Good morning, ladies and gentlemen, welcome to the conference call on EVN's results for the 2017-2018 financial year. At this time, all participants have been placed on a listen-only mode. 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, welcome to the conference call on EVN's results for the 2017-2018 financial year. One year ago, I started my presentation by saying that the financial year 2016-2017 had been out of the ordinary in many respects, That last year's results might not be seen as a benchmark for future performance. In 2017-2018 financial year, extraordinary effects were again responsible for exceptional results. Whereas the previous year had been positively supported by favorable weather conditions and one-off effect from the agreement with NEK, in this financial year, higher energy market prices led to a positive non-cash earnings effect from the valuation of hedges. The by far largest portion of this effect was realized by our sales company, EVN KG, which hedges energy procurement as part of its risk management.
I would like to remind you that EVN KG is an equity accounted entity with operational nature, Its earnings contribution is included in group EBITDA. The improvement in EBIT was due to the fact that negative effects from impairment testing were lower compared to last year. Apart from these extraordinary factors, the following developments had a material impact on our business development. Warmer temperatures had a negative impact on energy sales and network volumes, especially in Southeast Europe. In generation, we are fully in line with our strategy to further grow our wind capacity. As of July, our installed capacity amounted to 318 megawatts, in comparison with 269 megawatts at the end of last financial year. By end of 2019-2020 financial year, we plan to reach 370 megawatts, which is our next milestone. Subject to appropriate conditions, our strategy aims to reach 500 megawatts in the midterm.
Due to the expansion of our wind portfolio as well as due to favorable water flows, the group's renewable generation increased by 5.7% during the reporting period. Our entire thermal capacity in Lower Austria, which is about 1.1 gigawatts, was under contract to Southern Germany during the past winter. From May until September 2018, we provided 230 megawatts of reserve capacity to stabilize the Austrian transmission networks. Our regulated gas distribution business in Austria was influenced by the new regulatory period, which started in January 2018 and provides for a lower allowed return on invested capital. Therefore, also given that network sales volumes in the previous year were higher than the reference period, natural gas network tariffs were cut by 16.2% on average this year.
In the international project business, we were able to complete construction on four wastewater treatment plants and to hand them over to our customers. Three of these projects were in Macedonia, and the fourth one was the project in Prague, which we realized together with partners. In September 2018, the contract for a new project in Bahrain was signed. I will talk about this project in more detail a bit later. We continued to base a high portion of our business on regulated and stable activities. In 2017-18 financial year, these activities had a share of 73% of our EBITDA, whereby 56% comes from Lower Austria.
Based on this year's extraordinary results, we will propose to the annual general meeting, to be held on the 17th of January 2019, to pay out a dividend consisting of an ordinary dividend of EUR 0.44 per share, plus a one-time bonus dividend of EUR 0.03 per share. In repeating last year's approach of paying a bonus dividend of EUR 0.03 per share, we would like to let our shareholders benefit from a performance which was exceptional and significantly above normalized levels. We take the opportunity to specify our dividend policy for the future. We aim for holding the absolute amount of the ordinary dividend, which is EUR 0.44, at a constant level. This clarification comes on top of the target payout ratio, averaging approximately 40% of group net result over the long term. Let me continue with the key financials of our 2017-2018 financial year.
In 2017-2018, the group's revenue was 6.5% lower year-over-year at EUR 2.1 billion. Reasons for the decline include a decrease in thermal electricity generation below the higher prior year level, lower revenue from natural gas trading, as well as a weather-related volume effect in Southeast Europe. Lower revenue was also recorded in the international project business. Positive factors, such as the increase in renewable electricity generation and higher heating sales, were unable to fully offset the revenue decline. In 2017-2018, lower revenue, as described before, led to a decline in the cost of electricity purchases from third parties and primary energy expenses. Higher upstream network costs represented a contrary factor. The results from equity accounted entities with operational nature increased due to the valuation of hedges held by EVN KG as of the balance sheet.
In addition, the earnings contribution of Verbund Infrastruktur AG increased as it contained an impairment loss in the previous year. Based on these developments, we are reporting today a decline in EBITDA by 6.9% to EUR 671.8 million. In comparison with the previous year, the effects from impairment testing were significantly down by EUR 81.7 million to EUR 20.6 million. Therefore, the group EBIT improved by 13.3% year-over-year to EUR 392.9 million. Financial results dropped by 73.9% to minus EUR 37.2 million. This decline reflects, among other developments, the absence of positive valuation effects from Verbund shares, which resulted from the transfer of these shares from WEEV, the Pension Scheme Gerhard, to EVN Energy in the previous year. Total group net result was by 1.4% higher at EUR 254.6 million. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure.
Based on our strong operating performance, our balance sheet structure remains strong. Please note that the further increase in equity was mainly due to the higher price of the Verbund shares. Net debt, including non-current personal provisions, was reduced by EUR 249.5 million to EUR 963.7 million as compared to the 30th of September 2017. Gearing decreased from 38.5% to 23.5% during the reporting period. Before I will go through each of these segments in detail, I would like to give you a general overview on the EBITDA development of our business segments. The direct comparison of the EBITDA development per segment illustrates some key drivers of our performance 2017/2018. The generation segment recorded sound operating results, whereas the decline in the energy segment reflects, among others, the absence of prior years' favorable weather effects. EBITDA in the network segment reflects negative volume and price effects.
Negative temperature effects are also visible in the Southeast Europe segment. In the environment segment, lower EBITDA results from a less dynamic development in the international project business in this year. Please note that for purposes of illustration, we have adjusted the graph showing last year's EBITDA in Southeast Europe and environment segment for last year's one-off effects, the positive one-off related to NEK and the negative one-off related to the valuation allowance inventories. With this general overview, let me now move on to the next slide, which covers the generation segment in more detail. In this segment, our renewable generation was up by 4.5%. This increase was supported by additional wind capacity and good water flows, especially during the first half of the financial year. Wind conditions itself were below the previous year and long-term average. In contrast, thermal generation volumes declined by 15.7%.
This was partly due to scheduled and unscheduled downtime at the Wartholten power plant. I would also like to remind you that in the winter 2016, 2017, there was a strong demand for electricity in Europe due to the unusually cold weather. Before I will talk about how the market design for reserve capacity contract has changed recently, I would like to highlight that in the past winter half year, our entire thermal capacity in Lower Austria, which is 1,090 MW, was under contract with TenneT. In addition, we had a contract with Austrian Power Grid for 430 MW of our natural gas-fired power plant in Theiß during the summer. The demand to supply reserve capacity to stabilize the networks in Southern Germany and Austria was again high. Our plants were called on 157 days during the 2017, 2018 financial year.
In my opinion, this is a clear message and underlines how much our energy system needs conventional generation as long as we can't rely on marketable storage technologies for excess renewable production as it occurs on every windy or sunny days, but doesn't when there's no wind or sunshine. Based on this development, revenue of the segment was up by 12.8%. Please note that the generation segment also includes the revenue from the thermal waste utilization plant in Schwechat, which has been included in this segment since the fourth quarter of 2017, 2018. Operating expenses increased by 22.7%, which was also partly due to the reallocation of the thermal waste utilization plant to this segment in the fourth quarter. The results from equity accounted investments improved due to a higher earnings contribution from Verbund Innkraftwerke, which had suffered last year from impairment loss.
This development resulted in a rise of EBITDA by 19.2% to EUR 123.7 million. The impairment losses to renewable and thermal generation plants had been higher in the previous year, therefore, EBIT in this segment now improved to EUR 78.4 million. In talking about an outlook for the generation segment, we need to differentiate between renewables and thermal. Capacity-wise, we will definitely benefit from the first full year operation of the additional 49-megawatt wind capacity, which we installed during 2017, 2018, as well as from the commissioning of a new 18-megawatt wind park in January 2019. Earnings contribution from renewables also depend on electricity prices for all plants without subsidies, tariffs, as well as wind and water flows. As you know, water flows are poor at the moment. The earnings contribution from the supply for reserve capacity will definitely decrease in 2018, 2019.
Due to the split of the German-Austrian electricity price zone, which became effective as the 1st of October, it is no longer possible for us to directly provide contractual reserve capacity to TenneT. However, 43 megawatts of our gas-fired plant in Theiß are now under contract with Austrian Power Grid for a period of at least three years. In view of the above, we expect earnings in this segment to be lower in 2018/2019. On the next slide, I will continue with the energy segment. The energy sales volume showed interesting developments, whereas warmer weather conditions led to a decline in natural gas and heat sales volumes. Electricity sales rose during the reporting period, supported by higher sales to industrial customers. The main driver of revenue development in the energy segment is the marketing of electricity produced in our thermal power plants.
Our production there, but also reduced natural gas trading activities, as well as the valuation of hedges that had due to a decline in revenue. In total, revenue was down by 8% year-on-year. Operating expenses decreased due to lower expenses from primary energy carriers and natural gas trading, as well as due to the valuation of hedges. The creation of a provision of an onerous contract related to the marketing of our own electricity production had a contrary effect. The share of results from equity accounted investees, which operation nature increased by 17.7%. This reflects the positive non-cash effect valuation of hedges recorded by our electricity and natural gas sales company, EVN KG. In total, EBIT amounted to EUR 80.8 million. This corresponds to a decline by 20.6%, and EBIT decreased by 22.3% to EUR 57.4 million.
Our outlook for the segment needs to be seen in close connection with the valuation of effects from hedges, which had an extraordinary positive effect on the energy segment. Whereas higher electricity prices had positive but non-cash effects in 2017/2018, the rising prices on the wholesale market will create challenging framework conditions for our sales activities in the future. The reason is that higher procurement costs in the energy business can only be passed on gradually to customers. To summarize, we expect earnings to be positive in 2018/2019, but markedly lower than the previous year. On the next slide, I will present developments in our network segment. In our Austrian regulated business, the whole year was in line with our expectation, respectively, the development which we had already observed during the first three quarters.
The performance slowed due to the lower tariffs for the natural gas distribution and due to a decline in natural gas distribution volumes. These volumes effects resulted from the warmer winter and the reduced use of the thermal power plants in Lower Austria. Based on this price and volume effects, revenue in this segment was down by 2.2%, whereas operating expenses increased due to higher upstream costs for network stabilization and increased costs for our third-party services. In total, segment EBITDA declined by 13.5% to EUR 253.4 million, and EBIT was down by 19.7% at EUR 142.6 million. For 2018/2019, we expect segment results to be lower than the previous year. This outlook is based on the fact that a new five-year regulatory period will start for electricity distribution networks in January 2019, following natural gas distribution networks in January 2018.
Tariffs will adjust downwards for higher electricity and natural gas volumes occurred during the extremely cold period 2016/2017. On the next slide, I will continue with the Southeast Europe segment. The development of our activities in Southeast Europe was influenced by the substantially warmer winter, which had material negative impact on network and energy sales volumes. This development led to a decline in revenue by 5.8% to EUR 902.8 million. In the previous year, the agreement with the state-owned Bulgarian electricity company, NEK, had a substantial positive effect of EUR 42 million on operating expenses. Based on these developments, EBITDA was substantially lower this year at EUR 104.6 million. EBIT amounted to EUR 40.2 million. We are still waiting for a decision in the application proceedings with the Republic of Bulgaria.
I would like to remind you that the hearings took place in November 2016, which means more than two years ago. Subject to stable regulatory and energy sector framework conditions, we expect earnings in the coming financial year to reflect 2017/2018 level. I will conclude my presentation of this segment with the environment segment. I would like to start with an update on developments in our international project business. During 2017/2018, we successfully commissioned four general contractor assignments, the wastewater treatment project in Prague, which we realized together with partners, as well as three wastewater projects in Macedonia. We are still working on another three general contractor assignments in the wastewater sector in Macedonia, Poland, and Croatia. In 2017/2018, our German subsidiary, WTE Wassertechnik, concentrated not only on existing projects, but also on the acquisition of two new projects in Kuwait and Bahrain.
We are pleased to inform you that in September, the contract was signed for a project in Bahrain. It is also a general contractor assignment, so no financing is required from our side. The project involves the expansion of the capacity of an existing wastewater treatment plant in Tubli, which in future will be able to service 1.6 million residents. The contract includes the construction of a sludge drying and utilization plant at the same location. The project is scheduled for completion within 36 months, represents a total contract value of approximately EUR 180 million. This will be realized together with local partners who our share in the project will be around 50%. In Kuwait, some more patience is required, we are in an exclusive negotiation stage and are in a constant dialogue with the tendering authorities regarding details of the project contracts.
To conclude, our order book in the International Projects business as of the 30th of September was EUR 203.5 million. Based on the beforementioned developments in the International Projects, and despite the progress on general contract assignments currently in realization, International Projects business was less dynamic in comparison to the previous year. The weather-related increase in drinking water sales volumes in Lower Austria was unable to offset the development in the International Projects business. Besides, I've already mentioned earlier in the call, revenue for the fourth quarter of the thermal waste utilization plant in Zwentendorf was assigned to the Generations segment. Therefore, in total, we are reporting a decline in revenue by 24% to EUR 150 million. The operating expenses also went down in line with the development of the International Projects business.
In addition, the comparable period prior year value was unusually high due to a necessary valuation allowance to inventories. In total, EBITDA amounted to EUR 30.1 million and EBIT amounted to EUR 9.3 million. Financial results amounted to minus EUR 10.4 million. Our outlook in the Environment segment is always subject to the further acquisition realization of assignments in the International Projects business. Based on the positive development of the newly acquired project in Bahrain, earnings are expected to exceed the previous year in 2018/2019. With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our group cash flow. Group cash flow declined by 2.1% to EUR 560.3 million due to the improvement in the results before income tax, and certain contrasting developments such as the decline in impairment. Cash flow from operating activities rose by 18.6% to EUR 603.5 million.
This increase reflected contrary non-recurring effects from the previous year. The valuation allowance inventories, and the reduction in liabilities resulting from the arbitration decision of the Walsum 10 power plant. A positive effect in the reporting period resulted from changes in other working capital. Previous years' Walsum 10 arbitration decision had a similar corresponding positive one-off effect to the reduction of the investment sum. This also impacts the comparability of cash flow from investing activities, which now amounted to minus EUR 457.1 million. The main focus on investment was on electricity and gas network, as well as wind parks. Part of the group's liquidity was invested in mainly cash funds, which is also shown in cash flow from investing activities. The cash flow from financing activities mainly reflected the dividend payments to the shareholders, EVN AG, and majority shareholders, as well as the scheduled repayment of loans.
The net change in cash and cash equivalents amounted to minus EUR 7.1 million. Please note that net debt was reduced by EUR 249.5 million. I would like to conclude my presentation with the outlook for the group. I would like to remind you that back in the financial year 2014/2015 and 2015/2016, we were reporting net results of EUR 148.1 million and EUR 156.4 million respectively. These more normal levels have now been outperformed twice through extraordinary non-recurring effects. Bearing this in mind, as well as certain changes in framework conditions which I described when talking about the segment outlook, such as the new regulation in Austria, the new framework for reserve capacity contracts and higher procurement costs, our expectation is to return to normalized historic level, assuming average conditions and obviously lack of one-offs. To be specific, group net result 2018/2019 is expected to range from EUR 160 million to EUR 180 million.
group net result could be significantly influenced by regulatory background, the legal proceedings currently in progress in Bulgaria, and the remaining legal proceedings related to Walsum 10 power plant project, as well the progress on activities in Moscow. Our investment strategy remains unchanged and our focus continues to be on network infrastructure, renewable generation, and the drinking water business. Thereby, we will further strengthen our stable and regulated activities in Lower Austria, which remain the basis for sustainable and stable earnings. All in all, we plan to invest yearly approximately around EUR 400 million, whereof approximately EUR 300 million will be directed to our Lower Austrian activities. I'm now reached the end of my presentation of EVN results for the 2017/18 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 star on your telephone keypad. In case you wish to cancel your question, press nine star again. Please press nine and star to state your question. Please press nine and star to state your question. The first question comes from Duncan Scott, Deutsche Bank. Please go ahead with your question.
Hi, good morning. Thanks for taking my questions.
I had a couple questions on the outlook for 2018-19. I know you only give guidance generally at the net income level, but looking at your qualitative guidance for each of the individual business segments, there's nothing in there in that outlook that really comes as much a surprise. I was wondering if there's something going on in the financial results about the minorities line that also contributes to your guidance of a step down in earnings for next year. In the energy segment, you said that earnings will be markedly lower next year, I think you said in your report. Should we think of this as being markedly lower than the results, including the EUR 38 million one-off positive effects, or even if we strip out that positive effect, will next year's results still be markedly lower than that?
Finally, just in the generation segment, can you give us any more details about the reserve contracts you signed in Austria? Is that just a fixed price per kilowatts, or how does that work there? Thank you.
Okay, thanks for the couple of questions here. You are right, we are not giving any surprises in the expectations for the segment in the ongoing year, because this is where we are and what we see. Everything else will come where we are at the beginning of the winter. The winter has been quite warm in October and till mid-November, therefore, it's a little bit an up road regarding the winter and the winter volumes. The question regarding the generation, regarding the reserve capacity, there's actually really a change. In the past years, this has been on a tender basis from TenneT. Now, regarding the law in Austria, it's regarding cost-reflecting basis. Therefore, it is not about earning in the generation field and regarding reserve capacity as we did in the past, where we were able to have an earnings contribution from a low double-digit base regarding the reserve capacity.
Again, just on the energy segment, talking about the guidance being markedly lower, is that including or excluding the EUR 38 million non-cash effect?
No, this is excluding the one-off effect. We are on the normal planning basis with average heating degree days and expected volume. As you have seen, the change in the wholesale market started in 2017, there was a strong increase in this year. Therefore, it takes some time here to pass this higher procurement cost to the customers. We started in October 2018, we are now observing the wholesale prices for the near future.
Okay. Thanks a lot. Thank you.
The next question comes from Teresa Schinwald. Please go ahead with your question.
Hi. Good morning. I would also have a follow-up to the energy segment. Could you help us with gauging, actually, the effect? What was the hedging valuation effect? How much did the onerous contract provision interact? Just to give us a feeling of how much was one-off in this segment this year.
Yeah. Theresa, regarding the valuation of the hedges, it's around EUR 40 million at the end of September. Regarding the onerous contract, it's around EUR 40 million in this segment.
Sorry, 40 or 14?
40 for visor in the segment of the energy and procurement of this onerous contract. For the hedges coming from the sales company, it's around EUR 40 million at the end of September.
Thanks a lot.
The next question comes from Richard Alderman, Macquarie. Please go ahead with your question.
Hello, can you hear me?
Yes.
Good morning. Can I just clarify a couple points? Firstly, could you just go over the point you made about the change in the basis for the TenneT structure, just in terms of the impact of that in your business going forward? Secondly, could you just clarify how much of the guidance is relating to the cost pass-through of higher sales costs through the year? Will you be able to pass this through at some point through higher price rises in terms of the higher generation costs that you're seeing at this point in time in the cycle?
Okay. I think the most important thing is, thank you for posing this question once again, it is actually true that after the border between Germany and Austria is not open anymore as it has been since 2002. The new regulation foresees that APG, the Austrian Transmission Grid Operator, is now in charge to secure the operability of the border. Therefore, on the basis of the existing law, they are calling capacity on the basis of costs. This is not the old tender procedure as we have seen in the past. Therefore, also in comparison to last year, the expectation on this year and the generation is completely different regarding the thermal capacity. We have been called for 430 megawatts Theiß for the whole year, not only winter but also summer, for the whole year, and this for the next three years.
In this way, it's a bit of more planability, but it's a lack of market pricing for capacity as we have seen in the past. Regarding the prices, we did the price increase, reflecting the higher wholesale prices and the change on the border with the 1st of October, increasing the energy price for electricity by around 13.2% and for gas from 4.8%. These increases have been done. They are put in our planning. They are put in our segment expectation.
Is there any scope for a further price increase through the rest of the financial year coming?
Well, we are observing the development of the wholesale prices and our opportunities, and this is the most I can say in this moment.
Okay. Thank you.
The next question comes from Luder Schumacher from Société Générale. Please go ahead with your question.
Good morning. Just two questions from my side. The first one is on the cash flow. You mentioned that there was quite a significant working capital improvement. Could you give us a number for that and also tell us what you expect to happen with that for 2018-2019? Should this reverse, just be the same, or could we expect further improvements? The second one, I'm not quite sure you will have more visibility there, but of course, your second-biggest shareholder has reduced their stake, went to just below 30%. Do you have any idea if that was it? Was it a one-off or could there be more stake sales? I guess there will be some kind of discussions. Are they happy with just below 30%? Just any kind of further light you could shed on that would be useful.
Thank you a lot. Ownership questions, only what I see as a fact that over the years, they have decreased their stake in EVN gradually. Obviously, using the stock exchange. They have now given guidance that they went below 30%. The next line where they would have to go public would be 25%. Let's see if you follow the volumes of EVN share. You see a certain amount on liquidity there, but more, I'm not able to comment on that. This is the first one. The second one, you're right. We had a cash flow improvement on the working capital. As you know, the working capital issue is one related to the balance sheet date. It's a bit hard to really give a clear expectation there.
The volume which we have seen has been around EUR 40 million here. In the year before, we had an extraordinary effect regarding an impairment we had to do on the boilers of the Moscow plant. Maybe you can also take this into account if you compare the figures.
Okay. Thank you.
At the moment, there seem to be no further questions. Ladies and gentlemen, if you would like to ask a question, please press 9 and star. There are no further questions.
Thank you for joining today's conference call. Please join us again next year on the 28th of February 2019. We will publish the results for the first quarter of 2018-2019 financial year. Season's greetings to you all and a successful year 2019. Goodbye.