EVN AG

VSE:EVN

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Conference Call on EVN's Results for the First Quarter of 2021/'22 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 Results for the First Quarter of the 2021/'22 Financial Year. The developments in the energy market during the past month took many energy expressed by surprise. Within an unbelievable short period of time, market prices for natural gas, CO2 emission certificates and electricity reached historic highs. Due to our diversified business model, this market distortion had different effects on our various activities, whereas renewable generation benefited from higher prices, there were negative impacts on the procurement side.

EVN KG, our Austrian supply company, already reacted to higher procurement costs and passed them on to customers. For electricity, higher end customer prices became effective as of January, as for natural gas as of February. In South East Europe, the high electricity prices are a challenge for the whole energy sector there. Our activities are especially impacted by rising costs for network losses. Together with other utilities in Bulgaria, North Macedonia, we initiated a close dialogue with regulatories and governments to discuss possible measures to keep the system stable. In both countries, extraordinary government, respectively, regulatory measures were introduced as partial compensation for the significant rise in energy procurement costs. The remaining additional costs should be reflected in future tariff decisions.

Before I will guide you to our numbers of the quarterly results, I would like to reiterate our key messages. In line with our strategy 2030, we decided to further increase investments. This is already visible in the first quarter, which shows us a rising CapEx at 26.8%. Over the coming years, annual investments were reached to levels of around EUR 500 million. Thereof, 3/4 will be dedicated to Lower Austria, mainly networks, renewable energy and drinking water investments. It is our ambition to increase EVN's attractiveness for ESG investors. That's why we stepped out of the coal-fired generation and procurement rights from the Walsum 10 power plants as of September 21.

But there is more than that. We agreed on CO2 emission reduction targets until 2034 with the international renowned science-based targets initiative. One measure is that we will further grow our renewable generation portfolio. Our goal is to grow our wind capacity by another 350 megawatts to 750 megawatts by 2030. And we will build up a photovoltaic portfolio of about 300 megawatts within this decade. As you know, it has become increasingly difficult to realize new wind projects, even with already approved by authorities. Therefore, I'm glad that we got green light for 2 new projects in Lower Austria. The projects have an installed capacity of 12.6 megawatts each. One is a repowering project.

Let me now continue with the key financials of the reporting period. The group's revenue was up by 49.1% year-on-year. The main reason for this development was the sharp rise in electricity prices, which had a strong impact on revenue in South East Europe as well as from renewable generation. Other positive factors included higher network sales volumes due to the cooler weather in all 3 core markets as well as the higher network tariffs set by E-Control in Austria as of the 1st of January 2021. The more frequent views of the TEZ power plant by the Austrian transmission network operator for network stabilization offset the lost revenue due to these investment from the Walsum 10 power plant.

I would like to remind you that last year, in the first quarter, we had a one-offs from the takeover of an additional electricity procurement right of the Walsum 10 power plant. Other operating income included a positive one-off, which -- it's depreciation was increased by a required impairment. The cost of electricity purchases from third parties and primary energy expenses were substantially up at EUR 552.8 million. The main driver were higher energy procurement costs in South East Europe. Other factors include the more frequent use of the TEZ power plant and higher procurement costs for our heating business. The share of results from an equity accounted MSDs was down from EUR 60.2 million to EUR 52 million. Declines were recorded, among others, by Energie Burgenland and other supply business -- our other business in Austria and Germany.

Based on this development, EBITDA was down by 39.5% at EUR 201.9 million. In the first quarter, we had to record a reevaluation of EUR 6.4 million to the Kavarna wind park in Bulgaria. The previous year, as already mentioned, was affected by impairment losses totaling EUR 113.3 million to the Walsum 10 power plant. In total, the group's EBIT declined by 4.7% to EUR 129.5 million, and now it's dropped to minus EUR 16.4 million due to foreign exchange developments. In total, we generated a group net result of EUR 81.5 million, which represents a decline 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 amounted to EUR 905.9 million. Gearing ratio was down and amounted to 12.8%. Our financial flexibility is solid. We benefited from low net debt and sufficient committed undrawn credit facilities, which amounted to EUR 552 million as of the end of December 2021. In April, our corporate bond with a nominal amount of EUR 300 million will become due for repayment as the preliminary refinancing measures and to a temporary increased financial flexibility, we concluded short-term loans totaling EUR 150 million and the term loans which carries until February, November and December 2023, totaling EUR 250 million. And further financial steps will be evaluated.

Let's move now to the next slide, which covers the Generation segment in more detail. Electricity generation volumes in this segment were down by 11.4% on a year-on-year basis. The reduction in generation came from the absence of Walsum 10 following the debt investments of our stake last year. On the other hand, power plant increased generation due to more frequent calls by the Austrian transmission network operator for network stabilization. The share of renewable generation increased to 54.4% compared to last year's 51.9%. Higher inflows were partly able to compensate the decline in hydro power. Revenue nearly matched the previous year. Higher electricity prices offset the decline in electricity generation. EBITDA was down at EUR 50.3 million. Again, please bear in mind previous year's positive one-off related to the takeover of an electricity procurement right. Also due to the revaluation of the Kavarna wind park in Bulgaria's segment EBIT increased to EUR 46.3 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 generated in EVN's power plants. Besides, it includes the revenue from our domestic heating business. The strong increase in wholesale prices resulted in higher revenue from the marketing of our own electricity production. Higher sales volumes supported revenue growth of our heating business. Therefore, revenue was up by 90.4%. Operating expenses reflected higher procurement costs for the heating business as well as the absence of a positive one-off related to the takeover of an electricity procurement right.

According to our contracts in the heating business, higher energy costs will be passed on to customer once a year based on price index mechanism. So it's a certain time like year. In Energy sales volumes, where they were above the prior year level due to colder temperatures and the return of demand to pre-COVID levels. The earnings contribution from that equity consolidated company EVN KG declined due to higher procurement costs. As already mentioned in the beginning of the call, EVM KG, meanwhile, increased prices for household customers for electricity and natural gas. Based on these developments, the segment reported an EBITDA of EUR 35 million and EBIT of EUR 29.8 million.

On the next slide, I will present the developments in our Networks segment. Networks' sales volumes increase supported by stronger demand for electricity and natural gas in their household customer segment, due to lower temperatures and higher gas flows related to increased use of gas fired generation from network stabilization. In the beginning of '21, there were also regulatory increased tariffs for both electricity and natural gas. Based on these volumes and price development, segment revenue increased by 7%. EBITDA in the Networks segment was up by 11.1% and EBIT by 16.3%. They're also going to drive determined new tariffs, which became effective with the start of the new calendar year. Based on so on such decisions, the network tariff for electricity will increase by 8.4% on average, and for natural gas by 4.7% on average.

On the next slide, I will continue with the South East Europe segment. Temperatures in South East Europe were above the previous year and long-term average which had positive volume effects. In combination with higher prices, this resulted in a sharp rise in revenue. As already mentioned in the beginning of this call, our South East Europe segments suffered from rising costs for network losses due to higher market prices. In both countries, extraordinary government respectively regulatory measures provide for at least partial compensation for the significant rises in energy procurement costs. In Bulgaria, our distribution network operator received the compensation from the government covering network losses which resulted from higher wholesale prices.

The compensation in the amount of EUR 31.6 million covered the period from July until December 21. The payment was made under a state aid program for the utility sector which the Bulgarian government had agreed to the European Union to be in line with EU laws. We are in constant discussion with the government regarding measures to cover higher costs which has been in period since January '22. In North Macedonia, the regulatory announced the extraordinary increase in electricity prices for household customers of EVN Home DOO and the network tariffs as of the 1st of January 2022 as partial compensation for the significant rise in energy procurement costs. The remaining additional cost should be reflected in future tariff decisions. Segment EBITDA was down at EUR 7 million and segment EBIT amounted to minus EUR 12 million.

I would like to conclude my presentation of the segments with the Environment segment. In our international project business, we can rely on a solid order book of about EUR 1.2 billion at the end of December. In total, WTE Wassertechnik is currently working on 14 projects in Germany, Lithuania, Poland, Romania, Bahrain and Kuwait, included us sewage large treatment project in Germany, which are done by our joint venture company sludge2energy. The financial performance of this segment is in line with the development in the international project business. Due to a slight reduction in construction activities as compared to last year, there was a corresponding decline of both revenue and operating expenses in the segment.

In total, this developments lead to a lower EBITDA of EUR 17.1 million and slightly higher EBIT of EUR 8.9 million euros. In view of the current political crisis, I would also like to inform you about EVM's remaining activities in Russia. As you will remember, we realized a couple of projects including drinking water plants and thermal waste utilization planned for the city of Moscow. These projects, they are also on a basis of PPA basis. For all of these projects in context or by the plants already ended. The last one in June 2020. With this, our last PPA project ended in Russia. However, we still own and operate 2 sludge fired combined heat power plants in Moscow. The total book value of these plants is single digit contribution, though the events, revenues and results are not material. Apart from that, we don't pursue any environmental projects in Russia or Ukraine.

With this, I conclude the presentation of the segments. On the last slide, I will continue with the development of our group cash flow. Gross cash flow was substantially lower at EUR 204.4 million. Please remember that it was an unusually high in the previous year to the receipt of a compensation payment for the takeover of the electricity procurement or decline was reduced slightly or higher dividends from equity accounted MSDs. The decline in cash flow from operating activities was lower in comparison. The sharp rise in energy prices was responsible for working capital effects. In the previous year, they're not collected part, as the reporting date of the compensation payment for the takeover of an electricity procurement had increased working capital even higher, and tax payments were above this year's level.

Cash flow from investing activities was influenced chiefly by a year-on-year increase in investments in property plant equipment and higher investment in cash funds. The increase in cash flow from financing activities is 2 to 3 bank loans totaling EUR 250 million. The net cash -- the net change in cash and cash equivalents amounts to minus EUR 182.5 million. As mentioned before, our financial flexibility is solid, secured with committed undrawn credit facility of EUR 552 million as at the end of December 2021.

I would like to conclude my presentation with the outlook for the group. Having just finished the first quarter, I would like to summarize our view on the current financial years to follows. We are going through an excellent year in substantial distortions. When looking at our main activities, we need to differentiate. For Generation, higher prices are clear positive and is certain upset. However, please be reminded Generation has been hedged at pre-running average level rather than peak levels. For our energy supply business, higher prices are burdened, which we will be able to overcome through price increases. However, there's a certain timing effect.

For South East Europe, we are facing a financial year of transition. Management puts all effort on finding substantial solutions with the governments and the regulatory authorities, but segment results will show the effect of this distortion. This is obvious as we will miss our usual EUR 40 million to EUR 60 million EBIT target for the segment, which we managed to outperform in the past couple of years. On group level, we are confident that our diversification management measures will provide a guidance to our financial performance. Hence, I confirm our guidance for this financial year. We expect a group net result in '21/'22 to be in a range of approximately EUR 200 million to EUR 240 million.

With this, I have reached the end of my presentation. I'm now looking forward to answering your questions.

[Operator]

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

[Lueder Schumacher, analyst]

Three questions from my side. The first one is on South East Europe. That has some decline in EBITDA you have seen there. Do you expect the full recovery here? Can you maybe run us through the process of recovering these extra costs? And are there any risk associated with maybe not recovering all of it? That's certainly somewhat some other companies have experienced in Eastern Europe that the recovery of these high -- very high procurement costs can be quite tricky. The second one is on EVM KG. You said that EBITDA was down due to higher procurement cost. Is that mainly a Q1 effect, i.e., you just had to wait for tariff increases to go through and now you're passing on higher procurement cost? And the last one is on generation, just to get an idea of the underlying EBITDA. There was all these one-offs. Can you maybe give us the total contribution of Walsum 10 in Q1 last year, i.e., the normal EBITDA as well as the one-off from the procurement?

[Stefan Szyszkowitz, executive]

Okay. Thanks for the question. First of all, South East. There is a regulatory regime and more or less, there is no liberalized markets. So it's a question mark when regulatory authorities do their normal decisions on future tariffs. In our case, this will be the 1st of July for Bulgaria and North Macedonia. And nevertheless, due to this extraordinary situation, the North Macedonia and the regulatory affairs made already a decision for the 1st of January partially compensating us for the burden we are carrying there. The issue is the energy we have to buy on a forward market there for the for the great losses. It is too early to say how the year will develop. As you have seen and I mentioned it before, in Bulgaria, we have been covered for this great losses from July to end the December.

Therefore, I would expect that they will have the resources due to their production in Kozloduy. And they are making their extraordinary profit. And they will use this to compensate down the line, the energy value chain to ensure that the end-to-end customer price decision will be not too harsh, and then not an extraordinary will be necessary. But of course, these are all about the discussions we are having. The situation in North Macedonia is more tense because they are being -- don't have own state production, which is relevant in the country itself. But we are following here the regulatory system. And of course, we are -- there our prices will be defined there. So there might be a timing effect. Therefore, we expect that we will have a weak year there, and that the making of these differences will come in the next regulatory period.

And to the EVN KG, of course, if you carry a higher procurement prices. But don't underestimate, we are also buying on a rolling basis. So it is not stress that we are buying energy for our customers on a short-term spot basis. Therefore, it's a rolling effect. And this is over all these years always taking place that you have a certain delay in both sides. But with this price decisions for the 1st of January for electricity, and the 1st of February for gas, and also the tariff setting for the grid under the bottom line, I think we will be quite stable on a normalized basis. If you compare EVN KG's performance this year in our expectation to last year, there's of course a big difference due to the change of the environment. And don't forget, there are also the question mark of the -- on the balance states evaluation of the rewards. So therefore, there is a certain volatility due to the business itself.

And regarding the effect of Walsum. If you compare the first quarter to the first quarter, the group was carrying a burden of EUR 2 million again coming -- as in EBIT results coming from the effects of this procurement, right, and all the results coming out of the parts -- the first part of the exit of Walsum, as we discussed and made transparent. The overall results on an P&L basis have been around a positive effect of EUR 11 million at the end of September 21.

[Lueder Schumacher, analyst]

So just 2 follow-up questions there. One is on Walsum. Just I was after the EBITDA. You did say in Q1 last year that net of the impairment charges is only minus EUR 2 million. But I'm specifically after the EBITDA, if you could give us the number of the -- for the one-off of the procurement rights.

[Stefan Szyszkowitz, executive]

The impairment has been EUR 113 million.

[Lueder Schumacher, analyst]

Yes. And the EBITDA contribution also is about EUR 56 million, EUR 57 million?

[Stefan Szyszkowitz, executive]

No, that's been EUR 115 million. And then the impairment [ EUR 113 million ].

[Lueder Schumacher, analyst]

EUR 115 million. Okay. And so last follow-up on Macedonia. You mentioned partial compensation. Just how partial are we talking, half, 70%, 80%, 90%?

[Stefan Szyszkowitz, executive]

No. See, this is very hard to judge what we are talking about. Are we talking on the yearly level? Or are we talking on the monthly one? That the increase of end customer prices has been 9.5%. And they were also taking off under the weakest certain tariff privilege, which brings another 5%. So the total effect over the next coming months and weeks will be around an increase of around 14.5%. Of course, it's pretty much depending how the weather, whether weather is developing, how much energy we have to buy on these kind of short-term energy prices. So I have no further information that more than I hope that the backlash in North Macedonia will be compensated by the Bulgarian stability and therefore under the bottom line, we will not have any result there. But hopefully, we will also not have a big loss step.

And on the group level is -- on the group level, this will be compensated by higher result on the renewable division. Therefore, I can confirm our -- therefore, we can confirm our outlook for the year at the same level as we have already give the signal in December.

[Operator]

And the next question comes from Teresa Schinwald.

[Teresa Schinwald, analyst]

It's kind of 2 and a half from my side. So first, could you give us an update on the progress of the Renewable Expansion Act amendments? Also, as you have mentioned, some administrative issues in project approvals. And secondly, in light of current events, could you also give us an update on the gas storage activities? Especially with the partners in the hydro storage facility?

[Stefan Szyszkowitz, executive]

Yes. Thanks a lot. As you can imagine, these kinds of development are really now bringing new questions also to the whole European energy supply system and also the security of supply. What we have seen on the gas side over the last couple of weeks and months, a higher volatility, and of course, the decrease of the levels of the gas storage facilities, which are very transparent by the way, also on the homepages of these institutions. And therefore, we are down to a level like we have seen it in 2013 and '14, if you compare this over the last 6 years. Fortunately, the temperatures have been not so. So deep over the last couple of weeks. So therefore, the official information by the institutions is that for this winter, the gas supply is secured by the stored volumes.

Of course, if there would be a change in weather in the upcoming weeks March and April, it could be more tense again, but there was a certain additional flow of gas also by LNG to Europe. And this was also partly booked into existing gas storage facilities. So it is tense. But it's not critical from today's point of view. What we have seen yesterday and also today that the flows from Ukraine, Russia, in Baumgarten has not changed. So they are at the normal level so far. But please keep in mind, the development, very dynamic. But there's no sign that the normal and natural supply is in any way influenced, as by the way more or less in 68. This was always secured. What we see is that Brussel is discussing how we can secure our gas needs more for the future and more for the next winter. Therefore, we are following the debate very closely. This is regarding the gas and regarding renewable act. As we have discussed it in the past, fortunately, Brussels was now giving the green light to the latest version of the new renewable act in the parliament. Therefore, now the ministry and the different ministries, because they are pretty much in the same boat, have to issue the directives to get this new law for really working.

And as you can imagine, we are expecting some guidance here also regarding how the new market premium will work and how the tender will function and how we can use all this new framework also for our activities, because as I mentioned before, they will be ready and willing to further invest in renewable generation. What we have also seen is that, in comparison to 3 years ago, 5 years ago, every wind park, even with photovoltaic activity is facing question marks on a local level, and therefore, it takes a lot longer time between making the decision to invest until the possibility to start this construction. Fortunately, we have now 2 smaller wind activities, which we're ready to build now. And we got the legal permits to do so. So we will start with a constructions in the year '22.

And we are very hopeful that bigger park will -- also will be ready, that we can start on the construction in the upcoming month. So there is a certain delay, but I would say on the general perspective, I think the support for renewable production will even get the boost coming out of the situation. So maybe there will be a change on attitude also. And then stronger consensus in society that we want to secure our energy needs as much as possible in renewable energy, all this knowing that renewable energy in this kind of wind and photovoltaic has one disadvantage. The question mark of how you can plan it. Just to let you know, if there's a lot of wind, this does not mean that there's not a need for ties to produce electricity. So the volumes alone, dependability is one issue which you cannot cross easily just by wind and photovoltaic production. Therefore, we will need a diversified energy industry also in the near future, midterm future maybe longer than we expect today.

[Teresa Schinwald, analyst]

And maybe a follow up also on distribution tariff. I've read that the regulator accounted for 37% increase in the loss energy coverage to accounting for higher prices. You already have an indication if this would be enough for this year because of course next year, the coverage will be renegotiated.

[Stefan Szyszkowitz, executive]

Yes. No ongoing debates also. The uncertainty in the system has increased in the past couple of weeks a lot. So I would not feel well yet to comment on to short-term assumptions in the moment.

[Operator]

There are no more questions. [Operator Instructions] There are no more questions.

[Stefan Szyszkowitz, executive]

Okay. Thank you for joining us for today's conference call. We will publish the results for the first half of '21/'22 financial year on Wednesday, 25th of May. Please join us then again and stay healthy and all the best.