Dear ladies and gentlemen, welcome to the conference call on the full year results 2018 of VERBUND AG. At our customer's request, this conference will be recorded. As a reminder, our 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 now hand you over to Peter Kollmann, who will lead you through this conference. Please go ahead, sir.
Ladies and gentlemen, welcome to our presentation for the full year 2018. Let me thank you for joining today's conference call. I am here with Andreas Wollein, our head of finance and investor relations. Before we move into the analysis of the business development of VERBUND, let me make a few general comments about the business year 2018. In general, the energy market environment for VERBUND developed favorably. 2018 was characterized by continued rise of electricity prices on the back of increasing CO2 prices. The improvement of the energy market environment, in combination with the positive impact of the cost-cutting measures VERBUND has taken in the past, all that paid off. The capital markets reacted positively, and we saw a strong increase of the share price, clearly outperforming both the Austrian stock index as well as the Dow Jones STOXX Utilities index.
Because of our strong increase in market cap, we have been included into several stock indices, like the STOXX Europe 600 Utilities and the MSCI Austria. Also, the rating agencies S&P as well as Moody's appreciated the measures that VERBUND took in the past, which, as you know, focused on strengthening the free cash flow and reducing our debt levels. That resulted in an upgrade of VERBUND AG's rating to A- stable with S&P and Baa1 positive outlook at Moody's. Because of our clear strategic positioning and consistent implementation of comprehensive measures in the past, VERBUND has reached very high level of strategic flexibility and increased the resilience of the business model to cope with the changes and increasing volatility we see in the market. At the beginning, let me highlight the most important influencing factors for the results development 2018.
The water supply determining the generation from our run-of-river hydropower plants was considerably lower than the long-term average and below the level of the business year 2017. Following the development of long-term futures prices at the electricity exchange, EEX, and based on our long-term hedging strategy for our own electricity generation, the average achieved contract price was slightly lower than in 2017. Compared to the record year 2017, we achieved a lower contribution from flexibility products, but a higher contribution than we had originally expected. Contributions from the grid segment were higher than in 2017 due to higher contribution from congestion management. The results development was also influenced by positive non-recurring effects, primarily reversals of impairments on some of our hydropower plants in Austria and Germany, as well as on our wind power assets in Romania.
The last influencing factor I would like to mention are the cost-cutting programs of the past, which had a positive effect on the results development in 2018. The overall impact of those influencing factors on the key figures of VERBUND are as follows. Reported EBITDA decreased by 6.3% to EUR 864 million. On an adjusted basis, it decreased by 4% to EUR 863 million. The reported group results, however, increased by 43.7% to EUR 433 million, but decreased by 3.5% to EUR 342 million on an adjusted basis. The operating cash flow was strong at a level of EUR 664 million. The free cash before dividend was positive at a level of EUR 450.3 million and allowed us to reduce the debt level further. Net debt decreased by 10% to a level of EUR 2.5 billion.
Based on the strong free cash flow, we will propose a dividend of EUR 0.42 a share in our AGM on April 30, which reflects the payout ratio of 33.7% on our reported group results and of 42.6% on our adjusted group results. Compared to last year, the dividend per share remains equal. In the following charts, I will explain the influencing factors on the results development in more detail. Let me start with the analysis of the own generation volumes. After an excellent start into 2018, we saw historically low hydro volumes in the second half of the year, especially in the third quarter at 0.76. We saw months that were among the lowest, which we have seen within the last 100 years.
On a yearly basis, at 0.94, the hydro coefficient, which as you know, is an index quantifying the hydropower generation of the run-of-river power plants, was 5% below the level of 2017 and six percentage points below the long-term average. Therefore, our own production from hydropower decreased by 1,000 gigawatt hours or 3.4% compared to 2017. Generation from thermal power plants was also down by 27.6% or 615 gigawatt hours, stemming from the decreased use of our Mellach CCGT for flexibility services, mainly congestion management. Generation from wind power also decreased by 118 gigawatt hours or 12.4% due to less favorable wind conditions in Germany, Romania and Austria. The second important influencing factor on VERBUND's results are, of course, the average achieved contract prices. In 2018, based on our hedging strategy, we achieved an average contract price for our hydro generation of EUR 29.3 compared to EUR 30.4 for 2017.
Please note that based on our hedging strategy, we priced the majority of the volumes up to 1.5 years in advance, that is when prices were much lower than they are today. To give you our sensitivity again, EUR 1 change means approximately EUR 25 million on our EBITDA line. Now on the next page, flexibility products. You know that one of the major trends in the new energy world is increasing volatility across Europe, across the European grid system. This is coming from the massive development of renewables. With our very flexible asset base consisting of CO2-free, low-cost pumped storage power plants and the most modern CCGT in Austria, we are very well positioned to benefit from this trend and to offer flexibility products to the market. 2017 has been an absolute record year, we always communicated that we do not expect a similar development in 2018.
However, 2018, though lower than 2017, ended with a results contribution from flexibility products amounting to approximately EUR 155 million. We saw lower contributions from control energy, congestion management, but also from pumping. The reduction here was expected because since October 2018, the CCGT Mellach has been put into a strategic reserve mechanism in Austria, under which we receive a fixed capacity payment and a payment for the generation. As a consequence, we have changed a rather unpredictable, volatile cash flow against a secure, quasi-regulated, stable cash flow for a period of three years. For 2019, we guide on a conservative basis on an EBITDA contribution of approximately EUR 100 million from flexibility products, thus lower than 2018. On the next page, we talk about our high voltage grid. The Austrian high voltage grid has a system length of approximately 7,000 kilometers and interconnected capacities with seven neighboring countries.
It is strategically of high importance for us, and it is also very important in terms of the European grid system and in terms of the portfolio of our businesses. It is a stabilizing factor as it has a highly regulated character. Under IFRS, in contrast to local GAAP, volatilities in the results contribution cannot be avoided. The main differences are, this is a reminder because that is something we talked about before, the revenue surpluses or shortfalls under IFRS are not utilized or compensated via the so-called regulatory accounts under IFRS. No rate provisions for asset line items are recognized, and IFRS uses slightly different depreciation and amortization basis than local GAAP.
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 2017, 2018, and what you see here is also our guidance for 2019 in terms of contribution from the grid. The EBITDA from the grid business increased substantially from EUR 160 million to EUR 240 million. The reason for the increase is mainly higher contribution margins from congestion management. Please also note that the current regulatory period started on the 1st of January 2018 with a WACC of 4.88% pre-tax for existing assets and 5.2% pre-tax, including an investment markup for new assets, therefore, an average of approximately 5%. The regulatory period lasts from 2018 to 2022. The regulatory asset base for 2019 is approximately EUR 1.5 billion. The next slide shows the non-recurring effects in 2018.
We give you also a comparison to 2017, which had a significant impact on the results development. Let's start with the positive one-offs in the other operating expenses amounting to EUR 0.8 million. That stems from a change in provisions regarding the dismantling of the thermal power plant, Korneuburg. This was the only non-recurring effect in EBITDA. The biggest non-recurring effects are impairments and reversal of impairments. The impairments amounted to EUR nine million in total, whereas the reversal of impairments amounted to close to EUR 130 million in total and were mainly related to some of our hydropower plants in Austria and Germany, as well as our wind power plants in Romania. The reversal of impairments was mandatory because of higher long-term electricity prices expectations following, among others, the strong increase of CO2 prices. We had a trigger event recalculated and therefore reversal of impairments.
In total, the operating results showed non-recurring effects of EUR 119 million. In the other financial results, we had a positive effect due to the measurement of an obligation to return an interest in our hydropower plant, Jochenstein, amounting to EUR 7.8 million. We also had an impairment for our hydropower plant, Ashta, in Albania amounting to EUR 2.2 million. In total, the financial results showed non-recurring effects of EUR 6 million. After considering the impact from the non-recurring effects on taxes and minorities, the non-recurring effect on the group results level amounts to EUR 91 million. We also show you the amount of the non-recurring effects in 2017, to make it easier for you to compare 2017 and 2018. I will present on the next page how the effects described before influenced our financial performance. Reported EBITDA decreased by 6.3%. The reported group results, however, increased by 43.7% to EUR 433 million.
The development, especially on the group results, was influenced by one-off effects, as I mentioned before, in 2018. These effects stem primarily from the reversals of impairments, which I took you through on the previous page. The development is a result of the decreased production from hydropower, which came from the below-than-average hydro situation, especially in the third quarter and the fourth quarter 2018. In addition, the decline in average achieved contract prices and lower contributions from flexibility products contributed negatively. What were the positive influencing factors? These were an increased contribution from the grid segments and a contribution from an increase in efficiency and as a result of our cost reduction programs, which we implemented in the past. The EBITDA margin slightly decreased from 31.7%-30.3%, and the EBIT margin increased from 13.7%-23%.
We will propose to the shareholders in our AGM on the 30th of April a dividend per share of EUR 0.42, which corresponds to a payout ratio of 42.6% on our adjusted group results. The dividend per share remains the same compared to last year. On the next page, let's look at our cash flow development. As you can see, the operating cash flow was solid at a level of EUR 664 million. It was also higher than in 2017. The reason for the increase were the aforementioned higher contribution from congestion management and higher contributions from grid utilization in the grid segments, higher tax payments, slightly reduced average achieved contract prices, and of course, the very dry months, which I mentioned before, were negative factors. The additions to tangible assets were EUR 292.5 million, higher than in 2017.
This is a result of higher CapEx for grid projects and maintenance CapEx related to hydropower plants. The free cash flow before dividends was highly positive at EUR 415.3 million. After dividends, still at a level of EUR 237 million. Let's turn to our gearing. Based on the very strong free cash flow, net debt decreased further from EUR 2.8 billion-EUR 2.6 billion. Net debt EBITDA remains more or less stable with 3.0 after 3.1 at the end of 2017. The trend remains very positive. Next page on the financial liabilities. The debt maturity profile shows a repayment of EUR 718 million in 2019, mainly consisting of a fixed interest bond in the amount of EUR 683.5 million. The debt maturity profile for the following years shows another peak in 2024, with repayments of half a billion, mainly consisting of a fixed interest bond in that same amount.
For liquidity backup, VERBUND has access to half a billion of syndicated loan facility, which is undrawn, has no MAC clause, is available until 2023. The facility has been renewed in December, the rating grid is solely linked to the ESG ratings of VERBUND. That, by the way, is a worldwide innovation. VERBUND has also access to uncommitted lines with a large number of banks, up to the amount of EUR 580 million. The total amount of our financial liabilities is approximately EUR 1.8 billion. The average interest rate on our debt is approximately 3.7%. 98% of our debt is subject to fixed interest. 100% of our financial liabilities are denominated in EUR. The ratings of VERBUND remain unchanged in the fourth quarter. The S&P rating of VERBUND is still single A minus, stable outlook. Moody's rating is a Baa1, positive outlook.
The rating development, of course, is a result of the numerous measures which we have taken in the past to increase our cash flow and to strongly improve our capital structure and the resilience of the group. On the next page, we move to the new CapEx plan for 2019 to 2021. The volume of our CapEx plan has roughly doubled compared to the previous years, reflecting the better market environment, especially high wholesale prices for electricity. The Austrian government has shown strong support regarding the target to reduce greenhouse gas emissions. The total CapEx for the three-year period between 2019 and 2021 is close to EUR 2 billion, split into growth CapEx of EUR 900 million and maintenance CapEx of more than EUR 900 million.
Please take into account that we currently calculate our new projects, except projects in the regulated high voltage grid, at a WACC of 5% plus a hurdle rate of 200 basis points. The main part of the growth CapEx, approximately EUR 600 million plus, will be invested into the regulated grid business, specifically into the high voltage South Grid Line, in order to increase the capacity to integrate new renewables and to better address the volatility and the instability in our grid systems across Europe. About EUR 224 million will be invested into renewables, the biggest project being the construction of the run-of-river power plant, Töging, in Bavaria. This is a project which we acquired in 2009, when we bought the hydropower plant on the River Inn. In addition to the growth CapEx, we are planning to invest around almost EUR 1 billion, actually, into maintenance between 2019 and 2021.
That's approximately EUR 300 million per year. The maintenance CapEx has increased because we invest a lot into efficiency measures. We have a number of those projects which aren't pure maintenance, but they actually allow us to increase the output and therefore the profitability of our existing fleet of hydropower plants. We view those investments among the best ones which we can currently take. At the end of the results presentation, the outlook for 2019. As you know, the key parameters for the development of the operations business are prices and hydro volumes. At the end of 2018, we have hedged approximately 66% of our hydro generation at an average price of EUR 36.9, which is approximately EUR 7.6 above the level of the full year 2018.
On a mark-to-market basis, as of March 7, 2019, the average achieved price would be at a level of EUR 40.7 and thus significantly above the level of 2018, more than EUR 11 above the level of 2018. We've also hedged approximately 25% of our hydro generation at an average price of EUR 47.3 for 2020. The mark-to-market valuation shows a level of EUR 50.6 for 2020. With regard to the year-to-date hydro situation, we have to report a very positive hydro coefficient of 120, which is an excellent start to the year, 20% above the long-term average year to date. Due to the strong volatility in prices in the market, we have changed our system for the guidance. I'm sure you're not surprised about that, as in the past, we had to make a number of adjustments, given the volatility in the market on both power prices and on the hydro situation.
We now communicate a range. The range represents the hedging as well as the opportunities and risk situation of the group. On the basis of the aforementioned developments, the guidance for the full year 2019 is an EBITDA of approximately between EUR 1.05 billion and EUR 1.2 billion, and the group result of approximately EUR 450 million and EUR 540 million. This, of course, under the assumption of average hydro and wind generation for 2019, and I mentioned the remaining opportunities and the risks inherent in our business model. As always, at this point, we want to highlight our sensitivities. A deviation of plus minus 1% in the generation from hydropower has an impact of EUR 8.5 million in the group results.
A deviation of plus minus 1% in the generation from wind power has a relatively small impact of EUR 0.3 million, and a deviation of plus minus EUR 1 in the wholesale price has an impact of EUR 5.8 million. You know our sensitivity of EUR 1 in power price means EUR 25 million in our EBITDA. Here, the number is, of course, lower because we have already hedged around 70% of our 2019 prices. With that, we have completed our presentation. Andreas Wollein and I will now enter Q&A and will respond to 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 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. Your line is now open. Please go ahead.
Good morning, Wanda Serwinowska, Credit Suisse. Two questions from me. The first one is on your free cash flow. Given the improved market outlook and improved your free cash flow generation, what are your priorities? Do you want to repay your debt? Do you want to increase your dividend, or would you invest more CapEx? The second question would be on the power price in Austria, given a market split in October. What have you seen so far? What do you expect? Have you seen any change in your pumped storage usage? Thank you very much.
Yes. Thank you, Wanda. Well, on the first one, free cash flow. Let me take a step back. We are very much focusing on free cash flow. We have been focusing on free cash flow for many years, and we are very happy with our free cash flow development. When you look at the last five years. We have always had a very positive free cash flow, even when power prices were declining. That allowed us to increase the resilience of VERBUND dramatically. We will be able to absorb any negative future developments as a result of that increased resilience. In terms of future use of free cash flow, I have mentioned before that we are increasing our CapEx. We're doubling our CapEx for the next three years. We're putting it into a number of different projects.
On the one hand, we increase our grid CapEx, which I think is very important. First of all, it increases our regulatory asset base. As a result of that, it increases the contribution from our regulated business, which we feel, from a portfolio theory point of view, is a perfect addendum to our volatile production business. That's one point. On the other hand, we are making more investments into our hydro business. We are increasing particularly on the efficiency measures, therefore we're increasing our output. We are increasing the return that is coming from our hydro business.
At the same time, when we see opportunities in the future on new renewables, i.e., on solar and wind, we will increase our exposure in those areas in order to further diversify our business model, but obviously remain within our core business of renewable production on the one hand, and the grid business on the other hand. In terms of the power price in Austria, with the border, we have seen that the difference now is around the three-euro range, which is something we have predicted. Sometimes it is slightly higher. We've also seen EUR 4, EUR 4.5. At the end of 2019, we will be able to look back. That is a difference, that is a delta that changes on an hourly basis, so we will look at the average for the entire year.
We will be able to give you a better view in terms of the average delta between the German market and the Austrian market.
Can I just ask a quick follow-up? On the dividend, is it fair to assume that the 40%-45% payout ratio will not change in the next few years?
Yes, that is fair to assume.
Okay. 40%-45% payout ratio, is it your long-term dividend? Because in the past, you were talking about a one-year dividend policy.
Yeah, that is not a long-term policy, because we don't have a long-term policy anymore. That is our policy for the next two years.
The last one, are you happy with your three times net debt to EBITDA, or do you want to delever further?
We are very happy with the net debt to EBITDA of 3.0, because that is our long-term target. Having said that, we will be able, given our free cash flow development, to reduce debt further, financial debt that is, and as a result of that, I would predict that we are going to be at around 2.5 in the not-too-distant future.
Thank you very much.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press 01 on your telephone keypad now. The next question is from Lüder Schumacher of Société Générale. Your line is now open. Please go ahead.
Quite a few questions from my side. The first one is on your guidance for 2019. I mean, your business model hasn't really changed over the last few years. It's still the same. Yes, there's volatility from power prices, as one would expect. First of all, why do you now give us a range as part of the guidance instead of just one number? Second, given that I understand your guidance is based on a hydro coefficient of 1.0, what elements have you assumed to get you to the bottom of the guidance, and what gets you to the top? That's the first question. The second question is on flexibility products.
It seems to be, with increasing amount of renewables and the number of times the TSO has to intervene to guarantee grid stability rising exponentially, it seems somewhat counterintuitive that you are expecting quite a big decline in the contribution from flexibility products. Would be quite interesting to hear your reasoning there. Lastly, Austria has moved all the state holdings to ÖBAG, the new holding company. What are the expectations of the implications of that? Would you expect to be the state a lot more assertive when it comes to, I don't know, setting dividend policies, et cetera?
Yeah, thank you, Lüder. Quite a few questions.
I have more
important. You have more?
No. Sorry.
We'll start with the first four questions which you had so far. First of all, on the guidance. There's a combination between your first and your second question because the second was on the elements, because you are correctly saying that we are assuming a hydro coefficient of one anyway. What are the other elements? Lüder, in the past, and I'm not just talking about the last year, I'm talking about the last few years, we have come out with ad hoc announcements, where we were forced by the very, very strict regulation in Austria that when we had any changes, we had to immediately inform the capital markets. That is much stricter than in other countries. In other countries, you wouldn't have as many ad hoc announcements.
As a result of that, we have come to the conclusion that, I think 90% of all the other utilities in Europe, we come out with a range. We want to give you as much transparency as before, but it is not just the volume, it's not just the hydro coefficient that is providing us with volatility and excitement throughout the year. It is the grid contribution. The grid, despite the fact that it is a regulated business because of IFRS, we have seen, and you might remember the last two years, we have seen quite dramatic changes in terms of results contribution coming from the grid. It should always be the same, and at the end of the day, if you look at it over a longer period of time, it is always the same as it is a regulated business. It's the 5% of our regulated asset base.
Because we don't have a regulatory account in IFRS, we have quite dramatic impacts from the grid business. At the same time, what we have seen in the past is the volatility in power prices has increased. If you just look at the development of the quarterly product over the last three months, you have seen a very wide range. Obviously we are hedging on a linear basis going forward, starting one and a half years in advance. It also means that volatility is something which we need to absorb and which has an impact on our numbers. The third element, which is volatile, again, just look at the difference between 2017 and 2018. EUR 50 million less contribution from flexibility products. I will comment on your third question on flexibility products. It's counterintuitive.
Before we go into that is another element which provides us with flexibility. Therefore, we think that it makes a lot of sense to give you a guidance range. By the way, with every quarter result, we will narrow the guidance. With every three months, we will have new information, we will have new data points, as a result of those data points, we are going to narrow the range step by step. We're not going to confront you with a very wide range throughout the year, it will narrow coming towards the end of the year, until we reach a single point. Yes, I fully understand your question on flexibility products. When we look at the European system, let's just forget about Austria for a second.
We look at the German grid, we look at the French grid, we see a lot of instability, we see a lot of volatility. All of you remember the announcements in terms of investments in Germany, for example, which have to be made. People were talking about EUR 30 billion. The new figures are close to EUR 50 billion. Those are unbelievable numbers. Why such huge numbers? It is exactly because the large build-out of solar and wind has to be synchronized with the grid. It is not synchronized with the grid, we have tremendous instability in the system, which is why we have to make those investments. At the same time, what we have seen is that one component of our flexibility products, control energy, has come down because competition, the supply and the prices for control energy have come down.
As a result of that, as we are there in a competitive environment, as with all the other flexibility products, by the way, we have seen control energy prices trending down now for a number of years, and we think they will continue to come down. On the congestion management, it is very hard to predict. You could assume that if the grid and the buildup of renewables is not fully synchronized, as is the current situation, that you have a lot of congestion management. Yes, that is true. At the same time, congestion management in the VERBUND specific case has moved from a free agent to a quasi-regulated business, because we have now a full-year contract. As a result of that, if you want to, we have substituted the volatility and the potential to make more money with the stability of a regulated return from that business.
That is on the flexibility products. If you have more questions, Lüder, we can go into even more detail. Now I want to come to your fourth question, which is ÖBAG. You were asking about implications. I can give you a very specific response to ÖBAG. ÖBAG is a holding company which has a number of stock-listed companies. Next to us, there is Post, there is OMV, there is Telekom Austria. As a result of that, you have a highly professional management within ÖBAG. You have analysts like yourselves that basically analyze those companies. They understand the capital markets very well. They understand very well what drives the companies, what drives the stock market. I think that they will be a very professional counterpart for all the companies within the roof of ÖBAG.
I personally think that it will be a positive implication for us and for the other companies.
Okay. Sorry, just one follow-up question from me. You said that the main reason for the range is the grid contribution and flexibility products. Can we assume that if you take your guidance for the grids of EUR 170 and flexibility products of EUR 100, that this should get you to the middle of the range?
Udo, this is a very cunning approach you're taking there. If I said yes, why do we have a range in the first place? Right? Then we would basically establish a number again. I would like to leave it with my comment on the range. I would like to add one other influencing factor. You mentioned two. There is a third one, which is the price. Yeah? If you take all three, there's quite a lot of moving parts.
Okay. Thank you.
You're welcome.
We haven't received any further questions. I hand back to Mr. Kollmann.
Great. Well, thank you very much for participation in our conference call. I very much look forward to our next conference call in three months. Thank you very much. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.