20 Mar Message from the Chairman
Chairman of the Board of Directors
It’s an honor to once again share with you achievements EDPR has made over the last year. In 2016, the company brought its total portfolio of clean, renewable energy to 10.4 GW of installed capacity by year-end, with the addition of 820 MW of new wind energy capacity. Of that capacity, 429 MW were added in the United States, our most important growth market; 200 MW in Mexico, which corresponds to our first project there; 120 MW in Brazil, which more than doubled our capacity in the country; and the remaining 72 MW in Europe. A total of 24.5 TWh of clean electricity was produced, avoiding the emission of about 20.1 million tons of CO2 and delivering on our commitment to conducting business in a way that contributes to a more sustainable planet.
Over the course of 2016, EDPR reinforced its position as the growth driver within EDP Group as it contributes now to 32% of EDP Group’s recurrent EBITDA.
We remain faithful to our focus on renewables, clearly a key solution to the global fight against climate change, among other side benefits. The political consensus around this topic has been to set a goal to limit global warming to 1.5º C. However, tangible initiatives are still missing to entirely tackle this enormous challenge. Currently only a small fraction of CO2 emissions worldwide are properly taxed. Even the EU Emissions Trading System is highly ineffective at encouraging changes to the energy mix given the oversupply of allowances that keep carbon prices too low. The economics of the sector have changed, we are moving from a variable-cost to a fixed-cost system, in which marginal pricing is no longer sufficient to incentivize investments, providing no clear long-term price signals incentives. The market must be redesigned and readapt in order to effectively promote the need for an increasing share of renewables in the energy mix. At current pool prices in wholesale markets, the sector does not offer the right economic incentives to invest, in renewables, nor in conventional sources. We believe that competition in the sector is important, but should be of a different nature, with ex-ante bidding in well-thought-out auctions for capacity, rather than ex-post marginal pricing in wholesale markets.
The turn towards renewables is inevitable. For instance, the EU aims to cut its total carbon emissions by at least 80% by 2050, from 1990 levels. It already has binding emissions’ and renewables’ targets for 2020 and EU leaders have also committed to 2030 targets. We therefore remain confident in our vision of enduring opportunities with realistic value as the result of doing business on the right side of the energy sector.
Last May, we updated our business plan through 2020. The company’s business case was set to remain supported in a clear strategic agenda over our distinctive three pillars: i) selective growth – on one side, prioritizing quality investments in our core markets (at about 700 MW per year versus 500 MW per year in the previous 2014-17 business plan), most of which have already secured high visibility over their returns through long-term contracts; and, on the other side, reinforcing our portfolio mix in new technologies, namely solar and wind offshore; ii) operational excellence – maximizing electricity production by leveraging on our high technical expertise, and reach higher levels of availability of our assets and superior load factors in our current and new projects in particular, while further reducing our core opex per unit of capacity, consolidating our unique operation and maintenance capabilities; iii) self-funding business – covering our €4.8 billion investment plan in the 2016-20 period, mainly from the retained cash flow from our assets, and this time only partly supplemented by our assets’ rotation program with an amount of up to €1.1 billion.
Half of our target for the company’s assets’ rotation program has already been reached. The appetite for equity stakes in renewable energy projects is increasing among institutional investors, such as infrastructure and sovereign wealth funds, and the program outlined in our business plan is well ahead of schedule. The €550 million transaction we carried out in the middle of last year, involving a 49% stake in a portfolio of projects in Europe, took place at an attractive multiple of €1.7 million per MW.
This figure marks a clear indicator of the quality of the company’s assets and the success of our strategy to crystallize value and enhance profitable growth, under a balanced discipline of indebtedness.
In addition, and in the context of the strategic partnership between EDP and China Three Gorges, another €363 million final consideration was settled in a transaction involving the sale to CTG of 49% of a portfolio of wind energy assets in Poland and Italy, bringing the cumulative amount raised by EDPR to €0.8 billion, since the program’s establishment in late 2011.
EBITDA reached €1,171 million in the 2016 financial year, while EBITDA adjusted for non-recurring items increased 12% year-on-year. On its turn, Net Income was €56 million, a 66% year-on-year decline due mostly to below average wind resources in the year and to favorable non-recurring events impacting the prior year and some unfavorable accounting impacts this year, yet having a positive outcome for the financial results in the immediate future.
More importantly, Retained Cash Flow, the net cash flow generated by our assets and available either for reinvestment, debt reduction or distribution to the company’s shareholders, totalled €698 million in 2016, representing a 13% year-on-year increase.
In light of this, it will be proposed at the General Shareholders Meeting to maintain the €0.05 per share dividend distribution, same as in the previous period, thus above the guided 25-35% range of consolidated net income, but representing only about 6% of total net cash generation.
EDP Renováveis is clear proof of how caring for the environment can lead to new profitable business models based on clean and carbon-free energy generation. Not just that, the company acts responsibly before all its stakeholders, as stated in its sustainable development principles and the public commitments that were underwritten, notably the United Nations Global Compact initiative, which set 10 principles in the areas of human rights, employment, environment and anti-corruption. The business plan defines explicit targets, setting a roadmap that brings together the three sustainability pillars and is laid down in ten different areas in line with the new UN Sustainable Development Goals through 2030. The action of the company is surely a keystone in the ongoing EDP Group’s high performance in the Dow Jones Sustainability Index for the Utilities Sector.
I would like to express my gratitude for the full support of all the company’s corporate bodies, namely my fellow members of the Board of Directors, who provided the necessary challenge and drive for another successful year. Also, I would like to express our appreciation to all of those related to our company, in particular our shareholders and business partners comprising our landowners, suppliers, government entities and regulators. But most of all, I want to emphasize my gratitude for the hard work and dedication of our 1,083 employees worldwide who are the basis for our excellence in terms of operational performance and growth, therefore enhancing the success story that is EDPR.