Message from the Chairman António Mexia

Annual Report 2018

Message from the Chairman

António Mexia

Dear Shareholder,

Over the past 12 years we have been anticipating the trends in the energy sector and aligning our business model with the energy transition for the fight against climate change - a requirement for those who are committed to creating a more sustainable world for future generations.

Our strategy has resulted in the creation of a leading renewable energy company. Today we are the second greenest player in Europe, with 65% of the EBITDA being sourced from renewable energy and a total installed capacity of 21 GW with considerable international exposure, more than 60% of the recurrent EBITDA is generated outside Portugal.

Renewable total generation

The commitment to sustainable development has long been incorporated in EDP’s strategy as one of the core values and we will continue to push forward with clear and demanding goals. In agreement with this, since 2008, we have been part of the Dow Jones Sustainability Index (DJSI), always with a leading position as one of the most sustainable companies in the world.

We are aware of the role that we will play in the global effort to decarbonize the world and limit the global temperature increase to 1.5° C. We are committed and intend to meet the ambitious goals of the Clean Energy for all Europeans legislative package, which targets a carbon-neutral European Union by 2050. Thus, today it is clear that the energy of the future will undoubtedly be electric and:

  1. Clean, with an increased need for decarbonization, where utilities play an increasingly important role, as they account for 40% of total emissions;
     
  2. Affordable, a paradigm that will be further enhanced by the decrease in the cost of renewables, reinforcing their position as the most competitive technologies;
     
  3. Reliable, with flexibility ensured by backup systems such as batteries, water reservoirs for pumping and thermal;
     
  4. Focused on the client, with the creation of new solutions and services based on energy efficiency, distributed generation, the use of batteries and the adoption of electric mobility.

As mentioned last year, the current revolution in the energy sector is characterized by “3Ds”: Decarbonization, Digitalization and Downstream, where today, we should also add the need for full Disclosure of the company’s performance. EDP is very well positioned for the future due to the anticipation of these trends. Our unique and distinctive starting point, fully aligned with an indispensable and irreversible energy transition, puts us in a privileged position to increase the ambition and the focus of our vision.

A demanding year due to the regulatory context in Portugal

2018 was a particularly difficult year, we were faced with non-predictable and unjustified regulatory measures in Portugal, leading to a significant decrease of our results. However, we maintained the focus, with a continuous bet and better than expected performance in EDP Renováveis, in Brazil and in Spain. These contributions mitigated the losses reported for the first time since the beginning of the privatization in the conventional business in Portugal.

EDP’s 2018 Group performance was based on three strategic pillars, namely:

  1. The continued focus of our growth strategy in Renewables and Brazil: ?In Renewables, EDP built more than 800 MW of onshore and solar wind and secured long-term contracts for 1.3 GW, of which 0.4 GW for two substantial solar projects - one in the United States (0.2 GW) and one in Brazil (0.2 GW). Furthermore, it was also a dynamic year in offshore wind with the beginning of the construction of Moray East in December and the acquisition of the exclusive right to develop a project of up to 1.6 GW in the United States, under a joint venture with Shell. Lastly, 2018 was also marked by the bet on the floating technology with the beginning of the construction of the Windfloat Atlantic, potentially the most efficient way to produce renewable energy in densely populated and deep-water countries. ?In Brazil, growth was supported by the completion of the first of five transmission lines, 20 months ahead of schedule, and by the acquisition of a 23.56% stake in CELESC which allowed us to be involved in the management of the company.
     
  2. A continuous portfolio optimization through the completion of the first majority sale - 80% stake in a ~500 MW portfolio of wind farms in the USA and Canada, with a capital gain of 129 million dollars - and through the sale of minority stakes in offshore projects, particularly in the United Kingdom (43%) and France (13.5%). These sales and risk sharing mechanisms allow not only for capital recycling, but also for value crystallization in a shorter time frame. In this context, EDP has also divested non-core and smaller scale activities, such as biomass in Portugal and small-hydro assets in Portugal and Brazil.
     
  3. The focus on operational efficiency allowed us to reach the target of OPEX IV two years ahead of schedule, generating total savings of 200 million euros. From a financing standpoint, we securitized 1.3 billion euros of tariff deficit, we were pioneers in Portugal with the issuance of a 600 million euros Green Bond and secured the funding of Moray East for a total amount of 2.6 billion pounds, a milestone in renewable energy on a global scale. In Addition, EDP contracted Tax Equity funding with the most favorable conditions of the last 10 years. All this allowed for a debt reduction of about 3%, compared to the same period.
Debt reduction

From an operational standpoint, the company’s performance should be considered as positive. Excluding foreign exchange impacts, the Group’s EBITDA increased by 2%, supported by the sustained growth in Brazil and in EDP Renováveis (despite weak wind resources, 6% below the long-term average), as well as by the strong recovery of hydro ressources and a rigorous cost control in Iberia.

However, the results of the Group were strongly penalised by the political interpretations of the Custos de Manutenção do Equilibrio Contratual (“CMEC”), in particular with regards to the final revisibility and the alleged innovatory costs, which amounted to a total non-recurring cost of 303 million euros. As previously communicated to the market, EDP considers that such decisions violate the law and the contracts signed, which were based on a contractual framework defined in 1995-1996 to make the company solvent and enable its privatization. Accordingly, EDP took the necessary measures to protect the interests and rights of all its stakeholders.

In Portugal, other sector specific taxes have also been maintained, even if some were implemented with an extraordinary nature. In short, our results suffered a negative impact of 672 million euros due to adverse regulatory measures and taxes or fees applied to the energy sector.

Impact from regulatory measures in Portugal

Despite these adverse regulatory impacts in 2018, we remain positive and believe that the energy policy of the coming years will provide the fundamental stability to foster private investment and ensure the energy transition.

Finally, from a financial standpoint, EDP reported a sharp reduction of 53% in the 2018 net profit to 519 million euros, mainly due to the regulatory situation in Portugal, which contributed with a net negative result. However, excluding extraordinary effects, recurring net income rose 3% to 797 million euros.

Returning Net Profit

Last but not the least, 2018 was also marked by the launch of a tender offer by our largest shareholder, China Three Gorges (CTG), over the share capital of EDP and EDP Renováveis. Referring to the presented proposal, the Executive Board of Directors communicated its position to the market in June last year.

A customer-centric company

Over the past year we have adjusted the organizational structure of our supply activity with a view of adapting our business solutions to a more conscious, more demanding and more digital customer. The objective was clear: greater value creation through the presentation of innovative service proposals.

We have created the e-factory, which aims to accelerate the development of products and services so EDP can continue to evolve in line with our client’s ambitions, with a clear focus on energy efficiency, distributed generation and electric mobility. Today, we are already perceived by the B2B segment and more specifically by the small and medium-sized enterprises as more than a supplier of electricity and gas, having recorded the largest ever annual increase in the sale of services to these customers in Iberia (57%).

At EDP, the relationship with our clients is crucial, thus the development of new capabilities has been focused on increasing the quality of our service which allowed us to ensure higher customer satisfaction, 78% in 2018 (+ 2b.p. than in 2017), through, for example, the use of artificial intelligence. This allowed us to maintain our customers’ portfolio with 9.8 million customers in electricity and 1.6 million customers in gas.

The electric mobility plan is increasingly relevant in the global effort for decarbonization. As a result, EDP has taken on the role of promoting the adoption of electric mobility, not only in Portugal but also in the remaining geographies where we are present.

In Portugal, we have continued to invest in the expansion of our charging stations network. Since 2017, 50,000 electric vehicles were charged which avoided the emission of about 423 tonnes of CO2. New charging solutions have also been created. On the one hand, the EDP Wallbox allows for more efficient management of consumption and greater control of the contracted power in private spaces. On the other hand, to target public spaces, we established a partnership with BP for the installation of 30 new chargers in gas stations. In Brazil, we launched the largest electric corridor in Latin America with BMW, making it possible to travel by electric vehicle between Rio de Janeiro and São Paulo. We have continued to invest in Spain, having already installed more than 80 charging stations in Asturias.

2018 was also the year of digitalization in EDP Distribuição, with the launch of the new functionalities of its app to simplify the interaction with all stakeholders, from clients to municipalities. The company also implemented 15 process robotization initiatives resulting in a potential saving of ~ 50000 hours of work. In parallel, we continued the effort of implementing smart grids, having already installed about 2.6 million smart meters in Iberia, this increase was especially significant in Portugal where this year’s growth was 51%.

Our people are our success

At EDP, in 2018, we focused on diversity and inclusion.

The strong commitment to gender balance over the past few years allowed us to increase the share of women in our workforce to 25%, a number that is quite substantial considering that this is traditionally a male sector. We remain determined to continue this path and to reinforce our diversity also based on other criteria. Today, we acknowledge that this diversity will bring new perspectives which will enable the creation of enhanced value for our business.

As a global company, EDP has employees from more than 40 nationalities and a growing demand for more analytical and technological profiles, aligned with the digital transformation and generation renewal of our company. To reinforce its positioning as a global company in the energy transition, EDP will continue to couple the deep knowledge of the current workforce with new talents from different backgrounds, which in 2018 corresponded to about 17% of our new admissions.

Furthermore, one should also highlight the important role of our volunteers. This year, EDP’s volunteer program mobilized more than 3,000 volunteers, who devoted more than 31,000 hours of their time to community service. I am proud of this number which shows that our people’s ability to deliver and dedication goes far beyond the contribution that they give to the company’s results.

Another example of the excellent responsiveness of our teams were the actions taken following the natural disasters that devastated Portugal in 2018. I want to thank all those who supported and contributed to the resolution of the various incidents caused by hurricane Leslie and the fires.

An ambitious path to sustainability

At EDP, we know that our role is not limited to the relationships with our customers and employees, we acknowledge that we must go further in our contribution to our communities. Therefore, we are committed to the development of areas such as the environment, culture, education, safety, health and social welfare in all the geographies in which we are present.

We have a very clear purpose of putting energy at the service of sustainability. For more than a decade now, we anticipated the main global trends through continuous investment in renewable energies, efficiency and innovation.

At the top of our strategic agenda is the commitment to demonstrate our performance in the 10 principles of the Global Compact, a United Nations initiative, focusing on Human Rights, Labour, the Environment and the fight against corruption, as well as our contribution to the achievement of nine of the seventeen Sustainable Development Goals of the United Nations Agenda for 2030. EDP’s participation in the World Business Council for Sustainable Development (“WBCSD”) and my appointment as chairman of the Board of BCSD Portugal and as chairman of the Board of the SEforALL also reflect our vision and our commitment to a sustainable development at a time when climate change is in full view.

It is also worth mentioning our active contribution to accelerate the decarbonization of transports in 2018, with a commitment to electrify our car fleet until 2030. We are also committed to developing new business offerings and solutions that promote the energy transition, as well as mobilizing communities for the electrification of transports.

Moreover, it should be noted that EDP remains the main private sponsor of culture in Portugal. In 2018, the MAAT and Central Tejo presented 17 exhibitions with more than 327,000 visitors. In Brazil, we strengthened our role with the support for the reconstruction of the Portuguese Language Museum in São Paulo. On the social component, EDP Group’s sponsorship in 2018 totaled 28 million euros, having already surpassed what was the initial 100 million euros target for the 2016-2020 period.

Today, EDP is a company that extends its ethical principles to all the dimensions of its activity. Internally, through the training and continuous reinforcement of auscultation, monitoring and auditing procedures. On an external level, through the involvement of suppliers and partners in the underwriting of good practices and the continuous auditing of activities.

An even greener future

EDP is well positioned to be a leader in the energy transition and embrace the new challenges of delivering superior value to our shareholders. Our portfolio, essentially green, puts us in a privileged position to implement our vision based on 5 strategic pillars:

  1. Accelerated and focused growth, with a clear bet on renewables leveraging on the knowledge and execution capabilities developed over the last decade;
     
  2. Continuous portfolio optimization, through the sale of majority stakes in renewables to accelerate organic growth and value crystallization, and also through the divestment of other assets to balance EDP’s risk profile;
     
  3. Solid balance and low risk profile, focusing on debt reduction, in the short term, with the aim of improving our rating;
     
  4. Efficiently and digitally enabled, through the continuous implementation of efficiency and digitalization projects boosted by the natural generation renewal of our people with the goal of having a more flexible and global organization;
     
  5. Attractive shareholder remuneration, based on the distinctive green positioning of our company, with sustained earnings’ growth and an attractive dividend policy.

Our sector is going through a revolution and EDP positioned itself on the right path thanks to its anticipation strategy and the ability to deliver in recent years. EDP has a clear ambition for 2030, we shall be coal-free and we will continue to contribute actively to the decarbonization of the economy by reducing our CO2 emissions by 90% (compared with 2005) based, above all, on generation from renewable energy sources (in more than 90%). Together with our customers, we will also promote electric mobility with the aim of achieving 1 million customers by 2030. On the other hand, we will continue with the effort of digitalization and decentralization, notably with the transformation of our Organization, the transition to smart grids in the Iberian Peninsula and the installation of more than 4 million solar panels for our Customers.

I invite you to find more detail on our operation along the pages of this report and to follow the way we are preparing for the future - a more digital, more renewable and more sustainable future. A future that will be electric.