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Edited Transcript of EDP.EP earnings conference call or presentation 3-Mar-17 11:30am GMT

Thomson Reuters StreetEvents

Full Year 2016 EDP Energias de Portugal SA Earnings Call

Lisbon Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of EDP Energias de Portugal SA earnings conference call or presentation Friday, March 3, 2017 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Mexia

Energias de Portugal S.A. - CEO

* Miguel Viana

Energias de Portugal S.A. - Head of IR

* Nuno Alves

Energias de Portugal S.A. - CFO

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Conference Call Participants

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* Rui Dias

UBS - Analyst

* Stefano Bezzato

Credit Suisse - Analyst

* Jorge Guimaraes

Haitong Research - Analyst

* Carolina Dores

Morgan Stanley - Analyst

* Neil Beddall

Fidelity - Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to EDP's 2016 yearend results conference call. (Operator Instructions). I must advise you this conference in being recorded today, Friday, March 3, 2017.

Now, I'll turn the conference over to your speaker today, Antonio Mexia. Please go ahead, sir.

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Antonio Mexia, Energias de Portugal S.A. - CEO [2]

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Hello, good morning, everybody. Thanks to be on the phone for the conference call on our 2016 results.

My first words would be to highlight that I like the figures that we have in front of us. We have a full delivery of all our commitments for the year, in all the key financial metrics. The first page, I think, it shows it rather well.

In May, when we met in Investors Day, we had given a guidance that was, already, at that moment, slightly above consensus. We revised guidance in July. We now present the figures that, in all lines, are better than the guidance that we have given revised in July.

I think it's important to show that this comes not only from above the line, and also from below the line. I know that there are people that don't like below the line, especially when there are positives. But clearly, you have to deliver this, deliver above the line. We will see that we have done it. We have also delivered and we -- and to deliver in it to do it, below the line.

Let's go through this presentation and to show exactly why I mean that these figures are good.

Our EBITDA reached EUR3.759 billion, supported by a good performance of energy management; hydro production in Iberia; and a 6% increase in average installed capacity, reflecting the commissioning of new hydro and wind capacity.

Our net profits stood also above our provision guidance of -- reaching EUR961 million. Benefiting from the outperformance at EBITDA level, but also the 14% decline of interest costs.

Below EBITDA, in 2016, we have several negative one-offs on financial results. Mostly related to the anticipated payments of some more expensive debt; and, a similar amount of positive one-offs at the tax level, which, together, compensate each other, resulting in an almost neutral impact at net profit level.

Basically, I believe that a lot today will be about one-offs and about debt. So, let's start with the debt.

We have also outperformed on our commitment for net debt. Of course, strongly due to a strong free cash flow generation and the 62% decline on regulatory receivables. Taking advantage of the strong appetite in credit markets for tariff deficit sales. But, let me help you in these figures.

When you see the EUR15.9 billion, you have to consider four elements that I would like to stress.

The first one is EUR300 million extra payments in terms of taxes. Where, obviously, not only it's already paid, but due to the fact that they have a positive interesting present value, we are doing what we need to do management-wise. So, it was a management decision that creates value. But, of course, in the short term you see this impact in the debt side of EUR300 million. But it makes all the sense.

The second is EUR100 million provisions that were transferred to the pension fund. As everybody knows, or at least they should know, EV doesn't change and, in any case, it's positive.

You have also EUR100 million of pre-payment of debt, or early debt. More expensive, but I believe it's also again a good management decision, and it should be taken into account.

Finally, you have EUR300 million of FX effect. Clearly, you have EUR800 million, EUR500 of them that makes a lot of sense management-wise. It was decisions that we have taken that create value for the shareholders and, of course, affect these.

So, trying to read this without taking in attention what makes sense for the shareholder value creation, I believe, it's not the best way to look at it.

In what concerns the dividend, I think also the last line in the first page. We, as we have stated, we propose an increase of 3% to EUR0.19 per share. That corresponds to a payout of 72%, inside the target payout range for the period. So, we are doing exactly what we have committed in May, once again in the Investors Day, and I believe that we have been doing this for the last 10 years. I think it should be reassuring that when people do what they say for a decade, I think it -- especially at the dividend policy, but everywhere, it helps a lot of people feeling relaxed.

In what concern slide 2. Let's start with recurring EBITDA. We can see that excluding one-offs recurring EBITDA grew 6%, based on the portfolio expansion and efficiency improvement, and including a 1% negative impact from ForEx.

Let's move, business by business. EDP Brazil recurring EBITDA reflect a 4% average depreciation of the real versus the euro and a 3% decrease of recurring EBITDA in local currency, penalized by demand decline in distribution in the regions where we operate, but it was overall in Brazilian market.

EDPR contribution to EDP increased 8% as a result of an 11% increase on average installed capacity and wind volumes 4% below historical average. Sometimes we speak about weather and we have seen people talked a lot and we have talked a lot about rain in the beginning of the year, but then we have lower wind than usual and, as we see, the last quarter was also weather-wise was not fantastic.

It's important to see what is recurrent and non-recurrent and, clearly, in EDPR you have this effects.

Regarding our Iberia business, it grew by 9% above the EBITDA growth of the whole Group, supported by the strong contribution of energy management; the growth in hydro production; the increase on regulated revenues in electricity distribution in Spain. I think it's a good news also, where our market share in terms of new revenues was much bigger than our market share, in terms of the part of the sector that we have. And finally, the good performance in terms of operating costs as we can see in the next page.

Moving in to costs. In terms of efficiency the measures associated to our OpEx IV achieved EUR105 million of savings in 2016, 22% above the target presented last May.

Once again, this good performance was supported by all key business area. In Iberia, which represents 58% of our operating costs, total OpEx remained flat, despite the 1% increase of average installed capacity and the 2% growth in number of customers.

At EDPR the ratio for OpEx per megawatt installed decreased by 5% reflecting not only the economies of scale, but also the good results from the insourcing strategy of parts of the O&M services mainly in US.

Finally, in Brazil, operating costs in local currency on a pro forma base comparison decreased 2% year-on-year, when adjusted for inflation as a result of 4% increase of pro forma OpEx in local currency and 6.3% inflation in the same period.

I think that I'd like to talk about cost, because we have now the ratio of net OpEx over gross margin on 27%, the lowest ever, and I believe that, clearly, a reference in the industry.

Let's move into slide 4 with net interest costs. Last year was also marked by a steady decline of net interest cost. 14% reduction as a result of a 5% decline on average debt and a 30 basis points' reduction on average cost of debt.

As you can see in the chart, we continue to access the credit markets for long-term maturity at the marginal cost of debt much lower than the 4.4% average cost of debt shown in 2016; and, also, clearly below the 5% average of our debt that was reached and will reach maturity in 2016 and 2017.

Taking into consideration the prepayment of some of the more expensive debts over 2016 and 2015, namely through the bond buyback closed in the last quarter and the prepayment of project finance at EDPR and the EDP [operating] level, we expect to decrease our average cost of debt to 4.3% in 2017.

I think that clearly it was a good year in what's concerned liability management.

On slide 5, let's go to the second topic that I like to address here, clearly after debt, recurring net income.

Net profit -- and we have two ways to show it. On the left and on the right. Let's start on the left.

Net profit amounted to EUR961 million standing 5% above 2015. There are several non-recurring impacts in 2016 that we hereby detail.

There are positives; there are negatives. Most of them offset each other. Their ultimate impact on net profit is only nearly EUR40 million corresponding to capital gain booked in the sale of Pantanal in Brazil and of our stake in Tejo Energia, that by the way were already foreseen and mentioned in May.

On top of this, there are additional costs with impairments and costs related with prepayment or more expenses with offset non-recurring impact of tax level. We have already talked about that. I have lower tax accounting, but I have cashed out because it creates value. I think this is important for people to recognize the impacts at P&L and, also, at the balance sheet.

I think that we end up with recurring net profit of EUR919 million.

Moving into the right. If you see we have an increase of 23% of EUR169 million, supported mainly, as you can see, by the growth of recurring EBITDA, but also by the improvement of recurring financial results.

At EBITDA level, there was a significant contribution from our Iberian operations, as we have already mentioned, demonstrating the value of portfolio diversification.

As to the recurring financial results, the contribution to earnings growth was prompted by the 14% decline on net interest costs, which offset the reduction in financial revenues, related to regulatory receivables and assets under construction.

But let's take another 30 seconds. Even if you put the recurring net profit at EUR850 million, a figure that by the way we have mentioned in May, taking into consideration the hydro situation, basically you would have also 8% increase on recurring net profit. So, you can pick both numbers, either 8%, either 23%. In any case, both of them are clearly above the 3% that we have committed on average to grow between 16% and 20% in the business plan.

Whatever the perspective, whatever the viewpoint, we are clearly above what we have committed last night.

Outlook for 2017. We continue -- are highly confident that we will continue to deliver a financial performance fully consistent with the targets established in the business plan. 2016 has proved it very strongly, and we feel comfortable to do this until 2020.

In Iberia, our EBITDA performance will benefit from further growth productivity. In generation, average hydro capacity will continue to increase, with one hydro plant commissioned in the first quarter 2017. The last one that still remains under construction expected to be commissioned by December.

In the supply business, we continue to see a low single-digit in terms of the number of contracts. In terms of market environment, we will have a tough year-on-year in comparison the strong performance in 2016.

Of course, it's raining a lot, and a lot of wind outside the room where we are speaking.

Although the market environment in the first two months of 2017 marked by low additions were not favorable to our portfolio, hydro, we don't anticipate any deviation from our previous expectation for 2017. Let's be clear, given our strong hedging position for the year, namely in terms of fuel procurement costs and increasing EBITDA contribution from our thermal plants.

We will continue to also focus on delivering our commitments, in terms of control of operating costs, not only Iberia but in all the subsidiaries.

At EDP renewables level, the expected increase between 7% and 9% of the average installed capacity, benefiting from the capacity additions in 2016 and 2017, will support a sound EBITDA growth; while at the level of EDP Brazil, the positive impact from Escelsa review will support EBITDA growth in distribution. In euro terms, we expect a positive impact from the Brazilian real appreciation, taking into consideration the strong performance versus the euro over the first two months of the year.

So, clearly, what we've seen in the first two months is the portfolio value. The fact that we have a diversified portfolio has been very important for us in the past. This is important in the present, and it is important for the future.

At earning levels, as we have already said, we expect further positive contribution from the decline in the average cost of debt, expected to decrease at least 10 basis points.

Moving to slide 7, and I would like to say, on track to deliver the 2020 targets. We are clearly very well on track, so I would say we are more advanced than we expected in my -- in what's concerned delivering those targets.

The delivery of renewables capacity additions continues evolving as scheduled in terms of timing, and as budget in terms of cost supporting, and the growth of recurring EBITDA. Note that the growth of 6% in 2016 is the double of our target, as I already mentioned.

Regarding the leverage, we moved faster than planned regarding the reduction of regulatory receivables, taking advantage of the market conditions. So, improving significantly our non-adjusted net debt to EBITDA ratio and reducing our absolute net debt figure by 8%.

I think that, nevertheless, the negative ForEx impact on both sides, net debt and EBITDA; the anticipation of CapEx, in order to secure comfortable safe-harbor growth options in US, that we have been explaining in the area of renewables; and third, some one-off tax and pension fund payments, imply that our adjusted net debt remains still just slightly below 4 times. But once again, totally consistent with our 2020 target, close to 3 times.

Regarding efficiency. We are already ahead of the targets presented in May, and we expect to continue to outperform those targets in the next couple of years, in order to be able to beat the EUR200 million target for 2017 of annual saving. So, more than the EUR700 million total cost saving for the period.

Finally, in terms of delivering attractive returns. We were ahead of our EPS target for 2016 and we expect to continue to benefit from our diversified portfolio of high-quality assets, over the next couple of years, allowing us to be confident on the delivery of our sustainable and predictable dividend policy, where we have been always doing what we have prior said.

Our commitments are always delivered, based on a target payout, between 65% and 75%, with the dividend floor of EUR0.19 per share.

Clearly, when we look into a utility, what do I like to see? Asset allocation. Are you putting the money where it makes sense? Are you going for projects where the returns are feasible or are you diving into the pool just to show megawatts? It's not our case. Clearly, I think, allocation is in the right place and the right dose.

Are you doing what you need to do cost-wise because it's what you need to do? We are doing cost-wise what we need to do.

Are you doing also below the line everything that you need to do, interest rates, tax, everything. Are you doing what you need to do and you are supposed to do? Yes, we are doing. So clearly, it shows that, as we have been doing in the last 10 years, once again, if you do -- it was a number that I saw yesterday -- in the last decades, they have been around for more or less 10 years, we are the second-best utility in total return to shareholders, in terms of integrated utilities, and it's -- our intention is to keep the same track record.

I think that the 2016 figures are good figures. I like what I see in front of me. But I also agree that we need, and I've tried to do this already, but then Miguel will go through the presentation, focusing on some of the issues that probably people need to be really well explained. Namely, one-offs and below the line.

So, thank you. Miguel will go through and then I'll come back for the final remarks.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [3]

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Thank you, Antonio. I will start with the capacity of generation in terms of our portfolio. Our installed capacity increased by 4%, or 6% on average, following an increase in terms of the weight of wind and hydro in Portugal, 0.8 and 0.4 gigawatts respectively, and also the shutdown of one coal plant in Spain.

Regarding electricity production. It increased by 10%, following the improvement of hydro resources in Iberia and the new wind and hydro capacity additions, and we reached the end of the year with hydro and wind representing 72% of capacity and 65% of the output.

Looking to the market environment in Iberia in 2016, we see that electricity demand went up 0.6%. Hydro production also increased by 42% on strong growth of hydro production; so, 33% above average of the historical average, in terms of average hydro year. These strong hydro volumes justify 21% year-on-year decline in terms of the average pool price to EUR40 per megawatt hour in 2016.

Moving to the EBITDA performance of the main business areas. We can see, starting with generation and supply in Iberia, we had an EBITDA growth of 13% year on year. Following the referred hydro resources above average, our hydro capacity increased 7% and our hydro production in liberalized market increased by 98%. But also, a good energy management result, with a decline in terms of the average sourcing cost by 23%, following average generation cost decline of 30% and the hydro weight in generation mix reaching 43%.

We have also benefited, obviously, from the long market position on clients, with electric production in 2016, representing 56% of electricity volumes sold to clients.

Moving to regulated networks. Here our EBITDA went down 4%, impacted by this one-off gain of EUR89 million of the sale of Gas Murcia in 2015. Adjusted for this, EBITDA went up 5%, supported by improved remuneration of electricity distribution in Spain and, also, a good performance in terms of costs.

Moving to EDPR. In renewables, EBITDA went up 3%. Nevertheless, excluding some gains in 2015, related mostly with ENEOP, the contribution of EDPR to EDP adjusted EBITDA increased by 8%, based on 11% average capacity increase, mostly in US but also with some contribution already from Brazil and smaller from Mexico installed at the end of the year. And also, a wind production, which was 4% below historical average, with a strong decline in terms of wind resources in the fourth-quarter 2016.

Finally, in Brazil, also, our recurrent EBITDA in local currency decreased 3%, so here excluding the gains on assets and acquisitions, which were quite significant in 2015 and still relevant in 2016. The recurrent 3% decline includes strong growth in generation, following strong decline in terms of hydro deficit costs, which were very significant in 2015, but almost immaterial in 2016. Also, the Pecem consolidation since May 2015, so we have a full contribution of Pecem in 2016.

Distribution. We had a decline, given that our operations were penalized by lower demand in the regions of our concession areas, so a demand decline of 5%, which was also one of the reasons for higher losses regarding over-contracted energy volumes in distribution.

Moving to the evolution of Portugal's electricity system debt receivables. We can see that the system generated a net surplus in 2016, a surplus of EUR118 million (sic - see slide 15, "EUR0.1 billion"), which is the second year in a row of the tariff surplus.

For 2017, this surplus is expected to increase to EUR0.5 billion according to the regulator's forecast, while the market evolution in first two months of the year showed that, until now, the numbers in the market are more optimistic than the numbers that the regulator assumed for this year.

So, we have a stronger demand for 1.5% demand growth. Pool prices are higher. And renewable volumes are lower, meaning that the cost of the regulated system with all the costs with the renewables and with special regime production, should be lower than assumed for this year. At least this is the indication that we have from the first two months of the year.

At level of EDP balance sheet. Regulatory receivables in 2016 went down by EUR1.5 billion, a big contribution from Portugal, a decline of EUR1.2 billion, following the significant amount of sales of regulatory receivables to third parties and, also, the referred system tariff surplus in 2016.

We had also the contribution from Brazil, with a decline of EUR0.3 billion, following energy costs below tariff assumptions in Brazil.

Moving to net investments, our net investments decreased by 30% to EUR1.2 billion, impacted by close to EUR1 billion of sales of minority stakes in windfarms in US and in Europe. While our amount of CapEx went up by 10% to close to EUR2 billion, reflecting expansion investments, significant growth in wind, due to investments related with the Safe Harbor clause in US; and also, a decline in expansion CapEx in hydro in Portugal, following the stage of conclusion of the works in the four hydro plants that we are finishing in 2016 and 2017.

Maintenance investments were mostly related with networks, but included also, in 2016, a significant amount of pluri-annual works in Iberian generation, which were concentrated in 2016.

Moving to our debt profile, the mix of consolidated debt by currency was quite stable; so, close to 70% euros, 20% dollars, less than 10% in riais. We have extended the average debt maturity from 4.8 years in 2015 to 5 years in 2016.

Regarding financial liquidity, it amounted to EUR5.3 billion, including EUR1.5 billion of cash and equivalents, and EUR3.7 billion of available credit lines, covering the refinancing needs beyond 2018.

In terms of financial results breakdown, we have already seen the very strong performance in terms of net interest cost. We can see also that, excluding one-offs, namely the EUR74 million in 2016 related with the anticipated payment of more expensive debt, we can see that net financial results went down by 5%, following the already-referred 14% decline of net interest costs, with a strong positive contribution, which were then partially mitigated by a decline of EUR64 million on financial revenues related with regulatory receivables, mostly related with the 62% decline of the amount in balance sheet and, also, the low returns of these receivables; and also, a 26% reduction in terms of the amount of capitalized interest, related with the commissioning of the hydro plants in Portugal.

Other financials include some negatives in 2015 and 2016; in 2015 related with the ForEx; and in 2016 related official energy derivatives at EDPR level.

Moving to the next slide, slide 21, on the evolution of net debt. We can see that net debt went down by 8%, EUR1.5 billion, which is explained by EUR1 billion of recurring organic free cash flow. Here we are including interest costs; recurrent taxes; maintenance CapEx; also, obviously, the EUR0.7 billion of cash dividends paid to shareholders, paid in May 2016.

Then we have EUR0.1 billion net impact, which includes here, as we referred before, not only the expansion CapEx; the disposals; the tax equity investment proceeds, which are fully in line with the business plan; but also, EUR0.3 billion of one-off tax payments done in 2016, EUR0.1 billion of extraordinary contribution to the pension fund in Portugal; and also, EUR0.1 billion of costs with prepayment of debt.

On top of this, we had obviously the already referred significant contribution of decline of regulatory receivables, EUR1.5 billion reduction. And also, the negative impact from the stronger real and stronger dollar, which impacted the net debt negatively by EUR0.3 billion.

I would highlight that our net debt to EBITDA ratio goes down from 4.4 times to 4.2 times, supported on decline of regulatory receivables. The adjusted net debt to EBITDA has slightly increased from 3.8 times to 4 times.

Also, I would highlight that this ratio is significantly penalized by the ForEx evolution, given that although the real has been stronger in the recent months, [the truth is] that our EBITDA in 2016 is penalized by 1% because of the real average [depreciation], namely at the beginning of 2016. Also, we have the full negative impact on ForEx in our net debt.

Finally, regarding net debt (sic) breakdown, we can see that following the EBITDA performance, so 4% decline, but 6% growth on recurrent, financial result and income taxes, with flat effective tax rate adjusted for non-recurrent and financial results with improvement of 5% excluding non-recurrent issues, result on the net profit increasing by 5%, or the recurrent net profit increasing by 23%.

So, following the presentation, we can go to the Q&A session, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Rui Dias.

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Rui Dias, UBS - Analyst [2]

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I have three questions. The first one is regarding your 2017 outlook, could you just please give us a bit more detail on the expected EBITDA evolution in Iberia particularly. Q4 was extremely weak. Q1 has been weak as well. So, I guess that the question is how low do you think 2017 could go, based on the current market conditions. This will be the first question.

Secondly, regarding your 2020 targets, and apologies if I'm missing something here, but if we combine your EBITDA growth targets with cost savings, lower debts, and lower cost of debt, I can't match your bottom line growth targets. It looks too conservative unless you expect some negative impacts in the meantime that would offset an otherwise stronger performance. So, maybe you could give us some color on that.

Also, you are assuming a cost of debt of 4.2%, just slightly below 4.4% that you recorded in 2016. But given that you have 60% of total debt to refinance until the end of 2020, at probably half or 25% discount to these current debt costs, isn't this also too conservative, this 4.2%?

And final question on natural gas, I understand that there are no talks to sell these assets, at the moment. But is this option on the table? And under the scenario that you would sell the assets, where would make sense from a strategic point of view to allocate the potential proceeds? Thank you very much.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [3]

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Hello, Rui. Here is Miguel Viana on the performance of 2017, in terms of outlook in Iberia. I would say that on the regulated part of the business, no news. We'll continue to do our work, in terms of efficiencies. If something the rate of return can be slightly better in terms of evolution of any 10-year bond deals, but not a big impact.

On the generation and supply, the first two months, as we said, and it's public, it's below the average production in terms of hydro. We are in Portugal the first two month 0.63% of average production for these months.

But it's also true that the thermal production has been doing very well. We benefit this year from procurement of fuel at very competitive costs with the closing of fuel procurement in the beginning of 2016. So, part of what we lose from lower hydro production will compensate with very healthy margins in thermal, given the good hedging that we did.

Having said this, I think the (inaudible) effect that was referred, given if generation supply can be slightly lower than what was the base case, I would say that we have other areas, namely Brazil, which is doing quite well.

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Nuno Alves, Energias de Portugal S.A. - CFO [4]

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So I'll take care of the 2020 target and the interest rate, and as far as 2020, what we've mentioned, or Antonio mentioned over the call was, that right now we are ahead of the game, but we see no reason and it's too early to start changing 2020 targets. So, we're ahead of the game and we intend to keep it that way, but it's too soon to change.

And on the specific -- on the interest rate, we've already -- we have guided in 2016, 4.4% for 2016 and 2017. We've already reduced the 2017 to 4.3% and if rates stay where they are, you're right, probably the 4.2% 2018/2020 average rate is too high right now. I would have to agree, but we're not revising. We're revising 2017 already to 4.3%. If we see fit, then we will do it later on, but looking at it today, it looks a little bit conservative, you're right.

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Antonio Mexia, Energias de Portugal S.A. - CEO [5]

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And about your first question and the answer of Miguel, clearly, it means that we feel comfortable with the consensus of EBITDA for 2017, and so we don't have any reason, even with lower rate in January, to change anything. Cearly, again, I want to stress this, we feel comfortable with the EBITDA for 2017.

In what concerns natural gas, it's our duty to, of course, study all the options concerning our asset portfolio. I think that we have been doing this in a rather good way. We are watching, of course, what's going on in the market. We are curious about what's happening in the sector, in the gas sector in Spain. We are following it attentively.

But all I can say today is that we are not taking any decision concerning whether or not to go ahead with any eventual sale of natural gas. We follow this very attentively, as you can imagine but we have not, today, taken any decision.

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Rui Dias, UBS - Analyst [6]

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Thank you very much.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [7]

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Thank you. We can go to the next question, please.

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Operator [8]

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Stefano Bezzato.

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Stefano Bezzato, Credit Suisse - Analyst [9]

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Two questions, if I may. The first one is on the taxes. Given that you're showing the energy tax as a non-recurring item, what is the likelihood of this tax to be removed and what could be the timing? Is there any update there?

The second question is on the securitization of the Portuguese receivables. Do you have a target for this year and in general, how do you see the interest in the market, given the recent increase in interest rates? Thank you.

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Nuno Alves, Energias de Portugal S.A. - CFO [10]

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Okay. Let me start with the tariff deficit. The target is to do roughly about EUR1 billion of securitization. The market is as good as it was, at least as good that it was last year, so we continue to see demand. The prices are, if anything, tightening as compared to last year. So, we see no reason, at least for now, not to do the EUR1 billion that we have planned for the year.

In as far as taxes are concerned, and I'm not sure I understood fully the question, but let me try to give some color on it. This is nothing -- part of it is nothing different from what was done in the past, which is, you pay upfront and then you have a lower cost of, on the taxes going forward.

Essentially, what you're having here is, you pay the certain amount upfront, that's cash out, and you have to book the present value of the fair value of those cash flows, and that's why you book a positive. So, essentially, the interest rate or the IRR that we have by paying upfront and getting a tax reduction going forward is a positive today and that's why you book a gain. But in terms of cash, it's a negative upfront.

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Stefano Bezzato, Credit Suisse - Analyst [11]

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Actually, my question was on the energy tax, on the EUR62 million.

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Antonio Mexia, Energias de Portugal S.A. - CEO [12]

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But I think that's what Nuno mentioned. I think it's, once again, very important because it's value creation.

In what concerns the sales, what we have today as a sign is that as extraordinary measures are being, let's say, reduced or eliminated elsewhere, we expect movements as it was already the case.

As you know, when we presented we have considered that we would -- in May we talked about keeping the 100% tax in 2016 and a reduction in 2017 and 2018, and vanishing until 2020.

So, we have no reason, as we speak, to believe that that perception and that movement will be done. So, we expect a reduction, a progressive reduction until a cancelling in 2020. We have to if it happens, but we have no reason to change our vision that we have presented May last year.

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Stefano Bezzato, Credit Suisse - Analyst [13]

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Thank you very much.

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Operator [14]

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Jorge Guimaraes.

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Jorge Guimaraes, Haitong Research - Analyst [15]

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Just like to go back to the guidance issue. Your subsidiary EDPR just changed its depreciation policy from 25 to 30 years. And that should -- on its own would allow for an increase in guidance. This question is related also to what Rui ask before.

But you are maintaining the guidance, so can you help me on explaining all this math, because it seems to me that on an underlying basis you are reducing your earnings guidance for next years; or at least, not raising it as substantially it should.

So, this is my -- is it related to the -- to this tax anticipation effect of receiving now, and not in the -- and then the tax rate increasing much faster over the next years? Is it financial cost? What am I missing on this?

Sorry to be so direct on this question, but as of now, stock is down 5%, so why -- maybe this is related to that? I don't know. Thank you very much.

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Antonio Mexia, Energias de Portugal S.A. - CEO [16]

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Thank you for the question. Is -- let's be also -- it's a good question, and the answer is also very clear.

When we -- in May, we have told that we were analyzing that option, we have not rushed it. It had no impact in 2106, but when we talked in May we were already consider it, and the impact for 2017/2018 onwards of that revision, eventually slightly below what is now reality, but it was already included in the guidance.

So, it does -- it means that it was already in the figures that we shared with you, up to 2020, last May. So, we are not revising elsewhere anything. It's basic -- it was already there, as we have mentioned in May, and just I want to reassure this that was already included in the management presentation.

But thank you for the question; it helps us to clarify.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [17]

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We can go to the next one, please.

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Operator [18]

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Carolina Dores.

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Carolina Dores, Morgan Stanley - Analyst [19]

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I have three questions. First one, could you walk us through what you expect for deleveraging 2017? I understand you -- probably your FFO should still radically improve, because you don't have as much one-off payments that is -- as you had in 2016. On the other hand, I'm not sure if you're counting on as many disposals, so a bit of color of that would be helpful.

Second question, what are you expecting for tax rate for 2017?

And my third question is that commodities have moved a bit. If you can comment on what -- ideally, for 2018, because it's the full year without CMEC, what do you expect to be the cliff on EBITDA coming from the roll-off of the CMEC? Thank you very much.

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Nuno Alves, Energias de Portugal S.A. - CFO [20]

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Tax rate for 2017, roughly 20%.

Right now, in as far as the debt, all we're saying is, every year going forward we will see the debt reduction. What we're talking about, or as a number today, we would expect to see EUR300 million/EUR400 million lower in 2017.

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Antonio Mexia, Energias de Portugal S.A. - CEO [21]

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In what concerns the CMEC, we have no reason to change what we have been sharing: it's that the cliff should be around EUR50 million in the area of post-CMEC, Caroline, as we have shared already, six months ago.

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Carolina Dores, Morgan Stanley - Analyst [22]

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Okay. Thank you.

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Antonio Mexia, Energias de Portugal S.A. - CEO [23]

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Thank you.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [24]

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We can go now to questions online. One question from [James Farrell], BNP. Can you show the movement in adjusted net -- adjusted debt, and explain the increase in adjusted debt EBITDA?

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Nuno Alves, Energias de Portugal S.A. - CFO [25]

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Essentially the number goes up slightly, but that has to do, if you don't -- if you leave the extraordinaries of 2015 in the EBITDA, it goes up a little bit. If you take them out, then it improves. So, it's just a question of the bigger gain that we booked in 2015 in relation to the Brazilian asset. So, in terms of ratios it improved slightly from one year to the other.

On the last question. Spot prices in Portugal January/February. They have been above last year's.

Well, for the outlook for 2017, essentially, it's, as most of you know, since the fourth quarter of 2016 and until today, we have several aspects which pushed the spot prices up. Namely, the nuclear stoppage in France, which made the Iberian Peninsula be going from a net importer to a net exporter, so increasing the prices.

On top of that, as you -- as we've already mentioned, there has been a lot less rain in average, putting the prices up. But if we look at the prices for the days coming, we are back to the [40] sold and that's the level at which we would expect and it to normalize during the year.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [26]

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I don't know if we have other questions on the line.

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Nuno Alves, Energias de Portugal S.A. - CFO [27]

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We have one more.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [28]

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I think we have one more, so our last one.

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Operator [29]

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Neil Beddall.

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Neil Beddall, Fidelity - Analyst [30]

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Apologies if I'm going to ask the same questions that have been asked before. I'm not sure whether I am or not to be perfectly honest.

I'm looking purely at the cash flow for the year, and one of it's to do with the tax aspect of it. Your tax actually paid has gone up quite significantly to over EUR620 million for 2016 from EUR140-odd-million. Is that an ongoing thing? I assume that relates to what you were talking about, about you pay tax upfront and then when you -- the IRR is better.

But is that something that you do on annual basis or is this just a one-off for 2016 and then the tax payment will actually go down quite significantly for say the next two/three years or however long?

The other question was just on the securitization of the regulatory receivables, which looks to me as if it accounts for a fairly significant proportion of the improvement in working capital.

Am I right in assuming that if you continue to securitize at the EUR1 billion level that you were talking about, we'll see a similar improvement in working capital for 2017?

And if that's the case, does that actually mean that the regulatory receivable is then effectively eradicated in 2017? Or does it continue to increase by about EUR1 billion for you, so that it's a more -- it takes a longer term to actually eventually get repaid?

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Nuno Alves, Energias de Portugal S.A. - CFO [31]

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Okay. Well, let me try to answer both questions. In as far as the tax, yes, this year was an extraordinary payment in two places, in Portugal and in Spain.

So, cash-wise, it's Portugal and Brazil where there were extra measures that were taken and we took advantage of those. These are not repeat transactions, so the government is not going to put this up again next year. Even though part of the payment is over three years, the majority of it was this year.

I would not expect this to be continuous and I would not expect for the government to keep on doing it. Even if it did, we would not have the assets to do it, so there's a limit to what you could do.

So to answer that one, you should not expect this current level of taxes to be maintained cash-wise.

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Neil Beddall, Fidelity - Analyst [32]

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Okay. It should go back to more historic levels, should it?

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Nuno Alves, Energias de Portugal S.A. - CFO [33]

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Yes. It should go back to about EUR300 million/EUR350 million a year. That's why we say there's an extraordinary cash payment of about EUR300 million this year.

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Neil Beddall, Fidelity - Analyst [34]

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Right, okay. Okay, so that -- okay, great.

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Nuno Alves, Energias de Portugal S.A. - CFO [35]

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In as far as the tariff deficit is concerned, what you have is the system is still generating roughly EUR1 billion of deficit, which has to be paid for. But you have a surplus, so the surplus today in the system is EUR500 million, sufficient to pay the EUR1 billion and then it generates a surplus of EUR500 million. Meaning that if we sell EUR1 billion, by the end of the year, we'll end up with the same amount.

I know this is confusing, but what you're having is every year the surplus gets bigger and bigger and that's why we show the system deficit going down from EUR5 billion to EUR4.5 billion next year; and then we'll keep on going bigger and bigger. In essence, what you're going to have is the deficit that we need to sell being smaller and smaller in every year to remain the same in the balance sheet, but we are not expecting it to disappear prior to 2020.

That's what we've been guiding and that remains still. The best guess today is that we will -- the system will still have a deficit by2020 and, at that point in time, will disappear.

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Neil Beddall, Fidelity - Analyst [36]

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Okay. All right. Would I be right in assuming that will come down by, I don't know, something like EUR200 million/EUR300 million every year or something like that, if it's going to be --?

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Nuno Alves, Energias de Portugal S.A. - CFO [37]

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The deficit?

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Neil Beddall, Fidelity - Analyst [38]

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Yes.

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Nuno Alves, Energias de Portugal S.A. - CFO [39]

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The system deficit on my balance sheet?

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Neil Beddall, Fidelity - Analyst [40]

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Yes.

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Nuno Alves, Energias de Portugal S.A. - CFO [41]

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Yes. Yes.

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Neil Beddall, Fidelity - Analyst [42]

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Got you. Okay. That's great. Thanks a lot, Nuno. Ta. Cheers.

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Miguel Viana, Energias de Portugal S.A. - Head of IR [43]

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We go now to some final remarks, just to conclude.

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Antonio Mexia, Energias de Portugal S.A. - CEO [44]

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Thank you, everybody, for being here.

Once again, just to stress that balance above the line and below the line, we have beaten guidance and consensus. Talking about consensus, we feel comfortable with the consensus as the key metrics of EBITDA, net profit and the debt, and even beating clearly these numbers, so as we speak, we expect 2017 to be a good year.

Thank you very much and see you soon.

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Operator [45]

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Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.