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

Good afternoon, ladies and gentlemen. I'm Catalina Nedelcu and in my capacity of Head of Investor Relations at Electrica, together with the entire management team, I would like to welcome you to the presentation of the third quarter 2021 financial results. Those of you who are attending only by phone, please download the presentation in PDF format available on our website on the Results and Presentation section. Kindly note that the entire conference is being recorded. [Operator Instructions] The participants connected online can send written questions using the dedicated section of the live webcast, while those attending by phone should follow the operator's instructions. [Operator Instructions] Now I give the floor to Mrs. Corina Popescu, Electrica's CEO to begin the presentation.

Good afternoon, ladies and gentlemen, and thank you for joining our call. Before leaving the floor to Madalina and going into the presentation of the Group financial results, I would like to start with some highlights of the third quarter of 2021. Following the trend on other European markets, the Romanian energy market recorded a step increase in terms of price of about 50% compared to the same period of the last year. I speak about wholesale energy market. This volatility represents an important risk factor, both for energy suppliers and distributors, and this impact is seen in our consolidated figures. During this complicated period, we focused on meeting our commitments to customers, and although we have considered all potential scenarios and identified solutions to ensure supply continuity and to strengthen our resilience to further shocks, the recording of significant additional costs, especially from the energy acquisitions had an important impact on the financial results for this quarter. In the current epidemiological situation which prolongs not only the public health crisis, more predictability is needed. At least for the next period, especially in the implementation of the temporary measures adopted by the parliament at the end of October, consisting in offsetting the invoice and keeping price for certain customer categories or postpone the payment of the DSO tariff. Despite the market challenge and its unpredictability in the third quarter, we reinforced the efforts to implement Electrica's Group growth strategy by seeking to conclude more transactions in the renewable energy production sector, diversifying the financing sources for these important projects, developing energy efficiency projects, and maintaining the high level of investment in our distribution segment. For the rest of the year, we continue to be focused on operational performance, increasing and improving the service provided while optimizing costs. Please let me now hand over to Madalina, who will go into the financials and the outlook in detail. Thank you very much.

Hello. This is Madalina Rusu speaking, Head of Budget and Controlling of Electrica. I will start with a short overview of the Group's performance. Then I go into more details about the segment performance presentation, and we will focus a little on the third quarter mainly. In the first 9 months of 2021, the revenue increased by 5%, mainly from the supply segment. But despite this revenue evolution, EBITDA has recorded a 43% decrease year-on-year, while the net consolidated profit decreased by 82%, reaching RON 72 million. Regarding the financial position, the Group increased its net debt position balancing its capital [Audio Gap] I'll offer more details on [Audio Gap] regarding EBITDA evolution year-on-year. [Audio Gap] in the first 9 months of 2021, [Audio Gap] the main driver being the energy margin [Audio Gap] RON 175 million, following the negative impact from the supply segment, which is only partially offset by the distribution segment's favorable effect. Operating expenses evolution had a negative [Audio Gap] mainly from the unfavorable impact of RON 142 million variation of impairment adjustments for trade and other receivables for the supply and [Audio Gap]. But also compared with 2020, we recorded a non-recurring positive impact of RON105 million, following the reversal of the impairment adjustment for uncollected VAT related to one of our debtors, Oltchim. Also, there is an impact from the increase of employee benefits by [Audio Gap] mainly following the salaries and other benefit increases in the distribution area, as a result of the CLA provisions alignment in the 3 regions, following [Audio Gap] the distribution side, the regulated asset base at the end of Q3 was RON 5.8 billion or around EUR 1.2 billion. The energy margin on the distribution segment has increased by RON 83 million as a result [Audio Gap] generated by significantly higher volume distributed by 7.3% and by an average increase of [Audio Gap] in the distribution segment compared to 9 months 2020, which evolution which surpass the increase of network losses [Audio Gap]. The operating expenses dropped by approximately RON 18 million from several cost categories reduction, like transport [Audio Gap] cancelled by the receivables impairment adjustment of around RON 24 million mainly due to insolvency of several customers. Overall, on the distribution segment, EBITDA increased by RON 43 million, while the net result increased by RON 35 million. Net debt of the segment increased by 11% compared with 2020 year-end, while significant financial resources are used for financing the distribution network investment and the working capital deficit. The information for each distribution is presented on Slides 6 through 8. The distributed electricity volumes recorded an increase on all voltage levels for all regions and also, all 3 of them have good results regarding the network losses percentage achieved being below the targets set by the regulator. The network losses costs are higher for all regions due to, on one hand, higher quantities needed to cover the network losses in Muntenia Nord and Transilvania Nord cases, and on the other hand, to higher purchase prices recorded especially in the third quarter, when the increase in price was by 36% compared to the same period in 2020, so quite significant. The distribution company aims to implement the investment and maintenance plans approved by ANRE for this year and the statutory values of ANRE recognizable CapEx realized is RON 280 million, respectively, 44% of the estimated plan for 2021, while the commissioning plan stands at 49% of the annual plan. The distribution company made every effort but it must be taken into account that we received a lower level of connections from non-household consumers, which we budgeted at a higher level according to the legislative changes. And most important, the pandemic conditions that caused delay or limitations, such as the impossibility of honoring some contracts, the timely delivery of equipment and material by the contractors, a lower capacity for contractors to carry out work due to staff unavailability, et cetera. On Slide 10 we've presented the electricity network maintenance segment, where in Q3 2021, EBITDA decreased by around RON 20 million, while the net profit dropped by around RON 26 million. The increase in revenues being cancelled by the OpEx and employee benefit increase. Now moving to the supply segment. In 9 months 2021, the company supplied 6.9 terawatt hours of electricity to 3.5 million consumption places on both segments. The segment revenue increased by [ RON 344 million ] or 10%, mainly driven by the rise of the retail sale price by 9.3% and by the 1.3% rise in the volumes of electricity supplied on the retail market. The cost of electricity purchased for supply increased by 26%, mainly by RON 588 million, mainly due to, on one hand, to the increase of 35% of the average electricity purchase price completed for both segments, and, on the other segment, by the 23% increase year-on-year of the electricity volume purchased for the competitive segment. We should also mention that in 2020, we had a positive impact of the recovery from the past years, which have no positive effect in 2021 also. The effect of the purchase price increase was felt especially in the third quarter of the current year, when the prices stood up by 47% compared to the same period in 2020. So as a result, EBITDA decreased accordingly by RON 261 million and the net profit by RON 224 million. Regarding the financial position, this decreased by 62% compared to 2020 year-end due to lower cash and cash equivalents. Now Slides 13 and 14 refer to the supply activity during the pandemic context and the latest market evolution perspective. And we have all noticed in the third quarter of this year that the Romanian market, alongside other European energy market, recorded a steep increase in energy prices. And I think it's worth mentioning, for instance, the Day Ahead Market purchase price that recorded an accelerated upward trend in Q3 2021, recording prices increased by 197% compared to September 2020 and by 130% higher compared to September 2019, being the highest trading prices recorded. I think it's worth mentioning the comparison with the budget also to have a quick view. We had an upward trend of electricity distributed quantity by 5% compared to the budget. The cost of electricity needed to cover the network losses was by 15% or RON 69 million above the budgeted level due to both larger volumes needed and to higher prices. And also on the supply segment, we recorded retail electricity volume increased by 2% compared to the budget. And in the next slide, I've presented the information about the receivables evolution and the liquidity at Group level as we do in our presentation all the time. Thank you. And now, we will take a short break to receive your questions and then we'll come back.

[Operator Instructions] The first question comes from the line of Ciopraga, Iuliana with Wood & Company.

I have a question regarding CapEx for distribution. You're saying that you delivered almost 49% of the CapEx agreed with the regulator. What happens if you don't succeed to deliver the full CapEx agreed with the regulator? And also, do you see chances of that happening? That's the first question. And also, how are you -- what do you see the impact from these compensations that were approved by the government? Do you see them impacting you in any way? That will be the second. And if you could give us any guidance on supply going forward, supply business going forward and also in the context of these compensations that were approved.

Okay. I will start by answering to the first question regarding the CapEx. And I will give you some highlights regarding the second and third question. So the CapEx realized percentage, it's -- or until end of the year we'll succeed it to recuperate the difference of what happened with some postponement in some acquisitions. But we are quite sure that until end of the year, we'll fulfill all the obligations in front of the regulatory body, will not be a delay by fulfilling this obligation. All of us, we know that this year is a huge delay by delivering the equipment that need to be installed in the network. And due to this fact, also some contracts have some small delays that will be covered until end of the year. Livioara, do you want to add something on this topic?

Good afternoon, Livioara Sujdea speaking, Distribution Director. I can only strengthen what already our CEO emphasized about the fact we are pretty confident we'll manage to perform the entire investment plan in terms of commissioning. The main delays are coming from some problems in delivering equipment and some limitations in the context of the pandemic times. However, according with our recovery plan, we do believe that we'll manage to conclude the entire working investment this year. However, in the worst-case scenario, if something may happen in December, we have the possibility to recover certain delays by the mid of 2022. So it is already foreseen in the secondary legislation, so we are allowed to recover any potential delays. So concluding, we do believe that in the investment area, we don't have a real risk, and we can manage it. Thank you.

Okay. Iuliana, you had a second question on the impact of the compensation and the outlook on our supply business. So as you know, we have a slight piece of legislation and metallurgical norms still in process of issuing in some clarifications, still under discussions at the level of our professional association and also one-to-one clarification on how to apply the law with the capping on the pricings and the compensation mechanism. So obviously, with this information on table, we are currently assessing and running different scenarios on how this capping of the price -- the final price between November until March will affect the supply business, because it really must depend on each detail for the application of the law. The impact of the compensation definitely will have a cash flow impact. Until we will be able to collect the amount of the compensation due, there will be a shortening of the cash flow, and there will be more working capital to be financed in this period. So we have various scenarios in here. We are pretty much confident that we would be able to secure adequate cash and non-cash financing to support this period. And as regards the outlook of the supply business, I think it is pretty obvious with the third quarter results that with this significant surge of the electricity prices in the past months and the months ahead of us, these historical high prices had a negative impact on the overall cost of acquisition. For the next year, we hope that we will be able to pass this increasing cost of acquisition to our customers. In fact, the legislation already passed for this -- for the first quarter with the capping mechanism would probably, at least for one segment of our portfolio, limit this capacity. But again, it's too early to make any comment. We will encompass this into the budget proposals to be issued next year.

Ms. Iuliana, are you done with your questions?

One more thing. And your feeling regarding the outlook for the supply business, when do you see the margins normalizing in the supply business?

Right. So if by normalization means the outlook that we have provided in the past for what would be a normalized net profit margin for this business, so as soon as practically possible. But again, in normal market conditions, as we have also explained in the past, we do have a hedging strategy in place. And we have discussed that this hedging strategy has provided some protection to the company in various periods starting from the experience that the company had in the first quarter of 2017, where we had experienced another crisis in the energy market. And this hedging strategy, in fact, although it is a lot more detailed and complicated, it actually tells us how much energy to acquire in advance and with how many months in advance. And the closest view are to month of delivery, you will be off-taking in a higher percentage. It is obvious that with the profiling, and with this strategy, you cannot be 100% off-taken with electricity. And depending on the market price evolution, if you actually forecast accurately, the market price direction, the stable market prices increasing or decreasing, then your strategy applied correctly will provide you the best result. In fact, although we have forecasted some upward evolution of these prices, in fact, the evolution has exceeded our expectations, both in terms of forward market prices as well as spot market prices. And it is not only an evolution which happened in Romania, it's throughout the whole region and the Europe, and it has taken by surprise also other players in the market. So yes, with this evolution, there's negative impact on the supply business. And the second criteria, so we would need a more stable and predictable market in wholesale electricity and also the natural gas, but we will also need more, let's say, predictable legal and regulatory framework. If by time to time, we do have legislation interfering into the business with the capping mechanism, with the whole compensation mechanism, then depending on how this is applied, it can affect the margins and it also can affect the business through financing needs from a working capital perspective and so on. So the best way market will -- the best results will be provided for our business if the markets are left to act openly in a purely competitive environment with no regulatory and legal intervention, which could negatively affect the business. And also, if we have an efficient market, not characterized by an oligopoly or whatever to be a sellers market and not a buyers market. So we need more efficient energy markets. When this will happen? Yes, we'd hope about soon as possible. Thank you.

[Operator Instructions] We have a follow-up question from Ciopraga, Iuliana with Wood & Company. Ms. Iuliana, can you hear us? We cannot hear you.

Sorry, I was muted. I was wondering about the legislation. Doesn't it help you pass the increase in prices to consumers? I mean, all this regulation, isn't it easier now to pass the increasing prices to consumers, given that prices are capped and there are also compensations approved? Or how does it work?

So we can increase the price to the end customer, but for the segments that are under the ordinance will be applied the cap first and second the compensation. So the difference will be actually the compensation received from the authorities that are in charge, based on the ordinance. For some of them are the special agencies that will take -- will be built and for the second one, the Ministry of the Energy. For the cap price, this actually for that segment will be, we suppose, in the pocket of the supplier. And when the market will come down, this will be passed through to the end customer. This is how we redid the ordinance. But how Mihai already explained, we still are looking for the way that will be implemented. We ask for the special instruction for all the Romanian authorities to be sure that everything will be implemented how it's established in the law.

So in principle, the law does help you pass the increase in prices to consumers. So there are -- I mean, because, I guess, you had contracts with the fixed price, and I'm wondering, in that case, in the case of contracts with fixed price, are you able to renegotiate the price right now with this law, with the help of this law? That's the bit I don't -- I'm not sure I understand.

So Iuliana, just to follow up on what Mrs. Popescu was already explaining, so this capping of the price has a dual effect. Depending on your acquisition basket, okay, what you have already contracted previously, and we're delivering the relevant period of time, you really need to look into the acquisition portfolio and the period for which they will benchmark against the acquisition price, because you have also capping on the active energy to be sold and capping is to be implemented for the final tariff applied to the consumer. So yes, you can also judge from the perspective in which you take from your already existing portfolio for electricity already acquired, the cheapest electricity to be allocated into this portfolio, but it really much depends also on the ability of those sellers to stay in the contract, not to terminate the contract and to also have an analysis for which period you actually apply, whether there is an opportunity cost embedded into this piece of legislation, meaning to give more quantitative example. For example, if you acquire the electricity base load for the full next year at, I don't know, 700 lei, then this period also encompass one more expensive quarter, which is first quarter, which has a different price embedded into this base load price guide for the first year. So since it is applied also for the period January to March, for the first quarter, you are actually taking from the portfolio on a very expensive piece of electricity, which is kept from a price point of view, okay. The compensation itself, again, the effect that we are currently seeing is the cash flow effect. Okay. We have to wait until we recover those amounts, okay. Are we able to do this, rerun the numbers, see what available financing we have in place? We're still comfortable, from this point of view, and we have various methods to find the gaps. And I'm sure that we could also secure the additional financing that we would require. But this is only valid for certain categories of consumers that are targeted by this piece of legislation. For the other categories, there is nothing to stop us to implement rather good pricing and to be able to sign contracts with passing in full acquisition cost of electricity to them, which is significant if we compare from 1 year to another. And I hope with this clarification, we were able to respond somehow to your concerns, which we definitely share, and we -- I can assure you that the part on our agenda is a significant part, especially with the supply segment, but not only. Thank you.

[Operator Instructions] Ladies and gentlemen, there are no further audio questions at this time. I'll now turn the conference over to management for any webcast questions. Just a moment, I'm sorry. There is a follow-up question once again from Ms. Ciopraga, Iuliana with Wood & Co.

I just want to know about the proposal of the regulated grid tariffs until end of March. How likely do you see that happening? And I understand there's also a proposal, an order already by the regulator to include into the case of the next year higher prices for grid losses, so they will not be keeping the ex-ante price. And if you could comment a bit on these 2 questions of news from the regulator.

Okay, Iuliana, Corina Popescu speaking. We are in the discussion now with the Romanian authority regarding the possibility to recover this high increasing of the acquisition price for grid losses. There are some solutions. And we already requested a lot of change in the methodology, starting from eliminate cap price increasing year-on-year 7%, by changing the structure of the methodology, and establish another principle in the methodology. We discussed also the possibility to receive some compensation of the acquisition price. So there are a lot of discussions on the table. But until now, unfortunately, nothing it is agreed on this topic. It's also a debate if the energy law will be changed, by the way, transpose the European Directive 944 to have another market structure. There are also discussions to have a single buyer for the grid losses for all the DSO and the TSO. Or another kind of model that are used in the European countries that the cost of the acquisition for grid losses will be transferred to the supply business and will not affect it anymore the distribution business. So they are open topics on the table, starting from models that imply the change in the market until short-term measures, as I mentioned, compensation of the acquisition price until March, when the price was freezed for distribution activity. I hope I succeeded to clarify.

[Operator Instructions] At this time, there are no further audio questions. I will now turn the conference over to management for any webcast questions. We have a question from an audio participant, Cosmina Ivana with Swiss Capital.

I was wondering if the company could pay dividend out of this year's net profit. So in the last 5 years, irrespective of the company's profitability, you paid a stable dividend per share of RON 0.73. So could you tell us if this scenario would continue looking forward, despite the difficult environment with all these energy price spikes?

Thank you, Cosmina, for the question. So, okay, to answer correctly to your question, the dividend policy of the company is unchanged, I think, from 2018. The dividend policy foresees for a dividend payout ratio from the standalone profit of Electrica between 65% to 100%. And within this range, there will be a Board proposal for the rest of the shareholders to approve the dividend per share and the total dividend to be distributed by Electrica. There are certain provisions in the dividend policy, which gives the guidance to the shareholders where the dividend payout ratio might be a mandate, and there are considerations between, correspondence between the accounting profit and the cash basis behind the profit and also other considerations, which you articulated and we can discuss them. What concerns the net results of Electrica on a stand-alone basis this year, we have already started to publish the interim standalone financial statements of Electrica. I think it's the first year. And you have the results of Electrica on a stand-alone basis for the first 6 months. We have a budget, both on a consolidated level and as well as on a stand-alone level. And since mostly the budget of Electrica is determined, at least on the financial revenues signed from dividend income to be already received and recognized as revenue from the subsidiary, which is based on past statutory profit and is reflected into the budget already, and since the expenses are more predictable, there is nothing to lead us to believe that based on the interim results of Electrica, on a stand-alone basis again, and based on the budget on a standalone basis of Electrica, we will not be able to meet the standalone budget of Electrica. So considering the expected net profit in line with the budget on a standalone level of Electrica, there will be that net profit behind that could support a total dividend to be distributed based on the standalone profit of Electrica. And the second question to be addressed in accordance also with the guidance provided in the dividend policy is whether we will be somehow affected, at least, from a cash flow point of view, that would require the company to propose to the shareholders a lower dividend payout ratio. So to retain part of the profit in consideration of the fact that this year was rather a difficult year with some gaps also in the distribution business, to mention, for example, the gap between the ex-ante price of electricity recognized to the tariff and the actual acquisition price of electricity, the impact on the supply business, with the impact of the new legislation in terms of capping and compensation price mechanism, which will induce significant working capital need. And with all these pieces being put together, at least we will be able when we would convene the GMS to be scheduled next year to determine whether this dividend payout ratio needs an adjustment in line with the published dividend policy, which might result in a lower dividend per share and probably another dividend yield. But it is too early to have the statement. You have the guidance in the dividend policy, and you have also these elements that at least accounting profit will be there. You need to have a cash basis to be able to pay this and to leave also the company capitalized and better equipped to go through this challenging period.

Ladies and gentlemen, there are no further questions at this time. I'll now turn the conference over to management for any closing comments. Thank you.

Ladies and gentlemen, the conference is now concluded. And we would like to thank you for your presence. For any questions that you might have, please send us your e-mails at [email protected]. Have a good afternoon. Thank you.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling and have a good afternoon.