EDP - Energias de Portugal, S.A.

Good morning, ladies and gentlemen. Thanks for being with us today for the Conference Call on EDP's 2019 Third Quarter Results.

As usual, we will begin with a presentation by our CEO, António Mexia; and our CFO, Miguel Stilwell de Andrade which will provide us an overview of the results and the main developments of this period. We'll move to a Q&A session in which we will be taking your questions both by phone; and via our web page www.edp.com.

Expect this call to last no more than 60 minutes. I'll give now the floor to our CEO, António Mexia.

So, good morning, everybody. Thanks as usual for those that are attending in this results conference call.

So, the first slide that I want to share with you the Slide 3. Basically we have the key highlights.

And the key highlights give us an overview of our performance over the first nine months. At EBITDA level, we see an increase by 10% to €2.66 billion with a strong growth across all our three business platform.

That's important.

Well, thank you António. Let's move on to slide 15.

And here on slide 15 you can see that during the last 12 months we've built over 900 megawatts of wind farm about two-third of these additions coming through in North America. On the other hand though, we've sold 1.4 gigawatts of wind capacity of which 400 megawatts in North America related to the deal we announced in December 2018; and one gigawatt in Europe of which we had 51% so just 0.5 gigawatts net of minority the deal that António has already mentioned.

So additionally, we also sold around 0.2 gigawatts of small hydro plants in the fourth quarter of 2018 in Portugal and Brazil. So obviously that's explains this movement that you can see here on the graph on the left side.

So all together September 2019, we had 26.3 gigawatts of installed capacity of which 73% related to renewables sources. Concerning generation mix, so on the right-hand side.

So the main highlight goes to the six terawatt hour reduction year-on-year on hydro generation mostly due to the weak hydro resources in Portugal, which we've talked about and which were 39% below long-term average. On the other hand, our generation from wind and solar increased one terawatt hour backed by the 3% increase in average capacity and the higher load factors from new additions, but it's also important to highlight that in this period thermal generation declined one terawatt hour, with gas generation almost doubling year-on-year from a low base; and finally replacing coal generation given that there's been an increase in CO2 prices and lower gas prices.

So all together in the first nine months of 2019, we had 48 terawatt hours of electricity of with 64% from renewable sources which is big and which is very penalized by hydro scarcity in Portugal and doesn't reflect ongoing basis. Moving on to slide 16, so here wind and solar EBITDA increases 40% year-on-year to €1.2 billion, so significantly impacted by the €226 million asset rotation gain in Europe you can see here.

Even excluding, this impact EBITDA would have grown by 14%. I think it's important to highlight.

So it would have grown, excluding this impact driven by the increase in average installed capacity of 3% mainly in the U.S. and Brazil; and also the higher average selling price by 6% mainly in Brazil.

But also benefiting from a 6% appreciation of the U.S. dollar versus the euro; and also benefiting from a 6% increase in electricity production.

And despite stable deviation of wind resources versus the historical average on a year-on-year basis, the new wind farms have higher load factors than existing portfolio. So that explains basically the movements on the EBITDA in wind and solar.

Moving on to slide 2017 and EBITDA from hydro. So here, you can see it's decreased with 34% year-on-year to €443 million mostly explained by the weak hydro resources in Portugal, as I mentioned the hydro coefficient 39% below historical average.

So as a result the hydro generation in Iberia this year was almost half of the previous year at 5.9 terawatt hours. But this impact was slightly mitigated by a 3% increase in the average selling price, reflecting the hydro increased opportunity cost; as well as due to our forward sales hedging strategy.

So furthermore pumping volume also rose 10% year-on-year optimizing production from the low reserves with stable pumping margins in the region of €15 per megawatt hour. In Brazil, Brazil EBITDA from hydro declined 40% year-on-year due to several factors: so first 8% decline of installed capacity, due to the disposal of the mini hydro plants by the end of 2018.

Secondly, lower average selling price; and third our hedging strategy which allocated a higher percentage of our annual energy contracts to the second half of the year. Moving on to slide 18, and the regulated networks.

So regarding our network activities EBITDA increased 18% to €749 million. In Brazil, EBITDA increased 59% propelled by both distribution and transmission operations and already discussed that.

And both – António mentioned that. So in distribution the start of this new regulatory period implied a significant revision of the regulated asset base recognized by Enel, implying a €59 million increase from the update of the present value of our distribution concession residual asset value, but the results of the distribution operations also benefited from the annual tariff updates and the 3% increase year-on-year on electricity demand mostly in Espírito Santo state.

In transmission, 2019 is the first year of material EBITDA contribution following the entrance into operation of our first-line in December 2018 as well as progressing construction work in the other four lines. In Iberia network, EBITDA performance was mainly supported by a 4% decline in OpEx, which EBITDA was also impacted by Portugal declining rate of return, which is obviously connect the evolution of Portugal's 10-year bond yield.

Moving on to slide 19. So client solutions and energy management.

This includes the supply energy management and thermal generation. EBITDA from these operations increased 19% year-on-year to €284 million.

In relation to supply in Iberia, EBITDA improvements resulted from the normalization of operating margins starting from a particularly difficult 2018. It's something we've talked about already in the strategic update back in March and also increasing penetration of new service.

So we had an increase of overall €64 million. Regarding thermal and energy management in Iberia, we have better results from energy management support for hedging operations.

We've more than offset the duration of the coal load factors which can go from 80% in the third quarter of 2018, 22% in the third quarter of 2019. In Brazil EBITDA from these activities declined mainly due to lower volumes in supply and weaker results from the hedging strategy.

For thermal last year's results were positively impacted by €25 million gain due to the downward revision of the contracted availability level. Excluding this effect thermal EBITDA was stable year-on-year.

Going on to Slide 20 and talking about the Portuguese electricity system debt. So I think the key note here is that the regulator released the proposal for electricity tariff in Portugal for 2020 back on the 15th of October.

The final proposal will be out on the 15th of December. So it's clear from this proposal that the Portuguese electricity system is following a sustainable path downward with continuous reduction in electricity system debt which is forecasted to reduce by €0.6 billion to $2.9 billion by 2020.

So this is -- you can see this has come a long way since the peak a couple of years ago. So it's expected the tariff debt will continue to be gradually reducing until to be paid fully down by or before 2025.

That's inline with our expectations. In São Paulo the regulator defined tariffs for the last resort consumers so proposing a decline of 24%, again demonstrating the financial sustainability of the electricity system in Portugal.

For our distribution operations the rate of return on RAB is expected to be the same as in 2019 so 5.16% would be then adjusted after according to the Portuguese 10-year bond yield. Regarding the Fed, the extraordinary energy tax, but the amount referring to 2020 should be defined by the annual state budget.

The first government proposal should be presented at the parliament by December 15. Typically this is done on the 15th of October, given however given we had elections at the beginning of October it's deferred by two months.

So to conclude on this section, I'd just like to remind that the results of the recent Portuguese solar auction also with 1.3 gigawatts awarded at an average tariff of €21 per megawatt hour. I think it's also signed of the potential gains of the system, Pecem city system from the new renewal addition.

So clearly we're talking about a sustainable system. And -- so I think some of the concerns we had two years ago are fairly open.

Slide 21, net debt net debt at €13.8 billion in September 2019, so 2% rise versus December 2018, but it's a 1% decline year-on-year. So the main impacts on net debt are; first, recurring organic cash flow which is almost €1 billion which is a 1% decrease year-on-year.

Despite the weak results from Hydro and they're offset by gain on the asset rotation. Secondly, the net expansion investments amounted to €0.9 billion as a combination of net expansion investments with a significant weight devoted to renewals and transmission.

And then also on the other side €1 billion proceeds from asset rotation deals. Obviously there's also the payment in May of the annual dividend amounting to around €700 million.

And then there's also the positive €500 million from the 50% equity content in the hybrid bonds issued in January. And then there's some other effects relating to exchange rates and some regulatory receivables.

So overall adjusted net debt recurring EBITDA is 3.8 times down from the quarter. Slide 22 in talking about financial results.

So here net financial costs stood at €545 million in the 9 months of 2019 so that's an increase of 23% in relation to the same period of last year. But this figure is highly impacted by some particular volatile items not relating to interest costs.

So just to remind in the 9 months of 2018 so last year the one-offs were the IFRS 16 adjustment of €25 million, there's a Celesc badwill impact of €15 million, there’s a capital gains of €19 million mostly related to Temares project that we sold down last year. Then also both 2018 and 2019 there the results of net core and derivative mark-to-market which totaled a negative year-on-year impact of €24 million.

So stripping that out as a result of the interest-related costs rose by 4%, €70 million basically justified on one hand by a 20 basis point decrease in the average cost of debt 4%. And there's also a difference in the mix because of the higher weight of U.S.

dollars and Brazilian real in our overall consolidated net debt which is where we're doing most of our investment. And then there's also an impact of U.S.

dollar appreciation. So if we look also at Slide 23, we've included the slide just to show that -- I mean EDP 5-year yields in euro are near 0 territory.

I mean they've fallen 115 basis points since last September. Our U.S.

dollar and Brazilian yields have also fallen by close the 200 and 300 basis points respectively. So this significant decline in our medium and long-term yields includes expectations regarding refinancing in the following years.

So note that, we have €4 billion of bonds both euros and U.S. maturing until 2022, mainly several bonds with coupon rates in the region of 4% and 5%.

You can see here on Slide 23. This number does not include the €750 million hybrid with the 5.375% coupon rate for the first call option in September 2021.

But we also have almost €1 billion of debt in Brazilian reais which will mature by 2022 and which will also bring a significant opportunity to interest cost savings given where the penalty cost in reais has gone for last couple of months. So we expect to get some material savings in the near future just a low interest rate environment which means that our overall 4% great addition to our business plan.

Now means, I think we can beat that going forward. To conclude, I'd just like to mention that we still have around €7.7 billion in liquidity which €5.9 million relating to available credit lines covers our refinancing need beyond 2022 protecting us from any volatility in the credit markets and also enabling us to manage basically the refinancing on some of the transactions that we expect over the next 12 months.

So slide 24 last slide, from here you can see sort of the breakdown of the net profit in waterfall. Our EBIT rose by 36% following the 10% rise in EBITDA.

As a reduction in the amount of provisions given that last year we had the €285 million of extraordinary provisions relating to the effect over compensation. And as a result and associates went down by €97 million due to the previously referred adverse year-on-year comparison of non-interest related items and also a 20 basis point decrease in the average cost of debt.

Income tax expense increases by €95 million year-on-year with an effective tax rate of 15% on the nine months of 2019, so still a fairly low effective tax rate. And regarding non-controlling interest, this includes €158 million relating to EDP renewables and the €114 million relating to Brazil.

So the total amount increases by €35 million closely reflects the increase of the net profit in the profit part. Overall net profit grows 7% to €460 million, while our recurring net profit grew 55% €585 million.

So that concludes my section of the presentation. Now I'll turn it over to Miguel Viana to do the Q&A.

Thank you, Miguel. So we'll start here with some questions from the web.

And then we built that to the sound. So the first question that we have from the web is from Andrew Moulder from CreditSights.

Essentially on the wake effect that was discussed in the last couple of days on the cause of our and how do we see that in terms of our investment decisions?

So, thank you Miguel. Clearly I believe that we have presented our load factor expectations to investors based on 25 years of wind resource and predictive models between 2018 and since '94.

And the conclusion is that, EDP has being experienced stable wind resources with very low volatility. And this was again explained yesterday by EDP Renewables.

Finally, I believe that our internalization activity brings more value into the question. It means, that we have knowhow, example of calibrating models.

But overall what I would like to say is that, we have been advanced well in the learning curve. We have suffered some of these problems, of course, but it was in 2007, 2008 so at the beginning of our development.

So we have learned a lot of things in the last decade. So we are now very sure, very confident about what we have been showing and commitment that by the way proved by the recent figures.

And still in renewables, we have questions from and also from from Bloomberg.

Regarding the main power projects that we have won yesterday, if we get some more details on the next steps.

So, clearly this is very good news. As you know we were leaders in onshore in the U.S.

We have been successful in Europe in offshore namely new day in France. But clearly, we wanted to our footprint.

And we did it through a -- in a process that we have now consolidated our leadership positioning. And with returns that are respecting everything that has been shared with you.

We are talking about 1.5 times return -- equity returns with double-digit even before any strategy of sell down. So these 20 years PPAs first now in marcuses with megawatts.

And now we expect to even enhanced this if -- with the connected results shows that we have been very, very -- doing a very good job in the last year to be prepared to win this with very interesting returns in a state where the commitment is about doing more offshore winds and the investment in ports has been very significant. So the potential in that area is big and it shows that when we -- in last December, we auctioned for the site.

We did it well. And then the team is the first to be congratulated with a fantastic job that -- it's very important for EDP.

In wind offshore but now on floating we have a different question also from Eric Mamado from .

In terms of South Korean partnership and how we see this evolution of floating technology?

So first of all Korea is wind power Korea active solution in EDPR is consortium. We had the ambition to develop an initial 500 megawatts floating.

And why it's important? First, because the South Korean government falls for 13 gigawatts of offshore wind installed by 2030, so the potential is huge.

And so we believe that we are adding value by combining, establishing the industry leaders in renewables and offshore project development. Going side with the local market and basically the industry expertise provided by the wind power career.

And I would like to highlight that the wind float that we are developing, the wind plan technology that we've been developing throughout the last, I'll say mainly last five years with a new project in Portugal with 25 megawatts with turbines of 8.5, the biggest in this technology, with the floating technology. The learning curve on our side has been very relevant and we'll show that we are in the forefront of these new opportunities in floating offshore.

And, of course, this plus the rest that we have just mentioned in the U.S., it means that now we are clearly already in the top five in the world of offshore and we want to go up in that ranking.

Now a question also from Jorge Alonso.

Regarding special energy tax in Portugal. If we have some expectation here some development.

Thank you. That question is relevant.

As you know probably only in the 2020 public budgets, we will have visibility of who it is. But it's very relevant to mention that the system debt deleveraging is progressing and clearly indicates room for reduction already in 2020.

So this is important. As you know budget proposal will be released by -- before Christmas and two relevant commitments were resumed last year is that -- and it was already included in the budget last year.

To reduce the energy tax as the system deleverage and it's the case and to allocate two-thirds of the revenues from energy tax it’s 50/50. So I believe that we have everything to expect that reduction because both criteria are supposed to be not just mentioning the system that -- the system that declined by -- in the first nine months by €160 million since December 2018 to €3.7 billion.

Clearly accelerating in the first quarter, but I remember that EDP share is 10%, only 10% of the total system at the end of September. For the full year, it will decline by -- typically by 3 -- €0.3 billion with a negative impact from weaker demand partially due to mild temperature.

But it means that EDP regulatory receivables are expected to be broadly stable. And it's important to mention the 2020 debt proposal signals a decline again of €0.6 billion in the debt.

So, it means that we will be well below the 2012 level and so all the conditions for the sales changing are there.

We have question from Arthur Sitbon from Morgan Stanley.

The guidance on 2019 EBITDA has increased, but recurring net profit outlook remains in line with what had been mentioned in the first half results conference call. Could you walk us through the moving parts below this level in the P&L if any of these items is more negative than expected?

So this is clearly the fact that what is growing in our company. The areas where we have minorities.

So, renewables Brazil, so whenever you go from up there to down there, you have the impact of this where the growth is. As you know typically the negative impact in Iberia, it was the hydro and regulatory issues in Portugal.

The first below average, the second already included in our vision. And, of course, below the line you have financial costs in 2019.

And the fact the hybrid, the fact that we have increased the share of dollars and reais. But I would like to stress this.

We will see the benefits of lower rates because of the fact that we have a big refinancing program relatively to the others. And by the way the average maturity was considered eventually a problem one or two years ago.

Now it's an opportunity. So it's always like this in life.

So you have an opportunity to have throughout the period 2022 impact of lower financial costs.

A question also from .

Regarding net debt guidance for the end of the year.

So I don't know Miguel if you want to share the same.

I mean, I think for net debt end of the year, we will be looking roughly in line with those of last year. I mean, obviously, this year the leverage space was slightly slower than expected just because there was also much weaker than average hydro conditions, but we should be close to €13.5 billion that's what we're aiming for.

I think it goes also part of this question which was the tax impact for the freedom provision. I mean, this will be a deductible.

And so the bottom line impact of the €87 million is around €60 million.

They asked for an update in terms of the total plant in Iberia.

So the process as I mentioned and now I'd like to stress again, because I know that it's relevant after growth, after assets rotation in rubles of course disposable is probably one of the top three issues that we want to give full visibility. The process is progressing with no changes from what we said before.

As we speak hydro assets in Iberia is the most likely option. We have alternative complementary disposals in Iberia are also being considered.

If it says we it's always important to have plan B. So it means that we will keep the necessary flexibility eyeing on a reduction of exposure to the market.

We will make sure that the process results in a clear benefit for our business plan execution and shareholder value. And finally, we remain confident of full execution before 2020 year-end and we expect to give visibility until the end of this year or maximum beginning of -- early, early 2020.

So as you know the fundamentals are there. We have a very high market share in generation in Portugal.

So it makes sense to everybody being aligned on this process. So it's diversity to generation players in Portugal.

And process is going as everything that relates to Portuguese government and anything that relates to Brussels is going as normal. So we expect this process to be as we announced in March exactly keeping the pace.

We have a question also from from Bloomberg. Load factors of coal-fired power plants in Iberia have sharply do you plan to book coal asset impairments anytime soon?

So as you know every year we revisit the issue. Typically in the last -- at the year-end.

By then we always incorporate expectations for commodity prices as well as the remaining life of assets as is normal in order to access potential impairments. So we know coal plants have been working much fewer hours this year, which will certainly be factored in rather with the expectation for future role in the daily and ancillary markets.

High C02 prices and lower gas prices have reduced core plant headroom. So clearly, we have been already doing some moves in the recent years.

And we will repeat the exercise every year to go to give transparency to our expectations in what concerns this call. As you know, we are leaders in commitment of decarbonization, but of course in the transition and we need to evaluate exactly what does it mean in terms of the impact.

So in any case non-cash. We will be having the exercise as you.

And we have a final question on the web before we move to a couple of questions on the phone. So it's regarding hydro EBITDA in terms of the positive impacts from hedging in this first nine months of the year.

So what we have here essentially that our average selling price shows an increase of 3% as we show in our results release. This compares to the 10% decline of power prices.

Obviously, there is here a positive impact from hedging, which we estimate in the region of €70 million. Obviously, you have further impacts namely the increase of realized premium versus base loads given that the load factors of hydro were lower than average.

So finalizing here the answer of questions through the web. We'll move now to the phone where we have a couple of questions.

Thank you and good afternoon everyone. The first question please I have is on the hydro disposals.

And as we are getting close to hopefully the conclusion of this. I was wondering if you're still sticking to your idea of dedicating all of the proceeds to paying down debt or if you see room sometime towards the end of the plan, perhaps to accelerate investments in maybe I don't know domestic renewables given the trends we are seeing in merchant solar or to grow dividends perhaps?

The second question is -- and if you can't answer this I'm happy to take it offline. But is there an easy way to think about the non-cash items included in the EBITDA with all the new IFRS changes.

I'm trying to figure out the cash conversion of EBITDA. And if not happy to take it offline.

The third one is on European consolidation. I mean, recently the CFO of a company that is in the industry a similar market cap to yours says that he expects lots of M&A in the next few years in utilities as companies try to reposition for the next 10, 20, 30 years.

You seem to own lots of assets that people would want for the next 10, 20, 30 years. So I'm wondering if proactively you think there could be value for shareholders from consolidation, if you were to merge with someone else, what would be the advantages?

Why would that be the case and what's the value of scale I guess in developing renewables is the question. Thank you.

Thank you, Alberto. Typically, the second question will probably need to be a live answer than they should not be over the phone.

But just it's of course a very interesting, but of course not obvious at all. But let's start with the first and then let's move to the second proceeds.

As you know, we have tried very clear in this call to highlight that before, okay, you can have more rain, a little bit less rain, you can have some hurdles in terms of cash provision. We wanted clear to give the visibility about commitment delivering the key pillars of the business plan.

Visibility on growth. I think that's better than anybody is expecting huge impact of new PPA signed in a very competitive market and entering new markets that are exciting and with very attractive returns.

So, I'm talking about U.S. I'm talking about Colombia.

Then the second pillar is about the asset rotation at better prices, than we expected, taking advantage of course of the market condition. But finally, the idea of proceeds of -- and reducing exposure to ideal market was always focused on the deleveraging and keeping that down.

So, if anything we -- the first commitment is, put the balance sheet in a place where we have committed. And of course, this allow us to have additional flexibility, if it's the case to do some more.

But we have not missed any opportunity because of lack of financial strength. We have been delivering everything that we need.

And we have always been able to find business structure, business models and financial structure that will deliver that growth and sharing that growth with our shareholders. I think that even the assets rotation it's a good -- I think that we are a good set in what concerns the different valuations between public and private markets and EDP.

I think, it's bridging very well the difference between both markets. So, let's do what we have been doing that I think it's clearly value-enhancing for the shareholders and adjust the speed of growth, but it will be of course just doing more as we have been doing until now.

European consolidation. I remember, again, when I -- we started long ago in this industry that I was told by a lot of people, that we would not only have four utilities.

It was 2006 or 2007 that we would only have four utilities in Europe. It was written by somebody that I will not -- it's not you.

But the question is do I see room for people, trying to improve their positioning in management position? Clearly, yes.

But what I would like also to answer is we have defined a strategy that permits -- that allows ourselves to control our destiny. It means that we know what we want.

We have anticipated the trends. So, typically, we have done the partnerships that we need namely, we are building the partnerships that we need in offshore.

We have been clearly being able to prove that we are able to grow now soundly in solar. So, I think that we control our destiny.

And frankly, a lot of people probably need more out what we have and I need less what they have. So, frankly, I'm not over excited about that story.

We are reaching one hour of the call, so I will just move to the final remarks by the CEO and we'll follow-up any more technical question through the IR team.

So, after this is my last comment that shows that, of course the industry is an exciting industry over the Albert . It's going to be an exciting world because everything has been changing, as you know, business models, economics margin or cost of the adding technologies, the importance of the client.

I think that as a final remark, I know that we have sometimes in EDP relative to our size. We have a lot of moving parts of small items provisions below the line whatever.

So details especially in Iberia not to say mentioned Portugal. But I think that the big picture is, we know exactly what we want to do.

We have been able clearly to deliver in very competitive markets with very -- either in solar, either now recently in offshore in new markets and also regulatory basis like challenging like in Brazil. We have been clearly best-in-class in what drives our growth and we have been humble enough, now that we need to keep our sound balance sheet and not going out of tune just because we have specific macro situation.

So I think that we feel responsible on that balanced approach and keeping control of our story as leading the energy transition. So, thank you for your time and see you soon.