EVN AG

Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first half of 2020-2021 financial year. At this time, all participants have been placed on a 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 Schischkowitz.

Good morning, and welcome to the conference call on EVN results for the first half of the 2020 We are reporting today a sound performance for the first half of our financial year. EBITDA, EBIT and good net results are above the previous year. The main drivers for this improvement were the earnings contributions from our equity-accounted investees, in particular our supply company EVNKG and developments in our environment segment, in particular the start of the Kuwait project. The corona crisis only had selective negative impacts on our operating results. Our integrated business model and a widely diversified customer base continue to be stabilizing factors. Our investment level was high. We were able to increase investments by 21.3% to 155.8 million euros. This is in line with our commitment to further increase of cutbacks. Our plan is to invest on average up to 450 million euros per year in the near future. Thereof, up to three-fourths will be directed towards regulated and stable activities in Lower Austria. The key investment focus, now and in future, is on network infrastructure.

This investment fulfills three strategic objectives.

They secure supply security, enable a carbon-free energy future, and provide for further growth of our regulated business. Other investment areas are renewable generation, biomass, and drinking water. I would like to explain our recent progress in these areas. End of December, we started operations on a new wind farm with an installed capacity of 8.4 megawatts. This increased our installed wind capacity to 376 megawatts. And we are confident that before the summer, we will have around 400 megawatts under management. In Krems, which is the 55th largest town in Lower Austria, we will construct a new biomass cogeneration plant. The investment volume is about 40 million euros. Upon commissioning, which is planned for early 2023, this plant will supply renewable electricity to approximately 15,000 households and natural heat to 30,000 households. In the international project business, we were awarded a new contract in Romania, As a general contractor, we will be responsible for the modernization of a plan for drinking water supplies. The contract value is approximately 12 million euros. I am also pleased to inform you that EVN is back in the Vienna Stock Exchange in these ATX since March.

Let me now continue with the key financials of the reporting period.

The Group's revenue was up by 7.6% year-on-year. The main reason for this development is the start of construction of the wastewater portion in Kuved. In addition, temperatures were colder than last year, which led to slightly higher network sales in all three core markets. Contrary factors were lower effects from the evaluation of hedges for the electricity generation and a decline in revenue from natural gas trading. In the second quarter, the deterioration of the green dark swept led to the creation of an additional provision for on-off contracts in the amount of 35.5 billion euros linked to the electricity production in the Walsum 10 power plant. The main reasons for the rise in EPTR were higher earnings contributions from equity-accounted industries, higher investments led to rise of scattered depreciation and normalization, The connection with the takeover of an additional electricity procurement drive and impairment loss of around 113 million euros was recognized through the Walsum 10 power plant already in the first quarter. For a year-on-year comparison of effects from impairment testing, please bear in mind that higher country risk payments of Southeastern European countries due to the COVID-19 had triggered impairment losses of 15.5 million euros in the previous year. Based on these developments, the group EBIT was up by 10.3% and amounted to 254.5 million euros. Financial results were up by 27.8%. In total, we generated a group net result of 176 million euros, which represents an increase by 15.3% over the previous year. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. EVN's net debt has remained constant by approximately 1 billion euros. Paying ratio was down and amounted to 17.9%. Our financial flexibility is solid. We benefit from lower net debt and sufficient committed unborn credit facilities which amounted to 551 million euros as of the end of March 2021. Our strong balance sheet structure from the basis of pursuing organic growth opportunities in our regulated and stable oxygen activities. The Rating Agents have recently published their annual updates and confirmed our current graded ratings. They have an A1 rating from Moody's and an A rating from S&P. Both ratings are well in line with our goal of having ratings in the solid A range. Before I will go through each of their segments in detail, I would like to give you a general overview on the ABTA development of our business segments. The ABTA's development per segment illustrates the key drivers of our performance during the reporting period. With the exception of the SE Europe segment, all other segments showed improvement in comparison with the previous year. Let's move on now to the next slide which covers the generation segment in more detail. Electricity generation volumes in this segment are down by 4.1% year-on-year. whereas renewable generation suffered from poor wind flows, thermal generation decreased due to the lower use of our gas-fired planting types for network stabilization. ABDA was up at 102.7 million euros. This increase was mainly due to a positive runoff effect related to the welcome transaction in the first quarter. In addition, there was a revaluation of our equity-consolidated investment in the Ashton Hydropower plant in the amount of 9.6 million euros. In the previous half a year, they had to record an increment loss of 4.9 million euros due to the higher country risk premiums at that period. Both effects were driven by country risk premiums in the discount rate. In the previous year, it increased and in the year before, it went down. Capital depreciation amortization increased as a result of higher investments. In total, the generation segment generated a higher EBIT of 60.5 million euros. On the next slide, I will continue with the energy segment. The development of revenue in the energy segment depends primarily on the marketing of the electricity generator, the EV and power plants. Therefore, due to, among others, lower thermal generation and the year-on-year decline in valuation effect of hedges, revenue was down by 26.3%. The volume transaction in the Frost Corp. also had the positive one-off effect on the APTA in the energy segment. This effect was confronted by the additional provision for Norris Contract in the second quarter, which I mentioned before. The energy sales volume showed positive developments. Electricity, natural gas, and heat sales volumes were above the prior year level. The increase in demand for natural gas and heat resulted from colder temperatures. Growth in electricity sales was supported by an expansion of the customer base and stronger demand from household customers. The COVID-19 pandemic did not have any material negative effects on energy demand. The share of results from equity-accounted indices with operation in nature improved by 44.3 million euros. This increase was supported by a sound operating performance of alien categories and positive effects from the valuation of hedges. Based on these developments, the energy segment reported a PTA of 67.4 million euros and EBIT of 56.7 million euros. On the next slide, I will present the developments in our network segment. Network service volumes increased, supported by stronger demand for electricity and natural gas in the household customer segment due to lower temperatures in our core region in Lower Austria. This was constructed by a slight decline in electricity consumption by commercial customers. There were no material negative effects on network flow volumes from the COVID-19 pandemic. At the beginning of the new calendar year, there also determined new network trials. Trials for electricity were increased by 6.3% on average, and those for natural gas were increased by 6.4% on average. Based on this volume and price development, segment revenues increased by 5%. EBITDA in the network segment was up by 11% and EBIT by 15.5%. On the next slide, I will continue with the Southeast Europe segment. Temperatures in Southeast Europe are lower than the unusual mild period here, but still higher than the long-term average. In Bulgaria, we are facing stronger competition following the market liberalization for commercial customers as of October 2020. Based on these developments, we are reporting today an increase in network sales volumes constituted by a decline in energy sales volumes. Segment ABT was below the previous year level. The reasons for the decline were higher energy procurement costs as well as lower sales margins in the regulated supply business in North Macedonia. In contrast, segment ABT was up. As already mentioned, higher country risk premiums for southeastern European countries due to the COVID-19 had triggered impairment losses of 15.5 million euros in the previous year. I would like to conclude my presentation of this segment with a minor environment segment. In our international project business, we were awarded a new contract in Romania regarding the modernization of a plant for drinking water supply. The project has a contract volume of about 12 million euros. In total, WTE Watertechnik is currently working on nine projects in Germany, Lithuania, Poland, Romania, Bahrain and Kuwait. The order book was about 1.4 billion euros at the end of March. In addition, our joint venture company, Slush2Energy, is currently working on three sewage sludge treatment projects in Germany. The financial performance of this segment is in line with the development in the international project business, There was a corresponding rise of both revenue and operating expenses in the segment. All in all, the segment benefited from the start of construction of the Kuwait wastewater cordage, which is accounted for according to the percentage of completion methods. In addition, there was a positive one-off effect at our lower Austrian water supply company. In total, this development led to an increase in EBITDA to 39.5 million euros and an EBIT to 99 million euros. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of our group cash flow. Cross-cash flow was substantially up to 591 million euros. This was mainly due to the compensation payment for the takeover of an electricity procurement enterprise. A further factor was the higher balance of dividend from equity accounted in the C. An increase in cash flow from operating activities was even higher in comparison due to the developments in the working capital. Cash flow from investing activities was influenced chiefly by year-on-year increase in investments in property, plant, equipment and higher investments in cash funds. The cash flow from financing activities reflected the scheduled repayment of loans and dividends for our previous financial year. A counter-effect was the insurance of a green private placement. The net change in cash and cash equivalents amounted to 1.8 million euros. I would like to conclude my presentation with the confirmation of the outlook for the group. Assuming average conditions in the energy business environment, we expect that the group net result 2021 will be in range of approximately 200 to 230 million euros. However, the further cause of the corona crisis and the resulting macroeconomic effect would have a negative influence on individual businesses areas at EVM and in turn on the development of earnings for the entire group. I confirm our dividend policy. It is directive to holding the absolute amount of the dividend at least constant at 49 cents per share. I'm now looking forward to answering your questions.

Ladies and gentlemen, I would like to ask a question. Please press 9 star on the telephone keypad.

Good morning. I'm Peter Crampton here from Barclays. Just one question on, you know, kind of Austria's plans regarding renewables. They've got this big ambition by 2030. to kind of reach kind of total energy transition and for lots and lots of investments that kind of happen in the renewable energy sector. Are you kind of expecting some opportunities here for, you know, EGN, particularly since you do have that big net debt headroom in the balance sheet and an ability to invest more? And do you feel the framework is now good enough to do so? Thank you.

Thank you, Peter, for this question. I want to confirm that we are all expecting that the Parliament is voting on this new Energy Act before the summer break. As we all know, a lot of additional regulatory decisions have to be made after that, so the clear legal framework for the future development of renewable energy will be in place, I think, in autumn. EVN, as I mentioned before, is hoping to have around 400 megawatts of wind under management before the summer break. We have an additional 100 megawatts on projects on different stages of confirmation, but already the contract from the old system of the regulation. And of course, we expect that society and regulatory framework has to give incentives for the further development of installed renewable capacity for wind and photovoltaic for the future. In the photovoltaic case, it depends pretty much also on the land regulation, where you are allowed to get a permit for photovoltaic. This is still debated also. in the provinces. So it's not quite clear if these ambitious targets of 2030 are already reflected in a framework which is allowing companies like ours to develop this project as we would like to do. An additional opportunity we are also pursuing now is that we will look on additional renewable energy in North Macedonia and Bulgaria. because there we are already a grid operator, have access to the grid and have an organization in place.

Thank you for that answer.

And the next question comes from Luda Schumacher, live open.

Hi, good morning. Luda Schumacher here. Three questions from my side. The first one is on EVM KG. Clearly very strong results there. Could you maybe elaborate a bit on the drivers behind the strong performance and whether that is likely to be sustainable or should we look at this as more of a one-off? The second question says, is on something you mentioned earlier in the presentation. You said that the clear focus for CapEx is on network infrastructure. Why do you see network infrastructure as that much more of an attractive investment opportunity than renewables? Is it less competition? Is it just the regulated returns that you see as attractive? It would be quite interesting to hear your general thoughts there. And lastly, on Walzum, another provision, another impairment, negative clean dark spreads. I mean, What is the investment case for valgum with carbon prices above 50 euros a ton? Wouldn't it be easier to just fit the plant into the coal closure tender? And that's all from my side.

Okay, thank you. First of all, regarding EVNKG, this is our sales company. Of course, we have volume effects there. We have also price effects. And if you look on the results over the last couple of years, you see quite a strong fluctuation. So it's pretty much always depending how the procurement costs in the period are developing and how you can pass through additional costs regarding procurement. If the timing of increase of procurement energy costs and pricing is in line, then there should be no big fluctuations. This has happened in the recent past and now you see in this year that the price increases of two years ago are now having the full effect connected also with the temperatures which we have seen here.

Yeah?

What over the mid-term we were always looking on around the 5% kind of retail margin on the volume and of course we are above this in this year. It is not sustainable as a business model. It is just a question of adopting at the right period and the right timing. Regarding the investment strategy which I want to to confirm again, around 450 million euros. It is a brutal investment. This is without a grid connection. This is on the level of the next couple of years. Three-quarters of them go to lower Austria, and there, luckily, we have a broad opportunity to invest. Of course, in the infrastructure of the grid, because the grid infrastructure on the electricity side has to be adopted for the further renewable production and connection. So, we started originally to develop the grid on the basis of the existing customer grid. Now, step by step, we have to invest in 110 in substations to get the additional produced renewable energy into a grid and to further develop the grid in this case. This is a regulated business with, I think, very transparent regulatory framework. Therefore, this is keeping the kind of backup of EGN's results for the upcoming years. Renewables are still also in the sense of regulated subsidiary business. Of course, this is the new law. We will go into a market premium. So there is not a fee-to-interview system anymore. But for us, it's also for the time being, this is a regulated business. And we have also stable businesses which are not regulated, but the definition could work similar, like the water business. Therefore, I think we are quite good as an asset manager of grid infrastructures trying to have as many products as different grid infrastructures and one overhead OPEX structure. This is the case where we believe in, I think, where we are also good in, and also in comparison our tariffs to the tariffs from other grid operators show that we have quite a management performance. So therefore, I think this is what EVN is good at in the independent if it's heating, if it's water, if it's telecom, or if it's gas and electricity. And regarding the third point, which you have taken very well, of course, the welcome case is not the case anymore when we made the investment decision. In old Prime Minister Schröder's time, we wanted to get the confidence of investors in thermal production. Times have changed. The government has changed. The next government of Germany is on the way after the election in September. We are following quite closely the debate in Germany. We try also to understand what can trigger changes there. They have made a decision regarding the law, how to exit thermal electricity production. We have seen over the last couple of weeks even further demands for us as a minority stakeholder of the Walsum Power Plant. It is not a decision up to us, it's a decision together in the joint venture with the majority stakeholder. What we also try to understand is how the fading out of the nuclear production in 22, 23 is influencing the German energy market not only on the production side but also on the stability security side. So I would expect that we have a clear view what we are able to do under what conditions and what we can also get the approval by our boards and put to our shareholders and we know more closer which are the conditions regarding the further future of the energy system in Germany, because this will influence on the legal base, on the private base, and also on the CO2 base, because what we have seen in the last couple of months was also a speculation on the CO2 limitations volumes. So there is more than just the energy industry in the rights of this CO2 emission. There's always a financial speculation taking place. Therefore, it's very hard to judge in the moment. Very clear.

Thank you.

There are no more questions. And to get a reflection of the questions, please press 9 star on your telephone keypad. And the next question comes from Ms. Teresa Schindwald. Your line is open. Okay, there are more questions.

Okay.

In this case, thank you for joining today's conference call. We will publish the results for the first quarters of 2021 financially on 30th to 26th of August. Please join us then again. Stay healthy and have a wonderful summer. Goodbye.