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 Q2 2021. [Operator Instructions] I would now like to turn the conference over to Julia Von Wietersheim, Senior Manager, Investor Relations. Please go ahead.

Ladies and gentlemen, thank you for joining us this afternoon for today's investor and analyst conference call on EnBW's figures for the first 6 months '21. Thomas Kusterer will guide you through today's presentation. After that, we look forward to your comments and questions. And with this, I hand over directly to Thomas to take you through the relevant figures and slides. Thomas, please go ahead.

Julia, thanks a lot. Ladies and gentlemen, I would also like to welcome you to today's conference call. Let me begin with our key messages on Slide 2. In the first half year, adjusted EBITDA was nearly 7% down on last year. This continues to be primarily due to temporary effects in the 2 segments: Sustainable Generation Infrastructure; and System Critical Infrastructure. The earnings guidance for the full year 2021 is unchanged. Our portfolio transformation towards renewables is well on track. At the same time, we are gradually phasing out coal-based generation. As you know, we have set ourselves the goal of climate neutrality by 2035 at the latest. Climate change mitigation requirements continue to become more demanding. Climate legislation has also become more rigorous both at European and national level. The current political orientation towards sustainability and circular economy fully supports our strategic direction towards 2025 and beyond. At the same time, this puts continued pressure on the profitability of our coal-fired power plant. You may have seen our press release on July 15. In the course of preparing our half yearly report, we announced that we were adjusting our medium- to long-term profitability forecast in line with current market assumptions. Resulting on off effects led to impairment losses and increases in provisions to the -- in the Sustainable Generation Infrastructure segment of about EUR 1.25 billion. About EUR 700 million mainly relates to our coal-fired power plants. In addition, provisions for onerous contracts in connection with long-term electricity procurement agreements have had to be increased by EUR 300 million. Besides that, our offshore wind farms were also affected in the amount of approximately EUR 250 million. However, these are mainly accounting effects relating to higher profit margins in the first few years of operation due to the feed-in tariff model under German Renewable Energies Act. Further factor is new data on variations in offshore wind conditions with a few future expected generation volumes. This had economic impact on our offshore wind farms. However, mainly on Baltic 2, the overall impairment loss in the context of reduced wind yield assumption is around EUR 50 million, so almost neglectable in the overall context. These one-off effects will, of course, have an impact on the 2021 annual financial statements, but will not affect our operating results or our earnings forecast for the full year 2021. It is all the more important for us to keep on implementing our 2025 strategy, continuing with our growth initiatives and staying focused on efficiency. We remain committed to our goal of a solid investment-grade rating. In the European comparison, EnBW continues to have 1 of the strongest credit ratings among the peer group of integrated utilities with an A- rating from Standard & Poor's and a Baa1 rating from Moody's. Looking at our operating business. Over the last 6 months, we have made major progress with the rollout of our fast-charging infrastructure for electric vehicles. We have the biggest fast-charging network in Germany and aim to further strengthen this position. Our goal is to have a charging site every 40 to 50 kilometers. We're also currently building large high-speed charging sites for electric vehicles, so-called fiber hubs at supermarkets and drugstores, in urban centers and along autobahns. This enables the integration of charging into our everyday routine. We took the first fiber hub into service last year. More will be added this year. This brings me to the Renewable Energies business. Our 187-megawatt solar farm in Weesow-Willmersdorf went into full operation this March. Two more large-scale photovoltaic projects, each with 150 megawatts, are under construction in Brandenburg. All of these solar farms operate entirely without any government subsidies. Our goal is to increase our renewable share of generation capacity to 50% by 2025. We are making good progress here, especially when it comes to offshore wind power. As you know, we aim to bring He Dreiht, Germany's first subsidy-free offshore wind farm, in operation by the end of 2025. We recently announced that we are planning to build this 900 megawatts wind farm with the latest Vestas turbines that have an installed capacity of 15 megawatts each. We expect to sign the contractual agreement by the end of this year. With this technology, wind turbine performance has improved more than sixfold within a decade. This shows that our project developers made the right decisions. By using the most advanced and cost-efficient turbine technology, we have the opportunity to build and operate He Dreiht without any subsidies. Final investment decision is expected in 2023. Moreover, we have entered into long-term power purchase agreements for 150 megawatts of solar power capacity with Blue Elephant Energy, a solar and wind farm operator, based in Hamburg. The project in Andalusia, Spain consists of 350 megawatts solar farms. These are currently being built and grid connection is scheduled for the second quarter of 2022. They are expected to reduce annual CO2 emissions by about 96,000 tonnes. That demonstrates how sustainability is the compass of our corporate strategy. The projects under construction and our near term pipeline clearly underline our strive to carbon neutrality and demonstrate our long-term sustainable business model. Let me now continue with the financial details in the first half of 2021. Let's get started with a brief look at our adjusted EBITDA and group net profit on Slide 3. As already stated, our adjusted EBITDA at group level decreased by around 7% to almost EUR 1.5 billion, mainly to the following 3 reasons: negative valuation effects in the Sustainable Generation Infrastructure segment; higher personnel expenses mainly due to increasing demand for grid expansion; and lower wind yields impacting our offshore and onshore wind business. Adjusted group net profit attributable to the shareholders of EnBW AG significantly increased by 60% to EUR 596 million in the first 6 months 2021. The positive factor here was an improvement in the financial results from the gain on marking securities to market as compared with large expenses last year. But now let's take a more detailed look at the performance of our 3 business segments on the following 3 slides. On Slide 4, let me get started with our segment, Smart Infrastructure, for Customers. Compared to previous year's figures, the adjusted EBITDA of this business segment significantly rose by more than 50% to EUR 208 million. This positive development is mainly due to improved earnings in the commodity business and a positive earnings trend of our subsidiary, SENEC. Just to remind you, SENEC is 1 of the top 3 providers of home storage systems for solar power plants in Germany. Briefly to our System Critical Infrastructure segment on Slide #5. Adjusted EBITDA in this business segment declined by around a tenth or EUR 83 million comparing the first half year of 2020 and 2021. The reduction in earnings was due to higher personnel expenses, which were mainly related to the necessary grid expansion and an increase in expenses for balancing energy. Higher network user charges did not fully compensate for these additional expenses in the first 6 months of 2021. Finally, let me comment on the development of our third business segment, Sustainable Generation Infrastructure, on Slide #6. In the first half of 2021, adjusted EBITDA was about 11% below the prior year level. Let's take a closer look at the 2 parts of this business segment, Renewable Energies as well as Thermal Generation and Trading. Adjusted EBITDA in the renewables business decreased by 10%. Mainly poor wind conditions compared both the prior year period and the long-term average contributed to this decline. In Thermal Generation and Trading, adjusted EBITDA dropped by 12% due to temporary negative valuation effects. Whereas in the previous year, valuation effects relating, among other things, to gas storage were positive. The absence of these effects now has a temporary negative impact on earnings. As already outlined in our Q1 call, this will delay the earnings ramp up during the year. However, we do not expect this to have any impact on the full year numbers 2021. And this brings me to the development of our retained cash flow on Slide 7. EBITDA is about -- was about 14% down in the first half of 2021. As a result, our retained cash flow decreased by 23% to EUR 833 million. This is mainly due to higher interest and taxes paid and a higher dividend payout of EUR 1 compared to EUR 0.70 last year. Moreover, this year, our AGM took place at the beginning of May. And as you would expect, the dividend was paid out immediately after the AGM. Our 2020 AGM, however, was postponed due to the pandemic. Therefore, half of the dividend was dispersed as an advance payment in the second quarter, whereas the other half was paid after the AGM in the third quarter. On the other hand, there was a positive effect due to a larger contribution from dedicated financial assets. On Slide 8, let me illustrate the net development. For the first 6 months of 2020, net debt decreased by EUR 2.6 billion as of June 30, 2021, compared to December 31, 2020, mainly based on the following 2 effects included in working capital. Firstly, there were receivables under the German Renewable Energies Act, mainly because EnBW received payments under the act as of June 30, 2021. That balance on the corresponding bank account was EUR 700 million. Secondly, margin payments for our trading business decreased based on the price development, primarily for CO2. And moreover, the discount rate on pension provisions increased from 0.75% to 1.15%, which is included under the other items. This brings me to our outlook on Slide 9. General conditions such as the further development of the coronavirus pandemic are continuously monitored and evaluated regarding potential impacts on our business. As of today, our guidance for adjusted EBITDA on our 3 segments in 2021 still applies. In the Smart Infrastructure for Customer segment, we expect an 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 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 revenues to increase slightly. This is because we expect returns from higher investment in the electricity and gas rate in accordance with the respective credit development plan. In Sustainable Generation Infrastructure, we expect significant growth. That puts adjusted EBITDA in 2021 between EUR 1,375 million and EUR 1,475 million. The forecast for wind yields and hence generation volume is based on long-term average. As already mentioned, wind yields in the first half of 2021 were below the previous year's level and the budgeted levels due to poor wind conditions. On the other hand, we expect the performance of our trading activities in 2021 to be in line with the prior year's earnings contribution, and we expect earnings from our thermal generation to exceed our budget. Therefore, adjusted EBITDA at group level will further increase in 2021 to a range between EUR 2,825 million to EUR 2,975 million. And with this, I would like to hand over to Julia again to kick off our Q&A session.

Yes. And I hand back over to our operator, Emma. Please go ahead.

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

I really just wanted to know a little bit about this -- the impairment, particularly as it relates to offshore wind. Because when you made the -- I mean I appreciate that was only quite a small part of it, but you talked about new data on variations of offshore wind conditions. And also, you talked about the sort of long-term trend in electricity prices. Perhaps could you just elaborate a little bit on what new data you're talking about in terms of wind conditions and also what your assumptions are on electricity prices here? And I also wondered, in sort of in connection with that, whether it makes a difference to your FID decision on He Dreiht. I mean, if something has changed here, this could potentially reduce your returns there. And my second question, really, I don't know whether it's pertinent to ask this really, but I just wondered if there's any plan in place for a successor to Mr. Mastiaux, who's not going to be renewing his contract when it expires next year. I mean, I regard him as sort of the strategic architect of your current plan. So is there anything in place yet for his successor?

Andrew, let me get started with your second question regarding Frank and the potential successor. That's up to our Supervisory Board, and I think these discussions are currently ongoing. So I'm afraid I cannot go into more detail here. But I would assume that our Supervisory Board over the next couple of months will make a decision here who will be succeeding Frank as CEO. Regarding impairment, fair questions regarding wind conditions and price development. We do have, let's say, new appraisals and assessments regarding wind conditions. We took into account here. And we have seen for the -- for Baltic 1 especially and Baltic 2, especially Baltic 2 that they are slightly below what we have assumed in the past. So effectively, it's really limited to Baltic 2 and not so much to the North Sea, which is currently Hohe See and Albatros. And to your point to the FID regarding He Dreiht, no, we do not see that, given the overall context, also including the fact that we have seen enormous technical development in offshore since we have entered into the decision to bid for He Dreiht. We do not see that the profitability of this project has declined, contrary, to be honest with you. We see it more positive than we have seen it 2, 3 years back. And regarding power prices, yes, here, it's compared to our previous long-term assumptions back in 2019 that we do see in the long term slightly lower wholesale market prices. But that's really not a bigger change in our underlying assumption. It's just slightly below what we have seen back in 2019. And that you can clearly point to lower commodity prices, especially gas prices compared to prior years. And that's kind of a bit counterbalanced by the increase in CO2 prices currently you're looking -- you're currently looking at. So overall, it's not that dramatic what we have seen in changes in our overall assumptions for renewables. Where it does make a difference is significant divestment, of course, just due to the fact that the CO2 prices went up significantly. So we have seen a clear squeeze in the divestment here. And that's basically the point for the reduction of the impairment we had to record for our core power stations. Does that answer your question, Andrew?

Yes. Yes. I mean that's much clearer. So it's not really -- you haven't seen changing wind conditions, particularly in the North Sea? It's more Baltic Sea.

Yes, not to the extent that's really relevant for the profitability of either Hohe See, Albatros, nor He Dreiht.

Right. Okay. Maybe I could ask just 1 more question, which is not related to your results actually. I just wanted an update on SuedLink and ULTRANET. I mean how is that progressing in terms of those 2 transmission lines? And when are you now expecting those to be commissioned? Is that within your 2025 plan? Or is it outside of that?

Commissioning is outside our 2025 plan, Andrew. I think, currently, we are talking about 2028 for the 2 lines for SuedLink to be commissioned. ULTRANET is earlier, but SuedLink is, I think, meanwhile 2028. And what we've also seen is increase in the overall cost due to commodity price changes. I mean it's, I think, across Europe or globally that you see increase in commodity prices and steel and so forth and copper. So we've seen price increases. And at the same time, compared to what we were hoping for in terms of commissioning a bit of delay due to the approval processes we are currently in the middle of. So 2028 is the commissioning date we are looking at today.

For both of them? I thought you said ULTRANET would be a little bit sooner.

No. ULTRANET is earlier. I think that's in our mid-term plan, isn't it, 2025?

6.

6, okay. [ Jan ] just said, it's 2026. So 2026 is ULTRANET and '28 is SuedLink.

Right. Okay. And sorry, if I can just ask 1 question related to that. You said that you've seen an increase in costs. So what are we now talking about in terms of the CapEx for these 2 projects?

I think it's around EUR 6 billion in overall costs for the 2 projects. So that's basically what we are currently looking at. Overall, I think what we need to state is that we are currently seeing increases in investment needs in our transport and as well as our distribution networks due to the, let's say, increase in a decentralized generation capacity. So from my perspective, we will see even more investments in transportation as well as in distribution networks over the next couple of years.

[Operator Instructions] There are no further questions at this time. So I hand back to Julia Von Wietersheim for closing comments.

Okay. Thanks, Emma. Thomas, thank you for your answers and comments, and I'd like to thank everybody for attending today's call. So the next call will take place in autumn on November 12 when we publish our 9-month figures. If you have further questions, please contact us at the Investor Relations team. So it only remains for me to wish you all a wonderful summer vacation, hopefully and stay healthy and talk to you soon. Bye-bye.

Bye.

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