Q2 2020 EnBW Energie Baden Wuerttemberg AG Earnings Call

Karlsruhe Aug 9, 2020 (Thomson StreetEvents) — Edited Transcript of Enbw Energie Baden Wuerttemberg AG earnings conference call or presentation Thursday, July 30, 2020 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ingo Peter Voigt

EnBW Energie Baden-Württemberg AG – Head of Finance, M&A and IR

* Thomas Andreas Kusterer

EnBW Energie Baden-Württemberg AG – CFO & Member of the Management Board

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Conference Call Participants

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* Andrew Moulder

CreditSights Ltd. – European Head of Research & Senior Analyst of European Utilities

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. I am Emma, your Chorus Call operator. Welcome, and thank you for joining EnBW’s Investor and Analyst Conference Call on the Q2 Results 2020. (Operator Instructions)

I would now like to turn the conference over to Ingo Peter Voigt, Head of Finance, M&A and Investor Relations. Please go ahead.

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Ingo Peter Voigt, EnBW Energie Baden-Württemberg AG – Head of Finance, M&A and IR [2]

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Thank you, and good afternoon, ladies and gentlemen, here from Karlsruhe. Thank you for joining us this Thursday afternoon for our investor and analyst conference call on EnBW’s 6-month figures 2020. Probably at the beginning or for some of you already in the middle of the summer holiday season. We hope you are all well and healthy in these still unusual times.

As always, our CFO, Thomas Kusterer, will guide you through today’s presentation. In light of the corona pandemic, he will outline the main effects in our performance and positioning in the first 6 months of ’20. And after that, we look forward to your comments and questions.

With this, I will hand over directly to Thomas to take you through the relevant figures and slides. Thomas, go ahead.

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG – CFO & Member of the Management Board [3]

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Ingo, thanks a lot. And ladies and gentlemen, I’m pleased to welcome you to today’s conference call, too.

As a starter, we successfully completed several important projects in the second quarter. As already mentioned in our Q1 call in May, we issued a senior bond at the beginning of April, EUR 500 million with a coupon of 0.625% and a 5-year maturity, a very successful transaction in a very volatile and uncertain environment.

Only a few weeks later, in the second half of June, we executed a further EUR 500 million transaction, this time, a green subordinated bond with a noncore fixed structure, a 60-year maturity and an initial coupon of 1.875%, again, from my perspective, a quite successful transaction. The proceeds will be used entirely for renewable energy projects to further reduce CO2 emissions. The amount was entirely earmarked for refinancing Valeco, our French onshore wind and solar company. Just to remind you, by acquiring Valeco in June 2019, we also secured growth opportunities in one of the most important renewable energy markets in Europe, with Valeco’s existing project pipeline totaling 1,700 megawatts in onshore wind and solar projects. Moreover, the issuance of this subordinated bond reduces our refinancing risk and will therefore support our rating and liquidity position.

In this regard, I would like to take this opportunity to underpin our commitment to solid investment-grade ratings and the role of subordinated capital as a permanent layer of EnBW’s capital structure. Let me take this opportunity also to briefly comment on our current ratings. At the end of March, Fitch lowered EnBW’s issuer rating by one notch from A- to BBB+. The reasons were the acquisitions of Valeco and Plusnet in 2019 and the imminent start of our growth phase with high investment and increasing financial debt. On the other hand, the growing contribution to EBITDA from the regulated business led Fitch, on the basis of its rating methodology, to confirm the A- and BBB flat ratings for our senior and subordinated bonds. The outlook remained stable.

In May, S&P confirmed our rating of A-, outlook stable. Our Moody’s rating is also unaltered after a credit update in June at A3 with a negative outlook.

In a difficult environment, all agencies confirm EnBW’s solid investment-grade ratings. The deciding factor is EnBW’s strategic focus on grids and the renewable energies business. With the high degree of predictable cash flows in its operating business, EnBW maintains a robust and predictable business model.

In June, we signed a new sustainable syndicated credit facility of EUR 1.5 billion, including an option to increase the facility amount by EUR 500 million, with a 5 plus 1 plus 1 maturity structure. This facility marks the first facility in its size in the corona environment with a long-dated maturity structure. Again, if you may say so, a solid proof of our sound capital market reception and positioning.

In addition, as a new feature, we incorporated sustainability aspects for the first time. Borrowing costs are now tied to EnBW’s sustainability performance. The fact that after several green bonds, we have now made our syndicated credit facility sustainable, underscores our strategic orientation. We are increasingly transforming into a sustainable and innovative infrastructure partner by the end of 2025.

So much on our financing instruments. We also have good news to report on the divestment side. Since 2004, EnBW has held a financial investment in MVV. The stake in MVV has developed well since we invested in it. At the beginning of April, EnBW and RheinEnergie, another relevant shareholder in MVV, announced their intention to sell their combined 45.1% stake in MVV to funds advised by the international asset manager, First State Investments. On June 30, 2020, the transaction closed and the transfer of our 28.8% stake was successfully completed at an attractive price. And in the upcoming weeks, we also expect to be able to successfully conclude the sale of our shareholdings in EVN.

But now to the operating business. Let’s talk about the development in the first 6 months 2020. As you know, EnBW responded to the outbreak of the corona pandemic at an early stage, establishing a task force at the beginning of February. A large proportion of the workforce has been working from home since early March. Measures such as contact-free shift handovers were adopted immediately for teams which have to work on site. At all times, so far, EnBW has reliably delivered its services without any restrictions.

Precisely as it was the case in the first quarter, our second quarter operating results likewise show no material impact of COVID-19. Our adjusted EBITDA is up 24% in the first half year 2020. Our business segments are showing stable development, and our retained cash flow even more than doubled. It underscores, at least for the time being, the resilience of our business. Despite the anticipated impact of the corona crisis on parts of our operating business on a full year’s basis, EnBW is maintaining its existing earnings guidance for the current 2020 financial year. As before, adjusted EBITDA is expected to be between EUR 2.75 billion and EUR 2.9 billion. I will go into this in more detail at the end of the presentation.

But first, let’s take a more detailed look at the 6-month figures. Let’s get started with a brief look at our adjusted EBITDA and group net profit on Slide #3. As already mentioned, our adjusted EBITDA at group level increased by 24% to EUR 1.587 billion, mainly due to the following 2 reasons: the first-time full effect of our 2 new offshore wind farms, Hohe See and Albatros and also higher wholesale market prices. Group net profit was down in the first 6 months, as in the first quarter. This is very much linked to considerable losses on the capital markets, which led to a large expense from the mark-to-market valuation of securities. Consequently, our adjusted group net profit declined from EUR 510 million in the first 6 months 2019 to EUR 370 million this year.

But now let’s take a more detailed look at the performance of our 4 business segments on the following 2 slides.

On Slide 4, let me get started with our Sales segment. In the first half of 2020, the corona pandemic led to a moderate negative impact on adjusted EBITDA in the Sales segment only. Overall, adjusted EBITDA increased compared to the prior year period. At EUR 136 million, it is 10% above the figure for the first 6 months 2019. This positive development is mainly due to the fact that Plusnet, our nationwide telecommunications company, has only contributed to earnings since the beginning of the third quarter 2019.

In the first half year, adjusted EBITDA in our Grids segment remained stable due to increased investments. Revenue from the use of electricity and gas transmission grids was higher. This was offset by lower revenue in the gas distribution grids related to milder weather compared to prior year period. The corona pandemic had only a moderate negative impact on adjusted EBITDA in this business segment. So earnings development in the first half of 2020 was not significantly affected. Therefore, with EUR 745 million, the Grids segment continues to be our business segment with the highest earnings contribution.

Let’s now turn to the renewable energy segment on Slide 5. Adjusted EBITDA increased significantly by 100% to EUR 426 million in the first half year 2020. Our 2 new North Sea offshore wind farms are the main reasons for the earnings development. Hohe See started operation early in the fourth quarter 2019 and Albatros in the fourth quarter — in the first quarter, sorry, in the first quarter of 2020. Therefore, they are now contributing substantially to earnings. Moreover, the Valeco portfolio, consisting of onshore wind farms and photovoltaic systems, is fully consolidated and contributing to earnings since the third quarter of 2019. In addition, weak conditions at our offshore and onshore wind farms were more favorable compared to the prior year period. And finally, electricity from hydropower was sold at higher wholesale market prices than in the previous year.

Finally, let me comment on our Generation and Trading segment. The positive development continued in the first 6 months. Adjusted EBITDA increased by 39% to now EUR 395 million because, firstly, we supplied our electricity at higher wholesale market prices compared to the first half of 2019. Secondly, increased volatility on the wholesale market allowed for an additional positive contribution to earnings from our trading activities. These 2 effects more than offset the loss of the earnings contribution from our Philippsburg 2 nuclear power plant, which was decommissioned as planned at the end of 2019.

This brings me to the development of our retained cash flow on Slide 6. As mentioned at the beginning of this presentation, our retained cash flow more than doubled to EUR 1.091 billion, mainly due to the following 3 effects: the higher cash EBITDA; lower income taxes paid in the reporting period; and finally, lower dividend payments. Due to the postponement of our AGM, EnBW paid out an advanced payment of EUR 0.35 on May 11. The remaining half of the proposed dividend and, therefore, another EUR 0.35 per share was paid out on July 22, hence impacting cash flow in the second half of 2020.

Net debt increased by almost EUR 770 million as of June 30, 2020, compared to December 31, 2019. Let me illustrate the key factors in this development on Slide 7. Our working capital increased by more than EUR 1.1 billion, mainly based on the following effects: firstly, trade receivables significantly increased relating to the Renewable Energies Act. The EEG bank account of our transmission grid operators decreased by EUR 506 million from EUR 289 million as of December 31, 2019, to minus EUR 218 million at the end of the first half 2020. Secondly, margin payment on securities due to the current market price fluctuations and the positioning held in the market increased. In addition, the minor decline in the interest rate for pension provisions had a slight increasing effect on the net debt. On top, the mark-to-market valuation of noncurrent securities decreased by almost EUR 400 million.

Finally, on Slide 8, let’s take a look at our forecast for the current financial year. As already mentioned at the beginning of my presentation, our operating results show no material impact of COVID-19 in the first half year. From today’s perspective, the adjusted EBITDA forecast on group level as well as for the individual business segments remains unchanged, assuming the development of the corona pandemic remains at the current level and the easing of measures by the federal and state governments can be maintained.

The adjusted EBITDA in the Sales segment is expected to exceed the level of the prior year. The reasons for this are the earnings contribution of Plusnet and efficiency improvements through new billing systems. However, unit sales have decreased due to the corona pandemic in the first half of 2020, and some value adjustments had already to be made on receivables. We assume that these effects will continue, even slightly increase, in the second half of the year.

In 2020, the adjusted EBITDA of the Grids segment is supposed to reach the 2019 level. We expect revenues from the use of grids to remain stable. This will be driven by additional earnings due to increased investments into projects, included international electricity and gas Networks Development Plan. Negative effects on adjusted EBITDA caused by the corona pandemic should be offset within the segment.

The adjusted EBITDA of the renewables segment will increase significantly in 2020, as already mentioned. This is mainly related to our offshore wind farms Hohe See and Albatros contributing to earnings for the first time on a full year’s basis. New onshore wind farms and photovoltaic systems will also have a positive impact on earnings. Some of them already realized in 2019 and in the first half of 2020 and some either under construction or planned to be purchased until the end of 2020. We generally assume in our forecast that wind yields will be in line with long-term average. In 2019, wind conditions were slightly lower. As a result, earnings in 2020 are expected to be slightly higher than in the previous year.

In the Generation and Trading segment, we expect an improved result in 2020. This is because we sold our electricity deliveries in 2020 at higher wholesale market prices than in the previous year. The decommissioning of Unit 2 of our Philippsburg nuclear power plant at the end of 2019 will have counteracting effect.

The last proportion of adjusted EBITDA accounted for by Grids and Renewable Energies ensures resilient, stable cash flows in the operating business. Therefore, our adjusted EBITDA for the group continues to apply at a range between EUR 2.75 billion and EUR 2.9 billion. As a result, on a quid pro quo basis, earnings will be between EUR 350 million and EUR 500 million above the original strategic target of our EnBW 2020 strategy of EUR 2.4 billion by 2020.

And with this, I would like to hand over to Ingo to open up the Q&A.

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Ingo Peter Voigt, EnBW Energie Baden-Württemberg AG – Head of Finance, M&A and IR [4]

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Yes. Thank you very much, Thomas, for your always quite in-depth remarks and comments. And with this, I hand back to the operator to open up Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes to the line of Andrew Moulder with CreditSights.

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Andrew Moulder, CreditSights Ltd. – European Head of Research & Senior Analyst of European Utilities [2]

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Thomas and Ingo, it’s Andrew here. Well, I just wanted to say welcome really with — from sunny London. I thought I was getting in before the sunny Karlsruhe.

(technical difficulty)

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG – CFO & Member of the Management Board [3]

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Andrew, we can’t hear you. Hello.

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Operator [4]

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(Operator Instructions) I believe Mr. Moulder has disconnected from the call. He seems to be having some technical issues.

And at this moment, there are no further questions in the queue.

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG – CFO & Member of the Management Board [5]

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Again, to ask a question, I hand over again to Ingo.

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Ingo Peter Voigt, EnBW Energie Baden-Württemberg AG – Head of Finance, M&A and IR [6]

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Yes. If there are no further calls, then, of course, we thank you all for participating in today’s call. And we’d like to remind you that our next call on our 9-month figures of ’20 will take place on November 13.

And with that, thank you very much for everyone attending and enjoy your summer break. And we will take care of Mr. Moulder.

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Thomas Andreas Kusterer, EnBW Energie Baden-Württemberg AG – CFO & Member of the Management Board [7]

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Bye-bye.

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Operator [8]

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Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.