Earnings Call: H2 2010

Mar 4, 2011

Summary

EBITDA rose 7% to €3.6bn and net profit increased 5%, supported by renewables, Brazil, and regulated assets. Guidance called for low-single-digit 2011 growth, lower CapEx, and net debt reduction, amid weak Iberian power markets.

Hello, everybody. Thank you for being present for the 2010 results presentation. As usual, I will start with the key remarks concerning 2010. Then I will pass to Miguel Viana. He will have a detailed presentation. Then I will come back to wrap up and talk a little bit about 2011. Then, as usual, we will go for Q&A. So 2010. First thing that I would like to stress is the increase of 7% to EUR 3.6 billion of EBITDA. This increase is basically due to a mix of two things. A balanced portfolio, because as you will see, the evolution of the business is quite different. Also, of the fact that we have been growing in areas that are, let's say, returns are more protected than in other technologies. Third, because of efficiency. I will talk a moment about efficiency later, because I think it's very important in moments like this. So balanced portfolio. As you see, the fact that we have, as everybody knows, a lot of regulated assets and long-term contracted assets is very important for the stability of our cash flows. You see regulated network and long-term contracted in Iberia. The EBITDA is growing 10% year-on-year. The stable returns, the efficiency improvements, and of course, the new assets. So we are capturing already the value of the new assets in Murcia and in also Spain, the gas assets that have performed better than we expected when we bought those assets. This shows the importance of these regulated and long-term contracted part of the business. This is very important because the liberalized electricity market in Iberia was very challenging. As you know, we already expected a very tough market. The market, if anything, it was slightly tougher than we expected. We have, as we have already foreseen, a contraction of hedge thermal spreads and lower arbitrage gains. The fact of this tough Iberian market, as we are less exposed, even if it's of course an issue, is less an issue for us because of all the regulated and long-term contracted assets that we have in Iberia. The second is, of course, Brazil. Brazil as being the most exposed, relatively wise, for the moment, utility in Europe. Brazil represents now 18% of our EBITDA. Also because of increase of electricity demand, but very positive evolution of exchange rate, we have an increase of 22% year-on-year. So Brazil is delivering what we want it to represent in our portfolio. The second part in terms of growth besides Brazil is, of course, EDP Renewables. The EBITDA increased by 31%, of course, due to the increase of the installed capacity. EDP Renewables represents now 20% of the EBITDA of the company for the first time. Here, what I would like to stress is the reinforcement of the regulatory stability in the Spanish market. It was, for a long moment, an issue during 2010. Now it's settled. It's important for us and for all the players. The second is the fact that we have signed, and by far the number one in new PPAs in U.S. markets, 841 megawatts in U.S. And 555 just in the last quarter. So we have made a huge effort, competitive effort, in terms of reducing our merchant percentage. I think that it's a very good sign for our portfolio. At the same time, a word for gas. Gas in Iberia increased and gave us a push on the Iberian market, also because we have now additional assets. Basically, portfolio effect. The second is efficiency. As you will see, we have kept the net OpEx over gross profit ratio at 28%. It is the best in the industry in Iberia. I would like to stress the fact that when we presented, almost three years ago, the targets in terms of cost reduction for 2012, we had a target until that year of EUR 160 million, and we have already reached in 2010. So with two years in advance, that target. Once again, we have very well performed on the cost reduction front. So efficiency portfolio of low risk portfolio. Of course, the fact that we have been growing on areas that have delivered better results relative to other technologies. After the 7% year-on-year increase on EBITDA, we go down to a 5% increase year-on-year to a net profit of EUR 1.079 billion. Let us see how we reach that. First, also, the net interest costs increased 3% year-on-year, but the average cost of debt reduced from 4.0% to 3.5% when we compare 2010 with 2009. We have kept the average debt maturity stable at five years. It is important for obvious reasons. After ending the year with EUR 4.4 billion in financial liquidity, we have already tackled the market for EUR 1.4 billion. So at this stage, as we speak, we have EUR 5.8 billion. It means that in liquidity, we are basically funded until almost the end of 2013. Because of all the issues of financing and especially sovereign risk, whatever, I think we all agree that it is very important and gives enormous visibility critical at this moment. Net debt is basically flat quarter-on-quarter. It is slightly increased over 0.1, basically because, as you know, it was foreseen at least as part of the Spanish tariff deficit to be sold. It was not the case in the last quarter. It was already the case at the beginning of 2011. This EUR 16.3 billion includes EUR 1.4 billion of regulatory receivables. The FFO over net debt increased from 16% to 18%, and the net debt or EBITDA, if you adjust, and you will see all these ratios further down the presentation. If you adjust for regulatory receivables, it ended the year with 4.1. That compares with 3.9 in 2009. CapEx wise, it is clear that we have been doing what we have told the market. It stayed at close to EUR 2.7 billion. A reduction of EUR 600 million year-on-year, and 74% was in expansion CapEx, of which almost 80% in wind and hydro. As you know, we have already committed to further CapEx reduction to around EUR 2.2 billion in 2011 and EUR 2 billion in 2012. We have already stated this, and we are committed to this CapEx reduction. That of course, as you will see, the ratio of CapEx over EBITDA decreases very sharply between 2009, 2010, and 2011. So in this front, what I would like to stress is after delivering operational results based on a portfolio low risk approach and efficiency. On this line, we have kept what? Low financial risk management, execution of selective growth on more protected areas, and keeping the low risk profile, namely on the funding side and in what concerns adjusting the growth of the investment program. It means reducing the CapEx, bearing in mind our strong commitment with the financial ratios that we have stated for 2012. And we will 2011 and 2012, and I will talk about this later. The commitment is to keep, as we have done in 2011, delivering what we have promised. Miguel, can you go through the presentation? I will come back to the wrap-up. Hi. Good morning, everybody. Moving through the presentation. On page four, we can see the key operating headlines of 2010, in which we saw a 7% increase of installed capacity of EDP, following the resulting increase of expansion in wind power, essentially. Regarding wind and hydro, it represents already 61% of total capacity by December 2010, and production of electricity from hydro and wind represented 64% of energy produced. Moving to slide five, we can see that in terms of EBITDA breakdown, 88% of 2010 EBITDA came from regulated or long-term contract activities, with the weight of Portugal in our EBITDA going down from 51% in 2008 to 45% in 2010. Excluding the impact from Forex, our EBITDA would have grown by 4%. Moving to slide six on efficiency, we can see that the ratio OpEx over gross profit of EDP remained flat at 28%. And we have, regarding our efficiency program, it has reached, in terms of cost savings, EUR 159 million for the measures taken up to 2010. Our efficiency program is now 33% above 2010 targets, and we have almost practically achieved our 2012 targets two years in advance. Moving to business areas, and starting in Slide 8 with the market environment in our key areas of operation. We can see that in Brazil, 2010 was marked by a strong growth of demand, 7.8%, also clearly below 2008 levels. In Portugal and Spain, we saw also clear recoveries of electricity demand. With the demand growing 4.7% in Portugal and 3.3% in Spain. In Portugal, we are already above 2008 demand levels. In Spain, we are still slightly low, below that. In gas, the gas market was penalized by the higher hydro production and lower CCGT output. Note that the strong growth in Portugal is essentially driven by strong demand growth from export industries, namely pulp and paper and chemicals. Moving to the long-term contracted generation Iberia, which represented 24% of our EBITDA. We are talking essentially about our long-term PPAs and the CMEC system generation in Portugal. We can see that our EBITDA went up by 7%, so essentially at level of the PPA CMEC generation. This slight improvement in terms of EBITDA is related with the stable return on assets of 8.5% pre-tax real. We had some positive impact from higher pool procurement results, and this already includes the negative impact from the 1% decline of installed capacity with the end of the PPA for a small fuel oil plant that we have, named Barreiro. The special regime had a strong positive impact from the strong increase in the output from mini hydro and an increase of 46 megawatts in terms of installed capacity. Moving to Slide 10, we can see that in terms of the market environment for our liberalized operations in Iberia, it has changed significantly between 2009 and 2010. Essentially starting in terms of margins, we can see that the clean dark spread and clean spark spread available to be closed in the market for 2009. We had the opportunities to close very attractive margins, namely in the fourth quarter 2008 and beginning of 2009, which was not such the case in 2010, in which of course, the margins available in the market to be closed were considerably lower in average versus what happened in 2009. Regarding the evolution of final price of electricity wholesale market in Spain, we saw also first that we had strong arbitrage opportunities in the second quarter 2009 and still in the first half of 2010, given that the spot price was below our hedge generation cost, as you can see in the right-hand picture. Nevertheless, these arbitrage opportunities that had a significant impact in our results in second half of 2009 and still a little bit in the first half 2010, they were not relevant in the second half of 2010. Also, in terms of ancillary services, they were very strong in the winter of 2009 and 2010. But this demand for system cost was not so strong in the second half of 2010. Moving to the area of sales to clients. We can see that we continued to grow significantly in terms of volume sold to clients, both in electricity and in gas. In electricity, with a focus on the SME segment, with an increase in our total market share from 11% to 12% in 2012, and in Portugal reflects the gradual transfer of clients to the free market. In gas retail sales, essentially the growth is driven by a more competitive sourcing mix on spot gas purchases that we did on an opportunistic way, and also the opening of the Portuguese free gas market, in which we have reached already a 28% market share in 2010. Summing these two points, the lower margins and stronger volumes, we can see that on Page 12, the stronger volumes were not enough to compensate the decline in the margins available. This implies a decline of 33% in our EBITDA from liberalized activities, which of course is also due to a very challenging comparison versus 2009, which was a very positive year. If we compare to 2008, our EBITDA in 2010 is 8% higher than 2008. Moving to Page 13 regarding commercial activity in Portugal, we can see that there's no material impact on customer collecting cycle, even considering the low economic cycle. If we look to overdue debt from customers Average collection period, even the levels of impairment for our customers, doubtful debt, they remain quite flat or even with some slight improvement in 2010. There's no material impact from the current economic environment. Moving to regulated energy networks, which represented 26% of our EBITDA, we can see that we show the 13% growth of EBITDA. With electricity in Portugal, the EBITDA going down 1% year-on-year. Nevertheless, it includes some negative impact from the lower tariff adjustment and from higher cost with the human resources restructuring. Adjusted for that, EBITDA would have grown by 4%. In Spain, this strong growth of 30% is driven essentially by the improvement in regulation on a retroactivity way to 2009. In gas in Iberia, we have the positive effect from the inclusion of the assets acquired in Spain, namely gas distribution assets in Murcia and Cantabria. But also even EBITDA pro forma excluding this acquisition would have grown 25%, which reflects the organic growth performance of our gas network. Moving to EDP Renováveis. We would highlight in 2010 the strong volume of PPAs signed in U.S.A. and also the regulatory clarifications in Spain, which were key for our operations both in U.S. and in Spain. We can see that on the left hand that we signed in 2010 571 megawatts of PPAs for existing assets plus 270 megawatts for future projects for 2011, 2012. So reducing the future risk in terms of merchant markets in U.S. In Spain, from the 44% of end of the year installed capacity that is under the new regulation, so under the Royal Decree 661 from 2007 and now affected by the new regulation. This new regulation excludes retroactivity and provides stability for the long term with low impact on our results. Moving to page 16, in terms of evolution of average selling price. Average selling price went down by 1%, reflecting slight improvement in Portugal, France, Belgium, Poland, and Brazil. So essentially, we are talking about markets, most of them with CPI updates, et cetera. In Spain, a decline by 6%, which reflects a lower level of forward prices hedged. In U.S., we saw increases both in terms of average PPA price and average merchant price. Nevertheless, the increase of the weight of merchant in the portfolio during 2010 implied a decline in terms of average selling price in U.S. In terms overall, EDP Renewables, as already reported, EBITDA went up by 31%, reflecting the 17% increase of installed capacity and 32% increase in output. Finally, Brazil which presented 18% of our EBITDA. The EBITDA went up by 22%, reflecting a positive impact from the appreciation of Brazilian real versus euro, 19% appreciation. In local currency, 3% up, reflecting the 6% growth of EBITDA in distribution, which reflects the 11% growth of LV distributed volumes. In generation and other, 1% decline, which reflects essentially the dry weather conditions in the second half of 2010. Hopefully, that's the financials. In terms of CapEx, reached close to EUR 2.7 billion, with maintenance representing 26%. We can see that in terms of wind power, continues to represent the bulk of expansion CapEx in 2010. So 79% of expansion CapEx was made in wind and hydropower. We plan to reduce our CapEx to EUR 2.2 billion in 2011 and EUR 2.0 billion in 2012, following the cut in wind U.S. expansion. In terms of construction in progress and hydro concession payments. So the total is EUR 2.2 billion, which includes essentially the concession payments made. In terms of construction in progress now, the big chunk comes from our Pecém plant in Brazil, which should be finalized by the end of this year, starting operations in January 2012. In wind, we have right now 590 megawatts under construction, and hydro construction in Portugal is growing. With 2012, we expect we have already three plants under construction with an expected EBITDA of EUR 40 million. For 2012, if we sum the coal plant in Brazil plus the hydro in Portugal, we expect EUR 150 million positive impact from new capacity on EBITDA in 2012. Moving to page 22, we can see that in terms of regulatory receivables, they moved up to EUR 1,443 million, with Spain being the largest component, of course, the Spanish tariff deficit. Nevertheless, we would like to highlight that we have already received the EUR 205 million in the first two months of 2011 from the two tranches securitized of the Spanish tariff deficit, and that in Portugal, we had the remaining component, which amounted to less than EUR 500 million. Moving to slide 23, we can see that net debt was impacted by higher than expected regulatory receivables and Forex on top of the planned expansion CapEx. If we start for net debt of 2009, we can see that we had a free cash flow of 1.9, then we paid 0.6 billion of dividends. Expansion CapEx was 2.1. The increase of regulatory receivables was 1.1, and then we still had the negative impact from Forex and fair value, which resulted in a net debt reported of 16.3. Moving to page 24, we can see that in terms of average debt maturity, it remains at five years, with the figure quite in line with what was last year. We maintained the rating in the region of A minus for the three rating agencies. FFO to net debt improved from 16% to 18% in 2010. Net debt to EBITDA, excluding regulatory receivables, was 4.1 by 2010 versus 3.9 in 2009. We maintained in term between fixed and floating, so floating 56%, fixed 44%, and with diversification in terms of debt by currency and debt by source of funds. Moving to financial liquidity position, on page 25, we can see that following the EUR 1.4 billion of funding raised in the first two months of 2011. We are talking about 0.9 billion of two bond issues, one for five years and one for three years, and also European Investment Bank, 15 years loan of EUR 300 million, and summing also 200 million of the securitization from the Spanish legacy assets. We reached the end of February with EUR 5.8 billion of cash and liquidity facilities available, summing, of course, to the 4.4 that we had by the end of 2010. If we compare this volume of financial liquidity to our refunding needs for 2011 and 2012, we can see that we have a comfortable liquidity position that covers the funding needs over the next 24 months. On top of that, we have target proceeds from disposals in 2011 of EUR 500 million. Regarding regulatory receivables, we expect a decline in Spain with the ongoing securitization and a slight increase in Portugal. Net profit in slide 27. We can see that from the 7% increase of EBITDA, net interest cost, as it was already referred, went up by 3%, reflecting the lower cost of debt of 3.5%. Higher earnings before taxes, a slight increase in terms of effective tax rates. Minorities reflect EDP's economic interest is down from 72% to 65% following the sale of treasury stock. Overall net profit went up by 5% year-on-year. I would move now to António Mexia for the conclusions. Thank you, Miguel. First slide of the conclusions is a soft slide. This soft slide shows, I believe, some important facts that generally are behind the figures. As you have seen, when you compare ourselves with our peers, we have seen the evolution in terms of how do you play the game, where we are strong, and how you basically build the difference with the rest. An index is always an index, but in any case, this index shows a very positive trend. In 2010, we were rated number one in utility sector. Electricity utility sector, we have been top of the class. I would like to stress where. As we are talking about figures, I would like to stress the highest score in the sector in risk management, in stakeholder engagement, in price risk management, in scorecard management systems, in human capital development, and of course, the rest, sometimes biodiversity, reporting climate, everything. Typically, the way we approach risk, how we manage people, and shows that we have been really changing the way how we do business and how we communicate with our stakeholders. As you know also, because Nuno Alves, we are number one in financial statements ranked in the world in all the industries. I think it is also very good in terms of, it is a recognition that we tend to be very transparent and very accurate in what we say to the market. Let us see for 2011. We should start, first issue is always, what about the Iberian market? The issue is the Iberian market is going to keep as a tough market. The liberalized market is going to be tough. As you see, the wholesale energy prices, forward prices for 2011, for the end of 2011, are flat compared to what they were at the end of last year. At the same time, you have forward energy market for 2011. You have been quite aggressive in terms of inputs. At the same time, the demand is slightly recovering in Spain once again. Portugal, that was already in 2010 above 2008. You have a 1.2% decrease. If you adjust by climate and working days, is minus 0.5%, so less than half of this figure. But it shows that demand will be probably relatively flat with a slight increase in electricity in Spain for the year. The name of the game is spot markets with residual demand for thermal power production and thermal spreads being kept at low levels. In this environment, we have been doing what we usually do, doing profitable hedging, because you have always to distinguish between hedging and profitable hedging. We have been hedging. We have our selling price average slightly above EUR 50 per megawatt hour, so in line with 2010, and the locked-in margin also slightly above EUR 10 per megawatt, in line in 2010. We will go through for a contracting of electricity sales and fuel costs to keep risk down. As you know, here it's a moment where we capture all the value of having a lot of long-term contracted generation, especially protected by the CMEC in the Portuguese market. So very different from the other players in Iberia. Overall, we expect we have a good visibility for the EBITDA in 2011, around 90% with very low risk. As you will see, liberalized activity will reduce its rates to 10%, down from 12. Brazil will slightly increase to 20%. Here, I would like to stress the shelter stable framework until 2013. In terms of wind power, as you will see, it will go up to 24% of the EBITDA of the company. We will have benefit from the impact of the PPAs that were signed. We have a very limited exposure to pool price in Spain due to hedging and new regulation. As you will see, we are growing in markets, especially in Poland, also in Romania, where the selling prices are well above portfolio average. Overall, we see a positive increase in 2011. Regulated network, it will stay stable. Visibility, it's the key word. In terms of long-term contract generation, as all of you know, Carregado fuel plant was shut down, so we have a reduction of EUR 85 million that was already foreseen when you compare to the EBITDA of 2010 in terms of the CMEC. The forecast contracted gross profit for the CMEC is EUR 860 million. So good visibility in terms of EBITDA that will drive us a low single-digit growth EBITDA for 2011. In terms of debt, the average cost of debt no further than 4%. It's important. In terms of receivable, we expect the additional securitization in Spain, and the first 2 months were delivering good news. A slight increase in Portugal. Very important, we have a commitment of having a net debt in 2011 lower than our net debt in 2010, bearing in mind, of course, the exchange rates that are foreseen in the business plan. For this, we have a plan of cash proceeds from disposals around EUR 500 million in several options under analysis. This is, of course, foreseen, managed to be sure that we will reduce debt in 2011 compared to 2010, bearing in mind the stable Forex rates. Net profit, we expect a low single-digit growth, as we have already stated in our last meeting. So once again, growing with a low single digits. I would also like to stress that we are also today having a good visibility to 2012 in the sense that, as we all know, we have a huge investment program in projects where the time to market will be towards the end of this year and beginning of next year. So you will have the new PPA coal plant in Brazil, plus 3 new hydro plants in Portugal. Only for this, we expect EUR 150 million positive impact on EBITDA for 2012. In the same line, in terms of commitments with the financials and adjusting to what is the state of the energy market, we are lowering our CapEx in 2012 to a EUR 2 billion level. We target the full cash dividend of EUR 0.185 per share, in line with the previous guidance. I remember that this guidance was given in July 2006, and we have been, until now, always increasing, as agreed at that moment, the dividends. Why? Because we have now a clear positive free cash flow generation in 2012. As we have already stated since that year, since 2006, and even, of course, confirmed by even bearing in mind the tough years of 2008, 2009, and 2010. We have a huge change in the cash profile of the company because of the focus growth, of the efficiency, and of course, the adjustment of the CapEx program with a strong positive free cash flow generation in 2012. Execution of our ongoing investment will add cash flows with attractive returns. Control risk. We will be keeping merchant winds low, especially in U.S. market, of course. As you know, being the company that disclosed more PPAs in the U.S. market and the one that is putting in the business plan the toughest, let's say, the sharpest decline in new additions in U.S. market for 2011 and 2012, it shows that we always avoid denial sizes. I think, once again, we are different, and of course, these deliver value for shareholders. Also, control risk and financing. Improving free cash flow profile and, as we have already seen, ensuring funding needs always two years ahead. As a wrap-up, what we have in 2010. Improvement of returns. Increase on EBITDA and in net profit. Wind power and Brazil were key growth drivers. At the same, a safe and sound financial management contributed to an increase in net profit. We have been focusing on sectors, countries in technologies that are delivering better returns compared to other technologies. Because I think it's profitable growth. It's asset allocation. I think it's smarter, and at the same time keeping the control risk on the contracted activities, on market diversification, on the CapEx reduction, on the liquidity. Keeping this low-risk DNA of the company and bearing this in mind, after already talking about the dividend for next year, of course, we are going to propose to the annual shareholders' meeting a dividend of EUR 0.17 per share, which represents a 10% increase year on year. Thank you, and let's go for the Q&A. Thank you. Ladies and gentlemen, if you do have a question at this time, please press star followed by one on your telephone keypad. To cancel your question, please press the hash or pound key. Once again, that is star one to register and the hash or pound key to cancel. Our first question comes from a line of Raimundo Fernandes. Please go ahead with your question, announcing your company and location. Hi. Good morning. This is Raimundo Fernandes, Questão de Hora in Madrid. I wanted to ask you about the current degree of sovereign risk in Portugal, and knowing that EDP is a prudent company within the very high degree of liquidity, you have been raising more debt. I just wanted to understand, how are you planning to deal with this or whether it has any direct implication on the company? The sovereign spreads in Portugal are high, and there is some consensus views that it may be having to go to the IMF. I just wonder whether a company that is almost fully regulated like EDP, whether it would have any practical implication in that scenario. I assume that you will be studying it. I just wanted to understand whether potential concerns are exaggerated, or you think it is something to be concerned about but something that is very manageable for EDP. Thank you. Raimundo, I guess you are talking about the financial aspects and not so much the regulation part of it. Am I correct? Sorry, I was on mute. I am talking generally about whether there are implications for potential borrowing costs, whether there are implications for the economy in general and for demand. What are the risks that you may face, and as well on the credit rating? To see whether a company that is almost fully regulated like you are, whether that is a concern that we should be considering, or you think that whatever happens to the Portuguese state, you will be pretty much immune? Thanks. Okay. I guess we had a good example in the bond issue that we did at the end of January, beginning of February, where we raised EUR 750 million for five years. That was the first syndicated bond issued by Portuguese or even Portugal since a year ago, and the one before had been ours. We regularly seem to be the ones that open the market. We had very strong demand. Obviously, we paid a higher spread than we are accustomed to. If you see how the issue price came in and what has happened since, I think that more and more the market is putting a level of risk of EDP significantly below the Portuguese Republic right now. Nonetheless, we are paying more, and that is an issue that concerns us going forward. Hopefully, this will be mitigated going forward. As far as the Portuguese Republic rating is concerned, I guess at least from what we heard this week, the news were better than most had expected. In fact, what we have seen is that even though the credit watch was not taken away, it did not result in a downgrade. It resulted in a postponement of the rating revision which seems to be at least the rating agencies are a little bit more undecided on what to do to the Portuguese sovereign. The numbers that we have seen from the budget execution have been better than expected. From the sovereign side, it seems to be that the numbers are coming in a little bit better than before. We have to wait to see what happens to the Portuguese rating, but that has to do with Portugal and the rating agencies. As far as we are concerned, there are two issues that maybe we can cover right now, is that once again, we pre-funded the company, so we have no issues whatsoever. Conservatively, we are saying we are not 2013 covered because, if we do the math to the nitty point, we probably have it totally covered already by 2013. But surely 2011 and 2012 is fully done, so we have no need whatsoever to go to the capital markets to raise bonds if we so decide to. This decision of pre-financing has helped us to be in a management of liquidity in a much stronger position than we were three years ago and to face whatever comes from the markets in a much more relaxed position than we would be otherwise. Also, Raimundo, in what concerns people tend to forget that we are already 55% out of Portugal, business-wise, not financial, but business-wise. At the same time, our business is— If you pick one of the good businesses, you have of course, the very resilient Portuguese energy business. It means that we have quite a low exposure to the economic cycle in Portugal in our portfolio because of the nature of the regulation and the nature of the long-term contracts that we have. I think this is sometimes undervalued, is the fact that when you look into macroeconomics and if you don't like what's going on in the country in terms of electricity markets, it's clearly something that is because of regulation, because of the long-term contracts. It's a very, very resilient one. It's a good part of the business. Instead of having a discount for that, just for the energy, it's good. It's a resilient one. But the biggest important remark is the one that financially Nuno's mentioned. Okay? Thank you very much. Our next question comes from the line of Alberto Gandolfi. Please go ahead with the question, announcing your company and location. Yeah. Good morning. It's Alberto Gandolfi, UBS, London. I have three questions, please. The first one is a little bit more strategic. You're talking about lowering debt via disposals of EUR 0.5 billion. How about new measures? Very recently, a competitor of yours slashed quite significantly renewable CapEx for 2012. You already did it at the end of last year, but so did they. I was a bit surprised not to see a bit more reduction in CapEx coming from renewables, and I would like to see what's the logic behind that. Is there anything else that we should consider, for instance, a buyout of EDPR or any other measure that could help lower the net debt faster than what you are considering here? Then other two questions on your guidance. For 2011, can you elaborate a little bit what you expect in terms of evolution from Brazil, given what's going on with the distribution regulation? Can you help us model a little bit the liberalized business in Iberia? You are hedged, but it seems your spreads are a little bit lower, so I would expect a decline in EBITDA from the liberalized business. Then moving below the line if you talk about a low single-digit increase in EBITDA, I don't know, it could be EUR 150 million. It would seem that this would be more than offset by increasing depreciation, increasing the cost of debt, and the absolute amount of debt versus the average amount of net debt in 2010. You don't have capital gains. You're having increasing minorities. So, can you maybe comment on these items? Because low single-digit increase in EBITDA would look quite tough to beat the reported, I think, you are reporting right now. Thank you. Okay. I will start. Alberto, thank you. It's António. Lowering debt through the disposal, that's the will that we are using to be sure that we will deliver what we are saying, is with the current forex expectations to have a lower debt at the end of 2012. Why appear has talked about lowering very aggressive renewables investment. I like to see that. The difference is that we have been doing this much sooner than everybody else. We have already done it. When, namely in the U.S. market, we have already, for 2011, done it, and we have already stated for also for 2012. But we have done it more than one year ago, almost two years ago. We avoided any denial perception about the evolution of those markets. When we see a reduction to 200 MW in the U.S. on a yearly basis, even with others' reduction, we are still the one that has reduced more in that market. The difference is, we done it first, and now you cannot compare what we have done one year ago to what people are doing later, and we have done it sooner. I'm sorry, we have just been quicker than everybody else in this, especially in the U.S. market. Of course, probably at the same time as FPL. We have been very aggressive in adjusting investment in the markets where we see short-term problems, because we still trust that the U.S. market is very good in the long term. At the same time, and I think it's also different, we have been able to show option growth in very attractive markets like Poland, or even relatively wise, when you see new bids in the Spanish market. If you do the ranking, please see who is typically on the top, number one in terms of new additions for the future. In terms of megawatts awarded. Clearly, avoid any denial on the tough short-term markets, and at the same time creating options in attractive markets where the average price is today much higher. We have been more aggressive and sharper than, I believe, others. In terms of Brazil, as you know, we have visibility for shelter until 2013. In what concerns Bandeirante, as everybody else, we expect better than the 7.15%. We expect something closer to 8% after the negotiations. Part of it is visible, shelter. Part of it will be established, I believe it's by August. You correct me, Miguel, but by August, and we expect better than the 7.15%. At the same time, we expect, as we have seen, an increase on energy demand, and the first two months of the year shows that we are in the good direction. In terms of liberalized market in Iberia. We have been very clear. EBITDA in 2011 was already lower than in 2010. I think that we have reached the bottom in the last quarter of 2010. In average, the EBITDA of the liberalized activities quarter by quarter in 2011 will be higher than the EUR 80 million reported in the last quarter of 2010. I think that we have been doing in all the fronts, like the domestic coal, et cetera, what we need to do to have a nice as possible market. I will stress again, we are the least exposed utility in Iberia to these markets. EBITDA, going from EBITDA to profit, Nuno likes to do the explanation. Alberto, obviously, you are right. You just forgot to mention two lines which go the other way around and justify why we still see net income with low single-digit growth when compared to 2010. We expect in 2011, number one, to have less provisions than we did in 2010 and to have a lower or to have a tax break that will lower our rate in taxes for 2011 too. So those two together will compensate the increase in depreciation and interest and justifying the increase in net income. Very clear, thank you. Okay. Maybe you want to answer. We have a couple of questions from the internet. Maybe António can answer one, and I will answer the other one. From Mariano. Mariano from Goldman Sachs. Goldman Sachs. How comfortable are you with your already rolled U.S. targets in 2012? As you can see, we have been, as I already stated, the toughest reduction in U.S. markets to 200 megawatts average in 2011 and 2012. At the same time, we have already closed PPAs. That represents three-quarters of the new additions into 2011 and 2012. So this is very strong. So lowering construction and already signing PPAs, already signed for the new additions. So I think that we have been very pragmatic about the U.S. market. So once again, I would like to stress we have done this before anybody else. Concerning Spain, how many megawatts do we have to build? Still in the pre-registry. We will build 250 MW still in the pre-registry. What is our view after 2012? As I have mentioned, after 2012, I think that we are in a very good position in terms of quality of assets concerning the regional tenders that were delivered until now. We rank very well in the top line, so probably number one in new additions after this. Of course, we need to know exactly what will be the regulation. If any Spanish government wants to reach the targets that are still there, they need to introduce after 2012 something that makes sense. We expect that the tariff scheme will put us close to the bottom of the actual range in terms of floor and ceiling model. We are very confident that even in that environment, we have done all the math with all the portfolio that we have, and we have a very sound and profitable package fleet for after 2012. Of course, we would like to see this regulation as soon as possible. The fact that they have separated clearly wind from solar is good news. The fact that they have settled until 2012 with a scheme that for us had a very marginal impact shows their commitment, the Spanish commitment to the wind development. Today it is clear that wind is competitive with thermal. In our math, it is clear that if you want to have a wind farm competitive with a gas plant that, of course, pays the CapEx and the gas, you have an indifference level around $100-$110 per barrel. I think that we are reaching that volume and that today, the mature wind industry, the onshore wind, is clearly competitive and does not represent a burden for the tariff scheme. So we feel confident that the Iberia market will keep developing wind as expected. Maybe I can answer the other internet question from Andrew Moulder, CreditSights. The question is, when we state that net debt 2011 less than net debt 2010, if we are assuming we securitize all the remaining Spanish tariff deficit in 2011. Our assumptions for 2011 is that free cash flow will be zero, slightly positive, excluding all extraordinary. So meaning there is no extra positives and negatives from Spanish tariff deficits, and there is no Forex change to what it was in 2011. Having said that, what we have budgeted for this year is that whatever is generated in Spain of new tariff deficit will be compensated by the sales in the market. Right now, we have already pretty much achieved it. One more 2 billion trade, and we probably will have it all done. We would not see any surprise in Portugal of a large deficit. The other issue there is that we know that we are going to be exercised another 10% put of the Naturgas transaction, and we will be exercised the put of Genesa. For that, in order to compensate those two extraordinaries, that is why we have to raise the EUR 500 million in sales, that way achieving the reduction in net debt. Maybe we can go to the next question. Our next question from the telephone comes from the line of Pablo Cuadrado. Please go ahead with your question, announcing your company and location. Hi, good morning, everyone. It is Pablo Cuadrado from Banca Privada d'Andorra, Merrill Lynch in Madrid. Just two quick questions, or a few questions have been already answered. On that of the net debt improvement for 2011. I was wondering whether you can confirm if you are including in your budget as well, the potential buyout of minorities coming from the wind division in Spain. I think there is a joint venture with MacBreya that I think you are in negotiations in order to take the minorities. The second question very quickly, Nuno mentioned about lower provisions in 2011 projected. I was wondering whether you can give us more color about why the provisions have been increasing during 2010, above EUR 100 million. Thank you. Okay. As far as the renewables put of Genergex, I just mentioned, yes, we are accounting for that together with the natural gas put. Yes, those two puts are in the plan for 2011, and the EUR 500 million will more than cover those two puts. As far as the increasing provisions that we have in 2010 when you compare to 2009, those have nothing to do with the economic environment, be it in Portugal and Spain. In fact, we continue to see non-performing debt from clients very well, identical to what it was prior to 2008. No issues there. We booked a provision there of a major contract we have with a Spanish company, and that is why it increased materially. That is the main difference from what we had before, and that will not occur again in 2011. Thank you. Thank you, Paulo. Next question. Our next question comes from the line of Javier Garrido. Please go ahead with your question, announcing your company and location. Good morning. Javier Garrido, JP Morgan in Madrid. I was curious about the comments you made about the tax rate, and particularly also after the evolution of cash tax payments in 2010. Could you please explain to us why the tax rate is going to be lower in 2011, and whether that's going to be recurring or not? Also on taxes, could you please elaborate on the 2010 tax benefit that you got in the regulated Portuguese business? Again, whether that cash benefit is a tax deferral or is just simply a tax savings, sorry, and whether it's going to be recurring or not. The second question is, again, I'm sorry, on net income guidance for 2011. I just wanted to know whether you were including any capital gains from that half a billion EUR of asset disposals or not. I think that's it. Thank you. All right. Well, the last one first. No, we're not assuming any capital gains or anything material. This year there's some, last year there was some. But meaningful or material? None. As far as tax is concerned, the 2011 is a tax break. It's not that the tax will change. The resulting effective tax is going to be less, and it's now going to be a recurrent item. As far as this year, and what you have, and you see it on the cash flow, it has to do with the current taxes and deferred taxes. This basically is concerned with how you book taxes on the tariff deficits. So once you sell, you book it up front, and then when you don't receive it and you're generating, you're deferring the tax. So that all in all, what you see on the FFO in our page of about EUR 180 million this year, if it was excluding all those for those issues, you probably should have about EUR 280. So EUR 100 million more this year and EUR 200 or EUR 300 million less than it was back in 2009. So if what you're looking for is the recurrent number, it should roughly be about EUR 280. Perfect. Thank you. Next question. Our next question comes from the line of Fernando Garcia. Please go ahead with your question, announcing your company and location. Hi, good morning. Fernando Garcia from Espirito Santo Investment Bank in Madrid. You were mentioning in the presentation that you expect an average cost of debt of around 4% in 2011. Could you comment on the hypothesis behind and on sensitivity to a reoccurring crisis? Our hypothesis that we are working on is, on average, the Euribor to go up by 25 basis points and the refinancing to be a little over 1% more expensive than we had before. Because we are only refinancing a little over EUR 1 billion, its impact is only on less than 10% of the debt. So our expectation is 4% to be the most. I would be unhappy if it goes over 4%, and I don't see how, unless we saw Euribor rates go up very fast. Which despite yesterday's news, I still doubt that the ECB will raise rates before the summer, but we will have to wait and see. But we are comfortable with this guidance of 4%. We have another internet question. Alejandro Visio from Cygnus. With EDPR trading 20%, 30% below book value, are you considering any strategy to crystallize that value, squeeze out minorities, divestments? I will pass that on to you. I think that you are right in what concerns the value at which it is trading. Basically, when we consider selling minority stakes in some wind farms, of course, it is because those sales would be made at a very different multiple in terms of million EUR per megawatt than it is today seen through the stock. So we would like to see crystallization of the value through those operations. Squeeze out of minorities, it is not the case. We are very committed with our first vision in terms of mother company financials being totally kept under control. In terms of divestments, as I have mentioned, the only case would be these minority stakes in specific wind farms where you can build structures to crystallize value and help the funding. But we do not see any other change. Why? Because we have already basically reduced the growth very much in the company, and we have kept targeting in those new megawatts, the key markets where the average price is higher or where you have, as the market has been showing clearly, better assets than the competition with better load factors in more mature markets. So clearly, I think that investment-wise, focus in partnerships in wind farms, it is our strategy, and we do not want to squeeze out minorities. Next question. Our next question comes from the line of Bruno Silva. Please go ahead with your question. Announce your company and location. Good morning, Bruno Silva, BPI, Porto. I have three questions, if I may. The first one on Brazil. With the announcement of an increase in payout, just wonder if you are changing the financing strategy of your listed subsidiary. Another related question with Brazil, if going forward and considering urging by regulator and other guys in Brazil urging for consolidation of distribution market, if you could enter that plan, consolidating and considering financial restrictions, if you would see it as more likely to sell down a minority stake in the assets or cutting your direct listed stake in order to absorb more assets. The second question, I would like to go a little bit deeper, if you don't mind, on the liberalized business guidance you have given, related with how much of the thermal production that you expect to be needed to cover expected sales in 2011. How much of that is not hedged yet? Considering your comments on increasing fuel prices, what would be your worst-case scenario, and what would be the alternatives to serve your expected output? Finally, there have been comments by some of the companies, I don't know how relevant it would be for you, not that much possibly, in terms of the accelerated depreciation in Spain, if that is also considered in your guidance of net debt. Thank you very much. Just to start, accelerated depreciation in Spain is not considered. That's clear. We have not considered this. In what concerns Brazil, we have not changed our financial strategy for Brazil. We still ring-fence. We finance ourselves in Brazil for the Brazilian venture. Nothing has changed. The only thing is, of course, the company is being able to show very strong figures, and basically, the company is paying to the shareholders. Nothing new, and I think that the payout is basically in line with what makes sense in the Brazilian market. In terms of the consolidation, we have been talking about this issue for the last 3 to 5 years. We have been very clear about what we want to build from Brazil. Brazil is today strategic. When everybody 3 or 4 years ago was asking why we don't leave Brazil, now everybody understands why we kept the focus in Brazil. Now everybody would like to see it more. We are relatively the most exposed. I think that we have around a very brown business, and we're, through the swap premium, giving away some disco company with no synergies, and increasing the generation part makes sense. If we grow, we want to grow in generation. We don't intend to have any fancy participation on these consolidation markets, because these are very complex and I believe not value creation. We don't need to change our strategy. We have growth options in terms of both thermal and hydro. We have been focusing on targeting growth only when it makes sense in value creation, like it is the case of wind farms with the PROINFA scheme and keeping all the value-destroying options. We do not need to change our strategy, and we will benefit from this. Of course, we are there to stay. Bruno, on the liberalized business, just on the further contracting for 2011, I would like to highlight two points. One is that the marginal prices that we have been contracting are significantly higher than the 50% average that we have. The prices are moving up, which is positive. In terms of the remaining part, we have a lot of flexibility. In terms of contracts, we have negotiations going on. Also note that on these volumes, we are not including the domestic coal, which is also, let us say, you can consider contracted. I would say that the future forward contracting will be based on exercise of flexibility on fuel purchases, volumes of gas uses, volumes of production which can also be adjusted, and also on contracting at higher selling prices than what we have today in terms of average. Next question. Our next question comes from the line of Florence Taj. Please go ahead with your question, announcing your company and location. Good morning. This is Florence Taj from MFS. I was wondering if you could update us on the Chinese entry into your capital base. Also, on the disposals, the EUR 500 million, if you could give us a bit more color on what you are thinking there, which part of the business those are likely to come from. Okay. Chinese. As you know, the time to market decision of those companies is quite long. We believe that they are in the internal process of implementing what they have stated, because it was a statement by CPI. It is a decision driven by CPI. Clearly, they announced this to the market. I think that they are in the internal process to make that decision. I do not see any change in their target. The only thing is that the time has confirmed what I have already stated to everybody, that this process is long because as everybody knows the decision-making process of these entities is very long. In terms of disposals, several options. As Nuno has mentioned, we have targeted this to be sure that we keep the commitment of lower debt considering the put exercise. As I have mentioned before, one of those examples is the minority stakes in wind farms. Clearly, we are targeting things, several options that we will not change the nature of our business, and the opposite, in certain cases, it will tend to crystallize value and show visibility in those values to the market. So wind farms is probably the first and best example. Okay. Thank you. Next question. Our next question comes from the line of Manuel Palomo. Please go ahead with your question, announcing your company and location. Hi. Good morning. Manuel Palomo from Citigroup in Madrid. I've got a couple of questions on strategy, one on debt and the other one on the liberalized business. On debt, just wanted to know whether you have any intention to change or at least to reduce your exposure to floating rates. Secondly, on the liberalized business, it has proven to be the right strategy to be long supply, short generation. Also wanted to know whether you have any intention to re-weight it or to change it. Then a clarification on CapEx. CapEx for coming 2 years, it's EUR 2.2 billion and EUR 2 billion, and I just wondered whether this is net CapEx including or net by the cash grant figure. If so, what's the cash grant figure you are expecting for these 2 years? Thank you. Liberalized market business. Let's start by this. Being long on supply and short on generation. We have done it before the others. I think it's our strategy. We will keep doing like this. The fact that we were able to keep the double of the market share in Spain in terms of supply compared to our generation shows that we mean serious when we want this strategy of being long in supply and short in generation. Also we tend to be rather shorter than other players in terms of gas to have the flexibility that Miguel mentioned. In terms of CapEx, we are talking about growth CapEx. Nuno will explain this. It includes it, but it's minimal. The 3 years is EUR 50 million, so it wouldn't change the rounding of the number. In as far as the debt, the fixed versus the variable, this is the year-end results. Once you see the first quarter results, the numbers will have changed. I cannot give you a number right now. Okay. We can go now to the left back end, please. Our last question comes from the line of Jorge Alonso. Please go ahead with your question, announcing your company and location. Hello. Good morning, everybody. Jorge Alonso from Societe Generale in Madrid. I have a question regarding the working capital. We have seen an increase on the working capital, not only regarding the regulatory receivables, and I would like to know your opinion regarding this issue in 2011 apart from the regulatory receivables evolution that you operate inside. Thank you very much. Okay. The main change is the extraordinary tax we paid this year concerning the securitization of the Portuguese deficit back in 2009. We paid roughly EUR 430 million more due to that extraordinary tax. Was there any other question? Yes. That was the only question, no? Yeah. Yeah. Okay. Okay. No more questions? You have one. Last question. From Ana Maria? No. No? No. Okay. Okay. If there is no additional question, thank you very much. Based on the questions I see everybody also still in the mood of understanding how the energy market will proceed, especially in the area. Hopefully, we have been clear in what concerns our strategy and doing the same as we have been doing, that is reaping the benefits of that strategy in terms of the commitment, in terms of the financials, and hopefully, the visibility that we have today for 2011, and already for a strong 2012 in terms of all the investment that we have been doing. The discipline that we have been implementing in all fronts shows that we have been doing what we have to do, and that we will do what we have to do to keep exceeding expectations. Thank you very much, and hope to see you soon.