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

Ladies and gentlemen, thank you for standing by. The Electrica teleconference is starting now. Thank you.

Hello, everyone. I'm Raluca Kasap, Head of Investor Relations. And together with the entire Electrica management team, I would like to thank you for joining the Electrica Conference Call and Live Webcast to Present and Discuss the Q1 2023 financial results. Those of you who are connected only by phone, please download the presentation in PDF format available on our website under Results and Presentations section. The participants connected online or through phone can address written questions on the live webcast or can intervene live on the Q&A session. You can as well send questions through email at IR@electrica.ro. [Operator Instructions] The recorded presentation will be available on our website starting latest tomorrow and the transcript as well as soon as possible. We kindly ask you to see the disclaimer on Page 3 of the presentation. Now we'll begin the presentations of the financial results followed by the questions-and-answers session. At this time, I would like to turn the conference over to Mr. Alexandru Chirita, Electrica's CEO, to begin the presentation.

Good afternoon, ladies and gentlemen, and welcome to our conference. It's been a year now since I embarked on this exciting journey as Electrica's CEO in very uncertain and challenging times to drive change, foster innovation, and take advantage of the new opportunities in the energy sector. In this context, I'm proud to say that the Electrica team has embraced challenges as catalysts for growth and transformation, and together we have proven resilient and adaptable and made great progress. I want to express my gratitude to our entire team, to partners, clients, investors, and stakeholders, thank you for your continued support and trust in us. Please be assured that we are motivated to do better and better. After the best yearly results since the listing to date in 2022, at the level of total revenue as well as the level of EBITDA and net profit, the financial performance of Electrica Group in the first quarter of this year reflects our commitment to operational optimization and strategic adaptation in a still very complex and unpredictable energy market. This upward trajectory underlines our commitment at team level to the sustainable evolution of the group. As for future projects, following the current strategy, we are working on developing the Production segment, taking into consideration all the restrictions coming from the challenges in the supply chain area at international level. We currently have an operational photovoltaic park, 2 ready-to-build photovoltaic projects, and interesting 3 other projects which are in different stages of being put in operations. As we announced in late April, we are planning to invest over RON 160 million in the Generation segment this year. As we confirmed in March, our strategy still aims to develop a portfolio of electricity generation capacities from renewable sources, both wind and photovoltaic, with a total capacity of 400 megawatts by 2024. I know everybody is looking to hear about our new generation prospects. In the spirit of innovation and forward momentum, I stand before you today to share my renewed commitment and excitement for what's on the horizon for our organization. Our team is currently working tirelessly exploring new ideas and carefully refining our strategies to ensure that these forthcoming projects truly reflect our values and aspirations. I assure you that these initiatives will underline our commitment to serving our clients better and taking strides in pushing the boundaries of our capabilities. It is our promise to share more concrete details with you as soon as we can. We believe that this new chapter in our story will be a monumental 1, filled with opportunities, triumphs, and learning experience. We are already working on the new mid- to long-term strategy at group level focused on adapting our business model to very complicated ecosystem we operate in. The regulatory environment is becoming more predictable, but there are multiple other challenges coming, for example, from the ever-growing ESG requirements of the capital market. As we shape our plans and strategies, we need to be agile to optimize and adapt our operations to fluctuating market condition and to the legislative framework. We aim to strengthen the financial stability and increase operational efficiency in all businesses divisions, while promoting sustainable growth, consolidating our portfolio and ensuring stable prospects for Electrica. Overall, we consider that the company's performance is good taking into consideration the ongoing challenging conditions in the energy market, results that encourage us to continue our strategic efforts to maintain a top position in the energy sector. Most of all, we have been focused to be prepared to quickly respond and adapt to challenges that kept arising. Electrica's results in the last 2 quarters reflected also in Electrica's share price performance on the Bucharest Stock Exchange. In these 4 months, the share performance surpassed performance of their Total Return Index, as you will see in our presentation. As we've announced, it is our aim to be included at the beginning of next year in the FTSE Russell indices, and therefore, we are proud to let that in the first 4 months we fulfilled all the necessary capitalization and liquidity criteria with the support, of course, of our 2 market maker partners. Now allow me to present the first quarter 2023 financial results in a nutshell. The first quarter of this year registered an increase of almost 8% in total revenues and other operating income compared to first quarter of last year and the positive EBITDA of RON 170 million compared to the negative EBITDA of RON 51 million in the first quarter of 2022. The result was mainly generated by operational performance of the Distribution segment due to a few factors, among which are closer-to-normal operational landscape after the centralized purchase system, MACEE, was implemented. Therefore, there was a significant decrease in the cost incurred in the purchase of electricity for covering network losses. The increase in revenues, due mainly to the increase of the distribution tariffs starting 1st of April 2022 until 30 of March 2023, although there was a 9% decrease in distributed volumes in trend with the national consumption. Please note that almost 20% average increase in tariffs starting 1st of April 2023 is not reflected in this quarter results, and we will discuss that in August when we present the next results. In the Supply segment, we registered overall negative impact due to a few factors among which: on the retail market, 3% increase in retail price and 9.4% decrease in supply volumes, increased costs with purchase of electricity for supply, mainly by the increase of the prices on the electricity market at the time of purchase and limitation of the transfer to the final consumer of this price increases. Once again, I would like to extend my gratitude for your unwavering support and trust. It is this faith that motivates us to aspire higher and dream bigger, so let's look forward to these future projects with anticipation and eagerness as we continue to grow together. Now I give the floor to Stefan to get you through the detailed financial results.

Hello, everybody. Good afternoon. Welcome to our conference regarding the results for quarter 1 2023. My colleague, the CEO of Electrica Group, also touched a little bit the numbers, but I will explain this in more detail for you, and then we will welcome your questions in the usual Q&A session. First of all, I'll ask my colleagues to go to Slide #3 and mention that the results that we are posting are reported according to the localized IFRS established and prepared in accordance with the Order of Ministry of Finance 2844/2016, which regards the capitalization of the expenses with the difference of price for network losses as a capitalized intangible asset. As you know from the results -- for the results that we published, we consider that the results are similar also under IFRS-EU, because based on the amendments to the concession agreements we constitute -- those numbers will constitute a difference of financial assets under IFRS-EU. But for quarters, we report under OMFP 2844, but we'll give you all the details regarding the capitalization so that you can calculate your [ proxies ] and make all the analysis. In fact, in the way in which this year unfolds, we consider that it will be not significant capitalization to be constituted. So basically, for this year, we will not have the impact of the difference of price for energy for network losses in a significant amount, like was the case for 2022. Then I'll move to Slide #4 and [ wait ] a little bit on the overall results of the group. The overall results of the group are showing an increase of revenues, as was mentioned also by Mr. Chirita, which is related to the increase of prices of energy. In terms of net results, we are posting a negative result of RON 67 million, which is related to the Distribution segment. And I will explain the reason for this result, which we are confident that will be recuperated in the next quarters. But in respect of EBITDA, we have a positive result RON 170 million EBITDA, which is a result which is putting us into confidence in terms of having a good year for this year and having a [ recuperation ] during the following quarters. Basically, the loss related to the Distribution segment is related to the fact that there is a time gap interval between the moment in which the capitalization of the expenses with the difference of price of network losses for last year enters into expenses starts to be amortized and the moment in which we are starting to recuperate according to the legislation through Ordinance 153/2022, we are starting to recuperate those amounts in tariffs. So basically, the first capitalization was constituted at 3 quarters last year, quarter 3 last year, and it started to be amortized already during quarter 4. The second capitalization was constituted at end of quarter 4 last year, and it started to be amortized or put on expenses in quarter 1 this year. So we have roughly RON 50 million impact of these expenses, capitalization which starts to be amortized, while the increase in tariffs on average with 80%, as mentioned, is applied only from 1st of April. So the results for the following quarter will show the recuperation also in terms of the distribution part. One more to be mentioned also in terms of the position of net debt. We do have a slight increase there, which is related also to financing the CapEx plan in the distribution part, but also it's related to the fluctuations regarding the working capital in respect of invoicing for the Supply segment and applying for the request for repayment under the support scheme. As you know, there was a change of the legislation by Ordinance 192/2022, regarding the change of the support schemes in December. And this meant for us and for the other suppliers, a period needed to make changes in our IT system to implement a new algorithm for the support scheme. And basically, we have started to invoice the quantities right after 16th of December 2022 only in February. And then there is this effect related also to the repayment [ requests ], which have to be submitted -- as you know, cannot be submitted sooner than 2 months from the month of consumption. And, of course, you need to have the invoice first issued. So there is this effect, which impacted a little bit the cash flow for the first part of the year. Now moving into Slide #5 to the consolidated EBITDA and net result evolution. The EBITDA for first quarter 2023 is RON 220 million higher than the EBITDA for quarter 1 2022 with a positive result, which is mainly due to the positive variation of the energy margin, RON 234 million, which is mainly coming from the Distribution segment where we have, as I've mentioned also by Mr. Chirita, the impact in the decrease of the energy purchase to cover network losses because starting the 1st of January, we have the centralized acquisition mechanism for the energy, the so-called MACEE mechanism for the centralized purchase of energy, according to which we are basically covering 70%, 75% of the need for the network losses in the distribution subsidiary at the price of RON 450 per MW, which correlated with the price that was approved by ANRE for the tariffs and the equivalent average ex-ante price for this year makes us confident in what I was explaining at the beginning. That is the fact that for this year it should not be a significant difference between an effective average price of purchasing of energy from network losses and the ex-ante price. So the difference is which to be reflected in capitalization will not be significant. Then we have a negative effect of RON 150 million from the Supply segment, which is mainly caused by the decrease in the revenue for the electricity and natural gas supply. Basically we see that there is a fall of the volumes of electricity supplied. And in general, we see that there is a fall of the volume of energy distributed. So it seems that the market has adjusted in a way from the energy prices from last year. Probably there is also a situation in which people are more focused on efficiency, investing for efficiencies like [ consumers ], but also paying more attention to the economy, et cetera. And in some cases also probably some economic activities which are discontinued temporarily. Then we have the other revenues, the effect of RON 30 million, mainly due to the fact that in the Supply segment we had last year some contractual compensations which haven't corresponded in 2023. The capitalization of RON 21 million, as I was mentioning at the beginning, it's quite small amount. This amount calculated as a difference between the net cost with the purchase of electricity and the cost of own technological consumption, which is included in the tariffs. And this is, as I mentioned, the capitalized asset according to OMFP 3900/2022. There is also a small impact related to OpEx where we have an increase in the Distribution segment related to the need to align the provisions for the [ 3 zones ] after the merger of the companies, and also an increase in expenses for repair, maintenance, and materials aligned with the increase of cost generally in the inflationary context. If we look at the net result, the net result is better with RON 91 million, mainly for the positive evolution of EBITDA, which is slightly elevated by the evolution of financial results with minus RON 47 million because we do need to finance all this amounts related to support scheme and to the network losses for the distribution and in the context of the increasing interest rates and increased amount of net debt [ raised ] this impact. And also we have the increase in amortization and depreciation of assets of RON 52 million, out of which RON 50 million is the depreciation for the network lapses, which I've mentioned from the first slide. We also have the negative impact in profit tax because we have a reduction of the benefit with profit tax as a result of the decrease of the previous financial loss. In the next slide, Slide #6, we have the position related to our position as a leader player in distribution and of supply. Generally, we are always publishing these numbers. The source is represented by the latest regulatory reports. I should mention that in terms of Universal Service and supplier of Last Instance, we are the market leader. And in other markets, we do have a strong position as well. On the graph for the NL, the gray part comprises both the 2 companies, Enel Energie Muntenia and Enel Energie. Moving to the Slide #7. We have analysis and the split of the evolution of the results for the distribution. The highlights, besides the impact in the network losses and in the energy margin, you have the details here related to the energy margin, but also the 1 related to the capitalization of RON 21 million. Then other impact to be mentioned, the net result increased by [ RON 220 million ], mainly from the positive evolution of EBITDA with a negative variation of the financial result of RON 21 million. As mentioned, we need to finance the difference of price of network losses. And you can see the details about change of the network losses cost from RON 680 million net with income in first quarter 2022 to RON 368 million net with income in first quarter of the current year. The net debt increased with RON 173 million compared with the year end because of the network construction financing, as we are focused on achieving our CapEx plans and also on recuperating the part of the CapEx plan related to the previous year, which was not achieved during the previous year because we needed to also finance the network loss [ as defined ]. Then we have the usual graphs where we explain, following the request from the various analysts, the evolution from the RRAB, the rentability calculated based on the regulated asset base and with the regulated rate of return. First of all, from this part, this is Slide #9, from regulated asset base rentability to the regulated profit with the various components. This is based on the budget, and then we have the part from the regulated profit until the net result, which is under our approved budgets. And then we have this analysis for the first quarter 2022. We have only from the total net revenues to the net results. It's not a detail where we put through the full graph like in the slide before because we don't have the split from ANRE for certain categories on quarters, and we would not make some assumptions related to [indiscernible]. But this is a detail on which we are always waiting [indiscernible] details and clarifications if needed. Then we have the details about the 3 regions in Slide 12, 13 and 14 in terms of customers, the network losses cost, the distributed volumes, and so on. You see that there is -- we are seeing a decrease of the distributed volumes, energy of distributed volumes. Basically, quarter 1 2023 showed an amount of electricity distributed down 9% compared to quarter 1 2022 with this evolution -- negative evolution at all voltage levels. Also in Slide 15, we have a detail about the investments, the current investment plan for 2022, which is RON 464 million, out of which RON 328 million for this year and RON 135 million recoveries related to the previous year and also the parts related which were commissioned in the first quarter, RON 50 million in terms of investments. Slide 16 brings a summary of results for the Electrica Serv segment, energy services segment overview. Here, we have a slight profit to the first quarter 2022, an increased with RON 5 million from last year. In fact, EBITDA increased with RON 4 million compared with the same period of 2022, mainly as a result of the increasing revenues with RON 3 million due to the fact that the situation in the energy market triggered an increase of the demand for photovoltaic system, which generated new contracts for Electrica Serv in terms of projects for building a solar photovoltaic project. And mainly this change in EBITDA is providing the result also for the net results. In case of Electrica Serv, we have a net result, which is higher than the EBITDA because there is a significant financial result, which is positive. Electrica Serv has significant liquidities, which are contributing in the cash flow system and they are basically financing the gap of liquidity at the level of the group and the [indiscernible] interest. So their financial activity is not generating income. Moving to the Supply segment. We have the main numbers in Page 17. For the Supply segment, we have an EBITDA of RON 70 million for first quarter 2023 and net profit of RON 24 million. It is a slight decrease compared with the first quarter of last year, mainly due to the evolution of the following elements. We have decreased the revenues from the supply of energy and natural gas, which is mainly due to the decrease in volumes of energy supplied by 9.4%, which is only partially compensated by the result of the increase of selling prices in the retail market by 3%. Then we have the result in the subsidies. Other operating revenues increased by RON 339 million, reaching RON 987 million, representing mainly subsidies based on the ordinance related -- on the ordinances related to the support scheme. We have an increase of the purchased energy cost increased by RON 319 million, which is mainly generated by the increase of the energy purchase price that could not be transferred towards the final consumers. Here, we should mention that we tried to have a balanced position in which even if the prices have decreased in the market in terms of energy, and we see some moments with significantly lower prices in the [ retail ] market. We are trying to have a balance in which we are at least buying some quantities also on the forward contracts also for the financiers and also for ourselves. We will not see ourselves in a situation in which we are depending -- we are overly depending on the Day Ahead Market. We have then a favorable effect of RON 24 million from the variation of the green certificate. And also under IFRS 9, looking at an analysis of recoverability of receivables, we have further effect in terms of using some impairment. In terms of net debt, we have an increase of RON 433 million compared with first quarter 2022, which is mainly related to the increase of overdrafts, which are used to refinance the support scheme and also the [ delay in ] factor in issuing the invoice to the customer related to the fact that we needed to make additional changes in our system in order to implement the changes in the algorithm for the support scheme. Then we have in the next slide the details related to the Supply segment in terms of market share. which I also mentioned at the beginning of our presentation, you can see in the Slide 19, the evolution of the energy supplied, and the fact that there is a decrease in terms of volume of electricity supplied also on the retail market. And then Page 20, [indiscernible] and analysis in terms of the legislative measures and also the main factors, which impacted the results of the first quarter on the Supply segment. We also showed the evolution of the energy prices on the balancing market and on the Day Ahead Market, and we also have the details related to the centralized mechanism for centralized purchase of energy, for which also the supply subsidiary is benefiting. But according to the mechanism, the priority is given the TSO and DSO, which are the first which benefit and gets mostly the energy at RON 450, and then there is the marginal part, which goes to the supply subsidiaries. There is an yearly allocation and then also a monthly allocation, and this is basically covering [ ourselves ] for the following months. It's providing us significant quantities; also important in terms of managing the supply. Moving further, we have the details on Slide 21 related to the evolution of the receivables. Now if you look at the outstanding receivables adjusted to the turnover, there is a decrease in first quarter 2023 related to -- compared with the end of the year. The balance of receivables increased by 10% in nominal terms, in the context that we needed to adapt the IT systems to the changes brought by Law 357/2022 and then Ordinance. low 57 for 2022 and then all enhanced RON 192 million by 2022. This implementation of changes was successfully completed and the decrease in the value of the tablets estimated for the second quarter. In terms of outstanding receivables, we are focused on a plan to accelerate the collections, and in the portfolio level, we believe that there is an improvement in the recovery rate for the first overdue interval from 1 day to 60 days overdue. Basically, we have -- in terms of bad debt allowances, we have some amounts which are like most of them older than 5 years related to litigation, insolvency, or bankruptcy, and this will be recognized after the finalization of the respective bankruptcy processes, but it's not a situation in which we have like new bad debt generated in the last period. We have some written-off amounts, which are related to that. Moving further, we have as a first time in our presentation first slide related to Production segment. In terms of highlights for the Production segment represented by Electrica Furnizare, but also the other subsidiaries, SPVs, which are in various stages in terms of the project developed there and also ownership by Electrica of the respective project. And we do have a positive EBITDA for the segment, which is mainly generated by the existing part, which is producing energy under Electrica Energie Verde. This EBITDA has a slight decrease compared to first quarter 2022, which is impacted mainly by decrease of income from the sale of energy as a result of decreasing prices in the first quarter 2023 compared with the previous year. We do have for 2 of the companies, Sunwind Energy and Green Energy Consultancy & investments. We are focused on initiating starting the construction phase, and we are planning to operationalize this possible. Moving further, we have the slide on the group liquidity. It's up RON 23 million. You can see the evolution of the liquidity that is a decrease, let's say, in terms of available liquidity compared with 2022, which is related to the fact that, as I mentioned, we needed to also finance the delay in invoicing the supply term quantities, so under supply subsidiary and also related to filing in for the reimbursement request under the support scheme following the amendment of the support scheme throughout 192/2022. We have also a slide in the dividend distribution. I will not state much on that. I would just say that we consider that in the current context, which is still quite volatile and quite challenging and also in terms of evolution of the liquidity in the market, the [ decision ] which we proposed was related to a lesser dividend that what we were posting previously. also in the idea that we need to develop generation and the production part. And for this, we needed [ funding resources ]. That will be the summary of the presentation for now, and we are looking forward for your questions, and together with my colleagues here, we will try to answer them to you as accurate and promptly as possible.