Dear ladies and gentlemen, welcome to the conference call of VERBUND AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Peter Kollmann, CFO, who will lead you through this conference. Peter, ahead, sir.
Thank you. Good morning, ladies and gentlemen. Let me welcome you to our presentation for the first of three quarters, 2019, and let me thank you for joining today's conference call. I'm here with Andreas Wollein, our head of finance and head of investor relations. Now, before we move into the analysis of the business development, let me make a few general comments. The year 2019 continued well for VERBUND. Our results were positively impacted by increasing contract prices for electricity and the hydro coefficient above the long-term average and above last year's level. Our key figures reflect the favorable energy market environment. VERBUND's low-cost base and our restructuring efforts of the last years have supported our positive development. All this is reflected in our very strong free cash flow of dividends amounting to EUR 450 million, being 115% above last year's figures.
We were, as a result, able to reduce our debt to historically low levels with a net debt amounting to approximately EUR 2.3 billion. Against this background, I would like to go into more detail in terms of the first three quarters of 2019. At the beginning, I would like to highlight the most important influencing factors for the results development. Following the positive development of long-term future prices at the electricity exchange and based on our hedging strategy for our own generation, the achieved contract prices were higher. hydro coefficients determining the generation from our run-of-river hydropower plants was higher than the long-term average and above the levels of the first three quarters of 2018, despite the fact that we had a very low third quarter 2019. The results were also positively influenced by higher contributions from the grid segments, but negatively influenced by lower contributions from flexibility products.
We also saw a positive contribution from our cost-cutting and efficiency improvement programs, which we have implemented in the past. The impact of these factors on the key figures in the first three quarters are as follows. Our reported EBITDA increased by 39.5% to EUR 946 million, and the reported group results increased by close to 60% to EUR 451 million. The adjusted group results increased by 63.3% to EUR 453 million. The operating cash flow is very strong at a level of EUR 893.8 million, which is a plus of 65%. The free cash flow, which I mentioned before, came out at a level of EUR 451.8 million after dividends, which is an increase of 114%, and that allowed us to reduce the debt levels further. Net debt, therefore, decreased by 10.3% to a level of EUR 2.3 million compared to year-end 2018.
Based on the results development at the level of our hedging, we adjust our guiding range for 2019. Based on average hydro and wind conditions in the last quarter 2019, we expect an EBITDA between approximately EUR 1.19 billion and EUR 1.24 billion and the group result between EUR 540 million and EUR 580 million. The payout ratio will be between 40% and 45% of the adjusted group results. In the following charts, I will explain the influencing factors on the results development in more detail. Let me start with our generation volumes. With regard to the hydro coefficients, in total, we saw good first three quarters, although quarter three was very weak at 1.09, sorry, at 1.02. The hydro coefficients, an index quantifying the hydropower generation of the run-of-river power plants, was 6% above the level of the first three quarters of 2018 and two percentage points above the long-term average.
Our production from annual storage power plants increased by close to 1% due to high inflows despite less turbining. Own production from hydropower, therefore, increased by 1,372 gigawatt hours or 6% compared to the first three quarters of last year. Generation from thermal power plants was up by 22.8% or 198 gigawatt hours, stemming from the increased use of our Mellach CCGT for congestion management. Generation from wind power also increased by 78 gigawatt hours or 13.4%, due to more favorable wind conditions in all our wind markets, namely Germany, Austria, and Romania. The second important factor is the average achieved contract price at the end of the first three quarters. Based on our hedging strategy, we achieved a contract price for hydro generation of EUR 39. Note that we have already hedged approximately 96% of our 2019 volumes.
On a mark-to-market basis, as of 24th of October 2019, we calculate with a price of EUR 39 per megawatt hour. Next page, flexibility products. As you know, one of the major trends in the new energy world is increasing volatility in the grid system, of course, resulting from a massive development of renewables. VERBUND with our very flexible asset base consisting of CO2-free, low-cost pumped storage power plants and the most modern CCGT in Austria, we're very well positioned to benefit from this trend through the sale of our flexibility products. As a result of approximately EUR 160 million in the first three quarters of 2018 from flexibility products, we registered a value of approximately EUR 90 million in the first three quarters of 2019. This decrease stems mainly from lower contributions from congestion management.
Please note that since October 2018, our Mellach CCGT has been put into a strategic reserve mechanism in Austria, under which we receive a fixed capacity payment for the generation. As a consequence, we have changed an unpredictable, volatile cash flow against a quasi-regulated, secure, stable cash flow for a period of three years. For 2019, we increased our guidance for flexibility products to approximately EUR 120 million due to higher contributions from congestion management. On the next page, on the grid development, you know that the Austrian high voltage grid with a system length of approximately 7,000 kilometers and interconnected capacities into seven neighboring countries, is strategically of high importance for the group, also because of its importance in the European grid system and of course, because of its regulated character. Under IFRS, in contrast to local GAAP, we have volatility in the results contribution.
That cannot be avoided because, as we have explained in the past, IFRS, in contrast to local GAAP, does not allow to apply the regulatory accounts, which balances surplus and shortfalls to the regulated return of currently approximately 5%. The chart on the left-hand side provides you with a comparison between the EBITDA according to local GAAP and the EBITDA according to IFRS for the first three quarters compared to the first three quarters of 2018. It also includes our guidance for 2019. EBITDA from the grid business under IFRS increased to EUR 170 million, mainly due to higher contributions from cross-border capacity auctions and the initial application of IFRS 16. Please note that we keep our IFRS guidance for 2019 at a level of EUR 260 million. I would like to stress that based on the surplus gains of the past, the so-called regulatory account currently holds approximately EUR 280 million.
This surplus on the regulatory account will be reduced in the coming years, as a consequence, the results from the grid business under IFRS will be negatively influenced by this working down of the EUR 280 million surplus. I would like to hand over to Andreas, who is going to go through the key financial figures and the non-recurring effects. Please, Andreas.
Thank you. Slide seven shows the minor non-recurring effects in the first three quarters of 2019. In addition to some very small impairments amounting to minus EUR 0.7 million in total, there was a negative one-off effect in the other financial results stemming from the measurement of an obligation to return an interest in connection with the Donaukraftwerk Jochenstein amounting to minus EUR 2.4 million. After considering the impact from the non-recurring effects above on taxes amounting to EUR 0.8 million, the non-recurring effects on the group result level amounted to negligible minus EUR 2.4 million. Moving on to slide eight, we show the exact development of the financial figures. Reported and adjusted EBITDA, as already mentioned by Peter, both increased. This increase is mainly a result of our renewable generation segment, which was up by EUR 285.4 million, mainly due to the higher sales prices and better hydro availability.
The EBITDA in the grid segment in the first three quarters was also EUR 12.7 million higher, as described before. EBITDA contribution from all other segments were slightly up by EUR 2.5 million. The EBITDA in the sales segment was down by EUR 31.5 million because of IFRS valuation effects in the trading business. The negative valuation effects at the year-end will again turn when the contracts are closed. In addition, the cost reduction and efficiency increase programs of the past had a positive effect on the results development. Depreciation increased by EUR 24.8 million due to the initial application of IFRS 16. The financial results improved due to the higher results from our participation in the provincial utility KELAG and lower interest rates because of planned debt repayments. The reported group results therefore increased by EUR 168 million or 59.5% to EUR 450.9 million.
Adjusted for non-recurring effects, the adjusted group results increased by EUR 175.7 million to EUR 453.3 million. Very positive, the development of the EBITDA margin, which increased from a level of 32.6% to 35.5%, reflecting the above-mentioned effects on EBITDA. The EBIT margin shows a comparable increase from 21.1% to 25.4%. This is, I would say, within the sector, a very strong development. Finally, I would like to mention the additions to tangible assets, which were based on our CapEx plan above the previous year's level at EUR 230.8 million. The additions concerned mainly the investments into the modernization of our Austrian hydropower plants, as well as investments into the high-voltage grid business. On slide nine, we continue with the financial figures. A very positive story here, again, is the development of the operating cash flow in the first three years 2019, which increased strongly.
It showed an increase of 64.9% to EUR 893.8 million due to the aforementioned higher average achieved contract prices and the better hydro availability from our run-of-river power plants. The free cash flow after dividends also showed an impressive increase of 114.2% from EUR 210.9 million to a level of EUR 451.8 million. As a consequence, net debt decreased to around EUR 2.3 billion. Gearing decreased further from 43.1% to 36% at the end of the first three quarters. On page 10, we continue to show you some developments with regard to our financial liabilities. On the left side up, you see the debt maturity profile showing a remaining repayment of EUR 11 million in 2019. The fixed interest bond in the amount of EUR 683.5 million has already been paid back as of July 16th, 2019, based on the strong cash flow development so far and the projections until the year-end.
We have decided not to refinance the bond long-term, but we have made use of the low interest rates in the money market and funded the remaining gap on a short-term basis. The debt maturity profile for the following year shows another peak in 2024 with a repayment of EUR 525 million, consisting mainly of a fixed interest bond. The ratings of VERBUND remained unchanged in Q3. The S&P rating of VERBUND is still at a strong level of A- with a stable outlook. Moody's rating is at Baa1 with a positive outlook. The rating development is a result of the numerous measures VERBUND has taken in the past to increase cash flow and a strong improvement market environment for the VERBUND business model. Now let me hand over again to Peter, who will finalize the presentation with the outlook for the full year 2019.
Yeah. Thank you, Andreas. As you know, key parameters for the development of the operational business are prices and hydro volumes. At the end of the first three quarters, we attached approximately 57% of our hydro generation at an average price of EUR 49.6 for 2020, which is approximately EUR 20.3 per megawatt hour above the level of the full year 2018. On a mark-to-market basis, as of October 24, the average achieved price would be at a level of EUR 50.1. We have also hedged approximately 12% of our hydro generation at an average price of EUR 48.6 for 2021. The mark-to-market valuation shows a level of EUR 50.9 for 2021. Now, with regard to the year-to-date hydro situation, we have to report a hydro coefficient of 1.02 as of the 28th of October, which is 2% above the long-term average.
As I mentioned before, we adjusted our guidance for the full year 2019. We now expect an EBITDA of approximately between EUR 1.19 billion and EUR 1.24 billion, and a group result of approximately between EUR 540 million and EUR 580 million, under the assumption of average hydro and wind generation for the last quarter of 2019. We plan to pay out between 40% and 45% of the group results after adjustment for non-recurring effects. As always, at this point, I would like to highlight the sensitivities. A deviation of ±1% in the generation from hydropower has an impact of EUR 1.6 million in the group results.
A deviation of ±1% in the generation from wind power has a relatively small impact of EUR 4.1 million, and a deviation of ± one EUR per megawatt hour in the wholesale price has an impact of EUR 4.7 million in the group result. With that, I would like to invite you to Q&A.
Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 01 on the telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question is answered before it's your turn to speak, you can dial 02 to cancel your question. If you're using speaker equipment today, please raise the handset before making your selections. One moment please for the first question. The first question received is from Wanda Serwinowska from Credit Suisse. Your line is now open, madam.
Good morning. Wanda Serwinowska from Credit Suisse. Three questions from me, if I may. The first one is on the implied hedging price for 2021. When I calculate the implied hedging price that you achieved in Q3, it gives me EUR 57.5 per megawatt hour. It's like it's a EUR 10 per megawatt hour premium to the German forward curve. I would appreciate any color on that one. On 2021 hedging, when you show mark-to-market at EUR 50.9 per megawatt hour, what do you use as a forward curve? Do you use Austrian or do you apply a premium to the German forward curve? The last question is on the Austrian power price market. It's been a year since the German and Austrian power markets have been separated. Any conclusions? Anything that you have seen so far? Thank you very much.
Thank you, Wanda. I will start with your third question, and Andreas will talk about your hedging question. Now in terms of the power price, I would like to take a step back just in terms of an explanation. The power price separation is of course, a result of concessions within the European system. I think there is some sort of a rationale in terms of the separation. As power markets within Europe are very complex and as it is permanently worked upon finding the right solution in terms of stabilizing the entire European grid, we think that we are going to see positive developments within the next 10 years in terms of the grid development. The algorithms and the calculations that are going to be done within Europe in terms of stabilizing the system and optimizing the system will continue.
As a result of that, we will certainly see developments within France, within Germany, particularly within Germany, in terms of what can be done to optimize the system further. That means that if we anticipate future developments, we could well see that five years down the road, the separation between Austria and Germany could look different from what it's looking today. You know that currently we have 4,900 megawatts. You also know that the average spread between Austria and Germany is around three. Sometimes it's slightly more. In terms of making your calculations, I think three is a good number. Again, anticipating the medium to long term, we don't exactly know how the European grid system is going to be accounting for the various disparities between grid systems across Europe and also disparities between countries like Germany.
I hope this answers your question. By taking the bird's-eye perspective on a very complex subject in terms of transfer capacities and stability of the European grid system.
Yes, it does. Thank you very much.
With regard to the hedging, to give you, let's say, the latest figures from the end of October. For 2019, I think we have now hedged 97% of our volumes at a price of EUR 39 per megawatt hour. I think in the mark-to-market valuation, if we would value the remaining open 3% of volumes with the current market prices, we would also end the year with around EUR 39 per megawatt hour. For 2020, we have now hedged 59% of our volumes at a price of EUR 49.9 per megawatt hour. In a mark-to-market valuation, the average achieved contract price for 2020 would be EUR 50.1 per megawatt hour. If we talk about 2021, we have currently hedged around 13% of our volumes at a price of EUR 49.1 per megawatt hour and a mark-to-market valuation of EUR 50.9 per megawatt hour.
These prices already include, let's say, the spread between Germany and Austria.
If I may follow up, but 57.5 EUR per megawatt hour achieved in Q3, it's an enormous number comparing to the German forward curve. Even if you apply EUR 3, EUR 4 spread, it's still another EUR 5, EUR 6.
Let's put it this way. I think what we realize is the spread between the German spot and the Austrian spot, and this price difference was quite high in Q3, but it's more volatile.
Okay. Thank you very much.
Yeah.
The next question we received is from Luda Schumacher from Bank J.P. Morgan. Your line is open, sir.
Good morning. A few questions from my side. One is again on the hedging and the EUR 57 that you have achieved in order for this to achieve this enormous boost from EUR 44.3 to EUR 48.6 on just 4% of volume sold. Was there just a bigger element of peak pricing that went into that? I'm just trying to understand the price of above EUR 57 a megawatt hour, as well. Is this really a one-off? I'm not aware of any particular spikes in spot prices that would justify it. I'm just quite intrigued by that number. Second question is on your interest in EDP's hydro assets. What is the timeline here? When can we expect to hear something? Lastly, you mentioned that there is EUR 280 million unwind coming of the surplus in the regulatory account. You mentioned over a number of years. Exactly how many years? That's it for now.
Yeah. Luda, on the hedging. Of course, you have peak prices in there as well. When you look at the peak prices, you know that there is more than EUR 10 difference in the peak prices. Of course, you have an even higher difference when you take the Austrian spread. This is the reason why you see a big number there.
Luda, on a short-term basis, the more we say the short term during the year, the higher the peak ratio is. This is also, I think it's also an effect on the hedging side.
On the 280, Luda, very hard to say. It's the regulator who decides at the end of the day. Of course, we negotiate with the regulator, and I can tell you what I would like to achieve. I would like to achieve a 10-year, very steady reduction of the surplus account. Yeah, that's something I would like to see. However, it is possible that the regulator wants to possibly accelerate within the next five years and therefore have slightly less. In terms of a fair assumption, I would take a gradual build-down of the 280 over 10 years. Sorry, what did you say about the timeline?
Just the bidding for the EDP hydro assets. When should we know the results of that, if you have the timeline you could share with us?
Yeah. As the timeline is governed obviously by the seller, I can't really comment on the timeline. However, we will deliver a very clear message to the market as soon as there is any new information.
Is that something that we get result this year? If you can at least say this, or is it something that could drag on into Q1 next year?
I think there is a higher probability for hearing something this year. As is in an auction, it's always possible that things get delayed, and it is possible that things drag on into the beginning of next year.
Okay. Thank you. Very clear.
The next question received is from Tanja Markloff from Commerzbank AG. Your line is now open, madam.
Good morning. I would have a question on the sales division. In the interim report, you mentioned a reorganization of the division, and I'd be interested in what is planned there, and also if you could give us a guidance for the fourth quarter divisional result for the sales division, as you had a special effect related to hedges in the third quarter.
Yes, sure. We don't give out the fourth quarter number in terms of the sales division. I would like to tell you more about what we are planning on an operational level on the sales side. This is a project where we are streamlining our efforts. i.e. on the one hand, we are reducing costs. We are trying to improve the interface with our client base by applying cutting-edge technology. This is something which we are going to do within the next two to three years. We have already started, and we would like to increase the effectiveness and the efficiency of our retail business. At the same time, we have also included our interface with our business clients, so it's not just the retail clients, it's the business clients as well, and there we are going through a streamlining exercise as well.
What you should see at the end of the day, when everything goes according to plan, you will see a combination of higher revenues, higher profitability, and higher effectiveness of this business.
Okay, thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press 01 on the telephone keypad now. The next question received is from Teresa Schinwald from Raiffeisen Centrobank. Your line is now open, madam.
Thank you very much. Good morning. I would like to ask you to give us an update on the construction of the transmission line in Salzburg, where there has been some movement recently. The impact also on CapEx. That's my first question. If you already have a view on the draft regulation or directive for next year's transmission tariffs, which foresees a 15% decline for transmission tariffs.
Yeah, on the transmission tariff, I can't comment. The Salzburg line is an important question because it is the most important investment which we have been pursuing in our grid business for a long time. The impact on CapEx will be up to EUR 900 million over the entire building period of the Salzburg line. We have already started to incur CapEx on the grid side, and we will probably have the biggest CapEx amounts next year and the year after. The Salzburg line, which has been a huge discussion, as you know, for many years, in terms of when it's going to start. The start of the Salzburg line is as we speak.
Thank you very much.
The next question received is from Bertram Bartek from [Inuadible]. Your line is now open, sir.
Good morning. I would have two questions for you. First is to the split between Austrian and German markets. Purely from the legal point of view, and the development of proceedings, is there now a higher probability that the power market split would be canceled in the near future? The second, if you can talk a little bit about the outlook for operating costs for the next year. Thank you.
Sure. First of all, on the market split. You're probably referring to decisions by the courts in terms of the border between Austria and Germany, that decision by the court will most likely be appealed. The reason why the court have decided the way they have decided is because of a formal mistake which has been made, i.e., consultancy periods were not followed. They should have been followed. They were not deciding on the technical aspects, they were deciding on legal formalities. Currently, number one, we think that it will be appealed. As a result of that, we don't think that the market split will be repealed. We think that the market split between Austria and Germany will continue. I would also like to remind you of what I said at the beginning.
I think Wanda was asking the question about the Austrian versus the German markets and the 4,900 megawatts. Just to give you a quick summary on what I said before, I think that we will see major technical developments through increases in processing power, artificial intelligence, et cetera, and great ambitions to optimize the European system. As a result of that, I think the way borders and transfer capacities are being managed in the future will be different. I'm pretty sure of that. Will it take five years? Will it take seven years? Will it take 10 years? I'm not sure, but what I see and what I know is that there are very ambitious plans to optimize the system, which also makes sense because it is a very costly system. On the outlook for operating expenses, we don't give an outlook for operating expenses.
As we have said in the past, after our three cost-cutting programs, which we have had over the last five years, that many of those cost programs have not been completed yet, i.e., they are ongoing programs and we are trying to reduce increases by wages, increases in CapEx because of inflation, increases on the other operating expenses, again, through inflation and more demand for some products, i.e., things getting more expensive through our programs. We try to limit the increase as much as we can. However, we have additional increases in areas that cannot be linked to bottom line. I'll give you one example, which is cybersecurity. Cybersecurity expenses for every single sector. I've just been in the conference yesterday, where I've seen CFOs from many different sectors. Everybody has exactly the same issue, i.e., cybersecurity is not optional. Cybersecurity is something you need to do.
As we have critical infrastructure, that is something where obviously, we are going to have an increase in cost. You have areas, again, this is not just utilities, this is in all the sectors. Digital investments are going to increase your expenses when you introduce them. The positive effect you will see at a later stage. To give you an example, we're working on our digital power plants, which is something where we think that comparing ourselves to others, also on a global basis, we're making very good progress. That is something where the future would mean that all our 130 hydropower stations have a digital twin and are fully digitized. However, to get there is something you cannot do overnight. That takes years. That is also linked to cost.
At the end of the day, the efficiency and also the effectiveness of those hydropower plants will obviously increase.
Okay. Thank you very much.
We received a follow-up question of Lueder Schumacher from J.P. Morgan. Your line is now open, Lueder.
Yeah, just one more question from my side. It's on flexibility products.
Yeah.
You have raised the full year guidance from EUR 90 to EUR 120.
Yeah.
I guess that's mainly as a result of already having achieved 90 at the nine-month stage. Q3, I guess, then must have been unexpectedly good for flexibility products. What exactly happened there? Yeah, where does the extra revenue come from? Is it mainly dealing with the influx from renewables? It's not really a quarter where I would usually expect a peak or significant revenues for flexibility products.
Yeah. Lueder, I can give you the reason. Well, first of all, you're right, Q3 has been good. The reason is, if you remember, congestion management increases were, in the past, very often derived from more demand out of Germany. What we have seen in the third quarter was an increase in congestion management within Austria between west and east. The reason is that we had demand on the east side. We had good production on the west side. We had a west-east flow of electricity, which was not able to be fully transported. This has something to do with the Salzburg line. This just shows how important the Salzburg line is. One of the reasons, of course, is low hydro, i.e., when you have low hydro, you have more congestion within Austria.
Another reason which I find extremely interesting is that Austria has really, particularly within the last nine months, developed into a platform for transfer. About 75%-80% of the electricity that had entered Austria, has left Austria to different countries around Austria. We have really evolved into, call it a platform for electricity transfer. If you combine that with the low hydro and with the fact that thermal is dropping out in the east of Austria, and if that is combined with lower wind, for example, in Lower Austria and in Burgenland, then you have inner Austrian congestion.
Okay. That's great. Thank you.
As there are no further questions, I hand back for the speakers.
Yeah. Thank you very much. Two very interesting questions, and I look forward to talking to you on our next conference call for the full year results. Thank you very much. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.