Verbund AG

VSE:VER

Earnings Call Transcript 2020-Q1

[Operator]

Dear ladies and gentlemen, welcome to the conference call of VERBUND AG. At our customer's request, this conference will be recorded. [Operator Instructions]

May I now hand you over to Peter Kollmann, who will lead you through this conference. Please go ahead, sir.

[Peter Kollmann, executive]

Thank you. Ladies and gentlemen, let me welcome you to the presentation of VERBUND for the first quarter 2020. And let me thank you for joining today's conference call in these exceptional times. I hope you're all well and healthy. I'm sitting here on my own in my office. Andreas Wollein is in a different room. So you see we take social distancing very seriously.

Before we move into the analysis of the business development of VERBUND, let me make a few general comments about this extraordinary first quarter 2020. 2020 started well for the general economy and for VERBUND until the coronavirus arrived in Europe and had devastating consequences not only on the people but also on the economy as a whole. The energy business sector, as you know, could not escape from this development. The situation is being characterized by falling prices for primary energy sources, CO2 certificates and declining demand for electricity. All that results in a decline in wholesale prices for electricity which obviously has an impact on us.

However, due to our hedging strategy, VERBUND managed to deliver satisfying results development in the first quarter, slightly lower on a year-to-year comparison. But we managed to guarantee the security of supply in Austria without any issues and problems, and we are ready to restart with our project pipeline once corona restrictions will be lifted.

Against this background, I'm going to present the figures for the first quarter to you now, and I'm moving to the next page. As always at the beginning, I want to highlight the most important influencing factors on our results development. Based on our long-term hedging strategy for own generation from hydropower, the average achieved contract price was higher compared to the first quarter 2019 despite much lower spot market prices for electricity. The hydro coefficient determining the generation from our run-of-river hydropower plants was higher than the long-term average but considerably lower than in the first quarter 2019. Contributions from flexibility products, especially from congestion management, increased compared to last year. And overall, the resource development was negatively influenced by lower contributions from the Grid segment.

The impact of these influencing factors on the key figures is as follows. EBITDA decreased slightly by 4.9%. The group result decreased by 12% to EUR 156.5 million. The operating cash flow was at a level of EUR 298 million. That's a minus of 21.5%. And the free cash flow was positive at a level of EUR 150 million and allowed us to reduce the debt level further. Net debt decreased by 6.7% to a level of EUR 2.1 billion.

Let me now give you our adjusted outlook for the business year 2020. Due to the COVID crisis, we adjusted our guidance range. VERBUND expects for 2020 an EBITDA between EUR 1.09 billion to EUR 1.25 billion and a group result between EUR 470 million to EUR 560 million. The payout ratio will be between 40% and 50% of the adjusted group results. The adjustment reflects the significantly lower spot market prices for our unhedged volumes for 2020 and the lower contribution from the Grid business coming from lower national tariffs because of lower demand for electricity as well as lower contributions from congestion management services and auctioning of cross-border grid capacities.

On the next page, on those charts, I will explain the influencing factors in more detail. I would like to start with our own generation volumes. If you look at the hydro coefficient, we saw low levels in January but above-average levels in February and March. At 109 the hydro coefficient, as you know, an index quantifying the hydropower generation of the run-of-river power plants, was 9 percentage points above the long-term average but 12 percentage points below the level of the first quarter 2019, which was exceptional. However, the production from annual storage power plants increased by approximately 14% due to increased lowering of water levels and more turbining. Own production from hydropower therefore only slightly decreased by 122 gigawatt hours or 1.6% compared to the first quarter 2019. Generation from thermal power was up by close to 50% or 191 gigawatt hours, reason mainly from the increased use of the CCGT Mellach for congestion management. Generation from wind power also increased by 19 gigawatt hours to 6.2% due to a more favorable wind condition particularly in Germany and Romania.

Second important influencing factor is, of course, the average achieved contract prices at the end of the first quarter 2020, always based on our hedging strategy, we achieved an average achieved contract price for hydro generation of EUR 46.2. For the full year 2019, we achieved EUR 39. Please note that we have already hedged approximately 78% of the volume for 2020. Now on a mark-to-market basis, as of end of April 2020, we calculate with a price of EUR 43.7 per megawatt hour plus/minus EUR 1, has a sensitivity of approximately EUR 25 million in the EBITDA line.

On the next page, flexibility products. You know that one of the major trends in the new energy world is increasing volatility in the European grid system, a result of the massive development of renewables with our very flexible asset base consisting of CO2-free low-cost pump storage power plants and our very modern CCGT in Austria. We're very well positioned to benefit from this trend through the sale of flexibility products. After result of EUR 23 million in the first quarter 2019 from these flexibility products, we registered a value of EUR 32 million in the first quarter 2020. The increase results mainly from higher contributions from congestion management. Please also note that since October 2018, our CCGT Mellach has been put into a strategic reserve mechanism in Austria, under which we'll receive a fixed capacity payment and a payment for the generation. As a consequence, we have changed an unpredictable volatile cash flow into a secure stable cash flow for a period of 3 years. For 2020, we maintain our guidance for flexibility products which is approximately EUR 100 million.

On the next page, we talk about our grid. As you know, the grid continues to be of strategically high importance for the group. It has an increasing importance in the European grid system. We like -- we very much like the regulated character of the business. As always, I mentioned that there is a gap contrast between IFRS and local GAAP that creates a certain amount of volatility in the results contribution, which, unfortunately, we cannot avoid. The chart on the left-hand side provides you with a comparison between the EBITDA according to local GAAP and EBITDA according to IFRS for 2019, for 2020 and, of course, our guidance for 2020. The EBITDA from the Grid business, according to IFRS, slightly decreased from EUR 98 million to EUR 84 million. The reason for the decrease results mainly from lower contributions from congestion management. We reduced the grid guidance from approximately EUR 220 million to approximately EUR 190 million because we expect lower contributions from congestion management services and auctioning off of cross-border grid capacities mainly as a result of the COVID-19 crisis. Please also note that the current regulatory period started on the 1st of January 2018 with WACC of 4.88%, pretax for existing assets and 5.2% pretax including an investment market for new assets, therefore, an average of approximately 5%. The regulatory period lasts from 2018 to 2022. The regulatory asset base for 2020 is approximately EUR 1.7 billion.

Now the next slide shows how the effects described before influenced our key financial figures. As I mentioned before, the EBITDA decreased by EUR 16.9 million to EUR 331 million. The decrease is mainly caused by the Grid segment, which was EUR 13.4 million lower than in the first quarter of 2019. All other segments was also down by EUR 8.7 million mainly due to the Thermal segment being lower as there were no positive contributions from changes in provisions compared to last year. These effects were slightly counterbalanced by higher EBITDA contributions from the hydro segment, which was about EUR 2 million; in the new renewable segment, with EUR 2 million; and the sales segment, with EUR 1.7 million. Depreciation increased by EUR 5 million, and the financial results deteriorated by EUR 9.8 million from minus EUR 2.2 million. This was mainly attributable to the other financial results to the negative measurement of securities according to IFRS 9, lower earnings contributions from interest accounted for using the equity method also had a negative effect. Lower interest expenses because of high repayments in 2019, however, showed a clear positive effect.

The group result, therefore, decreased by EUR 21.6 million or 12.1% to EUR 156.5 million. The EBITDA margin slightly decreased to a level of 26.3%. EBIT margin also decreased from a level of 21.4% to 18.8%, reflecting the above-mentioned effects.

Finally, I would like to mention the additions to tangible assets which were, based on our CapEx plan, above the previous year's level of EUR 88.2 million. The additions concerns mainly the hydropower plants in Toging in Bavaria as well as grid investments.

On the next page, I'll start with the operating cash flow in the first quarter 2020 decreased compared to the first quarter 2019. The decrease of 21.5% to EUR 298.2 million is mainly caused by margining payments from the Energy business and changes in the working capital. The free cash flow showed a decrease from EUR 305.6 million to a level of EUR 150 million caused by the lower operating cash flow, as described before, and increased investment activity. Net debt, as a result, decreased to around EUR 2.1 billion from EUR 2.3 billion. Our gearing decreased from 34.4% at the end of 2019 to 30.7% at the end of the first quarter 2020.

Now with that, I would like to hand over to Andreas Wollein, who is going to take us through the financial liabilities and the CapEx plan 2020-2022. Please, Andreas.

[Andreas Wollein, executive]

Thank you, Peter.

So on Page 9, you see, as always, our chart showing our development with regard to financial liabilities. The debt maturity profile shows a remaining repayment of EUR 226 million for this year, mainly consisting of a fixed interest bond in the amount of EUR 200 million. The debt maturity profile also shows another peak in 2024 with repayments of about EUR 525 million, mainly consisting of a fixed interest bond in the amount of EUR 500 million. So this year's repayment will be done mainly out of our, let's say, free cash flow, so this amount basically is fully covered. As liquidity backup, VERBUND has access to EUR 500 million syndicated loan facility, which is undrawn, has no MAC clause and is available until 2023 with 2 extension options. So this works very well as a liquidity backup especially in these times where liquidity is very important. VERBUND has also access to uncommitted lines with a large number of banks up to an amount of approximately EUR 400 million. The total amount of financial liabilities is around EUR 1 billion, so a very low number. The average interest rate on our debt is approximately 2.8%. And 98% of our debt is subject to fixed interest rates.

In Q1 2020, the development of the external ratings of VERBUND AG showed a continuing positive trend. So after the Standard & Poor's upgrade at the end of last year to a single A flat stable outlook, also Moody's improved and upgraded VERBUND's rating in January to A3 stable outlook. So we are now among all the utilities in Europe, I would say, among the best-rated utilities, and this development is clearly a result of the number of measures VERBUND has taken in the past to increase and optimize the cash flow and also, of course, the better market conditions for the VERBUND business model so far.

Yes. When we move to Page 10, you see the CapEx plan. You see the CapEx plan. The CapEx plan is unchanged. So we still work under a 3-year CapEx plan of about EUR 2 billion. So you see the split between the growth CapEx and the maintenance CapEx. So it's about EUR 790 million in maintenance CapEx, about EUR 1.3 billion is growth CapEx. The main part of the growth CapEx we invested into the regulated business, especially into the 380 kilowatt Salzburg line in order to increase the capacity to integrate new renewables and also better address the volatility and congestions in the grid system. About EUR 520 million will be invested into hydropower and new renewables. The biggest project here in the hydro segment is the construction of the run-of-river power plant Toging in Bavaria, a project which we acquired in 2009. And we bought -- we had -- when we bought the hydropower plants on the Inn River.

In addition to the growth CapEx, we are planning to invest around EUR 790 million into maintenance between 2020 and 2022, which is approximately EUR 260 million per year. So the CapEx spend as a basic message is unchanged. Even in this environment, and we are further working on our projects, which I described.

So now let's say, the last slide of the presentation, I would like to hand over again to Peter to present the outlook.

[Peter Kollmann, executive]

Yes. Thank you, Andreas.

As you know, key parameters for the development of our operational business are prices and hydro volumes. Now let's look at 2021. At the end of the first quarter, we have hedged approximately 34% of our hydro generation at an average price of EUR 46.2 for 2021, which is approximately EUR 7.2 above the level of the full year 2019. Now importantly, on a mark-to-market basis as of April 24, the average achieved price would be at a level of EUR 42.3 per megawatt hour, approximately EUR 3.3 above the 2019 level. We have also hedged approximately 5% for hydro generation at an average price of EUR 43.2 for 2022. The mark-to-market valuation shows a level of EUR 43.9 for '22.

With regard to the year-to-date hydro situation, we have to report a hydro coefficient of 1.01 as of end of April, which is 1 percentage point above the long-term average. On the basis of the aforementioned developments, the guidance for the full year 2020 is now an EBITDA of approximately between EUR 1.09 billion to EUR 1.25 billion and the group result of approximately between EUR 470 million to EUR 560 million under the assumption of average hydro and wind generation for the quarters 2 to 4 as well as the chances and risk situation of the group.

For the financial year 2020, VERBUND plans to pay out between 40% and 50% of the group results after adjustment for nonrecurring effects.

As always, at this point, I would like to highlight our sensitivities. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 3.7 million in the group results, a deviation of plus/minus 1% in the generation from wind power of EUR 0.4 million and a deviation of plus/minus EUR 1 in the wholesale price has an impact of plus/minus EUR 3.8 million in the group results.

Now with that, I would like to begin with our Q&A session, please.

[Operator]

[Operator Instructions] The first question received is from Lueder Schumacher of Societe Generale.

[Lueder Schumacher, analyst]

Indeed, Lueder here from Soc Gen. A couple of questions from my side. The first one is on your revised outlook. You say that it has been revised down to account for the effects of the COVID-19 crisis. What exactly are these effects and where -- in which divisions should we expect to see them? As you said, you're already 78% hedged on the hydro business. So presumably, that is not where you expect to see the effects. Grids would only account for about half of your downgrades, so I'd be interested to see where you expect to see those lower earnings in the rest of the year.

The second question is on flexibility products. I'm a bit confused there. On the one hand, you say it's been exceptional. It's been very strong. You point towards a 36% increase in flexibility products. And yet for the grids, you are talking about lower contribution from congestion management. It would be great if you could explain this a bit more. Where do you see the impact of the higher congestion management? Where should it be lower? And why has the outlook for the full year not changed from the EUR 100 million if you've seen a 36% increase in Q1?

And lastly, perhaps the easiest one, Gas Connect Austria, do you have any update for us on that?

[Peter Kollmann, executive]

Yes, thank you. I will start with the Gas Connect. We are currently in the midst of our due diligence. As you can imagine, due diligence is not exactly getting easier with all the restrictions in place, so that is certainly very challenging. As soon as we have more specific information, we will share it with you. But at the moment, I cannot comment on Gas Connect any further.

I think your first question in terms of guidance, obviously, I think it's the most important question, probably something that interests every single person on the call. The guidance change is very much influenced by power prices. When you looked at the power price development for the last 6 months, we have seen a steady decrease, quite dramatic actually, in every single product, in a quarterly product, in the weekly product, in the -- also in the forward product i.e., the 1 year forward product. And that is something that is very much impacting the open volumes, which we have. So when you look at the time when we originally gave you the guidance, we still had around 7 terawatt hours which were not hedged. And we're open. And the -- and at that point in time, the average prices were above EUR 40. At the moment, we are around EUR 30. So what you see there is you see a dramatic drop in prices. I'll just give you one example, which is the quarterly products. 6 months ago, the quarterly product was at EUR 45. It then moved down at the beginning of the year from EUR 45 to EUR 40, but then it dropped by another EUR 10, and currently, it's below EUR 30. So you see that there is a dramatic development, which as far as we are concerned is the result of the crisis, and we can talk about that in a second. And that has a direct impact on our revenues, and that has a direct impact on our EBITDA and on our earnings. And that is the key driver for our new guidance.

On the grid, you're right, on the grid, we had different effects. We actually had 3 effects. One effect on the grid was that we have lower revenues from auctions, number one. Number two, we have higher costs on congestion management, yes. So therefore, the contribution from the grid is lower because the cost of congestion management is higher. And then, of course, we have less -- because the demand has come down, we have less tariff income from the usage of the grid, which also had an impact. So I would say the key -- the big driver is the power price. The second biggest driver is the grid. And those are the key factors which resulted in the lowering of our guidance.

Now I've already mentioned the flexibility products. In terms of the flexibility products, and I always have to say that, and it's -- I know it's boring because it's always the same answer. It is very hard to predict flexibility products because it's a direct result of the volatility not just in Austria but also in Germany, in France, in all the surrounding countries. But we have decided that we are going to stick to our EUR 100 million guidance on the flexibility products because it's very difficult to predict the increased volatility for the rest of the year, increased volatility as a result of demand, supply, which is obviously different as a result of the corona crisis. The demand in some of the countries has come down quite dramatically. And again, if somebody is interested, we can talk about sort of like demand situation on this conference call in the geographical areas.

So that is -- Lueder, that is the -- that would be the key response to your 3 questions.

[Andreas Wollein, executive]

Lueder, may I add to your question about the flexibility products. So the difference, and I agree, it's a little bit confusing, let's say, to argue that we have different developments from congestion management in the grid segment and in the all other segments. But the reason for that is that when we have an increase in congestion management services, this is the positive effect and the improvement is seen in all other segments because it's related to the operation of the thermal power plant made last year because it's heavily used there. On the other side, in the grid business, you may see a decline coming from this effect because there are a couple of clawbacks from the past. So it's always a roll-up for all different measures for the last 2 years. So in this regulatory system, you may see, let's say, a decline in the contribution. But based on the fact that we have an increase in the -- in the congestion management, you have an increase. So that's why you have 2 different developments.

[Operator]

The next question received is from Ms. Serwinowska of Crédit Suisse. [Operator Instructions] And we come to the next question, it's from Louis Boujard of ODDO BHF.

[Louis Boujard, analyst]

Yes, Louis Boujard. Could you hear me?

[Peter Kollmann, executive]

Yes.

[Louis Boujard, analyst]

Okay. So just a few questions on my side. I'd like to come back a little bit on Lueder's question. The first one regarding the power market prices. Just your answering that you might have also some sensitivity to the quarterly product and the monthly product in your previous answer. I was wondering if you could give us an idea in terms of volume, in terms of percentage. When you hedge your volumes 1 year forward, what would be the share that you will hedge with the yearly products and the share that you would hedge with quarterly and monthly products? It could be interesting in the current environment where quarterly, monthly and yearly products don't matter exactly the same price, to have this kind of information.

The second question regarding the flexibility product. I know how it's difficult for you to give a view, but I would have expected also maybe some upside into that figure for 2020, in particular, with regards to what is happening in the French nuclear fleet. Could you remind us maybe what was the impact? Or what could be the impact in absolute terms of the stoppage of the nuclear fleet? Back in 2016, we remember that a lot of nuclear fleet were off the grid in the winter of 2016, '17. Maybe it could be interesting to have an idea of what was the sensitivity at that time. And is it possible in your view that such sensitivity could happen again maybe this winter?

And my last question is regarding the carbon prices. Could you give us your view regarding the potential evolution of this market in the current commodity environment? It's difficult apparently to go significantly above EUR 20 at the moment. What do you see going forward considering the evolution of this market?

[Peter Kollmann, executive]

Yes. Thank you. Yes, first of all, the way we hedge is 60-20-20. So 60% would be 1 year forward, 20% would be the quarterly product, and 20% would be the short-term products.

In terms of your second question, very interesting one, something we observed. If the French decided to put nuclear power plants into revision that would have an impact on a very strong export situation of France, which we currently have. So the key exporters in Europe at the moment are France and Germany. France, of course, a very, very strong baseload contribution. If France decided to cut down its nuclear production, that would have an impact on price, in my view. Yes, there are, as always, different schools of thought on this. This is something that is relatively new in terms of configuration for this winter. But coming -- let's just assume that we have a cold winter. And if nuclear production is going to come down in France, that could indeed have an impact -- a positive impact on power prices.

Last time in when we had the problems in the nuclear and in some of the Belgian power plants and a lot of the power plants had to be revised, that at the time had an impact on power prices. I can't tell you exactly how much it was, but it was quite significant.

In terms of the carbon price, a very difficult one. And the best is probably to say nothing because so far I have a good track record in terms of my predictions, so I don't want to spoil it. But I have never been, as you know, a believer that we are going to see CO2 prices going through the sky. I have said that I could see a level of EUR 30 and EUR 35, but I have been very conservative on CO2 prices. At the moment, we are below EUR 20 today. And now we have a bandwidth. I mean people that look at CO2 prices in great detail see an oversupply and could well imagine that the prices could go down to EUR 15. Other people argue that CO2 prices, which have a lot of support also from the political side, could go back up to EUR 30. I would feel very comfortable if we stick around sort of like between EUR 20 and EUR 25. That will be my personal prediction sort of like for 2020 in terms of CO2 prices.

[Operator]

[Operator Instructions] And we received follow-up of Mr. Schumacher.

[Lueder Schumacher, analyst]

Yes. Just a quick follow-up question for me. We have seen other peers around Europe struggling with predicting new load profiles amid all the lockdowns. What's the experience with APG? Is it all smooth or is it struggling, hence, even more demand for balancing power?

[Peter Kollmann, executive]

Yes. That's an important question in terms of the grid. APG has been extremely well prepared. And there were a number of grid operators across Europe which were actually in conference calls with APG and taking some guidance from APG as they have started extremely early to prepare for the situation in terms of crisis management. And I'm knocking on wood, as you can imagine, but so far, we have not seen any problems. The grid has been -- and I'm not just talking for Austria, I'm talking for the rest of Europe. The grid has been relatively stable. And yes, there is volatility because demand is changing. Some countries' demand has gone down by 20%. But it is relatively stable, and we had -- and we have no major issues. Obviously, everybody is totally focused on it, and everybody is working extremely hard to handle the situation. I mean I mentioned before the demand situation. I mean it's quite interesting what we have seen. For example, you might remember from our last conference call, somebody asked me what I thought the demand decrease because there weren't any numbers at the time how much demand increase could be. I think I mentioned something between sort of like 6% or 7% to 10%. And in Germany, we have actually seen sort of like an interesting development. We have seen sort of like demand going down to close to minus 18% at the worst. And now demand is sort of like going up again with the partial opening, you have seen that the car industry is starting to produce again. So the demand has gone up, and we are now at approximately minus 7%, yes, compared to the pre corona levels.

In Austria, we are at minus -- approximately minus 14%. In Italy, we were at a stage at the most extreme, minus 40%, which if anybody had asked any grid operator if that would be a possibility, people would not have seen it in any scenario, but we have seen demand coming down to minus 40%. But it's now up to minus 17%. And in France, we have approximately minus 16%. So what you see is, we see that the demand is still down. I think that it will continue to stay down, of course, with the loosening of the lockup regulation, it's going to increase. But I think overall, demand is going to stay lower. And then, of course, we have to take into consideration how severe the impact of the recession is going to be. And I mean a lot of you are sitting close to your economic research departments, and you probably know that there is a lot of discussion in terms of how long the recession will take. There is a lot of discussion how quick the recovery is going to be. And we are also running through different scenarios in our simulations for the next few years, which we have already concluded. We are taking into consideration 3 different scenarios: a quick V-shaped recovery, which we think is unlikely; we're taking into consideration a recovery by the end of next year. And when I say recovery that by the end of next year, we would be approximately at the pre-corona levels in terms of GNP. And then, of course, we're also taking into consideration almost like as a bad case scenario that we would have a prolonged recession with very low growth, with very low consumer demand. Our best case, to be transparent, is that we think that we are going to see pre-corona levels end of '21, beginning of '22.

If I look at research, that seems to be the consensus at the moment. But I think that we are in unchartered waters, and it remains to be seen how quickly we will recover and how quickly consumer demand is going to recover.

[Lueder Schumacher, analyst]

That's very interesting. So just to complete the numbers, as you said, German demand was down 18% at worst and is now 7%. Austria was down 14%. It was -- France, 16%. Do you just have the numbers for Austria and France where we are now?

[Peter Kollmann, executive]

Yes, in Austria, we are at the moment at minus 14%. And in France, we are currently at minus 16%.

[Lueder Schumacher, analyst]

So these are current numbers, these are not the worst you've seen?

[Peter Kollmann, executive]

No, no, these are current numbers. It's the current numbers. Yes.

[Operator]

And the next question received is from Teresa Schinwald of Raiffeisen CENTROBANK.

[Teresa Schinwald, analyst]

I have 2 actually. So the first one is on how do you handle on your end customer business side? Overhedged electricity, have you already sold it? Or what are you going to do?

And the second one is Bloomberg ran a story today about VERBUND green power and their target to increase the share of new renewables generation to 25% by 2030. If you're prepared to tell us already a bit more about that.

[Peter Kollmann, executive]

Yes, sure. I will talk about the new renewables, and Andreas is going to cover your question on retail. Yes, we -- from a strategic point of view, we have decided that over the next 10 years, we are going to diversify our renewable generation. As all of you write on a regular basis, Hydropower dominates our business model, it dominates our earnings, and it dominates our share price. We have, from a strategic point of view, have come to the conclusion that over the medium term we are going to diversify our renewable generation because of 2 reasons. Number one, as I've often said, unfortunately, we don't have a second Danube. It would be wonderful if we had more rivers in Austria and we could build more hydro. That is not possible, so we have limited investment opportunities into hydro, point number one. Point number two, we think that from -- in terms of generation profile and in terms of technical diversification, it makes sense for us to diversify into wind. We're already in wind but not very large, as you know, and into solar, particularly as wind and solar are and will be even more competitive in terms of generation costs.

We have come up with a target of 25% within the next 10 years. That would be 25% of our generation. Why 25%? To be relevant, we think that we need to have critical mass. Also in terms of being able to have synergies and to -- and as I said, to be relevant. So that is why 25%. And it could be 20%, it could well be 30%. It really depends not so much on the organic growth. But it depends a lot on the inorganic growth because organic growth, as you know, in new renewables, in wind and in solar is quite slow.

Now with that, I would like to hand over to Andreas for the retail response.

[Andreas Wollein, executive]

Teresa, sorry, I didn't understand your question acoustically. Can you repeat it?

[Teresa Schinwald, analyst]

Yes, sure. It's about potentially overhedged retail volumes that might not be consumed over the course of the year.

[Andreas Wollein, executive]

Well, basically, Teresa, we are not overhedged, we cannot be based on our hedging strategy because we -- basically, we sell electricity to end customers always, let's say, at -- for -- on the basis of 1 year futures today to the prices of the electricity exchange and with regard to volumes, I mean, these are fixed volumes which they have to take, so which they have to buy based on the contract. So basically, when you want to refer to the fact that if we have an issue with customers not, let's say, fulfilling the contracts, the clear answer is no, we haven't. There's only one customer where -- who is arguing, let's say, with a force majeure clause. But the likelihood of this customer to be successful, we think, is very limited. So -- but this is the only one here. So basically, we don't have any issue with customers not fulfilling the electricity supply contracts.

[Operator]

The next question received is from Petr Bartek of Erste.

[Petr Bartek, analyst]

I have 2 questions. So first is to the Hydro segment. In the first quarter, you reported only 1% increase in EBITDA, while prices were up more than 15%. And generation was down 5%. So to me, it looks like the operating costs are growing at 10% rate. So if you can comment on that and give us some outlook for the rest of the year in terms of costs.

And second question is the regulatory account in the Grid segment. If you already have some agreement with the regulator, how it will be reflected in tariffs. And also in the first quarter, I believe the Grid segment, had again, some extraordinary revenues, so some more color on that.

[Peter Kollmann, executive]

Yes. Thank you, Petr. We're going to split the responses. I'm going to cover the regulatory account and the cost, and Andreas will talk about your first question with regard to the first quarter differences, if I understood it correctly.

Now on the regulatory account, you're right, it is something we discussed on our last conference call. And I mentioned that we are in negotiations with the regulator in terms of how fast or how slow we are going to decrease the regulatory account. Our objective would be that we have a regular or a linear decrease of the regulatory account, which is, at the moment, approximately EUR 270 million. We are still in discussions, and we don't have a specific result. That is the short answer. If and when we have a result, we will obviously inform you.

In terms of cost, there is a cost increase coming from areas that are related to innovation and to cybersecurity. Cybersecurity is something which we view as very important. We are a critical infrastructure and it's critical infrastructure. We need to be extra careful, which is why we are -- we have -- at the end of last year, we have decided that we are going to further invest into our cybersecurity, both on the APG side, of course, and on the VERBUND side. That is something that increases the OpEx. Apart from that, all the other cost items are in line with expectations.

Andreas?

[Andreas Wollein, executive]

Petr, with regard to your first question, I think that's relatively simple to answer. So you're right saying that the result in the generation segment is stable compared to the first quarter last year. And we also rightly say that there is a price increase, so we realized average achieved contract prices which are, let's say, higher by about EUR 5. But on the other side, you have a strongly declining volume effect based on what we said before. So in Q1 2019, we had a hydro coefficient of astonishing 1.21, so it's 21% above the long-term average compared to only 9% this year in the first quarter. So if you calculate, let's say, the volume effect and the price effect, you may see that these both effects are -- let say, have the same -- roughly the same size, the same amount but, of course, in different direction. So that's the reason why the EBITDA in the generation segment is quite stable.

[Petr Bartek, analyst]

Sorry, so the increase in prices was relatively smaller in first Q than what we can expect for the full year?

[Andreas Wollein, executive]

So, of course, we cannot forecast the hydro volume for the rest of the year. I mean for the time being it's relatively low, so we -- I think year-to-date, the hydro coefficient is now exactly in the long-term average. So -- but of course, to forecast how the hydro situation will be for the rest of the year is almost impossible. With regard to prices, you have the effect which we described before. And that's the reason why the -- we reduced our guidance for the full year.

[Operator]

The next question we received is from Martin Tessier of MainFirst Bank.

[Martin Tessier, analyst]

I have 3, actually. So regarding your diversification in renewables, you mentioned that it should be more external growth than organic growth. Could you give us more information on the geographies that you target? So would you be more interested in the acquisition of selected projects or the acquisition of a small or medium player as a whole? And finally, do you already have a megawatt capacity target in the short to medium-term in the base?

[Peter Kollmann, executive]

Yes. On the diversification, we have decided that we are going to stay within Europe. We would like to stay close to where opportunities are. As a result of that, the key countries we're looking at, at the moment would be strong solar and partially wind countries but particularly solar. We're looking to Spain. We're looking to Italy. We're looking to France. We always look to Germany, which we consider almost like our home market; Austria, of course. As far as Eastern Europe is concerned, we are less active in terms of looking at that specific market. But we have a big radar screen, and we look at a lot of different opportunities. So if there is an interesting opportunity, we don't want to miss it. But geographically, we want to stay within a region which we can reach easily, number one; and number two, where we have very clear regulatory frameworks and want to stay within Europe, as I mentioned. Now in terms of -- we don't have specific megawatt targets short term. The reason for that is clear that when we look at inorganic opportunities, there are a lot of factors to be successful. As you know, there is -- a lot is done through auctions. In the past, we have been disciplined in terms of pricing. In the future, we will continue to be disciplined on pricing. As a result of that, there is always the possibility not to win in an auction or not to get an opportunity. You might remember that we have been very interested in the hydro assets in Portugal. And we have not been successful because we have decided that we're not going to go above the specific level in terms of purchase price. As a result of that, it is -- I can't give you a specific number in terms of how much megawatts we are going to acquire within the next 2, 3 years.

And then I think you had another question, if I understood it correctly, if we were willing to buy small companies which are in the solar sector and the wind sector. Did I understand correctly?

[Martin Tessier, analyst]

Yes, exactly. Either you acquire one project or you acquire a whole small or medium independent power producer.

[Peter Kollmann, executive]

Yes. Both is possible. We are both looking into projects where we just buy projects. But we're also looking into companies which develop and own portfolios and pipelines.

[Operator]

As there are no further questions, I hand back to Mr. Kollmann for closing remarks.

[Peter Kollmann, executive]

Yes. Thank you very much for your interest. Thanks a lot for your numerous questions. I can assure you that, as I have said in the last conference call, that our crisis management has worked extremely well. We have been able to put thousands of people into home office within a week. We had no issues in terms of home office and the lockdown, which has been quite strict in Austria. As a result of that, I can report to you that we are very satisfied with our crisis performance so far both on the generation level but also on our retail level, on our services and, of course, on the grid level. And I'm very confident that we will continue to perform well even if there is a second wave, which obviously I hope that there won't be.

With that, I would like to thank you and look forward to hearing you on our next conference call. Have a good day.

[Operator]

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