EVN AG

Good morning, ladies and gentlemen, and welcome to this conference call on EVN's results for the half-year 2021-22. 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 Siskowitz. Please go ahead.

Good morning, and welcome to the conference call on EVN's results for the third half of the 2021-22 financial year. Since last summer, the energy markets took an unexpected development. What started as a post-COVID price increase turned into a historic distortion of energy markets and prices. And ultimately, the war in the Ukraine began, the main drivers for this development. The impacts of this development on EDN and our integrated business model are varying. For a generation, higher prices are positive and provide for a certain upside. However, please be in mind that generation has been hedged at pre-running average levels rather than peak levels. For energy supply business, higher prices are a burden, which we will be able to overcome through price increases. However, this is a timing effect. In Southeast Europe, the higher electricity prices are a challenge for the whole energy sector there. Our activities are especially impacted by rising costs for net resources, In both countries, extraordinary government, respectively regulatory measures, were introduced as partial compensation for the significant rise in energy procurement costs. The remaining additional costs should be reflected in future tariff decisions by the regulatory authorities. Due to the recent deterioration of the geopolitical and economic environment, above all for global supply chains, we have to reassess the risks and earnings expectations for EVN Group. of the international project business of ATE. This resulted in impairment losses to Goodwill and the international project business in the amount of 52.9 million euros and to the residual carrying amount of the two combined sludge fire heat and power plants in Moscow in the amount of 4.4 million euros. Apart of these two plants, we have no further remaining activities in Moscow. Our investment level in the reporting period was high. We were able to increase investments by 22.9% to 109.1.5 million euros. This is in line with our commitment to further increase capex. The focus of our investments remains on networks, renewable energy, and drinking water in lower Austria. We are also actively working on our target to further increase renewable generation capacities. Construction work started for three new wind parks. These projects will raise our installed capacity by a total of 67.2 MW. Commissioning of these new wind parks will take place in course of the next financial year. Let me now continue with the key financials of the reporting period. The group's revenues rose up by 65.5% year-on-year. The main reason for this development was the sharp increase in electricity prices, which had a strong impact on revenue in Southeast Europe as well as on renewable generation. In Austria, the higher network trials set by e-Control in Austria as of the 1st of January 2021 had a positive influence on network revenues. The more frequent use of the price power plant for either a central transmission network operator for network stabilization largely offset the loss value due to the disinvestment of Bison 10 power plant. Cost was also recorded in the international project business. I would like to remind you that last year in quarter one, we had a one-off from the takeover of an additional electricity procurement right from the Bison 10 power plant. Other operating income included a positive runoff, while depreciation was increased by a required increment. The cost of electricity purchases from third parties in primary energy expenses were substantially up at 1.3 billion euros. The main driver were higher energy procurement costs in Southeast Europe, including coverage of network losses. Other factors include the more frequent use of the Thai power plant and higher procurement costs for our heating vehicles. The share of results from an equity-accounted indices was down from 127.3 million euros to 85.2 million euros. The claims were recorded, among others, by our supply company EVNKG and BIRAC. Based on these developments, EBITDA was down by 21.6% at 420.2 million euros. As already mentioned, we had to record impairment losses on the goodwill in the international project business and two combined heat and power plants in Moscow. These impairment losses were constructed by a revelation of 6.4 million euros to the Carvana wind park in Bulgaria, which we recorded in the first quarter. The previous year was affected by an impairment loss totaling 113.3 million euros to the Walsum 10 power plant. In total, the group's EBIT declined by 17.1% to 211 million euros. Financial results dropped to minus 31.3 million euros due to the weaker performance of the IR138 fund and foreign exchange developments. In total, we generated a group net result of 127.4 million euros, which represents a decline by 27.6% over the previous year. Now I would like to move to the next slide, which provides some information regarding the group balance sheet structure. UVN's net debt amounted to 1.1 billion euros. Curing ratio was down year-on-year and amounted to 16%. Our financial flexibility is solid. We benefited from lower net debt and sufficient committed to undrawn credit facilities, which amounted to 602 million euros as of the end of March 2022. In April, our corporate bond with a nominal amount of 300 million euros was due for repayment. As a preliminary free financing measure and to keep financial flexibility high, we concluded short-term loans totaling 150 million euros and term loans with tenors until February, November, December 2023, totaling 250 million euros. We also issued a registered bond in April amounting to 155 million euros. and further refinancing steps will be evaluated. Today I can inform you that the rating agencies recently published their annual update on EVM. Both agencies confirmed the ratings and stable outlooks, so we are rated R1 from Moody's and R-plus from Scope Ratings. According to our financial policy, our goal is to maintain ratings in the solid A range. Let's move on now to the next slide, which covers the generation statement in more detail. Electricity generation volumes in the segment were down by 5.1% year-on-year. The reason was the excellence of Vol. 10 following the disinvestment of our stake last year. On the other hand, our tight power plant was called more frequently by the Austin Transmission Network operator for network stabilization. The share of renewable generation increased to roughly 60% compared to last year's 53.5%. Higher wind flows were partly able to compensate the decline in hydropower. The revenue was up on a year-on-year. Higher electricity prices compensated the decline in electricity generation. EBITDA stood at 137 million euros. Also due to the re-evaluation of the Karana wind park in Bulgaria, segment EBIT increased to 122.4 million euros. Today, I will also provide an update to our segment outlooks, which we published last December. For the generation segment, we are raising our full-year guidance due to the increase in electricity prices and above-average electricity generation from wind power in the first six months. On the next slide, I will continue with the energy segment. Before I talk about the developments in the energy segment, I would like to address the topic of gas supplies in the current geopolitical situation. At the moment, 80% of Austria's total gas demand has been sourced from Russia. Austria's dependency on Russian gas is a question of existing connections across regional transport pipelines and infrastructure. More than 50% of European gas demand accounts for industrial customers. If, for whatever reason, gas deliveries from Russia to Austria are interrupted, government energy control measures would be initiated. Based on the respective law, the Austrian government and the Austrian regulatory authority would need to decide on the distribution of gas. Such law and situations have never been tested so far. I do hope that such a worst-case scenario will never occur. At EVM, supply security for natural gas has always been a key priority. Therefore, We have always rented gas storage capacity for Mark Austin to have own gas reserves for our customers available in the case of an unexpected gas shortage. As winter is over, the process of refilling the gas storage facilities again has already started, and we have already reached a level of about 32% for our supply business. In addition, we are aiming to secure strategic gas reserves whenever possible from sources other than Russian ones. Our focus is to secure our gas reserves to the possible maximum before the winter beginning of next winter season. We are aiming at 80% on the supply business. Now I would like to inform you about the developments in our energy segment. A strong increase in electricity prices resulted in higher revenue from the marketing of our own electricity production. Higher sales volumes and price adjustments support the revenue growth of our heating business. Therefore, revenue rose sharply and stood at 394.9 million euros. Operating expenses reflected costs for primary energy carriers for the increased use of the Thais power plant as well as higher procurement costs for the heating business. According to our contracts in the heating business, higher energy costs will be passed on to customer wants or twice a year based on price index mechanism. So there's a certain time lag here. The sales volume showed different developments. Whereas electricity sales increased, natural gas declined due to milder temperature. The earnings contribution from the adequately consolidated company ENKG declined due to higher procurement costs. EVNKG already increased prices for House of Customers for electricity as of January and for natural gas as of February. Based on these developments, the energy segment reported an UTD of 8.48.5 million euros and an EBIT of 37.9 million euros. I can confirm the outlook for the energy segment. In the absence of positive one-off-year effects from last year, we expect a decline in segment 2000. In addition, the situation of EVNKG has changed. The price increases on the customer side, which we implemented in January and February, were meant to pass on higher procurement cost levels, which we had reached during autumn. However, as you know, there have been additional price hikes in the markets due to the war in Ukraine. This even higher procurement cost will be passed on according to a new price index mechanism which we included in our contracts. However, there is a time delay. Therefore, we expect a further deterioration of the results of our supply company until end of September. On the next slide, I will present the developments in our second network segment. Network sales volumes. showed a stable development for electricity, whereas natural gas volumes rose due to the increased use of the gas by assimilation for network stabilization. In the beginning of 2021 and 2022, the Austrian regulatory increased tariffs of both electricity and natural gas. Based on these volumes and price developments, segment revenue were upped by 26.2%. EBITDA in the network segment increased by 4.1% and EBIT by 3.1%. We adjust our full year outlook. We expect lower segment results due to the increase in market prices and resulting higher costs for network losses as well as higher depreciation resulting from higher capex. On the next slide, I will continue with the Southeast Europe segment. Temperatures in Southeast Europe were below the previous year. and long-term average, which had positive volume effects. In addition, customer changes from leveraged markets reported growth in sales volumes. In combination with higher prices, these developments resulted in a sharp rise in revenue. As already mentioned in the beginning of this call, our Southeast Europe segment suffered from rising costs for network losses due to the higher market prices. In both countries, extraordinary government respectively regulatory measures provide for at least partial compensation for the significant rights and energy procurement costs. In Bulgaria, our distribution network operator and our heating company received compensation payments in the total amount of 67.5 million euros to cover higher costs. In North Macedonia, the regulatory announced an extraordinary increase in electricity prices for household customers of EVM homes and in the network tiles as of 1 January 2022 as a partial compensation for the significant rise in energy procurement costs. The remaining additional costs shall be impacted in future tariff decisions. Segment EBITDA was down 21.2 million euros and segment EBIT amounted to minus 17.3 million euros. As already mentioned in Q1, The distortions on the energy markets and resulting higher costs for network losses could be the reason that we will miss our full year EBIT target range of 40 to 60 million euros. But based on the current regulatory framework, the negative effects caused by higher costs for network loss coverage should be recovered through tariff adjustments in the following years. I would like to conclude my presentation of this segment with the environment segment. As already mentioned in the beginning of today's call, the recent geopolitical developments, being the war on Ukrainian inflation, rather strained economic outlook, and last but not least the global supply chain issues, through all these factors taken together, have changed the group's risk and earnings expectations for the international project business of WTE. Therefore, we quoted an impairment losses to Goodwill in the international project business in the amount of 52.9 million euros and to the residual carrying amount of the two sludge-fired cogeneration plants in Moscow, which was 4.4 million euros at the end of March. Apart from these two plants, we do not pursue any environmental projects in Russia or Ukraine. The financial performance of this segment is in line with the development in the international project business, in line with the progress on the Kuwait project. There was a corresponding rise in both revenue and operating expenses in the segment. EBITDA amounted to 23.8 million euros. EBIT declines due to the before-mentioned impairment losses and amounted to minus 49.9 million euros. In view of the impairment losses, we also needed to adjust our segment outlook. For the full year, we expect a decline in segment results. I'll also have to highlight the risk that any intensification of international crisis could lead to additional project delays due to the disruption of international supply chains and consequently to further declining earnings. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of our group catchphrase. The cost cash flow was substantially lower at 389.6 million euros. Please remember that it was unusually high in the previous year due to the receipt of a compensation payment for the takeover of an electricity procurement right. The decline was reduced slightly by higher dividends from equity accounted in the state. The decline in cash flow from operating activities was even higher in comparison. The sharp rise in energy prices and lower investment by EVNKG in the group's cash pool were responsible for working capital effects. Cash flow from investing activities was incrementally by year-on-year increase in investments in property, plant and equipment and a change in investments in cash funds. The increase in cash flow from financing activity is due to three bank loans totaling $250 million. The dividend payment for last financial year represented a contrary factor. The net change in cash and cash equivalents amounted to minus 90.7 million euros. As mentioned before, our financial flexibility is solely secured with committed undrawn credit facilities of 602 million euros as of the end of March 22. I would like to conclude my presentation with the outlook for the group. We are going through an extraordinary year with the substantial distortions which were not predictable in a few months ago. Therefore, we had to adjust some of our segment outlook, as I informed you during the call, and it's also documented in our letter to shareholders. On group level, we are confident that our diversification and management measures will provide the silence to our financial performance. Hence, I confirm our guidance for this financial year. We expect group net result in 2021-2022 to be in a range of approximately 200 to 240 million euros. With this, I have reached the end of my presentation. I am now looking forward to answering your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press 9 and the star key on your telephone keypad. In case you wish to cancel your question, press 9 and the star key again. Please press 9 and star for your question. And the first question comes from Peter Crampton. Please go ahead.