Energias de Portugal (EDP), Portugal’s leading power company, came out with a radical 90% renewables plan in the 2030 timeframe with much of the action by 2022, encouraging investors to fight off its proposed acquisition by China Three Gorges (CTG). CTG has been pursuing EDP since the middle of last year and holds 23.27% of stock, valuing the business at €10.8 billion.
But CEO Antonio Mexia gave a multi-hour presentation to investors in London this week, painting a picture of an exceptionally bright future for EDP, built around a continuation of his own strategy, which dates back to 2005, when the company embraced renewables early, and began a globe trotting move into Brazil, the US and the rest of Europe, which has seen its generation assets grow and its renewables know how extend dramatically.
Initially EDP built revenues in hydro power, then later in wind and finally in solar, and has many plumb US contracts in renewables, as well as a growing presence in Brazil and key parts of Europe.
It is also well known that shareholders feel that the CTG bid undervalues the company, and one activist hedge fund, Elliott Management, has been highly vocal espousing a strategy not dissimilar to the one Mexia outlined. Elliott wanted EDP to sell off Brazilian assets, sell 49% of its Iberian distribution operations and focus entirely on renewables.
That’s not precisely what is going to happen, although the long term plan which only came right at the end of the investor presentation, ticks a lot of those boxes. Mexia made a lot of mileage out of his strategy of selling off non-core assets, but also recycling minority shareholdings in core assets, at a profit.
He showed that EDP has sold €3.1 billion of shareholding minority stakes, over the past few years, but now says he will sell over €4 billion majority stakes. But his talk about laying down further transmission lines in Brazil flies in the face of the idea of selling off Brazilian operations. He was clear that selling minority positions has strengthened the balance sheet, but where he sells off entire businesses it will drive profit through the P&L as well as add to cashflow. It began when EDP sold off its natural gas business and has included non-core hydro assets.
We expect to see more of these bold transitions coming from strategic reviews at the top of major European energy businesses, very similar to the type of transformations that companies like France’s Vivendi went through, when it sold off its water assets, and became a global media operation.
Right now some of the EDP disposals have included sub-scale operations like mini-hydro plants and biomass operations in Portugal, and mini-hydro in Brazil. But in the future they will sweep in around 27% of the business which is conventional coal and gas generation, which EDP will rapidly squeeze down to around 10%.
“Excluding about 10% of the business which will rely on gas as backup (CCGT turbines) we will only add 100% renewable projects. The company will get to 2022 with 70% of our energy from renewables, and to 2030 with 90%,” he said.
And in that time it expects to invest some €12 billion in capex, but sell off over €6 billion in assets, and exit 2022 with €2 billion less debt than it has today, and a far stronger Net debt to EBITDA ratio, down at 3.0. That ratio was 4.0 in 2018 and will reach 3.2 in 2020, said Mexia.
Part of the reason for the Chinese firm bidding for EDP is because the company had €672 million in impairments and taxation during 2018, partly due to one off generation taxation, partly due to write downs after the withdrawal of CMEC (support payments set up when it privatized). It also had some difficultly in the US where it also suffered the ending of tax credits on older US wind farms, after ten years of operation. This gave it a loss for the first time ever in Q3 2018, and drove down its share price.
But Mexia makes a compelling case that this is a bad time to value the company on fundamentals when so many underlying trends are about to come right.
It is strong in the US, and currently States representing 56% of US electricity provision have made it clear they want to get off reliance on coal and nuclear, and the EDP presence in the US represents a huge opportunity.
Additionally Mexia says the company will be 100% digitally connected (through smart meters) by 2022, and also talks about 4 million customers with decentralized Solar panels in homes it is contracted with, and 1 million customers in Portugal with eMobility accounts for Electric Vehicles.
Take away the bad news of one off taxes, lower than ideal hydro flow, a weak summer of low wind in Portugal, some currency disadvantages and expected set-backs from loss off tax breaks, and everything is healthy in the shop, says Mexia.
We would expect EDP to remain free from the grasp of CTG, unless it seriously upgrades its bid – but that pre-supposes that it is not purely opportunistic. We also expect more energy operators to take the bold step of dumping conventional generation assets, while they are still worth something, and using that to rebuild a stronger renewables empire. Right now the immense size of opportunities in China, and the complete lack of home grown competition in the US, makes for strong financial performances from anyone who knows that they are doing in wind and solar.
EDP rejected a €10.8 billion bid for the business last May, from CTG, which shareholders have baulked at, but the offer is still there. Today the company has 21 GW of generation facilities in renewables, is one of the top five in the world for Wind at 12 GW, and has a 65% EBITDA on its renewables business.