EDP Renováveis, S.A. (OTCPK:EDRVF) Q4 2023 Earnings Conference Call February 28, 2024 9:30 AM ET
Company Participants
Miguel Viana – Head, Investor Relations & Sustainability
Miguel de Andrade – Vice President & Chief Executive Officer
Rui Teixeira – Chief Financial Officer & Executive Director
Conference Call Participants
Manuel Palomo – BNP
Javier Garrido – JPMorgan
Alberto Gandolfi – Goldman
Arthur Sitbon – Morgan Stanley
Jorge Guimaraes – JB Capital
Fernando Garcia – Royal Bank of Canada
Gonzalo Sanchez Bordona – UBS
Miguel Viana
Good afternoon, everyone. Thank you for attending EDPR 2023 Results Conference Call. We have here with us our CEO, Miguel de Andrade; and our CFO, Rui Teixeira, will run you through the key highlights on the update of – on the execution of our strategic plan and the financial performance of the year. We’ll then move to Q&A in which we’ll be taking your questions both by phone and the written questions that you can insert from now onwards in your conference web page. This call is expected to last close to 60 minutes. I’ll give now the floor to our CEO, Miguel de Andrade.
Miguel de Andrade
Thank you, Miguel. Good afternoon to everyone and I think it’s good that we can talk and update you on what’s been happening in 2023 and also the company’s update and outlook for the year. And I’d start off by saying that 2023 was a challenging year for the renewable sector in general but also EDPR in particular. And I don’t think there’s any sugar coating it and I won’t try to. I’ll give you a balanced and realistic view of where I think the sector is and where EDPR is.
As you know, we’ve been regularly briefing you on the year and the fourth quarter didn’t go particularly well either. There were several issues that negatively impacted us and that we’ve been working through and are continuing to work through and I’ll go through that in detail in the presentation.
There are also some positives that I will highlight. So I would start off just by going – just before going to the bulk of the presentation to Slide 4 just saying, 2023, as I said is definitely challenging.
Overall, for 2024, we do expect underlying business to grow in 2024 as much as above 20%. But assuming the capital gains in line with the business plan that there would be a moderate growth in EBITDA, overall.
So moving forward to Slide 4. First I think if you look at the capacity additions, we had a strong fourth quarter in 2023. We added 1.7 gigawatts of renewables, which is quite an impressive volume for a single quarter. And so we ended up the year with a total of 2.5 gigawatts of annual capacity addition. So this is what we’d previously anticipated at the nine-month results release.
Going forward for 2024, we have very good visibility on the execution of our 4 gigawatt target. We already have 85% of this capacity currently under the construction. And the last couple of months we’ve seen also the normalization of the solar panel supply chain in the US. So we had a pretty adverse environment over most of 2023 and seems to have normalized now.
Regarding balance sheet, as you know in 2023, we reinforced our capital structure with €1 billion equity raise and we’ve also successfully implemented a new script dividend policy which we – so it would be the second year. We just came out with the news release for that this week. On asset rotation, I think it was a particularly strong year, great execution by the teams and reflecting I think the value of the assets.
And I remember this time last year, when we were getting a lot of questions on the demand for asset rotation, if you could still keep it up. And yes, I mean the answer was clearly in 2023, we had three great transactions contributed to a total of €1.7 billion of proceeds €460 million of gains and an average gain of 60% on invested capital. So Again a year on – I think we can look back and say, it was a great year for asset rotation. And it’s clearly above the 20% to 25% target return for asset rotations that we assumed in the strategic plan.
We continue to see strong interest from investors. And in the beginning of 2024, we already announced the closing of one transaction. We’ve signed another one. We expect them to close in first quarter of ’24 totaling a total of around $1.1 billion in terms of enterprise value.
But ’23 was also marked by quite a few material headwinds. And we shared them over the last couple of quarters and now we’re actually showing the numbers impact. We had a well below average wind resource with the negative impact of around 200 million in the 2023 EBITDA, mostly penalized by the El Nino effect on the US wind resource. I think we flagged that already I think in the first quarter numbers of last year that that was beginning happened. We had a cost associated with the delay on the transmission line permitting and the wind project in Colombia. We have the bottlenecks on the solar panel supply chain in the US and we have a countercyclical callback taxes in Europe. So altogether, these headwinds represent about a — €400 million negative impact on our 2023 EBITDA and we seriously distort our underlying P&L.
Finally, in late December, we announced an agreement for a transaction that comes — I think it will allow us to simplify the corporate structure. It’s definitely earnings accretive from day one. So we bought back 49% of a one gigawatt portfolio of wind farms that we operate in Europe, around €570 million. The implicit enterprise value per megawatt multiple was around 1.2 times and we expect the transaction to be closed in the second quarter of this year.
So now I’ll go deeper into these topics and I’ll start off just by taking a step back and just looking at the big picture. First, we had some positive news coming out of the comp in December, essentially talking about tripling the renewables capacity between 2022 and 2030 to reach the 1.5-degree target. And so, that commitment was say signed by more than 130 national governments. We have the European Union coming together and also agreeing to triple that. So I think that broad tailwind continues to be there and we continue to see it pushing the sector forward.
Solar PV and wind is expected to account for 95% of global renewable expansion. And that’s where we are placed. So we’re well placed to take advantage of that. And in general, the generation costs continue to be below both fossil and nonfossil fuel alternatives. There’s also been upward revisions of the ’23 to ’27 targets for renewables in countries like Brazil, Germany, the US for large economies where we’re present.
In the offshore, we also expect the upward price revision auction coming up in around 6%. The price cap increased by 66%. And in the US, we’re also seeing a significant increase in the pricing, including inflation updates over the construction stage. So we are seeing conditions improve materially for auctions, both onshore and offshore. We saw in 2023 also the approval by the FERC or the Federal Energy Regulatory Commission, overrule to speed the interconnection processes. As you know, that’s one of the issues which is holding up a lot of projects for the sector. And that’s the first major change to the interconnection requirements in two decades. So work is being done by the different regulators to try and get — streamline the permitting and the licensing initiative.
And in Europe, I think the European Commission has also come out with a goal, recommending a 90% greenhouse gas emissions compared to 1990 of around 90% — so 90% reduction for 2040 compared to 1990. So, things seem to be going in the right direction. The broad macro wins are there. Now, it’s really about execution.
And so if we go on to the next slide, I think if we look back, we are continuing to scale up significantly versus what our growth rate was in the past. As I say over the decade 2010 to 2020, we’re growing around 700 megawatts a year. We’re now — we just did 2.5 gigawatts that’s still a significant increase versus what our historical growth is. And as I said, we are very confident on the 4 gigawatts for 2024.
I mentioned to you 85% is under construction 15% is expected to start over the next few months. It’s got a big way to solar DG project that normally have an average construction time of around six months.
And I think it’s important to say also that most of the solar panels have already been delivered to the project in the U.S. and so that gives us a bit of high degree of confidence there.
I’ll move forward to the next slide on asset rotation. So, here as I mentioned, very strong gains around 60% gains on invested capital. Three transactions Spain, Poland, and Brazil. I won’t go through in a lot of detail because I think we’ve already given information over the course of last year. So this is not news for most of you.
I would just highlight that in the beginning of 2024, we’ve already closed those two additional transactions so around 500 megawatts €1.1 billion enterprise value. Let’s say the other transactions for 2024 have already been launched and we expect to get the gains and the proceeds to be at least in line with our strategic plan target.
If we move to Slide 8. Just give you a highlight on the buyback of the 49%. I think it was a good opportunity that we had to take back 100% control gives us quite a bit of additional flexibility, simplifies the ownership structure. It’s cash flow and earnings accretive day one and it gives us more flexibility for hybridization repowering and even on the energy management side.
So, we’re expecting this for the second quarter. But as you can see pretty healthy numbers double-digit cash yield and around €40 million expected contribution to net income.
Move to supply chain. So, supply chain definitely a much stronger position I think than we were maybe nine months ago. We had to reconfigure the supply chain in the U.S. because you know we had a large dependency on LONGi panels as a result of significant delays in the imports of those panels.
We went back and we recontributed to — so now we have nine different suppliers for the 2024 deliveries between the U.S. and Europe. They’re all aligned with ESG audit requirements and traceability and the manufacturing origin. So, I think that’s really something that’s important is to make sure that we don’t get caught up in any issues around UFLPA’s the Uyghur Forced Labor Protection Act or tariffs in the U.S.
So, some of these modules are already produced in the U.S. And we’ve diversified the polysilicon including new origins from the U.S. Germany and Malaysia. So, I think overall we’re in a better place or more resilient place now in relation to the supply chain.
And as I say if you see your on Slide 9 at the bottom, we’ve got the 70% of the solar panels already delivered which this is what I mentioned on the — some relation to the previous slide.
So, that I think positions us well. I think if you look at costs on the right-hand side, it’s also important to see that the costs have been coming down for solar panel prices significantly. We’ve recently closed Finerge agreements on about or one gigawatt of solar panel volumes for late 2024 or early 2025 deliveries mostly in Europe. I think it’s record low prices. So, I think that also places us well for the growth there.
If we move to Slide 10 talking about risk and hedging and long-term contracted. So — as you know we normally have a policy of being quite contracted and hedged going forward. That sometimes has a downside if prices spike and we don’t capture all that upside.
But it also has an advantage which is when prices fall, we also don’t get as much impacted. So we’ve kept a high rate of long-term contracted and hedge electricity sales. Normally, we target long-term contracts of at least 15 years maturity and we try to lock in at least 60% of the cash flows for the investment of ENPV with this contracted profile.
Specifically in relation to 2024. So 90% of the expected generation is already contracted or hedged and in 2025, 85%. Only 50% is related to European electricity markets, which is mainly Spain. The rest of the merchant exposure is mostly US and Brazil, where electricity prices have — the volatility has been less significant.
And I think it’s also important to note that this residual exposure to spot electricity prices is associated with the low-risk volume management of renewables generation intermittency. So that obviously, there can be can blow more or less. In the case of blows less, you want to make sure you’re not over-hedged. And so that is typically where we want to be.
Regarding prices, they were above €80 per megawatt hour for 2024 above €70 per megawatt hour in 2025. So significantly above the current forward prices. So that is part of the downside, but it’s part of let’s say in relation to a smaller volume. The average maturity portfolio of the long-term contract is around 13 years. So I think that provides quite a lot of stability to the [indiscernible].
If we move forward to Slide 11. So this is an important point that I think we’ve raised in a couple of calls and sort of conferences, which is — I mean, we are investing over the economic cycles. And in particular when we look at revenues that we are securing, since 2022 for renewable projects to be delivered going forward for 2024, 2025 and beyond we are investing in what we think are better conditions, higher PPA prices assuming already a higher cost of capital. And so obviously having also higher absolute returns. So I think this will end up being a pretty good project.
So 61% of the projects the secured capacity the decisions were taken since 2022. So as I say taking advantage of these assumptions. These projects were approved at an average of over 1.4x WACC. They will be entering operations from late 2024 onwards. And so I think we might benefit from a slight improvement of market conditions, if there’s an easing of supply chain pressure or lower interest rates versus the 2023 peak levels. Overall, we continue to see attractive returns, based on our investment criteria, not just within the portfolio of secured projects, but also projects under development that we haven’t yet secured for commissioning in 2025 and beyond.
Go to Slide 12. This is a point which I think is important. Obviously, in a market where energy prices are reducing at least on the merchant side. And where there have been delays, it’s really important to be focused on efficiency. And making sure that we are mitigating the impact of the delays in the project. So on one hand, we’ve been making sure that we are focusing the growth. So around more than 90% of secured capacity for 2024 to 2026, we’re expecting to come from 10 core markets and just — and 60% from three core markets which is basically the US, Spain and Brazil. So leveraging there on the critical mass that we have in those markets.
In terms of organization, we are leveraging on the EDPR synergies. So particularly in terms of back office and some global functions to make sure that we’re not duplicating teams or not duplicating functions. So I think that’s allowing us to streamline, let’s say the operations and the overheads and really make sure, we are the leanest most efficient company possible.
In terms of cost efficiency, we are implementing a series of cost efficiency savings, including the length of [ph] head count that given a slower growth. And so we are estimating savings of more than €30 million already in 2024 and growing. And on O&M we’re also seeing increased availability and also a linear cost structure there.
That’s more on the efficiency and on the organizational front. On the technologies, hybrids, we continue to see a lot of potential for hybrid. So we’ve now reached 107 megawatts of operational wind and solar hybrid projects in Poland, Portugal and Spain. We’re the first ones to actually have hybrid projects in Portugal and in Spain. And we continue to work to materialize our one gigawatt of hybridization pipeline. So those are let’s say quick wins that will have quite a lot of value just because of the sharing of the infrastructure in terms of the interconnection and access roads and so forth.
In terms of storage, we’ve already installed 60 megawatts in the US. We have around 200 megawatts under construction also in the US and we’re working also in the pipeline in the UK. And then in terms of solar DG, the generation installed capacity both in APAC and in the US has increased over 50% year-on-year. So we do have leverages, or we do have synergies in this business line together with EDP to establish a global platform.
And in terms of contracts, I mean, in many cases these are relatively large contracts. So in 2030, we closed the largest US corporate sponsorship of a distributed PV with Google. And we have quite a highly publicized contract of around 500 megawatts and that’s something that we’re working on to make real over the next couple of years.
Finally in this section just another word on OW. So we currently have two gigawatts of wind offshore projects under construction in Europe. And around 1.7 gigawatts of projects in advanced development stage in both Poland and in the US.
Starting the under construction, we have three projects in France, I mean they are progressing as planned, the CODs are expected in 2025, 2026. Nor’Wester [ph] project in the UK has the foundation installation already underway. I mean, there’s some amazing photographs online if you want to see them. The offshore substation platform is being installed.
Regarding Poland and BC-Wind, it’s been proved, so we have the connection capacity. Increase of around 100 megawatts, which means that we have a project, which could reach almost 500 megawatts in total.
And finally on South Coast wind, which used to be called Mayflower project. That’s the project in the US of Massachusetts. It’s an advanced stage of permitting and interconnection. The revenue is not secured. As you know we canceled the PPA last year and that’s part of the numbers last year, and we are analyzing the potential bid into the first multistate PPA auction in the US. So it’s a Rhode Island, Connecticut and Massachusetts. That bid is expected or let’s say that auction is expected around the end of March.
So like both onshore but also for offshore, we do follow the strict investment criteria. Namely in terms of target risk and returns. And we’re also obviously aim to minimize the timing between PPA contracting and FID. So it’s, obviously, very important. I think we’ve seen that very clearly in the sector over the last year. The importance of trying to line up both revenues and costs to mitigate that potential disconnect in case there’s a market disruption.
So I’ll stop there for now. I’ll pass it over to Rui to go through the 2023 numbers and then I’ll come back for closing remarks. Thank you.
Rui Teixeira
Thank you, Miguel and good afternoon to you all. I would like to take you through the 2023 results now. And if we move just to Slide 15, a as we already anticipated in the previous presentations, 2023 operational performance has been heavily impacted by the El Nino weather event in North America. It impacted the region this year since April more or less, leading to an annual renewable index deviation of minus 7% in the region. And this compares to a plus 4% in 2022. So a big drop year-on-year. Obviously, these low wind volumes had a negative impact a substantial one close to €0.2 billion of EBITDA.
But there are two important message I would like to convey with the chart on the right-hand side of the slide. The first one is, that El Nino is cyclical. It’s a cyclical phenomenon. We are aware of it and we already incorporate these sort of events, in our long-term forecast of our net operating hours. So, it is captured in our 50 MW PV estimations when we go for a financial investment decision for our projects.
The second one is that our historical data shows that the slope of removal resource deviation is zero. So there’s no evidence that our portfolio is exposed to a declining with speed. And that obviously, we do have the short-term financial impact by the volatility, the normal volatility of wind and particularly impacted by this type of phenomenon, weather phenomenon as the El Nino. But it doesn’t mean that we have an onward trend of portfolio profitability.
For 2024, we do expect a gradual recovery towards more normalized levels of resource. If we now move to Slide 16. Along with other — with lower wind resources, EDPR performance in 2023 was also impacted by other headwinds that we have talked about several times and those are mainly related with the delays of capacity in US and the Colombia and some windfall taxes energy taxes in Europe.
So regarding the first one US, solar project delays caused by the supply chain issues that Miguel already discussed, impacted our EBITDA by about €50 million — €51 million this year. For 2024, we do not expect additional costs from COD delays. As around 70% of the equipment has already been delivered for the year’s installations.
And the construction schedule foresees a gradual ramp-up of the US solar capacity and generation volumes over 2024. Clawback in Europe had an impact of €106 million of — at EBITDA level in 2023. Effectively lower than what we initially expected in the beginning of the year. You may recall that we were estimating a potential of €300 million of impact and this was on the back of lower prices throughout 2023.
For 2024 Polish clawback is — has added to it so it will not be active in 2024. Romania will continue to have an impact into noncash impact as we — after we unwind the one of the hedges. So if there will be an impact but again, it will not be a cash one. The clawback pure impact what we call the effective application of a clawback will not be material at all, given where we are in terms of price conditions for 2024 or price forward curve for 2024.
Spain, as you know, we introduced the 7% tax on generation revenues and this will imply around €15 million impact in 2024. But all in all, the big number the €106 million that we had at EBITDA level is going to reduce materially as we move to 2024.
Lastly, we have incurred costs with delays in Colombia. This amounts to about €53 million in 2023 P&L. This is related to the short position that we have given that we have the delivery commitment the energy delivery commitment but we don’t have the operating reform.
We are in an advanced stage of negotiation with the majority of the off-takers, aiming to reduce that short position. In parallel, we have been hedging an important portion of the generation that you are bound to deliver in 2024, and this would reduce the potential impact in 2024.
As you’ve seen in our numbers, we decided to book a non-cash impairment of €179 million, driven by the project delays that which, of course, we consider a non-recurring impact. And I’m sure we can provide you with some more details if you ask.
Also, as Miguel already said, we expect to get a transmission line environmental permit in the second half 2024, and continue with construction to have these projects fully operational, I would say by late 2025.
On slide 17, recurring EBITDA was about €1.8 billion. That’s a 14% drop year-on-year. This has a positive impact on the asset rotation gains of €460 million, which are very much above the target that we set for our business plan. And also, the EBITDA growth, or, I’m sorry, evolution, was driven by an increase in terms of the 12% year-on-year installed capacity.
But of course, we had that negative impact from lower renewable resources and a lower average selling price of about minus 6% year-on-year, with Europe coming down from the abnormal peak prices in 2022, and this was partly compensated by the 8% increase in realized prices in the US, mainly coming from the new additions at higher prices. Also, there are some temporary headwinds in Europe and the Americas that I have already explained.
Also to highlight the reduction of share of profits from associates, and this is driven by the reduction of the wholesale prices in the UK versus, again, a very extraordinary level in 2022 in the PPA cancellation penalty that we booked back in Q2. So all-in-all, this justifies the drop in EBITDA to €1.8 billion.
On slide 18, the net expansion investments of €2.9 billion. I think it’s an important number to high. It shows really that we carry on with the growth, even though we have these headwinds. By the end of the year, net debt was at €5.8 billion. That’s an increase of around €0.9 billion versus December 2022, mainly driven by the growth effort with this overall €4.2 billion of expansion CapEx on a gross basis, partially offset by the asset rotation and also the tax equity proceeds.
Maybe here, I think it’s important to highlight that 2024 started with a strong balance sheet position. Obviously, with the €1 billion additional asset rotation already executed and signed for the year. That basically reducing the generate debt to about — to the levels of the 2022 year-end. We will have more proceeds from this asset potation transaction through the year, along with a strong contribution from tax equity proceeds as the U.S. projects get to COD and I expect to hear more than €1 billion contribution.
If we now move to slide 19. Financial results amounted €313 million in 2023 decreasing 30% versus 2022. There are some impacts here currency as we have been rebalancing the — as you know the — on the net hedge investment of the U.S. dollar exposure. Also some reversion of the negative impact on — of ForEx and derivatives back in 2022 as well as higher capitalized financial expenses in line with the current project timings.
Average cost of debt increased to 4.8% driven by a higher gross debt of around €1 billion year-on-year. And EDPR debt has 82% of the stock at fixed rate. And it’s important to mention that our financial liquidity and that includes cash and committed credit lines that continues to cover refinancing needs beyond 2026 and that more than 70% of our debt matures post 2026.
So if we now move to net profit. Net profit totaled €513 million versus €671 million back in 2022 impacted by the top-line headwinds partially compensated by the strong execution on the asset rotation side as well as the improved financials. Non-recurring accounted events that net profit were mainly the PPA cancellation in Massachusetts from Q2 and this is at EBITDA level. The impairment in Colombia this quarter and the Romanian provision at depreciation and amortization and this is related to the tax buyback in Romania.
Lastly as announced yesterday to the market the Board of Directors will propose in 2024 General Shareholders’ Meeting to continue with this group dividend program that we introduced last year. Our results responding to the year 2023 providing I would say once again with a flexible remuneration system for our shareholders that can opt between cash or shares.
And with this Miguel, I would hand back to you for closing remarks. Thank you.
Miguel de Andrade
Thank you, Rui. So in relation to 2024 guidance, first I’d say that we reiterate the 4 gigawatt installations for 2024. This at 85% is already under construction 100% secured with long-term revenues in the DG — and the parts is also beginning to progress. The second is to say that we start off with a strong balance sheet position. And we have a capital increase. We’ve — €2.4 billion of asset rotation proceeds executed in signs as of today. We’ve had another €0.5 billion of tax equity proceeds also cashed gain. And we will continue to execute significant volumes of asset rotation proceeds and tax equity during 2024. So I think that’s a positive message and something that we continue to see in the market.
Despite the 2024 strong expected installations we do have a lower cumulative capacity added versus the business plan. So that leads us to estimate a lower volume of renewable generation in the year to around 40 to 42 terawatt hour range even so that’s a year-on-year growth of around 15% or more than 15%. And despite the higher weight of the long-term contracted and hedged in generation in our portfolio there has been a material decline and I’m sure you’ve all seen that in the market over the last couple of months of electricity prices in Europe.
As I mentioned earlier in the presentation so Brazil and the US there wasn’t such a high increase. There isn’t such a — there isn’t also a decrease. That leads us to estimate the average selling price for the global renewable generation portfolio as a whole the €53 to €55 per megawatt hour.
So we don’t normally provide guidance at this point in terms of EBITDA or net income, but let’s say this is some sort of help to try and get a view on how we’re seeing 2024 as of today. So as Rui mentioned, we do see some headwinds continue to maintain in 2024. Although, obviously, it’s a lower size in 2023. We’ve been working through a lot of these issues, but we will continue to have some PPA costs in Colombia. We have — but don’t forget that we also have some of the hedges in Colombia. So this is not — it’s not a — it’s a straightforward calculation there.
We have non-cash costs with hedges due to clawbacks in Romania and also some residual El Nino effects in early 2024. We’re assuming an El Nino of, let’s say, just one year. And so that would come off sort of over the next two quarters. So in relation to guidance for 2024 our recurring EBITDA showing a moderate year-on-year growth with a higher underlying contribution excluding capital gains.
So we had a lower underlying in 2030 and higher capital gains in 2023 as you know. And in 2024 we expect that the capital gains would be, let’s say, in line with what we had in the business plan. And obviously that means that the higher — there will be a higher underlying contribution from the business to give us a moderate year-on-year growth for 2024. So I’m not trying to sell you a big store. I’m just saying that I think, we — 2023 is definitely a bad year in terms of the underlying. Obviously, we had then a good contribution from the asset rotation 2024 — we’ve seen the underlying improve versus 2023.
Going forward, we will continue to grow. We will continue to invest based on the investment criteria. I think, we’ve always been very clear about that. I think, we’ve been disciplined about that. We take relatively conservative projections in terms of energy prices for the future. And we will be focusing on projects that give us those returns and prioritizing returns over volumes. That’s something that I also want to leave that message that we are here to create value and we are here to grow, but making sure we’re getting the returns that we want.
And I’d stop there. And we can turn it over to Q&A and going in depth wherever you want. Thank you.
Question-and-Answer Session
A – Miguel Viana
Yes. I think the first question comes from Manuel Palomo from BNP. Manuel, please go ahead.
Manuel Palomo
Hello. Good afternoon, Miguel, Rui and Miguel. Thank you for taking my questions. I will ask three questions if I may. First one is on the average selling price you expect a decline from €61 megawatt hour to somewhere between €53 and €55-megawatt hour in 2024. My question is what are drivers for the decline? I understand that partly should be a some exposure, but I wonder whether you still see some pressure on PPA prices. That’s the first question.
Second is just a clarification on the asset rotations for year 2024 after your recent statements Miguel about the asset rotations. You see also in the slides that asset rotations in 2024 will be in line with business plan, does it mean that it will be closer to the 300 rather than the above 400 that we saw in 2022 and 2023.
And lastly, I wanted to ask you about your views on the returns for the assets, because one of the big concerns that the market would have is that — well there’s some merchant exposure, but also there’s some exposure to forward curves beyond termination of PPAs. I wonder whether you could shed some light on this and whether you are now assuming lower overall returns for your fleet. Thank you very much.
Miguel de Andrade
Thank you, Manuel. So — I’m not sure — quite sure I got the last question. So you’re talking about the deals — the returns on the asset rotations and whether there’s exposure to merchant post-PPAs or something? I didn’t quite catch …
Manuel Palomo
No, no.
Miguel de Andrade
…that.
Manuel Palomo
Sorry. No I was — I meant to ask about the returns.
Miguel de Andrade
Yeah.
Manuel Palomo
Your asset fleet not the asset of rotations, but the existing fleet in general terms.
Miguel de Andrade
Okay. So on the first price — on the first point around pricing the reason for decline. It’s essentially on the merchant component. So obviously the PPAs are what they are and the hedges are what they are.
So although we have limited merchant exposure, the prices were obviously much higher than previously and now they’ve come down. And so it’s a small volume let’s say, but it’s a big delta. And so that then impacts obviously the average selling price.
Particularly if I’m not mistaking off the top of my head, but it’s around four terawatt hours in total 50% of that is in Europe and sort of 50% of that in Spain. And if you look at the deltas of price movement over the last couple of months that basically is what is driving the change in the average selling price. So roughly that’s sort of the explanation.
On the second point, so yeah just to clarify that’s exactly what I was saying. So we’ve had great asset rotation deals last year. We had them also in 2022, clearly above €400 million. Like we do, we never count on extraordinary gains or anything like that. I mean, if it comes — it comes, that’s great. That’s upside for us.
But in terms of guidance, we definitely don’t want to create any expectations. So what we’re saying is, the asset rotations for 2024, let’s say, in this guidance last year which is the moderate EBITDA growth.
We are assuming doing around the 300 market that we had in the business plan. So we’re not taking a more aggressive approach there. So what it means if you back that out is that you have a slightly better underlying performance obviously. So you have a decrease in the asset rotation gain, but you have an increase in the underlying.
On the third point, so I think — basically on the returns. And if I understand, I still can’t quite understand the question. But from what I understood the exposure to merchant post-PPAs and how that impacts the returns of the projects, right?
So yes, I think there the comment, I would make is that 60% — around 60% of our NPV is contracted which means that there’s 40% either with the PPA — well, typically with the PPA which means that there’s 40% NPV which is dependent on the remaining 15 years of life of the projects.
So or in another way assuming projects 30 years, you lock in a PPA for 15 years which will typically cover around 60% of your NPV. The remaining 15 years represents 40% of the NPV which is exposed to merchant.
And there, I mean I can tell you, our prices are well aligned with market with other markets, Independent Consultants and other things like that sometimes even below that. So it already factors in the penetration of renewables and aggressive penetration of renewables in the future.
Things like what we call the Solar Adjustment Factor, Wind Adjustment Factor. So when — assuming that there’s a lot of renewals that that’s going to pressure the lower prices that’s all factored into the numbers when we run the models and so just to be very clear on that.
And in terms of the absolute returns, I think one of the interesting things is to look at the PPA prices we’ve been locking in over the last couple of months even in this declining wholesale prices.
So in Spain, recently prices for wind around €55 and solar €42, Germany €70, UK €70, Italy €78, France €85, Singapore, there’s a couple of projects but between €58 and €62 and giving us high single-digit IRRs. In the case of the UK. it was actually double-digit IRRs. So good IRR minus wack spreads, clearly above the 200 basis points and also with a high NPV contracted. So in many cases even above 60% NPV contracted. So this is just to give you sort of a sense of the – of what we’re seeing in the market at the moment. Does that help?
Manuel Palomo
Yes, thank you. Absolutely good.
Miguel Viana
I can go to the next question. I believe the next question comes from Javier Garrido from JPMorgan. Javier, please go ahead.
Javier Garrido
Yes. Good afternoon. I will have three questions, please. First question is on Spain, given that Spain is the bulk of the merchant exposure in Europe, which is where we are seeing the collapse in prices. Can you give any indication of what is the price that you are using as a reference for your guidance for merchant in Spain, what is the wholesale price or the capture price that you are assuming for the Spanish market in 2024?
The second question has to do with the guidance that range of terawatt hour versus prices. Is it fair to assume that if the output comes towards the lower end of the range, we should expect achieved prices coming closer to the higher end of the range because it’s reasonable to assume that you will have less merchant output in the mix?
And then the third question is about below the EBITDA line. I understand you are not willing to provide guidance but you can provide some indication of the moves because in financial results, there is quite a lot of action that you have taken to manage top line. So you can give some indication of where we should see in net financial costs in 2024? And also of minorities given the CTE deal, it makes sense to see reduction in minorities. If you can cast any light on the lines below EBITDA that would be very helpful. Thank you.
Miguel de Andrade
Thank you, Javier. So I’ll take the first two and then I’ll ask Rui to comment on the – below the EBITDA. So on the first one, I mean we’re using basically updated for prices. So it’s – we’re not making any specific assumptions or our modeling we’re just taking what we’re seeing in the market at the moment for the year both in Spain and in the other markets.
On the second point, so yes, I understand your rationale. So lower volumes overall, I would just say though that the relative percentages, so it depends where the lower volume happens. But if there was a lower volume than it’s not clear that we have the higher achieved prices, because as I say, it depends whether it’s coming in or we have more contracted or whether we have more merchants. If we had lower volumes in the geographies where we have more merchant then, yes, then — it’s the delta wouldn’t be as large. And below EBITDA, Rui, if you want to comment?
Rui Teixeira
Hi Javier. I would say there are roughly €0.1 billion less depreciation, €0.1 billion less minorities and €0.1 billion lower taxes and financial costs, round figures.
Javier Garrido
That’s great. Thank you.
Miguel Viana
Thanks. I think we can go for the next question. Next question comes from Alberto Gandolfi from Goldman. Alberto, please go ahead.
Alberto Gandolfi
Hi. Good afternoon and thank you for taking my questions. I also have three please. First going back again to the 2024 guidance, just to be very clear. You’re talking about moderate growth year-on-year, just to be 100% right, you’re using the recurring one point — roughly €1.85 billion EBITDA. And I was going to ask you. I really like your slide 16. It really details all the headwinds temporary headwinds here in 2023. Would it be possible to say for you to tell us, what similar headwinds have you assumed in the 2024 guidance? So do we have €200 million, €300 million, €400 million of temporary effects on 2024 profits? I’m asking this, because the original guidance you gave about a year ago for 2024 was €2.5 billion.
Secondly, going to 2026 now, I know this is not subject of the call to revisit guidance. But can you remind us what power prices you were using for 2026. And what level of hedges and visibility we have right now? Because I remember that I think the base load price was above €80 a megawatt hour. And again, in Spain, we are below 50 for 2026. So I was trying to understand if we need to take 5, 6, 7 terawatt hour of merchant exposure. And trying to see on a mark-to-market basis where we might end up. So if you help us with the building blocks would be great.
And the last question is, I can’t help noticing that the divergence of performance between EDP and EDPR is even more pronounced. Is there a psychological threshold beyond which you would just be more inclined perhaps to combine the two companies in a single entity and what would be the rationale? Thank you.
Miguel de Andrade
Thank you, Albert. On the first one, so on the — yes, so the base is the €185 million that you mentioned. And in terms of, let’s say the deltas that we still expect for 2024. So we’re expecting roughly half of the impact of 2023. I mean as I mentioned some of the El Nino we’re still expecting to carry on through 2024. That’s clear. We’re not expecting any so just going through these. We’re not expecting any additional costs with the PPAs or just no delays. Poland, I mean we have this highlighted here mainly what we are expecting sort of, will continue let’s say for 2024. Colombia will continue to be a drag in 2024. So I mean Rui, what are the other key issues there? But I think those are sort of — will be the key ones.
Rui Teixeira
Yeah, I would say so, Miguel if you want to Alberto just to give you a round numbers, Colombia is likely to keep the €50 million ballpark, the Romania non-cash is going to be around — the flowback non-cash is about €50 million. As I mentioned there you have the 7% tax in Spain that will be about €15 million. So all-in-all. I would say 0.1 ballpark.
Alberto Gandolfi
Thank you. Plus US load factors, right? That’s already for Q1 probably about what €50 million to €100 million as well?
Rui Teixeira
I’m sorry, can you repeat Alberto?
Alberto Gandolfi
Sorry, the US load factors on top of this, so is it about €100 million plus, so we’re talking about €200 million to €250 million is probably embedded as a temporary effect in your 2024 guidance as a negative?
Rui Teixeira
So I would say not that high. But yes in Q1, we should have some impact in January and February from low wind speeds in the US.
Alberto Gandolfi
Thank you.
Miguel de Andrade
Alberto, on the second one. So I think you’re roughly right. I mean — so we’re looking at the same prices I guess that you are in terms of the forwards for 2025 and 2026. So we don’t have a better estimate or guess than you would have. I would — perhaps the only nuance I would make that we sometimes look at is what is the implied market price based on the gas forwards because the gas is a much more liquid commodity rather than the merchant that you see in the Spanish wholesale price.
So the gas might give you just a slightly higher price than the wholesale electricity price. Like the implied electricity price from the gas will give you slightly higher than the wholesale electricity price that you’ll see. But, yes, that’s basically — we’re assuming the same values that you’re seeing.
In relation to the third question, sorry, just in relation to the second question. But I think the point there that I made on the slide on the long-term contracted hedging is that a big part of our revenues are long-term contracted in hedging terms. So, yes, there is that merchant component. The delta is what it is. So I mean you run the numbers on that, but we’re not providing additional guidance or methodology versus what you said.
On the EDP versus EDPR, I think here the question is really — we’ve talked a lot about this quite often. I mean we, obviously, look at that option constantly. It’s a regular thing. I think it would always be important to understand what would be the value behind it. I think we’ve always said we’ve been comfortable and we are comfortable with the current structure.
We are working on and I mentioned that in the call on trying to extract as many synergies as possible under the current structure, so integrating the back offices and some of the global functions to get the synergies. Obviously I’m not going to provide like any specific levels or anything like that where it would make sense. But I mean in the past in 2017, I think it was a different market, different circumstances when we try to buy the minorities of EDPR. At this point we’ve said, we are comfortable with the structure and I’d keep saying that. That’s not something that I see changing. It depends.
We want to buy for cash would not make sense. We don’t have the balance sheet for that and it be into the shares [ph], it really depends on the relative ratio and the truth of EDP is also relatively depressed. And so I think it would depend very much on the ratios. So, I’ll just leave it at that. It’s an option. We analyze it, but doesn’t seem like it makes a lot of sense at this moment.
Miguel Viana
The next question comes from Arthur Sitbon from Morgan Stanley. Arthur, please go ahead.
Arthur Sitbon
Hello. Thank you, very much for taking my questions. I have two. The first one is on is — well in one of your slides, you talk about current PPA prices that are still resilient to the downward trend on wholesale prices. I guess that’s a comment that is applicable to contracts that have been signed so far. I was wondering, if you could comment on ongoing negotiations. Are they going according to plan despite the fall in prices? And generally speaking, I think we’ve seen difficulties to sign good PPAs at good prices in a market like Brazil for example, where power prices were depressed for quite some time. I think, we’re not there yet in Europe, but I would be interested in getting your view on what if anything may prevent European renewables market to turn like the Brazilian one, if ever power prices were to drop further. That’s the first question.
The second one, just on the guidance, on average selling price. So you’re talking at the midpoint of €54 per megawatt hour. That’s down 12% year-on-year. But you indicate that only 10% your revenues are merchants. So I’m struggling a bit to reconcile, how the price could come down 12%, if only 10% of revenues are exposed. I guess, it may be related to the hedges. But yes, any more detail on that would be quite helpful. Thank you, very much.
Miguel de Andrade
Thank you, Arthur. So the negotiations as I mentioned, so we’ve been managing to cost PPAs at relatively good prices. I mean, the Brazilian example that you give — it’s — I mean it’s true, you’re having a very high hydro conditions in Brazil which is depressing the prices. I think that that — which is in the top I think also maybe a function of the — with El Nino, but that’s expected to turn around. So this will be cyclical over time. And we’ve seen Brazil with like maximum levels sort of at the cap relatively recently. So, I think in Brazil in particular, we think that that’s a short-term issue. And once that sort of — the hydro normalizes then you have the PLD which is very sensitive to the hydro conditions reestablished.
In any case, one of the reasons that we did also take [indiscernible] of Brazil and we mentioned that at the time is that, we do have a very good trading in commercial alarm in Brazil. And I think that’s one of the things where — or one of the areas where we’re seeing quite a lot of value by being able to articulate that with EDPR. So that we have, let’s say renewable projects in Brazil and being able to place that energy with retail customers or sort of B2B customers in Brazil, which the EDP Brazil have that — those competencies EPDR did not. And I think they take profits we can do that. We can manage that better.
EU like Brazil. Listen, EU had low prices. I mean we’re now — we’ve just come through a peak of energy prices, but the EU was growing quite rapidly also in renewables with prices also in the round €40 to €50 per megawatt hour in terms of wholesale prices. So, I think the driver for Europe is it’s not just the wholesale prices. I think it’s the decarbonization metrics. It’s making sure that the company is or the actual company commitments to go on decarbonizing. That’s driving a lot of the demand for the PPA. So, it’s a different situation from Brazil where they don’t have such a strong focus on that decarbonization let’s say objective.
So, the EU — so I talked about Brazil but and on the EU I think it’s very much demand driven by the EU emissions objectives. On the — hopefully that answers the question.
On the second question. So, it’s really just a function of yes it’s not a lot of merchant exposure, but the delta is quite large. So it’s a small volume time is a big delta. I think that’s the point.
Arthur Sitbon
Thank you very much.
Miguel Viana
Thank you, Arthur. So, the next question comes from Jorge Guimaraes from JB Capital. Jorge, please go ahead.
Jorge Guimaraes
Good afternoon. Thank you for taking my questions. I have three. The first two are related to Colombia and the third one is a more conceptual one. On Colombia, is it possible to tell us if there is any capital investors beyond what has been impaired?
And two, to clarify the situation you seem to suggest that the negotiations continue but — at the same time, you impair the project. So, I would like to understand if you really expect the project to go ahead what will happen to the capital that was impaired now? And if not, what capital has been left to impair?
And the third one is there seems to be some type of disconnection between what financial markets are pricing for renewables. And what European Union authorities want for green transition. I don’t know if you share this view, but if so, what do you believe that European authorities can do to prevent the low power prices from stalling the growth in renewable? Thank you very much.
Miguel de Andrade
Thank you. So, on Colombia. Just to clarify I mean we did the impairment based on the best information that we have we are in advanced stage of negotiation of let’s say pushing forward the PPAs to 2027. So, I think we have pretty good visibility there.
Now, the amount of capital let’s say the book value that we have is around €500 million. Part of that is impaired. The rest we think there’s a path to having a viable project and that’s what we’re working with together with the Colombian government and — I think what’s on the critical path at the moment is the environmental.
Well, so it’s the PPA renegotiations that’s ongoing and information I have is progressing well and then getting the environmental license as quickly as possible and locking in the agreements with the endogenous community. So, once that’s done then we’d be in a better position to progress with the project.
And Rui do you want to comment to anything else in Colombia?
Rui Teixeira
Maybe just highlight that the sort of assumptions that we use because yes, it’s important that we have this renegotiation so that we reduce that front position. So, that was one important input into the impairment test. Also I mean we use a low double-digit return rate to discount the cash flows.
So, that we are also conservative. But at the end of the day given where we are we will still even continue with the project forward it was prudent to book at this point is roughly speaking €180 million.
Miguel de Andrade
On the second question I mean it’s a great question. I think, yes, I mean obviously the financial markets are not rewarding renewables at the moment. So I think that’s pretty clear from looking at the share price. In the EU objectives, I think, things continue to progress. I mean if we take ourselves back two years and I think I’ve said this a couple of times. So we tend to overestimate how much impact certain things will have in the short term and underestimate how much they have in the medium and long term. And I think this is one of the cases where Europe is taking pretty aggressive steps in terms of changing and improving and simplifying the licensing and permitting regimes and the different member states are doing that.
They’ve come out with a new market design at the end of last year which for the first time incentivizes and recognizes PPAs and CFDs as being like an intrinsic part of the market design. That’s something which didn’t exist in the past. There’s been a lot of push to have governments come out with more structured predictable auctions over time to continue to drive the demand for renewables.
And so when we go from quarter-to-quarter can feel like things sometimes are not going as well as expected. But I think when we look back certainly in this case when we look back Europe has actually taken quite a lot of big steps and I think they continue to do that. And looking forward I think those will have an impact. I mean if we look at the bottom — if you look at installations of renewables globally, but even in Europe there was a material increase in 2023. And I think the expectation is that some of these measures go on feed through into the let’s call it the real economy to the companies and to the different member states et cetera that the project will continue to progress and accelerate and that there will be financially sustainable and profitable.
So I think the EU continue to have that objective. As I’ve said a couple of times I don’t think it’s just the environmental issue anymore. I think it’s definitely also driven by national security issues. I was in Berlin recently and definitely it’s very palpable. The need to continue to drive the renewables growth there and introducing that concept of overriding public interest.
And they’re giving examples like a German official talking about the fact that in the past when you wanted to build a project you would sometimes get stuck in courts and you were basically the judge had to decide between two conflicting private views the local community which didn’t want the project built and maybe the promoter who wanted the project built. Now you’ve introduced this concept of a public interest. And so the judge can decide between the local community or the public interest. And in many cases that allows him to unblock the situation and move forward with the project.
Sorry, back online. Okay. So I apologize for — apparently the connection was broken. Obviously it’s a signal for us to move on. Hopefully that was clear my answer. Maybe we can move on to the next question.
Miguel Viana
So we have now the next question from Enrico. We have still three questions. If you can just make one question in order to accelerate here a little bit and give opportunity for everybody to make questions. Please go ahead. Enrico?
Maybe we can go to the next question which is from Fernando Garcia, Royal Bank of Canada.
Fernando Garcia
Yes. Thank you for taking my question. I have several fronts about Colombia. So I wanted to know there what is the situation of the turbines for this project. So now you say that you are expecting to get all permitting in the second half of the year. So can you be more specific on that?
And then can you tell us from getting old permitting what are your expectations in order to build that project? How long can that take? So you say as well that in terms of the PPAs that you are advancing the position to boost the PPAs to 2027. Then from that 2027 how many years will cover that PPA after, and it will be with the same pressures that you have before? And finally, on the arbitration process, can you provide some information such as timing that you expect in this arbitration? And what are you asking in this arbitration? Thank you.
Miguel de Andrade
Thank you, Fernando. So let me take a couple of these and we can complement. So on the turbines, I mean, the turbines have been locked in they’re locked in before with Vestas, and we actually have them physically already in Colombia. So that’s say that that’s given.
In terms of the permitting, we’re expecting the environmental license to be obtained by around October. And in terms of the PPAs the advanced negotiation, yes, so it’s pushing them to 2027. I think the question was how many years, I think, they’re 15-year PPAs.
In terms of the timing of the arbitration. So what we would expect is to get or to renegotiate or to get an arbitration to decide that the remaining PPAs that haven’t renegotiated with us that their conditions should be changed to be aligned with the ones that we have renegotiated, so at least that.
In general, on the PPAs also, I think your question was around prices and how long, but in general maintaining prices, but just extending it a bit further in providing some additional volume because the PPA didn’t cover the full expected volumes of the project. I think, hopefully that answers your questions.
Fernando Garcia
Yes. Thank you.
Miguel de Andrade
Yes. Thanks.
Miguel Viana
Thanks, Fernando. So we have last question from Gonzalo from UBS.
Gonzalo Sanchez Bordona
Hi. Thank you for taking my question. Did you say, Miguel, there was the last question. So I was going to stick to one and maybe I have two.
Miguel Viana
No. You can do two. No problem.
Gonzalo Sanchez Bordona
Okay. Perfect. So first one is on the diluted with CTG. I’m assuming that now with longer-term power price is probably lower than it was just a few weeks or months ago. You might find that rebuying some of the minorities might be a bit cheaper than it used to be. So I was wondering whether you see a possibility for doing more this like that one that would be, I guess, clearly secretive and very fast turnaround last given the flexibility you mentioned on the field ready with CPG. And if that is the case, what kind of timing of volumes evolve we’ll be looking at? That is the first one.
And second one is related with the very interesting data you brought on the on Slide 15 on the evolution throughout the years of the portfolio in El Nino phenomenon. I’m guessing your guidance for 2024 is based on the recovery that you expect based on this chart. But I was looking at for instance the period 2014, 2015 where you see a more step or deeper fall from the previous high level to the following low level. So I was wondering if you have some alternative scenario in which it takes a bit longer to recover based on methodical — methodological models or anything like that? And if that is the case, what is kind of a secondary scenario? Things don’t go under your base case assumptions for 2024. What kind of impact or volatility we could expect on the numbers for 2024? Thank you.
Miguel de Andrade
Thank you, Gonzalo. So I’ll take the questions and if we can complement I think on the El Nino. But on the CTG, let’s say in terms of Ovideo’s deals. Yes. So I think this was a good deal as I mentioned. I think it was it’s fair and with the good multiples. If we find other alternatives or other options that are like this. Yes, it’s accretive day one. It’s cash flow positive day one. It’s — it seems to — well, it ticks all the boxes. So it definitely contribute to the bottom line. So we would be open to doing additional deals. I mean this type if it makes sense and if we get the right conditions for it, but we don’t — say I’m not disclosing anything specific at the moment.
On the second on the El Nino. So — listen predicting metrology and climate is an impossible science or a pretty — very difficult science. But the expectation let’s say the typical correlation looking at what’s happened in the past is that there would be — the Q1 and Q2 would still be impacted by the El Nino, but then it would start shifting to La Nina so the opposite effect by Q3 and Q4. So that would potentially lead to above average volumes in the US.
But listen that’s — I wouldn’t place any guidance on that just because I think we’d like to predict based on 350s which is the average in this case we are in an El Nino. So I think we can say that obviously the El Nino will continue at least for another one or two quarters. But exactly what it will do after that will be — we might have some small correlations, but not something I would they make a big bet on. In any case Rui we want to comment?
Rui Teixeira
Hey, Miguel, Hi, No. I think it basically — meaning there is no statistical evidence right now that suggests that the El Nino would be prolonged if any as Miguel said La Nina. So for the forecast or sort of the guidance that we are providing here, we’re basically taking the view that for the rest of the year, so let’s say somewhere around Q2 and then definitely Q3, Q4 we should go back to sort of €350 million scenarios.
Gonzalo Sanchez Bordona
Very clear. Thank you.
Miguel Viana
So I think you can move to closing remarks Miguel.
Miguel de Andrade
Okay. Listen, thank you. Sorry I went on a little bit longer maybe than what we expected, but just to say we know 2023 was challenging. We continue to have some of those same challenges in 2024. That’s clear. We are working through a lot of these issues. Rui, I think set out very clearly what are those headwinds and we will go on solving them. Total focus is on execution, making sure we are able to deliver. I think we do have the four gigawatts that we are working on very hard to deliver this year. We had a great year in 2023 in terms of asset rotation.
So I think that shows just a general structural demand and appetite for these type of assets. But I think we keep our eye on the ball and focused on the medium and long-term goals. And so, writing out some of these challenges and the economic cycle. And so that’s very much what the team is all focused on. And certainly, that’s what myself and Rui are very focused on and we’ll keep you up to date I guess now at the first quarter numbers. I mean we’re not expecting anything great for the first quarter because of these challenges that I talked about, but hopefully we will see some recovery over the rest of the year, and we’ll keep you updated as soon as we know any more information. Thank you.
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