„Supply security doesn’t happen automatically“

The two members of the Executive Board of EVN AG, Peter Layr and Stefan Szyszkowitz, in a discussion on the current situation on the energy markets and the development of EVN during the 2013/14 financial year.

Mr. Layr, the energy industry is currently faced with significant challenges. What are the central issues from your point of view?

Peter Layr

Layr: One of the current core problems is the low level of wholesale prices, above all on the Central European electricity exchanges. The recent price developments have led to a massive loss in the value of conventional electricity generation plants – because their cost-effective operation has become virtually impossible. As a reaction to this situation, many domestic and foreign utility companies have started to mothball not only older crude oil- and coal-fired power plants, but also state-of-the-art facilities. Decisions over the construction of new plants are also being postponed. Conversely, the question is how to balance the natural fluctuations in the production of renewable energy in order to ensure stable and reliable energy supplies in the future. The expansion of renewable energy should be supported – but it must be integrated in an overall energy sector concept.

Mr. Szyszkowitz, how would you describe an overall concept that pays special attention to electricity generation from renewable energy sources?

Stefan Szyszkowitz

Szyszkowitz: By its very nature, the generation of energy from the sun and wind can only be planned up to a certain point. That means relatively high volatility, which must be cushioned with the help of predictable forms of generation. However, the previously mentioned mothballing of power plants reduces this reserve capacity and therefore conflicts with stable and reliable energy production that includes renewable energy. In addition, the fluctuations in energy production from renewable sources create substantial challenges for the networks and their stability. That’s why we need to keep the network in good shape, so we can continue to provide energy in the same reliable way. Then again, we also need to think about the effects of subsidies and their influence on the market. In Germany, as an example, the preferential treatment given to renewable energy has forced other generation forms out of the market – even though they are the guarantee for supply security.

“We need to keep the network in good shape, so we can continue to provide energy in the same reliable way.” Stefan Szyszkowitz

In other words, that also means harmonising the different interests currently prevailing on the energy market?

Layr: At times you have the impression that supply security is either generally taken for granted or not sufficiently discussed. Neither of these alternatives is good because supply security doesn’t happen automatically. We only have such a high standard of supply security in Austria because the utility companies made steady, wide-ranging investments in production capacity and in the network in earlier years – of course, in good faith that they would be compensated for these investments over time. EVN has even defined supply security as its number one priority. This view is also shared by our stakeholders, as you can see on our materiality matrix which was updated again this year in an extensive process.

“Any attempt at a solution must combine supply security, energy efficiency and renewable generation.” Stefan Szyszkowitz

Szyszkowitz: Of course, consumers and politics are interested in the cheapest possible energy prices. As an integrated utility company, we are also working continuously to make our operations as efficient as possible at all levels of the value chain and, through these efforts, to offer our customers attractive prices. In spite of this, we must realise that energy has a value and therefore also a price. Recognising this value guarantees that sufficient energy will be generated in the future to maintain our high quality of life and to keep our industrial location competitive.

The security of energy supplies as a common goal is undisputed. In your opinion, how can we harmonise the different interests of consumers, politics and utility companies?

Layr: One important step will be to create uniform energy sector framework conditions throughout Europe. What we currently see, unfortunately, is a variety of local solutions with hardly any coordination. An important point here, as was mentioned above, is that a value must be placed on the provision of energy that balances out the volatile generation from renewable sources. Our cooperation with the Federal Network Agency in Germany has shown that this concept can work: we provided power plant capacity for energy deliveries to Germany during the past three winter half-years and will also make 785 megawatts of generation capacity available for the next two winter half-years. If and when requested, we can deliver electricity within a short period of time. We are paid for providing this reserve capacity and, in this way, can keep our power plants in operational condition.

Szyszkowitz: From my point of view, any attempt at a solution must combine supply security, energy efficiency and renewable generation. It’s also important to avoid any loss of comfort for the consumer. At EVN, our work is based on these premises – and, consequently, the focus is always on the customer and his or her needs. EVN has always relied on an integrated business model that covers the entire value chain in the energy business. How would you describe this model against the backdrop of the current environment?

Layr: The comparatively stable network business forms the core of our activities. In generation, we focus on a flexible energy mix that includes both thermal and renewable components. That allows us to protect availability of capacity and output. In energy distribution, we can build on a strong brand. Our business activities are complemented and further diversified by the environmental services business. Additionally, our portfolio of strategic investments helps to strengthen the Group‘s vertical integration. The energy sector is currently undergoing a major transformation and, for that reason, we are proceeding with particular caution and relying on our sound judgment. Our goal is to consolidate the existing business in our core markets and realise opportunities to further improve our efficiency. In the areas of renewable energy, water supplies and the heating business, we also see substantial opportunities for the future in Lower Austria.

Moving from the current challenges to visible successes: what were the highlights of the 2013/14 financial year?

Layr: EVN performed well in spite of the major challenges faced by the energy industry. One particular achievement I am particularly pleased about: We were again successful in providing above-average high supply security for our customers. Stable energy supplies are, last but not least, a fundamental requirement for the positive development of Lower Austria as an industrial and commercial location. But they also mean high living standards for our household customers who can always depend the required energy forms and on drinking water in sufficient quantities and the necessary quality.

“One important step will be to create uniform energy sector framework conditions throughout Europe.” Peter Layr

And how would you evaluate EVN’s business performance?

Szyszkowitz: Based on the numbers, you can’t be satisfied with the results for 2013/14. However, any analysis must go one step further. The warm winter in 2013/14 obviously left its mark on our business. We were also faced with the effects of the past year‘s tariff decisions in Bulgaria and Macedonia and a lower number of orders processed in the international project business. These factors prevented us from duplicating the prior year’s operating results. However, the substantial decline in earnings resulted primarily from the necessary recognition of impairment losses in South Eastern Europe, in the environmental services business and in electricity generation. Since most of these impairment losses represent noncash items, they have no influence on EVN’s financial stability and also not on the expected dividend payment.

In other words, we shouldn’t worry about EVN?

Szyszkowitz: No, there is really no need to worry! The strong cash flow from our operating business will still support our continued investments in projects for renewable energy and supply security.

“The strong cash flow from our operating business will still support our continued investments in projects for renewable energy and supply security.” Stefan Szyszkowitz

Do these latest experiences have any effect on EVN‘s foreign strategy?

Layr: Yes, of course they have an effect – in the end, our consolidation course was strengthened. EVN was cautious in taking its first steps outside Austria, but the world is not the same as it was a number of years ago when the investment decisions were made. Unfortunately, you can never completely eliminate uncertainty. And here I also mean the consequences of the 2008 financial and economic crisis on the whole of South Eastern Europe. Our goal is to ensure the positive development of operating earnings over the medium and long term. Of special note here is the fact that we have created more than 100 new jobs in Lower Austria with our foreign activities and are also protecting existing jobs. Dozens of Austrian companies also benefit from orders related to our foreign business.

“The energy sector is currently undergoing a major transformation and, for that reason, we are proceeding with particular caution and relying on our sound judgment.” Peter Layr

You have made a number of good points. What specific projects would you say were particularly outstanding in the past year?

Layr: One particularly important project for natural gas supply security was the completion of the Westschiene natural gas transport pipeline. Its commissioning gives us a direct connection of our network to the RAG natural gas storage facilities in Upper Austria. The special feature of this pipeline is that the direction of the natural gas flow can be reversed as needed. These storage facilities can be used to supply the population centres both in Lower Austria and in and around Vienna. In the electricity area, we further expanded the network to transport the increased feed-in volumes from windpower plants. This work focused, above all, on the 110-kV network. The medium- and low-voltage networks were also upgraded to deal with the feed-in from decentralised photovoltaic equipment. We strengthen our own activities in renewable energy with the construction of a windpark in Prottes-Ollersdorf, where twelve 3-megawatt generation wind turbines will be installed. Other projects involved decentralised heat supplies from biomass. We expanded several existing district heating networks and also built new plants, for example in Fischamend. With over 60 plants, we are the largest producer of natural heat in Austria.

“We can build on a solid foundation for the future.” Stefan Szyszkowitz

Szyszkowitz: In the area of water supply, a number of additional communities have entrusted us with the operation of their pipeline networks or arranged for connections to EVN’s cross-regional supply network. And with the construction of natural filter plants, we are creating the basis to improve the quality of the water by natural methods. It’s not common knowledge, but we currently supply more than 500,000 residents in Lower Austria, directly and indirectly, with drinking water. Our international environmental services business is now working on nine projects – for example, the wastewater purification plants in Warsaw and Kotor-Tivat in Montenegro. The Mia Milia/Haspolat wastewater purification plant in the Cypriote capital of Nicosia was commissioned in April. However, I would also like to mention a different, but no less important project: our campaign “EVN for Lower Austria“. In 43 individual projects, EVN’s employees supported social or charitable organisations throughout Lower Austria during the past financial year. EVN gave these employees additional time-off for their activities and provided financial support for purchasing the necessary materials. A very special point for me is that, with this campaign, the company and employees were able to demonstrate their social responsibility in Lower Austria together.

What can EVN’s customers expect in the coming financial year?

Layr: EVN’s sales company reduced energy prices in electricity by 10% on average as of 1 October 2014 within the framework of the EnergieAllianz. With this step, we passed on the lower wholesale prices to our customers before the start of the winter season. It also proves one more thing: our customers can depend on us. We offer the full range of services provided by a modern utility company from a single hand and are also available to help our customers with advice and support when they plan and realise projects or energy efficiency measures. Our bonus point programme is also new: customers can collect points and then exchange them for energy services or energy-saving products. Together with the social experts in various institutions like Caritas or the Chamber of Labour in Lower Austria, we will also ensure that social accuracy is respected in the implementation of the bonus programme and the Austrian Energy Efficiency Act.

And what do you have in store for your shareholders?

Szyszkowitz: On the one hand, we will propose a dividend of EUR 0.42 per share to the Annual General Meeting, thus matching the previous year’s distribution. Our strong cash flow gives us sufficient funds for this purpose, and there is no need to increase debt. On the other hand, we can build on a solid foundation for the future, which is also illustrated by our balance sheet, and we expect further strong cash flows in the future.

The future is a good keyword: What projects will EVN be implementing in the coming months?

Layr: In total, we want to invest one billion euros in supply security and the use of renewable energy in Lower Austria over the next four years. Here are a number of examples: We are currently constructing the already mentioned windpark in Prottes-Ollersdorf which will have a total capacity of 37 megawatts. That will lead to a substantial increase in the capacity of our windpower plants from the current level of 213 megawatts. In the area of water supplies, we are building two natural filter plants in Obersiebenbrunn and Drösing, which should be commissioned in 2015, and construction on a similar plant in Zwentendorf is scheduled to start in the near future. Natural filter plants reduce the hardness of the water by natural means. When these three plants are completed, we will be able to supply roughly 100,000 additional households with soft water in spring water quality.

“We want to invest one billion euros in Lower Austria over the next four years.” Peter Layr

Let’s take a look at the more distant future: What are EVN’s long-term goals, and how are they related to your stakeholders?

Layr: Our primary goal is to protect the high level of supply security expected by our customers. That can be achieved, on the one hand, through investments like the ones I just mentioned and, on the other hand, by the highly qualified employees who ensure trouble-free operations and, if difficulties arise, react quickly and efficiently to solve the technical problems. The expansion of energy production from renewable sources is another important focus – it requires high investments in strong and intelligent network infrastructure. In particular, the expansion in this area must be based on sensitive planning and include the involved communities. People play an important role in the system transformation towards renewable energy.

Szyszkowitz: We want to increase our focus on services that meet the needs and requirements of our customers and, based on these services, generate stable earnings that support the necessary investments and convince our investors of EVN’s long-term orientation. For EVN as a listed company, long-term stability is also the declared goal. Our shareholders should see this stability in the predictable development of dividends and in a stable investment grade rating.

Last but not least: Do you have any wishes for the 2014/15 financial year?

Layr: I have a number of wishes for EVN and our customers – but wishes alone are not enough. That’s why all of us at EVN are working together consistently to carefully analyse current and future issues and to develop what we believe are the best answers. However, what I would really like to see is a transparent discussion of the value of energy and network supply security with the relevant decision-makers and public authorities. Supply security can only be protected on a lasting basis when it is given the value it really deserves.

“I would really like to see a transparent discussion of the value of energy and network supply security.” Peter Layr

Szyszkowitz: This wish is one I can only underscore – we need a logical, EU-wide energy policy that is focused on sustainability, but doesn’t lose sight of supply security. And we need innovations that will keep us in shape for the future. An important step in this direction is the founding of the EVN future lab to develop and test new business models and products.