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

Hello. I'm [indiscernible], part of Investor Relations Department and together with the entire management team, I would like to welcome you to the presentation of Electrica results for the first half of 2021. Those of you who are connected only by phone, please download the presentation in PDF format available on our website on the Results and Presentation section. [Operator Instructions] Kindly note that the entire conference is being recorded and due to the large number of participants, the participants' voices will be disabled. Now we will begin the presentation, and we will have a discussion on the financial results for the first 6 months 2021. Afterwards, we will discuss about the financial impact of electricity market perspective evolutions on group activities. And at the end, we will have a Q&A session after a short break. Now I will leave the floor to Ms. Corina Popescu, Electrica's CEO, to begin the presentation.

Thank you very much. I want to welcome everybody to the presentation of H1 2021 financial results of Electrica Group. In the beginning, before to leave the floor in favor of Madalina to present the figures, I would like to mention only some important things that happened in this first 6 months that can be noted. We followed our strategy, and we succeeded to sign the agreement for the first 207 megawatts in production in the renewables. And in the last GMS that has placed in August, we put the basis of our production company, under which we will start to develop our production in Electrica Group. This is an important step that with a strategy to conclude it in order to reach our targets from the strategy also. And I think this will add supplementary value to our group. Regarding the distribution, we will start the integration of the 3 DSOs after the legal merger that was approved in the end of 2020. And regarding supply segments, we start to manage this opening of the market, and we have some major step also favorable in this direction. Let Madalina Rusu to present the figures. And if you have questions, please address and we are here to give you all the answers.

Hello. I'm Madalina Rusu, Head of Budgets and Controlling. And I will start to offer an overview of the group financial information, and then I will go into more details about the segment performance for each segment. In the first 6 months of 2021, we had a 2% increase in revenues, mainly from the energy revenues on the supply segment. But despite this revenue evolution, EBITDA has recorded a 27% decrease year-on-year, while the net consolidated profit decreased by 60% and reached RON 76 million. Regarding the financial position, the group has balanced capital structure compared to the previous year, increasing its net debt position and the main drivers behind this evolution are, on one hand, the supply segment with its cash position decreased. And on the other hand, the distribution segment, where the CapEx plan and the working capital deficit is financed. Starting 2020, as you know already, the group has cash pooling structures in place and the positive impact is visible as the cash utilization by intragroup loans led to significant less usage of bank overdrafts. We will go on with the evolution year-on-year. In the first half of 2021, EBITDA decreased by RON 129 million compared to the same period of last year, reaching RON 357 million. The main driver being the energy margins with a negative variation of RON 101 million. The most significant impact comes from the lower supply energy margins generated by the higher level of electricity purchase costs, following the complete market liberalization from this year, and also considering, as we previously mentioned, that 2020 was favorable influenced by the recoveries on the regulated segment. The distribution segment's margin has a positive impact on consolidated level, following the rise in both distribution tariffs and quantities of distributed electricity. But this effect is only slightly offset by the network losses evolution. Other revenues reported a negative variation of approximately RON 4 million, mainly from the evolution of the energy services company's revenues. There is a negative impact of RON 23 million from the operating expenses increase, mainly from the following: increase of employee benefit by RON 14 million, mainly generated by the salaries and other benefits increases in the distribution area, as a result of the CLA provision alignment in the 3 regions following the merger. And this negative effect is being partially offset by the expenses decreased within the supply company, where there was no voluntary leave program in 2021 compared to 2020. There is also a negative impact of RON 12 million from the impairment adjustments for trade and other receivables, as a result of some clients' insolvency on the distribution segment, but I will go in more detail later on. The net change in provisions also had an unfavorable impact of approximately RON 11 million. Out of this amount, RON 7 million referring to the provision recognized for the supply subsidiary potential obligations, representing compensations derived from the application of the performance standard for the electricity supply activity, following the market liberalization starting 1st of January 2021. These negative effects were partially offset by the OpEx decrease by RON 9 million, especially due to recognizing in 2020 an impairment loss related to the AMR system, which has no effect in 2021, and also by the RON 5 million reduction of maintenance and material cost in 2021. On the distribution side, the estimated regulated asset base at the end of H1 was RON 5.8 billion, representing around EUR 1.2 billion. And the distribution segment's revenues recorded a decrease by 7% compared to H1 2020. The main factors behind this evolution being: Firstly, the favorable impact of approximately RON 109 million following the rise of 9.1% in the volumes of electricity distributed and an average of 2.9% increase of the distribution tariffs year-on-year. The second factor is the negative impact from the drop of revenues recognized in relation to the distribution network impairments, decreasing by RON 189 million compared to last year. But this has no significant impact on the margin, because it's almost entirely offset by the related expense. And the last factor is a negative impact from the changes in the operational segment's structure. It was following the merger of SEM and SERV in 2020. Starting from 2021, SERV revenues are presented in the electricity network maintenance segment compared to 2020 when these were included in the distribution segment. The cost of the electricity purchase to cover network losses increased by around RON 6 million and this is mainly due to higher volumes of electricity needed to cover network losses, but also to a rise of electricity purchase price. The employee benefits increased by approximately RON 5 million, as I already mentioned. And this negative effect is partially offset by the changes in the operational segment structure. The operating expenses have dropped by RON 19 million from several cost categories reduction like transport, fiber optic rent, et cetera, and is canceled by the receivables impairment adjustment of approximately RON 24 million, mainly due to the insolvency of several customers like Getica, COS Targoviste, et cetera. There is also an unfavorable impact from the net change in provisions around RON 4 million, mainly due to the increase in employee benefit estimates, as a result of the actuarial report computation that we performed this middle year. Overall, EBITDA increased by RON 81 million, while the net result increased by RON 64 million. Net debt of this segment increased by 5% compared with 2020 year-end. Significant financial resources are used for financing the distribution networking platform and the working capital deficit, which results from the timing differences between our actual costs and the expanded costs approved by the regulator. In the next slide, we present the information about each distribution region, referring to network losses, distributed volumes and realized CapEx. It's worth mentioning that compared with last year, when the pandemic crisis started at the end of Q1, this year, the distributed electricity volumes reported an increase on voltage level for all 3 regions. And while regions are now above the network loss percentage target set by the regulator, we should remind that these are relevant during the year, but only at the year-end. Regarding the network losses costs, these are higher for Transilvania North and Transilvania South, in line with the evolution of distributed electricity volumes, which are also higher. And for Muntenia North, network losses cost recorded a decrease, mainly due to a lower electricity volume needed to cover network losses. The distribution company [indiscernible] this year. And at this moment, there are no elements that [indiscernible] it may not be possible or easily accomplished. And I should mention that at the end of H1, the statutory values of ANRE recognizable CapEx realized by DEER is RON 178 million. Going further, I would like to mention that the electricity distributed quantity has an upward trend, not only year-on-year, but also compared with the budget, which is 3.7% higher. The cost of electricity needed to cover network losses was by approximately RON 14 million above the budgeted level, mainly due to larger volumes of electricity needed to cover these network losses. Moving to the electricity network maintenance segment. In H1 2021, EBITDA decreased by around RON 12 million, while the net profit dropped by around RON 16 million. When the increase of revenues from this segment is just [indiscernible] by the OpEx and its increase. Going to the supply segment. The latest available data as of April 2021 show that Electrica Furnizare has a market share of 18.54%, and is the market leader on the U.S. and SoLR market, with a market share of 31.14%. And on the competitive market has a share of 10.71%. In 6 months 2021, the power supply company supplied 4.6 terawatt hours of electricity and 3.5 million consumption place is taken into account to both segments. Revenues increased by 8%, mainly driven by the 6% retail sales price increase, but also of the 0.8% rise in the volumes of electricity supplied on the retail market. The cost of electricity purchased for supply increased by 24% year-on-year, mainly determined by, on one hand, the higher electricity purchase price, both on the competitive and universal service segment, and supplier of last resort segment, which in 2020 was regulated and was influenced by the recovery in the form of positive corrections for some purchases losses from previous years when the tariffs approved by ANRE were below the actual electricity purchase price, positive effect that doesn't decrease in 2021. And on the other hand, the other factor is the 14% increase year-on-year of electricity volume purchased for the competitive segment. So as a result of all these factors, EBITDA decreased unfortunately by RON 197 million and the net profit by RON 168 million. And regarding the financial position, the net cash decreased by 68% compared with the year-end due to lower cash and cash equivalents being one of the main drivers behind the net debt to increase for this semester. Both in terms of consumers' numbers and volumes on the retail market, we can measure that the position is stable compared with H1 2020. And the next slide referred to the supply activity during the pandemic context and later market evolution perspective because we had a lot of changes in the last year. We reported supply volumes up by 2.2% compared to the budget. So I would like to emphasize that the change is brought by the alignment with the EU regulation, started to have an impact on the electricity market, meaning that the day-ahead-market prices recorded an upward trend year-on-year, peaking historical maximum level for June 2021, expected to increase by 152% compared with June 2020 and 106% compared with June 2019. So these are the highest trading prices recorded in June in the last 10 years. Regarding the performance of the electricity and natural gas fuel segment, no significant changes took place in our last meeting. The emergency ordinance for SMEs remains still applicable. And at the end of this half year, there were only 692 clients with certificates that requested deferral of payments of around RON 21 million, which is significant compared with EFSA portfolio. Also regarding the evolution of the receivables collection aging interval, significant changes were recorded only in the evolution of 0 to 30 days interval with an increase of around 15% compared with year-end 2020. And in the next slide are presenting information about liquidity after the dividend payment at the end of Q2. And now we will take a short break of maybe 10 minutes to receive your questions, and then we'll come back. [Break]

Hello, everyone. So we have received a bundle of questions. Some of them are overlapping. And I will try to respond to the questions that are similar in nature. One question refers to the quantity that -- the electricity that company has already brought on long-term market for 2022 and 2023. Unfortunately, to this question, we cannot answer both Distributie Energie Electrica Romania and Electrica Furnizare are market player, and they are acting in a competitive environment. Both companies have offtake strategies in place and the risk management strategies that foresee that part of the estimated consumption for Distributie Energie as well as for the estimated sales for the electricity supply company needs to be purchased in advance. For obvious reasons, meaning competitive issues, we are not disclosing how much we purchased in advance, by how many months in advance and so on, but these strategies are in place. Obviously, we are not purchasing in full all the required quantities, but it's a strategy applied in sets. That is why part of the estimated consumption for Distributie, and the estimated sales for Electrica Furnizare are also exposed to market risk, meaning that in a certain period of time, the prices have upward or downward evolution and these are exposing the combined to this market risk and it was obvious that part of this risk was transferring to our results in the first half. Another related question is how do we see the evolution of the margin in the second half of 2021 in the supply and distribution? For the distribution, being a regulated company, I will only comment on what the deviations are as compared to the regulated model. As for the supplies, we have 2 main components: one is universal service. For that part of the business, the price is already announced for the second half of 2021. So from a revenue perspective, things are rather fixed, what concerns the price. For the competitive market, for the other segment, with eligible clients, we have contracts in place. Other contracts are new, but we also have pricing strategies made and we are trying to discuss and to negotiate with our customers, passing over partially or fully the market price effect onto their contracts. And this strategy has already -- is in place and it also has some level of structure because we are trying to have this revenues adjustments. But on the other hand, due to our hedging strategy, which is a quantitative one, we have already secured the acquisition of electricity for the second half through prior forward contract before the wholesale price increasing. However, this is not covered in full. And again, it would pretty much depend the margin evolution. On the evolution also of the spot prices, as they have market prices in the second half, a balancing market evolution, the assessment is that if -- should the prices on the wholesale market and to have this, I would say, rather unexpected evolution with this record high prices, one would expect that this would have a negative influence on the margin in the supply business. On the distribution segment, we've mentioned that the deviation as compared to the budget are mostly what concerns network losses costs, and this is also mostly a price effect in which the cost of electricity is -- part of the effect is also due to the quantity of electricity required to cover network losses. But at least what concerns the quantity is our expectations of the measures that we have in mind and should be implemented for the rest of the year were that of keeping the network losses -- percentage network losses within the regulatory value. So for the distribution, this would be pretty much expected, mostly because of the deviation. But obviously depends also on the distributed prices of electricity. So you could expect your further valuation. Another question is related to our expectations in terms of number of clients in the second half of 2021. In case the question [indiscernible] it is not about the consumers, end consumers of the Electrica Furnizare. Definitely, we have our budget and the business plan. This is a liberalization market. A lot of our clients [indiscernible] universal service and competitive offers, and we are not expecting a severe loss of network clients. So in terms of number of clients, our expectations are aligned with the budget. Also another question on the supply. How far prices increased in the first half of 2021 will impact the [indiscernible] results of Electrica? Part of the prices in 2021 in the first half was impacted combined in the first half, but definitely if we enter into SoLR contracts signed in May or June for a 1-year period of time, the cost of this -- the electricity price is embedded into this acquisition prices shall be reflecting into our future results and it is the company to transfer our price increases into the end consumer prices. So obviously more -- the longer the period is for the contract, for 1 year or 2 years, definitely our selling strategies and the way we justify our end prices to the consumer will [indiscernible] acquisition prices and the end consumer should be the one that should bear that market price increases. What are the company's plans regarding the recently approved acquisition of electricity production capacity and when we will see the impact of this acquisition? If the question is related to the 3 recent SPVs acquired, meaning that we already paid 30% of the price and acquired 30% of the shares in 3 SPVs that should develop some renewable energy through the projects. First of all, the PVs existing into the [indiscernible] agreement needs to be fulfilled in order for us to be able to make the acquisition in full to 100%. And afterwards, the impact shall be contained by the CapEx for this -- the project implementation. And I will discuss another question, how much [indiscernible] definitely in line with the existing price PV and wind project, how much is supposed to take to build 1 megawatt installed capacity of PV or wind capacity. So the CapEx will follow probably starting 2021. And COB should be expected probably in the last part of 2023. Is it possible to recover the impairment losses on supply if they came from universal service? Definitely no, if you are referring to the adjustment of the receivables. This can be recovered but we adjust [indiscernible] temporarily. The impairments are booked in the statements prepared using the [indiscernible] as well and they are also recorded into the financial statements of the subsidiary, part of using recent accounting policies. Under IFRS, they are recognizing [indiscernible] IFRS 9. When [indiscernible] what is the usual process for the net provision by the regulator in [indiscernible]. The question regard to the distribution regulatory tariffs, they are not recognized in accordance with [indiscernible] further impairments for distribution in the following [indiscernible]. If the question refers to the impairment recognized on the distribution segment in relation to certain supplier of [indiscernible] it depends on probably the future provision of the electricity market prices and financial well being of those suppliers whether they will be able to meet their financial obligations. The question on the margins was already addressed. On the second half, we expect the regulator to expect the increase in power prices weakness this year in 2022, allow [indiscernible] for 2020. The current methodology is to year lag behind, but we already addressed this issue to the regulator. It's still an early discussion. We don't have the [indiscernible] regulator since the evolution of the prices was rather unusual, and it takes long to be recovered in the tariffs. We are seeing a recent working capital in H1, the increase in receivables is not being met by an increase in payables. What is the reason for this? And what should we expect going further? Most of the evolution is temporary in nature, and you should have a close look to the note to the financial statements with respect to the payables and receivables, but when you're looking to the receivables part of the business, take into account that what you have, for example, on the supply segment, price increase [indiscernible] quantity effects. Then the turnover is increasing and then we should have the same non-receivable turnover [indiscernible] for the overall accounts receivables [indiscernible] environment. And [indiscernible] payables is also important, and there is no worry in the working capital evolution since the group has a strong ability to finance the working capital evolution. And moreover, with the recent changes brought into the regulation, we should be able to [indiscernible] consumers, which should add towards improving the customers for the sales year towards paying the receivables and not building enough additional account receivables. And we should also act towards increasing the recovery rate and reducing the deferred rates when we have those estimates of the impairment adjustments towards the receivables. We are seeing increase in losses of the external network maintenance subsidiaries and can you explain why the losses have increased and what should we expect to happen [indiscernible] by the group's management. And one should take into account that the resulting electrical service [indiscernible]. The company is doing a post-merger integration and certain activities are being currently redefined. We do have a new strategy under analysis in order to better define the purpose for this company and the market to act on and to be able to generate the value add for the group and to better focus on external clients. Currently, most of the focus is for the internal clients on the distribution segment, but our goal is to be able to turn it into the future to be more on the other market and to add both of them together with [indiscernible] providing value-added services to our customers. Like for example, the PV project and other related projects. Can you share any details on the rest projects you acquired [indiscernible]? Okay. I think we have already answered the project question. There is a disclosure into the notes of the financial statements in the subsequent event and we disclosed percentage [indiscernible] 30% and expectation to complete the transaction [indiscernible] next year. CapEx financing and project implementation and then [indiscernible] of operation, probably second half of 2023. Compensation deriving from the application of the performance under [indiscernible] following the complete margin liberalization process starting 1st of January [indiscernible]. Due to the operational risk since we do -- we do have another launch of requests from [indiscernible] in very short periods of time, the operational risk happened, meaning that we were not able to process all the client requests in due time. And that is why [indiscernible] supposed to base on compensation to the customers, some changes in the interpretation in the regulation starting 1st of July, meaning either we should be proactive or reactive on company. The assessment is already made as of 30th of June. We have already recognized the provision for this obligation of RON 7 million. But we do hope that the plans we have [indiscernible] measures will act towards having 0 or [indiscernible] signs. So we feel that we should have a [indiscernible] of our business, but we are considering this effect of the operational risk. And we see that in the second half of this year, the pace of [indiscernible] has already reduced [indiscernible] we will not be able to implement those measures aim at having good -- nice operational objective of the [indiscernible] in due time. The effect should -- also will lower. [indiscernible] revise the budgets for financial year 2021, what do you see [indiscernible] net profit on the supply and distribution segment? It's a good question. We are not discussing about revision of the budget downwards or upwards. What you can see in the first half is at least due to the second quarter of this year, we are somehow behind the interim budget over 3 months. Definitely, we don't have any reason for releasing -- updating the budget, [indiscernible] but as we have discussed, there are some negative valuations for the distribution segment and we are discussing the [indiscernible] for the network losses segment. If this shall continue by the end of the year, definitely it will have a negative impact on the P&L, which was not forecasted when we [indiscernible] the budget in February. And for the supply flows through the same assessment, meaning that the net energy margin has swinged due to these acquisition prices. When we are looking back to the project, our estimate future evolution of our market prices and their market prices for this year -- for the remainder of the year and for the other quantities that were required to be far from the market was definitely lower than what the prices we currently see in the market. So in order to utilize the recession, we will have to closely monitor the market price evolution. Other question also related to the working capital, I think it was already replied. The question on the working capital was previously replied [indiscernible], but on the receivables we provided [indiscernible] Have you made any progress regarding the capacity development? Yes, we have received the approval of the shareholders to set up a new subsidiary, which will be the group subsidiaries used in order to develop new projects. We have recently acquired 3 SPVs, both for PV and wind project. Last year, we have made already operating in small PV capacity, which is under the umbrella of Electrica Furnizare and their subsidiaries. And we have also many other projects which are currently analyzed, but they are in those stages of analysis and discussions, which do not require disclosure. When we will be in a similar position, we will make the adequate disclosure to the market, since we've already announced the strategy [indiscernible] in terms of the installed capacity [indiscernible] Can you tell us what was the company's exposure on the overall spot balancing market related to the [indiscernible] distribution segment? Not as detailed as required. Since again, I mentioned that this information is kept for competitive reasons by our companies, but also the distribution -- although they are less impacted as compared to supply subsidiary, they also have their own OpEx strategy and they started in 2021 with quite a comfortable coverage position, but definitely not fully. That is why they are also influenced by the evolution of the spot prices especially. How much is the balance [indiscernible] by the end of 2021 H1? [indiscernible] the current regulatory framework. [indiscernible] We already covered for the regulated segment last year and the closing balance happened as of 31st December 2021 (sic) [ 2020 ]. From 1st of January 2021 onwards, there are no unrecognized balances. If the question refers to the distribution business, we are disclosing this information [indiscernible] in the annual financial statement. And last information disclosed was in the annual financial statements for 2020. How do you compare with your budget for the distribution and supply? I think I have already made some qualitative statements in terms of budget. At least for the second half, it's pretty obvious that [indiscernible] interim budget. Okay, with our forecast for EBITDA margin for the third and fourth quarter in the current context like is the next question. How easy is to transfer the increasing price to consumer? It's not at all easy, especially when those customers have contract with prices. But what I can disclose is that part of the pricing strategy that we [indiscernible] meaning that for our customers, we have already managed to transfer part of the price effect into their contract, definitely explaining the market conditions and the fact that we need to be partnered into this business in a long-term relation, not focusing on the short term. Should we expect for the significant provisions for [indiscernible] should be booked by the end of the year? Again, at least my expectation is that since we are allowed to disconnect the customer or at least inform them that we have the ability to disconnect them and they don't have the ability to postpone their payment, this should act towards improving our recovery rate for receivables voluntarily and also reducing default rate. All these combined, so that our less adjustments for receivables for bad debt. And -- but if we combine all these information together. Quantity of network losses in H1 were substantially higher than the regulatory limit? I think I have discussed in previous earnings call. And the final analysis is made on annual basis. This does not mean that we are not preoccupied with what happened with the interim figures and since [indiscernible] with the fact that we have the deviation, we already have plans to contain an additional measures to contain this slight excluding of those limits. And hopefully, those measures will pay us by the end of the year. But still it is still early to state that by the end of 2021, we will stay exactly within the regulatory limit. We know what we have to do, and we know that there is a negative deviation. We already mentioned there was a continuation for this question, meaning that the deviation has -- and I already explained that there is quantity effect. The quantity is expected to be final if you exceed the limit, whereas the price effect is temporary as long as our average acquisition price of electricity purchase stays below or at most the average acquisition price for all the [indiscernible]. So it's temporary in nature, plus 2 years from this moment, the quantity is final. And there is, I think, 1 last question. We did not understand the impairments are not deviations to the budget for distribution. First of all, we [indiscernible] budget since the budget is [indiscernible] We do include in the budget some estimates for the provisions for the impairment to align with some historical values and our best prediction, but nobody [indiscernible] in the budget, for example, the fact that as of 30 of June, one important supplier will file for insolvency. So we will expect the distribution. But definitely, we could not have this forecasting ability to enter in the budget [indiscernible] which we have an effect of, I think already RON 18 million only that important supplier. So yes, the correct answer is that there is a deviation because we did not forecast the fact that the market will turn into this evolution and definitely those suppliers, which were less other -- than other additional suppliers, and they mostly [indiscernible] probably to the spot market, would have financial difficulties, which will lead them to file for their own insolvency in order to have this protection, but with the change effect over the other market participants. Are there any other questions?

Thank you very much. These were the questions. Thank you for participating to our events. At any moment, if you have questions, please send us e-mails to ir@electrica.ro or call us. See you In November at our next webcast conference.