EnBW Energie Baden-Württemberg AG (EBK) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome and thank you for joining EnBW's investor and analyst conference call on the Q3 results 2020. [Operator Instructions] I would now like to turn the conference over to Ingo Peter Voigt, Head of Finance, M&A and Investor Relations. Please go ahead.

Yes. Thank you very much, and a very good afternoon, ladies and gentlemen, here from Karlsruhe. Thank you for joining us this Friday afternoon for our investor and analyst conference call on EnBW's 9 monthly figures '20. We hope you are well and healthy even in these still unusual and even challenging times. As always, we have got our CFO, Thomas Kusterer, with us who will outline the following topics: our climate neutrality strategy, which we published on October 6; and the main effects on our performance and positioning in the first 9 months '20 in the life and circumstances of the COVID-19 pandemic. After that, we look forward to your comments and questions. And with this, I will hand over directly to Thomas to take you through the relevant figures and slides. Thomas, the floor is yours.

Ingo, thanks a lot. Ladies and gentlemen, I would like to welcome you too to our today's conference call. Let me get started with the key messages for 2020 so far. First, I would like to look at the topic that is of great importance for EnBW today and even more so in the future, our climate neutrality strategy on Slide 3. As most of you are certainly aware, we have been repositioning our business portfolio since 2013. In 2012, just 19% of total installed capacity came from renewables. By the end of this year, that figure will rise to 40%. This demonstrates the clear focus and concrete implementation of our sustainable corporate strategy. Over the [ top of that ], even before the Coal Exit Act, we voluntarily parted with about 40% of our conventional power generation capacity for environmental and economic reasons. Based on this consequent repositioning and today's political and regulatory environment, we formulated and now adopted a comprehensive package of concrete measures for environmental, economic and social sustainability. We have a clear implementation plan to attain our climate neutrality target. Starting from 2018, we will reduce emissions by 50% until 2030 to a maximum of 8.8 million tonnes of CO2. By the end of 2035, at the latest, the entire EnBW Group will no longer have any net emissions and that we'll be climate neutral. Of course, major part of the emissions reduction is the coal phase-out. Today, EnBW has 4.6 gigawatt installed capacity for coal-fired electricity generation. By 2030, we have reduced our coal capacity by about 2.5 gigawatts. The remaining roughly 2 gigawatts will be decommissioned between 2030 and 2035. These are our latest, most flexible and most efficient hot coal plants: RDK 8 in Karlsruhe, our share in GKM 9 in Mannheim as well as the lignite plant in Lippendorf. To further reduce our Scope 1 emissions, we also need to fuel switch from coal to gas to securely provide the district heating in the future. Besides that, reducing emissions from our vehicle fleet, canteens, buildings, et cetera, is important, however, will certainly play a minor role in our effort to net zero CO2 emissions by 2035. To fully decarbonize power generation, the decarbonization of gas and, finally, the availability of hydrogen will play an important role. We currently assume that hydrogen availability will increase substantially in the second half of the 2030s. To further reduce our Scope 2 footprint, we will purchase green energy to cover grid losses. We will then attain climate neutrality in our Scope 1 and Scope 2 emissions by the end of 2035, meaning we will be climate neutral in electricity generation, heat generation and our network business. After 2035, unavoidable residual emissions can be offset by purchasing recognized offsetting allowances. Our priority, however, is clearly on avoidance of CO2 emissions. Offsetting will only be used as, let's say, last resort. Let's go back to Slide 2 and have a brief look at our other key messages. In October, we issued a senior bond with a volume of EUR 500 million. Thanks to a strong demand, we were able to obtain attractive terms, a 10-year term maturity and a coupon of 0.25%. This is EnBW's third issuance in the current financial year following a EUR 500 million senior bond fund at the beginning of April and a EUR 500 million green subordinated bonds in mid-June. Ongoing growth of our Renewable Energy segment is part of our sustainable corporate strategy. Our first commercial solar park, Weesow-Willmersdorf, is the biggest solar farm in Germany that runs out subsidies. We already connected 27 megawatts to the grid in October. The total capacity of 187 megawatts is to be fully operational by year-end. Moreover, we have already taken final investment decisions for 2 more large-scale solar projects of about 115 megawatts each in Brandenburg. So despite the current COVID-19 pandemic, we continue to pursue our growth projects. With the high proportion of steady cash flows in our operating business, we maintain a robust and predictable business model. In the first 9 months of 2020, this enabled us to increase our adjusted EBITDA to over EUR 2 billion. This is an increase of more than 20%. However, our Sales segment is currently subject to a moderate negative impact from the COVID-19 pandemic. We expect that this will continue until the end of the year. Accordingly, we are adjusting our guidance for the Sales segment for this year slightly. Despite the anticipated impact of COVID-19 pandemic on parts of our operating business, on a full year basis, EnBW is maintaining its existing earnings guidance for the current 2020 financial year. I will go into this in more detail at the end of the presentation. But first, let's take a detailed look at our 9-month figures. Let me start it with a brief look at our adjusted EBITDA on group net profit on Slide #4. Our adjusted EBITDA on group level increased by 22% to EUR 2.063 billion, mainly due to the following 2 reasons. The first one, full effect of our 2 new offshore wind farms, Hohe See and Albatros; and also, high wholesale market prices. Group net profit was down in the first 9 months. This is closely linked to the performance of our financial assets, predominantly the mark-to-market valuation of securities. Consequently, our adjusted group net profit declined from EUR 507 million in the first 9 months 2019 to EUR 367 million this year. Now let's take a more detailed look at the performance of our 4 business segments on the following 2 slides. On Slide 5, let me get started with our Sales segment. In the first 9 months 2020, the COVID-19 pandemic led to a moderate negative impact on adjusted EBITDA in the Sales segment. But at EUR 216 million, adjusted EBITDA for our Sales segment is 3% above the figure for the first 9 months 2019. Since the beginning of the third quarter 2019, Plusnet, our nationwide telecommunications company, has contributed to earnings. In the course of COVID-19 pandemic, however, and adjusted for changes in the consolidated group, the segment earnings are 11.3% down. EnBW subsidiaries sold smaller quantities to B2B customers. As a result, quantities purchased in advance had to be resold into the market at a lower price. In the first 9 months, adjusted EBITDA in our Grids segment decreased slightly by 2.5%. Compared to the prior year period, earnings in the distribution grids declined due to lower volumes mainly due to COVID-19. At the same time, revenue from the use of electricity and gas transmission grids was higher. Overall, earnings development in the first 9 months was not significantly affected by the COVID-19 pandemic. With EUR 1.030 billion, the Grids segment continues to be our business segment with the highest earnings contribution. Let's now turn to the Renewable Energy segment on Slide 6. Adjusted EBITDA increased significantly by 88% to EUR 586 million in the first 9 months of 2020. Our 2 new North Sea offshore wind farms are contributing substantially to earnings. Hohe See started operations early in the fourth quarter 2019 and Albatros in the first quarter of 2020. Moreover, the Valeco portfolio consisting of onshore wind farms and solar parks in France has contributed to earnings since the third quarter of 2019. In addition, wind conditions at our offshore and onshore wind farms were more favorable compared to the prior year period. And electricity from hydropower was sold at higher wholesale market prices than in the previous year. Finally, let me comment on our Generation and Trading segment. The positive development continued in the first 9 months. Adjusted EBITDA increased by 66% to now EUR 376 million because, firstly, we supplied our electricity at higher wholesale market prices compared to the first 9 months 2019; secondly, increased volatility in the wholesale markets allowed for an additional positive contribution to earnings from our trading activities. These 2 effects more than offset the loss of the earnings contribution from our Philippsburg 2 nuclear plant, which was decommissioned as planned at the end of 2019. This brings me to the development of our retained cash flow on Slide 7. Our retained cash flow increased to EUR 1.114 billion mainly due to the following 2 effects: the higher cash EBITDA and lower income taxes paid in the reporting period. At our AGM, which took place on July 17, the remaining half of the dividend following an advanced dividend payment of EUR 0.35 per share on May 14 was paid out on July 22. As a consequence, cash flow was impacted by almost minus EUR 95 million in the third quarter 2020. Net debt, as outlined on Slide 8, increased by almost EUR 1.118 billion as of September 30, 2020, compared to December 31, 2019. Let me illustrate the factors in this development. Our working capital increased by EUR 878 million, mainly based on the following effects: firstly, trade receivables significantly increased relating to the Renewable Energies Act. The EEG bank account of our transmission grid operator decreased by more than EUR 900 million from EUR 289 million as of December 31, 2019, to minus [ EUR 680 million ] at the end of September 2020. As a result of the COVID-19 pandemic and associated drop in demand for electricity as well as the significant decline of the electricity spot prices, the EEG levy grounded for 2020 did not cover the respective expenses for Renewable Energies. Secondly, the mark-to-market valuation of our noncurrent securities decreased by almost EUR 200 million. In addition, the minor decline in the interest rate of pension provisions had a slightly increasing effect on net debt. The extraordinary increase in the EEG payment in 2020 is temporary. At beginning of June, the federal government has decided to cap the EEG levy as part of its economic stimulus package in order to ease the pressure on electricity prices. In October, it was decided that EEG levy will be reduced to EUR 0.065 per kilowatt hour in 2021 and to EUR 0.06 per kilowatt hour in 2022. The difference between the EEG levy cap and the actual EEG payments for 2020 through 2022 will be covered by the federal budget. Consequently, the EEG accounts of our transmission grid operators will be balanced at the beginning of 2021, which will considerably improve our working capital position. Finally, on Slide 9, let's take a look at our forecast for the current financial year. The COVID-19 pandemic had a moderate negative impact on the group's adjusted EBITDA for the first 9 months of 2020 only. Our earnings guidance for the full year 2020 remains an order for adjusted EBITDA on group level and for the 3 segments: Grids, Renewable Energies and Generation and Trading. For the Sales segment, as mentioned at the beginning of the presentation, we are adjusting our guidance from originally between EUR 325 million and EUR 400 million to a range between EUR 275 million and EUR 325 million. As mentioned before, this is because adjusted EBITDA in the Sales segment is currently negatively impacted by the effects of the COVID-19 pandemic. In 2020, adjusted EBITDA in the Grids segment is expected to reach the 2019 levels. We expect revenues from the use of grids to remain stable. This will be driven by additional earnings due to increased investments into projects included in the national electricity and gas networks development plan. Negative effects on adjusted EBITDA caused by the COVID-19 pandemic are expected to be offset within the segment. The adjusted EBITDA of the Renewable Energies segment will increase significantly in 2020, as already mentioned. This is mainly related to our offshore wind farms, Hohe See and Albatros, contributing to earnings for the first time on a full year's basis. New offshore and new onshore wind farms and solar parks, it also had a positive impact on earnings. Some of these were already completed in 2019. Others are planned to be commissioned or acquired in the course of 2020. We can already assume in our forecast that wind yields will be in line with long-term average. In 2019, wind conditions are slightly lower. As a consequence, earnings in 2020 are expected to be slightly higher than in the previous year. In the Generation and Trading segment, we expect an improved result in 2020. This is because we supply our electricity in 2020 at higher wholesale market prices than in the previous year. The decommissioning of Unit 2 of our Philippsburg nuclear power plant at the end of 2019 will have a counteracting effect. Therefore, our adjusted EBITDA guidance for the group continues to apply at the range between EUR 2.75 billion and EUR 2.9 billion. We continue to expect on a like-for-like basis earnings to be between EUR 350 million and EUR 500 million above the original strategic target of EnBW 2020 strategy of EUR 2.4 billion by 2020. And with this, I would like to hand over again to Ingo to open up the Q&A session.

Yes. Thank you very much, Thomas, for your detailed remarks and comments. And with this, I hand back to the operator to open up Q&A.

[Operator Instructions] The first question comes from the line of Andrew Moulder with CreditSights.

I got a few questions, actually. Can I just ask something about the court case with Vattenfall yesterday where it won, I guess, a review of the compensation law for the closure of nuclear plant. Can you just perhaps comment on that? I mean what does that mean for you? I mean does it mean anything at all for you? Or if you could perhaps just comment on what that might mean for you and maybe for the other nuclear generators in Germany. Secondly, on the Coal Law, RWE on their conference call yesterday said that it hadn't yet been signed or finalized. So can you also just give me an update on where we are exactly with the Coal Law? When it will be signed and when you expect it to actually sort of come into effect, I guess, really? Do you expect it to be signed by the end of the year? And then perhaps a couple of questions just on EnBW specifically. On your guidance, you've reduced the Sales segment quite significantly. I mean if I look at the midpoint, I'm probably looking at a reduction down to about EUR 300 million from about EUR 360 million. So I guess my question really is, is there any improvement that's counteracting that in the other segments? Or is it really just the fact that your guidance is quite wide and you can absorb the EUR 60 million reduction in sales just without changing your guidance? And finally, I know you went into the working capital and the EEG payments. And I know vaguely how it works. But could you just go through that again, please, just to explain how that's impacting your working capital? How quickly you expect that to be recovered? Will you get it back -- all back next year? Or will you need to wait until the end of 2022 when the government -- when those caps are in place on the EEG? I know that's a few questions, but thank you very much.

Andrew, many thanks actually for asking the questions. Let me get started with Vattenfall yesterday. Actually, it doesn't really impact us because the main factor was about residual volumes that Vattenfall was not able to use. And that doesn't apply for us. So we don't expect any kind of impact on us. However, we need to look at it in detail. But for the time being, that's actually how we look at it. Secondly, regarding the Coal Law, indeed, it's not signed yet. And we are in dialogue, actually, with Berlin and the others. So I can't give you a detailed time line on that. Indeed, we are approaching year-end. But I can't give you a detailed -- a better answer than that, actually. We are in discussions. Regarding the guidance, indeed, we're talking about something like -- that's actually our underlying assumption, EUR 40 million to EUR 50 million in sales, so the impact we are expecting from COVID-19. And indeed, our guidance is wide enough that we still assume that we will be within the guidance on a group level. And regarding the EEG account, we assume -- and that's the discussion we are currently having with our government, that we will be reimbursed and we will get -- and the payment will be balanced -- the account will be balanced in January, starting in January and then in the course of 2021. But the biggest part of it will be balanced in January next year. So we do assume that by January, we'll see a significant reduction of our working capital.

Sorry. So does that mean that the reduction of working capital would come at the end of this year? Or will it be in the first quarter next year?

It will be in January next year.

Okay. You have a figure perhaps for what you expect working capital to be at the end of this year. I know it's quite variable with the EnBW, but do you know where it might be?