VERBUND AG (VER) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of bond. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Peter Kollmann, who will lead you through the conference. Please go ahead.

Ladies and gentlemen, welcome to our presentation for the full year '21. And let me thank you for joining today's conference call. Before we move into the presentation, let me make a few general comments about the business year '21. '21 was characterized by a huge increase in volatility in European wholesale electricity prices, as you know, a key value driver for VERBUND's business development. This development is due to two main factors: One, the strong commitment of the EU member states to a comprehensive decarbonization of the energy system, which led to an increase in the prices for European CO2 certificates. Two, there was a massive increase in the prices for primary energy sources such as natural gas and coal in '21. The reasons for these price increases were the global handle for energy, especially in Asian countries, above all China, 'the low average gas storage inventories in Europe; unfavorable weather conditions; the delay in the commissioning of the Nord Stream 2 gas pipeline and above all geopolitical uncertainties. In this environment, VERBUND's optimally positioned with its business model that is consistently geared towards decarbonization, key success factors are green, cost-effective electricity production from reliable, constant run-of-river power generation; flexible peak power generation from our storage power plants regulated electricity and gas grids, which are required for the decarbonization of the energy system; strong focus on the expansion of renewable electricity generation from wind and PV. Again, this more strategic background, the business development as well as the share price development of VERBUND, was very positive in the past fiscal year '21, and I would like to move now into the specific details. At the beginning, let me highlight the most important influencing factors for the results development in '21. Following the prices at the electricity exchange and based on our hedging strategy for own electricity generation with hydropower, the average achieved project price increased by EUR 10.2 to EUR 64.8 per megawatt hour. The hydro coefficient determining the generation from run-of-river hydropower plants was 5 percentage points below the long-term average and 6 percentage points below 2020. Production from our hydro reservoirs was also lower compared to last year. On the other hand, contributions from flexibility products in all categories, but especially control energy and intraday trading strongly increased in total by 49% compared to last year. Finally, we had a positive contribution from the full consolidation of Gas Connect Austria. The impact of these key factors on our figures is as follows: EBITDA strongly increased by 22.1% to EUR 1.579 billion, and the group result increased by 38.3% to EUR 873 million. The adjusted group result increased by 30.8% to EUR 799 million. The operating cash flow strongly declined to a level of EUR 98 million, which is minus 90% due to higher margin payments for the Energy Trading business. The free cash flow after dividends as a result of margining, again, was negative at a level of minus EUR 1.329 billion due to the lower operating cash flow, higher investments into tangible assets and fully consolidated subsidiaries as well as higher dividends compared to last year. Net debt increased by 86.6% to a level of EUR 3.5 billion. VERBUND expect for 2022 reported and adjusted EBITDA between approximately EUR 2.6 billion and EUR 3.5 billion reported earnings range of between EUR 1.4 billion to EUR 2 billion and adjusted earnings of EUR 1.34 million to EUR 1.94 billion. Our guidance for APG is approximately EUR 85 million for '22. For Gas Connect Austria, approximately EUR 90 million for '22, and the flexibility products, EUR 130 million. Now based on our strong results, we will propose an increased dividend of EUR 1.05 per share in our AGM on April 25. That would reflect a payout ratio of 45.7% in on the adjusted group results. Now on the next page, before I talk about the segments of our company, I will give an overview of the hedging volumes. For '21, we achieved an average contract price for hydro generation of EUR 54.8, EUR 79 for '22 and EUR 66.7 for '23. Now please note that we have already hedged approximately 69% of the volumes for '22, approximately 23% of the volumes for '23 as of December 31, '21. On a mark-to-market basis, as of the 23rd of February, we calculate with a price of EUR 120 for '22 and EUR 128.9 for '23. As you know, EUR 1 plus or minus, has a sensitivity of approximately EUR 25 million in our EBITDA line. Now we come to the Hydro segment. At 0.95, the hydro coefficient, as you know, an index quantifying the hydropower generation of the run-of-river power plants was 5 percentage points below the long-term average and 6 percentage points below the level of 2020. The production from annual storage power plants decreased by 6.9%, lower inflows and increasing storage levels overcompensated higher turbining. Higher average achieved prices and an increase in the contribution from flexibility products had a high impact then reduced volumes. Therefore, EBITDA in the hydro segment increased by 19.3% to EUR 1.1 billion. Our main hydro projects, the 480-megawatt Limberg III pumped-storage power plant project and the 45-megawatt Reißeck II+ pumped storage power plant projects above from time. Now let me continue with the analysis of the own generation from new renewals. The new renewals coefficient, here, it is an index quantifying the generation VERBUND power and PV amounted to 0.91 in '21 compared to 1 in 2020. Generation from wind power decreased by 9.1% or 84 gigawatt hours and amounted to 839 gigawatt hours in '21. Less favorable wind conditions in all markets, i.e., in Austria, Germany and Romania were the reasons for this development. Generation from PV amounted to 2.1 gigawatt hours in the reporting period. Now taking a look at the EBITDA development in the new renewables segment, we see that the EBITDA decreased by 9.5% to EUR 53.3 million. Now next page on the sales segment. Taking a look at the EBITDA development here. We see that EBITDA decreased by 21% to EUR 60 million. The deterioration in EBITDA results from the measurement of derivatives for electricity and gas as well as our gas procurement costs for delivery to end customers. Higher contributions from flexibility products could not fully compensate this development. VERBUND delivered electricity and gas to approximately 527,000 end customers in '21, that represents an increase of approximately 2%. When we move to the next page to the all other segments. We see that the generation from thermal power plants was up by 8.8% or 91 gigawatt hours due to the market-driven use of CCGT Mellach for district heating production in the fourth quarter. Higher volumes and higher prices contributed positively to the EBITDA development. The contribution from flexibility products, on the other hand, decreased by EUR 5.5 million. The contribution from KELAG, the provincial utility from [indiscernible] the financial results increased by 27.8% to approximately EUR 36 million due to a better hydro situation and higher achieved sales crisis compared to last year. Finally, let me inform you that CCGT Mellach was contracted from APG again for future congestion management, starting with the 1st of October '21. In addition, Mellach is providing district heating for the city of Graz. The district heating power plant Mellach was not contracted by APG and is therefore mothballed as of the 1st of October '21. On the next page, we'll talk about the grid segment. First, the contributions rom APG our subsidiary responsible for the Austrian high-voltage grid with a system length of approximately 7,000 kilometers and interconnected capacities into 7 neighboring countries. As you know, there is a difference between local GAAP and IFRS, under IFRS and conscious local GAAP, volatilities in the results contribution cannot be avoided because the so-called regulatory accounts cannot be applied. The EBITDA for '21, from the Electricity Group business according to IFRS, was EUR 254 million, EBITDA guidance for the grid is only approximately EUR 85 million, which is a strong decrease as the regulator will reduce the regulatory account in '22. What does it mean? It means that the regulator is cleaning off to sort of profits from the past. We expect the regulatory account to decrease by approximately EUR 130 million to a level of approximately EUR 220 million. Gas Connect Austria operates and constructs atural gas, high-pressure pipelines in Austria. The company is also responsible for the marketing and provision of transport capacity at water points so-called entry and exit capacities and the transport capacity required for domestic natural gas demand. Gas Connect Austria operates in proximately 900-kilometer long natural gas, high-pressure pipeline grid, 5 compressor stations positioned along the pipelines guarantee the relevant pressure. In addition to operation, maintenance and repairs, those are also important tasks. The company plays a pivotal role in the supply of natural gas in Europe. And of course, in Austria, the natural gas is transported to the Austrian federal states, but also to Germany, France, Slovenia, Croatia and Hungary. With regard to the results contribution of Gas Connect Austria, we only report June to December '21 on an isolated basis amounting to approximately EUR 77 million. Please also note that we do not provide value from last year as we did not own the asset by then. The guidance for '22 with regard to Gas Connect Austria is approximately EUR 9 million under IFRS. This guidance relates to the full year '22. Now we come to the nonrecurring effects on our P&L in '21. There were no one-off effects in the EBITDA even in 2020 and '21, the impairments of EUR 9.9 million mainly related to the goodwill of Gas Connect Austria; the reversal of impairments due to higher power price assumptions related to Mellach; various hydropower plants in our wind power plants in Romania amounting to EUR 115 million in total. Overall, the operating results showed nonrecurring effects of EUR 105 million. The transition consolidation of matrix caused a positive nonrecurring effect of EUR 11.9 million, in the other results from equity interest. We also had a negative nonrecurring effect in the other financial results related to the measurement of an obligation to return an interest in the hydro power plant Jochenstein amounting to EUR 23.3 million. There was also an impairment related to trends Austria gas pipeline amounting to EUR 18.3 million as well as the reversal of impairment for our hydropower plant, Ashta in Albania, amounting to EUR 16.8 million. In total, the financial results showed nonrecurring effects of minus EUR 16.4 million. The aforementioned one-off caused an effect of minus EUR 13.8 million on taxes. Now after considering the impact from the nonrecurring effects and minorities, the nonrecurring effects on the group result level amounted to EUR 75 million. We also show you the amount of the nonrecurring effects in 2020 in comparison. Now I'll hand over to Andreas for the development of our key figures, please Andreas.

Thank you, Peter. We are -- let me present how the effects described before, influences financial performance in 2021. So the reported EBITDA increased by 22% to EUR 1.579 billion. The reported group result increased by 38% to EUR 873 million and the group result developments in 2020 and 2021 were influenced by one-off effects. Adjusted for this effect -- the adjusted group result increased by around 31% to EUR 799 million. I think the reasons for this development were already explained by Peter, so I proceed with the relevant key figures. The EBITDA margin slightly decreased from 37.5% to 33.1%. The EBIT margin decreased from 26.7% to 26.5%. We will propose to the shareholders in our Annual General Meeting on April 25, dividend per share of EUR 1.05, which corresponds to a payout ratio of 41.8% on the reported group results and a payout ratio of 45.7% on the adjusted group results. So the dividend will increase by around 40%. Moving on to the next slide, Page 12. We will -- I will start first with the operating cash flow. So the operating cash flow 2021, strongly decreased, as mentioned, to a level EUR 98 million. The main reason for this extraordinary decrease were higher margining payments for the key derivatives in the electricity business, which have to be paid for open positions at the clearinghouse of the electricity exchange. Please note that once the contracts are closed, the payments will be reversed. The additions to tangible assets of EUR 843 million were much higher than in 2020 and were caused by CapEx for grid projects and maintenance CapEx related to the hydro power plant. Main projects are the 380-kilowatt line in Austria and the hydropower plant Töging in Germany. The free cash flow before dividends was negative at minus [ EUR 110,000 million ], so the free cash flow after dividends showed a level of EUR 1.3 billion. In addition to the lower operating cash flow from higher investment into tangible assets and fully consolidated subsidiaries as well as higher dividend payments compared to 2020. Net debt increased to EUR 3.5 billion, mainly due to higher short-term borrowings from banks in connection with the margin cost, the issuance of the green and sustainability linked bond and higher financial liabilities in connection with the acquisition of Gas Connect Austria. Net debt to EBITDA increased to 2.2 after 1.5 at the end of 2020. Moving on to Slide 13, shows the financial liabilities. So you see that debt maturity profile shows a repayment of a very low amount of EUR 25 million in 2022. You can also see a peak in 2024 with repayments of EUR 672 million mainly consisting of a fixed interest bond in the amount of EUR 500 million and another peak after 2029, consisting of a fixed interest bond in the amount of EUR 500 million as -- with due date 2041. The liquidity back up for funded access to a EUR 500 million syndicated loan facility, which is [indiscernible] is available until 2023, with two extension options. VERBUND has also access to committed and uncommitted lines with a large number of banks up to an amount of approximately EUR 2.8 billion. The total amount of our financial liabilities is approximately EUR 2.8 billion. The increase is mainly caused by the issuance of the green bond, the acquisition of Gas Connect Austria and the higher amount of short-term money market liabilities due to higher margining requirements. The average interest rate on our debt is approximately 1.68%, 44% of our debt are subject to fixed interest. In 2021, the development of the external ratings of VERBUND AG was stable. So Standard and Poor's rating of VERBUND AG remained unchanged at single A stable outlook, and Moody's rating remained unchanged at A3, a stable outlook. Yes. Now I would like to hand over to Peter again for the CapEx plan and the guidance.

Thank you, Andreas. Before we move to the outlook for '22, let me comment on the updated CapEx plans. The volume of our plan has, again, increased compared to the previous years. The total CapEx for the 3-year period from '22 to '24 is more than EUR 3 billion, split into growth CapEx of EUR 2 billion and maintenance CapEx of EUR 1 billion. The main part of the growth approximately EUR 831 million will be invested into the regulated grid business, especially into the so-called sales product line in order to increase the capacity to integrate new renewables and better address the volatility and concession in the grid system. In addition to VERBUND also investing into new renewal projects and selected hydropower plants, investments relates to Austria and Germany in the year '22, VERBUND is planning to invest around EUR 877 million, there of EUR 507 million into growth projects and EUR 370 million into maintenance. Now we are coming to the pages, which is probably the most interesting one for you, the outlook for '22. As always, at this point, we want to highlight sensitivities. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 24.5 million in the group results; a deviation of plus/minus 1% in the generation from wind power has an impact of plus/minus EUR 1 million; and a deviation of plus/minus EUR 1 in the wholesale price has an impact of EUR 5.1 million in the group results. Now on the basis of the aforementioned developments, our guidance for '22 is as follows: We expect the reported and adjusted EBITDA of approximately between EUR 2.6 billion and EUR 3.5 billion, and we reported group result of approximately between EUR 1.4 billion and EUR 2 billion, this under the assumption of average hydro and wind generation. For '22, VERBUND plans to pay out between 45% and 55% of these results after adjustment for nonrecurring effects of approximately between EUR 1.34 billion and EUR 1.94 billion. Now with that, I would like to hand over to you for Q&A. I'm sure that you have many questions, and we look forward to our discussion.

[Operator Instructions] And the first question is from Wanda Serwinowska, Credit Suisse.

Three questions for me, if I may. The first one is, can you please share your thoughts on the windfall of profit taxes. Have you had any discussions with the Austrian government, do you see any risk of the adverse political interaction in Austria. Second question is the European Commission is reviewing the power market design. Can you please comment on that? Any thoughts would be much more appreciated. And the last question is on the margin payments. Can you please quantify the impact on the net debt in 2021? And when do you expect to reverse?

Yes. Thank you, Wanda. I'll start with the so-called windfall profit tax. We have no indication from the Austrian government that the windfall tax is being planned. The Austrian government is currently focused on other measures that includes a recycling of higher tax income because of higher power prices, higher energy prices everything that has been considered and discussed so far, would basically come out of the budget. Please don't forget that we are 51% owned by the Republic of Austria to the Republic of Austria directly profits from our dividend payments that plays a role as well. And the second point, that's a very interesting and important one. How is the power market design going to change over the next few years? I think that the dramatic increase in power prices, combined with geopolitical effects has been a catalyst for a complete rethinking along the lines how power pricing in the system should work in the future. We're basically talking about the merit order and the fact that a relatively small number of power plants can actually determine the price for the entire energy production within a given country, within a given system. You're right, there is a discussion on a lot of different levels. There is a discussion on the EU level, there's a discussion on national level in Spain, for example, I think the Spanish have already started quite early in fall to think about changes to the merit order. They were one of the first ones to also add the European Union to really focus on that point. It is our understanding that in the Ministry of the economy in Germany, there is also a discussion on potential effects of higher power prices on the effectiveness and the efficiency of pricing of the energy system in the future. So yes, medium term, we could see a change there. Short term, we don't think so. And in terms of margin payments, maybe I should take a step back because I know this is a very important point to many of you because it is something that is a focal point for all the utilities across Europe. Most of us have been suffering from a dramatic increase in margin payments, which we had to make within a short period of time. Some of us were not expecting such a dramatic moves. What we have done in fall of last year, we have run several simulations where we looked at realistic case scenarios we look at worst-case scenarios, one of our worst-case scenarios in December was actually a war in the Ukraine. We never expected it, but it's something we included in our accumulation. As a result of that, we have started, let me say, relatively early to make sure that we have all the required liquidity in place and more. So yes, you can see that we have an impact in our cash flow, free cash flow, obviously, in our operating cash flow, we have an impact in terms of our debt levels, which have gone up dramatically. However, those are all this all short-term debt. And when the contracts expire, all that money will come back. So it is not what I would consider our core debt level, but it is an extraordinary debt level as a result of extraordinary developments.

The next question is from Olly Jeffrey, Deutsche Bank.

Two questions from me, please. One is just carry on with the conversation on the potential for the windfall tax. I understand that you're saying that the Austrian state is looking at other -- taking other measures in the short term to release billing pressure. If I could take you a bit further to think about if the site were to take other steps. You mentioned the dividend, you think perhaps special dividend might be a plus port of call ahead of a windfall tax. Is that -- are we interested to get your thoughts on that? And secondly, just on the margining, could you please just clarify what the cash flow impact was in 2021? Because you stated that I missed it. I'm sorry, last question is the guided range that you gave for 2022, is that based on market forwards from the 23rd of February. Because if it is, I note that power prices have moved up another EUR 50 a megawatt hour or so since then, which could potentially add a couple of hundred million on to the range that you've given. So if you could clarify, please, when that guidance will cut and what market would you use to make those projections?

Yes, all very good points. Again, on the windfall tax, obviously, we can only assess current discussions. And what I've said before is the status quo. This is where we are part today. It is possible that when Germany, for example, introduces a windfall tax being a neighbor, which is often looked at in terms of coordination of measures, et cetera, et cetera, that could theoretically have an impact on decision-making in Austria. . So I cannot exclude that there will be a windfall tax in Austria per our information today, it's a relatively low probability. Would other measures be possible? The answer is yes. I mean, we have a dramatic increase in our earnings in '22. And that could lead to a special dividend. I cannot exclude it. At this point in time, because that dramatic increase is reflected in the payment anyway because of the payout ratio, there will be an increase in dividends per se. Could there be an extra special dividend because of a very difficult situation for energy consumers? I cannot exclude it. It's very much a political decision. At this point in time, again, I think this is the low probability because high earnings, as I said before, reflected in high dividends, but it is a possibility. Now the margining has been in the region of around EUR 1 billion in the case of bonds. Could it be more? Yes, it could be more. That is all we have included in our simulation. And I can assure you that we are perfectly prepared. Even if we had an additional dramatic move in power prices, we would be covered on the basis of our committed and uncommitted lines and in terms of our preparation for those situations. The point which you have made about forward prices, that is -- you're absolutely right. And that is why we have given a very, very broad range. As you can imagine, we have to discuss this range for quite some time. It is by far the broadest range, which we have ever given and we try to be as precise as we can. But this year, it is simply impossible. It is impossible to predict gas prices. It's impossible to predict power prices with even with flexibility products and the grid. There is high volatility. So please see the very broad range, which we currently have and a reflection of that new dimension of volatility, which we have seen. However, what we will do, the more information we have, the more data points we have over the course of the year, we will narrow the range as we have done last year to give you the best possible guidance we can. Now coming to the point of deviation in forward prices. Yes, that has a huge impact. Now we have -- if we take, for example, the beginning of March, where we were -- for '22, 76% hedged. There we had a price of -- at that specific point on that specific day, of EUR 280. Now if you took that price of EUR 280 and you combine it with the hedge level of EUR 92, which we had at that point in time, you come up with EUR 140. So then the increase would be from the EUR 54.8, which we had in '21, EUR 240. However, when for the open amount, you take a lower figure, which can be totally rationale because we -- because we have such a huge swing in power prices, then this number would be completely different. The one thing which I can tell you sort of like as an important data point for your own calculations. More or less, for today, we are 76% hedged. That hedged level is at EUR 92, this is for '22. For '23, we are 42% hedged at a level of EUR 86. And for '24, we are 28% hedged with a level of [ EUR 88.5 ]. And the unhedged levels, I hate to say it, but pretty unpredictable at this point in time, given how geopolitics is currently influencing price in addition to all the other influencing factors.

The next question is from Louis Boujard, ODDO BHF.

Just if possible as a follow-up, could you repeat the hedge that you just pronounced because I did not have the opportunity to them if you don't mind, and I think it's more closer to the actuality and so it would be nice. My actual question was the following the first one on your development strategy, notably in terms of growth. We know that you want to invest in renewables, and you have made two nice operation in Spain recently. I'm a bit surprised to see that reserve than actual independent producers on which you could eventually benefit from additional pipeline going forward. Could you explain why, for the time being, you prefer to focus specifically on assets reserve than independent producer. Is there any reason behind it? Do you feel more comfortable at putting specific assets reserve than the company globally in order to enable more growth in the future? My second question would be also a detailed one, I would say, to have a bit more view in granularity notably in the squeeze that you are mentioning into the margins for your sales business, notably on the gas procurement side. Could you elaborate, where does it come from? Is it because you have difficulties to pass for the increasing gas prices to your finance customers? Or is there any other reason which is related to a non-hedged position into your volumes business that were eventually above expectations, which would mean that it's not necessarily recurring going forward. Of course, I leave other questions for geopolitical environment. I think you already provided some nice and interesting elements on it.

Yes, I'm happy to repeat the hedging levels. Now for '22, we are 76% hedged and the average price, which we have locked in through those hedges, is EUR 92.1. For '23, we are hedged 42% and the locked-in prices were EUR 86. And for '24, we are hedged 28% at a price of EUR 88.5. So that is the detail on the hedges. Again, you see that for '23 and '24, there is still a lot of open volume as in line with our hedging strategy. And there is, obviously, ample opportunity for positive developments in terms of power prices for the forward years '23, '24. Now your question on growth in Spain. Yes, I can explain that very well -- no, I should say, I hope I can explain it very well. We have acquired two assets, which have an existing business. We have done that because we wanted to establish a position in Spain. We wanted to learn more about the market, not just by observing it, but by really being there and selling electricity and generating electricity and the next step will be that we are going to make acquisitions, which have both, which have existing businesses, including regulated businesses and where we have pipeline. At the same time, we will have people in Spain we will have a subsidiary in Spain. And through that subsidiary, we will also be able to do more on the pipeline side. That is the reason why we have made our first, I should say, relatively small acquisitions in terms of existing businesses. Now the gas point I have not fully understood, was it related to Gas Connect Austria, our regulated gas business, our transport and distribution business, or was it more related to our Mellach power plant, CCGT, which is basically active in the grid reserve, but also has the opportunity to be in the market at least for one of the lines?

It's for the sales segment. In fact, you mentioned in your information that you had a negative impact in EBITDA due to higher gas procurement costs for your end customer base.

Yes, maybe I should take a step back in terms of sort of like to let you know how it's done. The gas which we require for the CCGT Mellach, is not bought by the spot market, then we try to estimate how much we need for the good reserve and how much we need for market operations. What we need for the grid reserve is, obviously, fully compensated through the regulatory components and what we need for the market size is basically the clean spark spread. And if you are referring to the fact that we have values in our books Mellach higher than in the previous year, sort of like the reversal of an impairment that we have done as a result of higher clean spark spreads, which we're anticipating in the future. I hand over to Andreas with an additional point.

So I think you're referring to the sales segment and the development there. So as we pointed out, so there is a reduction in the same segment overall, the biggest. So we have positive and negative effects here. So the positive effect is the additional income from Brexit utility products. The positive effect is also coming, to certain extent, from prices, but there are also negative effect, two negative effects: One is the measurement of the derivatives to electricity and gas, which is, I think, logic, if you look at the current market prices. And the second negative impact is the higher gas procurement cost by end customers. I think that's what you're referring to. So there is a margin squeeze in our end customer business. I think this is also no surprise. I mean we have done some price increases a couple of days ago in a significant amount. But nevertheless, given that the prices have increased so much and we have to buy also, to a certain extent, cash in the market in order to supply our and customer bases, there is a margin squeeze. It's not -- I mean, given the fact that our end customer basis is rather limited or is relatively small, I think the negative impact is not that dramatic. So it's a small thing. It's a single-digit negative contribution per month currently.

The next question [ Teresa Schinwald ], Raiffeisen Bank.

Three questions. The first one is on the repower EU plan, which we see a sharp cut of gas volumes imported from Russia over in this year. And the phase out by 2027 given that TCA pipelines are set by Russian gas, could you take rpobably in terms of your risk perception there? . Then the second one, and I did back testing the implied hedging prices in the fourth quarter seem to have been significantly below the market averages. Could you give us an explanation on that? And the third one is on your renewable strategy and the CapEx outlook. Given your recent acquisitions, the renewables CapEx does not seem to be excessive. Is it based on what we know right now, plus whatever comes from the German joint venture. Could you tell a bit more about that?

Yes. I'll start with your point with regards to Gas Connect Austria. There are two components. The first one is short term, the second one is medium term to long term. I will start actually with the medium to long-term one because that is a geopolitical one that concerns, first of all, all of Europe, but particularly Austria and Germany. . If we assume that Europe has been announced, will reduce its dependency on Russian gas. That would mean that medium-term gas flows into Gas Connect Austria will decrease. I can tell you why, because one of the very, very large pipelines coming from Russia into Europe is called Brotherhood. Brotherhood is coming from Siberia from the gas fields there through the Ukraine than Slovakia into the hub of Gas Connect Austria, which is called Baumgarten. That is all Russian gas. So if that gap were reduced, let's just say, by 50%, that, of course, would reduce the transport capacity and the tariff income from Gas Connect Austria. One needs to see the Italian side as well because a lot of the gas that comes from Brotherhood via Baumgarten goes into tech. That is the direct connection -- gas connection into Italy. And Italy has already announced that it wants to, again, reduce gas even short term, i.e., by the end of the year by 50%. I don't know if it's even possible, but that is the plan. But that would, of course, again mean that there would be much lower gas flows going through there as well. What does it mean? Again, from a perspective of compensating for the gas that is not coming from Russia, what are the potential sources and what is -- and how much can we increase those sources? What is possible and what is feasible? Now obviously, particularly as far as Italy is concerned, it is Northern Africa, I should say, Spain and affiliate because they have. They have pipelines from Algeria and from Libya. There is one pipeline that goes from Algeria via Morocco but also directly to Spain. That is an important gas provision for the Spanish market. Then you have Algeria and Libya with gas going through transmit to Italy. And Italy will most likely need if they really want to reduce by as much as they have said, they will need all that additional gas coming from Northern Africa. Same is true for Spain. That basically leaves us with LNG. We think that LNG can be can be increased by around 10% to 15%. It's not the ships, it's not the source of the LNG at this point in time. The limiting factor is the terminals -- the LNG terminals. This is why the European Union and the different countries has decided to build more LNG terminals, but that will take time. So short term, it's probably rather 10% LNG increase, maybe 15% that can be achieved. At a later stage, may be more. And then, of course, you have Norway, and there we estimate approximately anything between 3%, maximum 5%. So when you see all those flows, they don't necessarily go through Gas Connect Austria. And that, obviously, lower flows means lower tariffs, but it is a regulated business and the regulated system needs to be adjusted to provide the appropriate return to Gas Connect Austria. On the -- I'll jump to the third question, the renewable CapEx. What you see in the numbers which we have given, you see organic growth and that organic growth in the numbers is particularly Austria and Germany. If there were inorganic transactions, i.e., M&A transactions that would come on top of what we have shown you here. So there is no inorganic included in here. Organic growth, I have to add is cumbersome. I think in the last conference call, we have discussed that point because when you do organic growth, you need the entire process from grid connection to environmental approval. You can get resistance from the local level and you usually have very, very long [ permission ] processes. Now that the European Union and many of the countries want to accelerate the permission processes. However, we have not seen it specifically. It works, so that is something we are observing. If all that works quicker, then of course, we would like to. We would love to increase our organic growth. There will be there would be an objective which we have. Now in the fourth quarter, I can give you an explanation. We had we had very, very low hydro levels, unexpected low hydro levels in the fourth quarter. That shows you that the weather is something you can never control and you can never forecast. We had 0.83% hydro level, hydro coefficient. And as a result of that, we basically -- because it was already in the fourth quarter, we had to buy back in the market at relatively high prices. And as a result of that, we had a negative impact in the fourth quarter as a result of that.

And we have a follow-up question from Wanda Serwinowska, Credit Suisse.

Sorry, it's [ Resi ] from Credit Suisse. I work with Wanda. Just a quick follow-up to the question and I just asked earlier. Do you see a better power market design than, I guess, the current merit system or in probably in other words, if we going the system in our wheel is possible if it's possible at all.

Yes. I'll give you my personal opinion, but I think that we are going to move into some sort of the capacity market. we are going to have more and more renewals coming onstream over the next few years, actually over the next decade. And at the same time, we are getting out of fossil fuels. We're getting out of coal. We're getting out of -- we want to reduce gas. And in some countries, we're getting out of nuclear. Dixon is not going to change a lot on that. As a result, what we're losing is baseload and baseload is an absolute necessity for the stability of the system. It's a clinical norm. And the only way how we can provide baseload is through -- you can call it many ways. You can call it a capacity market, you can call it reserve, strategic reserves, whatever it is. And that capacity market would have a different pricing from the classic Mellach order. So why would that make sense? It would basically make sense because people had themselves, if we have more and more cheaper production of electricity coming from wind, coming from sun, coming from hydro and other sources, and we have more volatility in the system. Why should we have that very expensive gas power station in the merit order determining the entire price for the chain of renewable energy. And I think that could lead to a rethinking of the merit order. The merit order is coming is an old system coming from a centralized coming from a centralized energy system where you could -- you would know exactly how much you produce and how much demand you have the centralized system worked very well as a centralized system and the merit order was foreseeable because you knew that you had a large proportion of generation in the merit order. And the system was -- you could say, system was predictable. The system was considered to be fair. Now what is currently being discussed and possibly introduce medium to long term. would be exactly what I've said before, that you take out the top part of the merit order and that you put that into, I call it -- but they will probably find the financial capacity into the capacity market that serves the stability and serves the blackout avoidance through specific payments which -- and that could be the regulated business that could be other players, but that would be a particular payment, which they get for providing that service to the market.

And the next question is from Piotr Janikowski, Citibank.

It's Piotr from Citi. I have two questions, please. So firstly, I wanted to ask about the Gas Connect in Austria. When is the -- do you know maybe details until when you have a valid contract for the transit. And what is the structure of the profitability of transit versus domestic gas domestic high usage? I just wanted to understand a little bit of if we were to diversify away from the Russian gas and through LNG, how much of the business would go away and when in terms of stability of this asset? And the second question to ask you about your renewable M&A, do you have, in your mind, some kind of a target of capacity contribution where you want to develop your renewable assets through M&A.

Yes. I would share the second 1 will be covered by Andreas, and I will quickly talk about Gas Connect Austria. Well, first of all, the stability of the pipeline of Gas Connect Austria is very, very high, highest possible quality, some of the pipelines are able to transport hydrogen. So Gas Connect Austria has already anticipated potential future developments. Then of course, yes, a lot of the gas comes from Russia. And the long-term contract from Russia has been very reliable over many, many decades. The first long-term contract Russia has ever made is actually done with OMV, which is the original owner of Gas Connect Austria, if you remember correctly, I think it's like 67 or 68. So that was one of the first long-term contract between Russia and Europe. And Russia has been very focused on those long-term contracts and delivering on those long-term contracts. With Europe for geopolitical reasons, trying to alter the dependency on the Russian gas that would obviously have an impact on the long-term contracts, long-term contracts that are in place when they run out in the future, they would be replaced with short-term bookings. And overall, the transport capacity would go down. So the transport capacity of the pipeline is coming from Siberia because it's the Yamal pipeline, which is going to Belarus, Poland into Germany. That's a pipeline that was constructed in the early 80's already at the time, a huge discussion because the Americans claimed. And they were obviously right in that case that this is the start of a dependency of Russian gas and that could be a lot of risk. And then Brotherhood, again, huge pipeline also coming from Siberia, but coming into [ Boungarden ] i.e., into gas Connect Austria directly. And I cannot tell you what the value impact would be that is something we need to simulate. We need to simulate European gas flows, that is highly complex, as you can imagine, there are lots of different parameters, which need to be taken into consideration. Those are very complex mathematical models. But that is something we will do. And if we come to the conclusion that there are much lower capacities coming through Gas Connect Austria, there is certainly something we need to discuss with regulator because it's, as I said, for the private business is a related business with a regulated return, and that regulatory return needs to be provided through the system by the regulator. Have I given you enough response to your questions with the re-gas flow. So are there any additional open questions which you have?

No, I just thought that potentially Italy built LNG and the gas flow drops you may be paused to take an impairment on this asset because that all understanding all of the long-term relationship, the ratio has changed to the extent that maybe this pipe will not be utilized as much as I thought -- this is more kind of a simply a cutoff as this gas flow stops. And there is -- I thought there is a contract with Italy, which I think runs until the end of the decade, but I just wasn't sure whether that's the case. It's probably unlikely looking at the current market environment that this contract will be extended. But you gave enough answer.

Okay. You're welcome. Now to the second question, Andreas.

Yes, Joe, I think you know our strategic target, which we have published in the past. So we want to reach around 25% of our total generation in new renewals are until 2030. This target follows the strategic movement that we want to diversify our generation business on a regional and on a technological basis, we have not provided, and I think this -- we will do that we have not provided any split. So what we what we will do organic and organic Inorganic is always opportunistic. And I think it will be a mix. The key criteria for us is always value and how much value we can achieve independent if it's organic or inorganic. But I think it's very stick that we will realize a mix between these two. So this is the answer to the question. Is that clear?

Yes, this is. We're talking 25% of the volumes, right, not the result?

It's 25% volume.

And the next question is from Ingo Becker, Kepler Cheuvreux.

Peter, on your elaboration on long-term system prices and the possibility of capacity market equivalent kind of design. Can you set light how you're baking this view into your renewables pitches when you go for new projects. Apparently, the long-term assumption here is very important to the lifetime return assessment. And if you can, what you experienced so far is how competitors are handling that, that what you're seeing there? My second question would be on your flexibility products, which I think last year were EUR 180 million I think you didn't detail out the figure you expected this year. I was just wondering what it might be and what is the trend there, particularly in this volatile market environment?

Yes, I will start with the flexibility products. What we have seen in '21, we have seen an increase in control energy, which we have not expected. Controlled Energy has been very, very stable for a long time. It's a very predictable market. However, with the dramatic increase in power prices, control energy prices have gone up as well. There has been also more demand for controlled energy. As a result of that, we had -- will increase from a number that was in the 20s to a number that was in the 50s between 2020 and '21. Now we think that it's going to be high in 2022 as well, but not as high as '21. On the concession management, again, we had an increase, but we think that concession management might be lower in '22 on the pumping and turbining, we think that there will be an increase. And into that, we think that it will be slightly lower. So when you take all that together, we have basically come up with the EUR 130 million in terms of flexibility products, which is very much sort of like in line with the previous years. But I agree with you, there is a lot of volatility. And it could well be that, that number is going to be higher if indeed, we see with the more demand for concession management and more demand for control energy and continued high prices in those areas. Now as far as the merit order is concerned, I would be very surprised if anyone is taking that into long-term power projections. I don't think so. And I'm not really seeing it. Why? Because people -- for many people, it's a very theoretical subject. And I think it is more like people that try to really understand future development of energy transformation, energy systems that really go into the detail of how a new merit order would work, what the pricing would be, what the regulatory impact would be. There are many aspects which need to be considered. I think that is almost like at this point in time in terms of power, price, development, too complex. However, when you look at new renewables, you're looking at catch-up prices anyway. We're not looking at base we're looking at capture prices and many of the curves, I mean, definitely, our internal curves take into consideration the very large increase in renewable generation in specific countries. It's still kind of in terms of the expectations, which we have in 2030. It is still relatively slow, but we think that it will accelerate over the next few years. That is certainly the target of many countries, particularly now with our aim to create more independent from Russia. Renewals help us there. So catch-up prices are going to be very important because when you have more renewables, obviously, you have cannibalization, and that needs to be taken into consideration in catch-up prices. So hoping that gives you sort of like a perspective in terms of, is that what we have discussed, capacity markets merit order, is that already in the market? The short answer is I don't think so.

And we haven't received any further questions at this point. So I hand back to the speakers for closing remarks.

Yes. Thank you very much. That was one of the conference calls with a very, very broad discussion on many different subjects. It's dramatic times for many reasons. And I fully understand that the companies in there -- in the numbers and the forecast reflects, in part, those dramatic events and particularly the volatility. So I would like to thank you for your interest. I would like to thank you for your questions. And I look forward to our next conference call. Thank you very much. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.