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. If any participant has difficulties hearing the conference, please press star key followed by 0 on your telephone for operator assistance. May I now hand you over to Peter Kollmann, 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 Wollein, 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 2018. The development of the energy environment has been positive for VERBUND, 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 taker 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 VERBUND 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 2017, mainly due to lower expenses for congestion management. The efficiency increase and cost-cutting programs of the past also contributed positively, and we had minor positive non-recurring effects due to the resolution of outstanding issues related to our thermal power plants, Dürnrohr and Korneuburg.
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 EUR 503.7 million. The reported group result was higher by 47.3% to EUR 227.5 million. The adjusted group result was up 43.9% to EUR 222 million, and the operating cash flow was very strong at a level of EUR 480 million, representing an increase of almost 25%. The free cash flow before dividends was EUR 356 million. That's an increase of 30%, and that allowed us to reduce the debt level further. Net debt decreased by 6.8% to a level of EUR 2.6 billion. As communicated by our ad hoc on the 18th of July, we also increased the outlook for 2018. We're now expecting EBITDA of approximately EUR 950 million and a group result of approximately EUR 370 million.
Of course, that is all based on average hydro and wind conditions for the second half year of 2018. VERBUND plans a payout ratio between 40% and 45% on the adjusted group results, which amounts to approximately EUR 365 million. 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 2017. At 1.08 hydro coefficients, which as you know, is an index quantifying the hydropower generation of the run-of-river power plants, was 19 percentage points above the level of 2017 and still eight 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 Mellach for flexibility services. Generation from wind power decreased by 32 gigawatt hours or 6.6%, mainly due to less favorable wind conditions in Romania. A second important influencing factor on VERBUND results, the average achieved contract prices. At the end of the first half year 2018, we attached 90% of our hydro generation at an average price of EUR 29.3 compared to EUR 30.4 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. One euro ± has a sensitivity of approximately EUR 25 million in the EBITDA line.
On a mark-to-market basis, as of the 12th of July 2018, we calculate with the price of EUR 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, on 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 development. In the first half year 2018, we had a contribution from control energy, congestion management, grid system services, intraday trading, and pumping operations of, in total, approximately EUR 71 million. If you take the same time last year, we had EUR 107 million 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 a very cold winter and a hot summer. We had temporary closures of French nuclear power plants because of revisions. Third, 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 2018, explaining the different development in congestion management. For 2018, we guide an EBITDA contribution for flex products of approximately EUR 130 million. That is unchanged to the beginning of the year.
As in the past, we would like to stress that this figure is highly volatile, the predictability is limited. As you know, 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 interconnector capacities into seven neighboring countries, is strategically of very high importance for the group. It has a growing importance in the European grid system, we obviously like the regulated character of the system. Under IFRS, in contrast to local GAAP, we have a big volatility in the results contribution. That is something we cannot avoid. One of 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, 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 2018 in comparison with the first half year 2017, it includes our guidance for the full year 2018. The EBITDA from the grid business strongly increased from EUR 88 million to EUR 139 million. The reason for the increase is mainly lower than planned expenses for congestion management. This is, of course, related to what I mentioned before. We increased our guidance to approximately EUR 160 million according to local GAAP and to approximately EUR 210 million according to IFRS. The next slide shows the non-recurring 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 €0.8 million. The impairment test conducted resulted in a reversal of impairment amounting to €6.2 million, was also related to the resolution of open issues with EVN in relation with those power plants. In total, the operating results showed non-recurring effects of €6.9 million. After considering the impact from the non-recurring effects above on taxes amounting to EUR 1.7 million, the non-recurring effects on a group result level amounted to a total of €5.2 million. 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, whereas the former by €87.7 million or 21.1% to €503.7 million, the latter by €87 million or 20.9% to EUR 502.9 million. The increases, among others, are attributable to the renewable generation segment, which was up by EUR 64 million, mainly due to the better hydro availability. The EBITDA in the Grid segment in the first two quarters was substantially up as well by EUR 15.4 million 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 EUR 16.8 million, stemming mainly from lower results in the Thermal segment.
Depreciation slightly decreased due to the sale of assets and impairments in 2017. The financial result improved due to higher results from our participation in the provincial utility KELAG, as well as lower interest rates following our deleveraging of the past years. The reported group result therefore increased by EUR 73 million or 47% to EUR 227.5 million. Adjusted for non-recurring effects, this is mainly related to the resolution of open issues with EVN in connection with the closed power plants, Gmünd and Korneuburg. The adjusted group result increased by EUR 67.8 million or 43.9%. As a consequence of the aforementioned reasons, the EBITDA margin again increased substantially from 28.2% to 36.7%. 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 EUR 100 million.
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 EUR 480 million due to the better hydro availability from our run-of-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 EUR 273.6 million to EUR 355.9 million. The net debt correspondingly decreased to around EUR 2.7 billion, gearing decreased from 50% at the end of 2017 to 46% in the first half year 2018. A few words to our financial liabilities.
The debt maturity profile shows a remaining repayment at the end of this year of around EUR 155 million, will be covered out of our own liquidity and cash positions. We don't have to refinance on a long-term basis. The debt maturity profile shows as well one peak in 2019, mainly consisting of a fixed interest bond in the amount of EUR 683 million and one in 2024, mainly consisting of a EUR 500 million bond. We have liquidity tied up to a EUR 500 million syndicated loan facility, which is undrawn. The total amount of our financial liabilities currently is around EUR 1.9 billion. The average interest rate 3.7%. The ratings of the group are still unchanged.
We expect a change based on the financial development at the end of this year. It's still at a level of BBB+ with a stable outlook S&P and Baa2 positive outlook at Moody's. Let me hand over again to our CFO for the outlook.
Thank you, Andreas. 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 first half year 2018, we have hedged approximately 50% of our hydro generation at an average price of EUR 31.5 for 2019, which is approximately EUR 1.1 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 EUR 39.4, which is approximately EUR 9 above the 2017 level. For 2020, we have so far hedged approximately 10% at a price of EUR 40.9. On a mark-to-market basis, the average achieved price would be at a level of EUR 44.2. 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 five percentage points above the long-term average. On the basis of the aforementioned developments, the guidance for the full year 2018 is an EBITDA of approximately EUR 950 million and the result of approximately EUR 370 million. That, of course, under the assumption of average hydro and wind generation for the second half. VERBUND plans to pay out between 40%-45% of our adjusted results, which are going to be approximately EUR 365 million. As always at this point, I want to highlight the sensitivities. A deviation of +/- 1% in the generation from hydropower has an impact of +/- EUR 4 million in the group results. A deviation of +/- 1% in the wind generation has an impact of EUR 4.2 million, a deviation of +/- EUR 1 in wholesale prices has an impact of +/- EUR 1.9 million.
With that, we have come to the end of our presentation, we are open for your questions.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it is your turn to speak, you can dial zero two to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment please, for the first question.
Right. It seems that there are Oh, okay. There are questions coming in?
Yes. Now there are questions coming in. We've received the first question. It comes from Wanda Serwinowska of Credit Suisse. Please go ahead. Your line is now open.
Hi. Good morning. Wanda Serwinowska, Credit Suisse. Two questions from me. The first one would be on the power price and CO2 price outlook.
Yeah.
Any comments from you would be much appreciated. 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 one-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 two, three 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. 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 wide range of predictions where CO2 will go to. Anything from CO2 prices will go down to EUR 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 in CO2. 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, or 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.
There is a structural change with the announcement of the market stability reserve, which has an impact on the options, and with other measures. Overall, with the political discussion, where across Europe you will not find a single politician who is 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. 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 Boujard of Oddo. Please go ahead, your line is now open.
Yes. Hi, Louis Boujard from Oddo BHF. Thank you very much for taking my question. Just would like to come back on your slide page six, if you don't mind. It would be maybe helpful if you could give us a bit more color on the deviation into the local GAAP in your guidance for EUR 160 million of EBITDA into the grid business. If you could split what comes from the increase into the regulated asset base, and what might come from other elements, recurring or not, such as flexibility products or else. If we could have some figures attached to it would be helpful. 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.
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 six, 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. 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. It has a very simple explanation. The simple explanation is that currently we receive the 5% regulated return on our regulated asset base. If, for example, we have a lower cost for control energy, or if we have lower cost for congestion management with an APG, which had not been reflected in the original tariff, that, of course, means that we have higher results.
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 have not been predicted. When you go to the specific effect which we have seen this year, i.e., a higher contribution from the grid, where is it coming from? This is, I think, one of your questions. It is coming from two areas. It is coming from lower costs, which APG had for congestion management, because there was less demand for congestion management in the system, which, by the way, we had predicted, because 2017 was particularly high.
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 EUR 50 million.
Okay.
Okay, thank you. As there are no further questions, I would hand back to you.
Yes. Thank you very much for your interest. 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.