EnBW Energie Baden-Württemberg AG (EBK) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. I'm Sophia, Chorus Call operator. Welcome, and thank you for joining EnBW's Investor and Analyst Conference Call Full Year 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.

Thank you very much, and a very good afternoon, ladies and gentlemen. A very warm welcome this Thursday afternoon, and thank you for joining us this afternoon for today's investor and analyst conference call on EnBW's figures '20. An exceptional year, the year of the global outbreak of COVID-19. In light of these still unusual and challenging times, we hope you are all well and healthy. As always, we have got our CFO, Thomas Kusterer, with us, who will guide you through today's presentation. Main themes of this year's presentation are the key developments in financial year '20, being the final year of our 2020 Strategy, the impact of the coronavirus pandemic, our forecast for '21 and, of course, our strategic outlook. After that, we look forward to your comments and questions. With this, I hand over directly to Thomas to take you through the relevant figures and slides. Thomas, the floor is yours, please.

Ingo, thanks a lot. Ladies and gentlemen, I would like to join Ingo in welcoming you to today's conference call. To start today's presentation, let me begin with our key messages on Slide 2. Our operating KPI, the adjusted EBITDA is at EUR 2.8 billion, which is well within our forecast range of EUR 2.75 billion to EUR 2.9 billion. Alongside our Grids business, the other main earnings driver this year was Renewable Energies, primarily because of our 2 new offshore wind farms, Hohe See and Albatros, with a total capacity of 640 megawatts. Despite the coronavirus pandemic, 2020 was a reasonably good year for us in business terms. Our business model showed itself to be robust and flexible in the crisis. The pandemic did not have any significant impact on our group operating earnings in 2020. This is mainly because of the industry our company operates in, stability from our portfolio approach, with a high degree of stable cash flows in our operating business. And as an operator of system-critical infrastructure, we are naturally equipped to deal with crisis. Against the backdrop of our investments, mainly, as I said, in Grids and Renewables, we issued 3 bonds in 2020, 2 senior bonds with a volume of EUR 500 million each and a green subordinated bond also with volume of EUR 500 million, to refinance Valeco, the French wind and solar power company we acquired in 2019. We've published the sustainability performance data, use of proceeds and further information on these and all other EnBW green bonds today in our EnBW Green Bond Impact Report 2020. In addition to this, as a new feature, we incorporated sustainability aspects for the first time in our EUR 1.5 billion syndicated credit facility. The borrowing costs are tied now to EnBW's sustainability performance. The fact that after several bond -- green bonds, we have now made our syndicated credit facility sustainable to underscores our strategic orientation, and our closely linked sustainable financing strategy. Just a few weeks ago, in the around 4 auction for the award of seabed rights by The Crown Estate in the U.K., EnBW and BP secured 2 large, very attractive areas of 1.5 gigawatts each in the Irish Sea. EnBW and BP will jointly develop these offshore wind farms off the coast of Great Britain in a 50-50 partnership. More on this at the end of the presentation. This major project is an example of how we are consistently developing our business model on the basis of sustainability criteria. Climate action is a central part of this. By the end of 2035, we aim to be climate neutral. We announced this target in October 2020. More on this too at the end of the presentation. As you know, 8 years ago, we published our EnBW 2020 Strategy. Since then, based on the requirements of the energy transition in Germany, we have systematically transformed our company with measurable targets. We have implemented these targets of our 2020 strategy almost 100%, many of them we achieved even early or even exceeded them. The slide you see next is the strategy slide that we have shown every time since 2013. With today's presentation, finally, the slide is history. In the past fiscal year, we successfully completed our 2020 strategy. This portfolio transformation was based on the following key milestones. Between 2013 and 2017, we applied to decommission 9 conventional power plant units and cut our carbon-intensive power generations by about 40%. At the same time, we expanded wind power more than eightfold to now approximately 1,900 megawatts. Moreover, we have built a position in new business areas. For example, we are the German market leader in fast charging infrastructure for electric vehicles. And the Valeco and Plusnet acquisitions in 2019 make our ambition to grow business beyond our Strategy 2020 horizon. In parallel with our portfolio transformation, we systematically implemented many efficiency measures. By the end of 2019, we increased our efficiency by around EUR 1.4 billion on an annual basis. That's about 1/3 of all controllable costs. Back in 2012, our operating result was EUR 2.4 billion. Our aim was to regain that level by 2020. We already achieved this in 2019. At EUR 2.8 billion, our adjusted EBITDA in 2020 is actually more than 15% above our original target. Grids and Renewable Energies accounted together for 78% of the operating earnings in 2020. The target here was at least 70%, with that substantially strengthened our risk-return profile. This brings me to Slide 4. We also tackled the nonfinancial targets under the EnBW 2020 Strategy with determination, consistency and discipline. Here, too, we achieved the target for our KPIs almost 100%, in some cases early or even above target. A key target in our portfolio transformation has been the percentage of the generation capacity accounted for by Renewables. In 2020, at 39%, that figure was only just under our target of more than 40%. A central figure on the road to carbon neutrality is CO2 intensity. The CO2 intensity of electricity generation generated by EnBW was 372 grams per kilowatt hour in 2020. Our goal was a 15% to 20% reduction from the 606 grams per kilowatt hour recorded in 2015. We substantially exceeded that target with a reduction of 39%. That was despite increasingly frequent redispatching of our power plants in 2020 by transmission system operators. The main reason for this were, first, the decommissioning of fossil power plants, most of which had to be transferred to the grid reserve because of their system relevance to ensure security of supply; second, market-driven developments; and third, effects of the coronavirus pandemic, which had a nearly year-round impact on demand. Allow me to illustrate how we responded to the coronavirus pandemic on Slide 5. First of all, as an operator of critical infrastructure, we have always been well prepared for potential crisis to ensure that we can supply our customers safely, securely and reliably 24/7. The measure of electricity supply reliability is the System Average Interruption Duration Index, in short SAIDI. In 2020, the average outage duration per end customer was just 15 minutes. Early and consistent measures to protect our operating and field personnel ensured that the coronavirus pandemic did not cause any staff shortages that would have delayed fault findings and repairs in our grids. We also prevented customers from getting into problems by restoring electricity and gas services to people whose energy supply have been disconnected. Satisfaction among EnBW customers improved by 14% to 132 points in 2020. During the coronavirus pandemic, EnBW was perceived as a reliable energy supplier. To protect our workforce, we established a task force at the beginning of February 2020. In terms of work organization, we have taken numerous steps to ensure that we have had full teams available at all times. For key units, we have the facilities to physically separate teams with strict safety measures. Since early March 2020, a large proportion of our workforce has been working from home. As of today, we still have more than 10,000 employees working from home. And as things stand today, this situation will doubtlessly last until early summer. In hindsight, investments in IT and digital infrastructure before the pandemic clearly paid off. With stable systems and processes, our business continuity is fully secured. In addition, during the course of the pandemic, we continuously expanded programs for our employees, including things like virtual sports programs. Our employee survey at the end of 2020 shows that our workforce has a very positive view of how the company has handled the effects of coronavirus pandemic. The people engagement index, a new KPI introduced in 2020, allows us to draw conclusions about employee motivation and commitment as well as satisfaction. On a scale of 0 to 100, we scored 83 points. This is a high score compared to other companies. We also work continuously with trainings and programs to minimize workplace hazards that could cause accidents or work-related illnesses. The focus here in 2020 was on the coronavirus pandemic and its impacts. Our occupational safety KPI is lost time injury frequency, in short LTIF. The number of accidents per million hours worked slightly fell in 2020 from 3.8 to 3.6. In a nutshell, I think it is fair to say we are conscious of our social responsibility and act accordingly with foresight. Ladies and gentlemen, let us now get into our financial review of the past fiscal year, starting on Slide 6. Adjusted EBITDA increased by 14% year-on-year in 2020 to EUR 2.781 billion. We, therefore, fully met our guidance range of EUR 2.75 billion to EUR 2.9 billion. And that despite difficult conditions, also in terms of the coronavirus pandemic. This underscores our stable and robust business model. The 3 segments: Grids, Renewable Energies as well as Generation and Trading each delivered results within their guidance range. Sales exceeded its -- in Q3 revised guidance and also concluded 2020 within its original guidance range. Hence, all 4 segments' contributions to adjusted EBITDA are within the guidance range. One thing that stands out is the huge increase in the Renewables share from about 20% to 30% of total adjusted EBITDA. Let us now take a look at our 4 business segments in a bit more detail, starting with Sales on Slide 7. Adjusted EBITDA was up in the Sales segment with a 3% increase to EUR 335 million. Plusnet contributed to earnings for the full year for the first time, having been acquired at the third quarter of 2019. Adjusted for changes to the consolidated group, we see a 7% decline in earnings. Due to COVID-19, EnBW subsidiaries sold significantly smaller volumes to B2B customers. Respectively, already contracted volumes had to be sold off. Conversely, the result relating to other periods increased due to adjustments in the energy-related provisions. It has the net effect that we exceeded the revised guidance and ended inside the original guidance range. Looking at the development of the sales volumes. 2020 electricity sales decreased by 3% to 34.3 terawatt hours compared to prior year, whereas gas sales increased by 19% and to 217 terawatt hours. B2C electricity sales moderately decreased by only 0.5 terawatt hours despite the fact that we are in an ongoing challenging market environment and, on top of this, face the coronavirus pandemic. The withdrawals from the B2B commodity business under the EnBW and Watt brands was fully implemented by the end of 2019. As a result, sales volumes in the B2B electricity market only fell slightly by 0.5 terawatt hours compared to the previous year. B2C gas sales decreased only by 0.3 terawatt hours despite the ongoing challenging market conditions. And B2B gas sales increased by around 34 terawatt hours compared to prior year due to the acquisition of Gas-Union by VNG. Let's now turn to our Grids segment on Slide 8. In our largest segment, Grids, which accounts for about half of our operating result, adjusted EBITDA was close to prior year level at EUR 1.347 billion. There was a slight volume-related reduction in earnings from distribution grids. This was almost entirely offset by higher revenues from the use of electricity and gas transmission grids. The reason for this was an increased investment in grid supply, security and reliability. The coronavirus pandemic consequently had only a moderate impact on Grids earnings in 2020. As shown on the slide, transmission volumes for electricity declined by 5% in 2020, whereas transmission volumes for gas are nearly on prior year level. On Slide #9, let me comment on the development of our Renewable Energies segment. In the Renewable Energies segment, we significantly increased adjusted EBITDA by around 2/3 in the first year -- in the fiscal year 2020. Adjusted for the effects from changes in the consolidated group, primarily our Hohe See and Albatros offshore wind farms and the Valeco acquisition, the increase was 6%. A substantial rise in earnings is mainly due to Hohe See going into operation in the fourth quarter of 2019 and Albatros in the first quarter of 2020. Valeco has contributed to earnings since the third quarter of 2019, and hence, for the full year for the first time last year. Wind conditions at our onshore wind farms were also better than in the prior year. In addition, electricity generated by our hydro power plants was sold on a forward market at higher wholesale prices than in the prior year. In line with the increased earnings, generation volume also significantly increased by nearly 1/4 compared to prior year. This also, our generation mix, has changed in 2020, more than 30% of renewable energies produced was offshore wind and 17% onshore wind. Finally, let's now turn to our fourth business segment, Generation and Trading, on Slide 10. Adjusted EBITDA increased in 2020 by a moderate 3.7%. For one thing, we supplied our electricity at higher wholesale market prices, for another, trading activities had a positive impact on earnings due to increased volatility on the wholesale markets. This meant we were able to more than offset the shutdown of Block 2 at the Philippsburg nuclear power plant at the end of 2019. Let us now take a look at 2 of our segments from a sustainability perspective on Slide 11. EU taxonomy, which is a classification system defining environmentally sustainable business activities, is a central component of the EU Green Deal. We've already launched a project in 2020 to implement the EU taxonomy requirements in relation to climate change mitigation. To provide even more transparent and comprehensive information in line with our sustainable profit strategy, we have decided to early adapt the future reporting requirements for some parts of our business already, even before the EU taxonomy is going to be mandatory. In a first step, for 2020, we are focused on the 2 segments, Renewable Energies and Grids, and report on their respective business activities. Over the following years, we will extend our EU taxonomy reporting to all group activities and segments. For the first time in our integrated annual report 2020, we published the required information on revenue, OpEx and CapEx in environmentally sustainable activities for Grids and Renewables. In addition to the EU taxonomy requirements, we also disclosed adjusted EBITDA figures. As shown on the slide, in relation to the entire EnBW Group activities, the environmentally sustainable proportion for 2020 is an 18% share of revenue, a 26% share of OpEx and a 60% share of CapEx. And the environmentally sustainable adjusted EBITDA accounts for 65% of the group total. We've released all results of our project and further information on the EU taxonomy in a detailed publication today. This brings me to the development of our retained cash flow on Slide 12. Our retained cash flow increased to EUR 1.639 billion, mainly due to 2 effects, the higher cash EBITDA and lower income taxes paid in a reporting period. Moving to the next slide, Slide 13, with a brief look at our KPI, internal financing capability. To maintain a good credit worthiness, while transforming our portfolio within our 2020 strategy, we had introduced this performance indicator in 2017. In 2020, the target value of greater than 100% was slightly exceeded. And with more than 99.2%, we were also able to achieve our target of a balanced internal financing capability of an average of around 100% for the period 2017 to 2020. With the beginning of our 2025 strategy, we are now entering into a growth phase. Therefore, the internal financing capability will be replaced by the debt repayment potential, so the ratio of the retained cash flow to net debt. This KPI should enable us to achieve a controlled growth in earnings within the scope of our financial targets while maintaining a solid investment-grade rating at all times. On Slide 14, let me comment on the development of our net debt. Our net debt increased by more than EUR 1.5 billion as of December 31, 2020, compared to December 31, 2019. Let me illustrate the key factors of this development with this waterfall chart. Our working capital increased by EUR 718 million, mainly based on the following effects. Trade receivables significantly increased relating to the German Renewable Energies Act. The corresponding bank account of our transmission grid operator decreased by more than EUR 900 million from EUR 286 million as of December 31, 2019, to a negative balance of almost EUR 630 million as of December 31, 2020. As a result of the coronavirus pandemic, the associated drop in demand of electricity and a significant decline of the electricity spot prices, the levy, based on the Renewable Energies Act, granted for 2020 did not cover the respective expenses for Renewable Energies. However, this extraordinary increase of corresponding payments in 2020 was only temporary. On January 11, 2021, the bank account balance was settled through an additional payment of EUR 765 million from the Federal Republic of Germany. Secondly, the decline in the interest rate for pension provisions had an increasing effect of almost EUR 580 million on net debt. Let's now turn to the proposed dividend for financial year 2020 on Slide 15. In line with our dividend policy, we aim for a dividend payout ratio of between 40% and 60% of the adjusted net profit. Adjusted net profit was at EUR 683 million in financial year 2020, 13% below prior year figure. This was due to a decrease in the market valuation of our securities compared with the prior year figure, which reduced the financial results. Due to the unusually high market valuation of securities in the financial year 2019, these effects were excluded for calculating the 2019 dividend payment. In 2019, a 40% dividend payout ratio was applied on the recalculated adjusted net profit. Last year's dividend payout ratio was consequently 40%. For 2020, we are once again aiming for a payout ratio at the lower end of our specified range. This strengthens our balance sheet and enables us to continue at full speed with the transformation of our company. The proposed dividend for 2020 is thus EUR 1, and the total payout is EUR 271 million. The Annual General Meeting will decide on the resolution for the profit appropriation, and hence, the dividend payout on May 5. In view of the ongoing pandemic, the Executive Board and Supervisory Board have decided, under the term COVID-19 Measures Act, to hold this year's AGM once again as a virtual meeting. On Slide 16, let's now take a look at the current fiscal year. At the beginning of 2021, we regrouped our business portfolio into 3 strategic segments, while our portfolio approach continues to apply. Smart Infrastructure for Customers, comprising electricity and gas sales, billing services as well as e-mobility, telecommunications, broadband, photovoltaics and storage; System Critical Infrastructure, which mainly absorbs our electricity and gas transmission and distribution grids; and our third segment, Sustainable Generation Infrastructure with renewable energies, conventional power generation and our trading activities. Our guidance for the adjusted EBITDA in our 3 new segments in 2021 as follows. In the Smart Infrastructure segment, we expect an adjusted EBITDA of EUR 300 million to EUR 375 million. So against the backdrop of a challenging market environment and the ongoing coronavirus pandemic, we expect stable earnings at their prior year level. We, likewise, forecast earnings on prior year level in the System Critical Infrastructure segment. We expect the adjusted EBITDA to be between EUR 1.3 billion and EUR 1.4 billion. Despite the coronavirus pandemic, we assume grid revenue to increase slightly due to returns from high investments in projects in the electricity and gas grid in accordance with the respective network development plan. In Sustainable Generation Infrastructure, we expect growth of 8% to 15%. That puts the adjusted EBITDA in 2021 between EUR 1.375 billion and EUR 1.475 billion. The largest share of this, at about EUR 900 million, will be accounted for by renewables, which we are continuing to expand. Assuming that wind yields in 2021 are in accordance with prior year long-term average, we expect earnings to be above 2020 levels. We also expect the performance of our trading activities in 2021 to be in line with prior year's earnings contribution. At group level, we assume the operating results to increase by 2% to 7% in 2021, which means an adjusted EBITDA in the range between EUR 2.825 billion and EUR 2.975 million. Ladies and gentlemen, that brings me to Slide 17, our strategic forecast. With our EnBW 2025 Strategy, we have set ourselves the target to increase our adjusted EBITDA to EUR 3.2 billion. All 3 strategic segments are expected to contribute significantly to this earnings growth. In the Smart Infrastructure for Customer segment, the focus of investment is on electric mobility, telecommunications, broadband, photovoltaic and storage. We plan to continue expanding our fast charging infrastructure in order to promote electric mobility. In the telecommunications and broadband business, we are going to expand our network infrastructure and increase our range of services. Moreover, we also aim to continue growing in the German home storage market for solar power. In the System Critical Infrastructure segment, we will continue to build our transmission grid for electricity and gas as well as our distribution grids. We will keep on systematically upgrading our electricity distribution grids for the future challenges so that they are well prepared for electric mobility and electric heat. Finally, our third segment, Sustainable Power Infrastructure, mainly focuses on the expansion of renewable energies. For our photovoltaic project, we target a portfolio totaling 1.2 gigawatts by the end of 2025. In 2019, we made the investment decision to build the largest solar farm in Germany without government subsidies. Our solar farm in Weesow-Willmersdorf already set its first kilowatt hours into the grid in 2020. And the next 2 large-scale PV projects, likewise, in Brandenburg and, likewise, without government subsidies, are already under construction. Together, the 3 solar farms will have a total installed capacity of some 500 megawatts. Furthermore, we intend to significantly expand wind power generation capacity. It is our target to increase the capacity to 4 gigawatts by 2025. Major milestone is our He Dreiht offshore wind farm, which is scheduled to go into operations with 900 megawatts at the end of 2025. The final investment decision will be taken in 2023. In addition, as already mentioned, we won a total of 3 gigawatts in offshore wind projects with BP in the U.K. In terms of timing, implementation of this huge renewal project will follow-on from our 2025 -- from our 2025 strategy. Let's turn to Slide 18 to have a closer look on this project. EnBW, together with BP, were jointly awarded 3 gigawatts in seabed rights off the coast of Great Britain by The Crown Estate in the U.K. To be precise, we secured 2 large areas with 500 and 320 square kilometers, with a planned capacity for two 1.5 gigawatt offshore wind farms in the Irish Sea. These areas are estimated to be the highest value areas in the first auction of offshore wind drives in England and Wales for 10 years. And we expect ideal synergies from the 2 sides due to location proximity. The partnership of BP and EnBW brings together 2 leading energy companies with deep operational experience and growing renewable portfolios. Headquartered in the U.K., BP has deep and trusted relationships across the energy spectrum from North Sea oil and gas supply chain and an industry-leading trading organization to take energy to market. Final investment decisions are expected to be taken in 2026. And we assume that as of 2028, the offshore wind farms in the Irish Sea will be taken successfully into operation. Let me close by looking even further ahead to 2035 in Slide 19. We continue to set consistently ambitious targets also regarding climate neutrality by 2035. Being an energy company, we can make particularly effective contribution to climate action. As I've just shown, we continue to expand our renewable energy activities. By the end of 2025, these are planned to account for half of our generation mix. We will exit coal-based conventional generation by the end of 2035. At group level, we aim to halve greenhouse emissions by 2030 compared with the 2018 base year and to achieve climate neutrality in our own emissions at the latest by the end of 2035. Some group companies such as Energiedienst are already climate neutral. And since the beginning of 2021, Nexif B.V. has been one of the first emission-free distribution grid operators in Germany. We believe that a business enterprise is only fit for the future if it demonstrates social responsibility and has a clear and ambitious sustainability agenda. In the end, we are talking about our license to operate, and hence, the future economic success of our company is closely linked to our long-term sustainability performance. And with this, I would like to hand over to Ingo to kick off our Q&A session.

Thank you, Thomas, for your comprehensive remarks and comments. And with this, I hand now back to the operator for opening up the Q&A session.

[Operator Instructions] The first question is from the line of Andrew Moulder, CreditSights.

Yes. I have to ask about the U.K. leases. I mean, obviously, you paid a very high price there. I think it was something like EUR 230 million, and you've got 2 of them. So that's EUR 230 million for you and EUR 230 million for BP, I guess. Did you -- where did that number come from? I mean was that very much driven by BP wanting to get into the offshore renewable space because the number is so much higher than any of the others? And I also wonder what happens if you don't actually get awarded a CFD for the wind farms on these sites? Does that mean that you'd sort of walk away from it? Or do you think you could operate them on a merchant basis? So that's really my first question. I got just 2 more. Second question, on the working capital, obviously, EUR 700 million or something this year, but you said that you've got -- you've had settlement of the EEG Bank account in February, I think. So does that mean that, kind of broadly speaking, as we go into the end of the first quarter, your working capital is pretty much 0? The change in working capital is now -- or rather that EUR 700 million has been reversed? And my final question. You talked about the target for 2025, and you had EUR 3.2 billion. Did I miss that? I mean I thought your target was EUR 3 billion, and I was going to ask why isn't it higher? And you've obviously increased it to EUR 3.2 billion. Is that a new target? And what makes you more confident on the EUR 3.2 billion rather than the EUR 3 billion that you presented at the 2019 Capital Markets Day?

So again, Andrew. And if you allow me, I would like to start with your third question, then your second, and then would like to come to first.

Yes, make things easier, I think.

Actually, we always said and we also said that in last year, above EUR 3 billion, and now we are just a bit more concrete on it and say, EUR 3.2 billion. So it's not that we are more ambitious. It's just being more precise and what we are trying to achieve by 2025. Regarding your working capital question, yes, that's right. We will see a reversal of that EUR 700 million by the end of the first quarter. We got reimbursed by, if I'm not mistaken, EUR 765 million, I think was the 11th of January, if I'm not mistaken. So yes, that's exactly right. On U.K. and from outside in relatively high payment of EUR 231 million. Andrew, given the fact that you are U.K. based, you might have heard of Phil and Kirstie, and you might be aware of their TV series. And what is right for, let's say, real estate also applies for wind offshore. It's all about location, location, location.

Phil and Kirstie? I thought who is he talking about? Phil and Kirstie -- yes -- location, location, location.