E
EDP Energias de Portugal SA
ELI:EDP
EDP Energias de Portugal SA
ELI:EDP
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Good afternoon, ladies and gentlemen. Thank you for being with us today in the conference call on EDP's first quarter 2020 results. We'll begin with a brief introduction by our CEO, António Mexia; then our CFO, Miguel Stilwell de Andrade, will provide us with an overview of the results and the main developments of the period. And then we will come back to our CEO for a more detailed analysis of the status of our strategy execution, in particular, focusing on the impact from COVID-19.Finally, we'll move to a Q&A session, in which we will be taking your questions, both by phone and via our web page. We expect this call will last no more than 60 minutes. I'll give now the floor to our CEO, António Mexia.
Thank you, Miguel. Good afternoon, everybody. Hope you are all well and safe as well as your families and friends. I know that we have been living in difficult times, but once more, gives more value for the work that we have been doing. And so thank you very much for attending this results conference call. I think the keyword at this moment is resilience. And I would like to start by providing this overview on our performance. And I believe that the start of 2020 was marked by the achievement of very important milestones and showed exactly this resilience that derives from our diversified portfolio and its high quality, which was crucial for the good performance in a volatile environment, as well as some decisions that we have taken and are already in our DNA. EBITDA increased by 6% to EUR 980 million due to the combined effect of hydro recovery and strong results in our energy management activity in Iberia. That more than offset the low wind resources in the period and the negative impact of the 13% devaluation of the Brazilian real. The net profit increased by 45% year-on-year to EUR 146 million, benefiting from EBITDA contribution and the decrease in average cost of debt by 60 basis points. And excluding the nonrecurring costs on our hybrid bond buyback of EUR 45 million, recurring net profit rose 51% to EUR 252 million. Our net debt-to-EBITDA fell to 3.4x, adjusted for regulatory receivables and the temporary impact from the sale of tariff deficit, with our net debt decreasing by 8% to EUR 12.7 billion, the lowest absolute level over the last 13 years. Additionally, our financial liquidity is at historical maximum level of EUR 6.9 billion, which covers our refinancing needs beyond 2022. I think it's important to share this in this moment. Finally, our annual dividend of EUR 0.19 per share was approved by more than 99% of votes at our virtual AGM on the 16th of April, right in the middle of the lockdown period, and the payment date will be next week, May 14. I will now pass the word as usual to Miguel Stilwell, our CFO, for a more detailed analysis of our results, and then I'll come back to provide an overview on our strategy execution. Thank you. Miguel?
Thank you, António. So let's start on Slide 5, talking about hydro and wind resources, which is obviously a major driver of our results. So hydro resources had a very strong recovery in the quarter compared with an extremely weak first quarter of 2019 but is still 9% below the average year. During this period, our reservoirs stood slightly above the historical average, providing a pretty good indication for the second quarter of 2020. And it's also worth mentioning that April was a pretty good month, 17% above average. For this year, we have, I think, good hydro resources in general. Regarding wind resources. So after a decrease of 3 percentage points year-on-year, this stood 10% short of the long-term average in the quarter. And the production declined 8%, a major impact on the deconsolidation of our wind farms following last year's asset rotation deals. So if we disregarded this effect, production would have increased 2% year-on-year, and this is something which is quite detailed also in the EDPR presentation and results. So moving on to Slide 6. An important message here is regarding our green position. Renewables, the weight of renewables in our production mix increased from 69% to 79%, even though our wind capacity declined following last year's asset rotation deal. Our thermal production declined, and this was mostly driven or almost entirely driven by the coal production in Iberia, which was reduced very significantly. Another important message is our steady focus on growth in renewables. So during the last 12 months, we installed around 700 megawatts of wind and solar capacity, and we still have another 1.3 gigawatts under construction. However, you can see a decline in installed capacity year-on-year, but this is impacted by the asset rotation deals, as I mentioned, totaling 1.3 gigawatts of gross capacity. I'd like to highlight that this number is strongly impacted by the 1 gigawatt gross capacity of the wind farms sold in Europe last July. So we had 51% in this portfolio. If you consider just net capacity, this decline would only be around 100 megawatts. Let's move on to Slide 7, on the financials. So as António mentioned, our EBITDA went up by 6% to EUR 980 million on the back of the strong recovery of the hydro in Iberia, adding EUR 65 million to EBITDA. And also the good performance of the client solution and energy management activity in Iberia, which had an EUR 82 million increase year-on-year. So these good results were offset by the EUR 47 million decline in wind and solar activity and the hydro results in Brazil, which were weaker this quarter. I will go into more detail on each of these platforms in the following slides. On Slide 8, starting with wind and solar. So EBITDA declined 12% to EUR 340 million, mainly due to the reduction in the average installed capacity of 7%. And this, as I mentioned, is very much related to the deconsolidation of the wind assets sold last year. So this was around 1 gigawatt in Europe, 137 megawatts in Brazil and around 200 megawatts in the U.S. So the European platform was the most penalized by this effect. As I mentioned, the wind resource also worsened, and all in all, production fell 8% year-on-year. The average selling price remained broadly stable, obviously, very much driven by the fact that we have long-term PPAs, tariffs, CfDs in the majority of the wind farms. So going on to Slide 9 and talking about the hydro business. Here, the EBITDA from hydro rose 22% year-on-year to EUR 209 million, mostly in Iberia or entirely driven by Iberia. So here in Iberia, the improvement in resources led to an 87% increase in production despite the declining pool prices that we've observed over the last couple of months. The ultimate impact on the segment was immaterial because we basically forward contracted all of the sales for this period. So I think this is an extremely important point, and we'll probably come back to that later. Please bear in mind that EBITDA had an EUR 18 million impact rising from the clawback levy in the generation taxes in Spain, which we had been suspended in the first quarter of last year, but we're still recognizing in this first quarter 2020. In Brazil EBITDA fell 38%, excluding ForEx effects, due to the, mostly, obviously, the unfavorable evolution of the PLD and the GSF versus our contracted position, which required the acquisition of energy through bilateral contracts, and that penalized the performance. So moving on to Slide 10 in regulated networks. Here, the EBITDA from networks decreased 2% to EUR 237 million. In Portugal, the results were penalized essentially by the decline, 50 basis points on the return on RAB to 4.8%, which is very close to the regulatory floor of 4.75%, and already reflects the low Portuguese bond yields since October to date. Obviously, the Portuguese bond yields have increased over the last 2 months, but before then, as you know, they were extremely low. This effect was just partially compensated by a 1% decline in OpEx in Iberia. In Brazil, those -- a good solid growth of 11% in local currency. This was driven by the growth in the transmission activities, with the execution of 63% of investment and the commissioning also of the Maranhão transmission line. Distribution EBITDA declined 1%, penalized by a 5% decrease in distributed volumes in the period. Let's talk about the segments client solutions and energy management on Slide 11. Here, there was an increase in 74% to EUR 200 million. So it's a strong contribution from energy management in Iberia, and António mentioned that right upfront. And this resulted from our hedging strategy and the strong volatility in the energy market in the quarter. And so that much more than compensated the 77% decline in the coal production. The supply business also grew EUR 13 million versus the first quarter of 2019. As you know, this is a business that's been improving steadily over the last couple of quarters, including the impact from the 5% increase in the penetration of supply services. In Brazil, the EBITDA increase was supported by the improvement of thermal variable cost versus the PPA benchmark. Slide 12, OpEx. OpEx in Iberia was up 1%. I think, overall, though, this is a good achievement given that last year's quarter already had a 3% reduction year-on-year. So it was already a challenging comparison. In Brazil, the OpEx in local currency, excluding growth, was up 1% when inflation was close to 4% up. In EDPR, the adjusted core OpEx per megawatt was up 4%, following the need to cope with the business plan growth and also the asset deconsolidation from last year's asset rotation. And again, this is something, I know, EDPR has already spoken about. So concluding on the OpEx. Excluding FX, it increased 3%, reflecting the growth activity, while on a like-for-like basis, it stood flat. We still expect over the next couple of quarters that the OpEx will come down on a like-for-like basis as foreseen in the business plan. Slide 13, financial deleverage. So I think good news here. Our net debt declined 8%, mainly supported by the strong results in our operations, as I have already described, and this led to a 51% increase of our recurring organic cash flow. So also, our net expansion investments of EUR 0.1 billion reflects, on one hand, the expansion build-out activity of around EUR 400 million and also the EUR 300 million of proceeds from last year's asset rotation deal in Brazil, and also the tax equity partnerships in the U.S., both of which cashed in this quarter. The change in regulatory receivables and tariff deficit sales, they had a combined cash positive impact of around EUR 0.5 billion in this quarter, mainly due to the sales to 5 bilateral transactions we did with the bank of EUR 825 million. And so that impacted a lot the 2020 tariff deficit in the quarter, around EUR 0.6 billion of which will be just a temporary positive effect that will then be diluted throughout the rest of 2020. So it's important to bear in mind when doing the net debt-to-EBITDA number that there is this temporary effect, although positive in absolute terms, it will then be diluted. Finally, the depreciation of the Brazilian real versus the euro to date resulted in a positive impact of around EUR 0.2 billion in the period. And so the overall net debt-to-EBITDA, excluding regulatory receivables and the temporary effect from the sales of the tariff deficit, went down to 3.4x. So as António mentioned, a pretty low number versus the last decade. So it would have been EUR 3.2 million without the tariff deficit adjustment, but as I say, you need to make that adjustment. Moving on to Slide 14. The total interest-related costs declined 20%, EUR 35 million year-on-year, and this followed the 60 basis points decline in the average cost of debt. This excludes the EUR 57 million one-off costs with the liability management at the beginning of the year and also some other smaller noninterest costs. Overall, this means a cost of 3.4%, which compares with the 3.9% at the end of last year and the target of 4% we had in the strategic update. So again, this is something I know we've talked about a lot over the last couple of months, and we were expecting to see a decline in the interest costs, and we're clearly seeing it here in this first quarter. You can see on the right-hand side of the slide, the new debt issues, the top right-hand side, then it costs significantly below average. And the bonds repurchased are maturing at the bottom right-hand side of the slide, you can see they also had costs significantly above average. And this is a trend we expect also to continue going forward for the following quarters, and it's compatible, as I said, with what we've indicated in the past. On financial liquidity, Slide 15. So here, at the end of March, liquidity stood at around EUR 6.9 billion, covering our refinancing needs beyond 2022. At the beginning of April, already during the COVID lockdown period, we issued a EUR 750 million green bond, with a 7-year maturity at 1.7% yield, and had a lot of interest from the market. I mean it was massively oversubscribed, which I think was obviously positive news in the middle of all this. So this bond is currently trading at a premium in the secondary market. So this, combined with the hybrid and the tariff deficit sale we did earlier in the year, really positioned us well, I think, to face the crisis that we're all living through. It's also worth mentioning that regarding the pending deals, as we've always indicated, we expect the financial closing of the hydro disposal of the EUR 2.2 billion to be done in the second half of 2020. So again, very comfortable with our liquidity position. Finally, just moving on to the recurring net profit. This rose by 51% to EUR 252 million with the hydro and energy management in Iberia playing a critical role here. Also important to stress, this is something I have mentioned, the good performance of our financial results, penalized by the one-off costs with the hybrid bond buyback, but as you know, with a very positive economic effect. So I'll pass the word again to António. Before I do that, just again to reiterate also, as been mentioned by António earlier, I hope you are doing well and safe. And let's -- we'll come out of this stronger than we came into this crisis. Thank you.
Thank you, Miguel, very much. So I will move now to address EDP's action under the current COVID-19, as well as an update on the execution of our strategy. We see on Slide 18, I think it was obvious that the strategy that we presented last year was clearly oriented by a wide derisking approach throughout all our strategic pillars, those 5 pillars of our strategy. First, our growth has been focused on long-term contracted renewables, wind and solar, at competitive prices, as well as regulated networks. These are businesses which have little exposure to volatility in energy prices and demand. Indeed, on our investment decisions, we have followed not only a strict return criteria, but we are also selective in terms of risk with the new investment decisions having an average contracted maturity of 15 years and the contracted NPV above 60%; meaning, for example, that we have refrained ourselves from investment in merchant solar. On top of that, we have established a target of EUR 6 billion of proceeds during the period of '19 to '22, which consists of EUR 2 billion from disposals and EUR 4 billion from asset rotation. These proceeds will be used to fuel our growth and to deleverage while reducing our merchant exposure. Regarding our balance sheet, we have defined an upfront financial deleverage target of reaching a net debt-to-EBITDA of 3.2x already in 2020. In parallel, we have retained a conservative policy on financial liquidity, covering close to 24 months of financing needs, which some of you may have considered as too conservative some months ago, but that today give us additional comfort on the execution of our plan. Digitalization was also promoted to the core of our strategy, and we have committed to invest EUR 800 million on digital CapEx to increase asset intelligence, operation and process efficiency. And finally, we have maintained a sustainable dividend policy consisting of a target payout range of 75% to 85%, with a dividend floor of EUR 0.19 per share. The ESG criteria are also embedded in the top priority of our strategy, namely through the clear decarbonization path until 2030, with the target to achieve 90% of renewables in our electricity mix, 90% reduction of CO2 emissions versus 2005 levels and become completely coal-free. Moving to Slide 19. The importance given to ESG standards in our strategy is also reflected in the strong commitment to all our stakeholders. In our view, ESG is not a trend. As I mentioned, it's in our DNA, and it's part of our long-term strategy being key to build a resilient company. As such, now more than ever, we are called on to demonstrate our commitment to our stakeholders, and we quickly respond. We have taken numerous initiatives, and you will see in the next slide, providing a key positive contribution to our society and, of course, enhancing always our reputation. In Slide 20, let's start with our priority, safety of our people, as we promptly implemented specific measures in all geographies to ensure that. For instance, in Portugal, we have already had about 70% of our employees working from home 2 days before the declaration of state of emergency. Currently, overall, in our group, more than 72% of our people are working remotely, with approximately 100% of the office staff working still from home. Of course, this was only possible due to the strong digitalization effort in the last years. Indeed, EDP is a case study in Microsoft related to the rollout of Microsoft Teams, which allowed us to become more connected, collaborative and innovative, sensing that was crucial for a lockdown period. We have also ramped taken the necessary measures to minimize exposure of our employees, which are critical to ensure the continuity of supply and thus need to be in the field. The usual ones, such as the delivery of personal protective equipment and the reinforcement of cleaning and disinfection. All in all, we were able to ensure business continuity without any disruption of services, and we are convinced that this is a new opportunity to take on the lessons learned and benefit from additional efficiency improvements, namely through this [ prefer ] digitalization, which may have important positive impacts in the future. Now moving to Slide 21. I'm aware of the unprecedented times we are currently living. We are also promptly active in taking initiatives contributes to mitigate the impact of COVID-19 in our communities. So far, we have donated more than EUR 11 million to our main geographies through several initiatives across the most affected areas of society, public health, culture, education and the social sector. Also, and very important, to support our suppliers and keep the value chain working, namely small and mini companies, we have anticipated the payment of invoices during April and May. Overall, in April, we have already paid more than EUR 30 million related to almost 2 months anticipations of invoices, and now we are making prompt payments of invoices up to EUR 500,000, totaling up to EUR 100 million. This is our way to cooperate with hundreds of partners, more than 1,200 in our value chain, providing liquidity to promote economic activity and employment. Regarding our clients in Page 22. We have also adapted our supply operations to meet their current needs. We have a distinct portfolio of clients in each geography. In Portugal, we have a higher rate of B2C, while in Spain, B2B is clearly the core of our supply activity. In both geographies, direct debit of B2C clients reaches considerable high levels, which could be a mitigator of payment delays in these turbulent times. In Brazil, we have a more balanced mix between B2B and B2C, as you know. Even the COVID context, we have mainly implemented 3 types of measures to support our clients. First, we reinforce the visibility of digital channels to continue ensure high-quality of service, while avoiding a physical contact. Secondly, we suspended the energy cuts, in most cases, clearly ahead of any regulatory decision to do so. And finally, we reinforce the flexibility of determined payments methods, not charging any interest in an effort to help those clients that are facing particularly vulnerable situations. In parallel, we suspended a significant part of the commercial activities, and our field forces was reduced to focus only in urgent interventions. Also, we launched a discount tariff plan for health professional and supplied free energy to hotels that supported hospitals in the fight against this pandemic. In Slide 23. Regarding demand evolution, we can see in the graph on the left that, in Portugal, the decline during the lockdown period was concentrated in the nonresidential segment, particularly in small business, which represents 7% of total electricity demand. These steep reductions in electricity demand corresponds to the lockdown period and are expected to be smoother in the year with the easing of confinement restrictions. During the period from January to April, Portugal demand declined slightly less than 3% year-on-year. In Spain, electricity demand decreased almost 7% as here, the lockdown began earlier and there is a higher head weight of industrial consumption. In Brazil, the 4% fall in demand in our concessions is related not only with lockdown measures as the impact of COVID was felt later in Brazil, but also due to specific issues such as adverse temperature effect and a strong decline in consumption from a single large industrial client [indiscernible], which is a free market client, and thus, has no impact on our overcontracting position. Note that regarding the impact of changes in demand on regulated net revenues in networks, the impact is 0 in Spain, irrelevant in Portugal and somehow material only in our distribution business in Brazil. Moving to Slide 24, talking about hedging. We are fully hedged for 2020, with all our expected generation hedged at an average selling price close to EUR 55-megawatt hour and an average thermal spread at middle single-digit, with a good energy management position that should mitigate the impact of the adverse market context. For '21, the expected reduction in electricity production is driven by the disposal of 6 hydro plants in Portugal, and we have already hedged 60% of our expected production at the price close to EUR 50-megawatt hour. Moreover, this 60% hedging does not include the 12 terawatt hours a year of consumption of our B2C clients, which, as you know, have a very low churn rate. Finally, we are also in a comfortable position regarding gas long-term contracts, which should represent around 60% of our expected gas needs in 2021. Moreover, following the maturity of 2 contracts in 2020, gas sourcing costs will be more competitive in '21, 50% of which with index of oil prices and close to 50% linked to TTF European gas spot price, which is higher correlation with Iberia electricity prices.Brazil. In this geography, we consider that we have a resilient business model well-adapted to face the recent increase of volatility financial and energy market. The strong fluctuations of the currency is something that we have lived over our more than 25 years of presence and experience in Brazil, and thus, justifies our long-term standing ring-fenced financing policy with all funding of Brazil operations in local currency. And we continue also to have a more conservative financial leverage in this country with a 2x net debt-to-EBITDA ratio. Among the specific measures that we have adopted recently, I would highlight the reinforcement of financial liquidity with an additional BRL 3 billion through the anticipation of refinancing deals, short-term cash flow enhancement measures, including TOTEX management and the adjustment of the dividend policy already in 2020. Regarding our operations in the last years, expansion CapEx in Brazil has been devoted, as you know, to long-term contracted activities, namely transmission, which have 30 years regulated revenues, indexed to inflation and with no demand exposure. On operations that are more exposed to the current downward trend in demand and energy prices, namely hydro, supply and distribution, we expect to mitigate negative impacts through our integrated management of energy market risk in order to take advantage of the natural hedges between the different business segments in Brazil. Now moving to Slide 26. We continue executing successfully our portfolio operating optimization strategy, which will provide clear contribution to our deleverage targets. On hydro, we have announced, as everybody knows, in December, the sale of 6 hydro plants in Portugal for EUR 2.2 billion. Process is moving forward. The EC approval was already granted. National regulatory requests were already submitted, and the financial closing is expected to the second half of this year, eventually in the third quarter. Those teams have been working on this on both sides. In line with what we have stated in 2019 results presentation, we continue also to consider other complementary options of the optimization of our portfolio, both in Iberia and in Brazil. In asset rotation, the JV with Engie for the offshore wind was already granted the EC approval, and we are working now to complete the process of transfer of assets by each partner to the new company. Moreover, as we have stated before, for 2020, we are working on 2 deals of asset rotation, totaling 0.7 gigawatts of net capacity. That process have now moved to a second stage in order to receive binding offers by the summer. Regarding renewables in Slide 27. We continue developing our pipeline with 1.3 gigawatts under construction, while expecting to add 1.6 gigawatt of capacity this year, mostly in the U.S. As usual, the majority of the plants are planned to be commissioned in the first quarter. We have seen occasional construction restriction due to COVID, mainly related to the lockdown and with supply chain disruption, which can lead to some delays. However, this is not expected to have any material impact on projects fundamentally. Furthermore, we continue executing new PPAs, 500 megawatts year-to-date, and even during the lockdown periods when we have announced 3 PPAs in 3 different markets: Spain, Mexico and U.S. On the next slide, 28, I would like to share the vision that we see a green deal as an opportunity to develop a new model of prosperity, building a more resilient society. It's true that the world is facing not only a public health challenge, but also an economic challenge. It's critical that political decision-makers and designing the planet for an economic rebound post-COVID look at the energy transition as key for prosperity model. As such, in the last month, we have joined forces with other 179 individuals, including ministers, members of European parliament, other CEOs of several sectors to reinforce our availability to jointly implement green build ambition. We have a large pipeline of projects that will promote economic stimulus, job creation and accelerate the energy transition by replacing generation from fossil fuels with renewable generation. And the timing is right. The renewables are already more competitive than conventional generation, as we have seen in the several renewables auctions that have been taking place around the world, and we are witnessing a broad support of the society to green alternatives in all activities sector. Economic growth in green investments are no longer the trade-off. They go hand in hand, and together, they can build a more resilient society based on a new model of prosperity where everybody wins, nobody is left behind. Moving to last slide. I think that we can say that we have entered into this COVID period in a quite comfortable position regarding the execution of our business plan, which places us in a much more resilient position to cope with the challenges posed by this crisis. First, regarding our growth. We have already secured 83% of the planned 7 gigas of wind and solar additions between '19 and '22. On transmission, we have already executed 63% of BRL 3.9 billion CapEx plan. Second, on portfolio optimization, we have already closed and agreed more than half of the EUR 6 billion proceeds related to disposals and asset rotation. Third, we have also reinforced our balance sheet upfront being at 3.4x in March and with good visibility in reaching 3.2x by the year-end. In parallel, we have a liquidity position of EUR 6.9 billion, as stressed again by Miguel, covering financing needs at least beyond 2022. On cost, we have done well in the first quarter this year. And our internal vision is that we should have a very strong performance throughout the year, with the current environment having a net positive impact at this point. Also with no doubt, the current context provides an opportunity for accelerated digitalization and associated operational efficiency improvements that were not foreseen before this period. On shareholder remuneration, next week, we will pay our 2019 dividend of EUR 0.19 per share as expected and approved, which represents an 81% payout ratio, totally in line with our sustainable dividend policy. We continue to take important steps forward regarding an earlier than expected delivery of [ our digitalization ] targets as we can see by our first quarter '20 figures, but also considering the expectation for the next quarter. I would say that overall in all metrics, we are close to achieving or surpassing 2/3 of our targets up to 2022, which, as I said before, places us in a very comfortable position to face the new challenges ahead. If I have to pick keywords, I would pick energy management, very successful; second, capital market management, including liability management; third, deal execution, both at asset rotation and asset reshuffling; fourth, investment execution with unprecedent development of the pipeline. So these 4 elements prove that we have been really doing what we should. So for 2020, we feel comfortable with the consensus at the EBITDA level, at the net profit, at the debt level. We are ahead of our plans. The business plan was designed to be resilient, and EDP is well positioned for this [ green rhythm ].So thank you very much, and let's move to the Q&A. Miguel?
[indiscernible] question by the phone, please.
[Operator Instructions] And our first question is coming from Stefano Bezzato from Crédit Suisse.
Three questions from me tonight. First, on the farm downs, can you give us a bit of color if you're seeing any change in the level of interest from potential bidders before and after the COVID-19 outbreak? The second question, still related to the COVID-19 outbreak, is on working capital. What is the worst-case scenario you have in terms of impact on working capital from delayed bill payments and all other negative impacts we can have because of the current crisis? And how quickly do you think you can recover that? And my last question is on the -- on your hedging strategy. You're showing a EUR 5 per megawatt hour decline in power price achieved from 2020 to 2021. Is there any chance you can recover part of this decline through higher supply retail margins?
So Stefan, thank you. Farm downs. Farm downs were really, as you know, it's part of our business model today, part of our recurrent activities, and it was important to have the perception of the market post COVID. And frankly, I just want to confirm the following: We have received the nonbinding proposals, and the values are exactly what we expected before the crisis. So I believe that the scarcity effect and the look for yield of quality, including these renewables scenario, I think it has proven to be very resilient. And if anything, we have more people bidding for these than I expected before, at the beginning of the process. So as we see, we will reach clearly the figures above EUR 200 million that was expected in terms of capital gains for the farm downs for the year, and we feel really comfortable with the market after COVID. What concerns the hedging strategy, I believe, that our figures, we are talking about prices before any supply margins and before ancillary services, and I think that we are having already hedged this close to 50% for next year, around 60% is good. We will, of course, keep closing. And as you know, the second half of the year will be important for this, for the rest and, of course, depending also on the price of CO2. In terms of higher supply margin, it depends very much, and I think it's a little bit early to say that in what concerns '21, we feel that we are already in a rather safe positioning, especially with our low retail position in Portugal that, of course, is less sensitive to '20 price movements. So clearly, we feel comfortable with what we have. And we, at this stage, we would not be hedging in a rush. We don't need it. Miguel, for the COVID working capital.
Stefano, so clearly, in terms of working capital, the measures approved both in Portugal and Spain should have some temporary effects on the working capital and net debt. But we expect to be progressively recovered as of the third quarter 2020 onwards. So really, we should probably expect to sort of peak around May, June. The impact on the 2020 net debt will depend on the, obviously, on the length of this lockdown period and the recovery afterwards. But in any case, it's important to bear in mind that 62 of our customers in Portugal have electronic billing and almost 100% in Spain. And so we think this is something which is very manageable. We've gone through previous crisis in the past, and I don't think this would be a major issue for us.
So we now go to the question for -- by the Internet. And the first question comes from José Ruiz. Are you comfortable with the net profit consensus for cash for 2020?
Thank you, José. For 2020, we are comfortable with current net profit consensus around [ a tender ]. It makes sense with information that we have today. Note that this net profit market consensus assumes energy's tax as a recurring cost. This number does not include nonrecurrent gains. And probably, as you know, as we are doing a lot of deals in 2020, we will have some figures coming from there. And so first, the main uncertainty, as everybody knows, is how will the recovery take place and will there be a second wave of the COVID. In any case, we feel comfortable, and the key variables that we need to follow to the rest of these basically in Brazil, basically business-wise and also FX-wise. Of course, we have been seeing a rather normal year even if up to March it was slightly below a normal year, much better than last year. In April, we are already in a normal year, above, and April was above. It depends on the last quarter. But we have already 46% of a hydro in a normal year. So the energy management results are supposed to be strong. And so we feel totally comfortable with the consensus. Miguel?
The next question that we have, especially regarding -- it comes from Fernando Garcia from Royal Bank of Canada. Could you comment about the Portuguese tariff deficit? And what are your expectations for 2020?
Okay. So on the tariff deficit, obviously, there -- it's been coming down progressively over the last couple of years, as you know, and I think that's been one of the positive messages coming out of the Portuguese electricity system. Obviously, we think that this year, it will be impacted by the lower pool prices and lower consumption. And so what I could probably say on this is that we expect at probably the end of the year a number would be higher than the 2019 kind of year number. So we could see an increase in the tariff deficit this year, which we then expect to be reabsorbed by the system in the following year. So that's basically -- in terms of numbers, I think it's still a little early to tell. And so it's something we'll clearly monitor over the next couple of months.
Can go now to another question from the web from Jorge Guimarães, JB Capital. What is the expected run rate of Iberia thermal and energy management for the next quarters?
Thank you, Jorge. Energy management was very good in the first quarter. Of course, difficult to anticipate for the rest of the year. I would say that the start of the second quarter this year is going well, that we prefer to maintain a cautious approach. And I would like you to note there is some hedging between supply and energy management and thermal. So I think that it was a good year because, as you know, EDP, our strategy like volatility in the first quarter, we had that volatility to rely. And what concerns your second question, Jorge, about our peers, said that they were delaying negotiations with clients for 2020 to sales, waiting for better market conditions, we can follow a similar strategy. The answer is yes, our contracting season, as I mentioned, is normally more concentrated in the first quarter. So we see no material change on that dynamic. The third question from you, Jorge, was if we plan to have some hedging to protect against FTC losses in the devaluation of Brazil versus the euro. As you know, we have a ring-fencing strategy. Miguel can, of course, enhance on my answer. But clearly, the market is not liquid enough. It would be too expensive. So it's part of the business to have those exposure at the EBITDA level. We have been basically ring-fencing, that's a critical element.
Maybe we can go now to another question on the web. If you could elaborate on your gas position. And it comes from Fernando Garcia, Royal Bank of Canada. And if you could elaborate on your gas position and contracts versus gas customers and the expected CCGT output. Could you comment as well on your gas contracts, if there's risk?
Okay. Fernando, thank you. As you know, as of today, we have 80% of our 2020 gas oil-linked. CCGT production, of course, contracted at negligible spreads. Note that oil prices have come down, and this will reflect in cheaper oil-linked gas production for the first quarter of 2020. For 2021, long-term gas contracts represent 60% of our expected gas need, 50% Brent-indexed gas, passing costs, which cost should be more competitive given the recent decline in oil price, and 50% CTF-indexed gas source, which is highly correlated with Iberian profile. So a bit part of our gas sourcing costs will be TTF, a significant one has a high correlation, and we see this as a positive. So our strategy is to link this more, and it's what they have been doing. So we feel more comfortable today.
We can go now to the phone questions, please.
[Operator Instructions] At this time, we'll take our next question from Harry Wyburd from Bank of America.
Three questions for me, please. So firstly, I wondered if you could go into a bit more detail on Lat Am and give us -- Latin America, and give us a bit more color on what's happening in Brazil. One thing that's cropped up on a few calls in the last few days has been the notion of some kind of regulatory relief. So I'd be interested to know your thoughts on that. And then what effect that could have both on earnings, but also on working capital and debt? And then the second one on the hydro sale. So I'm assuming that you will be able to fully reiterate that, that sale is definitely going to go ahead. But a couple of sub questions on it. So firstly, how do you adjust for the water actually in the reservoirs? Obviously, reservoir levels are very high at the moment. So is there any chance of positive adjustment on the sale price to reflect the higher reservoir levels? And then on interest costs, you're getting at EUR 2.2 billion in the door. And looking on Page 14, you've got a EUR 35 million year-on-year quarterly run rate improvement in interest costs just from bonds refinancing versus last year. If we just look at the disposal of EUR 2.2 billion, and if you are retiring bonds at 4.5%, would that be correct to assume that, that's about a EUR 25 million quarterly run rate improvement in your interest costs just from the asset sale, which should kick in from the fourth quarter of this year? So just interested if you can confirm that the numbers and thinking on that. And then the final one, just on the dividends. Interested to know your view on what the government stance in Portugal is on dividends. Obviously, it's a very important topic for a lot of companies at the moment. So have you had any viewpoint from the government on that? And I guess, some people were predicting that 2021 or 2022 might be the year when the dividend increases. Is that something that we can still envisage even in the post-crisis landscape?
Thank you. I will start with dividend, then the hydro sale and I will then pass to Miguel. He wants to comment also on Brazil. In terms of dividend policy, we feel very comfortable with our dividend policy in this target range between 75 and 85. It is for the information that we have today, I want to be clear, we see the current dividend policy as totally sustainable. It's true that we are living in exceptional and uncertain times. Nobody is immune totally. But I think that we will always do the best in terms of medium, long term for the shareholders. In our view, our dividend policy, it's the right balance between sustainable shareholder remuneration, reinvestment and control leverage. We are today in a much stronger position versus any previous moment, difficult moment, because of the liquidity. So we have decided, as you have seen, to keep the proposal that we are fully supported by Supervisory Board and by 99 -- almost 99.9 of the shareholders because dividend in 2019 represents a 50% payout on our cash flow generated before expansion in a year when we were able to reduce net financial debt over EBITDA to 3.6 from 4. And in terms of environment, we have seen clearly a support for this balanced approach that we have been explaining. We have followed all the CMVM in terms of providing information to shareholders, proving that liquidity was there, that the long-term sustainability of the business and continue to support it. So we have run all that was supposed to be checked by, mainly, by European market authorities as just a recommendation, not because it's the only thing that they can do. And what we have seen is a rather normal reaction to what is normal current of affairs. We have all the Portuguese companies relevant that have the conditions, proceeds with dividends and they paid what they were expected to do. We don't expect any major change, but we don't see what will be if we have a major second wave at present, what will be reaction. But as we speak today, if anything, we see 2020 as being a year where we deliver, fully deliver. So I don't see why -- any reason why we would not propose and why channels would not vote what we have as current dividend policy. So we are comfortable with this. I would like to, also, in terms of hydro, all the revenues of the hydros are fully ours until closing. And so as we see towards the end of the year, we will keep the normal running of the business. And by the way, that, I would say that a small amount compared to EUR 2.2 billion. But anyway, the revenues are ours until then. The interest cost, it's true that it's a mixture. As you know, in our business plan, we had already included EUR 2 billion debt reduction proceeds from the sales. And so it was already incorporated, but I think -- and I will pass to Miguel to check your EUR 25 million impact on interest cost. And Miguel, this and plus regulatory relief in Brazil.
So in terms of, as António mentioned, this is already built into the business plan. So what you need to look at is the overall debt level and how that evolves. And so we're expecting to be around the 12 or below 12, excluding regulatory receivables on that basis. Obviously, we have a large CapEx program, and so that's why it's important not to just look at the isolated impact of the hydro sale, but look at it in the context of the overall debt and investment program that we have. In any case, what we've said is that certainly versus our business plan, we are doing better than expected in terms of the interest cost. So we highlighted last year that we're expecting around 4% cost of debt, and we're well below that. As you saw in the first quarter, we're at around 3.4%. And in terms of absolute numbers, I think we were guiding to close to or but below EUR 100 million overall interest savings over this period. In terms of Lat Am and some detail on Brazil, and regulatory relief in particular. So I think the key points on Lat Am from a business perspective and in Brazil is the overcontracting on the distribution such to the extent that they don't have an unbundled system. Also issues around, obviously, the payments of receivables from the customers. I think the good news is that ANEEL, the regulator, is trying to be as helpful as possible. And so it's helping finance the distribution companies and also pay for the low-income customers. And so to that extent, that is certainly providing a positive uplift on that. On the major structural issues, and even though we're less impacted by that maybe than some others, on the GSF, which is obviously an issue for the profitability of the system in Brazil, there is currently, I think, some legislation that has been discussed in Congress, and which would provide also a positive uplift on the business there. In any case, that is something which is still being discussed at the level of the Congress, and so we will provide further details as soon as I think they become available. But as of today, it's still a draft proposal.
We can go now to -- I think the last question from the -- we have 2 from the phone, so let's go for the phone for the next question, please.
At this time, we will take our next question from Alberto Gandolfi from Goldman and Sachs (sic) [ Goldman Sachs ].
So the three questions are, in terms of the client solutions and energy management, would you mind to dig in just a little bit more into the main drivers? I'm trying to discern here what maybe a few months and what may be actually a bit more structural as long as this current depressed demand and volume situation persists. So can you maybe tell us if you had an open position, if you managed to be much more flexible in actually procuring from, perhaps, the spot market? I'm just trying to understand a little bit. I mean you already did like half of my full year forecast. And so I'm just trying to understand if April also started quite well, trying to gauge a little bit more on this division. The second one is, today, EDPR talked about, and you mentioned, António, actually, some potential delays. And I agree. I mean 3-, 6-month delays on tax wouldn't change much the value given the 30 years of future cash flows. However, can you maybe be more specific about -- it looks like almost 85% of your capacity is secured. Can you maybe talk a little bit more about the potential risks? And I guess those would be, if you can quantify those, and I guess that's probably already been offset by the Q1 performance in client solutions, but just curious to see if you think this is a fair observation or not. And the third one is talking about the opportunities from the green deal, potentially stimulating, relaunching the economy. The question is, you have lowered your financial leverage to 3.4x, and the hydro disposal is about to come through. But the question is, is your leverage and/or your portfolio structure suited now to capture all the potential opportunities from the green deal? Or should you maybe strengthen the leverage or do something else? I mean I still think you will be sharing quite a lot of the future growth with the minorities in EDPR if you didn't fully own it. So maybe if you can elaborate on those dynamics would be great.
Thank you, Alberto. I have seen that by the third question that -- at the end of the third question, that you like the topic, the topic of COVID-19, the question. So the first question is, if I could share with you is the following. Energy management, as I mentioned, in our cases, because of our positioning in terms of being long, allows us to do what? When you close the position and you are hedged, you can -- instead of generating, you can buy; because of our scale, you can -- you are big enough, but not too big to be able to go into the market and buy and then -- which helps the clients with higher margins that you were generating basically. So it's the reason why we like volatility due to this positioning. And so it's a reason why it contributed to a very strong energy management at the beginning. Of course, client solutions, clients after the beginning, mid of March and beginning of the pandemic situation, are less in a rush to have meetings because they cannot have the -- whatever optimization. So everything that relates to services is probably slower, but it's very small compared to what are the gains that you do on this energy management. It was done in a very smart way by our teams. We cannot anticipate because it depends very much on the evolution of the pool price and on that volatility to allow to repeat this. But in any case, we feel already very comfortable for the year and in terms of hedging for next year. EDP have potential risk. I would like to be clear in the sense that -- and if you have seen the question of, especially some delays in CapEx and commissioning, all sectors, mainly in the U.S., have been affected by the whole value chain. Almost of all our suppliers, in those cases, force majeure. But clearly, what we have here, as you know, we can still qualify to receive 100% of the PTC. That's the key question. Value-wise, 2, 3, 4 months, it's not meaningful. The question is, if you go from November, December into January, February, I think that we still cannot qualify to receive 100% of the PTCs of this year because the law includes clauses of a excusable event. And I think if you don't have an excuse with this COVID, I don't know, when do we have an excuse for continuous efforts. So we are moving from safe harbor into this scenario. And if the company approves, it continue works on the project, although it has not finished until the year-end, I think that EDP will also share this actually with everybody. The tax equity market in U.S. remains very robust, and it's very important to state, we have closed -- we have allowed our intention with a big institution of all tax equity investments for all the 2020 projects and in the middle of the COVID crisis. So I think that we are, on that front, we are -- we feel very comfortable. And as we have seen, we have been able to attack different markets besides the U.S., it represents our growth engine. But in European markets and also in South America, we have been able to tackle those markets. The green deal, if I understand your question is, I don't think that our leverage of our structure, even less our portfolio structure, is a constraint to take advantage of the green deal. What I believe the green deal gives us is a more stable -- it's supposed to give a more stable framework. And so less temptations to fool around with the incentives that you need to give to investment. And I think it's good news for everybody. But people, understanding that you need to give visibility, mainly, for example, through auctions. And the Portuguese market is an example. They will launch a new auction for renewables just before summer. And so people understand that visibility is a critical element, and the green deal win for us is not this commitment with the investability on the sector. But I will not just do more for more, and frankly, it's not the moment to leverage more. We don't know what will be the second half of the year. We feel very comfortable with the actual positioning, but we are really committed with the deleveraging and to go to the 3.2x, and we are not going to change this. And this includes, of course, using cash to buy minority. Here, we are -- we tend to be rather stable, not to spend too much cash in buying minorities.
We can go now to the last question on the phone. We have some more questions on the web that we will follow-up from the IR level given the timing in terms of closing the call.
We will now take our final question from Javier Garrido from JPMorgan.
First -- well, actually two questions on Portuguese regulation. What are your up-to-date thoughts about profile of reduction in the special energy tax, particularly now that you can anticipate different profile for [ the action in tariff deficit ]? And also, if you could update us on the recalculation of the clawback, where are we in that process? Second question would be on the cost of debt. I want to be very specific question to Miguel. Is there any reason at all why you could see an increase versus the current 3.4% that you have reported for the first quarter? And then the final question, a more generic question, you have mentioned a few times that you have different strategic options in Brazil without entering into which could be in your favor, but simply, would you mean to lay out what is -- what are in your view, those strategic options that you have in Brazil?
Thank you, Javier. First of all, I would also start by the fact that the regulatory risk in Portugal. The 1-year extension, we have not mentioned, but I would like to highlight this in distribution, that is supposed [indiscernible] gives additional visibility. I think it would be good. In terms of the profile in energy tax, the sales, as you know, is supposed to evolve and to be reduced according to the tariff deficit evolution. The tariff deficit last year decreased. This year, we were expecting initially at 600, then at 400 at the final calculations of the tariff deficit. Probably with the COVID situation, we will see rather an increase. But in any case, I would like to state two things. The commitment in terms of verbal commitment and execution committee by the government has not changed relating to the variable that is supposed to follow, the sales. But I would like to talk a couple of things. First is this reduction that, if everything peak of it was probably the amount of up to EUR 10 million, so it's really not a game changer in our account. So I think it's more the fact that people respect the principle than the fact that they were calculated at EUR 8 million or EUR 9 million or EUR 10 million reduction. So that's the most important thing for me. The second, so let's see how, if you evolve and the government will take a decision towards the summer. But of course, the COVID situation will probably have an impact. But in any case, I would like to stress that the figures that we have presented in this quarter already includes the full payment of sales for 2020. So it was specialized in terms of -- in timing. So as always, we pay at the beginning of the year the full amount. And then if anything, we will not have that upside that was supposed -- where we were supposed to have pre-COVID. In terms of clawback, the rules -- the law is clear. The Secretary of State did the dispatch, and now we probably is just a question of implementing. And so we see really the clawback as a netting off measure of the 7% paid in Spain and the taxes that are paid in Portugal and in Spain. So we don't -- we see clawback as we -- as finally as it should be, as a netting off measure that doesn't allow EDP to have the benefit of the 7%, but taking into account both sides of the border. Strategic options in Brazil. Of course, yes, and then I will pass to Miguel to the specific question of the 3.4% that we share the answer. But anyway, strategic options in Brazil. As you know, we prefer visibility. We prefer the transmission and distribution. If anything, we were more flexible on generation. By the way, in this moment, the fact that we have both allowed us to hedge a little bit because, as you know, distribution in Brazil is very volume-driven, much more than in Europe. Anyway, we are not in a rush in terms of -- you don't want to crystallize value in Brazil, in reais, you are not in a rush. Eventually, you can do swaps, you can adjust your portfolio, but we are not in a rush to do anything in Brazil. In Brazil, the key element was to protect cash, cash liquidity and we have been very focused on this, including the dividend policy out of EDP Brazil, that, by the way, is typical in Brazil. And so we have protected the company and take the measures that we needed for this. In terms of strategic options and things that we are pursuing, it's basically, as we have presented on a strategic business plan, focusing on delivering the deals that we have already presented, but also working on optionalities, on reducing merchant risk or reducing exposure to the market, on lowering exposure to markets where, eventually, we consider that we are already too exposed. So that's the trend that we will follow. Miguel?
Okay, good. On the 3.4%, I mean, there are essentially 3 variables which impacts the cost of interest rates and cost of debt. Basically, the rates, the mix of the different currencies, essentially, if the currency is dollars, euros and reais, and then any FX impact that there are. I mean, obviously, the dominant factor here is the rates, and that came down substantially over the last couple of months, and it's been coming down over the last year. So we expect that over the full year, the rate would be at 3.4% or even slightly below. And that will be as a result of this impact of the lower interest rates and this refinancing that we go on doing of different bonds that are still outstanding. As I showed on the slide in the presentation, we still have quite a few bonds even maturing this year, one in June and another one in September, which are well above 4%. I mean 4.1% and 4.9% are the 2 ones that are outstanding. So that as those mature, obviously, they will be replaced by cheaper financing. And so the overall debt cost is expected to come down.
I'm receiving signal from Miguel Viana that we should stop. So I just want to thank you again for your presence and the patience here as we are in a difficult moment. Keep you safe, keep you healthy. Just to stress, we were ahead of the events. Nobody could have anticipated this, but we were prepared to tough times. So we were ahead of the events. We are ahead of our plans. We resist, but clearly, we are committed to all our targets. And as you will see, we are -- we tend to be stubborn. That relates to being sometimes boring in this sector. And the next weeks will, I believe, improve. And the next times will prove what we have been doing again. So thank you very much. Let's go breathe, keep yourself safe and see you soon.