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.

Hi. This is Raluca, Head of Investor Relations. And together with the entire Electrica management team, we'd like to thank you for joining us for the first teleconference of this year to present and discuss the full year 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. The participants connected online can address written questions on the live webcast or can intervene live on the Q&A session. They can also send us e-mails at [email protected]. Kindly note that since 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, both in Romanian and English. We kindly ask you to see the disclaimer on Page 3 of the presentation, and we'll begin the presentation of the financial results. At the end, we'll have a question-and-answer session. I'd like to turn the conference over to our CEO, Mr. Chirita.

Thank you, Raluca. Dear ladies and gentlemen, on behalf of the Electrica team and myself, allow me to warmly welcome you to our first teleconference of this year. As always, it is a great pleasure to have you with us. The 2024 financial results confirm our capacity to deliver performance beyond the set objectives, especially given the complexities of the economic and regulatory environment in which we operate. Electrica Group has successfully navigated this challenging context, achieving financial results significantly above the budgeted expectation. The 2024 IFRS consolidated net profit is RON 389.5 million, 34.6% above our estimation in the budget last year, and we managed to make it more investments than we targeted. I believe this shows the effectiveness of our strategy and our team's determination to strengthen the company's position in the energy sector. We remain cautiously optimistic and prudent, particularly as we continue to navigate a transitional period toward market re-liberalization, a process we believe will present both challenges and significant opportunities for growth. EBITDA on IFRS for the year stood at RON 1.36 billion, a 3.5% increase over initial projections, underscoring our continuous focus on operational optimization. Operational revenues reached RON 10.68 billion, increasing by 1.5% compared to our initial budget, reflecting effective management and strategic market positioning. Furthermore, we intensified our investment efforts with the commissioned investments in the distribution segment reaching RON 808 million, 112.5% of our planned investments, reflecting our commitment to modernizing and digitizing our infrastructure for the benefit of our nearly 4 million customers. Operationally, our distribution segment recorded a notable performance with a 6.8% increase in revenues, driven by higher distribution tariffs and increased distributed volumes up to 4.2% compared to 2023. However, in our supply segment, revenues decreased by 13.1%, impacted primarily by lower volumes of energy supplied and regulatory adjustments. Despite these challenges, we effectively managed operational costs, significantly mitigating the financial impact. Our sustained efforts to strengthen the financial position were appreciated by the Fitch Ratings agency, who, on Thursday, improved the outlook of our rating from negative to stable, one notch above the sovereign rating, a decision that supports our strategic plans, including the green bonds issuance approved at the end of 2024 and planned for this year. Electrica continues to prioritize investments in renewable energy projects, having approximately 300 megawatts capacity in various stages of development. We are still aiming for one gigawatt production and 900-megawatt storage by 2030. We also remain actively involved in securing non-reimbursable funds to support our strategic objectives and enhance the sustainability of our growth. As you know, last year, our shareholders approved investments for building 2 photovoltaic parks, Satu Mare 3 and Bihor 1, with a total capacity of 136 megawatts, for which we are at this time, evaluating the EPC contract offers and already have submitted requests for funding through the modernization fund. The investment value for the 2 projects is EUR 87.5 million. In February this year, our shareholders additionally approved an investment of EUR 253 million for Crucea Wind Park of 121-megawatt capacity, and we are working on the EPC tender. We'd like to remind you that this project has been designated among the winners of the first round of the auction for the state aid scheme in the form of contracts for difference. Satu Mare 2 photovoltaic park of 27 megawatts is in the final stages of construction and should be operational in the second semester of this year. The first park that we build ourselves, Vulturu, has passed all tests, and it is in the process of getting the operating license, while [ Stanesti ] is operational. In regard to our new venture in smart grid technologies, we are working tirelessly with our partners to start building what we promised. Looking ahead, we hold a positive outlook for 2025, and are committed to exceeding expectations with regards to our investment objectives. Investments in network infrastructure, production capacities and improvement of our internal processes remain our highest priorities. We firmly believe that strategic direction will transform how Electrica Group delivers on its promises to shareholders, investors and partners, paving the way for sustainable and robust long-term growth. Short mention about the qualified opinion formulated by the financial auditor, Deloitte Audit SRL, on the consolidated financial statements for the financial year-ended December 31, 2024. Information we published on Saturday, and you probably noticed it. The reservation expressed by the auditor refers to the impossibility of testing until the date of publication of the financial statements, an amount of RON 979.5 million, representing commercial receivables still unvoiced related to the electricity supply segment. This amount corresponds to approximately 430 gigawatts of electricity delivered to end customers and was mapped 97% on consumption points being in an advanced validation process and to be invoiced by April 30, 2025, at the latest. Last but not least, I wish to address the auditor's report, which has been published. The auditor's qualified opinion exclusively concerned the financials of our subsidiary, EFSA, respectively, the amount above mentioned. The situation mainly results from factors beyond our control, like: the application of Emergency Ordinance number 312 from 2024, associated with contract tariff, which required the complex updates to the billing system, recalculations and reissues of invoices; the cyberattack on December 9, 2024, which, although it didn't affect the main infrastructure nor the clients, it requires significantly additional security measures and resource allocation; and also the successive and very frequent legislative changes in the price cap and compensation framework starting from 2021, which repeatedly impact our regular invoicing processes. In these conditions, Electrica Furnizare prioritized the correct implementation of the legal provision and the issuance of complaint invoices to customers, which unfortunately caused delays in billing. We emphasize that over half of the total unbilled energy recorded at year-end had already been invoiced by the time of financial statement publication with no significant issues regarding collections or bad debt. Furthermore, Electrica Furnizare has successfully secured from 2021 subsidies totaling of RON 5.7 billion out of RON 6.8 billion requested from authorities, significantly supporting our receivables recovery and maintaining our sustainable financial position. Electrica Group assures all its investors, financials and partners that it carries out with priority all necessary actions for the completion as soon as possible of the invoicing processes, the recovery of receivables and the complete testing of the related amount. In this regard, we are fully confident that the situation reported at this time by the auditor will no longer be applicable at the time of the issuance of the letter of representation by Deloitte, included in the documentation related to future Eurobond issue of the Electrica Group -- EUR [indiscernible] million. I will now pass the presentation to our CFO, Stefan, who will provide detailed insights into our financial performance. At the end of the presentation, we invite you to actively participate and address any questions you may have. Your insights and perspectives are highly valued. Thank you. Stefan?

Thank you, Alexandru. Just to make a small joke, my work is very easy now because Alexandru covered also a lot of the financial numbers. So it puts me in a simplified position, but I will still go through the consolidated financials and I will try to point out the main changes in numbers and what are the causes. So in this Slide 13, you can see basically the evolution of the consolidated revenues, which is in line with the evolution of the price in energy market. A few comments about the profitability. You can say that compared with 2023, the EBITDA and the net result is decreasing, but you should bear in mind that 2023, it was a very specific year with very, very good results. Basically in 2024, as we will explain in more detail later, were mainly affected on the supply segment by the volatility of the evolution of the prices in the balancing market. I will explain the context and the differences at the respective slide. In terms of net debt, net cash, we have, at the end of the year, a consolidated position of RON 4.4 billion, which is related to both the fact that we continue to support the support scheme, but we also are having expenses which are relating to the evolution of the portfolio of production for which we are advancing with the commissioning with the parks, and we have plans for all of them to be commissioned in the next couple of years. The point is, as you know, the support scheme will be finalized for the energy part of midyear 2025. And basically, we expect for this part of the year, that this peak of indebtedness to decrease and along with the decrease of the indebtedness, which is caused by the financing of the support scheme. As long as this is released, we will be able to gradually increase and put it at work for the development of the production. If we can go to the next slide. Here is the evolution of the consolidated EBITDA and net result evolution compared with the previous year. As mentioned, there is an energy market margin overall variation of minus RON 77 million, which is having a significant plus, which is composed of a significant effect of positive effect from the distribution segment, along with the increased tariffs and also with the increase of the volumes of distributed electricity. And then there is a negative effect accumulated from the supply segment, where we have the fact that we had the decrease in the purchase cost, but this manifested also not only in the cost, but also in the decrease of revenues from the sale of electricity. As you might know, according to the Government Ordinance 27, we have this cost-plus method, which is basically having the contract price and the final price calculated to the consumer established under the formula purchase cost realized plus the supply component. We were quite affected on this part by the evolution of the balancing market expenses with a significant number of consumers entering the market being connected in the networks, and this put a pressure on the evolution of the results on the supply because basically, I'm obliged to take that energy and pay the average purchase price to them. But then on some days, we simply cannot reposition and use that energy, and we are giving it in the balancing market with negative prices. In combination with that, we also had the effect of the changing of the way of recognizing the subsidies costs. Basically, we had a cap of the subsidies cost to be recognized under the support scheme, and there was a change by the regulations of the ANRE in terms of recognizing these costs, which was affected, in fact, applied very attractively from 1st of January. In OpEx, we have a negative variation of RON 236 million, which is mainly resulting from the negative effect of the expenses with salaries, most of them from the distribution segment and also apart from the other segments. Of course, in this context with the evolution of the inflation in the last year and so on, we also had some pressures to increase, in some situations, the salary costs in order to keep our best people and to keep them motivated and to keep them with the company. As a net result, the net result is variation is of minus RON 383 million, mainly negative evolution of EBITDA. And then we have a positive evolution of the financial result of RON 17 million and increase of amortization and depreciation along with the newly commissioned assets of minus RON 72 million. And then, of course, there is also the effect of the profit tax expense, plus RON 27 million. As mentioned, please bear in mind, the previous year was an exceptional year in terms of the result. Coming to the next slide. We have here the details about the distribution segment. As you see, evolution of EBITDA was positively influenced by energy revenues and also by the part related to other revenues. While the other elements were the evolution of the network losses costs, which increased with RON 60 million as expenses and then the part related to the employees' benefits. But otherwise, you can see that distribution performed quite well and has an EBITDA which is higher than in the previous year. Moving to the next slide. You have here the details about the main aspects for the distribution segment. I will not state too much on it. Going next slide, you have the usual analysis for the distribution segment. Here, you go from the regulated asset-based rentability and then going to calculate, including the regulated profit, RON 900 million. And then throughout this, we add the network losses capitalized cost of RON 191 million, and then we go to the gross result. And on the next slide, you have the further down going from total net revenue. We also have here the regulated results of RON 900 million. And here we go down the line, operating results, and then also having the net results under 1802 and then also 2844 and IFRS-EU. You can see also the various adjustments from this point of view, mostly the adjustments from 2844, the localized IFRS, and to the IFRS-EU, are represented by the impact related to the capitalization of network losses expenses, which are present in 2844 and are not posted under IFRS-EU. Going to the next slide, you have the details about the performance of our distribution company on the regions. I will go directly to 23 because here in 23, you have the details about the evolution of the network losses costs. In terms of net with income, the cost of electricity increased by RON 90 million, minus RON 60 million is the evolution of the expenses compared with previous year. There was an impact on the distribution because in the previous year, we had the MACEE mechanism, which supplied a lot of energy for the distributors. Now as this was changed starting with 1st of April 2024 and MACEE became voluntary, basically, the quantities which were provided via MACEE decreased significantly. So also the distributor -- our distributor like others bought more and more from the energy at market prices. In terms of investment, also the General Manager mentioned this degree of achievement, yes, compared with the ANRE plan, we have 115% of the commissioning plan value. Of course, this includes also the additional works of connections that we are getting as requests from the customers. But I think this is showing our strong commitment in achieving the investment plan, improving our networks and also increasing our regulated asset base, which is to be remunerated by the regulator. Going then to next slide, we have 24, we have the details about Electrica Furnizare, the supply segment. As mentioned here, the result was the negative one. In fact, as you might know, the supplies were affected across the industry. So it's not only a situation with Electrica Furnizare by the evolution of the energy prices in the balancing market. Especially in the summer, we saw this situation, which was quite abnormal compared with the rest of the EU, in which a lot of market prices were negative and with significant negative results. Now there was a measure taken by the authorities, as you know, in the summer, they took position, they discussed about the matter also. ANRE promoted the order 60, which could have kept the prices for temporary moment. In the balancing market, this was not the case to be put in place, and we had an evolution of the price towards the rest of the year, which was a calmer, let's say, but still, yes, not compared with previous year. As an idea, the cost with balancing was more than 6x per megawatt delivered to the customer higher than in the previous year with this effect that we mentioned to the end of the consumers in the market. In terms of net debt, you can see that the supply segment is relatively stable. And we expect that during this year with the end of the support scheme and the amounts which are requested under the support scheme will start to be also further paid. This will further decrease. Overall, we have, since the beginning of the scheme in November 2021, we got paid by the Romanian state RON 5.7 billion out of a total of RON 6.8 billion of requests, which were submitted to the regulator. So yes, you can see that as a percentage, there is a significant amount paid. And even if there are some delays in some moment, the amounts are recuperated. Going to the next slide, you have the position of Electrica in the market share. As you can see, it's not necessarily that we are #1 anymore, but we are still on the top. We are second on the total market share, including the supplier of last resort. And on the competitive market, we are third, but this is not a focus for us. Necessarily in market quota, we have a stable portfolio of customers. It's also a matter about optimization of the functioning, paying attention to the expenses and having a profitable activity. Next slide, it summarizes, I think, yes, 26 is the details about the segments of the supply. And then 27, you have the summary of the financial impact including the change of legislation. Bear in mind that this is based on the individual numbers of Electrica Furnizare, which are, as per Romanian accounting standards, the statutory Order of Ministry of Public Finance 1802. But it explains a little bit about the changes in the legislation. Then Slide 28, I think it puts details about the evolution of the weighted average price evolution on the head market, but also on the balancing market. And here, you can see in orange, the situation of 2024 compared with 2023, which was 2024, both on the head market and on the balancing market, it was far more volatile and including the negative prices February, March and then April, May in the balancing market. Slide 29 is the summary related to the evolution of the receivables. In terms of comparable numbers, there is a slight increase of the -- this is related to the fact that we had, during the year, the migration to SAP IS-U, which meant on one side, the delay in invoicing, which then pushed the process of invoicing with, let's say, roughly 1.5 months further. And then there is also some decisions regarding the way this is calculated and this is invoiced. The process of invoice generates this delay. This is to be also correlated to the fact that we didn't have resumption of issuing disconnection notices and doing disconnection until midyear. However, we don't feel that there is a problem of collecting receivables from the customers. Bad allowances are in an amount below RON 200 million for the entire portfolio, and this is mainly related to all cases. Most of them or significant part of them is older insolvency and other procedures. Next slide is about our Energy Services subsidiary. Here, we had an impact related to the fact that as the market become more and more competitive, it was more challenging for Electrica sales to get contract on these new markets related to installation of photovoltaic panels and compensators for active energy. We will still focus to change this in the future and to improve. But since the revenues decreased basically by half, this affected the EBITDA and the profitability. Next slide, it's about the production. So we have here a positive evolution because in terms of the net result of the production, we registered more than doubling net results than previous year. We are continuing to evolve with the 5 projects that we have in our production segment. Vulturu was completed, connected and finalized the trial period, then the photovoltaic park of Satu Mare 2. Sunwind Energy also is in advanced phases of being implemented and starting to produce energy. And all these projects are now with a clear path to being commissioned with the authorization of construction and all the details in place. And I think this is quite important, and this was also well appreciated by the market that after some long gestation in case of some of them, we are now in line with all of them to generate production capacity accumulated from all these projects of some 300 megawatts. Going to the next slide, we have the liquidity position. Of course, it's decreasing from compared with 30th of September because it's also in relation with the fact that towards the end of the year, we didn't have any more payments from the subsidies from the support scheme. But still, I think it's important to be compared with the result in 31st of December 2023. So the overall liquidity available is more than double. And what is also more important, I think, is that we managed to put a lot of the debt, a higher percentage of the debt on longer term, especially on the distribution segment to match with the recuperation of network losses. And this was also, as you saw, appreciated by the Fitch rating agency, which provides us with the change of the perspective from negative to stable. Then the other slide related to the evolution of the dividends. And then as an axis -- yes, as you saw, we are basically distributing a dividend, which might seem small, but I think it's 50% increase of the previous distributed. In terms of percentage compared with the distributable profit, you see that we are basically distributing almost everything compared with the distributable profit and stand-alone net profit. And yes, I think this would like to show that we are going to -- also in terms of gross dividend per share, there is an increase compared with the previous 2 years. And this would like to signal the fact that after the support scheme is done and with the production starting to be commissioned, we would like to move to a more consistent dividend of the dividend distribution. Now if you do have questions, we are welcoming your questions and we'll try to answer them together the team as detailed as possible. Thank you.

[Operator Instructions] The first question comes from the line of Andrei Ioana with Alpha Bank Romania. Please go ahead.

Can you hear me?

Yes, we can hear you just fine.

Great. I will start with my first question, and it's regarding the fourth quarter results. Can you please detail what happened in the distribution segment that triggered the decrease in bottom line? I've seen an increase in network losses, but this doesn't seem enough to justify the drop in results. Second, I have several questions regarding the fifth regulatory period. And I will start with the corrections for the fourth regulatory period. If you could please tell us some values here for the total corrections set for the fourth regulatory period, the correction for the efficiency gains and maybe even the correction for the inflation adjustment. And I don't know if you can, but if you can please disclose what is the value of the controllable OpEx set at the beginning of the period and maybe the efficiency factor because I know that there is a study for that. And one more here on the regulatory period. I was wondering what is the price for network losses projected at the beginning of the regulatory period? Is it a price inflation adjusted or a prognosis? If you can please detail. I'm curious what is the initial projection of ANRE, not the recognized level exposed. And one more, if I may. I'm trying to understand the difference in revenues, again, in the distribution segment between the reported value as presented in the financial statements and the net regulated income. There is a difference up to RON 900 million for 2024. Can you please tell us what generates these revenues that seem not to be regulated revenues on the distribution side? And that's all.

Thank you for the questions. I will ask my colleague, [ Geanina ], to take over, and we'll go with them, I think, one by one, not to miss any, try to be as explicit as possible.

Hello? Regarding the network losses target, if I understand well, your question is regarding the realized target, yes, for the total year. The realized target is 8.38%, and we are aligned with the regulated target. In fact, they are very little over target based on 8.89%. This is your question?

Not really. I was wondering the price, the prices ANRE considered for the network losses in its initial projection for the fifth regulatory period. What is the price for network losses considered?

For 2024?

For 2025.

For 2025 is RON 650 per megawatt hour without services, with the services is RON 674 per megawatt hour for 2025.

Okay. This was. And further on in the initial projection, this price is a price inflated price or it's based on an assumption, what kind of assumption?

During the fifth regulatory period, it will be applied the inflation. The methodology...

That was my question. And for the corrections for the fourth regulatory period?

For the fourth regulatory period -- correction, the total correction applied is near 0. So there were no significant corrections applied for the fourth regulatory period, but it was the increase of the RAB with around RON 1 billion, and this will be a huge positive impact in the fifth regulatory period. So not included in the correction. The total correction for the previous period is around 0.

[Operator Instructions]

Let's take a written question. And if there are any audio questions, we'll take them after.

Okay. Please go ahead.

So first question, the government has recently published a draft which regulates the new 1% taxation of special buildings, which will imply a 1% tax on the net value of special construction with private firms 0.5% of the gross value of such assets for the companies which are having assets in concession from the state. Yes, we have estimated the impact. The impact is estimated to be slightly more than RON 70 million. They are included in the budget proposed to be approved for 2025. It's not included in the regulated revenue in the tariffs for [ 2024 ]. It is an element that fulfills all the criteria for a non-controllable OpEx, and we think without a problem that we should recuperate it through the tariffs in 2027, the latest, if the methodology will not change. Initially, the fourth preliminary results were published in accordance with the OMFP, Order of the Ministry of Finance, I assume it's the 2844 order, whilst the first 3 quarters of the full year '24, we had the IFRS-EU numbers. From now onwards, the idea will be the following. For the quarters, we'll publish the IFRS, which is in line with the changes promoted also by the regulator for the financial supervisory authority for comparability purposes. For the full year, yes, the fourth quarter results, we'll publish both. We'll publish the IFRS numbers, and we will also publish the Order of the Ministry of Finance 2844 per 2016, which is also the localized IFRS, let's say. It has the flavor of the IFRS, but it has some changes. It impacts also us and other companies with some changes compared with the overall IFRS in our case, especially the part related to the capitalization of network losses. Then we had a question -- some questions... [Audio Gap]

[Operator Instructions]

In terms of corrections, at this moment, we estimate corrections of the year 2024 for the tariffs in 2026 of slightly more than RON 300 million. I think it's RON 340 million if I remember correctly. It's also in the administrator's report, mainly generated by the correction for the distributed energy.

Should you have any more questions, either register for audio or please write. Give me a second.

What was wrong in distribution in Q4? It's mostly the network losses, as you pointed out. I mean this is mainly the impact. There were also some effects related to some expenses with the staff, but mostly, it was the part related to the network losses because we have this cyclicity, this evolution of the activity during the year, and it was the fact that in November and December, we also had some colder time, affected also the price. So basically, October, basically, we had no capitalization of the difference of the network loss prices compared with [ exante ] price, but November and December brought some capitalization and some impact.

The investment plan for the next regulatory period are already published in [ ANRE ] order number 97. So the investment plan are published, the value of the investment plan.

You can find it in Slide 54 in the presentation.

Are there any more questions, please?

Also, just to mention in terms of the distribution segment, we had also some adjustments in quarter 4 related to the change of the margin for IFRIC 12 according to the evolution of the margin for [indiscernible] million out of that.

Let's wait 1 minute to see if there are any... [Audio Gap] Okay. As always, we are here. You can contact us any time to give you more details or we are on full disclosure of transparency at any time at your disposal. Raluca, you can take the floor.

Should you have any questions, we're always here. Please e-mail us at [email protected] or the phone contact that you have on our website. And we are going to see you in May. Thank you.

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