EnBW Energie Baden Wuerttemberg AG
XETRA:EBK
Earnings Call Analysis
Q3-2023 Analysis
EnBW Energie Baden Wuerttemberg AG
EnBW's first nine months of 2023 have been marked by a staggering 65% increase in adjusted EBITDA, reaching EUR 4.9 billion. Investors should take note of the company's upward revision of its full-year guidance to a range of EUR 5.9 billion to EUR 6.5 billion, signaling a confident outlook for the remainder of the year. Despite the challenges posed by the broader energy sector, such as the curtailment of Russian gas supplies, the company has demonstrated resilience and an ability to capitalize on higher hedge prices, contributing to a notable increase in group net profit by approximately EUR 1.3 billion relative to 2022.
Financial stability is reinforced by undrawn credit facilities exceeding EUR 6 billion, providing ample liquidity for ongoing and future investments. Investors should applaud the recently concluded acquisition of another 24.95% stake in TransnetBW, which advances EnBW's strategic focus on grid infrastructure expansion within Germany.
The pursuit of renewable energy is evident through EnBW's execution of significant power purchase agreements (PPAs) with reliable partners such as Deutsche Bahn and Deutsche Telekom, demonstrating prudent management of the merchant risk of their substantial 960-megawatt offshore wind farm, He Dreiht. Furthermore, with half of He Dreiht's capacity secured through PPAs, the company secures a steady revenue stream post-2025 when the wind farm becomes operational.
Ambitions for a low-carbon future are evidenced by the construction of new gas power stations prepped for future hydrogen use, proposing a 60% immediate reduction in CO2 emissions and setting a path towards eventual climate-neutral operations. Additionally, reaching the milestone of 1,000 quick charging stations nationwide positions EnBW as a leader in e-mobility infrastructure.
The Smart Infrastructure for Customers segment faced a decline, primarily from one-off deconsolidation effects, yet underlying performance suggests improvements absent these effects. The System Critical Infrastructure segment, on the other hand, soared with a 49% increase in EBITDA driven by significant revenue growth from grid expansion and higher revenue caps reflecting necessary grid maintenance expenditures. Thermal Generation and Trading is the star performer, with nearly EUR 3.5 billion in adjusted EBITDA, benefiting largely from effective hedging strategies. However, the Renewable Energies segment's EBITDA dipped by 6.4%, although gains in run-of-river generation indicate an area of potential growth.
EnBW's forward-looking hedging approach is commendable, having already secured hedges for 100% of 2023, and substantial proportions for the following years, minimizing price risks and safeguarding profitability. The completion of the Neckarwestheim II nuclear power station's final shutdown reflects the decisive transition away from nuclear energy, while generation declines at other plants suggest areas for operational improvement.
Despite the robust generation of funds from operations, which hit EUR 3.8 billion, EnBW is managing substantial cash outflows, including income taxes and covering pension nuclear liabilities. Attention to these obligations is critical to understanding the full landscape of the company's financial health.
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Ladies and gentlemen, thank you for standing by. I'm [ Mohit ], your Chorus Call operator. Welcome, and thank you for joining the EnBW's Investor and Analyst Conference Call of the First 9 Months 2023. [Operator Instructions] I would now like to turn the conference over to Marcel Munch, Senior Vice President of Finance, M&A and Investor Relations. Please go ahead.
Welcome, ladies and gentlemen. Thank you also from my side for joining us for today's investor and analyst conference call on EnBW's results for the first 9 months of 2023. As always, our CFO, Thomas Kusterer, will kick off today's session, providing you with details on the developments in our business during the first 3 quarters and an update on our outlook for the remainder of the year. Afterwards, as always, we look forward to your comments and questions. And with that, I'll hand over directly to Thomas.
Thank you, Marcel, and ladies and gentlemen, a warm welcome from me too. As already stated on October 31, adjusted EBITDA on group level increased by 65% to EUR 4.9 billion in the first 9 months of this year. Based on the significant earnings increase in the third quarter, we consequently revised our guidance for adjusted EBITDA at group level to between EUR 5.9 billion and EUR 6.5 billion for 2023. I will share some more details on the primary drivers of this update towards the end of this presentation. The EUR 6.5 billion, the liquidity position of EnBW Group remains very comfortable as of September 30, 2023. In addition to that, we continue to have undrawn credit facilities totaling more than EUR 6 billion at our disposal. So much brief on the financial situation. Ladies and gentlemen, as you know, we at EnBW focus on the entire triangle of the energy transition, expanding renewable energies, reinforcing and building out grid infrastructure and ramping up a low CO2 dispatchable power generation. This reflects our unique setup as the only fully integrated utility in Germany. We continue to implement this strategic agenda as evidenced by a number of developments in the recent weeks. First of all, the transaction for taking on board a long-term investment partner for a minority stake of up to 49.9% in TransnetBW. One of 4 electricity transmission grid operators in Germany is now concluded. Last week, the German state-owned KfW Bank exercised an auction to acquire another 24.95% stake in TransnetBW. The terms are the same as those offered for another minority stake of the same size by a consortium of more than 30 banks, insurance companies and pension funds from Baden-Württemberg at the end of May. The transaction, which we now concluded successfully supports the widely extension of grid infrastructure in Germany. When it comes to the expansion of renewables. We made significant progress in managing the merchant risk of our 960-megawatt offshore wind farm He Dreiht, which, as you will recall, is subsidy-free and will start operation at the end of 2025. In August, EnBW signed a 20-megawatt long-term power purchase agreement with Deutsche Bahn at the beginning of November, another long-term contract for 100 megawatt was signed with a subsidiary of Deutsche Telekom. Contracts with financially very solid off-takers, Fraport, Evonik, Salzgitter and Bosch are already in place. Hence, with now 455 megawatt, IBW has already secured about half of the capacity of He Dreiht via PPAs. Moreover, we are making progress with the build-out of low CO2 dispatchable power generation. Following the start of construction of a new gas power station in Stuttgart-Münster in spring, construction work has already begun at the Altbach/Deizisau side at the beginning of November. And construction of our third fuel switch plant in Heilbronn is expected to start at the beginning of next year. The modern H2 ready gas-fired power plants will reduce CO2 emissions about by around 60% immediately. And in the future, the plants will be operated by a climate neutral on a climate-neutral basis using hydrogen. And finally, as the operator of Germany's largest quick charging network, EnBW has set the benchmark for e-mobility. In September, EnBW was the first company to reach the milestone of 1,000 quick charging stations nationwide. Ladies and gentlemen, let us now have a closer look at our figures for the first 9 months 2023. I would like to start with our operating earnings on Slide 3. With an adjusted EBITDA of EUR 4.9 billion. The financial performance was very strong in the first 9 months of 2023. This marks an increase of some 65% compared to the restated figures for last year. Like in the prior quarters of this year, the increase of adjusted EBITDA was largely driven by higher hedge prices and the fact that last year's 9 months figures are negatively impacted by the curtailment of Russian gas supplies and resulting costs to replace the shortfall at our subsidiary, VNG. Just as a reminder, to reflect the economic success of our segment, sustainable generation infrastructure even more accurately, from the first half of 2023 onwards EnBW reclassifies temporary valuation effects on hedging transactions from adjusted EBITDA to nonoperating EBITDA. Prior year figures were adjusted accordingly. Based on the adjusted EBITDA development, adjusted group net profit also increased significantly by roughly EUR 1.3 billion compared to the corresponding period in 2022. Let's now dive deeper into our operating segments on Slide 4. Adjusted EBITDA on Smart Infrastructure for Customers was at EUR 225 million, and therefore, below the prior year level. The decline is attributable largely to charges related to the deconsolidation of bmp, a green gas supply and sales company within EnBW Group as well as the associated write-downs on receivables. Pro forma for this negative one-off effect, earnings for the sales business would have been significantly higher than the previous year despite a continued reduction in gas sales volumes due to milder weather and saving behavior, given lower churn rates and lower seasonality in procurement prices. Compared to previous year, adjusted EBITDA of our segment System Critical Infrastructure on Slide 5, increased by 49% to around EUR 1.4 billion. The increase was largely driven by two effects. Firstly, a significant growth in revenues as a result of increased investment in grid expansion; and secondly, the fact that due to higher revenue caps, this year's grid usage charges already reflect the expenses expected for grid reserve and re-dispatch to maintain security of supply. In particular, the revenue caps for our transmission grid operator, TransnetBW now fully include the planned expense for grid reserve and re-dispatch for 2023, unlike the previous year when the reduction of earnings was mainly due to the increased cost of grid intervention and grid reserve. This timely recovery of earnings underlines the stability of the regulated grid business resulting in stable cash flows. On Slide 6, let me turn to the segment Sustainable Generation Infrastructure. Here we saw the most significant increase in earnings compared to 2022. Adjusted EBITDA increased significantly to almost EUR 3.5 billion in the first 9 months of 2023. Adjusted EBITDA, in the Thermal Generation and Trading increased sharply compared to 2022 and reached a level of almost EUR 2.7 billion. Above all, this is due to the fact that we were able to lock in higher price levels by hedging our generation margins in advance. For 2023, we are already completely hedged at the end of last year. At September 30, we hedged 90% to 100% for 2024, 50% to 80% for 2025 and 10% to 40% for 2026. Moreover, the prior year period included significant negative effects from the curtailment of gas supplies from Russia. This impact no longer applied since all supply contracts with Russian counterparties were terminated effective end of 2022. And of course, less electricity was produced at the nuclear power station, Neckarwestheim II compared to last year since the final shutdown took place on April 15, 2023. Furthermore, electricity generation also declined due to an outage at our -- at one of our power plants in Heilbronn. Adjusted EBITDA of Renewable Energies decreased slightly by 6.4% to EUR 786 million. Earnings from run-of-river generation increased and the addition of wind farms and photovoltaic plant also had a positive impact. But these effects were more than offset by foreign prices in the direct marketing of electricity generated by wind and photovoltaics. On Slide 7, let me comment in brief on the development of our retained cash flow in the first 9 months of 2023. Starting with significantly higher adjusted EBITDA of EUR 4.9 billion. We saw cash outflows for income taxes of almost EUR 600 million and for covering pension nuclear liabilities of EUR 281 million. Funds from operations came in at more than EUR 3.8 billion, which was also significantly higher than last year. Taking into account higher declared dividends of EUR 669 million, retained cash flow amounted to almost EUR 3.2 billion, exceeding the corresponding period 2022 by more than EUR 500 million. And this brings me to Slide 8. Let me explain the main effects when it comes to the development of net debt. During the first 9 months, 2023, retained cash flow was lastly driven. That was largely offset by two effects. Firstly, an increase in adjusted working capital of roughly EUR 1.6 billion, mainly due to a lower positive margin balance and reverse effects of trade accounts payable from the year before. And secondly, net investment of about EUR 2.3 billion, mainly in the following two segments: by expanding capacity, renewing the distribution grid as well as the execution of the electricity network development plan investments in System Critical Infrastructure grows more than EUR 1.4 billion. In the segment, Sustainable Generation Infrastructure investments were mainly related to our offshore wind farm, He Dreiht in the German North Sea and our fuel switch projects in Baden-Württemberg. In addition, the discount rate for calculating our pension provisions increased from 3.7% to 4.1%, which caused a decrease in pension provisions by almost EUR 300 million. Summing all of these effects up, net debt reached a level of EUR 11.2 billion as of September 30, 2023, which marks an increase of 3.6% compared to the level at the end of December 2022. Ladies and gentlemen, let me conclude today's presentation on Slide 9 with our revised outlook for adjusted EBITDA at both group and segment level for the financial year 2023. We reduced the forecast for adjusted EBITDA in Smart Infrastructure for Customers from between EUR 400 million and EUR 500 million, to between EUR 350 million and EUR 450 million, mainly due to the negative effects related to bmp, the green gas supply company, which cannot be fully compensated by positive earnings development in other areas. In System Critical Infrastructure, we continue to expect a significant increase over the last year with an adjusted EBITDA between EUR 1.6 billion and EUR 1.9 billion. As outlined already the negative effects in 2022 for grid reserve and re-dispatch to no longer apply in 2023, and grid revenues will increase due to higher investments in projects associated with the electricity and gas grid development plan. Last but not least, the expected earnings increase in Sustainable Generation Infrastructure is decisive for the upward revision of our forecast. Renewable Energies are expected to remain broadly at the previous year's level with an adjusted EBITDA of around EUR 1 billion. We expect higher generation volumes in 2023 from more favorable weather conditions and from a moderate increase in the number of renewable energy plants. Having said that, this positive effect will be more than offset by the falling price level compared with 2022. Continued volatility on commodity margins is expected to lead to a substantial earnings increase in Thermal Generation and Trading. All in all, we now expect adjusted EBITDA on group level to exceed our original forecast of between EUR 4.7 billion and EUR 5.2 billion. Instead, we now anticipate earnings in a range between EUR 5.9 billion and EUR 6.5 billion. And with this, I would like to hand over to the operator to kick off our Q&A session.
[Operator Instructions] The first question comes from James Sparrow from BNP Paribas.
Two really. First of all, just I mean, obviously, very good set results and very positive kind of outlook. I'm just wondering if you could talk a little bit if you can give any sort of guidance on how much is the sort of exceptional conditions in Thermal Generation and Trading might continue through into next year, and whether this has changed any of your sort of approach to kind of funding given the effectively EUR 1 billion additional of EBITDA you seem to be getting from them? And then the second question is a bit of a more general one relating to the Transnet sale. Obviously, there's a lot of different stuff in the German press about potential German transmission consolidation, and we'll most of us on this call are following the tenant situation. But I'm just curious as what you -- if you can give any sort of indication of how you think that this could eventually play out this talk of consolidation in the German government being a minority shareholder. I guess my question would be, all the kind of synergies that we had from combining the German transmission grids even if they're sort of still majority owned by people such as yourselves. Is there a benefit from combining without having to have sort of full sort of legal consolidation?
James, thanks for your question. Let me start with the first question regarding the exceptional situation on the market you were referring to. And obviously, the additional operating results and cash flows we incurred this year. Actually, we had quite a good hedge level also already for 2024 last year. So to a certain extent and already also hedged part of our 2025 production. So to a certain extent, we will also see the positive impact next year and the year after. Obviously, not to the extent that we are going to see it this year in 2023 because we were fully hedged by the end of last year already for 2023. So yes, we'll see the impact. On the other hand, you are certainly aware that electricity prices came down significantly in the course of 2023, quite rather quick and quite steep. So that's the contrary to what I just said regarding the 2022 impact. And regarding to Transnet, yes, I'm following the same discussion as you, James, when it comes to the consolidation and talking about tenant, I think actually, a consolidation of the transmission grid operator could make sense from a German government perspective. If it really makes sense from a synergy perspective, I'm not that certain, to be honest with you because I think the German transmission grid operators are quite efficient as we speak. So that needs to be seen. However, from a political perspective, I will not argue. Does that answer your question?
I guess as much as you can. But I mean, I guess, just a follow-up on that side. Would you want to sell out, sell down the other 50%...
James, we're just about to close to 49.9%. So we just signed the contract. And if everything is going to plan, we will close the transactions with both partners by the end of this month. And we're happy with the situation as it is for the time being, and anything else needs to be seen.
[Operator Instructions] Since there are no more further questions at this time, so I hand back to Marcel Munch for closing comments.
Yes. Thank you, Thomas, for your answers and comments. I'll take it that a comprehensive presentation. Thomas' previous comments have answered most of the questions that might have arose. So thank you all for taking the time to join today's call. We look forward to welcoming you again when we present our figures for fiscal year 2023 on our next conference call taking place on March 27, 2024. We now wish you all the best in the run-up to year-end and look forward to seeing and hearing from you again in next year's conference call. Until then, all the best and goodbye.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.