EVN AG

VSE:EVN

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the Q1 2018/19. [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 results for the first quarter of the 2018/19 financial year. The development of our activities during the Q1 of the current financial was pretty much in line with our expectations.

After 2 financial years, which were influenced by positive nonrecurring effects, we forecasted that this year's group net results would return to levels we had seen 2015, '16 and before.

Our cautious outlook was driven by a few key factors, which meanwhile became obvious during Q1. As of the 1st of October, 2018, the separation of the German-Austrian electricity price zone became effective, which changed the market design for reverse capacity quite a bit, whereas, in the previous winter, we provided a contractual reserve capacity of 1,090 megawatt to TenneT to transmission grid operator in the south of Germany. Such cross-border contracts are not possible any more. We again have a reserve capacity contract, but this is for the capacity of 430 megawatt for the Austrian transition grid only, so the capacity under contract is lower.

The other impact from the separation of the electricity price zone is that the wholesale prices in Austria are now higher than one's in Germany. From today's perspective, we expect the price differential to be approximately EUR 4 per megawatt hour on average over the year.

Therefore, on top of the already increased wholesale prices, this additional markup results in higher procurement costs for our sales company EVN Turkey. These higher procurement costs were only in part covered by price increase in electricity and natural gas working prices for household customers as of the 1st of October, 2018.

As of 31st of December, 2018, the development of the wholesale prices led to a negative effect from valuation of hedges held by EVN Turkey. I would like to remind you that at the end of the last financial year, the valuation of hedges has resulted in a positive nonrecurring valuation effect of about EUR 40 million.

Finally, energy demand in Lower Austria proved to be lower than in the previous year, as summer temperature basically extended until early November 2018, which marked an unusually late start of the heating season. This, among others, had impacts on natural gas sales and network volumes.

This brings me to the confirmation, the outlook for this financial year, which we already gave in December. Assuming average conditions in the energy business environment, group net result for '18, '19 is expected to range from EUR 160 million to EUR 180 million. I can also confirm our investment strategy, which continues to focus on regulated and stable activities. We plan to invest up to EUR 400 million per annum over the coming years, therefore, roughly EUR 300 million annually are dedicated towards networks, renewables and drinking water in Lower Austria.

The expansion of our wind portfolio is well on track. We completed the repowering of our first wind park and commissioned a new wind park Au am Leithaberge with an installed capacity of 18 megawatt. In total, the group now has a total installed wind capacity of 336 megawatt. We are moving closer to this 370-megawatt milestone, which we aim to reach by the end of '19, '20 financial year. Our midterm target for wind is 500 megawatt.

In the international project business, we received a contract by new general contractor assignment in Poland. The contract volume is approximately EUR 16 million.

Let me now continue with the key financials for the first quarter of our financial year.

The group's revenue was 0.6% higher year-on-year at EUR 596 million. Reason for this development, there are positive valuation effects from hedges in the Generation Segment as well as an increase in renewable generation and heat sales. This was contrasted by, among others, the price and volume related decline in the Networks Segment. The decline in EBITDA by 29.5% to EUR 163.2 million was mainly driven by the development of our sales company EVN KG, which suffered from higher procurement costs and negative effects from the valuation of hedges, as of the 31st of December, 2018. Based on the stable development of depreciation, amortization, including effects from impairment testing, the group EBIT was shown by 41.3% at EUR 97.4 million.

Financial results declined by 31.9% to minus EUR 15.5 million due to a weaker performance of the R 138 fund. In total, we generated a group net result of EUR 59.1 million during the first quarter of this financial year, which corresponds to a decline of 47.3% year-on-year.

Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Our strong balance sheet structure forms the basis of presumed organic growth opportunities in our regulated and stable Austrian activities. Net debt, including noncurrent personnel provisions rose by 7.2% over the level on the 30th of September, 2018, to about EUR 1 billion. Gearing increased from 23.5% to 25.9% during the reporting period.

If I will go to each of the segments in detail, I would like to give you a general overview on the EBITDA development of our business segments.

The overview of the EBITDA developmental per segment illustrates the key drivers of our performance during the first quarters. I already mentioned impacts on our sales company Innkraftwerke, which is supported in the Energy Segment, become clearly visible as well as the effects, which dampen the performance in the Generation and Networks segments.

On the positive side, there's a slight improvement development of EBITDA in South East Europe Segment and the Environment Segment.

It is very general overview. Let's move on now to the next slide, which covers the Generation Segment in more detail.

I already mentioned that in comparison to the previous year, the reserve capacity under contract declined from 1,090 megawatt to 430 megawatt. Therefore, the volume of electricity produced was lower, even though our thermal power plants were cold on 26 days in the first quarter '18, '19, which is the same number of days as the year before.

Our strong performance in wind generation was unable to offset the substantial year-on-year decrease in water flows. Based on these developments, electricity generation volumes in this segment in total declined by 9.6%.

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, operating expenses and depreciation.

Apart from this, a positive factor was the revenue from renewable electricity generation, which was higher than the previous year due to the general upward trend in electricity pricing.

Operating expenses in turn were also up due to a year-on-year increase in primary energy expenses. In total, these developments resulted in a decline in EBITDA about 5.8% to EUR 45.2 million and EBIT by 16% to EUR 30 million.

On the next slide, I will continue with the Energy Segment. The energy sales volume showed contrasting developments, whereas, the substantially milder temperature in the first quarter led to a decline in natural gas and heating sales volumes, electricity sales rose during the reporting period. Revenue in this segment increased based on the valuation of hedges. The valuation of hedges also caused an increase in operating expenses, which was additionally driven by the development of market prices. The results from our sales activities are negatively affected by higher wholesale prices. Our sales company Innkraftwerke, which is at equity consolidated with the operation of nature, suffered from the valuation of hedges and higher procurement costs, which were only partly covered by an increase of end-customer prices.

Based on these developments, the Energy Segment reported an EBITDA of minus EUR 6 million and EBIT of minus EUR 10.8 million.

On the next slide, I will present the developments in our Networks Segment.

Rest of networks volumes in electricity distribution remained almost stable. Those for natural gas declined due to the reduced use of thermal power plants in Lower Austria and higher temperatures. The compensation during the first quarter of this financial year was still based on network tariffs, which applied since the beginning of 2018. These tariffs have then been raised by an average of 2.4% for electricity and to reduce by an average of 16.2% for natural gas for household customers.

Based on these price and volumes effects, revenue in this segment was down by 4.5%, whereas, operating expenses increased due to higher upstream network costs.

In total, EBITDA declined by 18.3% to EUR 80.3 million, and EBIT was down by 27.4% at EUR 49.9 million.

The 1st of January, 2019, marked the beginning of new regulatory period for the electricity distribution networks. Similar to what we have seen last year for the new regulatory regulation of gas distribution networks, the weighted average cost of capital was reduced to reflect the general decline in interest rate levels. However, we are still -- reflects the efficiency of the distribution system operator. For distribution companies, is an average efficiency in the new WACC is 4.88%, whereas, companies with above average efficiency benefit from a higher WACC, which is the case for EVN's with company. For the [indiscernible] we have the new investments and are up is set by 5.2%.

In turn, the regulatory offered the general productivity factor by 1.25% to 0.95% per annum. At the beginning of the new calendar year, they also inaugurated and also determined new tariff -- network tariffs and reduced them by an average of 5.7% for electricity and an average of 9.3% for natural gas. These reductions are based on the application of the lower weighted average cost of capital, and they also represent an offset of positive volume effects, resulted from the cold winter in the previous periods.

On the next slide, I will continue with the South East Europe Segment.

In comparison to the previous year, favorable development of the temperature related energy demand in Bulgaria. And the growth of new realized market there led to an increase in network and energy sales volumes in the South East Europe Segment.

In Bulgaria, the invoicing method for the so-called green electricity markup was changed last July. In total, the change is neutral on the income line because revenue and procurement costs are reduced by the same amount. However, the change is responsible for a 3.7% decline in revenue, in spite of positive energy sector developments. However, write-offs of receivables and the change in the invoicing method for the green electricity markup were reflected in a decrease of 7.3% in operating expenses to EUR 27.9 million. Based on these developments, operating results improved by EBITDA of EUR 23.1 million and EBIT of EUR 7.6 million.

I would like to conclude my presentation of the segments with the Environment Segment. Before I compare this segment, please bear in mind that our thermal waste incineration plant in Lower Austria was reassigned to the Generation Segment and is, therefore, no longer included. Apart from the resulting impact on revenue, the international project business was less dynamic during the reporting period. Therefore, in total, we are reporting a decline in revenue by 51.8% to EUR 20.2 million. The operating expenses also went down in line with these developments, and the share of results from equity accounted investees with operational nature increased.

In total, these developments supported an increase of 19.4% in segment EBITDA to EUR 8.4 million, EBIT total is EUR 5.5 million.

In international project business, our order book was about EUR 230 million at the end of December 2018. It consists of 5 general contractor assignments for the construction of wastewater treatment plants in Croatia, Macedonia, Poland and Bahrain. The order book included a new assignment. In Poland, our German subsidiary WTE Wassertechnik will be the general contractor for the expansion of sludge treatment in the Gdynia water -- wastewater treatment plant in Poland. The planning and construction of the entire project will take 36 months, and the investment volume totaled -- totals approximately EUR 60 million.

In parallel, our efforts remain on the acquisition of the new project in Kuwait. We expect that the final awarding of the contract will be given by the local authorities during the current financial year.

With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of group cash flows.

Gross cash flows was down by 13.9% to EUR 200.7 million in the first quarter of this financial year, which reflects a decline in the result before income tax, though, partly offset by some contrasting developments. Due to the seasonal negative impact from lower balances of inventories, receivables and liabilities as of the balance sheet date, cash flow from operating activities amounted to minus EUR 7.6 million.

Cash flow from investing activities reflects the ongoing investments, which focus on wind parks, networks and drinking water supplies. The development was contrasted by payments received for network subsidiaries and inflows from the sale of securities in the R 138 fund in cash funds. The cash flow from financing activities mainly reflects an increase in the scheduled repayment of loans. The net change in cash and cash equivalents amounted to minus EUR 72.1 million.

I would like to conclude today's call with the outlook for the group.

As already mentioned earlier in the call, we confirmed today our outlook for the current financial year. Assuming average conditions in the energy business environment, group net result for 2018/19 is expected to range from EUR 160 million to EUR 180 million. There are other factors that can influence the group net results, including regulatory framework, the legal proceedings currently in progress in Bulgaria, the remaining processing -- proceeding related to the Walsum 10 power plant project as well as the focus on activities in Moscow.

I have now reached the end of my presentation of EVN results for the first quarter of 2018/19 financial year, and now looking forward to answering your questions.

[Operator]

[Operator Instructions] And the first question comes from Duncan Scott calling from Deutsche Bank.

[Duncan Scott, analyst]

I just wanted to ask a little bit about the Energy Segment. Can you maybe just give an -- give us an idea of the scale of the impact from the hedging valuations? So from -- the result from EVN KG, obviously, came down quite a lot year-on-year in Q1. So how much of that is driven by the hedging valuations? And how much of that is driven by the higher procurement costs?

[Stefan Szyszkowitz, executive]

It's around EUR 40 million in this quarter.

[Duncan Scott, analyst]

Is in -- that's the year-on-year change? Or is it...

[Stefan Szyszkowitz, executive]

No, this is the quarter-to-quarter change.

[Duncan Scott, analyst]

And that's driven mostly by the hedges? Or that's driven mostly by the...

[Stefan Szyszkowitz, executive]

This EUR 40 million reflects the value -- the difference in the value of the hedges.

[Operator]

The next question comes from Lueder Schumacher from Societe Generale.

[Lueder Schumacher, analyst]

Quite a challenging quarter for you, this one. My question so will be more for the outlook for the full year. Operating cash flow was down, and you mentioned working capital as the main reason. Could you tell us why working capital deteriorated? And do you expect this to normalize over the course of the year? And pretty much the same in Networks, I mean, it's down 18% EBITDA, it's just quite a move for what should be a stable regulated activity. What's the outlook for the full year there?

[Stefan Szyszkowitz, executive]

Regarding the cash flow. I think you know cash flows on quarterly basis are always as certain bit also, yes, because it's reflecting the relationships with the associated companies and also the authorized contracts. So I would not take this. If you do your prognosis regarding the year, we are not expecting a change on the cash flow, which is really on a different level than we have seen in the last years, still knowing that the weather will influence a lot on this. But -- so we are not so much concerned about this change, strong drop in the first quarter if we look for the outlook for this year. This is on the one side. And on the second side, there are 2 factors, which were reflecting the grid business. First of all, we are at the beginning in electricity on a 4, 5 years' regulatory period, a new period. At the beginning of this period, the parameters are fixed by the regulatory authorities. Now we have 5 years to outperform these parameters. And the second -- and for gas, we are in the second year. So for the gas, regulatory period started at the 1st of January, 2018. Yes, so in both fields, here we are at the beginning of more or less 5-year regulatory periods. And the second thing is winter was very cold, not the last year, the year before, and this is influencing the adjustment by the regulatory authorities regarding the volumes. So we see now 2 changes affecting the grid business, but we are confident that we will outperform the guidance of the regulatory authority, which will then reflect also in higher and more normalized, more historic levels of our grid business over the next years.

[Lueder Schumacher, analyst]

Okay. Actually just one more follow-up question if I may. You mentioned on the Generation Segment, the impact of higher procurement cost. That should also surely be a pass-through over time, isn't it? So that should normalize -- you should be able to pass the additional cost from the higher Austrian electricity prices and general higher wholesale prices on, should this normalize?

[Stefan Szyszkowitz, executive]

Yes. As you notice, it's part of our philosophy of being an integrated group and being active on all parts of the energy value chain that over a period, you are passing through the higher costs. Of course, we are not able to do this on this one step for all. So it takes a bit -- a little bit more time than just one fixing of the end-customer prices. On the other hand, we also had more time when prices went down. It should be, over time, be in a balance, and this is also part of the relationship with our customers, which we are pursuing that they can trust in our judgment regarding wholesale prices going down and wholesale prices going up.

[Operator]

[Operator Instructions] Next up we have Teresa Schinwald.

[Teresa Schinwald, analyst]

I have one on South East Europe operations, especially if you could provide us with an outlook for the full year EBITDA in this area.

[Stefan Szyszkowitz, executive]

On the EBIT level, we are pursuing -- so on the midterm on average around EUR 40 million to EUR 60 million coming from the South East segment. You have seen changes over the years, but I think the track record’s quite clear. And we are confident also this year that we achieve this.

[Operator]

[Operator Instructions] Okay, it looks that we have no more questions for today. So I hand it back over to you, Mr. Szyszkowitz.

[Stefan Szyszkowitz, executive]

Thank you for joining today's conference call. I came to invite you to dial-in, again, on Wednesday, the 29th of May when we are presenting our half-year results. Goodbye.