Verbund AG

VSE:VER

Earnings Call Transcript 2021-Q1

[Operator]

Dear, ladies and gentlemen, welcome to the conference call 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 this conference. Please go ahead, sir.

[Peter Kollmann, executive]

Thank you. Ladies and gentlemen, Andreas Wollein and I would like to welcome you to our presentation for the first quarter '21. And I would like to thank you for joining today's conference call.

Before we move into analysis of our business developments, I'd like to make a few general comments about the first quarter. The year '21 started well for VERBUND with relevant energy market conditions improving despite COVID-19. Electricity wholesale prices improved above all due to rising prices for CO2 certificates. And of course, the strong commitment from EU member states towards a comprehensive decarbonization of our energy system.

As I said, COVID-19 had no detrimental effect on our strategy and on the execution of our strategy. In addition, we have reached 2 important milestones. Number one, we decided to go ahead with Limberg III, which is a very large pump storage power plant with a capacity of 480 megawatts in the Alps and investment costs of approximately EUR 0.5 billion. And the second milestone is to support our very strong sustainable track record, we placed a very innovative EU Taxonomy line, Green and Sustainability-linked bond with a 20-year maturity, senior unsecured, with an amount of EUR 0.5 billion. We had very, very high demand of an oversubscription of 4.4x, and we had a very positive echo across the world for this global innovation.

Against this background, let me now present the figures for the first quarter '21. At the beginning, let me highlight the most important influencing factors. Based on our hedging strategy for our own electricity generation from hydropower, the average achieved contract price was higher compared to the first quarter 2020. It increased by EUR 1.7 to EUR 47.6.

The hydro coeffecient, as you know, determining the generation from run-of-river hydropower plants was lower than the long-term average and considerably lower than in the first quarter 2020. We also saw slightly lower contributions from flexibility products in all categories of those products except intraday trading. And the results development was also negatively influenced by lower contributions from the Grid segment.

Now the impact of these influencing factors on the key figures is as follows: EBITDA decreased by 8.6% to EUR 302 million. The group result decreased by 7.6% to EUR 144.7 million. The operating cash flow was at a level of EUR 203 million, and the free cash flow was positive at a level of EUR 35.3 million. That allowed us to reduce the debt level further. Net debt decreased by 2.3% to a level of EUR 8.838 billion (sic) [ EUR 1.838 billion ].

Let me now give you our adjusted outlook for the business year '21. The adjustment is caused by higher expected average achieved contract prices. We now expect an EBITDA between approximately EUR 1.13 billion to EUR 1.3 billion and the group result between approximately EUR 480 million to EUR 590 million. The payout ratio will be between 45% and 55% of the adjusted group result. As always, the guidance is under the assumption of average hydro and wind generation for the remaining quarters as well as the chances and the risks, which we incur in our business model.

On the next page, a few charts, which will explain the influencing factors on the results development in slightly more detail. With regard to the hydro coeffecient, we saw slightly higher levels in January compared to last year, but much lower levels in February and March. At 0.99, the hydro coefficient which, as you know, is an index quantifying the hydropower generation of the run-of-river power plant was 1 percentage point below the long-term average, but, and that is a huge number, 10 percentage points below the level of the first quarter 2020.

In addition, the production from annual storage power plants also decreased by approximately 15% due to less turbining. Own production from hydropower, therefore, decreased by 760 gigawatt hours or 11% compared to the first quarter 2020. Generation from thermal power plants was down by 77% or 444 gigawatt hours, stemming from decreased use of our CCGT Mellach for congestion management. Generation from wind power also decreased by 62 gigawatt hours or close to 20% due to less favorable wind conditions in Austria, Germany and Romania.

A second important influencing factor on our results are, of course, the average achieved contract prices. At the end of the first quarter '21, based on our hedging strategy, we achieved an average contract price of EUR 44.9 for '21, whereas for the full year 2020, we achieved EUR 44.6. Please note that we have already hedged approximately 77% of the volumes for 2021 in the first quarter.

On a mark-to-market basis, and this is important, as of 26th of April '21, we calculate with a price of close to EUR 49. You know that EUR 1 plus or minus has a sensitivity of approximately EUR 25 million in our EBITDA line.

On the next page, on our flexibility products, as you know, this is a major trend in the new energy world, with increasing volatility in the European grid system that comes from the massive development of renewables and will continue. With our very flexible asset base consisting of CO2-free, low-cost pump storage power plants and the most modern CCGT in Austria, I think we are very well positioned to benefit from this trend through the sale of flexibility products. After a result of approximately EUR 32 million in the first quarter 2020, we registered a value of approximately EUR 31 million in the first quarter of '21, so almost the same level. The slight decrease results from lower contributions, literally in all flexibility products except for intraday trading.

Please also note that since October 2018, our Mellach CCGT has been put into a strategic reserve mechanism, under which we receive a fixed capacity payment and a payment for the generation. As a consequence, we were able to change an unpredictable volatile cash flow against a quasi-regulated, secure stable cash flow for a period of 3 years. For 2021, we maintain our previous guidance for all flexibility products of approximately EUR 90 million.

On the next page, on APG, Austrian Power Grid, you know that APG is of very high importance for the group. It has a growing importance in the European grid system. It's also important because of its regulated character. We have shown you here on the chart, on the left-hand side, the comparison between the EBITDA according to local GAAP and the EBITDA according to IFRS. We've discussed many times before that because of IFRS, there is an increased volatility, which we would like to bring back to the kind of local GAAP numbers which we have. We are in discussions -- or we have been in discussions with the IFRS board for many, many years to basically accept the regulatory account, which we have in local GAAP, also in IFRS. Things are moving in the right direction. And maybe within the next 2 years, we are going to have a regulatory account in IFRS as well, which takes out the volatility of the numbers.

In terms of the grid guidance, again, same as with the flexibility products. We maintain our guidance of approximately EUR 180 million for '21. Please note that the current regulatory period, which started at the beginning of 2018 with a WACC of average 5% will end in 2022. And from that point onwards, we will have a new regulatory period. The regulatory asset base for '21 is approximately EUR 1.9 billion, but we have a very strong growth in the regulatory asset base over the next few years.

Andreas Wollein will take us through the key financial figures and through our financial liability situation. Please, Andreas.

[Andreas Wollein, executive]

Thank you, Peter. So going to Slide 7. You see again the development of our most relevant financial key figures. So EBITDA decreased by EUR 28.4 million or 8.6%. The decrease is attributable to the Hydro segment, which was EUR 25 million lower compared to Q1 2020, mainly because of lower hydro volumes coming from our run-of-river power plants. New Renewables and the Grid segments were also down by around EUR 9 million and EUR 3 million, mainly due to less favorable wind conditions in all our markets in which we are active in and lower contributions from the congestion management and cross border capacity options in the Grid segment. All Other segments and the Sales segments were higher by around EUR 0.4 million or -- and EUR 8.3 million compared to quarter 1 2020.

The increase in the Sales segment is coming from higher contributions from sales to end customers due to lower purchasing costs. Depreciation remained equal, but the financial result improved significantly from minus EUR 10 million to plus EUR 3 million. This was mainly attributable to the other financial result, due to the positive measurement of securities according to IFRS 9.

The lower earnings contributions from interest accounted for using the equity method had a negative effect. Lower interest expenses because of the bond repayments in 2020 show a clear positive effect. The group result, therefore, decreased by around EUR 12 million to 7 -- or 7.6%. The EBITDA margin increased strongly to a level of around 45%. EBIT margin also increased from a level of around 19% to around 31%. The reason for this was mainly a strong decline in the electricity revenue. This effect can be attributed primarily to the recognition of changes in the value of electricity derivatives in profit or loss in accordance with IFRS 9. The offsetting measurement effects are presented under the procurement cost. So the valuation does not have any impact on the results development.

Finally, I would like to mention the additions to tangible assets, which were based on our CapEx plan above the previous year's level at around EUR 100 million. The additions concerned mainly the hydropower plant turbine in Bavaria in Germany as well as our major equity investments.

Moving on to Slide 8. You see the development of the operating cash flow, which was down compared to the first quarter 2020, showed a decrease of 31.7% to EUR 203 million, mainly due to margin payments in our electricity trading business. The free cash flow showed a decrease from EUR 150.2 million to a level of EUR 35 million, caused by lower -- the aforementioned lower operating cash flow, as described before, and increased investment activities. Net debt decreased slightly to around EUR 1.839 billion. The gearing decreased from 27% at the end of 2020 to 26% at the end of the first quarter 2021.

Moving on to Slide 9, mentioning a few words about the development of the financial liabilities. You see here the debt maturity profile, which shows a total repayment of only EUR 30 million in 2021, with the peak in 2024, which is based on the repayment of fixed interest from in the amount of EUR 500 million. We also see that we have, of course, sufficient financial flexibility granted by our EUR 500 million syndicated loan facility, which is undrawn and is available until 2023.

The total amount of our financial liabilities is currently around EUR 826 million. The average interest rate on our debt is around 2.3%, 95% of our debt is subject to fixed interest rates. In 2021, the development of the external ratings of VERBUND was stable so far. So S&P rating of VERBUND AG remained unchanged at single A flat, stable outlook. Moody's rating also remained unchanged at the level of A3, stable outlook. The rating development is a result of the numerous measures VERBUND has taken in the past to increase cash flows and the improving market environment for our business model.

Now let me hand over to Peter again for presenting the CapEx plan.

[Peter Kollmann, executive]

Thank you, Andreas. Yes, the total CapEx for the 3-year period from '21 to '23 is EUR 2.25 billion, split into growth CapEx of EUR 1.37 billion and maintenance CapEx of EUR 884 million. The main part of the growth CapEx, approximately EUR 728 million, will be invested into the regulated grid business, especially into the 380 kV Salzburg line in order to increase the capacity to integrate New Renewables and better address the volatility and congestion in the grid system.

In addition, VERBUND is also investing into New Renewable projects and selected hydropower plants. The investments relate to Austria and Germany. In addition to the growth CapEx, we are planning to invest around EUR 884 million into maintenance between '21 and '23. Please note that the CapEx plan does not include the acquisition of Gas Connect Austria nor the hydropower plant Limberg III as those 2 were based on our midterm planning.

Now on the next page, the outlook. As you know, key parameters for the development of our operational business are prices and hydro volumes. At the end of the first quarter '21, we have hedged approximately 29% of our hydro generation at an average price of EUR 49.2 for 2022, which is approximately EUR 4.6 above the level of the full year 2020.

On a mark-to-market basis, as of the 26th of April, the average achieved price for '22 would be at a level of EUR 56.9, which is approximately EUR 12.3 above the 2020 level. We have also hedged approximately 13% of our hydro generation for '23 at an average price of EUR 55. The mark-to-market valuation shows a level of EUR 58.4 for '23.

And with regard to the year-to-date hydro situation, we have to report a hydro coefficient of 0.91, which is 9% below the long-term average.

Now on the basis of the aforementioned developments, the guidance for the full year '21 is now an EBITDA of approximately between EUR 1.13 billion and EUR 1.3 billion, and a group result of approximately between EUR 480 million to EUR 590 million. Of course, under the assumption of average hydro and wind generation for the remaining quarters of the year.

For the entire year '21, VERBUND plans to pay out between 45% and 55% of the group results after adjustment for nonrecurring effects.

Now as always, at this point, I would like to highlight the sensitivities. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 7 million in the results; a deviation of plus/minus 1% in the generation from wind power has an impact of EUR 0.4 million in the group results; and a deviation of plus/minus EUR 1 in the wholesale price has an impact of EUR 3.6 million in the group results as we already have a very high hedging level for '21.

Now with that, we have come to the end of our presentation, and Andreas and I will be ready to receive your questions, please.

[Operator]

[Operator Instructions] And first question received is from Lueder Schumacher of Societe Generale.

[Lueder Schumacher, analyst]

Two quite specific questions from my side and one general one. The first one, as you mentioned, Peter, that the hydro coeffecient year-to-date is 0.91. Quite low, obviously. Is that mainly due to a delayed snow melt, freezing temperatures or on seasonally low temperatures lasting longer than usual, i.e., it's very likely to normalize going forward?

The second one is on New Renewables. Are you making any progress in terms of capacity additions? Are you currently participating in any auctions for solar or wind?

And the more general question is on the general markets development. You're probably just leaning back, I can almost see the champagne corks popping. I mean carbon at EUR 55, German coal '22 is trading at EUR 68. We had very cold -- we had cold weather conditions, some strange things going on in the German market as well. Gas plants not available. Coal becoming a swing producer. So what do you make out of all of this? Can European energy markets still deal with the winter that is -- well, winter is highly cold unlike the previous 3 winters. And how do you see few commodities and power prices going forward?

[Peter Kollmann, executive]

Well, first of all, I have to say that my personnel profit and loss, i.e., Peter Kollmann's profit and loss is going to go down because on the last conference call, I said that I would pay for a nice lunch in Paris, if CO2 prices would go to where they went now. I must say that I have been wrong in terms of my predictions. However, that is, of course, very, very good news for VERBUND.

Now I will comment on the more channel question which you asked. But before that, I would like to comment on your other 2 questions. First of all, the 0.91, yes, it is low. And yes, you're right. It is a result of delayed melting of snow. That would have been great for the tourist season. Unfortunately, because of COVID-19, all the skiing facilities in Austria were closed. So nobody really took advantage of the cold weather and the snow, which lasted much, much longer than in previous years.

You're right that it will normalize because it will get warmer and the snow will come down, so we just have a delayed effect. But then again, climate is extremely difficult to predict. Are we going to have a very dry fall or very wet fall, we just don't know. If we take everything into consideration, obviously, we calculate on the basis of average hydro conditions for the rest of the year.

In terms of the New Renewables, as you know, we have been quite active in terms of participating in M&A processes. We also have looked at some potential development projects. On the inorganic, i.e., on the M&A front, we have not been successful. The main reason is that we have not deviated from our discipline, i.e., it is always possible to justify an investment by simply changing the power curve or by changing the duration of the assets or discount rates. All that, as you know, has a huge impact on the IRR calculation. That is something we have not done. As a result of that, we have not been successful in winning on any of those M&A processes, although we continue to focus on that area.

What we have done is, we have gone into a joint venture with a very large land owner in Germany. And there, we are planning to develop approximately 1,500 megawatts of solar in Germany, that is sort of like a medium-term project.

Now on the more general question, I'm quite surprised about the large increase of CO2 prices. The power price, of course, is a function of the large increase in CO2 prices and in commodity prices. We see a situation that is currently very hard to predict. We're going to have some EU action in June, which is going to be interesting to observe.

I give you my personal opinion, as always, on these conference calls. I think that there is a lot of speculative activity in the CO2 price because traders and hedge funds think that the CO2 price has just more momentum on the upside than on the downside given the political framework. Some people comment that it will be very difficult for politicians now to argue for lower CO2 price. Therefore, people think that it might well go up to EUR 60.

We are cautious, yes. Why? Because if the CO2 price and if power prices go up, we have a very, very positive impact in terms of our business. However, if the CO2 price goes down from where it is today, we are well prepared, which I think is important from a business point of view.

Longer-term predictions of power prices, by definition, are very hard, but I would like to make a comment which I have made before and which I think is getting more valid. We have now not only seen from German industry but also from the Federation of the French industry that they have seen and written and discussed with the political leadership in those countries that it is very hard for an industry, which is already suffering through COVID-19, to deal with the very high power prices. They basically argue that the power price and the entire climate action should not be solely focused on that specific area, but it should take a broader perspective.

What do they mean? They basically mean that it is not just the energy production which is responsible for CO2 emissions, but it is agriculture, it is traffic, it is buildings, it is heating, it is many, many other aspects. And they feel that all those other aspects need to be taken into consideration as well. And the focus purely on CO2 should be decreased in order to get to a more competitive level in power prices for the industry. I think that is a very valid argument. This is something that is going to be discussed a lot within the next 6 to 12 months and certainly a place which we need to observe.

[Operator]

[Operator Instructions] And the next question is from Wanda Serwinowska of Credit Suisse.

[Wanda Serwinowska, analyst]

Wanda Serwinowska, Credit Suisse. As Lueder asked 2 of my questions, I got only 1. So I would like to ask about the pipeline because you are growing the renewables outside Austria, you mentioned 1.5 gigawatts to be built. Can you share more details? Can you share the time line? How much money do you want to spend? I assume it's not included in your CapEx program so far. What returns are you looking for? If you could give us a rough number, a number of what plus spread? What is the EBITDA contribution? And do you really expect to build 100% of the pipeline? So any details would be much, much appreciated.

[Peter Kollmann, executive]

Well, today, when you go to the area where we have entered this joint venture with the landowners, what you will see is agricultural fields and nothing else. So we are -- we're at the very beginning of a project there. We still need to get access to the grid. We need to build. We need to develop.

But I'm more than happy to give you a number in terms of sort of like the framework which we're looking at. We have announced that we would be developing approximately 1.5 gigawatts, as you have mentioned. I give you a very rough framework in terms of CapEx. It would be around EUR 500 million in CapEx, it's actually below that, but I just want to give you a round figure. The returns, which we're looking at is, we're looking at returns which are above -- obviously, above our WACC in order to generate EVA. The WACC which we are currently using is around 4%, and we have a hurdle rate for this project above the 4%.

I will not give you a detailed figure for reasons of competitiveness and for reasons of still being at the very early stages of this. If we can develop more in that region, the landowners which we have entered the agreement with own much, much more land than the 1,500. And if the cooperation works well, which I'm currently assuming, there would be the potential to do much more.

The one thing which we should not forget is that in Germany, we have 1,000 hours of sun, whereas in other regions of Europe, we have 2,000 like in Spain. However, the Spanish market has proven to be very expensive at the moment, which is the reason why we have not been successful yet because we were not willing to, what I would consider, overpaying for pipeline or existing projects.

[Wanda Serwinowska, analyst]

Okay. Very, very quick follow-up. You said EUR 500 million of CapEx per gigawatt or for 1.5 gigawatts? Because I think...

[Peter Kollmann, executive]

For 1.5.

[Wanda Serwinowska, analyst]

Okay. So it's a bit lower, okay. So -- and then if I decide to assume that you can put the first megawatt in 2 years' time given that you are at the very beginning of the journey, and are you able to sign any PPAs given that the PPA market has started to develop in Europe?

[Peter Kollmann, executive]

Well, that's a very interesting one. We're observing the PPA market in Central Europe very, very carefully. As you know, Central Europe is much slower in the development of a PPA market than Spain. Spain has a very well-established PPA market. And in Germany, it's only starting. If we are -- if we were able to enter interesting, long-term PPAs in Germany, that is something we'll definitely look at.

[Wanda Serwinowska, analyst]

And the very last thing. Do you expect more upside on the capacity in Germany given the targets announced by the German government to accelerate the energy target? Or is it still too early to say?

[Peter Kollmann, executive]

You mean the target for the renewal build-out or the CO2 reduction target?

[Wanda Serwinowska, analyst]

The CO2 reduction. Because if Germany wants to become carbon neutral by 2045, I mean they need to double or triple or need to really, really increase the renewables build-out in Germany. So do you see much more upside there? Or is it still too early to say?

[Peter Kollmann, executive]

Me, personally, I'm critical about those numbers. I still see huge challenges.

[Operator]

As we received no further questions, I hand back to Mr. Kollmann.

[Peter Kollmann, executive]

Yes. I would like to thank you, as always, for very interesting discussions. And Andreas and I will always be available should you have any further questions or if there are any additional points which you would like to discuss.

With that, please stay healthy, get vaccinated, hopefully quicker than we here in Austria, and very much look forward to seeing you all, hopefully, in person over the next 6 months. All the best. Bye.

[Operator]

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