Dear ladies and gentlemen, welcome to the conference call of VERBUND AG about the full year results of 2017. At our customers' 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 participants have difficulty hearing the conference, please press star key followed by zero on your telephone for operator assistance. May now hand you over to Mr. Kollmann, CFO of VERBUND, who will lead you through this conference. Please go ahead, sir.
Thank you. Ladies and gentlemen, let me welcome you to our presentation of VERBUND for the full year 2017 figures, and let me thank you for joining today's conference call. I'm here with Andreas Wollein, our Head of Investor Relations and Director of Finance. Before we move into the analysis of the business development 2017, let me make a few general comments. In 2017, electricity prices were rising on the back of increasing oil, gas, coal, and CO2 prices. However, the improvement of the electricity wholesale price in 2017 may not hide the fact that wholesale prices are still very much below the full cost of new power plants. Europe-wide low temperatures at the beginning of 2017, as well as strong economic growth led to an increase in electricity demand in the VERBUND core markets, which are Austria and Germany.
Because of the continuing massively subsidized development of new renewables, the increase of supply turned out to be higher than expected. More renewable electricity increased volatility in the grid system dramatically. CO2 prices remained on a low level for a long period of time until around mid-2017, when hopes about an effective reform of the CO2 system and a discussion about the implementation of the minimum price led to an increase of wholesale prices. Because of our clear strategic positioning and our consistent implementation of efficiency programs, we feel that we are well prepared for the massively changing environment in the new energy world, and that we have provided a basis for sustainable growth and stability in the future. At the beginning, I would like to highlight the most important influencing factors for the result development 2017.
The water supply determining the generation from our run-of-river hydropower plants was slightly below the long-term average. Following the development of long-term futures prices at the electricity exchange and based on our long-term hedging strategy for our own electricity generation, the average achieved contract price was slightly lower than in 2016. Strong increase of volatility in the European grid system and the resulting need to provide flexible products to stabilize the grid, we achieved significantly higher contribution from those flexibility products, especially from congestion management. The contribution from the grid segment was lower than in 2016, mainly as a result of higher expenses for congestion management and lower contributions from control energy. The cost-cutting programs of the past had a better than expected effect on the results development in 2017.
The last influencing factor I would like to highlight are the non-recurring effects, especially impairment and reverse look impairments in some of our hydropower plants and of our thermal power plant in Mellach. The impact of these influencing factors on the key VERBUND figures in 2017 are as follows. The overall results development, both for EBITDA and group results, was negative on a reported basis, but positive on an adjusted basis in comparison to 2016. Reported EBITDA decreased by almost 12% to EUR 922 million, but increased on an adjusted basis to EUR 899 million. The group results decreased by 29% to EUR 301 million, but increased by 8.8% to EUR 354 million on an adjusted basis. I think that increase from EUR 300 million to EUR 354 million is really the key, which I will explain later in terms of what happened on an operations level.
The operating cash flow was strong at a level of EUR 640.6 million. The free cash flow before dividend was positive at a level of EUR 416 million and allowed us again to reduce the debt level further. Net debt decreased by close to 12% to a level of EUR 2.8 billion. Based on a strong free cash flow, we will propose a dividend of EUR 0.42 per share in our AGM, which will take place on the 23rd of April, that reflects the payout ratio of 48.4% on the reported results and 41.2% on an adjusted group results. Compared to last year, that is an increase of our dividends by close to 45%. On the next page and on the following chart, I will explain the influencing factors on the results development in more detail. I would like to start with an analysis of our own generation volumes.
I already mentioned the lower production from our run-of-river hydropower plants. The generation volumes in total were higher due to increased production from the thermal and wind power plants, the thermal ones particularly because of the strong requirement for congestion management. Own production from hydropower decreased by 122 GWh compared to 2016. At 99%, the hydro coefficients, which as you know is an index which quantifies the hydropower generation, was 1 percentage point below the level of 2016. 2016, by the way, was exactly on the long-term average. In contrast, generation from storage power plants increased slightly by 1.1%. As I mentioned, generation from thermal power plants, which is Mellach, was strongly up by 65% or close to 1 TWh, stemming from the increased use of our CCGT Mellach for flexibility services.
Generation from wind power also increased by 117 GWh due to more favorable wind conditions in Germany, Romania, and in Austria. The second important influencing factor, of course, is the average achieved contract price. In 2017, based on our hedging strategy, we achieved an average contract price for hydro generation of EUR 30.4 per MWh, which is slightly below the EUR 31, which we achieved in 2016. You see that the reduction in power price has slowed down. The price decline followed the development of the electricity exchange futures traded in 2016 for 2017. As you know, the sensitivity of EUR 1 equals around EUR 25 million in our EBIT line. You can see an increasing trend of the achieved contract prices during 2017, because the short-term electricity wholesale prices showed an upward trend in the course of 2017.
On the next page, we're talking about our significant contribution of our flexibility products. That is a major trend which we see in the European system. The new energy world requires flexibility products as a result of increased volatility, as a result of increased instability. That, of course, again, is a result of the massive development of renewables across Europe. That, of course, as you know, leads to unpredictability and volatility. With our very flexible asset base, consisting of CO2-free, low-cost pumped storage power plants and the most modern CCGT in Austria, we were very well positioned to benefit from this trend. We were and we still are, I should say, best positioned to benefit from this trend.
2017 has been an exceptional year, a record year in terms of flexibility, with a contribution from control energy, very high contribution from congestion management, grid system services, intraday trading, capacity reserve, and pumping operations of in total, EUR 200 million. If you compare that to the EUR 128 million in 2016, which has already been a very good number, you see a dramatic increase of EUR 70 million. The positive development in 2017 is a result of a combination of various reasons. First of all, we had the weather situation with the cold winter and hot summer. Of course, we had the temporary closures of French nuclear power plants because of revisions, but not just in one or two, but in a large number of nuclear power stations at the same time.
We had low hydro production in the first half year, as well as a strong increase in demand for congestion management within Austria because of some Eastern European countries separated the electricity markets from Germany. That is something we discussed in previous conference calls, which is the phase shifters between Germany and Poland and between Germany and the Czech Republic. As a consequence, congestion between Western and Eastern Austria has developed, which has led to an increased demand for inner Austrian flexibility products. It's not just the well-known congestion management, which is required for German flexibility or German instability, but also within Austria. For 2018, we got an EBITDA contribution of approximately EUR 130 million from flexibility products, very similar number to 2016. We would like to stress, of course, that this figure is highly volatile, and as we discussed many times, it's very difficult to predict.
Coming to the next page, where we're discussing our high voltage grid. Under IFRS, in contrast to local GAAP, the volatility in the result contribution cannot be avoided. What are the main differences between IFRS and local GAAP? Revenue surpluses or shortfalls on the IFRS are not utilized or compensated via the regulatory account, which we have in local GAAP. Under IFRS, we have no rate provisions or asset line items, which are recognized, and IFRS uses slightly different depreciation basis in comparison to local GAAP. All those differences hit us in the IFRS results, sometimes with excess, sometimes with lower revenues than the regulated business. Over time, it always compensates back, or it always comes back to the regulated return.
The chart on the left-hand side provides you with the comparison between the EBITDA according to local GAAP and the EBITDA according to IFRS for both 2016 and for 2017. We will also provide you with our full year guidance 2018. The EBITDA from the grid business decreased from EUR 248 million to EUR 159 million between 2016 and 2017. The reason for the decrease, higher-than-planned expenses for congestion management. With the start of January 1, 2018, the new regulatory period has started with a new WACC. The new WACC is 4.88% for existing assets and 5.2% for new assets. The average is approximately 5%. The new regulatory period lasts from 2018 up to 2022. The regulatory asset base for 2018 is EUR 1.3 billion. The next slide shows the non-recurring effects in 2017 compared to 2016. They had a significant impact on our results development.
I would like to start with the positive one-off effects in the other operating income, which stems from the sale of our participation, our e-mobility provider, SMATRICS. After the sale, the shareholders of SMATRICS are OMV and VERBUND with 40% each and Siemens with a 20% participation. The effect of that sale amounted to EUR 22.7 million. That was the only effect in the EBITDA. The biggest non-recurring effects are impairments, mainly in our hydropower plants and on our thermal power plants. In total, impairments in the hydropower plants amounted to EUR 244.1 million. The impairments are a result of changes in the energy market parameters and an increase in the WACC following the increase of interest rates. The amount of impairments on our thermal power plants, specifically on the coal-fired power plant in Mellach, and the closed oil-fired power plant in Neudorf-Werndorf, amounted to EUR 15 million.
Importantly, the reversal of our impairments for CCGT Mellach amounted to EUR 78.2 million, which had a counterbalancing effect. The reversal is, of course, a result of the likely implementation of a grid reserve in 2018, which is currently being discussed and which should be implemented hopefully relatively soon. In total, the operating results showed non-recurring effects of EUR 158.2 million. In the other financial results, we had a positive effect due to the measurement of an obligation to return an interest in the hydropower plant Jochenstein amounting to EUR 31.7 million. We also had an impairment for our hydropower plant Ashta in Albania amounting to EUR 4.1 million. In total, the financial results showed non-recurring effects of EUR 26.5 million.
After considering all the impacts from the non-recurring effects on taxes and minorities, the non-recurring effects on the group results, that to me is the key figure and the most important one is a net result of EUR 53 million, which is exactly the difference between our reported and clean earnings for 2017. On next page, I will show you how the effects described before influenced our financial performance. As I mentioned, the reported EBITDA decreased by 11.7% to EUR 922 million. As I mentioned, both years were heavily influenced by one-off effects. Adjusted for these one-off effects, EBITDA was almost the same in both years. As I've just mentioned, the adjusted group result increased by 8.8% to EUR 354.5 million. The positive development is a result of the increased contribution from flexibility products and the positive effects from our cost-cutting programs.
The financial results show the positive development because of the ongoing deleveraging. Negative effects came from the below-average hydro situation, the decline in average achieved contract prices, and the lower contribution in the grid segment. We will propose to the shareholders in our AGM on the 23rd of April, a dividend per share of EUR 0.42, which corresponds to a payout ratio of 48.4% on the reported group results and a payout ratio of 41.2% on an adjusted group result. The dividend in total, therefore, is an increase by almost 45% compared to last year. Now let's turn to cash flow developments. Operating cash flow 2017 was solid at a level of EUR 641 million. The reason for the decline vis-à-vis 2016 is a change in the working capital due to the delayed payment in 2016 from grid concession management services, which were actually provided in 2015.
Additions to tangible assets were EUR 231 million, slightly lower than in 2016. That is mainly attributable to CapEx for grid projects and maintenance CapEx related to hydropower plants. The free cash flow before dividend was highly positive at EUR 416 million. After dividends, the level of our free cash flow is still close to EUR 300 million. Now let's turn to the gearing. Based on our focus on free cash flow, which we've had for the last few years, net debt decreased further from EUR 3.2 billion to EUR 2.8 billion. Our net EBITDA is very close to our long target of 3. Now, let me take you through VERBUND's financial liabilities and the debt maturity profile. The debt maturity profile shows a repayment of EUR 190 million in 2018, consisting of the scheduled final and partial repayment of loans.
The debt maturity profile shows two peaks, one in 2019 and one in 2024. 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 approximately EUR 1.9 billion. The average interest rate is approximately 3.6%. 93% of our debt is fixed. 100% of the financial liabilities are denominated in EUR. The ratings for VERBUND have changed in 2017. S&P has upgraded the rating of VERBUND from BBB to BBB+ and stable outlook. Moody's has changed the outlook from stable to positive in the Baa2 rating category. The improvement of our ratings reflects the positive impact of our various restructuring measures as well as the improved market environment for VERBUND.
Before we move to the outlook for 2018, I would like to quickly comment on our CapEx plan, which we have updated in December last year. The total CapEx for the three-year period from 2018 to 2020 is now more than EUR 1.1 billion. That splits into growth CapEx of more than half a billion EUR and maintenance CapEx of EUR 600 million. The main part of the growth CapEx of approximately EUR 340 million will be invested into the regulated grid business, especially into our often-discussed Salzburg line. About EUR 177 million will be invested into new hydropower projects, mainly into the construction of the run-of-river power plants in Töging, in Bavaria, which we acquired in 2009, when we bought the hydropower plants on the River Inn. In addition to the growth CapEx, we are planning to invest around EUR 600 million into maintenance between 2018 and 2020, approximately EUR 200 million per year.
The maintenance CapEx has increased because we invest more into efficiency improvement projects into the hydropower segments. We're coming to the end of the results presentation for the outlook for 2018. As you know, our key parameters for the development of the operational business are our prices and hydro volumes. At the end of 2017, we have hedged approximately 73% for hydro generation at an average price of EUR 26.9 for 2018, which is EUR 3.5 below the level of the full year 2017. On the mark-to-market basis, as of end of February 2018, the average achieved price would be at a level of EUR 29.4, which would only be about EUR 1 below the level of 2017. We've also hedged approximately 44% of our hydro generation for 2019 at an average of EUR 29.6.
Again, the mark-to-market would be higher at a level of EUR 33.5 for 2019. With regards to the year-to-date hydro situation, we have very positive hydro coefficient of around 1.27 year to date, which is 27% 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 850 million and a group result of approximately EUR 300 million under the assumption of average hydro and wind generation for 2018. VERBUND plans to pay out between 40% and 45% of the group results after adjustment for non-recurring effects for 2018. As always, at this point, we want to highlight the sensitivities. A deviation of +/- 1% in the generation from hydropower has an impact of +/- EUR 5.8 million in the group result.
A deviation of +/- 1% in wind of EUR 4.3 million, and a deviation of +/- EUR 1 in the wholesale price has an impact of +/- EUR 4 million in the group results. With that, we have come to the end of our presentation, and we are open for your questions.
We will now begin our question-and-answer session. If you have a question for our speaker, 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 test the handset before making your selection. One moment, please, for the first question. The first question is from Vincent Gilles of Credit Suisse. Please go ahead.
Yes. Good morning, everyone. Two questions. I am going to sound a bit like a broken record, I guess on my question on flexibility products and power prices. Here we go. First question, flexibility products. Thanks very much for sharing a lot of information with us. Could you help us anticipate, predict, forecast, whatever the best word would be, how the EUR 113 million you are talking about for this year is going to break down? If anything would be helpful, I am sure for the market, given how difficult it is for outsiders to forecast that number. My second question is on the carbon market. Some of us are a bit surprised with the strength of the carbon price over the last few weeks.
If you could share with us your view of what may happen in the near future and maybe medium-term as well on the carbon price and how you will potentially change your hedging policy in view of your views on the carbon market. Thank you very much.
First of all, you do not sound like a broken record. You are just focusing on something that is very important, not just in Austria, Germany, but for the entire European market. We are seeing tremendous instability in the market and increased volatility. That instability and volatility has an impact. It is difficult to predict, as I have always said. I will try, as you say, how can you help us? I will try to help you as much as possible. Unfortunately, I do not have a crystal ball. I wish I had one. In 2016, we did not predict that congestion management in 2017 would be so high. We had climate, we had the closures in France, et cetera. All those influences coming together had an impact, and that is very difficult to predict. However, I will try to give you more guidance in terms of the 130.
When you look at the 2018 guidance, it is very similar than the numbers for 2016. We think that 2016 in terms of control energy, in terms of congestion management, in terms of intraday trading, et cetera. The sum of all the flexibility products, we feel that 2016 reflected, call it a normalized year. Although I know that talking about normality vis-à-vis flexibility products is maybe a little brave. However, what we have done for our guidance for 2018, we have taken away the dramatic increase in congestion management. We think it would not be appropriate to guide you towards something we view as very exceptional in terms of congestion management development in 2017. As a result of that, in our guidance for 2018, we have not made big changes in terms of control energy.
We have not made big changes in terms of intraday trading and other parts of the flexibility product, but we have reduced congestion management. I hope that gives you some help and some detailed guidance in terms of our flexibility product guidance. In terms of CO2 prices, I am very happy when CO2 prices go up. They can go up to 20 or to 25. Wonderful for us. We profit more than anybody else from high CO2 prices. As you know, we have always been skeptical around the development of CO2 prices. I may add that we have so far always been right with our predictions. We have said that we think that CO2 prices are more constructive when they were at around six. We said that we can well see that they move towards 10, maybe even higher.
I would not exclude the possibility that CO2 prices move to 15. The one thing which I think is important to discuss is the fact that we still have an oversupply of certificates. Even with all the reforms, we still have an oversupply. As long as the oversupply is very high, the signal for dramatically higher prices is not there. However, if we see further developments, and that would mainly come from the political side, that the demand for CO2 certificates goes up and at the same time the supply goes down, then of course we could see a more linear upwards development in the CO2 price. Why the CO2 price is where it is today, I can only give you a very general response. I think it is a result of trading activity.
I don't think that the trading activity and the heightened volatility in the CO2 price is a result of very fundamental reasons, because all the fundamentals should already be in the price, and they should have already been in the price when all the news came out about the reformation of the ETS system.
Thank you very much.
The next question is from Ryuta Schumacher of SoftBank. Please go ahead.
Good morning. Quick question on your outlook. Your outlook, as always at this stage of the year, is based on average hydro coefficient of 1.0. Year to date, you already said that the hydro coefficient is at 1.27. I would have thought with the levels of snowfall what we have seen, there's no good reason why that should go down materially in the first half of the year. Adding to this that you just took out the EUR 70 million for congestion management from your flexibility products, mainly for the purpose of being conservative. Would you describe your overall outlook of EBITDA of EUR 850 and a group result of EUR 300 million as rather conservative? Would this be a fair description?
Yeah. Coming to hydro, you're absolutely right. Hydro has been very strong. For all of you who've been skiing in Austria, and I hope you have decided to ski in Austria, snow has been excellent. I may say that I've been skiing, and I've been positively surprised about incredible snow levels. Now, those snow levels help us. They help us a lot. We have seen hydro coefficients, which we haven't seen for a long time. We're obviously very happy about that. There's a big but. Things can change. Hydro conditions can change. We can have a very dry summer. We can have a very dry fall. As a result of that, we stick to the hydro coefficient of one, and we have always done that. Ludo, you have known us for a long time.
We have never adjusted, because of a very good start to the year, our hydro coefficients, because things can change, and it can well be that we end up at around one. However, yes, that is a very good start, and if hydro level continues to be good, that, of course, is an upside. There is no doubt about that. Ludo, could you tell me again on your second point?
No, it was just a combination of very strong hydro flow year to date. Plus, personally, I would say that your guidance on flexibility products seems quite conservative. You said yourself that the need for flexibility products has been rising exponentially with ever more renewables feeding into the grid. One would have thought that, if anything, the need for flexibility products would increase. You're taking EUR 70 million off just for the purpose of being conservative. It just all adds up to a rather conservative outlook. That's the point I was trying to make.
Yeah. Well, Ludo, I'm not being conservative just to be conservative. Yes, we are careful with our guidance, you're right, because we don't want to be over-optimistic. We try to evaluate over a longer term period, and I mentioned that shortly before in my presentation. As a result of that, we have also looked at 2015, we have looked at 2016. We have looked at the very specific causes for congestion management in 2017. As a result of that, when you analyze that very diligently, you come to the conclusion that it is perfectly rational to bring back the congestion management levels. Similar to the CO2 prices and similar to hydro, I would be delighted if the system continues to be very volatile, and I would be delighted if the German instability continues, because our Mellach, which is perfect for flexibility product generation, will run and will generate revenues.
That is obviously something where we hope that it will be the case in 2018. At the same time, what we're also working on, as a direct result of that instability, we feel, and the regulator shares that opinion, that we should have a long-term grid reserve in Austria. Mellach, by definition, as the most modern and best-located CCGT in Austria, would play an important role in that long-term grid reserve. When I talk about long-term, I'm thinking around five years.
Okay. Can I ask you two more questions, please? One is on the operating cash flow, which is down 20%. You say the reason for that is working capital. What kind of level would you see as more representative for normal levels, the 2016 or 2017 level for the operating cash flow? That's one question. The other one is just the rather unusual increase in your dividend. It's a very strong increase. Has the requirement for dividends from your majority shareholder changed? This is something that could perhaps continue in the future.
I'll start with the dividend. No, we haven't seen any pressure from neither from our investors, i.e., the capital markets, nor from our core shareholder. We had discussions in 2016, when we reduced our dividend. Everybody considered that as fair because it was not just a dividend cut, but it was very much in line with a large number of measures which we have taken, i.e., cuts in personnel, cost programs, efficiency programs. We cut our investments significantly with a very strong focus on very strong free cash flow generation. As a result of that, as a combined package, we reduced the dividends. At the same time, we said we don't just reduce the dividends. Things improve because all the measures work. We keep the dividends at the 30%.
We said that we would go back to a more normal level in terms of dividends. That is exactly the reason why we increased it. Very much in line with what we said in 2016. We wanted to follow in 2017 what we actually said in 2016. In terms of the cash flow, I need to explain that because working capital change is a very rough summary. Services in the grid, which happened in 2015, towards the end of 2015, and which required a payment of EUR 80 million, came in after year-end. The services were done in 2015. The payment came in 2016, therefore, we had in 2016, EUR 80 million more in terms of cash, pure cash, than we should have had if it would have been paid when the services occurred in 2015. Sorry for the long-winded explanation-
No.
It's important to understand because we're not talking about a few million. We're talking about EUR 80 million. Yeah?
That's very helpful. Basically 2017 is a lot more representative. That's great.
Absolutely right. Yeah.
Thank you.
2015 and 2017, more representative than 2016.
Okay. Thank you.
As a reminder, if you would like to ask a question, please press zero one. The next question is from Dominik Olszewski of Morgan Stanley. Please go ahead.
Good morning. Thank you for taking my questions, two of them. On previous calls, we discussed the outlook for investment to some extent. Do you perceive enough opportunities within the organic options for growth, for example, the grids and some hydro CapEx? Or does the better balance sheet strength and better credit rating outlook encourage you to increase spend and perhaps even outside the existing opportunity set? Secondly, very usefully and helpfully flagged the new Austrian regulatory period, starting in 2018. What level of ramp growth do you think is now reasonable to assume in the new period? Thank you.
Dominik. On the first one, on the investments, we are lucky that we have organic investments, which make a lot of sense for us, in our core business. If I look a little bit further, our 10-year grid development plan, we have investments of EUR 2.5 billion. That is in a business which we like, which is regulated, and which we feel will continue to play a very important role, within not just the Austrian, but within the European system. At the same time, we have investments into our hydro business, both in terms of, I would say there are three parts for investments in the hydro business, and I think all three are very important. New projects, where we build new power plants.
Opportunities which we continue to develop in terms of increasing our efficiency, and there are opportunities through new technology, there are opportunities by combining reservoirs, et cetera. That is something where we look at our existing asset base, and we make investments and increase the efficiency, where we achieve high returns. The third one, which I feel is equally important. On many conference calls we have discussed our positioning, why is VERBUND so strong vis-a-vis strategic positioning for not just the next few years, but for a long period of time? The reason is that we have a very long-term asset base in terms of our hydropower plants. The hydropower plants, they are renewable. The trend is towards renewable, the trend is towards CO2-free. Other renewables are not predictable, they're volatile. We have base load renewable.
We have that for the long term, but it is very important that the substance which we have is maintained. We have always looked into the maintenance of our substance for the long term, with a lot of diligence. As a result of that, there are very large investments over the years going into keeping the substance at the very high level which we have. When we look at the availability rate of our hydropower fleet, we have close to 99% availability, which means that the quality of our asset base is very high. In terms of the regulatory asset base development, in that connection, I have assumed the 10-year plan of our EUR 2.5 billion in regulatory asset base.
The way the regulatory system works, that every year when we make an investment, that comes on top of our existing regulatory asset base and our running depreciation is deducted from the regulatory asset base. To give you an indication, we have approximately a growth of 8% per annum in our regulatory asset base, when you look at the net between investments and depreciation deducted.
Okay. Very clear. Thank you.
There are no further questions. I hand back to the speakers.
Well, thank you very much for your interest. Thank you for your questions, and I'll talk to you during our next conference call. Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.