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 half or half year 2026 results. I'm [indiscernible], Chorus call operator. The conference is being recorded. [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.

Welcome, ladies and gentlemen. Thank you for joining today's call on EnBW's results for the first half of 2026. I'm pleased to be joined by Deputy CEO and CFO, Thomas Kusterer, who will lead you through the presentation in just a moment. Afterwards, and as always, we'll open the floor for questions. Those of you joining via webcast, please feel free to submit your questions at any time using the chat function. And with that, let me hand over to you, Thomas.

Yes. Thank you, Marcel, and welcome all of you. [indiscernible] delivered a solid and resilient financial performance in the first half of 2026, despite elevated geopolitical tensions in the Middle East and ongoing volatility across energy markets. Earnings remained stable, supported by the resilience of our integrated business model. At the same time, we continue to execute consistently on our strategic agenda. We made potential progress across our growth priorities and further strengthened our well-balanced earnings platform along the energy value chain. We also see a more constructive energy policy environment, taking shape in Germany. While important details still need to be finalized, the overall direction is supported and provides greater planning certainty for future investments. Let's now move on to the next slide and take a closer look at our key financial metrics of the first 6 months of this year. EUR 2.3 billion, adjusted EBITDA was largely stable year-on-year and provides a solid basis for achieving our full year target. We, therefore, confirm our guidance for fiscal year 2026 at both group and segment level. Overall, our financial performance was built on a record contribution from our low-risk activities led by our Grid segment. In addition, our e-mobility business continued to show strong momentum and delivered another solid contribution to earnings. Turning to investments. We deployed EUR 2.4 billion in the first half of the year. The focus remains firmly low-risk and sustainable infrastructure with 84% allocated to low-rated activities and 88% tax on nearline. Net debt stood at EUR 13.9 billion at the end of June, reflecting the continued execution of our investment program. Our funding strategy remains aligned with our growth ambitions and supports a solid investment rate credit profile. Let's move on to the next slide to share some operational highlights. Across Europe, energy security has moved back to the top of the policy agenda. Recent geopolitical developments have again highlighted the importance of domestic infrastructure, greater self-sufficiency and lower dependence on external energy sources. This is exactly where EnBW's investment make a difference. Across grids, power generation, flexibility and customer infrastructure, we are helping to strengthen the security of supply, affordability and energy [indiscernible]. In system truly infrastructure, our major North-South transmission grid projects continue to make strong progress. The 2 gigawatt converter station for SuedLink in Transnet BW's grid area is now close to completion. With an in the final stretch and remains on track for commissioning by year-end. Both projects are key building blocks for a secure and efficient energy system. Sustainable generation infrastructure, the share of renewables in our in-store capacity reached a record of 72%. At the same time, we're expanding flexibility. To large-scale battery storage projects in Barba and Phillipsburg, the combined capacity of 900-megawatt hours are currently under construction. Together, they support a more resilience and increasingly self-sufficient energy system. In its small infrastructure for customers, we further expanded our leading fast-charging network in Germany. We surpassed the milestone of 9,000 charging points in the first half of the year. This supports the electrification of mobility and helps reduce dependence on fossil fuels. And with that, let's move to Slide 5. On Slide 5, let me briefly turn to He Dreiht, a project that is setting a new benchmark for terminated. Installation for all programs is virtually complete right now in the final phase of construction and nearing completion. Against this backdrop, let me briefly know the recent rotor blade incident that some of you may have seen reported in the media. The matter is currently being investigated and certain activities have been temporarily paused as a precaution. By the [indiscernible] towing, we remain confident in the project's overall progress. 960 megawatts, He Dreiht currently largest offshore in the farm in Germany, and will almost double EnBW's installed offshore wind capacity to around 1.9 gigawatts. The project also highlights how far offshore wind technology has come over the past 15 years. Compared with 41, Germany's first commercial offshore wind farm which EnBW commissioned in 2011, He Dreiht delivered 20x the capacity by requiring only around 3x the number of turbines. Beyond scale, He Dreiht was the -- was one of the first offshore wind projects worldwide to be awarded without public support. Backed largely by long-term PPAs, it will make a meaningful contribution to our long-term earnings base. Finally, European suppliers played a leading role across key components, underlining both supply chain resilience and European industrial strength. And against this backdrop, let's now turn to the major energy policy reforms that continue to shape the investment environment for projects like He Dreiht. Please turn to Slide 6. During the first half of the year, we saw encouraging progress on several key energy policy initiatives. While important details they need to be finalized, the overall direction of travel is being increasingly supportive to investment and energy transition execution. First, the recent adoption of Germany's new framework for the special generation so-called [indiscernible] makes an important step towards establishing the capacity market, provides greater investment visibility for this level of generation ahead of the first land auctions later this year. Second, the grid package is progressing through a legislative process, better coordination between grid expansion and renewable build-out should support a faster and more efficient energy transition. We continue to see scope for more and further improvements during the pelimentary process, and we leave incentive-based approaches as the best way forward to reduce this dispatch cost. And third, discussions around the future renewables frameworks are moving in a constructive direction proposed support mechanisms, including 2-sided CFDs, should enhance long-term revenue visibility and strengthen the business case for future renewable projects. Taken together, these reforms should help unlock the next phase of investment in grid, renewables and system stability. With that, let's turn back to our financial performance on Slide 7. As highlighted earlier, adjusted EBITDA reached EUR 2.3 billion after 6 months, and was in line with our expectations. Earnings continue to be underpinned by a strong contribution from low-risk activities, which accounted for 79% of adjusted EBITDA at half year. System infrastructure alone contributed almost 60%, reflecting the continued earnings impact of our investment program. Remaining segment also performed broadly as expected, followed by the lower end of the scale in sustainable generation infrastructure. In renewable energies, rigor hydro conditions were largely compensated by favorable wind conditions and organic growth. Thermal power generation and trading was impacted by softer market conditions, but still remained a solid contributor to earnings. By contract, smart infrastructure customers recorded strong growth led by e-mobility. Let's now take a closer look at the performance of our 3 business segments and move on to Slide 8. Starting with System Grid Infrastructure. Adjusted EBITDA of our Grids business reached EUR 1.3 billion in the first half of 2026, broadly in line with prior year. Earnings benefited from higher regulated revenues across all grid assets led by electricity distribution. Our regulated asset base is the key earnings driver for the segment and reflects the consistent expansion of our credit infrastructure. At the same time, personnel and maintenance costs increased in line with higher operational activity and partly offset the asset-based earnings growth. Overall, the segment once again demonstrated the resilience and predictability of its earnings profile. Moving on. Sustainable generation infrastructure on Slide 9. Adjusted EBITDA in sustainable generation infrastructure amounted to EUR 806 million in the first half of 2026. It was below the prior year level. And the earnings contribution from our renewables portfolio remained resilient despite exceptionally dry weather conditions. Segment earnings were impacted by a weaker performance in thermal generation and trading. Let me start with renewable energy. Adjusted EBITDA amounted to EUR 495 million. Earnings from resilience despite below average water flows and declining margins affecting hydro generation. This was largely offset by strong wind and solar performance supported by additional capacity. This included the continued ramp-up of our offshore wind farm He Dreiht, which contributed positively to earnings. In term Generation and Trading, adjusted EBITDA was at EUR 311 million after 6 months. Earnings were stable quarter-on-quarter but remained below prior year levels. Year-on-year, Earnings were affected by lower hedge generation margins and scheduled phaseout of coal capacity. This included our lignite exit at the end of 2025 as well as the transfer profile for hard cold power plant into grid reserve to a combined capacity of around 1.7 gigawatts. Trading performance improved compared with the first quarter but remain impacted by continued market volatility. That said, margin movements were fairly moderate, while our liquidity position remains strong. This was fully consistent with our respective risk appetite underlining the effectiveness of EnBW's risk management framework. Before moving on, let me briefly touch on our hedge generation position. For 2026, we are almost fully hedged. Looking further ahead, hedge ratios for 2027 stand above 80%, while 28% is between 40% and 70%. Also, started hedging for 2029 already. Go ahead with smart infrastructure for customers on Slide 10. In smart infrastructure for customers, adjusted EBITDA increased by 33% year-over-year to EUR 309 million, reflecting a continued strong momentum in e-mobility. Charging volumes continue to grow and translated into further earnings growth. [indiscernible] fuel prices provide additional support. More than 9,000 plus charging points and accelerating electric vehicle adoption, our market-leading network is well on track to achieve EBIT breakeven this year. In addition, commodity sales delivered a strong performance and further supported earnings growth in this segment. Let me now turn to adjusted net profit, and the reconsolidation on Slide 11. Adjusted net profit attributable to EnBW shareholders reached EUR 595 million in the first half of 2026, broadly matching the prior year. A strong adjusted financial results particularly offset the decline in operating earnings. Positive valuation effects from the solid performance of financial assets covering dedicated long-term obligations more than compensated for slightly higher interest expenses. At the same time, earnings attributable to noncontrolling interest increased reflecting better performance of minority-owned entities and weighing on adjusted net profit. Moving on to Slide 12 with a brief update on our investments. At the half year mark, gross investments amounted to EUR 2.4 billion. The year-on-year decline was fully anticipated and mainly reflects portfolio effects including our value-driven exit from 2 offshore wind projects as well as the timing and maturity of projects currently under construction. Importantly, it does not indicate any slowdown in the execution of our investment program. Overall, 88% of these investments were [indiscernible] by 83% were directed towards growth projects. Our investment priorities remain unchanged and continue to focus on risk. System critical infrastructure accounted for 61% of [indiscernible] investments in the first half of the year, supporting the expansion and modernization of our electricity and gas grids as the backbone of the clean energy transition. Further 30% of investments were directed towards sustainable generation infrastructure. This primarily included our offshore wind power [indiscernible] and the construction of 2 hydrogen-ready gas-fired power plant. Remaining investments mainly supported the continued rollout of our fast-charging network in smart infrastructure for customers. On the funding side, cash inflows from project partners increased as planned and mainly related to [indiscernible]. These contributions continue to complement our diversified financing framework. And with that, let's take a brief look at our retained cash flow on Slide 13. Retained cash flow amounted to EUR 787 million in the first half of 2026 and developed in line with our expectations. Compared to the prior year, the decline mainly reflects lower operating earnings, higher noncash effects in our gas storage business due to the higher price environment and higher cash contributions to shareholders following both the increase in our dividend per share and our capital increase. And with that, let's move on to net debt on Slide 14. The half year mark net debt stood at EUR 13.9 billion, slightly up from year-end 2025. Net cash investments of EUR 2 billion were the main driver for it partly offset by our solid cash generation. Structural support came from our permanent hybrid stock, capital stock, which reached its increased target level of EUR 3.5 billion by the end of June. During the first quarter, we successfully issued EUR 1 billion of new hybrid capital. Following the subsequent redemptions of an existing hybrid instrument, the resulting increase in equity credit amounted to EUR 250 million as reflected in the bridge. Let's close today's presentation with a few remarks on our full year guidance. Ladies and gentlemen, as outlined at the beginning of the presentation, we are on track to deliver our full year guidance for fiscal year 2026. As discussed, sustainable generation infrastructure is currently trending towards the low end of our expectations. Value or group outlook remains unchanged. Earnings were solid despite continued geopolitical uncertainty and volatile market conditions. At the same time, we maintained strong operational momentum across our strategic business -- growth businesses. Our integrated and predominantly low-risk business model continues to provide resilience while ongoing progress in Germany's energy policy framework further supports the long-term investment case. Taken together, this leaves us well positioned for the remainder of the year and beyond. And now let me hand back to Marcel.

Thank you, Thomas. Ladies and gentlemen, we'll now start the Q&A session.

[Operator Instructions] There are no questions by phone at this time. So I would like to turn back to Marcel Munch for any written questions.

Yes. Thank you, [indiscernible]. We have a few questions submitted via the webcast function. So let me start with the first question raised by Jose Crizal from Inside Investment. If EnBW wins capacity in the dispatchable capacity tenders in September or December, when would the project pass final investment decision? And what would be the annual CapEx profile through commercial operations?

I think that's a question from Joshua, if I'm not mistaken. Thanks for the question. Actually, first of all, we need to make sure that we are going to participate and then win in the auction. So I will not give you any indication regarding our potential final investment decision from any power plant that's at this point, just not possible to in all fairness. And secondly, I mean, it's a tender process. So we are certainly not providing any indication regarding volumes or capacity we potentially would be participated in any kind of action.

Thank you, Thomas. And we have another question by Bobby [indiscernible], which went into the same direction so I will pass it because Thomas answered it as he went along. If you have a follow-up questions follow-up question, please raise it again via the webcast. But [indiscernible] have also raised another question regarding which elements of the new upcoming regulatory period remain most important from EnBW's perspective. Are the allowed returns and absolute return percentages, the primary area of focus or are there other aspects that you believe will improve the return profile for transmission investments.

Thanks for the question, actually. I mean, first and almost, of course, a lot of returns are important. However, it's the overall system as such. Allowed returns is one thing, equity returns is another topic. So I think it's not just one number you can pin it down to. It's the overall system. And we need to ensure that from a regulatory perspective, the returns we can deliver in the first regulatory period are comparable to what we are currently seeing in the rest of Europe, which means that we would assume that with the new system, we should be able to see an increased equity returns in the regulated business.

Thank you, Thomas. Now we have a few questions regarding our ratings target and S&P's most recent update on our credit ratings. I'll try to group them so we can answer them in a coordinated way. It was raised amongst others by [indiscernible] from BofA and Alessandra McDonald. So let me start with the first one. Can I kindly ask on the credit ratings target? In the past, there was a solid commitment to A- ratings at S&P. How are you viewing those credit ratings in light of S&P's negative outlook? Do you have any obligation to maintain that A- rating with S&P, clearly you have sufficient levers to maintain A- ratings, including additional hybrid bond issuance. Keen to hear your views.

Thanks a lot, actually, for the question. And let me be precise actually, and I'm doing this now since quite a while. And I always -- and we always said that we are fully committed to a solid investment-grade rating. We never said we are committed to an A- or whatever rating. We always said we are committed to solid investment-grade ratings. Having said that, what we've seen from S&P lately is, first of all, affirmation of our A- rating to start with. All by with negative outlook, and that very much relates to [indiscernible] that the credit metrics might be under pressure with limited headroom relative to the current rating level. And I mean, it's not a big surprise that we, as a company, are currently in the face of elevated investments. And full earnings contribution will only materialize over time. I mean, when you look at our project in our transition grid for He Dreiht example, our gas power stations. They have substantial lead time and construction time. So it's not a big surprise that we are seeing some delays here. At the same time, I think it's fair to say that we've managed over the past couple of years -- last almost 15 years in all fairness. And that's also our intention going forward. We've managed the company with a long-term perspective, and we've always tried to balance financial discipline, value creation and strategic setup. And you can assume that that's exactly what we are going to do in the future. I mean we are well placed -- when it comes to our rating, I think we do have a strong foundation with 80% of low-risk earnings. You've seen that in the first half of 2026, state cash flows, strong capital base. And also actually, we are able to -- and we also have the operational flexibility to manage our rating going forward. So again, still committed to what we have said all along, solid investment-grade ratings, and you shouldn't expect anything else from us.

Thank you, Thomas. Now there are a few questions regarding in our CapEx program and the expected development of net debt. Let's start with the clarifying question by Alessandra McDonald. Is the more CapEx -- potential more in CapEx included in the EUR 50 billion CapEx plan should we decide to go ahead with the project.

Alessandro, thanks a lot for the question. It is included, however, given the time line of more it's limited to [indiscernible] low impact on our investments. So it's not really relevant until the early 2030s, and we are going to see what we're going to do with Morgan at a future time.

Thank you, Thomas. Following up with the next question. What's the latest guidance for net debt for fiscal year 2026 that was a question we come.

Bobby, the guidance is as it was before, around EUR 17 billion. Currently, we are just short of 14 million when you look at our investments of the average EUR 7 billion annually, and you can assume that we are kind of at that level by the end of 2026. And our cash flow generation, it's fair to say that we are moving to EUR 17 billion potentially.

And following up on that question from Michael Salter [indiscernible] Santander. Where do you expect the debt repayment ratio to be for fiscal year 2026?

It's in our annual report. I don't have it on top of my head, but -- it's 15% to 18%, right? 15% to 18%.

Sorry, let me just quickly see if there's -- Okay. Sorry, there was one aspect of Alessandra McDonald's question that we haven't touched upon at least during the Q&A session, the second net, can you provide more detail as to how the energy policy reforms in Germany will impact your CapEx and planned returns in the region?