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Under pressure from investors, EDP doubles down on renewables growth

EDP - Energias de Portugal SA is planning to finance a greatly accelerated expansion into wind and solar power through the sale of at least €2 billion of assets in its home market of Iberia and a global €4 billion asset rotation program, as some of its largest shareholders continue to wrangle over the utility's future.

CEO António Mexia told investors in London on March 12 that the new strategy, which foresees €12 billion in capital expenditures in the company's core markets between 2019 and 2022, would propel EDP forward in spite of several clouds currently hanging over the company, including a contentious takeover bid by China Three Gorges Corp., or CTG, and 2018 financial results that missed expectations.

"We have a distinctive equity story that has been blurred by recent events," Mexia said, emphasizing that doubling down on green growth would leverage the expertise the company has built over the past decade. "It's driven by the same ideas but it is a transformation," he said. "We'll just go faster."

Last June, EDP rejected a €9 billion all-cash takeover attempt by its biggest shareholder, Chinese state-controlled CTG, as too low. While CTG is seeking regulatory approval for the bid in jurisdictions including the U.S., Brazil and the E.U., activist hedge fund Elliott Management Corp., another EDP shareholder, has put forward what it calls a "superior" plan that would see the utility sell off assets worth €7.6 billion, including its Brazilian generation and distribution business, and spend €3.5 billion to build approximately 3.5 GW of new renewable capacity.

The €12 billion EDP has earmarked for investment go beyond Elliott's spending proposal, although its investment plans include transmission assets in Brazil, and EDP management suggested that the company could even expand in that country.

Overall, EDP plans more than 7 GW in gross renewable additions by 2022, with about 40% of its spending allocated to the U.S., 35% in Europe and 25% in Latin America. Annual capital expenditures will rise 60% to €2.9 billion between now and 2022, with 75% of the money invested in renewables, 20% in networks and the rest in client solutions and energy management.

The growth plans will be partly financed with at least €2 billion from asset disposals in Spain and Portugal over the next 12 to 18 months, focused on thermal and merchant-exposed generation, as well as at least €4 billion from sales of majority stakes in projects around the globe. EDP aims to keep control of the projects in half of the stake sales but will generally follow the approach of a recent majority divestment involving a 499-MW portfolio of onshore wind farms in the U.S., said CFO Miguel de Andrade.

Mexia said the company could exceed its €2 billion asset disposal target, given the right opportunities, and promised to provide more details on the plans before the end of the year. The company currently has 2.4 GW of coal-fired plants and 3.7 GW of gas-fired capacity in Spain and Portugal, and merchant and thermal generation made up 45% of the group's EBITDA in 2018.

As a result of the investment surge, EDP's renewables buildout will double to 1.4 GW per year in 2019 and 2020 and reach 2.2 GW in the following two years, de Andrade said, adding that most of the growth will be in onshore wind and, to a lesser degree, solar.

EDP said the investment plan should drive net profit above €1 billion and EBITDA above €4 billion in 2022, while net debt would be reduced from €13.5 billion currently to €11.5 billion under the plan. On top of €2 billion for deleveraging and €7 billion for expansion and maintenance, de Andrade said the company would pay out approximately €3 billion in dividends over the four-year period.

EDP saw its net profit for 2018 drop 53% from the previous year to €519 million due to regulatory measures and tax impacts in Portugal. The company's domestic unit reported a net loss of €18 million, while results at its renewables business and Brazilian subsidiary increased year-over-year.

EDP's shares rose by up to 1.2% on the Euronext exchange but dropped back to hover around the previous day's closing price of €3.27 in afternoon trading on March 12.

After expanding its footprint abroad over the last decade, Mexia said that now was the time to quickly scale up EDP's renewables platform to stay ahead of the competition. "We can and will deliver our commitment," he said. "Everybody's green, but we are greener."