EVN AG (EVN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. And welcome to this conference call on EVN's results for the half year 2021, '22. [Operator Instructions] Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz. Please go ahead.

Good morning. And welcome to the conference call on EVN's results for the first half of the 2021, '22 financial year. Since last summer, the energy markets took an unexpected development. What started as a post-COVID price increase turned to be historic distortions of energy markets and prices. And ultimately the war in Ukraine began, the main driver for this development. The impacts of these developments on EVN and our integrated business model are varying. For Generation, higher prices are positive and provide for a certain upside. However, please bear in mind that Generation has been hedged at pre-running average levels rather than peak levels. For our energy supply business, higher prices are a burden which we will be able to overcome through price increases. However, this is a timing effect. In South East Europe, the higher electricity prices are a challenge for the whole energy sector there. Our activities are especially impacted by rising costs for network losses. In both countries, extraordinary government expect that the regulatory measures were introduced as partial compensation for the significant rise in energy procurement costs. The remaining additional costs should be reflected in future tariff decisions by the regulatory authorities. Due to the recent deterioration of the geopolitical and economic environment, above all, for global supply chains, we have to reassess the risks and earnings expectations for EVN Group of the international project business [ of WTE ]. This resulted in an -- impairment losses to goodwill in the international project business in the amount of EUR 52.9 million and to the residual carrying amount of the 2 combined sludge-fired heat and power plants in Moscow in the amount of EUR 4.4 million. Apart of these 2 plants, we have no further remaining activities in Moscow. Our investment level in the reporting period was high. We were able to increase investment by 22.9% to EUR 191.5 million. This is in line with our commitment to further increase CapEx. The focus of our investments remains on networks, renewable energy and drinking water in Lower Austria. We are also actively working on our target to further increase renewable generation capacities. Construction work started for 3 new wind parks. These projects will raise our installed capacity by a total of 67.2 megawatts. Commissioning of these new wind parks will take place in course of the next financial year. Let me now continue with the key financials of the reporting period. The group's revenues was up by 65.5% year-on-year. The main reason for this development was the sharp increase in electricity prices, which had a strong impact on revenue in South East Europe as well as from renewable generation. In Austria, the higher network tariffs set by E-Control and -- in Austria as of the 1st of January 2021 had a positive influence on network revenues. The more frequent use of the Theiss power plant by the Austrian transmission network operator for network stabilization largely offset the lost revenue due to disinvestment of Walsum 10 power plant. Growth was also recorded in the international project business. I would like to remind you that, last year, in quarter 1, we had a one-off from the takeover of an additional electricity procurement right from the Walsum 10 power plant. Other operating income included a positive one-off, while depreciation was increased by a required impairment. The cost of electricity purchases from third parties and primary energy expenses were substantially up at EUR 1.3 billion. The main driver were higher energy procurement costs in South East Europe, including coverage of network losses. Other factors include the more frequent use of the Theiss power plant and higher procurement costs for our heating business. The share of results from at-equity-accounted investees was down from EUR 127.3 million to EUR 85.2 million. Declines were recorded, among others, by our supply company EVN KG and by RAG. Based on these developments, EBITDA was down by 21.6% at EUR 420.2 million. As already mentioned, we had to record impairment losses on the goodwill in the international project business and 2 combined heat and power plants in Moscow. These impairment losses were constructed (sic) [ contrasted ] by a revaluation of EUR 6.4 million to the Kavarna wind park in Bulgaria, which we recorded in the first quarter. The previous year was affected by an impairment loss totaling EUR 113.3 million to the Walsum 10 power plant. In total, the group's EBIT declined by 17.1% to EUR 211 million. Financial results dropped to minus EUR 31.3 million due to the weaker performance of the R 138 fund and foreign exchange developments. In total, we generated a group net result of EUR 127.4 million, which represents a decline by 27.6% over the previous year. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. EVN's net debt amounted to EUR 1.1 billion. Gearing ratio was down year-on-year and amounted to 16%. Our financial flexibility is solid. We benefit from lower net debt; and sufficient committed, undrawn credit facilities which amounted to EUR 602 million as of the end of March 2022. In April, our corporate bond with a nominal amount of EUR 300 million was due for repayment. As preliminary refinancing measure and to keep financial flexibility high, we [ concluded ] short-term loans totaling EUR 150 million; and term loans with tenors until [ February ], November, December 2023 totaling EUR 250 million. We also issued a registered bond in April, amounted to EUR 155 million. And further refinancing steps will be evaluated. Today, I can inform you that the rating agencies recently published their annual updates on EVN. Both agencies confirmed their ratings and stable outlooks, so we are rated A1 from Moody's and A+ from Scope Ratings. According to our financial policy, our goal is to maintain ratings in the solid A range. Let's move on now to the next slide, which covers the Generation Segment in more detail. Electricity generation volumes in the segment were down by 5.1% year-on-year. The reason was the absence of Walsum 10 following the disinvestment of our stake last year. On the other hand, our Theiss power plant was called more frequently by the Austrian transmission network operator for network stabilization. The share of renewable generation increased to roughly 60% compared to last year's 53.5%. Higher wind flows were partly able to compensates the decline in hydropower. Revenue was up on a -- year-on-year. Higher electricity prices compensated the decline in electricity generation. EBITDA stood at 177 -- EUR 137 million. Also due to the revaluation of the Kavarna wind park in Bulgaria, segment EBIT increased to EUR 122.4 million. Today, I will also provide an update to our segment outlooks which we published last December. For the Generation Segment, we are raising our full year guidance due to the increase in electricity prices and above-average electricity generation from wind power in the first 6 months. On the next slide, I will continue with the Energy Segment. Before I talk about the developments in the Energy Segment, I would like to address the topic of gas supplies in the current geopolitical situation. At the moment, 80% of Austria's total gas demand have been sourced from Russia. Austria's dependency on Russian gas [ is a question ] of existing connections to cross-regional transport pipelines and infrastructure. More than 50% of the Austrian gas demand accounts for industrial customers. If for whatever reason gas deliveries from Russia to Austria are interrupted, government energy control measures will be initiated. Based on the respective law, the Austrian government and the Austrian regulatory authority would need to decide on the distribution of gas. Such [ law on situations ] has never been tested, so far. I do hope that such a worst case scenario will never occur. At EVN, supplies secured from natural gas have always been a key priority. Therefore, we have [ always rented ] gas storage capacities from RAG Austria to have own gas reserves for our customers available in the case of an unexpected gas shortage. As winter is over, the process of refilling the gas storage facilities again has already started. And we have already reached a level of [ about 32% ] for our supply business. In addition, we are aiming to secure strategic gas reserves whenever possible from sources other than Russian ones. Our focus is to secure our gas reserves to the possible maximum before the winter -- beginning of next winter season. We are aiming at 80% on the supply business. Now I would like to inform you about the developments in our Energy Segment. The strong increase in electricity prices resulted in higher revenue from the marketing of our own electricity production. Higher sales volumes and price adjustments supported revenue growth of our heating business. Therefore, revenue rose sharply and stood at EUR 394.9 million. Operating expenses reflected costs for primary energy carriers for the increased use of the Theiss power plant as well as higher procurement costs for the heating business. According to our contracts in the heating business, higher energy costs will be passed on to customer once or twice a year based on price index mechanism, so there is a certain time lag here. The sales volume showed different developments. Whereas electricity sales increased, natural gas declined due to milder temperatures. The earnings contribution from the at-equity-consolidated company EVN KG declined due to higher procurement costs. EVN KG already increased prices for household customers for electricity as of January and for natural gas as of February. Based on these developments, the Energy Segment reported an EBITDA of EUR 48.5 million and an EBIT of EUR 37.9 million. I can confirm the outlook for the Energy Segment. In the absence of positive one-off effects from last year, we expect a decline in segment's results. In addition, the situation of EVN KG has changed. The price increases on the customer side which we implemented in January and February were meant to pass-on higher procurement cost levels which we had reached during autumn. However, as you know, there have been additional price hikes in the markets due to the war in Ukraine. These even higher procurement costs will be passed on according to a new price index mechanism which we included in our contracts. However, there is a time delay. Therefore, we expect a further deterioration of the results of our supply company until end of September. On the next slide, I will present the developments in our Networks Segment. Networks sales volumes showed a stable development for electricity, whereas natural gas volumes rose due to the increased use of the gas-fired generation for network stabilization. In the beginning of '21 and 2022, the Austrian regulatory increased tariffs of both electricity and natural gas. Based on these volumes and price developments, segment revenue were up by [ 26.2% ]. EBITDA in the Networks Segment increased by 4.1%, and EBIT by 3.1%. We adjust our full year outlook. We expect lower segment results due to the increase in market prices and the resulting higher costs for network losses as well as higher depreciation resulting from higher CapEx. On the next slide, I will continue with the South East Europe segment. Temperatures in South East Europe were below the previous year and long-term average, which had positive volume effects. In addition, customer changes from liberalized market supported growth in sales volumes. In combination with higher prices, these developments resulted in a sharp in -- rise in revenue. As already mentioned in the beginning of this call, our South East Europe Segment suffered from rising costs for network losses due to the higher market prices. In both countries, extraordinary government, respectively, and regulatory measures provide for at least partial compensation for the significant rise in energy procurement costs. In Bulgaria, our distribution network operator and our heating company receives compensation payments in the total amount of EUR 67.5 million to cover higher costs. In North Macedonia, the regulatory announced extraordinary increases in electricity prices for household customers of EVN Home and in the network tariffs as of the 1st January 2022 as a partial compensation for the significant rise in energy procurement costs. The remaining additional costs shall be reflected in future tariff decision. Segment EBITDA was down at EUR 21.2 million, and segment EBIT amounted to minus EUR 17.3 million. As already mentioned in Q1, the distortions on the energy markets and resulting higher costs for network losses will be the reason that we will miss our full year EBIT target range of EUR 40 million to EUR 60 million, but based on the current regulatory framework, the negative effects caused by higher costs for network loss coverage should be recovered through tariff adjustments in the following years. I would like to conclude my presentation of the segments with the Environment Segment. As already mentioned in the beginning of today's call, the recent geopolitical developments, being the war in Ukraine, inflation, rather strained economic outlooks and, last but not least, the global supply chain issues -- so all these factors taken together have changed the group's risk and earnings expectations for the international project business of WTE, therefore recorded an -- impairment losses to goodwill in the international project business in the amount of EUR 52.9 million; and to the residual carrying amount of the 2 sludge-fired cogeneration plants in Moscow, which was EUR 4.4 million, at the end of March. Apart from these 2 plants, we do not pursue any environmental projects in Russia or Ukraine. The financial performance of this segment is in line with the development in the international project business, in line with the progress on the Kuwait project that was a corresponding rise in both revenue and operating expenses in the segment. EBITDA amounted to EUR 23.8 million. EBIT declined due to the before-mentioned impairment losses and amounted to minus EUR 49.9 million. In view of the impairment losses, we also needed to adjust our segment outlook. For the full year, we expect a decline in segment results. I also have to highlight the risk that any intensification of international crisis could lead to additional project delays due to the disruption of international supply chains and consequently to further decline in earnings. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of our group cash flows. Gross cash flows were substantially lower at EUR 389.6 million. Please remember that it was unusually high in the previous year due to the receipt of a compensation payment for the takeover of an electricity procurement right. The decline was reduced slightly by higher dividends from equity-accounted investees. The decline in cash flow from operating activities was even higher in comparison. The sharp rise in energy prices and lower investments by EVN KG in the group's cash pool are responsible for working capital effects. Cash flow from investing activities was influenced chiefly by year-on-year increase in investments in property, plant and equipment; and the changed investments in cash funds. The increase in cash flow from financing activity is due to 3 bank loans totaling EUR 250 million. The dividend payment for last financial year represented a contrary effect. The net -- change in cash and cash equivalents amounted to minus EUR 90.7 million. As mentioned before, our financial flexibility is solidly secured with committed undrawn credit facilities of EUR 602 million as at the end of March '22. I would like to conclude my presentation with the outlook for the group. We are going through an extraordinary year with substantial distortions which were not predictable in -- a few months ago. Therefore, we had to adjust some of our segment outlook, as I reported during the call, and it's also documented in our letter to shareholders. On group level, we are confident that our diversification and management measures will provide resilience to our financial performance. Hence, I confirm our guidance for this financial year. We expect group net result in '21, '22 to be in a range of approximately EUR 200 million to EUR 240 million. With this, I have reached the end of my presentation. I'm now looking forward to answering your questions.

[Operator Instructions] And the first question comes from Peter Crampton.

It's Peter Crampton from Barclays. 2 questions, if I may. Firstly, I would be interested in EVN's views on what [ they see ] regarding kind of windfall taxes [ for kind of Austrian ] generation. And then the second question would relate to your Bulgarian and Macedonian business, where we are on kind of potential government intervention given all the issues we've seen in Romania.

Thanks, Peter; I think, 2 valuable questions. And first of all, you are referring to a comment of our Austrian chancellor which we did in a regional press, which caused also some turbulences on the Austrian stock exchange. I think there has been a reflection on certain measures which have been taken in other European member states. As we all know, this historic situation leads also in Brussels a debate about the pricing mechanism. We don't know where they are heading. Coming back to Austria, I'm -- cannot confirm any proposal which has been debated so far neither in the public nor internally which is really giving us any guidance where this debate will which -- will go. Therefore, I cannot further comment on that, yes. What you have seen is that Verbund obviously are trying to give a bonus to trustful customers and therefore also trying to change a bit in the public the reference that they are just profiting too much from the hydropower production in this environment, which as we know, as you know, is not the case for EVN because, if you look into the numbers, you'll see that we only have a percentage of own production in relation to end-customer supply of around 17%. And therefore, we are [ not the apple ] of the hydropower utilities. We are more now taking these higher prices and then having to pursue them to our customers. And the second question is regarding Bulgaria and North Macedonia. There we see a strong support to stabilize the energy sector overall. I mentioned before that we got the direct subsidies of around 67 million. in Bulgaria. We are expecting now the regulatory decisions on the 1st of July for Bulgaria and North Macedonia, so if we can give a guidance, we would expect that we are not making a negative result in this division, which is the best we can aim for because it will take a couple of times before the losses can be compensated.

And the next question comes from Lueder Schumacher.

Also 2 questions on my side. The first one is on gas supply. You mentioned that there's various provisions in Austria who deal with the event of a severe curtailment. Is there also something in the Austrian law similar to the energy security law in Germany where all supply obligations cease to be effective in the event of such a curtailment? i.e., nobody has supply obligations and there's no need to cover volumes in the market. It would be great if you could shed a little bit more light on the legal situation in Austria in such an event. I guess this is a very popular topic. And then also on South East Europe. I mean you already said you hoped to, well, be partially compensated and at least avoid losses. What time frame are we talking here for this compensation? Is it T plus 1, T plus 2? I mean, when can this actually gets -- become a profitable unit again, especially in this environment? And actually just one other question as well, on the impairment [ loss in ] the Environment division. What is behind that? Are these trends that we can expect to continue? Are there going to be more impairments in the future? Just general, what is the outlook there for this division? Sorry. 3 questions instead of 2.

Yes, thanks a lot for these questions. First of all, regarding the gas situation, there is a kind of emergency law, yes, which would be effective, yes, if the market is not giving gas enough anymore, either by the interruption of the supplies on the Russian side, on the European side, or by obstruction. If this is taking place and the market is not providing enough volumes anymore, then this phase, yes, of state intervention would start. In our case as EVN supply side, we always have this kind of 80% stored for our own [ means ], for our household customers over all these years. And we are just building up this reserve once again. As I mentioned before, we are now at 32%. And at beginning of November, we will be around 80%, which is our normal way to secure the supply for our customers, but [ the state ] has done additionally, that [ they ] started to raise and -- strategic reserves. And this should be -- at the end [ go up to 2 ] terawatt hours of gas, yes, which should be stored in facilities in Austria. Of course, we have the situation that [ Gazprom ] is not only a supplier of gas but also running some of the storage facilities, so this is a complicated legal situation, which I would call [indiscernible] transformation state because the European Union is working on a directive to have a little base already to handle this. So I would say that, from an Austrian point of view and being so much exposed in this situation, everyone tries to help to secure additional volumes either from Russian volumes or even third-party volumes. And we are quite successful in the moment also with third-party volumes to ensure that we have a more diversified mix for the coming winter. This is the situation regarding the gas situation in Austria, but highlight that, that legal framework is still underway. The second thing, yes, which I want to mention also. The new decisions by the regulator authorities will be on the 1st of July. Therefore, this will only go with 3 months into our financial year. Therefore, there is a delay going on. I would on the midterm give you the assurance that we expect to be back on this EUR 40 million to EUR 60 million EBIT expectation. [ And under the ] bottom line, Bulgaria is compensating, yes, quite [ consequent ] from month to month. It's on a monthly basis. These government grants work immediately and they will go directly into our expected result at the end of September, so we expect that the overall result in Bulgaria will compensate the delay in Macedonia and therefore stabilize the organization as a segment. And regarding the receivables and the international project business. It's just reflecting on the new environment, in-market country risk premiums, costs of guarantees and supply chain, that new projects, yes, will be not too easy to get granted on financial calculation which we have to do. And therefore, we took this step now to free ourselves, yes, from this kind of burden [indiscernible] for the new projects in the future.

Very clear. Just one follow-up on your answer of the -- to the first question, on gas supply. You said everything will be fine once gas storage is full, but if it were to come to complete curtailment of Russian flows -- and let's bear in mind, so far, there hasn't been any curtailment. Russian gas flows are very normal, apart from Yamal which has been down since October. What would happen to your supply obligation to your customers? If there's curtailment tomorrow, yes, government steps in, but would you still have to deliver?

No, this is a force majeure case, yes.

It's force majeure, okay...

Yes, yes, yes, but they would focus, yes, on household customers. And I'm sure they would -- also opening up the definition for protected customers regarding strategic suppliers, if you think about the agricultural production in Austria is on a high percentage completely dependent on gas. So processing, yes, of meat, yes, and food, yes, depends, in the industrial production, on gas. And I'm sure they will protect this, yes. So they go down from big customers to the small customers; and trying, yes, to secure that the demand, yes, is reduced. And they give the big customers certain information in advance so that they can close and run-down their facilities without this result of, yes, crushing the technical operations. So I think what is discussed in Europe everywhere is how to do that. It's not easy, as we know, for our distribution. [ Great, yes ], to do this, yes, because it has never been done before, but from the logic of the legal references, there is a clear guidance, yes, where to start and where to stop.

And the next question comes from Teresa Schinwald.

Also 2 questions from my side. And the first one, coming back again to the gas issue. I'm still trying to wrap my head around how the mandatory storage requirements would impact the results of RAG, as they're by far the largest storage owner in Austria. And Austria has, as far as I can see, a lower threshold for mandatory gas storage because it has so much storage. And at the same time, the storage facilities are connected to the German grid. Could you elaborate a bit more on that? And the second one is could you also shed some more light on the goods and materials that could cause delays in the projects business. Is it a general thing, or are there particular bottlenecks that we might look at?

Yes, thanks a lot. Regarding the Austrian situation, I can confirm that Haidach is a very valuable asset in the middle of Europe because it's the -- one of the biggest and the most strongest facility for gas, but it is primarily connected to Germany. Therefore, the Austrian government, also to split the resources between Austria and Germany, is now pushing and enabling RAG, yes, to build as fast as possible a strong connection to the Austrian high-pressure grid. This has to take place in the upcoming months this year. And let us hope that, during the winter, they will be able to finalize. And therefore, an example: Part of this technical equipment, it's not easy to buy these days in markets. And this is exactly what we are seeing, specified industrial equipment. It is not able to get any more in this kind of, more or less, real-time markets, yes. Therefore, we see this in a lot of projects, that even confirmed suppliers suddenly back step and try to prolong their obligations to -- for a couple of months, in some cases even longer. Therefore, I expect also a hit to the global economy because this [ is ] taking place just in the energy industry. This is taking place everywhere. On this level and coming to your second question, my comment regarding these delays is not in relation to the existing projects. We have some delays there, but we also have the right to be compensated for these delays. It is more about the overall calculation of future projects because, if you put all these risks in your financials, yes, then it's also a question if you can be successful in markets with these projects and this cautiousness after this crisis which we are going through now. And maybe you can see [ worse ] developments upcoming. We took the decision to readjust our expectations on earnings and risk in this case, yes, also regarding market risk premiums for countries and so on. I even would expect that a couple of potential customers will start to delay their projects because they must be in similar situation. Therefore, we will see this kind of hit on the global economy in a lot of different ways. Is it helping? Is this answering your question?

Yes, it is helping, but I still have a follow-up because, your renewables capacity targets, you have increased them several months ago. Did you already secure the supply contract for the wind mills and [indiscernible] [ installations ]?

Teresa, this is really the -- a good question, yes. What we are expecting will -- at the end of '22, yes, that we will have [ 450 megawatts ], yes, increased capacity. Of course, there can be delays in construction and so on, but the wind mills and the supply contracts of the wind mill, this was the earliest things we were drawing in the minute we made the decision and we got the permits to build because it's exactly what is happening. There is such a demand environment [ for wind mills, yes ], that if you are late to the party, you have to wait quite a time.

Okay, so at the moment, there seem to be no further questions. [Operator Instructions] Okay, so there seem to be no further questions, so let me hand back over to your hosts for some closing remarks.

Thank you for joining today's conference call. We will publish the results for the third 3 quarters of '21, '22 financial year on Thursday, 25th of August. Please join us then again. Stay healthy, and goodbye.