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

Ladies and gentlemen. Thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining EnBW's Investor and analyst conference call Q1 2021 results. [Operator Instructions] And I would now like to turn the conference over to Ingo Peter Voigt, Head of Finance, M&A and Investor Relations. Please go ahead.

Thank you very much, and very good afternoon, ladies and gentlemen, here from Karlsruhe, and a very warm welcome, and thank you for joining us this afternoon for today's investor and analyst conference call on EnBW's figures for Q1 of '21. As always, Thomas Kusterer will guide you through today's presentation. After that, we look forward to your comments and questions. With this, I'll hand over directly to Thomas to take you through the relevant figures and slides. Thomas, the floor is yours. Please go ahead.

Ingo, thanks a lot. Ladies and gentlemen, I would like to join Ingo in welcoming you to today's conference call. Let me begin with our key messages on Slide 2. Mainly due to temporary effects, the first quarter adjusted EBITDA was nearly 14% down on last year. We expect this will even out in the further course of the year. Therefore, the earnings guidance for the full year 2021 is unchanged. By successfully issuing 2 corporate bonds for EUR 500 million each at the end of February, we increased our liquidity position to redeem a hybrid bond with a volume of EUR 1 billion. The hybrid bond was repaid at the beginning of April. Divestments significantly increased in the first quarter to EUR 198 million, up from EUR 84 million in Q1 2020. This is mainly because EnBW sold 49.9% of an onshore wind portfolio to Commerz Real in February. EnBW will continue to manage, service and maintain the 14 wind farms, which have a total capacity of 133 megawatts and to market the green electricity they generate. As already reported, EnBW, together with BP, have jointly been awarded seabed area for 3 gigawatts of offshore wind farms in the U.K. Final investment decisions are expected to be taken in 2026, and we expect to start taking the offshore wind farms into operation from 2028 onwards. In March, our 187-megawatt solar wind farm in Weesow-Wilmersdorf went into operation. The next 2 large-scale photovoltaic projects with 150 megawatts each are now under construction in Brandenburg. All 3 solar farms are built and operated without government subsidies. As presented in our last conference call, we have adapted our segment structure corresponding to the EnBW 2025 strategy. Since the beginning of 2021, EnBW has been divided into 3 new segments with a focus on infrastructure. Smart Infrastructure for Customers comprising electricity and gas sales, billing services as well as e-mobility. Further, we concentrate on telecommunications and broadband as well as photovoltaics and battery storage for retail customers. System Critical Infrastructure, which mainly comprises our electricity and gas transmission and distribution grids. And third segment, Sustainable Generation Infrastructure with renewable energies, thermal power generation and our trading activities. So let's get started with a brief look at our adjusted EBITDA and adjusted group net profit on slide #4. Our adjusted EBITDA at group level decreased by 14% to EUR 814 million. As already mentioned, this was mainly due to a temporary effect in the System Critical Infrastructure and Sustainable Generation Infrastructure segments. I will give you more details on the relevant segment slides in a minute. Adjusted group net profit attributable to the shareholders of EnBW AG went up more than fourfold to EUR 321 million in the first quarter compared to Q1 2020. This increase in net profit is mainly due to a significant improvement in the financial results. Reason for that is a gain on marketing securities to market as of the reporting date. In the first quarter last year, this valuation effect resulted in a large loss. The higher income tax expense in the first quarter 2021 compared to last year had a negative effect on net profit. And now let's take a look at the performance of our newly structured 3 business segments on the following slides. On Slide 5, let me get started with our Smart Infrastructure for Customers segment. Our adjusted EBITDA in this segment increased significantly compared to the prior year's period at EUR 116 million. It is 48% above the figure of the first quarter 2020. The energy-related costs increased in 2020, whereas these costs decreased in Q1 2021. This development is a positive temporary one-off effect, which will largely be canceled out for the remainder of the year. We have been passing on this cost reduction onto our customers since 1st April 2021. With 14%, the Smart Infrastructure for Customers segment represents our smallest business unit on earnings level, whereas the following 2 segments are contributing about 45% each to our overall earnings. Let's now turn to our System Critical Infrastructure segment on Slide #6. Adjusted EBITDA decreased by 9% to EUR 378 million in the first quarter of 2021 compared to the same period at -- of the last year. This reduction in earnings is mainly due to rising fixed costs, including personnel expenses for staff expansion. These increased fixed costs for the necessary renewal of the grid will be reimbursed with a time lag in future regulatory periods. This factor was not fully offset by higher revenues from the use of grids. Finally, let me comment on the development of our third business segment, Sustainable Generation Infrastructure, on slide #7. Adjusted EBITDA declined by 25% to EUR 373 million in the first quarter 2021 related to the comparative period in 2020. In the area of renewal energies, adjusted EBITDA decreased by 12% to EUR 207 million. This was mainly driven by unfavorable weather conditions. We were faced with poor wind conditions compared to the same period last year and also compared to the long-term average. In the area of thermal generation and trading, adjusted EBITDA declined by 36%. A lot of positive valuation effects from the previous year mainly relating to gas storage had a temporary negative impact on earnings. This will delay the earnings ramp-up during the year. However, we do not expect this to have any impact on the full year 2021. Especially to the development of our retaining cash flow on Slide 8. Despite higher EBITDA, our retained cash flow decreased by 7% to EUR 725 million, mainly due to lower noncash expenses and higher interest paid. On the other hand, a larger contribution from dedicated financial assets had a positive effect. Our Annual General Meeting was 5 days ago, on the 5th May, and today, the dividend will be paid out. This is why, as in the same period last year, retained cash flow in the first quarter is equal to FFO. Let me illustrate the net debt development of the first quarter 2021 on Slide 9. Net debt decreased by about EUR 2 billion as of March 31, 2021, and compared to December 31, 2020, mainly based on the following 3 effects: First, the discount rate on pension provisions increased. Secondly, EnBW received payments related to the German renewable energy sector. Just to remind you, at the end of December 2020, the bank account of our transmission grid operator was at minus EUR 629 million. As already mentioned in our last conference call, it was settled through a payment of EUR 765 million by the Federal Republic of Germany on January 11. Therefore, at the end of March, the balance of the bank account increased to EUR 374 million. Thirdly, security margin payments decreased. This brings me to our outlook on Slide 10. General conditions such as the further development of the coronavirus pandemic are continuously monitored and evaluated regarding potential impact on our business. Our guidance for adjusted EBITDA in our 3 segments in 2021 remains unchanged. In the Smart Infrastructure Segment, we expect adjusted EBITDA of EUR 300 million to EUR 375 million. We forecast a stable earnings level in a challenging market environment, also in the light of the still ongoing pandemic and the price adjustment in April. We likewise forecast earnings on prior year's level in the System Critical Infrastructure segment. Here we expect adjusted EBITDA to be between EUR 1.3 billion and EUR 1.4 billion. Despite the coronavirus pandemic, we expect grid revenue to increase slightly. This is because we expect returns from higher investments in the electricity and gas grid in accordance with the respective grids development plans. In Sustainable Generation Infrastructure, we expect significant growth that puts adjusted EBITDA in 2021 between EUR 1.375 billion and EUR 1.475 billion. The largest share of this and about EUR 900 million will be accounted for by renewables, which we are continuing to expand. Further additions to renewable energies generation capacity is expected to have a positive impact on earnings performance. Assuming that wind yields in 2021 are in accordance with the long-term average, we expect earnings to be above 2020 levels. We also expect the performance of our trading activities in 2021 to be in line with the prior year's earnings contribution. Therefore, adjusted EBITDA at group level will further increase in 2021 to a range between EUR 2.825 billion and EUR 2.975 billion, as we already presented in our last conference call on March 25. And with this, I would like to hand over to Ingo to kick off the Q&A session.

Yes. Thank you very much, Thomas, for your, as always, comprehensive remarks and comments. And with this, I would like now to hand back to the operator for open up Q&A.

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

I had a couple of questions. You talked about the wind conditions and -- poor wind conditions and your renewables was down, I think, about 12%. Could you maybe just quantify that a little bit? When you say poor wind conditions, I guess you're talking about wind speeds. I mean, how much has the average wind speed actually dropped for your renewable generation EBITDA to fall by 12%? That's my first question. My second question really also relates to wind. A lot of your other offshore wind development companies, if you like, have been talking about floating wind and I just wonder what your thoughts are on floating wind and perhaps my most important question in that respect is, do you really believe that floating wind is necessary in order to get to the EU targets for 2030 and 2050? And my final question. You talked about repaying the hybrid bond in April. You've got another hybrid bond coming up for first call date next year in January, I think. Would you consider refinancing that early sort of within the short term, do you think given that interest rates, obviously, are still very low, but there is obviously expectations of increased inflation and therefore, increased interest rates, which may increase the refinancing cost on the hybrid if you wait a lot longer?

Ingo -- not Ingo, Andrew. Andrew, Let me get started with your third question, then the second and the first, if you don't mind. Indeed, we are considering actually to refinancing the hybrid early. So that's something we're looking at. But it's more considering it's not something we would confirm at this point in time. Secondly, regarding floating wind, indeed, Andrew, we think it's necessary to achieve the EU target and we are also involved, as you may be aware of, in R&D projects regarding floating offshore wind farms. We think it's -- as I just said, it's necessary and it will be, to a certain extent, the future of the winds. And to your first question regarding the wind conditions and specifically the wind speed, it's been 10% and 12%, actually, what we have experienced below prior year and also significant, I don't have the number actually, which would indicate what is compared to the average -- long-term average. But as the numbers regarding the prior years, it's minus 10% to 12%. Does that answer your question, Andrew?

Yes, yes, that does. No, that's good. I mean, so does that mean sort of broadly speaking, then the sensitivity of your renewables EBITDA, assuming there's no capacity changes in capacity sort of lines up with the falls in wind speed because you mentioned wind speed down 10% to 12%, EBITDA down 12%. So is that fair to assume?

Assuming that the technical availability is at the same level, it's fair to assume. And you also made the point actually, also assuming that we do not have any additional capacity, but yes.

Okay. Great. Maybe one more question then. Can I -- I mean, you've talked about a lot of effects impacting the first quarter. Can you just sort of summarize, I mean, what's the main effect that's really made the big difference? I mean, is it just -- I guess it's not just the wind speed, is it to do with -- I guess it's in the generation sector mostly. But Is that where most of the one-off effects are?

Absolutely, when it comes to EBITDA, it's valuation of gas storage, which is obviously a function of filling level at the end of March and also the spot prices at that point in time. So it's a valuation impact. And also actually valuation of -- when you look further down in our P&L, valuation of the financial assets.

[Operator Instructions] And there are no more questions at this time. I would like to hand back to Ingo Peter Voigt for closing comments.

Yes. Thank you very much, and thanks, Thomas, for your answers and comments. As always, we'd like to invite you if you've got further questions, don't hesitate to give us a call. And our next call on our Q2 figures '21 will take place on July 29 this year. And therefore, it reminds me to thank you, everyone, for attending today's call, and we wish you a nice afternoon, and goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.