EDP Energias de Portugal SA

ELI:EDP

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to EDP's First Half 2020 Results Presentation. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Miguel Viana, Head of Investor Relations. Please go ahead, sir.

[Miguel Henriques Viana, Head of Investor Relations]

Good morning, ladies and gentlemen. Thanks for being with us today in the conference call on EDP's First Half 2020 Results, which at this time -- the results are being reported exceptionally right after the summer holidays period. We hope you managed to take some rest and recharge batteries. We'll begin with the main highlights on the results, and then we'll provide an update on the strategy execution. We'll then move to the Q&A session, in which we'll be taking your questions both by phone and via our web page, www.edp.com. The call is expected to last no more than 60 minutes. I'll give now the floor to our interim CEO and also CFO, Miguel de Andrade.

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Hello, welcome, everyone -- everybody. Thanks for taking the call. And I hope you had a good summer break. I'm pleased to present a pretty solid set of results for EDP this morning. You all have seen they came out last night. And to take you through it. Maybe just before I go through some of the numbers, just to mention that COVID has definitely presented some challenges over these last few months. But I really think it also shows that the strong foundations of our business and the resilience and the robust response that has allowed us to continue to make progress on the execution of our strategic business plan. We talk about the Viesgo acquisition in Spain, which we announced in July and that was a significant achievement for us, and it really allows us to grow in activities that we believe are fully aligned with the energy transition, namely networks and renewables. We also continue to see important regulatory developments and a growing public support for the green agenda technologies. In our core markets in Europe and the U.S. I think that's come out also very intensely over the last couple of months. And while I think we've also felt the impact of the COVID pandemic, it's also been really a catalyst for progress in an area where we're very well positioned to generate additional value and more opportunities. So it's been a tough couple of months, but I think it's also highlighted the strength of our business. So let's go to the presentation in terms of the highlights for the first half. On this period, EBITDA fell 3% year-on-year to around EUR 1.9 billion. So on one hand, the EBITDA benefited from the recovery of the hydro in Iberia to close to the historic average in the first half of 2020. So compared to a very dry first half of 2019. So the hydro factor was approximately one. We also had very robust results in the Energy management segment and this was driven by our hedging strategy in the energy markets. This benefited obviously from the significant decline in the energy prices and the increase in the energy markets volatility. However, we also saw some negative pressure on the EBITDA from the depreciation of the Brazilian real and the contraction of the electricity demand in some of our key markets. I mean, obviously, this affected both our supply operations in Iberia and also the performance in our distribution business in Brazil, where not unbundled, as you know, the supply and distribution are essentially the same. In terms of recurring net profit, this increased by 8% to EUR 509 million. This was exclusively driven by the Iberian business, had an increase of EUR 120 million, so it almost doubled. So I think this is a really strong performance from the Iberian business this year. This more than compensated EDPR and EDP Brazil's lower contribution. In addition, we also saw the average cost of debt improved by 70 basis points to 3.3%. And this is essentially as we see more competitive refinancing costs when compared to our maturing debt. Overall, the reported net profit decreased by 22%, so this is dragged by nonrecurring items in the first half of 2020. Essentially, key items here are the impairments in the coal assets following the closure or the anticipated closure of Sines Coal plant in 2021. We announced that in July and also the one-off cost of the hybrid bond repurchase, which we did in the first quarter of this year. Net debt, down 2% year-to-date to EUR 14.1 billion. Obviously, this reflects in the first half of the payment of the annual dividend in the second quarter. This a recurring event every year. So there's more pressure on the second quarter. Also like to note that the net debt in June 2020 was flat versus June '19. And so as a result, the ratio of net debt-to-EBITDA was 3.7x in June 2020. Just slightly above the 3.6% in December '19 and clearly below the 4.1% shown last year year-to-date -- last year, June '19.In terms of cash flow, recurring organic cash flow rose EUR 300 million to EUR 1 billion. This is obviously supported by better performance and activities in which we don't have partners or minority interests and also to lower interest costs. So despite the COVID restrictions, and I think this is important to note, our expansion investments continue to move forward at a good pace, and they reached around EUR 800 million, of which almost 90% was allocated to new renewable projects. And the remaining -- the expansion of the electricity networks in Brazil. We've also made good progress on the implementation of our strategy post June 2020. So as you know, we closed the agreement for the acquisition of Viesgo to good valuation. This includes, as you know, the long-term partnership with Macquarie for electricity distribution business in Spain. It reinforces our regulated and long-term contracted risk profile. And we've had the opportunity to talk about this in detail in July. So I won't spend much time on this. Obviously, associated with this, we raised the EUR 1 billion for the rights issue, representing around 8.5% increase in share capital. But I think this was well received by the markets. It's critical to support the Viesgo acquisition. I'll touch a little bit more on this later on, but I think the general perception was very positive. Finally, we also announced over the last month 2 asset rotation deals totaling EUR 1.1 billion of enterprise value. So the first deal, which we announced in mid-August was 240 megawatts in Spain at an EV multiple of EUR 2.1 million per megawatt. This is for a portfolio with an average age of 9 years. The second deal, which we announced this week, refers to 560 megawatts in the U.S. at a EV of $2.1 million per megawatt as of COD. So I just highlighted as of COD is the reference that we should use. Implicit valuations in these transactions did support the positive outlook that we've shared with you in the first quarter conference call. So I think just reinforcing this trend that we've had. Let's move forward to the next slide. So on EBITDA, and the breakdown by business platform. So as I mentioned, consolidated EBITDA down 3% year on year, but would have been flat if we excluded the Forex impact, namely the Brazilian real, which depreciated 20% versus the euro. Within renewables and despite the 83% increase in our hydro production in Iberia, just 4% below historical average, the hydro -- the EBITDA had an 8% decline, mainly due to the decline in the wind and the solar. This in turn is explained by the winds resource in our global wind farms portfolio was 9% below long-term average. The Average capacity in operation decreased by 6%, and this is essentially due to the asset rotation last year, 51% stake in a 1 gigawatt wind portfolio. So obviously, that has a relevant impact on EBITDA level, it was EUR 87 million year-on-year impact on EBITDA. Obviously, at the net profit level, this is much less relevant since it's also plus minorities. Finally, the decrease in asset rotation gains by EUR 74 million year-on-year. So in the first half of 2020, the asset rotation gains were EUR 145 million, reflecting the valuation in the shareholding adjustments from the transfer of most of our offshore wind assets, the new 50-50 wind offshore joint venture with Engie as you know, is called Ocean Winds. Turning to networks. The 7% fall in EBITDA is mostly related to the depreciation of the Brazilian real. In local currency, EBITDA from networks in Brazil grew 12%, supported by the expansion of the transmission activities, fully mitigating the 8% decline of electricity demand in our distribution areas. In Iberia, EBITDA evolution reflects the decline of regulated returns in Portugal to 4.9% roughly and in Spain to around 6%. Finally the improvement in client solutions and energy management. I think this is a strong improvement. It's fully driven by the positive hedging results in Iberia, partially offset by the 17% decline in EBITDA from supply in Iberia, mostly given the contraction in electricity supply volumes by 7%. So this was most relevant in the B2B segment, where the decrease in volumes reaching 14% and was only partially mitigated by the 1.5% increment in the B2C segment. So let's move forward to the next slide on financing costs. So here, interest costs down 16% and supported by 70 basis points decline in the average cost of net debt, as I mentioned, and a 6% decrease in the average debt. Now this better performance be I mean, is due to the more active debt management. At the rates of maturing debt were much higher than those for new financing we've got this year. But it's also to mention, there's also a significant reduction in the short-term rates in Brazil. So as you can see here on the table on the right-hand side, we continue to have some short-term debt maturities with relatively high rates that will be maturing over the next quarter. So this should continue to support the downward trend on the average cost of debt over the next couple of years. I mean this is something I think we've been flagging, and you guys have also asked us about this over the last year or so. And I think we're seeing that flowing through now the P&L. Let's move forward to the next slide on recurring net profit. So here, the negative FX impact of EBITDA is obviously more diluted at the EBIT level and even more at the net profit level. Since we typically fund our operations in the local currency. So below EBIT, there's a positive impact from lower net financing costs, and there's also lower minority interest, both at EDPR and EDP Brazil. This is partially set by a slight increase in effective income tax. So overall, recurring net profit up 8% to EUR 509 million. Reported net profit significantly impacted but for the reasons I've already mentioned, so namely coal and the repurchase of the hybrid bond and investments. So let's move now to strategy and execution and just a few slides on this and a few key messages. Just quickly recapping what we've done since we announced our strategic update back in March '19. So I think we've really shown in this period. It's basically 1.5 years that we've been front-loading the execution of this plan. So this has been really important, particularly given what's happened over the last couple of months since the COVID, because we've managed to really lock in a lot of value creation, and it's put us on the right path to extract value from growth opportunities that we've been developing now for a number of years. In renewables, as you know, 84% of the 7 gigawatts target's for this period, long-term contracts. We're well positioned now for the accelerated growth in Europe and the U.S. Brazil, delivering on the transmission projects ahead of the regulatory schedule, even taking into account the COVID restrictions. Viesgo, stronger presence in activities aligned with the energy transition in our core markets. And I think, also with a significant number of synergies. Regarding portfolio optimization. So we've already closed or agreed more than 55% of the $4 billion proceeds related to the asset rotation. On top of that, we've announced EUR 2.7 billion of proceeds from 2 disposals in Iberia, so the 6 hydro plants in Portugal and the 2 CCGT and B2C supply portfolio in Spain. So overall, I think we consider this proactive portfolio restructuring has been a major source of value creation. On the balance sheet, obviously reinforce us EUR 1 billion of rights issue. And as mentioned, reinforced through a low operating risk profile with the increased weight of the regulated activities. On efficiency, fully on track to meet the targets in our strategic plan. OpEx decreasing 3% year-on-year in the first half of 2020. Obviously, part of that is to do with COVID. But it also really allows us to accelerate some of these savings. Given increased digitalization and also greater operational efficiency that we were redesigned during this period. So I think it's given us a boost in that respect as well. On shareholder remuneration. So we're comfortable with the sustainability of our dividend policy, as you know, the EUR 0.19 floor, target payout 75% to 85% and we're completely committed to reinforcing our green positioning and accelerating decarbonization. So as you know, that's a key part of our strategy, and it will continue to be. In the first half of 2020, 80% of our electricity production came from Renewables and our CO2 emissions factor decreased by 57%. Obviously, this is very much supported by the 74% contraction in coal production. Our green position is also reinforced not only by the closure of coal, but also involvement in some of the energy transition projects, including -- we're beginning to participate in the green hydrogen project in Portugal, we have some storage projects under analysis for Soto 3. And we also have some renewable projects that we intend to develop in Viesgo's coal sites, which are being decommissioned in the south of Spain. So definitely, green positioning is extremely important for us. Let's just move forward to the next slide. So just a quick note here on the rights issue. So as you know, successful 8.5% increase. I won't dwell much on this. But I think the market reaction to the operation show the merits of the combined acquisition and the right to issue deal. But as I say, that's something which is done. If we move forward to next slide, Slide 10. I think here, this is, I think, an interesting slide. So it shows how we've been active in reshaping our Iberian portfolio. So just reminding you, in December, we announced the disposal of 6 hydro plants in Portugal for the EUR 2.2 billion, already gotten the EU merger control approval, and we believe that Portuguese regulatory approvals are also on track. In May, we had the sale to Total of the 2 CCGT and the B2C portfolio. EU merger control already approved this transaction, as you know, the last couple of weeks. And the transaction and the restructuring and carve-out of the assets is ongoing so again, on track. And then in July, we also announced the acquisition of Viesgo, more recent deals. So it's still ongoing approvals, both at the European and Spanish regulatory level. But again, we think that's on track. And we expect that to be done by the fourth quarter. In fact, we expect all of these transactions to be completed in the fourth quarter of 2020. As we indicated in the strategic update, so the overall aim of the group is to reduce merchant price exposure and to really enhance the visibility of our revenue by increasing our long-term contracted assets. So I think these recent transactions are a really strong step in this direction. A note here, just regarding the integrated industrial project for Viesgo. So we're already working on a plan to be implemented in the first 100 days. And we expect to kick off just after the financial closing new transaction. But this is something we already have the teams working on this and fully developing the 100-day plan.Let's just move on to Slide 11, maybe a note here on the asset rotations. So the last couple of weeks have been really busy for the teams in terms of finalizing these deals. Last -- so back in August, we announced the sale of 240 megawatts, as I mentioned in Spain, EUR 2.1 million per megawatt. By comparison, our previous asset rotation deal in April was at around a multiple of 1.6x. So significant uplift in value despite a slightly older portfolio. I think here, the message is a lot of competition despite the COVID situation and very attractive prices. This week, we announced a sale of an 80% stake in the 560-megawatt portfolio in the U.S., which is both wind and solar, but an implicit EV multiple of $2.1 million powers per megawatt as of COD, as I mentioned. If we only consider the wind assets, the multiple would be around $2.4 million per megawatt. So that's also a significant increase versus our previous transaction in North America. So obviously, the EV multiples expansion in these transactions is not only due to the lower interest rates, both in Europe and the U.S. The 10-year government bond yields are -- declined by about 1% in Spain and about 2% in the U.S. But we continue to see, as I mentioned, strong appetite among institutional investors for these green assets with regulated or long-term contracted revenue. So I think there's a strong market there for the product. Let's move forward to Slide 12. So here, in terms of build-out. So despite the COVID, we've managed to keep a strong execution of the PPAs. We have the 84% of 7 gigawatts, as I mentioned, in terms of project delivery, there have been postponements, as you know, as we've mentioned earlier, imposed by COVID on some construction activities and also on the manufacturers value chain. So in some cases, this could imply some delays for up to around 500 megawatts of wind [ projects ] , which we had under construction in the U.S. for 2020, it might slip from the fourth quarter to the first quarter of 2021. I don't think this has any impact or material impact from a valuation perspective, the PTCs will still be there. So it's really just the COD will be beginning of '21. As you know, there was this extension for -- versus the previous -- the PTCs versus the previous target of December 2020. So we're pretty comfortable there. In relation to installed capacity by 2020, the number should be offset by the consolidation of the 500 megawatts of wind capacity coming from Viesgo, which -- financial closing is also expected before year-end. Regarding offshore wind, the JV is done. So established Ocean Wind's, as you know, brings positive impact because of the assets that were transferred and the revaluations that were done. 2 remaining assets be transferred from our side, Mayflower and so in the U.S. and Wind Float in Portugal before the end of this year. And on the Engie side, Seamade in Belgium, it's also expected before the end of this year. In relation to our project, the Wind Float Atlantic, this is commissioned in the summer. I mean, I think it's an interesting -- some have asked us about this project. It's an interesting milestone for the offshore industry. The largest turbine ever installed on a floating platform. And the 2 projects, the more also in relation to offshore other projects that are pretty advanced stage of construction. So Seamade in Belgium and Moray East in the U.K. So I think also going to be good references for our offshore targets. So they continue to evolve in line with the construction schedule, and I think that's on track.Let's move on to Slide 13. And here, just I think, a more high-level note just on additional opportunities on the green recovery. I think we've seen important developments and public support for the green technologies in general. And obviously, for [indiscernible], in particular. In Europe, number of mechanisms have been designed by the European institutions for the economy, the environment, digitalization, basically aiming to promote a recovery on a -- based on more sustainable economic model. So this really fits well with our strategy. I think we're really well positioned to benefit from it. Overall, the national Engie plan is estimated over 340 gigawatts of new onshore wind and solar capacity by 2030, of which 55% correspond to the 8 European countries where we're already present. So it's important also not to forget other investments that will be key, namely the hydro, electric mobility, smart grids, where we've also been very active. So I think, in general, good news for where we are strategically. The European institution has also created the Just Transition Fund, which can also be used to support the regions affected by the coal plant shutdown. So I think this will also be an added incentive to accelerate this transition and really accelerate the shutdown of coal and moving to renewals.In the U.S., that definitely would benefit from the extension of the PTCs and also some pretty ambitious energy transition policies that will be discussed in the run-up to November's election. So again, pretty exciting times, I think, for the green economy.Now let's move to Slide 14 and just a word on Brazil. Brazil has obviously been significantly impacted by the pandemic. But I think it's also been interesting to see that the Brazilian institutions have reacted and I think in a really solid way. To create several mechanisms, to support electricity companies in the sector and the consumers. And so just to highlight a couple of these. In the distribution and I would like to mention the creation of the COVID account. So this increases the liquidity for the companies. It's also a pass-through of costs related to the estimated COVID impact due to the surplus of long-term contract electricity volumes. So last July, EDP Brazil got essentially around BRL 600 million referring to the COVID account, which reinforce the financial liquidity. So it was a good measure for the sector as a whole. And obviously, we benefited from that. In generation, there was a recent approval by the Senate of new legislation to solve the GSF issue. I think this is a critical step to reduce the regulatory uncertainty. It's still the presidential approval, which is required to proceed with the release of the detailed rules from the regulator. The solution involves the extension of the concession periods for some hydro plants, in exchange for some upfront payments and will solve some pending financial settlements. So it will solve some uncertainty that exists until now. So I think that's also an important step that took place in August. In transmission, we had some delays in the construction works. Given the COVID, but construction has resumed, 71% of total CapEx related to 6 transmission lines was already executed. Last month, we announced the completion of the second part of the Lot 11 in the Maranhao state. It's fully operational now, 12 months ahead of regulatory schedule. And regarding future transmission options, we'll obviously continue to review opportunities. But we will also be disciplined in the way that we approach these. As you know, we are -- when we go into these auctions. Looking at the macro environment, strong depreciation in Brazilian real. So that worsens our financial in euros, but also some positive indicators from a macro view in Brazil, namely, really low interest rates, I mean, record low interest rates. The Selic, with the benchmark rate is recently reset at 2% by the Brazilian Central Bank. So in that sense, also greatly reducing the funding cost in Brazil. In March 2020, so beginning of the crisis, Brazil took several preventive measures to protect the financial liquidity, obviously those with a lot of uncertainty at the time. So they initially cut the dividend proposal and they had some CapEx postponements and increase of credit lines. But as a result, they had a very strong financial liquidity of BRL 3.4 billion, low leverage of around 2x net debt EBITDA. But given they're in a strong position, things seem to be recovering. Brazil's just now announced a share buyback program and clarification on this dividend policy, setting a dividend floor of BRL 1 per share of the 50% payout on adjusted net profit. So this is very much in line with the dividend proposal announced by Brazil in March. It's withdrawn because of the COVID, but we're now reaffirming that and maintaining that for the next 3 years. In the release, in the press release that the company made is also stated that the absence of investment opportunities in Brazil at attractive conditions. The remaining cash flow would be distributed either as buybacks or additional dividends. But basically, the idea is to have an optimized capital structure in Brazil and make sure that it's efficient. So let's just move to Slide 15. Talk a little bit about something which I know also interests many of you, which is the Iberian in energy markets. Those as I already mentioned, we had pretty solid results in energy management in the first half. This compensated the negative effect from weaker volumes and lower energy prices. For the rest of the year, we expect much lower energy management results below the average over the last 5 semesters. So really, the first half, in particular, the first quarter was exceptionally good. And obviously, going forward, just over the remaining months of the year, the second half, I mean it will be -- the reason for this is on the back of hedging in the -- it's got to do with seasonality and basically the recovery of energy prices. So just wanted to remind you though that this expectation is already reflected in our guidance, which we've been providing. Also in relation to '21, and also something I'd like to highlight, and we've been doing that over the last couple of months is we are reducing our merchant exposure. So disposals to hydro, as I mentioned, CCGT plant, the B2C portfolio, the shutdown of the coal. And so all of this contributes to reducing our merchant exposure in Iberia. We also have now almost 100% of our hydro nuclear production hedged at an average price of around EUR 45 per megawatt hour. So this is aligned with the forward prices. And 60% of our expected gas production, CCGT production at mid-single-digit spread on average. So this is essentially 2021, pretty much locked in. So let's just quick mention on Slide 16 on impact. Just to say, as I've mentioned before, it really shows that throughout this really challenging time we have shown a lot of resilience, in particular in the second quarter of 2020 was particularly tough in terms of the lockdown, in terms of the impact on the economy. And I think despite that, we were able to have solid results. Of course, this has to do also with the adoption capacity of the company, but also our people. So there's a lot of focus here on the business plan execution and throughout this period despite the lockdown and everyone being remote. There's a lot of support to our suppliers, to clients, I mean, just generally, the community. So I think in general, we try to really have a holistic stakeholder view here. And this translated also into a good quality of service also even in terms of both the supply business and the distribution business. Coming out of this, I think there's really an opportunity to take some of the lessons learned and benefit not only from an efficiency point of view, that's obviously relevant and through digitalization. But I think also new ways of working. And so I think this is really making us also reflect on how -- we even post dynamic, how we'll reflect that in the way that people interact here in the office and everything. And so I think that will bring a lot of benefits also in terms of motivation for our team. Last slide, let's just moving to summary. So we're maintaining the financial guidance that we shared with you just a month ago in the Viesgo acquisition and the rights issue presentation. So despite 2020 being difficult for COVID. We are keeping solid earnings resilience, recurring EBITDA, EUR 3.6 billion, recurring net income of EUR 0.85 billion, EUR 0.9 billion target. As you know, our recurring net profit assumes the sales is nonrecurring. So if you take that out, we're sort of a [ EUR 0.8 billion ] including the sales. In terms of the deals we expect to do in the fourth quarter, we expect to conclude in the fourth quarter. I think that will be deposits of obviously for the post-2020 period. So we see Viesgo, clearly the earning's is enhancing, significant value from the industrial project. And also, I think the better-than-expected terms of the Viesgo rotation deals also allows to a more optimistic view versus our strategic plan assumptions regarding the transactions over the next couple of years. So we still have around EUR 2 billion, slightly less than that due the next couple of years. I think what we've seen in terms of the asset rotations over the last 18 months, 24 months. This has allowed us to be slightly more optimistic versus our business plan assumption. We also see improved growth opportunities for renewables, both wind, onshore, offshore, solar, hybrid, [ bank ] with storage, green hydrogen. I think there's a lot of moving pieces here, which I think will give us good opportunities to create value, improved economics, a lot of public support, both in Europe and the U.S. So I think we have some tailwinds here. The portfolio restructuring and the focused growth in the long-term contracted and regulated activities is also going to reduce our merchant exposure and improve our low risk profile. And that, together with very supportive credit markets, lower yields for longer should allow us to also continue to reduce our average cost of debt. So this overall combined effect allows us to feel comfortable about the dividend policies, I mentioned. And so just generally, I think we continue to see a very positive outlook regarding EDP's capacity to lead this energy transition to really continue to create value for our stakeholders and our shareholders, obviously. So we'll see. Then have a couple of annexes. I'm not going to go through that, but you have a lot of information. We typically provide in other presentations. And you can refer to that in the Q&A if necessary. Let's stop here and turn it back over to Miguel Viana.

[Miguel Henriques Viana, Head of Investor Relations]

Yes, we can start now the Q&A session. Maybe we'll start with the questions on the phone, please.

[Operator]

[Operator Instructions] We will take our first question from Mr. Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, Head of European Utilities Research]

I will stick to three. And the first one is a bit pedantic, and I apologize in advance. But just to be clear, on your EUR 3.6 billion EBITDA for 2020 and EUR 0.85 billion to EUR 0.9 billion. You call it recurring, I think out there, there's different definitions by different people like analyst investors. Would you be so kind to tell how much asset rotation or offshore JV gains you are including in there? And what one-off costs do you include in there? I tell you this because you're talking about EUR 190 million one-off cost from -- at the bottom line from Sines, the liability management, early purchases of bond and the extraordinary tax. But you don't explain it here. That's also nonrecurring. So I was wondering how you treat that here. And lastly, you're not really giving here a big COVID impact like some of your competitors. So I was wondering, can you give us EUR 1 million figure impact from COVID, not currency, but perhaps just volumes and maybe adjusted for some of the extra gains in energy management you have. So it would be great to really get to a clean, clean, clean figure here to understand your underlying earnings power, which I believe is the key debates today. Second question, I'm really intrigued again by your comment that talked about 85% secured of the 7 gigawatts and if I put that together with your recent balance sheet measures, very interesting, the sentence you used there, you said, we are well positioned for growth opportunities in Europe and the U.S. Can you elaborate on that? The balance sheet of EDP by year-end, once you close all those transactions, is probably going to be EUR 5 billion stronger and really EUR 5 billion broadly. So securitization, asset rotation disposal. What are you going to do with all this money? I mean, I guess, growth opportunities, you talk about a renewable, can you give us more -- tell us what is the organization ready to deploy? Is it going to 3 to 3.5, 4 gigawatts within the next 3 years of gross capacity additions, I'm not asking your preview of the CMD, but just trying to understand what's the potential here. Last question, very quick. Also quite surprised, given that most of your enterprise values renewables, you do not seem to show a pipeline here. Can you share it with us a gross pipeline? We know some projects will never materialize. We know some projects will, we know you need to keep every day working to beef up in the pipeline. But can you tell us a snapshot where is it today?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Thank you, Alberto. So in relation to your first question, just how much asset rotation is in the recurring numbers I was talking about. So we're expecting that for the full year, we should be close to 0.4%. So I think yes, $145 million in the first half, and we've had 2 recent deals, which will be closing in the second quarter. And I think from the multiples, you can assume that there's obviously going to be relevant capital gains associated with that. So I think we'll be well ahead of what was our initial expectation, that's allowing us to mitigate the impacts of the COVID, which was the second part of this question. So after rotations, close to 0.4 and what I would like to highlight, though, also, it does show the recurring power of this business model because it's not 1, it's not 2, it's not 3, It's not 4, it's already several transactions that we've been doing over the last couple of years or certainly last 2 years, selling majority stakes, where we have consistently shown our -- not only the market appetite for these assets, but also the interest and the sort of the attractiveness of these assets, which has obviously increased even during this period. And also in this question, in terms of one-off costs. So as I say, in Sines, we're obviously impairing the asset value. We're also impairing the some of the coal value. And restructuring costs associated with that. The liability management is what it is. It's obviously the hybrid buyback we did at the beginning of the year and the sales as well. And I think this is detailed in the presentation. But essentially, that's sort of the one-off, which is clearly signaled and is not part of these numbers. In relation to the Spanish coal, we've already done that last year. So really the big Sines-- the coal is really -- Sines now in the second quarter. In relation to COVID. So we were obviously impacted by COVID and heavily impacted by COVID, Everyone was. It hasn't impacted the EBITDA level, let's say, above EUR 100 million in terms of -- but then don't forget, a lot of this was also in Brazil. So when it gets down to the net profit line, it's mitigated. And in Iberia, it has also impacted our commercial business and -- but then that was also mitigated by part of our energy management. So I certainly wouldn't draw the assumption on the contrary, we were heavily impacted by COVID. But fortunately, we also had other levers, which then allowed us to mitigate that impact. So as on a recurring basis, we ended up in a good place.In relation to your second question, so the -- well positioned for growth. Listen, I think we're focused on the business plan. As I mentioned, we're still at 84%. You can look at it as we're positive, we're 84%. I can say that we still have some more to do to get to the 100%. We would look at going to the market at the beginning of 2021 and providing an update on how we see sort of the company going forward for the next couple of years. And we would then be able to elaborate a little bit more. But just also in relation to this question, I think it's a relevant point. I mean, our balance sheet will be at the end of the year where we wanted it to be. In other words, we are still a BBB- rating, and we have the objective of trying to move to a BBB rating. And so that means that we need to be consistent in the way that we move in this direction. So it's not the transactions we're doing are allowing us to get a little bit more freedom and to move towards the BBB doesn't mean we suddenly have a huge amount of space. And so we are moving in the right direction, but on track. So in line with what we expected. So I'd say that's in relation to the capacity for more growth. Really, I'd like to probably answer that when we do a full sort of CMD. When we can take all the different pieces, put them together and have a sort of a solid coherent plan rather than just answering a part of it in relation specifically to renewables. And in growth pipeline, for the third question, you're right, we don't typically provide a lot of information on pipeline. And obviously, as we go on closing the PPAs, we provide that. We have a very large pipeline, which has allowed us to feed, and it's basically a funnel. And I think we've talked about this a little bit in the past certainly in some of the conversations, that sometimes you need to be developing this pipeline for 4, 5, 6 years in different geographies until you actually get it to maturity. So we don't provide that information. but I think the fact that we are able to deliver the PPAs and deliver the growth shows that it's a pretty solid pipeline that we have that's backing that funnel.

[Alberto Gandolfi, Head of European Utilities Research]

Sorry, Miguel, just to be clear on the first answer, and that was very comprehensive. So you have EUR 400 million gains from rotation before taxes and those not a very high tax rate here. And then you have EUR 200 million one-off cost, EUR 100 million volume cost on -- both on a pretax basis and on the EUR 100 million, some of it, a big chunk of it is Brazil. So it's kind of -- if I were to think EBITDA would be EUR 400 million gains and EUR 300 million cost, right?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Yes. Roughly.

[Operator]

We will take our next question from the line of Harry Wyburd from Bank of America.

[Harry Peter Wyburd, Vice President and Junior Analyst]

And 3 questions from me, please. So first 2, I'm afraid also on the guidance. So just kind of a sense when rewinding back to May at your first quarter results. It's a fairly positive update. And I think certainly, my interpretation was that the wind was sort of more blowing towards potentially this year coming out ahead of guidance, and you sort of updated it and the range you've given to perhaps a touch below if you're pedantic. What I'm interested in is what's changed? You sort of alluded to a less good outlook in the second half, Iberia retail. So compared to where we were when we were last speaking in sort of early to mid-May, what's really changed in the second half? Or has there been a sort of negative movement in the outlook for retail or any other part of the business that perhaps means we're kind of less looking at a kind of guidance upgrade or beat. Or is it just that the COVID impacts are actually bigger than what you'd anticipated back in May? Second one, sort of very granular, mainly, yes, no question. So does the EUR 0.85 billion to EUR 0.9 billion guidance and the EUR 0.4 million of gains includes an assumption for the remaining assets that are going to be folded into the Engie JV? Or would that be upside for those figures? And what are you assuming for the U.S. dollar in your EUR 0.85 billion to EUR 0.9 billion so i.e., is that based upon a mark-to-market as of today? And then third and final question, just on the legal case. So as I understand it, there's now a potential legal case where EDP would be a defendant. Can you just help us understand the time line on that case? Is that something that is expected perhaps to drag on for years or tens of years? Or is this something that you think could come to hedge relatively quickly?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Okay, Harry. So thanks for the questions. So maybe on positives and negatives versus May. So I think in May we were -- we'd already tried to factor in a lot of the moving pieces, which, as you know. So as I mentioned earlier, we were hit hard by COVID. There are also some positives that we were already beginning to see. And until we sort of built that into our view at the time. Positives, we have already seen the lower interest rates. We were seeing already higher gains in the asset rotation. Some of the negatives that, let's say, been highlighted over the last couple of months, the stronger devaluation of the Brazilian real. And obviously, the demand. So I think definitely, those pieces have continued to move, but the positive ones we've already seen, I think the Brazilian real has continued to devalue a little bit further versus where we were back in May. And in terms of the energy management also for the remaining part of the year, I think, as I mentioned, we had an extremely -- extraordinarily strong first quarter. Second quarter was good, but obviously less strong. And typically, the second half of the year is less strong than the first half. So as I mentioned, that's also already all built into our targets. So we're already now in September. We already have the chance to sort of incorporate the latest assumptions. And I think these positives and negative lead us to be comfortable with the guidance we provided a month ago. In relation to your question on the net profit, so yes, the guidance already assumes the gains that may come in from moving the remaining projects into the JV. So that's also built in. It's essentially Mayflower and Seamade, which are the ones that have -- will have the greatest impact in that. So that's a relatively quick question. And I think you also asked about the euro dollar, that's 1.15 in roughly is what we were assuming for that forecast. In relation to the legal case, listen, there's not really very much I can add to what we said in the past. So time line is uncertain, but certainly, it's something that we don't expect a lot of news in the short term. It could drag on. As you know, the legal cases in Portugal typically do drag on for a number of years. There's not any information that I can provide. No news in this respect. August is a pretty slow month, judicial holidays and that's all. Nothing more to say here.

[Harry Peter Wyburd, Vice President and Junior Analyst]

Okay. Many -- and just perhaps just on the legal case, if you had to provision anything in your accounts for that? Or has that any impact on…?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

No. No we -- I'll be very clear about that. We have not provisioned, and we have no intention of provisioning. I mean there's -- in fact, there isn't even any number out there that we could possibly even try to understand what -- have a reference. So no provision, no intention of provisioning and not even a reference that exists.

[Miguel Henriques Viana, Head of Investor Relations]

Okay. We can go to the next question on the phone, please.

[Operator]

So now the next question comes from Manuel Palomo from Exane.

[Manuel Gonzalez Palomo, Analyst of Utilities]

I've just got 2 questions. Well, 1 regarding Portugal in which I will ask you to please update us on the latest on [indiscernible] tax. And two related to recent auction. And what's your view on the results from that auction? And why you did not gain any -- or why you were not awarded many of these projects in -- under the different optionalities for the auction. Second one, and again, not trying to preview your CMV in the future, but I was wondering whether you could tell us what is the run rate in terms of installations that EDPR could do? Are you already at the peak of that? Or do you see still some room for improvement in the coming future?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Manuel, so in relation to the Portuguese regulation. I think essentially, we have the 3 different topics that we typically talk about, which is the sales, the claw back and the social tariff. I would say that in relation to the sales, the extraordinary tax, clearly, there's a commitment to have this evolve and that was set out in the government budget for the year that it should be reduced in line with the system debt. Unfortunately, this coincided with the COVID and so the system debt is actually not expected to decline this year. We do expect it to continue to decline going forward because the COVID is obviously a one-off impact. So it creates short-term pressure this year. But then we continue -- when we look forward to when we project the tariffs going forward and then the system debt, we continue to see it's completely sustainable and will fall away for the next couple of years. So in that respect, I think that political commitment is still there, and it's a question now of following this and seeing how it evolves. In relations to claw-back, again, I think some -- maybe some positive news on that, which we hope will come out over the next couple of weeks, maybe. Essentially, some steps were taken, as you know, the sector's state has already mentioned that we should net off the sales and the social tariff against the claw back. And so that now needs to be detailed and reflected in specific regulatory regulation, and that's been done. So hopefully, we'll have some news coming out of that. In terms of the social tariff, not really any news on that. So no change there. So that's Portuguese regulation. In terms of solar auction, we obviously go to these auctions and we participate the same way we participate in many other auctions around the world. We do our best. We set up the teams. We try -- we find the locations, we use our pipeline. But then we're also disciplined about what we see as the returns that we expect for these type of projects. And so we'll go in and we'll have a price that we're willing to go to. And then it goes beyond that, and we'll step out and we'll invest elsewhere. I think it was interesting to see the solar auction. So obviously, we'd also participated last year. We were awarded not in the auction, but afterwards then, with the project there. But this year, it had a particularity, which is you could also bid with storage. So 75% of the solar of the 700 megawatts ended up being taken in the modality, which is Solar Plus storage. That ended up being extremely competitive and say on a CFD basis, if we had to do a -- in one case, it was EUR 11 per megawatt hour. In some cases, it could even potentially be negative. So very aggressive prices. I'd have to also mention here that half of those megawatts were won by a South Korean company, which is also a producer of panels and storage. So they may have a different view on the economics and so they were able to be more competitive there. I can't really tell, but it's -- I guess it would be certainly interesting to try and understand a little bit more those economics there. But it's part of life. I mean we go to these auctions. We win some, we lose some, and that we just have to be disciplined in how we approach this. In relation to the question on the run rate. So clearly, we're ramping up, as you know, within renewables. We were at a run rate of around 700 megawatts, and we're ramping up to around 2 gigawatts. We have the pipeline. And I think that's something that we've all stressed is the big change, I think, strategically that we had was to build as much as we can. And then if necessary sell part of it to continue to recycle that capital. From an organizational perspective, we've also been ramping up. I mean, we've been hiring a lot of people. We've been sort of building out the organization, obviously, to match that. So this year, we would be already -- obviously, now with the COVID, it's been slightly delayed. The number of megawatts we're building this year, but we'd already be getting close to 2 gigawatts. So with in the 1.5 to 2.9 type range. As I say, some of those megawatts have slipped into 2021, but I think the organization is there. So we continue to ramp up the organization. I think we had the heart of it, the core we already had in terms of energy assessment, in terms of the relationship with turbine manufacturers. So I think that's there. And so we're really fleshing out in the different markets and in the markets where we already are to make sure we can continue to deliver those megawatts. So I mean this is always to say, we're comfortable with the run rate of the 2 gigawatts. I'd wait to see sort of the full CMD to talk about any other numbers apart from that.

[Miguel Henriques Viana, Head of Investor Relations]

We'll try now to answer some questions from the web. We have here some questions regarding Viesgo acquisition in terms of integration. So Stefan Bezzato from Crédit Suisse and [ Jose Marange ] from TB Capital. Are you in a position to provide more detail on the expected synergies and tax benefits from relation with Viesgo. Is it now possible for a more detailed view about potential synergies and also about how long we are going to see the same direction?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

So first, as I mentioned, we're focused now just on executing the M&A side and trying to get that closed by the end of the year and getting this through the different regulatory hurdles. We're also in parallel working on the integration plan for the first 100 days. So we're -- this will be basically doubling our size, more than doubling our size in networks for permanent concessions, we'll be combining 2 industrial projects. So obviously, I think we can all intuitively understand that this has a lot of value creation potential. I've seen some of the numbers from some of you guys, some sell-side analysts, and we're comfortable with those numbers. I think they're aligned with the benchmark for these kind of deals. Certainly, our internal numbers, which would not be very different from those. But I really can't share much more detail than that. I would just also say in relation to the tax issue, I mean, obviously, since we will have more than 75% in the distribution holding company, we will have the full fiscal consolidation within the EDP Spain parameters. So we expect that to also generate significant value.

[Miguel Henriques Viana, Head of Investor Relations]

We have then a question also regarding -- from [ Jose Marange ] in terms of coal plants of Viesgo impact on EBITDA in 2021. I think this is quite easy, maybe. We don't expect any EBITDA contribution. So we expect that all the extraordinary costs for shutdown will be already accounted both in 2019 and 2020. Finally, I think we have -- we are reaching the end of the call. We have a last one on the fixed income from James Sparrow, BNP Paribas. Can you talk about your funding needs after the capital increase and recent asset sales, having issued equity? Do you no longer need to issue IB debt? Will the focus be more on issuing cheaper senior debt in the future?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Yes. The answer here is yes. I mean, we'll continue to issue senior debt. Probably most of it or -- I mean, will either be euros or dollars. We also think it's important to continue to issue dollars. Since most of our growth or a part of our growth is also U.S. driven, dollar driven. Hybrids, listen, they're a tool, and we may use them in the future. So I would never say never. We need to reinforce the other metrics. But certainly, we don't have any plans to do that at the moment. And we just focus on executing the deleverage plan, which doesn't require any more hybrids for that. The capital increase was obviously just necessary because of the Viesgo acquisition.

[Miguel Henriques Viana, Head of Investor Relations]

I think we can conclude. Miguel, if you have any final remarks?

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Listen, I think it's -- there's been a -- obviously, the second quarter was a tough quarter, and we would have liked to go out to you guys on July and present on that. But as you know, it wasn't possible. I think we are very comfortable. We had solid results. We're comfortable with the guidance. We're comfortable in terms of the asset rotation deals, we're comfortable in terms of the way we're managing the energy management. So we're feeling very positive about the company. And several of you raised this in terms of our future prospects. I would prefer to have, let's say, a comprehensive discussion and presentation to all on this in the future. But certainly, we're feeling very good about the company and about the prospects going forward. So I think we're in a good place.

[Miguel Henriques Viana, Head of Investor Relations]

With this, we've finished the call. Thank you very much for your participation and hope to have you in the next weeks in some interactions in several conferences. And then on the third quarter results conference call that is reaching very close already. Bye.

[Miguel Stilwell de Andrade, Member of Executive Board & Interim CEO]

Thank you.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you.