EDPR self-funding model has been a cornerstone of EDPR strategy and its success has been crucial for funding growth. The self-funding model relies on a combination of cash-flow from operating assets, external funds from tax equity and other structured project finances as well as proceeds from asset rotation transactions to finance the profitable growth of the business. This model substitutes the previous financing strategy that depended on corporate debt from EDPR’s majority shareholder EDP.
The primary source of funds for the company is the operating cash flow generated from the existing assets, which is firstly used to pay for the debt service and capital distributions to equity partners, while the excess is available to pay dividends to the shareholders of EDPR or to fund new investments.
A strong operating cash-flow generation of about € 3.5 billion is expected for the period 2014-17.
EDPR has indicated a dividend pay-out ratio policy in the range of 25-35% of its annual net profit, thus allowing that most of the cash-flow available to fund growth. The dividends paid in 2015 amounted to about € 35 million corresponding to the low end of the range relative to the net profit of the previous year, representing only a small share of the available cash-flow generated in the period.
US TAX EQUITY AND OTHER PROJECT FINANCE STRUCTURES
EDPR always aims to find external financing to its projects, namely through tax equity structures, typical of the US, and through other project finance structures, available in other geographies. The use of such structures fit in the self-funding model because they substitute the need of corporate debt.
Moreover, the case of tax equity in the US also enables an efficient utilization of the tax benefits provided by the project thus improving its economics. In a simple view, under the tax equity partnerships, 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 ten years of operation.
In the case of project finance, it is also a means to contract long-term debt in local currency at competitive costs in order to mitigate the refinancing risk and to reduce the foreign exchange risk by having a natural hedge between revenues and expenses.
In 2015 EDPR signed three tax equity transactions relating to the total 398 MW capacity added in the US this year, and corresponding to tax equity financing proceeds of US$ 473 million. These transactions bring total tax equity financing proceeds ever raised by EDPR up from US$ 3.1 billion.
With regards to project finance, in 2015 EDPR closed an important project finance deal for its Baixa do Feijão wind farm in Brazil, with proceeds amounting to R$ 306 million. This project is a good example of the benefits of using project finance as it provides competitive financing from the Brazilian Development Bank (BNDES) as well as a natural hedging for currency volatility in the Brazilian real.
Proceeds from asset rotation transactions are also important sources of funds for the self-funding model of EDPR in financing the profitable growth of the business. Such model enables the company to advance 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 to the costs of the asset rotation proceeds themselves. These transactions involve the company selling minority stakes at the level of the projects (typically of 49%), and still maintaining full management control over these projects. Moreover, the scope of projects for these transactions tend to be mature projects, generally already operating and thus significantly de-risked, with high visibility of future cash-flows, that can be attractive to low risk institutional investors from whom EDPR can then source a competitive cost of finance.
In 2015, two transactions were signed in the United States. The first transaction includes the sale of 49% of EDPR’s Lone Valley, 30 MW, solar PV plant to an infrastructure fund. This transaction was completed at a competitive multiple and is EDPR’s first asset rotation transaction involving non-wind assets. The second, the Company’s second largest to date, involves the sale of 34% of a portfolio of operating and under construction wind farms amounting to 1,002 MW in the US. The completion of these two transactions brings the total asset rotation proceeds for 2014 and 2015 to € 800 million, having clearly surpassed EDPR’s Business Plan target of € 700 million. The early completion of this target is a clear indicator of the quality of the company’s installed asset base that has attracted the interest of many institutional investors.
During 2015, significant progress was also made with regards to the CTG strategic partnership. Under this agreement EDPR will sell 49% of Polish and Italian assets totalling 598 MW. The transaction scope covers 392 MW in operation in Poland and 100 MW in Italy with an average age of 4 years, as well as 107 MW under construction in Poland and Italy. This transaction adds to the Brazil and Portugal transactions signed with CTG in 2014 and 2012 respectively, as well as the MoU relating to the future sale of 49% stake in the ENEOP consortium signed in December 2013.
For the record, the referred strategic partnership between EDP (EDPR’s main shareholder) and CTG was established at the end of 2011 and entered into force in May 2012, foreseeing a total € 2 billion investment by CTG until 2015 (including co-funding capex) in operating and ready-to-build renewable energy generation projects, that may include wind energy assets from EDPR and, as after agreed, selected hydro power plants from other EDP business units.