EDP RENOVÁVEIS C R · other renewable sources such as solar PV plants, offshore wind power and hydropower dams. EDP RENOVÁVEIS COMPANY REPORT UTILITIES SECTOR 22 MAY 2016 STUDENT:

THIS REPORT WAS PREPARED BY JOÃO TIAGO CABO, A MASTERS IN MANAGEMENT STUDENT OF THE NOVA SCHOOL OF BUSINESS

AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY SARA ALVES WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT Page 1/29

MASTERS IN MANAGEMENT

EQUITY RESEARCH

EDP Renováveis (EDPR) produced energy is mostly

generated by onshore wind power. However, the company is

looking to diversify its energy sources and is focused on creating

solar PV power system and offshore wind power. Hydro dams are

also in the company’s plans if any opportunities arise.

The company has entered in the Mexican market through

a participation with Industrias Peñoles. This elevates the markets

to 12 countries where EDPR is now operating.

The Polish and Romanian market have been presenting

with the highest growth rates, leading EDPR to the leader producer

of renewable energy in Poland. In Romania, the company has

achieved its first solar PV power system. However, the USA and

Spanish markets are still the most relevant ones to EDPR.

The struggles faced by the company related to the

financial crisis, both due to the difficulties from Portugal and Spain

to pay their debts as well as the disturbs on the stock market, and

due to the regulation changes caused in the previous years, seems

to have come to an end and EDPR is now facing with several

growth opportunities.

The growth the company has achieved combined with the

increase in its efficiency are resulting in a decrease on its debt,

improving its debt to equity ratio.

Company description

EDP Renováveis is an energy producer company that uses only renewable sources. Its history started in 2007 when it was created by EDP to manage its assets from wind power. With time, the company grew and today EDPR is present in 12 countries spread around the world. Additionally, it is also expanding its portfolio to other renewable sources such as solar PV plants, offshore wind power and hydropower dams.

EDP RENOVÁVEIS COMPANY REPORT

UTILITIES SECTOR 22 MAY 2016

STUDENT: JOÃO TIAGO CABO [email protected]

A bright future ahead

Diversification is the key from growing

Recommendation: BUY

Vs Previous Recommendation BUY

Price Target FY16: 7,07 EUR

Vs Previous Price Target 22,4%

Price (as of 22-May-16) 6.74 EUR

Reuters: EDPR.LS, Bloomberg: EDPR:SW

52-week range (EUR) 5,70-7,38

Market Cap (EUR millions) 5.879,36

Outstanding Shares (millions) 872,31

Free Float 22,5%

Source: EDPR Annual Report 2014

Source: Euronext Lisbon

(Values in EUR millions) 2014A 2015E 2016F

Revenues 1.323 1.709 1.644

EBITDA 904 1.143 1.151

EBITDA Margin 68% 67% 70%

EBIT 423 578 630

Net Income 127 166 194

Cash Ratio 11% 6% 1%

ROA (%) 1% 1% 1%

ROE (%) 2% 3% 3%

D/E 1,26 1,42 1,21

P/E 49 38 37

EV Multiple 10,98 9,14 9,62

Source: EDPR Reports; Nova Analyst Estimates

http://www.novasbe.pt/


PAGE 2/29

Table of Contents

EXECUTIVE SUMMARY ............................................................................. 3

COMPANY OVERVIEW ............................................................................... 4

COMPANY DESCRIPTION ...................................................................................... 4 SHAREHOLDER STRUCTURE ................................................................................ 5 STRATEGY ........................................................................................................... 5

MARKET OVERVIEW .................................................................................. 6

COMPETITION ...................................................................................................... 6 DEMAND FORECAST ............................................................................................. 7 REGULAMENTATION ............................................................................................. 8 SPAIN ................................................................................................................... 9 PORTUGAL ......................................................................................................... 11 FRANCE ............................................................................................................. 11 BELGIUM ............................................................................................................ 12 POLAND ............................................................................................................. 12 ROMANIA ............................................................................................................ 13 ITALY .................................................................................................................. 13 UNITED KINGDOM .............................................................................................. 14 UNITED STATES OF AMERICA ............................................................................ 14 CANADA ............................................................................................................. 15 MEXICO .............................................................................................................. 15 BRAZIL ............................................................................................................... 15 MARKET FORECASTING ..................................................................................... 16

ASSUMPTIONS ......................................................................................... 17

REVENUE GROWTH ............................................................................................ 17 EBITDA MARGIN............................................................................................... 18 TAX RATE ........................................................................................................... 18 DIVIDEND PAYOUT ............................................................................................. 18 CAPM INPUTS DATA .......................................................................................... 19 OTHER ASSUMPTIONS ....................................................................................... 19

VALUATION ............................................................................................... 20

RECOMMENDATION ................................................................................ 21

RESULT .............................................................................................................. 21 SENSITIVITY ANALYSIS ...................................................................................... 23

APPENDIX ................................................................................................. 24

FINANCIAL STATEMENTS ................................................................................... 24 ADJUSTED PRESENT VALUE .............................................................................. 28 RESEARCH RECOMMENDATIONS ....................................................................... 29


PAGE 3/29

Executive summary

The energy market has been seen from the last decades as the future of utilities

sector. However, the huge fixed costs and capital requirements to operate,

aligned to an inefficient energy producer have been delaying the boom for this

sector. Nowadays, it is possible to understand this market will not have a boom

as it was expected, but it will gradually grow and today is sustainable enough to

be operated by global companies. Most energy companies had been created

spin-off from its renewable departments in order to provide them visibility and

consequently, allow them to create value on their own. Maintaining a connection

with its mother company has also generated synergies that permitted renewable

energy companies to keep growing in this competitive market that it has become

today. EDPR was no different from most global renewable energy producer, and

it was born from EDP to manage its renewable assets. In 2008, the company

went public with a share price of 8,00 EUR. After that, the share price has been

decreasing, reaching a minimum of 3,50 EUR per share. Most likely, the main

reason for this scenario was due to the financial crisis that struck the global

economy in 2008, few months after the company had gone public. Even with the

company consistently growing every year, currently producing the triple of energy

it produced at that time, the share price has never reach the 8,00 EUR per share.

This financial crisis had brought suspicion in the investors to the stock market,

and with countries such as Portugal and Spain with debt issues only caused an

additional negative impact at EDPR. Moreover, the countries implemented

reforms in the sector, since it was highly dependent on governments. The

financial crisis made it mandatory to reduce costs and then this sector was

deeply penalised. With time, financial situation in global markets, particularly in

Portugal and Spain, has improved and also the company has adapted to the

regulation changes it has faced, which resulted in an advantage for them (the

prices per EUR/MWh increased in most markets). This has resulted in an

improvement in its share price. In this analysis, it was used the Discounted Cash

Flows (DCF) in order to determinate the company value. The reason to use this

approach to the detriment of Adjustment Present Value (APV) holds in the

difficulty in calculating the agency and bankruptcy costs. Once this there is no

reliable form to calculate this costs, it was used the DCF valuation method due to

using more trustful inputs. As a result, it was obtained the company fair value of

7,07 EUR per share, higher than is being currently trade off in the stock market.

Nevertheless, although the positive results, the Sensitive Analysis performed (on

price per MWh, energy produced and WACC) showing EDPR is a risk security,

once its results present a high volatility to the inputs used.


PAGE 4/29

Company overview

Company description

EDP Renováveis (English: EDP Renewables) is a company operating in the

utility sector, which focuses on producing energy through renewable sources.

The production of energy comes mostly from its wind farms that are spread

around the world, with some solar power plants and hydric dams. Those wind

farms mostly are onshore, meaning that they are placed on land. However, the

company is considering to diversify its energy sources by producing offshore

wind farms (which are placed on the sea) and create more solar power plants.

We can perceive this strategy by the investments the company is performing. In

2014, the company concluded 10 projects in different countries where 2 are from

solar photovoltaics (solar PV) . These projects represent an increase in total

production of 471 MW. Nowadays, the total production of energy from EDP

Renováveis is about 21,4 TWh, which is nearly the triple of energy produced

back in 2008 when the company went public. According to the company

estimates, the energy produced by EDPR is avoiding the release of 18,7mt CO2

into the environment. Its headquarters are based in Madrid, however, it is traded

in Euronext Lisbon (PSI-20) with “EDPR” as stock symbol. Additionally, EDPR

has also an office in Oviedo, where it is legally registered. The company was

created in 2007 by Energias de Portugal (EDP) to manage the renewable energy

sector, although EDP had wind farms since 1996. In 2008, EDPR became a

public-traded company, with an open price of EUR 8,00. The company is

organised in one corporate centre in the holding which manages 2 platforms,

EDP Europe & Brazil and EDPR North America. These platforms are organised

according to their geographic location. The platform EDPR Europe & Brazil is

responsible for the Spanish, Portuguese, French, Belgian, Polish, Romanian,

Italian, British and Brazilian markets, while EDPR North America operates in

Mexico, United States of America (USA) and Canada. Regarding the company’s

Executive Committee, this is composed by 5 people. The first one is João Manso

Neto, which is the CEO of EDPR. The remaining of the Executive Committee is

composed by Miguel Amaro (CFO), João Paulo Costeira (COO of Europe and

Brazil), Gabriel Afonso (COO North America) and Nuno Alves (Executive

Committee Member). Additionally, the president of the Administrative Council is

António Mexia, the CEO of EDP, leading shareholder of EDRP. Besides the

Executive Committee, the Administrative Council also contains Audit and Control

Committee and Nominations and Remunerations Committee.

Image 1:Image 1: EDPR markets

Diagram 1: EDPR organization

Source: EDPR Annual Report


EDPR

EDPR NAEDPR

EU&BR

USA

Canada

Mexico

Spain

Portugal

France

Belgium

United Kingdom

Italy

Poland

Romania

Brazil


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Shareholder structure

The company holds in the market 872.308.162 shares since it became public on

2008. As previously mentioned, EDP is the main shareholder and holds about

77,5% shares of EDRP. EDP is also a utility company, being the largest

producer, distributor and supplier of electricity in Portugal, also with significant

operations in the gas sector and electricity in Spain. It is the fourth largest private

company producer of electricity in Brazil through its participation in Energias do

Brasil. In the Iberian Peninsula, EDP is the third largest electricity producer and

one of the major gas distributors. EDP has also a relevant presence in the energy

market in 14 countries, with more than 9.8 million electricity customers, 1.3

million points of gas supply and nearly 14.000 employees worldwide. In 2014,

EDP had an installed capacity of 22.5 GW, generating 60.3 TWh. EDP was

recognised as world leader in the Dow Jones Sustainability in the Utilities Sector

in 2013, and again in 2014, as a reflection of the performance group on

economic, social and environmental aspects. The holding company, Energias de

Portugal S.A. is a listed company which common shares are traded Euronext

Lisbon (PSI-20), as well as EDPR, since its privatization in 1997. In September

2013, MFS Investment Management informed Comisión Nacional del Mercado

de Valores (CNMV), the Spanish government agency responsible for financial

regulation of the securities markets, that it possesses 3,1% of EDPR shares and

consequently, the voting right. The remaining 19,4% of EDPR social capital are

spread around small investors. Consequently, these investors are also spread

worldwide, with a total of 23 countries. Regarding the type of these investors, the

majority are composed by Investment Funds which are followed by social

responsible investments, representing 80% and 16%, respectively.

Strategy

The EDPR’s strategy is based on three main pillars: increase profitability;

selective growth; and self-funded business model. This strategy is also in

accordance to EDP, which manages the group where EDPR is inserted. Hence,

to capture new growth opportunities and expand operations, the company aims

to successfully select the best projects, manages its performance under

standards of excellence and minimises dependence on external sources of

funding. These projects are usually selected through acquisitions or partnership

with local companies. As a result, in 2014, the company started 2 new projects

which will increase EDPR’s portfolio, both in markets and in new sources of

energy.

Table 1: EDPR new assets

Graph 1: EDPR shareholders




PAGE 6/29

Graph 2: CAPEX distribution

Graph 3: Companies production

Offshore wind power in France

EDPR had successfully assigned, in a consortium, 1GW of offshore wind power,

through partnership with GDF Suez, Neoen Maritime and AREVA. On this

project, which is composed by two wind farms on Tréport and Yeu and

Noirmoutier islands, EDPR will hold a minority position of 43%. This project has

special importance to EDPR since it not only increases its presence in the French

market, but also diversifies the energy portfolio with offshore wind power.

Mexican market

In 2014, EDPR entered in the Mexican market also through a partnership with

Industrias Peñoles. This project consists of a wind farm in Coahuila state, on the

north of the country. The construction commenced in 2015 and will start to

operate in 2016. The yearly energy production forecast is 180 MW. This contract

has a duration of 25 years and the prices were established in USD.

Market overview

Competition

Nowadays, the energy market is no longer a monopoly industry as it was several

years ago. Companies have developed from national companies to operate

globally and as a result, they were faced with something new in the business:

Competition. It is hard to point all the competitors EDPR faces on the market

since the tremendous local producers on the EDPR markets. Moreover, since the

company is present in 12 markets, there are global producers present in a portion

of the markets EDPR operates (from the 12 markets, only operates in 1 or 2).

Therefore, this analysis took in consideration the companies that present the

same financial and operating level as EDPR, as well as operating in the same

markets.

Companies Headquarters Production

(TWh)

Assets (in EUR

millions)

EDPR

Markets

Iberdrola Spain

22.373 10

Engie France 43.978 12

ENEL Green Power Italy 15.539 8

Acciona Spain 15.778 7

EDPR Spain 15.443 12

Source: Nova Analyst Estimates

As we can see, most of EDPR competitors are European companies. This result

is due to most of the North American and Chinese companies are operating in

Source: Companies data

Source: EDPR data


PAGE 7/29

Graph 4: Companies assets

Graph 5: GDP growth (%)

their home country. Additionally, most North American energy companies are not

focus on the renewable energy yet, since renewable energy usually is not more

than 10% of its total energy produced. To conclude, this shows the importance

and focus the European companies are giving to this sector, since half of the

competitors identified (ENEL Green Power and Acciona) produces energies only

through renewable sources such as EDPR.

Demand forecast

Regarding the demand forecast, in order to analyse the tendency for the energy

sector, it will be use to variables in this analysis: Population growth and global

Gross Domestic Product (GDP) growth. The reason for choosing these variables

holds in the main consumers of energy, families and companies. In the following

graph it is possible to obverse the population growth forecast.

Source: United Nations

By the graph, we can conclude the demand forecast for energy will grow based

on the population growth. However, it is important to highlight the main

responsible for the world growth will be Asia and Africa, two continents where

EDPR does not hold operations. On the other hand, Europe and North America,

the continents where the majority of EDPR energy is produced, will be stable,

which indicates demand will be stable regarding the families, unless the company

continues to expand to other markets. Regarding the GDP, we can analyse its

forecast in the following table.

2015 2016 2017 2018

Millions (in EUR) 64.972.680 67.460.410 71.348.053 75.517.484

% 3,12% 3,83% 5,76% 5,84% Source: International Monetary Fund

0

1 000 000

2 000 000

3 000 000

4 000 000

5 000 000

6 000 000

7 000 000

8 000 000

2015 2016 2017 2018

WORLD

AFRICA

ASIA

EUROPE

LATIN AMERICA ANDTHE CARIBBEAN

NORTHERN AMERICA

Source: Companies data

Source: International Monetary Fund


PAGE 8/29

Image 2: European Legal scenario

Source: EDPR data

With this, we can conclude the tendency in demand for energy will most likely

growth in order to fulfil the needs from both companies and global population.

Regarding the renewable energy market, this assumption is based on the

favourable regulamentation in place in most markets, showing that governments

are investing in this solution in order to become more independent on this vital

sector on the economy.

Regulamentation

In this aspect is where lays the most challenge to companies on this sector. The

reason is due to the business is still very dependent on governments. The

average of operating costs is relative low, but initial investment requires high

effort from companies. Consequently, the energy price is not defined by the

companies. Instead, there are legislations that define the price under certain

conditions. As a result, companies do not have the option to adjust the price

under its needs. This leads to an increase in the risk of the sector. Nevertheless,

due to the high investment done in this sector, special in the EU, there are

advantages for these companies, usually with governments buying all energy

produced. Next we present a brief resume of the most common bases that state

the price:

Feed-in Tariff (FiT):

Policy mechanism designed to accelerate investment in renewable energy

technologies. It offers long-term contracts to renewable energy producers,

typically based on the cost of generation of each technology.

Green Certificate (GC):

Tradable commodity proving that certain electricity is generated using renewable

energy sources.

Power Purchase Agreement (PPA):

Contract between two parties that defines all commercial terms for the sale of

electricity.

In the following table, we summarize the regulamentation inforce in the countries

EDPR have significate production.


PAGE 9/29

Graph 6: EUR/MWh

Table 2: Directive 2009/28EC goals

Country Legislation Factor to determine price EDPR average

EUR/MHw

Spain RD 413/2014 Return on standard assets 45

Portugal MO 325-A/2012 FiT 95

France Loi n°2000-108 FiT 91

Belgium Local legislation PPA and GC 109

Poland Order 18/10/2012 PPA and GC 88

Romania Legea 123/2012 PPA and GC 72

Italy DM 06/07/12 GC 118

US State legislation PPA 45

Canada GEA, 2009 FiT 99

Brazil PROINFA PPA 94


Moreover, there is the Directive 2009/28EC, published by EU, which aims to

promote the renewable energy production. The goal is to 20% of the EU total

energy consumption is produced by renewable sources. As a result, and due to

the financial crises, governments (mostly European) updated its legislation in

order to reduce dependence of this sector but without compromising its 2020

goals. By looking to the legislation, it is possible to see that in Europe, most of

the current legislation was after 2010, when the financial crisis began. The UK

and Mexico are not present in this analysis since EDPR does not directly

produces energy on these markets. Instead, it holds participations in some

renewable assets from local companies. In the following paragraph, it is possible

to analyse in more detail each market.

Spain

Spain market holds a tremendous importance to EDPR, which even led the

company to install its headquarters in Spanish territory. At the time of its creation,

in 2007, Spain was the third country with the most dependency of wind power in

the world, followed by the US and Denmark, and since EDP, major shareholder

of EDPR, was already on the Spanish market, it was decided to set the

headquarters in Madrid to take advantage of the big investments made by the

Spanish government on renewable energy sources, particularly on wind farms.

Source: European Union



PAGE 10/29

Graph 7: Spanish energy produced 2014

Prices by MWh are defined in Royal Decree 413/2014

This led EDPR to the third biggest producer of renewable energy in Spain, with

4.87 GWh, behind Iberdrola and Acciona with 11.896 GWh and 5.954GWh,

respectively. However, this sector was strongly affected by the financial crisis in

2008, since it was highly dependent on government’s investment. In 2015, the

Spanish government did not invest a single euro on this sector, something that

has not happened since the 80’s. Nevertheless, Spain intends to produce more

energy by renewable sources and reduce its independence to oil. In 2014, it was

approved the Royal Decree 413/2014 (RD 413/2014) which establishes the

remuneration system of renewable energy. With this new legislation, Spain

intends to increase its energy production and create a sustainable sector that is

not government dependent. This Decree ends with the fixed and market tariff by

implementing an addition to the market price. This addition is composed by: the

remuneration to the investment corresponding to the amount per installed power

facility, which covers the investment costs for a standard plant that cannot be

recovered from the sale of electrical power; and the remuneration to the

operation corresponding to an amount for the operation itself, which covers the

difference between operating costs and the revenue obtained from the market by

said standard power plant. This specific remuneration that allows companies to

produce electricity from renewable energy sources to achieve a “reasonable rate

of return”, which is calculated on the basis of a “standard power plant”, over the

useful regulatory life thereof and based on the business activity that would be

carried out by an efficient and well-managed company. Additionally, RD

413/2014 defines the concept of “reasonable rate of return” by referencing the

return on the secondary market average yield on 10-year government bonds for

the 24 months prior to May of the previous year as of the beginning of the

regulatory period1, increased by a differential. Notwithstanding, those facilities

that benefitted from a feed-in tariff regime as of July 14, 2013 will receive a

“reasonable rate of return” based on the return on the secondary market average

yield on the 10-years prior to the entry into force of Royal Decree-Law 9/2013

(RDL 9/2013) government bonds, plus 300 basis points. For new renewable

facilities, the specific remuneration will be granted by a competitive tendering

process respecting transparency, non-discrimination and objectivity principles.

Once power plants producing electricity from renewable energy sources have

completed their useful regulatory life, they would not be entitled to receive any

specific remuneration and would merely obtain the income associated with the

participation in the electricity market.

1 Each regulatory period will last for six years, the first starting in July 14, 2013, and lasting until December 31, 2019.

Source: Red Elétrica de España data


PAGE 11/29

Graph 8: EDPR invested capital in existing assets

Portugal

Similarly to Spain, Portugal is also a very important market to EDPR since it is

where the business has started. Additionally, EDPR was created to manage the

assets of EDP related to renewable energy, which is located in Portugal. Here,

EDPR comes present as second biggest producer with 1.652 GWh behind

Iberwind with 1.778 GWh, according to 2014 data. Renewable energy was

responsible for 50,4% of total energy produced in the country. Due to the country

small size, it is not seen as one of the biggest renewable energy producers, but

this figure makes Portugal one of the countries least dependent on fossil

energies. Here, like in Spain, Eolic energy is the main responsible for the high

production of renewable energy. However, hydro power is just being as the

second most used source of renewable energy. The two sources combined

represent 83% of renewable energy produced in Portugal. Regarding the

remuneration system, the generation of electricity from renewable energy

sources are mainly sold through a guaranteed feed-in tariff. Operators of

renewable energy plants are contractually entitled against the grid operator to

payment for electricity exported to the grid. The grid operator is obliged to enter

into a contract on the purchase of electricity at a statutorily set price. The feed-in

tariff consists of two elements: a guaranteed payment rate and an amount

calculated by a statutorily set formula. Most of the feed-in tariffs were defined in

2007 and are applicable to renewable technologies (except large hydropower

plants) for a certain timeframe (i.e., 2, 12, 15, 20, 25 or 35 years) or until an

upper limit of production is reached, whichever occurs first.

France

Although France market does not hold significant impact on EDPR, it is seen as a

strategic market, with a very high potential. The reason for this is due to the good

conditions the country holds for wind power, both onshore and offshore, and also

because renewable energy is far from being the main source of the country,

being only 15%. France counts mostly on nuclear energy to face energy

demands of the country, which represents around 77%. However, according to

Directive 2009/28EC, which intends that 20% of energy used in EU countries is

produced by renewable sources, France compromised itself with 23%. The

remuneration system in France is simpler than the one in Iberian countries. Here,

there is a fixed feed-in tariff for 82,00 EUR, adjusted with inflation, for 10 years.

Beyond this period, it is applied a tariff depending on the wind farm’s utilisation,

to 82,00 EUR at 2.400 hours until 28,00 EUR to 3.600 hours.

Source: EDPR data


PAGE 12/29

Table 3: Directive 2009/28EC

Belgium

Similarly to France, the Belgian energy is also highly dependent on nuclear

energy, which is responsible for producing 57% of the countries’ energy supply,

while the rest is produced by fossil and renewable sources with 36% and 7%,

respectively. Due to the EU directive from European Parliament, which set the

goals to achieve a 20% renewable energy production in EU, Belgium

compromised with 13% until 2020. However, the governments have been

pushing up on this goal, and there have been discussions on ending the nuclear

plants in 2025. Additionally, there are also plans to the country’s energy being

produced 100% by renewable sources. The onshore wind power does not hold a

very significant impact on the total energy produced, due to the relative short

area available in the country. Most renewable energy produced is from dams.

However, Belgium plans are to invest in wind farms offshore, to take advantage

of the strong winds on its exclusive economic zone. Another option that has been

talked about is to create an island in order to allocate wind farms onshore. The

main producers are by far Electrabel and EDF Luminus, two Belgium companies

that are held by French utilities groups. However, unlike EDPR, the energy

production from these companies is not exclusively from renewable sources. The

remuneration system in Belgium, contrarily to the other markets, prices are

regulated by each region. In the three regions, Elia, the Belgium distributor, is

forced to buy first energy produced by renewable sources. In both Brussels and

Wallonia2, each renewable-energy generator can sell to the operator of the local

transmission system, directly at a guaranteed minimum price. The price of the

energy produced by renewable source, which the local transmission system

operator is required to buy, is set at EUR 65,00. As for Flanders region, Elia in its

capacity of operator of the local power transmission system must apply the

Flemish minimum support to generation facilities connected to the local 70-kV to

30-kV transmission system in the Flemish Region. The minimum support that is

laid down depends on the energy source and generation technology that are

used and the date of commissioning. The date of commissioning also determines

how long this support is provided for.

Poland

This market is also seen as great potential to EDPR. Poland is a relatively new

market compared to the previous markets than the other countries since only

later had access to the several incentives from EU. The country energy is mainly

produced by coal, but Poland intends to change that and until 2020 has the aim

2 Region in the south of Belgium.

Country % renewable

energy

Target

Belgium 2,2 % 13 %

Bulgaria 9,4 % 16 %

Czech Republic 6,1 % 13 %

Denmark 17,0 % 30 %

Germany 5,8 % 18 %

Estonia 18,0 % 25 %

Ireland 3,1 % 16 %

Greece 6,9 % 18 %

Spain 8,7 % 20 %

France 10,3 % 23 %

Italy 5,2 % 17 %

Cyprus 2,9 % 13 %

Latvia 32,6 % 40 %

Lithuania 15,0 % 23 %

Luxembourg 0,9 % 11 %

Hungary 4,3 % 13 %

Malta 0,0 % 10 %

Netherlands 2,4 % 14 %

Austria 23,3 % 34 %

Poland 7,2 % 15 %

Portugal 20,5 % 31 %

Romania 17,8 % 24 %

Slovenia 16,0 % 25 %

Slovak Republic 6,7 % 14 %

Finland 28,5 % 38 %

Sweden 39,8 % 49 %

United Kingdom 1,3 % 15 %

Source: European Union


PAGE 13/29

Graph 9: Romania renewable energy production (%)

to achieve 15% of its energy production through renewable sources. Here, EDPR

presents itself as the main producer, with 12% of market share. However, EDPR

sold in the end of 2015 part of its portfolio to Poland and Italy. As far as the

remuneration system goes in Poland, electricity price can be established through

bilateral contracts or selling to distributor at regulated price at 163,58 PLN3/MWh

in 2015. For wind power, producers receive 1 Green Certificate (GC)/MWh which

can be traded in the market. Electric suppliers have a substitution fee for

noncompliance with GC obligation. In 2015, the substitution fee was set at

PLN300/MWh.

Romania

Romania market shows some similarities with the Poland market. Both countries

only had access to incentives from the EU later than the other markets and most

of its energy comes from fossil sources. However, due to the climate differences

between these countries, Romania market is considerably more advanced that it

would seem. The country has made large investments on renewable energy and

currently it represents around 38% of total energy produced in the country.

However, this result is accomplished mainly by hydro energy, with 27%. This

market is dominated by Romanian Electric Power Corporation, a state-

corporation. One aspect that makes Romanian market very important is its good

conditions to produce solar energy. This has even led EDPR to plant its first solar

power plant in 2013 on this market. Regarding the remuneration system, wind

assets receive 2 GC/MWh until 2017 and 1 GC/MWh after 2017 until completing

15 years. 1 out of the 2 GC earned until March 2017 can only be sold from

January 2018 and until December 2020. Solar assets receive 6 GC/MWh for 15

years. 2 out of the 6 GC earned until March 2017 can only be sold after April

2017 and until December 2020. GCs are tradable on market under a range from

29,40 EUR and 59,90 EUR.

Italy

Italy energy market is at a very mature stage. Although in 2005, at the time of

Directive 2009/28/EC, the country was not very developed in this sector

compared to other EU’s founders, in 2013 38% of the energy produced was from

renewable sources. Regarding the renewable power source, in Italy is the hydro

power that contributes the most for the 38%. One particularity of the Italy market,

is that wind power comes third on the list of the renewable energy sources used,

with solar PV being the second. Additionally, Italy is the biggest solar PV energy

producer in the world. Although the potential this market holds, EDPR only holds

3 37,92 EUR at rate of 14 March.

Source: IEA


PAGE 14/29

Image 3: EDPR presence in UK

Image 4: EDPR presence in USA

1% of market share, being far away from the market leader Enel Green Power. In

Italy, the remuneration system is for plants operating before 2013 receive, until

2015, market price plus GC. GSE, an Italian energy distributer, has the obligation

to buy GC 180,00 EUR/MWh minus the average price of the previous year, times

0,78. For 2015, GC price from GSE will be 97,40 EUR. From 2016 onwards,

during 15 years, market price plus premium scheme which can be calculated with

the previous formula.

United Kingdom

In the United Kingdom (UK), renewable energy was first implemented in the

middle of 1990, with small hydroelectric power plants. In 2005, by the time EU set

the goals for 2020 regarding renewable energy, UK had only 1,3% of its energy

produced by renewable sources. Nevertheless, the government set out the

ambitious goal of UK of 15%. In 2013, its production was already 14,9% from

renewable sources, being very close to the goal. Due to this, in 2007, the UK

government agreed to overrun EU target of generating 20% of the EU’s energy

from renewable sources by 2020 and exceed the 15% previous committed,

however, it was not established a goal. Most of its energy, produced by

renewable sources, is produced by wind farms and hydroelectric plants, due to

the UK’s climatic characteristics. The position of EDPR in this market is however

very low, by owning 49% of Inch Cape farm (with potential power of 1.000 MW),

in partnership with Repsol.

United States of America

The USA market is of extremely importance to EDRP. This market is currently

the market where EDPR produces most of its energy. USA is the second country

which consumes more energy, after China. However, renewable energy are

responsible only for 8% of the energy produced. Most of the USA energy is

produced by fossil sources, such as coal, petroleum and natural gas. In addition

to this, the country also produces energy throughout its nuclear plants. Alhough

the country has large reserves of fossil resources, the increase of energy

produced by renewable sources has been increasing significantly. Hydroelectric

power is by far the most used renewable energy source produced in the USA, but

the country also produces energy from wind and solar PV. EDPR entered the US

market in 2007 and since then it more than doubled its wind power production

making it one of the world’s largest producers. Today, it contains a market share

of 7%. The remuneration system in the USA is reasonably simple, since sales

can be agreed under Power Purchase Agreements (PPA), up to 20 years. The

GS however, are subject to each state regulation. Regarding taxes incentives,

Production Tax Credits (PTC) are collected for 10 years since operation date,

Source: EDPR data

Source: EDPR data


PAGE 15/29

which is 23,00 USD/MWh in 2013. Additionally, wind farms beginning

construction in 2009 and 2010 could opt for 30% cash grant instead of PTC.

Canada

Canada is one of the largest energy producers in the world. Most of its energy

derives from hydroelectric dams. However, wind power importance has been

increasing in Canada and today, the country is the 6th

largest producer in the

world. Although EDPR has a small participation, with an installed capacity of 30

MW in a country with more than 130.000 MW, Canada is seen as a very

important market on this North American grown strategy. Ontario introduced a

remuneration system based on a feed-in tariff (Ontario’s FiT) of 64,20 CAD/kWh

for applications received after 2 July 2010. Applications received prior to that had

until 31 May 2011 to install the system to receive the higher rate. Ontario's FiT

program also includes a tariff schedule for larger projects up to and including

10MW solar farms at a reduced rate. By April 2012, 12.000 systems had been

installed and the rate decreased to 54,90 CAD/kWh, for applications received

after 1 September 2011. The prices were updated in 2013 regarding solar prices

to a range between 28 to 38 CAD/kWh.

Mexico

Mexico installed electricity capacity in 2008 was 58 GW. Of the installed capacity,

75,3% is thermal, 19% hydro, 2,4% nuclear and 3,3% renewable other than

hydro. The general trend in thermal generation is a decline in petroleum-based

fuels and a growth in natural gas and coal. Since Mexico is an importer of natural

gas, higher levels of natural gas consumption will likely depend upon higher

imports from either the United States or via liquefied natural gas. This might

indicate numerous opportunities for renewable energy sector. However,

regarding EDPR, it has only entered in the Mexican market in 2014, throughout a

partnership with Industrias Peñoles. According to the Mexican Constitution, the

electricity sector is federally owned, with the Comisión Federal de Electricidad

essentially controlling the whole sector. Private participation and foreign

companies are allowed to operate in the country only through specific service

contracts. Attempts to reform the sector have been made but they were faced

strong political and social resistance in Mexico, where subsidies for residential

consumers absorb substantial fiscal resources.

Brazil

Although Brazil has large oil reserves, it produces most of its energy through

renewable sources. According to Energy Research Corporation (EPE),


PAGE 16/29

Graph 10: Global renewable energy produced

renewable energy in Brazil accounted for more than 85,4% of the produced

electricity used in Brazil in 2009. After the oil shocks of the 1970s, Brazil started

focusing on developing alternative sources of energy, mainly ethanol fuel

(sugarcane ethanol). Its large sugarcane farms producer and in 1985, 91% of

cars produced that year ran on this fuel. The success of flexible-fuel vehicles,

introduced in 2003 blend throughout the country, have allowed ethanol fuel

consumption in the country to achieve a 50% market share of the gasoline-

powered fleet by February 2008. However, the most used source of energy in the

country is the hydroelectric power, generating more than half of the country

energy. In Brazil, unlike the majority of the other markets, wind power does not

hold a very significant position on the country’s energy production. Yet, the

windiest periods in Brazil are from June to December, which coincides with the

months with less rain. Due to this, wind power has been seen as an alternative to

hydroelectric power in order to end the seasonality. Besides this three sources,

the country also invests in solar PV and biomass sources. Here, EDPR also has

a small participation, with only 1% of market share. Regarding the regulation, the

installed capacity is under the Programme of Incentives for Alternative Electricity

Sources program. This program is a Brazilian programme of incentives for

electricity generation projects aimed at three specific sources of renewable

energy: small-scale hydropower, wind power and biomass. Additionally, the

producers have the change to perform PPA under competitive auctions with

duration until 20 years.

Market forecasting

According to International Energy Agency (IEA) renewable energy will represent

the largest single source of electricity growth in the next five years, driven by

falling costs and expansion in emerging economies. Pointing to the great promise

renewables hold for affordably mitigating climate change and enhancing energy

security, governments were faced to reduce policy uncertainties that are acting

as brakes on deployment. Renewable electricity additions over the next five

years will reach 700 GW (twice Japan’s current installed power capacity). They

will account for almost two-thirds of net additions to global power. Non-hydro

sources will represent nearly half of the total global power capacity increase. The

share of renewable energy in power generation will rise to over 26% by 2020,

from 22% in 2013. To simplify, IEA states that by 2020, the amount of global

electricity generation coming from renewable energy will be higher than today’s

combined electricity demand of China, India and Brazil. Emerging countries will

increasingly shift to emerging economies and developing countries, which will

make up two-thirds of the renewable electricity expansion in 2020. China alone

will account for nearly 40% of total renewable power capacity growth and

Source: IEA data


PAGE 17/29

Graph 12: Market growth

Graph 11: Global renewable energy production forecast

requires almost one-third of new investment in 2020. Renewable generation

costs have declined in many parts of the world due to technology progress,

improved financing conditions and expansion of deployment to newer markets

with better resources. Announced prices for long-term generation contracts

reduced levels are emerging in diverse areas. Some regions now have the

potential to a development paradigm mainly based on increasingly affordable

renewable power. This is especially true in Sub-Saharan Africa. Financing

remains key to achieving sustained investment. Regulatory barriers, grid

constraints, and macroeconomic conditions pose challenges in many emerging

economies. In industrialised countries, the deployment of renewables requires

scaling down fossil-fired power plants, putting incumbent utilities under pressure.

An improving picture for renewables can have positive ramifications for global

climate change negotiations. But the accelerated case requires more coherent

and committed policy action.

Assumptions

Revenue growth

According to the IEA, and as aforementioned, the renewable energy market is

foreseen to increase in the long term, where the generation of energy through

renewable sources will increase from 22% obtained in 2013 to 26% in 2020.

However, regarding the mid-term growth, IEA forecasts a slow down on its

growth. Based on their last report “Renewable Energy Medium-term Market

Report 2015”, the forecasts are -1,42%, 2,16% and 5,63% for 2016, 2017 and

2018, respectively. The reduction in 2016 is based on the deceleration of

emerging markets like China and Brazil, which are two of the leading renewable

energy producers. These markets are facing challenges on their economics

which is leading to a deceleration on investment. Additionally, the EU is also

responsible for the reduction in 2016 due to the recent regulation on pricing

implemented in most countries. IEA believes this will have a negative impact on

the renewable energy producers since they will need time to adapt to the new

regulations and implement the necessary restructuring to operate. However,

according to the same organization, this situations will be overtaken and

renewable energy market will recover after 2017. As for EDPR, the company

presents a revenue growth of 6% in 2013, -3% in 2014 and 21% in 2015, which

shows revenues are extremely volatile. The company, however, does not have

activity in the Chinese market, which is the main renewable energy producer and

therefore, the main responsible to influence the growth in the market. Due to this,

the revenue growth was adjusted to -2% in 2016, 1% in 2017 and 4% in 2018.

Source: IEA data

Source: IEA data


PAGE 18/29

Image 5: Paris agreement

EBITDA Margin

Regarding the EBITDA margin, it was assumed as 70% of the revenues based

on the EDPR business plan for 2013-20174. In their strategy for this period, they

expected EBITDA to present 9% as CAGR. However, due to the decrease in the

market in 2014 and foreseen in 2016, in order to maintain the 9% CAGR,

EBITDA margin would have to be 90%, which would be a too optimist scenario.

Consequently, since EBITDA margin was around 67% and 68%, it was assumed

an increase in efficiency (which is also one of EDPR goals) and EBITDA margin

for 2016 and 2018 was assumed as 70%.

Tax rate

For the tax rate, in our forecast it was used only the Corporate Tax Rate. The

reason for this is due to the analysis of the Effective Tax Rate, we noticed

volatility from 8% to 25%. Also, penalties and other fines that influence the

Effective Tax Rate are unpredictable and therefore it was assumed EDPR will

only pay its Corporate Tax. Here, by analysing its Annual Report 20145, it was

possible to verify the Corporate Tax Rate EDPR is subject to. The document

states the Corporate Tax Rate was gradual reduced from 30% in 2013 to 25% in

2015, and that it would remain 25% from the periods beyond. Concluding, due to

a very recent change in taxes, we assume it will remain 25% during the periods

in this forecast.

Dividend Payout

For the Dividend Payout ratio, as in EBITDA margin, we used the EDPR

business plan 2013-2017. Here, they estimate to have a Dividend Payout ratio

from 25% to 35%. Due to this, our estimations would be also within this range.

However, in order to reduce and obtain a more accurate Dividend Payout, it was

analysed the previous years to obtain a historical data from this ratio. The

analysis reveals a ratio of 35%, 44% and 47% in 2013, 2014 and 2015

respectively. So, we assumed a Dividend Payout ratio of 35% in order to be

consistent with the company strategy and with its historical data.

4 http://2014annualreport.edprenovaveis.pt/strategy-2/business-plan-2014-17/

5 http://2014annualreport.edprenovaveis.pt/

Source: EDPR annual report


PAGE 19/29

Graph 14: CAPEX growth

Graph 13: Asset av. Age & useful life

CAPM inputs data

In this analysis, it was necessary to estimate EDPR’s cost of equity. One way to

obtain this valuation is by using the CAPM formula6. However, it was necessary

to obtain additional inputs. The inputs necessary to obtain EDPR’s cost of equity

are the risk free rate (rf), the beta (β) and the expected market return (rm) which

were obtained in the Professor Aswath Damodaran website7. This Professor is

known as author of several widely used academic and practitioner texts on

Valuation, Corporate Finance and Investment Management. Addtitionally,

Professor Damodaran is widely quoted on the subject of valuation, with a great

reputation as a teacher and in valuating companies and sectors. Since most

volume of EDPR business is placed in the USA, we use US bond for 10 years, as

it is used in the market. Though Bloomberg, it was obtained a value of 1,81%.

Following the same logic, the expected return on market was based on S&P 500

which according the professor is 7%. For the beta, since EDPR is operating on a

global market, competing also with global companies, we used the average beta

for the industry also given by the Professor Damodaran. However, to adjust the

beta as closer as possible to EDPR reality, it was used the unlevered beta

adjusted from cash, which is 0,84. This beta is the most “pure” beta of the sector

since assumes company only financed by equity and since cash is part of the

assets on the balance sheet but its risk is null, it was excluded from beta. The

next step will be calculating the unlevered beta8 for EDPR. The reason to

calculate from unlevered beta adjusted from cash rather from used the sector is

that EDPR cash and equivalents can be used instead of the market average. To

finalize, we calculate the levered beta9 by using the unlevered one, due to the

same reason as for the unlevered beta with the unlevered beta adjusted from

cash.

Other assumptions

Other assumptions that were not mentioned on the previous paragraphs, such as

CAPEX growth, cost of debt as examples, were calculated taking in consideration

its historical data, by calculating the average from the last three years. In the

Appendix is possible to consult all the assumptions taken on this analysis.

6 𝑟𝑒 = 𝑟𝑓 + 𝛽 (𝑟𝑚 − 𝑟𝑓 )

7 http://pages.stern.nyu.edu/~adamodar/

8 𝛽𝑈 = 𝛽𝑈 𝑐𝑎𝑠ℎ−𝑎𝑑𝑗𝑢𝑠𝑡𝑒𝑑 × (1 − (

𝐶𝑎𝑠ℎ

𝐴𝑠𝑠𝑒𝑡𝑠))

9 𝛽𝐿 = 𝛽𝑈 × (1 + (1 − 𝑡) ×

𝐷

𝐸)

Historial data

Forecast

0%

5%

10%

15%

20%

25%

2014A 2015E 2016F 2017F 2018F

Source: IEA data

Source: EDPR data


PAGE 20/29

Table 4: Investing valuation ratios

Valuation

To estimate the company value it was used the Discounted Cash Flows (DCF).

This approach consists in determining the future cash flows released from the

company to its shareholders and discounted to the present value. The reason for

performing the valuation by the DCF approach is based on it is currently the most

used in the financial markets. Moreover, even with the disadvantages of this

valuation method, it is still the one that provides more safety to investors.

Additionally, we provide on the Appendix the valuation by the Adjusted Present

Value (APV) approach in order to compare the results. This last method, consists

in determine the Net Present Value (NPV) by using the cost of the unlevered

company to discount the future cash flows, adding the possible benefits

generated by Tax shields. However, the agency and bankruptcy costs are not

easily calculated and thus, the assumption needed to this variable would not be

viable. To perform the DCF valuation method, first it was estimated the Free

Cash Flows to Firm (FCFF) from EDPR. FCFF represents the cash that a

company is able to generate after laying out the money required to maintain or

expand its asset base and thus, it was used this result as future cash flow from

the company that will be discounted. The following table presents the FCFF

statement and the results gathered.

EDP Renováveis

Consolidated Free Cash flow to Firm Fiscal Year Ending - December 31

€ millions 2016F 2017F 2018F

EBIT 651 638 654

Income Taxes -163 -160 -163

NOPLAT 488 479 490

Depreciation 521 546 578

Gross Free Cash Flow 1.010 1.025 1.068

Net Capex -22 -290 -561

Change in Net Working Capital 149 159 355

Operating Free Cash Flow 1.136 894 862

Change in Securities (in cash) 77 139 241

Non-Operating Free Cash Flow 77 139 241

Total Free Cash Flow Available to Investors

1.213 1.033 1.103


To discount the FCFF when performing the DCF approach, it is commonly used

the Weight Average Cost of Capital (WACC). This rate basically indicates the risk

of a firm by estimating an average between its cost of debt and cost of equity.

The formula to calculate WACC is presented below:

𝑊𝐴𝐶𝐶 = (𝐸

𝐷 + 𝐸× 𝑟𝑒) + (

𝐷

𝐷 + 𝐸× 𝑟𝑑 × (1 − 𝑡))



PAGE 21/29

Graph 15: US bond 10y growth

Graph 16: S&P 500 growth

Where:

E – Equity

D – Debt

re – Cost of equity

rd – Cost of debt

t – Taxes

As a result, we obtained a WACC of 7,74%, 7,56% and 7,42% for 2016, 2017

and 2018. The last necessary variable needed to calculate is the Terminal Value.

This variable is important since it represents most of the value calculated in the

DCF. The Terminal value corresponds to the cash flows generated by the

company in the future years from the forecast. Without the Terminal Value, the

analysis would be assuming the company would close in 2018 (in this analysis).

The formula to estimate the Terminal Value is given by:

𝑇𝑒𝑟𝑚𝑖𝑛𝑎𝑙 𝑉𝑎𝑙𝑢𝑒 =𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤𝑡+1

𝑊𝐴𝐶𝐶𝑡−𝑔𝑡

As far as the discount rate for the period beyond 2018 (i.e. g), we used the

Sustainable Growth Rate (SGR) by multiplying ROE with one minus Dividend

Payout ratio. The result was a SGR of 1,69%. With these three components

(FCFF, WACC and Terminal Value) it was determined the company Enterprise

Value (EV). By removing its liabilities, we obtain EDPR’s equity fair value. The

following table presents the result obtained in this analysis.

EDP Renováveis

Valuation Fiscal Year Ending Dec. 31

€ millions 2015A 2016F 2017F 2018F

Value of Operations 14.849 14.854 15.066 15.320

Securities 387 464 604 845

Total Enterprise Value 15.236 15.319 15.669 16.165

Liabilities -9.072 -8.646 -8.935 -9.313

Equity 6.164 6.673 6.734 6.852

Outstanding Shares 872.308.162 872.308.162 872.308.162 872.308.162

Current Share Price 6,98

Expected Share Price (Price Target) 7,07 7,65 7,72 7,85


Recommendation

Result

After performing our valuation through DCF approach, detailed explained in the

previous chapter, we conclude EDPR’s equity fair value is higher than its booked

value. Subsequently we analysed the difference between the share prices in

order to obtain the potential capital gain from the undervalue share. Moreover,

Source: Yahoo Finance

Source: Bloomberg


PAGE 22/29

Graph 17: Portuguese debt to GDP

we analysed the potential gains generated from changes in Net Equity forecast in

this analysis. The following board present the result obtained in this analysis.

EDP Renováveis


€ millions 2015A 2016F 2017F 2018F

Value of Operations 14.849 14.854 15.066 15.320

Securities 387 464 604 845

Total Enterprise Value 15.236 15.319 15.669 16.165

Liabilities -9.072 -8.646 -8.935 -9.313

Equity 6.164 6.673 6.734 6.852

Outstanding Shares 872.308.162 872.308.162 872.308.162 872.308.162

Current Share Price 6,98

Expected Share Price (Price Target)

7,07 7,65 7,72 7,85

Expected Capital Gain

9,6%

Shareholders' Cash In / Out (per share)

0,11 0,90 1,03 1,36

Expected "Cash" Gain

12,8%

Total Shareholders Expected Return

22,4%

"True" Recommendation

BUY

Recommendation (research notes)

BUY


Based on this analysis, it was obtained a recommendation of “BUY”. As

perceptible in the previous table, the total potential return on EDPR is 22,4%

which means is higher of its current value. The reason for this is due to its

undervalue share price, which offers a potential capital gain of 9,6%. The

remaining 12,8% are from potential cash generated from net change in equity (in

cash). The reason for this undervalue price share might be related to the recent

financial crisis that brought a colossal impact on the stock market, making shares

reduce its value from several years. However, EDPR has invested in several

projects all around the world which are bringing results, whatever is by creating

net profit or selling its assets to other companies (special Chinese companies

who have been investing in Europe). Another possible cause for its undervalue

share price might result from the regulation changes the sector has been facing

across the globe. To finalise, EDPR stock situation was affected by the struggle

faced from countries such as Portugal and Spain, who had to request for financial

assistance in order to pay their respective debts. Nevertheless, after some

impasse, both reason are reducing its impacts, since confidence is reaching the

stock markets, both Portugal and Spain are now in better control of its debt

compared to previous years in this analysis, and even the regulation changes

seems to be creating more value to EDPR, since it managed to increase the

price by EUR/MWh. Furthermore, EDPR operates in a sector that has been the

Source: Banco de Portugal


PAGE 23/29

Graph 18: Spanish debt to GDP

focus of organizations such as EU and G-20 as a solution of climate changes and

sustainable economics, and everything points out to remain as a priority.

Sensitivity Analysis

With the aim to provide a more confidence analysis, we conducted a Sensitive

Analysis to see how fragile this valuation is. The variables chosen are the energy

produced and the average price by MWh. The reason for choosing these

variables holds on the fact that EDPR does not control these variables. Energy

production is dependent on climatic environment and with changes on the

regulamentation, the company is dependent on legislation scenarios. The

Sensitive Analysis was calculating a change in these variables forecast.

Basically, it was tested the impact until 3% change in these variables growth. The

following table presents the results from the Sensitive Analysis.

EDP Renováveis

Sensitivity Analysis

Price

3% 2% 1% 0% -1% -2% -3%

En

erg

y P

rod

uced

3,00% 116,85% 102,49% 87,77% 72,63% 57,02% 40,86% 24,06%

2,00% 102,49% 87,61% 72,31% 56,52% 40,17% 23,17% 5,39%

1,00% 87,77% 72,31% 56,36% 39,83% 22,63% 4,63% -14,30%

0,00% 72,63% 56,52% 39,83% 22,45% 4,26% -14,90% -35,22%

-1,00% 57,02% 40,17% 22,63% 4,26% -15,10% -35,65% -57,66%

-2,00% 40,86% 23,17% 4,63% -14,90% -35,65% -57,89% -82,00%

-3,00% 24,06% 5,39% -14,30% -35,22% -57,66% -82,00% -108,77%


As conclusion from the Sensitive Analysis, it is possible to see that company is

still very dependent on macro environment situations. Although the results from

our valuation were very positive, future revenues are very hard to forecast since

this sector is dependent on the weather. Moreover, the prices are regulated by

governments which take the company control to adjust the price at its will.

Concluding, our analysis shows EDPR is a risk security, since small changes on

the variables cause high impact on the company value. Additionally, it was also

analysed the impact in a variation on WACC. Here, it was tested impact of 1,5%

on WACC. The following table presents the results obtained:

1,5% 1,0% 0,5% 0,0% -0,5% -1,0% -1,5%

Expected Return

-27,96% -13,65% 2,95% 22,45% 45,67% 73,80% 108,57%


Once again, it is possible to conclude the risk of EDPR by its volatility in WACC

due to the impact on the company value from small changes on WACC.

Source: Eurostat


PAGE 24/29

Appendix

Financial Statements

EDP Renováveis

Consolidated Income Statement Fiscal Year Ending - December 31

€ millions 2013A 2014A 2015E 2016F 2017F 2018F

Revenues 1.357 1.323 1.709 1.644 1.677 1.814

Operating Costs -437 -419 -566 -493 -503 -544

EBITDA 920 904 1.143 1.151 1.174 1.270

Depreciation, Amortization & Others -448 -481 -565 -521 -546 -578

EBIT 472 423 578 630 628 692

Financial Income / (Expenses) -247 -228 -288 -275 -256 -238

EBT 225 195 290 355 372 454

Income Taxes -57 -16 -45 -89 -93 -113

Profit of the Period 168 179 245 266 279 340

Minority Interest 34 52 79 72 82 101

Net Income 134 127 166 194 197 240

Notes: A - Audited; E - Expected; F - Forecasted


EDP Renováveis

Consolidated Cash flow Fiscal Year Ending - December 31

€ millions 2013A 2014A 2015E 2016F 2017F 2018F

Net Income 134 127 166 194 197 240

Depreciation, Amortization & Others 448 481 565 521 546 578

Change in Net Working Capital 56 -442 -784 172 184 328

Cash Flow from Operating Activities 638 166 -53 887 927 1.146

CAPEX -627 -732 -903 -1.031 -1.218 -1.444

Change in Other Fixed Assets -8 33 35 -77 -139 -241

Change in Other Fixed Liabilities 11 -63 239 107 162 307

Cash Flow from Investing Activities -624 -762 -629 -1.001 -1.195 -1.378

Change in Equity 339 183 93 782 902 1.190

Dividends paid -58 -79 -115 -93 -98 -119

Change in Financial Debt -173 194 360 -288 -275 -256

Change in Institutional Partnership & Deferred Revenues

-172 231 217 114 232 227

Cash Flow from Financing Activities -64 529 555 515 761 1.041

Change in Cash and Cash Equivalants

-50 -67 -127 401 493 809




PAGE 25/29

EDP Renováveis

Consolidated Balance sheet Fiscal Year Ending - December 31

€ millions 2013A 2014A 2015E 2016F 2017F 2018F

Assets Property, Plant and Equiment 10.097 11.013 12.612 13.027 13.648 14.449

Intangible Assets & Goodwill 1.301 1.405 1.534 1.585 1.660 1.757

Other Fixed Assets 455 422 387 464 604 845

Total Fixed Assets 11.853 12.840 14.533 15.076 15.912 17.051

Inventories 15 21 23 22 24 25

Accounts receivable 202 146 222 213 207 232

Other Current Assets 733 940 521 470 429 338

Cash and cash equivalants 254 204 137 11 411 904

Total Current Assets 1.204 1.311 903 715 1.071 1.499

Total Assets 13.057 14.151 15.436 15.791 16.983 18.550

Equity 6.088 6.271 6.364 7.146 8.047 9.237

Liabilities Financial debt 3.666 3.860 4.220 3.933 3.657 3.401

Institutional Partnerships and Deferred Revenues

1.508 1.739 1.956 2.070 2.303 2.530

Other Fixed Liabilities 432 369 608 715 877 1.183

Accounts payable 1.363 1.912 2.288 1.928 2.099 2.199

Total Liabilities 6.969 7.880 9.072 8.646 8.935 9.313

Total Equity and Liabilities 13.057 14.151 15.436 15.791 16.983 18.550




PAGE 26/29

EDP Renováveis Fiscal Year Ending - December 31 Ratio and indicators 2013A 2014A 2015E 2016F 2017F 2018F Operating Indicators

Installed capacity (GW) 8,5 9 9,6 10,1 10,6 11,1 Energy produced (TWh) 19,9 19,8 21,4 21,0 21,2 22,0 Load Factor 30% 30% 29% 31,5% 31,5% 31,5% Average Price (EUR) 68 67 80 78 79 82

Liquidity Measurement Ratios

Current Ratio 88% 69% 39% 37% 51% 68% Quick Ratio 87% 67% 38% 36% 50% 67% Cash Ratio 19% 11% 6% 1% 20% 41% DSI 12 18 15 16 17 16 DSO 54 40 47 47 44 46 DPO 1.123 1.643 1.455 1.407 1.502 1.455 Cash Conversion Cycle -1.057 -1.585 -1.394 -1.344 -1.440 -1.392

Profitability Indicator Ratios

Gross Profit Margin 68% 68% 67% 70% 70% 70% Operating Profit Margin 35% 32% 34% 38% 37% 38% Pretax Profit Margin 17% 15% 17% 22% 22% 25% Net Profit Margin 12% 14% 14% 16% 17% 19% Effective Tax Rate 25% 8% 16% 25% 25% 25% ROA 1% 1% 1% 1% 1% 1% ROE 2% 2% 3% 3% 2% 3% ROCE 4% 3% 4% 5% 4% 4%

Debt Ratios Debt Ratio 53% 56% 59% 55% 53% 50%

D/E 1,14 1,26 1,43 1,21 1,11 1,01 Capitalization Ratio 38% 38% 40% 35% 31% 27% Interest Coverage Ratio 1,91 1,86 2,01 2,29 2,45 2,91 Cash Flow to Debt Ratio 17% 4% -1% 23% 25% 34%

Operating Performance Ratios

Fixed Assets Turnover 11% 10% 12% 11% 11% 11%

Cash Flow Indicator Ratios OCF/Sales Ratio 47% 13% -3% 54% 55% 63%

FCF/OCF Ratio 8% -67% 1702% 138% 113% 96% CAPEX Coverage 1,02 0,23 -0,06 0,86 0,76 0,79 Dividend Coverage 11,00 2,10 -0,46 9,53 9,49 9,62 CAPEX + Cash Dividends Coverage 93% 20% -5% 79% 70% 73% Dividend Payout Ratio 35% 44% 47% 35% 35% 35%

Investment Valuation Ratios

Price/Book Value Ratio 55% 75% 99% - - - EPS 0,15 0,15 0,19 0,22 0,23 0,27 P/E 46 49 38 37 41 39 Price/Sales Ratio 4,49 4,74 3,72 4,35 4,80 5,09 Dividend Yield 1% 1% 2% 1% 1% 1% Enterprise Value Multiple 10,33 10,98 9,14 9,62 9,62 9,24 Notes: A - Audited; E - Expected; F - Forecasted



PAGE 27/29

EDP Renováveis Historical & Forecast Ratios Fiscal Year Ending - December 31

Key Assumptions 2013A 2014A 2015E 2016F 2017F 2018F

Revenues Growth 1% -3% 29% -2% 1% 4%

EBITDA Margin 68% 68% 67% 70% 70% 70%

Depreciation Rate 4% 4% 5% 4% 4% 4%

Cost of Debt 6% 6% 7% 7% 7% 7% Income Taxes 25% 8% 16% 25% 25% 25% Minority Interest Weight 20% 29% 32% 27% 29% 30% CAPEX Growth 2% 17% 23% 14% 18% 19% Other Fixed Assets Growth 2% -7% -8% 20% 30% 40% Other Current Assets Growth -13% 28% -45% -10% -9% -21%

Inventory Turnover 90 63 74 76 71 74

DSO 54 40 47 47 44 46

Financial Debt Growth -5% 5% 9% 3% 6% 6% Institutional Partnerships and Deferred Revenues Growth -10% 15% 12% 6% 11% 10% Other Fixed Liabilities Growth 3% -15% 65% 18% 23% 35%

DPO 1.123 1.643 1.455 1.407 1.502 1.455

Dividends Payout 35% 44% 47% 35% 35% 35%

Shares 872.308.162 872.308.162 872.308.162 872.308.162 872.308.162 872.308.162

rf (3m US bond) - - - 1,81% 1,81% 1,81%

βL - - - 1,72 1,60 1,50

rm (S&P 500) - - - 7,00% 7,00% 7,00%

re - - - 10,75% 10,12% 9,61%

βU - - - 0,83 0,84 0,82

βU cash-adjusted

0,84 0,84 0,84

r0 - - - 6,13% 6,17% 6,06%

WACC - - - 7,74% 7,56% 7,42%

gL - - - - - 1,69%

gU 0,84%




PAGE 28/29

Adjusted Present Value

EDP Renováveis


€ millions 2015A 2016F 2017F 2018F

Value of Unlevered Firm

16.560 16.432 16.533 16.672

Expected Tax Benefit from Borrowing

848 863 854

850

Total Enterprise Value

17.408 17.295

17.388

17.523

Liabilities -9.072 -8.646 -8.935 -9.313

Equity

8.336 8.649

8.453

8.209

Outstanding Shares

872 872 872

872

Current Share Price

6,98

Expected Share Price (Price Target)

9,56 9,91 9,69

9,41

Potential Capital Gain 42,1%

Shareholders' Cash In / Out (per share)

0,11

0,90

1,03

1,36

Potential "Cash" Gain

12,8%

Total Shareholders Expected Return 54,9%

"True" Recommendation

BUY

Recommendation (research notes) BUY




PAGE 29/29

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by João Tiago Cabo, a student of the NOVA School of Business and Economics, following the Masters in Management Equity Research – Direct Research Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Manage student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his own personal judgement. This report was supervised by professor Sara Alves who revised the valuation methodology and the financial model. All opinions and estimates are

subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his personal opinion about the subject company and its securities. He has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

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