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. I now hand you over to Peter Kollmann, CFO, who will lead you through this conference.
Please go ahead, sir.
Thank you. Good morning, ladies and gentlemen. Let me welcome you to our presentation for the 1st 3 quarters 2019. And let me thank you for joining today's conference call. I'm here with Andreas Wallerin, 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 Vogt. 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. Fabolme's low cost base and our restructuring efforts of the last years has supported our positive developments.
All this is reflected in our very strong free cash flow of dividends amounting to EUR 450,000,000 being 115% above last year's figures. We were, as a result, able to reduce our debt to historically low levels, with the net debt amounting to approximately EUR 2,300,000,000. Against this background, I would like to go into more detail in terms of the 1st 3 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 3 quarters of 2018 despite the fact that we had a very low quarter Q3 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 from the key figures in the 1st three quarters are as follows. Our reported EBITDA increased by 39.5 percent to $946,000,000 and the reported group result increased by close to 60% to SEK 451,000,000.
The adjusted group result increased by 63.3% to SEK 453,000,000. The operating cash flow is very strong at a level of SEK893,800,000, which is a plus of 65%. The free cash flow, which I mentioned before, came out at a level of $451,800,000 after dividends, which is an increase of 114%, and that allowed us to reduce the debt level further. Net debt, therefore, decreased by 10.3% to a level of 2.3 $1,000,000 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 1,190,000,000 and EUR 1,240,000,000 and the group result between €540,000,000 €580,000,000 the payout ratio will be between 40% 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 coefficient, in total, we saw good first three quarters, although quarter 3 was very weak at 1.09 sorry, at 1.02, the hydrocoleficient, an index quantifying the hydropower generation of the Round of River power plants was 6% above the level of the first 3 quarters 2018 and 2 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 13.72 gigawatt hours or 6% compared to the 1st 3 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 MENACCCD 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 €39, note that we have already hedged approximately 96% of our 2019 volumes.
On a mark to market basis, as of 24th October 2019, we calculate with a price of €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 for bund with a very flexible asset base consisting of CO2 free low cost pump 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 $150,000,000 in the 1st 3 quarters 2018 from Flexibility Products, we registered a value of approximately $90,000,000 in the first 3 quarters 2019.
This decrease stems mainly from lower contributions from congestion management. Please note that since October 2018, our Melas 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 charged sorry, as a consequence, we have changed an unpredictable volatile cash flow against the quasi regulated secure stable cash flow for a period of 3 years. For 2019, we increased our guidance for flexibility products to approximately EUR 120,000,000 due to higher contribution 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 7 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 1st three quarters compared to the 1st three quarters of 2018. It also includes our guidance for 2019. The EBITDA from the grid business under IFRS increased to EUR 170,000,000 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 260,000,000 I would like to stress that based on the surplus gains of the past, the so called regulatory account currently holds approximately EUR 280,000,000.
This surplus on the regulatory account will be reduced in the coming years. And as a consequence, the results from the grid business under IFRS will be negatively influenced by this working down of the EUR 280,000,000 surplus. Now I would like to hand over to Andreas, who is going to go through the key financial figures and the nonrecurring effects. Please, Andreas.
Yes. Thank you. So Slide 7 shows the minor nonrecurring effects in the 1st 3 quarters of 2019. In addition to some very small impairments amounting to minus €700,000 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 Sonografverke Jokenstein announcement to minus 2,400,000 dollars After considering the impact from the nonrecurring effects above on taxes amounting to 800,000 the nonrecurring effects on the group result level amounted to negligible minus €2,400,000 Moving on to Slide 8, we show the exact development of the financial figures. So reported and adjusted EBITDA, as already mentioned from EBITDA, both increased.
This increase is mainly a result of our Renewal Generation segment, which was up by €285,400,000 mainly due to the higher sales prices and better hydro availability. The EBITDA in the 1st 3 quarters was also EUR 12,700,000 higher as described before. EBITDA contribution from all other segments were slightly up by €2,500,000 and the EBITDA in the sales segment was down by €31,500,000 because of IFRS valuation FX in the trading business. The negative valuation FX of the at the year end will again turn when the contracts are closed. In addition, the cost reduction and efficiency increased programs of the past had a positive effect on the results development.
Depreciation increased by €24,800,000 due to the initial application of IFRS 16. The financial results improved due to the higher results from our participation in the provincial ability, Kellogg, and lower interest rates because of planned debt repayments. The reported group result, therefore, increased by EUR 168,000,000 or 59.5 percent to EUR 450,900,000. Adjusted for nonrecurring FX, the adjusted group result increased by €175,700,000 to €453,300,000 Very positive, the development of the EBITDA margin, which increased from the level of 32.6 percent to 35 point 5%, reflecting the above mentioned effects on EBITDA. The EBIT margin shows a comparable increase from 21.1 percent to 25.4%.
So this is, I would say, within the sector, a very, 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 €230,800,000 The additions concern mainly the investments into the modernization of our Austrian hydro power plants as well as investments into the high voltage grid business. On Slide 9, we continue with the financial figures. A very positive story here again is the development of the operating cash flow in the first 3 years 2019, which increased strongly. It showed an increase of 60 4.9 percent to €893,800,000 due to the aforementioned higher average achieved contract prices and the better hydro availability from our Rana River power plants.
The free cash flow after dividends also showed an impressive increase of 114.2 percent from EUR 210,900,000 to a level of EUR 451,800,000. As a consequence, net debt decreased to around €2,300,000,000 Gearing decreased further from 43.1 percent to 36% at the end of the 1st 3 quarters. On Page 10, we show we continue to show you the some developments with regard to our financial liabilities. On the left side up, you see the debt maturity profile showing a remaining repayment of €11,000,000 in 2019 the fixed interest bond in the amount of €683,500,000 has already been paid back as of July 16, 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 the repayment of €525,000,000 consisting mainly of a fixed interest bond.
The ratings of the bond remained unchanged in Q3. So S and P rating of the bond 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 for Puna state in the past to increase cash flow and a strong improvement market environment for the Perfumed business model. Now let me hand over again to Peter, who will finalize the presentation with the outlook for the full year 2019.
Yes. 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 1st three quarters, we attached approximately 57% of our hydro generation at an average price of €49,600,000 for 20 10 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 €50,100,000 We've also hedged approximately 12% of our hydro generation at an average price of €48,600,000 for 2021.
The mark to market valuation shows a level of €50,900,000 for 2021. Now with regard to the year to date hurdle situation, we have to report a hydro coefficient of 1.02 as of the 28th October, which is 2% above the long term average. As I mentioned before, we adjusted our guidance for the full year 2019, and we now expect an EBITDA of approximately between EUR 1,190,000,000 to EUR 1,240,000,000 and the group result of approximately between $540,000,000 to $580,000,000 under the assumption of average hydro and wind generation for the last quarter 2019. We plan to pay out between 40% 45% of the group results after adjustment for nonrecurring effects. As always, at this point, I would like to highlight the sensitivities, A deviation of plusminus 1% in the generation from hydropower has an impact of 1,600,000
in the
group results, a deviation of plusminus 1% in the generation for wind power, had a relatively small impact of €0,100,000 and a deviation of plusminus €1 per megawatt hour, and the wholesale price has an impact of €400,000 in the group result. With that, I would like to invite you to Q and A.
The first question we received is from Wanda Sabinowska from Credit Suisse. Your line is now open.
Good morning. Wanda Sabinowska from Credit Suisse. Three questions from me, if I may. So 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 €57.5 per megawatt hours.
It's like it's a €10 per megawatt premium to the German forward curve? I would appreciate any color on that one. And then on 2021 hedging, when you show mark to market at €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?
And the last question is on the Austrian power price market. It's been a yes since the German and Austrian power markets have been separated. Any conclusions, anything that you have seen so far? Thank you very much.
Yes. Thank you, Vander. I will start with the with your third question, and Andreas will talk about the your hedging question. Now in terms of the power price, the 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. However, as power markets within Europe are very, 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 5 years down the road, the separation between Austria and Germany could look different from what is looking today.
You know that currently, we have 4,900 megawatts. You also know that the average spread between Australia and Germany is around 3, sometimes it's slightly more. But in terms of making your calculations, I think 3 is a good number. But 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 Borrzeit perspective on a very, 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, so to give you, let's say, the latest figures from the end of October. So for 2019, I think we have now hedged 97% of our volumes at a price of 39 euros per megawatt hour, I think, in the mark to market valuation. So if we would value the remaining open 3 percent of volumes with the current market prices, we would also come and end the year with around €39 per megawatt hour. For 2020, we have now hedged 59% of our volumes at a price of €49.9 per megawatt hours. In a mark to market valuation, the average achieved contract price for 2020 would be €50.1 per megawatt hour.
And if we thought about 2021, we have currently hedged around 13 percent of our volumes at a price of €49.1 per megawatt hour and a market to market valuation of €50.9 per megawatt hour. So these prices already include, let's say, the spread between Germany and Austria.
If I may follow-up, but €57.5 per megawatt hour achieved in Q3, it's an enormous number comparing to the German forward curve. Even if you apply €3, €4,000,000 spread, it's still is another €5, €6,000?
Yes. It's, I think, the spot. We do not 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, yes?
Okay. Thank you very much.
The next question we received is from Lueder Schumacher from SocGen. Your line line is open,
sir. Good morning. A few questions from my side. One is, again, on the hedging and the 57% that you have achieved in order for this to achieve this enormous boost from 44.3% to 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 €57 a megawatt hour as well. Is this really a one off? I'm not aware of any particular spikes in spot prices that were justified. I'm just quite intrigued by that number. 2nd question is on your interest in the PDPs, hydro assets.
What is the time line here? When can we expect to hear something? And lastly, you mentioned that there is €280,000,000 unwind coming of regulatory of the your surplus in the regulatory count. You mentioned over a number of years. Exactly how many years?
And that's it for now.
Yes. Lueder, on the hedging. Of course, you have peak prices in there as well. And when you look at the peak prices, you know that there is more than €10 difference in the peak prices. Then, of course, you have an even higher difference when you take the Austrian spread.
So this is the reason why you see a big number there.
And Lueder, on a short term basis, so if the more we say the short term during the year, the higher the peak ratio is. This is also, I think, an effect on the hedging price.
On the SEK 280, it's very hard to say. It's the regulator very steady reduction of the surplus account. Yes, that's something I would like to see. However, it is possible that the regulator wants to possibly accelerate within the next 5 years and therefore have slightly less. But in terms of a fair assumption, I would take a gradual build down of the 280 over 10 years.
And sorry, what did you say about the time line?
Just the bidding for the EDP hydro assets, when should we know the results of that, if you have the time line you could share with us?
Yes. As the time line is governed, obviously, by the seller, I can't really comment on the time line. However, we will deliver a very clear message to the market as soon as there is any new information.
I mean is that something where we get resolved 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. However, as it is in an auction, it's always possible that things get delayed, and it is possible that things drag on into beginning of next year.
Okay. Thank you. Very clear.
And the next question we received is from Tania Marks from Commerzbank AG. Your line is now open.
Yes, good morning. I would have a question on the sales division. In the interim report, you mentioned 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 Q4 divisional result for the sales division as you had a special effect related to hedges in the Q3?
Yes, sure. We don't give out the 4th quarter number in terms of the sales division. However, 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, we are on the one hand, we are reducing costs.
On the other hand, 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 2 to 3 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. So 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.
And the next question we received is from Theresa Schindel from RASM Central Bank. Your line is now open.
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 Zwartsburg where there has been some movement recently, the impact also on CapEx? That's my first question. And if you already have a view on the draft regulation or foresees a 15% decline for transmission tariffs.
Yes. On the transmission tariff, I can't comment. However, the sales growth 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 €900,000,000 over the entire building period of the Salzburg mine. 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.
So the sales growth line, which has been a huge discussion, as you know, for many, many years in terms of start of the sales growth line is as we speak. The start of the sales group line as we speak.
The next question received is from Bertrand Bartek from SVB. Your line is now open, sir.
Good morning. I've got two questions for us just to the split between Austrian and German market. Materially from the legal point of view and the development of proceedings? Is there no higher probability that the power market split would be canceled in the near future? And 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 marketplace, 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 has decided, the way they have decided is because of formal mistake, which has been made, I. E, consultancy periods were not followed.
They should have been followed. So they were not deciding on the technical aspects, they were deciding on legal formalities. Currently, number 1, we think that it will be appealed. And as a result of that, we don't think that the market splits will be repealed. So we are so we think that the market split between Austria and Germany will continue, But I would also like to remind you of what I said at the beginning.
I think, Wendell was asking the question about the Austrian versus the German market 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, etcetera, etcetera, 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 5 years?
Will it take 7 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.
But as we have said in the past, after our 3 cost cutting programs, which we have had over the last 5 years, that many of those cost programs have not been completed yet, I. E, they are ongoing programs. And we're trying to reduce increases by wages, increases in CapEx because of inflation, increases on the other operating expenses through again, through inflation and more demand for some products, I. E, things getting more expensive through our programs, yes? So 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. I mean, 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 exceptionally the same issues, I.
E, cybersecurity is not optional. Cybersecurity is something you need to do. And as we have critical infrastructure, that is something where we need to that is something where obviously we are going to have an increasing cost. Then 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 and the positive effect you will see at a later stage. To give you an example, we are 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, and that is also linked to costs.
But at the end of the day, the efficiency and also the effectiveness of those hydro power plants will obviously increase.
We received the follow-up question of Lueder Schumacher from Daggen. Your line is now open.
Yes. Just one more question from my side. It's on Flexibility Products. You have raised the full year guidance from 90 to 120. I guess that's mainly as a result of already having achieved 90 at the 9 month stage.
So Q3, I guess, then must have been unexpectedly good for Flexibility Products. What exactly happened there? And yes, where does the extra revenue come from? Is it mainly dealing with the influx from renewables? Because it's not really a quarter where I would usually expect a peak or significant revenues for Flexibility Products?
Yes. Yes, Andrew, I can give you the reason. Well, first of all, you're right. Q3 has been good. And 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 Q1 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. So we had a flow, an east and 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. And one of the reasons, of course, is low hydro, I. E, when you have low hydro, you have more concession within Austria. Another reason, which I find extremely interesting, is that Austria has really, particularly within the last 9 months, developed into a platform for transfer. So about 75% to 80% of the electricity that has entered Austria has left Austria to different countries around Austria.
So we have really evolved into, call it, a platform for electricity transfer. And that 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 sort of like lower wind, for example, in Lower Austria and in Boenland, then you have inner Austrian congestion.
Okay. That's great. Thank you.
As there are no further questions, I hand back for the speakers.
Yes. Thank you very much to 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.