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.

Ladies and gentlemen, hello, I'm Raluca Kasap, Head of Investor Relations and together with the entire Electrica management team, I'd like to thank you for joining us today for the call and live webcast to present and discuss the quarterly -- the H1 2024 financial results, which were drafted in accordance with the IFRS-EU standards. [Operator Instructions] Kindly note that since the entire conference is being recorded [Operator Instructions] Let me tell you the recorded -- and 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 as well. Now we'll begin the presentation of the financial results, followed by a questions-and-answers session. At this time, I would like to turn the conference over to Mr. Chirita, Electrica's CEO, to begin the presentation.

Thank you, Raluca. Dear ladies and gentlemen, allow me to welcome you to 2024 1st half financial results presentation following the financial report released on the 27th of August. On behalf of Electrica team, and I'm thrilled to have such a distinguished group of experts and investors joining us today. We encourage you to take full advantage of this opportunity and challenges with your question. As always, we appreciate the unique perspective you bring into the discussion. In the first half of the year, the Electrica Group recorded a 6% increase in EBITDA compared to the first semester of 2023, as a result of solid strategies aimed at optimizing operations, particularly in the distribution segment, where revenues increased by 15%, supported by higher regulated tariffs and the growth of distributed electricity volumes. Operational profit remained similar to that of the first semester of 2023 amounting to -- I'm sorry -- however, net RON 322.8 million. However, net profit recorded a decline due to the unfavorable dynamics of the supply market, recording only RON 102.1 million. For more details on this, you will see more aspects in our further presentation. We remain focused on our key priorities investing in the grid while maintaining a strong focus on implementing measures aimed at stabilizing the results and generating sustainable term -- long-term growth. The EBITDA growth this semester was mainly driven by the operational performance of the Distribution segment. The distribution revenues increased with 15% to RON 2.244 million, and the reasons are mainly the two tariff increases. The one in the second quarter of 2023, about 20% and the second one, starting 1st of January this year with an average of 5.8% compared to the previous one, and the distributed volumes increased this semesters. As you know, investments in the infrastructure that we manage are a top priority for Electrica and are essential for providing high-quality services for our customers. As well as for supporting the transition to increasingly sustainable energy sources. In the first semester, we will [ function ] about 96% of the planned investment works in the ANRE approved PIF plan, representing about 76% of the budgeted investment for the first semester. We're happy to report that with the works carried over the 2023, realized in H1 2024, we have reached almost 114% of 2023 ANRE approved put into function investment plans. Through our group strategy, we committed to improving the performance of the managed infrastructure and to accelerating the digital transformation of the business, and one way to do it is by accessing as many nonreimbursable funds for investments as possible. Up to date, our distribution subsidiary has attracted about RON 2.2 [ million ] from the modernization fund, approximately 38% of the total financing already signed on the modernization fund and has 12 more projects submitted. As for the next strategic steps for this year, we are waiting for the final methodology for the PIF regulatory period for distribution to be finalized. You can find the gist of the proposed methodology in our presentation. It should be approved by ANRE soon, and we will revise our strategy for the next 7 years as we said when we launched it in December last year. In the Supply segment, the revenues from electricity and natural gas supply decreased by approximately 20% in the first semester. And this decline was primarily driven by 3% reduction in electricity sales volumes and 49% decrease in electricity purchase costs influenced by regulatory factors explained in our presentation. The lower acquisition costs were observed in both the forward and Day-ahead Markets, which also led to a decrease in revenues from electricity sales and subsidies, down by approximately 74% for electricity. As of 30th of June 2024, the estimated amount for subsidies receivable was RON 2,461 million of which the amount of RON 1,903 million represents unpaid requests submitted to the state authorities and RON 558 million, representing a request that has not been yet submitted to the state authorities as of 30th of June 2024. From 1st of July to date, subsidies amounting to approximately RON 1.3 billion were collected. When it comes to market share, Electrica Furnizare is still the largest supplier of electricity in Romania with a total market share of 16.18% and the competitive market share of 10.88% according to the latest ANRE report in April '24. It also has the most end clients in Romania. Electrica Group continues to pursue the expansion of its portfolio in the field of electricity production, especially from renewable sources, having at this time, projects in different phases of execution with a capacity of approximately 300 megawatts. We still aim to reach our 1 gigawatt target by 2030. The first photovoltaic park that we built ourselves, the Vulturu project will be completed by next month. In the case of Satu Mare 2, project works have begun and have a completion date of December [ '24. ] We plan to access non-reimbursable funds from the modernization fund for developing the 2 photovoltaic parks which are at this time at ready-to-build phase. Satu Mare 3 and Bihor 1, and have submitted the necessary documentation, therefore. As a pick of news, we are currently working on getting all the necessary approvals for our first storage capacity of over 35 megawatts in [ Fontanelle Mulesh ]. As we announced at the end of July, we intend to bring a new dimension to our business with the production and operation of advanced technologies in the field of green energy intended for national and European market through a joint venture with EsyaSoft from the United Arab Emirates, part of International Holding Company Group in UAE. This company in which Electrica will hold 25% of the share capital and EsyaSoft 75%, will bid production units for green energy equipment as well as electricity storage solution and digitalization solutions for the electricity distribution market. The project also includes the development and operation of an infrastructure for charging electrical vehicles. The new business segments intend to meet the growing demand at national and European level and will generate new jobs and at the same time, will benefit directly and indirectly all the core activities of the Electrica Group. When it comes to the capital market, after the entry in FTSE Russell indices in March 2024, last week, FTSE Russell confirmed that maintenance in the indices during the semi-annual review. As for the evolution of our share price in the first part of 2024, we reached the highest closing price since listing at RON 16.3 on 17th of July 2024. Until the results we are talking about today were published, we had an increase in share price this year of over 40%, much higher than one-off [indiscernible] are which increased almost 30%. As we recently celebrated the decade since our dual listing on the Bucharest Stock Exchange and London Stock Exchange, we reflect on the overall significant major transformation. Although the market reacted this with results -- to the results this semester, we are confident that our mid- and long-term strategy put us on a right track to continuous improvement and generation of added value for our investors. I will hand it over to Stefan, our CFO, to provide you with a detailed breakdown of our financial results. Stefan?

Thank you so much, Alex. Hello, everybody. Welcome to our conference regarding the results for half of year 2024. I would like to kindly ask my colleagues to go to this Slide 13, which is already posted for you with a summary of consolidated financials. I'll just say a little bit on this slide, mentioning that compared with first half of 2023, we have a decrease in revenues, which is mainly due to the decrease of quantities supplied on the Supply segment and also -- it's also in relation with the decrease in prices of energy. We will detail this in later stages of the presentation. In terms of EBITDA, I will just mention that in terms of amount, we are slightly higher than first half of 2023, margin is also slightly higher and also in respect of net results, we are some RON 40 million less than half -- first half of 2023, out of which RON 30 million is related to the cost of financing to the interest cost. Again, we will dive deep in more details on that on a later stage of the presentation. In terms of net debt position, I should make one comment. This RON 4.7 billion at the end of 2021 -- 2024, sorry, and the first half 2024, is to be taken into consideration also the repayments that we got from the state we were reimbursed some RON 1.3 billion. At the beginning of July, this is mentioned a subsequent event. And basically, this decreased significantly the cash position, which is now roughly around RON 3.4 billion. So it's less than the end of 2023. And generally speaking, as we were mentioning also in the past, we are focusing on this indicator and trying to keep it in the levels of [ maximum alignments net debt to EBITDA ] so that we keep also our financial covenants with the banks and the criterias for the future rating. Now moving to the next slide. I will propose to go to -- I will propose to go to Slide #14, and I will stay here a little bit to explain you about the evolution of EBITDA. Basically, compared with the result of first half of 2023, we have a change in EBITDA, which is explained by a positive contribution of the energy margin of RON 170 million and a negative effect of the increase of operational costs of RON 131 million. The net positive effect of the EBITDA is due to the positive contribution of the distribution segment with RON 377 million positive contribution, which is generated by the increase of the quantities of energy distributed by 4.9%, but also by the [Technical Difficulty] gives us a limitation on the revenue side. We'll explore this in more details in the slides related to the supply business. The negative variation of the OpEx of RON 131 million is mainly related to an increase of salaries and other employee costs of RON 37 million, out of which RON 27 million are coming from the distribution segment, and it's related to negotiation of increase in benefits in order to align the collective labor agreement. And then a negative impact from the supply segment, which is related to some increase in adjustments for receivables, receivable depreciation, but also some expenses with penalties. Also, there is a negative impact from a provision mainly from supply segment of RON 26 million. Now going to the net result and net result decreased with RON 40 million, out of which RON 30 million is coming from the financial result with the increase of the financing costs. I should mention that this should change the future because we are very actively negotiating with the banks and managing to obtain from the bank's reduction in the margins of the loans that we have contracted from them. And also as you will see later on in the liquidity slide, we are having now a better liquidity position with less amount drawn in the-- from the credit line. So it should impact the interest cost, the financing costs in the next period. Then we have also some impacts related to depreciation and also, of course, there is an impact from the profit tax. Going to the next slide. These are the key figures related to the distribution segment. I covered them mostly before. I will just mention that besides the energy margin effect. We are quite pleased with the performance of the Distribution segment because we had also decrease in utility expenses and rental costs. We had also some impact in other revenues. So we do have quite a significant result better result in terms of EBITDA, it's increasing by RON 367 million. And also, this also translates in an increase of the net results, which increased by RON 265 million, mainly from the positive evolution of the EBITDA, but also with the impact from increase of amortization, depreciation of assets and this effect is, of course, diminished by the impact from profit tax of RON 66 million because we have 4x higher profit before taxes in Half 1 2024 than Half 1 2023. This favorably impact is also a lot correlated with the decrease in the net of losses costs. Basically, as you'll see later on, we only capitalized under the local standards, RON 33 million. Basically, we had a very, very good performance of acquisition price of the energy, which is also due to the MACEE, but also due to the performance of our colleagues. In terms of net debt increase of RON 637 million compared with last year, 2023, this comes from increase of the bank borrowings we draw here, especially the amount from EIB we mentioned also in the previous conference. But we used part of the liquidity is generated to the refinance the investments made in the past, and the effect is offset by the decrease in the overdraft and mostly and also a decrease in the financial leasing. Going to the next slide. Here, we have the main aspects of the distribution segment. I will not say much on it. If you have questions, you can discuss them at the end. You see the evolution of EBITDA and of the net results. Going to the next slide. Here, you have the budget split that you know from our previous presentation with the composition from regulated asset base rent ability to the net result. And then on the next slide, you have also coming from the regulated profit to the net result in IFRS, which is based on the budget. It's kind of difficult to split this on a quarterly or a semester basis because we don't have the split for the ANRE element. But then on the next slide, we have the analysis of the results going from the statutory of the distribution company. And after the IFRS result that we are consolidating in our consolidated financials, and you see that the main elements of -- which are the main elements of expenses. And this has led to the net of losses to the OpEx and the regulated amortization. And then you see the differences between accounting depreciation, regulated depreciation and the various adjustments that we have going to the results OMFP 1802, which is RON 337 million, and the IFRS result, which is RON 370 million. I'll go to the next slide. These are the key figures of DEER that were mentioned also in the presentation before. I will not stay too much on it. I will just go to the slide and go to the next. And I will here mention the part related to the 4% of achieving the investment because we have discussed already about network losses and about the distributed energy in terms of advancements to make a clarification compared with the summary of financials that we mentioned. In fact, we are using several indicators for calculating this. And indeed, we have a degree of realization of the investment of 72%, compared with the budgeted figures, but in the budgeted figures, we generally budget also supplementary work related to the connections that appeared during the year and were obliged by the law to make these investments. So we generally were budgeting for this in order to also finance this part. But in terms of what we are reporting to the regulator, the degree of achievement of the ANRE plan is 96% of the planned value for the 6 months of 2024. So this is reported to the ANRE 2024 plan plus amounts to be recuperated from 2023 and from this point of view, we have a 96% of realization. And we are very, very happy with the performance of our colleagues in the distribution subsidiary from this point of view in terms of achieving the investment. Next slide please. Going to the Supply segment. In the Supply segment, we have a decrease of EBITDA of RON 340 million, which is mainly due to the evolution of the of the margin. I have explained in the initial slide about EBITDA, decrease in revenues from the supply of electricity and natural gas of RON 757 million, decrease of the other operating income of RON 1,351 million in relation to the decrease of the subsidies and the decrease of the electricity cost by RON 1,884 million with the decrease of the price of electricity. As a result, you'll see in the analysis on next slide, the energy margin is decreasing. And I will explain a little bit more the context about that. The net profit decreased by RON 311 million, mainly from the negative evolution of EBITDA and of the financial result of RON 25 million with effect, which is diminished by the evolution of the income tax. Net debt increases by RON 180 million by -- compared with the last -- end of last year. It's mainly due to the evolution of the cash and cash equivalents which is compensated by increase in our draft. And then a decrease of other loans, bank borrowings of RON 39 million. Going further in terms of Supply segment. So as Alexandru was mentioning, we are still the market leader in terms of the supply market. Going to the next slide. These are the key aspects related to the number of consumption places and number of -- and the volumes of energy supply, there is a decrease that you see of the volumes of electricity supply. And there is a certain slight decrease in terms of customers on non-household. You also have the analysis of the electricity revenues on the type of market segments, competitive SoLR of last result and the Universal Service. Now going to the next slide, here is the detail about the margin of the energy and also a summary of the changes in the regulation for the electricity segment. Basically, we have a decrease of the margin achieved of RON 211 million and a lot is also related to the fact that we have this situation that we also, we missed in the market related to the equilibration -- equilibrium market and the volatility of the prices in the equilibrium market. I mean, when we had the conference for the first quarter, you asked us whether we will do a budget re-forecast because we almost have done all the profit for the -- a large part of the profit for the full year and the budget we have done in the first quarter. And we told you that there is volatility in the market, and we remain cautious, and we are monitoring that. Basically, we are in the situation in which with more and more consumers connected to the market, we need to take this energy and in cases -- in some cases, it affects our balancing activities. And with the negative prices of the energy on the balancing market, this is eating up from our margin. But as you saw, this is a topic which is also to the interest of the authorities. Positions taken into this respect and the market. The equilibrium market got into a more stable situation right now from this point of view. Going to the next slide, please. This is the evolution of the prices in terms of comparing 2023 and 2024, comparing of the Day-ahead markets but also on the balancing market, the equilibrium markets. Before in terms of balancing market, there is a 2-month delay about getting the numbers. There is also the explanation about the increase of the prices in the Day-ahead market and the equilibrium market and the explanation related to the prosumers, which I already mentioned in the previous slide. Also, we should note that with MACEE becoming voluntary market, the amount of the -- the quantities of energy, which are proposed in the MACEE mechanism are literally going down to almost 0, and we see an increase of the percentage of what the quantities offered by the producers in the foreign markets. This is also to be connected with the fact that MACEE has become voluntary and that there is the increase in percentage of profit accepted from trading activities from 2% to 10%. Going to the next slide. In terms of outstanding receivables, we do have an increase of the outstanding receivables. But we should mention that a lot of it is related to the fact that we had a delay in invoicing because we switched from the core system of open to SAP HANA and this meant a couple of weeks of delay in invoicing. We are pushing to recuperate that. In fact, this is mostly recuperated. And also with the fact that the process of issuing disconnection notices and the passing of the disconnection process in July, June 2024, we are confident that this could be kept into control. In fact, the increase is mostly from the household segment. And then in this part, we don't anticipate any problems, especially with the disconnection notices being restarted. Going to the next slide. Electrica Serv has a positive EBITDA of RON 3.1 million, which is mostly a result of the evaluation of fixed assets carried at the end of 2023. In terms of net results, we have a 1.5% net result at the end of first quarter of 2024. We are pushing for our subsidiary to bid and to conclude as many contracts as possible for installing Photovoltaic wind power plants and reactive energy compensator, both on its own and also in partnership with our supply subsidiary. That is these projects have a certain period of being concluded contracts and then commissions and on the other side, that there is a certain part of fixed expenses that go each month. But we are still confident that for the end of the year, we will reach a positive result for the electric asset subsidiary. Going next slide. The Production segment, also this was touched by Alexandru, the topic. There is a decrease in terms of production because it's related to the decrease of prices of energy that we've mentioned. We expect that there will be a boost in this production activity with the commissioning of Vulture photovoltaic plant next month. And then we are also pushing and accelerating the commissioning of Satu Mare park Sunwind energy. And you have also the summary of the SPVs that we have currently in the production segment. Now going to the next slide. You have here the group liquidity and the comparison with the previous years. We should mention this -- one thing about this compared with the end of June, when you see we are having roughly RON 1 billion -- RON 1.1 billion of liquidity available in cash and available overdraft limits compared with that, we had the collection of funds from the government under the support scheme of RON 1.3 billion. So in fact, roughly at the end of July, we have some RON 1.5 billion of overdrafts available. So this is much, much significantly higher than end of -- of June -- of course, we will keep these lines available. We prolonged most of them until next year because we are monitoring the situation, and we are looking for any other volatility or slight delays in payments of the subsidiaries, et cetera. So we would like to be prepared and we are monitoring continuously the liquidity in order to avoid any gap. Then next slide. Here, you have the data related to distribution of dividends. You also have -- dividends have been paid the same amount like last year. I will not state among [ summaries ]. I will go then to mention that in the annexes, we have main corporate events and the main changes in the regulatory regime in the legislative regime. I'll stop here with the presentation, and I will finally ask for your questions.

[Operator Instructions]

So, I will start reading the questions that we already received or should we?

Ladies and gentlemen, there are no audio questions at this time. I will now pass the floor to Electrica management.

Thank you. I will start reading the questions that -- where we already received. And trying to answer them. So one of the questions -- first off, I will just go on the -- in the order in which they were received. So can you please give some details on balancing cost on the Supply segment? Are they the main cause of the loss? Are you allowed for 5% of the value of supply demand? Did you approach the regulator to recover these losses. Will you approach the regulator to change their methodology to have us benchmark and to pass through prices in the market for balancing costs from [ NN ] Yes. The cost with the balancing are significant. There are significant meeting -- there is a significant effort and many meetings with the authorities, the regulator, the Ministry of Energy. Also, through the professional associations, [indiscernible] and ACER, they were ACER and there were significant efforts made in terms of changing the methodology we should mention that equilibrium costs have a significant element indeed for the -- affecting the results in the supply. This is also to be connected with the fact that ANRE changed the reporting mechanism stating in the new guide for the amounts to be booked under the supply -- under the support team that there is the cost with equilibrium should be split pro rata between supplier of last resort and market segment and the non-supplier of last resort market segment. But this is not necessarily reflecting the reality of our activities because mostly the part of supplier of last resort is generating for us the balancing costs because that's the part in which we are getting customers in and out one which are difficult to be forecasted. There is a proposition related to increasing the 5% amount or the 5% value of the supply demand for the balancing costs. And this was promoted to the authorities. They are analyzing this. Of course, probably there will correlate this also with the situation of the budget deficit, but there is a proposal between [ 6% ] up to 20% or limited at 10% of the quantity and recognize the value of the market. Basically, the increase of the production in non -- in solar and wind energy increased the needs in terms of equilibrium because that part of production is not to be forecasted and some lack of availability on the equilibrium market, on the balancing market, which led to an increase of the prices, you saw the evolution. Another question is, can you comment on the not booked RON 550 million estimated receivables for the state subsidy? Would this have positively influenced the result and how much? The subsidies are registered in the revenue, the RON 550 million, are already registered in the revenues. Even if we are not placing the request to the ministry. And we should note that only after July, we had the technical possibility to file in for request. And we have, as far as I know, the only big supplier, which already submitted for on the -- for the new scheme after 1st of April -- 1st of January, sorry. So even if we are not sending the request, we are estimating the revenues, and we are booking them as estimation of subsidies. So it's not like affecting the evolution. Looking at the other questions. Hello everyone, looking at the [indiscernible], electricity, natural gas and merchandise purchase of the income statement, I noticed the amount of natural gas purchased in the first semester in the same amount. The amount in the first quarter, meaning that no additional gas purchased in the second quarter, but 70 gigawatt hour supply. So I was wondering if you had natural gas storage from previous startups or how that it work? So we also had -- this is correct. We also had gas in the deposits remaining from 2023. So we are able to supply from this gas in deposit. Basically, we purchased the gas needed to the consumption, and we inject in the deposit as per the regulations, even having a slight advance in achieving the regulation obligations. Just to mention on this equilibrium market, we should mention that this is -- this is an element which is affecting all the markets, all the major suppliers. And we can also quote on even on other types of operators. For example, June 2024, the published official figures also Transelectrica had 8x more higher equilibrium cost than 2023. So there is a context which is affecting the market. We are glad that the authorities are picking out of that, and we are looking at take measures, promoting also various initiatives to create a less volatile environment for the market. Are there any other questions?

[Operator Instructions]

If there are no more questions, then...

There is one written question. I'm sorry, there is one written question just submitted.

We wait. Not an issue. Give us one minute to prepare the answer. Okay. So we have one question. If we approach the regulator to recover the losses from the first semester -- the losses for the first semester -- question is regarding the balancing costs affected the whole market. So we are currently analyzing the effects on the market. It's not something that is only for Electrica. It's about the whole supply market. And I'm sure that also the regulator is looking at this situation. We saw some measures in the last few days that are meant to bring some balance to the situation. We will finish the analysis. And as soon as we have a clear image on how to approach this and what the solutions might be, we will announce it to the market transparent as always.

There are no other audio and written questions at this time, please -- the floor goes back to the Electrica management for any closing remarks. Thank you.

Thank you. If there are no more questions, then I'll take the last word. I know there is -- these financial results are seen as a setback but it's not a significant setback. This is not unbeatable. We've taken this time to closely analyze our challenges, identify areas for improvement and refine our strategies. Our team is more determined than ever to steer the company back to profitability and growth. We have to look at the overall actions that we took in the last 2 years. We demonstrated the resilience of the team, and I think we will find solutions to steer back on a proper course. These are external factors, most of them. We will manage as best as we can, and we are confident that the actions we are taking now will lay the groundwork for a stronger, more resilient company. In the coming months, I hope we can expect to see a positive impact of these initiatives, and we will work to diligently turn the tide. We are committed to transparency, and we will keep you informed of our progress every step of the way. Thank you for your continued trust and support. And I think together, we will navigate through this period and emerge even stronger. Thank you.

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