Equity Research EDP Renováveis S.A.: The Return and Cost of Tax Equity Agreements

The present document consists of an Equity Research on EDP Renováveis S.A. (EDPR). This report was drafted according with the guidelines from the CFA Institute Research Challenge. Originating from the Portuguese utility EDP, EDPR is today a global player in the renewable energy industry. The company develops, constructs, and operates renewable projects in over 20 countries worldwide. Its farms employ onshore and offshore wind and solar technologies. EDPR’s valuation was conducted through a Discounted Cash Flow model using a FCFF Sumof-the-Parts (SoP) approach in order to capture the different characteristics of each segment in which the company operates. The valuation yielded a buy recommendation with a price target of €24.7/sh for 2022YE, implying a 24% upside from the January 12th, 2022, closing price of €19.9/sh. To provide consistency to this analysis, other valuation methods were used, such as overall FCFF, APV, FCFE, Residual Income and Relative Valuation. As any investment, the acquisition of EDPR’s stock carries some risks, which are fully explained in the report. Even though this report was finalized on January 16th, 2022, an updated research snapshot was conducted to display in the valuation the impacts of Russia’s military invasion of Ukraine, which took place on February 24th, 2022. This update reflects information that was publicly available as of March 20th, 2022. Due to its relevance in the financing of EDPR’s operations in the United States, and considering the limited information on the subject, this document includes a chapter focused on tax equity agreements. In this segment, we studied the yield these agreements provide to investors and estimated the return to EDPR in its future projects when employing this source of capital. Furthermore, we discuss the factors influencing these returns for both tax equity investors and for the developers of renewable energy projects. Moreover, the cost of tax equity for the company was estimated and explained.