Miguel Stilwell d’Andrade is the CEO of EDP, a Portuguese utility with a global footprint. In 2008, EDP listed its subsidiary EDP Renewables, one of the world’s leading renewable energy developers and operators. EDPR is the world’s 4th largest wind energy producer, with 15 GW of installed renewable energy capacity, and a very ambitious growth plan to develop 4GW of capacity per year.EDPR listed in 2008, raising €1.6bn just before the global financial crisis, and recently came back to the market to fund its growth, raising €1.5bn in 2021 and €1bn in 2023, supported by sovereign wealth funds such as GIC and Abu Dhabi Investment Authority (ADIA)
🌱With Miguel, we discuss the process and timing of EDPR’s IPO back in 2008, the revolution happening in the energy sector, how to build long-term relationships with investors, and the importance of equity markets to provide capital for renewable companies. Miguel also shares his detailed views on how to speed up the deployment of renewable energy globally.
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🗨️ Our favorite quotes:
“Timing was everything. […] The biggest lesson I got out of that was, if there’s a window, you go for it.”
“The first thing is to recognize that this is a very capital intensive business.”
“The fun fact is: it’s a lot of hard work, but you do get to meet super interesting people.”
Disclaimer: this discussion is not financial advice, nor an investment recommendation, nor a solicitation to buy or sell any financial instruments, or an offer for financial services or any other transaction. The information contained in the recording have no contractual value and are destined for an informational purpose only. Amundsen Investment Management and the participants on this podcast may have holdings in the companies being discussed.
Per: Today, we welcome Miguel Stilwell d’Andrade, the Chief Executive Officer of EDP, the Portuguese utility company, and EDP Renewables, their listed renewable energy subsidiary. The energy transition requires significant amounts of capital, for example, to build new wind farms and solar parks. We think the equity markets are particularly well suited to provide patient equity capital for such companies, and who is better placed to talk about this than Miguel, the CEO of one of the largest renewable energy producers in Europe.
EDP listed its subsidiary, EDP Renewables, in June 2008, in a €1.6 billion IPO, just a few months before the collapse of Lehman Brothers slowed capital raising to a halt. More recently, they’ve been back in the market, raising capital to fund their very ambitious growth plans, with a €1.5 billion equity raise in 2021, and a billion euro raise in 2023. With Miguel we talk about how the renewable energy sector has evolved over the last 15 years, the capital allocation decisions for a large listed company, EDP’s company changing decision to invest massively in renewables, and its view on what is needed to achieve the energy transition.
Before we start, we would like to remind our listeners that our discussion is not financial advice, nor an investment recommendation, nor a solicitation to buy or sell any financial instruments or an offer for financial services or any other transaction. The information contained in the recording has no contractual value and are designed for an informational purpose only. Amundsen Investment Management and the participants in this podcast may have holdings in the companies being discussed.
Miguel, thank you very much for joining today. Maybe before we start, can you tell us a bit about what EDP actually is and the different activities you’re engaged in.
Miguel Stilwell d’Andrade: EDP is a global energy company. We operate now in approximately 28 countries, and we are really focused on driving the energy transition. That’s how I best describe it. We’ve got a commitment to going all green by 2030, being out of coal by 2025. Already more than 80% of our power generation is renewables, and so we’re really on this path to decarbonize ourselves and to help decarbonize the rest of the economy.
We’re originally a Portuguese company, so created back in 1976, but really since the early 2000s, we started growing internationally. We grew first into Brazil, late ’90s, and then Spain, early 2000s, into the US in 2007. Then we continued to grow, and the most recently went into Asia, based out of Singapore, but in nine countries in Southeast Asia, and all pretty much focused on renewables.
We do also have a networks business in Portugal, Spain, and Brazil. We’ve got about 380,000 kilometers of networks in those three countries, which is enough to go around the world several times. It’s an important portfolio stabilizer, it’s a relatively regulated business, but it provides quite a lot of cash flow, which we use to continue to invest also elsewhere.
Finally, we have clients. We have only residential clients in Portugal and in Brazil, but increasingly what we have is corporate clients that we sell renewable energy to in many different countries. For example, in the US, we’re the fourth largest renewable energy player in the US, and we mostly sell that renewable energy to companies who are the big tech companies like Google, Amazon, Microsoft. We’ll also sell to companies like Walmart. So really companies that want to do these large contracts for large wind or solar projects, and we’ll sell energy to them. Selling renewable energy to these large corporates is one of the ways that we use to basically ensure the financing or that we have an offtaker for this energy when we build these renewable projects.
Maybe just to finalize in terms of what is EDP, to give you a relative size, we’re about a €20 billion market cap company. We have a very large subsidiary called EDP Renewables, which is just focused on renewables, which is also about the same size, €20 billion market cap. We have an investment plan over the next four years of around €25 billion in these different geographies.
Per: So definitely a very large player in the energy transition, but personally, what led you to actually join EDP and then become the CEO of both EDP and EDPR over time?
Miguel: I think in life you find out that sometimes or many times decisions aren’t totally rational. I studied in Portugal till I was 18. I then left and went to study mechanical engineering in Scotland. I was there for four years. One of the years I actually went to Italy to do an Erasmus program.
I then came back and decided to switch completely to finance, and so I ended up graduating from university and becoming an investment banker working in London in the late ’90s. Then the guy I knew who was working there as well left and he became CFO of EDP in 2000. Most of my friends at the time, they were leaving the banks to go and work at dot-com companies and the new economy, and they were saying, forget about the old economy. What’s really important is the new economy.
I don’t know, I did something which at the time seemed to be slightly crazy, which was to go into a really, really old part of the economy, which is the energy part. I came back to Portugal to work at EDP. I was here for about a year and then I went to go do my MBA at MIT in Boston. I came back in 2003. I just find it a really interesting sector. I’ve had the privilege to work in multiple different roles. I was head of strategy in M&A at the company, and then I was part of the executive team running the distribution business. Then I ran the Spanish operations for a couple of years, I ran the supply business and then was CFO of the company as well for three years. Then I became CEO in 2000.
I’ve been involved in multiple areas of the company throughout this period, and I find it a super exciting sector. I say that many of our investors looked at utilities as we wanted them to be boring companies. What we wanted was to be predictable, provided dividends. You can just put your money there and don’t think about it. Yet everything is changing. That’s not true anymore. The way you produce and consume energy is changing dramatically. The way that you distribute energy is changing dramatically. Everything is becoming digitalized. You’re having to decarbonize all the energy mix. So I find it a fascinating sector and I’ve really enjoyed it and I’ve found different opportunities, and so I’ve gone on staying.
Per: It’s just amazing how the utilities business has changed since you joined the company, and today when you’re deploying, as you’re saying, €25 billion into new projects all across the world and using new technologies as well, because the windmills have evolved and the solar panels are evolving. It’s actually become avery much of a tech deployment business as well.
Miguel: For sure. There’s clearly a revolution going on in the sector. What has changed just over the last 10, 15 years, renewables used to be seen as a niche play, expensive energy. Nowadays, I don’t think anyone can not look at renewables. It’s the most competitive source of energy. It’s certainly the cleanest, so really, I think there is this massive transformation going on.
I think one of the most interesting things for me has been to see certain companies being very defensive about their legacy businesses and trying to protect that. I think other companies like EDP really embracing the change and saying, this can be a fantastic opportunity for us and let’s go for it, and that’s served us well. I think we’ve managed to grow internationally and really change our business, change our portfolio as a result of taking those decisions.
Per: I want to look back a bit at the IPO in 2008 of EDP Renewables, because you had EDP that was already listed, and then you chose to spin off EDPR in 2008. It was a market cap of €8 billion at the time, quite a large IPO. What drove the choice to list a subsidiary back then?
Miguel: It’s important to place ourselves back at that time. EDP had made a large investment buying a company called Horizon Wind Energy in the US, one of the largest renewable energy players there, done that in early 2007. It required a lot of capital to continue to invest and build out that business. At the EDP level, it wasn’t possible to raise additional capital because some of the investors didn’t want to put in additional capital, didn’t want it to be diluted.
We also couldn’t raise debt because our balance sheet was already relatively stretched. So we could either have slowed down the investment and not taken advantage of that, and that would have been a real pity. Or what we did was let’s carve out EDP Renewables and see if investors are willing to invest directly into that subsidiary. The truth is, we spoke to several financial advisors, we looked at what other peers were doing, and we went down that path. So we raised equity directly at EDP Renewables, and it ended up being a very successful transaction. We were able to raise, as you say, more than €1.5 billion at the time, which is extremely important for us.
Here, timing was everything. Again, placing ourselves back in 2008, at the beginning of 2008, there were already some signs of some financial instability. You already had some banks in the US doing impairments, having some issues around their balance sheet. We were racing against time to basically try and get the IPO done by June of 2008. Very practical reason, the Euro 2008 was happening in June. What we were told is, listen, you can’t raise money when there’s a Euro Cup going on, because no one is going to pay any attention.
Per: Especially with the retail tranche, right?
Miguel: Especially retail and others, because no one’s going to pay any attention. Analysts won’t want to see you guys. Actually, most of the banks were saying, you should wait till after the summer, and then you’ll have a clear window and you can raise capital. We were like, no, we want to do it. There’s a market there. We just make sure we do it before the Euro starts and we’ll get it done. So we actually had to really run a lot to get it done before, let’s say, the end of May, beginning of June, and we did, we managed to get it done.
Fortunately, because after the summer of 2008, I think everyone will remember, we had Lehman Brothers and the world collapsed, and it would have been impossible to do the IPO. We can go a little bit deeper if you want there, but the biggest lesson I got out of that was, if there’s a window, you go for it.
Per: You should never put back a good IPO, right?
Miguel: Yes.
Per: You should always do it when the timing is there.
Miguel: Exactly.
Per: From the investor side, if you look back in 2008, the economics were not exactly the same. There was a lot of subsidies. Was there a lot of pushback about just the economics of renewable energy at the time?
Miguel: I’d say there are two ways of looking at it. One is from the investor side. The other is from the consumer side. To be honest, from the investor side, this was highly regulated. It’s true, it was subsidized at the time, but there were very attractive returns, and so you were able to deploy a lot of capital with decent returns. Not fantastic returns, but reasonable returns. From the investor side, that wasn’t necessarily a problem. It was more an issue of, okay, is there any regulatory risk? How fast can you grow? Those types of questions.
I think from the consumer side, that’s where potentially there were issues around, okay, if this energy is being subsidized, is it going to be much more expensive and is that going to mean a higher bill for us? I think that was true back in 2007, 2008 or that decade. Nowadays, renewables is much more competitive than any other source of energy and it doesn’t require subsidies anymore. In terms of returns, the returns haven’t changed that much, actually. It’s just that you don’t need the subsidies anymore to get the same type of returns as you did then.
Per: Within the EDP, as you’re saying, a large regulated utility, this was quite a large company changing bet that you did on renewable energy development. What were the discussions you had at that time around this?
Miguel: Fortunately, Portugal and Spain, both at the time were very pro-renewables, more perhaps than other countries. There was a stable regulatory framework and there were relatively ambitious goals already at that time for renewables. In Portugal and Spain, we’re lucky to have an ecosystem where it was possible to deploy significant amounts of capital and get decent returns under this sort of regulatory framework. That wasn’t possible in other countries. Since then, obviously the world has evolved and it’s changed a lot. I think that was one point.
The second point is that renewables was seen as a niche play. A lot of the other utilities at the time, what they liked was big projects. A big coal plant, a big nuclear plant, or even gas plants. Renewables was seen as a sort of sideshow, something that wasn’t very credible. Certainly if you were a traditional utility guy, you didn’t really consider renewables to be a credible technology. I think that meant that we were able to invest for a relatively long time and build up critical mass when many other people were distracted and not really paying that much attention to renewables. So I think it was a combination of issues, but basically, we found that niche, we found that opportunity and we just went for it.
Per: from the retail investor side, your retail tranche was 15%, which is quite large. I assume that was mostly Portuguese retail and it was very popular. You had eight times over subscription on that retail tranche. What strategies did you do to get retail interest for the IPO, which probably actually helped on the execution as well?
Miguel: First of all, EDP has a very strong brand, certainly in Portugal and even in Spain, and so I think that helped because we were basically IPO-ing a company, but that had a brand that people recognized and that was seen as being a solid play. There was a complication because actually EDP Renewables was a little bit of a strange animal in the sense that it was a Spanish company listed in Portugal, so it has this strange governance.
Retail investors I think were quite enthusiastic about it. It was an investment in a company that they knew, or at least they knew the brand, sustainable, it had a potential high growth. Obviously we did a retail campaign, and so we worked with the local banks in Portugal and Spain. They normally have this ability to distribute to shares and to talk to some of their investors, some retail investors. Ultimately, I think this combination of factors meant that we were able to raise quite a lot of capital, or at least a lot of interest from retail investors, but the bulk was from institutional investors at the end of the day.
Per: In terms of pricing, you already had the benefit of some of your peers being listed. You had Enel Renewable Energy, you had Iberdrola. How did you think about pricing the IPO? Was having that peer group already listed a good sort of indication of where the market would be, or did you use another method?
Miguel: Oh, it was very important, I think. Certainly in these situations, investors will always try to benchmark you against someone else. If there are more peers, they will sort of try to find proxies and figure out, are you bigger, are you smaller, are you better, what countries are you in, what are the similarities? Then use that benchmark, that market benchmark to do your own pricing. I think we were able to come in with a relatively good pricing, so in line with peers, we certainly wasn’t at a discount. I think that was also important to us. We are one of the leading players of renewables and we were recognized at that. EDP Renewables continues to this day to be one of the few– many of the other renewable players in the meantime have been folded back into their companies.
Per: Yes. Today, EDPR is the benchmark, right? Especially in Europe.
Miguel: It is the benchmark. It is the largest renewable energy player in Europe.
Per: Your choice then of keeping it listed, because as you said, Enel, EDF, Iberdrola, all basically folded these companies back into the mothership, your choice of keeping EDPR listed, what drove that?
Miguel: One part is that it’s expensive to buy it back, to be honest. That’s also not a positive reason for it, but the positive reason, certainly today, is that it gives a lot of transparency to an important part of our business. It’s a way of raising capital. We raised over 1.5 billions in the IPO back in 2008, but then we raised another 1.5 billions in 2021, and we just raised a billion now in 2023. So that ability to go out to the market and raise capital from investors who want to invest specifically in renewables. We’ve also raised capital at the EDP level, but if you want to invest directly in a renewable player as pure play, then you invest in EDP renewables.
I think that ability to attract those types of investors has meant that it’s trading at a premium, at a much higher multiple than, for example, EDP itself or other comparables, so you can raise relatively cheap capital at EDP Renewables. So the transparency, the visibility on the assets, the ability to raise capital on very good terms, I think all of those mean that we are very comfortable with the current situation where you have both companies traded.
Never say never. To be honest, we did try to buy it back in 2017. At the time we put an offer and I think shareholders felt that it was worth more, and it was. EDPR was trading at about €7.5 per share. It’s currently trading around €18 to €20 per share. It’s been as much as €24 per share. It’s certainly grown and it’s a much bigger company nowadays. So we’re comfortable with the current situation and basically that it has several advantages, I think.
Per: How do you think about capital allocation when you are sitting at the EDP and EDPR level? Because it seems to me like you have a lot of possibilities. You can go out and get that financing. You get a project equity for your specific projects. You do asset recycling quite often, which is one of the advantages of being EDPR. Then you can also raise fresh equity for the company, EDPR or EDP. I’m just wondering about how you think about this capital allocation job that you have.
Miguel: I think the first thing is to recognize that this is a very capital intensive business. We deploy billions of euros over time. A lot of it is self-financed, so our own organic cash flow. I think that’s the first source of funds that we have, although we also then need to pay dividends and we have a relatively generous dividend policy. We can raise debt. That’s also an important part of the management of our balance sheet, we’ll go on raising debt over time. We raise hybrids. Hybrids are considered 50% equity, 50% debt for rating agency purposes.
We can sell assets and, let’s say, capture that value and then reinvest it back into the business, shat asset rotation strategy that you mentioned. Then finally, sort of almost at the other extreme from organic cash flow is actually raise new equity from the shareholders. That, for us, we only do if we think we have really good opportunities that we can’t do with any of these other instruments.
The way we look at it is there are a series of instruments for financing the investment. We look at what is our growth possibilities? What are the opportunities that we have? Are they good investment opportunities we think that they’re worth pursuing? Then we’ll look at this range of instruments and see what’s the cheapest and best way to finance that. We want to keep a solid balance sheet, so we’ll never raise more debt than what is necessary to keep a Triple B rating.
So it’s a constant mix of these different instruments that we’ll use to make sure we have a solid balance sheet, that we’re not asking too much equity from our shareholders. Obviously they’ll always question why you’re raising equity, so you have to have a pretty good business case for it, but we see it as sort of the full range of instruments that we should use.
Per: We actually have quite a number of companies, especially in the energy transition space, much smaller than EDPR, that are looking at an IPO and they’re wondering about these same questions. How should I actually structure my capital allocation? Should I be the owner of all my projects or should I bring in the project equity partner, an infrastructure fund, for example? Do you have any advice for these companies that are much smaller, maybe $200 million market cap today, but are growing in quite successful niches?
Miguel: The way we look at it is if they’re good investment opportunities, what’s important is to be able to execute them and finance them, execute them, get them done. We want to do as much investments or take advantage of as many investment opportunities as we can, as is reasonable, and then we need to figure out how to finance it. I think the question that people need to ask themselves is, how much capital do I need to do the investment plan that I want to do, that I think is valuable or that’s creating value? Then look at the instruments to finance it. It doesn’t go the other way around.
I think you need to look first at what are the opportunities you have and then how do you finance it and then try to square the circle. Maybe you’ve got limited financing capability, so maybe you’ll need to reduce the amount of opportunities you can take advantage of, but I think it has to start with what is there, what can you take advantage of, what opportunities are there, and then work backwards.
The other thing I’d say is not be emotional about projects or assets. We are quite happy to, and this was something that we started doing six or seven years ago, which is building the projects, we’ll keep some of them and some of them we’ll sell. Typically we’ll have a capital gain on that sale and we’ll be able to redeploy that capital back into the business. I think certainly from, let’s say, an engineering company, normally you’re quite emotional or you could tend to be emotional about the projects and think, oh, I don’t want to sell anything, I want to hold on to everything.
I think our mission is really to invest well, to drive this energy transition and so if that means that at some point you need to sell some assets to be able to build new ones that are profitable, then you should do it and not just hold on to what you have because then you also don’t move forward. I think for us, that’s been one of the most important parts. Our portfolio has changed dramatically over time. We’ve sold gas assets, we’ve sold coal assets, we’ve gone on, I’ll say, selling certain assets to free up the balance sheet, to reinvest in new assets that we can build to really drive this transition.
Per: Between 2008 and 2021, you actually didn’t come to the market to raise equity as EDPR, but then in 2021, you raised 1.5 billion. It’s actually the first transaction we participated in as Amundsen when we launched, so quite emotional about that one still. Then you came back in 2023, you raised a billion euros underwritten by GIC. Obviously this is a great way to raise capital. It’s very fast, it’s quite a lot of money, but what changed, actually, in 2021 that drove you to then come to the market?
Miguel: First, we had a new team. I joined in 2000 and we came up with a new business plan, which really wanted to accelerate the build out of renewables. To give you an idea, we were building about 700 megawatts per year in the decade 2010 to 2020. We came out and we said, we’re going to build, well, currently, around 4 gigawatts per year, so we’re multiplying it by more than five times the number of megawatts that we wanted to install every year. The reason for that is because we were seeing the opportunities, and so we were ramping up. To do that, we needed to raise capital.
So the direct answer is you had a new executive team coming in, new business plan, you had a big, let’s say, ramp up of the potential in growth of renewables. You had, for example, already quite a lot of talk about the Inflation Reduction Act, or at the time it was called the Build Back Better Bill in the US, so there’s already speculation about additional growth opportunities in the US, you had Europe also with quite ambitious goals, and so we said, let’s be more aggressive in terms of our growth plans. That was basically the reason. We really decided to ramp up the growth and take advantage of the opportunities we were seeing.
Per: Can you explain a bit then how 1 billion euros raised in equity, how this then actually translate into capital deployed, because obviously you’re leveraging that billion in certain ways, so how does it actually translate into your business plan?
Miguel: You can typically multiply it by two to three times in terms of available balance sheet capacity. To the extent that you have a typical debt to equity ratio of 50%-50%, if you raise an additional billion of equity, you might be able to raise an additional billion of debt. Then you also have the organic cash flow coming from the project that you’ve built, so those 2 billion of additional investment will itself generate cash flow, which can be reinvested back into the business. A billion of equity, get to maybe two and a half or more times leverage.
The way we thought about it was, again, looking at the opportunities, looking at the markets we’re investing in, figuring out how much additional debt we could raise, how much cash flow we had, and then trying to sort of plug the gap with equity. Obviously then there are also very practical limitations. I could say, I could invest another 5 billion, but I can’t raise 5 billion in the market.
There are some very practical considerations when you start talking to financial advisors and you start looking at what is your market cap, what is the depth of the market, of the investors that you’re tapping. Typically you have these conversations over time and they’ll tell you, listen, you can probably raise a billion relatively easily, a billion and a half it might start getting a little bit more difficult. If you try to go to 2 billion, we’re not saying it’s impossible, but the pricing will get very expensive. You sort of go on calibrating.
For us, and for different companies will be a different discussion, maybe different level, maybe smaller, bigger, I think for each company, it’s looking at what makes sense and what the market can absorb of additional equity. I think, again, we’ve built those relationships with financial advisors over many, many years, and so I think we ourselves also have a relatively good feeling for what’s in the market. We talk to investors all the time through the various roadshows that we do, and so we get a sense for what is possible and what’s not possible or what is attractive or not.
Per: When you compare to your peers who are part of larger groups, do you think it’s offering you an advantage, that separate listing of EDPR?
Miguel: I think at the moment, yes, for sure. For the reasons I mentioned, I think transparency, the ability to raise capital, the fact that it is a pure play, so it deserves a premium multiple and it gets a premium multiple, which typically is then reflected also on the EDP as the mother company. I think even more intangible things, let’s say, attracting people to work at EDP Renewables, it’s a pure play. So even the purpose and the way we position ourselves in the market for attracting talent makes a difference. I think some people want to work in a large renewal based company more than the more traditional utility. I think all of these different factors mean that it actually ends up being quite interesting to have a listed company.
Per: I wanted to look a bit ahead at the energy transition space more broadly. One of the things is the cost of developing renewable energy. It’s been going down over time, but now recently it started going up and you have the wind OEMs who are actually struggling to put up positive margins. How do you think about the cost side of this renewable energy deployment going forward?
Miguel: I don’t think it’s particular to the renewable energy, but it’s just more generic. Over the last 18 months or so, you’ve had just a much higher inflation overall where it’s all of your costs. Certainly for renewable energy projects, wind in particular, you had a very large increase in, for example, issues like the price of steel, the cost of transportation. Then the OEMs themselves had issues in that they had assumed certain contracts, certain commitments, for example, to customers, some of them like ourselves, with a fixed price, and if they hadn’t hedged their commodity prices on the backend, then you get squeezed.
I think what you saw was you basically had very low volatility and very stable prices in general over a long period, and so people were relatively comfortable in taking some risk around that, locking in fixed prices with their customers and maybe not necessarily locking in all of the cost side in hedging their steel costs and then labor costs, et cetera. Suddenly you got squeezed with this tremendous cost inflation. I think that’s certainly at least my view of what’s happened to a lot of the OEMs.
I certainly hope we get through this because I think it’s important to have a healthy supply chain. We’ve obviously talked, for example, certainly to Vestas, Siemens Gamesa, Nordex, some of the largest turbine suppliers in the market, and obviously, we want to make sure this whole supply chain works well because it’s not in our interest, I don’t think it’s anybody’s interest that they should go through tough times.
On the solar side, it’s slightly different. The solar side is very much dominated, as you know, by Chinese manufacturers or Southeast Asian manufacturers. Polysilicon had a very dramatic increase, but also a relatively dramatic decrease. It’s gone up and down and solar prices are back to pretty much the prices that they were before with one exception, which is the US. The US, the price of solar panels in the US is still about double the price that it is, for example, in Europe. That’s just a function of the fact with the Inflation Reduction Act in the US, there’s a bigger push to move the supply chain back into the US. There’s tariffs, there’s difficulty in importing. A bunch of different factors, but it just means that basically there’s been a higher cost of solar in the US.
Per: What about on the public policy side? I’m sure you interact a lot with regulators and you probably have your frustrations with the speed of regulation. What are the major bottlenecks you see on the public policy side?
Miguel: The key issues we see with public policy is the speed, as you say, of permitting, of licensing, of getting interconnection to the network. You can break it down by market. I think the European Commission has actually done a good job over the last 12, 18 months. After the war broke out in Ukraine, there was a lot of speculation about obviously the reduction of gas into, or the cut of gas into Europe and that we were descending into this terrible recession, that the winter of ’22, ’23 would be absolutely terrible.
The truth is we’ve gone through that winter and we’re now in the summer, and actually prices have come down significantly. There weren’t any sort of major cuts. I think Europe has done a good job. The member states have done a good job at that level. However, I do think that at the more granular level, in terms of actually then building up renewable projects so that you can reduce that dependency on gas, because now if it’s not dependency on gas from Russia, it’s from Qatar or it’s Nigeria or it’s the US, we need to get away from that dependency on third countries. Particularly because it’s more expensive than if you can actually build out renewables.
I think the commission has given certain guidelines that you should simplify the licensing and permitting and you should accelerate the projects. It’s now down to the member states and some member states are being more active, more proactive than others, but there’s still a lot to be done. As you say, I think there is some frustration. In general, I’d say the companies can scale up much more quickly than some of these public administrations, which need to–
There’s been a big overload of some of these public administrations because they’re really having to process a lot more requests for permits and licenses and so forth, but they need to, as I say, you need to digitalize these processes, you need to standardize them. You need to simplify them. You need to provide more resources, more people in some cases to just process all of this. It’s not enough to just talk about the energy transition and you wanted to build up renewables. You actually need to allocate resources. The companies can do it relatively quickly, but the governments, the administrations, they also need to do it so that you can actually get this done. That’s very much the European paradigm.
The US is different. Maybe just a quick word on the US. The US came out in August of last year with the Inflation Reduction Act. We’re coming up almost on a year since it was approved. Majorly consequential piece of legislation, really generous incentives and support for build out of renewables, electrical vehicles, but also with it, we call it a relatively protectionist component, so really incentivizing made in the US, bringing the manufacturing supply chain into the US, both solar and, let’s say, on the wind side. It’s a slightly different dynamic there. I’d say it’s relatively simpler to license and to permit in the US and there’s still bottlenecks, still a lot of requests, for example, for interconnection, which needs to get done, but I think the US will move forward maybe more quickly than Europe in some cases.
Per: Are there any countries you think are leading there in terms of digitalization and efficiency of the permitting?
Miguel: I’d actually say Portugal, even though it’s a small country, is doing a relatively good job. We’re already at about 60% to 70% renewable penetration. They’ve done things which can sound very basic, but can be actually relatively important. Things like if you have this certain capacity of wattage, let’s say in the past, of 100 megawatts, they said you can go up to 110 or 120. You can put in more capacity as long as you then curtail it so you don’t inject more than the required capacity.
What does this mean? It means most of the time you’re not operating at full capacity. The wind is not blowing at its maximum speed all of the time. So if you put in more capacity, probably for the average, you’ll be able to inject more energy into the network and maybe there’ll be a couple of hours over the year where you actually maybe need to shut off some of the turbines just so you don’t put in too much energy or overload the system, but you can optimize that. So you don’t need to be dimensioning it so that you never go the maximum capacity. You can actually control the amount of capacity that you’re actually using. Maybe that’s just one small example.
Another one, which I think is extremely important as well, is what we call hybridization, which is putting multiple technologies on the same line, on the same interconnection with the network. You can have wind, you can have solar, you can have hydro, you can have batteries. You have combinations of these, and they don’t always operate at the same time. The wind isn’t always necessarily blowing during the day, but the solar is working during the day. It doesn’t work at night. There’s more hydro in the winter, obviously, than in the summer.
Combining these different technologies on the same line, on the same sort of tube, if you want to inject it into the network, you can optimize this energy. This is actually something which is relative. The computer can model what these profiles would look like, and you can optimize it. That’s a better way of using the existing infrastructure without needing to put in a lot of additional infrastructure.
Unfortunately, that’s not possible in a lot of countries, and so it would be one way where if you have, for example, a lot of already existing wind projects, you can suddenly put in a lot of solar projects on the same point without needing all of this licensing and permitting. I think sometimes there are little things which sound like little things, but actually you can scale up much more quickly than you otherwise would. So we’ve been advocating that in many different member states and even, for example, in the US.
Per: That sounds like very good suggestions. If we look outside renewable electricity production, you invested in Lhyfe, a French hydrogen developer, at the time of their IPO, actually, as a cornerstone investor, where we were also cornerstones alongside you. I’m just wondering, how do you think about such opportunities in fields that are related to your main activity? Are you looking at smaller actors there?
Miguel: Our investment in Lhyfe, it’s driven off green hydrogen, and green hydrogen is basically green electricity turned into a gas. That’s maybe one way of sort of describing it. 70% of the cost of hydrogen is renewable energy, renewable electricity. We’re looking at hydrogen– as you know, there are many areas of the economy that can’t be electrified. The easiest way to decarbonize the economy is to electrify it. Because electricity, you can turn it into green electricity relatively easily. But there are certain parts of the economy that you can’t electrify, and so hydrogen is seen as a possible energy effect that can be used to decarbonize things like steel manufacturing, certain fuels, synthetic air fuels, ammonia. In places like that you can use green hydrogen.
Lhyfe is essentially a developer of hydrogen projects, and so we’re invested in Lhyfe, but we also see ourselves as a partner in the sense that we bring along the expertise in renewables and hopefully we can partner on projects where we help them have competitive renewable projects that can then feed and produce that green hydrogen for whatever commercial use they’re doing.
It’ll take time. One of the things I’ve said recently, I think there’s some inflated expectations in relation to hydrogen, certainly in the short, medium term. Personally, I don’t believe the European targets for 2030. I think they’re super ambitious. I think we tend to, in general, I don’t know if it’s a fact, but it’s a well-known sort of view that people tend to overestimate the impact certain technologies will have in the short term and underestimate the impact they’ll have in the medium, long term. I think this is probably one of those cases.
I think people are expecting hydrogen to come in much faster than it probably will, and so there are inflated expectations. We’ll then go into the valley of disillusionment and then we’ll come up to the slope of enlightenment. I think those are the technical terms. I think hydrogen will be an important part of the energy mix going forward, but I think we just need to be careful not to overshoot on the inflated expectations or to undershoot on the valley of disillusionment when we see that a lot of the projects actually aren’t coming out because the economics don’t work or because technically it’s not viable.
We are investing in hydrogen. We are taking a very pragmatic view. For example, in Spain recently, the European Commission awarded seven IPCEI projects. IPCEI projects are projects of common European interest. So this allows them to be funded, supported so that you can actually make them viable because in the short term, they need public support. We want three of seven, which is a very high hit ratio, because if we had Iberdrola, Naturgy, Repsol, et cetera, they all won just one of them, and we had three of the seven projects.
I think we have a relatively good base and knowledge of what’s happening in the hydrogen space. We do think that things will take longer than people are expecting, but that we will get there in the end, but we need to be quite pragmatic and I think reasonable or lucid about what can actually be done in the short, medium term.
Per: What role do you think the listed equity markets have in sort of helping fund the energy transition because you have a lot of infrastructure funds. How do you think about the role of the listed markets there?
Miguel: I think it’s an important instrument, which can give a lot of visibility to the market. In certain cases, it can provide a way of financing investments with a relatively low cost of capital. As I mentioned earlier, we see it as multiple different instruments, including equity and equity comes in two forms, private and public. We’ll also do private. We also have investors coming in directly in some of our projects and taking a stake in a wind project or a solar project.
I think listed works well when it’s a portfolio of projects and where you’re looking for just relatively patient equity in a sense. Normally private equity will have a timeline, which was within five years, seven years maximum typically. Now it doesn’t mean you can go a little bit longer. They’ll have to rotate out. They’ll have to sell those projects again, and so it’s not so long-term. If you have a listed company that can be a long-term play. In that sense, it’s slightly more patient. Maybe it won’t be the same investors, but you’ll still have the equity there in some form or will have raised it in some form.
Per: Any fun facts you could share from either your IPO or the roadshows you’ve done since being CEO and meeting with investors?
Miguel: The fun fact is it’s a lot of hard work, but you do get to meet super interesting people. You mentioned we raised equity from GIC, from ADIA in Abu Dhabi. We had more regions. I think it’s always incredibly interesting and insightful to a lot of times have these conversations with sophisticated investors, get their view on how the market is doing. It’s a lot of hard work. You’ll get a lot of people that won’t invest, but you’ll get some that will invest. The fun fact is that it is fun.
One of the things that I most enjoy is actually talking to investors and getting their feeling for how the market’s doing and how they’re seeing our peers. GIC, it started off this relationship. They invested €1.25 billion, so €850 million in EDP Renewables, and then another €400 million in EDP, because we also raised €1 billion at EDP to finance the buyout of EDP Brazil. But they were a small investor in EDP originally as a public investor.
Then we bought a company in Singapore called Sunseap. I started traveling to Singapore and we decided, let’s go and visit GIC. The guy there was like, oh, well, meet our private. I met with them there in Singapore. Then a few weeks later we met with their team in London. Then I did a call with the head of infrastructure globally, and then ended up meeting the global CIO in Davos. We ended up talking to all the different stakeholders in GIC, and I think it was incredibly insightful and useful, that process.
It just shows that you really need to play a patient game. This was played out over many, many months, in fact, years in some cases, for example, in the case of ADIA. These are conversations that you will go on having with investors over time. Then someday maybe you’ll need to actually pick up the phone and call them and say, listen, we’re thinking of raising capital on these terms. Are you interested or not? Would you come over the wall or not?
It’s definitely something that you shouldn’t just think of it as you’re raising it for the IPO. These are long-term relationships in many cases that you’re building up well before you actually raise the capital and well after you raise the capital. At some point, I had someone tell me on the board that the market is a mythical creature, and I was like, “Well, no, it’s people, and it’s people who are investing, and you need to build up those relationships because those people on the other side who are deploying capital, they need to know the company, they need to know who’s the management team, they’re taking decisions.”
A lot of times we talk about the market, but the market is made up of individuals who are taking decisions every single day. I think those relationships over time are incredibly important to develop, because as I say, you shouldn’t just think of on a transactional basis as like, okay, I’ve raised the capital, bye-bye. No, it starts well before and it never ends. It’s an ongoing process.
Per: In your case, it’s a track record built up over 15 years of EDPR as a separate company, and then you’re actually able to raise a set of billion euros overnight with some very high quality investors. It’s very fast once you get there, but it’s a long, long way to get there. Miguel, thank you very much. This was very interesting. We went through a lot of the fields of energy transition together and I learned a lot in the process, so thank you for that. Best of luck with deploying the strategy going forward. I think it’s important for you as a company and also for Europe and the US and Asia, so, looking forward to that.
Miguel: Thank you for having me on. It’s a pleasure to talk to you and thank you for all the questions. Hopefully it was interesting and I’m happy to talk again.
Transcript
Per: Today, we welcome Miguel Stilwell d’Andrade, the Chief Executive Officer of EDP, the Portuguese utility company, and EDP Renewables, their listed renewable energy subsidiary. The energy transition requires significant amounts of capital, for example, to build new wind farms and solar parks. We think the equity markets are particularly well suited to provide patient equity capital for such companies, and who is better placed to talk about this than Miguel, the CEO of one of the largest renewable energy producers in Europe.
EDP listed its subsidiary, EDP Renewables, in June 2008, in a €1.6 billion IPO, just a few months before the collapse of Lehman Brothers slowed capital raising to a halt. More recently, they’ve been back in the market, raising capital to fund their very ambitious growth plans, with a €1.5 billion equity raise in 2021, and a billion euro raise in 2023. With Miguel we talk about how the renewable energy sector has evolved over the last 15 years, the capital allocation decisions for a large listed company, EDP’s company changing decision to invest massively in renewables, and its view on what is needed to achieve the energy transition.
Before we start, we would like to remind our listeners that our discussion is not financial advice, nor an investment recommendation, nor a solicitation to buy or sell any financial instruments or an offer for financial services or any other transaction. The information contained in the recording has no contractual value and are designed for an informational purpose only. Amundsen Investment Management and the participants in this podcast may have holdings in the companies being discussed.
Miguel, thank you very much for joining today. Maybe before we start, can you tell us a bit about what EDP actually is and the different activities you’re engaged in.
Miguel Stilwell d’Andrade: EDP is a global energy company. We operate now in approximately 28 countries, and we are really focused on driving the energy transition. That’s how I best describe it. We’ve got a commitment to going all green by 2030, being out of coal by 2025. Already more than 80% of our power generation is renewables, and so we’re really on this path to decarbonize ourselves and to help decarbonize the rest of the economy.
We’re originally a Portuguese company, so created back in 1976, but really since the early 2000s, we started growing internationally. We grew first into Brazil, late ’90s, and then Spain, early 2000s, into the US in 2007. Then we continued to grow, and the most recently went into Asia, based out of Singapore, but in nine countries in Southeast Asia, and all pretty much focused on renewables.
We do also have a networks business in Portugal, Spain, and Brazil. We’ve got about 380,000 kilometers of networks in those three countries, which is enough to go around the world several times. It’s an important portfolio stabilizer, it’s a relatively regulated business, but it provides quite a lot of cash flow, which we use to continue to invest also elsewhere.
Finally, we have clients. We have only residential clients in Portugal and in Brazil, but increasingly what we have is corporate clients that we sell renewable energy to in many different countries. For example, in the US, we’re the fourth largest renewable energy player in the US, and we mostly sell that renewable energy to companies who are the big tech companies like Google, Amazon, Microsoft. We’ll also sell to companies like Walmart. So really companies that want to do these large contracts for large wind or solar projects, and we’ll sell energy to them. Selling renewable energy to these large corporates is one of the ways that we use to basically ensure the financing or that we have an offtaker for this energy when we build these renewable projects.
Maybe just to finalize in terms of what is EDP, to give you a relative size, we’re about a €20 billion market cap company. We have a very large subsidiary called EDP Renewables, which is just focused on renewables, which is also about the same size, €20 billion market cap. We have an investment plan over the next four years of around €25 billion in these different geographies.
Per: So definitely a very large player in the energy transition, but personally, what led you to actually join EDP and then become the CEO of both EDP and EDPR over time?
Miguel: I think in life you find out that sometimes or many times decisions aren’t totally rational. I studied in Portugal till I was 18. I then left and went to study mechanical engineering in Scotland. I was there for four years. One of the years I actually went to Italy to do an Erasmus program.
I then came back and decided to switch completely to finance, and so I ended up graduating from university and becoming an investment banker working in London in the late ’90s. Then the guy I knew who was working there as well left and he became CFO of EDP in 2000. Most of my friends at the time, they were leaving the banks to go and work at dot-com companies and the new economy, and they were saying, forget about the old economy. What’s really important is the new economy.
I don’t know, I did something which at the time seemed to be slightly crazy, which was to go into a really, really old part of the economy, which is the energy part. I came back to Portugal to work at EDP. I was here for about a year and then I went to go do my MBA at MIT in Boston. I came back in 2003. I just find it a really interesting sector. I’ve had the privilege to work in multiple different roles. I was head of strategy in M&A at the company, and then I was part of the executive team running the distribution business. Then I ran the Spanish operations for a couple of years, I ran the supply business and then was CFO of the company as well for three years. Then I became CEO in 2000.
I’ve been involved in multiple areas of the company throughout this period, and I find it a super exciting sector. I say that many of our investors looked at utilities as we wanted them to be boring companies. What we wanted was to be predictable, provided dividends. You can just put your money there and don’t think about it. Yet everything is changing. That’s not true anymore. The way you produce and consume energy is changing dramatically. The way that you distribute energy is changing dramatically. Everything is becoming digitalized. You’re having to decarbonize all the energy mix. So I find it a fascinating sector and I’ve really enjoyed it and I’ve found different opportunities, and so I’ve gone on staying.
Per: It’s just amazing how the utilities business has changed since you joined the company, and today when you’re deploying, as you’re saying, €25 billion into new projects all across the world and using new technologies as well, because the windmills have evolved and the solar panels are evolving. It’s actually become avery much of a tech deployment business as well.
Miguel: For sure. There’s clearly a revolution going on in the sector. What has changed just over the last 10, 15 years, renewables used to be seen as a niche play, expensive energy. Nowadays, I don’t think anyone can not look at renewables. It’s the most competitive source of energy. It’s certainly the cleanest, so really, I think there is this massive transformation going on.
I think one of the most interesting things for me has been to see certain companies being very defensive about their legacy businesses and trying to protect that. I think other companies like EDP really embracing the change and saying, this can be a fantastic opportunity for us and let’s go for it, and that’s served us well. I think we’ve managed to grow internationally and really change our business, change our portfolio as a result of taking those decisions.
Per: I want to look back a bit at the IPO in 2008 of EDP Renewables, because you had EDP that was already listed, and then you chose to spin off EDPR in 2008. It was a market cap of €8 billion at the time, quite a large IPO. What drove the choice to list a subsidiary back then?
Miguel: It’s important to place ourselves back at that time. EDP had made a large investment buying a company called Horizon Wind Energy in the US, one of the largest renewable energy players there, done that in early 2007. It required a lot of capital to continue to invest and build out that business. At the EDP level, it wasn’t possible to raise additional capital because some of the investors didn’t want to put in additional capital, didn’t want it to be diluted.
We also couldn’t raise debt because our balance sheet was already relatively stretched. So we could either have slowed down the investment and not taken advantage of that, and that would have been a real pity. Or what we did was let’s carve out EDP Renewables and see if investors are willing to invest directly into that subsidiary. The truth is, we spoke to several financial advisors, we looked at what other peers were doing, and we went down that path. So we raised equity directly at EDP Renewables, and it ended up being a very successful transaction. We were able to raise, as you say, more than €1.5 billion at the time, which is extremely important for us.
Here, timing was everything. Again, placing ourselves back in 2008, at the beginning of 2008, there were already some signs of some financial instability. You already had some banks in the US doing impairments, having some issues around their balance sheet. We were racing against time to basically try and get the IPO done by June of 2008. Very practical reason, the Euro 2008 was happening in June. What we were told is, listen, you can’t raise money when there’s a Euro Cup going on, because no one is going to pay any attention.
Per: Especially with the retail tranche, right?
Miguel: Especially retail and others, because no one’s going to pay any attention. Analysts won’t want to see you guys. Actually, most of the banks were saying, you should wait till after the summer, and then you’ll have a clear window and you can raise capital. We were like, no, we want to do it. There’s a market there. We just make sure we do it before the Euro starts and we’ll get it done. So we actually had to really run a lot to get it done before, let’s say, the end of May, beginning of June, and we did, we managed to get it done.
Fortunately, because after the summer of 2008, I think everyone will remember, we had Lehman Brothers and the world collapsed, and it would have been impossible to do the IPO. We can go a little bit deeper if you want there, but the biggest lesson I got out of that was, if there’s a window, you go for it.
Per: You should never put back a good IPO, right?
Miguel: Yes.
Per: You should always do it when the timing is there.
Miguel: Exactly.
Per: From the investor side, if you look back in 2008, the economics were not exactly the same. There was a lot of subsidies. Was there a lot of pushback about just the economics of renewable energy at the time?
Miguel: I’d say there are two ways of looking at it. One is from the investor side. The other is from the consumer side. To be honest, from the investor side, this was highly regulated. It’s true, it was subsidized at the time, but there were very attractive returns, and so you were able to deploy a lot of capital with decent returns. Not fantastic returns, but reasonable returns. From the investor side, that wasn’t necessarily a problem. It was more an issue of, okay, is there any regulatory risk? How fast can you grow? Those types of questions.
I think from the consumer side, that’s where potentially there were issues around, okay, if this energy is being subsidized, is it going to be much more expensive and is that going to mean a higher bill for us? I think that was true back in 2007, 2008 or that decade. Nowadays, renewables is much more competitive than any other source of energy and it doesn’t require subsidies anymore. In terms of returns, the returns haven’t changed that much, actually. It’s just that you don’t need the subsidies anymore to get the same type of returns as you did then.
Per: Within the EDP, as you’re saying, a large regulated utility, this was quite a large company changing bet that you did on renewable energy development. What were the discussions you had at that time around this?
Miguel: Fortunately, Portugal and Spain, both at the time were very pro-renewables, more perhaps than other countries. There was a stable regulatory framework and there were relatively ambitious goals already at that time for renewables. In Portugal and Spain, we’re lucky to have an ecosystem where it was possible to deploy significant amounts of capital and get decent returns under this sort of regulatory framework. That wasn’t possible in other countries. Since then, obviously the world has evolved and it’s changed a lot. I think that was one point.
The second point is that renewables was seen as a niche play. A lot of the other utilities at the time, what they liked was big projects. A big coal plant, a big nuclear plant, or even gas plants. Renewables was seen as a sort of sideshow, something that wasn’t very credible. Certainly if you were a traditional utility guy, you didn’t really consider renewables to be a credible technology. I think that meant that we were able to invest for a relatively long time and build up critical mass when many other people were distracted and not really paying that much attention to renewables. So I think it was a combination of issues, but basically, we found that niche, we found that opportunity and we just went for it.
Per: from the retail investor side, your retail tranche was 15%, which is quite large. I assume that was mostly Portuguese retail and it was very popular. You had eight times over subscription on that retail tranche. What strategies did you do to get retail interest for the IPO, which probably actually helped on the execution as well?
Miguel: First of all, EDP has a very strong brand, certainly in Portugal and even in Spain, and so I think that helped because we were basically IPO-ing a company, but that had a brand that people recognized and that was seen as being a solid play. There was a complication because actually EDP Renewables was a little bit of a strange animal in the sense that it was a Spanish company listed in Portugal, so it has this strange governance.
Retail investors I think were quite enthusiastic about it. It was an investment in a company that they knew, or at least they knew the brand, sustainable, it had a potential high growth. Obviously we did a retail campaign, and so we worked with the local banks in Portugal and Spain. They normally have this ability to distribute to shares and to talk to some of their investors, some retail investors. Ultimately, I think this combination of factors meant that we were able to raise quite a lot of capital, or at least a lot of interest from retail investors, but the bulk was from institutional investors at the end of the day.
Per: In terms of pricing, you already had the benefit of some of your peers being listed. You had Enel Renewable Energy, you had Iberdrola. How did you think about pricing the IPO? Was having that peer group already listed a good sort of indication of where the market would be, or did you use another method?
Miguel: Oh, it was very important, I think. Certainly in these situations, investors will always try to benchmark you against someone else. If there are more peers, they will sort of try to find proxies and figure out, are you bigger, are you smaller, are you better, what countries are you in, what are the similarities? Then use that benchmark, that market benchmark to do your own pricing. I think we were able to come in with a relatively good pricing, so in line with peers, we certainly wasn’t at a discount. I think that was also important to us. We are one of the leading players of renewables and we were recognized at that. EDP Renewables continues to this day to be one of the few– many of the other renewable players in the meantime have been folded back into their companies.
Per: Yes. Today, EDPR is the benchmark, right? Especially in Europe.
Miguel: It is the benchmark. It is the largest renewable energy player in Europe.
Per: Your choice then of keeping it listed, because as you said, Enel, EDF, Iberdrola, all basically folded these companies back into the mothership, your choice of keeping EDPR listed, what drove that?
Miguel: One part is that it’s expensive to buy it back, to be honest. That’s also not a positive reason for it, but the positive reason, certainly today, is that it gives a lot of transparency to an important part of our business. It’s a way of raising capital. We raised over 1.5 billions in the IPO back in 2008, but then we raised another 1.5 billions in 2021, and we just raised a billion now in 2023. So that ability to go out to the market and raise capital from investors who want to invest specifically in renewables. We’ve also raised capital at the EDP level, but if you want to invest directly in a renewable player as pure play, then you invest in EDP renewables.
I think that ability to attract those types of investors has meant that it’s trading at a premium, at a much higher multiple than, for example, EDP itself or other comparables, so you can raise relatively cheap capital at EDP Renewables. So the transparency, the visibility on the assets, the ability to raise capital on very good terms, I think all of those mean that we are very comfortable with the current situation where you have both companies traded.
Never say never. To be honest, we did try to buy it back in 2017. At the time we put an offer and I think shareholders felt that it was worth more, and it was. EDPR was trading at about €7.5 per share. It’s currently trading around €18 to €20 per share. It’s been as much as €24 per share. It’s certainly grown and it’s a much bigger company nowadays. So we’re comfortable with the current situation and basically that it has several advantages, I think.
Per: How do you think about capital allocation when you are sitting at the EDP and EDPR level? Because it seems to me like you have a lot of possibilities. You can go out and get that financing. You get a project equity for your specific projects. You do asset recycling quite often, which is one of the advantages of being EDPR. Then you can also raise fresh equity for the company, EDPR or EDP. I’m just wondering about how you think about this capital allocation job that you have.
Miguel: I think the first thing is to recognize that this is a very capital intensive business. We deploy billions of euros over time. A lot of it is self-financed, so our own organic cash flow. I think that’s the first source of funds that we have, although we also then need to pay dividends and we have a relatively generous dividend policy. We can raise debt. That’s also an important part of the management of our balance sheet, we’ll go on raising debt over time. We raise hybrids. Hybrids are considered 50% equity, 50% debt for rating agency purposes.
We can sell assets and, let’s say, capture that value and then reinvest it back into the business, shat asset rotation strategy that you mentioned. Then finally, sort of almost at the other extreme from organic cash flow is actually raise new equity from the shareholders. That, for us, we only do if we think we have really good opportunities that we can’t do with any of these other instruments.
The way we look at it is there are a series of instruments for financing the investment. We look at what is our growth possibilities? What are the opportunities that we have? Are they good investment opportunities we think that they’re worth pursuing? Then we’ll look at this range of instruments and see what’s the cheapest and best way to finance that. We want to keep a solid balance sheet, so we’ll never raise more debt than what is necessary to keep a Triple B rating.
So it’s a constant mix of these different instruments that we’ll use to make sure we have a solid balance sheet, that we’re not asking too much equity from our shareholders. Obviously they’ll always question why you’re raising equity, so you have to have a pretty good business case for it, but we see it as sort of the full range of instruments that we should use.
Per: We actually have quite a number of companies, especially in the energy transition space, much smaller than EDPR, that are looking at an IPO and they’re wondering about these same questions. How should I actually structure my capital allocation? Should I be the owner of all my projects or should I bring in the project equity partner, an infrastructure fund, for example? Do you have any advice for these companies that are much smaller, maybe $200 million market cap today, but are growing in quite successful niches?
Miguel: The way we look at it is if they’re good investment opportunities, what’s important is to be able to execute them and finance them, execute them, get them done. We want to do as much investments or take advantage of as many investment opportunities as we can, as is reasonable, and then we need to figure out how to finance it. I think the question that people need to ask themselves is, how much capital do I need to do the investment plan that I want to do, that I think is valuable or that’s creating value? Then look at the instruments to finance it. It doesn’t go the other way around.
I think you need to look first at what are the opportunities you have and then how do you finance it and then try to square the circle. Maybe you’ve got limited financing capability, so maybe you’ll need to reduce the amount of opportunities you can take advantage of, but I think it has to start with what is there, what can you take advantage of, what opportunities are there, and then work backwards.
The other thing I’d say is not be emotional about projects or assets. We are quite happy to, and this was something that we started doing six or seven years ago, which is building the projects, we’ll keep some of them and some of them we’ll sell. Typically we’ll have a capital gain on that sale and we’ll be able to redeploy that capital back into the business. I think certainly from, let’s say, an engineering company, normally you’re quite emotional or you could tend to be emotional about the projects and think, oh, I don’t want to sell anything, I want to hold on to everything.
I think our mission is really to invest well, to drive this energy transition and so if that means that at some point you need to sell some assets to be able to build new ones that are profitable, then you should do it and not just hold on to what you have because then you also don’t move forward. I think for us, that’s been one of the most important parts. Our portfolio has changed dramatically over time. We’ve sold gas assets, we’ve sold coal assets, we’ve gone on, I’ll say, selling certain assets to free up the balance sheet, to reinvest in new assets that we can build to really drive this transition.
Per: Between 2008 and 2021, you actually didn’t come to the market to raise equity as EDPR, but then in 2021, you raised 1.5 billion. It’s actually the first transaction we participated in as Amundsen when we launched, so quite emotional about that one still. Then you came back in 2023, you raised a billion euros underwritten by GIC. Obviously this is a great way to raise capital. It’s very fast, it’s quite a lot of money, but what changed, actually, in 2021 that drove you to then come to the market?
Miguel: First, we had a new team. I joined in 2000 and we came up with a new business plan, which really wanted to accelerate the build out of renewables. To give you an idea, we were building about 700 megawatts per year in the decade 2010 to 2020. We came out and we said, we’re going to build, well, currently, around 4 gigawatts per year, so we’re multiplying it by more than five times the number of megawatts that we wanted to install every year. The reason for that is because we were seeing the opportunities, and so we were ramping up. To do that, we needed to raise capital.
So the direct answer is you had a new executive team coming in, new business plan, you had a big, let’s say, ramp up of the potential in growth of renewables. You had, for example, already quite a lot of talk about the Inflation Reduction Act, or at the time it was called the Build Back Better Bill in the US, so there’s already speculation about additional growth opportunities in the US, you had Europe also with quite ambitious goals, and so we said, let’s be more aggressive in terms of our growth plans. That was basically the reason. We really decided to ramp up the growth and take advantage of the opportunities we were seeing.
Per: Can you explain a bit then how 1 billion euros raised in equity, how this then actually translate into capital deployed, because obviously you’re leveraging that billion in certain ways, so how does it actually translate into your business plan?
Miguel: You can typically multiply it by two to three times in terms of available balance sheet capacity. To the extent that you have a typical debt to equity ratio of 50%-50%, if you raise an additional billion of equity, you might be able to raise an additional billion of debt. Then you also have the organic cash flow coming from the project that you’ve built, so those 2 billion of additional investment will itself generate cash flow, which can be reinvested back into the business. A billion of equity, get to maybe two and a half or more times leverage.
The way we thought about it was, again, looking at the opportunities, looking at the markets we’re investing in, figuring out how much additional debt we could raise, how much cash flow we had, and then trying to sort of plug the gap with equity. Obviously then there are also very practical limitations. I could say, I could invest another 5 billion, but I can’t raise 5 billion in the market.
There are some very practical considerations when you start talking to financial advisors and you start looking at what is your market cap, what is the depth of the market, of the investors that you’re tapping. Typically you have these conversations over time and they’ll tell you, listen, you can probably raise a billion relatively easily, a billion and a half it might start getting a little bit more difficult. If you try to go to 2 billion, we’re not saying it’s impossible, but the pricing will get very expensive. You sort of go on calibrating.
For us, and for different companies will be a different discussion, maybe different level, maybe smaller, bigger, I think for each company, it’s looking at what makes sense and what the market can absorb of additional equity. I think, again, we’ve built those relationships with financial advisors over many, many years, and so I think we ourselves also have a relatively good feeling for what’s in the market. We talk to investors all the time through the various roadshows that we do, and so we get a sense for what is possible and what’s not possible or what is attractive or not.
Per: When you compare to your peers who are part of larger groups, do you think it’s offering you an advantage, that separate listing of EDPR?
Miguel: I think at the moment, yes, for sure. For the reasons I mentioned, I think transparency, the ability to raise capital, the fact that it is a pure play, so it deserves a premium multiple and it gets a premium multiple, which typically is then reflected also on the EDP as the mother company. I think even more intangible things, let’s say, attracting people to work at EDP Renewables, it’s a pure play. So even the purpose and the way we position ourselves in the market for attracting talent makes a difference. I think some people want to work in a large renewal based company more than the more traditional utility. I think all of these different factors mean that it actually ends up being quite interesting to have a listed company.
Per: I wanted to look a bit ahead at the energy transition space more broadly. One of the things is the cost of developing renewable energy. It’s been going down over time, but now recently it started going up and you have the wind OEMs who are actually struggling to put up positive margins. How do you think about the cost side of this renewable energy deployment going forward?
Miguel: I don’t think it’s particular to the renewable energy, but it’s just more generic. Over the last 18 months or so, you’ve had just a much higher inflation overall where it’s all of your costs. Certainly for renewable energy projects, wind in particular, you had a very large increase in, for example, issues like the price of steel, the cost of transportation. Then the OEMs themselves had issues in that they had assumed certain contracts, certain commitments, for example, to customers, some of them like ourselves, with a fixed price, and if they hadn’t hedged their commodity prices on the backend, then you get squeezed.
I think what you saw was you basically had very low volatility and very stable prices in general over a long period, and so people were relatively comfortable in taking some risk around that, locking in fixed prices with their customers and maybe not necessarily locking in all of the cost side in hedging their steel costs and then labor costs, et cetera. Suddenly you got squeezed with this tremendous cost inflation. I think that’s certainly at least my view of what’s happened to a lot of the OEMs.
I certainly hope we get through this because I think it’s important to have a healthy supply chain. We’ve obviously talked, for example, certainly to Vestas, Siemens Gamesa, Nordex, some of the largest turbine suppliers in the market, and obviously, we want to make sure this whole supply chain works well because it’s not in our interest, I don’t think it’s anybody’s interest that they should go through tough times.
On the solar side, it’s slightly different. The solar side is very much dominated, as you know, by Chinese manufacturers or Southeast Asian manufacturers. Polysilicon had a very dramatic increase, but also a relatively dramatic decrease. It’s gone up and down and solar prices are back to pretty much the prices that they were before with one exception, which is the US. The US, the price of solar panels in the US is still about double the price that it is, for example, in Europe. That’s just a function of the fact with the Inflation Reduction Act in the US, there’s a bigger push to move the supply chain back into the US. There’s tariffs, there’s difficulty in importing. A bunch of different factors, but it just means that basically there’s been a higher cost of solar in the US.
Per: What about on the public policy side? I’m sure you interact a lot with regulators and you probably have your frustrations with the speed of regulation. What are the major bottlenecks you see on the public policy side?
Miguel: The key issues we see with public policy is the speed, as you say, of permitting, of licensing, of getting interconnection to the network. You can break it down by market. I think the European Commission has actually done a good job over the last 12, 18 months. After the war broke out in Ukraine, there was a lot of speculation about obviously the reduction of gas into, or the cut of gas into Europe and that we were descending into this terrible recession, that the winter of ’22, ’23 would be absolutely terrible.
The truth is we’ve gone through that winter and we’re now in the summer, and actually prices have come down significantly. There weren’t any sort of major cuts. I think Europe has done a good job. The member states have done a good job at that level. However, I do think that at the more granular level, in terms of actually then building up renewable projects so that you can reduce that dependency on gas, because now if it’s not dependency on gas from Russia, it’s from Qatar or it’s Nigeria or it’s the US, we need to get away from that dependency on third countries. Particularly because it’s more expensive than if you can actually build out renewables.
I think the commission has given certain guidelines that you should simplify the licensing and permitting and you should accelerate the projects. It’s now down to the member states and some member states are being more active, more proactive than others, but there’s still a lot to be done. As you say, I think there is some frustration. In general, I’d say the companies can scale up much more quickly than some of these public administrations, which need to–
There’s been a big overload of some of these public administrations because they’re really having to process a lot more requests for permits and licenses and so forth, but they need to, as I say, you need to digitalize these processes, you need to standardize them. You need to simplify them. You need to provide more resources, more people in some cases to just process all of this. It’s not enough to just talk about the energy transition and you wanted to build up renewables. You actually need to allocate resources. The companies can do it relatively quickly, but the governments, the administrations, they also need to do it so that you can actually get this done. That’s very much the European paradigm.
The US is different. Maybe just a quick word on the US. The US came out in August of last year with the Inflation Reduction Act. We’re coming up almost on a year since it was approved. Majorly consequential piece of legislation, really generous incentives and support for build out of renewables, electrical vehicles, but also with it, we call it a relatively protectionist component, so really incentivizing made in the US, bringing the manufacturing supply chain into the US, both solar and, let’s say, on the wind side. It’s a slightly different dynamic there. I’d say it’s relatively simpler to license and to permit in the US and there’s still bottlenecks, still a lot of requests, for example, for interconnection, which needs to get done, but I think the US will move forward maybe more quickly than Europe in some cases.
Per: Are there any countries you think are leading there in terms of digitalization and efficiency of the permitting?
Miguel: I’d actually say Portugal, even though it’s a small country, is doing a relatively good job. We’re already at about 60% to 70% renewable penetration. They’ve done things which can sound very basic, but can be actually relatively important. Things like if you have this certain capacity of wattage, let’s say in the past, of 100 megawatts, they said you can go up to 110 or 120. You can put in more capacity as long as you then curtail it so you don’t inject more than the required capacity.
What does this mean? It means most of the time you’re not operating at full capacity. The wind is not blowing at its maximum speed all of the time. So if you put in more capacity, probably for the average, you’ll be able to inject more energy into the network and maybe there’ll be a couple of hours over the year where you actually maybe need to shut off some of the turbines just so you don’t put in too much energy or overload the system, but you can optimize that. So you don’t need to be dimensioning it so that you never go the maximum capacity. You can actually control the amount of capacity that you’re actually using. Maybe that’s just one small example.
Another one, which I think is extremely important as well, is what we call hybridization, which is putting multiple technologies on the same line, on the same interconnection with the network. You can have wind, you can have solar, you can have hydro, you can have batteries. You have combinations of these, and they don’t always operate at the same time. The wind isn’t always necessarily blowing during the day, but the solar is working during the day. It doesn’t work at night. There’s more hydro in the winter, obviously, than in the summer.
Combining these different technologies on the same line, on the same sort of tube, if you want to inject it into the network, you can optimize this energy. This is actually something which is relative. The computer can model what these profiles would look like, and you can optimize it. That’s a better way of using the existing infrastructure without needing to put in a lot of additional infrastructure.
Unfortunately, that’s not possible in a lot of countries, and so it would be one way where if you have, for example, a lot of already existing wind projects, you can suddenly put in a lot of solar projects on the same point without needing all of this licensing and permitting. I think sometimes there are little things which sound like little things, but actually you can scale up much more quickly than you otherwise would. So we’ve been advocating that in many different member states and even, for example, in the US.
Per: That sounds like very good suggestions. If we look outside renewable electricity production, you invested in Lhyfe, a French hydrogen developer, at the time of their IPO, actually, as a cornerstone investor, where we were also cornerstones alongside you. I’m just wondering, how do you think about such opportunities in fields that are related to your main activity? Are you looking at smaller actors there?
Miguel: Our investment in Lhyfe, it’s driven off green hydrogen, and green hydrogen is basically green electricity turned into a gas. That’s maybe one way of sort of describing it. 70% of the cost of hydrogen is renewable energy, renewable electricity. We’re looking at hydrogen– as you know, there are many areas of the economy that can’t be electrified. The easiest way to decarbonize the economy is to electrify it. Because electricity, you can turn it into green electricity relatively easily. But there are certain parts of the economy that you can’t electrify, and so hydrogen is seen as a possible energy effect that can be used to decarbonize things like steel manufacturing, certain fuels, synthetic air fuels, ammonia. In places like that you can use green hydrogen.
Lhyfe is essentially a developer of hydrogen projects, and so we’re invested in Lhyfe, but we also see ourselves as a partner in the sense that we bring along the expertise in renewables and hopefully we can partner on projects where we help them have competitive renewable projects that can then feed and produce that green hydrogen for whatever commercial use they’re doing.
It’ll take time. One of the things I’ve said recently, I think there’s some inflated expectations in relation to hydrogen, certainly in the short, medium term. Personally, I don’t believe the European targets for 2030. I think they’re super ambitious. I think we tend to, in general, I don’t know if it’s a fact, but it’s a well-known sort of view that people tend to overestimate the impact certain technologies will have in the short term and underestimate the impact they’ll have in the medium, long term. I think this is probably one of those cases.
I think people are expecting hydrogen to come in much faster than it probably will, and so there are inflated expectations. We’ll then go into the valley of disillusionment and then we’ll come up to the slope of enlightenment. I think those are the technical terms. I think hydrogen will be an important part of the energy mix going forward, but I think we just need to be careful not to overshoot on the inflated expectations or to undershoot on the valley of disillusionment when we see that a lot of the projects actually aren’t coming out because the economics don’t work or because technically it’s not viable.
We are investing in hydrogen. We are taking a very pragmatic view. For example, in Spain recently, the European Commission awarded seven IPCEI projects. IPCEI projects are projects of common European interest. So this allows them to be funded, supported so that you can actually make them viable because in the short term, they need public support. We want three of seven, which is a very high hit ratio, because if we had Iberdrola, Naturgy, Repsol, et cetera, they all won just one of them, and we had three of the seven projects.
I think we have a relatively good base and knowledge of what’s happening in the hydrogen space. We do think that things will take longer than people are expecting, but that we will get there in the end, but we need to be quite pragmatic and I think reasonable or lucid about what can actually be done in the short, medium term.
Per: What role do you think the listed equity markets have in sort of helping fund the energy transition because you have a lot of infrastructure funds. How do you think about the role of the listed markets there?
Miguel: I think it’s an important instrument, which can give a lot of visibility to the market. In certain cases, it can provide a way of financing investments with a relatively low cost of capital. As I mentioned earlier, we see it as multiple different instruments, including equity and equity comes in two forms, private and public. We’ll also do private. We also have investors coming in directly in some of our projects and taking a stake in a wind project or a solar project.
I think listed works well when it’s a portfolio of projects and where you’re looking for just relatively patient equity in a sense. Normally private equity will have a timeline, which was within five years, seven years maximum typically. Now it doesn’t mean you can go a little bit longer. They’ll have to rotate out. They’ll have to sell those projects again, and so it’s not so long-term. If you have a listed company that can be a long-term play. In that sense, it’s slightly more patient. Maybe it won’t be the same investors, but you’ll still have the equity there in some form or will have raised it in some form.
Per: Any fun facts you could share from either your IPO or the roadshows you’ve done since being CEO and meeting with investors?
Miguel: The fun fact is it’s a lot of hard work, but you do get to meet super interesting people. You mentioned we raised equity from GIC, from ADIA in Abu Dhabi. We had more regions. I think it’s always incredibly interesting and insightful to a lot of times have these conversations with sophisticated investors, get their view on how the market is doing. It’s a lot of hard work. You’ll get a lot of people that won’t invest, but you’ll get some that will invest. The fun fact is that it is fun.
One of the things that I most enjoy is actually talking to investors and getting their feeling for how the market’s doing and how they’re seeing our peers. GIC, it started off this relationship. They invested €1.25 billion, so €850 million in EDP Renewables, and then another €400 million in EDP, because we also raised €1 billion at EDP to finance the buyout of EDP Brazil. But they were a small investor in EDP originally as a public investor.
Then we bought a company in Singapore called Sunseap. I started traveling to Singapore and we decided, let’s go and visit GIC. The guy there was like, oh, well, meet our private. I met with them there in Singapore. Then a few weeks later we met with their team in London. Then I did a call with the head of infrastructure globally, and then ended up meeting the global CIO in Davos. We ended up talking to all the different stakeholders in GIC, and I think it was incredibly insightful and useful, that process.
It just shows that you really need to play a patient game. This was played out over many, many months, in fact, years in some cases, for example, in the case of ADIA. These are conversations that you will go on having with investors over time. Then someday maybe you’ll need to actually pick up the phone and call them and say, listen, we’re thinking of raising capital on these terms. Are you interested or not? Would you come over the wall or not?
It’s definitely something that you shouldn’t just think of it as you’re raising it for the IPO. These are long-term relationships in many cases that you’re building up well before you actually raise the capital and well after you raise the capital. At some point, I had someone tell me on the board that the market is a mythical creature, and I was like, “Well, no, it’s people, and it’s people who are investing, and you need to build up those relationships because those people on the other side who are deploying capital, they need to know the company, they need to know who’s the management team, they’re taking decisions.”
A lot of times we talk about the market, but the market is made up of individuals who are taking decisions every single day. I think those relationships over time are incredibly important to develop, because as I say, you shouldn’t just think of on a transactional basis as like, okay, I’ve raised the capital, bye-bye. No, it starts well before and it never ends. It’s an ongoing process.
Per: In your case, it’s a track record built up over 15 years of EDPR as a separate company, and then you’re actually able to raise a set of billion euros overnight with some very high quality investors. It’s very fast once you get there, but it’s a long, long way to get there. Miguel, thank you very much. This was very interesting. We went through a lot of the fields of energy transition together and I learned a lot in the process, so thank you for that. Best of luck with deploying the strategy going forward. I think it’s important for you as a company and also for Europe and the US and Asia, so, looking forward to that.
Miguel: Thank you for having me on. It’s a pleasure to talk to you and thank you for all the questions. Hopefully it was interesting and I’m happy to talk again.
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