January 20, 2022

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Edited Transcript of VER.VA earnings conference call or presentation 18-Mar-20 9:30am GMT

Vienna Apr 13, 2020 (Thomson StreetEvents) — Edited Transcript of Verbund AG earnings conference call or presentation Wednesday, March 18, 2020 at 9:30:00am GMT

* Peter F. Kollmann

Erste Group Bank AG, Research Division – Head of Equity Research of Czech Republic

* Tanja B. Markloff

So dear ladies and gentlemen, welcome to the conference call of the VERBUND AG. At our customer’s request, this conference will be recorded. (Operator Instructions)

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

Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [2]

Good morning, and welcome to our presentation. I’m here with Andreas Wollein, our Head of Finance and Head of Investor Relations.

Let me make a few comments how we are dealing with the coronavirus. This is very important as we are critical infrastructure and have a high degree of responsibility. We have started early to mobilize and make all necessary adjustments using action plans which we had developed in the past for such situations. We fully support the very stringent measures taken by the Austrian government, which some of you might have followed. In other words, we are working for the best and preparing for the worst. I can tell you with a high degree of confidence that we will produce and sell as much electricity as always, of course, depending on hydrological levels. I can also assure you that APG, our grid operator, is highly experienced and prepared for any crisis situation including the current one.

With that, over to Page 3 and our 2019 business developments. At the beginning, the most important influencing factors for the results development. The water supply was not only considerably above the level of business year 2018 but also slightly higher than the long-term average. Following the development of long-term futures prices and based on our long-term hedging strategy for our own electricity generation, the average achieved contract price was much higher than in 2018. The contributions from the Grid segment were higher than in 2018 mainly due to higher contribution margins from congestion management. The last influencing factor are lower contributions from flexibility products.

The impact of these influencing factors on the key figures of VERBUND in 2019 are as follows. Reported and adjusted EBITDA increased by 37% to EUR 1.18 billion. The reported group result increased by 28% to EUR 555 million, as did the adjusted group result, which increased by 60.4% to EUR 549 million. The operating cash flow was very strong at a level of EUR 1.2 billion, that’s plus 81%. The free cash flow after dividends was excellent at a level of EUR 640 million and allowed us to reduce the debt level further. Net debt decreased by 11.9% to a level of EUR 2.25 billion. Based on our strong results, we will propose a dividend of EUR 0.69 a share in our AGM on April 28, which reflects a payout ratio of 43.2% on our reported group results and 43.7% on the adjusted group results.

Now next page. In the following charts, I will explain the influencing factors on the results development in more detail. After a very good first half in 2019, we saw again low hydro volumes in the second half of the year, especially in the third quarter. Nevertheless, 1.01, the hydro coefficient, was 7% — was 7 percentage points above the level of 2018 and 1 percentage point above the long-term average. Thus, our own production from hydropower increased by 1,976 gigawatt hours or 6.9% compared to 2018. Generation from thermal power plants was down by 2.6% or 42 gigawatt hours, stemming from the decreased use of the CCGT Mellach for our flexibility services. Generation from wind power, however, increased by 95 gigawatt hours or 11.4% due to more favorable wind conditions in all markets.

The second important influencing factor on our results are, as you know, the average achieved contract prices. In 2019, based on our hedging strategy, we achieved an average contract price of EUR 39 per megawatt hour, and this compares to EUR 29.3 for 2018. Please note that we priced the majority of the volumes up to 1.5 years in advance and EUR 1 per megawatt hour, plus or minus, has a sensitivity of EUR 25 million on our EBITDA line.

Now next page. One of the major trends in the new energy world is, of course, increased volatility in the entire European grid system coming from the massive development of renewables. With our very flexible asset base, consisting of CO2-free, low-cost pump storage power plants and the most modern CCGT in Austria, we are very well positioned to benefit from this trend. However, 2019 ended lower than 2018 in terms of flexibility products, with the result contribution amounting to EUR 119 million with lower contributions from congestion management, pumping and control energy.

The reduction, however, was partly expected because since October 2018, the CCGT Mellach has been put into a strategic reserve mechanism in Austria, under which we receive a fixed capacity payment and the payment for the generation. As a consequence, we have changed an unpredictable volatile cash flow against a secure quasi-regulated cash flow for a period of 3 years. In addition, a good hydro situation is often inimical to the development of flexibility products. For 2020, we see an EBITDA contribution of approximately EUR 100 million from flexibility products.

On the next page, talk about the grid. The Austrian high-voltage grid with a system length of approximately 7,000 kilometers and interconnected capabilities into 7 neighboring countries is strategically of very high importance for the group because of its growing importance in the entire European grid system and its regulated character. However, under IFRS, in contrast to local GAAP, volatilities in the results contribution cannot be avoided.

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 2018, 2019 and our guidance for 2020. The EBITDA from the Grid business according to IFRS slightly increased from EUR 242 million to EUR 258 million. The reason for the increase is mainly higher contribution margins from congestion management.

Please also note that the current regulatory period started on the 1st of January 2018 with a WACC of 4.88%, pretax for existing assets and 5.2% pretax including an investment-markup for new assets, thus, on average, approximately 5%. The regulatory period lasts from 2018 to 2022. The regulatory asset base for 2020 is approximately EUR 1.7 billion.

The next slide shows the nonrecurring effect in 2019 compared to 2018. Compared to 2018, there were no one-off effects in the EBITDA section. We had positive nonrecurring effects related to reversal of impairments amounting to EUR 47.8 million. Those reversal of impairments were mainly related to some of our hydropower plants in Austria and our wind power plants in Romania due to lower cost of capital and higher wholesale prices for electricity. In total, the operating results showed nonrecurring effects of EUR 46.6 million.

In the other financial results, we had a negative effect due to the measurement of an obligation to return an interest in the hydropower plant Jochenstein amounting to EUR 55.6 million. We also had a reversal of impairment for our hydropower plant Ashta in Albania amounting to EUR 16.4 million. In total, the financial results showed nonrecurring effects of EUR 39.2 million. After considering the impacts from the nonrecurring effects on tax and minorities, the nonrecurring effects on the group result level amounted to EUR 5.8 million. We also show you the amount of the nonrecurring effects in 2018 just to give you a comparison.

Now on the next page, I will present how the effects which I have described before influenced our financial performance in 2019. Reported EBITDA increased by 37% to EUR 1.18 billion. The reported group result increased by 28% to EUR 555 million. The result development, especially the group result in 2018, was positively influenced by one-off effects. In 2019, these effects stemmed primarily from reversal of impairments on some of our hydropower plants in Austria and Albania as well as in our wind power assets in Romania. The obligation to return an interest contributed negatively.

Now adjusted for these one-off effects, EBITDA increased by 37.1% to EUR 1.18 billion. The adjusted group result increased by 60.4% to EUR 549 million. The very positive overall results development is mainly a result of the higher achieved contract prices. In addition, the increased production from hydropower contributed positively, especially in the first quarter and the second quarter. Positive influencing factors were also increased contribution from the Grid segment, whereas reduced contributions from flexibility products had a negative effect.

The EBITDA margin slightly decreased from 32.4% to 30.4%. The EBIT margin decreased from 24.5% to 22.2%. The declines are due to changes in the accounting policy according to IFRS 9, which led to a reduction in revenues in 2018 and an increase in 2019.

Now we will propose to the shareholders in our AGM on April 28 a dividend per share of EUR 0.69, which corresponds to a payout ratio of 43.2% on the reported group result and a payout ratio of 43.7% on the adjusted group result.

Now let’s turn to the development of the cash flow, which I think is very important. The operating cash flow 2019 increased strongly to a level of EUR 1.2 billion, being far higher than in 2017 and in 2018. The 2 key reasons for the strong increase were, of course, higher achieved contract prices for electricity and a favorable hydro situation compared to last year. Furthermore, lower tax payments as well as a higher operating cash flow from the Grid segment contributed positively.

The additions to tangible assets of EUR 439 million were higher than in 2018 and derived from CapEx for grid projects and maintenance CapEx related to hydropower plants. Main projects are the hydropower plant in Töging in Germany and the 380-kV line in Austria. The free cash flow before dividend was very strong at EUR 817.4 million after dividends at a record level of EUR 640 million. Now based on the strong free cash flow, net debt decreased further from EUR 2.6 billion to EUR 2.3 billion. Net debt to EBITDA also decreased strongly to 1.9x after 3x at the end of 2018.

Now let me take you through VERBUND’s financial liabilities and the debt maturity profile. Debt maturity profile shows a repayment of EUR 234 million in 2020, mainly consisting of a fixed interest bond in the amount of EUR 200 million. The debt maturity profile for the following years shows another peak in 2024 with repayments of EUR 524 million, mainly consisting of a fixed interest bond in the amount of EUR 500 million. 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.

VERBUND has also access to uncommitted lines with a large number of banks up to an amount of approximately EUR 500 million as well. Total amount of our financial liabilities is approximately EUR 1.1 billion. The average interest rate on our debt is approximately 2.79%. 91% of our debt are subject to fixed interest. 100% of the financial liabilities are denominated in euro.

In the fourth quarter, we had an ongoing positive trend on our external ratings. Our S&P rating was upgraded by 1 notch to single A/stable outlook. Moody’s followed in January 2020 with an upgrade to A3/stable outlook. The rating development is, of course, a result of the numerous measures VERBUND has taken in the past to increase our cash flow and to improve our business model in every respect.

Now before we move to the outlook for 2020, let me quickly comment on the updated CapEx plan. The volume of our CapEx plan has increased compared to the previous one, reflecting the better market environment. In addition, the Austrian government has shown strong support regarding the target to reduce greenhouse gas emissions. The total CapEx for the 3-year period between 2020 and 2022 is EUR 2 billion, split into growth CapEx of EUR 1.28 billion and maintenance CapEx of EUR 790 million. The main part of the growth CapEx, approximately EUR 700 million to EUR 800 million, will be invested into the regulated Grid business, especially into the 380-kV Salzburg line in order to increase capacity to integrate new renewables and better address the volatility and the congestions in our grid system.

About EUR 520 million will be invested into renewables, the biggest project being the construction of the run-of-river power plant Töging in Bavaria, a project which we acquired in 2009 when we bought the hydropower plants on the River Inn. In addition to the growth CapEx, we are planning to invest around EUR 790 million, into maintenance CapEx and efficiency increases between 2020 and 2022. There, we’re talking about EUR 265 million per year.

Now the next page and at the end of our results presentation, the outlook for 2020. As you know, key parameters for the development of our operational business are mainly prices and hydro volumes. At the end of 2019, we have hedged approximately 65% of our hydro generation at an average price of EUR 49.5 for 2020, which is approximately EUR 10.5 above the level of the full year 2019. Now important on a mark-to-market basis, as of February 27, the average achieved price would be at a level of EUR 45.1 per megawatt hour, which is approximately EUR 6 above the 2019 level. We have also hedged approximately 16% of our hydro generation at an average price of EUR 49 for 2021. The mark-to-market valuation shows a level of EUR 44.4 for 2021.

With regard to the year-to-date hydro situation, we have to report a hydro coefficient of 1.13. This is as of 11th of March 2020, and that is, of course, 13% above the long-term average.

Now on the basis of the aforementioned developments, the guidance for the full year 2020 is an EBITDA of approximately between EUR 1.15 billion and EUR 1.34 billion and a group result of approximately between EUR 510 million and EUR 630 million under the assumption of average hydro and wind generation for 2020 as well as the chances and the risk situation of the group. For the financial year 2020, VERBUND plans to pay out between 40% and 50% of the group result after adjustment for nonrecurring effects of between approximately EUR 510 million and EUR 630 million.

As always, at this point, we want to highlight the sensitivities. A deviation of plus/minus 1% in the generation from hydropower has an impact of plus/minus EUR 6.8 million in the group results. A deviation of plus/minus 1% in the generation from wind power has an impact of plus/minus EUR 0.6 million in the group results. And a deviation of plus/minus 1% — sorry, a deviation of plus/minus EUR 1 per megawatt hour in the wholesale price has an impact of plus/minus EUR 5.9 million in the group result.

Now with that, I would like to hand over to you for any questions you might have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Wanda Serwinowska of Credit Suisse.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [2]

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Wanda Serwinowska, Credit Suisse. Three questions from me. The first one, could you please update us on the regulatory surplus? Could you disclose what was the surplus as of the end of last year? Is there any update on the repayment?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [3]

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Wanda, sorry for interrupting you. It’s a very bad connection. I have a very — well, let’s just try.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [4]

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Okay. So maybe I will just speak slower. The first question is on the regulatory surplus. What was the surplus at the end of last year? Is there any update on the repayment? Do you still expect to repay the surplus over the next 5, 7 or 10 years?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [5]

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Okay. Sorry, let me just repeat if I understood correctly. You were talking about the regulatory account, the repayment on the regulatory account, okay?

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [6]

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Yes, yes.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [7]

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Okay. Understood.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [8]

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Okay. The second question is on the potential acquisition of the stake in the Gas Connect Austria. Could you disclose the 2019 EBITDA and net income? And what are the rationale behind the deal? Because I think you are not active in that — in the gas business. Is this the level of the organic growth? But at the same time, you increase your CapEx. So I’m just trying to understand why do you want to invest in that.

And last question is on the power price. Can you comment what you see on the market? Do you expect the current weak power price market to prevail? Do you still see a EUR 3 per megawatt hour premium in Austria versus Germany? And would you be able to disclose the latest hedging? Because the hedging as of last year is helpful, but I would say, hedging is [off] and February would be much more helpful.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [9]

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Yes. Okay. Now let me start with the power price as I can imagine that all the participants on the conference call are very much focused on that. We feel that the power price in our region, which is, of course, Germany, Austria, is going to decrease. The coronavirus has an impact. We feel that Germany will go into recession. We also feel that the demand for electricity will go down. At the same time, we see that commodity prices are not only low but will continue to be low. I’m talking about the gas price. I’m talking about the coal price. But I’m also talking about CO2 prices, which are now below EUR 20. We don’t see either commodity prices nor the CO2 price increase. At the same time, with the demand for electricity going down, we think that there is pressure on the power price for the foreseeable future.

In terms of our latest hedging figures, for 2020, we have hedged 75%. The mark-to-market on those 75% hedged, 25% unhedged, is 44.5. For 2021, we have hedged, to be exact, 27%. There, the mark-to-market figure currently is 44.1%.

Now it is very difficult to predict how power prices are going to evolve. What I’ve given you before is our judgment. There are different schools of thought. I think given the current situation within the economy, this is something that is very hard to predict. But as you have seen in our guidance, we are being cautious. And we’re already anticipating in our business planning that power prices might come down from here. At the same time, I would like you to think back, we had power prices at the beginning of 2016 that were just slightly above EUR 20. Even during that period, we have been very resilient.

As you know, within the last 5, 6 years, we have worked extremely hard to eliminate any sources of losses which we have had, that we have either sold or closed our thermal power plants. We have dramatically reduced our debt. So I say with complete confidence that today, we are positioned extremely well, and I would like to underline extremely well, for any situation which we’re going to have in the power market within the next years if the economic situation continues to worsen, which is a possibility. In fact, I would think it is likely.

Now coming to your second question, Gas Connect Austria. Gas Connect Austria is a regulated business. It is exactly the same as APG. It is a transport business of energy, APG electricity, Gas Connect Austria gas. You’re right that we don’t have an elaborate experience as far as gas is concerned, however, we have a deep understanding and a deep knowledge in any kind of regulated business. As a result of that, we feel that we can develop this business extremely well.

At the same time, from a strategic point of view, we feel that hydrogen and green gas is going to evolve over the next 10 years as a very important factor within the electricity world. We feel that we are also experts in terms of electricity storage, and there is a close link between hydrogen transportation and storage, where we think that there is a strategic aspect.

At the same time, it is a regulated business. You know that I have, for many, many years, always been a big fan of APG. I have supported the growth of APG as much as possible because I think that the regulated business is a very good additional component to a more volatile generation business. As a result of that, we take a favorable look at Gas Connect Austria. We now have an exclusive agreement with OMV. I’m not going to discuss any numbers. The reason is not that I don’t want to be transparent with you, the only reason is that we haven’t even had our kick-off meeting yet, which basically means that we have not even started with our due diligence. And as you know, VERBUND, we have a very good team, both on the financial side and on the operational and strategic side, which is going to turn every stone, and we are going to look at this business with the greatest care and diligence.

Coming back to your first question, the regulatory account has increased slightly. So we currently stand at around EUR 300 million. In 2020, we’re not going to see a reduction of the regulatory account. We are in discussions with the regulator. As I have said on the last conference call, our objective would be to have a linear decrease of the regulatory account over the next 10 years. We’re always trying to be as predictable as possible. And we think that if we increase it by, let’s say, EUR 20 million, EUR 25 million every year over the next 10 years, that would be something that would be in our interest and obviously in your interest. But as I’ve mentioned, we are still in discussions with the regulator.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [10]

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Okay. Can I have just a very, very quick one follow-up. You mentioned a decline in the electricity demand. Any number that you can share with us? I know it’s very hard to estimate it, but any thoughts on that one would be very helpful.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [11]

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Yes. I fully understand, and I think that you and the other 100 people on the conference call would be interested. I don’t have reliable figures. I mean I could give you a personal estimate. And as you know, I’m not shy to give personal estimates. I think the demand is going to go down by anything between 5% to 8%. I would be very surprised if it were 10%. But please be cautious, that is my personal opinion. There is no specific data as of yet. Obviously, we will get data in the future. But overall, we think it is fair to say that not just in Germany, across Europe, electricity demand will come down.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [12]

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And do you know by any chance what was the decline in the consumption back in 2008, 2009 during the financial crisis, if you could give an estimate?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [13]

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Yes. Wanda, there was an ambulance in the background. I haven’t heard what you’ve said.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [14]

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Sorry. Do you know what was the decline in the demand consumption back in 2008, 2009? Because if you see like a kind of flavor, I know the situation isn’t comparable, but do you know the number by any chance?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [15]

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Yes. I mean, the one thing — I know there are many comparisons now and that is perfectly understandable between our current crisis and the financial crisis. However, the big difference which we are currently seeing is that we have a real impact on the real economy. We have a real impact on production. I mean you will see within the next few weeks that in many sectors of the industry, production will decrease significantly. And when production decreases, obviously, you have less energy demand. That is something that you will see across Europe, maybe even on a global scale. That kind of production decrease in the real economy, and I cannot give you specific numbers, we have not seen during the financial crisis. So I think the comparable number of less demand during 2008, 2009 and 2020 and ’21 will not be leading towards a very specific result.

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Operator [16]

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Our next question is from Tanja Markloff of Commerzbank.

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Tanja B. Markloff, Commerzbank AG, Research Division – Equity Analyst of Utilities [17]

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I would be interested whether you could share with us your view on the sales and Grid division, to what extent these 2 divisions could be impacted by the lower demand. So how much of the sales, for instance, goes into retail and how much into industrial customers. And if demand predominantly from industrial customers dropped, what this could mean to your sales volumes and margins? And also for the Grid business, whether this would be temporarily impacted.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [18]

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Yes. I will start with the Grid business. In the Grid business, there will be no changes. If there is less expenses for congestion management because the volatility decreases in the European grid system, which is a possibility if there is less demand, that would actually increase the results at the Grid business. However, that is extremely hard to predict. It’s — as we have discussed on many conference calls before, there are so many influencing factors on the volatility, that flexibility products are very, very hard to predict. But I think that with EUR 100 million in terms of flexibility products and with our guidance on the Grid business, we are — we have a very sound guidance there.

On the demand, I mean, even if the demand comes down, it doesn’t mean that we are going to sell less. We will always sell our entire production. The only impact would be on the price, yes? So that is exactly what I said before. Did we think that there might be a decrease in power prices? Again, difficult to predict. But if demand comes down, we will obviously still sell our entire volume but at potentially lower power prices. But don’t forget that for 2020, we’re already 75% hedged at a level of EUR 47. And the 25% that are unhedged obviously will depend on power price developments going forward.

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Tanja B. Markloff, Commerzbank AG, Research Division – Equity Analyst of Utilities [19]

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And within the sales division, what would be the impact?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [20]

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Yes. Within the sales division, we don’t see an impact on the — there are a lot of people — like in Austria, a lot of people are at home. People are working from home. People obviously use more electricity at home as if they are away from home. At the same time, offices are partly empty, so there is less electricity used in offices. But at the end of the day, currently, we don’t think that we have a big impact on our retail business.

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Operator [21]

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(Operator Instructions) The next question is from Lueder Schumacher of SocGen.

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Lueder Schumacher, Societe Generale Cross Asset Research – Equity Analyst [22]

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A couple of questions from me, both on the direction of power prices. Your outlook wasn’t the most optimistic in terms of power prices, so I take it that this is versus the rather depressed levels we are seeing in the market already. Now in terms of your EBITDA guidance range, what numbers were you using for the bottom and the top of the range? I know the hydro coefficient will be a big influencing factor. But just on power prices for the bottom of the range, did you use prices from a week ago, 2 weeks ago, beginning of the month or even maybe perhaps a number that would be below the current [cash forwards]?

The second question is kind of also related to the same statement, if you are really so bearish on power prices and do you think they will continue to go down, if that would be somewhat consistent with having a hedged level of only 27% for 2021, I mean that would suggest that you really think — that if you’re so open still for 2021, that would suggest that you perhaps see some of the sell-off in power prices as maybe a bit overdone.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [23]

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Yes. First of all, on your first question, what we have done in terms of our guidance, we are simulating potential outcomes. And we’re not only looking at power prices, but we’re looking at a lot of different influencing factors. And we run those simulations by changing those variables, coming up with a lot of different results, and then we give you a guidance. So it is not just the power price. And we’re running different power price scenarios for the 25% which are currently unhedged. I don’t want to give you a specific number as we would be misguiding you because we don’t have one specific number, but we’re running a lot of different numbers in a lot of different scenarios.

At the same time, we’re obviously trying to optimize. We have our pumped storage. We are calculating optimization of when we sell our power which we have in our reservoirs. So there are many different aspects how we come up with our guidance. What I can say is that, yes, our guidance is conservative, but I think it makes a lot of sense to be conservative. When you look at the current environment, I’m rather surprised on the upside than being surprised on the downside. That has always been my approach, which I have taken. And I think that we should continue with that approach as it has served us extremely well in the past.

Coming to hedging levels, what you could see, you could see a decrease in demand now as a direct result of the recession which we’re going to see in Europe, which we are predicting. However, and this is a discussion which many of you are probably having internally as well, some people talk about a V-shaped recovery, which we have seen in the past. Some people are talking about the slow recovery. In a V-shaped recovery, obviously, power prices would go up very quickly. If we have a slow recovery, power prices would probably go up not as fast as if we have a quick recovery. Now we are basically trying to be prepared for both scenarios. As a result of that, we are constantly looking at our hedging levels. And we think that our — the combination of our 2020 and ’21 hedging levels given the current situation make a lot of sense.

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Lueder Schumacher, Societe Generale Cross Asset Research – Equity Analyst [24]

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Okay. Can I just go back on your first — so I wasn’t really — and I’m sure your process for coming up with the guidance is very complicated and there are a lot of data inputs. Can you perhaps share with us when — what’s the cutoff point for taking data on board when you made this guidance range?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [25]

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No, the day before yesterday. So we are constantly evaluating. We are, as you can imagine, in full operations, and we are constantly evaluating. As a result of that, we have looked at our numbers even shortly before we have come up with our guidance.

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Operator [26]

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The next question is from Mr. Bartek of Erste Group.

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Petr Bartek, Erste Group Bank AG, Research Division – Head of Equity Research of Czech Republic [27]

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Three questions, if I may. First, the outlook or the guidance for the Grid segment EBITDA, if you can explain the differences between the guided IFRS EBITDA and guided local GAAP EBITDA, which is quite light, EUR 70 million. Second, the reported other financial cost, the one-off of EUR 56 million, did it affect your cash flows in 2019 already? Or it will affect cash flow in 2020? Or it will not affect the cash flows? And if you can share your view on the future development of spreads between Austria and German electricity prices.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [28]

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Yes. I will start with the third one. We don’t see any changes in the spreads between Austria and Germany. We have originally even before the border came into action, we predicted EUR 3. The past experience since the border has been in place has confirmed that the EUR 3 are about the right number. And in our internal calculations, we continue to use the EUR 3 difference between Germany and Austria.

In terms of the difference between local GAAP and IFRS, the main difference is that in IFRS, we don’t have the regulatory account, which basically means that whenever we have changes in the auction results, we have changes in the cost for control energy or we have changes in congestion management, all that feeds directly into our results numbers on the Grid, directly into our EBITDA. In local GAAP, as we have a regulatory account that basically always absorbs those changes, we have the regulated return, which is basically the percentage of our regulatory asset base. The key drivers, as I’ve just mentioned, auction results, the congestion management and the control energy and then, of course, the changes in the repayment or in the increase of the regulatory account. In the past, the key differences between local GAAP and IFRS, just looking at the last 3 years, were mainly in congestion management.

Now on the second question, I didn’t quite acoustically understand it. You mentioned something what has an impact on the cash flow or the one-off? No, the one-off having no impact on the cash flow.

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Petr Bartek, Erste Group Bank AG, Research Division – Head of Equity Research of Czech Republic [29]

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So this is only a revaluation and with no effect on cash flows in the future?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [30]

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Correct. Correct. No cash flow impact.

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Petr Bartek, Erste Group Bank AG, Research Division – Head of Equity Research of Czech Republic [31]

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Maybe a follow-up question on the Grid’s EBITDA. If I look at the chart for the last 3 years and prediction for this year, it seems that the difference between IFRS and local GAAP is actually sustainable. So the extra income from control and energy conversion management auctions is something what you would treat as sustainable, this EUR 60 million, EUR 70 million plus above the local GAAP?

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [32]

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No. The safe way of how to look into the Grid return is the regulated return. So over the long run, it is the regulated return. And only over the short to medium term, it is basically all the IFRS effects which I’ve described before. So to be on the safe side, on your modeling, it is the regulated return, which is the 5% from the regulatory asset base. So the increase of the regulatory asset base and from that, the 5% until the end of the period, which is 2022, is the best way to model the Grid business long term. In the meantime, of course, we have — on the IFRS, we have those effects which I have described before.

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Operator [33]

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As there are no further questions, I hand back to the speakers for the conclusion.

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Peter F. Kollmann, VERBUND AG – CFO & Member of the Executive Board [34]

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Yes. I would like to thank you for the very active participation. We have the highest number of participants today which we have had over the last 5 years. I would like to reiterate again 3 aspects. Number one, both our Grid business and VERBUND is extremely well prepared for any kind of crisis situation. I would like to reiterate that both in our Grid business and on our electricity production, we will produce as much in the crisis as we always produce, and we will transport as efficiently and as effectively as we always do. Number three (sic) [two], that we have worked in a difficult period in ’14, ’15 and ’16 to make our business model as resilient as it can possibly be for any outside shock either through a short-term crisis or even a medium-term development in terms of a recession and negative impact of the economy.

We have reduced our debt. We have increased our cash flow. And the last point, which I think is very important, we continue to be one of the most cost-effective producer of green energy in Europe, if not the most cost effective. I would like to remind you that our production costs, if we take everything into consideration, is around EUR 20. As a result of that, we feel very confident that whatever happens, we are extremely well prepared.

With that, I would like to thank you for your participation and look forward to talking to you in our next conference call. Thank you, and have a good day.

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Operator [35]

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

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