EVN AG

VSE:EVN

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first quarter of the 2020/2021 financial year. [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 quarter of the 2020/'21 financial year.

We started this financial year with a sound performance. EBITDA, EBIT and group are above the previous year. The main drivers for these developments were the earnings contribution of an equity accounted investees, in particular, our supply company, EVN KG; and developments in our environment segment, in particular, the start of the Kuwait project.

The COVID-19 pandemic remains a permanent factor in our daily working environment. We need to constantly ensure the protection of our employees, customers and business partners. Especially activities and projects which require personal interaction, traveling and international supply chains remain challenging.

However, from a financial point of view, the corona crisis only had a selective negative impact on our operating results. Our integrated business model and a widely diversified customer base continue to be stabilizing factors.

As communicated last year, the corona crisis shall not impact our investment program. On the contrary, we are committed to further increase CapEx. Our plan is to invest on average up to EUR 450 million during the next couple of years. Therefore, up to 3/4 will be directed towards regulated and stable activities in Lower Austria.

During Q1, we were able to increase investments by 13.9% to EUR 86.8 million. The key investment focus now and in the future is on network infrastructure. These investments fulfill the strategic objectives. They secure supply security, enable carbon-free energy future and provide for further growth to our regulated business.

Further investment areas are renewable generation, biomass and drinking water. I would now like to explain our recent progress in these areas.

End of December, we started operation of a new wind farm with an installed capacity of 8.4 megawatts. This increased our installed wind capacity to 376 megawatts in Krems, which is the fifth-largest town in Lower Austria. We will construct a new biomass cogeneration plant. The investment volume is at about EUR 30 million. Upon the commissioning, which is planned for early 2023, this plant will supply renewable electricity to approximately 15,000 households and natural heat to 30,000 households.

In the international project business, we were awarded a new contract in Poland. As a general contractor, we will be responsible for the modernization of a wastewater treatment plant. The contract value is EUR 11.4 million.

Let me now continue with the key financials for the first quarter. The group's revenue was up by 4.8% year-on-year. The main reason for this development is the start of the wastewater project in Kuwait. In addition, temperatures were colder than last year, which led to slightly higher network sales in all 3 core markets. Contrary factors were lower effect from the valuation of hedges for electricity generation and a decline in revenue from natural gas trading.

I would like to inform you that our Q1 results include certain one-off effects. These result from the effect that we took over an additional electricity procurement right from the Walsum 10 power plant in December 2020 in order to simplify the current contractual relationships which this power plant is against the backdrop of the German law, which requires a termination of coal fire generation.

Our quarterly report contains a detailed description of the accounting effect. In a nutshell, I can say that in view of the positive one-off effect in EBITDA, which is contrasted by an impairment loss, the transaction had in total a negative P&L effect of EUR 2 million on the group.

The other main reasons for the rising EBITDA were higher earnings contribution from equity accounted investees. Based on these developments, the group's EBIT was up 14.4% and amounted to EUR 135.9 million. Financial results were up by 25.9%. In total, we generated a group net result of EUR 93.5 million, which represents an increase by 12.7% over the previous year.

Now I would like to move to the next slide which provides some information regarding the group's balance sheet structure. EVN's net debt has remained constant at approximately EUR 1 billion. Gearing ratio was down and amounted to 19.3%. Our financial flexibility is solid. We benefit from lower net debt and sufficient committed undrawn credit facilities, which amount to EUR 571 million as of the end of December 2020. Our strong balance sheet structure forms the basis for pursuing organic growth opportunities in our regulated and stable Austrian activities.

Before I will go through each of these 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 development per segment illustrates the key drivers of our performance during the reporting period. Whereas the networks in the South East Europe segment are slightly above the previous year, the other segments show more substantial improvement. These are due to the sound performance of our supply company, EVN KG, the nonrecurring effects related to the takeover of the additional procurement rights from Walsum 10 and the developments in the Environment segment.

With this general overview, let's move on now to the next slide, which covers the Generation segment in more detail. Electricity generation volumes in this segment were down by 4.8% year-on-year. Renewable generation volumes were slightly above the previous year. Above average, good water flows offset the decline in wind flows. Thermal generation declined due to reduced use of the Walsum power plant. EBITDA was up at EUR 56.8 million. This increase was mainly due to a positive one-off effect related to the Walsum transaction which I mentioned earlier. Scheduled depreciation and amortization increased as a result of higher investments. In total, the Generation segment generated a higher EBIT of EUR 35.7 million.

On the next slide, I will continue with the Energy segment. The development of revenue in the Energy segment depends primarily on the marketing of the electricity generation in EVN's power plants. Therefore, due to a lower generation at the Walsum power plant and the year-on-year decline in valuation effects from hedges, revenue was down by 28.3%. The Walsum transaction also had a positive one-off effect on the EBITDA in the Energy segment. These effects are contrasted by the impairment loss on the group level which I mentioned before.

Energy sales volume showed positive developments. Electricity, natural gas and heat sales volumes were above the prior year level. The increase in demand for natural gas and heat resulted from colder temperatures and the increase in electricity sales came from an expansion of the customer base.

The COVID-19 pandemic did not have any material negative effects on energy demand.

The share of results from equity accounted investees with operational nature improved to EUR 37.7 million. This increase was supported by a sound operating performance of EVN KG and positive effect from the valuation of hedges. Based on these developments, the Energy segment reported an EBITDA of EUR 53.6 million and EBIT of EUR 48.3 million.

On the next slide, I will present the development in our Networks segment. Networks' sales volumes increased, supported by a weather-related increase in demand for electricity and natural gas in the household customer segment. This was contrasted by a slight decline in electricity consumption by commercial customers. There were no material effects on network sales volumes of the COVID-19 pandemic.

Based on these volume developments and the tariff decision as of January 2020, which provided for a reduction of network tariffs for natural gas by an average of 8.1% for household customers, segment revenues were slightly above prior year level. EBITDA in the Networks segment was up by 3.6% and EBIT by 1.7%.

With the beginning of the new calendar year, the Austrian regulators determined new network tariffs. Tariffs for electricity were increased by 6.3% on average. And those for natural gas were increased by 6.4% on average as of 1 January 2021.

On the next slide, I will continue with the South East Europe segment. Temperatures in South East Europe were lower than usual mild previous year but still higher than the long-term average. In Bulgaria, we are facing stronger competition following the market liberalization for commercial customers as of October 2020. Based on these developments, we are reporting today an increase in network sales volume contrasted by a decline in electricity sales volumes. Segment EBITDA and EBIT remained stable at prior year level. They amounted to EUR 33.6 million, respectively, EUR 15.5 million.

I would like to conclude my presentation of the segments with the Environment segment. In our international project business, we were awarded a new contract in Poland regarding the modernization of the wastewater treatment plant. The project has a contract volume of about EUR 11 million. In total, WTE Wassertechnik is currently working on 9 projects in Germany, Croatia, Lithuania, Poland, Romania, Bahrain and Kuwait. The order book was about EUR 1.5 billion as of the end of December. In addition, our joint venture company, sludge2energy, is currently working on 3 huge sludge treatment projects in Germany.

The financial performance of this segment is in line with the development in the international project business. There was a corresponding rise of both revenue and operating expenses in this segment. All in all, the segment benefited from the start of the Kuwait wastewater project, which is accounted for according to the percentage of completion method. In addition, there was a positive one-off effect with our Lower Austrian water supply company. In total, these developments led to an increase in EBITDA to EUR 17.9 million and the EBIT to EUR 8.4 million.

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

Gross cash flow was substantially up, EUR 407.8 million. This was mainly due to the compensation payments for a takeover of the electricity procurement right. A further factor was the higher balance of dividends from equity accounted investees. The increase in cash flow from operating activities was lower in comparison. One reason were the higher income tax payments.

Cash flow from investing activities was influenced chiefly by a year-on-year increase in investments in property, plant and equipment and higher investment and cash flows. The cash flow from the financing activities reflected the scheduled repayment of loans. A contrary factor was the issuance of a green private placement. The net change in cash and cash equivalents amounted to minus EUR 43.8 million.

I would like to conclude my presentation with the confirmation of the outlook for the group. Assuming average conditions in the energy business environment, we expect that the group net result in 2021 will be in the range of approximately EUR 200 million to EUR 230 million. However, the further course of the corona crisis and the resulting macroeconomic effects could have a negative influence on individual business areas at the end and, in turn, on the development of earnings for the entire group. I confirm our dividend policy is directed to holding the absolute amount of the ordinary dividend at least constant at EUR 0.49 per share.

I'm now looking forward to answering your questions.

[Operator]

[Operator Instructions] And the first question comes from Lueder Schumacher from Societe Generale.

[Lueder Schumacher, analyst]

A number of questions on my side. The first few questions are on the transaction on the 150 megawatts of electricity procurement rights on Walsum 10. It seems to be that everybody else is trying to get out of coal exposure and you're adding to it. I was wondering what the thoughts behind it were and how exactly EVN will benefit from that transaction. You mentioned simplifying the current contractual relationship in the tax. I still want to know how adding to coal exposure will benefit EVN.

The second one, also related to Walsum 10, is apparently there's going to be a second compensation payment. When will this be paid? And when it will be paid or how big is it? And would it also be immediately impaired as it appears to be that what happened with the first compensation payment?

And then just for clarity, you mentioned there was an impact from this transaction in the Generation segment and the Energy segment. Could you tell us exactly how much it is in each segment so we can strip it out for the underlying trend?

And the same also goes for the environment section. That's another question. If you could quantify the impact from Kuwait and also the positive one-off on EVN Wasser?

[Stefan Szyszkowitz, executive]

Okay. Thanks a lot. I can confirm we try to look on the Walsum power plant also under the changed condition of the stepping out of Germany out of thermal production based on lignite and coal. Therefore, as a minority stakeholder in the company where we, on the other hand, are also having this power supply contract and the Viennese municipality was a contractual partner in this. Therefore, we try to consolidate our position regarding the future of the Walsum power plant. And we're expecting over the next years see a clear guidance also from the market and the valuation of the power plant.

The new law has been issued in August. The first auctions have taken place. This is what we are looking very closely at. But I'm not able to give you more information on that on this basis due to contractual obligations we are having there.

You're completely right that the transaction itself is issuing, of course, question. The second payment is already done, yes. So we are expecting not from this payment any further impairments. What we are, of course, facing is that the total volume itself in the future has always to be priced at the balance sheet days.

So there is no further impairment coming out of this deal. Everything has been already recognized in the figures. You have this also in our notes. And I would recommend if you have a telephone call also with our investment relation guys here to walk you through the different lines. I think it's much easier than to do this here in a bigger group.

Regarding the Kuwait questions, which are also giving a contribution to the EBIT, it's a single-digit contribution. We are at the beginning of this big project. Luckily, all the issues in preparation could be solved in Kuwait already in advance. We used the period of the pandemic for this. Therefore, the ships with the pipes are already on their way. The third ship is loaded in the harbor. So I think with all the delays, we are still in the original time frame. And also, the customer is supporting us. So I think despite all the pandemic issues, we think we will manage this project quite well. And this will lead also to step-by-step higher EBIT contribution from this project in the next couple of years.

[Lueder Schumacher, analyst]

Okay. Just one follow-up question on your first answer. Is the idea that Walsum 10 will initially participate in one of the German coal closure tenders?

[Stefan Szyszkowitz, executive]

Honestly, everything has to be evaluated. But we are in a minority stakeholder there. So the lead is not with us. But all of us know the sensitivity of this issue. We have done our impairments with the year 2033 regarding this contract. On this basis, it's between today and 2033 when decisions have to be made.

We will see from the environment how the stepping out of the nuclear production in Germany with, at the same time, higher installed renewable energy capacity will lead to questions regarding the power supply in 2020, '23. I think this will be the crossroads when the real decisions will have to be taken.

[Operator]

Our next question comes from Teresa Schinwald from Raiffeisen Bank International.

[Teresa Schinwald, analyst]

I also have a follow-up on the Walsum issue. You've mentioned the certain swing capacities on the balance sheet from the procurement rights. We have seen a significant reduction in output from Walsum 10, obviously given its coal-fired production. So I wonder if this procurement right, the valuation is already based on this lower output level we have seen at Walsum in the past 2 years. This would be my first question.

And the second one is on the state of the game of the Renewable Expansion Act in Austria as the likelihood of the vote on this is now rather low in the first quarter. Could you tell us a bit more about that? What's still open in negotiations? And what could be a new time line?

[Stefan Szyszkowitz, executive]

Okay. To the first question, of course, from now on, we have to put the whole volume of this power supply contract up to the valuations. Of course, power price is the basis of everything, also of the production of the power plant. But we try to put everything what we gained now on the same levels. So we have this consistent position since the end of December regarding our total procurement rates.

The second thing is, of course, everyone is expecting this new act for the further support of renewable energy production is being sent to the Parliament, voted on and put into the law. The interesting thing is -- and this seems to be the complicated thing is they need a 2/3 majority. So the government needs also the position in the parliament and it has to be accepted by the European Commission.

Therefore, there are 2 obstacles to put all the policy initiatives into a framework which is then accepted not only by the Parliament with this majority but also by the European Commission. Therefore, I think the negotiations and documentation in advance are taking more time than they would have expected because it would be very embarrassing if they vote on a law and then the Commission is not accepting this.

On the other hand, it's getting step by step a higher attention also in Austria. So I still would confirm that we would think that before this summer, the law should be voted. And then after the approval by the Commission, the formal approval by the Commission should be effective. So I would expect that this is the new basis for us for the further development in this year '21.

[Operator]

At the moment, there are no further questions. [Operator Instructions] And we have a follow-up question from Lueder Schumacher from Societe Generale.

[Lueder Schumacher, analyst]

Sorry, just one follow-up question. On -- you mentioned there's good hydro flow. Can you quantify that? How much -- how good was the hydro flow in Q1 compared to normal?

[Stefan Szyszkowitz, executive]

Let me give it second. We are just looking at the comparison.

Okay. Regarding the KPIs we are using for that, it's around 110 in comparison to the average production. So this was quite nice. We had a lot of snow also. But it was interesting that wind was so weak. So let's see how this is on the midterm and long term. If there's anything also, the energy balance of our activities and even of the state itself, this kind of climate effect is still something which is not having too much empiric data for the past to compare them in relation. Also, photovoltaic will be the third input which will be interesting then for us on volumes but also regarding on the timing during the day and the season.

[Operator]

At the moment, there are no further questions. [Operator Instructions] There are no further questions. And with this, I hand back to Mr. Szyszkowitz.

[Stefan Szyszkowitz, executive]

So thank you for joining today's conference call. We will publish the results for the first half of our 2021 financial year on Thursday, 27th of May. Please join us then again. Stay healthy and goodbye.