EVN AG

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

Good morning and welcome to the conference call on EVN's results for the first three quarters of the 19-20 financial year. We are reporting sound results today. Group net results for this year is up by 25.2%. EBITDA and EBIT also exceed prior year's level. This positive development was mainly supported by the recovery of our supply company EVN Cashier. After implementing two price increases in 2018-19, In changing the methodology for accounting of hedges, we managed to bring the operational results of the equity-convergenciated company EVN KG back to a normalized level. Therefore, I can confirm our full-year guidance. We expect group net results for the 19-20 financial year to range between 180 and 200 million euros. Such outlook is made under the assumption of the average conditions in the energy business environment and the stable situation in connection with the corona crisis during the fourth quarter of this financial year. Our integrated business model and broad customer diversification proved their resilience so far and served as a stabilizing factor during the Corona crisis. During the third quarter, there were only some limited negative impacts of the pandemic. In particular, lower electricity demand, especially from industrial customers, is visible in energy demand and network distribution volumes. However, the volume effects in the networks will be offset in future terms in accordance with the authoritarian method. Another negative impact related to the pandemic are impairment losses, which already became necessary in the second quarter due to increased country risk premiums. In total, these negative non-cash effects amounted to roughly 50 million euros. I would like to stress that we are highly committed to fulfill our investment program as previously planned and announced, irrespective of the corona crisis. We aim for an annual investment level of about 400 million euros. Thereof, 300 million euros are dedicated to Lower Austria. The focus here is on the regulated network business, the expansion of renewable energy, and growth of our drinking water business. There have been sporadic delays in some projects due to the lockdown, but these shall be recovered as soon as possible. We are currently working on the construction of a new wind park with an installed capacity of 8.4 MW. Commissioning is scheduled for the end of this calendar year. Our past efforts to expand our renewable generation capacities are visible when looking at the share of renewable generation. which was almost 60% in the reporting period as compared to 43% a year ago. This progress to reduce our CO2 footprint was of course also supported by the termination of coal-fired generation in June and last summer. In the international project business, I am highly pleased by the success achieved in the area of thermal sludge incineration. Based on the group an excellent experience in wastewater treatment and thermal waste incineration, it was just a logical step to further develop the Porsche's business. We anticipated a window of opportunity for thermal sludge incineration at an early stage when Germany changed the laws with the aim to restrict the spreading of sewage sludge on fields and, at a later stage, call for phosphorus recycling. Today I can inform you that we received three new general contract assignments for thermal slashing generation projects in Germany, Berlin, Hannover and Straubing. I will provide you with further information details later in the call. Some of the good news for the future development of our international project business is the closing of the wastewater treatment project in Kube at the end of July. Now all requirements are met to start the civilization of the project. The construction of the wastewater treatment plant will take two and a half years. In parallel, we will be responsible for the construction of a new panel infrastructure, which will take up to four years. On the shareholder level, on the 5th of August, the closing took place for the transaction between Ina Schatzwerke and EMPW. Vienna Stadtwerke retires 51 million EVN shares previously owned by ENBW, which corresponds to a stake of 28.4% in EVN. This makes the Viennese utility company our second largest shareholder after the province of Lower Austria, which owns a majority stake of 51%. There are mainly 20.6% 3% free flows, including 1% treasury shares. Let me now continue with the key financials in the reporting period. The group's revenue declined by 6.8% year-on-year. The main reasons for this development are the decline in thermal generation as well as volume and price effects in the network segments. In contrast, energy revenue in Bulgaria and the international project business showed a positive development. The recovery of Alien KG supported the improvement of the share of results from equity-accounted In addition, there were positive one-time effects in RAC and Energieburenland. In contrast, there were negative earnings contributions from Energieerland, fell as an impairment loss on our investment in Ashtar hydropower plant in Albania in the second quarter due to the higher country risk premium. EBITDA was up by 70.9% at 513.6 mmHg. Catered depreciation went up. This was due to investments, revelations we had to do after impairment testing at the end of last financial year and the initial application of EFAS-16. In turn, higher country risk premiums of Southeast European countries due to the COVID triggered impairment losses on assets in Bulgaria and Northern Macedonia in the second quarter. The group's EBIT increased by 20.3% to 284.5 million euros. In total, which generated a group net result of 210.7 million euros during the first three quarters of this financial year, which corresponds to an increase of 25.2% year on year. Now I would like to move to the next slide, which provides some information regarding the group's financial structure. As of the end of June 2020, net debt stood by around 1.1 million billion euros. Please note that the increase of net debt was also due to the recognition of non-current lease liabilities in connection with the initial application of EFS 16. This had an effect of about 70 million euros. Our financial flexibility is very solid. We benefit from low net debt and sufficient committed undrawn credit facilities, which amounted to 595 million euros as of the 1st of July. Gearing was up from 2020 to 25.1% in the first nine months of the financial year. Our strong balance sheet structure forms the basis for pursuing organic growth opportunities in our regulated and stable option activities. Before I will go through each of the segments in detail, I would like to give you a general overview on the ABTA development of our business segments. The overview of day-to-day development per segment illustrates the key drivers of our performance during the reporting period, which are well in line with our segment forecast. On the positive side, you can see improvement in the energy and Southeast Europe segment. In contrast, performance of the generation, environment, and network segments remain below the prior year. With this very general overview, let's now move on to the next slide, which covers the generation segment in more detail. Electricity generation volumes in the segment went down by 38.5% year-on-year. Renewable generation volumes were slightly below the previous year, whereas last year's commissioning of new wind parks reported an increase in wind production, water flows declined. Thermal generation dropped. This was due to the closure of our coal-fired plant in June of last year and lower use of our gas-fired plants in types of network stabilization. The usage of the Wallstrom power plant was below privacy level 2. Segment revenue declined in line with this development. The generation segment includes impairment losses, which I mentioned earlier, the Astra Hydro power plant, which is at equity control data in the Carolina wind park in Bulgaria. Scattered depreciation went up due to the investment in previous year's sale valuations. In total, the generation segment generated a lower EBIT of 49.4 million euros. On the next slide, I will continue with the energy segment. Revenue in the segment was by 33.7% below the previous year. This was primarily due to the decline in the marketing of our own electricity generation and the reduction in natural gas trading. The reduced usage of primary energy carriers and lower procurement prices were driving operating expenses down by 39.7%. The energy sales volume showed contrasting developments. Electricity sales volumes were up by 6.4%. The overall positive development of sales to industrial customers was however slowed by a corona-related temporary decline in sales to industrial customers. Natural gas sales volumes were down by 3.8% due to a warmer winter and an increased competition. Our electricity and natural gas supply business, which is handled by the NKGs, recovered and returned to normalized earnings levels. The EVN KG's contribution to an equity result was 35 million euros in the first three quarters after a loss of 41.8 million euros last year. You will remember this was caused by higher procurement costs and negative effects from the valuation of hedges at that time. Based on these developments in the energy segment reported every day, of 72.9 million euros and EBIT of 57.4 million euros. On the next slide, I will present the development in our network segment. As I already mentioned in the beginning of today's course, electricity consumption declines due to COVID-19, especially in this segment of industrial customers. Consequently, network sales volumes are down too. However, these volume effects will be offset in future charts in accordance with the Austrian regulatory method. The natural gas distribution volume declined too. The main reason for this was the reduced use of thermal power plants in lower Austria. I would also like to remind you that the lower RAC, or electricity distribution network, which was implemented on the 1st of January 2019, is for the first time applied for this post-financial year. Based on this volume and price effect, revenue went down by 4%. Based on the stable development of operating expenses, Every day in the network segment declined by 8.5% and EBIT by 31.5%. On the next slide, I will continue with the Southeast Europe segment. Energy demand in Southeast Europe suffered from mild temperatures and more recently the coronavirus crisis. Consequently, energy sales and network distribution volumes declined year on year. However, the financial performance in this segment was down during the reporting period. One supportive factor were lower procurement costs of network losses in Bulgaria. This segment includes the other two employment losses, which were triggered in the second quarter by higher country risk premiums due to the COVID-19. The one was for our district heating in Bulgaria that lost it, and the other for the customer base in Rota Macedonia. The total segment EBIT stood at 39.1 million euros. As always in summer, regulatory authorities decided on new regulatory electricity prices for household customers. In Bulgaria, with the effects of the 1st of July 2020, the prices for household customers in the EVN supply area were increased by an average of 4.2%, following an increase by 3.5% in July 2019. In northern Macedonia, the third position became effective on the 1st of August 2020. Its provider provided for an increase of roughly 7.4% for customers of our supply company a year in home. In last year's third position, there was no price adjustment. But please note that these price increases are contrasted by higher procurement costs. I would like to conclude my presentation of this segment through the environment segment. I already mentioned some success in our international project business in the beginning of today's call, so let me briefly repeat. In Kuwait, the closing of the wastewater treatment project took place at the end of July. Now all requirements are met such that we can start with the realization of the project. Due to the percentage of completion method, we will now be able to report results according to project progress. We were very successful in the acquisition of general contract assignments thermal sludge reutilization project in Germany. WTE Water Technic was awarded the contract in Berlin. The contract volume is about 190 million euros. EV and share will be roughly 50% of the contract volume. Please note that the realization of the Berlin project will start only in autumn 2021. In the thermal sludge utilization, we are also active through our joint venture Sludge2Energy. WTE Water Technics partnered with the German company Hupa. Sludge2Energy receives contracts for a few new projects, one in Hannover with a contract volume of around 14 million euros, one in Straubing with a contract volume of about 15 million euros. We see further potential for these projects in Germany. Therefore the projects in Hannover, Strauben and Berlin will add well to our track record in this area. In the international project business, WTE Watertechnik is currently working on 10 projects in Germany, Croatia, Lithuania, Poland, Romania, Bahrain and Kuwait. The order book was about 445 million euros at the end of June. This number does not yet include the Kuwait project as the closing only occurred at the end of July. Finally, I would like to inform you that the contract for the operation of the thermal waste incineration plant No. 3 in Moscow expired at the end of June and that the grant was transferred in accordance with the contract. The financial performance of the segment is in line with the developments in the international project business. There was a corresponding rise of both revenue and operating expenses in the segment. The share of results from equity-accounted industries with operation in nature was below the previous year. These are members that largest earnings from the wastewater port ship in Prague were included. In total, this development led to a decline by ETA to 14.1 million euros and an ETA to 5.3 million euros. This is a concluded presentation of this segment. On the next slide, I will continue with the development of our group cash flow. cross-cash flow fell by 70.3% to 392.3 million euros in the first three quarters of this financial year. It was caused by a lower dividend payment from equity-accounted indices. In addition, cross-cash flow was corrected by the dividend from FATUN, which was paid in July after the balance sheet closing date, but was approved in June and therefore already included in EVM's financial results. Due to the development of working capital at the end of June, cash flow from operating activities amounted to 205.8 million euros. Cash flow from investing activities reflected a partial delay of investments due to the COVID-19 disinvestment of securities in one of our funds and the guaranteed payment from the Republic of Montenegro for the wastewater-raised water project in Budva. This was contrasted by the equity contribution for the Kudret project and increased investments in cash funds. The cash flow from financing activities reflected that cattle's repayment of loans and the dividend paid for their previous financial year. The contrary factor was the issue of a green, promissory note loan. The net change in cash and cash in the equivalent amounts amounted to minus 75.8 million euros. With that, I would like to conclude my presentation. We are ready to take your questions.

Yes, ladies and gentlemen. If you would like to ask a question, please press 9 followed by a star key on your telephone keypad. If you would like to withdraw your question, press 9 and star again. And the first question comes from Mr. Peter Crampton from Barclays. Please go ahead.

Good morning. I'm Peter Crampton here from Barclays. Two questions, if I may. Firstly, looking at your group net results, the $211 million, and kind of looking at your guidance, you're now already above that guidance. Were there any kind of particular reasons you didn't adjust your full year outlook? And then the second question is, now where we have the e-mail stopgap transaction closed, Is there the potential of an HGX inclusion for EDN and what would be kind of the prerequisites of that to happen and when? Thank you.

Okay, thank you for your questions, Peter. You know, our financial year is following also the year regarding summer and winter. Therefore, we are now in the real summer quarter. So traditional, this is the weakest quarter of event performance. You have the fixed cost and you have especially the depreciation. On this basis, you cannot draw a conclusion out of this third quarter result to the guidance for the financial year. We will have a lot of end of the year balance sheet dates, approvals of the hedges and so on. And on this basis, I cannot change the outlook we are giving for the financial year. More or less, we confirm all trends are in line with this 180 to 200 million net result which we are expecting. And the second question which we are raising is this right after this kind completion of the transaction, the Vienna Stock Exchange is informed by the new owners about the new shareholder structure. Therefore, our free flow is actually above 20% following their regulation. But you know, there is also committees which have to evaluate this. And secondly, of course, the volumes which are traded in comparison to other competitors are defining then our chances. But I'm confident that on the midterm, we will get back into the ethics.

Perfect. Thank you for your answers.

The next question comes from Theresa Schoenwald from Raiffeisen Central Bank AG. Please go ahead.

Good morning, and thanks for taking my question. I have two. The first is on the hedge valuation effect, and pardon if I missed it during the presentation, but could you remind us on the remaining hedge valuation effect in the first nine months of this year? The second one is If you could provide us with an update on the renewables energy law in Austria that is still outstanding, has been outstanding for a very long time. If there has been any progress in the past three months and what's ahead.

Okay, I think some help to do your... evaluation is if you go to our notes and look on the equity investees and then you see EVNKG the photograph three quarters last year and this year how this has changed from minus 41 to plus 45 the main result for the group is coming from these changes from EVNKG and from this result two thirds are coming more or less, as a rule of thumb, from the hedges. The rest is the improved operating itself. So this is, I think, gives some guidance how important the influence will be in KG's results for the group's results. We are very careful regarding expectation because it's the end of September who will decide how big this effect will be on a four-year basis. But if you look on the comparison for the first two quarters and even in KG, you see the difference in the turnaround, which was taking place operational one-third and two-thirds by the changes of the market prices. Okay. The second is the new law. The new law is late. Because I remember when we were discussing the half-year result, we were expecting that the draft for the new energy law will be submitted to the Parliament before December. There were some news in the summer, now we are coming at least at the end of the holiday season, the latest information. It's expected somewhere in September because we need, in a couple of issues, we need also clear decisions to submit them for approval to Brussels. What has not changed, and this is maybe the most important for us, there is no indication that state institutions are ready to provide more than $1 billion in subsidies per year. So this is the the level of support which the public will give for the transition of the energy system on this basis because this is in a way in compliance also with the levels of the recent past and the system itself got in the past approval of Brussels so on this level it's too early to say what kind of further details will define our framework for the further transformation of the renewable production, not only for Austria but also for EDN Group. The project which we mentioned before and which we are pursuing are based on the old system of certifications or their permits for this project. It's more about additional projects in the near future which we would be able then to pursue This is especially true for photovoltaic. There is no clear guidance to know what kind of support for stabilization of big photovoltaic industrial parks will be given. There is a certain tendency that it will be a tender system, but not on which basis the support will be.

There are no further questions in the queue. Therefore, I will repeat. Ladies and gentlemen, in order to stage your question, please press 9 followed by a star key on your telephone keypad. On behalf of Ms. Teresa Schimbald, once again, please go ahead.

Sorry, I have a follow-up. also in the renewables sphere and I know the conditions in Austria are not the best for PV but there has been an increasing push for also PPA agreements in the southern parts of Europe and with your operations in Bulgaria would you see a potential for solar developments under PPA PTA contracts in Bulgaria or even northern Macedonia?

Yes, but we have not seen so far big-scale photovoltaics, which would be the basis for these PTAs on the mid-term. We are following this trend. We see also the publication, but we cannot confirm that in our core countries until now that this is a big change and and customer investor structure so far. It's still pretty much defined by a subsidiary's first phase of support for building up renewable capacity. It's more in Spain and in these Western European southern countries.

Okay, thank you.

There are no further questions in the queue. Therefore, I would like to hand over back to you, Mr. Schiffkowitz.

Thank you for joining today's conference call. We will publish our full year results on Wednesday, the 16th of December. Please join us then again and goodbye. Stay healthy.