EVN AG

F:EVN

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the EVN conference call for the Q1, 2Q, Q3 2018/2019 results. [Operator Instructions]

Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz.

[Stefan Szyszkowitz, executive]

Good morning, and welcome to the conference call on EVN's results for the first 3 quarters of the 2018/'19 financial year. Our performance during the first 9 months is pretty much in line with the development during the first half year, and it corresponds well with the outlook which we gave in December well for this financial year. Actually, on the positive side, I can today confirm and even specify our full year guidance. We expect good net results for 2018/'19 to reflect the upper end of the assumed range of EUR 160 million to EUR 180 million. For a year-on-year comparison of today's results, please bear in mind that in the last year, our third quarter results had already been influenced by a positive one-off effect in the amount of EUR 38 million, which resulted from the valuation of hedges. The main drivers of our performance during the reporting period were the same which we had already seen during the first 2 quarters. Rising wholesale prices led to a decline in the results of our supply company, EVN KG. In addition, the absence of network stabilization contracts for Southern Germany show an impact on the performance of the Generation Segment, whereas our Networks Segment suffered from volume and price effect. On the positive side, third quarter earnings were supported by sound contributions from wind power and cooler temperatures in May 2019. Actually, due to the weather in May, the temperature-related energy demand in Austria returns to an average level after the mild winter half year. As I already mentioned in our last call, we took the decision to exit from coal-fired generation in Lower Austria. Earlier this August, electricity generation from hard coal finally ended in our Dürnrohr power plant. Our focus is now on the future development of Dürnrohr as an energy location. The installation of an additional gas-fired boiler to generate steam for industrial customers is already in progress. In addition, they have specific plans for the construction of a sewage sludge incineration plant and a large-scale photovoltaic plant at our site in Dürnrohr. The termination of coal-fired generation in Dürnrohr is only one bit in how EVN contributes to the transition of the energy system. This year, we have been pushing hard on the expansion of our wind portfolio. In the beginning of the financial year, we stood at installed capacity of 318 megawatt. By the end of September, we will stand at approximately 370 megawatt. You may remember that we always define 370 megawatt as a midterm target on our growth path towards 500 megawatt wind capacity. Our plan was to reach 370 megawatts by the end of 2020, so we will outperform this target and reach these milestones already 1 year earlier. Our plan is to reach 500 megawatt by the end of 2023, which is, however, subject to appropriate framework conditions. We have a sound project pipeline of developed and approved wind projects in Lower Austria, but the Austrian system of feed-in tariffs from newbuild tax currently has to deal with a waiting list of already approved projects, and the next Austrian government to be formed after the general election in September will need to implement a new legal framework for renewables. I know that in the international project business everybody is waiting for news on the Kuwait projects. Focus has been made on the funding of project companies, which is complex as it involves state-owned Kuwaiti institutions as majority shareholders. In addition, negotiations continue for the envisioned project financing during the past month. Still, the final awarding of the contract is outstanding. Apart from Kuwait, our colleagues are very active in other international projects in this financial year. Only our German subsidiary, WTE, acquired 5 new general contractor assignments so far. Let me now continue with the key financials of the reporting period. The group's revenue was slightly above the level of last year and sits at EUR 1.7 billion. Positive valuation effects from hedges for the marketing of electricity generation as well as an increase in renewable generation and heating business were contrasted by, among others, the price/volume-related decline in the Networks Segment. The negative earnings contribution from EVN KG was the main reason for the decline in EBITDA which fell by 25.5% to EUR 435.7 million. Depreciation and amortization, including effects from impairment testing, was slightly up due to ongoing investments. Therefore, the group's EBIT fell by 39% to EUR 236.4 million. Financial results remain nearly stable at minus EUR 14.4 million. In total, we generated a group net result of EUR 168.2 million during the first 3 quarters of this financial year which corresponds to a decline of 38.4% year-on-year. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. As you know, we managed to bring down our financial indebtedness over the past couple of years. At the end of last financial year, we stood at a net debt level of about EUR 1 billion. Combined some seasonal fluctuations, we believe that the net debt will remain at this level for the time being. Gearing as of the 30th of June was 23.4%.

Our strong balance sheet structure forms the basis for pursuing organic growth opportunities in our regulated and stable Austrian activities. We plan to invest up to EUR 400 million per annum over the coming years, whereof roughly EUR 300 million annually are dedicated towards networks, renewables and drinking water in Lower Austria. Before I will go through each of the segments in detail, I would like to give you a general overview on the EBITDA development of our business segments.

An overview of the EBITDA development by segment illustrates the key drivers of our performance during the reporting period. It may be interesting for you to compare this chart with the ones we had in Q1 and Q2. You will see that after 3 quarters, EBITDA of the Generation and the Environment Segment now show a positive trend. In contrast, the Energy and the Networks Segment clearly suffer from the already mentioned negative impacts this year. EBITDA in South East Europe Segment continues to show a positive development. With this very general overview, let's move on now to the next slide which covers the Generation Segment in more detail. Wind generation was very strong, it benefited from the operation of our additional wind capacities and favorable wind conditions. Hydrology exceeded the long-term average but was unable to match the very good prior year level. Thermal generation volumes declined year-on-year given the decline in contractual reserve capacity. I would like to remind you that last year, we provided 1,090 megawatts as contractual reserve capacity for the transmission grid for South Germany. Now following the split of the German-Austrian electricity price zone, we only have 430 megawatt for parts of our natural gas plant in Theiss under contract with APG. Due to the lack of reserve capacity contract, our remaining natural gas-fired facilities in Dürnrohr, Korneuburg and Theiss are inactive and conserved in the current market environment. In total, electricity generation volumes in this segment were up by 1% year-on-year. Segment revenue benefited substantially from the increase in renewable electricity generation. When comparing the profit and loss statement, please bear in mind that the Generation Segment now includes our thermal waste incineration plant in Zwentendorf/Dürnrohr, which resulted in a respective increase in revenue as well as operating expenses and depreciation. In total, this development resulted in an increase in EBITDA by 9.7% to EUR 137 million and in EBIT by 5.3% to EUR 89.8 million. On the next slide I will continue with the Energy Segment. Our Energy sales were influenced by different factors. Demand was lower due to the mild winter half year, which was partially offset by the very cool temperatures in May, whereas, natural gas and heat sales volumes were below the previous year due to these weather effects. Electricity sales volumes rose based on growth in industrial customer segment, which helped to offset contrasting temperature-related development. Both revenue and operating expenses in the segment increased based on the valuation of hedges related to the marketing of own generation, especially procurement of primary energy tariffs and emission certificates. The increase in operating expenses were [ especially ] driven by the development of market prices. The deterioration in the Energy Segment is, however, mainly due to the performance of EVN KG, which is at the equity consolidated with operational nature. As in Q1 and Q2, EVN KG suffered from the valuation of hedges that the company did as part of its pre-running procurement strategy. The resulting negative impact as of the 30th of June 2019 was about EUR 100 million. In addition, higher procurement cost negatively affected the supply margins of EVN KG, which resulted in additional negative effect in the amount of EUR 40 million during the first 9 months. As you know, we did another price increase on electricity and natural gas for our household customers since the 1st of June. This is the second price increase in our current financial year. The first price increase was done last October. Both increases were about 13% each on the electricity working price and about 5% each on the natural gas working price. Based on these developments, Energy Segment reported EBITDA of minus EUR 23.7 million and EBIT of minus EUR 37.9 million. On the next slide, I will present the development in our Networks Segment. Higher temperatures during winter also slowed the development of the Network volumes. The natural gas distribution volumes were additionally affected from the reduced use of the thermal power plant in the last year. Apart from this volume effect, the decline in revenue also reflect the reduction in network tariffs for both electricity and natural gas, which became effective as of 1st of January 2019.

These tariffs reflect the lower weighted average cost of capital which applies for the new 5-year general regulatory periods. For electricity distribution, the new regulatory period started this year while natural gas distribution already a year ago. Operating expenses were up due to higher upstream costs and expenses for third-party services. In total, EBITDA was down by 16.2% at EUR 187 million, and EBIT was down by 29.8% at EUR 94.9 million. In the next slide, I will continue with the South East Europe Segment. To start with, the table show [indiscernible] 2019. In Bulgaria, the end-customer price for electricity for household customer in EVN supply area was increased an average of 3.5% following an increase by 1.4% in July 2018. In North Macedonia, the latest tariff decision did not result in any changes to the electricity prices for end customers following an average reduction by 0.2% last year. In North Macedonia, we started to act as the supplier of universal service at the beginning of July, based on the license which we received earlier this year. Based on this license, we exclusively supply households and small companies, which should add stability to our results in North Macedonia. The license has an initial term of 5 years. Now for some volume development in the segment. Temperature-related energy demand was slightly higher than previous year but below long-term average. In Bulgaria, we benefited from growth in the liberalized market. Based on this development, we saw an increase in Network and especially Energy sales volumes. In Bulgaria, the invoicing method for the so-called green electricity markup was changed last July. In total, the change is neutral in the results because revenue and procurement costs are reduced by the same amount. However, the change is responsible for a 3.9% decline in revenue in spite of positive energy sector developments. Lower write-offs of receivables and the change in the invoicing method for the green electricity markup are reflected in the decrease of 6.4% in operating expenses to EUR 597.1 million. Based on this development, EBITDA goes up to EUR 83 million and EBIT at EUR 37.5 million. I would like to conclude my presentation of the segments with the Environment Segment. As already mentioned at the beginning of the call, we were successful in the acquisition of 5 new projects in the current calendar year only. And during Q3, we completed our fourth project in North Macedonia. This means that as of July, we are working on 7 general contractor assignments in 4 countries: Lithuania, Poland, Romania and Bahrain. The order book was about EUR 252 million as of July. I would like to move on the financial performance of the Environment Segment during the reporting period. For comparison of this segment, please bear in mind that our thermal waste incineration plant in Lower Austria was reassigned to the Generation Segment and therefore no longer included. This clearly has an impact of Q3 numbers in comparison to the previous period. We are reporting both a decline in revenue as well as operating expenses. The share of results from equity-accounted investees with operational nature increase. In total, these developments left an increase in EBITDA EUR 22.2 million. EBIT was up EUR 13.5 million. With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our cash flows. Gross cash flow fell by 6.5% to EUR 474.1 million in the first 9 months of this financial year, which reflects the decline in the result before income tax though partly offset by some contrasting developments. Due to the negative development of working capital as of the balance sheet date, cash flow from operating activities amounted to EUR 238.8 million, which corresponds to a decline compared to last year. Cash flow from investing activities reflects a reduction of investments in cash funds and in securities in the R 138 fund. Net investments slightly increased year-on-year. The focus remain on CapEx and wind parks, networks and drinking water supplies. The cash flow from financing activities mainly reflect the dividend payment to the shareholders of EVN AG and minority shares as well as scheduled repayments of loans. The net change in cash and cash equivalents amounts to minus EUR 3.2 million. I would like to conclude today's call with the outlook of the group. As already mentioned at the beginning of this call, we confirm and specify our full year guidance. We expect group net result '18/'19 to reflect the upper end of the assumed range of EUR 160 million to EUR 180 million. Finally, I would like to inform you that based on the information provided, the EnBW Trust as at 30th of June 2019, we note that their stake has decreased further from previously 29.7% to 29.4%. Taking the consideration that we transferred 73,528 treasury shares to employees on the 9th of August, our free float is now 18.6%. I've now reached the end of my presentation of EVN results for the first 3 quarters of the 2018/'19 financial year. And now I'm looking forward to answering your questions.

[Operator]

[Operator Instructions] And the first question comes from Peter Crampton from Barclays.

[Peter Crampton, analyst]

Peter Crampton from Barclays here. Two questions if I may. In your guidance for this year, what kind of impact of one-off charges are you reflecting, particularly relating to this valuation of hedges? And then the second question is on your energy division. What would be kind of a stable-state EBITDA without one-off charges that one could assume from next financial year and beyond?

[Stefan Szyszkowitz, executive]

Well, regarding the valuation of hedges, it's always defined by the date -- the balance sheet date. And therefore, I cannot comment on this. We will follow the development very closely. What I can confirm is that on the third quarter, it's around EUR 100 million, the difference between last year's third quarter result. That's why we also changed the policy of accounting of these hedges. So over the period from April 2019 over the next 18 months, we have this exposure to balance sheet date valuations will decrease step by step, corresponding to the reduced volumes which are then have to be shown on this old accounting policy.

[Operator]

At the moment there seem to be no further questions. [Operator Instructions] Next question comes from Teresa Schinwald from Raiffeisen CENTROBANK.

[Teresa Schinwald, analyst]

My question is revolving around the reduction of the CO2 exposure after the closing of Dürnrohr. Do you have figures for us on that?

[Stefan Szyszkowitz, executive]

Yes. As you know, over the last 33 years, the power plant was a big [ source ] of production of electricity in Lower Austria, in the East of Austria. Of course, over the last years, it was only at a reserve capacity and therefore used only on certain days. On average, over the last couple of years, it was around 600,000 tons CO2 emissions a year. So for the Austrian balance of the CO2 emission regarding the target, its earlier exit from the production of thermal coal production -- electricity production, will be an amount of 3.2 million, 3.3 million tons of CO2 emission which have to be [ not booked ] on the national balance and therefore will help to reach goals in the future.

[Operator]

[Operator Instructions] Our next question comes from Martin Brough from Macquarie.

[Martin Brough, analyst]

Hello?

[Operator]

We can hear you.

[Martin Brough, analyst]

Okay. You've obviously done very well in rolling out the wind developments so far and met your interim target early. And I appreciate that we're now waiting for the results of the Austrian election at the end of next month to see what the underlying government framework might be going forward. But is there any additional work you can do in the meantime to prepare the sort of pipeline of projects to put you in the best position should the future government put in place opportunities to actually bring more projects to financial close?

[Stefan Szyszkowitz, executive]

We are working on additional projects. I think you're completely right. There is nothing to wait for. Of course, we need the approvals by the authorities, and we need this guidance of the framework. We all expect that the government will take efforts, yes, to further change the production profile of Austria on a very high level. Please don't forget that Austria is one of the European Union countries with the highest percentage of electricity production coming out of renewable energy, if you account also hydropower into this kind of field. We focus on our own home territory over the last years. So we think it makes a lot of sense that as much as possible wind power capacity should be installed in Lower Austria where the wind gains are good and we are also the grid operator, and therefore, this 500 megawatt at the end of 2023 will be not the end of wind power development in Lower Austria.

[Operator]

There are no further questions.

[Stefan Szyszkowitz, executive]

Thank you for joining today's conference call. We will publish our full year results for '18/'19 on Thursday, the 12th of December. Please join us then again. Goodbye.