6

6.Managers

António
Mexia

Chairman of the Executive Board of Directors
“ In a time of profound change, constant new challenges and the world evolving at an unprecedented pace, the central theme for a company is how to anticipate trends and know how to execute flexibly ”

Dear shareholder,
In the last ten years, EDP has proven capable of positioning itself at the forefront, anticipating the trends of our industry and knowing how to create new opportunities. We have created a differentiating profile and have proven ourselves able to execute our priorities in what has been a constantly changing and challenging sector. The results are in sight, with a decade of growth, delivery of results and value creation.

installed capacity
15,7 GW
26,8 GW
EBITDA
€2,6B
€4,0b
dividend per share
0,13€ /share
0,19€ /share
ffo/net debit
19%
22%
2016
2017

Today, to talk about the major trends in the energy sector is to talk about a revolution that is characterised by “4Ds”:

Decarbonisation, a theme evidenced by climate change and supported by the Paris Climate Agreement. Our industry has a key role to play in achieving emissions neutrality, as the solution is to electrify the economy based on renewable energy.

Digitalization, deep disruption in the most traditional business models and with implications throughout our entire value chain, from the operation of our assets to the way we relate to our customers and also the way we work.

Downstream, where we encounter a more informed, more technological and more demanding customer. A customer whose role changes from mere consumer to that of producer and manager of its own electricity. This new paradigm not only has implications for the type of supply but also attracts competitors from other sectors.

Disclosure, is much more than mere compliance with the relevant mandatory information. In the “information age”, society demands total transparency from the companies in the way they act, becoming their way of being.

These are the elements that make up the environment of our sector and for which EDP has been able to position itself: in Decarbonisation, where we were pioneers in focusing on renewables and today enjoy a leading position in the sector; in Digitalisation where EDP has more than 450 digital initiatives in the various Group geographies and units, based on RPAs, use of drones, IoT platforms and Data & Analytics, in Downstream, where we have positioned ourselves on the customer side, an example of this is the process of market liberalisation in Portugal, where, thanks to an innovative, high quality service offer, we have become undisputed leaders in electricity and gas sales, with 84% and 58% of market share, respectively; in Disclosure, where EDP has always acted with total transparency and has been reporting for more than 15 years in accordance with the most respected standards of sustainability, in Environmental, Social, Ethical, Corporate Governance performance or in its relationship with its investors. This is why we are convinced that the work we have done and the way we have positioned ourselves leaves us ready to face the future.

Results based on anticipation

Following a proactive strategy of creating value and taking advantage of market contexts without compromising our identity. In the Iberia Peninsula, we completed the sale of the gas distribution businesses in Spain and Portugal, allowing the crystallisation of value at attractive multiples and taking the opportunity to execute profitable deals for the Group. In Brazil, EDP has expanded its operation to two new business segments: transmission and distributed solar generation, which increases our ability to create value in this geography. In Renewables, EDP launched a takeover bid for EDPR, which resulted in a final stake for our company of 82.5%, allowing the Group to retain more income from this segment, which represented at the end of 2017 ~40% of Group EBITDA. 2017 was also a year in which EDPR was awarded in an auction with an offshore project in UK, a new path of growth in this sector. These operations, along with the entrance in the peruvian market, a partnership with CTG, have opened new growth options and reinforced the focus on renewable energies and low risk assets, simultaneously contributing to our commitment to deleverage and to deliver results with value creation. From a financial point of view, EDP reached a reported net profit of 1.113 million euros in 2017, an increase of 16% over 2016.

edp group

3,759
961
2016
3,990
1,113
2017

NET PROFIT (M€)

EBITDA (M€)

edpr

1,171
56
2016
1,366
276
2017

NET PROFIT (M€)

EBITDA (M€)

brazil

593
158
2016
615
168
2017

NET PROFIT (M€)

EBITDA (M€)

When we analyse the main drivers of this performance, we confirm the long-term vision that characterises us. The strong performance of the EBITDA of EDPR and EDP Brazil are the bases of these results, confirming once again the strategic choice of the focus on renewable energies and the internationalisation strategy in a market with strong growth potential such as Brazil. It should be noted that EDPR alone has installed more than 0.6 GW this year, surpassing today 11 GW of installed capacity, in a year in which the company attained its best results. EDP’s results are also based on the Group’s continued operational excellence, having achieved in 2017 OPEX savings 26% above initially planned, once again surpassing expectations.

It is also worth mentioning the decrease of 2 billion euros in net debt to 13.9 billion euros, which puts us at 2008 levels, contributing to EDP’s return to investment grade in all of the 3 major rating agencies, also acheived this year.

4.4
15,923
2016
4.1
13,902
2017

NET PROFIT (M€)

average cost of debt (%)

I would also like to mention that 2017 also marked the end of an investment cycle, the completion of the National Dams Plan, with the start of operations at Venda Nova III and Foz Tua, in which EDP invested a total of about 2 billion euros in Portugal. A period in which our company showed once again the ability to undertake large-scale engineering projects with significant impact on the local and national economy. A cycle is closed and a new one is starting now, focusing on the optimisation and operational excellence of our assets. These results were achieved in a particularly challenging year for our company due to the 19% drop in operating results in the Iberia Peninsula, arising from the activity in Portugal. It was a year in which the severe drought (2017 was one of the 4 driest years since 1931) and the legislative and regulatory changes implemented in Portugal together had a negative impact on our operating results of around 400 million euros. We have proved once again that, faced with an adverse environment in one of the geographies, the Group’s ability to transform and adapt over the years has enabled us to overcome adversity and maintain the growth and commitments.

The client in the centre of everything

Talking about how the company has adapted also leads us to talk about what is at the heart of everything we do today: our client. It is thanks to our focus on the people we serve that in Portugal, EDP consolidated its leadership position in the last year, with a portfolio of electricity customers that grew to 4.2 million and amounted to 650,000 customers for natural gas. In Spain, the trend was also strong, with more than 1.1 million electricity customers and 883,000 for gas. And with clients who, as I said, are more informed and more demanding, we have been able to continue presenting innovative proposals in the services area as Funciona service and secure invoice. We will evolve with our client betting on the concept of Smart Home, aligning with future trends such as solar energy production, electric mobility, electricity storage and energy management.

But the innovation of the offer to our customers has to be accompanied by a strong discipline and a rigor in the quality of service, and the truth is that we also have reasons to be proud of 2017’s results in this front. In the commercial area, we promoted automation initiatives and artificial intelligence that contributed to the generation of sustained savings and a reduction in the number of complaints per customer by 30% compared to 2016: in this, we continue to stand out clearly from our competitors. We also wish to be a model in electricity distribution and we continue to invest in the modernisation of our networks, having reached around two million smart meters installed in the Iberian Peninsula and with one of the best years ever in terms of network reliability in both Portugal and Spain.

Committed to society

While we are proud of the figures we have presented, we are also proud of the responsible role that EDP continues to play in society. Proof of this strong commitment with a more sustainable society is that, in 2017, EDP registered the 10th consecutive year in which it was included in the Dow Jones Sustainability Index, being the first among its peers. This year we have also made a commitment to contribute to the achievement of eight of the United Nations 2030 Agenda for Sustainable Development Goals.

In the social component, EDP also stands out with an investment of 30 million euros in 2017 in areas such as the environment, social integration, innovation, education, culture and art. It is worth mentioning that to date, our company has already fulfilled 84% of its commitment to invest 100 million euros in social areas in the period between 2016 and 2020. We continue to be the largest corporate sponsor of culture in Portugal, and in 2017 we also affirmed our position in Brazil as the main private investor supporting the reconstruction of the Museum of the Portuguese Language in São Paulo.

It is this positioning that is embedded in everything we do and EDP will continue to proactively act in key areas of our society by assuming a role of accountability to everyone and everything.

For people, with our people

Our work has a clear focus on creating value for our stakeholders. But this attention is not just dedicated to those who are outside the organisation. There is a similar effort directed to our employees. In this respect, I would like to highlight an interesting fact - 2017 was the year in which the so-called “baby boomers” ceased to be the most representative group in the company, trading places with “Generation X” and the “Millennials”. This is the image of a renewing EDP, which knows how to bring together several generations, which knows how to attract talent and is ready to welcome new people with new ideas and new backgrounds. This is a key point in preparing the company for the future, the ability to attract multidisciplinary talent and putting all the experiences and values of a diversified team working for innovation and a culture of excellence. Looking at our Group, in addition to the age diversity, it is important to mention that today we are a multicultural company, with people of more than 40 nationalities in the 14 countries in which we operate. It is this kind of diversity that we want to promote and our commitment was recognised in 2017 with EDP being awarded the Diversity Management award of the European Excellence Awards in HR 2017.

“In the middle of a revolution with the client at the center, we need Talent, Diversity, Innovation and Courageous”

Training continues to be one of the pillars of EDP and our teams are constantly learning. In 2017, the Group’s training hours amounted to close to 500,000 hours and involved 98% of our employees, and the EDP University was once again honoured in the awards for the best corporate universities in the world.

As I have already mentioned, our teams delivered solid results in 2017. But I would like to draw attention to the cases where people went further. This year was marked by tragic fires in Portugal and Hurricane Harvey in the United States. In these two cases the response of our people was extraordinary, voluntarily mobilising all possible support for the people affected by these events. At the end of the year we counted about 35,000 volunteer hours and registered about 2,300 volunteer employees.

This is a reflection of a company that has a strong commitment to society and an indication of the character of its people.

Visibility for the future

A future in which we want to continue to grow while maintaining our identity.
We are leaders in Renewables and we want to continue to emphasise these opportunities in markets that have been the Group’s main driving force, such as the United States and Brazil. Our investment for the future, as it has been to date, will focus on low-risk businesses with visibility into cash flows.

A future with a continuous focus on efficiency.
EDP has been an example in cost discipline and is now a benchmark in the sector with a gross margin OPEX below 30%, and implementing its fourth operational efficiency programme, the OPEX IV project. We will continue to launch efficiency initiatives with an increasing focus on Digitalisation.

A future in which we will continue to put the customer at the centre of our priorities.
Our commitment to our customers has been clear. We want to continue to differentiate ourselves and develop new value propositions, especially in areas such as energy efficiency, decentralised production, electric mobility, and everything else that falls into the Smart Home concept. We also want to grow and “export” our skills and, in that sense, EDP has already identified new markets for new growth paths in energy trading, such as in France, Italy, Poland and Texas, which, in addition to being attractive, enable us to leverage our presence in these geographies.

A future in which we are leaders in Digitalisation.
Our priorities for the future must be prompted by Digitalisation. EDP has already made great strides in Digital but our ambition is to be the leaders on this front. With this position, EDP aims to optimise its cost base throughout its value chain, improve solutions for its customers and develop business opportunities. In this context, at the end of 2017, we started a Project - EDP X - which aims to significantly accelerate the Group’s digitalisation pace and strengthen the underlying pillars such as Organisation, Data, Technology and our Innovation Ecosystem.

A future in which we will continue to create value.
As I said, in the last decade, EDP has proven itself capable of growing and delivering results to our shareholders. This year, the Executive Board of Directors will propose to the General Meeting a dividend per share of €0.19 in line with 2016 and in accordance with our dividend policy. It is in this sense that we will continue to work in the future, focusing on achieving the goals we have committed ourselves to and constantly creating value for our shareholders.

“Digitalisation, despite being technology, is mainly a matter of people, and most of the innovations in this new era will be the result of a culture of sharing and working together”

Thank you for yout support and i invite you to read about this last year's milestones in more detail in the pages that follow.


António Mexia
Chairman of the Executive Board of Directors