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

Ladies and gentlemen, welcome to the EnBW's investor and analyst conference call for the first half year results. I'm Alice, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Marcel Munch, Senior Vice President, Finance, M&A and Investor Relations. Please go ahead, sir.

Good afternoon, ladies and gentlemen. Thank you for joining us today to discuss EnBW's results for the first 6 months of fiscal year 2024, which we published earlier this morning. As is standard practice, Thomas Kusterer, our Deputy CEO and CFO, will first guide you through all the details in our presentation. And afterwards, we will, of course, be happy to answer the questions you may have. And now without any further delay, over to you, Thomas.

Marcel, thanks a lot, and a warm welcome to everyone. During Q2 2024, we continued our solid performance. Earnings in the first 6 months developed well across all segments and in line with the gradual normalization in commodity and energy markets. For H1, adjusted EBITDA stood at EUR 2.6 billion and adjusted net profit at around EUR 900 million, corresponding to our expectations. Hence, we confirm our full year EBITDA guidance. From a green financing perspective, we reached important milestones to advance our energy transition efforts. After issuing a green hybrid bond at the beginning of this year, we followed suit with the successful issuance of 2 green senior bonds totaling EUR 1.2 billion in July. 100% of the proceeds will be used to finance climate-friendly taxonomy-aligned projects, in line with our updated green financing framework. The framework now includes new project categories, hydropower and electricity transmission grids, to and from the basis for all our future green financing. As we speak, 52% of EnBW's outstanding bond issues are green, and we aim to issue at least 85% of our new issuances in a sustainable format by 2030. The recent transaction, we have fully realized our targeted financing volume for 2024 already and will now monitor the market for pre-funding opportunities. Next to our capital market financing activities, we are refinanced -- we refinanced and enlarged our syndicated credit line to a volume of EUR 2 billion. The facility is linked again to ambitious sustainability criteria, including the reduction of the carbon footprint of EnBW in Scope 1, 2 and, for the first time in, Scope 3 as well as the share of green investments according to the EU taxonomy. Another good news is the recent development in our offshore and onshore wind business. In June, we strengthened our position in the German offshore wind market by securing an attractive site in the North Sea in the offshore wind auction. The wind farm has a capacity of 1 gigawatt and is scheduled to go into operations by 2031. In addition, our French subsidiary, Valeco, ranked #2 in the most recent onshore wind auction in July with 117 megawatts. Also in July, EnBW has received grants from the German federal and state governments to develop large-scale hydrogen projects. EnBW was awarded a total of EUR 660 million for 3 projects along the whole hydrogen value chain. They are part of the so-called IPCEI projects certified by the EU as Important Project of Common european Interest and focus on hydrogen production, transport as well as storage infrastructure. This is an important step to ramp up the hydrogen economy in Germany. Staying with hydrogen, EnBW will participate in the construction and expansion of the German hydrogen core network, which is an essential component of the future European hydrogen backlog. We will initially invest around EUR 1 billion via our subsidiary, terranets bw and VNG VNG' as gas transmission company; ONTRAS, which have recently submitted specific commitments for pipeline projects to the Federal Network Agency. Let's now take a look at how well EnBW's integrated portfolio evolved and growth in our efforts to achieve climate neutrality by 2035. As we speak, we have around 6.5 gigawatts of installed renewables capacity, representing around 55% of our overall generation portfolio, a record high for EnBW, and the pipeline is well filled. Thanks to our success in the recent German offshore auction, our U.K. offshore projects, Mona and Morgan and our German offshore project He Dreiht, which is currently under construction. We are currently working on approximately 5 gigawatts offshore pipeline on a pro rata basis alone. By the way, the U.K. offshore project, Mona, developed particularly well with its accelerated grid connection date 3.5 years earlier than originally anticipated, which brings the COD to late 2029. Furthermore, Mona belongs to those projects whose development consent order was submitted and accepted first among all U.K. around 4 sites. At the same time, we consistently decarbonize our thermal power generation portfolio. During the first half of this year alone, we managed to reduce our coal-fired generation capacity by almost 1 gigawatt. Consequently, the coal-based revenue decreased to 3%. Considering these positive developments, we are now guiding a much lower CO2 intensity target for the year of between 290 and 350 gram per kilowatt hour. That is 102 gram per kilowatt hour less than originally forecast. But we are not stopping here and are also strengthening our balanced integrated portfolio. Be it the flexible backup capacity for our renewables, the wider grid infrastructure or the constant expansion of our e-mobility network, EnBW plays a leading role in all of these areas and takes its role as the leading integrated utility in Germany very seriously. Now back to the financials. As just mentioned, the normalization of the power prices corresponds to the adjusted EBITDA development in the first half of 2024 with EUR 2.6 billion for the group. This is in line with our expectations, in particular for the segment Sustainable Generation Infrastructure. Low risk activities comprising our grids as well as renewables business came up with a robust contribution of 68% of total earnings the first 6 months of this year, accordingly, accounting for EUR 1.8 billion in adjusted EBITDA compared to 55% in the first half of 2023. Let's now take a look at our business segments, starting on Slide 5 with Sustainable Generation Infrastructure where we achieved an adjusted EBITDA of almost EUR 1.5 billion. Starting with renewables, adjusted EBITDA amounted to EUR 596 million. The decrease year-over-year was driven by lower realized electricity prices, mainly from pump storage, despite the reallocation of the remaining 545 megawatts of these assets in our portfolio to renewables, in accordance with the updated EU taxonomy classification. The figures for the previous year have been adjusted accordingly. The decline in spreads was expected after exceptionally high levels in the previous year. New capacity additions in onshore, wind and solar, higher run of river power generation and better offshore wind conditions could only offset this decrease to a minor extent. Adjusted EBITDA in Thermal Generation and Trading was EUR 855 million, marked by significantly lower realized hedge margins and lower trading results on the back of reduced volatility in the commodity market. With respect to our hedging levels, we are fully hedged for this year, 80% to 100% for '25, 40% to 70% for '26 and up to 30% already for '27. Moving on to the segment System Critical Infrastructure. Adjusted EBITDA of System Critical Infrastructure came in at almost EUR 1.2 billion. This corresponds to an increase of 13% compared to last year as a result of higher earnings on investment projects in order -- in our Grids businesses across the group as well as lower expenses for maintaining grid reserve and redispatch. These positive developments were slightly offset by lower congestion revenues and higher personnel expenses in both our transmission and distribution Grid businesses. For our third segment, Smart Infrastructure for Customers, adjusted EBITDA increased significantly to EUR 173 million. The most relevant development is the absence of one-off effects. Last year was negatively affected by the deconsolidation of our subsidiary, bmp greengas. So our sales volumes due to mild temperatures and higher burdens from restructuring of the product portfolio, including the planned battery module replacement at SENEC had a counteracting effect. Moving on to Slide 8. For the first half of 2024, our gross investments totaled roughly EUR 2.5 billion. This was almost 60% above the previous year's figure. 90% of these investments were taxonomy aligned. And 87% were attributable to growth projects linked to the energy transition, while the rest of the investments in retrofitting existing assets. We invested almost half of our gross investments in Sustainable Generation Infrastructure. Mainly, this includes investments in our offshore activities in Germany and the U.K. and in our 3 hydrogen-ready fuel switch projects from coal to gas. Almost 40% of our gross investments were made in System Critical Infrastructure. As in previous years, the focus was on the expansion and modernization of our electricity, transmission and distribution grid. And the remaining investments went into Smart Infrastructure for Customers, mainly related to the further expansion of our e-mobility charging infrastructure. Overall, we recorded a higher amount of proceeds from divestments and cofinancing contributions by partners, particularly for our offshore wind farm, He Dreiht, and our transmission grid operator, TransnetBW. Ladies and gentlemen, retained cash flow amounted to EUR 880 million in H1, which is in line with the development of the adjusted EBITDA and higher dividends paid to our partners as well as to our shareholders after our Annual General Meeting in May. Let's illustrate on Slide 10. Net debt increased by EUR 0.9 billion, mainly due to significant net cash investments totaling EUR 2.2 billion. A major counterbalancing factor was reduction in pension provisions by roughly EUR 400 million, resulting from the higher discount rate. Finally, moving on to the guidance for the fiscal year 2024. As I mentioned before, we confirm our full year guidance, which is already -- which already reflects the decrease in volatility and lower power price environment. With a good performance during the first 6 months, we remain positive about both the guidance for the segments as well as on group level. And with this, let me hand over and back to Marcel for the Q&A session.

Thank you, Thomas. Ladies and gentlemen, let's now start the Q&A session, and I'll pass the ball to Alice.

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

Yes. Good results again, I suppose, guidance in -- still retained. That's excellent. I actually wanted to have sort of ask a general question about kind of how you're expecting the business to develop sort of beyond this year. And the main thing I wanted to get was the time table of when your new projects are coming online. I think you've obviously got SuedLink and ULTRANET. You've got the renewables. You've talked about Mona in your renewables comment earlier. You've also got the hydrogen-ready plants. So I'm just wondering kind of what the time table is for those to come online because, obviously, when I look at your EBITDA now, it's been artificially high for the last 2 years or so. So I'm guessing it's probably going to drop down a bit in 2025 as we start to see power prices come off and so on. So then I just want to know how it's going to increase past 2025 to get up to, I think you're talking about EUR 6 billion or so of EBITDA by 2030. So that's my first question. And my second question really is, I just saw a headline on Bloomberg that said you were considering using Chinese wind turbines for some of your offshore projects. And I just wondered what's kind of -- is there a cost advantage there? And are you worried at all about the maintenance issues and reliability or anything like that? Could you just perhaps talk a little bit more about if that headline is correct? And why are you considering using Chinese as opposed to, I don't know, Vestas or GE?

Andrew, thanks for your question. And let me get started with the second question immediately because that's not what I said. What I said was actually that we are -- in the current projects, we are not considering any kind of Chinese turbine. However, I didn't rule out that in the future, at some point in time, given the fact that we do only have a limited number of suppliers here in Europe, it might make sense to look into it. That's all I said. So it's not that we are currently looking into using Chinese turbines as we speak. So thanks for your question, actually, to allow me to clarify that. And to your first question regarding development of our operating results going forward, He Dreiht is going to be on the grid and CODs expected by late 2025; Mona, 2029. However, you also actually mentioned SuedLink, and SuedLink get immediate -- immediately reimbursed whenever we invest. So we do see immediate operating results from our investments into SuedLink. Having said that, we do not assume that we will see a decline in our operating results in 2025 and beyond. Contrary, on the back of our high investments, and it's not only the big investments we are always talking about, it's also onshore wind and solar is much shorter, let's say, pre-FID and COD time frames. We do see, on the back of these high investments, also an increase gradually of our underlying operating results through 2020 -- 2030. So I would say it's flat to slightly increasing by 2025 and beyond. It's more -- it's increasing through 2020 -- 2030. Did I answer your questions?

Yes. Yes, it does, actually, particularly the SuedLink and ULTRANET, I suppose, as well.

It's exactly the same, actually. It's the same and so much like SuedLink.

Okay. And can I just ask one quick question on Mona? You talked about that coming on late 2029. I should know this, but I'm afraid I don't. Have you already got a CFD in place for Mona?

No, not yet. FID is expected 2026. And I think the CFD option, we can get into is 2026 also. So we do not have the CFD yet. However, having said that, it's not only CFD. We can also actually consider to enter into PPAs. So it's both PPAs and CFDs we are looking at when it comes to our U.K. project.

Right. Sorry, I'm just -- I know I'm hogging the call here, but just one more question on that then. What are you seeing in the PPA market, particularly in the U.K.? If you're building these in the U.K., you need to be selling, I guess, into the U.K. So what's the PPA market like there at the moment?

It's not like in Germany. However, it's a good market. We do have the demand we -- you would expect. In that market, it's not the same like in Germany and everywhere else in Europe. The companies try to decarbonize their own production, their company, and reduce their own CO2 footprint. And that's why we do see a sensible interest in PPAs also in the U.K.

[Operator Instructions] We have a question from Mr. Erkan Aycicek, LBBW.

My first question is relating your outlook on the adjusted EBITDA level. And based on your outlook, if you have to calculate with an EBITDA between EUR 2 billion and EUR 2.6 billion in the second half of the year, which is below the first half of the year, maybe you can give some insights what's main reason for your assessment. And the second question is relating your net debt. Maybe you can give us some indication what to expect for the full year.

Yes. Welcome, and thanks for your questions. Regarding the balance between the first and the second half, that's quite usual, especially when you look at our Grids business. In the Grids business, normally, it's 55% in the first half and around 45% in the second half of the year. So that's why we do assume that you -- your underlying assumptions regarding our adjusted EBITDA for the second half is in line with that. And when it comes to our net debt development, currently, we are at EUR 12.6 billion. We do assume that we are going to see an increase to EUR 15 billion to EUR 16 billion by the year-end, and that's on the back of our high investment. As I mentioned before, actually, we are currently investing into He Dreiht, our U.K. projects, but also in our fuel switch project here in Baden-Württemberg on top of that SuedLink and ULTRANET. So we do have quite significant investments here. Our gross investments for the full year is expected to be around EUR 7 billion. So it's not a surprise, and we expect that our net debt is increasing accordingly. Is that helpful, actually?

Absolutely.

Did I answer your question? Perfect. Thank you.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Marcel Munch for any closing remarks. Marcel?

Yes. Thank you. And once again, thank you, Thomas. And yes, thanks to all of you for joining the call on our half year results. Thanks for listening in and also thanks for the questions you raised. Should you have any further questions, as always, please don't hesitate to contact our IR team. We then look forward to welcoming you again when we present our Q3 figures on our next conference call on November 12. And until then, we wish you all the best. Have a great day and a wonderful summer. Goodbye.

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