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27.08.2019 - EWE AG

Half-year results in line with expectations

• Sales and operating EBIT up, result for the period down
• CO2 reduction target for electricity production reached ahead of schedule
• Sale of Turkish companies reduces risks

Oldenburg, Germany, 27 August 2019. Energy and telecommunications service provider EWE ended the first half of 2019 in line with its own expectations: The company increased its Group sales by 7.8 per cent to EUR 2,949.2 million as of 30 June 2019 (2018: EUR 2,735.1 million). Operating EBIT – the key indicator for operating activities – rose by 4.6 per cent to EUR 271.8 million in the same period (EUR 259.9 million). The Group’s result for the period decreased year-on-year from EUR 149.7 million to EUR 115.1 million. EWE’s CFO, Wolfgang Mücher, explains: “The result for the period fell primarily due to the measurement of energy trading hedges on the reporting date. The rating of these derivatives deviates from market prices and is therefore volatile over the course of the year. As a result, it cannot be concluded that there are structural challenges.”

In the Renewables, Network and Gas Storage business area, external sales were down 5.0 per cent on the previous year at EUR 410.3 million (2018: EUR 431.8 million). The decrease was essentially due to the balancing of compensation under the Renewable Energy Act (EEG) in the feed-in compensation model. The business area’s share of total Group sales amounted to around 13.9 per cent (15.8 per cent). Operating EBIT came to EUR 205.8 million in the first half of the year (EUR 233.5 million), whereby the lower energy gross margin in the distribution networks led to a reduction in earnings. In the Renewables area, higher wind income from the RIFFGAT offshore wind farm and income from contractual penalties relating to the construction of the TWB II offshore wind farm had a positive effect. In addition, EWE GASSPEICHER earned higher fees with its cavern marketing activities.

The Sales, Services and Trading business area recorded a rise in external sales of 10.0 per cent to EUR 1,939.0 million (EUR 1,763.5 million). This resulted from increased energy trading activities and price-related measures in energy sales. The business area’s share of total Group sales amounted to 65.8 per cent (64.5 per cent). Operating EBIT rose significantly to EUR 73.8 million (EUR 40.6 million). This increase was primarily due to price developments in the gas market and the associated gas storage result in energy trading. There was also a one-off effect in the IT area from the sale of a segment.

The Overseas business area (Poland) registered a sales increase of 25.0 per cent to EUR 35.0 million (EUR 28.0 million), which was largely attributable to the electricity business. Its share of total Group sales amounted to 1.2 per cent (1.0 per cent). Operating EBIT declined to EUR -0.7 million (EUR 5.3 million). The decrease resulted primarily from expected losses and losses already realised in electricity procurement.

In the swb business area, external sales were also up 10.4 per cent on the previous year at EUR 563.8 million (EUR 510.9 million). This rise was mainly due to increased network fees at wesernetz and price adjustments in electricity and gas at swb Vertrieb. The business area’s share of total Group sales amounted to 19.1 per cent (18.7 per cent). Operating EBIT improved significantly to EUR 41.7 million (EUR 6.0 million). The main reasons for the increase were a higher revenue ceiling in the network area, lower maintenance expenses and positive volume effects due to power plant outages in the previous year in the waste disposal area. Negative weather-related volume effects and lower margins as a result of increased procurement costs in sales had the opposite effect.

The average number of employees in the EWE Group rose in the first half of the year to 8,741 (8,372). This increase was essentially attributable to projects at the network companies, the market region switch from low-grade to high-grade gas and the expansion of the group of consolidated companies in the Renewables area.

There were positive developments in the following key areas for EWE in the first half of the year:

CO2 reduction target reached ahead of schedule
The EWE Group’s specific CO2 emissions from electricity production fell to 493 g CO2 / kWh, representing a reduction of 40.4 per cent compared with the base value in 2005. The target set by EWE in 2014 to cut these emissions by 40.0 per cent by 2020 has therefore been reached ahead of schedule. “The increased use of onshore wind energy to generate electricity and the move away from hard coal as an energy source will also further reduce the EWE Group’s specific and absolute CO2 emissions over the coming years,” says EWE’s CEO, Stefan Dohler.

New Group strategy being implemented
The Group strategy published in summer 2018 paves the way for EWE to develop from a traditional energy supplier and telecommunications company into a solutions provider that brings together the areas of energy, heat, telecommunications, data and mobility for its customers through a simple and dependable approach. “We are currently in the process of organising the entire Group based on business areas so that we can manage our activities more efficiently across various Group companies,” explains Dohler. “This is necessary to ensure we can offer our customers interconnected, state-of-the-art products and services in an increasingly complex world.” The goal is to have established management of activities based on business areas throughout the Group in 2020.

Search for strategic investor ongoing
The company remains on schedule with its plan to sell a further 26 per cent of shares in EWE AG. “We have largely completed our discussions with the various interested parties and expect binding offers to be submitted in the coming weeks,” explains Dohler. “As a result, I am confident that we will be able to come to a decision together with our shareholders before the year is over.”

Turkish shareholdings sold

The sale of EWE’s Turkish companies to the Azerbaijani company SOCAR was completed during the first half of the year. As part of its strategic realignment, EWE examined the market before taking this step and decided to focus on the opportunities and challenges in its domestic market.
CFO Wolfgang Mücher was satisfied with the outcome: “Although we recorded an expense of EUR 39.9 million in the current half-year financial statements, the key factor is a risk reduction of EUR 220 million in relation to guarantees and commitments from EWE AG. Resources are also freed up which can be used effectively to implement numerous measures within the Group.” Wolfgang Mücher expounds on the promised overview: “To take objective stock of the situation, we earned around EUR 290 million less in twelve years than we spent on the acquisition of the companies at the time. EUR 330 million of this was due to currency depreciation alone.” This total has largely been recognised in previous years’ balance sheets in the form of value adjustments. The Turkish companies developed well overall during their time in the EWE Group, emphasizes Wolfgang Mücher: “We continuously acquired customers, established an efficient infrastructure and expanded the gas network into neighbouring regions around Bursa and Kayseri using investment capital generated in Turkey.” This means that many more people now have access to a safe natural gas connection and benefit from greatly improved air quality in the areas which were previously dominated by coal-fired heating.
None of this should be forgotten when evaluating this investment in hindsight. Nor should the fact that Turkey was very attractive for international investors in 2007: “The young population, a rapidly growing economy and the negotiations on EU accession taking place at the time are indicative of this,” says Mücher. However, the attempted coup d’état in summer 2016 caused an unexpected change in the political, social and economic environment of the investment. “The Turkish lira has lost so much value against the euro and dollar since then that our shareholdings have been impacted to an extent which could not be counteracted by hedging,” explains Mücher. The sale was therefore the right step to take, and SOCAR was identified as the right partner to enable the Turkish companies to continue growing successfully.
“We have achieved a good exit in difficult times. The reaffirmation of our stable rating by Moody’s also demonstrates that our decision to sell was the right one,” summarises Wolfgang Mücher.

Fibre-optic partnership with Deutsche Telekom
In March 2019, EWE and Deutsche Telekom signed an agreement to establish the joint venture Glasfaser Nordwest which aims to invest up to EUR 2 billion in fibre-optic expansion over a period of ten years. The company expects to serve up to 1.5 million households and business locations in parts of Lower Saxony, Bremen and North Rhine-Westphalia. The German Federal Cartel Office is expected to approve the project in autumn.

Outlook
Taking into consideration the specific developments expected within the industry, the political and regulatory environment and the continuing intense competition in the energy market, EWE continues to expect its operating EBIT in the current financial year to increase by ten to 25 per cent compared to 2018.

The half-year report is available at www.ewe.com:
https://www.ewe.com/en/investor-relations/publications/archive-interim-reports