Chairman of the General and Supervisory Board
Dear Shareholders: The 2017 financial year was one of the most challenging in my tenure as Chairman of the General and Supervisory Board. EDP continues to be a reference for the European electricity sector and has continued to consolidate its development within the defined strategic lines. The General and Supervisory Board, within the scope of its legal and statutory competencies, has maintained its active role in the supervision and ongoing monitoring of the activity of the Company’s Executive Board of Directors and of the Subsidiary Companies; in particular, in the areas of advice, analysis and follow-up of key decisions - in particular with regard to strategy definition, innovation, investments, divestments, financing operations - and structural policies in the various functional areas.
The General and Supervisory Board functions in plenary sessions and through its Specialized Committees (Financial Matters Committee/Audit Committee; Remuneration Committee; Strategy and Performance Committee; Corporate Governance and Sustainability Committee), in which it delegates certain functions, while still maintaining collective responsibility for their execution. The organization and preparation of Board meetings, as well as coordination with its Specialized Committees, are carried out at all times by the Chairman of the General and Supervisory Board and supported by the technical work of the Support Office. One of the most important functions of the Chairman of the General and Supervisory Board is to work jointly with the Chairman of the Executive Board of Directors, as well as with the other members of this executive body, in liaison with the activities of the Chairmen of the Specialized Committees of the General and Supervisory Board. In 2017, in the performance of their duties, the General and Supervisory Board and its Specialized Committees held a total of 40 plenary sessions and other meetings and issued 32 opinions, prior opinions and waivers of prior opinions. The activity of EDP Group in 2017, due to its presence in the international energy scene, was naturally influenced by the overall macroeconomic environment and the structural trends within the sector. In the macroeconomic context of 2017, there was an overall improvement of the world economy, with a growth of 3.7%. More specifically, the economies of the main countries where EDP operates (Portugal, Spain, Brazil and the United States of America), albeit at different levels, had a positive evolution in the economic cycle. In Portugal, there was an expansion of Gross Domestic Product of 2.6% (2016: 1.4%), in line with the improvement trends of economic activity in Europe (2017: 2.5%; 2016: 1.7%). The Spanish economy, like in previous years, continued to show stronger dynamics, with Gross Domestic Product growing 3.1% (2016: 3.2%). However, in both countries, this expansion of economic activity was only reflected moderately in electricity consumption, which rose slightly by 0.7% in Portugal and 1.1% in Spain. In turn, the Brazilian economy, despite the high public debt and the political situation, showed a slight recovery in 2017, with a growth in Gross Domestic Product of around 1% (2016: -3.6%). In electricity consumption, Brazil also saw a slight increase of 0.8% (2016: -0.9%). In the United States of America, a country where EDP Renováveis has strong presence, there was a growth rate of 2.3% (2016: 1.6%) in the Gross Domestic Product. The change in the US Presidency, a factor that potentially led to a degree of uncertainty as to the maintenance of certain measures to combat climate change, did not, in practice, substantially change the incentive scheme for investment in renewable production, ensuring sufficient visibility up to 2023. In the international financial markets, 2017 was characterised by historically low interest rates with positive effects on EDP, for which also contributed the improvements in the rating of the Republic and EDP itself. In this external environment, and in line with the strategic pillars defined, EDP decided to strengthen its shareholding position in EDP Renováveis through a takeover bid and, at the same time, to divest in the gas network in Portugal and Spain, meeting the appetite of investors. Dear Shareholders: The 2017 results were positively influenced by the active management of the portfolio and negatively by the drought conditions in the Iberian Peninsula and by political and regulatory measures, particularly in Portugal. The consolidated net profit attributable to EDP’s shareholders amounted to €1,113 million (2016: €961 million), in which the recurring component, excluding the effects of one-off operations, represents approximately €845 million (2016: €919 million). The return on total invested capital was 5% (2016: 5.5%), while return on equity was 10.5% (2016: 9.3%), which was influenced by the evolution in the degree of leverage and the balance of extraordinary results for the year. These are positive for the capital gains obtained in the gas network transactions and negative for the accumulated impacts of political and regulatory decisions. In the stock market, 2017 was marked by a general increase in the indices. EDP shareholders obtained a Total Shareholder Return (bearing in mind the reinvestment of dividends when paid) of +6%, which compares with a return of +19% on the PSI20 index and +21% on the Eurostoxx Utilities index. The performance of EDP’s shares was greatly influenced by the negative perception by the capital market of the political and regulatory risks in Portugal and the uncertainties generated. In fact, the 2017 financial year was marked by strong political and regulatory pressure, particularly in Portugal, which implied increased attention paid by the Executive Board of Directors and the General and Supervisory Board in defence of the legitimate interests of the company and its shareholders, under the legal framework and contractual regime in force. In its evaluation, the General and Supervisory Board considers that the results for 2017 confirm the coherence of the strategic priorities in the 2016-2020 Business Plan and an efficient implementation, in the constant search for value creation and a healthy balance with the interests of all stakeholders, the recognition and promotion of employees’ merit, and medium and long-term sustainability commitments. As Shareholders are aware, EDP’s strategy, in addition to the goal of attractive profitability, integrates the targeted growth pillar matched with the progressive reduction of the level of indebtedness. In the field of investment, 2017 was characterised by the completion of water investments in Portugal (Venda Nova III and Foz Tua) and in Brazil (São Manoel); by the start of a hydro investment in Peru (San Gabán), in partnership with China Three Gorges; EDP Renováveis’ expansion strategy in the on-shore and off-shore wind and solar photovoltaic segments, with an emphasis on the USA, for its attractiveness and stability; by the entry of EDP Energias do Brasil into the transmission segment, which is attractive as a new growth vector; and by the strategic investment of EDP Energias do Brasil (albeit with a minority stake) in the Brazilian distributor CELESC, with the aim of reinforcing in the future the distribution segment in selected States within the “controlled risk” pillar, which is also a permanent feature of the company’s strategy. In 2017, EDP took a significant step towards achieving its medium-term goal of gradually reducing the debt ratio (Net Debt/EBITDA). This indicator reached 3.5 times (3.7 times the Net Debt/Recurring EBITDA); adjusted for the effect of the regulatory assets of the electricity system on EDP’s balance sheet, this same ratio stood at 3.3 times. Due to the evolution of this indicator, EDP reached, in 2017, the best financial structure of the last ten years. 2017 was also an important milestone in the strategic partnership between EDP and China Three Gorges, with the latter completing its investment under the Framework Agreement upon its buying into EDP’s share capital. A new memorandum of understanding has been established between the parties, which sets out a framework for potential areas and geographies for joint cooperation in the future. Under the “Higher Efficiency” pillar – another permanent feature of EDP’s strategy – the General and Supervisory Board has constantly encouraged and monitored the various efficiency improvement projects, specific to the business units, and across the Group, including the continuation of the so-called “Opex” and “Zero Base Budget”, programmes aimed at the reduction of operating costs and the optimization of structures. As Shareholders are well aware, as part of its strategic management, and in addition to the goals of profitability, balanced growth with financial deleveraging and higher efficiency, EDP seeks to contribute to a more balanced world in the social, cultural and environmental domains. In this field, EDP continued to undertake specific actions in these areas in 2017, in the various countries in which it operates, particularly at the level of the two EDP Foundations (in Portugal and in Spain) and the EDP Institute (in Brazil). In global terms, we would like to point out the international recognition, via the Dow Jones Sustainability Index, where the Company has obtained very significant ratings in recent years, having secured the best ever score in 2017. In the field of structural policies too, the General and Supervisory Board and/or its Specialized Committees have actively monitored the main ones, namely human resources management policy, risk management policy, further development of digitalization and innovation projects. EDP, both internally and alongside selected international partners, is undertaking a number of innovation projects of great strategic interest, aiming at its adaptation to the business models of the future, and investing suitably in assets and people in order to contribute to their technical, human and cultural development, through the actions of its “corporate” University and professional training programmes in all areas. Dear Shareholders: In recent years, EDP has succeeded in achieving its objectives and fulfilling its commitments to all its stakeholders (shareholders, customers, employees and partners). EDP is nowadays an increasingly international company, its activities outside Portugal representing 62% of the total EBITDA. As a multinational company (operating in 14 countries), the challenges ahead lie in the context of the evolution of the sector at European and global levels. EDP will certainly continue to respond in the coming years to the challenges arising from the redesign of European energy policy and technological and market changes. In the field of European energy policy, the European Commission’s legislative proposals, known as Clean Energy for All Europeans, published at the end of November 2016, were much debated in 2017 with a view to their adoption in 2020. EDP has actively participated in and discussed their impact on the safety and stability of investments in renewable and conventional production. It is not yet possible to foresee the detail of the final result, but de-carbonization of the sector will remain the main objective of European energy policy. The growth of investment in renewable production, to replace progressively thermal production, and the energy efficiency purposes are therefore very much in line with the strategy that EDP has followed, both through the growth of EDP Renováveis and in the retail marketing segment, where the business model includes the supply of distributed renewable energy production technologies, energy efficiency and the provision of other services to customers. In the OECD countries, there is a trend towards a decrease in total energy consumption, albeit with a slight increase in the electricity consumption segment. This is due to more electrification of the energy process, since it is technologically more efficient than the fuel-burning process, and the expansion of the electric vehicle is a good example, within the overall de-carbonization objective. It is important to bear this structural trend in mind, because if growth in emerging countries is expected to increase naturally, in Europe, the US and other advanced economies, the investment perspective in the replacement of thermal production will be much more important, as will a more efficient overall management of electricity systems and energy mixes. On the other hand, in the retail trade - which EDP will soon expand to new external markets - new paradigms are at stake, as is the case of self-production and possible evolution in decentralized bilateral trade and even partial autonomy of the existing electrical system. In addition to the issues of regulatory rationality and optimization of existing resources that this structural change requires, EDP will continue to take advantage of these opportunities and to deepen the application of Information Technologies necessary to streamline processes and intensify the use of new decentralized optimization instruments, aiming at the balanced development of digitalization at all stages of the value chain (from a cost/benefit point of view). This is a part of the changing value chain that receives special attention in the priorities of strengthening the ongoing process of accelerating digital transformation in EDP, which is a fundamental element when responding to new perceptions of value by customers, anticipating their needs and streamlining the entire process of commercial and administrative relationship. Dear Shareholders: The future has in store important technological, market and competitive and regulatory challenges for EDP, but we are convinced that, with the support of its shareholders, the commitment, the dedication, the persistence and the professionalism of the teams, the Company will continue on its path to success. The future is built with people, with quality management and by implementing strategies in a dynamic manner, adapted to structural changes. I would like to end by thanking Shareholders for their confidence in the corporate management bodies, and the dedication and efficiency of all EDP employees.
Eduardo Catroga Chairman of the General and Supervisory Board