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.

Hello, it's Peter Crampton from Barclays. Good morning. Two questions, if I may. Firstly, I would be interested in EVN's views on what they think regarding kind of windfall taxes for kind of Austrian generation. And then the second question would relate to your Bulgarian and Macedonian business, where we are in kind of potential government intervention given all the issues we've seen in Romania.

Thanks, Peter. I think two valuable questions. First of all, you're referring to a comment of our Austrian Chancellor, which he did in a regional text. which caused also some turbulences on the Austrian Stock Exchange. I think there has been a reflection on certain measures which have been taken in other European member states. As we all know, this historic situation leads also in Brussels to a debate about the pricing mechanism. We don't know where they are heading. Coming back to Austria, I cannot confirm any proposal which has been debated so far, neither in the public nor internally, which is really giving us any guidance where this debate will go. Therefore, I cannot further comment on that. What you have seen is that Verbund obviously are trying to gives a bonus to trustful customers and therefore also trying to change a bit in the public the reference that they are just profiting too much from the hydropower production in this environment which as we know is not the case for EVN because if you look into the numbers you see that we only have a percentage of own production in relation to end customer supply of around 17%. Therefore, we are the apple of the hydropower utilities. We are more now taking the higher prices and then having to pursue them to our customers. And the second question regarding Bulgaria and North Macedonia, there we see a strong support to stabilize the energy sector overall. I mentioned before that we got the direct subsidies of around 67 million in Bulgaria. We are expecting now regulatory decisions on the 1st of July for Bulgaria and North Macedonia. So if we can give a guidance, we would expect that we are not making a negative result in this division, which is the best we can aim for, because it will take a couple of times before the losses can be compensated.

Thank you for your answers.

And the next question comes from Luda Schumacher.

Hi, good morning. Also two questions on my side. The First one is on gas supply. You mentioned that there are various provisions in Austria who deal with the event of a severe curtailment. Is there also something in the Austrian law similar to the energy security law in Germany where all supply obligations cease to be effective in the event of such a curtailment? i.e. nobody has supply obligations and there's no need to cover volumes in the market. It would be great if you could shed a bit more light on the legal situation in Austria in such an event. Yes, this is a very popular topic. And then also on Southeast Europe. I mean, you already said you hope to... be partially compensated and at least avoid losses. What time frame are we talking here for this compensation? Is it 2 plus 1, 2 plus 2? I mean, when can this actually become a profitable unit again, especially in this environment? And actually, just one other question as well on the impairment in these environments. What is behind that? Are these trends that we can expect to continue? Are there going to be more impairments in the future? In general, what is the outlook there for this division?

Thank you a lot for these questions. First of all, regarding the gas situation, there is a kind of emergency law. which would be affected if the market is not giving gas enough anymore, either by the interruption of the suppliers on the Russian side, on the European side, or by obstruction. If this is taking place and the market is not providing enough volumes anymore, then this phase of state intervention would start. In our case, as EVN supply sites, we always had this kind of 80% store for our own needs, for our household customers over all these years. And we are just building up this reserve once again. As I mentioned before, we are now at 32%, and at the beginning of November, we will be around 80%, which is our normal way to secure the supply for our customers. What the state has done additionally, that is started to raise and strategic reserve. And this should be at the end go up to two terawatt hours of gas which should be stored in facilities in Austria. Of course, we have the situation that Gazprom is not only a supplier of gas but also running some of the research facilities so this is a complicated legal situation which I would call that we are in a transformation stage because the European Union is working on a directive to have a legal base already to handle this so I would say from an Austrian point of view and being so much exposed in this situation everyone tries to help to secure additional volumes, either from Russian volumes or even third-party volumes. And we are quite successful in the moment also with third-party volumes to ensure that we have a more diversified mix for the coming winter. This is the situation regarding the gas situation in Austria. but highlighted that legal framework is still underway. The second thing which I want to mention also, the new decisions by the regulatory authorities will be on the 1st of July. Therefore, this will only go with three months into our financial year. Therefore, there is a delay going on. I would, on the midterms, gives you the assurance that we expect to be back on this 40 to 60 million EBIT expectation. Under the bottom line, Bulgaria is compensating here quite consequent from month to month. It's on a monthly basis. Our government plans work immediately and they will go directly into our expected at the end of September, so we expect that the overall result in Bulgaria will compensate the delay in Macedonia and therefore stabilize the organization as a segment. And regarding the receivables and the international project business, It's just reflecting on the new environment in market, country with premiums, costs of guarantees and supply chain that new projects will be not too easy to get granted on a financial calculation which we have to do and therefore we took this step now to free ourselves from this kind of burden and rucksack for the new projects in the future.

Very clear. Thank you. Just one follow-up on your answer to the first question on gas supply. You said everything will be fine once gas storage is full. But if it were to come to complete curtailment of Russian flows, and let's bear in mind so far there hasn't been any curtailment. Russian gas flows are very normal, apart from Yamal, which has been down since October. What would happen to your supply obligation to your customers? If there's containment tomorrow, yes, governments step in, but would they still have to deliver?

No, this is a force majeure case. But they would focus on household customers and I'm sure they would also open up the definition for protected customers regarding strategic suppliers, if you think about it. the agricultural production in Austria is on a high percentage, completely dependent on gas. So processing of meat and food depends on the industrial production of gas, and I'm sure they will protect it. So they go down from big customers to the small customers in trying to secure that the demand is reduced, and they give the big customers a certain... information in advance so that they can close and run down their facilities without crashing the technical operations. So I think what is discussed in Europe everywhere is how to do that. It's not easy as you know for a distribution grid to do this because it has never been done before but from the logic of the legal references There is a clear guidance where to start and where to stop.

Very clear.

Thank you.

And the next question comes from Theresa Schindler. Please go ahead.

Thank you and good morning. Also two questions from my side. The first one, coming back again to the gas issue. I'm still trying to wrap my head around how the mandatory storage requirement would impact the results of RAD as their by far the largest storage owner in Austria. And Austria has, as far as I can see, a lower threshold for mandatory gas storage because it has so much storage. And at the same time, the storage facilities are connected to the German grid. Could you elaborate a bit more on that? And the second one is, could you also shed some more light on the goods and materials that could cause delays in the project business? Is it a general thing or are there particular bottlenecks that we might look at?

Yeah, thanks a lot. Regarding the Austrian situation, I can confirm that Haida is a very valuable asset in the middle of Europe because it's the one of the biggest and the most strongest facilities for gas. But it is primarily connected to Germany. Therefore, the Austrian government, also to split the resources between Austria and Germany, is now pushing and enabling RAC to build as fast as possible a strong connection to the Austrian high-pressure grid. This has to take place in the upcoming months, yes, let us hope that during the winter they will be able to finalize and therefore an example part of this technical equipment it's not easy to buy these days in markets this is exactly what we are seeing specified industrial equipment it is not able to get anymore in this kind of more or less real-time markets therefore We see this in a lot of projects that even confirmed suppliers suddenly backstep and try to prolong their obligations for a couple of months, in some cases even longer. Therefore, I expect also a hit to the global economy because this is taking place just in the energy industry. This is taking place everywhere. On this level, coming to your second question, my comment regarding these delays It's not in relation to the existing project. We have some delays there, but we also have the right to be compensated for these delays. It is more about the overall calculation of future projects, because if you put all this risk into your financials, then it's also a question if you can be successful in markets with this project and this cautiousness. after this crisis which we are going through now and maybe even see growth or development upcoming we took the decision to readjust our expectations on earnings and risk in this case also regarding markets, risk payments and so on. I even would expect that a couple of potential customers will start to delay their projects because they must be in a similar situation. Therefore, we will see this kind of hit on the global economy in a lot of different ways. Is that helping? Is this answering your question?

Yes, it is helping, but I still have a follow-up. Because your renewables capacity targets, you have increased them several months ago. Did you already secure the supply contract for the...

This is really a good question. What we are expecting at the end of 2022 is that we will have 450 megawatts increased capacity. Of course, there can be delays in construction and so on, but the windmills and the supply content of the windmills, this was the early thing we were drawing in the minute we made the decision And we got the permits to build because it's exactly what is happening. There's such a demand and want from Indonesia that if you're late to the party, you have to wait quite a time.

Okay, great. Thank you.

Okay, so at the moment there seems to be no further questions. So if you would like to state another question, please press 9 and the star key on your telephone keypad now. Just wait a couple more seconds. Okay, so there seems to be no further questions, so let me hand back over to your host for some closing remarks.

Thank you for joining today's conference call. We will publish the results for the first three quarters of 2021-22 financially on Thursday, 25th of August. Please join us then again. Stay healthy and goodbye.