Dear ladies and gentlemen, welcome to the conference call of Verbund AG about the Full Year Results of 2017. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. I now hand you over to Mr. Coleman, CFO of Verbund, who will lead you for this conference.
Please go ahead, sir.
Thank you. Ladies and gentlemen, let me welcome you to our presentation of Vermund for the full year 2017 figures. And let me thank you for joining today's conference call. I'm here with Andreas Wallerin, our Head of Investor Relations and Director of Finance. But 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 fabung 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-twenty 17 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 results development 2017. The water supply determining the generation from our run 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 Procession Management and lower contributions from Controlled Energy. The cost cutting programs of the past had a better than expected effect on the results development in 2017. And the last interesting fact I would like to highlight are the nonrecurring effects, especially impairments 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 fabond 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 €922,000,000 but increased on an adjusted basis to €899,000,000 million. The group result decreased by 29 percent to ZAR 301,000,000 but increased by 8.8% to 200 sorry, to $354,000,000 on an adjusted basis. So I think that increase from 300 to 354 is really the key, which I will explain later in terms of what happens on an operating level. The operating cash flow was strong at a level of 600 and $40,600,000 The free cash flow to 40% was positive at a level of $416,000,000 and allowed us again to reduce the debt level further, net debt decreased by close to 12% to a level of DKK 2,800,000.
Dollars Based on a strong free cash flow, we will propose a dividend of €0.42 per share in our AGM, which will take place on the 23rd April. That reflects a payout ratio of 48 point 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 Wanner River hydropower plants, the generation volumes in total were higher due to an 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 gigawatt hours compared to 2016. And 99%, the hydro coefficient, 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 Melas, was strongly up by 65% or close to 1 terawatt hour stemming from the increased use of our CCGT Nela for flexibility services. Generation from wind power also increased by 117 gigawatt hours due to more favorable wind conditions in Germany, Romania and in Austria. The second important sourcing 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 €30.4 per megawatt hour, which is slightly below the €31,000,000 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 €1,000,000 equals around €25,000,000 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 to our flexibility products. That is a major trend which we see in the European system.
The new energy world requires flexibility product 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 pump storage power plants and the most modern CTHP 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 services, incubatorating, capacity reserve and pumping operations of in total, euros 200,000,000 if you compare that to the €128,000,000 in 2016, which has already been a very good number, you see a dramatic increase of €70,000,000 The positive development in 2017 is a result of the 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 1 or 2, 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 increasing 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. So it's not just the well known concession management, which is required for German flexibility or German instability but also within Austria. For 2018, we got an EBITDA contribution of approximately €130,000,000 from Flexibility Products, so very similar number to 2016. We'd like to stress, of course, that this figure is highly volatile. And as we discussed many times, it's very difficult to predict.
Now coming to the next page, there we're discussing our high voltage grid. Under IFRS, in contrast for 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. As a result of that, all those differences hit us in the IFRS results, sometimes with excess, sometimes with lower revenues than the regulated business. But 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. And we also provide you with our full year guidance 2018.
The EBITDA from the grid business decreased from $248,000,000 to $159,000,000 between 'sixteen and 'seventeen. The reason for the decrease, higher than planned expenses for congestion management. With the start of January 1, 2018, a new regulatory period has started with a new WACC. The new WACC is 4.88% for existing assets and 5.2% for new assets. So the average is approximately 5%.
The new regulatory period lasts from 2018 to 2022. The regulatory asset base for 2018 is BRL1.3 billion. The next slide shows the nonrecurring 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 eMobility provider, Smatrix, After the sale, the shareholders of Smatrix are O and V and Verbund with 40% each and Siemens with a 20% participation. The effect of that sale amounted to $22,700,000 That was the only effect in EBITDA. The biggest nonrecurring effects are impairments, mainly on our hydropower plants and on our thermal power plants. In total, impairments in the hydropower plants amounted to $244,100,000 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 Nela and a closed oil fired power plant in Leidofverndorf amounted to EUR 15,000,000 and important, the reversal of our impairment for our CHG demand up amounted to €78,200,000 which had a counterbalancing effect.
The reversal is, of course, a result of the likely implementation of the grid reserves in 2018, which is currently being discussed and which should be implemented hopefully relatively soon. In total, the operating results showed nonrecurring effects of JPY 158,200,000. In the other financial results, we had a positive effect due to the measurement of an obligation to return on interest in the hydropower plant, Yorkmerstein, amounting to $31,700,000 We also had an impairment for our hydropower plant, Ashta, in Albania amounting to $4,100,000 In total, the financial results showed nonrecurring effects of 26,500,000 euros After considering all the impacts from the nonrecurring effects on taxes and minorities, the nonrecurring effects on the group results. And that, to me, is the key figure and the most important one is a net result of $53,000,000 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 percent to 922 percent. As I mentioned, both the 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 $354,500,000 The positive development is a result of the increased contribution from flexibility products and the positive effects from our cost cutting programs. In addition, the financial results showed a 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 segments. We will propose to the shareholders in our AGM on the 23rd April a dividend per share of €0.42 which corresponds to a payout ratio of 48.4 percent 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 ZAR 641,000,000.
The reason for the decline, visavis 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 $231,000,000 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
€416,000,000
after dividends. The level of our free cash flow is still close to €300,000,000 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 SEK 3,200,000,000 to SEK 2,800,000,000. Our net debt EBITDA is very close to a long target of SEK 3. Now let me take you through Verbund's financial liabilities and the debt maturity profile.
The debt maturity profile shows a repayment of $190,000,000 in 20.18 consisting of the scheduled final and partial repayment of loans. Furthermore, the debt maturity profile shows 2 peaks, 1 in 2019 and 1 in 2024. For liquidity backup, Togonen has access to a $500,000,000 syndicated loan facility, which is undrawn, has no MEC clause and is available until 2019 with 2 extension options. The total amount for our financial liabilities is approximately $1,900,000,000 The average interest rate is approximately 3.6%. 93% of our debt is fixed.
100% of the financial liabilities are denominated in euros. The ratio for bond have changed in 2017. SMP has upgraded the rating of the bond from BBB to BBB plus and stable outlook. Movies 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 Verbose.
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 3 year period from 2018 to 2020 is now more than 1,100,000,000 That splits into growth CapEx of more than ZAR 500,000,000 and maintenance CapEx of ZAR 600,000,000. The main part of the growth CapEx of approximately ZAR 340,000,000 will be invested into the regulated grid business, especially into our often discussed sales work line. About $177,000,000 will be invested into new hydropower projects, mainly into the construction of the 1 of river power plants in Turgin, in Bavaria, which we acquired in 2,009, like with also hydropower plants on the River Inn. In addition to the growth CapEx, we are planning to invest around $600,000,000 into maintenance between 2018 2020, approximately $200,000,000 per year.
The maintenance CapEx has increased because we invest more into efficiency improvement projects into the hydropower segment. Now 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 prices and hydro volumes. At the end of 2017, we have hedged approximately 73% for hydro generation at an average price of €26,900,000 for 2018, which is €3.5 below the level of the full year 2017. However, on a market to market basis, as of end of February 2018, the average achieved price would be at a level of €29,400, which would only be about €1 below the level of 2017.
We've also hedged approximately 44% of our hydro generation for 2019 at an average of 29.6%. However, again, the mark to market would be higher at a level of €33.5 for 20.19. 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 €850,000,000 and a group result of approximately €300,000,000 under the assumption of average hydro and wind generation for 2018. Verbund's plans to pay out between 40% 45% of the group results after adjustments for nonrecurring effects for 2018.
As always at this point, we want to highlight the sensitivities A deviation of plusminus 1% in the generation from hydropower has an impact of plusminus €5,800,000 in the group result, a deviation of plusminus 1% in wins of ZAR 0.3000000 and a deviation of plusminus 1.0 in the wholesale price has an impact of plusminus €4,000,000 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 The first question is from Vincent Giere of Credit Suisse. Please go ahead.
Yes, good morning, everyone. Two questions. I'm going to sound a bit like a broken record, I guess, on my question on Flexibility Products and Power Prices, but here we go. First question, Flexibility Products, thanks very much for sharing a lot of information with us. But could you help us anticipate, predict, forecast, whatever the best word would be, how the EUR113 million you're talking about for this year is going to break down?
If anything, it would be helpful, I'm sure, for the market given how difficult it is for outsiders to forecast that number. And 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.
Yes. First of all, you don't sound like a broken record. You're 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. And that instability and volatility has an impact.
It is difficult to predict, as I've 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 don't have a crystal ball. I wish I had one.
In 2016, we did not predict that congestion management in 2017 would be so high because we had climate, we had the closures in France, etcetera, etcetera. All those influences coming together have an impact and that it's 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 concession management, in terms of intraday trading, etcetera, etcetera.
So 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 a vis flexibility product is maybe a little brave. However, what we have done for our guidance for 2018, we have taken away the dramatic increase in concession management because we think it would not be appropriate to guide you towards something we view as very exceptional in terms of concession 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 our concession management. So I hope that, that gives you some help and some detailed guidance in terms of our flexibility product guidance. In terms of CO2 prices, I'm 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 higher 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 6. And we said that we can well see that the move towards 10, maybe even higher.
I would not exclude the possibility that CO2 prices moved to 15%. But the one thing which I think is important to discuss is the fact that we still have the oversupply of certificates. So 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, yes?
Why the CO2 price is where it is today? I can only give you sort of like 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 ETF system.
Thank you very much.
The next question is from Muller Schumacher of SoftGen. Please go
ahead. Good morning. A quick question on your outlook.
I mean, your outlook
is always at this stage of the year is based on average hydro coefficient of 1.0. But here to date, you already said that the hydro coefficient is at 1.27. I would have thought with the levels of snowfall we have seen. There's no good reason why that should go down materially in the first half of the year. And then adding to this that you just took out the the €17,000,000 for all concession management from your flexibility products, mainly for the purpose of being conservative.
Would you describe your overall outlook as a multi EBITDA of €850,000,000 and the group result of €300,000,000 as rather conservative. Would this be a fair description?
Yes. Coming to hydro, you're absolutely right. I mean hydro has been very, 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 a hydro coefficient, which we haven't seen for a long time. We're obviously very happy about that. But and it's a big but, Things can change.
Weather conditions can change. We can have very dry summer. We can have a very dry fall. Result of that, we stick to the hydro coefficient of 1. And we have always done that, Ludo.
You have known us for a long time. We have never sort of like adjusted because of a very, very good start to the year our higher coefficient because things can change, and it can well be that we end up at around 1. 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.
Could you tell me again on your second point?
No. It was just a combination of very strong hydro flow year to date. Plus, I would personally, I would say that your guidance on Flexibility Products seems quite conservative. I mean, as you said yourself that it's 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.
So you're taking €70,000,000 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.
Yes. Well, Lula, 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 overoptimistic. We try to evaluate over a longer term period.
And as a result of that 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, very specific causes for congestion management in 2017. And 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 concession 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. And that is obviously something where we hope that it will be the case in 2018.
But at the same time, what we're also working on, we would like to 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. And Mela, by definition, as the most modern and best located CCGT in Austria, would play an important role in that long term good reserve. And when I talk about long term, I'm thinking around 5 years.
Okay. So can I ask you 2 more questions, please? One is on the operating cash flow, which is down 20%. You say the reason for that is working capital. Is the 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. And 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? And is this something that could perhaps continue in the future?
Well, I'll start with the dividends. 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 it's 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, custom personnel, cost programs, efficiency programs. We cut our investments significantly with a very strong focus on very strong free cash flow generation. So as a result of that, as a combined package, we reduced the dividends. But at the same time, we said we don't just reduce the dividends, then things improve because all the measures work, but we keep the dividends at the 30%. We said that we would go back to sort of like a more normal level in terms of dividends, and that is exactly the reason why we increased it.
So it's very much in line with what we said in 2016. So we wanted to follow in 2017 what we actually said in 2016. In terms of the cash flow, we had I need to explain that because the sort of like working capital change is sort of like a very rough summary. Services, which in the grid, which happened in 2015, towards the end of 2015, and which required a payment of $80,000,000 came in after year end. So the services were done in 2015.
The payment came in, in 2016. Therefore, we had in 2016, dollars 80,000,000 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 sort of like long winded explanation, but it's important to understand because we're not talking about a few million. We're talking about $80,000,000 Yes?
That's very helpful. So basically, 2017 is a lot more representative. That's correct.
Absolutely right. Yes. 2016 2017 more representative than 2016. Okay. Thank you.
The next question is from Dominique Ochezbi of Morgan Stanley.
2 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 of 1's existing opportunity set? And then secondly, very usefully and helpfully flag 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?
Yes. Yes, Tobinik, 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. We have if I look a little bit further, our 10 year grid development plan, we have investments of €2,500,000,000 That is into business which we like, which is regulated and which we feel will continue to play a very, very important role with the 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 3 parts for investors in the hydro business, and I think all three are very important. New projects where we build new power plants then opportunities which we continue to develop in terms of increasing our efficiency.
And there are opportunities by for new technology. There are opportunities by combining reservoirs, etcetera, etcetera. So that is something where we look at our existing asset base and we make investments and increase the efficiency where we achieve high returns. And the third one, which I see is equally important, on many conference calls, we have discussed our positioning, sort of like why is Verblum's 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, very long term asset base in terms of our hydro power plants.
The hydro power 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 baseload renewable. And we have that for the long term, but it is very important that the substance which we have is maintained. And we have always looked into the maintenance of our substance for the long term with a lot of diligence. And as a result of that, there are very large investments over the years going into keeping the substance at a very high level, which we have. And when we look at the availability rate of our hydropower fleet, we have close to 99% availability, which means that the quality, the quality of our asset base is very, very high.
In terms of the regulatory asset base developments, in that connection, I have assumed the 10 year plan of our SEK2.5 billion regulated 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 mix between investments and depreciation deducted.
There are no further questions. I hand back to the speakers.
Great. Well, thank you very much for your interest. Thank you for your questions, and talk to you during our next conference