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

Hello. I'm Alexandra Titan, Head of Investor Relations Department. Together with the entire team, I would like to welcome you to the presentation of Electrica's results the third quarter 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 under Investor News section. [Operator Instructions]. Kindly note that the entire conference is being recorded, [Operator Instructions] During our call, we will present the financial results for the third quarter of 2020 and the main aspect on the impact that COVID had on our group's activity. We will move afterwards, the main corporate events that took place since our previous presentation, and we will discuss also about the status of our group strategy implementation. Afterwards, we will have a Q&A session. I will now leave the floor to Ms. Corina Popescu, Electrica's CEO. Thank you.

Thank you very much, Alexandra. Welcome to the presentation of the results of Q3 2020 of Electrica Group. So I will mention only some few words, and then we'll start the presentation. 2020, it's a very difficult year for everybody, even if -- even this, I think we prove that what we promised to the market, we are prepared to deliver. Last year, we approved about Electrica Group, our strategy. This year is the year when we start to implement it, our strategy, and we start with a first step with a big project to consolidate the existing business. And with only small steps, we'll start to develop our activity, our unorganic growth. So next year, I think we'll prepare for the next step of implementing of the strategy. But until then, let's present the results and let's see what we are done this year. Madalina, I kindly ask you to start the presentation of the results.

Thank you very much. I'm Madalina Rusu [Audio Gap] Mentioning that for the first 9 months of 2020 [Audio Gap] from the Energy [Audio Gap] Also in the 9 months, we have recorded a 51% rise year-on-year, and the net consolidated profit had [Audio Gap] increasing by 146.2% [Audio Gap] and reaching RON 396 million [Audio Gap] Regarding the financial position, the group is on a slightly decreasing [Audio Gap] balancing this capital structure compared to [Audio Gap] The main drivers behind this evolution [Audio Gap] are, on one hand, the supply segment with its cash position decrease. And on the other hand, the distribution segment since we had to finance the CapEx plans and also the working capital. [Audio Gap] In the first 9 months, cash utilization by intra-group loans went in through the cash pooling structure. That's pool is usage of bank over [Audio Gap] So this [Audio Gap] Free cash pooling structure allowed the group to optimize the use of liquidity companies and to quickly cover any unforeseen liquidity needs. Looking forward, we will explain the EBITDA evolution year-on-year. [Audio Gap] increased by RON 280 million compared to the same [Audio Gap] last year. The main driver being the energy margin with a significantly positive variation of RON 245 million. Most notable part 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 year. Distribution segment margin also improved due to higher regulated tariff, but the positive effect is offset by the distributed volumes drop and by the slight increase in electricity costs needed to cover network loss. EBITDA was also influenced by the net positive effects, resulting from the reversal of [Audio Gap] impairment adjustment for the depreciation of uncertainty at the group level in amount of approximately RON 105 million, after adjusting the uncollected VAT from Oltchim. This favorable impact was partially offset by the recognition of the impairment adjustment expenses from approximately RON 50 million, following the receivables recoverability analysis considering also the COVID-19 impact. There is also a favorable effect of RON 41 million from operating expenses reduction as a result of our efforts of streamlining of several cost categories, especially on the distribution segment. During this period, we also recorded a gain of RON 8 million from the acquisition of LBM subsidiary, representing the difference between the market value and its net asset value. Positive OpEx were partially offset by employee benefit rise of RON 81 million, 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. Out of this amount, RON 25.6 million represents redundancy costs incurred for the voluntary leave programs of some group companies. On the distribution side, the estimated regulated asset base at the end of Q3 2020 was RON 5.6 billion or around EUR 150 billion. Revenue from the distribution segment increased by 2.1% compared to Q3 2019. Main factors generating this evolution are the favorable impact of approximately RON 54.8 million from the average increase in distribution tariffs, that offset the negative effect of the distributed volumes drop by 3% year-on-year. And on the other hand, the negative impact of RON 15.9 million from the decrease 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 purchase to cover network losses increased by around RON 7 million, mainly due to the increase in the electricity purchase prices, partially offset by the slight decrease of the quantity of electricity needed to cover network losses. The expenses for salaries and employee benefits increased by 13% compared to Q3 2019, following the new collective labor agreement provision entered in force in 2020. But this effect is almost fully offset by the OpEx reduction of approximately RON 45 million. Overall, EBITDA increased by approximately RON 53 million, while the net results increased by approximately RON 14 million. Net debt of the segment has increased by 3%, and represents one of the main driver behind the financial position evolution of group level as 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 cost incurred and those approved ex-ante by the regulators. In the next slide, information for each distribution company is presented, referring to financial aspects as well as CapEx plan, network losses and volumes distributed. Compared to last year, as a result of the pandemic crisis, there are significant distributed electricity volumes drops on the high and medium-voltage level for all DSOs, as the consumption for certain users, especially companies, was significantly reduced. While on the low voltage level, the quantities are only slightly below the last year ones or even increased, as is the case of Muntenia North. This change of the mix in distributed volumes level led to higher percentage values of network losses achieved. Due to technical aspects, the low level record the higher -- the low voltage level recorded the highest value. As we always mentioned, the target for the network losses are set for the entire year by ANRE and are relevant only at the year-end. But only as a matter of disclosure, all 3 DSOs are now below the ANRE targets. The cost with the network losses had a mixed evolution for the 3 DSOs, namely increase for Muntenia North and Transilvania North and decreased for Transilvania South. While talking about volumes for network losses, this increased only for Transilvania North. Regarding CapEx, except for Transilvania South, where there is a significant drop compared to the record CapEx values from Q3 2019, the other 2 DSOs are the same or even above the 2019 level. The distribution companies aim to implement the investments and maintenance plan 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 crisis on them. And going further, we present the financial impact of COVID-19 on the distribution activity in the first 9 months of this year. And we should mention that the cost of electricity needed to cover network losses was RON 22 million below the budgeted level for this period due to the evolution of the actual electricity purchase price compared to the estimated one at the budget moment. The electricity distributed quantity is 5% lower than the budgeted level for the period. And even though an improvement of the evolution of the distributed quantities is noticed in the last month, at this moment, the impact of the pandemic cannot be accurately separated from the total variation of volumes. It's worth mentioning that any correction between the actual quantities and the reduced distributed volumes, as we have this year, will be included in the 2022 tariffs, that will be granted by ANRE. Regarding Electrica Serv, I would only mention that we are performing the last steps of the merger, and Serv will be liquidated. And after the merger, the company's activity is expected to be optimized, both in terms of employees and profitability. Now moving to the supply segment. As of August 2020, the latest available data, Electrica Furnizare is a market leader with a total market share of 19.47%. The market share on the regulated side being 54.2%, while on the competitive market is 11.06%, higher compared to end of 2019. In the first 9 months, the group supplied 6.8 terawatt hours of electricity, a 0.5 decrease year-on-year to a number of 3.6 million final consumers, both in last resort regime and on the competitive market. The revenue from the electricity supply segment increased by 4.3%, mainly driven by the 3.2% retail sale price increase that offset the slight reduction of 0.5% of the retail supply volumes. The cost of electricity purchased for supply decreased by 2.7% in the 9-month period compared to the same period of last year, being mainly the impact of the downward evolution of the electricity purchase price on the regulated segment. As we mentioned, this is following the recovery in 2020 in the form of positive correction of some unrecognized costs from purchase of electricity from previous years when the tariffs approved by ANRE did not fully reflect our actual purchase price of electricity. During this 9-month period, EFSA registered an acceleration of the correction recovery and reached RON 156 million, value, which also includes the related regulated profit for this period. This is due to the average purchase price achieved compared to the one used in the ex-ante calculation. So as a result, EBITDA and profit increased accordingly. Regarding the financial position, the net cash decreased compared to December 2019 as the cash and cash equivalent position is lower by 17.6% at the end of Q3 2020. This is due to the slight decrease of collections following the change of payment channel during the pandemic period. Both in terms of revenues and volumes on the retail market, it can be noticed a stable position compared to H1 2020. And the next slide refer to the COVID impact on the supply activity. A decrease in the quantity supply that's compared to the values included in the budget is, of course, considered. And regarding the postponement of the payment of electricity and natural gas bill, no significant changes took place since our last meeting. The emergency audience for SMEs remain applicable. And at the end of the quarter, there were less than 700 clients with certificates that requested deferral of payment of around RON 20 million on a significant amount compared to EFSA's portfolio. Also regarding the evolution of the aging intervals in the collection of receivables, there is no significant variation as it is comparable with the end of 2019, and we have no impact on liquidity. Moving on, I would like to highlight that the available liquidity buffer is significant. And the level of received payments and liquidity is monitored daily by each company in the group and consolidated in order to detect any deviation in due time and will take the appropriate measures. Thank you. And now I will leave the floor to Alexandra to go on with the presentation.

Thank you, Madalina. On the next slide, you can find the main corporate events that took place since our last web conference in the third quarter and up to date. Also, there are some information on the main projects of the group. On the distribution operators integration project, meaning the merger absorption of the 3 DSOs, after Electrica's extraordinary General meeting of Shareholders approved the resolution of the absorbed companies on 21st of August, the merger has been approved by the merging companies GMSs. The Cluj court approved the merger process on 14th of October. So at this moment, the effective business integration is the focus in order to maximize the synergies. The effective date is the end of this year, 31st of December. And the group is preparing for the evolution towards the new energy system, digitally distributed and operated. The aim is to improve the financial performance and to ensure the long-term sustainability on the distribution segment, while on the other hand, to enhance the efforts in order to achieve the regulated target for the controllable OpEx. An important aspect related to the DSO's merger is the change in the methodology for establishing distribution tariff. The new order is enforced starting 1st of November 2020, and the post-merger tariffs are to be calculated based on the forecasted costs and revenues approved at the beginning of this regulatory period, distinct for each network area. Delivery representatives of the shareholder and of the DSOs have to send to ANRE by 30 days prior to the effective date, a document by which they undertake the benefits of the merger for each year of this regulatory period, including the cost reduction compared to the approved costs. The group's target is to reach the level of the controllable OpEx imposed by ANRE. Also, this methodology states that the merged companies will report annually separately the cost reductions compared to the approved costs, which are the gross benefits, as well as the expenses generated by the merger, which are not to be recognized in the tariff. The gross benefits will be shared between the operator and the network users, the distributor keeping 40% of this. The -- another provision is that the 2024 tariffs can increase in real terms by a maximum of 10% compared to the 2020 free zonal tariff. Regarding the integration project of the 2 energy services companies, also in this case, the same steps have been completed. And the Bucharest court approved the merger process of the services companies on 17th of September 2020, and the effective date of the merger is November 30, 2020. Moving further, we have additional information on the vertical integration project of the group. The news here is that Electrica Furnizare closed the transaction for the acquisition of shares in Long Bridge Milenium, the company which owns Stanesti Photovoltaic Park in Giurgiu County. Also, the transfer of shares ownership to Electrica Furnizare has been finalized at the end of August. The final purchase price is EUR 1.63 million, and it includes the adjustments made at the end of October in view of the financial results according to the trial balance at 31st of August 2020. And an additional information is that Electrica Furnizare took over the loan granted by the former shareholder to Long Bridge Milenium in total outstanding amount of EUR 3.82 million. And now in the last slide, information about dividend is presented. We would like to reiterate that the dividend yield computed at ex-date was 6.9%, and that we continue to offer a stable dividend yield as provided in our dividend policy. Now in the appendices, you can find additional information on regulations, both for the distribution and supply segment, evolution of shareholders, shareholding structure of share price and some additional information. But now that we have reached the end of our presentation, we invite you to ask questions using the Q&A session. And therefore, this, we propose to have a 5-minute break. And afterwards, we will come back to you with the answers. Thank you very much.

Hello. One of the questions received were related to the benefits associated with the merger of the distribution companies that are supposed to be shared among consumers -- between consumers and DSOs. Electrica DSOs being entitled to kept only 40% of those benefits. And the question is related to whether we do have currently an estimate over those benefits? First of all, as a matter of clarification, since the changes in the distribution methodology is already approved and it is clear related to the situation where different distributor operators are involved into a merger process, Electrica's objectives in the distribution segment was to be able in the fourth regulatory period to operate the distribution business with the level of operating expenses within the limits that were approved by ANRE as controllable OpEx. We all know that this was a very ambitious objective with changes that were promoted by ANRE at the beginning of the fourth regulatory period due to the significant changes in the distribution methodology. And in 2019, we have recorded quite a significant gap, exceeding the level of controllable OpEx. In 2020, according to our budget, we have proposed an ambitious reduction of those controllable operating expenses. And as Madalina explained, within the first 9 months of this year, we already managed to record significant savings regarding those controllable OpEx. And we do hope that by the end of the year, we will be as close to the target proposing the budget as possible. However, for the other 3 years of the fourth regulatory period, our ambition and strategy will remain the same. So we do hope that we will -- would be able to operate the distribution business of the DSO at a level of controllable OpEx approved by ANRE, and with already an efficiency target associated with those OpEx of 2% on a yearly basis. And currently, we do not have any additional estimate, whether we will be able to obtain additional savings, monetary savings, beyond the level of the controllable OpEx approved by ANRE. So the matter of splitting the benefit associated with the merger process between the DSO and consumers is only related to the additional benefits obtained beyond the level approved by ANRE as controllable OpEx. Currently, as already mentioned, we don't have the expectation that we would be able to achieve additional savings. But obviously, the process is a lively one, so we'll continue to monitor closely the measure that we can implement in this segment. And in those cases, if we achieve additional benefits, of course, the customers will benefit, but also the DSOs. Thank you.

Thank you very much. These were the questions received. In case you have any additional questions on our results or on our activity, please send us an e-mail at irelectrica.ro, and we will come back to you. Thank you for attending this event. And we are waiting for you to the next event that will take place. Thank you very much.