Ladies and gentlemen, welcome to the conference call on the half-year results 2024 of VERBUND AG. I'm Basilius Tekol Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a question-and-answer session.
You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. 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 2024. 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 2023, VERBUND started the financial year 2024 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 2024. And overall, the level of wholesale prices remains higher than before the start of the Russian-Ukrainian war, but well below the highs of 2022 and 2023. But now let's move on to the details of the first half-year 2024.
At the beginning, as always, let me highlight the most important influencing factors for the results development in the first half-year 2024 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 2024. 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 costs 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 2024. In the half-year 2024, 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 2025.
Now, the impact of these influencing factors on the key figures of VERBUND in the first half-year 2024 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 2024. Based on average hydro, wind, and PV generation in the quarters three and four, as well as the actual opportunities and risk situation of the group, VERBUND expects a reported and adjusted EBITDA between approximately EUR 3 billion and EUR 3.3 billion. The reported group result between approximately EUR 1.5 billion and EUR 1.65 billion for 2024.
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 are highly relevant for our results.
EUR 1 per megawatt-hour, ±, has a sensitivity of approximately EUR 25 million in our EBITDA line. Now, as of June 30, 2024, we reach an average achieved contract price for our hydro generation of EUR 123 for 2024, and we have hedged approximately 88% of our own generation volumes. For 2025, we have sold 51% of our own generation at a price of EUR 121.9. For 2026, 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 2024, the average achieved contract price for 2024 is at EUR 116.6, for 2025 at EUR 107.4, and for 2026 at slightly above EUR 80. Now, on the next page, let me comment on some developments in the various business segments of VERBUND. I will start with the hydro segment on this page.
As I already mentioned, at 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 2023. The production from our annual storage power plants, however, decreased by 3.1%.
Our production from hydropower, therefore, overall increased by 2,239 gigawatt-hours or 14.9% to 17,292 gigawatt-hours compared to half-year 2023. 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 45-megawatt Reisseck II pumped storage power plant project, as well as the 11-megawatt run-of-river project in Gratkorn, are progressing very well and will start operation in 2024 and 2025, respectively. Now, let me continue with an analysis of our own generation from new renewables.
The new renewables coefficient, an index quantifying the generation from wind power and PV, amounted to 0.94 in the first half 2024 compared to 1.01 in 2023. Generation from wind power increased by 81.1% to 443 gigawatt-hours and amounted to 989 gigawatt-hours in the first half of 2024.
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 renewable 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 2023 and in Austria and Germany in the first two 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 2024. Now, the chart also provides an overview on current developments in the renewable segment. Now, let me continue with an analysis of the sales segment, which, as you know, comprises 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 -EUR 143 million in the first half 2023. The EUR 15.9 million EBITDA contribution from the sales segment consists of -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 to flexibility products decreased by EUR 2.7 million. VERBUND delivered electricity and gas to approximately 480,000 end customers in 2024, representing a decrease of approximately 5.5% year-on-year.
Now, next page, we're discussing all other segments. The generation from thermal power plants was up by 81 gigawatt-hours, so 23.5%, to 423 gigawatt-hours due to an increased use of our CCGT in 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 2025. The district heating power plant in Mellach is, in contrast, contracted by APG for the period from the 1st of October 2023 to the 30th of September 2024. 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 2024 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 roll-up of previous years in the area of EPM 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 2024 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 2024 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 the 1st of January 2024, a new regulatory period started. APG receives a WACC of 4.16% for old assets, with the commissioning date up to 2022, a WACC of 4.88% for new assets with the commissioning date in 2023. And now, it's very important, a WACC of 6.33% for new assets with the commissioning date in 2024. So the total WACC for 2024 is approximately 4.5%. Now, there will be a yearly update of the WACC for new assets for each tariff-setting process until 2028.
Now, with regard to results contribution of Gas Connect Austria, we report an EBITDA of approximately EUR 47 million for the first half 2024. The main reason for the decrease are lower transmission revenues due to the war in Ukraine, particularly from the commodity tariff because of a tariff-related overcompensation in 2023. You will remember that in 2023, 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 2024 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 2023, to EUR 175.9 million in the first half of 2024. Now, with that, I would like to hand over to Andreas, who is going to discuss non-recurring effects and the key financial figures. Please, Andreas.
Yeah, thank you, Peter. So a quick word to the non-recurring 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 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 a risk-free tariff system.
The risk-free system comes with a lower future resource contribution because the regulator has changed the calculation of the RAB from replacement values to lower book values. In addition, Gas Connect Austria has to repay the historically collected risk premiums for 15 years to the system. Gas Connect Austria has higher EBITDA against 2023.
The measurement of an obligation to return an interest of Donaukraftwerk Jochenstein had a negative effect 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 non-recurring effects on the group results 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 million.
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 results 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.
Taxes on 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 2023 to a level of minus EUR 600 million in half-year 2024.
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 and 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. Yeah, as always, last page, our outlook. And as always at this point, I would like to highlight the sensitivities for 2024 as of the 30th of June. A deviation of ±1% in the generation from hydropower has an impact of ±EUR 6.9 million in our group result. A deviation of ±1% in the generation from wind and PV has an impact of EUR 0.6 million, and a deviation of ±EUR 1 in the wholesale price has an impact of ±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 2024. We expect the reported and adjusted EBITDA of approximately EUR 3 billion-EUR 3.3 billion and the reported group result of approximately EUR 1.5 billion-EUR 1.65 billion under the assumption of average hydro, average wind and PV generation in 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 2024, we plan to pay out 45%-55% of the group result after adjustment for non-recurring effects of approximately EUR 1.6 billion-EUR 1.75 billion. Now, with that, I would like to move on to Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue.
If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Wanda Serwinowska with UBS. Please go ahead.
Hi, good morning, Wanda Serwinowska UBS. Peter and Andreas, thank you very much for the presentation. Three 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 on hydro levels here today. 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, probably it's not renewables. So what has changed?
Is it 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. Is the third year when you incur the assets? So I think Andreas mentioned the change in the remuneration. So what is the fair value or book value of the asset right now, and how should we think about the EBITDA development beyond 2024? Thank you.
Yeah, you're welcome, Wanda. Now, first of all, in terms of the most recent numbers on our hedging levels for 2024, we are 89% hedged with a mark-to-market of €116/MWh, so nothing has changed. For 2025, we are 51% hedged with a mark-to-market level of €107/MWh. And for 2026, we are a third hedged, i.e., 33% with a level of €79/MWh. So that's 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 mainly of very, very good hydro coefficients. 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 added up to us being slightly more positive on the full year numbers.
One area, for example, flexibility products. Yeah, on Gas Connect Austria, there I need to give sort of 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 transfer capacities out of Russia are going to evolve.
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 the 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. There was one important point. The other important point is that we earned excess returns, which we made for the risk which we were willing to take.
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 a ction against the decision of the regulator, and we think that we are having a very strong case.
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. This is why we had to do the impairment. That impairment obviously means that our sort of the book value of Gas Connect Austria in our balance sheet is coming down accordingly.
So Wanda, quickly, the numbers for 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 three years starting from 2025 will roughly be, on average, EUR 70 million. Yeah.
Thank you. Can I just ask a quick follow-up? Peter, do you have maybe the hedging price without mark-to-market? So basically, we have a clean hedging price. And on hydro year to date, if you have it handy, that would 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 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 still have the high procurement cost 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 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. Yeah, more than happy to give you even more detail on the hedging side. We have hedged for 2024 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 2025, where we have hedged 51% at EUR 122. There we are exposed with about half on future power price developments.
The exposure in 2026 is even higher, with two-thirds, which are unhedged. The 33, which we have hedged, has been done at approximately EUR 80. This is the reason for the declining power price estimates between 2024 to 2026. What was the other point, Wanda? I think you had
the hydro. Just hydro year to date, and that's it from me. Thank you very much.
Yeah, the hydro year to date is 1.11. When you assume that the rest of the year is going to be our long-term average, you would come out with a 1.06 hydro coefficient for the entire year 2024.
Thank you very much, Peter.
You're welcome.
The next question comes from the line of Olly Jeffery with Deutsche Bank. Please go ahead.
Thanks very much. So just coming back to the sales segment and the EUR 100 million, at the beginning of the year, the negative valuation effect assumption within the guidance was minus EUR 100 million.
What is the current thinking and what you view that figure to be for the full year? And depending on how you view that, what could cause that to be zero by the year end, given you don't seem to have much of a negative valuation effect in the year to date? And then on 2026, I know 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. Thank you.
Yeah, sure. Yeah, 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, etc., etc. So we can't really go out and increase. That would obviously mean 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 are 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 2026, yeah, I mean, the reason is that sort of two years out, we still have quite some flexibility in terms of if we either accelerate our hedging or if we slow down 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 2026, 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 for the -EUR 100 million for the sales unit for this year that nothing's changed in your view, and that's from the beginning of the year? It's not that some of the parts within that, the negative valuation effect, for example, have got better, but other parts have got worse. The assumptions within that are still the same from the beginning of the year?
Yeah. Yeah. It hasn't changed dramatically. And it is still very similar for the reasons which I have outlined before.
Okay. Thank you.
The next question comes from the line of Harrison Williams with Morgan Stanley. Please go ahead.
Hey, morning, everyone. Thanks for taking my questions, and two from me. Firstly, on the GCA impairment, you mentioned that you had earned some excess returns from taking risk that you are now having to pay back. Can you confirm the quantity of that, and what's the timeframe that will be paid back?
And secondly, coming 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 timeline? Thanks.
Yeah, sure. No, I'm more than happy to discuss the situation with Gas Connect Austria. So the risk returns which we have received in the past, which we have to pay back, the total quantum is EUR 190 million, which we basically have to pay back over the next 15 years. As I say, we're taking legal action against that.
So I can't give you a probability because you never know how a judge will 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 get that back, that would obviously increase EBITDA directly. And then, of course, the same is true for the book value adjustment. If our legal arguments win on that point, that would basically improve the EBITDA of Gas Connect Austria as well.
I mean, but please be aware, Austria is not very different from any other countries in Europe. Those legal actions take a long time. I mean, we also have legal action on 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 more than a year ago.
This is very slow. That's just the way the courts work in Europe. We obviously hope that we're 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 to color on that?
Yeah. Yeah.
Okay. No, fair enough. 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.
That's clear. Thanks.
You're welcome.
The next question comes from the line of Thibault Dujardin with Bernstein Société Générale. Please go ahead.
Hello. Can you hear me?
Yeah. I hear you well. Thank you.
Yeah. Thank you. 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 at the global sales level and not at retail level, right?
Yeah. The minus EUR 100 million on the retail side encompasses everything, our entire retail activity, if that was your question.
Thank you. Thank you very much.
You're welcome.
The next question comes from the line of Louis Boujard with Oddo BHF. Please go ahead.
Thank you very much. Good morning, everyone. Maybe two 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 need to be paid back related to the GCA risk-free rate. Assumption that at the same time, the impairment is EUR 195.
So my question would be, if you could maybe give us a little bit more details on the EUR 195, 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 this 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, not only in Tunisia and in Spain, or if you're also interested in the transportation side of the green hydrogen future molecules, considering that you signed two MOUs recently. I guess that most likely you start to have quite a nice view on what you want to do in this field going forward. Thank you very much.
Yeah. 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.
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, as a 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 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 a 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-à-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 already 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 three 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, which is 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.
Okay. Thank you very much.
The next question comes from the line of Piotr Dzieciolowski with Citi. Please go ahead.
Hi. Good morning. It's Piotr Dzieciolowski from Citi. Thank you for the presentation. I have two 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. Second question I had was on the Gas Connect Austria but in a slightly different context. Assuming we have a truce with Russia post-US elections, so a scenario that is—who knows what that will be?
But would you be ready technically to import gas via southern route given the Nord Stream destroyed? And is that 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 project, whether you can sign anything creating a value? Thank you very much.
Okay. Now, I had a pretty bad line at the beginning. You were talking about Bavarian power prices. Sorry. Do you mind repeating the first question?
Of course. 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?
Yeah. Okay. Now, that is 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 introduce 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 is 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-Württemberg 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 technical consultants, two 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 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 need there 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 would certainly lead to very big political discussions. So on the second one, on Gas Connect Austria, 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 wanted 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.
Yeah. I mean, 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 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 need from probably 2026, 2027 onwards.
And that would basically allow us to import gas from Italy through a reverse flow. In terms of Russian gas flowing sort of through southern pipelines, well, I mean, that is a, 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 the 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 onto 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. Oh, and PPAs. That was the third question. Andreas, could you comment on PPAs?
Yeah. I got the question right. I think with regard to PPAs for our existing portfolio, I think currently we are selling—we are selling roughly 50% of our volumes are protected by tariffs. About 30% are contracted through PPAs, and about 20% is sold also under PPAs but has a spot market pricing.
So this is the current exposure. I mean, going forward, we have, I think, a target, a specific target that we want to sell roughly 80%-85% of our renewable production, especially related to the pipeline in Spain on the basis of long-term PPAs, let's say at least 5 years, better 7-10 years. And I think we would take about 15% spot exposure.
Yeah. Okay. Understand. Thank you very much.
The next question comes from the line of Teresa Schinwald with Raiffeisen Bank International. Please go ahead.
Thank you. It's kind of a follow-up to this question now on the renewable side because I get that the EBITDA outlook 2024 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 fell for Romania to this large extent? That's my question.
Yeah. Sure. Yeah. 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 the last figures and the comparisons of 2023. Looking into the future, it is very similar to hydro. We have sort of an average solar coefficient and wind coefficient as a result of our historical data which we have.
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 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 when we report the figures as we have done now, we are going to explain impact of prices and impact of volumes through our coefficients.
Thanks for that.
The next question is a follow-up question from the line of Olly Jeffery with Deutsche Bank. Please go ahead.
Thank you. Just a couple of follow-ups, please. Can you please let us know what you think the GCA RAB will be now in 2027? I think from memory, it was around EUR 640 million last year. Then in addition to that question, what was the negative valuation effect in the first half?
The last question is just coming back to the balance sheet question. 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 waiting basically to reason any update you can give on that because your balance sheet is clearly still very strong? All right. Thank you very much.
Yeah. 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 free cash flow will be stronger as a result of that. By the end of the year, our net debt to 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 three 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.
In terms of our target, we have—and target is probably the wrong word—but we don't want to go above a 3x net deb EBITDA. So right now, we're way below that. But we see sort of the 3x as a number we could live with, the rating agencies could live with. But either that has to go up quite a lot or EBITDA has to come down quite a lot in order to get to the 3x. Oh, yeah. And you asked about the regulatory asset base on Gas Connect Austria is around EUR 520.
Is that the view for what it would be by the end of the period?
Yes.
And the last question was on the—thank you for that. The last question was on the negative valuation effect that you saw in the first half. 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 mainly to your trading business that can oscillate depending on what direction the price of the commodities move in. I believe at the start of the year, your outlook for that figure for the full year was -EUR 100 million. But given sales was a positive number for the first half, I suspect you might not have recorded a negative valuation effect. But I just wanted to clarify if that was the case.
Yeah. Andreas has looked into that. He will give you the answer.
Yeah. So in the first half year, Olly, we have booked a negative valuation effect in the sales segment of -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. In renewables, we have a positive valuation effect of EUR 8.4 million. In total, let's say for all three segments, the negative valuation effect is minus EUR 63.2 million.
That's great. Thank you very much.
The next question is a follow-up question. Comes from the line of Thibault Dujardin with Bernstein Société Générale. Please go ahead.
Hello. Thank you very much. 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. I'm just wondering how we could reconcile all those elements. I would have expected the impairment to be higher in this context.
No. No. Quite frankly, I think there'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 on Gas Connect Austria. But look, I hate to repeat myself.
As I say, we have very strong arguments, and we feel 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 what you're specifically referring to, the risk premium, I mean, that is over 15 years.
Yeah. Yeah. So that is over 15 years. And when you consider future cash flows, they're going to be reduced by that number, by that annual number, which is obviously much, much smaller because it's over a long period of time.
But people, 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. 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, 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. Yeah. That are basically reducing the cash flow.
Thank you very much.
Thank you very much.
Okay. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Peter Kollmann for any closing remarks. Thank you.
Great. Yeah. 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 three 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.