EVN AG

Hello, ladies and gentlemen, and welcome to the conference call on EGN's results for the first quarter of 2019-2020 financial year. At this time, all participants have been placed on the listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Stefan Szydkowicz.

Good morning and welcome to the conference call on EVA end results for the first quarter of 2019-20 financial year. We have started with a sound performance in 2019-20 financial year. After finishing the first quarter at the end of December, EBITDA, EBIT and Group Net results are above the previous year. Most importantly, we delivered the envisioned normalization of our supply business. Our supply company ENKG suffered from higher wholesale prices, both in terms of reduced margin as well as devaluation of hedges. After implementing two price increases in 2018-19 and changing the methodology for the accounting of hedges, we managed to bring the operational results of the equity control group company EVNKG back to a normalized level. I would also like to highlight that the share of the group's renewable generation was 50% in the first quarter as compared to 34% in the previous year. Partly, this is a rise in renewable generation as a result of last year's expansion of our wind power capacity, as you know we now have an installed capacity of 367 MW. In addition, the termination of the coal-fired generation in Juneau last summer contributes well to the substantially less CO2-intensive production mix With our setup, EVN Group is in the best position when it comes to enabling the transformation of the energy system. Learning this topic, we plan to increase our communication efforts to the general public and to investors in special. EVN shall be recognized as the enabler of the energy transition. In the coming years, we will further expand our renewable generation fleet. This will not only include wind, but also large-scale photovoltaic For the latter, we have identified the potential of up to 100 megawatts for the group. We currently assess locations and best timing to implement such photovoltaic potential. Distribution grids are the backbone of the transformation of the energy system. Therefore, the major portion of our investment program is dedicated towards upgrading the network infrastructure for the integration of growing volatile and decentralized electricity generation from wind and sun. Let me remind you, that EVN is number one in authors in biomass heating, and that we have a strong footage in the environmental business. In a nutshell, and to conclude, we think that all of these activities will create broader demand from ASQ-oriented investors. I would also like to use today's call to provide some information on our new project in Kuwait. So let me turn to the next slide now. In January, the contract was awarded by the O.M. Herrmann I.S. Water Project. The project consists of two parts. First, there is the contract for the construction and realization of the wastewater treatment plant within the framework of a public-private partnership. Our German subsidiary, WCE Wassertechnik, will serve as the general contractor. The contract value is about 600 million euros. The capacity of the plant is for 500,000 cubic meters a day. which corresponds to the base worth of about 1.7 million people. In the past, WTE already realized projects of comparable size, for example, in Warsaw, Prague, Zagreb, or Istanbul. According to the DPD structure, WTE's customer under the EPC context will be a project company, which will receive project financing from a consortium of banks, including the German company IPEX. The majority shareholders of the project company will be Kuwait institutions. WCE will be a minority shareholder with a stake of 20% that will expect equity contribution to be invested at about 30 million euros. This equity contribution is covered by a state guarantee from the Federal Republic of Germany. The construction period of the plant is two and a half years. Thereafter, WCE will be responsible for the operation of the plant by a period of 25 years. The second part of the KUVET project is a general contractor assignment for the construction of the respective sewage infrastructure. This means pipes and pumping stations to transport the wastewater to the plant and the purified water back to be used for irrigation of farmland. The sewage infrastructure has a total contract volume of about 950 million euros. W-sharing this contract is two-thirds. The payment of this EPC contract will be directly financed by the state of KUVET. construction for this part of the project is scheduled to extend up to four years. Let me now continue with the key financials of the reporting period. The group's revenues declined by 3.3% year-on-year. The main reasons for this development are the decline in thermal generation, as well as the volume and price effects in the network segment. Contrasting factors include the increase in energy revenue in Bulgaria and an avenue in the international project business. The recovery of Ewing Tech A, as well as its sound performance in Southeast Europe, supported an improvement in EBITDA. It was up 16.8% at 190.6 million euros. The basis for scattered depreciation was higher due to the investments and revariations we had to do after the impairment testing at the end of last financial year. The group's EBIT increased by 21.9% to 118.8 million euros. In total, we generated a group net worth of 82.9 billion euros during the first quarter of this energy year, which corresponds to an increase by 40.3% on a year-to-year basis. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Our communication regarding capital structure and financial indebtedness remains unchanged. We believe that net debt will remain at a level of around 1 billion euros. for the time being, subject to some seasonal fluctuations. As at the end of December 2019, that debt stood at 1.1 billion euros. Please note that the increase of the net debt was also due to the recognition of non-current lease liabilities in connection with the initial application of EURS16. This had an effect of about 70 million euros in the first quarter. Sealing was 25.4% in the first quarter of the financial year. Our strong balance sheet structure forms the basis of pursuing organic growth opportunities in our regulated and stable arts and activities. We plan to invest approximately 200 million euros a year over the coming years. Therefore, roughly 300 million euros annually are dedicated to our networks, removal, biomass heating and drinking water and lower options. Before we go through each of these segments in detail, I would like to give you a general overview on the APTR development of our business segments. The overview of the APTR development of segments illustrates the key drivers of our performance during the reporting period. On the positive side, you can see improvements in the energy and the Southeast Europe segment. In contrast, performance of the generation and the network segment remain below the prior year, which is well in line with the segment outlook which we gave in December. With this very general overview, let's now move to the next slide, which covers the generation segment in more detail. The conditions for renewables were mixed. Water flows in the Danube and the Inri River, which were relevant for our electricity purchasing rights, were above the previous year. In contrast, they were below average hydrological conditions for our small hydropower plants. Wind flows in Austria were above the long-term average, but below previous year. However, last year's commissioning of new wind parks led to an increase in wind generation. In total, electricity generation for renewables in the generation segment exceeded last year, whereas thermal generation volumes declined. This was due to the closure of our coal-fired plant in Juneau and lower use of our gas-fired plant in Tides for network stabilization. In total, electricity generation volumes in this segment were down by 32.3% year-on-year. Segment revenues declined in line with these developments. The generation segment also reported lower EBITDA of 34.5 million euros. Capital depreciation and uptilted investments and re-evaluation resulted in a lower EBIT of 17.9 million euros. On the next slide I will continue with the energy segment. Revenue in this segment was by 22.7 below the previous year. It was primarily used due to the decline in the marketing of own electricity generation and the reduction in natural gas trading. The lower usage of primary energy carriers were driving operating expenses down by 33.6%. The energy sales volume showed contrasting developments. Volumes in electricity were up 10.4%, following higher supplies to larger customers in Austria and Germany. In turn, natural gas sales volumes were down by 1.9%. As already mentioned, our electricity and natural gas supply business, which was handled by EVN KG, recovered from returns to normalized earnings levels. EVN KG's contribution to its equity results was 6.3 million euros in the first quarter after a loss of 16 million euros last year, which was caused by higher procurement costs and negative effects from the valuation of hedges at the same time. Based on these developments, the energy segment reported an EBIT A of 31.7 million euros and an EBIT of 26.7 million euros. On the next slide, I will present the developments in our network segment. The network sales volumes show the different developments. Whereas volumes for electricity were slightly up, the natural gas distribution volumes declined in view of the reduced use of the thermal power plant in Lower Austria. I would also like to remind you that a new regulator appeared with a lower VAC started by electricity distribution efforts in January 2019. This means that much lower VAC was applied in our third quarter of 2020. Based on volume development and in view of lower tariffs, revenues went down by 5.3%. As expected, the network segment generally gets lower every day, of 68.6 million euros, which corresponds to a decline by 14.7%. If it was down by 27.4, at 36.2 million euros due to a higher schedule depreciation. At the beginning of the new year calendar, the Austrian regulatory, as always, determined new network tariffs. Whereas health for electricity were increased by 4.3% on average, those for natural gas were reduced by 8.1% on average. On the next slide, I will continue with the Southeast Europe segment. Whereas energy skills and natural distribution volumes suffered in this region from mild temperatures, we are reporting today a sound performance of our Southeast Europe segment. On support, the sector was lower for human costs for natural losses in Bulgaria. In total, EBITDA of this segment was up 33.3 million euros and EBIT at 15.5 million euros. I would like to conclude my presentation of this segment with the environment segment. I already gave a detailed overview on the Kuwait project at the beginning of the call. Therefore, let me now focus on other main developments in the international project business. As of the end of last December, we were working on eight general contracts as diamonds in Lithuania, Poland, Romania and Bahrain. The order book was about 259 million euros. This number does not yet include the Kuwait project as the contract was only awarded in January. The development of the order book had a positive impact on the development of revenue in the segment. The rise in revenue from the international project business was accompanied by a corresponding rise in operating expenses. The share of results from equity-accounted indices with the operation of Nature was below the previous year. Please remember that last year still included final earnings contributions from the wastewater project in Prague. In total, this development led them to a decline in EBITDA to 5.5 million euros and in EBITDA to 2.5 million euros. Finally, I would like to update you on the recent developments in connection with the termination of the wastewater treatment project in Budva and Montenegro. This topic has been ongoing since May 2018, when we determined the contract and started negotiations with the representatives of the municipality of Budva and the Republic of Montenegro. Last December, the enforcement of claims led to payment of the guaranteed amount of €29.3 million at the Republic of Montenegro. the municipality of Budva still has not paid its obligations. This is the reason why in January 2020 the arbitration proceedings defined in the guarantee contract with the municipality of Budva were initiated to enforce proper claims against Budva. As at the end of January 2020, WTE Water Testing also ended its internistic operation of the wastewater treatment plant which has been continued since May 2018 and handed it back over to the municipality. With this, I conclude the presentation of this segment and on the next slide I will continue with the development of our group cash flow. Our group cash flow fell by 29.9% to 140.7 million US in the first quarter of this financial year. This was caused by lower dividend payments from equity accountants in the C. Due to the negative development of our working capital as of the end Cash flow from investing activities reflected net investment in the first equity branch of the Kuwait projects. This was contrasted by disinvestment of cash funds and the guaranteed payment of the public of Montenegro for the wastewater project in Bhutan. The cash flow from financing activities reflected the scattered repayment of loans. The net change in cash and cash equivalents amounted to minus 90.4 million euros. I would like now to conclude our today's call with the outlook for the group. Based on today's first quarter results, we confirm our four-year guidance. Assuming average conditions in the energy business, we expect that the operating itself will remain constant. This brings us to expect that the group net result for 2020 will be in the range of 200 to 230 milliliters. And comparing the outlook with our results for the last financial year, please bear in mind that this included positive valuation effects of approximately 110 million euros after tax. Finally, I would like to inform you that based on the information provided by the NPW Trust at the end of December 2019, we know that their stake has decreased further from privacy 28.6% to 28.4%. This brings us up to a three-fourth of 20.6%, including our treasure shares of around 1%. I have now reached the end of my presentation of event results for the first quarter of the 2020 financial year. I am now looking forward to answering your questions.

Ladies and gentlemen, if you would like to ask a question, please press 9 and star key on your telephone keypad. If you would like to withdraw your question, press 9 and star key again. So please press 9 and star to ask a question right now. And we have the first question from today's session invite. Madam invite, your line is open.

Good morning. Thanks for taking my questions. I have a few. First one is, you mentioned lower hedging effects in your report. How much lower were these effects compared to the 40 million reported for the first quarter last year? Then the second question is on the network. If you could give us also... a value for the reduction of the transmission costs in the networks because they were lowered as well. Regarding the LTE results, they were really strong, surprisingly strong. Is this a benchmark for the rest of the year? What do you expect in terms of EBITDAs? for Southeast Europe, and the last one is a quick one. What was the non-recurring effect at RAT, and how much was it?

Okay, so thanks a lot, Madam Schinwald. Regarding the change in the variation of the hedges, it runs 40 million, and if you have a closer look, 2020 coming from KG and 20 million from AG. Regarding the calculation, the yearly adoption of the grid prices, actually it is true that the transmission cost adoption is also included, but under the bottom line, this kind of small increase is what is the total calculation. reflecting the cost adaption. In the network cost, they are higher, also the higher market prices. This is always a moving calculation. Regarding Southeast, actually the same issue regarding cost for balancing the agency has increased in the comparison year-to-year comparison of the first quarter. I would confirm that we are expecting an everyday between 40 to 60 million per year, more on the upper side, but please keep in mind that the prices are always adopted on the 1st of July and we have to wait until we know more how this will develop. regarding RAC last year's measures compensated this year's measures so it's also a timing effect here it's not a change in the structural production portfolio or the expectation regarding the results there in RAC which is what's happening in the fourth quarter of last year and therefore with our energy results on a yearly basis.

Okay, so if we would average the contribution in the fourth quarter and the first quarter, we could get a hint about the one-time effect.

Am I right? It's more stable than it looks if you just take the balance sheet data in the third quarter based on comparisons.

Okay, thank you. Bye-bye.

Next question comes from Mr. Peter Crampton. Mr. Crampton, your line is open.

Good morning. Thank you for taking my question. We've seen good recovery in your energy subdivision. And I just wanted to know, when do you expect these kind of negative one-offs to kind of fully have washed through? And what would be kind of a reasonable EBIT margin or kind of EBIT for the energy division in kind of a stable state environment? Thank you.

I think we expect one more year until the real actual volumes on this hedge accounting basis is coming to a more normalized level. But of course, the volatility as it we have seen over the last years is increasing through the volatility of energy markets in general. And regarding the margin, we are expecting over a longer period around 5% margin in this kind of retail business.

Thank you for your answer.

Ladies and gentlemen, if you would like to ask a question, please press 9 and star key on your telephone keypad.

So thank you for joining today's conference call. We will publish our half-year results for 19-20 on Thursday, the 28th of May. Please join us then again, and goodbye.