Verbund AG

VSE:VER

Earnings Call Transcript 2019-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call on the Quarter 1 2019 Results of VERBUND AG. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Peter Kollmann, who will lead you through the conference. Please go ahead, sir.

[Peter Kollmann, executive]

Thank you. I'm here with Andreas Wollein. Let us welcome you to the presentation of VERBUND for the first quarter 2019, and let me thank you for joining today's conference call.

Before we move into the analysis of the business development of VERBUND, let me make a few general comments about the first quarter. The year 2019 started very well for VERBUND. We were positively impacted by increasing contract prices for electricity and the hydro coefficient far above the long-term average. Key figures reflect this favorable energy market and operative environments. VERBUND's low-cost base and the restructuring efforts of the past have supported this positive development. The strategic positioning of VERBUND as almost 100% CO2-free, renewable producer with stable return from the high-voltage grid perfectly enables us to respond to future demands arising from changes in the energy world.

Against this background, let me now present the figures for the first quarter. At the beginning, I will highlight the most important influencing factors. Following the development of long-term futures prices at the electricity exchange and based on our long-term hedging strategy for our own electricity generation, the average achieved contract price was higher due to increased forward and spot prices for electricity. The hydro coefficient determining the generation from our run-of-river hydropower plant was considerably higher than the long-term average and above the record levels of the first quarter 2018. Furthermore, we achieved lower contributions from flexibility products, especially congestion management.

We have higher contribution from the grid segment and continued positive effect from our cost cutting and efficiency programs, which we implemented in the past few years. The impact of these factors on the key figures are as follows: our EBITDA increased by 28.9% to EUR 348 million, and the group result increased by 46.5% to EUR 178.1 million. The operating cash flow is very strong at the level of EUR 378 million (sic) [ EUR 379.8 million ], which is plus of 27%. The free cash flow after dividends was positive at a level of EUR 305 million, representing an increase of almost 27% and allowed us to reduce the debt level further. Net debt decreased by 6.3% to a level of EUR 2.4 billion.

Now based on these results, developments and the increasing level of our hedging, we narrowed the guidance range for 2019. We now expect for 2019 an EBITDA between approximately EUR 1.1 billion to EUR 1.2 billion, and a group result between approximately EUR 470 million to EUR 540 million. The payout ratio will be between 40% and 45% of our adjusted group results.

Now in the following charts, I will explain the influencing factors in more detail. Let me start with an analysis of our own generation volumes. With regard to the hydro coefficient, we saw, as I mentioned before, an excellent start into 2019. At 1.21 the hydro coefficient, which, as you know, is an index quantifying the hydropower generation of the run-of-river power plant, was 4% above the level of the first quarter 2018 and 21 percentage points above the long-term average.

However, the production from our annual storage power plant decreased by 21% due to reduced lowering of water levels and less turbining. Own production from hydropower, therefore, slightly decreased by 1% compared to the first quarter 2018.

Now the generation from thermal power plants was also down by 15.3% or 69 gigawatt hours, stemming from the decreased use of our CCGT Mellach for congestion management. Generation from wind power, however, increased by 28 gigawatt hours or close to 11% due to more favorable wind conditions, both in Germany and Austria. A second important parameter on VERBUND's results are, of course, the average achieved contract prices. At the end of the first quarter based on our hedging strategy, we achieved an average contract price for our hydro generation of EUR 37.8. Please note that we have already hedged approximately 80% of the volumes for 2019. On a mark-to-market basis, as of the 25th of April, we calculated with a price of slightly above EUR 40, and you know that EUR 1 has a sensitivity of approximately EUR 25 million on our EBITDA line.

Now the next page on flexibility products. As you know, one of the major trends in the new energy world is increasing volatility in the entire European grid system coming from -- mainly coming from the massive development of renewables. With our very flexible asset base consisting of CO2-free, low-cost pump storage power plants and the most modern CCGT in Austria, we are very well positioned to benefit from this trend through the sale of our flexibility products. After results of EUR 44 million in the first quarter 2018 from flexibility products, we registered a value of EUR 23 million in the first quarter 2019. Now where is this decrease coming from? Mainly from the low water contributions from congestion management. Please also note that since October 2018, Mellach has been put into a strategic reserve mechanism in Austria, under which we receive a fixed capacity payment and the payment for the generation. As consequence, we have changed an unpredictable volatile cash flow against the secure stable cash flow for a period of 3 years. For 2019, we adjusted our guidance for flexibility products from originally EUR 100 million to approximately EUR 90 million.

Now on the next chart. We're going to the high-voltage grid. As you know, we have interconnected capacities into 7 neighboring countries, strategically a every important asset for us as the entire European grid system gains importance. Furthermore, we very much like the regulated character of this business. Under IFRS, in contrast to local GAAP, we have high volatility in the result contribution. This is because of main difference between IFRS and local GAAP.

The chart on the left-hand side provides you with a comparison between EBITDA according to local GAAP and the EBITDA according to IFRS for the first quarter 2019 compared to the first quarter 2018 as well as our guidance for 2019. EBITDA from the grid business under IFRS increased to EUR 98 million, mainly due to high contribution margins from congestion management. Also note that we adjusted our IFRS guidance for 2019 upwards from originally EUR 170 million to now EUR 230 million.

Finally, I would like to remind you that the current regulatory period started on 1st of January 2018, with a WACC of 4.88%, pretax for existing assets and 5.2% including an investment markup for the new assets therefore, an average of approximately 5%. The regulatory period lasts from 2018 through 2022, the regulated asset base for 2019 is approximately EUR 1.5 billion.

The next slide shows how the effects described before influenced our key financial figures. EBITDA increased by EUR 77.9 million or 28.9% to EUR 348 million. This increase is a result of the renewable generation segment, which was up by EUR 81 million, mainly due to high achieved contract prices for electricity, as I mentioned before. EBITDA in the grid segment was EUR 7.6 million higher in addition to cost reduction and efficiency increased programs continue to have a positive effect on the results development. These effects were slightly counterbalanced by lower EBITDA contributions from all other segments being down by EUR 11 million, mainly from lower results in the thermal segment.

Depreciation increased by EUR 7.7 million due to the depreciation of usage rights in connection with the first application of IFRS 16. The financial result improved by 86.5% to minus EUR 2.2 million due to higher earnings contributions from Kelag as well as lower interest rates because of planned as well as unplanned repayments.

In addition, the other financial result increased due to the positive measurement of securities according to IFRS 9. The group results, therefore, increased by EUR 56.5 million or 46.5% to EUR 178.1 million. EBITDA margin remained unchanged at the level of 36%. The EBIT margin slightly increased from a level of 25.1% to 26.8%, reflecting the abovementioned effect.

Finally, I would like to mention the additions to tangible assets, which were based on our increased CapEx plan, above the previous year's level of EUR 48.1 million. The additions concerned mainly the investments into the modernization of our Austrian hydropower plants as well as investments into the grid.

On next page, you see our operating cash flow, which increased substantially compared to the first quarter of 2018, which show an increase of 27% to EUR 380 million, mainly due to higher achieved contract prices for electricity, higher tax payments had a contrary effect. The free cash flow after dividends showed an increase from EUR 240 million to a level of EUR 305.6 million. Net debt correspondingly decreased to around EUR 2.4 billion from EUR 2.6 billion. Gearing decreased from 43% at the end of 2018 to 38% at the end of the first quarter 2019.

Now let me take you through VERBUND's financial liabilities and the debt maturity profile. The debt maturity profile shows a remaining repayment of EUR 710 million in 2019, mainly consisting of a fixed interest bond in the amount of EUR 683.5 million. The debt maturity profile for the following years shows another peak in 2024 with repayments of EUR 525 million, mainly consisting of a fixed interest bond in the amount of EUR 0.5 billion.

For liquidity backup, VERBUND has access to a EUR 500 million syndicated loan facility, which is undrawn, has no net clause and is available until 2023, with 2 extension options. The facility has been renewed in December and the rating grid is solely linked to the ESG rating of VERBUND, which is a worldwide innovation.

VERBUND has access to uncommitted lines with a large number of banks, up to an amount of approximately EUR 672 million as well. The total amount for our financial ability is approximately EUR 1.8 billion, the average interest rate on our debt is approximately 3.7%, 98% of our debt is subject to fixed interest and 100% of our financial liabilities are denominated in euros.

Our rating remains unchanged. S&P rating of VERBUND is still at A-, stable outlook. The Moody's rating is at Baa1 with a positive outlook. The rating development is a result of the numerous measures, which we have taken in the past to increase our cash flow and to strongly improve market environment.

Now a short reminder on the next page on our updated CapEx plan. The volume of our CapEx plan has roughly doubled compared to the previous year, reflecting increased investments into our regulated grid business and a better market environment for investments into our hydropower business. Total CapEx for the 3-year period between '19 and '21 is more than EUR 1.8 billion, which is split into growth CapEx of EUR 875 million and maintenance CapEx of EUR 959 million. Please also take into account that we currently calculate new projects, accept projects into the regulated business at a WACC of 5% and a hurdle rate of WACC plus 2%. The main part of the growth CapEx approximately EUR 640 million, will be invested into the regulated grid business, especially into the 380 kilowatt Salzburg line in order to increase the capacity to integrate new renewables and better address the volatility and congestion in the grid system. At -- EUR 224 million will be invested into renewables, the biggest project being the construction of the run-of-river power plant in Töging in Bavaria, the project, which we acquired in 2009 when we bought the hydropower plants from the river Inn.

In addition to the growth CapEx, we are planning to invest around EUR 959 million into maintenance between 2019 and 2021, approximately EUR 300 million per year. The maintenance CapEx has increased because we invest much more into efficiency improvement projects into the hydropower segment.

At the end of the results presentation, the outlook for 2019. As you know, key parameters for the development of the operational business are prices and hydro volumes. At the end of the first quarter 2019, we have hedged approximately 45% for hydro generation at an average price of EUR 49.4, which is approximately EUR 20.1 above the level of the full year 2018. On a mark-to-market basis, as of April 25, 2019, the average achieved price would be at a level of EUR 51.9, which is approximately EUR 22.6 above the 2018 level. We have also hedged approximately 7% for hydro generation at an average price of EUR 44.4 for 2021. The mark-to-market valuation shows a level of EUR 51.3 for '21.

With regard to the year-to-date hydro situation, we have to report a very positive hydro coefficient of 1.18 as of the 25th of April 2019, which is 20% above the long-term average.

Because of the high hedging levels, we have narrowed our guidance for the full year 2019, and we are now expecting an EBITDA of approximately EUR 1.1 billion to EUR 1.2 billion, and a group result of approximately between EUR 470 million and EUR 540 million under the assumption of average hydro and wind generation for the quarters 2 to 4 as well as the chances and grid situation of the group.

For financial year 2019, VERBUND plans to pay out between 40% and 45% of the group results after adjustment for nonrecurring effect. As always, at the end, we want to highlight our sensitivities. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 5.5 million; in the group result, a deviation of plus/minus 1%; and the generation from wind power has an impact of plus/minus EUR 0.5 million; and a deviation of plus/minus EUR 1 in the wholesale price has an impact of plus/minus EUR 3.7 million in the group results.

With that, I would like to hand over to Q&A. Thank you very much.

[Operator]

[Operator Instructions] The first question received is from Duncan Scott of Deutsche Bank.

[Duncan Scott, analyst]

I just wanted to ask about the full year guidance. You've increased your guidance in the grid segment by EUR 60 million and you've lowered your guidance on the flexibility products by about EUR 10 million. So net increase of EUR 50 million. And the midpoint of the full year guidance range for EBITDA has only increased by EUR 25 million, however. So is this not an implicit downgrade of the full year guidance for the Renewables and the sales segment? And given the excellent hydro conditions year-to-date and strength in power prices, does it not feel very conservative?

[Peter Kollmann, executive]

Yes. Yes, I -- it is conservative. We -- as we have discussed, we had a very, very good start to the year with the -- with very strong hydro conditions. We have a decrease in the congestion management, actually we have a decrease in all the flexibility products, which is the reason why we lowered our guidance on the flexibility products. At the same time, mainly because of congestion management, but also because of IFRS 16, we have, as you have rightly pointed out, an increase in the guidance on the grid level. Overall, we're seeing a lot of volatility in the power price. So we have decided at this stage that we are going to increase the lower end of our guidance range. But at this point, we decided that we're not going to increase the higher end of the guidance range. We're observing another quarter, and we will then make another adjustment on our guidance at the end of the next quarter.

[Operator]

The next question received is from Lueder Schumacher of SocGen.

[Lueder Schumacher, analyst]

About 3 or rather 2.5 questions from my side. The first one is easy. It's just on the hydro coefficient year-to-date. Not quite sure if I've got the number, is it 1.19? That will be the easy one. The second one, it appears to be that your costs in the generation segment have come down quite a lot. Is it some kind of timing issue there? Or can we assume that this should remain at the same rate for the remainder of the year? And lastly, this is going back to the first question you received, it is not only the grid guidance, the EUR 60 million taken off the flex products, but we also expect 0.8 terawatt hours more hydro output, it's now 26 terawatt hours instead of the 25.2. And that's, I guess, is ignoring the hydro conditions that remain very strong. So of course, in the same direction -- I mean -- and I know you like to be very, very conservative this side of the summer. But there seem to be many moving parts that are moving just in the right direction. So just lifting the bottom of your guidance a bit, it seems to be a bit odd.

[Peter Kollmann, executive]

Yes. Lueder, let me come to the various points. But first of all, yes, it is conservative. Yes, there are a number of areas which are moving into our direction. That is true. I've mentioned before that we are extremely well positioned for the current environment. I think we're also well positioned for any future developments in the combination of a highly competitive generation combined with a very stable grid. But at the same time, what we have seen in the last few years, we have seen a lot of volatility. When we look at the flexibility products, you might recall that in 2016, we had EUR 200 million contribution from flexibility products. Last year, we had around EUR 150 million contribution.

Now we are estimating that we are going to have EUR 90 million contribution. We had an extremely dry, historically -- dry quarters, the third quarter and the fourth quarter last year, which quite frankly we didn't expect, we had a very good start of the year last year. So yes, there are lot of moving parts. Those moving parts -- a lot of those moving parts are moving into our direction. But we are still in -- at a point of the year where a number of things can change. And this is why we have come to the conclusion that, yes, we're going to increase the lower part, but we have not yet increased the higher part of our guidance. In terms of the cost base, the cost base is highly competitive in terms of our hydropower generation. It has come down over the last few years. Going forward, I would say that it is going to remain stable. There are no particular changes in terms of our cost base overall. There could be slight changes coming from the grid contributions, which has to be paid by generation. But apart from that, the cost base remains to be stable and highly competitive. Lueder, I think that, that should cover the 2.5 questions which you have had. Now on the one thing missing, the hydro coefficient. If you take the hydro coefficient of the first quarter and you assume the hydro coefficient for the remainder of the year to be at 1.0, the hydro coefficient for the whole year would be 1.04 and year-to-date it is 1.17.

[Lueder Schumacher, analyst]

1.17? That's great.

[Peter Kollmann, executive]

Yes.

[Lueder Schumacher, analyst]

So just as a -- can I get one there. So the 26 terawatt hours of hydro output you assume for the full year, that is just based on the 1.21 for Q1 and then 1 for the remainder of the year, is that correct?

[Peter Kollmann, executive]

That is absolutely correct. Yes.

[Operator]

We received the next question from Tanja Markloff from Commerzbank AG.

[Tanja Markloff, analyst]

I would be interested in your CapEx program, to what extent you may be willing to extend your potential wind portfolio as well? And which regions could be attractive, at which line?

[Peter Kollmann, executive]

Yes. In terms of our CapEx plan, in our CapEx plan, which you have seen in the presentation and which we have included in the full year presentation, we have no particular CapEx plan for onshore wind. The CapEx plan for the next 3 years, which has almost doubled, basically includes hydropower and grid. On the grid, we have this very, very large investment called the Salzburg line, which is the last segment of the 380 kV ring going around Austria, which will be a very important contribution to the grid's stability in the country, but also for the surrounding countries. If we see opportunities both on the wind side and/or on the solar side, within the EU, we are going to take advantage of that. We are -- we obviously have a huge expertise in renewable production. We also have a lot of experience and know-how in merchant production. As a result of that, if we see opportunities that are close to our business and close to our expertise, that is something we're going to look at. In terms of the hurdle rate, we are going to use the same hurdle rates as we're using for hydro, i.e., we would use our WACC plus the 2%.

[Operator]

[Operator Instructions] We received -- and the next question is from Louis Boujard from ODDO BHF.

[Louis Boujard, analyst]

Yes I -- Louis Boujard. I have 3 in fact, if I may. The first one is regarding the grid and the IFRS question. It has been 3 years in a row that your local GAAP EBITDA is below the IFRS EBITDA contribution. I was wondering if we should expect next year the trends reverse because we know that the local GAAP is taken into consideration, I think, into the 3 accounts, which is not the case of IFRS. Shall we consider that there is risk starting 2020 as a local GAAP might be above the IFRS level in terms of EBITDA contribution? And the second question is regarding hydro. Also, I'm sorry, I think that you gave some explanation on it, but maybe I missed it. I see that your reservoir indeed is pretty high and -- but in the meantime, your production and your output was slightly lower than last year. Could you please remind us what was the reason for the deviation between the level of the reservoir and the actual output that has been slightly below last year, is there any maintenance effect I'm seeing there that I missed during the explanation? And the last question is regarding your debt. You have a large bullet that will have to be refined this year, 2019. I was wondering if you could remind us what is interest rate attached to this note, please?

[Peter Kollmann, executive]

Yes. 3 questions. I will cover question 2 and 3, and Andreas is going to talk about the grid IFRS question. Let me start with the last one, the large bullet. The interest rate related to that repayment is 4.75%. So as a result of that repayment, we are going to lower our average interest rate significantly. It was 0.1, 0.2. Yes, you asked -- if I understand you correctly, you asked the question, why the production from our reservoirs has come down in comparison with the first quarter of last year. The reason is that we have a very sophisticated program how we are running our reservoirs. So it is basically a question of optimizing when we are pumping and when we are selling. And we are constantly, every day, we're constantly evaluating also in terms of our future expectation for prices both on a daily, on a weekly, on a monthly basis, when it makes sense to pump and when it makes sense to sell. As a result of that, you see differences, which are result of that optimization, yes? But there is no specific maintenance reason. There is no specific other reason, otherwise, I would have mentioned it. Andreas?

[Andreas Wollein, executive]

Yes. Maybe to add to that last question which Peter answered, I think you are fully right, we have not produced significant volumes, let's say, within our storage power plants in the first quarter, but we have now very high storage levels available for the second quarter. So there is additional potential compared to last year because of what Peter said before, it's an optimization pumping. We have good hydro situation in Q1, so we didn't have to use the storage. For the second quarter, we have more potential available.

With regard to the debt question, it's also point of refinancing. As far as that, we have a EUR 680 million repayment scheduled for the middle of July this year, based on the very good liquidity position you can see that on our balance sheet, we -- currently we have not a plan to refinance this. So we will do only a very small portion of that on a short-term basis and refinance that on a -- in the money market at very, very low rate. So you can assume that for, let's say, until the end of the year, the average interest rate goes down significantly. The third question with regard to the grid business, it is absolutely right what you were saying that we have now all of years, consecutive years in the grid business with higher returns and higher profits than allowed. Under the regulatory regime, as you know, the surplus is bundled or in a so-called regulatory account. We have currently, I think, a little bit more than EUR 200 million on -- in total on the regulatory account. It is up to the regulator to decide how he wants to use this -- the funds in the regulatory account. Our best guess currently is that he will decide or he will use this -- the funds in the regulatory accounts and -- over a couple of years. So there is a split likely over, let's say, a 5 or 10 years period where this regulatory account will be reduced. And there's a consequence there will be -- anywhere the cash outflow and also a reduction in the grid result in the next years compared to the regulatory allowed one, yes? So this is the answer to your question. It's a little bit complex, but unfortunately, as we always have explained, the system is complex to explain.

[Operator]

As there are no further questions, I hand back to Peter Kollmann.

[Peter Kollmann, executive]

Great. I would like to thank you for joining our conference call. I would like to thank you for the Q&A, and look forward to speaking to you for the next quarter results. Bye-bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.