mostly due to the extraordinary effect in the first quarter of '18 as a result of the downwards revision of the referenced availability level, which I noted.

Moving on to Slide 16, so net debt. So net debt increased to €13.7 billion in March '19, so it's a 2% rise versus December '18. If you exclude regulatory receivables, net debt was flat. In detail, so the regulatory receivables increased by €0.2 billion, €200 million, despite the overall electricity system debt decreasing by €62 million in this quarter. As you know, this week, we sold €600 million of tariff deficits, which we announced, so the regulatory receivables in our balance sheet will reduce significantly in the second quarter. Net debt was also impacted by roughly €900 million for net expansion investments in the period, with a significant part of that amount dedicated to payments to suppliers as expansion investments, with proceeds from asset rotations expected to flow in the coming quarters.

Also, this quarter reflects the €1 billion from the hybrid green bond issued last January, which has a 50% equity content. And basically, there's also some recurring organic cash flow of around €500 million, which has also contributed significantly to reducing the debt.

So moving on to Slide 17. So here are some of the key things to highlight. Cash and equivalents, €1.7 billion. We have €5.9 billion of available credit lines, so this covers our financing needs beyond 2021. This note also in terms of three key issues here in 2019. So first, the €1 billion subordinated green bond, which we issued at 4.5%. The second green bond after the €600 million, we issued back in October. Also, S&P reaffirmed our rating of BBB-, this is our rating in April. And as I mentioned before, the €600 million sale of the tariff deficits, which we did on May 13.

Moving on to Slide 18. And here, I think a little bit more detailed explanation to understand some of the movements here. So the net financial cost stood at €186 million in the first quarter of '19, which increased significantly relative to first quarter of '18. So this is explained basically by, first, the adoption of the IFRS 16, which increased the accounted financial costs by €10 million; secondly, there's a negative impact year-on-year of €31 million due to mark-to-market of financial noncash hedges, of which €21 million are due to the relative evolution of the U.S. dollar versus the euro interest rates.

As I mentioned, it's noncash. €10 million from mark-to-market of some hedging positions in energy markets, which were booked in the first quarter of '18 and not this year. Thirdly and finally, last year's gain booked on the sale of a 20% stake in our U.K. offshore project Moray East with €15 million. If you adjust the financial costs for these effects, the figure would have been €183 million.

And so then, the interest-related cost went up by €3 million, which was basically impacted by the higher average cost of debt, which increased from 3.7% to 4.%. This 4% is mostly impacted by the higher rate of the U.S. dollar and the Brazilian real in our total net debt, which you can see here on the right-hand side, together with the dollar appreciation against the euro.

Obviously, this also takes into consideration the issuance of the €1 billion hybrid bond in January and also lower level of short-term debt in the first quarter, which, as you know, the commercial paper typically has a negative rate. Since we took in a lot of cash right at the end of last year, we have lower levels of commercial paper.

Going forward, and I think this is a question which would come up. We are still comfortable with the 4% rate moving forward. I think in relation to '19, bear in mind that we have several much more expensive financing that are terminating this year and that we expect to refinance on more attractive terms than they are currently. And so that will contribute to keeping the financing cost at around 4% as we mentioned in our strategic update.

Moving forward to the final slide, Slide 19. Here, reported net profit, so as I mentioned, €100 million in the first quarter, 39% below in the first quarter of last year, obviously impacted by the financial costs, which I just mentioned and the income taxes. A word on income tax. So it went up by €25 million year-on-year, following a higher effective tax rate this quarter. As you know, tax is typically quite lumpy on a quarterly basis. We expect this to be normalized then over the rest of the year and to be at a level below 20% on a 12-month basis.

Moving forward, and this is something that we've also talked about in the strategic update, obviously, we expect the tax rate to evolve toward the mid-teens, but for '19, clearly, below 20%. Also, to highlight that in this first quarter, it's penalized for booking the full amount of extraordinary energy tax. So the €67 million, if you exclude that, so on a recurring basis, the net profit would have declined by 32% year-on-year, impacted by the -- these various aspects that I've just described.

And so with that, we close the presentation and move to Q&A. So thank you very much.

Question-and-Answer Session


Thank you, ladies and gentlemen. We will now being the question-and-answer session. [Operator Instructions] Your first question comes from the line of Stefano Bezzato from Crédit Suisse.

Stefano Bezzato

Three questions from me, please. The first one is on your -- on the selldowns of renewable capacity. You announced 1 gigawatt in April. That's already roughly 25% of your target for the four years. How quickly do you expect to achieve the €4 billion target that you have for -- announced in March?

The second question, still related to the selldowns. You mentioned you are comfortable with the guidance for -- with the current consensus for net profit in 2019 of around €800 million. How much capital gain would you include in that guidance?

And third question on the recent report on the excessive reigns from the Portuguese Parliament. Can you help us understand what can be the practical consequences for EDP? Do you expect any legal or government-driven intervention to implement the recommendations of the commission?

António Mexia

Thank you, Stefano. So the selldown of EDP Renewables, when. So clearly, we have basically reached more 90, I would say, 90% of the target for the year. We still expect to do something until the end of the year. So eventually, it will be less. As you know, we have presented in London that the figure will increase with time. But it means that, probably, we'll be doing a little bit more than expected this year because the market is there. So if anything, slightly quicker than expected. But of course, not one year in advance, just making the curve flatter than it was, flat in the sense that '19 will be a bigger contribution.

In terms of guidance and the impact of this, we expect to be above the €200 million, of course, that we have already presented. But it depends very much on the next deals. But clearly, slightly above this figure. In terms of your question of the Parliamentary Commission. First, I would like to highlight that the commission was -- the report was approved only by the parties, the left-wing parties, including Socialists and everything at his left, that it was voted against on the social democrats and to the right. So typically, it shows that it was a political exercise more than anything else. But I really would like to highlight three main issues raised in the report and to clarify our vision about this potential recommendations.

First, regarding the past results from tariff deficit sales, which, as you know, result -- and everybody knows results from EDP taking the risk of mark-to-market interest rates evolution, the government has already stated that any retroactive measure on this would not make any sense. And therefore, in the future, they would not be ready to take these interest rate risks because if they want to take the risk and the benefits, we are ready to give them the tariff deficits, so the question is they are not ready to take this risk. So I think that we are clear on that front.

Second, on the issue of double subsidies received by -- alleged received by renewables projects in the '90s, EDP and everybody else, so it was also already recognized by the government representative, there is no -- there is a total, like, of legal support to implement this measure, which was initially approved more than three years ago but never really enforced. So the figures that, in reality, is that this does not exist.

Finally, regarding Sines, the report recognizes, and I think it's very important, that Sines has been operating according to the law. Regarding the future, it's very simple. We would like to point out that Sines plant will generate electricities market and regulatory conditions are there. Imposing taxes and double taxes on it would, of course, and not on others, would remove its competitiveness. If there is no profitability, we'll shut down. But then you will have a huge problem in terms of security of supply. So any anticipation of the closure of Sines will represent the problems for the system. It's not my statement, it's already recognized by everybody. And of course, we agree, we are totally focused on decarbonization. But of course, decarbonization should be applied through the markets of CO2, and we have been very clear on this.

So it's clear examples about what we believe that are the main concepts eventually would be coming out of -- on the recommendations.


The next question comes from the line of Jorge Guimarães from JB Capital Markets.

Jorge Guimarães

I have three questions. Firstly, can you clarify something on the guidance view? Maybe this is just detail, but I understood that you are comfortable with the €3.5 billion EBITDA guidance. But then on the net income guidance, you said we could reach the €800 million depending on wind and rain. Should I assume that you need a higher than €3.5 billion EBITDA to reach the €800 million net income? This is the first one.

Second, what is your view about full year '19 cost of debt? And finally, one on the Portuguese regulation. What is your view about the generation clawback for the -- from Q2 onwards? Because generation tax is now in place again in Spain. And so the reason why that there was no clawback in Q1 is not there anymore. So what is your view about clawback for Q2, Q3 and Q4?

António Mexia

Jorge, I will talk about guidance and clawback, and then I would pass to Miguel. It should always be the CFO that talks about debt. Now -- to see that we are aligned. So the guidance, it's a pair. So let's be clear. The €3.5 billion and €800 million. So the question is, of course, the hydro of the last quarter, it's an important element just to be clear on that €800 million, but we don't see any mismatch between these two figures. So we feel they are connected, but, of course, we need, of course, to anticipate some, as I mentioned with the previous question, exactly what will be the gain above the €200 million in what concerns the assets rotation.

In what concerns the clawback, the answer is very simple. It's that if the tax disappears in Spain, the problem is automatically solved as it was the case in the first quarter. If the tax stays in Spain, there is a provisioning in the budget line in Portugal, so approved by the Parliament that the mechanism of clawback should be revised to be fair. Because everybody knows that it recognize that the system that was implemented was basically double taxation in the Portuguese system. So clearly, if it stays, we expect to see some two-way revising according to the law. Miguel, in what concerns debt?

Miguel Stilwell de Andrade

So in relation to debt, just to reaffirm what I said a little while ago. So we're comfortable with around 4% cost of debt. As I mentioned, the first quarter was more penalized than what we expect the rest of the year because of the high cash position, given the proceeds we received at the end of last year. And also, bear in mind, that over the rest of this year, we expect to go on refinancing some more expensive debt that we have and which will come in then at lower rates. And so there will be cheaper debt coming in to do that refinancing. So overall, still comfortable with the target that we gave in the strategic update.


The next question comes from the line of José Ruiz from Macquarie.

José Ruiz

Just two questions on my side. The first one is how much tariff deficits are you planning to sell in 2019? And what is the tax impact attached to that?

Second question is a clarification. You said -- sorry, talking about the €65 per megawatt achieved in hydro, you talked about opportunity cost, what do you mean by that?

Miguel Stilwell de Andrade

Okay. So I'll take that question. Look, on the tariff deficit sale, so, as I mentioned, we've got -- done €600 million already. We have approximately €1 billion on our -- or expect to have €1 billion roughly on the balance sheet. We still expect to do some more transactions this year either through securitization or bilaterals. And so clearly, we would expect to sell the rest of the tariff deficits that we have on our balance sheet throughout the year. On the €65 per megawatt, António?

António Mexia

Basically, when you have less water as it was the case, we basically manage selling the capacity when the difference between the base price and what -- and that peak price is higher. So basically, we just sold -- whenever you have lower volume, you sell it at the best moments. So it's the reason why the differential is bigger.


The next question comes from the line of Alberto Gandolfi from Goldman Sachs.

Alberto Gandolfi

The first one is on portfolio restructuring. Would you be willing to push your strategy with -- I mean am I correct, shrink to grow? So would you be happy, for instance, to focus more on Iberia and renewables and perhaps swap out some of the assets to gain a bit more of strategic independence? And any thoughts on that will be really appreciated.

The second is, again, a little bit on strategy. How important do you think is scale to develop renewables? There's a very long tail of new entrants, but there's only a really handful of players, and you are one of them, an elite that basically can add a couple of gigawatts a year. And so can you maybe talk about scale? What are your advantages? And if so, would you be open to perhaps integrate yourself with another of the big guys to create sort of the Avengers of renewables or like a super renewable developer if you are not into Marvel.

And the last question is a little bit more boring, on the numbers. You talked about €150 million negative swing year-on-year from hydro and wind, but last year, you were above average. So versus average, are -- is it correct, you are about €70 million, €75 million below average? And if so, if next year we add €75 million to the renewable division and you have an extra, I guess, €2, €3 megawatt hour on the hedge price, would that be a fair approach to calculate your renewable division for next year, over and above any capacity addition?

António Mexia

Alberto, it's a pleasure to have you back on the conference. Portfolio restructuring in renewables, and I believe that your two questions, the first questions, are related. We are very clear. I think that we are top player in renewables. So our restructuring -- let's start, our restructuring portfolio is based on the fact that we want to reduce exposure to Iberia. We want to reduce exposure to merchants. We want to reduce, if possible, the exposure to thermal. That's the key element. The recent past proved that we should be smaller in Iberia, especially in Portugal. So it's clear that -- we have been very clear in what we want -- where we want to start working on those sales. It's the reason I have mentioned that we have already designed the potential portfolio alternatives, and we are working on it as we speak.

In what concerns -- so basically, diversifying renewables, of course, important. But also, we recognized that renewables will be a very different endgame at -- in the future. I think that it's important to recognize this. It's one of the reasons why we like to crystallize value also on that -- from the whole strategy included on the assets rotation. Why? Because it gives you more value crystallization, optionality, lower risk and flexibility to adjust your path along the way. Scale is important, of course.

And of course, in terms of watts, having the right people but also attracting them so the -- and keeping the right people. Working with the key suppliers, this is, of course, also very important in offshore where you have a limited number of suppliers. So it is slightly different where -- I would say that in various ways, we are much smaller. The scale of the project can be much smaller, and so it's available for a totally different number of players, much higher than in wind and then, of course, much higher than in offshore.

In that front, in any case, we have just proven that we have been able, last year, to go fast in this. We have assured, last year, to have 500 megawatts and the key targets, especially for the U.S. with a specific pipeline, especially at the moment where wind goes down and solar goes up due -- because of the PTC going out and the ITC being kept. We have proven that we have both the team, the capabilities and the pipeline. So I think that we are fully equipped.

So we don't want to integrate ourselves. Why? Because it's an element. EDP is, basically, a renewables company. So we are only open to things that makes us growing faster but as -- at the driving seat. Because why? Because we are a key player. So in what concerns your last question...

Miguel Stilwell de Andrade

Yes. So Alberto, in relation to your last question, so the first quarter of '18 was also not fantastic. The second and third quarter in '18 were significantly above average. The fourth quarter was also bad. But as the year then ended up being more or less average, but there are definitely swings between the different quarters. Versus a normalized year, I'd say this quarter was around €150 million to €200 million below normalized depending on the price you assume. Prices going forward for 2020, I mean, typically, we go on closing dispositions over the year. And so if you take the current 4% to 5%, so I think it's at around 56 -- I mean, it would be thereabouts. It depends obviously on the evolution. But that's how I would look at it.

António Mexia

But I would like to -- a lot of people have mentioned, of course, this climate change and whatever, so it's the reason why in the introduction earlier, I have mentioned we studied on wind resource availability in our portfolio. And the conclusions that there is no trend and that there is low volatility on wind. So we have been monitoring this, and the results are clear. And in terms of hydro, we don't see a structural change in either volumes in terms of long-term average. We expect, however, more volatility, by the way, related to what Miguel just mentioned. So typically, we don't see a change in the volumes, we see a change in volatility in hydro but no impact on wind.


So we have no more questions. And so, for -- just to conclude.

António Mexia

So thank you, everybody, for being present. So I think that we have been keeping our strategy. One of the best definitions in life that I have heard about strategy is strategy is like rain dancing. You should always dance, not because you make it rain, but because you learn how to dance better. So typically, what we have been doing is, clearly, doing everything that depends on us, being rather sooner than later on those targets, cost cuttings, development of pipelines, asset rotation. So I think that we are basically dancing better.

Thank you and see you soon.