Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the Q1 2018-19. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Let me now turn the floor over to your host, Mr. Stefan Szyszkowitz.
Good morning and welcome to the conference call on EVN results for the first quarter of the 2018-19 financial year. The development of our activities during the Q1 of the current financial was pretty much in line with our expectations. After two financial years, which were influenced by positive non-recurring effects, we forecasted that this year's group net results would return to levels we had seen 2015-16 and before. Our cautious outlook was driven by a few key factors which meanwhile became obvious during Q1. As of the 1st of October 2018, the separation of the German-Austrian electricity price zone became effective, which changed the market design for reverse capacity quite a bit. Whereas in the previous winter, we provided a contractual reserve capacity of 1,090 megawatts to TenneT, the transmission grid operator in the south of Germany, such cross-border contracts are not possible anymore.
We, again, have a reserve capacity contract, but it's for the capacity of 430 megawatts for the Austrian transmission grid only, so the capacity under contract is lower. The other impact from the separation of the electricity price zone is that the wholesale prices in Austria are now higher than ones in Germany. From today's perspective, we expect the price differential to be approximately EUR 4 per megawatt-hour on average over the year. Therefore, on top of the already increased wholesale prices, this additional markup results in higher procurement costs for our sales company, EVN AG. These higher procurement costs were only in part covered by a price increase in electricity and natural gas working prices for household customers as of the 1st of October 2018.
As of the 31st of December 2018, the development of the wholesale prices led to a negative effect from valuation of hedges held by EVN AG. I would like to remind you that at the end of the last financial year, the valuation of hedges had resulted in a positive non-recurring valuation effect of about EUR 40 million. Finally, energy demand in Lower Austria proved to be lower than in the previous year, as summer temperature basically extended until early November 2018, which marked an unusually late start of the heating season. This, among others, had impacts on natural gas sales and network volumes. This brings me to the confirmation, the outlook for this financial year, which we already gave in December. Assuming average conditions in the energy business environment, group net result for 2018-19 is expected to range from EUR 160 million-EUR 180 million.
I can also confirm our investment strategy, which continues to focus on regulated and stable activities. We plan to invest up to EUR 400 million per annum over the coming years. Therefore, roughly EUR 300 million annually are dedicated towards networks, renewables, and drinking water in Lower Austria. The expansion of our wind portfolio is well on track. We completed the repowering of our first wind park and commissioned a new wind park with an installed capacity of 18 MW. In total, the group now has a total installed wind capacity of 336 MW. We are moving closer to the 370 MW milestone, which we aim to reach by the end of 1920 financial year. Our midterm target for wind is 500 MW. In the international project business, we received a contract for a new general contractor assignment in Poland. The contract volume is approximately EUR 60 million.
Let me now continue with the key financials for the first quarter of our financial year. The group's revenue was 0.6% higher year-on-year at EUR 596 million. Reason for this development, we have positive valuation effects from hedges in the generation segment, as well as an increase in renewable generation and heat sales. This was contrasted by, among others, a price and volume-related decline in the network segment. The decline in EBITDA by 29.5% to EUR 163.2 million was mainly driven by the development of our sales company, EVN AG, which suffered from higher procurement costs and negative effects from the valuation of hedges as of the 31st of December 2018. Based on a stable development of depreciation amortization, including effects from impairment testing, the group EBIT was shown by 41.3% at EUR 97.4 million.
Financial results declined by 31.9% to minus EUR 15.5 million due to a weaker performance of their R138 fund. In total, we generated a group net result of EUR 59.1 million during the first quarter of this financial year, which corresponds to a decline of 47.3% year-on-year. I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Our strong balance sheet structure forms the basis of pursuing organic growth opportunities in our regulated and stable Austrian activities. Net debt, including non-current personal provisions, rose by 7.2% over the level on the 30th of September 2018 to about EUR 1 billion. Gearing increased from 23.5% to 25.9% during the reporting period.
Before I will go through each of the segments in detail, I would like to give you a general overview on the EBITDA development of our business segments. The overview of the EBITDA development per segment illustrates the key drivers of our performance during the first quarters. The already mentioned impacts on our sales company, EVN AG, which is reported in the energy segment, become clearly visible, as well as the effects which dampen the performance in the generation and network segments. On the positive side, there's a slight improvement development of EBITDA in Southeast Europe segment and the environment segment. With this very general overview, let's move on now to the next slide, which covers the generation segment in more detail. I already mentioned that in comparison to the previous year, reserved capacity under contract declined from 1,090 MW to 430 MW.
Therefore, the volume of electricity produced was lower, even though our thermal power plants were called on 26 days in the first quarter 2018/2019, which is the same number of days as the year before. A sound performance in wind generation was unable to offset the substantial year-on-year decrease in water flows. Based on these developments, electricity generation volumes in this segment in total declined by 9.6%. When comparing the profit and loss statement, please bear in mind that the generation segment now includes our thermal waste incineration plant in St. Pölten, Austria, which resulted in a respective increase in revenue, operating expenses, and depreciation. Apart from this, a positive factor was the revenue from renewable electricity generation, which was higher than the previous year due to the general upward trend in electricity pricing. Operating expenses, in turn, were also up due to a year-on-year increase in primary energy expenses.
In total, this development resulted in a decline in EBITDA by 5.8% to EUR 45.2 million and EBIT by 16% to EUR 30 million. On the next slide, I will continue with the energy segment. The energy sales volume showed contrasting developments. Whereas the substantially milder temperature in the first quarter led to a decline in natural gas and heating sales volumes, electricity sales rose during the reporting period. Revenue in the segment increased based on the valuation of hedges. The valuation of hedges also caused an increase in operating expenses, which was additionally driven by the development of market prices. The results from our sales activities were negatively affected by higher wholesale prices.
Our sales company, EVN AG, which is at equity consolidated with the operation of network, suffered from the valuation of hedges and higher procurement costs, which were only partly covered by an increase of end customer prices. Based on these developments, the energy segment reported an EBITDA of minus EUR 6 million and EBIT of minus EUR 10.8 million. On the next slide, I will present the developments in our networks segment. Whereas the networks volumes and electricity distribution remained almost stable, those for natural gas declined due to the reduced use of thermal power plants and lower offtake and higher temperatures. The compensation during the first quarter of this financial year was still based on network tariffs, which applied since the beginning of 2018.
These tariffs had been raised by an average of 2.4% for electricity and reduced by an average of 16.2% for natural gas for household customers. Based on these price and volumes effects, revenue in the segment was down by 4.5%, whereas operating expenses increased due to higher upstream network costs. In total, EBITDA declined by 18.3% to EUR 80.3 million, and EBIT was down by 27.4% at EUR 49.9 million. The 1st of January 2019 marked the beginning of a new regulatory period for the electricity distribution networks. Similar to what we have seen last year for the new regulation of gas distribution networks, the weighted average cost of capital was reduced to reflect the general decline in interest rate levels. However, the WACC reflects the efficiency of a distribution system operator.
For distribution companies with an average efficiency, the new WACC is 4.88%, whereas companies with above average efficiency benefit from a higher WACC, which is the case for EVN's grid company. Furthermore, the WACC of the new investments in WACC is set by 5.2%. In turn, the regulator offered the general productivity factor from 1.25% to 0.95% per annum. At the beginning of the new calendar year, the Austrian regulator also determined new network tariffs and reduced them by an average of 5.7% for electricity and an average of 9.3% for natural gas. These reductions are based on the application of the lower weighted average cost of capital, and they also represent an offset of positive volume effects resulting from the cold winter in previous periods. On the next slide, I will continue with the Southeast Europe segment.
In comparison to the previous year, favorable development of the temperature-related energy demand in Bulgaria and the growth of liberalized market there led to an increase in network and energy sales volumes in the Southeast Europe segment. In Bulgaria, the invoicing method for the so-called green electricity markup was changed last July. In total, the change is neutral on the income line because revenue and procurement costs are reduced by the same amount. However, the change is responsible for a 3.7% decline in revenue in spite of positive energy sector developments. Lower write-offs of receivables and the change in the invoicing method for the green electricity markup were reflected in a decrease of 7.3% in operating expenses to EUR 27.9 million. Based on these developments, operating results improved by EBITDA of EUR 10- EUR 3.1 million and EBIT of EUR 7.6 million.
I would like to conclude my presentation of the segments with the environment segment. For a comparison of this segment, please bear in mind that our thermal waste incineration plant in Lower Austria was reassigned to the generation segment, and is therefore no longer included. Apart from the resulting impact on revenue, the international project business was less dynamic during the reporting period. Therefore, in total, we are reporting a decline in revenue by 51.8% to EUR 20.2 million. The operating expenses also went down in line with these developments, and the share of results from equity accounted investees with operational nature increased. In total, this development supported an increase of 19.4% in segment EBITDA to EUR 8.4 million, EBIT total plus EUR 5.5 million. In the international project business, our order book was about EUR 230 million at the end of December 2018.
It consists of five general contract assignments for the construction of wastewater treatment plants in Croatia, Macedonia, Poland, and Bahrain. The order book included a new assignment in Poland. Our German subsidiary, WTE Wassertechnik, will be the general contractor for the expansion of sludge treatment in the Kępino wastewater treatment plant in Poland. The planning and construction of the entire project will take 36 months, and the investment volume totals approximately EUR 60 million. In parallel, our efforts remain on the acquisition of the new project in Kuwait. We expect that the final awarding of the contract will be given by the local authorities during the current financial year. With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of group cash flows.
Gross cash flow was down by 13.9% to EUR 200.7 million in the first quarter of this financial year, which reflects the decline in the result before income tax, though partly offset by some contrasting developments. Due to the seasonal negative impact from lower balances of inventories, receivables, and liabilities as of the balance sheet date, cash flow from operating activities amounted to minus EUR 7.6 million. Cash flow from investing activities reflects the ongoing investment, which focus on wind parks, networks, and drinking water supplies. The development was contrasted by payments received for network subsidiaries and inflows from the sale of securities and then R138 funding cash funds. The cash flow from financing activities mainly reflects an increase in the scheduled repayment of loans. The net change in cash and cash equivalents amounted to minus EUR 72.1 million. I would like to conclude today's call with the outlook for the Group.
As already mentioned earlier in the call, we confirm today our outlook for the current financial year. Assuming average conditions in the energy business environment, Group net result for 2018/19 is expected to range from EUR 160 million to EUR 180 million. There are factors that can influence the Group net result, including regulatory framework, the legal proceedings currently in progress in Bulgaria, the remaining proceeding related to the Walsum 10 power plant project, as well as the progress on activities in Moscow. I have now reached the end of my presentation of EVN results for the first quarter of the 2018/19 financial year. I'm now looking forward to answering your questions.
Ladies and gentlemen, if you would like to ask a question, please press nine followed by the star key on your telephone keypad. If you wish to withdraw your question, please press nine star again. Please press nine star now if you'd like to state a question. The first question comes from Duncan Scott, calling from Deutsche Bank. Over to you.
Hi. Good morning. Thanks for taking my question. I just wanted to ask a little bit about the energy segment. Can you maybe just give us an idea of the scale of the impact from the hedging valuations? How the result from EVN AG obviously came down quite a lot year-on-year in Q1, how much of that is driven by the hedge valuations and how much of that is driven by the higher procurement costs? Thank you.
It's around EUR 40 million in this quarter.
That's the year-on-year change?
No, this is the quarter-to-quarter change.
That's driven mostly by the hedges or that's driven mostly by procurement costs?
This EUR 40 million reflects the difference in the value of the hedges.
Oh, okay. I see. Thank you.
Thank you. The next question comes from Ludo Schumacher from Société Générale. Over to you.
Good morning. Quite a challenging quarter for you, this one. My questions are really more for the outlook for the full year. Operating cash flow was down, and you mentioned working capital as the main reason. Could you tell us why working capital deteriorated, and do you expect this to normalize over the course of the year? Pretty much the same networks. It's down 18% EBITDA. It's quite a move for what should be a stable regulated activity. What's the outlook for the full year there?
Okay. Regarding the cash flow, I think cash flows on quarterly basis are always a certain bit also, because it's reflecting the relationships with the associated companies and also the outside context. I would not take this, if you do your prognosis regarding the year, we are not expecting a change on the cash flow, which is really on a different level than we have seen in the last years. Still, knowing that the weather will influence a lot on this. We are not so much concerned about this strong drop in the first quarter if we look for the outlook for this year. This is on the one side. On the second side, there are two factors which are reflecting the grid business. First of all, we are at the beginning in electricity on a 5 years regulatory period, a new period.
At the beginning of this period, the parameters are fixed by the regulatory authority. Now we have 5 years to outperform these parameters. For gas, we are in the second year. For the gas regulatory period started at the 1st of January 2018. In both fields, we are at the beginning of more or less 5-year regulatory periods. The second thing is, the winter was very cold, not the last year, the year before. This is influencing the adjustment by the regulatory authorities regarding the volumes. We see now two changes affecting the grid business, but we are confident that we will outperform the guidance of the regulatory authority, which will then reflect also in higher and more normalized, more historic levels of our grid business over the next years.
Okay. Thank you. Actually, just one more follow-up question, if I may. You mentioned on the generation segment, the impact of higher procurement costs. That should also surely be a pass-through over time, isn't it? That should be able to pass the additional cost from the higher Austrian electricity prices and general higher wholesale prices on. Should this normalize?
Yes. As you know, this is part of our philosophy of being an integrated group and being active on all parts of the energy value chain, that over a period you are passing through the higher cost. Of course, we are not able to do this on this one step for all. It takes a little bit more time than just one fixing of the end customer prices. On the other hand, we also had more time when prices went down. It should, over time, be in a balance, and this is also part of the relationship with our customers, which we are pursuing, that they can trust in our judgment regarding wholesale prices going down and wholesale prices going up.
Very clear. Thank you.
Thank you. If any other participants would like to ask a question, please press nine star now. Please press nine star now if you'd like to ask a question. Next up, we have Teresa Schinwald. Over to you.
Hi. Good morning. Thanks for taking my question. I have one on Southeast Europe operations, especially if you could provide us with an outlook for the full year EBITDA in this area.
On the EBIT level, we are pursuing, on the midterm, on average, around EUR 40 million-EUR 60 million coming from the Southeast segment. You have seen changes over the years, but I think the track record here is quite clear, and we are confident also this year that we achieve this.
Thank you very much.
Thank you. If any other participants would like to ask a question, please press nine star now. Please press nine star now if you'd like to ask a question. Okay, it looks like we have no more questions for today. I'll hand it back over to you, Mr. Szyszkowitz.
Thank you for joining today's conference call. I kindly invite you to dial in again on Wednesday the 29th of May when we are presenting our half year results. Goodbye.