Earnings Call: H2 2014

Mar 4, 2015

Summary

EBITDA rose 1% to €3.642bn in 2014 and net profit increased 4%, though adjusted net profit fell 8%. 2015 guidance included EBITDA above €3.6bn and net debt below €17bn, with Brazil’s drought the key uncertainty.

I must advise you, the conference is being recorded today on Wednesday, March 4, 2015. I'd now like to hand the conference over to your speaker today, António Mexia. Please go ahead. Well, good morning, everybody. Thank you as usual for being present in this presentation of the 2014 year-end results. What can I say to start? I think they are strong results in a year that was, of course, let's say, challenging in terms of environment because of the regulatory and legal, especially legal changes that were decided in the past. It was the first year of full impact of those measures. Clearly, we anticipated the impact on the accounts of this, but at the end of the day, I believe that the measures that we have taken management wise on the front of energy management costs and even on the debate of those regulatory issues, I believe that we succeeded in having very strong figures. We see the EBITDA growing 1% to EUR 3,642,000,000. So better than in 2013. Then we have this by block. Understanding exactly how the different components moved. What can we say? Let's start by Iberia. Iberia, you have 1% increase on EBITDA excluding one-offs. I think it's important to stress the very good energy management results of the year. We were also at a positive impact on the strong hydro. In Portugal, it was 27% above the average year. I would like to stress the very tight control at the level of costs that compensate regulatory cuts. Of course, as we have seen, a reduction of the risk, namely in Portugal, reduces the remuneration, but it's obvious that the other side of the coin of lower costs, financial costs, and I think that we have been able, and we have already stressed this also for the new regulatory period, to have something that makes a lot of sense. Cost control compensating regulatory costs. Iberia, even in an environment of weak prices due to the volatility, I think that we have proven that we know how to sail in these markets. Second block, renewables. Renewables, of course, we have an increase of new capacity, 5%, but it was not enough to compensate remuneration cuts, especially the changes in Spain that were decided at the beginning of last year. Of course, lower power prices affected and created one-offs as it was already stressed by EDP Renewables. One-offs, so higher than expected to the average impact of the new measure. The loss in 2014 are higher with the new regulation that they are expected to be on the steady state because of the lag on, especially at the beginning of the year, of the lack of information about what were supposed to be the new rules. In 2015, the impact will already be smaller than it was in 2014. The third block, Brazil. In terms of real figures, we have 3% increase in euros, 12% in local currency, in reais. Excluding the one-offs, you have a lower 18% EBITDA in reais, basically due to the impact of the droughts. In any case, I would like to stress something that is important that we have seen. We have been fighting for a long time to have the same rules in Brazil that we have in Europe in terms of accounting of receivables. Finally, we got it. I think it's important for the ratios. It also recognizes the rights of the company to those amounts. I think it's good in real terms. Also, what I would like to stress in Brazil is that we have been able to see in the market the tariff increases that are needed to have the system under control. When we look into other markets, like European and EDP, we talk about rate increases of 2% or 3% and we spend a lot of time to see if they are acceptable. What we have seen in Brazil is after increases of more than 20%, new increases above 30%, shows that the system is designed in a way, of course, let's see what happens on the demand side, but it's designed in a way that is clearly adjusted in the short term. We will talk a little bit about Brazil 2015 later on, but let's see. Iberia, sailing in a good way. Renewables impacted by the new remuneration in 14 days are higher than they will be on a steady state. Brazil, a good year, of course, with one-offs that must be considered. Overall, we have net profit of EUR 1 billion 40, an increase of 4% year-on-year. As we have committed, we will be proposing a cash dividend per share of 18.5, represented 65 payouts. Fully respecting our policy and fully respecting the commitments that we have presented once again in our Investor Day in May, and that we have been presenting clearly to the market. At the same time, let's focus a moment on debt. We have a decrease on debt to EUR 17 billion, and it's important to say, due to the stronger US dollar. If it was not for the increase on the dollar, the debt would be EUR 16.6 billion. Like for like, debt will be much smaller than it was in 2013. Another element that I would like to stress is lower regulatory tariffs for EDP compared to the previous year. But most importantly, what we have seen is that the increase on the tariff deficit in Portugal was exactly what was foreseen, EUR 500 million. That compares to EUR 800 million the previous year, more than EUR 1 billion two years ago. We foresee for 2015, no additional increase, so zero, and then create surpluses after 2016. Fully in line with expectations, and I think this is an important bit because people tend to be worried with the sustainability, and clearly, the figure shows that the system is evolving exactly as we have been sharing with the market. Net investments, EUR 1.79 billion, minus 20% year-on-year. Clearly focus on the CapEx control. And as we have seen, the hydro of the last 5 projects, we have more than 85% of the CapEx expected for those hydros. The current 5 that are being developed, 85% is done. The second big block was wind, mostly in the U.S. By the way, around two-thirds of the new additions in the 2 years will be in U.S. The cost of debt was 4.7, in line with what we have been sharing with the market. An increase from the 4.4 last year due to the replacement of very low cost funding that, basically when we started in the U.S. market, it is one of the biggest components. That is clear here, we can talk about, we have seen a big drop on our marginal cost of debt, so the trend is clearly positive in our direction. We have a strong liquidity position above EUR 6 billion by December 2014, with an average maturity of 4 years, and we will surely be talking about this in the Q&As. We have just to share positive signs with you, and we will talk about what are our intentions in these fields. Good positives also, EDP back to investment grade status by Moody's. We are already by Fitch. Clearly, the positive outlook for S&P is also good news. So basically on that front, we have been doing what is supposed to be done, and we have been delivering. Because it shows credibility in what concerns our deleveraging policy, in what concerns our commitments to getting back better financial ratios, and the commitments towards 2017 being in our top agenda. Overall, what we say, once again, having the risk of being boring, the lower risk profile of the company supported these resilient results. Portfolio are highly regulated, and we have been able to manage well this regulatory environment. The long-term contracted base also gives support to our portfolio. The fact that we have this diversified market and assets allowed us to have these resilient figures. We clearly proved again, focus on risk, focus on efficiency with lower costs, and also being on time and on cost and in the amount that we are foreseeing in terms of investment. So giving visibility of controls and balance growth as committed in the business plan. I will pass now to Miguel, and I will come back for the final remarks and Q&A. Miguel, please. Thank you, António. Good morning, all of you. I will start with the evolution of EDP's generation mix, in which installed capacity went up by 1%, following essentially the new capacity in wind, mostly in U.S. In terms of power production, we saw a 2% increase, supported by the referred increase of the wind capacity and also the rainy weather in Iberia. So by end of 2014, wind and hydro represented 70% of installed capacity, and they represented 71% of production in 2014. Moving to the next slide. We can see that the 1% growth of the EBITDA reflects first, resilient performance in Iberia. Secondly, the impact of the drought in Brazil. And third, the low revenues at level of EDPR in Spain on the regulatory cuts. Adjusted EBITDA fell by 3% year-on-year. This is excluding the gains with the sale of Jari and Cachoeira Caldeirão in Brazil, and also human resources restructuring impact in Portugal. We have also a Forex impact negative by 2% or EUR 56 million, mostly due to the devaluation of real against euro of 8%. Operating costs fell by 1% on a consolidated basis, with a similar decline in Iberia. We have here the positive contribution from some headcount reduction, mostly through early retirement in Portugal. At level of EDPR, costs were stable, despite the 5% increase in installed capacity, while in Brazil, costs went up 6% in local currency, in line with the inflation in Brazil. Note that our OPEX efficiency programs reached the EUR 144 million of savings, anticipating the targets of 2015 to 2014. Regarding net investments, we have a decline of 20% to close to EUR 1.8 billion. This EUR 1.8 billion would have been below EUR 1.6 adjusted for some pending proceeds from asset rotation deals at level of EDPR in United States, in the amount of $343 million which we expect to receive during the first quarter of 2015. Overall, our focus in terms of investments program continues on the expansion of wind capacity. Now, very focused in U.S., but also in Brazil and starting in Mexico, and also the conclusion of the five hydro projects that we have under construction in Portugal, four of them that we expect to conclude already in 2015. Moving to regulatory receivables, namely regulatory receivables at level of the Portuguese electricity system. They increased EUR 80 million in the fourth quarter 2014, reaching the EUR 5.3 billion by December 2014 that we had previously guided one year ago when we were releasing the 2013 results. In the next slide 9, we can see that at level of EDP's balance sheet, these regulatory receivables fell by more than EUR 200 million, reflecting a decline in the region of EUR 100 million in Portugal. Note that in 2014, we made more than EUR 1.2 billion of securitizations. We had also, obviously, the already known accented deficit, which was previously known by us, and some deviations also, net deviations close to EUR 400 million. In Spain, regulatory receivables in the balance sheets went down to almost zero, following the securitization of the remaining 2013 tariff deficit. The only market where we had an increase was in Brazil due to higher cost with thermal generation. I would highlight that now the regulatory receivables in Brazil are fully booked at balance sheet level following the accounting change that occurred in Brazil in December 2014. In terms of net debt, EDP continues to fund all its investments and operations in local currency to mitigate all the Forex risk. This means that by December 2014, 22% of our debt was US dollar denominated, 5% denominated in reais, and 71% in euros. Also, in terms of interest rate term, we keep floating rates representing slightly more than 50% of our debt. A breakdown that provides some hedging on the impact of inflation on our regulated revenues. Moving to the evolution of net debt during 2014. We can see that it fell by EUR 41 million to EUR 17 billion by end of the year. This is the result of EUR 1.7 billion of funds from operations, excluding maintenance CapEx, the funds generated in our operations, and including the maintenance CapEx. We had a positive impact from a decline in regulatory receivables by EUR 0.2 billion. We paid EUR 0.7 billion of dividends. We also spent EUR 0.8 billion on the expansion CapEx and net investment. Finally, we had EUR 0.4 billion adverse impact, mostly from U.S. dollar appreciation versus the euro, which resulted in the EUR 17 billion of debt by the end of 2014. Still on financial debt, on page 12, we can see that average cost of debt rose 30 basis points to 4.7%. This increase is justified by some debt maturing over 2014, which was paying a low average interest rate, still from before 2008, so debt contracted before 2008. Regarding the average debt maturity, it was at four years by December 2014 versus 3.9 in December 2013. Financial liquidity by December 2014 was EUR 6.1 billion, as a result of EUR 3.5 billion of available credit lines and EUR 2.6 billion of cash and equivalents. As you can see on page 14, this financial liquidity covers all our refinancing needs until the end of 2013. Finally, our consolidated net profit rose by 4% to EUR 1,040 million. This reflects the combined impact of several items. A decline of net depreciations and provisions by EUR 30 million. Financial results significantly impacted by the capital gain with the sale of 50% of EDP Asia to CTG, a capital gain of EUR 118 million. It includes also, for the first time in 2014, this extraordinary tax introduced in Portugal for energy operations, so an extra cost of EUR 61 million at the bottom line. We have also EUR 35 million increase of minorities, both at level of EDP Brazil and EDP Renewables, which resulted in the net profit of EUR 1,040 million. Note that adjusted net profit was EUR 905 million in 2014, representing an 8% decline versus 2013. Regarding dividend policy, the executive board of directors of EDP is proposing to the shareholders' meeting a dividend of EUR 0.185 per share that is fully in line with previous years, fully in line also with our commitment in our Investor Day of May 2014, and that represents a payout ratio of 65%. Moving to the 2014 performance by business area. In terms of electricity market environment in Iberia in 2014, I would say that it was marked by a second half of the year with much lower wind and hydro volumes versus the first half of the year, which allowed some recovery, both of thermal production and pool prices in the last part of 2014. In terms of electricity demand in Iberia, it went down by 1.1%, reflecting milder weather, both in the summer and in the fourth quarter. When adjusted for temperature and working days, it was flat in Portugal, and it showed a mere 0.2% decline in Spain. On our division for liberalized energy activities in Iberia, electricity production went up 13%, strongly impacted by the 42% increase in hydro volumes on the transfer of the three hydro plants to liberalized market from PPAs, and also the previously referred rainy weather. In terms of thermal load factors at our coal and gas plants, it showed no material changes versus 2013. In terms of EBITDA in liberalized energy activities in Iberia, it went up 25% in 2014 versus 2013, benefiting from these strong hydro volumes. The positive impact from energy management of our long positioning clients, which was stronger in the first half of the year than in the second half. Also negative impact from several regulatory changes, such as the clawback costs and lower revenues in ancillary services in Portugal. Also lower capacity payments and higher generation taxes in Spain. Moving to the EBITDA performance in terms of our division of long-term contracted generation in Iberia, EBITDA went down 6%, penalized by the previously referred transfer of three hydro plants from PPA CMEC regime to the liberalized market. Also, the EBITDA in terms of special regime was penalized by lower volumes of production following the deterioration of remuneration methodology in Spain. The EBITDA performance of our division regulated energy networks in Iberia went up 2% year-on-year, and when adjusted for non-recurrent impacts, this increase is 1% year-on-year. Per division, we can see that Electricidade in Portugal, EBITDA went up 3%, reflecting tight cost control, even including the lower return on RAB in 2014 versus 2013. Electricidade in Spain, EBITDA down 6% on also low revenues and regulated revenues and revenues from new grid connections. Gas in Iberia, EBITDA was flat, essentially including our divisions both in Spain and Portugal. In terms of the performance of EDP Renováveis, the growth from capacity addition was mitigated by the regulatory changes implemented in Spain. So EBITDA, overall, at EDPR fell 2% year-on-year, resulting from a 13% decline of EBITDA in Iberia, a 9% increase of EBITDA in North America with a 4% increase in output and a 5% increase in average selling price, and a 5% increase of EBITDA in other markets, reflecting capacity additions in Romania, Poland, France, and Italy, and also lower prices in Romania. In Brazil, our subsidiary, EDP Brazil, faced a difficult market environment in the fourth quarter 2014. It was marked by mainly a hydro GSF factor of 88% in the fourth quarter, extremely low, as the strong thermal dispatch had to be implemented in order to preserve the hydro reservoirs. It was marked also, the fourth quarter, by several double-digit discount annual tariff updates, in which we benefit at our subsidiary, Bandeirante, from annual tariff increase of 22%, and also the previous referred accounting change, in which, since December 2014, we are able to account regulatory seals in Brazil, both at level of P&L and balance sheets, regulatory seals that we will recover through tariffs in the future. In this context, EBITDA of EDP Brazil in 2014, in local currency, showed a 12% growth on the referred change on accounting method, which allowed the booking of regulatory seals of EUR 600 million by December 2014. Roughly BRL 400 million, referenced to 2014, and BRL 200 million, referenced to 2013. Our generation division EBITDA went up 14%, including the gain with the sale of Jari and Cachoeira Caldeirão, 50% stakes to CTG. Adjusted for this, EDP Brazil EBITDA went down 18% in local currency, with EBITDA distribution being essentially flat, also reflecting flat regulated revenues without any impact from regulatory revenues right now. Hydro generation recorded a 32% decline on EBITDA as a consequence of the normally low GSF of 91% in 2014, which implied that we had to buy energy in the spot market in order to comply with our contracts, and with a net negative impact, net of hedging, of minus 339 million reais. I will pass now to our CEO for the outlook for 2015 and conclusions on this presentation. Thank you, Miguel. For the outlook, I think that it's important, once again, to split among areas. Let's start by Iberia. Here, the first note that I would like to give is the energy demand evolution. As you see, the real increase of electricity demand in Spain is 2.0 and 2.9, since the beginning of the year. Even with the adjusted figures, it's flat in Portugal and an increase in Spain of 2.4. You see clearly a demand on gas, and a change on the mix because of the lower hydro, of a huge increase on thermal demands and lower hydro generation in Portugal due to a weaker year. That will have different impacts, some negatives and of course, some positives, especially at the tariff deficit level. On the prices, what we have today is around the 47, so mid 40s. We shall review the further prices. Typically on balance, let's see. Favorable demand, strong client portfolio expansion in the free market. We are adding 80,000 new clients in Portugal per month. By the way, we will discuss this probably on the Q&As, but on the liberalized market, some of the conclusions in terms of a poor fourth quarter is related to higher costs of hiring these clients, but of course, this will bring positive margins. Clearly, this is a very positive sign. As I mentioned, the dry weather, so lower hydro output, but higher prices. The immediate result is less energy management possibilities because lower volatility, and of course, the lower hydro is connected with that phenomenon. Higher thermal demand. Better spreads on lower fuel costs. In theory, also lower gas deviation opportunities. But the overall picture that we want to share with you is that we have already sold 23 terawatt-hours at 55. The key element is that we have already spread fixed on 85% of the gas sourcing. When we're talking about the lower global demand of LNG, it's important to say that we have already 85% of the gas hedged, and 60% of the coal outputs. Both with better margins than in 2014. Basically, this diversified generation portfolio and the hedge based on clients reduces the exposure to the volatility, even in a market where we have less energy management possibility. Clearly, once again, I think sailing rightly in the market. Regulatory receivables. When always a key question for people around the table. I trust there's no tariff deficit expected for 2015. Flat 2014 and 2015, then going below EUR 500 million already in 2016 and going in the direction of EUR 500 million, half a billion, in 2020. Why we are comfortable with these figures? We are still at the beginning of the year, but let's see. Demand in line with what the regulators expected. Pool prices, the EUR 347.7 in line, making sense with the pool price for the full year of EUR 350. I remind you that the first quarter is always the one that tends to have lower prices because of weather conditions, so typically, it makes sense. Also lower special regime production. Once again, in line with what was expected with the regulator. Also remember, the first quarter tends to be a strong quarter in terms of special regimes. The financial sustainability of Portuguese electricity is clearly in front of us. That's important, and the evolution of 2014 and now the evolution of 2015 makes us much more comfortable. Another block, here with, of course, more uncertainties. Talking about Iberia, talking about receivables, basically, we are talking about visibility. In what concerns Brazil, the uncertainty is, of course, bigger. In January, we have the worst January in the last 84 years, so the drought is bigger in 2015 than it was in 2014 at the beginning of the year. February is 59% of the historical average. So clearly the inflows below what was supposed to be. The hydro reservoirs, and let's focus on the key regions, they are at 20% compared to what was higher than 43 years ago and 35% last year. So below February 2001, the toughest year since the beginning of the century. But let's see what is the impact. The most important impact is on the GSF. The GSF was 81% in January, 78% in February. This, of course, makes us wonder what could be for the full year. At this stage, we expect, and we have anticipated 86% for the full year. If with 86%, that is below the 90% that was in 2014. But as we have a much lower PLD, the negative impact on the generation should be similar. The issue is, if the GSF goes lower than the 86%. For each 1% lower, we are talking about an impact in terms of EBITDA on EDP Brazil of minus 37 million reais. So slightly more than EUR 10 million. But of course, this is the figure that we need to consider if it will happen or not at this stage. But what is very important, and I would like to stress this, is first, as I mentioned, the new spot price. We have a cap that went down from the 822 to 388. You know how much we have fought for this and we have worked for this. In all the quarter presentations, we have mentioned this that finally, I think that these results should be stressed. Second, tariff hikes. They are there. Clearly it's a right measure in the right direction in what concerns the tariff increases. But the most important is the third bullet. The extraordinary tariff increase is approved. More than 32% at Energias and 33% at Escelsa starting March 2nd. This clearly shows that the measures are taken in order to have the system under control. Also structurally a good sign. The final proposal for regulatory WACC for the next revision. As you know, people were talking about something below 7.2% in terms of real post-tax, and now we are talking about higher than 8%. At this stage, 8.09%. Somebody dropped a copy. It's also a positive sign in terms of the regulatory recognizing the risk evolution on the market. Brazil, the key issue is, of course, what will be the GSF. I would like to stress something that is very important. We are targeting measures that will be identifying in the short term to mitigate adverse impact from this eventually lower GSF if it's the case. We are clearly working on measures. We should consider these lower GSF as a one-off, and we will be working on that front to be sure that we will compensate, if reality gets tougher than what we expected with the 86%. After Brazil, one key element. EDP is back to investment grade by Moody's. I think two key issues. The tariff deficit securitization. Visibility on the sustainability of the system in Portugal, I think it makes people more comfortable. Also, the fact that we have been working clearly with clear measures on the CTG partnership, on the asset rotation, but also in sale of assets, and also on lower investment level. Fulfilling the commitments that we have presented to the market, and especially stressed again in May last year in the Investor Day. The average impact is clear on the five years EDP bond yield. Huge drop in the last 14 months. Very important. Very significant since this re-rating. As we have been mentioning, this could have at least an impact on average of lower EUR 50 million a year, on average for the next three years. Also, we are now well positioned to extend the debt maturity. We have already told the market that we are considering a 10 years bonds in the first half of this year. We have now a new five years credit facility of EUR 1.6 billion that was replaced by EUR 2 billion. Just to mention that the spread went down from 4% to a 1.1% spread in that deal. I think that is quite significant. In terms of 2015 outlook, we see ourselves comfortable with the consensus. More than EUR 3.6 billion on EBITDA. More than EUR 900 million for net profits. At this level, assuming an average cost of debt going down to 4.6%. We see also net debt below EUR 17 billion, so reducing again the debt. The execution of tariff deficit securitization, we have a target of at least EUR 800 million for the Portuguese tariff debt securitization deals. The asset rotation that we have already presented to the market, and also the CTG partnership. As you know, between closed deal and committed, we have already given visibility for EUR 1.3 billion. Part of this will have financial closing on the first half of this year. Our intention is that towards the end of the year, we will give visibility to up to EUR 1.7 billion to EUR 1.8 billion out of the EUR 2 billion full commitment. It's clear we want to reach the end of the year with 85% of that commitment visible to the market. Typically behind us. In what concerns the EBITDA, we assume an average hydro year, so lower arbitrage opportunities. We have new hydro capacity additions. I remember this 250 megawatts in first half, almost 1 gigawatt in the second half of 2015, with the new hydros in Portugal. In Brazil, we do not assume any rationing at this stage. As I mentioned, we expect the 86%, let's see. We have the Pecém fully consolidating. In what concerns wind, the strong U.S., and new wind capacity. We have almost 400 megawatts commissioned at the end of 2014. So a lot of additions towards the end of last year. We have lower exposure to power prices in Spain. I have mentioned that the first quarter last year was tough because it was difficult to hedge in a system where we do not know the rules. So we have already 2 terawatt-hours hedged at EUR 47 in Spain for the EDP Renewables. And we have for Portugal, the full consolidation of EDPR, 40% in ENEL, expected at least between six and nine months. I would like to stress that Iberian regulated networks, the sale of energy assets in Murcia, with an impact of EUR 18 million on EBITDA with the consolidation. Lower return on RAB. As you know, we have a flow of 6%, given the indexation to the five years Portugal bonds. We have, at this stage, an expected impact of lower EUR 40 million compared to 2014, on the back of this lower Portuguese risk. So the figures are clear. To finalize, based on this resilient performance, on the focus on profitable growth, and keeping the low risk profile, where here I focus once again, 1.5 TEV securitization last year, 1.3 in Portugal, where we have now the intention to do at least EUR 800 million. The disposals of EUR 400 million of asset rotation strategy and CTG partnership than in 2014. Including, of course, looking into the figures and seeing the Forex impact. We need to compare the like for like. Of course, the improvement of the investment grade of EDP. I think that there are really positive signs on that commitment. So earnings per share 2014, EUR 0.285. We will propose EUR 0.185 fully in cash, 65% payout. So I think that we have an improvement on the visibility on the midterm cash flow. I think it is important. We have clearly, in front of us, visibility on this. Based on what? What we have been proposing to the market. Good asset mix, good returns, diversified market, and especially focus on a very good risk agenda and balance approach between deleveraging and growth. Let's go for the Q&A, and thank you. Thank you. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Or you can submit your question via the chat facility on the web. Your first question comes from the line of Stefano Bezzato. Please ask your question. Yes. Hi, good morning. Stefano Bezzato from Credit Suisse. Three questions, if I may. The first one, sorry to go back to Brazil, but you mentioned the measures announced by the government to promote efficiency. For now, a 5% target. Do you expect this target to increase over the coming months? Do you expect any risk left of power rationing instead of the efficiency measures? What would be the impact that you would expect on EBITDA of generation and distribution from the energy saving measures or power rationing in the coming months? The second question is on your dividend. I think you did not mention the dividend policy in your 2015 outlook. Can we assume that the EUR 0.185 stays as a floor independently from the hydro situation in Brazil? Finally, on Iberian generation. I noticed that you announced to have sold 23 terawatt-hours for this year at EUR 55 per megawatt-hour. You also flagged the today forward curve point at 45, 46. Are these numbers, the 55 and the 45, 46 comparable? Therefore, we should expect a reduction in achieved price in the coming quarters, or does your stated achieved price include more components that we should take into account? Thank you. Stefano, good morning. Thank you. Let's start being clear about the dividend policy. Dividend policy, no matter what, the EUR 0.185 is a floor. Even if the rain was zero in Brazil, let's be clear, and this will of course not be the case. There will not be change to this commitment. I think that we have been very clear on it. Especially, we'll never change this for non-recurrent events, one-offs like impact in Brazil. In what concerns the third question about Iberian generation, I think yes, it's comparable. I think that what we have been showing is that if you have lower energy management possibility because of lower volatility in the first quarter, what we have already hedged and the fact that, especially we have hedged on the gas side, that is a tougher market, but also to the fact that we have today better margin in 2014, gives us a comfortable situation. In terms of Brazil. In terms of Brazil, I would say that for now, we don't have a clear view on rationing measures, so we are waiting for what's going to be the decisions by the government. What the company is doing is to prepare itself for such a scenario in terms of operating costs, IT systems, et cetera, in terms of management of regulatory agenda. But I think it's too early to say any impact in terms of impact from rationing. Obviously, it should be negative, but it's difficult to quantify for now, but we'll follow up with the market in the following months as things evolve. The idea of having a rationing, of course, the decision will be taken probably only towards May, so towards the end of the rainy season. I've been in Brazil 2 weeks ago, and clearly the political environment is clearly against taking this rationing decision. Why? We have already shared this, everybody shares this, is that the fact that this would be recognizing that the energy policy was not the right one in the recent past, and even the actual President Dilma in 2001 was very critical of the rationing, and that the rationing was just translating bad management. I think that the government will do whatever they can to avoid this scenario. But sometimes reality can impose on ourselves so clearly. But I don't see decisions in the next 2 months, and it's very difficult to consider. In any case, what has been, of course, being discussed is that if you have a rationing on the side of the generations, depending on the level, you also get rid of the contract, the responsibility to deliver the contract that we have signed. So it will reduce your risk of going into the market and buying energy to sell because we are committed to. So at the same time, on generation side, it could have a kind of compensation. In any case, what is now really challenging is how can a generation sector, after a 90% GSF last year. And if GSF goes below, even if it's 86 or 85, live and will ask for any kind of compensation because the system was supposed to be, let's say, balanced, and the reasons why the other generation are suffering is basically because of mismanagement of the central system. Clearly the discussion is how to compensate and how to create new rules to compensate this. Rationing, let's talk about, if any, later on, because today is not only probably at this stage, but also it's difficult to quantify depending upon how they will establish it. I'm sorry, Stefano, not to be more clear, because nobody's very clear about this. Understood. Thank you. The last question, Stefano, on the prices. The wholesale prices. Of course the 45, 47, you are talking about base load. The sales that we have at around 55. Yes, they are comparable. The only thing that I would highlight is obviously most of these sales are through our final clients, and we have been focusing on the residential and the small clients. Obviously, the profile of consumption is more concentrated in peak hours. The difference is that this 55 is more concentrated in peak hours at higher prices than base load. But excluding that, the prices are comparable. I would highlight lastly also that most of these contracts with the clients, they were closed in the contracting season for 2015, which was between September, October, November 2014. We can go to the next question, please. Thank you. Next question comes from the line of Fernando Garcia. Please ask your question. Yes. Hi, thank you for taking my question. First, starting with your guidance for 2015 with an EBITDA of over EUR 3.6 billion, net income of over EUR 900 million. My question there is that this includes EUR 78 million gain from the gain of the divestment of the gas distribution assets in Murcia. Am I right assuming that recurring net income after taking this out will be below EUR 900 million in your budget? Then my second question, if you could update me on the European Commission investigation of the extension of the concession of the hydro assets in Portugal. I wanted to know if this investigation is still open. My third question is on the latest IMF report on Portugal. They said that the Portuguese electricity interim tariff deficit target was not met. Also they say that the elimination of this tariff deficit postponed from 2020 to 2022. Could you provide me there what it was the interim target end of 2014? From the presentation, I think you disagree with the 2022 target. Could you explain what is the underlying difference in assumptions between yours and IMF? Finally, just to understand the rationale for your calculation of the recurring net income for 2014. For example, you are including there or taking out there the extraordinary energy tax, but this is happening as well in 2015. There are some political parties saying that they will keep it post-2015. Is this starting to be recurring? This will maybe not be taken out. Second, for example, you are not taking out the extraordinary effect from the corporate tax reduction in Spain that I think that is EUR 67 million, so I wanted to know why. Thank you very much. I will start with the European investigation, the IMF, and then I will leave Nuno to talk about taxes. Let's be clear. European Commission investigation. No news. I think it's a dossier that is gaining some dust on any shelf. No questions neither to us, neither to other, let's say, I believe stakeholders on this process there. So no news. But as I always mention, it's a dossier where if there is any news, eventually, it would not be bad news for us. In what concerns the IMF approach about the Portuguese sustainable deficit or not. 2014 was a year that we have already anticipated, especially when we saw the first quarter where the tariff deficit increased by EUR 500 million. We are now stating that is zero in 2015. The difference compared to what the IMF was saying is probably due to the first quarter of last year. Talking about tariff deficit evolution, because a strong quarter of wind, I think it's really probably not very meaningful. If the end of the deficit is not 2020 but 2021 or 2022, putting this as an issue, I would say that is basically ridiculous. What I would like to say is that what we will see is, are the tariff increases being put in place according to what was expected? So between 1.5% and 2% above inflation. The answer is yes. Are these measures being also taken with others that will, let's say, minimize any risk of not doing this, like the social tariff? The answer once again is yes. Is demanding evolving as it was expecting the assumptions? For 2014, it tends to be rather no. The only thing is that demand was lower than the 1% expected, but now we are seeing this on 2015. Once again, I don't see any material change that would make any pressure or any reason to change the measures that were taken at the cogeneration, at renewables, all the other measures that were taken and are old and well known by the markets. So I don't see any news. In what concerns special taxes, we still live in a world where we tend to believe that the commitments are to be fulfilled. It was a short-term measure towards the sector, not EDP, but all the sector. That was short-term because it was extraordinary. We still consider this. Our approach and reaction towards this measure was take into account that they will be taken for considered 2014 and 2015. We see clearly the situation in Portugal evolving, if anything, better than expected. So it doesn't make sense to keep extraordinary taxes for longer, and if it's the case, we will decide what we will do according to that reality. At this stage, we don't anticipate, and we don't consider any new taxation after 2016. So let's see if it's the case. If it's not the case, we will act accordingly. Nuno, about reduction on The question on the guidance on the EBITDA, I guess is the first one. Well, the guidance includes everything. Includes the positives and the negatives. It's our best guidance we can give you today with what we have at hand. So it does include both positives and negatives. It does also include whatever we see coming throughout the year. And as far as the adjustments, all we try to do is to give you what the adjustment should be to get to return. We have all the other extraordinaries, if you think they are not to be adjusted, to adjust them. Next question, please. Thank you. Your next question comes from the line of Carolina Dores. Please ask your question. Hi, good morning, everyone. Thank you for taking my questions. I have three. First one is on leverage. You noted in, well, towards the end of 2014 and 2015, has been impacted by the higher FX, and there's also the full consolidation of Gesante. If you add those both effects, there's EUR 1 billion additional debt versus where your business plan was. So my question is, if you're still comfortable reaching 3x net attribute by 2017, and if there's additional measures that you're working to get there. My second question is a bit of what António gave the heads up. It's on the supply in Portugal, because it was loss-making in 2014. When do you expect this business to be profit again? And third, I wanted to understand the negative provision that you've done on Pecém in the fourth quarter. Does that mean that all the negative costs for unavailability of Pecém have been provisioned? If so, what is the outlook for the earnings of Pecém for 2015? Thank you very much. Let's see. In what concerns the target going into 3x net debt in 2017. Let's be once again very clear. We have been stating to all on the debt side, on the equity, to all the people that we need to talk at the same time. We don't have different speeches according to people that are in front of us. By the way, here, everybody is there on the phone, so we have everybody at the same time. The commitment with the leverage is very consistent. We have been doing clear this on the CapEx side. Of course, the Forex effect, we could not anticipate it. Pecém, of course, as you mentioned, it was not supposed to happen, but at the same time, it could be an opportunity in terms of value creation. In what concerns asset rotation, in what concerns the investment levels, in what concerns disposals and the partnership with CTG, all these layers will be managed according to the key target of proving year by year that we are doing what we need to do to go in that deleveraging path towards 2017 targets. In what concerns supply, let's see. The EBITDA from liberalized activity was poor in the first quarter of 2014. Somebody told this. First, let's see. The favorable market environment in the first half, low pool prices, strong hydro volume, strong gas on sale, was not repeatable in the second half. We already anticipated this. The gas wholesale market in the first quarter was much weaker in 2014 than in 2013. Low market volatility in the first quarter in 2014, without room for additional energy management. But the question is, the difference is not in generation. The difference was in supply, as you mentioned. We had extra cost last year. The positive last year, so in 2013, the bono social, the social bonus in Spain. The fact that in 2014, we captured 400,000 new clients compared to 100,000 the previous year. So that was a peak moment in terms of new additions. In 2015, when you compare year-on-year, you will not have the same impact as you had when you compare 2014 with 2013. In what concerns, what was the last question? Pecém. Beyond that. Yeah. Okay. In as far as Pecém, you are right. All the provisions that are known as of today- were made. They have been accounted for. In as long as the plants work okay, there won't be any more provisions or penalties to be taken. If it gets worse, then we will have some extra penalties. But it assumes the plants were operating as they should. So we provision ahead of having to pay those penalties. In as far as the numbers of expected for Pecém, Carolina, I will ask you to call the investor relations and get the right number. I don't have it right here. We will give it to you later on. But just to give you an idea, availability. The availability was 76% in 2014 because we stopped for three months, unit number one, between August and November. We have been since then, being well above the regulatory level of 90. We have now, since the beginning of the year, at the level of 95. In December last year, it was 97. So clearly, what we see today is, of course, you still have the impact of the moving average of lower than expected with the previous year. But now we have been clearly improving the average being above what the minimum level, the average level of 90%. The detailed figures can be given to you. Next question. Thank you. Your next question comes from the line of Alberto Gandolfi. Please ask your question. Good morning, and thank you for taking my questions. I have four, please. The first one is on the evolution of net debt and free cash flow. You just reported EUR 17 billion, and you say below EUR 17 billion. With the disposals that I understand EUR 400 million-EUR 500 million agreement with CTG. Perhaps you do not expect the cash to be received in 2015. I do not know if you can comment on that, but with this EUR 400 million-EUR 500 million, the pending disposal in the U.S., securitization of receivables, even though you are still contributing to the tariff, and a little bit of free cash, I would have expected perhaps a little bit of a narrower guidance to the net debt, so a little bit more precise. I was wondering if you could help me out with this, because from what you are saying otherwise, the logical conclusion, well, not logical, but the conclusion seems that you are largely free cash flow negative in 2015, which I do not think is the case. Could you maybe help us out a little bit more here on building blocks on what is organic free cash 2015, what is disposals, what is the evolution of the tariff deficit components, and securitization obviously. Second question, forgive me for going back again to this adjusted net income, but on slide 15, you talk about $905 million. Am I right? That is not adjusted for the drought in Brazil, which you mentioned, has an impact negative of EUR 121 million. I think it is on slide 2 of the press release. If you can also, thirdly, talk about your cost of debt. You are talking about 4.7% in 2014, 4.6% in 2015, and a debt maturity of 4 years. How can it fall just 10 basis points year-on-year? If 4 years is the average maturity of your debt, should not we see the cost of debt going to something like 3% or lower within 4 years? What am I missing here? 1.5% on EUR 70 billion is pretty much, what is quite a lot. Last one, big picture on the dividend. I am thinking, what is next year? EDPR is on a track, continues to deliver growth. We know what is going on in Brazil. The hydro is coming in Portugal. When will you actually be able of beginning to grow again your dividend? If you cannot give a precise year, of course, can you tell me your mindset? Is it a matter of leverage? Is it a matter of credit rating, or is it a matter of payout ratio? Thank you so much. The net debt. What I think you are missing on the debt, and let us be clear, on the guidance, we are including the consolidation of Pecém, and Pecém's debt will be roughly about between EUR 500 million and EUR 600 million total. That will be included in this number. You will have an increase in debt because of you start reconsolidating Pecém if the deal goes through. Then you also have to consolidate Eneop, which is the wind business we will split up with Enel throughout this year. As we move it from equity to full consolidation, we will have to consolidate another EUR 200 million. Yes, if we were not doing those 2 moves, you are absolutely right, the free cash flow will look terrible. It is not the case. It is despite having to include this extra EUR 800 million, we are still guiding below 17. Clearly, there's an item here, which is the dollar/euro, which we cannot do anything about. If it goes to parity, probably it will be complicated to deliver on the EUR 17 billion. But if it stays at reasonable rates like it is today, I think we can still achieve going below 17, despite, as I said, consolidating an extra EUR 800 million of debt from these new assets. Nuno, forgive me, just to be clear, you're telling me that on constant scope, you would expect to lower your net debt year on year, and even in the medium term, don't see why not, between EUR 700 million and EUR 800 million a year, or perhaps a bit more? I think that is going to depend also on, in this, we are including divestments to CTG, which typically you should not count as free cash flow. Okay? I would say that in 2014 and 2015, if you exclude divestments and tariff deficit zero, we should be fairly close to zero free cash flow. What we said is once EBITDA goes up in 2016 and 2017 and reduction in the CapEx, then free cash flow is probably going to be in the nature of EUR 500 million per year, excluding divestments or tariff deficit working capital changes. So your recurrent free cash flow in 2016 and 2017, it's supposed to go up to about EUR 500 million in 2016 and 2017. Now, the adjustment on net income, you're right, it does not adjust for the rainy season in Brazil. So that's too bad. It's like having a lot of wind. It's too good. Having less rain, it's too bad, but we don't adjust for that. As far as the interest rate, I was waiting to see when that question was going to come up. Clearly things are looking better. Clearly the four six looks okay this year. Why? There's two aspects there. We will pay our last fairly cheap refinancing that we have this month. It's still going to cost us more to replace that refinancing. So on an average, then cost will go up. It will also go up by the consolidation of Pecém. That is still money. Clearly, the revision of the term loan and all the refinancing should still, in the second half of the year, start bringing the average cost down, and this year won't change much. Probably in 2016, we will see it fall another 20, 30 basis points in 2016, and will continue into 2017. The scenario that was presented in Investor Day right now looks a little bit conservative, you are right. But for 2016, the reason has to do with refinancing still this EUR 1 billion bond which is due in March and the Pecém consolidation. I will pass on the dividend to António. Thank you. Dividend. Of course, when we are considering the dividend to be proposed next year, at this time based on the 2015, as I have mentioned, the floor is to be respected no matter what. The floor will be respected no matter what. But as we have anticipated here, based on even without rationing in Brazil, this will have an impact on our accounts. So even if we have good visibility, the visibility that we have today makes the net profit slightly lower than in 2014. Proposing at this stage an increase of the dividend would make rather no sense. Clearly what we have stated, we need some events to happen. I think that we ran throughout the crisis increasing the dividend since 2006 by 85%. I think that we are very clear on the message. We have been getting out of the dividend payout range whenever we need to respect the floor because, and by the way, because typically if we go, it is because of non-recurrent events. Even we have not considered the adjustment, hopefully we can consider no rain in Brazil a non-recurrent event. Let us be rational on this front. We will be changing the dividend as soon as it makes sense net profit-wise or earnings per share-wise. Excuse me, sorry, I did not quite catch precisely when we are talking about the free cash flow reduction. I know disposals are one-off, but I do not quite remember what you have said on the securitization. How much contribution for 2015, 2016, and 2017 do you expect from the securitization of receivables? Thank you. Well, what we've assumed on Investor Day business plan is EUR 800 million of securitization per year. Per year. Thank you so much for your patience. We have been doing more in 2014. As it's clear, we have done EUR 500 million more. Maybe I'll just go through some internet questions. There's quite a few questions here on the internet. Let me see if we can browse through. One is concerning the average cost of debt going forward. I guess I answered that. The other is on if it's still strategic to be 3x by 2017. I guess we were very clear on that. What are the obstacles of reaching this target? We still feel that this is doable. Clearly, Brazil drought lasting 2-3 years is not on the program. If it gets back to normal, we see no problem in reaching the 2017 numbers. But even with the drought in Brazil, if it's not 3x, we should be very close. We will make sure we take care of how to get there or close enough. We're not too concerned right now that we will not meet 2017 numbers. There's a question here on the sales. I don't know if you want to say something. No. Sales, I already mentioned. We accept the measure as temporary and extraordinary because of extraordinary situation in Portugal, even if we have doubts on the legal framework as the other companies. Clearly, we have been considering that this will be for 2014 and 2015 and no longer than this. If it's the case, we will take in due time, in due place, the decisions according to that. But at this stage, we don't anticipate that the commitments that were delivered will be changed. There's a question on if the agencies are concerned with the situation in Brazil. Could that trigger a rating event? I would not say they are worried, but they are attentive. They, as we do, they view the drought as an extraordinary event. So they don't view it right now as a recurrent event. At that point, it should not be taken into consideration when evaluating the risk. Clearly, they are attentive as we are. We're more than attentive. We are deeply concerned. But it's not impacting right now the way we work. Should we move on to the next question? We can go to next question on the phone. Thank you. Your next question comes from the line of Javier Garrido. Please ask your question. Yeah, good morning. Most of my questions were on the free cash flow, which I think you have elaborated. Although, to be honest, I may be a bit slow, but I don't yet fully understand what is the conclusion on the 2017 3x net debt-to-EBITDA target. Somebody may correct me if I'm wrong. Should I understand that you are still looking for 3x net debt to EBITDA in 2017, plus whatever may come from the Forex moves and Pecém? So basically, 3x net debt to EBITDA plus the extra net debt on the book because of the acquisition of Pecém and the negative impact of Forex. Is that right? That would be the first question. The second question, also on free cash flow, looking backwards in 2014, I noticed a significant swing in the financing of working capital from suppliers of equipment. I wanted to understand whether that means that now that working capital is the stable one, or if you should see a reversal in that and you should see a cash outflow in this line in 2015. So as to understand what is the sustainable level from this financing. The final question would be on the supply business. Actually, I am not sure I understand what is going on, because you mentioned that in the fourth quarter, you have a negative impact because of the cost of acquiring those clients. If I am right, firstly, those clients are your clients in the regulated sector, so there shouldn't be such a big one-off cost of acquiring the clients. So you could explain to me where is the extra cost of getting that client switch from regulated to liberalized market? Secondly, I understand that in January, you started an aggressive campaign responding, to some extent, to a GALP campaign in Portugal. Would you expect to see additional one-off costs out of that campaign, or would you expect to see the first half results in supply in Portugal being negative as they were in the fourth quarter in 2014? Thank you. Javier, the 3x continues to be the guidance for 2017. The Pecém consolidation hardly has any impact on that ratio. Okay? Because you have to consolidate the EBITDA as well as you consolidate the net debt. So net by 2017, the expected net debt over EBITDA of Pecém is very close to 3, so it would not change the ratio at all. What else can I say? It continues to be our guidance and the acquisition of Pecém doesn't change anything. The rest remains the same. As far as the suppliers, yes, you see a little excess, which is not usual from us. That has to do mostly with EDP Renewables qualifying or creating some options for the extension of the PTC, which at a later stage they will decide on or not to use if they see fit. But they have to do that by December, otherwise they would not qualify for the PTC. So this is invoices that might be used or not going forward. I think it is clear about the targets and the swings due to the U.S. market. Let us hear the supply. Clearly, first, we are now leaders, answering or not with campaigns. We are leaders in the market with 86% on the liberalized market on electricity, with almost 50% on the liberalized market in terms of new clients in the gas. The dual approach has been very effective. I think that we have been using the right policy in terms of transparency and of course, with lower acquisition costs, I believe, compared to others. But in any case, whenever a client goes from the last resort consumer to the liberalized market, we are talking about two different entities that EDP needs to compete in that market as any other players in terms of campaigns, in terms of third party supplying, in terms of agents, in terms of whatever door to door, all the mechanism of bringing people out of the regulated market into liberalized market. I operate exactly in the same conditions as the others. It is normal that in a year where you moved from 1.3 to 3. Let us see. At the end of 2013, you had 1.9, and you went into 3.1 million liberalized market clients of EDP. We have increased by 1.1 million clients. Let us remember that by December of 2012, there were less than 1 million. Clearly the increase last year was big. Of course, the rate, even if we are now considering, as I mentioned, 80,000 a month, will be going down. You are now capturing the value of the clients. The first quarter impact will be probably in the same nature of last year. But then now we are taking advantage of all the clients already in the liberalized market, where, by the way, the churn rate is very small. Typically, the second half of this year will be delivering already very different results from the last two quarters. We can go now for the last question, please. Thank you. Your last question comes from the line of Florence Taj. Please ask the question. Yes. Hello. Sorry, I just have a follow-up question on Brazil. If I look at the EUR 3.6 billion guidance for this year, for 2015, you expect 16% of that to come from Brazil, which would be EUR 575 million. But in 2014, it was EUR 620, including roughly EUR 70 million of accounting change. So let's say it's EUR 550. So on an underlying basis, you're expecting Brazil to be up this year? I understand there are many moving parts with Pecém, et cetera, and the tariff increase. Can you walk us through how you go from the EUR 620 this year or EUR 550 underlying to that guidance for 2016? What you're assuming in terms of Pecém and the tariff, and the additional impact of the lower hydrology factor. Hi, Florence. It's Miguel. In terms of what is included in terms of the figures for 2015, you're right, it's slightly higher. What you have to consider is that obviously it includes Pecém, which we assume that should be fully consolidated in the second quarter of the year. Obviously, distribution, we have the new accounting, so no major impact, and we have a similar impact in terms of GSF losses versus last year. So as it was referred to, we are now forecasting a GSF of 86%. How much is Pecém consolidation? How much are you factoring in for this year? We assume from the second quarter. It will depend also on some contractual negotiations ongoing for some improvement. Note also that we have the reversion of the provision that we made in the fourth quarter. That part of it is already to cover losses in 2015. But regarding the detail below this line of Brazil, namely Pecém and the other parts, I think we prefer not to go too much detail because of the previously referred uncertainty on the several moving parts in Brazil. Okay. Thank you. In terms of EBITDA in Pecém, what we had in the budget was in the region of EUR 60 million for 12 months. Okay. Great. Thank you. Thank you. We have no further questions. Please continue. Thank you. Once again, thank you for being present. As it was mentioned in the last question, we have a lot of moving parts. I think that we have the control of those moving parts, especially in the Iberian market. Also, we have a clear visibility in what concerns renewables. In what concerns energy management, I think that we have been clear in what concerns the visibility of the 2015 figures. Even if we are today at the beginning, we feel comfortable with that visibility. Of course, the most moving part is Brazil. Brazil, I think that we have already been anticipating lower GSF than the previous year. But we have already seen also legal and regulatory measures that make sense. Even the impact of Pecém could even be slightly better than the one that Miguel just mentioned. But clearly, that will be the question mark. In any case, this question mark will not change anything about either the commitments in terms of deleveraging, neither the commitments of dividend. By the way, we will be looking, even if it's a one-off extraordinary measures in Brazil. Because of the market, we will be looking into measures that will compensate for this. After, I believe, a strong 2014, where we delivered slightly better than expected by the market on average, I believe that we will have 2015 challenging, but we're at this stage of the year. We are at the beginning of March. We have already good visibility based on the decisions that we have already taken, and the commitments that we have are today very clear. We tend to be on the safe side. Once again, thank you for your presence and see you soon. Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.