15 Feb Interview with the CEO
JOÃO MANSO NETO
VICE-CHAIRMAN OF THE BOARD OF DIRECTORS AND CEO
HOW SATISFIED ARE YOU WITH EDPR’S 2016 FINANCIAL RESULTS?
Objectively, I would point out that at EDPR we have once again delivered a solid execution of the strategic agenda laid out in our 2016-20 business plan. That was demonstrated by our ability to reach most of our 2020 targets. We have added 820 MW of installed capacity to our portfolio, exceeding our 700 MW yearly average target, with an additional 248 MW under construction. Our total electricity production of 24.5 TWh represents a 14% increase and surpasses our 10% yearly growth target. EBITDA of €1,171 million increased by 12% adjusted for non-recurring items, above our yearly growth target. This performance was made possible by a positive contribution of €40 million in our electricity price hedges, which have very effectively sheltered our revenues from some unfavorable price movements in wholesale markets. It was also supported by a 5% reduction in the Core Opex/MW, in excess of our 1% reduction target. Our results could have been even better if wind resources had been closer to normal levels, but our average load factor fell 4% short of the P50 scenario in 2016, standing 11% below in the fourth quarter. Obviously, weather conditions are out of our control, but we are confident that wind resources always revert to its mean performance in the long-run. In contrast, something in which we have a degree of control is the energy availability of our assets where we keep delivering an outstanding performance of 97.7%, above our target of 97.5%. Our high-quality assets yielded €698 million of Retained Cash Flow, the net cash generated by our assets after remunerating the external sources of financing – namely debt, tax equity and asset rotation partners. The Retained Cash Flow is the amount available for reinvestment, deleveraging or distribution to our shareholders. This figure was 13% higher than the previous year, a fact that demonstrates our company’s solid growth profile. In 2016, under the rigor of our self-funded business model, we successfully cashed in a sizeable asset rotation deal of €550 million at an attractive multiple of €1.7 million per MW to further leverage the cash flow generation of our assets by fueling additional growth opportunities. Along the way, we are consistently lowering our cost of debt, which is currently at 4.0%, after restructuring and prepaying about €2.3 billion since 2015, of which €0.9 billion this last year. In this process of optimizing our cost of debt, sometimes we end up having to write-down some items associated with the cancelled debt, negatively impacting our current net profit, yet clearly standing to benefit our future Net Income. For instance, in 2016, we incurred more than €25 million in such non-recurring expenses, and €8 million in the year before. Due to this process and other non-recurring items, along with a below-average wind resource, our reported Net Income of €56 million declined 66% in 2016. Yet, our Net Income adjusted was €104 million and this is grossly in line with the previous year adjusted for non-recurring events, namely the significant non-cash positive impact of the revaluation of some assets we acquired control of in Portugal that were previously jointly owned. I would like to reinforce that the decline in Net Income year-on-year is justified by non-recurrent short-term factors, which make sense from a long-term strategic perspective, since they will reduce our cost of debt and thereby improve future results.
DO YOU MAINTAIN YOUR POSITION ON THE COMPETITIVENESS OF WIND ONSHORE EVEN WITHOUT INCENTIVES?
Absolutely. The evidence is growing ever more indisputable. Recently, independent studies by industry experts showed that wind onshore technology has seen its “levelized cost of energy” – the all-in cost of building and operating a plant over its lifetime – drop by 66% since 2009, with an additional 26% decline expected by 2025. Wind onshore and solar photovoltaic are currently competitive with gas and coal-fired plants in many areas. Administratively set tariffs and other incentive-supporting mechanisms have played a role in fostering the deployment of renewables, allowing these technologies to progress and thus help bring costs down, in a virtuous cycle. However, the success of renewables in reaching higher penetration in the energy mix has created a vicious cycle of depressed power prices in wholesale markets, as those energy sources have almost zero marginal running costs – after all, the wind and sun are free. Paradoxically, this creates a situation in which wholesale market prices continue to fall as more renewables are connected to the grid. Without a new market model framework, investors will lack the incentives to take on the necessary investments. Wholesale prices in Europe dropped from about €80 per MWh in 2008 to €30-50 currently. Yet the solution, in our view, must not come from adding more subsidies to the system, but rather from fixing the currently dysfunctional power markets in a world that demands more renewables. Clearly, a system based on marginal costs is not adequate. We need long-term price certainty to incentivize up-front capital investment in the installation of renewable capacity. That is why we favor market competition for new capacity installations with reliable prices over the long run, avoiding exposure to variable wholesale prices. Market fixing should also come in the form of more effective pricing of CO2 emissions. Also essential are investments in power grids to better manage the intermittency of renewables, with more interconnectivity reaching longer distances and smarter adaptations to supply and demand.
IF WIND ONSHORE IS TRULY COMPETITIVE, WHERE YOU’RE ALREADY A KEY GLOBAL PLAYER, THEN WHY THE DIVERSIFICATION INTO SOLAR AND WIND OFFSHORE?
Simply put, there are places where wind onshore is not viable or is less competitive than other energy sources, such as solar. This is true for France, due to a lack of both available territory and social acceptance of wind farms in the landscape. These factors account for the interest in wind offshore in the country. In the UK and other North Sea regions, wind offshore is also a strong industry that has attracted many interests given the rich wind offshore resources. The solar case is already valid in some regions of the US, such as California, or countries in southern Europe, where solar photovoltaic is more economical. We believe that solar technology and costs will continue to improve, and that solar and wind are set to become the two most competitive technologies.
Therefore, we must be able to offer the best renewable technology for each market at each moment. This need explains our increased focus on solar, which will represent 10% of our capacity additions through 2020 according to our business plan, and our investment stake in developing wind offshore.
Moreover, many of our competitive advantages in wind onshore are replicable in wind offshore and solar photovoltaic technologies. That’s another reason why it makes perfect sense.
HAVE THE RECENT POLITICAL DEVELOPMENTS IN THE US, CURRENTLY YOUR MOST IMPORTANT GROWTH MARKET, PROMPTED YOU TO CHANGE YOUR STRATEGY?
Some concern about the US’s new political landscape for renewables made a noticeable impact on our stock price performance since the last quarter of the year. We always act as takers of the political choices made by voters and citizens, and we never speak out publicly about governing bodies of countries where we operate. Nonetheless, we feel certain that the business case remains strong and see no reason to change course in our strategy to consider the US our core growth market. In recent Senate hearings, the new Secretary of the Treasury voiced his support of the current Production Tax Credit scheme. This reaffirms the phase-out of PTCs, approved in 2015, that enjoyed bipartisan support in a Republican-majority Congress. In the US, we have secured PTCs under safe harbor for our current 2016-20 business plan target additions of 1.8 GW. This includes PPAs of 1.1 GW, more than 55% of which were signed with non-utilities. Also, 0.4 GW of this capacity was already commissioned in 2016. We are currently taking continuous commercial actions to close PPAs for the remaining 0.7 GW; for which we have over 5 GW of possibilities in the pipeline. If we find conditions to promote even more of our pipeline than our initial target, we have also secured PTCs under safe harbor for an additional 1.3 GW as an option we can execute namely through a “build and transfer” approach without affecting our balance sheet. The fundamentals in favor of renewables remain in place. In most of the country, wind and solar are already the sources of energy with the lowest levelized costs – even unsubsidized – and those costs are expected to decline further in the years to come. Even though the Clean Power Plan is now likely to be delayed, plenty of additional demand for renewable energy will still exist; note that it provided less than 5% of the nation’s electricity in 2015.
These increases in demand are the result of three clear drivers: increasing renewables quotas under the Renewable Portfolio Standard (RPS) defined at the state level; utilities retiring coal power plants, which are either old or non-compliant with environmental regulations; and increased interest from the C&I (commercial and industrial) segment in negotiating long-term contracts directly with renewables suppliers, which in 2015 accounted for more than 50% of the PPA market. Moreover, deploying renewable infrastructure generates local jobs and benefits local communities and economies, generally in rural areas. If the likely tax reform includes a reduction in the current 35% federal income tax rate, the tax burden over the return on assets will surely be reduced.
However, it is still too early to assess the full potential impact of this change and any eventual effects on the financing conditions from the indispensable tax equity.
WHAT ABOUT THE SITUATION IN EUROPE? DO YOU SEE POSITIVE PROSPECTS THERE AS WELL?
The case of Europe is a bit less prominent in the short term than that of the US, as the latter still has much lower penetration of renewables. In the long term, however, prospects are equally positive and share the same fundamentals. We believe that opportunities in Europe are set to escalate in the medium term based on several factors: the 2030 targets already unveiled, a 40% cut on CO2 emissions and over than 27% share of renewable energy consumption; the recovery of electricity demand together with a common vision in Europe for a competitive and sustainable energy matrix and a redesign of the market, and the wave of nuclear and coal power plant shut-downs already announced in several European countries. In the short term, opportunities are limited as electricity demand is stagnant or declining due to growing energy efficiency; a sluggish economy; and some degree of overcapacity of electricity systems that still persists. That’s why we are currently exploring areas in Europe where our low-risk approach fits in. Projects with visible execution in our planned 2016-20 additions include 0.5 GW of capacity in Portugal, Italy and France, where suitable business opportunities are available with high visibility over prices in the long run. There is also Brazil, a growing wind energy market that benefits from strong wind resource. We built 120 MW there in 2016, and have 127 MW under construction for 2017 and 143 MW in an auction secured for 2018. Despite some socio-economic turmoil in the country, we remain confident that Brazil will continue to provide profitable business opportunities for us.
HOW DO YOU SEE EDPR IN TERMS OF EFFICIENCY AND COST CONTROL?
I believe that we have a distinctive approach as compared to our peers, namely in terms of our unique O&M strategy. We internalize our core activities through our modular maintenance and self-perform models for the wind farms in which the full-scope contract has already expired. By performing high value-added activities in house, we are able to reduce costs by extracting value from manufacturers while minimizing our dependency on them. Due to our experience and expertise in running wind farms, we are able to do this without jeopardizing the quality of our O&M activities or our technical availability. We carefully assess which maintenance model best fits each of our wind farms and, in the case of modular maintenance, we also decide on the level of insourcing activities. The results obtained confirm the success of this strategy as the 5% year-on-year decrease in the Cope Opex / Average MW is also supported by our O&M models. As our business plan describes, we expect to further decrease the proportion of full scope in our portfolio in the future.
WHAT MAKES YOU BELIEVE YOU HAVE THE RIGHT COMPANY TO DELIVER ON YOUR PLAN?
I can point to three essential qualities: our strong market positioning, solid balance sheet and excellent technical and human capital. Our teams have a visible track record of delivering results that reflect distinctive core competencies in areas that are key success factors for our industry. The systematic premium of our capacity load factors versus the averages computable in most of the markets where we operate is an indisputable indication of this. In 2016, our load factors surpassed the market average by 2 pp in Spain and France, 1 pp in Poland and 6 pp in Italy. Another clear sign of our teams’ outstanding collective performance is visible in our ability to win auctions profitably and close long-term contracts successfully. Just look to our share in last year’s auction awarded in Canada and Italy, or our consistent ability to close long-term PPAs in the US, both with utilities and non-utilities. Naturally, this is also the outcome of our well-established presence in key markets with continuing business opportunities. We do not need to prioritize expansion into new countries, as there is enough scope in our current markets to deepen our presence while remaining diversified and maintaining our growth objectives. It is also important to be present in markets and technologies in which price is not all that matters, as in wind offshore in high-income economies such as the UK or France, or as in solar that complements the energy mix in many relevant markets, such as California or Southern Europe. Finally, we have the financial muscle to take on an investment plan close to €5 billion for the 2016-20 period even amid an external environment that is not always favorable to risk minimization that could allow the lowest cost of funding appropriate for such large long-term infrastructure investments. We rely mainly on our own net cash flow generation, supplemented by a logic asset rotation program. Our shareholders are confident in us, and are willing to accept a relatively modest dividend distribution that is justified by the accretive growth opportunities that we offer. Our sustainable business principles are well integrated into our day-to-day operations and in our strategic plan. Sustainability is at the core of EDPR, and a clear roadmap up to 2020 has been set based on explicit targets in 10 areas: health and safety, environmental protection, ethics, innovation, human capital development, social support, stakeholders management, waste management, CO2 avoidance and risk management.
IS THERE A FINAL MESSAGE YOU WOULD LIKE TO SHARE?
I’d like to take this opportunity to reiterate our confidence in achieving our business plan targets, namely a compounded annual EBITDA growth rate of 8% along with Retained Cash Flow of more than €900 million by 2020. Capacity additions are well on track. More than 65% of the 3.5 GW planned for 2016-20 has already been built or secured with high visibility over the top line, with prices awarded through auctions or long-term contracts. The outlook for 2017, is to reach low double-digit growth rates in EBITDA and Retained Cash Flow. That is based on the near term visibility of the operating drivers of the business, namely the earlier addition of new energy capacity and the superior performance of our Opex efficiency. I would like to thank all of our stakeholders – shareholders, employees, local communities, landowners, suppliers, public authorities, offtakers, among others – who help us achieve our business plan objectives on a daily basis and make it possible to construct and operate wind farms and solar plants at very high standard levels – powerful tools for tackling climate change. I’d like to especially thank our shareholders for their belief in us and our vision for the future, as well as our employees for their ability to stay focused and to transform challenges into opportunities.