S.N. Nuclearelectrica S.A. (SNN) Earnings Call Transcript & Summary

Hello again. My name is Valentina Dinu. I'm IR with S.N. Nuclearelectrica S.A. And today, this is the investor conference call for the financial results for the first quarter of 2022. As usual, I will introduce my colleague, Dan Niculaie to deliver you the presentation, and then we can go straight to questions and answers. Then the floor is yours. Thank you.

Thank you. So hello, everyone. Thanks to hear you. So today, we are going to present the financial statements for the period ended on June 13 for the Noralta consolidated with other subsidiaries so the structure of the presentation, it's simple. We're going to go through the financial statements. And then we're discussing about a little bit about OpEx, CapEx, technical performance and then let the next schedule for presentation of financial statements. So in terms of financial performance, I'm glad to report that this is an exceptional semester. We have managed to increase ourselves to a unprecedented level of RON 3.1 billion, which is driven primarily by the increase in price of credit electricity. However, with [ exception ] of several items -- operational items, we managed to keep the cost under control. In terms of operational expenses, which are not necessarily foreseen, we had the windfall tax, which is of significant value. It's almost RON 0.5 billion -- it's more than RON 0.5 billion, and we have some variations in the cost of energy required for the purpose of production of energy and an increase in the cost of personnel, mainly driven by the fact that we are refining people in order to prepare for the future projects of our company. So ultimately, the EBITDA shows RON 1.7 million amount. And the net profit is RON 1.2 billion, which is 55% higher than budgeted amount and more than 200% higher than the result in June 2021. In terms of financial highlights, you will see here the elements, which contributed to the net result. So first of all, the main driver of the exceptional performance is the increase in the sales of electricity, which is driven by the increase in the average price of selling of electricity. The largest negative impact is the windfall tax which has not reached a containable value in 12 months, and it was not fully budgeted for this year. So in terms of the balance sheet position, as you can see, no big changes from the last 6 months and the total assets have increased mainly with the generated profit. We are quite fast reducing our [indiscernible] level. This year, we'll probably have 0 [ yet ]. Other than that, no are there other big changes on the balance sheet. We're going now to into little bit the sales evolution for the electricity. So the most largest impact was increasing the price of electricity driven by the transaction performed under the competitive market. And also the spot market had a positive intent. So therefore, the sales in electricity have reached the increased from RON 1.3 billion to RON 3.1 billion. In terms of sales structure, now this is a very detailed analysis. So let me give you a little bit of background okay. So basically, we sold almost the same quantity of electricity. However, the regulated price was much higher, the regulated -- the average price was much higher. We also sold the same quantity on the spot market. However, the average price on the spot market was higher, which, of course, generated more revenues for us. Well, basically, the spot market sale price was -- average was higher than RON 1,000 megawatt hour compared to less than RON 300 per megawatt hour in 2021. So in terms of expenses, operational expenses on the screen, you see a very detailed presentation of all the elements, which contributed to the cost side of the project. So the largest cost element, of course, was low windfall, which was almost RON 600 million. And then of course, the depreciation and amortization the, cost of traded electricity, which, unfortunately, was twice the amount of last year because of the increase in price of LNG. The personnel expenditures mentioned increased on the account of increased number of employees, about 11%. The cost of uranium fuel about the same as last year, nothing special to be both. The rest of the OpEx elements, the contribution for the commissioning with no variable changes. The rest of the items are of smaller values. I'm not going to go through these elements unless you have specific questions. The next slide about CapEx. So we managed to keep our program of investments. We managed to overpass our budget, so we are glad to report that we managed to realize 52.8% of the budgeted investments. You see here the breakdown of investment made on tangible assets in the statements. Other elements related to CapEx, a lot of information, I will go quickly through this information. We are moving forward with the program to refurbish Unit 1. So as you probably know, in February 23, the shareholders of the company took the decision to move to Phase 2 of the project, which is entitled an amount of RON 1.85 billion. And we have also signed the first contract with a Canadian company for the engineering bit for the project and -- for the engineering of the tools required for the refurbishment. In terms of Unit 3 units for -- you probably heard that yesterday, our shareholders have approved -- our plans to move to Stage 1 for the development of an Unit 3, Unit 4 projects, conditional on an agreement with the government to support the development of the project. And our contribution to the to the development of Unit 3 and Unit 4. At this moment is estimated to be in the region of EUR 185 million. Moving further. In terms of projecting emissions, nothing ready to report, we are functioning within the legal boundaries of safety. The nuclear burn factor is well within the limits. And of course, the unit performance for Unit 2, the sort capacity factor is very good. We are proud to report that we are keeping in line with our previous years. In terms of the next step, in September, there's going to be the publication of the third quarter report, a conference call and the conference call will happen in November 2022. So that's the short presentation in nutshell. If you have any other questions or -- I am here to answer. Thank you.

I'm sorry, I'm not sure maybe you mentioned this -- and I think that in the second quarter, the price on the spot market was below the average spot market from the market, can you tell us why there was a difference. It wasn't huge, but still there is a difference. Now I was wondering what triggers these differences and what we should expect going forward. Also, the price, the forward price is lower in the second quarter compared with the first? And if you could put let us know why that happened?

You probably know, we are selling most of our energy on the stock exchange. So I assume that this is the situation on the early section of the supply and demand on the market. And so nothing else to say about this. It's as mentioned, the first trimester version was indeed exceptional in terms of the prices on the market.

And can you let us know what the triggered the difference in prices in the second quarter versus the first, the lower price in the second quarter versus the first?

On the spot market?

No, no, go forward.

On the competitive market?

Yes, on the forward market.

It's -- as mentioned, I don't know the detail because I'm not early following the day-to-day variations of the market, but I assume that, that was the effect of the supply and demand on the stock exchange.

But normally in forward market, we would have -- I would have expected more predictability that's why I was asking what happened in the second quarter...

Nothing special to my knowledge.

And regarding -- can you tell us how much for forward already for 2023, the number. I don't know if you disclose it or not.

We've not disclosed on 2023. It's -- we don't have a policy to present this information because we have a large factor on the market, and we can -- we don't want to influence the market.

Also, if you can comment a bit on the Unit 3 and 4 and the small majority reactor. So far as I understood after previous discussions with the EU and the IR team, you would be considering another equity partner in the project, right? Because we see the statement from Mr. [indiscernible] and he enter the U.S. and he expects decision from the U.S. Axiom bank, sometimes this month on financing of the project, but it's not clear I mean, to me, at least, it's not clear, who the equity partner would be in the project because they are basically agreeing to finance, but it's a loan.

There might be a confusion. We are not envisaging at the moment to bring another equity partner in go nuclear, the project company. The only partners will be S&M in the government who will bring uranium and heavy water as income contribution to the financing structure of the project. And the rest of the financing will be provided by digital credit agencies from Canada. U.S. and Europe. And of course, yes, we've been during U.S. and we received encouraging signs from U.S. team with regards to the involvement in the project.

So there won't be another equity partner in reactors 3 and 4 or in the SMRs?

In the Unit 3 and Unit 4, we are not envisaging at the moment, another equity partner. In with the SMR, the financing structure is not yet complete. We are not exceeding bringing another equity partner alongside the SNN and the owner of the land. So this is too early to report to report on this.

But then for the Unit 3 and 4, who would be assuming -- I mean, assuming there will be delays like we've seen other project delays and the cost overruns. What would be assuming that? How would that work.

The cost overrun and the abandonment scenario under discussion with the government at the moment, we will come back with the information on the strategy in this respect.

How soon do you expect -- how long should we expect further details on the reactor 3 and 4?

Sorry?

On the reactor 3 and 4, how soon should we expect further details on this?

We are reporting as soon as we progress on with -- on this project. So at least literally trimester or every 6 months. But if there is anything substantial to report, of course, it will be communicated to all the interested parties.

And the state. I mean, they will be guaranteeing the financing as far as I see here. So basically, they would be granting this loan from U.S. Axiom Bank. Is this how that would work?

This is under discussion with the government decision that has been taken.

Will there be an equity injection by the state directly into the Nuclearelectrica.

No, not necessarily. When the project it will be compete, the government will contribute with uranium and heavy water from its own reserve so an income contribution.

And -- but I've seen -- I mean, I've seen some numbers mentioned some amount for the projects. How much would they be financing the U.S. Axiom Bank. how much of the project 80%, 90%? How much will they be...

You are probably aware that there have been several export trading agencies involved in the project. One will be from U.S. another from Canada because Canada technologies is Canadian technologies. And there will be ECAs from France and Italy for the respective -- for the Italian and French technology. So each -- you are probably aware that this project has been developed with a mixture of technology from North America and from Europe and each ECA will support the export of the technology from each country, from U.S.A., Canada, France, Italy and a portion of the local cost. The exact split is not -- is to be determined because the engineering phase is not yet completed, so we don't know at this moment the exact split of country of origin technology.

And for the local part, who would finance local, I mean, Nuclearelectrica be required to invest equity into the project?

At the moment, the local cost will be financed partially by the ECA in accordance with the UACC consensus, which allowed the ECA to finance up to 50%.

ECA? What is ECA?

Export Credit agencies. [ UACC ] Export Development Canada, BPI France, such as Italy is at the same as Axiom Bank in Romania Export Credit Agencies. So in accordance with the UACC consensus, which regulates the activity of the ECA on the market. The ECAs are allowed to finance a portion of the local cost. What is not financed by the ECA will be financed by also [indiscernible] by financial institutions.

So at the moment, there is no clear -- you don't have a very clear financing structure, how much equity wouldn't create required to inject into Nuclearelectrica.

At the moment, as mentioned, the project is in early stage. We are as indicated on the Wednesday, the government and the rest of the shareholders in Nuclearelectrica gave the go-ahead for the second stage of the project, which is conditioned upon an agreement with the government for the support of the project, which will in turn allow Nuclearelectrica to invest up to EUR 185 million in engineering works. At the end of this engineering work will know for sure what is the exact mixture of products in the project, and therefore, what will be the exact mixture of financing from the Export Credit Agency and ultimately, what will be the equity to debt structure.

How long would that take? Because you need a support agreement with the state. How long do you think that would take? I mean before RON 185 million growth 1 first, this support agreement. How long they -- how long do you think that will take.

And to keep up the project, these renegotiations I assume we will not take more than 1 year.

And at the end, you'll know -- I mean, once you have the support agreement, when will you know how much money you will need to bring this equity?

Again -- so when the engineering is complete by the end of Phase 2, when we will have spent the EUR 185 million on engineering segment.

Okay. So made 1 year to -- and how long would that stage last. Two years?

Almost 2 years, yes.

Okay. So basically, in 3 years, we will know exactly how much money Nuclearelectrica will need to bring to the project, right?

Of course, we -- as soon as the engineering is progressing, we know more about it. So it's a matter of reading the gap of knowledge. But I guess at the state -- the agreement with the state will include all these details.

What happens if the project is delayed, cost overrun is et cetera, right, or not really? Or that will happen later.

This is something that we need to discuss with the government.

Because even if you were to inject just 5% in the project, it will be a substantial amount for the company of Nuclearelectrica size.

Of course.

One thing, just one thing. Regarding dividends, would there be -- would you consider cutting up? I mean reducing the payout below 50 in order to finance reactor 3 and 4? I mean is it something that the state would be considering? Because...

I do not, as you probably know, since we are a state-owned enterprise listed on the stock exchange. So we are bound by the regulation governing all the state on the enterprises. So we are in close consultation with the government in order to determine the best payout ratio each year. So at the moment I don't have visibility on the payout ratio for the following years. But of course, we are advocating the need for a sensible payout ratio that will allow the company to develop all of the projects on its pipeline.

Yes. But it's a problem that we are looking at a very large projects. In the longer run, there could be the possibility that the payout of [indiscernible] 150, right? I mean this is kind of what you're seeing because if you do need to inject significant equity into the project, then of course, there is this risk, right?

We are aware of the need, of course, to retain as much as possible as the free cash flow in order to develop the project. And this is also acknowledged by our counterpoints.

Okay. But the decision was probably taken in more than -- definitely more than a 1-year, probably in 3, right? When you not...

Of course, yes, each year, you probably know that we have a very strict budgeting regime. We have to report the investment that we're going to make in each year. So we engage with our shareholders each year to determine what is the best payout ratio.

If there are no other questions, can I ask a bit more specific to the results?

Sure. Sure.