EVN AG

VSE:EVN

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first half of the 2018/2019 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 half of the 2018-'19 financial year. The numbers, which we're reporting today are in line with the development, which we are already seeing during the first quarter and they are in line with the outlook, which we gave in December for this financial year. At that time, we informed the market that after 2 financial years, which were influenced by positive nonrecurring effects, this year's group net results would return to levels which we have seen in 2015, '16 and before.

Despite the warm winter, I can confirm today our full year guidance.

We expect that group net result for '18-'19 will range between EUR 160 million and EUR 180 million. When talking about our performance in the first half year '18-'19 , I would like to remind you that wholesale prices increased sharply during the last financial year already. This increase resulted in a positive and noncash one-off effect of about EUR 40 million related to the valuation of hedges as of the 30th of September 2018. As of the 31st of March 2019, however, the valuation of hedges, which our supply company, EVN KG, did as part of their prerunning procurement strategy, which resulted in a negative one-off effect of about EUR 70 million. In addition, higher procurement costs negatively affected the supply margin such as that EVN KG suffered from a loss of minus EUR 44.3 million during the first half of 2018-'19.

We always made the point that we closely monitor the development of wholesale prices and its impact on margins in our supply business. Therefore, we just have recently decided to do another price increase on electricity and natural gas power household customers, which will become effective as of the beginning of June. This is the second price increase in our current financial year. The first price increase was done last October. Both increases were about 13% each on the electricity working price and about 5% each on the natural gas working price.

As next topic, I would remind you that the volume of our reserve capacity contracts declined. Last year, we provided 1,090 megawatt. These were all of our Austrian thermal capacities as a contractual reserve capacity for the transmission grids in South Germany. Due to the split of the German-Austrian electricity price zone, which became effective at the 1st of October 2018, this is not possible anymore. We still have contractual reserve capacity, but the volume is lower at 430 megawatt for parts of our natural gas-fired plant in Theiss. Due to the lack of reserve capacity contracts, our remaining natural-gas fired facilities in Korneuburg Theiss are inactive and conserved in the current market environment.

Yesterday, we published our decision that we will terminate the coal-fired electricity generation in our Dürnrohr power plant in autumn 2019. From a technical point of view, operation of the coal-fired plant would have been possible until 2025 at the latest. But due to the lack of reserve capacity contract and the recent rises of prices for CO2 emission certificate, we took the decision for a premature termination. We will still use up the remaining coal on stock, which will allow us another 30 days of electricity generation.

We did not order any new coal. The assets related to the coal-fired generation, Dürnrohr, are completely written off. Therefore, this decision will not have any impact on the result of the current financial year. The third main driver for lower results are, as envisaged today, the reduced tariffs in our Austrian segment for Networks, which reflect a lower regulatory cost of capital.

Before moving on to the key financials, I would like to present some further highlights, which occurred during the first 6 months of our financial year. Wind conditions have been very favorable during the reporting period. In combination with the continuous expansion of our generation capacities, our wind activities are contributing substantially to our results. As of now, our total installed wind capacity is 336 megawatt, and we are currently working on the construction of another 3 wind parks with a total capacity of 31 megawatt. Our midterm goal remains unchanged. Subject to market conditions, we intend to grow our wind capacity up to 500 megawatt.

On the 10th of April, we finally received the decision of the ICSID court on our arbitration case against Bulgaria, which was continuous since 2013. Please note that part of these claims were already settled out of court in 2017. This out-of-court settlement with the Bulgarian state-owned electric company, NEK, had resulted in a positive pretax one-off effect of EUR 42 million in 2016-'17.

According to the premium and final decision received now, EVN has not been awarded any further compensation. Therefore, the decision will not have any further impact on our balance sheet or results, in other words, the whole ICSID topic is now finished.

Next, I have a positive news from Croatia and North Macedonia. In Croatia, we obtained the extension of 2 concessions for our natural gas business from 30 to 50 years. So the concessions now run until 2060. As you know, we started to set up a natural gas distribution business in the Dalmatian Coast some years ago. The business is still small but constantly growing also based on prospering tourism in that. Based on the extended concession, impairment testing triggered a reversal of impairments of the Croatian natural gas business in the amount of EUR 2.1 million.

In North Macedonia, we were successful in the tender and were awarded the license to active supply of universal service. Based on such license, we will be able to exclusively supply all household customers and small-sized businesses starting from the 1st of July 2019 at a regulatory fixed price and the guaranteed supply margin. The initial term of the license is 5 years.

In the international project business, we received 4 new contracts for general contractor assignments in Poland and Lithuania. These new projects have been -- have a total contract volume of about EUR 65 million.

And finally, spring is always the time when the rating agencies complete the annual review of their credit ratings of EVN. This year, the outcome is very satisfactory as we received the upgrades from both the agencies.

Already in April, S&P upgraded EVN from A- to A with a stable outlook. And in May, Moody's upgraded EVN from A2 to A1 with a stable outlook too. Our goal is to maintain such a solid A category ratings in the future.

Let me now continue with the key financials of the first half of our financial year. The group's revenue remained almost stable in a year-to-year at EUR 1.2 billion. Positive valuation effects from hedges for the marketing of electricity generation as well as an increase in renewable generation and heat sales were contrasted by, among others, a price and volume related decline in the Networks Segment.

We already mentioned negative earnings contribution from EVN KG was the main reason for the decline in EBITDA by 29.9% to EUR 330.3 million. Based on an almost stable development of depreciation, amortization including effects from impairment testing, the group's EBIT was down by 41.8% and EUR 198.1 million whereas the financial results showed a slight improvement. In total, we generated a group net result of EUR 129 million during the first half of the financial year, which corresponds to a decline by 43.8% year-on-year.

Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Net debt, including noncurrent personal provisions, rose by 8% over the level on the 30th of September 2018 to about EUR 1 billion. Gearing increased from 23.5% to 25% during the reporting period. Our strong balance sheet structure forms the basis of our pursuit of organic growth opportunities in our regulated and stable Austrian activities. We plan to invest up to EUR 400 million per year over the coming years. Therefore, roughly EUR 300 million annually are dedicated towards network's renewables and drinking water in Lower Austria.

Before we go through of -- 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 development segment illustrates the key drivers of our performance during the reporting period. We already mentioned impacts of our sales company, EVN KG, which is reported in the Energy Segment, become clearly visible as well as those factors which negatively affect the performance in the Generation, Networks and Environment segments. On the positive side, we are reporting today slight improvement EBITDA result in Europe segment.

This is a very general walk-through. Let's now move to the next slide, which covers the Generation Segment in more detail. Wind generation in this segment was up. We benefited from the operation of our additional wind capacity, favorable wind conditions. Hydrology was good but still below the even better water flows we saw a year ago.

Thermal generation volumes declined year-on-year given the decline in contractual reserve capacity, which I mentioned earlier. Based on these developments, total electricity generation volumes in the segment declined by 13.2%.

When comparing the profit and loss statement, please bear in mind that the Generation Segment now includes our thermal waste incineration plant in Zwentendorf, which resulted in a respective increase in revenue, operating expenses and depreciation. Apart from this, revenue also benefited from the increase in renewable electricity generation.

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 by 4.9% to EUR 99 million and EBIT by 15.8% to EUR 67.7 million.

On the next slide, I will continue with the Energy Segment. Energy sales in general suffered from the mild winter in Austria. However, we need to differentiate when looking at the development of sales volumes. Natural gas and heat sale volumes were down due to the warm temperatures. Electricity sales volumes in contrast increased due to new contracts with industrial customers.

We were able to offset conserving temperature-related development. Both revenue and operating expenses in this segment increased based on the valuation of hedges related to the marketing of owned generation, respectively, the procurement of primary energy carriers and emission certificate. The increase in operating expenses was additionally driven by the development of market prices.

Our supply company, EVN KG, which is at equity consolidated with operational nature suffered from the valuation of hedges and higher procurement costs as already explained earlier in this call. Based on these developments, the Energy Segment reported EBITDA of minus EUR 15.3 million and the EBIT of minus EUR 25 million.

On the next slide, I will present the developments in our Networks Segment. Higher temperatures also slowed the development of the network volumes. The natural gas distribution volumes were additionally affected from the reduced use of the thermal power plants in Lower Austria.

Apart from these volumes effects, the decline in revenue also reflects a reduction in network tariffs for both electricity and natural gas, which became effective as of the 1st of January 2019. These tariffs reflect a lower weighted average cost of capital, which applies for the new 5-year regulatory period.

For electricity distribution, the new regulatory period starts this year while natural gas distribution already a year ago. Operating expenses were up due to higher upstream costs for network stabilization effects. In total, EBITDA was down by 18.8% and EUR 148.8 million, and EBIT was down by 29.4% at EUR 87.4 million.

On the next slide, I will continue with the South East Europe segment. To start with, I would like to briefly remind you of 3 topics concerning South East Europe, which I already mentioned in the beginning of the call, which are also described in more detail in our quarterly report.

In North Macedonia, we received a license to exclusively supply households and small companies. In Croatia, we received the extension of 2 natural gas supply concessions. Finally, for Bulgaria, we received the decision dates.

Now for some more volume developments in that region. Even though the temperature-related energy demand was below the long-term average in Bulgaria and Macedonia, Network and especially Energy sales volumes were up in the segment. Higher electricity sales volumes were due to the growth in the Bulgarian liberalized market.

In Bulgaria, the invoicing method of 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 5.2% decline in revenue in spite of positive Energy sector development. So our 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 with EBITDA of EUR 54 million and EBIT of EUR 24.3 million.

I would like to conclude my presentation of this segment with the Environment Segment. I would like to start with the developments in the international project business. We received 4 new contracts for general contractor assignments in Poland and Lithuania.

The new wastewater project have a total contract volume of EUR 65 million. The order book was about EUR 255 million at mid-April. So this number already includes the 4 new projects, which we received only then.

Our efforts to acquire the big wastewater project in Kuwait recently focused on negotiating the envisioned project financing as well as establishing the project company, which will be majority owned by the Kuwaiti state institutions. We expect the final rewarding of the contracts will be given by the local authorities during the current financial year.

Now I would like to move on to the financial performance of the Environment Segment during the reporting period. For a comparison of this segment, please bear in mind that our thermal waste incineration plant in Lower Austria was reassigned to the Generation Segment, is therefore no longer included.

The positive development of the order book in the international project business is not yet reflected in the numbers of this segment. Actually, project volume in progress was less dynamic than the previous year as the newly acquired project will only be reflected in revenue of future project.

Based on these developments, we're reporting both a decline in revenue as well in operating expenses. This share of results for equity-accounted investees with operational nature in the -- in contrast increased. In total, these developments led to a decline in EBITDA by 20.6% to EUR 13.2 million. EBIT totaled EUR 7.5 million.

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

Gross cash flow was down by 11.2% to EUR 389.2 million in the first half of this financial year, which reflects a decline in the results before income tax though partly offset by some contrasting developments. Due to the negative development of working capital as of the balance sheet date, cash flow from operating activities amounted to EUR 107.1 million and, as such, was below prior year's levels.

Cash flow from investing activities reflects the reduction of investments in cash funds and securities in the R 138 fund. Net investments slightly increased year-on-year. The focus remain on CapEx and wind parks, networks and drinking water supplies. The cash flow from financing activities mainly reflects the dividend paid for the previous financial year and scheduled prepayment of loans. The net change in cash and cash equivalents amounted to minus EUR 44.9 million.

I would like to conclude today's call with an outlook for the group. As already mentioned at the beginning of this call, we confirm today our outlook for the current financial year. 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. There are factors that could influence the group net result, including the future regulatory new framework in South East Europe as well as the progress on activities in Moscow.

I have now reached the end of my presentation of EVN's results for the first half of 2018-'19 financial year. I'm now looking forward to answering your questions.

[Operator]

[Operator Instructions] The first question is from Peter Crampton from Barclays.

[Peter Crampton, analyst]

Just 1 question for me. If I look at your energy subdivision, you're kind of EBIT loss-making this year whereas in the past, you tended to have quite good EBIT contribution in this division. I was just wondering going forward kind of what to expect from this division, what you're kind of doing to get back to an EBIT profit or bull situation?

[Stefan Szyszkowitz, executive]

Peter, you're right. The turn of the wholesale market has hit us in this year. But due to the 2 prices, decisions we made as of 1st of October and the 1st of June, yes, we will make up the wholesale increase, which we have seen in the last 2018 year.

So we are always aiming on average on the long term for higher single-digit gross margin. So this is what we are aiming for and which we try to achieve.

[Operator]

The next question is from Duncan Scott from Deutsche Bank.

[Duncan Scott, analyst]

I was just wanted to clarify firstly on the impact from the hedging valuation. I think you said it was a EUR 70 million impact at EVN KG. That EUR 70 million, is that between the end of December and the end of March? Or is that between the end of September and March? Just to clarify there. And then given that we've seen quite big impacts from the valuation of hedges in the last couple of sets of results, maybe you could talk a bit about your hedging strategy for the energy retail business.

[Stefan Szyszkowitz, executive]

Okay. Thanks. I can confirm it's a EUR 70 million from end of September to the end of March just to help give you an understanding of the volume on this.

And you're right. Due to the change in the Austrian, German market, yes, we will in the future, beginning from April on, try to have a hedge accounting on most of the volumes. It's a lot of documentary -- documentation necessary to do so, but it's better to decrease the volatility in markets, which are getting more volatile anyway.

[Operator]

[Operator Instructions] The next question is from Teresa Schinwald from Raiffeisen CENTROBANK.

[Teresa Schinwald, analyst]

I would love to -- would love you to elaborate a bit on the new renewables support law in Austria, if this helps, changes anything regarding your renewable strategy.

[Stefan Szyszkowitz, executive]

Yes, Teresa. Maybe also for the other participants, we have a political crisis in Austria. So it's very hard to judge all the projects in the legislation, which h been drafted and is now already filed in the parliament, will be handled over the next 4 or 5 or 6 or even 6 months. What we have is that we have more or less a consensus that the change of the energy system to a more renewable system with some targets to 2030, it's very ambitious. So it bears a very ambitious target. You need measures, yes, and you need a certain consensus in society how much money to spend to achieve this kinds of target. Therefore, I am not so.

Optimistic that any energy law will be voted in the Parliament, which give us the sustainable framework for the next 4 to 5 months. But I'm convinced that also regarding the political debate generally in Europe that there will be some ambitious legislation come up but maybe not before the election in September.

[Operator]

[Operator Instructions] Mr. Szyszkowitz, there are no further questions in the queue.

[Stefan Szyszkowitz, executive]

Yes, Thank you for joining today's conference call. I came to invite you to dial in again on Wednesday (sic) [ Thursday ], the 22nd of August, when we will present our results for the first 3 quarters. Goodbye.