Verbund AG

VSE:VER

Earnings Call Transcript 2023-Q1

[Operator]

Hello, and welcome to VERBUND AG First Quarter Results Conference. My name is George, and I'll be your coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions]

I now hand the call over to your host today, Mr. Peter Kollmann, CFO, to begin this conference. Please go ahead, sir.

[Peter Kollmann, executive]

Thank you. I'm here with Andreas Wollein. Ladies and gentlemen, welcome to the presentation of VERBUND for the first quarter '23, and let me thank you for joining today's conference call.

Before we move into the analysis of our business development, let me make a few general comments. In the first quarter '23, wholesale prices for gas and electricity fell significantly, and at times, even though below the level recorded before the war in Ukraine, has concerns about security of gas supply in Europe decreased after the winter. This is particularly due to historically high levels of gas storage.

The proposals published by the EU Commission on the reform of the electricity market design should further stabilize the sentiment on the energy market. The aim of the European Commission is to accelerate the expansion of renewable energies as well as the phaseout of gas and, of course, to protect households from price fluctuations, also to protect households against future price peaks and, of course, market penetration. The revision of the act does focuses on maintaining the existing market design and orienting the energy market more towards renewables and the expansion of infrastructure.

Now let me move on to the financial details of the first quarter. At the beginning, let me highlight the most important influencing factors. Based on our hedging strategy for our own electricity generation from hydropower, the average achieved contract price increased by EUR 89 to EUR 202.8 in the first quarter. The hydro coefficient, as you know, determining the generation from our run-of-river hydropower plants, was slightly weaker than last year and below the long-term average. However, production from our hydro reservoirs was higher by 13.5% compared to last year.

Generation from wind and PV was up compared to last year, mainly driven by the acquisition of renewable assets in Spain. Thermal generation in contrast, strongly decreased due to the lower use of our CCGT in Mellach. Contributions from flexibility products decreased, mainly due to a decrease in pumping and intraday trading because of lower margins compared to last year. The sales segment also, and you will not be surprised about that, contributed negatively, among others, due to higher procurement cost for energy. Finally, a negative impact on our results derived from the implementation of the levy on excess profits in Austria, Germany and Romania.

The impact of these influencing factors on the key figures is as follows: EBITDA increased by 18.7% to EUR 967 million, and the reported group result increased by 2.8% to EUR 529 million. The adjusted group result increased by 14.1% to EUR 529 million. The operating cash flow strongly increased to a level of EUR 1.363 billion. The free cash flow after dividends was positive at a level of EUR 1.16 billion. Net debt decreased by 30% to a level of EUR 2.74 billion.

Let me now give you our updated guidance for '23 based on an average hydro, wind and PV generation in the next 3 quarters. We expect the reported and adjusted EBITDA between approximately EUR 3.7 billion to EUR 4.3 billion, and we reported group results between approximately EUR 2 billion and EUR 2.4 billion for '23. The payout ratio will be between 45% and 55%.

Now let me move into more detail. Let me start with the hedging volumes and hedging prices, which are, as you know, highly relevant for our results. A EUR 1 plus or minus in the achieved price has a sensitivity of approximately EUR 25 million in our EBITDA line. As of the 31st of March '23, we reached an average achieved contract price for hydro generation of EUR 188.2 for '23, and we have sold approximately 77%. For '24, we have sold 39% of our own generation volumes at a price of EUR 156. And for '25, we have sold 33% at a price of EUR 141. So on a mark-to-market basis with prices as of the 27th of April, the average achieved contract price for '23 is at EUR 174, for '24 at EUR 155, and for '25 at EUR 134.

Now on the next page, I would like to comment on our hydro segment at 0.93. The hydro coefficient, as you know, an index quantifying the hydropower generation of the run-of-river power plant was 7% on below the long-term average and 1% below the level of the first quarter '22. Production from annual storage power plants increased by 13.5%. Own production from hydro power gas for overall increased by 121 gigawatt hours, but 2% to 6 terawatt hours compared to the first quarter of '22. Higher average achieved prices, the main reason for the increased EBITDA. However, lower contribution from flexibility products, the levels of excess profits and the lower hydro coefficient had a negative impact on our EBITDA. In total, EBITDA, the Hydro segment increased by 70% to EUR 170 million.

Regarding CapEx, our main hydro projects, the 480 megawatts Limberg III pumped-storage power plant and the 45-megawatt Reißeck II pumped-storage power plants are on time. The 11-megawatt run-of-river project Gratkorn is also on time, and the completion is expected for '24.

On the next page, a more detailed analysis of our own generation from new renewables. The new renewable coeffcient, which is an index quantifying the generation from wind power and PV, amounted to 1.03 compared to 1.06 in the first quarter '22. Generation from wind power, nevertheless, increased by 7.3% or 24 gigawatt hours and amounted in total to 337 gigawatt hours. More favorable wind conditions in Germany, and our new installations in Spain more than offset the less favorable wind conditions in Austria and in Romania. Generation from PV amounted to 35 gigawatt hours in the reporting period, stemming from PV installations in Austria and Spain.

Now taking a look at the EBITDA development in the new renewable segment. We see that the EBITDA increased strongly to an EBITDA amounting to EUR 60 million. In addition to the increase in volumes, higher average achieved prices contributed to this positive development. The chart also provides an overview on current developments in the renewable sector.

On the next page, on our sales segment. Taking a look at the EBITDA development there. We see that it decreased strongly to a negative value of more than EUR 100 million. The reason is, among other things, as a result of sharply higher procurement prices for electricity and gas, as well as lower earnings contributions from our flexibility products. VERBUND delivered electricity and gas to approximately 520,000 end customers in the first quarter. That represents a decrease of approximately 13,000 customers year-on-year.

On the next page, on all other segments. Here, particularly our generation from thermal power, as mentioned before, it was down by 381 gigawatt hours to 307 gigawatt hours. This is a result of a decreased use of our CCGT Mellach for both electricity and the strategic reduction. That has led to declining electricity and district heating revenues. Furthermore, negative effects from the valuation of energy derivatives in connection with future energy deliveries led to a sharp drop in EBITDA. The contribution from flexibility products decreased by EUR 5.6 million. The contribution from KELAG, which is the provincial utility of Carinthia increased from EUR 8.8 million to EUR 14 million, due to a better trading results and higher contributions from their heating business.

Finally, I would like to remind you that the CCGT Mellach was contracted from APG, Austrian Power Grid, for future congestion management. In detail, Line 10 is contracted from the 1st of October '21 to the 30th of September '23. And Line 20 from the 1st of April '23 to the 30th of September '23. In the first quarter and the fourth quarter, we used Line 20 on a market-driven basis. The district heating power plant in Mellach is contracted by APG for the period from the 1st of April '23 to the 30th September '23.

Now on the next page, the more detailed analysis on our grid segment. The EBITDA for the first quarter was approximately EUR 87 million. This is a decline, which was mainly due to lower contributions from auctions. In addition, the higher shortfall in the current year, regarding loss energy procurement had a negative effect. The largest positive deviation resulted from the contribution from balancing energy.

I would like to remind you that as of January 1 this year, we have a new regulatory period. The regulatory system has been changed. E-Control, the Austria regulator, has set a new WACC for '23 and has changed the WACC into a WACC for existing assets and work for new assets. The WACC for existing assets has been set at 3.72%. The WACC '23 for new assets has been set at 4.88%. Overall, the WACC for '23 will be 3.9% when you take the mix of the new assets at the existing assets.

On top of the WACC, EPG can receive an incentive-based bonus of a maximum of EUR 12 million a year. The WACC for existing and for new assets for '24 will be set again at the end of '23 and will reflect the higher interest rate environment. EPG has appealed against the level of the WACC, mainly because of the reflection of historic development of interest rates, but not reflecting the strong increase in rates since last year.

The new EBITDA guidance for the electricity grid for '23 based on the new regulatory promoters and the increasing regulatory asset base is approximately EUR 340 million. Now the reason for the increase in our guidance is a result of lower expenses for lost energy procurement due to lower electricity prices as well as lower prices for control energy. The planned demand of the regulatory account at the end of '23 will be approximately EUR 470 million.

With regard to the results contribution of Gas Connect Austria, we reported an EBITDA of approximately EUR 47 million for the first quarter. The main reason for the increase were higher profit margins from the transmission grid as a result of higher commodity tariffs, which we have received. The guidance for '23 with regard to Gas Connect is approximately EUR 110 million under IFRS -- the increase results from lower procurement costs for gas to run our compressor station.

The next slide shows how the effects described before influenced VERBUND's key financial figures in the first quarter. Because of the aforementioned developments, EBITDA increased by EUR 152 million or 18.7% to EUR 967 million. Depreciation increased by 15% to EUR 126 million, due to the acquisition of Spanish assets and increased investments into the high-voltage grid. The financial result improved from minus EUR 27 million to plus EUR 2.2 million. This was attributable to higher earnings contribution from interest accounted for using the equity method, mainly KELAG and higher interest income, while higher interest expense is mainly caused by the issuance of our ESG-linked Schuldschein volume of EUR 0.5 billion in November '22 had a counterbalancing effect.

Taxes on income increased significantly because of a positive nonrecurring effect amounting to EUR 56.6 million in the first quarter of '22. This effect resulted from the revaluation of deferred taxes due to the reduction of the corporate income tax in Austria as part of the Eco-social Tax Reform Act. The group result, therefore, increased by EUR 14.6 million or 2.8% to EUR 529 million. The group results after adjustment for nonrecurring effects was up 14%.

Finally, I would like to mention the decrease in addition to tangible assets in total from EUR 360 million to EUR 117 million in the first quarter '23. This decrease of 67.5% resulted mainly from the acquisition of a 70% share in 1 PV and 4 wind power project companies in Spain with a total capacity of 171 megawatts from Capital Energy in the first quarter of '22. On the bottom left, you will find the additions into tangible assets of Gas Connect and Austrian Power Grid. Whereas on the bottom right, you will find the additions into tangible assets in the renewables business and others.

On the next page, I'll start with the operating cash flow, which in the first quarter, strongly increased to more than EUR 1.3 billion, mainly due to a significantly higher average price achieved for electricity as well as inflows from margin payments for hedging transactions, which were deposited with the clearinghouse of the exchange as a collateral for open positions. These positive effects were partly offset by higher income tax payments and higher interest payments.

The free cash flow after dividends showed a positive development from minus EUR 105 million in '22 to a level of EUR 1.16 billion, a significantly higher operating cash flow and lower investments in property, plant and equipment were the reasons for this positive development. As I mentioned before, net debt decreased from EUR 3.9 billion at the end of '22 to EUR 2.7 billion at the end of the first quarter '23, mainly due to lower short-term borrowings from banks in connection with the margining and the positive cash flow development. Gearing correspondingly decreased to a level of 27.5% compared with 46.8% at year-end '22.

Now coming to the final page of our presentation, the outlook. As always, at this point, we want to highlight our sensitivities as of the end of the first quarter. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 18.8 million in our group results for '23. A deviation of plus/minus 1% in the generation from wind and PV has an impact of plus/minus EUR 1.7 million. 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 for '23 because of our already high hedging levels, which we have for '23.

Our updated guidance for '23 is the following. VERBUND expects to report an adjusted EBITDA between EUR 3.7 billion and EUR 4.3 billion and the reported group result of between EUR 2 billion and EUR 2.4 billion, of course, as always, under the assumption of average hydro, wind and PV for the remaining quarters of the year. For the financial year '23, we plan to pay out between 45% and 55% of the group results after adjustment for nonrecurring effects.

Now with that, I would like to hand back to our conference organizer for the Q&A. Thank you very much.

[Operator]

[Operator Instructions] Our first question is coming from Wanda Serwinowska from Credit Suisse.

[Wanda Serwinowska, analyst]

Two questions for me. One is a very straightforward. If you could give us the latest KPIs, so hedging and hydro levels, that would be appreciated. And the second question is about the new framework of the proposal announced by the Austrian government yesterday. I know it's early days, it was announced only yesterday, but any color would be appreciated. I mean, first of all, is it going to be a retroactive? Or are we talking only about the volumes to be delivered in H2 this year? Would your '24 and '25 hedging will also be impacted? And then it seems that the revenue cap is lowered by EUR 20 per megawatt hour. So it's going to be EUR 140 instead of EUR 160. Should we expect renewables benefit to be applied again for you? Or anything that you can basically help us to estimate that?

[Peter Kollmann, executive]

Yes. We'll split the answer. I will talk about announcements from our Chancellor, which was done yesterday. And all your questions, Wanda, are perfectly rational and fully understandable. And quite frankly, we have exactly the same questions, but I will comment on that. And then Andreas will give you all the details in terms of hydro development.

Now we were surprised about yesterday's announcement. I think it is a result of a very intense political discussion around inflation. Inflation in Austria is higher than in most of the other European countries. This has been a topic for quite some time. Quite an emotional topic. The opposition parties are using it to attack, for obvious reasons, the governing parties for not doing enough. And yesterday, the Chancellor has basically come up with a way forward for the reduction of prices around electricity and for the reduction of prices around general cost of living, and the one area we'd like to talk about is on the electricity prices.

He has not been very clear in terms of timing. He has not been very clear in terms of exactly the way it's going to be implemented. We don't know if it's going to be retroactive or not, and we don't know exactly what the framework would look like. What he has said is that he wants retail prices for electricity to come down. And if he doesn't see electricity prices for retail coming down, he would consider the levy on excess profits to be changed.

Now that sounds to me like a condition. And whenever you have a condition, you don't know exactly what is going to happen. Obviously, retail prices for consumers is a result of many providers of electricity. Some of them are the regional utilities. Some are smaller private companies. Then, of course, us, although we don't have a huge market share on the retail side. And then it remains to be seen how and when this will be implemented, this lowering of electricity prices for retail.

And only then can we evaluate if that is going to lead to a changed levy on excess profits. So we have to observe exactly what the implementation will be. It will go through parliament. There will be discussions, and the discussions have already started yesterday with comments from the opposition parties. And I know that there is uncertainty going forward because you don't know exactly what is going to be the impact.

But at this point in time, as you know, I would always like to give you as much transparency as possible. I'd like to give you the numbers, which we have shared with you, but we don't have them at this point in time because we don't have enough information. As soon as we have more information, obviously, we inform the market. However, I think that because this is an important topic and there is a lot of media attention, I think that over the next few weeks, media will report on a regular basis on sort of like new developments.

With that, I would like to hand over to Andreas to discuss hydro.

[Andreas Wollein, executive]

Hi, Wanda. So quick information about the hydro development. I think it is in the presentation that in the first quarter, hydro coefficient was 7% below the long-term average. That had, of course, a negative impact in EBITDA of around EUR 50 million. So now going forward, April was better, still slightly below the average. It's around 4% below the long-term average. May is, I think, improving. There's a lot of rainfall now also in the next couple of days, so I guess May will be much better than the long-term average.

So I think in a nutshell, in the first quarter, below the long-term average. In the second quarter, it looks much better. Given the fact that it's raining now, I guess, we will have a much better hydro situation in Q2.

Yes, with regard to the hedging levels, I think the latest figure I can give you is the data from May 9. And here, what I can say is that we have hedged so far for this year, 81% of our own generation at a price level of EUR 184 per megawatt hours. Because short-term prices are lower, the open volumes currently would be priced at EUR 127 in a mix mark-to-market. It would be EUR 173.2 per megawatt hours going forward.

For 2024, we have hedged 48% of the volumes at a price level of EUR 155 per megawatt hour. And again here, let's say when we would also take into account the open volumes priced at current market prices, we could reach -- we would currently reach an average sales price of EUR 156 per megawatt hours. And for 2025, we have sold 37% at EUR 140 per megawatt hours. On mark-to-market, it will be at roughly similar level or so, around close to EUR 140 per megawatt hours.

[Wanda Serwinowska, analyst]

So 2025, it's 47%?

[Andreas Wollein, executive]

It's 48%, yes.

[Wanda Serwinowska, analyst]

For 2025.

[Andreas Wollein, executive]

No. For which year?

[Wanda Serwinowska, analyst]

2025. It was not...

[Andreas Wollein, executive]

2025, it's 37%.

[Wanda Serwinowska, analyst]

Yes, 37%. Okay. And then Peter, so one more follow-up. But it doesn't really see that if it's only 2023 at risk, it could be '24, '25. Have you heard anything about Austrian government [ talking about the ] expansion of the revenue? Because in theory, they should be effective only until end of this year, right?

[Peter Kollmann, executive]

Yes, that's correct. No, we haven't heard anything in particular. There is a possibility that it would be expanded into '24. I can't really see anything about '25 because it's very hard to see what electricity prices in '25 are going to be. I'm sure we are able to discuss the electricity prices at a later point in this conference call. But yes, you're right. There is some uncertainty.

The one thing which we are seeing both in Austria and Germany and certainly in other areas of Europe as well is a more intense discussion around electricity prices, both for retail and for the industry. And when you observe the latest discussions in Germany, for example, where an industrial price for electricity of EUR 60 per megawatt hour is being discussed, that reflects the overall concern both industry and the political leadership has vis-a-vis the competitiveness of Europe vis-a-vis other regions of the world.

And I think the discussion in Germany is a very serious one because we have already seen that very large companies, particularly on the chemical side but other users of electricity as well, are making investment decisions outside Germany and, in many, many cases, outside Europe because of very high electricity prices.

So this is a trend where we're talking about billions of investments that are not happening in Germany because of high electricity prices for the industry, and I'm pretty sure that the German government will make a decision on this. There is still a discussion within the coalition, but my prediction would be that it will come up with some sort of electricity price for the German industry. And that, of course, could have an effect on Austria. Because if you have a support for the German industry, let's just say, all the way down to EUR 60, and the Austrian industry is paying 50% more or 100% more, that would be unacceptable. And I'm pretty sure that the Austrian government will then react in tandem with the German government.

And the result of that, there is still -- there continues to be -- I mean this is something -- this has been our theme on our conference calls for the last 18 months. Since gas prices started to increase even before the invasion of Russia into Ukraine, but then with the invasion and the following discussions, higher gas prices leading to high electricity prices, at the same time, inflation, which is not only a result of energy prices, of course, but also of the tremendous increase in demand and supply over the last few years and the policy of the central banks.

When you mix all that together, there are -- there will be a lot of uncertainty over the next 1, 2 years at a minimum, and I think that we just have to be prepared of the decisions will be made in terms of the electricity prices. Then, of course, overlay is the discussion around merit order and the discussion around capacity markets because what you see is, in Europe, we will have a very strong build-out of renewables. Synchronized with that, we need to have, [ similar options now ], we need to have a dramatic build-out and investment increase in our infrastructure. Otherwise, we cannot integrate the renewables. And all that is related to very high cost.

And at the same time, with the build-out of renewals, and this is a topic which we have discussed in our last conference call, we have more and more necessity. And again, this is not an option, but this is a must for backup. Because renewables, obviously cannot give us the system stability. As a result of that, we need a full backup for when we don't have any wind and have no solar, and that backup is going to be very expensive. And the backup, by definition, cannot be renewable because we don't have enough hydro in Europe. Obviously, hydro, and this is the unique aspect about hydro, is renewable-based loads, but that's the only one except for nuclear.

So we have to think in Germany very, very carefully around how we are going to create the backup. And Mr. Herbert has already said that he needs a huge amount of gas, CCGTs as a backup. And then the question, and that is open, will be how is that going to be financed, number one; and number two, will that enter the merit order in a normal way? Will it enter the merit order at a specific gap? Or will it not even enter the merit order because it is part of the capacity market?

So I'm talking about Germany because Germany, obviously, whatever the merit award or whatever the capacity market in Germany is going to be will directly or indirectly have an effect on the energy market design in Austria.

[Operator]

Our next question will be coming from Mr. Harrison Williams of Morgan Stanley.

[Harrison Williams, analyst]

The first is just a follow-up on what you were just mentioning about this German power price corridor. It's my understanding that the state would effectively subsidize industry down to that EUR 60 a watt level, so it wouldn't be punitive on the electricity generators. I am just wondered if you confirm if this was to be replicated in Austria or similar design. Do you envisage the same sort of design? Or do you think given maybe some of the comments yesterday that it could be more punitive? So that's the first question.

And then the second question relates to grid investment opportunity. So I think in your previous report, you flagged APG CapEx about EUR 3.5 billion over the next 10 years. And I wonder, given that we're seeing companies across Europe wise higher than CapEx expectations into transmission grids along with this renewable build-out, how much higher could that number go? And what would be -- what would you need to see to raise your own guidance here? And that's it.

[Peter Kollmann, executive]

Yes, sure. Two good points. I'll start with the second one. We need more CapEx in Europe, way more CapEx. In Austria, yes, we have EUR 3.5 billion in our planning, but it will be higher. And the same is true for Germany. The same is true for every other European country. So we will see, and we have to see, huge investments into infrastructure.

Because if we don't make those investments into infrastructure, the energy transformation is not going to work. And I don't know if you remember, but for many, many years, starting in 2015, and I remember that very well because I'm also responsible here, not just for finance, but also for infrastructure, I said that we cannot have an energy transformation without a grid transformation. And I'm really baffled than surprised that it has taken such a long time for decision-makers to understand and to realize that the infrastructure development in the energy system across Europe is a contingency [indiscernible]. And as a result of that, we need to catch up, and we need to further invest. Investments are obviously more expensive and more challenging, but we will see a dramatic increase in infrastructure investments across Europe. That's to your second point.

The first point, you're right. The government has basically said, look, we are going to subsidize the industry from our budget. The key question is, where is the money going to come from? I mean budget just means that they have to take it from somewhere. They can increase debt levels, which is always a big discussion in Germany, as you know. But at the same time, they will have to use either money that comes in through dedicated areas, which are related to electricity or that are related to energy, or to just use taxpayers' money. So that remains to be seen.

If the government or if the state -- it's not the government, if the state would subsidize Austrian industry in the same way as we have currently heard from the German government, I don't know. It could be exactly the same procedure, the same [indiscernible], but it could be different. It could be more direct sort of like steady on the electricity industry, which will then be reallocated. But that is completely open. That is something we don't know. But I would say, as always, when you have complex system changes, which we currently have, there's a relatively wide bandwidth of decision-making possibilities.

[Operator]

[Operator Instructions] Next question comes from Olly Jeffery of Deutsche Bank.

[Olly Jeffery, analyst]

Three questions, please. One to follow up on what's been said already, and I guess it's 2 parts. One is, just so we're clear, it sounds like you're implying that you think one option here could be that the Austrian government sets the power price cap at EUR 60 a megawatt hour. Is that kind of what you're implying? Because that's how it's coming across as a possible outcome.

The second question is just related to this, just thinking about the impact in 2023. I mean, so far, it sounds like the power price gap is down EUR 20 a megawatt hour. And if that were applied to the full year, given you've got around 25 terawatt hours of run-of-river and you only keep 10% of the upside, above the power price cap, it sounds like it could be a EUR 500 million hit would be my estimate for the full year. If it was applied to the full year, and that's assuming you can still keep the renewable CapEx offset. If that's true, you can't keep your renewable CapEx to offset if that EUR 500 million estimate for the full year based on that cap coming down 20 years and megawatt hour at current?

So those two questions were, I think the [ Europe, again ], and that's last one. And then the last question is, just can you please confirm that for the -- for the full year that you're still assuming EUR 100 million provision for the consumer association issue that's slightly resolve next year and also EUR 200 million negative for the derivatives? Just to check that hasn't changed.

[Peter Kollmann, executive]

I'll start with the third one, that's the easy one. The answer is yes. The first one, I'm glad you asked because that's not what I'm insinuating. I've been talking about the current discussion in Germany, which has centered around EUR 60. And I have said that Austria or the Austrian industry cannot ignore the fact that there is a subsidy to the German industry all the way down to EUR 60. And Austria will be producing at much, much higher costs. There will be a huge discussion in Austria.

And there could be consequences here in Austria that the Austrian government decides to do something similar, and that would not be sort of like a cap, but that would basically be from the Austrian budget similar to the German budget, giving a subsidy to the Austrian industry. All that obviously needs to be with the EU regulatory framework. Subsidies are very strictly observed in Europe. We have a very strict framework for subsidies across Europe. So all that remains to be seen. But I definitely not inferred or insinuated on the price cap in Austria. So I'm glad you asked. Yes, otherwise, we would have been a misunderstanding on that.

On the '23 numbers, I wish I could give you a number. Obviously, I could only give you a number if we knew all the parameters and if we knew the timing. So this comes back to what Wanda asked me at the beginning. There is still uncertainty, and there is still uncertainty around timing, implementation, exactly how much it would be. As a result of that, I shy away from giving you a number, which I then have to correct because what parliament decides is going to be different from what people now insinuate from yesterday's press conference, which is just basically given a framework with a lot of conditions attached to it.

But what I would like to share with you is how much we have used for our guidance, for our current guidance, in terms of levy in the different regions. In Austria, we have used around EUR 350 million. That's the assumption which we have used. But again, here, I have to say that depends, obviously, on the development of the power price. In Germany, we have used around EUR 40 million. And in Romania, we have used around EUR 20 million. So that is sort of like the -- that is what we have today implemented as part of our guidance. All that remains to be seen. It depends on developments, which I have mentioned before.

Any new levy if it were introduced, like, for example, if there were a reduction of the cap in Austria, that is something that would then be recalculated if and when we know exactly what it's going to be and from when it is going to be applied. And that at that point in time, we will immediately inform you.

[Olly Jeffery, analyst]

I've had one follow-up because in your opening answer to the first question that Wanda asked, I think you said that the chance for what retail prices supposed to come down. And if they don't come down, they'll consider changing the excess profit levy. And what I want to check, is your understanding of the Chancellor's comments, is he referring from the levy changing from EUR 140 to EUR 120? Or as you're referring to levy of the new levy of EUR 120 possibly going lower?

[Peter Kollmann, executive]

No, I think what the Chancellor meant, it was typical when you start interpreting sort of like press conference of politicians. But I think what he meant was basically to lower from the EUR 140 to the EUR 120. That is my understanding. And the offset of renewable investments, which is something that is very important to the government, that, in my view, and I don't have detailed information, obviously. But in my view, it would be -- it would not be changed because it was the government, which particularly mentioned when the EUR 140 was established that they want to incentivize the utilities to invest into renewables. And as a result of that, they had come up with that concept.

So I think they're not going to change anything in terms of the offsetting. As a result of that, it would then be again interpreting what has been said in the press conference yesterday, a decrease from the EUR 140 to the EUR 120 but with the full ability of the utilities to offset it with renewable investments up to a specific point.

[Operator]

We now move to Mr. Joseph Kalwoda calling from Wil Asset Management.

[Joseph Kalwoda, analyst]

Three, 4 quick questions. The first one will be a cash cost. Cash cost per megawatt hours used to be roughly EUR 20, and I'm wondering how much that has changed over the last 2 years, just a ballpark number.

Second question would be, can you please share the amount or the size, the retail size in terms of volume and price for overall numbers? You just pointed out before, it's not significant, but I'd like to get an idea how big that is.

The third question will be, you have done an excellent job with the forward sales with the price of EUR 188, according to the presentation with current spot prices slightly above EUR 100. If you go to your homepage as a retail client you can actually get power directly from you, and the current price as of today for retail grants is EUR 310 spot EUR 20 per megawatt hour.

I'm just wondering because of this obvious, very significant excessive price gap between versus the forward sales, the EUR 188 at the current spot price of roughly EUR 100 as shareholders, do we have to brace here for more litigation? How high is the litigation risk? As you remember from last call, you've pointed out that you have made reserves already of EUR 40 million for last year because we received from our consumer organization.

The fourth -- you want to answer already? Or why you just want me to go ahead with further questions? It's up to you, whatever it's more comfortable -- if you're more comfortable with.

[Peter Kollmann, executive]

No, no, no, please, go ahead. Go ahead because you should start -- go with third question. Okay. No, why don't we go through all your questions, and we will answer.

[Joseph Kalwoda, analyst]

Okay. Another one is actually because of the success in pricing gap, we are talking about EUR 300, EUR 180 and EUR 100 spot price. Is this -- do you feel still being compliant with the S of the ESG?

And finally, the final question actually was partially covered already on the Austrian government summit from yesterday. Would you be rather -- even though we don't know yet any details of those potential framework to bring down inflation rate. And the energy industry was specifically singled out as a copper tier, right? Would it be rather -- as per VERBUND -- would it be rather inclined to smaller the excess tax? Or would you significantly reduce the price for the retail side? That's a strategic question. You can answer that already. You don't have to know the details of the framework, obviously, no?

[Peter Kollmann, executive]

Yes, sure, sure, sure. Well, do you have any further questions? Or shall I start?

[Joseph Kalwoda, analyst]

No, this is it for the moment, but I might have a follow-ons.

[Peter Kollmann, executive]

Yes. Sure, sure. Well, I'll start with the last one. I don't think it is sort of like VERBUND decision because this concerns the entire Austrian utility industry. And some of the regional utilities has a very large retail business and a very important retail business. As a result of that, I think this is going to be an interesting few weeks of a very broad discussion around a lot of different utilities in Austria, particularly on the regional side, where the share of the retail business on the overall profit and loss is much, much higher than in the VERBUND case.

As a result of that, I can't really answer that. And if theoretically, we were in control of the entire Austrian market than it would be -- and I think this is what you are referring to, it would be optimization question. It would basically be what would be more beneficial. Would it be more beneficial to reduce the retail price and not get a levy? Or keep the retail price where it is and absorb the levy? Yes, but that is a pretty mechanical function.

On the cash cost, I'm coming to the first one, and I'm looking to Andreas here to help me with the other ones because I've only -- I'm not sure if I've written down everything correctly. But I think that your first one was has the cash cost gone up? Yes, the cash cost has gone up, but only slightly.

[Joseph Kalwoda, analyst]

Can you give a specific number?

[Peter Kollmann, executive]

Well, I won't give you a specific number because those numbers, we usually don't give out, but I can tell you that the overall cost of production at VERBUND has gone up approximately EUR 1.

[Joseph Kalwoda, analyst]

Still in the EUR 20 range then?

[Peter Kollmann, executive]

It is still in the EUR 24 park. It is still in the EUR 20. That's exactly right. On the ESG, I know what you're referring to. You're basically -- if I understood you correctly, what about your social responsibility if your retail or consumer power price goes up a lot. Well, the...

[Joseph Kalwoda, analyst]

Sorry to interrupt you. Always in relationship with the forward price you've sold at the spot price, so we are significantly above our own average forward sales of EUR 188. That's what I'm alluding to, you know.

[Peter Kollmann, executive]

Yes. Okay. Good. So I will -- okay. So this has not been an ESG question.

[Joseph Kalwoda, analyst]

No, it's all interrelated. It's just -- the mark optionality, if your pricing policy, it's close to the forward sales, this is rational. But everything else has just been in -- especially if you are 80% owned by the public. It really puzzles me.

[Peter Kollmann, executive]

Okay. No, if you allow, I will keep the ESG aspect aside, and I will basically focus on hedging.

[Joseph Kalwoda, analyst]

Going back to this point. I mean is this ESG relevant, this aggressive pricing policy or not from your point of view?

[Peter Kollmann, executive]

It's not aggressive. It is not aggressive. This is why I was asking you if you wanted to refer to the social aspect of high consumer prices, but it is not aggressive. This is all relative. But of course, the retail prices have gone up because the procurement costs have gone up. And the -- and it's perfectly rational. The fact that electricity prices have gone up has not been caused by the utilities but has been caused by other aspects. Therefore, I don't think it is ESG-relevant.

[Joseph Kalwoda, analyst]

Even though our cash costs have moved by EUR 1, right?

[Peter Kollmann, executive]

Yes.

[Joseph Kalwoda, analyst]

Or as to put that into perspective, the EUR 20, the EUR 100, the EUR 188 and the EUR 310, always to put that into a relationship now.

[Peter Kollmann, executive]

Yes, yes. Well, the -- you're right that when you compare production cost of -- and I don't even want to talk about VERBUND, I want to talk about the generation business overall. When you compare production costs to current energy prices, then, of course, you have a very large gap wherever you have generators that have very low cost of production. That is true.

And as a result of that, last year, we have decided to do a special dividend. There was basically a discussion which we had with the government, where we have said, yes, there is a gap. And we want to make our contribution on top of the very large dividend, which we have paid out as a result of our higher earnings. And that special dividend was EUR 400 million, and the EUR 400 million special dividend was related to that aspect.

The discussion around retail, and I need to be careful because I don't want to mix up different aspects, you're right that we have provided for potentially losing the claim by the consumer association against us but also against other utilities vis-a-vis high power prices. And for that, we have provided for '23 of around EUR 100 million.

[Joseph Kalwoda, analyst]

You have topped that. You have topped that because I think last quarter, you said [ EUR 40 million ], right? So that [ will stop] the number.

[Peter Kollmann, executive]

No, no, we have always said EUR 100 million. We probably said EUR 100 million in terms of the provision for '23 for that specific consumer association play. And we don't know what the result is going to be, and we think it's going to take a long time, and we might even get sort of like a result from the charges only next year, only '24.

And then were you referring -- I just want to fully understand, and as you can see, I want to ask you for more details so that I can give you a full and transparent answer. Were you also implying to the current hedging levels which we have and the future prices of electricity? Or was that a misunderstanding?

[Joseph Kalwoda, analyst]

No, I'm just talking about the current -- what do you currently charge? This is it, just from your home base, EUR 310. This is it. The question I actually had is, how much of your total business is retail in terms of volume and in terms of price. Do you have some...

[Peter Kollmann, executive]

How much of our total business in terms of EBITDA or in terms of the volume of...

[Joseph Kalwoda, analyst]

No, in terms of volumes, sales and in terms of price.

[Peter Kollmann, executive]

The volume of our retail business is approximately 1.5 terawatt hours.

[Joseph Kalwoda, analyst]

Okay, okay. And what's the percentage of the total as a percentage?

[Peter Kollmann, executive]

Well, we -- well, our total is 25 terawatt hours of generation. So it is 1.5 terawatt hours out of 25 terawatt hours of generation per annum.

[Joseph Kalwoda, analyst]

Okay, okay. Perfect. And in terms of pricing? I mean you charge a significantly higher price with the EUR 310. So price must have a higher share then.

[Peter Kollmann, executive]

Yes, I don't...

[Joseph Kalwoda, analyst]

For the proceeds...

[Peter Kollmann, executive]

Can I ask you something? And please don't get me wrong, but you have a very detailed question. We have a conference call with a lot of investors. If you don't mind, I would refer you to Investor Relations. And there we can go through those points in great detail because it might take longer. It might take 20, 30 minutes, and we're more than happy to respond to all those points. Would that be okay with you?

[Joseph Kalwoda, analyst]

It's just basically a final question. It's only -- if you divide the 1.5% from the total volume, this is 6%. So cash proceeds must be significantly more than 6%, right? How much are they more?

[Peter Kollmann, executive]

Yes, yes, yes. [ 1.5 or 25 ].

[Joseph Kalwoda, analyst]

So how much is on a cash basis? What are the proceeds for those 1.5 on average? It's, I guess, more than 6% because you charged...

[Peter Kollmann, executive]

No. The retail business is loss-making.

[Joseph Kalwoda, analyst]

Lose-making, okay.

[Peter Kollmann, executive]

Yes, of course, yes. The retail business is loss-making because the procurement cost for the retail business is higher than what we are charging.

[Joseph Kalwoda, analyst]

Okay, okay, okay. Very interesting, very interesting. Okay. I didn't know that. Okay.

[Peter Kollmann, executive]

Yes, that's great. And look, please call us, call our Investor Relations department, and we will go into every gory detail you wish and give you all the answers. But we have already received feedback from analysts and investors that they would like to continue.

[Operator]

Our next question is coming from Teresa Schinwald of Raiffeisen Bank International.

[Teresa Schinwald, analyst]

I have a follow-up on the revenue cap and tax expense effect on EBITDA you mentioned. Could you split these by country? I think the total was EUR 69 million. That's the one thing. And then your outlook on short-term prices for the summer, [ Chancellor ] has suggested a little between EUR 120 and EUR 140, for most of the remaining year, would you agree on that?

And the third one is, what's your outlook on the M&A in the new renewables business with the new interest rate environment? There was certainly an impact on home demand, on project economics, valuations. Do you expect to speed up your efforts and take opportunities? This would be my 3 questions.

[Peter Kollmann, executive]

Okay. Well, thank you very much. On the first one, the split would be approximately 58 in Austria. 7 in Germany, 4 in Romania.

On the second question on the short-term power price, that, again, is very difficult to judge, as you can imagine. But I'll give you my personal opinion. I think that gas prices will continue to fall for a number of reasons. You probably know most or all of them, followed by higher gas prices when we come towards winter, but then, of course, dependent on how cold the winter is going to be, et cetera, et cetera.

In terms of our M&A activity, we will continue with our path of diversification into renewables, i.e., PV and wind. We are constantly observing the market, and we are looking at opportunities in the core regions, i.e., in Austria and Germany, but also in Spain, in Italy, in Romania. We analyze opportunities. And when we feel that it fits, we do it.

And in terms of interest rates, I will share that with Andreas, as Andreas is our interest rate expert. He's also responsible for the Treasury, as you know, and I will hand over to him on interest rate expectations. I will also give you my views afterwards. Please, Andreas.

[Andreas Wollein, executive]

Yes, Teresa. So I mean I'm not sure why you're exactly referring to the interest rate expectations, but I'm sure you know exactly where rates currently are. So rates have moved up. And this is, of course, a topic which we have to reflect into our capital costs when we do M&A, what we also reflect in our financing assumptions when we do M&A. But currently, of course, we expect according to the developments in the market that short-term rates will further increase by 1 or 2 steps. And the long-term, let's see. I mean, we have, I think, an inverse wind curve. And yes, so this is our expectation. So short-term increase. On the long term, we will see in the coming years. So interest rates we developed, but we expect the worse price curve or the universe unique curve to stay for, let's say, a couple of months, yes.

[Teresa Schinwald, analyst]

Can I comment? Sorry, I think there was a misunderstanding. I was referring to the general yield environment having an impact on the availability and attractiveness of renewables projects and especially financial investors' interest. Because now for the global investors, obviously, the change in interest rate environment change the attractiveness of some of the renewables project. So it was more geared out the opportunities that might arise for the utilities players in this year.

[Andreas Wollein, executive]

Yes. Teresa, I think the higher yield environment, of course, has an impact on investors' behavior, and that's what we currently see. Of course, that some of the business models of the past of some of the investors may not work anymore. So there is, I think, a changing behavior. Nevertheless, there is still a lot of money, let's say, in the market. So if you're referring to if we see, let's say, a decline in investors' interest and inorganic opportunities, I would deny that. So we still have a lot of interest. There's a lot of money here. The market is still up. And because there is a strong intention of, let's say, in a way, of mainly of even more of industrial investors now to beat up significant portfolios in renewables.

Of course, it's not tricky now because we have -- it's more challenging now because we see the aforementioned political impact, which makes it more difficult to predict cash flows. I think we have this inflationary environment, which directly corresponds into asset costs and, of course, into resulting CapEx. So this is all, of course, more challenging going forward and driving the interest rate environment, as we mentioned before. So it's more challenging. And I would say these increases in any case, capital costs and the various hurdle rates, which you [indiscernible] are applying, it's the same for us, of course, when we participate in the processes. But I would say and largely speaking, a hot market, a lot of investors' interest, maybe currently more from industrial investors. But there's still a lot of money, let's say, in the sector with pressure to be vested into renewables.

[Operator]

Ladies and gentlemen, we only have time for one more question, and that next question is coming from Mr. Piotr Dzieciolowski of Citi.

[Piotr Dzieciolowski, analyst]

I have 2 questions, please. So firstly, I wanted to ask -- go back to the discussion about the possible additional measures on the wind for taxes. Last year you've done some action -- preemptive action to kind of show your contribution to -- you offer a special dividend and then you offer a special scheme for suppliers. This year number seems to be better year-on-year than the last year based on your guidance. So would you consider a similar step-up in actions in form of whatever you can think of whether dividend or special offers?

And then on supply prices, reading this word of Mr. Chancellor, how is that possible that you see the offers coming lower quicker on the supply segment? What are you already making losses because of the high procurement costs and you are a really small part of the market. So is there any reason why the other suppliers would have some room to offer lower prices. So they would have to accept the losses, and therefore, all of the logic is not going to work, and therefore, we will see these measures.

[Peter Kollmann, executive]

Yes. I'll start with the second one. I agree with you. It's going to be very complex, and it remains to be seen what the effects on inflation is going to be. So I think the -- I understand the cooking that's happening, but I don't know what the results will be and how tasty it will be and how effective it will be.

I think a lot of discussion needs to go into what has been said yesterday. I think that it needs to be carefully evaluated what the real impact on inflation would be because that is the driver. The entire discussion has been around high inflation in Austria. And that has been the, I would say, the single catalyst for what happened yesterday. And yesterday was focused on electricity and food. And the food industry -- the food prices are high because of electricity prices. That was a quick and easy answer, right?

[Piotr Dzieciolowski, analyst]

Yes. I was just thinking like if we talk about the retail prices, there is no way why would VERBUND had offered the lower prices having minus EUR 100 million EBITDA. Is that possible? The procurement cost profile is going down, that could be lower or that's fixed for the year.

[Peter Kollmann, executive]

Yes, yes. No, exactly. We already -- sort of like our retail business is already loss-making. As a result of that, if we lowered more, then we would have more losses in our retail business. The question is going to be -- and this is why at the outside, I said it is very hard to really put -- to put a timing, specific figure, specific rules on it. Because how is the government going to do it? Is the government going to expect that there will be a move from all the players across Austria to lower prices to retail in tandem? Yes, no, I don't know. How will that be done? Because there are currently a lot of different prices from the regional utilities. So does not all have the same prices, they're different prices, the different bonus schemes, et cetera, et cetera. I mean this is an open market, right? So that remains to be seen.

And then, of course, how is -- if the prices were lowered on the retail side, how is it going to be calculated what the impact on inflation is going to be? Because it could well be that there is no impact on inflation because there are other parameters. Inflation, as we all know, is very complex. And if you look at the European Central Bank, the Federal Reserve and most of the economists, they can't even predict inflation for 6 months or 9 months. So how are we going to calculate the impact on Austrian inflation by sort of like short-term measures as reducing some of the food prices and the reduction of electricity prices?

So yes, I basically agree with you that it's going to be very complex. The implementation is very complex, and the calculation of the effect is going to be difficult. It's very difficult to pinpoint if there were a reduction in inflation. Is it really coming from that? Or is it coming from other aspects, which is easily possible? So that is a real tough one. And I'm sure that in 3 months when we have our next conference call, we will discuss this point in great detail, hopefully, with much more flesh and with much more effects and much more data points.

On your first one, you are right. We have taken preemptive action. And by preemptive action, we have reacted very quickly, and we have also reacted in a way that we were doing something for everybody, i.e. special dividend doesn't only go to the Republic of Austria, but it also goes to you.

And now with the levy for '23, with the new discussions and with the large number of contributions, which we have to make anyway, so value on excess profits, number one. Then with our higher earnings, obviously, higher tax to the government. Then of course, with higher earnings, our dividend is going to be higher. And at the same time, we have, as you know, a very strong commitment to making investments into infrastructure and to make investments into renewals. If you take all that together, I don't think that we are going to have a special dividend in '23. Yes. I cannot say an absolute no, but I don't think that we are going to pay a special dividend.

[Piotr Dzieciolowski, analyst]

And just very last, quick squeezing in. We've seen the cash conversion significantly above 100% versus EBITDA. This is as I understand the recovery of variation margins. Is that going to continue for the next couple of quarters? And how much of this variation margins by the year you expect to recover?

[Peter Kollmann, executive]

Yes. Well, that's an interesting one, and I will share the answer with Andreas because Andreas is looking at the -- sort of like -- at the variation margins at the margining provisions with the cash, which we require on a daily basis. But if you assume that gas prices, as I have said before, if you assume that gas prices will come down as a result of that, electricity prices will come down. And then, of course, the margin requirements will come down. Having said all that, and Andreas, please add, but as a result of that, we could see less cash flowing towards the exchanges. But, and this is an important part, we don't know what will happen. And we have decided -- we, at VERBUND, have decided that we want to be prepared for short-term hikes as a result of things which we cannot predict today. And as a result of that, we are -- we have -- we are prepared and we have enough availability for cash, access to cash that we can cover even very, very large short-term increases in power prices as a result of, I don't know, access tariffs, whatever it is. Yes. Andreas?

[Andreas Wollein, executive]

Yes. Piotr, I think you recognized it very ready. So I think in Q1, I think the cash flow improved by about EUR 1 billion because the net debt -- sorry, the net debt decreased by about EUR 1 billion. It's because on a quarterly comparison, I think roughly EUR 800 million, EUR 900 million difference in margining. We currently are still outstanding around EUR 1.1 billion, EUR 1.2 billion of margining, which is a relatively constant figure, I would say, because we are proceeding with our hedging strategy. So we are further selling our, let's say, electricity through futures, but also of course forward. But there is still also new positions, for new trading positions. We need the flexibility. So it's difficult to predict. But what Peter said is we are very cautious because it's unpredictable, and we have decided to keep financial flexibility at very, very high levels until -- over winter time, at least until Q2 next year. So yes -- so for the time being, I think in our planning, we assume a relatively constant margin requirement, which is around EUR 1 billion for this year.

[Operator]

Ladies and gentlemen, that will conclude today's question-and-answer session. I'd like to turn the call back over to Mr. Kollmann for any additional or closing remarks. Thank you.

[Peter Kollmann, executive]

Yes. I would like to thank you for a very active, dynamic and interesting discussion for your many questions, which you have had. I fully understand, particularly as we had news only yesterday, and we had our conference call today. I can assure you that we will provide you with facts and figures as soon as we have more clarity on the regulatory framework, and I very much look forward to talking to all of you in 3 months. All the best, and have a wonderful day. Bye-bye.

[Operator]

Thank you very much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day, and goodbye.