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 in Electrica, together with the entire management team, I would like to welcome you to the presentation of the fourth quarter and full year 2021 financial results. In the beginning, key highlights about the financial year and the performance at Group level in 2021 will be presented by our CEO, Mrs. Corina Popescu. Mr. Stefan Frangulea, Chief Financial Officer, will give you more details about the financial performance of each business segment. 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. [Operator Instructions] Now I leave the floor to Mrs. Corina Popescu, Electrica's CEO, to begin the presentation.

Thank you, Catalina. Good afternoon, ladies and gentlemen. Welcome to the presentation of the final results of 2021. Only some few remarks regarding the 2021 was a very difficult year with a lot of events, which actually impact also the results of Electrica Group. I would like to mention the full liberalization of the local electricity market after January 1, 2021, with all types -- for all types of consumers. And this actually turned around the results for our supply company. 2021 was, as I already mentioned, a hard year with good things and bad things from Electrica perspective. I will start with the good things. We have and we follow our strategy at group level, and we try to step in on the production. We already signed last year the new projects for 284 megawatts from which 163 megawatts in photovoltaic and 121 megawatts in the wind project. These are the projects ready to build, and we hope that we already will start in this year the project. The plan is to use and to apply also for European funds available in Romania for modernization fund and from national plan for resilience to build these new production units. On the distribution side, also we'll follow our strategy. Last year, we already signed the contracts we apply for European funds for digitalization of the distribution side. We have in place projects in -- on the total value of EUR 50 million, all of them for digitalization and extend it of the existing network. What happened not only for Electrica now at the energy market, a higher increasing of the price in the Q4 and this affects our results on both segments, supply and distribution because also on the distribution side, even if we succeeded to fulfill all our obligations and we finalized 2021 by respected all our already plans on the investment side, we succeeded to finalize all the investment that we put it on the budget. The activation price for grid losses change also the result on the distribution side. On the supply side, it is an imbalance between the contracts that are concluded on OPCOM platform with the producer and trading company, which has the right to cancel their contract. And on the other hand, the contracts concluded by Electrica Furnizare with end customers with fixed price cannot be changed or canceled. This imbalance of the rules actually put us in the situation that after the higher increasing of the price in -- after the middle of 2021 to [ elongate ] and to have this better results on the supply segment. I kindly ask Stefan to come with a detailed information on all the segments. And at the end, if you have questions, please let us know which are and we'll try to clarify everything that you needed.

Thank you, Corina. Thank you all for connecting and turning out to the conference. Moving to the slides with the details about the financial results; in terms of revenues, the revenues of the group have increased from RON 6.5 billion to RON 7.1 billion, which is along with the increased price of the energy in the energy market. In terms of EBITDA, EBITDA at the group level, the result is a negative minus RON 120 million. And in terms of net cash, the highlight on the slide is, of course, we needed to finance more in order to finance the higher levels of purchased energy and also to pre-finance the support scheme that Corina was mentioning and which was implemented towards the end of the year. But I think we have proven our resilience and I will give more details at the end about that. I think more relevant for you is to look at the details on the segments, and I'll ask my colleagues to go to the first slide related to segment of distribution. And moving to that segment, I would like to mention that distribution segment has an EBITDA, which is still positive at the level of RON 372.4 million for 2021. The erosion compared with the results for last year was due to the increase in the energy costs related to covering the own technological consumption, [ PPT ] including the network losses. Basically, the price at which our distribution company needed to purchase the energy from the market was more than 60% higher on average for the year than the values which were stipulated Ex-ante by the regulator. Of course -- and this effect was felt mainly during the third and the fourth quarter of the year when the increase in the prices was 36% in quarter 3 and respectively, 167% in quarter 4 compared with the relevant quarters from previous year. Of course, according to the mechanism stipulated by the regulator, this difference is to be recuperated but is to be recuperated starting in -- from the year [indiscernible] by inclusion in the tariff. Also, in terms of elements, which affected the result on the distribution side, we should mention that there is an increase in impairment and for trade and other receivables in relation with some electricity suppliers, which became insolvent. The amount is RON 27.8 million. And also, there is technically an effect related to an increase in employee benefits, but this is related to 2 things. One is the alignment after the merger of the stipulations in the agreements with the unions, collective labor agreement, but it's also coming from the months which were granted by the regulator, Ex-ante, considering also a balance between all operators in the country. The net result, of course, was further influenced by the increasing the negative financial result as the additional funding was needed to finance the difference between the energy price for the own technological consumption. And of course, we will need to finance that difference until the mechanism stipulated by the regulator will give us the correction in the tariff. Also in respect of the distribution segment, we would like to mention that we would like to mention the correction coming from the previous regulating period. Basically, at the beginning of the current regulator figure to the fourth, the regulator made the total negative correction at the closure of the previous one, the third one, which amounted to RON 665 million in terms of the year 2018, out of which some RON 341 million were for the -- some meters, which were recognized as investments in the second regulatory period. This was appealed incurred by our subsidiary because in 2013 the regulator recognized the matters for -- in the bar based on the principle of nondiscrimination for all the operators, although they were not registered as fixed assets. This correction related to the third period, decreased the regulated profitability for the fourth period with an annual average value of RON 146 million. Regarding the Supply segment, the EBITDA in the Supply segment was negative in 2021, reaching the level of minus RON 439.7 million. The main cause for this evolution is the increase in the prices in energy market, as I was mentioning by our CEO previously correlated with the impossibility of transferring these price increases to the final customers. Following the trend at the level of the entire Europe, the price is also in the Romanian energy market increased significantly to give you a matter of measure. The prices on the next day market increased in December 2021 at the level which was 400% more than the price at the beginning of the year in January 2021. Also, the prices for the forward contracts, for example, for the quarter contracts increased, especially starting third and fourth quarter. The evolution was from something like RON 250 per megawatt hour to RON 1,300 per megawatt hour. This effect, another important factor was the situation in which we were faced with unilateral termination of some of the contracts concluded on the wholesale market, some traders and some producers decided to unilaterally terminate the contract, and this generated additional quantities to be bought on the day-ahead market. Last but not least, based on our obligations as a supplier of last resort, we have taken over a significant number of final customers and this led also to the need to purchase larger quantities from the day-ahead market. The negative impact of these increases in prices led to a negative energy margin of approximately RON 695 million in 2021. Also, since Corina was mentioning the liberalization of the market, the liberalization of the market at the beginning of the year brought some protection measures, which also had a negative impact on the EBITDA. Basically, the situation was such that for domestic customers who have concluded -- who have not concluded a contract until June 30, the electricity consumption was built at the price of the universal service offer communicated by the supplier of the last resort. If the customer did not enter the competitive market until June 30, the commercial discount was to be applied. This also generated a total negative impact of RON 18.3 million. The end of the year brought the measures related to the support scheme, which were established by the Romanian government for domestic and non-household consumers and also this generated a negative impact on the company's results. Thus, in the last quarter of the year, the application of this support scheme for the final consumer, which was introduced by the Government Ordinance 118, approved them through low 200 to 250 to 259 and then amended to the Government Ordinance 130, also generated an effect of reducing the EBITDA margin, especially to the cutting mechanism due to the uncertainty and regarding the full recovery of the respective amounts by the suppliers. And also in addition, by pre-financing these schemes, this increased significantly our financing costs. Regarding the Electricity Services segment, starting with 2021, this includes the activity of Electrica Serv. Electrica services was included until 2021 in the distribution segment. Now it's included in the Electricity Services segment, but without the part of activity, which is performed by Electrica Serv in the distribution network, which remains in the electricity distribution segment. Due to this modification in the operating segment structure, the values of the current year are mostly higher than compared to the previous one. In terms of the good things related to last year, which were mentioned also by Corina, I would like to say that we think that this year, which was a difficult year -- this year, which ended 2021, has proved our resilience as a group and has confirmed that some decisions which are taken part -- in the past helped build this resilience. And I'm thinking about having the financing secured for the remaining part of the current regulatory period, having implemented the merger of distribution subsidiaries, which allows us now to go to operational synergies and economies of scale or having the cash pooling scheme implemented and in place. And this allowed us to optimize the liquidity between the group companies and to go through this period in which the financing need was higher. Considering all of the above, our group actively reviews and implement policies and strategies to optimize the future activity to recover the loss generated by the increase in energy prices, and these strategies are aimed at several directions, including how to set the selling price for final consumers, how to draw up the contracts with specific cloud clauses, which to allow for passing the price increases to the customer. But also negotiating new credit facilities, monitoring the payment terms, but also the collection in order to mitigate or reduce the impact of the further potential increases of energy and natural gas costs and to improve the group results. In conclusion, considering the actions that were already implemented and that we are looking forward to implement and that are scheduled already the group anticipates a recovery of most of its financial and operational performance in the near future. Of course, this depends a lot also on the changes which are under discussion in terms of law, legislation and from the regulatory area. As soon as additional information will become available the effects of the group business and financial performance will be analyzed and the most appropriate measures will be implemented. If my colleagues from the executive team do not have other elements to be added, I'm welcoming together with them all your questions.

[Operator Instructions] Ladies and gentlemen, there are no audio questions at this time. I will now turn the conference over to management for any webcast questions. Thank you. Excuse me, can the management hear us?

Yes, we can hear you. We are addressing the online questions and just one second to register all of them, and then we will start answering. Okay. I will read the question for everybody, which are not aware, and then I will start to answer. The most we received from the state were already included in the P&L or due to the late recovery, this amount are not yet seen in the financial statement. Where could you see the impact on compensation scheme and price capping? Could you please guide us in understanding how this regulation impact Electrica Furnizare? So the results of the compensation scheme and price capping are in the P&L. We speak now only about the supply side. So unfortunately, the scheme, how we defined last year didn't cover all the cost on the supply side. And these are the reasons that we have problem with the losses in Q4 because there are 2 different caps, one in the relation of -- with end customer. And the second one is not fully recognized acquisition price. As you already know, this scheme was changed starting with February 1, 2022. And there are discussions now for a new scheme starting with April 1. And all the discussions that we have, it is to have fully recognition of the costs on the full chain. That means acquisition, all the taxes that need to be paid and the cost of Electrica Furnizare on top of this. Unfortunately, how it defined the scheme, not very clear from the beginning, put us in difficulty to implement it. It's something that are for the whole market, not only for Electrica Furnizare. So only to understood what happened if we have the cap on the final price. And the difference is between the cap on the wholesale market and the acquisition price are higher than the final price and the cap. The differences between these 2 spreads are not fully re-compensated. I hope it's clear. I hope I try to add some light, if not we'll coming back. In the BOD report, it was emphasized the uncertainty regarding the full recovery of the amount related to the support scheme. I think I already discussed about this. We discussed about full year recognition for 2022. And this is what is debate now for 2021 will not have the full year recognition of the -- we don't have the full year recognition of the cost and the legislation cannot have an impact for the past. We can have impact only for 2022. How much is the company expecting the impact on the support scheme to be in the first quarter of 2022? This is something that we cannot comment on this because we don't have the total amount. I would like to ask regarding the management expectation following the April 1, 2022. I saw the press information that according to the draft, the supplier will have a regulated market and the cap profit, could you comment on it? There are only the discussion. The good things for the new regulation is that we'll have the full recognition of the cost because the huge impact that we have in Q4 was that they didn't recognize the full cost of the supply activity. And the discussions are to have the full year recognition of the cost for the whole 2022 also for the Q1. Considering the recent events in Ukraine already lead to an increasing of price of gas and electricity, how do you estimate the impact of these events for the company? So as I already mentioned, our strategy is not to be very -- to have -- our hedging strategy is to be covered in the long-term contract. We have concluded the contract in 2022 also in 2021 with delivery in 2022. So the increasing on spot market will not affect dramatically the result of the company in 2022. Why did the company decide to pay a dividend and to raise cash, we are debt issuing at the same time? So we have -- I will ask Stefan to give you the answer on this.

There are 2 components here. First of all, it's related to the fact that according to the existing dividend policy, it is stipulated that the dividend is to be paid from the net distributable profit of the Electrica S.A. standalone, which had a profit or last year, RON 321 million because it cashed in the dividend from 2020 from the subsidiaries. The other idea was that we wanted to pass a segment to the market from this point of view. And last but not least, there is a level of liquidity at the level of Electrica S.A. We are optimizing this and utilizing this to finance the group. But there is a level of liquidity that we can use for this element. In terms of raising debt, the debt is raised for each activity specifically. We have the financing for the working capital of the subsidiaries, which has a certain cycle and these loans are reduced and covered and then redrawn again according to the evolution of the activity. Then we have the loans for the investment in the distribution network and then we have to separate the loan for potential M&A transactions. Moving to other questions. In respect of the losses on the distribution segment in 2021, according to the mechanism, which is currently in place, this will be offset by future higher tariffs starting from [ T+2 ] and considering the caps of annual increase in tariffs. So starting [ T+2 ], this would be recognized in the tariffs. The amount, the impact is also in the report and in our presentation. It's like RON 397 million. We have a discussion about the amount [ En-are ] confirmed to us already in a letter minimum RON 350 million and this is confirmed by them and mentioned that it is still a preliminary number because it's still under calculation in the market not being closed. Our calculation would look at RON 360 million. Moving to other question, regarding the -- producers to be fully acquired by the company. We don't see any delay in that process. I think the only delays would be only related to the administrative measures in developing those projects because you need to obtain documentation, the ATRs, the various steps, but from point of view financing -- we have the bridge loan, which is contracted in the autumn for these kind of projects and that's available. And when we will move with operationalizing this profit, we are planning to refinance that loan from a potential bond issuance. Regarding the price, the average price for acquisition of energy -- for 2021, the number both in the distribution and in the supply is slightly above RON 500 per megawatt. I will take a look also about the number for the last quarter.

It is another question regarding why we disclosed the correction impact -- impacting the fourth regulatory to with a 3-year delay from the start of the period. So we have a new Board and the decision was to increase the transparency on Electrica. We already start to prepare the 5 regulatory period and the decision is to publish everything. And on the other hand, after we merge the redistribution and having a single distribution segment in the Electrica Group, the decision and the request done by [ En-are ] is to publish more transparent figures for distribution segment. And we have the obligation to explain that for a better understanding the accumulated negative effects of the market development and past correction upon the regulated profitability. Regarding the supply of natural gas, what are the company plans regarding this segment of business, considering that it was unprofitable during the last 3 years? We plan this year to renew our strategy, and we revisit also the possibility to extend on the gas side. I think considering the fleet for 55 program for sure, our plan will go on more on electricity and renewables in the next plan and in the next strategy that we plan to have it for the group. We received another new question. Considering today's perspective, do you estimate an improvement for the financial results in 2022 compared with the situation in 2021? For sure, we already start and we are in the advanced discussion on both segments, distribution and supply. And we are looking for new regulations starting with April 1, which will be in place, which actually improve that result in 2022. Can you comment on your expectation for the supply business in 2022? Should we expect a positive impact for the renewal of the supply contract? Yes, based on the regulations that are now in debate, in parliament and also at government level. The good signal that we have on the supply side is that all the costs will be recognized and this will not affect the margin even if we'll not have a higher margin on the supplies business like in the past, will have a positive one. So for any question that you already addressed, if your answer is, I don't know, not complete or if you want further information, please feel free to send us your questions to our e-mail address [email protected] or you can jump into the Q&A session via your phone. If you would like to address it if you think you will need more information about what you've already asked. Thank you.

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