VERBUND AG (VER) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the conference call on the half year results 2024 of VERBUND AG. I'm Berzelius, the Chorus Call operator. The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Peter Kollmann. Please go ahead.

Thank you very much. Ladies and gentlemen, let me welcome you to the presentation of VERBUND for the first half year '24. And let me thank you for joining today's conference call. I'm here with Andreas Wollein, our Head of Finance and Investor Relations. After a record year in '23, VERBUND started the financial year '24 as a strong resilient and well-positioned company. But as you know, the energy environment remains highly uncertain. In particular, the most important value driver for VERBUND, the wholesale power price, is highly volatile. We have an increase in the second quarter following the sharp correction in the first quarter '24. And overall, the level of wholesale prices remains higher than before the start of the Russian-Ukrainian war, but well below the highs of '22 and '23. But now let's move on to the details of the first half year '24. At the beginning, as always, let me highlight the most important influencing factors for the results development in the first half year '24 at a glance. Based on our hedging strategy for our own electricity generation from hydropower, the average achieved contract price decreased by EUR 68.8 per megawatt hour to EUR 113.3 in the first half year '24. The hydro coefficient determining the generation from our run-of-river hydropower plants was well above the long-term average at 1.12. Generation from wind and PV was up compared to last year, mainly driven by the commissioning of new power plant capacity in Spain, Germany and Austria. The Sales segment also contributed positively among others, due to lower procurement cost for energy. Contributions from the Grid segment decreased coming from lower results of Gas Connect Austria as well as Austrian Power Grid. The same applies to all other segments whose contributions also decreased mainly because of higher gas procurement costs due to the increased use of CCGT Mellach. Contributions from flexibility products were lower, mainly due to a decrease in congestion management and control energy, but substantially higher than in the first quarter '24. And in the half year '24, we had to book an impairment loss for Gas Connect Austria because of the final cost decree setting the regulatory framework starting from the 1st of January, '25. Now the impact of these influencing factors on the key figures of VERBUND in the first half year '24 are as follows. EBITDA decreased by 21.9% to EUR 1.762 billion, and the reported group results decreased by 29.3% to EUR 910 million. The adjusted group result decreased by 22.9% to slightly above EUR 1 billion, and the operating cash flow also decreased to a level of EUR 1.85 billion. The free cash flow after dividends was negative at a level of EUR 600 million. Net debt increased by 41.9% to a level of EUR 2.496 billion. Now, let me give you our updated guidance for '24. Based on average hydro, wind and PV generation in the quarters 3 and quarters 4, as well as the actual opportunities and risk situation of the group, VERBUND expects reported and adjusted EBITDA between approximately EUR 3 billion and EUR 3.3 billion and the reported group result between approximately EUR 1.5 billion and EUR 1.65 billion for '24. The payout ratio will be between 45% and 55% of the adjusted group result between approximately EUR 1.6 billion and EUR 1.75 billion. Now on the next page, as always, very important, our hedging volumes. Let me go into more detail here, and let me start with the volumes and the hedging prices, which you know are highly relevant for our results. EUR 1 per megawatt hour, plus or minus, has a sensitivity of approximately EUR 25 million in our EBITDA line. Now as of June 30, '24, we reached an average achieved contract price for hydro generation of EUR 123 for '24, and we have hedged approximately 88% of our own generation volumes. For '25, we have sold 51% of our own generation at a price of EUR 121.9. And for '26, we have sold 33% of our volumes at EUR 78.7 per megawatt hour. Now very important on a mark-to-market basis with prices as of the 15th of July, '24, the average achieved contract price for '24 is at EUR 116.6; for '25 at $107.4; and for '26 at slightly above EUR 80. Now on the next page, let me comment on some developments in the various business segments of VERBUND, and I will start with the Hydro segment on this page. As I already mentioned, 1.12 the hydro coefficient, which is an index quantifying the hydropower generation of the run-of-river power plants was 12 percentage points above the long-term average and 17 percentage points above the level of the first half '23. The production from our annual storage power plants, however, decreased by 3.1%. Own production from hydropower therefore overall increased by 2,239 gigawatt hours of 14.9% to 17,292 gigawatt hours compared to half year '23. Now lower average achieved prices could not be compensated by the increase in volume and are the main reason for decreased EBITDA in the Hydro segment. In addition, flexibility products decreased by EUR 16.1 million. In total, EBITDA in the Hydro segment decreased by 24.4% to roughly EUR 1.5 billion. Now regarding CapEx, our main hydro projects, the 480 megawatt Limberg III pumped-storage power plant, the 450 -- sorry, the 45 megawatt Reisseck II pumped-storage power plant project as well as the 11 megawatt, Gratkorn run-of-river power plant are progressing very well and will start operation in '24 and '25 respectively. Now let me continue with an analysis of our own generation from new renewables. The new renewables coefficients, an index quantifying the generation from wind power and PV amounted to 0.94 in the first half '24 compared to 1.01 in '23. Generation from wind power increased by 81.1% to 443 gigawatt hours and amounted to 989 gigawatt hours in the first half of '24. New installations in Spain, in Austria and Germany more than offset overall less favorable wind conditions. Generation from PV amounted to 210 gigawatt hours in the reporting period, representing an increase of 30.5% and stemming mainly from PV installations in Spain. Now taking a look at the EBITDA development in the New Renewables segment, we see that the EBITDA decreased by 19.4% to an EBITDA amounting to EUR 88 million. Although volumes increased due to the acquisition of wind power installations in Spain in the third quarter '23 and in Austria and Germany in the first 2 quarters 2024, lower average achieved prices led to this decrease in EBITDA. Although approximately 80% of the total renewable volumes are either protected by tariffs or hedged with long-term PPAs. There is a remaining exposure to spot market prices, which were obviously lower in the first half '24. Now the chart also provides an overview on current developments in the Renewables segment. Now let me continue with an analysis of the Sales segment, which, as you know, comprises a trading and sales activities of VERBUND. Now taking a look at the EBITDA development here in the Sales segment, we see that EBITDA increased strongly due to a slightly positive value of EUR 15.9 million after the minus EUR 143 million in the first half '23. The EUR 15.9 million EBITDA contribution from the Sales segment consists of minus EUR 43.5 million from the retail business. So still a significant loss, but EUR 59.4 million from the trading business. The increase in the segment EBITDA is mainly due to lower procurement prices for electricity and gas. In addition, flexibility products decreased by EUR 2.7 million. VERBUND delivered electricity and gas to approximately 480,000 end customers in '24, representing a decrease of approximately 5.5% year-on-year. Now next page, we're discussing all the other segments. The generation from thermal power plants was up by 81 gigawatt hours or 23.5% to 423 gigawatt hours due to an increased use of our CCGT Mellach. The strong decline in EBITDA is mainly due to negative effects from the valuation of energy derivatives in connection with future energy supplies of approximately EUR 54 million and increased fuel expenses due to the increased use of our CCGT Mellach. The contribution from KELAG, the provincial utility of Carinthia increased from EUR 38.3 million to EUR 52.2 million due to better hydro situation as well as higher margins in the trading business. Finally, let me remind you that our Mellach CCGT is no longer contracted from APG for future congestion management. Line 10 and Line 20 are operated on a market-driven basis, at least until the 1st April, '25. The district heating power plant in Mellach is contracted by APG for the period from the 1st of October, '23 to the 30th September, '24. On the next page, we will give you more detail on the Grid segment. As you know, the Grid segment consists of our regulated businesses, Austrian Power Grid as well as Gas Connect Austria. The EBITDA for the half year '24 from the electricity grid business according to IFRS was approximately EUR 128 million, and therefore, EUR 55 million lower than last year. The reduced earnings contribution from auctions had a negative impact. In addition to a significantly higher tariff rollout previous years in the area of ECM provisions, there is also a significant increase in the other provisions compared to the previous year, mainly due to a volume-related reduction of national grid revenues. The EBITDA guidance for the electricity grid for '24 was decreased very slightly from approximately EUR 235 million to approximately EUR 230 million. The reason for the slight decline includes lower national revenues due to lower volumes. The planned amount of the regulatory account at the end of '24, is expected to be more or less unchanged at around EUR 510 million, which, as we have discussed in the last conference call, is a pretty high number. Let me also remind you that starting from 1st January, '24; a new regulatory period started. APG received a WACC of 4.16% for old assets with the commissioning date up to '22; a WACC of 4.88% for new assets with the commissioning date in '23. And now it's very important, a WACC of 6.33% for new assets with the commissioning date in '24. So the total WACC for '24 is approximately 4.5%. Now there will be a yearly update of the WACC for new assets for each tariff-setting process until '28. Now with regards to the results contribution of Gas Connect Austria, we report an EBITDA of approximately EUR 47 million for the first half '24. The main reason for the decrease are lower transmission revenues due to the war in the Ukraine, particularly from the commodity tariff because of the tariff-related overcompensation in '23. You will remember that in '23, gas prices -- gas we need for the compressor stations went up dramatically and were compensated by the regulator with the commodity tariff. The guidance for '24 with regard to Gas Connect Austria, increased slightly from approximately EUR 75 million to approximately EUR 80 million under IFRS. The increase is due to slightly higher transmission revenues. Overall, we see a strong decrease in the EBITDA of the Grid segment from EUR 295.5 million, which we had achieved in the first half '23, to EUR 175.9 million in the first half of '24. Now with that, I would like to hand over to Andreas, who is going to discuss nonrecurring effects and the key financial figures. Please, Andreas.

Yes. Thank you, Peter. So a quick word to the nonrecurring effects which you may not have expected. So we booked impairments amounting to around EUR 195 million, stemming from an impairment of the CCGT Mellach as well as an impairment of Gas Connect Austria. The declining weighted short and medium-term contribution margins due to lower clean spark spreads are the reason for the Mellach impairment. At GCA, the reason for the impairment loss is the adjustment of the long-term business plan with regard to the new regulatory system for the upcoming regulation period for us starting from 2025. Because of the changed business environment and the inherent risk of future gas flows, starting from 2025, Gas Connect Austria will be moving to risk-free tariff system. The risk-free [Technical Difficulty] future contribution because the regulator [Technical Difficulty]. In addition, Gas Connect Austria has to pay [Technical Difficulty]. Gas Connect Austria [Technical Difficulty] the measurement of an obligation to return an interest of overdraft [indiscernible] had a negative impact of around EUR 17 million on the other financial results. In total effects on the financial results were minus EUR 17 million. After considering the effects on taxes and minorities, the nonrecurring effects on the group result level amounted to minus EUR 98.5 million. On the next slide, on Slide 10, a quick summary of the development of the key financials. Because of the aforementioned developments, the EBITDA decreased by EUR 492.8 million to EUR 1.762 billion. Depreciation increased by 13.4% to EUR 285 million, mainly due to the acquisition of Spanish assets and the increased investments into the high-voltage grids. The financial result improved to EUR 24.7 million. This was attributable to higher earnings contribution from our participation in KELAG. Higher interest income and lower interest expenses mainly caused by the repayment of a schuldscheindarlehen, as well as lower interest expenses from money market transactions. So taxable income decreased also to an amount of EUR 297 million. The group result, therefore, decreased by EUR 377 million to EUR 910.1 million. Finally, I would like to mention the increase in additions to tangible assets in total from EUR 311 million in half year 2023 to about EUR 444 million in half year 2024. On Slide 11, you see development of operating cash flow and free cash flow as well as our gearing. VERBUND's operating cash flow in the first half year decreased to EUR 1.85 billion, mainly due to a lower average achieved price for electricity as well as lower cash return flows from margining payments for our hedging transactions in the electricity business, which were deposited with the clearing house of the electricity exchange as collateral for open positions. The free cash flow after dividends also showed a negative development from EUR 927 million in half year '23 million to a level of minus EUR 600 million in half year '24. The lower operating cash flow and higher investments in property, plant and equipment as well as higher dividend payments were the reason for this development. In Q2 2024, we paid in total dividends to VERBUND's minority shareholders in subsidiaries of approximately EUR 2 billion. Net debt increased from EUR 1.759 billion at the end of 2023 to EUR 2.496 billion at the end of first half year 2024. Gearing correspondingly increased to a level of 24.4% compared with 15.7% at year-end 2023. So with that, I'll hand over to Peter for the outlook. So the last chart of the presentation before we go into Q&A.

Thank you, Andreas. Yes, as always, last page, our outlook. And as always at this point, I would like to highlight the sensitivities for '24 as of the 30th of June. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 6.9 million. In our group results, a deviation of plus/minus 1% in the generation from wind and PV has an impact of EUR 0.6 million and a deviation of plus/minus EUR 1 in the wholesale price has an impact of plus/minus EUR 2.1 million in the group result as we are already hedged to a very large percentage. Now let me repeat our guidance for '24. We expect the reported and adjusted EBITDA of approximately between EUR 3 billion and EUR 3.3 billion and the reported group result of approximately between EUR 1.5 billion and EUR 1.65 billion under the assumption of average hydro, average wind and PV generation in the quarters 3 and 4, as well as the actual chances and risk situation of the group for the remainder of the year. For the financial year '24, we plan to pay out between 45% and 55% of the group results after adjustment for nonrecurring effects of approximately between EUR 1.6 billion and EUR 1.75 billion. Now with that, I would like to move on to Q&A.

[Operator Instructions] The first question comes from the line of Wanda Serwinowska with UBS.

Wanda Serwinowska, UBS. 3 questions from me. The first one is, let's start with the KPIs. Peter, if you could disclose the latest hedging levels and hedging prices, that would be -- and hydro levels year-to-date, that would be extremely helpful. The second question is on your guidance. You raised the lower end of the 2024 guidance by EUR 200 million at the EBITDA. It's not Grid, it's probably it's not New Renewables. So what has changed? Is better hydro, better power price or sales or retail that is performing better that you see it in May? And the third question is on the GCA. It's the third year when you incurred the assets. So I think Andreas mentioned the change in the remuneration. So what is the fair value or book value of the assets right now? And how should we think about the EBITDA development beyond 2024?

Yes, you're welcome, Wanda. Now first of all, in terms of the most recent numbers on our hedging levels for '24, we are 89% hedged with the mark-to-market at EUR 116. So there nothing has changed. For '25, we are 51% hedged with a mark-to-market level of EUR 107. And for '26, we are 1/3 hedged, i.e., 33% with a level of EUR 79 per megawatt hour. So that's on the -- on your first question. On the second question, yes, we have a strategy that every quarter, we obviously -- with more data points and with more information, we are looking at our full year numbers, and we try to narrow our guidance. So this is why we have narrowed our guidance here. As a result of -- mainly of a very, very good hydro coefficient that is one very important reason. Another reason is that power prices, as you know, have gone up. So we have seen lower power prices and particularly with the gas prices going up, not so much the CO2 prices, but with the gas prices going up, power prices have gone up. Remains to be seen how sustainable that is, but that had a positive effect. And then there were a few other areas that sort of like added up to us being slightly more positive on the full year numbers, one area, for example, flexibility products. Yes. On Gas Connect Austria, there I need to give sort of like a slightly fuller explanation. Gas Connect Austria has moved from the old regulatory system that had a volume risk component to a risk-free cost-plus system. You will ask what is the reason for that change? Well, the reason is that the business model of Gas Connect Austria has changed dramatically. Why? The flows from Russia have come down, the transport capacities have come down. As a result of that, the revenues of Gas Connect Austria are very volatile, uncertain, as far as the future is concerned. We don't exactly know how future trends for capacities out of Russia are going to evolve. And we immediately entered quite some time ago, actually, negotiations with the regulator and we said to the regulator, we would like to move away from sort of like a volume risk system to a risk-free system. The risk-free system has an impact in the sense that we earn less because we have no risk anymore. Although, I must say in all transparency, the regulator has been everything else, but generous with us. They basically adjusted book values down because in the old system, we had an inflation adjustment, which basically gave us a boost on the book values, so the book values came down. That was one important point. The other important point is that we earned -- we earned excess returns, which we made for the risk which we were willing to take. And the regulator has now said that we have to repay what we have taken in for additional risk returns, we have to pay it back because now we are in a risk-free system. Now we disagree with that. And we are taking legal action against the decision of the regulator, and we think that we are having a very strong case, but it might take quite some time before we get a decision. As a result of that, according to the impairment regulation, we had a catalyst, and as a result of that, we have basically looked at the future cash flows as they present themselves today. And this is why we had to do the impairment. That impairment obviously means that our sort of like the book value of Gas Connect Austria in our balance sheet is coming down accordingly.

So Wanda, quickly the numbers. So the book value starting from next year for the total GCA business will go down to around EUR 550 million. And the average EBITDA contribution for the next 3 years starting from 2025 will roughly be on average, EUR 70 million.

Can I just ask a quick follow-up? Peter, do you have maybe the hedging price without mark-to-market. So basically, we have like a clear hedging price? And on hydro year-to-date, if you have it handy, that will be also very helpful. And then the last one on the guidance. I remember you were pretty cautious on the retail EBITDA this year. Has anything changed? I think at some point earlier this year, you expected a negative EUR 100 million. Or retail has been performing better and you are more neutral on it right now?

No. On the retail side, we are between a rock and a hard place. On the one hand, we have -- we still have the high procurement costs from the higher power prices of the past. And at the same time, we have tremendous pressure, not just us, but the entire utility sector in Austria, tremendous pressure from the government, actually from all stakeholders that we should have a relatively low retail prices for electricity. So we have a classic, as I said, between a rock and a hard place. And as a result of that, we're still -- I mean, we have an improvement, a big improvement, but we're still minus EUR 100 million -- approximately minus EUR 100 million. Yes, more than happy to give you even more detail on the hedging side. We have hedged for '24, the 89% at EUR 123. There you see that, obviously, here, we have the old hedges which were done at higher power prices in contrast to where we would sell today. The same is true for '25, where we have hedged 51% at EUR 122, that we exposed with about half on future power price developments. The exposure in '26 is even higher with 2/3 which are unhedged to 33%, which we have hedged has been done at approximately EUR 80. This is the reason for the declining power price estimates between '24 to '26. What was the other point, Wanda? I think you...

Just hydro year-to-date, and that's it for me.

Yes. The hydro year-to-date is 1.11. And when you assume that the rest of the year is going to be our long-term average, you would come out with the 1.06 hydro coefficient for the entire year '24.

The next question comes from the line of Olly Jeffery with Deutsche Bank.

Just coming back to the Sales segment and $100 million at the beginning of the year, the negative valuation effect consumption within the guidance is minus EUR 100 million. What's the current thinking on what that -- your current view that figure to be for the full year? And depending on how you view that, what could cause that to be 0 by the year-end, and given you don't seem to have much of a negative valuation effect in the year-to-date. And then on 2026, I know if you haven't really increased your incremental hedge since Q1. Is there any particular reason for that? And I'll leave it there for now.

Yes, sure. Yes, on the Sales segment, I wish I could tell you that there is going to be an improvement until the end of the year. We don't think so. So the best estimate would be for approximately EUR 100 million for the rest of the year. It is, as I have said, that we don't -- and when I say we, in that case, I really mean the entire Austrian utility sector, we don't have huge pricing power because of the pressure which we have from all sides, from the government, from the regulator, et cetera, et cetera. So we can't really go out and increase that would obviously be an immediate improvement. So we still have to be very competitive on that side. And we can't change the procurement. We have basically entered our hedges about 18 months ago. And as a result of that, there is still relatively high prices, which flow into our numbers. Now that, of course, is going to improve. So when we talk next year and then the year after, we should obviously have, I would hope, quite a dramatic improvement in our retail business. In terms of '26, yes, I mean, the reason is that sort of like, 2 years out, we still have quite some flexibility in terms of if we either accelerate our hedging or if we slowdown our hedging, this has something to do with if we think that there might be some improvements. But as you know, we have a pretty stable hedging strategy in terms of starting 18 months forward. And in '26, we have -- when power prices were still higher, we have accelerated and now we have slightly slowed down. But you shouldn't read anything specific into that hedging number.

That's helpful. But can I just confirm to the minus EUR 100 million in the sales units for this year? There's nothing has changed in your view on that from the beginning of the year. It's not that some of the parts within that, that make the valuation effect, for example, has become -- got better but other parts have got worse. The assumptions within that still the same from the beginning of the year?

Yes, yes. It hasn't changed dramatically, and it is still very similar for the reasons which I have outlined before.

The next question comes from the line of Harrison Williams with Morgan Stanley.

2 from me. Firstly, on the GCA impairment, you mentioned that you had earned some excess returns from taking risks that you are now having to pay back. Did you or can you confirm that the quantity of that? And what's the time frame that will be paid back? And secondly, going back to the sales segment, I mean, what is the way out of this situation for you? Is it that you need power prices to fall? Is it something that you're allowed to put through a certain amount of cost increase every year? I mean, as you look to this hopefully normalizing, what needs to happen and what is the time line?

Yes, sure. I'm more than happy to discuss the situation with Gas Connect Austria. So the risk which -- or the risk returns which we have received in the past, which we have to pay back are the total quantum is EUR 190 million, which we basically have to pay back over the next 15 years. We -- as I say, we're taking legal action against that. So we are -- I can't give you a probability because you never know how a judge you would see that. All I can say is that we feel that we have very, very strong legal arguments that should not be -- that there should not be a clawback of that specific amount. And if we -- if we get that back, that would obviously increase EBITDA directly. And then, of course, the same is true for the book value adjustments. If we -- if our legal arguments win on that point, that will basically improve the EBITDA of Gas Connect Austria as well. I mean, but please be aware, and Austria is not very different from many other countries in Europe, those legal actions take a long time. I mean, we also have legal action on the Austrian Power Grid because of the WACC. We feel that the WACC is too low, particularly for the old investments. There, we have also taken legal action already like more than a year ago, and this is very slow. That's just the way the courts work in Europe. And we hope that -- we obviously hope that we are going to get results as soon as possible. Now could you remind me of your second question? Was that related to Gas Connect Austria as well?

Sure. No, that was on the Sales segment. So I mean just what needs to happen for you to, I guess, return to profitability within that? Is it power prices falling? Is it something that just takes time? Some color on that.

Yes. Yes. Okay. No, fair enough. That on the Sales segment, I think what we need is -- when the old hedges run out, we are going to benefit in our procurement from lower power prices. If we assume that the retail prices, which we're charging remain relatively stable, obviously, we are going to have an immediate impact. So that is the key -- that would be the key factor for returning to profitability.

The next question comes from the line of Thibault Dujardin with Bernstein, Societe Generale.

Just a question to understand regarding the guidance on the sales and to differentiate between the retail and trading activity. The guidance of minus EUR 100 million, is that the global sales level and not at a retail level, right?

Yes, the minus EUR 100 million on the retail side encompasses everything, our entire retail activity, if that was your question.

The next question comes from the line of Louis Boujard with ODDO BHF.

Maybe 2 questions. One clarification again, sorry for that on the impairment aspect. I think that you mentioned in one of the Q&A and one of the answers that you provided, EUR 190 million that needs to be paid back are related to the GCA risk-free rate assumptions. At the same time, the impairment is EUR 195 million. So my question would be, if you could maybe give us a little bit more details on the EUR 195 million so that we could understand if and where is the room for potential reversal depending on the decision that could be taken in the future, including also the part related to the Mellach CCGT as well. It would be interesting to have the detail if you can provide it. My second question would be more on a strategic point of view related to the MoU that you signed recently over the past few weeks, notably regarding Tunisia and regarding Spain, specifically on the hydrogen aspect. Just would like to understand if you're focusing more on the production side and that's in Tunisia, and in Spain. And if you're also interested into the transportation side of the green hydrogen future molecules considering that you signed 2 MoU recently. I guess that most likely you start to have quite an idea on what you want to do in this field going forward?

Yes. I will start with the second one. As far as hydrogen are concerned, I will start with the transportation side. One of the reasons why we acquired Gas Connect Austria was hydrogen, hydrogen transportation. The position of Gas Connect Austria in the heart of Europe really being at the crossroads of north-south or actually, I should say, south-north and east-west means that the network of Gas Connect Austria for any future transportation would be critical. The -- as you probably know, there is the so called South Corridor, that South Corridor would bring hydrogen from the southern region, including Northern Africa, all the way through Italy into Austria and through Austria into the rest of Europe, particularly into Germany. And there, the transportation is part of a regulated hydrogen business, which means that any investments into Gas Connect Austria, be it new hydrogen-ready compressor stations, be it the lining of existing natural gas pipelines or indeed even new pipelines, would be added to the regulatory asset base and the result of that get a regulated return. So this is why we think that any future hydrogen infrastructure, as is being discussed by the European Union almost on a daily basis, is something that would add to our regulated business. So that is on the transportation side. And this is only Austria. On the production side, we feel that wherever we have an activity with renewables, like, for example, in Spain, that the production of hydrogen can be added value in addition to PPAs in addition to selling electricity, particularly when you have excess production, something that has been discussed a lot, particularly on the solar side. This is where you should see the -- also the joint venture announcements which were made recently. And then, of course, what we have on the radar screen would be even production on a greater scale of hydrogen. But this is something that is, as I say, on the radar screen where a lot of conditions and preconditions need to be ready for big production happening and hydrogen flowing into Europe. The demand of hydrogen also needs to evolve and there is still some uncertainty. So you probably know that the European Audit Office has come out with a very large report, I think it's just a few weeks ago, where they basically reassessed the strategy of the European Union vis-a-vis hydrogen, and they feel that there might be some delay. So this is something where one needs to be very smart to basically look at the developments. But the one area where we feel that we definitely want to be ready is on Gas Connect Austria on the regulated side. So that brings me ready to your second question, where you basically asked me for more details sort of like what could change in order to increase the value of Gas Connect Austria? Well, if we succeed with our argumentation in the courts, and obviously, we are hopeful, otherwise, we wouldn't have done it, then there could be a number of changes that would basically increase our future cash flows in Gas Connect Austria and thus, our results, our EBITDA. And in my view, there are sort of like 3 key areas that would have an impact. Number one, it would indeed be what I mentioned the risk premium, which we have made in the past and which we would have to repay, number one. Number two, the book values, which would mean that we had an increase in the regulatory asset base. And then, of course, the WACC. So the more generous the WACC would be -- I shouldn't even say more generous, the fairer we're just talking about the fair WACC. I'm not even talking about the generous WACC. The more fair the WACC would be, again, the higher future cash flows.

The next question comes from the line of Piotr Dzieciolowski with Citi.

It's Piotr Dzieciolowski from Citi. I have 2 questions, please. So first one, I wanted to ask you whether you had a chance to look into this idea of introducing pricing zones in Germany? And what could be the potential impact on the Austrian power pricing? I presume the Bavaria region would trade lower and therefore, could impact your pricing? Just wanted to hear your views on this subject. And second question I had was on the Gas Connect Austria, but in a slightly different context. Assuming we have a truce with Russia, post U.S. election so, a scenario that is, who knows what that will be. But would you be ready technically to import gas via Southern Route given they are not destroyed and is technically possible and how much you could ship to Germany? And then maybe a third question, can you please tell us what are the PPA levels available to you on your Spanish new projects, whether you can sign anything creating a value?

Okay. Now I had a pretty bad line at the beginning. You were talking about the varying power prices. Sorry, do you mind repeating the first question?

I wanted to ask you whether you had a chance to look into this aspect of introducing pricing zones in Germany, if that was introduced, what could be the impact on the Austrian power pricing?

Yes. Okay. Now that is -- that's an important question because you're right, price zones have been discussed for many, many years. From a purely technical point of view, one should actually reduce price zones because they would make the management concessions, control energy and all that, easier. However, in the past, and I personally believe that it will continue, there's a huge political resistance against price zones. The reason is that power prices are, obviously, a competitive factor for the industry. So wherever you have higher prices, those states would feel a disadvantage versus other states. They would then possibly conclude that industry could move from, let's say, Baden Wurttemberg to Schleswig-Holstein. And all that creates a big discussion. And I can tell you, I personally would be very surprised if Germany introduced specific price zones. According to sort of like technical consultants, 2 price zones would not be enough. If you really wanted to do it right, you would have to introduce much, much more price zones that would basically reflect critical nodes and critical areas in the grid. The answer will be that and we have already heard it from both from the government but also from the grid companies in Germany, they will increase their investments, they will accelerate the build-out of the grid and the more you have a strong grid infrastructure, the less needs that will be for price zones. And by the way, the same political argument goes for Austria. If you would introduce a price zone in Austria between east and west, that will certainly lead to very big political discussions. So on the second one, on Gas Connect Austria, what was -- the key point basically was, I just want to paraphrase because I want to give you the correct answer. You were saying that if you had changes and if you basically want to import more gas from the South, would that be a possibility? Correct?

No. No, I was thinking whether we could think about the scenario, whether we reinstate the Southern Route on the Russian gas imports. Whether that's technically possible?

Yes. I mean the -- well, let me take a step back. If you look at the pipelines around Austria and if you think about Austria and gas flowing into and through Austria, the one thing that would be possible would be Italy. There is a connection between Italy and Austria. It's called TAG Pipeline. And the TAG Pipeline in for decades, has basically had a very, very large flow of gas from Russia going through Austria into Italy. Now Italy has completely changed the procurement of gas. They are buying much, much more from Algeria. They are buying much, much more LNG. They have increased the LNG capacity. As a result of that, the flow of gas into Italy is very, very small. And indeed, Italy will have more gas than the needs from probably '26, '27 onwards, and that would basically allow us to import gas from Italy through a reverse flow. In terms of Russian gas flowing sort of like through Southern pipelines, well, I mean, that is -- there are many different ways. I mean, for example, gas coming from Azerbaijan, from Kazakhstan that is basically flowing into Europe. And there is TurkStream as well. That gas could theoretically -- but I don't want to get into geopolitical discussion, that gas could theoretically come from Russia. So if there are states that are willing to buy Russian gas, gas doesn't have a color where you can say, this is gas from Russia, but this is gas from other sources, you could actually have a conversion in those specific countries, and they basically just gas which they import from Russia, for example, they could then deliver on to Russia. By the way, the same is true, and this is a discussion which we have had on the last conference call, the same is true for LNG. The imports of Russian LNG into Europe have gone up by quite a lot. And as a result of that, it is -- unfortunately, the reality is more complex and sometimes different from the way it is presented to us. PPAs that's the third question. Andreas, could you comment on PPAs?

Yes. If I got the question right, I think with regard to PPAs for our existing portfolio. I think currently, we are -- we are selling roughly 50% is -- of our volumes are protected by tariffs. About 30% are contracted through PPAs and about 20% is sold also under PPAs, but as a spot market pricing. So this is the current exposure. I mean, going forward, we have, I think, as a target, a specific target that we want to sell roughly 80% to 85% of our production, renewable production, especially related to the pipeline in Spain on the basis of long-term PPAs, let's say, at least 5 years, better 7 years to 10 years. And I think we would take about 15% spot exposure. Yes.

The next question comes from the line of Teresa Schinwald with Raiffeisen Bank International.

It's kind of a follow-up just question now on the renewable side, because I get that the EBITDA outlook '24 for Spain and Italy is coming down given the spot market pricing component. But could you please give more reasons why the EBITDA expectations for Austria went up and why they sell for Romania to this large extent? That's my question.

Yes, sure. Yes, the EBITDA, both in Austria and Romania is influenced by the volumes on the one hand and then, of course, by the price development. The volumes we have shortly discussed before, in terms of sort of like the last figures and the comparison for '23. Looking into the future, it is very similar to hydro. We have sort of like an average solar coefficient and wind coefficient as a result of our historical data, which we have. And obviously, if there is more wind than expected, that has an immediate impact on our EBITDA. Similarly, we have some price exposure, both in Romania and in Austria and therefore, sort of like price developments or our prognosis on price developments has an impact on our overall prognosis on EBITDA. But what we are going to do, we will obviously sort of like when we report the figures, as we have done now, we are going to explain impact of prices and impact of volumes through our coefficient.

The next question is a follow-up question from the line of Olly Jeffery with Deutsche Bank.

Just a couple of follow-ups, please. Can you please let us know what you think the GCA RAB will be in 2027? I think from memory, it was around EUR 640 million last year. And then in addition to that question, what was the negative valuation effect in the first half? And the last question is just on you coming back to the balance sheet question. I mean, obviously, you've got a very strong balance sheet. Is there any update you can give on targets that you might be looking at? Are you still actively seeking to deploy that balance sheet? Are you -- you're waiting for particular reason? And any update you can give on that, because your balance sheet is clearly still very strong.

Yes, sure. I will start with the last one on the balance sheet. In fact, our balance sheet by the end of the year is going to improve slightly because our -- because our free cash flow will be stronger as a result of that. By the end of the year, our net debt EBITDA will be, I guess, around 0.8%. Our previous estimate has been around 1%. So yes, you're right. We have a very strong balance sheet. We have firepower for CapEx. In addition to our CapEx plan, which is for the next 3 years, EUR 5.5 billion. However, it really depends on any opportunities that might arise. But if an opportunity arises, yes, we definitely have the balance sheet. We recently had a rating agency upgrade. The one aspect which the rating agencies pointed out, and I think that is important, is that Austrian Power Grid is going to have strong investments over the next 10 years, something we discussed on previous conference calls. As a result of that, the regulatory component within our business model is going to increase. So there will be growth on the regulated side. That is something obviously that helps our strength from the point of view of the rating agencies. And in terms of our targets, we have -- and target is probably the wrong word, but we don't want to go above a 3x net debt to EBITDA. So right now, we're way below that, but we see sort of like the 3x as a number we could live with, the rating agencies could live with. But either debt has to go up quite a lot or our EBITDA has to come down quite a lot in order to get to the 3x. Yes. And you asked about the regulatory asset base on Gas Connect Austria is around EUR 520 million.

Is that the view for what it would be by the end of the period?

Yes.

And the last question was on the -- the last question was on the negative valuation effect that you saw in the first half, did you see -- did you record one in your P&L at all for the first half or not?

When you say the negative valuation effect, which one exactly are you referring to?

It's the negative valuation effect, I believe you record in connection to maybe to your trading business that can oscillate depending on what direction demand prices and commodities move in?

Yes.

At the start of the year, your outlook for that figure for the full year was minus EUR 100 million. But given that the sales is a positive number for the first half, I suspect you might not have recorded a negative valuation of that, but I just want to clarify if that was the case?

Yes. Andreas has looked into that. He will give you the answer.

So in the first half of the year, Olly, we have booked a negative valuation effect in the Sales segment of minus EUR 18 million. In the Thermal segment or in all other segments, we have booked minus EUR 53.7 million as a negative valuation effect. And in New Renewables, we have a positive valuation effect of EUR 8.4 million. So in total, the negative -- let's say, for all 3 segments, the negative valuation effect is minus EUR 63.2 million.

The next question is a follow-up question, comes from the line of Thibault Dujardin with Bernstein, Societe Generale.

I have a question back on GCA. I see that the impairment is of EUR 170 million, and you were referring to paying back EUR 190 million plus lower return. And I'm just wondering how we could reconciliate all those elements? I would expect -- I would have expected the impairment to be higher in this context?

No, no. Quite frankly, I think it's a pretty big impairment. So when we went through the calculation, I would have liked the impairment to be smaller because we have done impairments in the past as well in Gas Connect Austria. But look, I hate to repeat myself. We are -- as I say, we have very strong arguments and we feel that -- that the regulator has been too harsh with us on Gas Connect Austria. As a result of that, we think that there could be some upside there in the future once we have a result of our legal action. But the -- but what you're specifically referring to, the risk premium, I mean, that is over 15 years, Yes?

Yes.

So that is over 15 years and when you consider future cash flows, they are going to be reduced by that number, but that annual number, which is obviously much, much smaller. It is because it's over a long period of time.

But Thibault, it's -- the outcome of the impairment testing is always a function of a lot of different components influencing the calculation. So there are negatives and positives. Yes? The negatives are, of course, what we mentioned, the repayment of the risk premium. It's the reduction of the book value, then we have a specific WACC, which may, on a group level for GCA, there are also some positive elements. We are not disclosing, let's say, all the details about the impairment calculation, but we have mentioned the main influencing factors on the outcome of the impairment test and the outcome is the EUR 100 million, let's say, roughly EUR 190 million of impairment on EBITDA level.

And coming back to your specific point is, as it is over 15 years, so we're talking about EUR 13 million per annum that are basically reducing the cash flow.

Ladies and gentlemen, that was the last question. I would now like to turn the conference over to Peter Kollmann for any closing remarks. Thank you.

Great. Yes. As always, I would like to thank you for your participation, for your great interest. It's always exciting because there are always different points, which in our conference call, we focus on. Today, it was clearly Gas Connect Austria. I'm sure next time, it will be something else. So thank you very much for the lively discussion. I wish you all a great summer. Recharge your batteries and we very much look forward to talking to you in around 3 months' time. All the best. Bye-bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye