EVN AG

VSE:EVN

Earnings Call Analysis

EVN's Renewable Expansion and Mixed Financials

EVN experienced mixed results in the first three quarters of the financial year. Group revenue fell by 13.9% to €2.5 billion due to lower wholesale prices. The renewable segment performed well, with a rise in generation from 76% to 84%, and they are on track to reach 500 MW of wind capacity by year-end. Despite higher personnel expenses and an impairment loss, the group’s EBITDA was €657.9 million, and net debt at €1.1 billion. EVN expects a group net result near €460 million and maintains an investment forecast of €700-900 million annually, focusing on network infrastructure and renewable energy.

Introduction and Market Environment

During the first three quarters of their financial year, EVN experienced a mixed market environment. Mild temperatures across their markets led to reduced energy demand, coupled with changes in customer behavior towards energy-saving measures and increased self-generation using photovoltaic equipment. The stabilization of wholesale electricity and energy carrier prices was a positive factor, as prices had previously reached historic peaks.

Renewable Energy Expansion

EVN continued its investment in renewable energy projects, with the repowering of an 8-megawatt wind park completed and a new 22-megawatt wind park in Paasdorf on track for completion by year's end. Additionally, work began on a significant repowering project in Prellenkirchen, increasing capacity from 14 to 48 megawatts by the second half of next year. EVN remains on course to reach its 2030 wind energy target of 770 megawatts, with a major milestone of 500 megawatts expected by the end of the calendar year. This expansion is set to boost average annual wind generation to 1.3 terawatt hours.

Financial Performance

EVN's group revenue was down 13.9% year-over-year to EUR 2.5 billion, mainly due to lower wholesale prices and reduced revenue from electricity generation in South-East Europe. Additional factors included lower gas network prices and volume effects, as well as a reduction in grid network tariffs in Bulgaria. Personnel expenses rose by 16.8% due to workforce increases and collective bargaining adjustments. Despite higher operating expenses related to impairment losses on outstanding receivables from a project in Montenegro, the share of results from equity-accounted investees improved significantly.

Networks and International Projects

The Networks segment saw mixed results due to mild weather conditions and shifts in consumer behavior. Network distribution volumes for both electricity and natural gas decreased. However, higher system network tariffs for electricity led to a revenue increase in this segment. The international project business faced revenue declines, mainly due to the near-completion of a wastewater treatment project in Kuwait.

Segment Analysis and Outlook

In the South East Europe segment, electricity network sales volumes increased, offsetting the effects of a warmer winter. Despite this, revenue dropped to EUR 1 billion due to lower electricity prices and network tariffs in Bulgaria. The favorable regulatory environment this year in Bulgaria provided benefits that are expected to reverse next year. The Environment segment faced revenue decreases due to the advanced project status in Kuwait and an impairment loss of EUR 22.5 million for a project in Montenegro.

Investment and Dividend Commitment

EVN reaffirmed its commitment to annual investments ranging from EUR 700 million to EUR 900 million, focusing on network infrastructure, renewable generation, and drinking water supplies. The company also expects to maintain a dividend of at least EUR 0.82 per share. Looking forward, EVN's guidance remains cautiously optimistic, reflecting the typical seasonal fluctuations in energy sales.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to EVN's results for the first 3 quarters of 2023, 2024 financial year. [Operator Instructions] Let me now turn the floor over to Stefan Szyszkowitz.

[Stefan Szyszkowitz, executive]

Welcome, everybody, to EVN's conference call on the results for the first 3 quarters of this current financial year. The first 9 months of our financial year were influenced by mild temperatures in all three markets and therefore, low energy demand. We are also still observing changes in customer behavior towards a reduction in energy consumption through energy-saving measures and increasing own generation volumes from customer operated photovoltaic equipment as well.

Wholesale prices for electricity and energy carriers stabilized again at substantially lower levels as compared to the historic peak we have seen in the previous year. Framework conditions for renewable generation were favorable. Wind condition improved year-on-year, but were slightly below average. Water flows were above the long-term average.

The expansion of our renewable generation capacities is well on track. In June, we completed the repowering of an 8-megawatt wind park. The construction of a new 22-megawatt wind park in Paasdorf is progressing as planned and will be completed by the end of this calendar year. And we started a large repowering project in Prellenkirchen, which will increase its capacity from 14 to 48 megawatts once commissioned in the second half of next year.

I confirm our 2030 expansion target for wind, which is 770 megawatts. Currently, we stand at 478 megawatts. By the end of this calendar year, we will reach the historic 500-megawatt milestone. With this, we will reach a scheduled average annual wind generation of 1.3 terawatt hours.

The additional renewable capacities have a positive impact on our share of renewable generation, which was up from 76% to 84% during this reporting period. I also confirm our total annual investment, which will remain within the level of EUR 700 million to EUR 900 million. Lower Austria will account for around 3/4 of this which is almost half earmarked for the network infrastructure.

Let me now continue with the key financials on the first 3 quarters. Group's revenue was down by 13.9% in year-on-year to EUR 2.5 billion. The main reasons were the decline in wholesale prices, which reduced revenue from electricity generation in South East Europe segment.

Other reasons include price and volume effects in the gas network as well as a reduction in grid network tariffs in Bulgaria, which reflects the regulatory adjustment of the overcompensation for additional cost of covering network losses in the prior year. In addition, revenue at the international project business also declined year-on-year because of the already largely completed wastewater treatment plant in Kuwait.

In line with the development of wholesale prices because of electricity purchases from third parties, primary energy expenses were down on a year-on-year. The cost of materials and service also decreased and reflect the development of revenue in the international project business.

Personnel expenses increased by 16.8% compared to prior year which reflects the necessary increase in workforce and adjustments according to the collective bargaining agreement as well.

Other operating expenses went up due to the impairment loss on the outstanding receivables for our wastewater project in Montenegro. This impairment loss was already recognized in the first quarter following the arbitration judgment.

The share of results from at equity accounted investees improved to EUR 4.2 million after minus EUR 157.7 million in the previous year. Despite an overall year-on-year improvement in EVN KG, our energy supply business is still under pressure and EVN KG is reporting a loss. This was partly due to an impairment of natural gas inventories, which were produced in the past as a strategic reserve to ensure supply security of our customers.

Other challenging factors include strong competition, energy savings and increasing electricity generation from customers' own photovoltaic systems. All of these developments made the planning of sales volumes more difficult.

In total, group EBITDA amounted to EUR 657.9 million. Scheduled depreciation and amortization increased by 5.4% year-on-year, reflecting our higher investment program. Hence, group's EBIT totaled EUR 399.9 million, which means an improvement by 11.3%.

Financial results improved to EUR 162.3 million, mainly due to the higher dividend from Verbund and the better performance of our fund for pension obligations. In addition, last year was negatively affected by foreign exchange effects. In total, we generated a solid group net result of EUR 479.6 million in the first 9 months of this financial year.

Now let's move on to the next slide, which provides information regarding the group's balance sheet structure. Balance sheet totally decreased by 2.7% compared to the financial end '22/'23. Whereas noncurrent assets were relatively stable, in total, the decline in current assets were caused by a reduction in trade receivables, receivables from EVN KG, from liquidity settlement by EVN Group and receivables from hedges. Declines were also recorded in cash fund investments and in cash and cash equivalents.

As of the end of June, EVN's net debt amounted to EUR 1.1 billion and was below the level as of the end of September '23. Correspondingly, gearing ratio stood at 17%. But with the volume of investment, we expect an increase of net debt by the financial year-end.

Our financial flexibility remains solid. As at the end of June, EVN had contractually committed undrawn credit limits in the amount of EUR 835 million. Our declared goal is to maintain a solid A category ratings in the future. To achieve such things, we are strictly monitoring the adjusted target ratios of both of our rating agencies.

Therefore, we use the net debt-to-FFO ratio as a KPI to manage our financial performance, investments and capital structure. Currently, the ratio is about 1.4. With growing investments over the coming years, the ratio will increase. However, our aim is to keep a net debt-to-FFO within the range of 1.5 to 2.0.

On the next slide, I will present the developments of our segments in more detail. First the Energy segment. Energy demand in this segment was negatively influenced by the mild temperatures. Hence, energy sales volume to end customers dropped year-on-year.

This development was intensified by the challenging framework conditions we are currently facing in our supply company EVN KG, increasing competition as well as energy saving efforts of our customers and their growing own generation from their photovoltaic systems have further intensified the decline in energy sales. Hence, volume forecasts are becoming more and more difficult.

Revenue dropped to EUR 626.7 million. The main factors for this development are, on one hand, lower wholesale prices and the resulting lower valuation effects from hedges; on the other hand, the reduced use of the power plant Theiss.

Operating expenses decreased year-on-year by 16.9%, which mainly reflects lower primary energy cost for electricity and heat generation. The earnings contribution from the equity accounted investees amounted to minus EUR 107.4 million, up from a loss of minus EUR 264 million in the previous year. This is mainly resulting from the supply business in EVN KG.

The loss recorded by EVN KG was partly due to an impairment loss of natural gas inventories purchased in the past as a strategic reserve to protect supply security. The impairment equaled EUR 37.3 million at the end of the third quarter.

EVN is also a leading provider for e-charging infrastructure. We currently operate about 2,900 charging points. Based on these charging points and warming agreements with other operators of e-charging stations, we have issued 19,500 e-charging cards. In total, segment EBITDA amounted to minus EUR 19.1 million and EBIT totaled minus EUR 39 million.

Let us now turn to our generation segment, which has shifted almost entirely to renewable energies over the years. Electricity generation volumes in this segment increased by 14.3% on a year-to-year due to the rise in renewable generation volumes. The main reason for this positive development are the year-on-year increase in wind and water flows and the expansion of renewable energy capacity.

Volumes from thermal energy sources further declined year-on-year due to a further reduced use of our Theiss power plant by the Austrian network transmission operator for network stabilization. Revenue decreased despite higher production volumes by 9.1% to EUR 334.5 million. The main reason for this development were a declining market prices.

Operating expenses were year-on-year lower due to the decline in the Energy Crisis Contribution for electricity. This Austrian windfall levy was EUR 10.6 million in the first quarter of our financial year. Thereafter, in line with the new legal regulation, which became effective in January, no further payments were required. The earnings contribution from the equity accounted Verbund Innkraftwerke also declined year-on-year due to lower market prices.

All in all, EBITDA amounted to EUR 193.6 million. Based on higher scale of depreciation, amortization because of our investment program, segment EBIT stood at EUR 159.3 million.

Let's continue with the Networks segment. The very mild weather conditions and the change in consumer behavior in terms of energy savings on one hand and increased proportion of consumers on the other also impacted our Networks segment. Because of these developments and the lower use of our Theiss power plant for network stabilization, network distribution volumes for electricity and natural gas decreased year-on-year.

Despite the lower distribution volumes, segment revenues increased to EUR 508.5 million due to the higher system network tariffs for electricity, which compensated lower revenue from natural gas. A positive revenue contribution was also recognized by our Internet and telecommunications services company.

Operating expenses decreased due to lower upstream network costs because of decreased tariffs. In total, EBITDA was up to EUR 226.8 million. Taking into account higher depreciation and amortization due to a high investment level, EBIT totaled EUR 102 million.

Let's move on to the South East Europe segment. The network sales and energy sales volumes were influenced by contrasting factors: higher electricity network sales volumes by household and industrial customers were able to offset the effect from the warmer winter temperatures, whereas energy sales volume showed a stable development in North Macedonia but declined in Bulgaria due to mild temperatures.

Revenue decreased to EUR 1 billion due to the downward trend in electricity prices and lower network tariffs in Bulgaria, the later used to offset the overcompensation of costs from network loss coverage in prior year in accordance with the regulatory methodology. Corresponding to the development of revenue, operating expenses are lower due to a decrease in cost offered by electricity purchases and energy tariffs.

All in all, EBITDA amounted to EUR 162.5 million and segment EBIT totaled EUR 100.1 million. As a general comment, please note that the benefit in Bulgaria also in the current financial year from low procurement costs from network loss is due to the decline in market prices as compared to levels reflected within the regulation.

In line with the regulatory methodology, these higher results will be adjusted by lower tariffs in the next financial year. This means that we will have an extraordinary high result in South East segment this year, which will reverse next year.

Finally the Environment segment. In our international project business, we are currently working on nine projects. At our project in Kuwait, we reached a peak in the summer of the previous year. The waste water treatment plant was completed at the end of December, and the test run was successfully finalized. The second part of the project which relates to the infrastructure of the pipe system is also about 3/4 complete.

I would also like to comment on the status quo of our intentions of the invest WTE. The focus of EVN Group remains on the core energy business. Therefore, we are continuing to evaluate additional strategic options for WTE in line with the investor feedback received from the structured sales process for the complete sale of WTE that was terminated on the 4th of April 2024.

Against the backdrop of all these development, revenue in the segment decreased year-on-year to EUR 296.7 million. This is a result of the advanced project status in Kuwait. Correspondingly, operating expenses declined.

In addition, an impairment loss of EUR 22.5 million was recognized on the outstanding receivables for a wastewater project in Montenegro. This impairment was already recognized in the first quarter following the arbitration judgment.

In total, segment EBITDA dropped to EUR 22.2 million and EBIT amounted to EUR 4.6 million. Financial results nearly matched last year's level and stood at minus EUR 18.4 million. All in all, result before income tax amounted to minus EUR 13.8 million.

The next slide shows the development of our group cash flows. Gross cash flow was lower year-on-year at EUR 890 million despite the improvement in the result before income tax as well as higher dividends from equity accounted investees. The main driver for this development was the correction in the previous year to the higher negative results from the equity accounted EVN KG.

Cash flow from operating activities totaled EUR 829.1 million, reflecting the development of working capital. This also consider last year's negative effect caused by the liquidity settlement for EVN KG and the related higher capital commitment for working capital.

Cash flow from investing activities amounted to minus EUR 312.8 million. The increasing investment level was compensated by the sale of cash funds. The higher investment also contrasted by higher construction and network subsidies in the network and heating business. In addition, there was the capital contribution provided by EVN to EVN KG in the previous year.

The position -- cash flow from financing activities amounted to minus EUR 486.4 million and included capital repayment and the dividend payment for the previous financial year. The net change in cash and cash equivalents amounted to EUR 30 million.

Let's come now to the outlook for this current financial year. After the first 9 months of this financial year, I can specify our outlook for this financial year.

We expect group net results to be at the upper part of previously communicated range of EUR 420 million to EUR 460 million based on the development of the operating business and under the assumption of a stable regulatory and energy policy environment. The dividend is expected to equal at least EUR 0.82 per share for the current financial year.

As already mentioned at the beginning of this presentation, total annual investment will be in the range of EUR 700 million to EUR 900 million. The core areas are investment in network infrastructure, renewable generation and drinking water supplies.

Finally, I would like to invite you to join us on the 2nd of October for our investor webcast, which is entitled EVN, the Future of Energy Transition, Innovation, Midterm Targets. Please expect a 1-hour webcast followed by a Q&A.

We will formally introduce our new CFO and the CTO to you. Together with my two new colleagues, we will focus on selected innovation project, which will demonstrate how EVN successfully is positioning itself in the new business areas we see evolving through the transition of our industry.

Furthermore, based on the positive feedback we've received from analysts and investors at our last year's Capital Markets Day, especially with respect to our long-term financial perspective, we appreciate that the market participants has been asking us for further transparency regarding the mid-term financial view. Therefore, we would like to use the opportunity to accommodate such requests a bit further.

That's the end of my presentation. Look forward to answering your questions.

[Operator]

[Operator Instructions] And the first question is from Patrick Steiner, Kepler Cheuvreux.

[Patrick Steiner, analyst]

It's Patrick speaking. Two from my side. Firstly, if you look at investments in the first 3 quarters, EUR 345 million, what's the realistic number for the full year in your view? That's first one. And the second one, if I'm not mistaken, EVN KG earnings contribution turned positive in Q3. Could you explain what were the main drivers behind that? And should we expect this positive development to continue?

[Stefan Szyszkowitz, executive]

Yes. Thanks a lot. First of all, we expect around EUR 900 million. You always know it's depending how the investment project can be finished at the end of September, so around EUR 900 million is a realistic outlook for this year, and this will be also the level of investment for the upcoming years.

And the second is, of course, you might know we have this kind of development at the third quarter is better than the fourth quarter of our business development because energy sales in the summer are always lower than, of course, in the winter period. Therefore, more or less we are peaking after the third quarter, and therefore, the outlook we gave today is a realistic outlook.

[Patrick Steiner, analyst]

All right. And specifically about EVN KG, do you expect the positive earnings contribution to continue generally over the next quarters?

[Stefan Szyszkowitz, executive]

EVN KG is, of course, facing the last year of this energy market, wholesale market turbulences and of course, especially for the security of supply of gas, as we mentioned in the presentation and also in the document, I would expect for this year something like around EUR 100 million loss for EVN KG depending pretty much at the end, and of course, what is at the balance date, the value of their rewards. Therefore, it's just an estimation.

[Operator]

The next question comes from Teresa Schinwald, Raiffeisen Bank International.

[Teresa Schinwald, analyst]

My questions are valuation related. So first one is on the impact of the derivatives valuation in the third quarter, the results of EVN KG. Can you give us a hint of how much it was, and in particular, the gas valuation? Here, I would also like to ask for a bit of an outlook because gas prices increased by EUR 5 or something since the end of June, so if we can expect a more positive impact here in the fourth quarter.

The second question is more on the segment outlook. So if -- you provided a range before for the Energy segment, the lower end and now it's looking a bit more negative. What can we look for, for a positive number and all that? And the same is actually on the other segment, if you could shed a bit more detail on that. And the third one is the usual, what's the order backlog for the Energy segment?

[Stefan Szyszkowitz, executive]

Okay. Thanks, Teresa. First, I'll take the third one as the first one, it's EUR 666 million. So it's a simple number, and therefore, I start with this.

Regarding EVN KG, as I mentioned before, I would expect around EUR 100 million at the end of September, more or less a realistic loss which is more or less 50-50 regarding operative losses and the derivatives. And of course, we will know at the end of September what the hallmark prices will be.

What was a problem this year, of course, that it was the second very warm winter. Therefore, volumes -- sales volumes were down and the need to impair the security of supply, gas stored volumes, which we did in the summer of '22 when the crisis was peaking regarding security in the winter, this went down from around EUR 61 million at the end of March to EUR 37.3 million.

And gas prices, if they go up a bit, this might be also then reduced a little bit further. But we're talking about a couple of millions up and down. So I'm not expecting here from today's point of view, a big change.

As we have seen, we have a strong result in renewable generation despite the decrease of wholesale prices because we could compensate with new capacities and new production, more or less the price reduction. But of course, it is a lower result and we have seen the heydays of last year. And of course, this will also in the future come down a further step because [ OMX ] prices are different to what we have seen.

The general outlook of the segments, if you took it on a simple line is the Energy segment is negative in comparison, generation lower prices. In the grid network, we have positive tariffs, yes, but less volumes. And South East, we will have an extraordinary good result due to this kind of regulatory situation in Bulgaria, which was very favorable, and this will be adjusted, of course, in the next year.

So next year will be a correction year in Bulgaria, but we will confirm also on our investor webcast that we expect this EUR 70 million to EUR 90 million on the midterm in South East as a more or less plannable result, which we are targeting. And of course, the outlook for the Environmental segment is driven by the impairment of the arbitrage court decision regarding Budva. So this is an extraordinary effect.

[Operator]

At the moment, there seem to be no further questions. [Operator Instructions] And we have one more question coming from [indiscernible], Societe Generale.

[Unknown Analyst]

Can you hear me?

[Stefan Szyszkowitz, executive]

Yes, excellent.

[Unknown Analyst]

Yes. Just one question regarding the guidance. Apparently, in the 3Q, in the 9 months, you already almost -- well, you derisk the guidance. May I ask why you are keeping the upper range of the guidance at this level?

[Stefan Szyszkowitz, executive]

Yes, a good point there. But we're in the energy business and in the summer quarter, the sales are traditionally the lowest. Therefore, the fourth quarter of our financial year is the weakest. And therefore, the expectation and the outlook we confirm today is a realistic one. Also, if you look on the third quarter results of the last years. So we see this pattern that the summer quarter is the weakest in our financial business year.

[Operator]

[Operator Instructions] Mr. Szyszkowitz, there are no further questions from the audience.

[Stefan Szyszkowitz, executive]

So thanks for joining today's conference call. We will publish the results for the full financial year on Thursday, the 17th of December. Have a nice day, and goodbye.