Societatea Energetica Electrica S.A. (EL) Earnings Call Transcript & Summary

Hello. I'm Alexandra Titan, Head of Investor Relations Department. Together with the management team, I would like to welcome you to the presentation of Electrica's results for the first half of 2020. Those of you who are connected only by phone, please download the presentation in PDF format following the link available on our website. This is available under the Investor News section. Participants connected online can [Audio Gap] as from the first 6 months of 2020, and we will continue with the main aspect referring to the impact that COVID-19 had on our group's activities. We will move afterward to the main corporate event [indiscernible] strategy implementation. Afterwards, we will have our Q&A session. I will now leave the floor to our CEO, Mr. Corina Popescu. Thank you.

Hello, everybody. Welcome to our conference today. And I will -- before to start the presentation, I can say only some few words regarding the results. Even if the past H1 period was a very hard period for all the company, we proved that we are a solid company. We can make [indiscernible] to all the provocations that are happened in the last period of time and the results can prove that. Only some few words, even it was difficult to pass this period of time, we succeeded to speed up all the restructuring process to start to digitization and to adapt our business to the new conditions. I kindly ask my colleague to start the presentation. And in the end of the presentation, we are looking to answer to all your questions. Please, Madalina.

Hello. I'm Madalina Rusu, Head of Budget and Controlling. I will start this section with the group financial information. A consolidated level, in the first half of 2020, we had a 3.2% increase in revenues, mainly from the energy revenues coming from the supply and the distribution segment. Also in this 6-month period, EBITDA has recorded a 35% increase year-on-year. The net consolidated profit trend for the first half of this year surpassed the EBITDA trend -- surpassed already the EBITDA trend increasing by 74% year-on-year and reaching RON 190 million, compared to RON 109 million in the comparative period. With regards to the financial position, the group is on a net debt position, slightly balancing its capital structure. The main driver behind this evolution at group level is the distribution segment since we had to finance the CapEx plan and also the working capital deficit. In H1 2020, the cash utilization by intra-group loans granted through the cash-pooling structures, developed at the headquarter level increased, leading to less usage of bank overdraft. These structures allow the group to optimize the use of liquidity between companies and to quickly cover any unforeseen liquidity needs. Moving forward, we will explain the EBITDA evolution year-on-year. In the first 6 months of 2020, EBITDA increased by RON 127 million compared to the first half of 2019. The main driver is the energy margin with a significantly positive variation of RON 216 million. The most notable influence comes from the supply energy margin generated by the reduction of electricity cost, especially on the regulated segment, reflecting the recovery of purchase losses from the previous years when the tariffs approved by are -- were below the actual electricity purchase price of Electrica Furnizare. The distribution segment margin also improved due to higher regulated tariffs. The positive effect being validated by the distributed volume drop and by the slight increase in electricity costs needed to cover network losses. These positive aspects were partially offset by the other OpEx rise as a net effect of the following 3 factors. First, employee benefits rise as a result of the changes in the structure of the benefits granted to the group's employees according to the new collective labor agreement for a better alignment with the market evolution; second, negative effect from -- the second is a negative effect from trade and other receivables, impairment adjustments following the receivable recoverability analysis, considering also the COVID-19 impact; and the third one is the positive effect of the operating expenses reduction as a result of our efforts for streamlining several cost categories. On the distribution side, the estimated regulated asset base at the end of H1 2020 was RON 5.6 billion or around EUR 1.15 billion. The revenue from the distribution segment increased by 3.6% compared to H1 2019. Its contribution to the group consolidated revenue being around 23%. The main factors generating this evolution are the favorable impact of approximately RON 32 million from the average increase in distribution tariffs that offset the negative effect of the distributed volumes drop by 4.8% year-on-year. And the second one is the positive impact of RON 12.8 million from the increase of revenues recognized in relation to the distribution network investment compared to the same period last year, with no significant impact, though, on the bottom line. The cost of the electricity purchased to cover network losses increased by 2.8% or around RON 10 million. The evolution being mainly due to the increase in the electricity purchase price, partially offset by the slight decrease of the quantity of electricity needed to cover network loss. The expenses for salaries and other employee benefits increased by 15% compared to H1 2019, following the new collective labor agreement provisions entered in -- first in 2020. Overall, EBITDA slightly increased, while the net result decreased by RON 22.8 million as a result of the asset depreciation increase year-on-year of the negative impact of the financial result evolution and also of the income tax variation. Net debt of the segment has increased by 6% and represents the main driver behind the financial position evolution at group level, significant financial resources are used for the distribution network investment financing. There is also an impact from the working capital financing due to the timing differences between our actual costs incurred and those approved exante by the regulators. In the next slide are presented information for each distribution company, referring to financial aspects as well as CapEx plan, network losses and the volumes distributed. Regarding CapEx, except for Transilvania south where there is a significant drop compared to the record CapEx value from H1 2019, the other 2 DSOs are only slightly below the 2019 value. 2020 investment plan is lower by around 20% compared to 2019. And I would like to mention that yesterday, Electrica's BoD approved the implementation of the CapEx plan by 10 -- RON 20 million for Transilvania south mix. The distribution companies aim to implement the investments and maintenance plans approved by ANRE for this year. And at this moment, there are no elements that lead us to consider that will not be possible to be fully accomplished. Of course, we are carefully monitoring the impact of the COVID-19 crisis on this. [indiscernible] with the network losses had a mixed evolution for the 3 DSOs namely increased for Muntenia North and Transilvania north and increase and decrease for Transilvania south, while talking about quantities for this network losses, this increased only for Transilvania north. Compared to H1 2019, as a result of the pandemic crises, there are significant distributed energy volume drops, as I mentioned earlier, on the high- and medium-voltage levels, for all years so, while on the low voltage, the quantities are only slightly below the last year [indiscernible]. This change of the mix in distributed volumes level led to higher percentage values achieved in H1 2020. Due to technical aspects, the low voltage level records the highest network loss. However, the target for the network losses are set for the entire year by ANRE and are not relevant now, but only at the year-end. Regarding the last 2 companies from the distribution segment, Electrica Serv, EBITDA is lower by RON 11 million due to revenue decrease after eliminating the impact of the sale of the assets to the group DSO. A reduction of the related expenses start to be [indiscernible]. This is mainly the effect of reduction in the number of works performed due to the restriction from the pandemic period and also to the lower value of [ out of ] services for DSO as a result of starting the establishment of their own fleet. This impact is partially offset by the maintenance and repair expenses reduction by approximately RON 4.2 million. Now moving to the Supply segment. According to the latest available ANRE report as of May 2020, Electrica Furnizare is the market leader with a total market share of 19.97%. On the regulated side, it has a market share of 53.8%, while on the competitive market is 11.4%, higher compared to end of 2019 on both markets. In H1 2020, the group supplied 4.6 terawatt hours of electricity or 0.8% decrease year-on-year to a number of 3.6 million final consumers both in last regime and on the competitive market. In the first semester of 2020, the revenue from the electricity Supply segment increased by 3%, mainly driven by the 3.9% retail sales price increase that offset the slight reduction of the quantity by 0.8%. The contribution of the electricity Supply segment to the group consolidated revenue is of approximately 76%. The cost of the electricity purchase for supply decreased by 8.9% in H1 2020 compared to the same period of 2019 being mainly the impact of the downward evolution of the electricity purchase price on the regulated segment. This is following the recovery in 2020 in the form of positive correction of the purchase losses from the previous years. RON 139 million were already recovered from the total budgeted value of RON 170 million for the entire year. As a result, EBITDA and net profit increased accordingly. Regarding the financial position, the net cash decreased compared to December 2019 as the cash and cash equivalents position is lower by 8% at the end of H1 2020. This is due to the slight decrease of collections following the change of payment channels during the pandemic period. Both in terms of revenues and volumes on the retail market, it can be noticed, only a slight change compared to December '19 and March 2020 due to the regulated side portion increase. So this being said, thank you. And I will leave the floor to Alexandra.

Thank you, Madalina. Okay. Moving forward on the slide regarding the dividend distribution. Information regarding the dividend is presented, the gross dividend of RON 0.7248 per share was approved by the shareholders in April and the dividend yield is 6.9% at ex-date. Thus, we continue to offer a stable dividend yield as provided in our dividend policy. In the next few slides, we have presented the main aspects referring to COVID-19 impact on our group's activities. We remind you that there was data margins in Romania between 16 of March and 14th of May, and the state of alert afterwards reinforced at this moment. More details on all the measures implemented in the last 5 months are presented in the annex and were discussed at our previous web conference. Going further, we present the hypothesis of the financial impact of COVID-19 on group's activities in the first half of 2020. On the distribution side, even though the cost of electricity needed to cover network losses was higher by RON 10 million year-on-year, it was below the budgeted level by RON 12.5 million as electricity purchase price decreased compared to the estimated one. The electricity distributed quantity decreased by 4.8% compared to the same period of 2019 and is by 7.3% lower than the budgeted level. The largest volumes reductions were recorded on high- and medium-voltage levels, and the companies were the most affected and their consumption decreased during the state of emergency. Therefore, any correction for the reduced quantities will be included in the tariff for 2022, which will also be adjusted for the RRR change during this year. A slight improvement in the evolution of the distributed quantities is noticed after the state of emergency ended. But the impact of the pandemic cannot be separated exactly from the total variation of volume. It is not possible to make a reliable estimate of the evolution of distributing electricity revenues for the entire year 2020. The next slide refer to the supply activity. There is a decrease of the consumption compared to the levers included in the budget. This effect comes on one side from the increased consumption of the household customer segment. But -- and on the other hand, from the estimated decrease from the other customer segments. As a result, the decrease in consumption, together with the purchase and sale price evolution, could have an impact on the gross supply margin on the competitive segment at the end of the year, but this impact cannot be accurately estimated at this moment. Furthermore, the volumes of the regulated electricity purchase agreements allocated based on other decisions, increased to 99% in the second half of 2020 compared to 73% in the first part. Therefore, the quantities of energy purchase from the competitive market according to ANRE Order 236 from 2019 to cover the needs of household customers in the second half of the year are resolved on the wholesale and the retail market at existing prices at this moment. Regarding the purchase prices, there is a downward evolution, especially on the spot market. Determined by the consumption decrease by the increase in the production from renewables, by the decrease on -- of the natural gas prices, but also by the decrease of electricity purchase price on the market of the countries from the region. As a result, the spot market decreased by 28% on average year-on-year in the first 6 months of the year, while the forward product for the third quarter went down by around 26% and the ones for the last quarter of 2020 recorded a 60% decrease compared to the beginning of March. This is estimated to generate a favorable effect on the gross margin on the Supply segment. Regarding the postponement of the payment of electricity and natural gas bills, the emergency ordinance #29 for SMEs that we discussed at our previous web conference remains applicable. The balanced value of receivables from clients with valid state of emergency certificate is of around RON 31 million, while the amount provisioned is around RON 4.5 million at the end of the first 6 months. Until end of June, 762 clients with certificates requested deferral of payments and amount of around 21%. But this is an amount insignificant compared to EFSA portfolio. This slide also presents the evolution of the aging intervals in the collection of receivables, and there are no differences compared to the previous period only small variation, which will -- is not expected to impact significantly our liquidity. Moving to the group liquidity slide. Madalina already mentioned the reasons behind net debt evolution, and this slide provides further details. As you can see in the graph, the available liquidity buffer is significant. The level of received payments and liquidity is monitored daily by each company in the group and consolidated in order to detect any deviations in time. Since our last conference, there were some corporate events that took place at group level presented in the next 2 slides and also some changes were introduced in the distribution and supply segment, but these are more detailed in the annex. So for more details, please see information in the annex. In the last part of our presentation, we have 2 slides presenting the main steps taken in implementing the group's strategy for 2019 to 2023. We have the distribution operators integration project meaning the merger absorption of the free distribution companies, and the integration project of the 2 energy services companies. At the beginning of July, the Board approved the vote in favor of the 2 mergers and [indiscernible] Extraordinary GMS for the dissolution of the group companies, meaning Transilvania south and Muntenia north on the distribution side and Servicii Energetice Muntenia or ENEL Energie services side. After the EGMS the mergers implementation will continue from a legal point of view and afterwards, the effective business integration will be the focus in order to maximize the synergies to prepare both the distribution ENEL Energie services companies for the evolution towards the new energy system, and to improve the financial and operational performance and services quality in a customer-oriented approach. Also, the invested capital allocation and development of the capabilities for the smart technologies implementation are expected to be optimized on the Distribution segment, while optimization of resources allocation between the 2 energy services companies will help the group to ensure the coverage of a wider range of services. Other important project refers to the vertical integration of the group through acquiring producers of energy from renewable resources. Here, EFSA signed in June the share purchase agreement for the acquisition of all shares in Longbridge Millennial company, which owns Stanesti Photovoltaic park in Giurgiu County with an installed capacity of 7.5 megawatt. The closing of the transaction and the transfer of shares are subject to fulfillment of the conditions precedent agreed by the parties, and the final purchase price will be determined at the closing. This is the first step in the process to expand the group's value chain and to develop a sustainable way for group's activities, especially taking into account Green Deal’s challenges. The fourth project refers to the supply area transformation and is projectizes in the entire organization is focused on the optimization of the sales and customer care activities, together with the development of the relevant internal skills. The implementation is in progress on all the 3 areas organizational structure, processes and technology. It focus on creating an organization prepare to respond to existing and future market challenges on the improvement of the satisfaction and loyalty degree of the client and of the overall competitiveness and financial performance. Now I will give the floor to Madalina to add something -- some additional information.

Just a brief clarification. The correction regarding the reduction of RRR from 6.9% to 6.39%, will be reflected in the 2021 tariff. So I think this is useful to be known.

Okay. Thank you. Now we have reached the end -- the first part of our presentation. In the annex, you can find more information about shareholder structures, regulation on the planned distribution segment and so on. We propose to have to take a 10-minute break for you to ask questions. [Operator Instructions] And we will come back in 10 minutes to answer your questions. Thank you. [Break]

Hello, everyone. So we came back. We received several questions. I will read them as they follow up. So the first question is in second quarter of this year. The distributed volumes decline was slightly below national consumption while supply volumes were declining significantly less than the market. How do you comment? First of all, our 3 distribution operators cover only 3 regions, namely 18 counties. And we saw a decrease of the distributed volumes, especially on the high- and medium-level voltage. Therefore, the decrease was -- especially on account of nonhousehold customers. While on the low-voltage level, we in with stable or a slight increased evolution. So the comparison with the national consumption evolution is valid as long as this pattern followed economic development of each region and the businesses that are established in the out region. There is, of course, a correlation between the distributed volumes and the supplied volume since most of our business in the supply is covered by -- and it's in the same area as with our distributor operators, but the relationship is not 1:1. Obviously, supply business is a competitive business. We carry business also in other areas. So there is no 1:1 correlation. That is one of the explanation of the fact that supplied volumes accounted a lower decrease. The second question is where do we stand currently with the merger of the 3 distributor operators? And when the mergers will be completed, there will be a sole set of distribution tariffs? so on August 21st, we have convene the GMS of Electrica GMS has to decide on the dissolution of Translilvania Sud and Muntenia Nord distribution companies. The dissolution of this company is the result of the merger through absorption and according to our constituted act. It is the competence of the GMS to approve the dissolution. Once we will have a favorable decision of the GMS for the dissolution, the merger post should continue. And the effective merger date is established as of 31st of December 2020. If the merger -- if as a result of the merger, we'll have separate distribution tariffs, the answer is that for the 3 years remaining of the fourth regulatory period, most probably not because the drap methodology foresees for the maintenance of keeping up 3 separate regional tariffs. Of course, the situation might be different for the fifth regulatory period and onwards, but we will have to see. Another question is whether there are any news regarding the formal definition of the vulnerable customers and their treatment after the market liberalization starting 1st of January '21. We do not have currently any updated information on this topic. Obviously, as soon as we will have something clear, we will communicate. Another question. I think -- okay, I will read the question. You mentioned correction for 2020 quantities being lowered and forecasted will be given back in 2020? Not necessarily. We've mentioned that the quantity corrections -- during the presentation, we mentioned that the corrections for the decrease of distributed quantities will be given back through to corrections 2 years after or so in 2022. And then, of course, there is a question for the correlation between the tariffs and the fall in volumes. So actually, the tariffs were not modified, starting May to take into account a reduction of the regulatory rate of return. And we have mentioned during the presentation that the correction for the decrease in the regulatory rate of return started in 13th of May, from 6.9% to 6.39%. It will be reflected into the next year tariffs of 2021. And obviously, the tariffs were determined based on the forecasted distributed quantities for 2020, which forecasted the regulated quantities based on which the tariffs were established for this year were actually higher than the ones from last year as they are also reflected into our budget. What is the financial impact of the merger of the distribution subsidiaries? As we have explained also into the documentation provided to the shareholder in support of the approval of the dissolution of the 2 companies, which will be absorbed as a result of the merger, we do expect a favorable financial and operational impact on our Distribution segment because we do foresee operational synergies and also potentially financial synergies. But obviously, these will be seen in time. We've made some estimates, but it's really much dependent on the way the regulatory methodology would look like for the remainder of the fourth regulatory period and also in future. So we are still assessing those. But obviously, we do expect at least to have operational synergies and more efficient business from this point of view because we did explain in the past, one of the most important challenges for the Distribution segment is the controllable OpEx, which we need to contain and to be able to operate the business with the level approved by the regulator. The other question, I think we have replied when the change in regulatory rate of return will be reflected into the distribution tariffs. Another one is for the Supply segment. How much of the RON 170 million line losses from the acquisition price has been actually recovered in the first half of the year? I think we have mentioned detailed in the presentation but I will repeat. The RON 170 million line losses was the initial estimate, which was also included in the budget for 2020 as a budget assumption for full recovery. In fact, after final assessment and corrections for the last year, we have concluded that based on the closing of the 2019 and the final adjustments, the final figure to be recovered this year is only RON 146 million. So slightly lower than RON 170 million. And out of this RON 146 million [indiscernible], we already managed to recover more accelerated, RON 139 million [indiscernible] . So most of the amount in the first 2 semester of this year and this explains also the performance of the Supply segment for the first half of the year. So based on this status of recovery, we are confident that we were recovering full by the end of the year what is remaining. We have another question regarding Supply segment. Why the revenues have increased, while cost with electricity purchases have declined? And what caused the increase in the final sale price? This actually do have a combination of several factors. First, the factor on the cost of electricity is, the more accelerated recovery of the accumulated losses from the past. Another one is the positive evolution of the -- especially of the spot prices -- at market prices compared with last year. So we have also been positively impacted by the lower prices on the spot market, especially. And also, we've managed to -- in some cases, maintain, other cases negotiate some price for the competitive market segment, which allows us to improve the margin on the competitive segment. There is a question related whether we -- do we have several budget scenario for the second half of the year, considering also that there is a possibility of a second wave of coronavirus in autumn? Yes, we do have operational assessment and estimate as part of the management pack also at the level of subsidiaries and group level. But as you can see from our results, we beat the pedals from a liquidity trade scenario for the worse to come. And still we have managed to maintain quite a favorable financial position despite the fact that some of the evolution was quite negative in the last period. And another question is related to the acquisition for the Stanesti Photovoltaic Farm. When the transaction will be closed and when you can see the impact? Obviously, we need to further negotiate with the seller and the certain CPs, condition precedents need to be met. One possibility is for this transaction to be closed in the third quarter, but this is really much dependent on the ability of the seller to close certain CPs. There is one big question whether the individual financial -- the stand-alone financial statement of Electrica, when this will be presenting? Then whether we could give some estimate on the net individual profit for the budget level? In fact, the quarterly results and the half year results, we do publish only consolidated financial statements. But you do have some indications in the segment notes to the financial statement. So you can see in the notes to the financial statements, indications on the Electrica stand-alone, not only at the segment level. Okay. And the last question is for our CEO. And I'll read the question and I will give the floor to Corina to answer this question. We have read that NL is reconsidering their strategy of liquidated Romanian assets as a result of the Green Deal expectations of fund inflow from EU in the development of the network. What is your opinion on the impact of this program on Electrica and its development and profitability? Thank you.

Thank you, Mihai. Regarding this last question, we -- as we already informed you, we apply for the European funds, and all our projects was qualified. And we are looking to use all the opportunity to develop our activity. The first applications are on DSO segment. But if Romania will succeeded to define new opportunities to develop and to implement their strategy to develop our activity unorganic (sic) [ inorganic ] so to enter in different other kinds of segments, for sure, we'll use all those opportunities. We have people qualified, and we prove that we are able to take all those opportunities. I really hope that Romania will be able to define in due time a program, and for sure, we'll be able to take European funds to develop us and to increase our profitability. Thank you very much.

So these were all the questions received until this moment. In case you have other questions, you can send them by e-mail at [email protected]. Thank you very much for attending the conference and hear you next time. Bye-bye.