EDPR self-funding model has been a cornerstone of EDPR’s strategy and its success has been crucial for funding growth.
The self-funding model relies on a combination of the Retained Cash Flow from operating assets and EDPR’s successfully Asset Rotation strategy, along with the US Tax Equity structures to finance the profitable growth of the business. This model, that was already included in the previous business plan, substitutes the initial financing strategy that depended on corporate debt from EDP, the major shareholder of EDPR.
The primary source of funds for the company is the EBITDA generated from existing assets, which after paying debt services costs, deducting capital distributions to equity partners and taxes is called Retained Cash Flow, meaning the amount available to pay dividends to EDPR shareholders and/or to fund new investments.
A strong Retained Cash Flow generation of c.€3.9 billion is expected for the period 2016-20.
EDPR indicated in May 2016, a dividend pay-out ratio policy in the range of 25-35% of its annual net profit, thus allowing most of the Retained Cash Flow to fund growth. The dividends paid in 2017 amounted to c.€44 million.
Proceeds from asset rotation transactions are also important sources of funds for the self-funding model of EDPR in financing its profitable growth. This enables the company to cristalize the value yet to be realized from the future cash- flows of its existing projects over their long remaining lifetime and reinvest the corresponding proceeds in the development of new value accretive projects, with superior returns. These transactions involve the company selling minority stakes (typically 49% stake) at project level while maintaining full management control. The scope of these transactions tend to be mature projects, generally already operating and thus significantly de-risked, with high visibility to future cash-flows, that can be attractive to low risk institutional investors from whom EDPR can source a competitive cost of finance.
For the period 2016-20 EDPR has the target of completing €1.1 billion of Asset Rotation transactions, which as of December 2017, €550 million were already executed.
For the completion of the Asset Rotation target, EDPR will continue to seek accretive projects with superior returns, thus crystallizing value and accelerating profitable growth.
US TAX EQUITY
EDPR always aims to find external financing to its projects, namely through tax equity structures, typical of the US. The use of tax equity in the US enables an efficient utilization of the tax benefits generated by the project, otherwise unusable, therefore improving projects’ economics. In a simplistic view, tax equity investors contribute a sizable part of the initial project investment, receiving in return almost all of the PTCs granted to the project for first 10 years of operation along with the benefits from the accelerated depreciation.
In 2017 EDPR signed two tax equity transactions, a total funding of $507 million related to all projects that started operations in 2017.