Interview with the CEO
JOÃO MANSO NETO
VICE-CHAIRMAN OF THE BOARD OF DIRECTORS AND CEO
Q1 FIRSTLY, AS A SUMMARY, COULD YOU GIVE US A QUICK OVERVIEW OF THE 2015 RESULTS?
A1: In 2015, EDPR gained visibility. Visibility regarding fulfilment of our 2014-17 business plan, within which we have already reached important goals despite only being at the halfway point. Visibility regarding our growth up until the end of 2017 and post-business plan options. Visibility regarding remuneration in the US, with the extension of the PTC and the continued demand observed for PPAs. Visibility regarding the commitments to fight climate change ratified by countries in the COP21. All this has demonstrated that EDPR is on the right path, and consequently it has won its shareholders’ trust in recent years.
Firstly, EDPR’s load factor was above the market average again this year. Despite wind resources in 2015 being lower than forecast, we reached an outstanding load factor of 29%, thanks to the fact that we were able to maintain a technical availability above our goal of 97.5%. Even so, since 2013 we have been able to reduce our core operating costs by 2% annually. A large part of our success is thanks to the implementation of initiatives in O&M, both with our M3 modular maintenance programme and our new Self- Perform programme in the US.
In 2015 we produced 21.4 TWh of clean electricity, with practically no water consumption or emissions, thanks to our 602 MW of new capacity, of which 398 MW were installed in the US market. In addition, we were able to secure future growth in this market by signing PPAs for a capacity of 200 MW; since 2013, EDPR has executed PPAs for a capacity of 1.8 GW.
I would like to draw attention to another important milestone for EDPR in 2015: the completion of the ENEOP project in Portugal. At this point, not only have we consolidated our 40% portion of the consortium, we have also strengthened our project portfolio even further by acquiring an additional 80 MW of this project, thereby increasing our asset base by an additional 613 MW of EBITDA consolidated capacity.
Q2 HOW WAS THE COMPANY’S PERFORMANCE FROM A FINANCIAL PERSPECTIVE?
A2: Our outstanding operating performance resulted in EBITDA of €1,142 million, an increase of +20% YoY, adjusted by non-recurring events. Earnings were bolstered by the recovery of the Spanish pool price, underpinned by our risk management policy and our hedged exposure to wholesale prices, the reduction of our core operating costs and the growth in our operating capacity following our self-funding model.
Net profit rose to €167 million, driven mainly by the recovery of the pool price in Spain, but also by more favourable financing conditions, since following the recovery of the debt markets, EDPR renegotiated its corporate debt with EDP, lowering the marginal cost of the debt from 5.2% to 4.3% in 2015.
This result entailed €701 million of operating cash flow which, following our self-funding model, allowed us to make a net investment of €719 million over the course of the year, enabling us to reinvest the value generated through our asset rotation programme and the funds from the tax equity and project finance structures.
We outperformed the DJ Eurostoxx Utilities SX6E (+10%) and the NYSE Euronext Lisbon PSI20 (-19%) over the same two-year period.
Q3 SPEAKING OF THE OUTLOOK FOR THE FUTURE, HOW DO YOU THINK THE ENERGY MARKET WILL EVOLVE?
A3: Clearly, current market trends play in renewable energy’s favour, thanks to the reform of the emissions trading system in Europe (EU ETS), to the progress which, despite difficulties, may lead to a new Clean Power Plan in the US, and above all, to the commitments that stemmed from the COP21 held in Paris.
The structural reforms to the emissions trading system in Europe and the Clean Power Plan in the US are measures which will encourage the elimination of the energy sources which pollute the most; a fairer price is being set for their emissions, or their removal is being considered directly.
However, it was within the framework of the COP21 conference held in Paris that a more firm commitment was reached. A total of 195 countries adopted a binding agreement with which to slow climate change, limiting the temperature increase due to climate change to 2°C, a threshold beyond which the most negative effects are known to occur. Through individual commitments, countries have undertaken to significantly reduce their emissions with a 2025- 30 horizon and with review mechanisms in place in order to periodically increase the ambition of these commitments.
Onshore wind power in particular allows us to reduce our dependency on fossil fuels by taking advantage of an endogenous resource with technology that is intensive in terms of the human capital it requires.
The fact that the cost of wind turbines has fallen by almost a third over the past six years means that this is the cheapest technology in many regions around the world. Photovoltaic costs have also fallen considerably in recent years, leading major global players to focus on renewable energies.
In this context, the competitive advantage of a company like EDPR is bolstered. Growing environmental awareness increases the value of one of our energy’s inherent characteristics: respect for the environment.
Yet, to bring these new opportunities in renewable energies generated by the fight against climate change in various countries to fruition, a more suitable environment in which to carry out our business has to be established.
Q4 SO WHAT SHOULD THIS REGULATORY FRAMEWORK LOOK LIKE TO TURN THESE NEW PROSPECTS INTO OPPORTUNITIES FOR EDPR?
A4: As I said in my interview in 2014, companies need a stable regulatory framework and we need visibility going forward in order to carry out our business in a controlled risk environment.
This year the US government took an important step forward by extending legislation on the PTC for a five-year period with a progressive phase-out in line with what businesses, like our own, wanted in order to plan our growth with total visibility. The extension of this legislation in the US provides market stability, in addition to being politically robust, having been approved by a Republican-led house and senate.The fact that it includes a progressive phase-out shows that these technologies are increasingly more competitive and that this trend will continue in the coming years. The fact is, wind technology in new plants is the most competitive of the various electricity sources
if analysed from the standpoint of levelized costs.
In another market where we have a strong footprint –the Spanish market– renewable energies are once again being promoted, following a long period of inactivity. A recent auction attracted significant interest and was highly competitive, as we expected. EDPR was awarded 93 MW for projects with very high wind resources, pre-committed CapEx and authorisations about to expire. Despite the exceptional nature of this auction which, due to the interest generated, only involved very high quality projects and in a particular situation, it is already a sign of change. It reflects the need for countries to continue to promote renewable technology and the evolution of onshore wind, specifically, towards greater competitiveness.
Consequently, we hold strong in our belief that the industry will become increasingly more committed to
a model based on auctions which provide long-term visibility for companies, and a low risk profile for investors. This is the case in Brazil, where this year we were able to secure 140 MW to continue our growth beyond that defined in the 2014-17 business plan.
Q5 NOW THAT WE HAVE REACHED THE MIDPOINT IN THE 2014-17 BUSINESS PLAN, WHAT IS THE COMPANY’S CURRENT SITUATION? IS EDPR IN A POSITION TO REACH ITS GOALS?
A5: To date, EDPR has laid solid foundations to reach, and even exceed, the goals set for 2014-2017, following a roadmap based on selective growth, investing in quality projects with predictable future cash flows and a fluid execution, backed by strategic competencies which provide higher returns, and all within a framework of a prestigious and recognised self-funding model designed to accelerate value creation.
From a growth standpoint, EDPR has already incorporated 1.1. GW in 2 years, thus exceeding the 500 MW per year established in our business plan. Furthermore, we already have total visibility regarding growth until 2017, and we are securing opportunities for growth beyond 2017, as is the case with the auction in Brazil I mentioned and an opportunity in Portugal through the acquisition of licenses from the Vestinveste consortium, corresponding to 216 MW of wind power capacity which is expected to enter operation over the course of 2018.
As regards our self-funding model, in just two years we have already exceeded our asset rotation target. We have already completed transactions valued at €800 million, €100 million more than the goal set for the entire four-year period. This crystallises the value created in our wind farms and accelerates its reinvestment. Furthermore, since 2013, EDPR has executed PPAs for a capacity of 1.8 GW, providing total visibility for the company’s growth objectives in the US for the 2014-2017 period, as well as the profitability of current facilities through the signing of new PPAs for a capacity of 275 MW for projects already in operation.
In this regard, all our new investments add to our quality asset base. In 2015, we once again exceeded our goal with regard to facility availability and cost control. Our new maintenance programmes for our facilities are yielding better results thanks to the shift to modular maintenance management through the M3 initiative and the extension of activity insourcing in the US through our self-perform initiative, which we have fully rolled out this year, following its successful 2014 pilot programme, to other facilities with maintenance contracts pending renewal.
All of the foregoing is contributing to the annual growth of operating results, not to mention our commitment to sustainability. Within the framework of the 2014-17 business plan, we also defined a sustainability roadmap that we have closely followed and that is helping us to strengthen our business model based on clean, environmentally-friendly energy to position us a benchmark in sustainability.
Q6 WHAT ARE THE CHARACTERISTICS WHICH DEMONSTRATE THE SUSTAINABLE SPIRIT OF EDPR, ON TOP OF THE GREEN NATURE OF ITS BUSINESS?
A6: Firstly, our main concern when defining our sustainability strategy is employment. It is our greatest asset and this year we broke the barrier of 1,000 employees distributed among 12 countries and comprising 28 nationalities. We take an interest in their professional development and provide training programmes and opportunities, thus preparing our staff to face the challenges that lie ahead. After various years pursuing this goal, we are beginning to reap the rewards through geographic and functional mobility which allows us to cover the needs generated by the business with staff fully adapted to the company’s culture, while at the same time, providing them a career path. It is worth pointing out here that all the new director positions have been filled this year by personnel trained within EDPR, a clear reflection of our efforts to foster opportunities within the company. Thanks to the benefits we offer to ensure a positive work-life balance, we have been recognised as the “Best Place to Work” in both Spain and Poland.
However, on top of our employee’s professional development, our number one priority is their safety and that of any person working at our facilities. Over 90% of our capacity has an OHSAS 18001 certified health and safety management system, which is a guarantee that we have the appropriate procedures in place to ensure the safety of our employees and all the contractors working at our facilities. Furthermore, this year we increased their health and safety training and also carried out various drills so that they are prepared in the event of an accident. Similarly, we also strive to prevent any form of environmental impact and more than 90% of our installed capacity is ISO 14001 certified, certification which demonstrates our commitment to the environment, guaranteeing processes to ensure coexistence and guarantee the lowest possible environmental impact from our activity.
We follow a culture of respect for our environment, as reflected in the company’s code of ethics, and we want this to be consistently at the forefront of our employees’ minds on a daily basis. We pursue a deep knowledge among all employees of the company code of ethics, and, therefore, in 2015, a new business ethics training programme was initiated at EDPR. Furthermore, in order to publicise the company’s new anti-corruption policy, specific training was provided in 2015.
Q7 LASTLY, WHAT WOULD YOU LIKE YOUR FINAL MESSAGE TO BE?
A7: 2015 was a year of significant progress, demonstrating our capacity to deliver on results. At barely the halfway point in our business plan, we have already exceeded our self-funding goals and have been able to provide visibility regarding the fulfilment of our plan up to 2017.
This is all thanks to our employees, which form a team committed to the company and who I want to thank for their dedication and hard work.
I would also like to take the opportunity to thank everyone with whom we work with on a day-to-day basis, especially the landowners and other members of the communities where we operate, members of the local and national administrations we work with and all our suppliers, thanks to whom we are able to develop and operate an array of extremely high quality wind and solar plants.
Lastly, I also want to thank our shareholders for the confidence they have placed in us and for believing in our vision for the company. Shareholders have been awarded thanks to our delivering on results, something we will continue to do in the coming years, following our current business plan and the forthcoming business plan for 2020, which we will present next May.