Dear, ladies and gentlemen, welcome to the conference call on the Half Year Results 2018 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. May I now hand you over to Peter Coleman, Chief Financial Officer, who will lead you through this conference.
Please go ahead, sir.
Yes. Thank you. Let me welcome you to our presentation. Let me thank you for joining today's conference call. I'm here with Andreas Wallerlein, our Finance Director and Head of Investor Relations.
Before we make the analysis, let me make a general comment about the business development of the first half year twenty eighteen. The development of the energy environment has been positive for Verbunds with increasing wholesale prices for electricity, obviously, mainly driven by the rise in CO2 certificate prices and rises for primary energy sources like coal, oil and gas. As a fixed cost generator and being a price tag in a market where wholesale prices are still determined by coal fired power plants, there is almost no other utility in Europe benefiting like us. Our current strategic positioning and our consequent focus on free cash flow in the last years adds to the positive stance of FoBond today. The recent share price development has reflected this positive momentum.
Against this background, let me now present the half year figures 2018. On the next page and at the beginning, let me highlight the most important influencing factors for the results development in the first half year. Based on a strong hydro availability, generation from hydropower plants was up. Contribution from our flexibility products was lower compared to the record year 2017. Contribution from the grid segment was higher than in the first half year twenty seventeen, mainly due to lower expenses for concession management.
The efficiency increase and cost cutting programs of the past also contributed positively, and we had minor positive nonrecurring effects due to the resolution of outstanding issues related to our thermal power plants, Duenroa and Konigborg. The overall impact of these influencing factors on the key figures of Verbund in the first half year was strongly positive. Reported EBITDA increased by 21% to 503,700,000 The reported group result was higher by 47.3 percent to $227,500,000 The adjusted group result was up 43.9 percent to $222,000,000 And the operating cash flow was very strong at a level of €480,000,000 representing an increase of almost 25%. The free cash flow before dividends was 3 €56,000,000 that's an increase of 30%, and that allowed us to reduce the debt level further. Net debt decreased by 6 0.8% to a level of €2,600,000,000 As communicated by our ad hoc on the 18th July, we also increased the outlook for 2018.
We now expect an EBITDA of approximately €950,000,000 and a group result of approximately €370,000,000 Of course, that is all based on average hydro and wind conditions for the second half year of twenty eighteen. Permond plans a payout ratio between 40% 45% on the adjusted group results, which amounts to approximately €365,000,000 In the following charts, I will explain the influencing factors on the results development in more detail. Let me start with the analysis of our own generation volumes. The generation volumes in total were significantly higher. Own production from hydropower increased by more than 3,000 gigawatt hours or 23.1% compared to the first half year twenty seventeen at 1.08 hydro coefficients, which, as you know, is an index quantifying the hydro power generation of the Rand River power plants, was 19 percentage points above the level of 2017 and still 8 percentage points above the long term average.
Generation from storage power plants also increased by 24.4% because of the rising precipitation. Generation from thermal power plants, however, was down by more than 50% or 670 gigawatt hours, stemming from the decreased use of the CCGT Malloch for flexibility services. Generation from wind power decreased by 32 kilowatt hours or 6.6%, mainly due to less favorable wind conditions in Romania. A second important influencing factor on Verbund's results, the average achieved contract prices. At the end of the first half year twenty eighteen, we attached 90% of our hydro generation at an average price of $29,300,000 compared to $30,400,000 for the full year 2017.
Please note that the maturity of the hedging volumes for 2018 were hedged in early 2017 when prices were much lower. €1, plus or minus, has a sensitivity of approximately €25,000,000 in the EBITDA line. So on a mark to market basis, as of the 12th July 2018, we calculate with the price of €31.5 per megawatt hour, which is higher than the level for the full year 2017. This, of course, is a result of the 10% that are not hedged for 2018. Now the next chart, we talk about flexibility products.
2017, as you know, has been a record year, which and that is something we have always stressed, should not be taken as a reference year for the future developments. In the first half year twenty eighteen, we had a contribution from Control Energy, congestion management, grid system services, intraday trading and pumping operations of, in total, approximately €71,000,000 If you take the same timing last year, we had €107,000,000 in the corresponding period. That represents a decrease of 33%. The very positive development in the full year 2017 was, and you might remember that, mainly the result of a combination of various reasons. First, we had a weather situation with very cold winter and a hot summer.
We had temporary closures of French nuclear power plants because of revisions. 3rd, we had very low hydro production in the first half year, and we had very strong demand for congestion management within Austria because some Eastern European countries separated their electricity markets from Germany with phase shifters, which led to lower electricity flows from these countries to Austria. Some of these factors were lacking in the first half year twenty eighteen, explaining the different developments in congestion management. For 2018, we guide an EBITDA contribution for flex products of approximately €130,000,000 That is unchanged to the beginning of the year. As in the past, we would like to stress that this figure is highly volatile and the predictability is limited.
As you know, and I'm now on the next page, as you know from our last conference call, the Austrian high voltage grid with a system length of 7,000 kilometers and interconnected capacities into 7 neighboring countries is strategically of very high importance for the group. It has a growing importance in the European grid system, and we obviously like the regulated character of the fleet. Under IFRS, in contrast to local GAAP, we have a big volatility in the result contribution. That is something we cannot avoid. What are the main differences between local GAAP and IFRS?
It is mainly that revenue surpluses or shortfalls under IFRS are not utilized or compensated via the regulatory accounts, which we have in local GAAP, that is the key difference between local GAAP and IFRS, and that is one of the reasons that the grid results show a lot of volatility under IFRS. 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 half year twenty eighteen in comparison with the first half year twenty seventeen, and it includes our guidance for the full year 2018. The EBITDA from the grid business strongly increased from €88,000,000 to €139,000,000 The reason for the increase is mainly lower than planned expenses for contraction management. This is, of course, related to what I mentioned before. And we increased our guidance to approximately €160,000,000 according to local GAAP and to approximately €210,000,000 according to IFRS.
The next slide shows the nonrecurring effects for the first half year. Let's start with the positive one off effect in other operating expenses stemming from the adjustment of a provision for dismantling costs in connection with the resolution of open issues with EVN that amounts to €800,000 The impairment test conducted resulted in the reversal of impairments amounting to €6,200,000 and was also related to the resolution of open issues with EVN in relation to those power plants. In total, the operating results showed nonrecurring effects of €6,900,000 After considering the impact from the nonrecurring effects above on taxes amounting to €1,700,000 The nonrecurring effects on the group result level amounted to a total of €5,200,000 Now in terms of the key financial figures, I will hand over to Andreas. Please, Andreas.
Yes. Thank you. Only a few comments to the development of the key financial figures. Reported and adjusted EBITDA both increased versus the form of by €87,700,000 or 21.1 percent to €503,700,000 The delta by €87,000,000 or 20.9 percent to €502,900,000 The increases, among others, are attributable to the Renewable Generation segment, which was up by €64,000,000 mainly due to the better hydro availability. EBITDA in the grid segment in the 1st two quarters was substantially up as well by €50,400,000 due to lower expenses for congestion management.
In addition, the cost reduction and efficiency increase programs of the past had a positive effect on the results development. These positive effects were slightly counterbalanced by lower EBITDA contributions from all other segments being down by €16,800,000 stemming mainly from lower results in the Thermal segment. Depreciation slightly decreased due to the sale of assets recites from our participation in the provincial utility, Kellogg, as well as lower interest rates following our deleveraging of the past years. The reported group result, therefore, increased by €73,000,000 or 47 percent to €220 €27,500,000 adjusted for non recurring effects. This is mainly related to the resolution of open issues with the closed power plants, Glenor and Kornalberg, the adjusted group result increased by €67,800,000 or 43.9%.
As a consequence of the aforementioned reasons, the EBITDA margin again increased substantially from 28.2 percent to 36.7 percent, the EBIT margin as well from a level of 16.5% to 25.2%. 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 around €100,000,000 The additions concerned mainly investments into the modernization of the Austrian hydropower plants as well as the investments into the high voltage grid. On the next slide, you see the development of our cash flow and the debt development. Operating cash flow was substantially up. It increased by around 25% to €480,000,000 due to the better hydro reliability from our Ramabr River power plants as well as the storage power plants and increasing earnings contribution from the grid segment.
Higher tax payments had an opposite effect. The free cash flow before dividends showed an increase from $273,600,000 to $355,900,000 The net debt, corresponding liquor, decreased to around $2,700,000,000 Gearing decreased from 50% at the end of 2017 to 46% in the first half of twenty eighteen. Now a few words to our financial liabilities. The debt maturity profile shows a remaining repayment at the end of this year of around €155,000,000 will be covered out of our own liquidity and cash positions. So we don't have to refinance on the long term phases.
The debt maturity profile shows as well one peak in 2019, mainly consisting of a fixed interest fund in the amount of €683,000,000 and 1 in 2024, mainly consisting of €500,000,000 bond. We have liquidity backup to the €500,000,000 syndicated loan facility, which is undrawn. The total amount of our financial liability currently is around SEK1.9 billion. The average interest rate is 3.7%. The ratings of the group feel unchanged.
We expect a change based on the financial development at the end of this year, but it's still at the level of BBB plus with a stable outlook, S and P and the A2 positive outlook at Moody's. Now let me hand over again to our CFO for the EBITDA outlook.
Thank you, Andreas. Now let me take you through the outlook for 2018. As you know, key parameters for the development of the operational business are prices and hydro volumes. At the end of the 1st half year twenty eighteen, we have hedged approximately 50% of our hydro generation at an average price of €31,500,000 for 2019, which is approximately €1,100,000 above the level of the full year 2017. On a mark to market basis as of July 12, 2018, the average achieved price would be at a level of €39.4 which is approximately €9 above the 2017 level.
For 2020, we have so far hedged approximately 10% at a price of 40.9 euros On a mark to market basis, the average achieved price would be at a level of €44,200,000 With regard to the year to date hydro situation, we have to report a hydro coefficient of 1.05. This is as of mid July 2018. That is still 5 percentage points above the long term average. Now on the basis of the aforementioned developments, the guidance for the full year 2018 is an EBITDA of approximately €950,000,000 and the result of approximately €370,000,000 That, of course, under the assumption of average hydro and wind generation for the second half. Pagoda plans to pay out between 40% 45% of our adjusted results, which are going to be approximately €365,000,000 As always at this point, I want to highlight the sensitivities, A deviation of plusminus 1% in the generation from hydropower has an impact of plusminus €4,000,000 in the group results, a deviation of plusminus 1 percent in the wind generation has an impact of €200,000 and a deviation of plusminus €1,000,000 in wholesale prices has an impact of plusminus €1,900,000 With that, we have come to the end of our presentation, and we are open for your questions.
Ladies and gentlemen, we will now begin our question and answer session.
Right. It seems that there are okay. There are questions coming
in. Yes. Now there are questions coming in. We've received the first question. It comes from Wanda Zvienko of Credit Suisse.
Please go ahead. Your line is now open. Good morning. Wanda Zvienko of Credit Suisse. Two questions from me.
The first one would be on the power price and CO2 price outlook. Any comments from you would be much appreciated. And my second question would be, given an improved power price outlook and your financial position, when would you consider coming back to your prior long term dividend policy instead of having a 1 year dividend policy? Thank you very much.
Sure. I think in terms of power price and CO2 price, that is something we have always discussed on our conference calls, and it is a discussion which I very much appreciate. However, unfortunately, I don't have a crystal ball, and we have seen over the last 2, 3 years a lot of volatility, both in power prices and CO2 prices. I give you my view in terms of the development until the end of the year, also for next year. First of all, on the power price.
The power price in Germany, Austria is still very much influenced by the coal price. The price setting, power plants in Germany is still coal despite the fact that there is a big political discussion that coal will be taken out of the market step by step, I think that for the foreseeable future, we will see coal as the price setting mechanism in Germany. As a result of that, the German power price is very much a function of the coal price. What we have seen on the coal price is a very big increase from $70 not too long ago to almost $90 just below $90 where we are at the moment. There is strong demand, as you probably know, from China and India.
It is very hard to predict what the demand situation will be for the next 12 to 18 months. But what we see is that we have a backwardation in the coal price, I. E, the futures market in coal, the forward market in coal is leaning towards a lower price. If that were indeed happening, that would have a direct, very highly correlated impact on the German power price. The CO2 price is something that has been discussed, particularly in 2018, a lot, of course, among utilities but also among the research community and among the investor community.
There is a very, very wide range of predictions where CO2 will go to. Anything from CO2 prices will go down to 10% and some predictions that CO2 prices will go up dramatically. We, as Verbund, we feel that there is still a structural oversupply in the CO2 market. We feel that there has been a lot of speculation CO2, and we feel that some of the participants in the industry, in the utilities sector, have started to buy more than they actually need in order to be prepared, I call it, hedged, for a potential further increase in CO2 prices. As a result of that, we think that there is not a dramatic structural change.
I mean, there is a structural change with the announcement of the market stability reserve, which has an impact on the options and with other measures. And overall, with the political discussion, where across Europe, you will not find a single politician, We're not going to say, Oh, yes, of course, we want to cut CO2 prices. How all that is going to be translated into a medium- to long term policy in Europe where Eastern Europe, Poland, all the others that have no interest in higher CO2 prices will agree, that remains to be seen. So to sum up, I think that power prices will most likely for the rest of the year stay where they are as a result of stable CO2 prices and stable coal prices. However, looking into the future, there is some potential for coal prices to go down, which would have an impact on the overall power price.
Okay. Thank you. We've received another question. It comes from Louis Bouchard of ODDO. Please go ahead.
Your line is now open.
Yes. Hi, Louis Boujard from ODDO BAYCER. Thank you very much for taking my question. Just would like to come back on your slide, Page 6, if you don't mind. It would be maybe, if you could give us a bit color on the deviation into the local GAAP in your guidance for €160,000,000 of EBITDA into the grid business.
If you could split what comes from the increase in the regulated asset base and what might come from other elements recurring or not such as flexibility products or else? And if we could have some figures attached to it, it would be helpful. And the second question, if you don't mind, could you give us an update on the separation of the German and Austrian business? It would be nice. I have in mind that it might be in the following months that we might have some impact on that topic.
Thank you very much.
Yes. First of all, on the local GAAP versus the IFRS, We can go into a lot of detail. The reason why we have given you on Page 6, the delta between the local GAAP and the IFRS is for one very specific reason. We are always reporting numbers in the grid, which are relatively volatile. And the reaction which we have received from some of the investors, particularly during roadshows is, well, this is a regulated business and it is volatile.
And it has a very simple explanation. The simple explanation is that currently, we receive the 5% regulated return on our regulated asset base. And if, for example, we have lower cost for control energy or if we have lower cost for concession management with an APG, which has not been reflected in the original tariff, that, of course, means that we have higher results. And that is something that is being shown in the IFRS. In the local GAAP, it is not being shown because all those differences go into what is called the regulatory account, which is basically, call it, an absorption valve for any excess revenues or for any higher costs, which has not been predicted, yes?
So when you go to the specific effect, which we have seen this year, I. E, a higher contribution from the grid, where is this coming from? And this is, I think, where one of your questions. It is coming from 2 areas. It is coming from lower cost, which APG had for concession management because there was less demand for concession management in the system, which, by the way, we had predicted because 2017 was particularly high.
And the second component was that there was less demand for control energy, and there were lower prices for control energy. As a result of that, because the cost for control energy and the cost for congestion management were lower, the revenue contribution of the grid is higher by more than 50,000,000 euros
Okay. Okay. Thank you. As there are no further questions, I would hand back to you.
Yes. Thank you very much for your interest. And in case you have not been on vacation yet, I wish you all a very relaxing vacation and an opportunity to recharge your batteries. All the best. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.