EVN AG: Business development in the first half of 2017/18

Highlights

• Solid development of business in the first six months of 2017/18
• Significantly milder temperatures - especially in South Eastern Europe - reduce results in the energy business
• Increase in renewable energy generation - expansion target of windpower to approximately 370 MW by the end of 2019/20
• Extensive investments - with focus on Lower Austria - based on stable earning power and solid capital structure
• Expansion of the cross-regional pipeline networks for further improvements in local drinking water supply
• External ratings in the A-range confirmed, Moody's raised outlook from stable to positive

   
Key results

• Revenue: -4.9% to EUR 1,246.0m
• EBITDA: -2.1% to EUR 470.8m
• EBIT: +6.5% to EUR 340.3m
• Group net result: -1.9% to EUR 229.4m

   
Energy sector environment
The cold winter in the previous year was followed by milder temperatures in all three of EVN's core markets - Austria, Bulgaria and Macedonia - during the reporting period.
 
The forward prices for base load and peak load electricity rose substantially during the first half of 2017/18, while the spot market prices were lower than the comparable prior year period due to the milder weather. In general, prices on the electricity market remain extremely volatile.
 
The improvement in economic indicators and reductions in production were reflected in a substantial increase in the average prices for primary energy carriers, above all natural gas. The quoted prices for CO₂ emission certificates also increased during the reporting period. This rise was attributable, above all, to the positive development of the economy and the resulting increase in the demand by the industrial sector as well as an announcement by the European Parliament in February 2018 of a stronger reduction in emission certificates beginning in 2021.
 
 
Improvement in EBIT; moderate decline in EBITDA and Group net result
Revenue recorded by the EVN Group was 4.9% lower year-on-year at EUR 1,246.0m in the first six months of 2017/18. The primary reasons for this development were a decrease in thermal electricity generation below the high prior year level, lower revenue from natural gas trading, a weather-related drop in energy and network sales volumes in South Eastern Europe and a decline in revenue from the international project business. Contrary positive factors - above all increases in renewable electricity generation and heating sales - were unable to fully offset the revenue decline.
 
The cost of electricity purchases from third parties and for primary energy expenses fell by 1.0% year-on-year to EUR 591.2m in the reporting period. The main factors for this development were the reduction in thermal electricity generation, a decline in natural gas trading activities and weather-related lower energy sales volumes in South Eastern Europe. In addition, the amount of prior year was reduced by a positive effect from the agreement with the state-owned Bulgarian electricity company NEK in 2016/17. The cost of materials and services fell by 25.8% to EUR 124.7m, chiefly as the result of developments in the international project business. On the one hand, the lower volume of orders during the reporting period was automatically connected with a reduction in expenses. On the other hand, the comparable prior year value was influenced by the EUR 45.5m valuation allowance recognised to the remaining aggregate components from the former thermal waste utilisation plant project no. 1 in Moscow.
 
EBITDA recorded by the EVN Group fell by 2.1% to EUR 470.8m, while EBIT rose by 6.5% to EUR 340.3m in the first half of 2017/18. However, it should be noted that the prior year value included an impairment loss which was recognised to the Gorna Arda hydropower plant project in Bulgaria.
 
Financial results were nearly stable at EUR -25.1m (previous year: EUR -25.4m). Group net result for the period amounted to EUR 229.4m and was 1.9% lower than the first half of the previous year.
 
 
Sound balance sheet structure; reduction of net debt
EVN's positive operating results create the foundation for a solid balance sheet structure. EVN's net debt fell by EUR 85.0m below the level on 30 September 2017 to EUR 1,128.2m. As a result, gearing improved to 32.9% (30 September 2017: 38.5%).
 
Both rating agencies updated their classification of EVN in April 2018: Moody's confirmed the A2 rating and raised the outlook from stable to positive; Standard & Poor's confirmed the A- rating with a stable outlook.
 
In May 2018, EVN refinanced its existing EUR 400m syndicated credit line in a positive market environment. The new facility, which was provided by a consortium of nine banks, has an unchanged volume and a term of five years with two extension options of one year each.
 
 
Developments in the energy and project business
 
Energy business
 
Electricity generation was 19.5% lower than the previous year at 3,318 GWh in the first half of 2017/18 following a drop of 30.3% in electricity generation from the thermal power plants to 2,151 GWh. The decline is attributable to the high prior year value, which was influenced primarily by the stronger demand for electricity in Europe during the cold winter 2016/17. The production of electricity from renewable energy rose by 13.1% to 1,167 GWh, supported by strong water flows and the continuous expansion of windpower capacity. The Oberwaltersdorf windpark was commissioned in October 2017, and the step-by-step commissioning of the Sommerein windpark is scheduled for the third quarter of the current financial year. This will raise EVN's windpower generation capacity to 314 MW in 2017/18 and to roughly 370 MW by the end of the 2019/20 financial year through the realisation of projects already approved by the authorities. EVN's target is to expand windpower capacity to 500 MW over the medium term through the realisation of projects which, in part, have already been approved by the authorities. However, this will depend on appropriate framework conditions. Investments in the energy business will also continue to focus on network expansion to protect supply security.
 
For the first time, all EVN thermal power plants in Lower Austria, which have a combined generation capacity of 1,090 MW, were under contract to serve as reserve capacity for southern Germany during the winter half-year 2017/18. Their actual use for network stabilisation remained at a high level. For the period from May to September 2018, EVN's thermal power plants are under contract with a capacity of 430 MW to stabilise the networks in Austria.
 
 
Environmental and water business
 
Investments in the Environment Segment rose by 37.4% to EUR 7.0m in the first half of 2017/18. This increase reflects EVN's strategic approach to continue its efforts to improve the security and the quality of drinking water supply in Lower Austria. The expansion of the cross-regional pipeline networks represents the current focal point of work. Construction is also proceeding as planned on a further natural filter plant southeast of Vienna to reduce the hardness of the water by natural means. EVN is also steadily expanding its activities in the area of local drinking water supplies: after taking over the management of the local drinking water networks in two additional Lower Austrian communities at the beginning of January 2018, agreements were reached with two further communities for the transfer of management as of 1 July 2018. EVN currently supplies roughly 570,000 residents of Lower Austria with drinking water, including more than 110,000 directly.
 
In the international project business, EVN was working on six general contractor assignments for the construction of wastewater treatment plants in Croatia, Macedonia, Poland and the Czech Republic as of 31 March 2018. The final awarding of the contracts for the two projects in Kuwait and Bahrain are ongoing, and a decision is still expected during 2018.
 
 
Confirmation of outlook
Assuming average conditions in the energy business environment, Group net result for 2017/18 should return to a normal level that reflects the average of the 2015/16 and 2016/17 financial years. However, Group net result could be significantly influenced by the regulatory background, the proceedings currently in progress in Bulgaria and the remaining proceedings connected with the Walsum 10 power plant project as well as the progress on activities in Moscow.
 
The complete Letter to Shareholders for the first half of 2017/18 is available under: www.investor.evn.at.