OEZVF - VERBUND AG (OEZVF) Q3 2023 Earnings Call Transcript

2023-11-03 09:56:04 ET

VERBUND AG (OEZVF)

Q3 2023 Earnings Conference Call

November 2, 2023 6:00 a.m. ET

Company Participants

Peter Kollmann - Chief Financial Officer

Andreas Wollein - Head, Group Finance and Investor Relations

Conference Call Participants

Olly Jeffery - Deutsche Bank

Harrison Williams - Morgan Stanley

Thibault Dujardin - Société Générale

Louis Boujard - Oddo

Piotr Dzieciolowski - Citi

Teresa Schinwald - Raiffeisen Bank International

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the conference call on the quarters 1 to 3 for 2023 results of VERBUND AG. Throughout today's recorded call, all participants will be in a listen-only mode. The presentation will be followed by question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Peter Kollmann.

Peter Kollmann

Yes, thank you very much. Good morning, ladies and gentlemen. Let me welcome you to our presentation for the first three quarters, '23. And let me thank you for joining today's conference call. I'm here with Andreas Wollein. I'm traveling, so I'm hoping for a very stable telephone line. If not, Andreas is here with us as well, calling in from Vienna. Before we move into the analysis of the business development of VERBUND, let me make a few general comments.

After the rollercoaster year '22, which was mainly influenced by several factors such as the Ukraine-Russia war, massive changes in the capital markets with high interest rates and inflation, and, last but not least, the secular-specific challenges like the structural change in the wholesale markets with extreme price hikes and volatilities, volatilities which were accompanied by massive state interventions and enormously increasing CapEx requirements into renewable for those who are into infrastructure and new applications.

Now, the business year '23 has gone back into more quieter waters, more normality. However, with structurally higher prices and higher volatility, a volatility which is going to stay with us for many years to come, again achieve well this obviously in a massive transition, and at the end of this transition will look very different. Against this background, VERBUND is presenting its Q3 figures, a very strong set of figures, indeed the best numbers which we have ever presented. We have strong earnings, strong cash flows, high profitability, and an enormous financial strength which you can see when you look at our balance sheet with very low debt levels. We are very well-positioned for the future and for the energy transformation which I have just mentioned.

Now, when we move to the next page, let me highlight the most important influencing factors for our results development. Following the development of prices at the electricity exchanges and based on our hedging strategy for our own electricity generation from hydropower, the average achieved contract price increased by €64.4 to €176. The hydro coefficient, which is determining the generation from our run-of-river hydro power plants was better than last year, but below the long-term average. Production from our hydro reservoirs was also higher by approximately 70% compared to last year. Generation from wind and PV was up compared to last year, mainly driven by the new assets which we acquired in Spain and took into operation.

Thermal generation, in contracts, strongly decreased due to lower use of our CCGT Mellach. Contributions from flexibility products are still at a very high level, but decreased compared to the record year, '22. The sales segment contributed negatively among others due to higher procurement costs for energy. The grid segment developed well with strongly increasing contributions from the Austrian Power Grid, as well as from Gas Connect Austria. Finally, a negative contribution to our results is coming from the levy on excess profits in Austria and Romania, totaling approximately €77 million in the first three quarters, '23.

Now, the impact of these influencing factors on the key figures of VERBUND in the first three quarters is as follows. EBITDA increased by 83.6% to €3.549 billion, and the reported Group result increased by 85.9% to €1.98 billion. The adjusted Group result increased by 103% just about €2 billion, the operating cash flow strongly increased to a level of €4.15 billion. The free cash flow after dividends was strongly positive at a level of €1.475 billion, and net debt decreased by 38% to a level of €2.42 billion.

On the basis of the strong financial development in the first three quarters, '23, we updated our guidance for the full-year '23 based on average hydro, wind and PV generation in the fourth quarter, as well as the opportunities and, of course, the risk situation of the group, VERBUND expects the reported and adjusted EBITDA between approximately €4.15 million and €4.45 billion, and the reported Group result between approximately €2.25 billion and €2.45 billion for the full-year '23. The payout ratio will be between 45% and 55% of the adjusted Group result between approximately €2.27 billion and €2.47 billion.

The earnings forecast and information on the expected payout ratio are obviously contingent on VERBUND not being impacted further by possible energy policy measures to skim off some of the profits at energy companies.

Now, let me go into more detail on our hedging volumes and hedging prices which are, as you know, highly relevant for our results. I have to remind you €1.00 per megawatt hour plus or minus has a sensitivity of approximately €25 million in the EBITDA line. Now, as of September 30, '23, we reached an average achieved contract price for our hydro generation of €173.2, and we had sold approximately 96%. For '24, we have sold 51% of our own generation volumes at a price of €151.8, and for '25, we had sold 38% of the generation volumes at €138.3. On a mark-to-market basis with prices as of October 13, the average achieved contract price for '23 is at €171, for '24 at €148, and for '25 at €134 per megawatt hour.

Now, moving on to the next page, let me comment on some developments on the hydro segment. At 0.93, the hydro coefficient, which you know is an index quantifying the hydropower generation of the run-of-river power plant was seven percentage points below the long-term average, but 9% above the level of '22. The production from annual storage power plant increased by 7%. Own production from hydropower, therefore, overall increased by 2.26 gigawatt hours or 10.9% to 23,000 gigawatt hours compared to the first three quarters of '22. Higher average achieved prices and higher volumes are the main reasons for the increased EBITDA. However, levels on excess profits and lower flexibility products had a negative effect on EBITDA.

In total, EBITDA in the hydro segment increased by 71.6% to €3.114 billion. Regarding CapEx, our main hydro projects, the 480 megawatt Limberg III pumped-storage power plant project and the 45 megawatt Reißeck II+ pumped storage power plant project, as well as the 11 megawatt run-of-river project Gratkorn, and the 14.3 megawatt Stegenwald run-of-river power plant projects are progressing well, and are all on time.

Now, let me continue with the analysis of the old generation from new renewables. The new renewables coefficients, which is an index quantifying the generation from wind power and PV amounted to 1.04 in the first three quarters '23 compared to 1.01 in the same period last year.

Generation from wind power increased by 19.5% or 140 gigawatt hours and amounted to 858 gigawatt hours in the first three quarters. More favorable wind conditions in Germany and Romania as well as new installations in Spain more than offset less favorable wind conditions in Austria.

Generation from PV amounted to 287 gigawatt hours in the reporting period stemming from PV installations in Austria and Spain. Taking a look at the EBITDA development in the new renewable segment we see that the EBITDA increased by 75% to a level of €157 million.

In addition to the increase in volumes mainly from our new installations and acquisitions in Spain, we had higher average achieved prices, which made a positive contribution to our EBITDA development. The chart also provides an overview on current developments in the renewable sector.

Now we had numerous requests regarding more details on our new renewable activities, so we decided to provide you with an additional chart on a regular basis from now onwards. This chart outlines our capacities in operation and in construction in our markets split by technology i.e. wind and PV as well as our targets for 2030.

In addition, we are providing the expected EBITDA contribution in 2023, the historic CapEx spend as well as the planned CapEx until 2030. Please note that the additional explanations in the footnotes on the bottom left of the chart.

As you can see we have currently slightly more than 1,000 megawatts of new renewables in operation that is approximately 760 megawatts in wind and 250 megawatts in PV. Out of the 1,000 megawatts we currently operate approximately 600 megawatts in Spain, 90 megawatts in Germany, 110 megawatts in Austria and approximately 230 megawatts in Romania. We have currently approximately 115 megawatts renewables assets under construction.

Now with all the projects outlined on the chart, we will already reach our target of 3.8 gigawatts renewable capacity by 2030. Furthermore, I would also like to add that our most recent project communicated to the market on the 25th of October regarding the acquisition of 56.4 megawatts wind portfolio in one of Germany's federal states in Hesse, North Rhine-Westphalia and Lower Saxony was sold by an infrastructure fund managed by Impact Asset Management and that is now included in the figures of the chart.

Now moving on to our sales segment, as you're aware the results development in the sales segment is still negatively influenced by the margin pressure stemming from strongly increased wholesale prices of the past and the impossibility to pass on the price increases to our end customers.

In the first three quarters of 2023, EBITDA contribution improved but is still negative at a value of minus €165 million. EBITDA contribution from the retail business was negative at approximately €300 million. Now this figure includes a €70 million provision for the lawsuits, a provision which we booked in the first three quarters of this year. So, VERBUND delivered electricity and gas to approximately 500,000 end customers in the first three quarters which represents a decrease of approximately 31,000 customers.

Now let's move on to the grid segment. As you know, the grid segment consists of our regulated business Austrian Power Grid which is the electricity transmission grid operator as well as Gas Connect Austria, which is the gas transmission operator. EBITDA for the first three quarters of 2023 from the electricity grid business according to IFRS was approximately €240 million.

Now as a reminder let me highlight that as of the 1st of January 2023, we have a new regulatory period. The regulatory system has been changed. E-Control, the Austrian regulator, has set a new WACC for 2023 and has split the WACC into a WACC for existing assets and a WACC for new assets. The WACC '23 for existing assets has been set at 3.72%. The WACC for new assets has been set at 4.88%. So, overall the WACC for 2023 is 4% on average.

On top of the WACC, APG can receive an incentive-based bonus of maximum €12 million per year. Now the WACC for existing and for new assets for 2024 will be set again at the end of '23 and will reflect the higher interest rate environment. APG, as you know, has appealed against the level of the WACC mainly because it reflects a historic development of interest rates and does not reflect the very strong increase in rates since last year. The guidance for the electricity grid for 2023 is unchanged at approximately €360 million. The planned amount of the regulatory account at the end of 2023 will be approximately €490 million.

Now with regards to the results contribution of Gas Connect Austria, we report an increase of our EBITDA to approximately €173 million for the first three quarters 2023. Now what is the reason for this increase? It is mainly due to a one-off increase in the commodity tariffs because of higher gas prices and that will be reversed by the regulator next year. The guidance for 2023 with regard to Gas Connect Austria is therefore increased to approximately €190 million under IFRS for the full-year.

Now we'll hand over to Andreas with all other segments. Please, Andreas.

Andreas Wollein

Yes, hello. Let me continue with the last segment. Yes, despite the fact that the thermal generation failed by around 500 gigawatt hours, the EBITDA contribution in all other segments increased to a level of approximately €17 million because of positive valuation effects from the energy derivatives in connection with future energy deliveries.

However, the contribution from the flex products to the segment decreased by around €14 million. The contribution from our participation in KELAG, the provincial utility of Carinthia, increased from €13 million to €47 million due to better realized sales prices for old generation in addition to better hydro conditions. Furthermore, the heating and trading business contributed positively.

Finally, let me inform you that the CCGT Mellach is no longer contracted from Austrian Power Grid for future congestion management. Both lines are operated on a market-driven basis at least until April 1, 2025, if economically feasible.

If we move on to the next slide, we now present to you the development of the most important key financial figures. So, Slide 10 shows the development of EBITDA. As mentioned before, EBITDA increased by 84% to around €23.549 billion. Depreciation increased by 15% to €388 million, mainly due to the acquisition of our Spanish renewable generation assets and increased investments into the high voltage grid.

The financial result improved from minus €23 million to minus €18 million. This is mainly attributable to a higher earnings contribution from interest accounted for using the equity method, mainly KELAG, and higher interest income while higher interest expenses, mainly caused by the issuance of an ESG-linked Schuldscheindarlehen of €500 million last year and the interest expense from the loans taken over from the Spanish companies acquired in the previous year had a counterbalancing effect.

The group result increased in total by 86% to €[1.98 0.6] (ph) billion. The group result after adjustment for non-recurring effects was up by 103.7%. Finally, I would like to mention the increase in additions to tangible assets in total from €811 million to close to a €1 billion. This included, for example, the acquisition of operating wind power plants in Spain with a total capacity of 257 megawatts and potential for hybridization repowering from EBITDA.

Yes, if we move on then to the next slide, you see the impressive development of the cash flow. So, for both operating cash flow in the first three quarters strongly increased to €4.153 billion, mainly due to a significantly high average contract price achieved for electricity as well as inflows from margining payments for hedging transactions, which were deposited with the clearing house of the electricity exchanges collateral for open trading 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 €628 million to a level of €1.475 billion. The significantly higher operating cash flow was the main reason for this development.

And finally, the decrease in net debt to a level of €2.4 billion is due to lower financial liabilities because of the repayment of short-term money market liabilities. Gearing correspondingly decreased to a level of 23% compared with 46.8% at year-end 2022.

The next slide, Page 12, shows our current actual CapEx plan. I think it's unchanged. So, for both plans to invest in total €4.5 billion in the period 2023 to 2025; out of this number approximately €3.1 billion is for growth and approximately €1.5 billion is for maintenance CapEx. Approximately €1.4 billion goes into the electricity grid. Approximately €1.1 billion goes into new renewables and approximately €1.2 billion into our hydropower business. The rest will be invested into GCA, Gas Connect Austria and other projects like storage technology.

The opportunistic M&A activities, of course, are not included in this figure. Please note that we are currently working on a new CapEx plan, which will be presented with the full-year figures in March next year.

Yes, so Peter, I again would like to hand over to you for presenting the outlook.

Peter Kollmann

Thank you, Andreas. Now, as always at this point we want to highlight the sensitivities as of the 30th September 2023. A deviation of plus minus 1% in the generation from hydropower has an impact of plus minus €3.8 million. In the group result, a deviation of plus minus 1% in the generation from wind power and PV has an impact of plus minus €0.4 million and a deviation of plus-minus €400,000, and a deviation of plus-minus €1.00 in the wholesale price has a impact of €700,000 million in our Group results for '23.

Now, we updated our guidance due to the following three factors. Number one, we expect lower expenses for windfall taxes. Why? Mainly due to the fact that the planned CapEx for the years '24 to '26 is now also deductable from the levy. Falling electricity prices also had a positive effect on the calculation. The second reason is we expect to earn more from flexibility products in the full-year '23, mainly from pumping. And the third reason is we increased the guidance for Gas Connect Austria, as I outlined before.

Now, our updated guidance for '23 is the following. We expect the reported and adjusted EBITDA of approximately between €4.15 billion and €4.45 billion, and the reported Group result of approximately between €2.25 billion and €2.45 billion, of course under the assumption of average hydro, wind and PV generation in the fourth quarter '23, as well as the chances and risk situation of the group. For the financial year '23, VERBUND plans to pay out between 45% and 55% of the Group results after adjustment for non-recurring effects of approximately between €2.27 billion and €2.47 billion. The earnings forecast and information on the expected payout ratio are contingent on VERBUND not being impacted further by possible energy policy measures to skim off some of the profits at energy companies.

Now, with that, let us move on to the Q&A session, which Andreas and I will do together. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Olly Jeffery with Deutsche Bank. Please go ahead.

Olly Jeffery

Thanks for taking my questions -- questions please. So, the first one is just looking at the updated guidance you've given today, but what you've achieved in the nine months, from what's implied for what and you would do in Q4 if you get to the midpoint of guidance. And that would imply €750 million, around €370 million net income. Net income quarters Q1, where you did €530 million. Explain why you're expecting to see that drop off? Is that just being conservative or are there other things that we should consider? The first question. Second one I'll ask is [technical difficulty] Austria, you mentioned the guidance increase, and they -- offset could be expected to come next year when that situation is reversed?

Peter Kollmann

Yes, okay. When we look at the key drivers for our revised guidance, first of all, we had originally considered a windfall tax of slightly more than €400 million. With the offset of investment in '24, '25, and '26, we have been able to reduce that to about €125 million, so that is the key reason. That is the reason number one we have an impact of around €300 million. The flexibility products went up from €250 million to €300 million, and the key difference has also been Gas Connect Austria. And maybe I should explain that in a little bit more detail. There, we're moving from €140 million to €190 million.

As you might remember from last conference call, Gas Connect Austria is suffering from lower capacities because the capacities from Russia obviously coming dramatically. However, the regulator has given us what they call a commodity tariff, which is basically a special payment for the compressor stations which are using gas, and that that gas is much more expensive. And that has as effect of around €50 million, i.e., from €140 million to €190 million. And that is included in our guidance as well. Overall, in terms of the hydro coefficient, we currently have around 0.92, so we are eight percentage points below the long-term average. And when we take everything into consideration, we think that our guidance is fair. It's not overly conservative, it's a fair guidance for the rest of the year.

Olly Jeffery

Fine. Do you expect the -- should we consider the €50 million next year or do you expect a steeper decline in the EBITDA outlook for GCA?

Peter Kollmann

Yes, that's important. We expect Gas Connect Austria EBITDA over the next three years to come down. So, this €190 million in '23 really is a one-off as a result of these commodity tariffs, which will go away in the coming years.

Operator

Mr. Jeffery, are you done with your question?

Olly Jeffery

Sorry I -- but yes. Yes, thank you very much. That was very clear.

Operator

The next question comes from the line of Harrison Williams with Morgan Stanley. Please go ahead.

Harrison Williams

Hi there, morning. Thanks for taking my questions, two for me. The first was on windfall taxes. So, thanks for the updated guidance this year. As we look forward to next year, recently the European Council agreed that these price cuts could be in place until mid next-year. Are you able to provide any guidance on the impact of that or is it such that these allowances make that de minimis?

And the second question I had was just on long-term CapEx spend. I think you mentioned the release you expect you will invest about €15 billion over the next decade. I was hoping you can maybe provide some breakdown of that investment between hydro, electricity grids, gas grids, and renewals? Appreciate you provide that to 2025, but should we be extrapolating that or expecting an increase in maybe electricity grids toward the end of the decade? Thanks.

Peter Kollmann

Yes, sure. First of all, on the windfall tax and for the CapEx allocation, I will hand over to Andreas. On the windfall tax the EU has given member states, as you have rightly said, the possibility to prolong the [info marginal] (ph) tax, the windfall tax until middle of '24. We have no indication per today that Austria is planning to take advantage of that possibility. However, given the fact that we had a windfall tax until the end of this year in Austria, as opposed to a number of other countries, I think there is the possibility that the Austrian government will decide to take advantage of this possibility given by the European Union and will expand the windfall tax in Austria as well. So, to summarize, we at VERBUND, we don't know what the government will decide. However, my personal judgment would be that there is a possibility that it will be prolonged until the middle of next year. Now, on the capital allocation, maybe just before Andreas start, the one thing you should be aware of because it has been in the press that infrastructure investment of around 9 billion will be necessary. As we have talked many times before, the infrastructure is the foundation for the integration of renewables. So, that is something that is very, very important for the overall transformation of the energy system, not just in Austria, but everywhere. So, those are highly strategic and very important investments.

Having said all that, you need to go through pretty cumbersome approval processes, which basically means, and you have insinuated that the big investments in infrastructure will come towards the end of the technical period. For the great development, the €9 billion plan, and the investment, so for bonds capital allocation into those investments will be much heavier what's the end of the 10-year period than at the beginning.

Now, on the overall distribution, please, Andreas.

Andreas Wollein

Yes. So, I think the overall strategy here is with regard to capital allocation is diversification of cash flows going forward. And when we talk about the split, and please take in mind the CapEx numbers are always moving parts and we're currently working on that as well, and may come out with different numbers at the beginning of next year when we publish our full-year recites. But when we talk about this currently 15 billion until 2030, I think it's fair to assume that the biggest share goes into the regulated electricity grid business, so it's around 40%. And then, we have around 20% moving into hydropower, again about 20% moving into new renewables, and about 20% into hydrogen and storage facilities. So, this is a rough split until 2030, and as I mentioned before, it's following the logic to diversify our cash flows away, let's say, from merchant exposure in our home markets.

Harrison Williams

All right. Thanks very much.

Operator

The next question comes from the line of Thibault Dujardin with Société Générale. Please go ahead.

Thibault Dujardin

Hello, thank you very much for taking my question. Quick come back regarding the windfall tax, may I ask if you had an estimate of the impacted pull up in 2024 assuming of some level as it is currently? And second point, would you have the latest age of hydro production levels and prices?

Peter Kollmann

Yes, sure. Let me start with the latest figures in terms of our hedging levels, literally per yesterday, we are for 24, we are hatched 60% at the mark to market of €145, and for 25 we are hedged at 40% at a level of €130. In terms of the windfall tax, no, we have no impact calculation. In terms of the potential windfall tax in '24, obviously, first of all, we don't know if it's going to come. If it comes, we don't know at what level the most recent cap in Austria was 120 which was reduced from 140 where it was before.

Then we had the offsetting mechanism with the Austrian investments in '24, '25, '26, so we don't know what the rules would be in terms of offsetting investments for the next six months period, a windfall tax would be introduced, so there's just too many moving parts in order to make an impact analysis.

Thibault Dujardin

Thank you very much. Maybe a follow-up question concerning the windfall tax for 2023 including in your guidance. You mentioned one of the other €25 million, may ask the CapEx associated in terms of offset?

Peter Kollmann

Yes, the CapEx which we are offsetting that is a number of which we have not made public. Those are internal investment CapEx numbers for our Austrian investments.

Thibault Dujardin

Okay. Thank you.

Operator

[Operator Instructions] The next question comes from the line of Louis Boujard with Oddo. Please go ahead.

Louis Boujard

Good morning and thank you for taking my question. I would like to come back maybe on first question on the grid segment and more specifically on what we can expect for next year and going forward. In particular in APG, what we see here is that you have a poor remuneration framework at the stage, at the same time you have a strong commitment, willingness to increase investment in this topic going forward. What could be the likelihood of the significant revision, and what could be the magnitude, and when shall we have some indication and probable or likely higher remuneration that you could expect from it on the web basis? On top of it, there is a lot of moving parts in this business next year. Could you maybe help us to bridge a little bit what could be as a potential earnings of this assets in the next year, which regards to the one of effects in the different elements that have been recognized in this year? Maybe, the next question would be also to elaborate a little bit this time in the sales segment. Here, for reserved, of course, considering the situation, but at the same time you mentioned that there is some elements in terms of mitigating measures that could be implemented in order to avoid two half points increase to the final customers. How shall we expect it to impact the earnings going forward most specifically in 2024? Does that mean that we are going to remain in the difficult situation for this segment going forward? Or do you have room eventually to improve a little bit and enjoy a bit of asset return on this assets? Thank you very much.

Peter Kollmann

Yes. I'm going to share the answer with Andreas. Let me make a statement with regards to both the electricity grid segment and the gas grid segment. First on the gas one,

we're showing a very high EBITDA number for Gas Connect as I mentioned before, moving up to 190 million because of a very special tariff. But when you look at the overall development of the gas business, this business is very challenged by much, much lower capacities, as you might remember, Gas Connects Austria is basically a hub for Russian gas, which came in through to Ukraine was then used obviously in Austria, was delivered on to Southern Germany and to Italy, very large amount and with those gas capacities being much, much lower, we are currently negotiating with E-Control in new Paris model for the coming years without such a new tariff model, the business model of Gas Connect Austria would be highly challenging. So, depending on what the new tariff model is going to look like, we are going to have a new set of EBITDA figures going forward and obviously that is something where we will inform you as soon as we have agreed something with E-Control. The situation on with the Austrian Power Grid is exactly the opposite. There we have a lot of grow because of very important infrastructure investments.

The challenge is the regulatory return which is why we have come to court because we have come to the conclusion that the historic continuation of interest rates should not be applied in a situation where you had a very, very large increase in interest rate over a very short period of time as we have seen we argue that by the win like many others in Europe we argue that the high interest rates should be with selected and that in Methodology should be change slightly. Now E-Control has already listened to us as far as the new investment or concern to the late for the new investment for '24 will be much higher than it was in '23 it will be around 6.25%. This is for the new investment. Overall, the development of EBITDA because if I understood you correctly, you are asking for the key influencing factors going forward over the next few years.

I would say the top 5 influencing factors would be number one, of course, the regulatory asset base which is going to increase year by year. The regulatory account the way it's going to be used by the regulator, and then of course the classic influencing factors which are the auction result the congestion management and control energy. Those are like the key implanting factors which we need to observe. Overall, of course, it is the regulated return IE, the whack which we are going to achieve in APG. With that, I would hand over to Andreas to talk about the sales segment.

Andreas Wollein

Yes, so with regard to this sales segment, I think Louis we discuss a couple of times. I think you know that we have is currently a negative which the only segment which is not performing as we would like to see, so there is a negative contribution coming from the end customer business of more than €380 million including the provision, and also for the full-year that we set up a provision for this lawsuit based on the so-called VPI, let's say of this lawsuit. So, yes, we don't have a final decision yet. We don't know when this decision is called decision would come. We expect the end of the year maybe beginning of next year. But I think we have set up probability way to provision in order to reflect potential negative impact. I mean for the next year we cannot give you a forecast yet. I mean we don't have a formally approved budget yet so we are not going to publish a focused of these segments of the various segments but when we look in to next year, we expect the negative contribution to be strongly reduced. Maybe not to zero but there will be a much lower negative impact next year coming from the retail segment. Yes, so I think -- Of course we are doing all relevant measures in order to restructure the business as much as possible. And we are considering a lot of different options with regard to the end customer segment going forward but maybe do a little talk about it.

Operator

The next question comes from the line of Piotr Dzieciolowski with Citi. Please go ahead.

Piotr Dzieciolowski

Hi, good afternoon. Piotr Dzieciolowski from Citi. I have a two question please. So, first of all I wanted to ask you about your 15 billion CapEx by the end of the decade. I mean, I look at your current consensus for your profitability. It looks like you will generate more cash than 15 billion or you don't have any of that, or you have a limited data at the moment. So, at what point do you think this longer-term strategic plan will be revised either including a CapEx or thinking about different ways to pay shareholders either dividends or say buyback or anything like this? So, what needs to happen for you to take the decisions on at least to direction of the cash allocations? And then second, when you think about the 3.8 gigawatt rebuild target, how much of it do you think you will buy and how much of it you will build organically?

Peter Kollmann

Yes, okay. Let me start with the second one. And, Andreas, please chip in when there is any additional information. On the 3.8 gigawatts we are going to do more organically than in the past. The reason is value creation. Obviously, when you buy through M&A you are not in the full-scale value creation. It is important in order to have a platform. It is important to gain critical mass, but at a specific stage it is important to get more into organic development so that is something we're going to increase. But when we talk about M&A, it's not just buying existing projects, the results of the possibility of buying developers or taking advantage of opportunities.

As you know, the market has been very difficult recently from a development perspective to reason being higher CapEx. Solar panels are now cheaper but CapEx is still a challenge then of course there's a lot of volatility on the PPA side. There is a tendency towards base PPAs as opposed to price as produce. And then, of course, there's high interest rate, so there a number of challenges for the market and we are having a very strong balance sheet and having the firepower, we will take advantage of opportunities if and when they arise, and that could be opportunities on the development side. In terms of the €15 billion CapEx, I mean you know our business model, our cash flow generation is very much dependent on the power price, so if the power price remains relatively high, if there's a structural change in the power price which some people argue remains to be seen but some people argue that we're going to have structure higher power prices if that were the case, we would have a higher cash flow generation, and that together with the leeway which we have on our net EBITDA would allow us to make investments into all areas which we have mentioned before in terms of our capital allocation, and in addition, we will be able to pay a generous dividend. So, that is something where we need to look at power price developments very carefully and adjust our CapEx accordingly, but for today, and with the increase in CapEx on various fronts, I would say that the €15 billion number is rather conservative number and not a very aggressive number in terms of CapEx allocation.

Piotr Dzieciolowski

Okay. Thank you very much.

Operator

We have a follow-up question from the line of Olly Jeffery with Deutsche Bank. Please go ahead.

Olly Jeffery

Two quick follow-ups, the first one was, can you just clarify that for the €15 billion, any corporate M&A, renewable development portfolios, would be on top of that? I think that's what you were saying, just to clarify. The second question is a hypothetical. So, earning is that this year you now have a CapEx offset. You can include for CapEx spend '24 to '26. If the windfall tax is extended into next year, the presumption would be that you would not have any ongoing CapEx offset, which CapEx is allowed to be offset from '27 and beyond. Is that a right way to think about it, so that next year, if the cap were extended, you potentially might not have any CapEx to offset?

Peter Kollmann

Yes. That's a way to think about it. I can't really comment on it because I really don't know. I don't know if the government is going to extend. We haven't seen the government extending until the end of the year, despite the fact that many, many other countries in Europe haven't done that. Germany, for example, they finished June '23, Austria extended until the end of the year, so they have already shown in the past that they number one extended. They have reduced the cap from €140 to €120. Again, that was something where there weren't many other countries that were following a similar stance. I mean, Romania is at €90, but they are sort of like an outlier. So, yes, there is a possibility, but how it would be structured? What the cap would be? What the offset of investments would be? Would they basically go beyond €26? The way you've mentioned, we really don't know. That's very, very hard to say.

And coming back to your CapEx, yes, you're right. If we were to make acquisitions on the development side that would be on top of the €15 billion, and generally speaking, I mean, as Andreas has said, we have not -- we don't have an approved budget that will be in December. We don't have the guidance and the CapEx plan for the years '24, '25, '26 published. We will do that with the full-year figures in March of next year, but it's a fair assumption that the CapEx for the next three-year period will go up.

Operator

The next question comes from the line of Teresa Schinwald with Raiffeisen Bank International. Please go ahead.

Teresa Schinwald

Hi, thank you for taking my question. I was a bit surprised about Mellach not being contracted to ATG, because so far I understood that Mellach was strategically important also location-wise for the great stabilization not only in Austria, but also in southern Germany. So, could you please elaborate a bit on that? The second one, speaking about southern Germany, is there any update on your take about the potential price zone split of Germany, and what's your impact assessment on Austria?

Peter Kollmann

Teresa, could you -- sorry, maybe it was just me having a bad line. Could you repeat the second question?

Teresa Schinwald

Yes, if there is an update of your impact assessment on a potential power zone, pricing zone split of Germany for Austria.

Peter Kollmann

Okay. So, I'll do the second one, and Andreas, if you were so kind as to do the CCGT question. Well, an impact assessment on a potential split in Germany is very difficult, because there are many, many variables that would go into such a split. It is very complex.

By the way, I don't think that there will be a split in Germany, because it's not even necessary. The new system basically has critical branches, and with the flow-based market coupling, there are algorithms which look into different zones across Europe, and if there is a concession in a specific zone, i.e. a critical branch, that will then be resolved. So, the splitting into two zones, when you look into the future development of the European grid system, might not even be necessary. However, theoretically, if you split Germany into two zones, you would obviously have a lower price in the north, you would have a higher price in the south, and Austria would obviously be much, much closer to the southern price than to the northern price.

Teresa, having said all that, it's very theoretical because with all the information for today; I cannot really see a zone splitting within Germany.

Andreas, could you comment on the CCGT, please?

Andreas Wollein

Yes, Teresa, with regard to Mellach, I think it can be easily explained. It was a pure economic decision, so we were considering what is the best economic or commercial option for us, either to participate in this regulated congestion management process, or to sell, let's say, the electricity produced by Mellach into the market on a merchant basis. These two options showed a clear result, which is to sell the electricity into the market at least until 2025, where we can then make a new decision and we can apply theoretically for this congestion management services again. So, it was an economically driven decision, and we have decided not to apply or to participate in this congestion management process, which the Austrian Power Grid had to handle.

Teresa Schinwald

Thank you very much. Thank you.

Operator

There are no further questions at this time. I hand back to Peter Kollmann for closing comments.

Peter Kollmann

Yes, ladies and gentlemen, let me thank you for, as always, many questions, a very good discussion, and I look forward to our next conference call with our full-year results and wish you a great day. Thank you very much. Bye-bye.

Andreas Wollein

Bye.

Operator

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.

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VERBUND AG (OEZVF) Q3 2023 Earnings Call Transcript