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. I'm Raluca Kasap, Head of Investor Relations. And together with the entire Electrica management team, I'd like to thank you for joining our call today to present the third quarter financial results. Those of you who are connected only by phone, please download the presentation in PDF format available on our website on the Results and Presentations section of the Investors section. [Operator Instructions] Kindly note that the entire conference is being recorded [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 disclaimers on Slide 3 of the presentation. Now, we'll begin the presentation of the financial results which will be followed by questions-and-answers session. Should you have any questions during the presentation, you may send them either by e-mail at ir@electrica or through the web or audio question. At this time, I would like to turn the conference over to Mr. Chirita, Electrica's CEO, to begin the presentation. Thank you.

Dear ladies and gentlemen, on behalf of Electrica team and myself, allow me to welcome you to 2024 third quarter financial results presentation following the financial report released on 15th of November. And as always, I'm happy to have such a distinguished group of professional experts and investors joining us today. As you all are familiar with the structure of our event, at the end of the presentation, we encourage you to take full advantage of this opportunity and challenge us with your questions. The insights and perspectives you bring into discussions are much appreciated and helpful. The consolidated results for this period highlight the complexity of our economic and regulatory environment and our commitment to addressing these challenges responsibly and strategically. We have intensified investments and made significant progress in our strategy. Our investments in modernizing the distribution infrastructure reflect our determination to provide high-quality services to nearly 4 million users. Our dedication to optimizing operations, strengthening our regulated asset base and enhancing resilience remains unwavering. We [ reacted ] to this energy transition and have made progress in expansion of our renewable energy portfolio. Since our last webcast, we have made progress. Our photovoltaic park, Vulturu is in the testing period connected to the National Energy System starting at the end of October 2024. The works for Satu Mare 2 photovoltaic project with partial funding from PNRR program are in an advanced phase of execution, which will be completed this year. We have also secured in October 20% more of the share capital of Crucea Wind Park project. We now own 60%. And yesterday, we applied for the newly established CfD scheme. For the Satu Mare 3 and Bihor photovoltaic projects, we are working on launching the [Technical Difficulty] acquisition soon after our shareholders approved 11 days ago the investment. I take this chance to thank our shareholders for their trust. We are already working on implementing the resolutions from GMS at the beginning of this month, and I refer here to the launch of our [ bond ] program and the syndicated credit facility meant to optimize our loans. Our most important strategic objectives are improving the performance of the managed infrastructure and accelerating the digital transformation of the business. As I said, we remain focused on our key priorities, investing in the grid, investing in renewable energy production projects while maintaining a strong focus on implementing measures aimed at stabilizing the results and generating sustainable long-term growth. We're working tirelessly to access as many non-reimbursable funds for investments as possible. To date, our distribution [Technical Difficulty] about RON 2.2 billion from the Modernization Fund, approximately [Technical Difficulty] of the total financing already signed on the Modernization Fund and has 12 more sub-projects submitted. We have also secured new financing for investments in green production and electricity storage. As to the financial results, we achieved an EBITDA of RON 1.06 billion, an operational profit of RON 623.7 million and a consolidated net result of RON 302.4 million, in line with our original annual projection. As in the previous quarter, the performance of the Distribution segment was exceptional, 8.1% increase in revenues due mainly to the higher volume and higher tariffs, while in the Supply segment, we recorded a decrease of 15.2% compared to the first 9 months of last year, due mainly to lower subsidy revenues and lower supplied volumes. I will now let our CFO, Stefan, give you all the details on the financial results. Any questions as you -- will be answered at the end.

Thank you, Alexandru. Good afternoon to everybody also from my side. I would suggest that we go to Slide 13, the first slide in our deck of financial results with a summary of consolidated financials. I will post some comments on this. So, in comparison with the previous year, we have a decrease in the revenues, which is related to the decrease of the prices of energy in the market. In terms of EBITDA and EBITDA margin, I would mention that, as you see, we are at similar levels 9 months 2024 compared with 2023, in terms of the value of the EBITDA and in terms of value -- percentage of the margin. As net result and net result margin, there is a slight decrease compared with last year, but we have posted a solid RON 302 million net profit at 9 months 2024, which we believe is in line with our forecast and makes us better positioned for staying within the budgeted figures for the year. Also on the net debt, as you can see, has remained relatively stable. There is a slight decrease. We benefited off the cash-in of a significant amount of subsidies in July and we managed this liquidity until now, 9 month position is RON 3.7 billion. Moving to the next slide, Slide 14. In terms of the consolidated EBITDA and net result evolution, the consolidated EBITDA for 9 months compared with 9 months 2023 has a variation of RON 125 million, which is mainly due to the following elements: a positive variation of the energy margin of RON 89 million, negative variation of OpEx of RON 211 million. This combined giving the result of minus RON 125 million. In terms of the variation of the energy margin, we have a positive result from the distribution segment, which is related to 2 elements. First is related to increase of tariffs in energy distribution. Second is also increase of the volumes of distributed energy by approximately 5.1%. And then we also have an impact related to the decrease in the energy purchased to cover network losses. It's also related to [ the market ] until mid-year this year, but it's also related to the performance of our team in the distribution in respect of purchasing energy to cover the network losses. On the Supply segment, we have RON 326 million negative impact in terms of the margin. This is coming from several causes. One is related to the decrease of the sales volumes and the decrease of the purchase cost. This is also to be connected to the fact that according to the last form of the Government Ordinance 27/2022, as you know, we have the method -- cost-plus method. So basically also the contract price and final price calculated to the consumer starts from the purchase costs realized and then we add the supply component. And in this way, when the purchase cost is going down with the supply component being stable, this is also affecting the revenues. And then, we have also an impact related to -- lower amounts related to subsidies from the Ministry of Energy and ANPIS in correlation also with the decrease of prices of energy. But out of this, there is also approximately RON 245 million impact, negative impact, which is related to the changes introduced by the new ANRE guide from 29 July 2024, regarding the new calculation of the amounts to be recovered, especially in relation with the balancing market. In terms of negative variation of OpEx of RON 211 million, we would comment that this is to be splitted in the following main elements; negative impact in terms of expenses with salaries in the distribution segment in relation with the negotiation of some increases in benefits in order to align the remunerations and under the collective labor agreement. We have also a negative impact of RON 77 million in operating expenses, which is due to the increases of expenses with penalties. In some cases, we are using also this as a financing element related to the fact that we have some delays in cashing in the subsidies from the state. And then, we have also a negative impact from the change of provisions for risk and expenses of RON 30 million, mainly for Supply segment. In terms of the variation of the net result, it's 9 months 2023 versus 9 months 2024, it's minus 188% (sic) [ RON 188 million ] which is mainly related to this variation of RON 125 million in EBITDA, and then also a negative evolution of the financial result with RON 21 million related to increase of costs with the interest as we continued to finance the support scheme. And then the increase in amortization and depreciation of assets RON 50 million, which is also related to the evaluation of assets that we had done at the end of last year with a small positive effect impacting profit tax. Going to the next slide, you have the highlights on the distribution segment in Slide 15. They were pretty much covered in the initial slide. What I would mention in addition in respect of the details mentioned on the initial slide is that the favorable impact of the distribution segment results is mostly related from the decrease in network losses costs, by some RON 83 million net with income for the -- so that in the first 9 months 2023, this cost was QAR 671 million net with income. This is related to decrease also of network losses quantity with 12%, but also the decrease of the average purchase price. In terms of net debt on the Distribution segment, we have a minor increase of RON 22 million compared with year-end 2023, which is to be put into perspective in comparison of also the increase of cash and cash equivalents, yes, we have RON 409 million increase of cash and cash equivalents, which were used to decreasing the overdraft. And the increase of the bank borrowings is also related to putting some of the debts which are on short-term on medium term. So, basically decreasing on overdrafts and moving the debt towards longer tenure to match the expiration of amortization of network losses from 2022. You have also the graph related to the evolution of EBITDA, 9 months 2023 versus 9 months 2024. Here, you see that the most important contribution is -- positive contribution is from energy revenues and network losses cost. And then on the other elements, the other elements are relatively stable in comparison to 2023 versus 2024. On next slide, you have the main elements of Distribution segment. On Slide 16, I would mention that for the first 9 months of 2024, we only have, in realized value only RON 27 million as capitalized values for network losses. So this shows that the performance of effective price of purchasing the energy for network losses was very, very close to the budgeted and to the [ standard ] figures. Then the next slide, 17, you have the usual split and analysis that you -- some of the analysts requested, going in the initial slide, you see from the regulated asset base yield rentability to the net result. And then in the next slide, you have the [ porting ] from regulated profit to the net result, and then going also with the adjustments, IFRS to show the net result IFRS. And then Slide 19 shows the analysis of the regulated net results for the 9 months 2024. The first 2 slides were related to the budgets to understand the logic. Unfortunately, we cannot split that on quarters because we don't have the split of some elements of that under the ANRE base amounts. But here also, you can see starting from the total net revenue, the amounts related to network losses realized OpEx and then the differences between accounting depreciation, regulated depreciation, you can see the composition of all the costs up to the operating results. And then to the result according to the statutory OMFP 1802 and then the adjustments up to the IFRS results for the distribution for 9 months. Then you have in the Slides 20, 21 and 22, the details of the operational performance for the distribution in DEER as a whole and then the 3 regions as per the reporting that we got you used to. And then some comments on the Slide 24 related to the degree of realization of the commissioning of the investments and also the evolution of the network losses and distributed energy. Slide 25, it's the summary of the Supply segment. Here on this slide, I would mention in addition to the -- what I have presented at the beginning of my presentation that in terms of net profit, the net profit decreased by RON 438 million, mainly from the evolution of EBITDA, and then with the financial -- negative impact also from the financial results of RON 28 million, and also positive element of decrease of the income tax as a result of recognition of receivables with deferred tax according to IAS 12. In terms of net debt, net debt also decreased by RON 300 million compared with the year-end 2023, as a result of the fact that we cashed in the subsidies at the beginning of July, and this was used to repay a significant part of the overdrafts and bank borrowings. Then, Slide 26 is the position -- the competitive position of Electrica Furnizare on the supply market. In the first half of 2024, first half, we are like still the largest supplier in the market. And for July, the second largest supplier on the market. Slide 27 brings you the key aspects of quarter 3 in terms of the split on the market segments; competitive, universal, supplier of last resort and also evolution of the number of consumption places and volume of electricity supplied with the key operational indicators also being presented from the evolution in the last 3 years on Slide 28. Slide 29 and Slide 30 brings some summaries related to financial impact of the electricity market in terms of changes in the legislation, evolution of the purchase cost. As you can see in Slide 30, in the graph presented there, you see the evolution of the prices on the balancing market and also the evolution of the prices in the day-ahead market. There is a certain volatility, especially on the balancing market. You can see the period in -- that we were also mentioning in our previous investor presentation, and the period until in the summer when we had significant periods with negative prices in the balancing market. At the end of July, this situation was calming down, and we saw a relatively smoother evolution of the balancing market. Also in terms of supply, turn to Slide 31, in terms of receivables, in terms of total outstanding receivables adjusted with the turnover, have, I think, for the first time since a long period an increase, but this increase which is related to the fact that, first of all, we changed the core system and with the migration from open to SAP ISU, there was a delay in invoicing, but we started to recuperate and also started in September, the recuperation of that part. And then, we also had the situation where for a period we were not able to issue disconnection notices, which we were able to restart issuing since June 9 with the disconnection process starting from early July, and this is always helping with the collection. In terms of IFRS 9, the amount that we have as a bad debt allowance is RON 166 million, and it's related to historical amounts. We really don't -- still we don't consider that we have a collection element related to collecting from the customers. It's just some delay which is, as in the previous couple of years, generated by the delay in invoicing, either related to technical elements, like it was the case now with the migration to SAP ISU or changing the algorithm as a result of the change of the legislation under the Ordinance 27. So, this is the element which might induce apparently an idea of increasing outstanding receivables, but in fact, it's not related to the payment [ component ] behavior of the consumers. In terms of Electrica Serv, we are having net results for 9 months close -- slightly above RON 0.4 million. And in terms of EBITDA, we have an increase in EBITDA, reaching a value of RON 4.5 million. A lot of that is related to the revaluation of the fixed assets. Also revenues, I would mention that the revenues in 9 months 2024 compared with 9 months 2023 have a slightly positive evolution as a result of the increase in projects for green energy, photovoltaic projects executed in this period. In terms of production segment, Slide 33, we have a decrease of EBITDA in 9 months 2024, which is generated by the decrease of the prices -- energy selling prices compared with previous year. The net result is decreasing by RON 1.1 million as a result of this evolution of EBITDA, but offset by the financial result improvement of RON 2.2 million, which is related to the fact that by merging some of the companies in Electrica, the loan to those subsidiaries basically disappeared. So we don't have, on the Production segment, that component related to interest cost. And for the new projects for the development part, we are capitalizing the interest as per the legislation. So, this shows the improvement of the financial result related to Production segment. In terms of group liquidity, Slide 34. We are in the best liquidity position after 2022, after the -- we had the support scheme in place. There is RON 641 million cash position, effective cash; and then another RON 938 million available lines to be drawn at the end of September 2024. So, this would position us -- will put us in a good position to continue to go on with the liquidity, fulfilling our obligation until end of the year and over the horizon of the end of the year. You have also the slide with the distribution of dividends that you already know, we comment on that also in our previous Investor Day. So, I would stop here with my speech and we would welcome your questions, and we are prepared to answer your questions. Thank you.

[Operator Instructions] Thank you. Ladies and gentlemen, there are no audio questions at this time. I will now pass the floor to Electrica management.

Ladies and gentlemen, if there are no audio questions, we will take a couple of minutes break to answer the written questions and we'll get back to you. If anyone wants to register to ask audio questions, please do so now. Thank you. [Break]

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

Thank you for your questions. I will start with the first. Thank you, Chirita, for the remark related to results. So, we also thought that we will surprise in a good way the markets with the results of quarter 3, which are showing our efforts and are showing the approach of portfolio of businesses, basically when one of our line of business, be it the Supply is and was affected by the part related to the balancing market in the summer, we're able to post the very good performance on the distribution business. So, yes, you are right, the distribution assets, which are financed by non-reimbursable funds, but your funds are not becoming -- are not considered as a part of RAB. We are not getting the RRR on it. It's only the part which is not eligible from the project, the other part which is financed [ right there ], which is subject to the RRR, but the part which is financed by the non-reimbursable funds is not subject to RRR. However, we should mention that there is an incentive of 0.5%, so not 1% like in the past but 0.5%, which will be guaranteed for investments in networks made within the project, co-financed from non-reimbursable EU funds. Since we are at the distribution, I will also look at the next question on the distribution. So for distribution, I was wondering if you are still able to secure a significant part of the energy through March or do you rely more on the spot and wholesale markets? The fact is that after in April -- the March became voluntary, the amount in March decreased and [Indiscernible] starting midyear. So from the summer, there are virtually no amounts in March. So we are relying on the performance of our teams and purchasing energy in term contracts and also balancing market and day ahead market. But we are happy with the performance we are achieving on that side. In terms of the supply -- so, do you publish any guidance in respect of the percentage of customers that are under specific threshold of consumption, roughly how many are among the 100 kilowatts and so forth? Of course, we have this analysis as part of our segmentation of the customers, but it's not something that we will put on public because it's also a matter of competitive advantage knowing our customer in the supply market in front of our competitors. However, it should be mentioned that in case of many households, yes, that is a significant portion of households, including in the city areas, not only rural areas, which are able to stay within 100 kilowatts. And then, also many of them, usually for the households not exceeding 300 kilowatts. The high demand for electricity in the last couple of months has caused higher imbalances, which led to higher acquisition prices. But I was wondering if the increased sourcing costs are also affected one way or another as revenue to the invoice you send to final customers? Now, we have 2 types of capping in relation to that. First of all, I was explaining in the presentation, basically we have the price that we are invoicing to the customer is determined under the method of cost plus. So, basically, we are starting from the acquisition price and ending with the supply component. And then there is also the element related to the balancing cost. For the balancing cost, we have a specific capping for those costs which are accepted under the Government Ordinance 27, the only amounts which are accepted are under the cap of 5% of the values of the energy supplied. So, we have this kind of limitations. We are not able to pass this to the customer. We had this situation in the summer where we had the significantly higher prices and negative prices in the balancing market. This is related to several elements, also the fact that we moved to 15 minutes balancing of the balancing market. Previously, it was 1 hour matching, and now we have 15 minutes matching. And then there is also the situation related to some elements regarding legislation. So, for example, obliged by the legislation to take energy from the consumers to pay the average price on the portfolio -- on the acquisition portfolio. And then if there is Sunday afternoon, I would just give that energy in the energy market -- in the balancing market, for negative prices being forced to generate the losses. So, there is a matter also about fine-tuning of legislation. Also, since we are a supplier of last resort in the month and we need to take customers from the market, this is very difficult to balance. I mean, we are taking the everyday customers, and we are in the situation in which, yes, for these customers, at least in the short term, we need to cover them from balancing market. So this is also an impact. It's a situation which affects, in fact, all the major suppliers. In terms of the gas purchases made on this quarter, on this amount, I need to -- yes, we have in the financials, the portion related to purchase acquisitions. Can we expect that quarter 4 consumption to be covered from the reserves as well? We had some acquisitions of gas in the third quarter, but it was not significant. So it was really not significant. It's true that the expectation was to cover it from the reserves. Okay. I understand that Vulturu project has been connected to the network. Okay. Vulturu, yes, what does it mean? Vulturu supplies energy to the system. And currently, in this testing phase, the price of the energy supply is determined according to the methodology of the regulator of ANRE. We expect the electricity prices to rise, but we are waiting to see exactly how the energy and gas market will be evolving after it will be liberalized after quarter 1 next year. How do you expect the supply price to evolve post listing of the caps at the end of first quarter 2025? Do you see any efforts progressing in defining the vulnerable customer? Any idea how would that work, if at all? There are discussions about defining the vulnerable customer and how would be the mechanism, what should be the criterias, what should be the entities, which will ensure the filtering and the registration of these customers, but it's not yet clarified. When this will be more -- we'll have more visibility on that, we'll communicate. In terms of evolution of the prices, what do I know and what we know is that the authorities confirm that they are considering gas -- an energy release program in a similar way like the gas release program under the support scheme for the gas. This is related to the fact that after end of the support scheme, there should be some quantities, guarantees to be provided on the forward contracts on the forward market so that not all the quantities remain in the day-ahead market and in the balancing market. So this should -- yes, we are not looking at sort of guaranteeing prices, but guaranteed quantities which to be also on the forward contract, so that we don't have spikes in the day ahead market and in the balancing market. Now, since we are also in this spot, you may be adding something to the question about recuperating from the customer. As I mentioned, the limit is 5% for the balancing cost then there is a limit of RON 700 per megawatt of acquisition price, which is not currently an issue under the current market prices. For the selling at the prices under the cap price, which might be the case for some customers, we invoice the customer only if the increase of price plus the supply market or the supply margin -- supply component of RON 73 per megawatt gets us to a lower price than the contracted price. If they're unconstitutional -- court does deem the windfall taxation as unconstitutional, would that impact supplier at all, including the funds still to be received for the state? I think that the impact -- this is still under analysis. It's a complex issue, but this is related not necessarily to what we need to collect from the state, but it's mostly related to how the state was funding the support scheme and the payments to our assets, about how the state was funding the Transition Energy Fund. This is still to be monitored, but in terms of the amount that we need to receive, I think this will not be impacted in terms of recuperating the respective amount. I think this should cover most of the questions. Yes, I think we covered most of the questions. If you have further questions, we are waiting for them. If not...

[Operator Instructions]

Okay. As there are no more questions, we thank you again for the participation. We are always available if you have any more questions, and we are really optimistic on the future ahead. Although there are tough times, I'm sure, together, we will go through them. Thank you.

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