ERG SpA

MIL:ERG

Earnings Call Transcript 2021-Q3

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ERG Third Quarter 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Paolo Merli, CEO of ERG. Please go ahead, sir.

[Paolo Merli, executive]

Good afternoon, everybody, and welcome to our webcast. Here with me is Michele Pedemonte, our CFO, will take you through the results in more detail after my opening remarks. So the key message I'd like to convey today is the following. It's still a very strong quarter, up significantly year-on-year at operating level and even more so at bottom line, which reflects the -- I think, the amazing job done on both capital structure and noncash cost, resulting in lower financial and depreciation charges prospectively.

The first, as a consequence of the liability management programs on the debt side, and the latter as a consequence of the extended useful life of the asset base following our lifetime extension programs. So you'll see in a moment that thanks to this very solid set of results and thirdly, strong price environment out there. We are ready to revise our full year guidance up once again.

But on top of the economic results, which are definitely good, what I'm most proud of is the excellent execution achieved year-to-date towards our 2125 business plan targets. Execution turned out to be weaker and more effective than expected. As a premise, let me finally point out the unprecedented price environment we are in, especially since August, September as a consequence of the gas and CO2 price trends. To me, this simply means that the energy transition is not just crucial but increasingly urgent.

This very unique situation as to immediate consequences on our figures. On one end, it's boosting our operating results as a portion of production is still merchant, as you know. While on the other hand, it's inflating our net financial position given the mark-to-market of derivatives against future delivery. I mean, the delivery beyond 2021.

In a nutshell, that's the premise I wanted to give you and what this document is about. So let's now start commenting on results. I'm going to Page 4. You see EBITDA is up 10% and 20% year-on-year over the 9 months and third quarter, respectively. So as I said, satisfactory results, but let me hear focus on the third quarter.

So in the third quarter, we closed with EBITDA of EUR 57 million, up 36% year-on-year. So despite the lack of wind all over Europe, especially in September, we managed to increase our EBITDA significantly year-on-year, thanks to the increased installed capacity and a stronger price scenario. Both for merchant and incentive price, and this was particularly true in Italy.

Solar EUR 24 million of EBITDA, slightly up year-on-year and very solid over time. Hydro was once again the outperformer of the period in the quarter with EBITDA almost doubled in the period, but say, the same trend we have seen over the 9 months, driven by finally heavy rain in 2021 against the drive here in 2020. And this, coupled with the utilization of reseats, which were filled with water at the beginning of the year. As far as our CCGT is concerned, we are we experienced the opposite situation with EBITDA of EUR 8 million during the quarter, less than at the result over the same period in 2020. We knew it 2021 is particularly for the CCGT because we are carrying on the investments to revamp the plant.

But coming back to the results and the comparison to last year. This drop mainly reflects the phaseout of white certificates which accounts for EUR 5 million in the comparison. And then the extraordinary negative spark spread we have seen over the period with those spikes in gas and CO2 prices, resulting in a squeeze in generation markets. And all this happened in a quarter where we started the general shutdown at the end of August and is still on -- going on. The general shutdown to which we are going to revamp the steam turbine of the module 1. And once the plant will get back to normal, they get back on stream, the plant will be eligible for receiving life certificate.

So the positive news is the maintenance works, as I mentioned before, for the refurbishment are going on very well. So we expect to be all this work to be completed by the end, say, mid-November and then the plant back on stream, say, at the end of the month, with its eligibility for white certificates, which means that as of 2022, the plant should recover its normal level of profitability.

Let me now comment on net profit, which was EUR 30 million in the quarter, up 3x year-on-year. I think quite an impressive number and driven up by all the work done over the last few years to minimize our cost of debt and noncash costs. As I said -- already said to liability management programs and life extension programs. I think quite important to say something about the net financial position, which ended the period at EUR 1,829 billion, roughly EUR 400 million higher than at the end of -- of course, it reflects the dividend paid, the huge investments made over the first 9 months of the year. But also, as I said, the negative mark-to-market of future derivatives on energy prices. This is something that is not worrying us. It's a momentary effect and we expect this to have a reversal effect either through the sale of the hydro assets or through the -- those derivatives arriving at the delivery time.

So let's move on. Page #5. I'd like to spend few minutes on the very important achievements. We obtained -- we achieved over the last 3 months since we met last -- on our webcast in August. You know that a few days after that webcast on August 2, we signed an important agreement with Enel to dispose of our hydro assets. So here today, I'd like to inform you that in the meantime, just a few days ago, we received all clearance needed from the antitrust, so we can confirm that closing will take place first days of 2022.

This, for us, is a very important step towards the further transformation into a pure window solar operator to be completed with the sale of our their assets. And in this respect, I expect that we'll be able to announce an agreement in the forthcoming weeks, let me say like this. Here, you have the main financial figures and agreements in the forthcoming weeks, let me say like this.

Here, you have the main financial figures around the hydro transaction, EUR 1 billion of enterprise value, then there is the perimeter of derivatives, which are included in the transaction with fair value at positive for us in terms of adjustments in price, we expect EUR 130 million, and this is the number based on the value registered, let's say, at the end of September. This amount basically is already discounted in our net financial position. Because the cash we anticipate to the clearing out, but this amount will be received by the company at closing for the hydro asset if the conditions will remain basically the same.

Let's -- moving on say, on one end, we moved on, on the asset rotation. On the other, we moved on in expanding our portfolio of activity. On October 1, we announced an acquisition, which is very much representative of what we are seeking in order to reinvest our proceeds coming from the asset rotation. The acquisition is about 152 megawatts of wind and solar assets in France and Germany for a total consideration of roughly EUR 200 million.

So we expect this portfolio to contribute roughly EUR 20 million or slightly less than that going forward. and we are going to consolidate the asset as of October 1, 2021. So the transformation and the good news, I think what I think I perceive as a good news that the transformation is moving on and faster than expected in our plan.

Moving to Page #7. I have a list of achievements was quite busy period, say, the last 3 months. let me summarize like this. We continue to work on securing revenues in line with our strategy to target at least 80% of quasi regulated revenues. We signed a 5-year PPA in France with Engie, covering plans exiting their incentive scheme by the end of the year for a total amount of 55 megawatts.

Then you already knew that we participate with 144 megawatts in the last auction. And in September, we had the official feedback from GSE that we were awarded all those megawatts were awarded a tariff for 20 years, let me say, at Kepper in the area of EUR 61 per megawatt hour.

In September and October, that's another positive news. We managed to obtain -- through [indiscernible] So full authorization for 2 further projects in Italy. One is a repowering project that was in our business plan. 50 megawatts in absolute and 30 megawatts in differential terms. The other project is totally an upside compared to our business plan because it was a greenfield -- is a greenfield roughly 47, 48 megawatts.

And the 2 projects took part to the last auction, which was held in October 2021. So we're still waiting for the outcome, the results of the auction, but we are quite positive, say, about the outcome. Then we had several achievements in the ESG area, which, as you know, is at the core of our strategy and we obtained 3 important recognitions. One, which surprised, honestly, ourselves. We were ranked the first out of 80, 90 electric utilities around the world by ISS. And the science-based target at the second shipment science-based target initiative approved our 21 25 emission reduction targets.

And finally, last but absolutely not least, ERG has been included in the MPEG index, which means we are in the -- we are ranked in the first 40 corporate in Italy listed most exposed, say, to the ESG world. So, so far so good. We are right, say, on track with our business plan.

Last achievement, quite important one because, as you know, in September, we issued our third green bond EUR 500 million 10-year duration. It's the longest duration so far for us. The issuance once again a great success with demand exceeding 6x the offer. In the end, all this brought mill to maturity below 1%, which I may say is a very satisfactory, very, very satisfactory level.

And now over to Michele for his comments on Q3 results.

[Michele Pedemonte, executive]

Good afternoon, and thank you again for your attention. I am on Page #10. Our demand in Italy was up 3% year-on-year, mainly due to the fact that the third quarter 2020 was still negatively impacted by the pandemic situation. You see here that the only technology which contributed positively to demand was wind, plus 9%. Whilst there was a decline in all other technology namely solar, minus 2%; Hydro, minus 2%; and thermo, minus 6%.

Looking at ERG, our wind production in Italy were up 8%, pretty much in line versus currency average, while hydro was up 44% higher than national level due to its location in Central Italy, which benefited from good hydro volumes, coupled with the use of reservoir in this period. Electricity prices in Italy in third quarter 2021, that there was an unprecedented rise in electricity prices, with the national price at 124, tripled year-on-year.

The all-in price from EUR 141 million to EUR 234 million, benefited from the rise of electricity prices, coupled with the rising incentive, which you know is calculated on the basis of last year's average national electricity price that recorded very low levels due to the covenant of now. The trend in electricity prices, as you know, mainly reflect the strong rise in gas prices and in CO2 prices.

As a consequence, our CCGT clean spark spread declined to EUR 3 megawatt hour with rising gas and CO2 prices, only partially offset by a recovery of prices in [indiscernible] This number reflects premium versus the national price of 11.8% versus 13.5% last year. At the bottom right of the chart, you can see the average reference selling prices for our productions country by country. Even abroad, it's worth noting the generalized prices in Q3, in particular, in countries where we have green certificate type mechanisms such as mini.

Now on Page 11. And here, as usual, a picture of the main drivers or business of the EBITDA evolution in the third quarter. As we've said before, Bank in Italy was up EUR 12 million, due mainly to better electricity prices and the higher value of incentives, coupled with rising volumes. Winter broad was up EUR 3 million mainly due to a decline in production offset by the contribution as of July of the recent acquisition in France.

Solar almost in line year-on-year with slightly lower volumes, partly offset by better prices in the period and by the contribution of Goran in France. Hydro, up EUR 60 million, thanks mainly to a rise in volume plus 44%, driven by the exploitation of reservoir. Energy available in Lake is a 16 gigawatt hour, minus 98 gigawatt hour versus the end of the year.

Capacity was down EUR 13 million, as already commented, mainly due to the 1 certificate phaseout and the squeezing of spark spread in the period. Let me also and that in September, we started the maintenance work for the refurbishment of the plant, which is expected to return to its normal level of profitability as of our 2022.

I am now on Page 12 on wind results. EBITDA in Q3 was EUR 57 million, up 36% year-on-year. EBITDA was up in Italy, 44% last and a broad 18%. Production in Italy were up 80%. As far as prices in Italy, the average revenues were EUR 140 megawatt hour, higher than EUR 122 megawatt hour last year. The average is EUR 102 megawatt hour. So in the end, the rise year is related to a stronger scenario, both in Italy and abroad, coupled with the rise in production in Italy and with M&A acquisition in France.

Let's move on solar results. Here, EBITDA increased slightly at EUR 24 million, plus 2% for the following items: higher unitary revenues in Italy at EUR 346 million versus EUR 321 million in last year, again, as a result of the higher merchant price and the contribution of the France acquisition since July 2021.

Moving on. I'm on Page 14. I'm going to comment the high results. EBITDA was EUR 34 million, plus 93%, up year-on-year, mainly as a result of higher volumes, coupled with a better price scenario and the higher value of incentives. As such, Unit revenues were EUR 135-megawatt on. The main takeaway here is still the same, strong hydrovability in third quarter, thanks to the use of the reservoir. Vis-a-vis a particularly driving season in third quarter 2014.

Moving on to Page 15. I'm going to comment on thermal results. EBITDA in the third quarter was EUR 8 million, significantly down 62% year-on-year, which, of course, is a direct consequence of the end of the end in 2020, the first 10 years of the ability of White Certificates, minus EUR 5 million and a negative scenario, minus EUR 8 million.

Let's move on, on Page 16. And now a brief overview of investments in the period. Here, it's worth focusing on 9 months. We invested EUR 367 million versus EUR 110 million over the same period of last year. During the 9 months, CapEx are composed as follows. About EUR 188 million of M&A in wind and solar abroad. I'm speaking about acquisition of project in Sweden for EUR 41 million and the recent acquisition of wind and solar and store capacity in France for EUR 147 million.

I remind that the economical effect of the latter started as the second half 2021 while the plant in Sweden is under construction. About EUR 155 million related to organic CapEx in wind refer to construction activities, mainly in U.K., France, Poland and Sweden. This figure includes also the CapEx for the repowering [indiscernible] done in the period.

About 8 million related to refurbishment of Model 1 of the CCGT plant in order to renew its eligibility for 10 years period of [indiscernible] And finally, about $15 million of maintenance CapEx spread across all our technologies.

Moving on, I am now on Page 18. I'm commenting on profit and loss on a recurring basis. I've already commented on EBITDA, EBITDA. So going down the profit and loss and looking at the third quarter of the year. I'm going to comment the depreciation of financial expenses and [indiscernible] So depreciation, we have lower depreciation, EUR 5 million that reflects the reduction in depreciation of some in assets due to the end of the amortization period, coupled with a review on depreciation plan of some intangible wind assets due to the lifetime extension project of our asset and the reduction in depreciation on the consolidated accounts of the IO assets due to an increase of the amortization period without any tax effect.

Net financial expenses were at EUR 7 million versus EUR 13 million in third quarter 2020, thanks to a lower cost of gross debt, 1.7% versus 2.3% on previous year, mainly following the issuance of our second green bond in September 2020. The tax rate in the quarter was 26% against 22% in third quarter 2020 taxation in the quarter benefited from [indiscernible] in the area of EUR 2.7 million.

As a result of all this, adjusted net profit amounted to EUR 30 million in the third quarter versus EUR 9 million in third quarter 2020 and EUR 130 million in 9 months of 2021.

Now I'm on Page 19. And let's take a look at the cash flow statement and the net financial position for the 9 months. Net financial debt closed at EUR 1.829 billion, up by EUR 390 million from the end of 2020. Starting from the left, we have our EBITDA, EUR 400 million; the investments made over the period of EUR 160 million; change in working capital financial charges and dividends of EUR 113 million.

And a change in the mark-to-market of the hedge in future derivates EUR 255 million that reflects the strong increase of future commodity prices. So all these effects led to a net debt of EUR 1.82 billion. Please note that about EUR 130 million of armatures are cut connected to the hydro business, and they will be subject to a positive price adjustment in the sale agreement with the hydro buyer. I think that I have started on all the relevant items. Thank you again for your attention. And I will now hand over to Paolo for his final remarks.

[Paolo Merli, executive]

Thanks, Michele. Here, we are with guidance for 2021. We've already commented the 9 months result. But thanks to this solid set of results today and the further installed capacity that came within our scope as of October 1, I mean, contributing as of the first quarter. And also the unprecedented price scenario, which anyway is boosting our results. We are now today in the position to revise our guidance upwards for the full year with just 1 quarter missing.

Let's say, in order EBITDA, central case up by EUR 20 million. of which roughly EUR 5 million will be coming from the newly acquired capacity in France and Germany. CapEx, once again, we revised up the central case by roughly EUR 200 million, which is not the case. It's not a coincidence. It's exactly what we are going to pay for latest acquisition in France and do. As a result of all this and the dynamics of mark-to-market that I explained in my opening remarks, and then Michele explained even better in his picture, the net residential position guidance is increased by EUR 350 million.

So I'll say, EUR 200 million for the investment and the remaining for -- mainly related to the dynamics of the mark-to-market. But please consider that this is just a temporary effect because it will have full reversal in 2022 because most of this amount is related to the hydro and CCGT pyramid. So thank you very much for listening, and we are now ready to take your questions.

[Operator]

[Operator Instructions] The first question is from Sara Piccinini with Mediobanca.

[Sara Piccinini, analyst]

I have three questions, and then maybe I can follow up later with other. The first question is on hedging. Can you please provide an indication on the level of price that you expect for 2022 and '23 and also the level of hedging in terms of percentage of production.

The question -- the second question is more related on the impact of these higher prices on the actual value of the green certificate for next year. So if this year, we have such a high price, this could significantly reduce the level of white certificates for 2022. So this should have a meaningful impact on results. Can you please explain us what is your expectation on that? I know if there is any limit on the value of the white certificates related to the hedging contracts.

Okay. Sorry, this was the first question. So the level of hedging and also the impact for next year for white certificates. And the second question is on CapEx cost inflation. We are seeing a lot of debate on cost inflation and the implication that this could have on future CapEx. What is your position on that? And how much of your CapEx is already secured? And also in terms of supply chain disruption, do you see anything going?

And then the third question is just a clarification on the guidance of net debt. Sorry I know that you already explained very well, but just to be sure I understood correctly. So the EUR 1.92 billion that you're giving for guidance for net financial position should be adjusted for the EUR 130 million that you -- that Enel should give you as a price adjust correct? And also, could you quantify the level of these derivatives on the debt that you expect by year-end? And then that should be the absorb going forward and sorry for the longer question.

[Paolo Merli, executive]

Okay. Okay. Sara, very clear your question. Thanks. So the first one on the hedging, let's say, I give you rounded number, but say the hedging for 2022 -- the production hedge in 2022 is in the region of 75%, slightly higher than that. And the price more or less is in the region of EUR 65 per megawatt hour. And for 2023, the coverage of production is in the region of 50% and more or less the price is very similar. So price, which is higher than what we expected at the time of announcing the business plan.

About the value of the incentive for '22, you are perfectly right. It's a mathematical formula, 180 less the price for 2021. The price for 2021 is going to be something between EUR 100 or EUR 110. That means just a mathematical effect. The incentive next year should be in the region of EUR 50, something like that, more or less. So more than enough the level we had -- we are having in 2021. Of course, this is going to -- in our preliminary projections. This effect should be more or less offset by the fact that we still have a portion of energy, which is merchant -- So the 2 effects should be surely balanced consider that also outside Italy part of the asset base is going to enjoy higher scenarios.

So for instance, let me give you this detail, but for instance -- in Germany, the tariffs in Germany are 1 way CFD. So if the price is higher, then the tariff, and that's the case in 2022, at least according to the forward market, you're going to get the merchant price. In Poland as well because the mechanism is merchant plus origin certificates, part of the production in Poland is covered, but part is merchant. So all in all, we think the 2 effects should be at least balanced. But just -- this is just a preliminary say, a preliminary projection we are building, say, these days, high end of next year. About CapEx Definitely, you are right. I think it's not a secret -- there is strong, strong inflation all over sector. For sure, the wind turbine providers have reported data last week over the last few weeks, and they announced profit warning because this cost inflation is squeezing their margins. Fortunately, in our case, we have been good, but maybe also a little bit lucky because we signed just last year, a couple of framework agreements with 3 years duration with Vests and Enercon, which provide us with, let me say, almost full coverage for our business plan.

There are some indication to steam to -- sorry, to iron, but it's not very material. So, so far, we are a very near or we are just experiencing a near increase, Mani, mean few percentage points compared to what we inserted in the business plan. So there is no major impact because we are covered by this framework agreement. Let me just give you an example, to be more -- even more clearer. Say you see -- I said during the webcast that we obtained to Autoridanice for 2 projects. One was already in the business plan, so it was covered by the framework agreement with vectors and then the CapEx per megawatt is exactly in line with what we announced, 1 million per megawatt.

The other one is a greenfield. It's a very good wind farm, so the return is still amazing. But in that case, that project wasn't in the business plan, wasn't covered by the framework agreement. And here, we are experiencing a higher CapEx per megawatt, at least 10% higher than that. So your point is correct. I hope the legislator in particular, the ministry of the energy transition when it looks at the next auctions take into consideration the fact that this inflation is going to probably reverse the LCOE trend, which was expected to going down forever, say, I hope -- but this is not an issue for ERG, it's an issue for the entire sector or probably other industries.

But in our case, auctions is the main tools through which players are going to secure revenues. So I hope we all hope that legislators around Europe, at least we are in Europe. We are thinking about this. And for instance, connecting and linking the tariff price to inflation at least. In Italy, there is no inflation. The price, the tariff is nominal for 20 years. I hope I answered this question.

And the third one, yes, let me try to explain even better the -- so in our net financial position, EUR 1.829 billion at the end of September. This number includes to EUR 177 million, so almost EUR 300 million associated to the hedging, the futures we have, say, signed over time to cover 22, 23 and 24 production, okay? And also the remaining part Part of this amount is linked to the hydro and the exact number is EUR 130 million at September. What's going on with this amount? If the market remains exactly the same, which is a strong assumption, that the one we had at September 30, at the end of the year, we will still have this number in our net financial position. But just a few days after, say, let's assume, I don't know. The closing with AML will be on January 2, let me say, just to guess a day. That day will pay us EUR 1 billion plus EUR 130 million. So we are going to recover -- our net financial position will be covering, say, in 2022 in the first quarter of 2020. This is just the amount of the hydro. And then similar -- very similar situation for the CCGT, but there, we're still not -- we haven't yet closed the sale. So let me wait. I hope Sara, I explain everything well.

[Sara Piccinini, analyst]

Yes. Yes, it was very, very clear. Just a very quick clarification. The price for the level of hedging that you are indicating is excluding hydro price?

[Paolo Merli, executive]

Yes. Yes, yes, it's a wind and solar. Let me say, it's for our wind and solar production.

[Sara Piccinini, analyst]

Okay. And can you [indiscernible] 2021 level? The very last.

[Paolo Merli, executive]

The coverage in 2021 was slightly below EUR 60, I think, slightly below EUR 60 because the coverage have been built, say, during over 2020 when the price were at that level. 55, the exact number is EUR 55.

[Operator]

The next question is from Roberto Letizia with Equita SIM.

[Roberto Letizia, analyst]

I have a follow-up on Sara's question on the hedging, because this every time this makes me confusion when it is reexplained again, but just to be clear. You do not hedge the Italian production covered by green certificates because this is these are naturally hedged. So when you say the hedging you say is as a mix of the Italian production covered by the green certificate, which are naturally hedged plus the production that are covered by financial contracts, is that correct? This is the first question.

The second one relates to the disposal procedure. Wondering if you can now give us a figure of how much of net income is going to be deconsolidated next year in order to allow us to have a better forecast of the 2021 profit and loss. The -- just wondering, yes, whether the sale of the CCGT if it's going to happen by the end of the year or beginning next year or whenever it's going to happen, it will trigger significant changes in the indexation participation of ERG as far as you know, of course, because this is not a very predictable matter. But maybe you are already accounted for by the fact that in some of the major global index you may have an additional re-rating by the fact that your ESG position probably increase.

[Paolo Merli, executive]

Thanks to you, Roberto. But let me elaborate a little bit more on our hedging policy. Now when I say we have covered roughly 70% of production. I mean all the production -- the renewable production. So we -- it's true that we have this mechanism for the incentive, but you know that the natural hedging is -- yes, it's there, but it's partial because it covers multiyears because the coverage assured by the formula is going to be the year after and consider that not far away in time, our incentives are going to expire. So in our policy, we tend to protect the budget here. So we cover -- we have hedging ratio based on the entire production, the entire renewable product. That's -- I hope it's now clear.

The -- let me answer first the last -- your last question. Masa, the sale of the CCGT, I -- We expect to have it for sure by the end of the year. But let me say the announcement -- the announcement, I hope will be coming same very next few weeks. And yes, you are right. Once the CCGT will be disposed of we are, say, landing on a 0 carbon award that's the only plant we have in our portfolio that meet CO2. And yes, we have some idea of the impact of this on, for instance, the Standard & Poor Energy Index, other indexes, other ratings.

We are already very top rank in all the ESG say, not ranking -- rating.-- But for sure, in the indexes in the equity indexes, we should make a quite important step forward once CCGT will be out of our portfolio. But honestly, that's behind our strategy. That's why we are disposing this plan because this plant is a fantastic one. has always generated cash flow and -- We are now finalizing say, the general shutdown. And at the end of November, we expect the new team to buy the new steam system be on stream and then eligible once again for another shot of wide certificates for the next 10 years.

And you asked me the impact of net profits, say, in the region EUR 50 million, some EUR 50 million, EUR 60 million can be in time on net profit coming from the hydro and term more or less.

[Roberto Letizia, analyst]

So for both of them. So that included the deconsolidation, 56?

[Paolo Merli, executive]

Combined. I think, Roberto, I covered all your questions, right?

[Roberto Letizia, analyst]

Yes, you did.

[Operator]

Mr. Merli, there are no more questions registered at this time.

[Paolo Merli, executive]

So thank you very much, all, and we'll be in touch, say, early in January or maybe before through our press releases. So thank you very much for listening, and have a good afternoon.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.