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EDP Renewables 2013 Annual Report

Interview with the CEO

The company’s growth will be focused in markets where the project’s output is sold through long-term, low-risk-profile contracts that deliver predictable and recurrent cash-flows and guarantee the stability of the project’s return.

 

Q: WHAT WERE THE MAIN DEVELOPMENTS OF THE RENEWABLE ENERGY SECTOR IN 2013?

JMN: My first comment when I analyse 2013 is that throughout the year we were able to confirm onshore wind technology as a competitive source of electricity. The question is no longer only about being green, but it is also about being competitive when comparing against other sources of generation. The tender for new nuclear power in the UK brought to public knowledge what is the price of a technology. Nuclear is commonly argued to have a lower cost versus renewables, yet the price awarded in this nuclear tender was 20% to 30% higher than the price of onshore wind energy in France or Portugal.
Based on this increased competitiveness, onshore wind continues to lead the number of annual installations worldwide. Excluding Europe, the development of new onshore wind projects increased in the relevant markets. Although installations in the US were drastically lower, once the PTC was extended in the beginning of the year, activity ramped up so that 2014 is now set up to be a solid year of growth due to the record figure of projects already under construction or in a ready-to-build state.
Europe – which is the worldwide leader in the wind energy industry – is lagging in terms of growth due to the increased discussions about the sustainability of renewables, as they were incorrectly identified as the cause of the increase in electricity prices and reducing the region’s economic competitiveness. This discussion was particularly exacerbated in Spain where the Government unilaterally intervened in the sector’s financial stability by changing the regulatory framework for wind energy projects built in the past 20 years.
However, 2013 also confirmed the strong appetite from institutional investors in gaining direct exposure to the solid visible returns provided by wind energy assets that are well managed and remunerated under long-term schemes.

Q: BUT PEOPLE CONTINUE TO PERCEIVE RENEWABLE AS A LUXURY THAT WILL ONLY SURVIVE WITH THE SUPPORT OF SUBSIDIES…

JMN: There are several persistent myths about renewable energy that have penetrated public opinion and are influencing the political landscape around the world. The idea that renewable energy is much more expensive than fossil fuel generation and will always rely on subsidies to be competitive is completely outdated.
When looking to the different investment costs, economic agents need to always analyse what are the total costs of each technology and the truth is that onshore wind with quality load factors is already competitive with all the other electricity generation technologies.
Typically renewable energy is perceived as being expensive because its total cost is compared to wholesale prices, and this is not correct. No technology is profitable based on existing wholesale electricity prices and this demands a restructuring of the electricity market in Europe.
The price gap between the European and the US electricity market is not driven by renewable energies but from the boom in production of shale gas in North America.

Q: WHAT WAS EDPR’S ACTION PLAN FOR THIS CHANGING ENVIRONMENT?

JMN: We decided to implement a rapid shift in investments for the upcoming years. Leveraging on our highly competitive and diversified pipeline of projects, and also on the more favourable business environment in the US, we placed the US at the centre of the company’s growth.
In Europe, the management of the regulatory agenda and actively participating in the public debate intensified. This was not only specific to renewable energy but also for other sources of electricity.
I’m always focused on making sure EDPR continues to deliver premium operating metrics, for example in availability and load factors, and that financial sustainability and cost control continues to be a priority for all. With this mind-set we will continue to deliver premium returns.
We also continued our asset rotation strategy of selling minority stakes in operating projects. This allowed us to take advantage of the increased number of low-cost-of-capital financial investors looking to the fundamentals of the wind energy business and its solid low-risk profile.

Q: DOES THIS SHIFT TOWARDS THE US MARKET MEAN EUROPE IS A MARKET WITHOUT GROWTH?

JMN: No. Wind energy is economically competitive and contributes to the de-carbonization and energy independence of the European economy. Europe wants to reduce its CO2 emissions by 40% and just reinforced its objective of having 27% of electricity production coming from renewable sources by 2030. Countries like the UK and Poland will need new power generation capacity as several coal plants are slated to retire in the upcoming years. But one does not need to go that far out in the future to justify the demand as several European markets still need to install new renewables to achieve the 20% renewable energy target by 2020.
EDPR has been operating wind energy assets in the region since the 90’s and is currently present in 8 European markets, so we are long-term investors and will continue to look for new opportunities.

Q: HOW IS EDPR PLACED IN THIS NEW COMPETITIVE SCENARIO?

JMN: We really believe in the competitiveness of the projects originated by our teams, and the quality of our portfolio of assets is the most evident proof of it. Based on our knowledge in maximizing wind farms output, we will focus our growth in projects which can sell their production through long-term contracts, typically 15 to 20 years, with terms defined based on competitive systems.
We believe that investments in such a capital intensive business need to have long-term visibility on returns. In our opinion the best way to provide visibility and to deliver the most competitive price to end consumers, is to introduce ex-ante competition to award contracts for new installations. This competition can exist through energy auctions, organized on a national/regional basis, or through private negotiations with off-takers.
This competition is already a reality in some markets, such as the United States, Portugal and Brazil. It’s also gaining traction in several other markets, most recently in Italy, and others are planning to introduce this mechanism for their future capacity additions, like Poland.

Q: LET’S NOW MOVE TO EDPR’S 2013 PERFORMANCE. WHAT WERE THE MAIN HIGHLIGHTS?

JMN: In 2013, the company again delivered quality growth. We met our growth targets with the addition of 502 MW to our portfolio that now reaches 8.5 GW. The high quality assets produced 19.9 TWh of clean electricity and resulted in revenues of 1.4 billion euros.
The additional capacity was concentrated in our growth markets, mainly in Central Eastern Europe which contributed 70% of the new capacity. This included building our largest wind farm in Romania, adding to our leading presence in Poland, and installing our first project in Canada.
The financial results for the year were clearly impacted by the regulatory changes in Spain. What is encouraging is that despite these cumulative changes, which negatively impacted results by 71 million euros, EDPR was still able to deliver financial growth, thus showing the benefits of its diversified portfolio and resilient business model.
Our EBITDA was up 1% year over year, our Net Profit increased 7% and operational cash-flow increased by 5%. Based on these figures and in line with our commitment, the EDPR Board of Directors will propose to distribute 26% of the consolidated Net Profit as dividend.

Q: IN THIS CHANGING ENVIRONMENT IS THE VISION OF THE COMPANY CHANGING FOR THE FUTURE?

JMN: No. When we first identified the potential of renewables, specifically onshore wind, we understood its competitiveness would quickly increase and become cost competitive with alternative options and thus represent an important share of the world’s generation mix. This vision materialized and we continue to be strongly committed to it. We continue to see a crucial role of renewable’s energy in the energy matrix and its increased competitiveness provides a bright future for the sector.
EDPR is a top worldwide player in renewables and is a long-term investor in the industry. We are experts in the development and operation of wind farms and we want to capitalize on our core capabilities and structural competitive advantages to deliver long-term value to our shareholders and stakeholders.
To obtain long-term value in this industry, EDPR has a strategy structured around three pillars: (i) delivering increased profitability supported by the performance of EDPR’s premium wind farms; (ii) selective and profitable growth, and; (iii) a self-funded business model. My commitment to the company is to deliver this strategic agenda.
We need to continue to achieve premium operating figures and to maximize value from the assets already in operation. To achieve this excellence in operations we will continue to execute performance optimization initiatives to increase efficiency and maintain strong control over costs.
Looking for new investments, as I said previously, we introduced in 2013 a shift of the growth towards the United States and the company is committed to adding new value accretive projects to its portfolio. It is also relevant to maintain our self-funded business model and to achieve this we will continue to execute asset rotation transactions and re-invest proceeds in visible projects.
I would like to stress that the company’s growth will be focused in markets where the project’s output is sold through long-term, low-risk-profile contracts that deliver predictable and recurrent cash-flows and guarantee the stability of the project’s return. With this approach, EDPR will be able to define its own future and continue to lead the renewable energy sector.

Q: WHAT IS THE CURRENT STATUS OF THE ASSET ROTATION TRANSACTIONS ALREADY EXECUTED AND WHAT IS THE ROLE OF CHINA THREE GORGES?

JMN: Since we started the asset rotation strategy we have executed 4 transactions and entered into a MoU for a fifth transaction.
Our first partner in the asset rotation strategy was Borealis for a portfolio of US wind farms. The second transaction in the US was with Fiera Axium involving a single wind farm. In Europe, we signed an agreement with Axpo for a portfolio of wind farms in France. And lastly, we signed two agreements with CTG for the assets in Portugal (the first concluded in June 2013 and the second – a MoU – regarding a future transaction including the ENEOP project which is on its way to conclusion).
But what is more important than the number of transactions or the names of the players involved, is the amount invested by our new partners. The first four transactions totalled 620 million euros. This is a remarkable success of the execution of this strategy as it is almost equivalent to a full year of investments for the company.
We will continue to execute new asset rotation transactions as it is a key source of funding for the company and allows
it to maintain equilibrium between growth and financial discipline.

Q: IS EDPR LOOKING TO OTHER RENEWABLE TECHNOLOGIES OR WILL IT CONTINUE TO BE A WIND COMPANY?

JMN: Onshore wind is our priority. It is the most competitive renewable technology and EDPR has continuously delivered premium operating metrics as a worldwide market leader.
Looking ahead, offshore wind is a natural extension of our strong competences in wind energy. We are actively participating in the UK offshore wind market and we partnered with GDF Suez for an offshore wind tender in France. The main challenge for the offshore projects is to increase its competitiveness and reduce costs.
We are also involved in the solar PV space but the growth and opportunities will always be more limited. We will base our strategy on having an opportunistic approach and implementing a dual strategy where solar is an extension of our developments in wind.

Q: WHAT MAKES EDPR A GREAT PLACE TO WORK?

JMN: First and foremost are our people. It takes a dedicated team of experienced and driven individuals in order to continuously deliver on targets in this incredibly fast paced environment.
In 2014, I will continue to maintain a close relationship and direct contact with each of our employees, listening to their comments and suggestions, explaining the strategic decisions made by the management and continuing the activities developed in 2012 and 2013.
We have received several recognitions and this is a significant achievement for the company. We accept these recognitions with great pride and it is crucial that our employees are happy in their place of work, which in turn contributes to the strong performance of the company.
Beyond that, I believe we offer great training opportunities, competitive benefits, and simply have a group of people who are dedicated to realizing the vision of our company, which is to be a leading renewable energy company in terms of performance and sustainability.

Q: WOULD YOU LIKE TO LEAVE A FINAL MESSAGE?

JMN: I would like to say to our shareholders that we have a good company with high quality assets and a team which is grounded in solid principles and values. We are ambitious but not unrealistic, so we are going to base our growth in areas that fit our low risk investment profile and we are going to fund this growth by executing our strategic agenda. Renewable energy is one of the most competitive sources of energy and has an excellent and important future.
With that said, I would like to thank our employees for their hard work and dedication and our shareholders for their c
ontinuing trust and belief in our mission.