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

Hello. I'm Raluca [indiscernible], the Head of Investor Relations squad. And together with the entire Electrica management team, we'd like to thank you for joining the Electrica conference call for the presentation of H1 results. There's a live webcast, and there are also participants connected online. And we are going to present and discuss, as I said, the financial H1 results. Those of you who are connected only by phone, please download the presentation in PDF format available on our website under the Investors Results and Presentation section. [Operator Instructions]. Kindly note that since the entire conference is being recorded [Operator Instructions] Now we'll begin the presentation, which will be followed by a question-and-answer session. You will receive instructions from the operator. For those of you who are on the phones and for those of you who are online, you can see the instructions on the screen. I would like to turn the conference over to Mr. Alexandru Chirita, our CEO, to begin the presentation. Thank you.

Thank you, Raluca. Good afternoon, ladies and gentlemen, and welcome to the conference. Thank you for participating at our presentation of H1 2022 financial results. First, we would like to share the following highlights. The financial results in the second half of H1 2022 demonstrate the group's above average performance in difficult market conditions and confirms our strategic efforts. We're well adapted to maintain a top position in the field in which we operate. The volatile energy market has continued to have a major impact on all players' financial results in the first half of this year. For H1 2022, EFSA recorded a good performance with a net profit of RON 213 million and a positive EBITDA of RON 287 million. We identified the best ways to mitigate the negative effects generated by market volatility. The authorities also started to reimburse the amount from the support subsidy scheme. At the same time, EFSA continued the process of accelerating the digitalization process, investing in solutions to increase customer satisfaction, meant to optimize at the same time the activity at the operational level. As you all are well aware, on the distribution segment, the results are directly affected by the market conditions and the regulatory framework. The good news is that starting with 1st of April 2022, the distribution segment benefited from increased tariffs by 20.3% through emergency ordinance 27, which allowed to recover of the amount of RON 363 million spent for energy acquisition in 2021. The additional amount spent for energy sourcing for grid losses will be recovered in future prices in a period of up to 5 years after 31st of March 2023. There continues ambitious investment program carried out since the beginning of the previous regulatory period, aiming to modernize the network infrastructure and accelerate the expansion of smart metering on a large scale that will lead to reduction of grid losses in line with regulated targets. Taking into consideration the supply area performance above the market expectation and the fact that we started to recover the amounts from the authorities, we are optimistic about the second half of 2022. I would like to turn the presentation over to my colleague, Stefan, to present the financial results in more detail. Stefan, please?

Thank you, Alexandru. Good afternoon, everybody. In terms of delving into a deeper analysis, I would like my colleague to go to Slide #3. So in terms of numbers, in summary, consolidated financials, we have a positive EBITDA of RON 101 million. We have a negative result consolidated of RON 175 million, which is mainly due to the difference of the price for network losses in the distribution segment where we have a difference of RON 574 million, which will be recuperated according to Ordinance 27 in the period of 5 years following 31st of March 2023. And then in net debt, of course, we have a significant increase in net debt because we needed in this period to prefinance the support scheme introduced by ordinance 118/2021 and then prolonged through ordinance 27/2022 Now moving into the analysis of EBITDA and net result on the next page. I would like to mention that in terms of consolidated results, we have a variation of EBITDA compared with first half of 2021 of RON 256 million, which is mainly due to the negative variation of the energy margin. The energy margin has negative components related to the Distribution segment and the positive component related to the Supply segment RON 301 million positive component from Supply segment and RON 534 million from the distribution segment as a negative impact. The part related to the supply segment is related, of course, to the increase of the receivables and of the revenues from energy and natural gas and of course, the increase in other operating revenues from subsidies under the support scheme. And this far exceeds the increase of the cost of energy purchase for supply. Basically, this shows that our strategy following the result at the end of last year, our strategy in terms of securing as close as 100% of the energy and of the gas for the contracts for the customers to have it sought from forward contracts is a strategy which was repaying and was bringing results. In the Distribution segment, the negative impact of minus RON 534 million has 2 components. There is a positive component related -- of RON 224 million related to increase of revenues from energy distribution, which is mainly due to the fact that starting with 1st of April, the average distribution tariffs had increased compared with first quarter 2022 by 20% in order to allow to recuperate the difference from the price for net losses for the year 2021. And then, of course, there is the negative impact of RON 758 million related to increase of energy of expenses with the purchased energy for network losses. This is a result of increasing of the energy price with 115%. There are also some other minor effects. I would mention mostly the negative variation of the operational expenses with RON 27 million. It's a net impact, which is a reduction -- and this is despite the fact that, of course, in terms of utility costs, we do have an increase. But we have a positive impact related also to the change in provisions and of course, a slight decrease in material and maintenance expenses. Moving to the -- on the same slide to the net results. The variation of the result compared with first half 2022 is RON 252 million, which is mainly due to the negative evolution of EBITDA also of the financial result, which is a negative impact of RON 46 million because we increased the financing and all this financing is bringing the cost and the financing cost is on the increase. So we needed to refinance the supply -- the support scheme on the supply side, and we need to finance the difference for the price for network losses. And of course, there is also a positive impact of RON 56 million from income tax because it's the deferred income tax effect related to the result of last year. Moving to the next slide and moving to the segment in terms of distribution segment. Most of the things were mentioned already. There is a decrease of EBITDA of RON 532 million, which is mostly due to the energy margin. We mentioned already the increase in energy revenues and the decrease related to costs with the network losses. The net result is mainly due to the negative evolution of EBITDA, to which there is also an impact of the financial results, negative impact, RON 26 million related to the increased cost to finance the difference of price in CPT. And then there is a positive impact of the income tax. Now it should be mentioned that the unfavorable impact on the distribution segment, and this result is mainly due to the fact that we witnessed an increase in cost of network losses. And the cost of energy for the network losses, the average purchase price for energy for network losses being 115% higher than the ex-ante value established by the regulator. And this generated additional cost of RON 544 million. This amount, as mentioned before, will be recuperated in a period of up to 5 years after 31st March 2023 based on Ordinance 27. Moving to the next slide. You have in Slide 6 details about the distribution segment, including some details about some relevant regulatory information related to the fact that in this current regulatory period, we started with the correction related to the meters coming from the previous regulatory period. And also in the next slide, in Slide 7 and Slide 8, we presented some reconciliation in relation with the regulated net results because we saw that some of the analysts were focused on that, and we can discuss this also separately in more detail. In Slide 7, you see the impact of the deviation of regulated CPT of RON 574 million that I've mentioned. And then on Slide 8, you see the correction related to meters for the whole year. And then you see that also in terms of network losses deferred income, we have minus RON 124 million. Basically, out of the RON 450 per megawatt price established by ANRE due to the limitations in regulation methodology only part of it, roughly RON 400 million, was given in the tariffs and the difference was stipulated as deferred revenue. Then you have the slides related to each of the 3 regions. As you know, we are in Slide 9, 10 and 11. As you know, we are reporting until the end of this current regulatory period on the 3 regions because the 3 companies that we merged at the end of 2020 are having different sets of tariffs, having different history in terms of investments, and we are continuing to report by -- until the end of the regulatory period in this format. Moving to the next slide. I would go to Slide 13, where there is an element regarding Electrica Serv. Electrica Serv is basically, it's -- here, you have the summary of the Energy Services segment. It should be mentioned that this is adjusted in the sense that the activities, which are delivered for the distribution subsidiaries where taken out and reported above in the distribution segment. There is a positive impact in terms of contribution to EBITDA. There is basically, in terms of EBITDA, an increase compared with last year by RON 5 million which is mainly related to the increase in demand for photovoltaic systems and the new contracts which are concluded by this -- by the company in this activity. Also, there are some elements to be mentioned in terms of benefits from employees. It's a net result, a positive result of RON 6 million, which is coming from mix of results related to provision for restructuring plan of RON 7 million, which was established for this year, but also a decrease in employee benefits and decrease in other salary expenses. There is, as a negative element, there is an increase in the operating expenses of approximately RON 9 million, which is mainly due to the increase of the material cost and utility costs. Moving to the next slide. We have the supply segment of Electrica Furnizare. If you look at the main figures, we have EBITDA of RON 287 million at 6 months. Net result RON 213 million. And of course, there is an increase in the debt. The net debt increased to RON 1.425 billion because of the necessity to prefinance the support scheme related to the system for protecting the end consumers introduced by the Ordinance 118 from 2021 and Ordinance continued by Ordinance 27 from 2022. In terms of supply segment, it should be mentioned that going to slide -- staying on Slide 14, we explained the evolution of EBITDA. There is an increase compared with the first half of last year. with RON 260 million compared to first half of last year, which is mainly due to the evolution of the margin for energy and gas, -- which exceeded the increase in the revenues from energy and gas and the income related to subsidies was -- these increases were higher than the increase in purchase energy costs. Also, there is unfavorable effect of RON 39 million related to trade receivables, but it should be mentioned also in the connection with the slide of trade receivables on the following pages that basically, this is not necessarily the situation of problem of collection rates. But due to the fact that the support scheme was modified several times, this triggered the need to have modifications in our core systems and this means that there were some situations and some periods in which we're not able to invoice according to the regular schedule. So basically, we invoiced with some delay and this triggered a delay in receivables, but it's not necessarily a matter of collection. Since I've touched this subject related to collection, I should be mentioning that starting 1st of July. So until 30th of June, we were in the impossibility to disconnect the nonpaying customers. I'm thinking about households. Starting with 1st of July, there is -- this limitation is eliminated. So we could start disconnecting. So this should trigger improved collection and also starting, I think, 8th of July also for the business consumers, which were benefiting of the certificate for emergency situation. There was an interdiction of disconnecting, which is now also eliminated. So from this point of view, we don't see -- we see a possible improvement. It should be mentioned that -- in terms of collections, it's not necessarily a problem related to collection despite the fact that we were in the interdiction to disconnect the customers. We're still able to do campaigns of collection to them, and we were able to go in part the ones which were delayed in payment. Moving further on. I would go to Slide 19 and to stay on the Slide 19 for a minute in relation to the evolution of the liquidity of the group. Of course, the liquidity of the group was put at pressure by the fact that we needed to prefinance the support scheme on the supply side, and we need to prefinance the net losses on the distribution side. In this -- in view of this, we addressed the GMS 2x for some ceilings related to concluding financings for the subsidiaries in order to cover this financing need, and you can see that after the result of first quarter of 2022, which was the most, let's say, pressured, we see improvement in terms of liquidity position. This is also related to the fact that on the support scheme, the state is processing the request, and there is a significant amount of money that was collected by us in June and July. And basically, on the previous support scheme, which ended on 31st of March, we are up to date in terms of collections. For that part, we only need to collect the upside part, which we filed in until 31st of July related to recuperating the P&L effect from the initial scheme. And now there is -- the process is ongoing for processing, starting processing the repayment request for the scheme under Ordinance 27. The next slide is about dividend distribution. We have decided to pay our dividend also this year, which is dividend, of course, lowered, considering the results from last year. But we consider that in order to show that the resilience of the group and the fact that we do believe that group will redress financially after the result at the end of month last year and also to give a signal to our shareholders, there was the decision for dividend to be paid and the dividend was paid in June. So despite, let's say, the liquidity, the need to finance from the liquidity, the support team and the total losses. In summary, this would conclude our main presentation. Of course, you have the appendices related to various other information that we usually present to you. And at this moment, I would leave the floor for your questions and we'll try to answer them as complete as possible. Thank you.

Just 1 more thing. We'd like to tell you that we convened the [ BMS ] yesterday for the 12th of October for the amendment of the Articles of Association. Now we will take a 5-minute break to take in the questions. I would like to ask the operator to give the necessary instructions. You can also send your questions to the e-mail. [Operator Instructions] Thank you, operator, please.

[Operator Instructions] We'll now take a 5-minute break. Thank you. [Break]

Ladies and gentlemen, thank you for holding. We are to resume our conference and thank you. . Thank you.

Thank you all for the questions and for the very high interest related to our conference, which is shown in the number of questions that you have asked. We'll go through them one by one and together with my colleagues here, we will present the answers. So first question, what do you expect forward looking on the supply side, given the new capping scheme applicable starting with quarter 2. And if we are maintaining the budgeted figure? And what about the budget this year at group level? So in terms of the supply side, given the capping scheme, we are quite confident that we'll be staying in the budgeted figures. This is shown, I think, also of the results at 6 months if you are comparing with our budget, the revised budget that we published in April. The very important part is we are very hedged to a very large extent in terms of sourcing the energy from forward contracts. So the dependence to the Day-Ahead Market is very, very, very limited. Looking at the group level in terms of what is in our power, we're confident that we can stick to the budgeted figure. There is this element related to the network losses for the distribution subsidiaries, where you do know that there are some discussions also in the public consultation related to possibility to capitalize the difference related to the price of energy price for the network losses. And of course, since -- if the regulatory and legislative framework will change and this will generate a significant impact in terms of financial performance compared with the budget we will revert to you. As also announced in the past, you remember that we initially published the form of the market and then considering the approval of the ordinance 27, we came with the revised version of the budget. Regarding price paid for grid losses, can you share it with us? And I think we -- I skipped one, sorry. The next one would be the average acquisition price for the distribution segment and for the supply side, if you can share with us the figures. The average acquisition price for the distribution segment is in the presentation. It's RON 967 million . The price for the supply side, I would not really look to give you a figure because it's a competitive market there. But I would assure that we would have been profitable even without the support scheme. Can you provide us some details on the pipeline related to the green energy. We do have projects signed for 283 megawatts, and we are focused on operationalizing them as fast as possible during this year and next year, probably some capacities even this year. We are really focused on developing this generation portfolio for vertical of the group because I think that validating our strategy from the past. Last year showed that on a long run supply without generation is difficult to be sustainable. What is the amount until mid-2022, estimated to be recovered in future years coming from CPT? We mentioned, I think, in the presentation, it's RON 574 million for 6 months this year. Have you bought any volumes for 2023? Okay, asset commissions -- sorry, asset commissioned for by mid-2022 are lower than the plan agreed with the regulator. This is correct. We are doing all the efforts to recuperate in terms of commissioning of investment plan. We are confident because we had the situation also in the past related to some delays, let's say, midyear, that some of them are related to the issues related to disponibility of meters and all sort of supplies that after the post pandemic context. We were in the situation of having some delays in delivery of some of the equipment, which were needed. Of course, there is also the possibility to recuperate -- also with the regulator, there is possibility to recuperate in the first half of next year for part of the plan, which was not commissioned. Last but not least, we should mention that there is also some challenges related to what to finance first because if we need to finance RON 1 billion for difference of pricing CPT or something like this, probably a rough estimation for the year. It's more than double than the CapEx plan, but somehow, we are prioritizing them both, and we think that we could be able to update by 1st of October in terms of CPT plan for the results of 9 months and to show the improvement. Have you bought any volumes for 2023 for distribution CPT? The answer is yes. I would not give a percentage because this is changing from one day or from one week into the other. It is not necessarily that significant, and I don't know whether it will be wise to secure that much considering the public discussions, which are considering various kind of solutions for the difference for price for CPT for next year might be, I don't know, long-term contracts or different kind of other arrangements. You mentioned our intention to make a bond issuance this year. Is this an operation ongoing or still subject to a forward decision? You know that in the GMS for the financial results in April, we have approved the -- we have received the approval from the shareholders for a bond issuance. And this is something that we are contemplating in relation also with what I've mentioned before related to the plans of commissioning the green energy project, the generation in solar and wind. So yes, we are monitoring -- closely monitoring the market focused on the diversifying funding sources. And yes, this is something which we are considering to do this year depending on the right opportunity. So far, since the ending of second quarter, how much have you cashed in subsidies in the month of July and August? We have cashed in close to RON 400 million supplementary to what it's shown in the results at 6 months. We are seeing significant improvement in terms of the mechanism. I think that after the initial -- maybe some bureaucratic and clarification phase, there is a certain fine-tuning of the mechanisms, which starts to function. At the end of first quarter 2022, the operator -- the distribution operator put investments of 21%. I think this was covered by a question before. Can you detail please the increase in other operational revenues? Yes, of course, the operational revenues are basically including the revenues from subsidies under the support scheme. Represents the values to be recovered because right now under the support scheme in relation to the energy that we are providing to a customer we are invoicing the customer up to the price level, which is the cap under the ordinance, under the support scheme and for the difference above, it's -- we have filing in for amounts to be recuperated from the authorities. That's -- the second next one is, did you manage to exceed the 72, I guess it's the 73 megawatts our regulated margin for supply. What do you expect regarding supply and performance in the following context. I don't know how -- I don't understand the conclusion of how did you manage to exceed. So just to explain is that under the previous scheme for quarter 1, there was not this element related to the RON 73 per megawatt supply cost. So there was a different way in which the scheme was functioning then. This started from 1st of April and RON 72 per megawatt is the total supply cost, which is covered under the supply scheme for the supplier. Of course, if you are a large supplier and you are able to have economies of scale and you are paying attention to your expenses, you will be able to have a cost which is lower than that. And basically, the mechanism of the ordinance is allowing ourselves to keep the savings basically the efficiency compared with that. We are confident the supply performance in the following quarters would continue to remain at the same level. So we are confident we'll be staying in -- at least in the numbers under the budget. Please explain the 5% rule for imbalances for the government ordinance. So the idea is that the monthly costs with the transactions in the equilibrium market, considering both purchase and sale which are exceeding 5% of the cost of purchase from contracts, Day-Ahead Market will not be recognized, and we don't get from the state budget, the amounts which are exceeding this 5%. It should be mentioned, however, that for the supply of last resorts so for the customers that we are getting in our portfolio, based on the mechanism of supplier of last resort, and for the month of July, we have been a supplier of last resort, and we got some customers in the portfolio. So for these customers, there is not this limitation, yes. There is no limitation of 5% for the equilibrium market. Considering the following quarters, should we expect a steeper decrease in the trade receivables or an increase in impairment given that you are now able to disconnect those problematic customers. We don't expect a dramatic change. I mean we're not expecting also in the past, we explained, I think, also in the conference for results at the end of the year or quarter 1, even if we are not able to disconnect. This was not really -- I mean, yes, there is an impact, but it's not a dramatic impact in terms of evolution of the receivables. As explained during the presentation, the increase in impairment was also significantly due to the fact that we invoiced with delay because we needed to implement in our systems, the changes. So the supply scheme was introduced in November last year. And then after end of January, it was changed. So we needed to change some things in the systems in terms of algorithm and how to invoice, et cetera. And then at the end of March, starting with April, there was another algorithm, another mechanism. So all this meant a delay of invoicing from our side because we needed first to stop the system to make the changes in the system and so and so forth. So basically, you see the RON 40 million change in impairments there, but this is not really an effect of a real collection issue. What is the share of supply volumes covered by long-term contracts? Roughly, we have fully mitigated until the end of the year in terms of covering the supply business with sourcing from forward contracts. We have a strategy, which is looking for more than one year, and we are also purchasing for next year. It's a strategy, which is, I think, aligned with the best practice in the market. I am not going to go into too much detail since this is about a competitive business. But I could say that until end of the year, we are really certain that we'll stick to the margin elements, and we will not have the dependency and the risk related to the volatility of the Day-Ahead market like we had at the end of last year What do you mean by capitalizing the grid losses difference? So there is this mechanism, which is introduced by the Ordinance 27, but will need to be detailed or clarified in more detail in an amendment probably to this piece of regulations through which we are -- the difference of price between the effective price for the network losses and the ex ante price needs to be -- would be capitalized, would be considered as a financial asset basically. But as it is set up now, it's only for the part which is financed from loan. And for this side, we will get rewarded half of the regulatory rate of return. So this is roughly 3.2%. This was the view at the moment of ordinance 27 that this would cover the financing costs related to financing the difference of price for network losses. Of course, in the meantime, the financing costs have evolved to another level, and this is not really necessarily covering [indiscernible], but still, it's providing part of the cover. Of course, there is another discussion in terms of putting these expenses related to the difference of price for network losses as an asset, capitalize them as an asset and having them amortized in several years in line with the recuperation, but this is to be publicly discussed. And it's an idea to be explored in a clarification of ordinance 27. Okay. I think these are most of them. There is another 1, yes. The last 1 is that there was very low CapEx in the budget for development, how soon we should expect to see some of the capacities operating? Can you share more details on how much? So the idea is the following: it's true that most of the projects will be closer to fruition starting next year. We would be looking to have something operational. We will aim to have something operational also this year. But of course, this depends on various elements related to permitting, related to also availability of the equipment, of the solar panels, et cetera. So as mentioned, it would be our aim to have something operationalized this year, but most you will see next year. And this is also reflected in what you mentioned about the relatively low CapEx in the market for green energy development. Okay. So I understand we have 5 more questions on audio.

Operator, can you please start.

[Operator Instructions] The first question is from the line of [indiscernible] Alexander with BT Capital Partners.

The first question is if you could remind us what is the amount you cashed in April and June in terms of subsidies? And where we could find this amount in the financial statement?

Ladies and gentlemen, we apologize for the pause. [Operator Instructions]. Operator? Yes. We apologize. You will have to give your answer once again because we could not hear you. Can you please repeat?

Okay. Tell us. When to start, please.

You can start now.

I have understood the question. So now I'm followi with the answer. So we have collected RON 79 million around in the first half and then RON 391 million after the end of the first half. This is mentioned in the subsequent events note in the financial situation, I think it's not 20. Now if you compare with the RON 631 million, which were receivables from subsidies at quarter 1, there is a difference which is related to the upside offered by the Ordinance 27 in respect of the P&L effect in the initial scheme. If you remember in the initial scheme, under the 3 mechanisms, there was a mechanism of capping where we're having a P&L effect. So basically, we are not able to recuperate everything from the state budget. There was the same as cap of RON 0.525 per megawatt. So under the Ordinance 27, we will offer the possibility to also request for this difference, and there is roughly the difference of RON 130 million, which we filed in, and we expect to be collected. So this is the composition. In respect of the estimation of receivables that we have put in the financials at the end of the quarter 1, there was a difference of between 1% and 2%, which is immaterial. So at that moment, we made an estimation which was based on what we know so far without having the files and all the templates and all the matrixes for filing into the regulator for the amount and not all the details were clarified. I hope this answers your question.

Okay. And how much from this total amount is -- from this total amount is from the Ministry of Energy and how much from the Ministry of work if you can share with us.

I don't have necessarily this granularity. I can look for some situations and can discuss in more detail. For the new scheme, starting with Ordinance 27, what I should tell you is that basically it will be the same split in the sense that we're filing with the regulator, but in terms of payments, the payments for the retail for the individuals will come from the health, from the work ministry and the part related to the business customers will come from the energy. Now looking at the past, from what I remember, we have collected roughly from Work Ministry from [indiscernible] an amount, which is roughly RON 300 million, RON 320 million. So compared with the this amount, which was collected from the Ministry of Energy for the rest. It should be mentioned that in the initial scheme, there were mechanisms there. And therefore, the mechanism of compensation, this was to be recuperated from the [indiscernible] and the amount was roughly RON 320 million. We can discuss separately, and I can give you detailed split.