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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining EnBW's Investor Analyst Conference Call Q3 2021. [Operator Instructions] I would now like to turn the conference over to Marcel Münch, Head of Financial, M&A and Investor Relations. Please go ahead.
Hello, everybody. It's Thomas Kusterer. I'm going to get started. Good afternoon, ladies and gentlemen, and thanks for joining us this afternoon for today's investor and analyst conference call on EnBW's results for Q3 2021. To start, please allow me to introduce Marcel Münch, who took over as Senior Vice President, Finance, M&A and Investor Relations at EnBW, as of September 1. Marcel, why don't you just say a few words.
Yes. Thank you, Thomas. Sure. And having been with EnBW since 2014, I led our M&A team for the last 4 years, and I'm now looking forward to the enlarged responsibilities. In doing so, I know that I can build on a trusted team whom I know very well. Going forward, our focus will continue to be on the implementation of our EnBW 2025 strategy. In this context, continues and regular investor dialogue is of great importance to me. With this in mind, I'm looking forward to getting to know many of you personally as soon as circumstances permit. And as for today, well, you all know the drill, Thomas Kusterer will now guide you through today's presentation on EnBW's results in Q3 2021, followed by a Q&A session. And without further ado, I hand it back to Thomas.
Marcel, thanks a lot, and I'm really happy to have you on board in your new role. Let me get started with our key messages on Slide 2. In the first 9 months of 2021, adjusted EBITDA was slightly below last year's by about 4%, which again proves our robust business model. As of the end of Q3, we still see some temporary negative effects in the 2 segments, Sustainable Generation Infrastructure and System Critical Infrastructure, which we expect to reverse by year-end. Furthermore, we are glad to confirm that the COVID pandemic has had no significant financial impact during this year. In the light of the first 3 quarters and the recent market development, our earnings guidance for the full year 2021 is unchanged. As of September 30, 2021, net debt was EUR 3.5 billion lower than at the end of 2020, mainly driven by a significant reduction in working capital. More on this in the course of the presentation. Before diving into the details of our Q3 results, let me touch on 2 highly relevant topics. Firstly, market prices and volatility. When spot and forward commodity prices in Germany were at unusually elevated levels at the beginning of October, our risk-based and forward-looking liquidity management proved again that we are well prepared even for such exceptional situations. We comfortably met all liquidity requirements, which were temporarily high due to security margins, which had to be posted without tapping our syndicated loan facility. Meanwhile, markets have come down to some extent. However, we will, of course, closely monitor further developments. Secondly, I want to give you an update on the implementation of our climate neutrality ambitions. As you know, we want to reduce carbon emissions by at least 50% by 2030 and cut them to net 0 by 2035 at the latest. Recently, we decided to register block 7 of our hard coal power plant in Karlsruhe decommissioning by no later than mid-2022. This confirms that we are pressing ahead with our plans to phase out coal. It is up to the Federal Network Agency to decide whether the unit can be decommissioned or whether it is subject to reserve power plant requirements should it be deemed system relevant. On our way to climate neutrality, we feel natural gas as a bridging technology, which plays an important role in accompanying the expansion of renewables and realizing the Energiewende in Germany. We've already made arrangements for 2 fuel switch projects switching initially from hard coal to natural gas in the midterm and to green gases alternatively to hydrogen in the longer term. In this context, we are planning to replace our coal power plant in Altbach near Stuttgart with a low-emission CCGT plant to produce electricity and heat with some 63% lower CO2 emissions. This means this site could be completely coal-free by 2026 with an immediate and significant impact on our CO2 emissions. Final investment decisions on our fuel switch projects will be taken at a later point in time. Our sustainable financial instruments and especially our green bonds support our path to climate neutrality already. More than 1/3 of our outstanding bonds are green. The proceeds from the EUR 500 million green subordinated bonds issued in August will be used for building wind farms, solar projects and the expansion of our fast-charging network for e-mobility. We've made great progress here in the last 9 months. We already own Germany's largest fast-charging network, and we aim to extend this leading position. We deliver responsibility and sustainability. And we work continuously to further enhance our CSR profile. In October, ISS ESG announced that they now rate EnBW with a B score were not higher than before. This notably reflects the improvement in environmental management. It puts us in the top 5% among multi-utilities. That being said, let me now continue with the financial details for the first 9 months of 2021. Slide #3 shows the development of our adjusted EBITDA and group net profit in the first 9 months of 2021 compared to prior year figures. We already mentioned, our adjusted EBITDA at group level decreased by around 4% to EUR 1.970 billion, mainly driven by the following 3 factors which have already seen -- which we have already seen during the first half of the year. Higher personnel expenses, mainly due to grid expansion, lower wind yields also in the third quarter and temporary negative valuation effects in Sustainable Generation Infrastructure based on significantly increased electricity prices. However, it is important to note that these will partly unwind towards year-end as contracts go into delivery. Adjusted group net profit attributable to the shareholders of EnBW AG nearly doubled to EUR 730 million. A positive factor here was an improvement of the financial results, mainly based on our financial asset management stemming from a gain on marketing securities to market as compared with a large expense during the same period last year. Investments due to an optimum risk reward ratio benefited from the positive market trend to an above-average extent in the first 9 months of this year. Equity markets and illiquid investments contributed positively here. And now let's take a deeper look in the performance of our 3 business segments on the following slides. Let me get started with Smart Infrastructure for Customers on Slide 4. In the first 9 months of 2021, adjusted EBITDA in this segment increased significantly by 37% compared to the previous year's figures to EUR 297 million. This development was driven by 2 main factors: improved earnings in the commodity business at all our sales companies and a positive earnings trend at our subsidiary, SENEC, one of the top 3 providers of home storage systems for solar power installations in Germany. This business segment now accounts for 15% of the group's total adjusted EBITDA. This brings me to our largest business segment, which stands for about 50% of EnBW's adjusted EBITDA, System Critical Infrastructure on Slide #5. Compared to the prior year level, adjusted EBITDA in this segment declined by around 4% to EUR 991 million in the first 9 months of the current fiscal year. Reduction in earnings was due to higher personnel expenses, which were mainly attributable to the necessary grid expansion. These additional expenses could not be fully offset by higher grid revenues. At this point, please allow me elaborate on what is probably the most important aspect for the segment when it comes to future investments and returns. As you are aware, 3 weeks ago, the Federal Network Agency published the allowed regulatory equity return rate for electricity and gas grid for the fourth regulatory period. The new rates apply for gas grid operators from 2023 and electricity grid operators from 2024 onwards. The rate of return on equity for new assets will be fixed at 5.07% before corporate tax compared to 6.91% today. The new rate of return on equity for all assets at 3.51% before corporate tax is about 1/3 less than the current level. We are currently examining the Federal Network Agency's decision documents very carefully and reserve the right to take further steps. When comparing returns on grid assets across Europe, this puts Germany well behind countries such as Italy, France and the U.K. Having said that, reinforcement and expansion of electricity and gas grids, which from the backbone of our energy infrastructure, is crucial for the energy transition. What is at stake here is the restructuring of the energy system sector coupling and ultimately, the achievement of our climate goals as a society at all. This means that grid system operators must continue to be allowed sufficient financial leeway. And we expect that the Federal Network Agency will take this important aspect into account in its future deliberations and decisions. Finally, let's turn to Sustainable Generation Infrastructure on Slide #6. This business segment contributes 43% to the group's overall adjusted EBITDA in the first 9 months of 2021 compared to 2020 adjusted EBITDA in this segment decreased by 11% to EUR 853 million. Let's take a closer look at the 2 parts of the segment, Renewable Energies on the one hand and Thermal Generation and Trading on the other. Adjusted EBITDA on our renewables business dropped by 7%, mainly due to relatively poor wind conditions compared with the prior year period as well as with the long-term average. Available wind was significantly below expectations in 6 out of 9 months during Q1 to Q3. This effect is not specific to our renewables fleet at EnBW but affected all offshore wind operators, especially in the North Sea, but also in the Baltic Sea as well as onshore wind operators across Germany alike. The second part of the segment, Thermal Generation and Trading, adjusted EBITDA fell by 18% due to temporary negative valuation effects, which as mentioned already beforehand, we'll continue to partly unwind towards the year-end as the underlying trading contracts go into delivery. And this leads me to the development of our retained cash flow on Slide 7. EBITDA decreased by 8% in the first 9 months of 2021 compared to the same period of 2020, our retained cash flow decreased by nearly 20% to EUR 893 million. In addition to the EBITDA reduction, this development can be attributed predominantly to a higher dividend payout of EUR 1 per share compared to EUR 0.70 last year and higher interest paid. On Slide 8, let me show you the development of our net debt in the first 9 months of 2021. Net debt dropped by around 25% to EUR 10.8 billion as of September 30, 2021, compared to December 31, 2020, mainly due to the following effects in addition to our retained cash flow. The first and second of which led to a significant reduction in working capital. Firstly, security margin payments received in our trading business increased substantially based on the commodity price development in 2021. Secondly, lower receivables under the German Renewable Energies Act mainly because EnBW received payments under the act. As of September 30, 2021, the balance on the corresponding bank account was plus EUR 674 million compared to minus EUR 629 million as per year-end 2020. And third, the discount rate on pension provisions increased from 0.75% to 1.25%. On the other hand, we continued to invest significantly across our main business segments. We spent around EUR 870 million in System Critical Infrastructure, mainly on the expansion of transmission grids, but also on the expansion and renewal of distribution grids and rolling out the grid infrastructure for electric mobility. In the Sustainable Generation Infrastructure, we invested around EUR 530 million in the renewables business, mainly in offshore wind power as a result of our successful bid in the United Kingdom and the construction of large-scale solar farms in Germany. 73% of our total gross capital expenditures in the first 9 months went into growth projects. Now let me elaborate on our outlook for the full year 2021 as described on Slide 9. As mentioned at the beginning of the presentation, both for the group and for the 3 business segments, our guidance for adjusted EBITDA for the full year 2021 remains valid. In Smart Infrastructure for Customers, we are expecting adjusted EBITDA of EUR 300 million to EUR 375 million. Against the background of the good performance in the first 9 months of 2021, we expect earnings to be at the upper end of that range. In System Critical Infrastructure, we expect adjusted EBITDA to be between EUR 1.3 billion and EUR 1.4 billion. Grid revenues will increase slightly year-on-year as a result of returns on higher investments. These projects are included in the network development plan, electricity and network development plan gas. Our earnings develop through the end of the year will depend to a large extent on weather conditions in the fourth quarter. In Sustainable Generation Infrastructure, we expect significant growth that put adjusted EBITDA in 2021 between EUR 1.375 billion to EUR 1.475 billion. Further expansion of renewable energy generation assets will have a positive impact on earnings compared to 2020. The forecast for wind yields and thus generation volumes in Q4 2021 is based on the long-term average. As already mentioned, wind yields in the first 9 months were below both the prior year and the budgeted level due to poorer wind conditions. This effect will, however, be more than offset by the current performance of our trading activities, which we expect to continue to be very solid during the remainder of 2021. Moreover, negative valuation effects, which had a temporary impact on our Q3 figures will, as already mentioned, to a certain extent, unwind further towards the end of the year as contracts go into delivery. We, therefore, forecast adjusted EBITDA at group level to further increase in 2021 to a range between EUR 2.825 billion and EUR 2.975 billion compared with EUR 2.781 billion in 2020. And with this, I would like to hand over to Martin.
Thank you, Thomas, for walking us through the presentation. I would now like to kindly ask our operator, Nairobi, to kick off today's Q&A session.
[Operator Instructions] The first question is from the line of Andrew Moulder from CreditSights.
Welcome, Marcel. Good to have you in the role.
Hi.
Now I just -- I've got a couple of questions actually. Hopefully, you're not going to limit me to 2. A lot of people -- a lot of analysts have been asking about year-end net debt from companies, and they've all been very reluctant to give a figure on the year-end net debt. I wonder is it possible you might be able to give us some idea of where you think your year-end net debt might be given the movements you're seeing in the commodity market? That's sort of the first question. Second question, you had this big inflow of working capital, which I guess is a lot to do with the margin payments, variation margins. I mean that, to me, would indicate that you are generally short in terms of both gas and power in order to have an inflow rather than an outflow because of the way prices have moved. So perhaps you could just confirm that? And could you also just talk a little bit about liquidity? Because I know you said you've been managing it very well with the risk-based forward-looking management model that you have. But how are the banks kind of responding to this whole situation? I mean are they proving to be very accommodative and prepared to increase facilities if it's needed? Or are they playing hardball and not sort of believing things will change? I mean I just like a little bit more color about how difficult managing liquidity has been in these very extraordinary circumstances. And I just had 2 more questions, please. You talked about RDK 7 closing in 2022. I presume RDK 8 is not really slated for closure until 2038. So I just wonder how do you feel about the possible sort of coalition agreement that may lead to closure of coal plants by 2030. And finally, you talked about the regulated returns. I just wanted to ask really if that has any impact on the 2 big transmission lines that you're involved in, SuedLink and ULTRANET, I mean, presumably, if the returns are very low that could see some delays to those, which I think are actually fairly essential for the energy transition. So could you perhaps comment on that? And sorry for all the questions.
Andrew, your questions are as always very welcome actually. And let me try to answer them in the row you actually asked them, and please help me if I not -- if I didn't get all of them in the way you actually want them to be answered. So net debt year-end, I mean, we seem to be a bit more open than others are. We expect something around EUR 10 billion as net debt by year-end, okay, of course, actually a bit depending on market development, but that's the ballpark, we see our net debt by year-end. Your second question was around the decrease of our working capital. And yes, as you indicated, half of it is actually very much linked to derivatives. So actually, cash inflows due to margin payments received. And the other 50% is pretty much linked to the Renewable Energies' bank account. We received payments under the Renewable Energies Act. So that's the other 50%. That's with a broad brush, but that's the numbers basically. Regarding liquidity, and you were alluding to potentially a situation beginning of October when we had this extreme movement in markets and liquidity needs. Actually, yes, the banks are extremely accommodative. But I mean, we didn't need any kind of assistance by our banks. All the facilities we had in place, cash bank lines and so forth, CP market that was sufficient actually to cover the liquidity needs we had at this very date and to be open with you, we could have sustained even beyond what we had to post at that day without actually -- without having to get into our syn loan facility.
Sorry, Thomas, can I just ask, what are you kind of doing with the money? I mean you've got all this cash come in, but it is going to need to be paid back, I guess, over the end of -- well, over this year and probably over the subsequent years. So are you just keeping it on your balance sheet? Or are you kind of investing it and then just going to borrow again when you need to pay the money back?
Basically, we have it on the balance sheet. We make sure that we have it available on the short term. And we need sufficient cash anyway for our trading organization. What we do actually, we look at volatilities in the market. We are using various scenarios, and we try to be able to cover this with liquidity and bank lines for short and long term so that we can react on respective movements in the market. So that's why I'm saying our quite prudent liquidity management has proven to be successful in this experience situation, and that's how we deal with it. Does that answer your question, Andrew?
Yes. Yes, that's good. There was one thing that you didn't actually answer. I just wanted to confirm that the margin movements are because you're short power and gas? Or is it just that you're short gas and not short power? I just wasn't quite clear on that.
I mean given the fact that we are selling forward our generation in electricity, we are structurally short in electricity. Of course -- however, at the same time, we are, of course, buying commodities like coal and gas and also CO2 certificates. So that's actually why we've seen such a big movement in the beginning of October because electricity prices went up, and at the same time, CO2 prices went down. And in combination, that meant quite a bit of an outflow to ensure that we are able to cover the initial margins and the variation margins, which we had due to the exchange.
Yes. Okay. That makes sense.
Okay. Your fourth question actually was regarding RDK 7 and 8. Yes, indeed, we assume that RDK 8 is running longer. It's our latest hard coal power plant. However, it is under the current plan in Germany to exit coal. If I'm not mistaken, RDK 8 is due to be shut down in beginning of the 2030, it's not '38. I think it's 2030 or 2031. I'm not quite sure, but around that. So that's what we expect actually for RDK 8 to be shut down or to be closed under the current plan and the current exit plan in Germany.
Okay. Sorry, that's a little bit surprising. I mean, RDK 8 was only commissioned a couple of years ago. Why are you closing it early? I mean, didn't you want to just keep it operating as long as you possibly could? Or was that not allowed under the legislation?
It's not allowed actually. That's the plan. Actually, that's a clear plan to actually to close the plant. And I think, RDK -- not I think, I'm sure RDK 8 is due to be shut down by 2030. And I remind you to one thing actually, some of the lignite power stations are allowed to run longer, and therefore, hard coal power stations needed to be shut down earlier. It's not -- from a CO2 perspective, certainly not what you would assume, but that's how it is set up actually. And that's what is agreed with the government.
Right.
And your fifth question was around regulated assets and regulated returns and you were alluding to the SuedLink and ULTRANET. And your question was actually does the return, the reduced return have an impact on these 2 lines. No, actually, Andrew, there's no impact on the 2 lines to be built there in the middle of the approval process, and we assume SuedLink at this point in time will be commissioned by the end of 2028. So there's no impact due to the decreased returns, yes.
Why is that? Are they not going to be affected by the decreased returns or the decreased returns already allow you still a sufficient return on those 2 assets?
We have the obligation actually to build it under the German Networks' plan. So there's no way around it. So we have to build these lines in the Networks' plan and development plan and we have the obligation to. And actually, we were fully aware that we do have a decrease. So we expect it to have a decrease in equity returns. However, what we currently see the 5.07% is below what we would have expected and assumed as being the right return. That's for sure. On the other hand, as I just said, we are obliged to build these lines, and we will build them.
Right. Sorry, I don't want to hog the call, but I mean that sounds a bit unfair. If you don't believe that return is adequate, you still have to build them. So when do you actually eye a return on these?
Yes, that's why we are closely looking into the documents we just have received from the Networks agency and see if there are any further steps needed. But that's something we need to look into before we can comment more on it, Andrew.
Is it possible that these 2 assets, because there's an obligation to build them, could actually be outside of the current regulatory return?
No.
No? Okay. All right. Great. Thank you very much, and thanks -- good to hear you.
Thanks for your question actually. Thank you, Andrew.
[Operator Instructions] There are no more questions at this time. I hand back to Marcel Münch for closing comments.
Yes. Thank you all for attending today's call and for your interest in the development of EnBW. And thank you, Thomas, for your answers and comments. We look forward to presenting our full year figures 2021 on our next call on March 23, 2022. Meanwhile, should you have any further questions, please do not hesitate to contact our Investor Relations team. Until then, stay safe and healthy and talk to you soon. Bye-bye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.