EDP Energias de Portugal S A : Transcript Capital Markets Day 2023

EDP - ENERGIAS DE PORTUGAL

Thursday, 2nd March 2023 10:00 Hours Lisbon/UK time Chaired by Miguel Stilwell d' Andrade

Company Participants

• Miguel Stilwell d'Andrade, Chief Executive Officer
• Rui Teixeira, Chief Financial Officer
• Miguel Viana, Head of Investor Relations

Miguel Viana

Good morning, ladies and gentlemen. Thanks for all that are attending the EDP Capital Markets Day 2023, either here in the room or via the webcast. We'll be presenting our EDP plans to contribute to the energy transition and at the same time creating value to all our stakeholders.

In terms of the agenda of the event, so we'll have first part of the presentation in which our CEO, Miguel Stilwell d'Andrade, will be presenting our strategy and outlook in terms of business platforms for the business plan period and the vision for 2030. Then we'll pass to our CFO, Rui Teixeira, which will go through the financials of the plan and how do they work. And finally, coming back again to Miguel Stilwell for the final remarks.

We'll have a second part covering Q&A in which we'll be getting questions both here from the audience in room, but also written questions that you can place right now at the web cast in the platform. So, the event should last all together something between two and two and a half hours.

And without further ado, I'll pass now to our CEO to start the presentation. Thank you.

Miguel Stilwell d'Andrade

So, good morning, everyone. And welcome, everyone, in this room, but also those of you that are watching us online virtually. I think it's good to see a lot of familiar faces. I think last time we presented a strategic update was two years ago and we were still in the middle of the COVID pandemic. And so, it was all done virtually, for those of you that remember that.

So, it's great to be here today. I wanted to thank, obviously, all the investors that are following us, also all the analysts that have been following us, the EDP journey over the last couple of years. I think we've been working hard not only to deliver, and we

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talked about the 2023 results earlier this morning, but we also wanted to talk about the prospects going forward. So, how we take EDP along this journey.

Also, special word to Joao Talone, our EDP Chairman, also to my colleagues on the Executive Board that are here and the management team of EDPR. I think it's really a privilege to work with such talented people and such a talented team. And I think that's really one of the things that differentiates EDP from many of the other companies.

So, I'll start off by saying this is a great time to be in this sector. I truly believe that. I think we truly believe that. And I'd say that we see two key things.

One, the world is changing, it's changing very fast and very volatile, certainly over the last two years. We see inflation. We see higher interest rates. We see volatility. We see supply chain disruptions. So, that's here to stay.

I mean, we believe that certainly over the foreseeable future, volatility will be here and we need to cope with it. We need to have a resilient business plan, a resilient company

But our sector is also changing. And there is this need to drive the energy transition to have more energy independence in, for example, places like Europe, certainly in the U.S.to have affordable energy. And all of that is going to require a massive amount of investment. And that is, I think, where we come in, where we can add value by contributing to adding this investment which has been done at a time when we are seeing much higher returns than we are seeing in the past.

So, I think we see substantial investment opportunities, certainly going forward over the next couple of years. And I think I'm personally both excited, but also optimistic for what we'll have going forward.

So, if I had to summarize perhaps the business plan, and before I even get into the slides, and I haven't even started passing any slides, but to summarize, and some of that information is out there, I'd say perhaps five key things.

First, we're accelerating our commitment to renewables, to the energy transition, also networks and clients. We think it's a good time to invest. The returns that we will be locking in at this point in time with higher cost of capital will be good projects, good PPAs for the next couple of years.

The second is that we're anticipating the financial targets that we've set out in the previous business plan, back in 2021, by more than a year. So, in 2023, we will exceed the target that we had set back then. And we expect to exceed the '25 target in 2024.

So, this shows a good acceleration of the business plan. And we're then extending the business plan out to 2026. As you know, not many companies are currently doing that, but we are projecting that a further year past 2025 to 2026. And so, committing to improving the targets that we're setting out here versus the previous plan.

The third point is that we're taking EDP Brazil private. I'll talk a bit more about that. But we believe there's a strong industrial rationale for that. It's earnings accretive, it's value-creating, it's also we're putting an attractive price for minorities.

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At the end of the day, we think it will be a win-win operation. And we think it'll bring simplification also of our operations in Brazil. But I'll get to that also in the moment, but we see that clearly as making sense for the company.

The fourth point, I'd say, and that's particularly important in the times we live in, is to have an absolute commitment to the BBB rating. So, that's a red line for us. For those of you that are from the credit rating agencies, I can see some of you, that is a commitment for us, and we are absolutely set on doing that.

So, to finance this growth, to finance taking EDP Brazil private, we are doing two equity raises -- one at EDP which is already more than 60% subscribed by institutional investors; and also, one at EDP Renewables which is already fully subscribed by GIC. You have already seen the announcement that came out earlier today. So, both of those capital raisings allowing us to support the growth, allowing us to support taking EDP Brazil private, and ensuring we keep a solid balance sheet so that we can ride out the volatile times.

The fifth is we will be increasing the dividend. So, we are having the payout ratio 60% to70%. And we see that we will be able to have stronger dividend payments over the next couple of years. This is natural, which will follow the increase in the net profit. So, we are expecting double-digit growth in net profit. And that should, obviously, translate then into good dividend payouts.

In a nutshell, and as I say before I even get into the slides, but I think just to keep that in mind, I think EDP is a great investment opportunity. I mean, certainly, it's in a great sector, fast-growing, a lot of good investment opportunities. And I think with the strong support of investors with the commitments that we've already seen, there's no doubt that we will be successful. And I think the team is highly motivated, really infused in executing and delivering on this business plan going forward.

So, I think that's one of the key messages you have. You didn't have to get the CEO doing top down, we've got to reach these targets, this was a bottom-up approach. And I think the team here is absolutely committed to making sure that we get that done.

All right. So, getting into the presentation. So, I'll talk a little bit about what we're seeing in the overall macro world, some of the key highlights. And I'll talk also about our platforms, the different business units. We have already mentioned them, we've just said our financials, and then just some closing remarks.

I'm just going to show this slide. I think you know it, but I think this is basically to say that major push for driving the energy transition continues to be there. And it's very present when we think about, for example, Europe or think about the U.S. in terms of pushing that sort of green transition.

But what I'd say is that, apart from the need to battle climate change, and that's been a big push over the many, many years, over the last couple of years, what we've seen is that certainly the last 12 months, if not to say for the last 18 months, we've seen a lot of changes in the global dynamics. We've seen gas flows into Europe decrease

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dramatically, as you know, because of the terrible war in Ukraine. So that's had a major impact on Europe.

We've seen an increase in energy prices globally, whether it's gas, but whether it's oil, whether it's electricity prices. So, that's been also something that's been very present. Inflation, higher interest rates so, from a macro perspective, that's also been a big disruption over the last 12 months. Supply chain challenges, that's also been something which has become more present over this period, increasing Capex costs.

So, we've incorporated, obviously, all of these dynamics and we recognize that. I mean, we are perfectly conscious about what's going on in the world. And that's why we've also designed this business plan to on one hand drive growth, but at the same time make sure that we can navigate through these different challenging dynamics.

I think the only thing I'd say is that all of this has just reinforced, and we believe that, the need for energy independence, affordable energy, and reliable supply chains. And that's something that has become very, very clear over the last 12 months.

Now, it's not just us that are seeing this. I mean, the whole sector is seeing this. I think governments are seeing this, certainly, even sort of regions like Europe are seeing that. We can talk about the U.S., we can talk about the Inflation Reduction Act. I mean, I truly believe that's one of the most consequential pieces of legislation tackling climate change that has come out, probably ever. Very simple, very powerful, very clear, sending very specific messages in terms of driving the renewables but also moving the supply chain to the U.S.

I'm not going to get into detail on all the issues around the tax credits and the way it works, I'm sure most of you know that. But what we are seeing is that certainly impacts some of the profitability positively in the short, medium term. And then we think it will drive further growth from 2025 onwards. So, as people, like ourselves, ramp up the investments, as they ramp up the development of the pipeline, those are projects that will start coming in towards the back end of the business plan.

In Europe, REPowerEU, again, came out just shortly after the war in Ukraine. And we've seen additional measures being taken by the European government, whether it's the Green Deal, the industrial plan, whether it's the reflection on the market design, where what we know so far, and we can talk about that as well, but it's basically that how do you accelerate. How do you create sort of an environment where you can have more PPAs, where you can have more penetration of renewables?

Asia Pacific, again, huge, massive area of the world in terms of energy consumption and growth. We are seeing more and more renewable targets also being set up there. And so, I think we've already positioned ourselves there as well.

Now, there are still challenges. So, there are challenges certainly in terms of ensuring that we have predictable, stable regulatory frameworks. That's something that we've been certainly fighting for. I think the whole sector has been challenging the European Commission and other places on making sure that's in place.

Simplifying the permitting processes. That's true in Europe. It's true in the US as well. So, how can we accelerate projects that can take four or five or six years to be

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developed? They need to be done on a two-three-year maximum. That is being tackled on a country-by-country basis.

So, Europe has already given some guidelines. We are beginning to see specific countries also move on that aspect. And then the interconnections as well, that's an important part that also will be necessary to drive growth of renewables. On this point, I'll also talk a little bit in a little while about how we can take advantage of the fact that we already have a large installed base to leverage on those interconnection points.

But summarizing all of this, I think, are good structural tailwinds for investments in the renewable sector. And that's something that we will continue to bet on.

This is an interesting graph just because two years ago, we showed some numbers about what was expected by the International Energy Agency in terms of growth of renewables, growth of DG, batteries, networks. And so, on the left hand side, you can see what were the targets two years ago, and now you can see the targets that are the most recent targets. In all cases, increases of 30, 70, 40, or doubling. So, 30%, 70%, 40%, or even doubling in the case of the networks' investments. So, we are clearly seeing increased targets just over these two years.

And so, for us, and just summarizing it, let's say, on one side some of the key messages, we are expecting 25 billion of gross investment over the next four years, around 4.5GWs per year. So, this will ramp up, I'll show you in a little bit more detail, but we'll ramp up from about 4 to 4.8. sort of towards the backend.

Overall, 50 GWs by 2030, that's something that we think is achievable if we continue to ramp up. We are also reaffirming some of our ESG credentials in terms of being coal-free by 2025, all green by 2030. And an important point as well, we'll be net zero by2040 and this has already been certified by the Science-based Targets initiative which, as you know, actually validates scientifically, so it's not just greenwashing. This is specific targets that have been validated by that organization.

On the balance sheet, as I mentioned, the BBB rating, the 20%, 21% FFO/Net Debt for '26, which is obviously a solid ratio. Having a significant part of our EBITDA and investments in highly rated markets, whether it's Europe or in the U.S.

And in terms of value creation, we're expecting to grow substantially our EBITDA and our net income. So, our net income on a double-digit basis compounded over the next four years. And with a revised dividend for by 2026 of around 20 cents.

So, let's get into a little bit more specifics. You'll have seen the announcements earlier this morning or some of you may have seen that, which I just saw on the key highlights, actually giving you some of the specifics.

So, in the previous business plan, we had around EUR4.8 billion per year. We're increasing that by around 30%. One of the things I mentioned is that Capex per MW has increased. So, to do the MWs, you need more Capex.

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