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 Dr. Peter Kollmann, who will lead you through this conference. Please go ahead, sir.
Good morning, ladies and gentlemen. I am here with Andreas Wollein, our Head of Finance and Investor Relations. Let me welcome you to our presentation for the first quarter 2018 figures, and let me thank you for joining today's conference call. Before we move into the analysis of the business development of VERBUND, let me make a few general comments about the first quarter. Hydro conditions were exceptionally positive in the first quarter. That is why we decided to increase our outlook for 2018. Flexibility products were lower than the year before. However, 2017 represented, as you know, an extraordinary year with regards to almost all flexibility products. The performance in the grid segment was strong compared to last year. All of these developments had a positive effect on our performance and on our key figures. Let us move into more detail.
At the beginning, let me highlight the most important influencing factors for the results development in the first quarter. The water supply determining the generation from our run-of-river hydropower plants was 17 percentage points above the long-term average and 25 percentage points above the level of 2017. Contributions from flexibility products were lower than in the corresponding period in 2017. I would like to remind you that 2017 was exceptionally strong. Why? Cold weather, outages of nuclear power plants in France at the beginning of the year, and a few other influencing factors. Contributions from the grid segment were higher than in the first quarter 2017, mainly due to lower expenses for congestion management. Finally, cost-cutting programs of the past years had positive effects on the results development. The impact of these factors on the key figures on VERBUND are as follows. EBITDA increased by almost 19% to EUR 270 million.
Group results was higher by 30% to EUR 121 million. The operating cash flow is very strong at a level of almost EUR 300 million, representing an increase of 94.6%. Free cash flow before dividends was positive at a level of EUR 241 million, which is an increase of 155%. That allowed us to reduce the debt level further. Net debt decreased by 17.3% to a level of EUR 2.589 billion. Due to the very good hydro conditions in the first quarter, we decided to increase our outlook for 2018. We now expect an EBITDA of approximately EUR 870 million and a Group results of approximately EUR 320 million based on average hydro and wind conditions for the remainder of the year. As announced with the full-year results, we plan a payout ratio between 40%-45% on the adjusted Group results for 2018.
On the next page, the following chart, I will explain the influencing factors in more detail. Let me start with our generation volumes. The generation volumes in total were significantly higher, despite the fact that the production from thermal and wind power plants decreased. In the first quarter, we saw a strong increase from our profitable run-of-river hydropower plants. Hydropower increased by 1,600 gigawatt hours or almost 29% compared to 2017. At 1.17, as you know, our hydro coefficient, an index which quantifies the hydropower generation, was 25 percentage points above the level of 2017, i.e., the first quarter 2017, and 17 percentage points above the long-term average. Generation from storage power plants also increased by 34.7%.
However, generation from thermal power plants was down by more than 50% or 520 gigawatt hours, which is a result of the decreased use of our Mellach CCGT for flexibility services, particularly congestion management. Generation from wind power also decreased by 50 gigawatt hours or 5.4% due to less favorable wind conditions in Romania. A second important influencing factor on our results, of course, the average achieved contract prices. At the end of the first quarter 2018, we have hedged approximately 83% of our hydro generation at an average price of EUR 27.9 for 2018, compared to EUR 30.4 for full year 2017. As you know, EUR 1 plus or minus has a sensitivity of approximately EUR 25 million on the EBITDA line. Based on the increasing wholesale price environment, you can see an increasing trend of the achieved contract prices for 2018.
On a mark-to-market basis, as of end of April 2018, we calculated with a price of EUR 30.1 per megawatt hour, which is already pretty close to the level for the full year 2017, which was EUR 30.4. Next page, with regard to flexibility products, as I mentioned before, 2017 has been a record year. We should not take that as a guidance for the future. We had a number of effects at the beginning of 2017, which I mentioned before, which led to the very, very strong flexibility product development last year. In the first quarter this year, we had a contribution from control energy, congestion management, grid system services, intraday trading, capacity reserve, and pumping operations of, in total, approximately EUR 44 million after close to EUR 70 million in the corresponding period of last year. That is a decrease in flexibility products of 36%.
I already mentioned the reasons for the exceptional development in 2017. For 2018, we guide an EBITDA contribution from flexibility products of approximately EUR 130 million. As I mentioned before, that figure is highly volatile and the predictability is very limited. On the next page, as you know from our full year conference call, the Austrian high voltage grid with a system length of approximately 7,000 km and an interconnected capacity into seven neighboring countries is of high importance for the group strategically. As we mentioned before, we see a growing importance in the European grid system of our very central position within Europe, and we like the regulated character of our grid business. Under IFRS, in contrast to local GAAP, we have a volatility in the results contribution, which unfortunately we cannot avoid.
We would like to have the same, quote-unquote, regulatory account system as we have in local GAAP and IFRS. Unfortunately, that has not been accepted so far, despite the fact that we had a number of conversations with the IFRS board over the last few years. As a result of that, we have revenue surpluses and shortfalls in IFRS, which are not utilized or compensated via the regulatory accounts that we have in local GAAP. The chart on the left-hand side provides you with a comparison between the EBITDA according to local GAAP and EBITDA according to IFRS for the first quarter of 2017 in comparison with the first quarter of 2018, and our revised guidance for the full year 2018. EBITDA from the grid business strongly increased from EUR 57 million to EUR 90 million under IFRS. What is the reason? Reason is mainly lower than planned expenses for congestion management.
We increased our guidance to EUR 160 million according to local GAAP and to EUR 206 million according to IFRS. There is a lot of volatility, and we can't really predict congestion management and control energy for the remainder of the year. That is something we just need to observe. I would like to hand over to Andreas Wollein, who is going to take you through the next three charts.
The next three charts show how the effects described before influence VERBUND's key financial figures. On the first slide, you see more or less the P&L figures. EBITDA increased by more than EUR 40 million to EUR 270 million. This increase is mainly attributable to the renewable generation segment, which was up by about EUR 35 million, mainly due to the better hydro availability in Q1. The EBITDA in the grid segment was up by EUR 32.7 million due to the lower expenses for congestion management. In addition, the cost reduction and efficiency increase programs had a positive effect on the results development. These effects were slightly counterbalanced by lower EBITDA contributions from all other segments being down by EUR 13.6 million, stemming mainly from the lower results coming from the thermal segment. Depreciation slightly decreased due to the sale of assets and the impairments, which we did last year.
The financial result improved due to the lower interest rates because of planned as well as unplanned debt repayments. The group result increased by EUR 28.1 million or 30% to EUR 121.6 million. The EBITDA margin increased from an already high level of 28.1% to 36.1%, reflecting the above-mentioned effects on the EBITDA level. The EBIT margin showed a comparable increase from a level of 17.4% to 25.1%. I would like to mention the additions to tangible assets, which were slightly higher than in the first quarter last year, at the level of EUR 33.7 million. The additions concerned mainly the investments into the modernization of some of our hydropower plants in Austria, as well as some investments into the Greek business. The next slide shows the cash flow and debt situation. VERBUND's operating cash flow in the first quarter was extremely strong.
It showed an increase of close to 100%, 94.6% to EUR 298.5 million, due to the better hydro availability, due to the repayments from margining effects out of our trading activities and the increased earnings contribution from the Greek segment. The free cash flow also strongly up from EUR 94 million to a level of EUR 241 million. This is the reason why we could further deleverage the company significantly. Net debt decreased from EUR 2.8 billion to below EUR 2.6 billion. The gearing decreased from 50% at the end of 2017 to 44.1% at the end of the first quarter 2018. A few words to our financial liabilities. On the next slide, you see the debt maturity profile, which shows a remaining repayment of around EUR 170 million in 2018. This is a loan which is due in December this year.
It is also worth mentioning that VERBUND additionally performed an unscheduled repayment of a loan before maturity of around EUR 62 million in March this year as part of our active liability management. Furthermore, the debt maturity profile shows two peaks, one in 2019, mainly consisting of a fixed interest bond in the amount of EUR 680 million, and one in 2024, mainly consisting of a fixed interest bond in the amount of EUR 500 million. For liquidity backup, VERBUND has access to a EUR 500 million syndicated loan facility, which is undrawn, has no MAC clause, and is available until 2019 with two extension options. The total amount of our financial liabilities is now approximately EUR 1.9 billion. The average interest rate on our debt is approximately 3.8%. 97% of our debt is based on fixed interest rates. We are more or less 100% financed in EUR.
The rating of VERBUND AG remained unchanged. We have a rating of BBB+ with a stable outlook at S&P. At Moody's we have a Baa2 rating with a positive outlook. Let me hand over again to Peter Kollmann, who will present you the last chart. It's the outlook for 2018 and 2019. Thank you.
Thank you, Andreas. As you know, key parameters for the development of our operational business are mainly prices and hydro volumes. At the end of the first quarter 2018, we have hedged approximately 45% of our hydro generation at an average price of EUR 30.1 for 2019, which is approximately EUR 0.3 below the level of the full year 2017. On a mark-to-market basis, as of the 26th of April, the average achieved price would be at a level of EUR 36.1, which is approximately EUR 5.7 above the 2017 level. With regard to the year-to-date hydro situation, we have to report a very positive hydro coefficient of 116%, again, as of the 26th of April, which is 16 percentage points above the long-term average.
On the basis of the aforementioned developments, the increased guidance for the full year 2018 is an EBITDA of approximately EUR 870 million and a group result of approximately EUR 320 million under the assumption of average hydro and wind generation for the rest of the year. VERBUND plans to pay out between 40%-45% of the group results after adjustment for non-recurring effects. As always at this point, we want to give you our sensitivities. A deviation of ±1% in the generation from hydropower has an impact of ±EUR 4.7 million in the group result. A deviation of ±1% in the wind generation has an impact of EUR 0.3 million, and a deviation of ±EUR 1 in the wholesale price has an impact of EUR 3.1 million in the group results. With that, I would like to open to Q&A.
If you have a question for our speakers, please dial 01 on your 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 is your turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Wanda Serwinowska of Credit Suisse. Please go ahead.
Good morning, Wanda Serwinowska, Credit Suisse. Three questions from me, if I may. Firstly, on your 2018 EBITDA guidance, you raise the group EBITDA guidance by EUR 20 million, but at the same time, you increase your EBITDA guidance for the grid business by EUR 46 million. So isn't it reflected in your guidance or what are we missing here? My second question is, if you could give us the updated 2020 hedges, because I couldn't find it in your presentation. My last question is on the carbon outlook. During the FY 2017 conference call, you said that the carbon price is an outcome of the trading. Since then, the carbon price has gone up by 25%. Do you reiterate your view on the carbon pricing? Thank you very much.
Right. Okay. Thank you. Let me start with the carbon outlook. Yes, you are right. I have been relatively negative for many, many years on the carbon outlook. Carbon has indeed gone up quite dramatically this year. Year to date, I think it is almost 60%, where the carbon price has gone up. There are different schools of thought within the market vis-a-vis the entire ETS scheme. There are many different opinions in terms of how much the actual oversupply is, and as a result of that, is the current price a proper reflection of the demand and supply within the market over the next few years? My personal opinion is that we still have a significant structural oversupply in the market. I continue to be of the opinion that we are currently at a very solid level in terms of the carbon price.
I think that the upside from here, I think we're currently at around 13, the upside from here is limited. That is a view which could be right, could be wrong. I think it depends a lot on the trading sentiment, on the one hand. The other hand, I think it depends a lot on the political will over the next few years vis-a-vis emissions and climatic changes, which are going to be reflected in political measures. The 2020 hedges, we have not included the 2020 hedges in our presentation because we have only hedged 1% so far. We have not really started with the one-year forward hedges. As a result of that, we have not included it in our presentation. As far as the 2018 guidance is concerned, you're absolutely right.
We have not one-to-one included the increase in the grid into our full-year guidance. We have only taken the very good water conditions. As a result of the water conditions, assuming that we have 1.0 hydro coefficient for the rest of the year, we have increased. Excuse me. Why not the grid? The reason is that we have seen, particularly in the IFRS, a lot of volatility, not just within the last few months, but within the last few years. Therefore, as we don't know how things are going to evolve for the remainder of the year in terms of congestion management and control energy, we have decided at this point in time, relatively early in the year, not to include it in our full-year guidance.
Okay, there's a potential EUR 50 million upside on the EBITDA on the top of EUR 870, right? If the congestion management and control energy.
If the conditions remain as they are, if volatility does not lead to any negative developments, there is a potential upside.
Okay
on the grid sector.
Thank you very much.
The next question is from Lueder Schumacher of SocGen. Please go ahead.
Good morning. Two questions from my side. One again on the grid. The 206 you mentioned there, how much of that is due to timing differences, clawbacks, et cetera, and how much would be a sustainable level due to RAB returns and the international business, which I appreciate can be volatile as well. If you can give us the component that is due to these one-off items. On the flexibility products, just the usual question, can you tell us how they roughly break down by the different divisions?
On the grid, the EUR 40 million, roughly, they come from both the congestion management and from control energy. Control energy expenses have come down. Why? The price for control energy has come down. It has been a more competitive market at the beginning of the year. As a result of that, APG has spent less money on the control energy. Therefore, you have approximately half of the EUR 40 million coming from the control energy, and the other half, approximately, is coming from less expenses for congestion management. That's really where it's coming from. It's less Regulatory Asset Base-based differences, and it is less timing differences. On the flexibility products, we usually don't give the exact figures in terms of the changes, but I always, on the conference call, give you a feeling or give you an idea how things have evolved and how they might evolve.
On the control energy, I'm now comparing to 2017, because 2017 has been, as we have discussed also on the last conference call, an exceptional year. On the control energy, we are slightly down in terms of contribution. Congestion management, we are predicting to be way down from last year and to be approximately at the level of 2016. On the pumping, that again has been exceptional in 2017. We think that we're going to be down there as well. On the intraday trading, we think that the level is going to be about the same as in 2016 and 2017. Overall, when you put it all together, that is where the EUR 70 million are coming from, between the EUR 200 to the EUR 130.
The EUR 130, in which divisions can we expect to find how much of it? How does it break down between the different divisions?
The biggest part is congestion management, and congestion management is between 40%-50% of the entire figure.
Okay. Thank you.
You're welcome.
The next question is from Tanja Markart of Commerzbank. Please go ahead.
Good morning. I have a question on the financial liabilities, the maturity profile that you mentioned. I would be interested, the EUR 172 million and the EUR 719 million bonds, well, the EUR 680 million bond and the other one, to what extent you may reduce your financial charges from the refinancing that you will probably be able to keep or refinance?
When we talk about the repayment in 2018, so the December repayment of about EUR 170 million, based on the good liquidity position we have currently on the balance sheet, we will not refinance the repayment. I would say, here is a potential that we reduce the interest expenses, or let's say the interest rate level from around 4% to basically zero for this amount. When we talk about 2019, the repayment of the big bond, I think we have not made a decision yet. This bond is also carrying a fixed coupon of around 4.75%. Given the fact that, or under the assumption that we have to fully refinance the bond, which I guess based on the current conditions is not very likely, so the amount will be lower. There is also, let's say, a strong reduction in interest expenses, which we expect for next year.
As I said, the bond carries a coupon of 4.75%. If we are, let's say, issuing a bond today, a 10-year bond, we would roughly pay 1.5% coupon. This is roughly the spread, reflecting the potential improvement in the interest expenses.
Thank you very much.
You're welcome.
As a reminder, if you would like to ask a question, please press zero one. The next question is from Ingo Becker of Kepler Cheuvreux. Please go ahead.
Yeah, Ingo Becker from Kepler. Good morning. Two questions on CO2 and coal. Peter, can you give your view on what has been in your experience driving the CO2 price so steadily lately? Some argue that right now you have a fuel switch price level that makes a lot of fundamental sense. On the other side, it seems to have a lot of liquidity concerns in the market that have been fueling getting people to buy. What's your take on that? I was wondering if you have a view on coal, which was pretty erratic year to date, down earlier this year, lately recovering in full. Power essentially is back up where it started at the year, and apparently for you, pretty crucial what the next direction would be, and I was wondering what your views are on this. Thank you.
Yeah. Ingo, on CO2. To be perfectly frank, I'm struggling slightly in terms of really fully understanding the dynamics of the CO2 market. I think you're right about liquidity concerns. That's something I've been observing as well, that there is a prediction of potentially higher CO2 prices, call it market psychology. As a result of that, there seems to be some trading in terms to be prepared and to buy certificates. Of course, when you have liquidity concerns, there's a self-fulfilling prophecy, because then, of course, you think that there could be, as a result of the liquidity concern, a supply shortage, and therefore price could go up further. That is market dynamics, which is short-term. I usually look structurally at the overall supply and demand.
There I have not changed my opinion, which I've had for the last five years almost, in terms of the CO2 market, and where dare to say so far it's been right, that the structural oversupply in the market has always put a cap on the development of the CO2 prices. Whenever in the past we have seen that because of market dynamics, the CO2 price has gone up, and there has been very positive sentiment in the market, and we've seen that a year ago and two years ago. All of a sudden, things have changed and the CO2 price has come back. The key question to me is there anything I have missed? Is there anything I'm not seeing? Is there anything that has structurally changed?
The one thing that has potentially changed is there seems to be a more constructive and a slightly more forceful attitude within the European Union on CO2. I think that is a sentiment which we see in many countries on the political level. We see it here in Austria with the new energy policy 2030, which is very optimistic in terms of cutting CO2 and producing more and more from renewables. We can see it in the discussions in Germany, which Ingo, I know you observe it very well in the detail. Then, of course, we have similar discussions across Europe and other countries as well.
I think that we just need to observe political will and how political will is going to be transferred into very specific measures and how those are going to be implemented are going to have a real effect in terms of CO2 pricing, and how people are going to decide to potentially take coal out of the market. That brings us to your second question, which is coal. I can only give you a personal opinion, and unfortunately, I don't have enough time to really go into coal analysis, commodity analysis, despite the fact that it would interest me highly. I think that the market is currently trading at a level which is higher than I had originally anticipated. I think that there is a trend or there should be a trend towards coal going down.
Again, I always look at supply and demand, I see that, when I talk to colleagues in China and when I talk to people that are responsible for coal, that the trend definitely is that demand for coal is going to come down. That is a real trend and that is something which we are going to see in China as well as in other countries, but particularly in China. I think that China is the key factor for the coal price. However, even if you're right on the trend, you could see short-term developments that are contrary to that. The one thing that is absolutely certain is that the coal price is still the price-setting mechanism for the German power price.
As long as that is the case, and I think that is what you have implied in your question, we have to observe coal developments very intensely in order to really fully understand and grab our price development in our market.
Okay. Thank you.
The next question is from Dominik Olszewski of Morgan Stanley. Please go ahead.
Good morning. Thanks for taking my questions. Firstly, with regards to operating cash flow, which has seen meaningful year-on-year improvement. In your presentation, you mentioned margining reversals. Are there any particular working capital or cash flow effects that we should be aware of for the rest of this year? Secondly, with regards to the approaching price zone separation and the potential premium between Austria and Germany, how much of any premium is already reflected within your disclosed hedging via proxy hedges or otherwise? Thanks.
I will start with the second question, Andreas, while it's going to the operating cash flow one. On the border differential, we are currently taking the market differential, which we have for 2019 and 2020. That differential for the amounts which are not hedged is implied in our numbers. On the operating cash flow, Andreas
As we mentioned before, we have a strong increase in the operating cash flow. The reason for that is because we have a roughly EUR 70 million positive effect coming from, let's say, liquidity repayments or cash repayments from congestion management. We have here about a EUR 45 million positive effect coming from the water supply, so the positive hydropower situation, and about EUR 65 million is coming from, let's say, the trading business, which I mentioned is a cash flow coming back out of the margining because of the price developments and, let's say, running out of some of our futures or forward contracts. This is the main effects why the operating cash flow has been so strong.
Okay. Thank you.
Thank you.
The next question is from Teresa Schinwald of Raiffeisen Centrobank. Please go ahead.
Hi. Good morning. My first question also refers to the separation and also talking to other non-listed Austrian utilities, they complain a bit about the transparency of the market. Looking at your mark-to-market, I was by about EUR 2 positively surprised about the current curve for 2019. Could you talk us a bit more through the pricing process, especially when it comes to the more short-term product? That's my first question. The second one is regarding Mellach Power Plant. You were so kind in the past years to provide us with an outlook for this part of the business, and if you could help us this year again.
Right. I will start with Mellach and I don't know about all the others, but the line has been very bad. If I have not acoustically, if I have not fully understood the question, forgive me. On the Mellach one, I just repeat your question, you asked about the Mellach development for this year, how we predict it?
Yes.
Yes. Let me take a step back in terms of Mellach. Mellach for us is at the moment, and I think that is not going to change in the foreseeable future, an asset for flexibility products and particularly for congestion management. The Mellach congestion management contribution last year has been very strong. For regulatory reasons and for competitive reasons, we don't give the specific numbers in terms of the specific Mellach contribution. It has been very strong last year, and most of the congestion management which we have delivered in 2017 has come from Mellach. In terms of 2018, as you know, we have been more careful in terms of our predictions from congestion management. As a result of that, we think that the contribution from Mellach as opposed to 2017 is going to be smaller. However, it depends on the long-term grid reserve contract, which is currently negotiated.
That is something some of you might remember we have discussed on the full-year conference call. We are currently negotiating with our Austrian regulator in terms of a long-term grid reserve, where we would get payments for a period of three to five years. We're actually thinking that it's going to be probably the five years, which we view as more positive than the three years. That is going to be a fixed contribution to our Mellach Power Plant, which would make Mellach a quasi-regulatory business. I think we have a lot of background noise. Could somebody who is walking around the room, because we're hearing loud steps, go on mute? Great. Thank you. Now, in terms of the hedges, the transparency is as good as the markets. The liquidity in the market is not fantastic.
The highest liquidity obviously we had in the one zone market, where we had a very liquid futures market, which has been used by everyone. With the separation of the markets, we have a very liquid market, which is the German market, and we have a much less liquid market, which is the Austrian market. As a result of that, you could argue that when you have an illiquid market and a liquid market and you look at the price difference, it's not perfect. I would agree with that statement. However, it is what it is. We have to take it as a given, and that is the only indication which we have from the market, and that's the one we're using. It could well be that with more liquidity coming into the Austrian futures market, that we're going to see slight differences.
However, we have, and that you might remember when we had those conversations sort of like one and a half years ago, almost like two years ago, when we first talked about the potential separation of Austria and Germany. You asked me at the time what my prediction would be if I had to predict on the basis of what I know. At the time, I said, in my view, it's going to be between EUR two and EUR three. That's exactly where we are at the moment. We're between EUR two and EUR three. I think at the time I thought it makes sense. I still think it makes sense.
I don't think that we're going to go way above the EUR three, and I don't think that we're going to go below the EUR two. If you try to put sensitivities in your model, that's probably a good range to use.
Thank you.
There are no further questions. I hand back to the speakers.
Great. Thank you very much for your questions, and I look forward to speaking to you on our next conference call. Have a good day.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.