VERBUND AG (VER) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the VERBUND's AG Conference Call on the First Quarter of 2025 Results. I am George, the Chorus Call operator. [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. I'm here with Andreas Wollein. Let me welcome you to our presentation of VERBUND's first quarter '25 results. And let me thank you for joining today's conference call. The development of the first quarter '25 was characterized by ongoing geopolitical uncertainties, increasing risk related to the consequences of the tariff policies triggered by the U.S. government and of course, regulatory uncertainties. In Austria, the new government extended the taxation of windfall profits. In these highly volatile markets, VERBUND presents a solid business development for the first quarter. Now let me highlight the most important influencing factors for the first quarter at a glance, and let me highlight 2 of them. First of all, the hydro coefficient and then the average achieved contract prices. The hydro coefficient, which, as you know, determines the generation from our run-of-river hydropower plants was significantly lower compared to last year. At a level of 0.83, it was 17 percentage points below the long-term average and 46 percentage points below the first quarter '24. The reason for the decline was an extraordinary low snow level and little rainfall. And as a consequence, a low hydro availability in the melting season. However, the average achieved contract price increased by EUR 8.7 to EUR 126.8 compared to the first quarter '24, mainly because of limit sales at the beginning of '23 and from November '23 onwards as part of our hedging policy. This allows VERBUND to benefit from the still high futures for electricity at that time and clearly shows that despite being in a phase of normalization of power prices, volatility is still high. Now let me go into more details for the results. I'm starting with the hedging volumes. There, you see that our hedging is highly relevant for our results. You know that EUR 1, plus or minus, has a sensitivity of approximately EUR 25 million in the EBITDA line. The development of the average achieved contract prices reflects the backwardation of the electricity futures and the normalization, which I mentioned before. As of the 31st of March '25, we had sold 76% of our own generation volumes for '25 at a price of EUR 116.8. For '26, we had sold 43% of the generation volumes at a price of EUR 80.3. And for 2027, we had sold 1% of the generation volumes at a price of EUR 88. On a mark-to-market basis, with prices as of the 30th April '25, the average achieved contract price for '25 is at EUR 109.4, for '26 at EUR 82.4 and for '27 at EUR 79.4. Now on the next page, let me comment on some developments in the various business segments of VERBUND, and let me start with the hydro segment. At 0.83, the hydro coefficient was 17 percentage points below the long-term average and 46 percentage points below the level of the first quarter '24. The production from annual storage power plants decreased by 4.8%. Own production from hydropower, therefore, overall decreased by 2,425 gigawatt hours of 30.7% to 5,468 gigawatt hours compared to the first quarter of '24. Now the decreased volumes could not be compensated by the higher average achieved contract prices. Therefore, the EBITDA in the hydro segment decreased by 32.7% to EUR 480.7 million. Regarding CapEx, '25 will be marked by the planned COD of 2 important projects. Number one, the Limberg III pumped storage power plant project, which increases the flexible pumping capacity by 480 megawatts as well as the 14-megawatt Stegenwald run-of river power plant project. If we continue to the new renewable segment, there, the coefficient, which here is an index quantifying the generation from wind power and PV was also significantly below the average and below the '24 numbers. It amounted to 0.76 in the first quarter '25 compared to 0.89 in the first quarter '24. Generation from wind power, therefore, decreased by 12.3% or 69 gigawatt hours and amounted to 489 gigawatt hours in the first quarter. Now less favorable wind conditions in all countries of operation of VERBUND, namely Austria, Germany, Spain and Romania. What are the reasons for this development. Generation from PV in Spain and Austria rose by 10 gigawatt hours to 87 due to new installations. Now taking a look at the EBITDA development of the new renewable segment, we see a slight increase of 4% to an EBITDA amounting to close to EUR 60 million. The increase despite lower production volumes is a result of higher average prices. VERBUND operates currently approximately 1.2 gigawatts of new renewables in Spain, Austria, Germany and Romania. In the first quarter, we have made final investment decisions for approximately 600 megawatts of additional capacity in Spain. It is part of the approximately 1.6 gigawatts of renewable pipeline, which we are going to build between '25 and '27. Now we are coming to the sales segment. Taking a look at the EBITDA development here, we see that EBITDA strongly increased to a positive value of EUR 36.6 million. Why? We were able to stabilize the earnings development in the end customer business. The EBITDA in the retail business improved from minus EUR 24 million in '24 to a level of EUR 7 million now. The EBITDA in the trading business was more or less unchanged. Contributions from flexibility products slightly decreased by EUR 0.5 million. The improvement is a result of the implementation of several measures to increase our profitability like an optimized electricity procurement strategy and some cost-cutting measures. Now we're coming to the Grid segment. As you know, the Grid segment consists of our regulated electricity high-voltage grid and our gas grid. The EBITDA from the electricity grid business according to IFRS was approximately EUR 127 million. That's an increase of EUR 42 million. Why this increase? Well, it's mainly due to higher contributions from auctions following the high price spread between the Austrian and the German market and as a result of congestion management. As a result of that, we have also raised our EBITDA guidance for the electricity grid for '25 to a level of approximately EUR 300 million. The planned amount of the regulatory account at the end of '25 will be approximately EUR 570 million and will, therefore, increase again. With regard to the results contribution of Gas Connect Austria, we report an EBITDA of approximately EUR 17 million for the first quarter '25. The EBITDA guidance for '25 with regard to Gas Connect Austria is approximately EUR 40 million under IFRS. The decline compared to last year can be explained by the cessation of Russian natural gas transport through the Ukraine. As a consequence, a shortfall of approximately EUR 40 million will reduce the '25 result and will be compensated with T+2 starting from '27. As the regulator will amend the volume for the tariff calculation at the end of '25 for '26, we do not expect a negative impact in '26. With that, I will hand over to Andreas, who is going to cover the next 3 pages before we come to the outlook.

Yes. Thank you, Peter. Going on with the all other segments. Generation from thermal power plants was up by about 590 gigawatt hours. In addition, higher average prices achieved and in particular, positive effects from the valuation of energy derivatives and a higher contribution from the flexibility products led to the increase in EBITDA. The contribution from KELAG, the provincial utility of Carinthia decreased from EUR 20.9 million to around EUR 15.9 million. The decline compared with the previous year is mainly attributable to the lower price level and special items affecting the balance sheet. On the next slide, let's talk about the key development of key figures, key financial figures. First of all, going to the EBITDA development because of the aforementioned developments, EBITDA decreased by around 18.1% to EUR 723.9 million. Depreciation increased by 7.4% to around EUR 148.8 million due to the increased investment volume at Austrian Power Grid and in the hydro segment. The financial result declined to about EUR 1.3 million. On the one hand, we saw weaker results from KELAG. On the other hand, interest expenses declined due to lower interest expenses from money market transactions. The other financial result had a negative effect. Taxes on income amounted to EUR 131 million. The group result, therefore, decreased by around 21% to EUR 397 million. Finally, I would like to mention the slight decrease in additions to tangible assets in total from EUR 160 million in Q1 '24 to EUR 152 million in Q1 '25. Major investments mainly related to the hydropower plant, Limberg III, various electricity grid investments. On the next slide, we see the development of the operating cash flow and the free cash flow. So VERBUND's operating cash flow decreased to EUR 538 million, mainly due to the lower contribution margin from the Hydro segment as a result of the aforementioned significantly lower hydro availability and the change in margining payments for hedging transactions in the electricity business, which were deposited as collateral for open positions with the exchange clearing house. This was partially offset by lower income tax payments. The lower operating cash flow was also the main reason for the negative development of the free cash flow after dividends, it declined from EUR 675 million to a level of EUR 289 million. Net debt decreased again from a level of EUR 1.97 billion at the end of '24 to a level of EUR 1.69 billion at the end of the first quarter '25 due to the positive free cash flow. Gearing correspondingly decreased to a level of 14.6% compared with 17.9% at year-end '24. Now I would like to hand over again to Peter for giving you the outlook for full year '25.

Thank you, Andreas. Yes, at the end of the presentation, our outlook, as always, at this point, we highlight the sensitivities as of the 31st of March. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 11.4 million in our '25 results, a deviation of plus/minus 1% in the generation from wind and PV has an impact of EUR 1.3 million and a deviation of plus/minus EUR 1 in the wholesale price has an impact of EUR 4 million. Our updated guidance for '25 is as follows: -- we expect a reported and adjusted EBITDA of approximately between EUR 2.7 billion and EUR 3.2 billion and the reported group result of approximately between EUR 1.35 billion and EUR 1.7 billion under the assumption of average hydro wind and PV generation in the quarters 2 to 4. The earnings forecast is contingent on the group not being impacted by any further legal or regulatory changes. For the financial year '25, we are planning to pay out between 45% and 55% of our adjusted group result. With that, let's move into Q&A.

[Operator Instructions]. Our first question comes from Olly Jeffery with Deutsche Bank.

The first one is just on, can you please give the latest hydro coefficient year-to-date? I gather April was particularly low. And I'd just be interested to know, was it so low that you had to buy any power off the open market to compensate for any generation shortfall? And then the other question I have is around APG and the buildup in the regulatory account expected from the increased guidance for that division this year. When would be your best estimate on when you would expect that to come out of the accounts? Is it generally kind of 2 years forward? Or how should we think about when that additional regulatory account buildup should come out?

Sorry, acoustically, could you repeat the second question, please?

The second question was on APG. So you've seen -- we've seen an increase in the guidance this year for that division quite materially. My understanding is that because the APG guide has been increased, that additional EBITDA that you're earning will go into the regulatory account. we should, therefore, expect that to come out over the following years. But does that come out in 2 years' time? Could that come out next year? How is the negotiation with the regulator? Can you just remind me how this buildup again in the regulatory account, how you expect that will come out of your IFRS P&L? And at what point do you think that might happen?

Yes, sure. I will start with the second one. You're right that as a result of higher auction results and better results as a result of congestion management, we have better results. You might remember, our last guidance has been EUR 210 million for '25. We have increased our guidance to EUR 300 million. That is a significant increase. That's good. But the downside is that, as you have rightly said, the regulatory account is going up. We had on various conference calls last year and for the full year '24 results, we discussed the regulatory accounts. And our objective has been to actually decrease the regulatory account step by step in a linear way as it is obviously a burden for us, and we are okay with the regulatory account. However, we would like to see the level going down and not going up. Now with the unexpectedly high auction results, we have a movement where instead of being below EUR 500 million, we are now significantly above EUR 500 million at EUR 570 million. We will obviously enter, I would say, forceful negotiations with the regulator, and we will argue that we would like to continue with our policy of decreasing our regulatory accounts. The objective would be that we don't have a sudden move. But that again, as I mentioned before, we do it on a linear way. Can I give you an exact number of how much we would like to reduce it year-by-year? The answer is no, not because I don't want to give it to you, but because it is the result of the negotiation with the regulator. The regulator has to agree. We think that the regulator will be constructive because the reduction of the regulatory account allows to lower the tariffs and that is actually something that is positive for the end customer. You know that the big discussion in Europe is, of course, that with the build-out, the massive build-out of infrastructure, the grid costs go up. So the decrease in the regulatory account is actually a very positive move. On your first question, our hydro coefficient currently is 0.79, which is obviously very low in comparison to the long-term average.

Olly, as you pointed out, yes, we were forced to do some buybacks in the market. You know that usually, we are selling our average dry year. And if we are below, then we have to buy back electricity in the market. This was especially relevant in March when the hydro coefficient only for this month for March was at 0.67. So 23% below the long-term average, sorry 33%. And here, we had to buy back close to EUR 40 million of electricity with a value of around -- or close to EUR 40 million. So yes, and the impact was around EUR 40 million for the first quarter.

And is there no impact from the hydro coefficient that you've seen in Q2 on that same buyback? Or were you sufficiently okay because you had enough room in your unhedged book?

Yes, we can only say that for April as well, hydro levels were low, and we had to buy back some volumes, not by far, not the amount like in March, but there was a negative impact. I cannot give you the number right now, but we had to buy back volumes.

Yes. The -- I mean the hydro coefficient for the first quarter, that is something that has been widely discussed. As Andreas has mentioned, the low hydro availability has continued into April, but also into May. The hydro coefficient in April has been 0.72, which is obviously very low. In May, the hydro coefficient is below 0.8 as well. So this is a trend from the first quarter that has continued into the second quarter. And if you would take the hydro coefficient, which we have until the end of the first quarter, and you take the rest of the year with the long-term average, you would be at 0.97. However, if you basically continued with the low hydro coefficient into April and May, then, of course, the overall expectations for year-end would be even below that, yes.

The next question comes from Alberto De Antonio with BNP Paribas.

The first one will be regarding the renewables and specifically in Spain. During the first quarter, you have seen a PPA with Endesa, if I'm not wrong, linked to a wind farm in Huelva. Could you provide some details about the terms, duration, quantities and prices of this PPA? And what's your expectation for future PPAs there in Spain? Specifically, for the solar PV in the presentation, you're still targeting 2 gigawatts of installations up until 2030. But if you look at the data from [indiscernible] in Spain, there are already + gigawatts installed and during peak demand, only 15 gigawatts are generated. So what's your rationale for keeping those investments there? And my second question will be regarding CapEx. I think during the first quarter, you have invested around EUR 250 million, but the total CapEx target for the year, adding maintenance and growth CapEx is around EUR 1,950 million. Could you give us like some kind of bridge between the current investments and the investments for the remaining part of the year?

Yes. I'll start with the first one, and Andreas will take the second one. On the, I mean, what you said is an important point, and that is, of course, a big discussion in the market in terms of the build-out of Spanish solar. I think the entire discussion has been triggered again by the massive blackout. By the way, Austrian Power Grid, and we are very proud of that, has been selected to run -- to lead the committee, the European Committee to look into the causes and the remedies for this massive blackout. It's -- as you can see from the media and from the reporting, it has been very, very complex. I think there will be a lot of learning from what happened and why. There were wide discussions around oscillations. There is sort of like a second second by second playbook, what exactly happened. So that is going to be very interesting. And as I said, Austrian Power Grid is leading the European Committee on the investigation. So that has triggered the discussion around solar in Spain. As far as your specific question is concerned, we don't give out the specific terms of our PPAs, but PPAs will certainly play a very important role in the Spanish market going forward in order to secure cash flows in solar. The cannibalization -- those are data widely available from the regulator, the cannibalization continues. There are more hours with low prices or negative prices. As a result of that, there will be certainly a demand for what I call synthetic baseload, which can be generated by either combining different technologies or indeed by using batteries. I think that the usage of batteries in the Spanish market will certainly ramp up significantly in order for load shifting from when the production is highest. In terms of going forward, as I've said in the presentation, we have a large pipeline. We continue to work on that pipeline. But at the same time, we also continue to work on combination between solar and wind. And certainly, with a big intensity, we're looking into the combination with batteries as well for the reasons I mentioned above. Andreas, on the CapEx bridge.

Yes. With the CapEx, Alberto, there is a lot of seasonality. And you're rightly pointing out that in the first quarter, there has been a relatively low CapEx number. But for Q2, 3 and 4, there will be a significant ramp-up, especially because of higher CapEx in the grid business, but also into the build-out of the renewable pipeline in Spain. So in Q2, we're going to have around EUR 500 million in Q3, around EUR 700 million and in Q4 around EUR 600 million. So that would make up roughly the EUR 1.92 billion for the total year. That's the current planning. So it's a massive ramp-up with, I would say, around EUR 600 million to EUR 700 million additional CapEx in Spain for renewables and the biggest part of the remainder is going to be invested in the regulated grid business.

Can you repeat the numbers of the CapEx...

It is for Q2, 3 and 4, EUR 500 million, EUR 700 million, EUR 600.

[Operator Instructions]. Our next question comes from Thibault Dujardin with Bernstein.

Regarding the project on batteries, may I ask if you are taking into account in your project support mechanism? And what is the expected IRR for such projects? This would be my first question.

Okay. So you said, if I may paraphrase, you said what would be the IRR for battery projects in Spain, correct?

Correct. And if you are assuming a support mechanism, capacity mechanism, for instance?

Okay. Yes. The second point is a very important one, and this has been widely discussed in Spain, particularly last year. It has slowed down a little bit at the beginning of this year, but it will continue. That is a capacity payment to battery installations, including auctions, et cetera, et cetera. I think that would be a very important move by Spain. It is in the interest of the stability of the Spanish market to support battery build-out. It should go hand-in-hand with the build-out of solar. So at the end of the day, in order to provide stability, that is not only true for Spain, but actually for all the markets, you need to synchronize the build-out of the renewables with the build-out of the grid. By the way, that is something the new Minister for Energy has said within the last few days. We were very happy about this statement because, as you know, this is something we have been saying for the last 10 years that the synchronization between the grid build-out and the renewable build-out needs to be executed. And finally, there seems to be a better understanding that this has to happen. And I would -- and there, you're totally right. I would include batteries into that synchronization because batteries will play a very important role to stabilize the renewable build-out as a result of that support subsidies for batteries would be an important move. In terms of the IRR, we don't give specific battery IRRs. But what we do, and I would assume most of our competitors do the same thing, is we look at -- we look at the solar projects, we look at the IRR of the solar project. We add the CapEx of the batteries. We look at the cash flows, which we generate as a combination of both. And then we calculate our IRR. And we usually have the same IRR objectives as we have on any project, i.e., our capital cost plus a hurdle rate in challenging markets with a lot of volatility. Obviously, sometimes we have to go below the 200 basis points. But generally speaking, that's our objective.

And an additional question regarding flexibility revenues. It increased this quarter. I ask if you maintain your guidance on lower global for the year contribution in the context of higher production, do you maintain your guidance of lower contribution from flexibility for the full year?

Okay. Again, let me paraphrase because acoustics are not very good. You are saying if the current guidance of flexibility products is fully included in our guidance numbers, and the answer is yes.

Okay. But with higher CCGT production, does it change anything?

No. No, that is included in our guidance.

Our next question comes from with Louis Boujard with ODDO.

Maybe 2 on my side, just a clarification. The first one regarding the hydro coefficient. So we know that you posted and we knew the figures that Q1 of this year -- end of Q1, sorry. We know now that April was poor and May is most likely very poor as well. So my question would be regarding your guidance for the full year. Do you include already the poor output up until May? Or do you even include eventually further low level of hydro for the full 1H, for instance, considering that it is unlikely that it will revert to 1 by 1st of July, for instance? Or are you just considering that it's normalized from the remaining 9 months of the year, Q2, Q3, Q4? Just to understand a little bit the underlying assumptions that you have taken and your volume assumption for the hydro for the full year guidance adjustment. The second question would be -- I would like to come back a little bit and have your thoughts regarding the Spanish blackout eventually, if you could share with us what you think could be the reasons, if it can have an impact regarding the investment plan in renewables going forward or if it could have impact more into interconnection developments or into batteries and flexible development into the country? And where you think it could lend us in terms of potential investment to be expected into the country? Is it something that should put a break? Or is it something that should eventually enlarge new development into the Spanish country?

Yes. Thank you. Both questions are very relevant. I'll start with the first one with hydro. As always, we have -- for the first quarter, we have taken the numbers until the end of the first quarter, and that has been put into our guidance. The weak hydro coefficient of April and May have not entered our guidance because that would not be sort of like the regular methodology, which we use. If you included April and May into the guidance, there is in terms of volumes, there is a certain downside. At the end of the day, and we have seen that before, it could be very rainy during the summer. It could be very rainy during the fall, and then we're going to have a surprise on the upside, yes. So I'm just mentioning it. I want to give you a very clear answer in terms of April and May, not being part of the guidance. But I also want to make you aware of the fact that it is extremely difficult to predict weather and rainfall for the rest of the year. On the -- is that -- is that the answer to the question which you have had on hydro?

Yes, indeed. That's indeed the answer I expected for this part.

Okay. Perfect. Then on the second one, I mean, you are perfectly right, and you are asking all the right questions. Now I could give you an answer as a result of what I think being very much involved with Austrian Power Grid and the Austrian infrastructure. However, to be fair, as there is a committee, which has been put into place in order to look exactly at -- at what happened and the learnings and the consequences, I think it would be too early to come up with a personal opinion. It's a little bit dangerous as well. But the one thing I can tell you, and this is something that has been said from the Spanish side, both from the regulator and also from the grid operators, they certainly will look into the overall impact of renewables on the market. They will certainly look, and I don't want to get too technical, but they will look into inertia -- so when you -- when we had the, I call it, the old centralized system, we had the generators running at 3,000 circles per minute. As a result of that, you had a lot of stability in terms of 50 hertz. The 50 hertz were given by the mass of the generators that was basically producing a lot of stability. So when you take that -- those massive generators out of the system and you replace it basically with decentralized, more volatile generation, then a stabilizing factor in the system [lags]. And that is something that needs to be looked at, that is something all the grid experts and the technicians and the electrical engineers, they're well aware of that. But we basically -- and this is not just true for Spain. This is true for all of Europe. We need to look very specifically into situations where we have no rotating masses in the system or very little rotating masses in the system and where we basically have mainly renewables. And under those circumstances, how can we make sure that we have the stability, which is one of the primary objectives of the European system. And it could well be that -- and here I'm speculating, it could well be that the result will be to look even more intensively into the grid, into the technologies the grid can provide in terms of our products and the stabilizing products, and we discussed this on our conference call quite a lot is, of course, the control energy, primary, secondary, tertiary control energy to keep the level at as close as possible at the 50 hertz in order to avoid the blackout. And then, of course, there's congestion management, but there could be other measures as well. But what I will do is when we have our next conference call in approximately 3 months' time, we will already have the results from the commission, and I'm more than happy to then discuss.

Our next question is a follow-up from Olly Jeffery.

So 2 follow-ups. The first is just moving on to windfall tax, the EUR 200 million has been spoken about at an overall level for the wider sector. Is your expectation still that it would be within the EUR 50 million to EUR 100 million range for the full year? And do you have a lot of confidence in that estimate? Do you think that, that could be either higher or lower than what's in the guide? I'm just trying to understand how much uncertainty there is around that? And then just on coming back to the hydro production for this quarter. Just doing some back of the envelope numbers, I think normalized hydro production in Q2 for the run-of-river is around 8 terawatt hours. So taking into account the coefficient for April and so far in May, I think you'd be about 1 terawatt hour under budget for this point of the year for Q2. I appreciate things can change in the future. Is that a reasonable estimate for where you are under budget from a terawatt hour perspective for Q2 so far? Or am I being too high in that estimate?

I totally rely on your calculation. You know the company well. Quite frankly, I haven't done the calculation myself. But it's -- in terms of gut feeling, it sounds about right. On the windfall tax, yes, it's still between the EUR 50 million and EUR 100 million, we are -- we don't have specific results. We're still in negotiations, or should I say, in discussions. And it's going to be somewhere in between. Is it going to be towards the EUR 100 million? Or is it going to be towards the EUR 50 million? I don't know. But we are within that range.

Do you think that the impact of that tax will be booked to the EBITDA line or in the tax line? Just wondering how you'll treat that at the end of the year.

That is on the earnings line.

[I.e.,] will be included within your overall tax rate for the year?

Yes, the EUR 50 million to EUR 100 million is a number. If you put yourself in the shoes of the Ministry of Finance, the Ministry of Finance is basically saying, overall, I would like to achieve EUR 200 million from the energy sector. I mean we are obviously the key player in Austria in the energy sector. Therefore, the biggest contribution is going to come from us. And those EUR 200 million he wants to get, i.e., that would be below the tax line.

Our last question is a follow-up from Thibault Dujardin.

Can you hear me? I ask if you could give an update on the hedging levels and mark-to-market?

Yes, sure. In terms of the hedging levels per today, for '25, we are 80% hedged at a mark-to-market of 111. For '26, we are 45% hedged at a level of approximately 87%. And for '27, it's a relatively small amount. It's only 3% at a level of 85%. So for '27, we still have obviously a very large exposure to power price movements, either up or down. And on '26, slightly above the 50%. And then the mark-to-market is 87%.

Ladies and gentlemen, this was our last question. I hand back over to the management for any closing remarks.

Yes. As always, I would like to thank you also in the name of Andreas for a very interesting discussion, very relevant questions, which we're always happy to answer. Thank you very much for your interest and for your participation, and I look forward to talking to you either in person or during our next conference call. 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.