Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first three quarters of 2017/18. 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's results for the first three quarters of the 2017/2018 financial year. On the 2nd of August, we published an ad hoc announcement in which we already communicated to the market that our results for the first three quarters of this financial year would benefit from a positive non-cash effect in the amount of about EUR 38 million. This effect resulted from the valuation gains on hedges as of the reporting date. The by far largest portion of this effect was realized by our distribution 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 the operational nature and its earnings contribution is included in group's EBITDA.
The impact of the valuation of the hedges on our full year results will depend on the energy prices as of the 30th of September 2018. The main other factors which influenced our business during the reporting period were the following. In comparison with the previous year, the last winter was much warmer, especially in Bulgaria and Macedonia. In particular, this had a negative impact on energy sales and network volumes in our Southeast Europe segment. In Austria, the temperature-related energy demand was below the previous year. It was still colder than the long-term average. 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 at the end of the last financial year. Subject to appropriate conditions, our strategy aims to reach 500 megawatts in the midterm.
By the end of 2019/20 financial year, we plan to reach 370 megawatts, which is our next milestone. Due to the expansion of our wind portfolio, as well as due to favorable water flows, the group's renewable generation increased by 11.5% 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, and from May until September 2018, we provide 430 megawatts of reserve capacity to stabilize the Austrian transmission networks. Our regulated gas distribution business in Austria is influenced by the new regulatory period, which started in January 2018, and provides for a lower weighted average cost of capital. Therefore, also given that the network sales volumes in the previous year were higher than the reference period, natural gas network charges were cut by 16.2% on average this year.
I will provide more details on our international project business later during this call, but as a highlight, I would like to mention that we were able to finish and hand over three out of four waste water projects in Macedonia until July. Let me now continue with the key financials of the first nine months of our financial year. The group's revenue was 6.5% lower year on year at EUR 1.7 billion. Reason for the decline included decrease in thermal electricity generation below the higher prior year level, lower revenue from natural gas trading, as well as weather-related volume effects in Southeast Europe. Lower revenue was also recorded in the international project business. Positive factors, such as an increase in renewable electricity generation and higher heating sales, were unable to fully offset the revenue decline.
When looking at expenses, please consider the two material one-off effects which we reported last year. Firstly, we had a positive pre-tax effect of EUR 42 million due to the agreement reached with NEK. Secondly, there was a valuation allowance on inventories of EUR 45.5 million in the international project business. On balance, those effects are nearly neutral at the level of group EBITDA, but it's important to bear them in mind when comparing segment results. As already mentioned, results from equity accounted entities with operational nature increased due to the positive non-cash effect in valuation of hedges as of 30th of June 2018 in EVN KG. We are reporting today a moderate decline in EBITDA by 3% to EUR 585 million. Due to the absence of impairments, which became necessary in the previous year, the group's EBIT improved by 28.6% to EUR 387.2 million. Financial results amounted to minus EUR 14.7 million.
Compared to last year, the decline in financial results reflects the absence of positive valuation effects of Verbund shares, which resulted from the transfer of these shares from WEEV Holding GmbH to EVN AG. In total, group net result was by 12.9% higher at EUR 273.2 million. Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Our strong operating performance continues to support our strong balance sheet structure, which form the basis of pursuing organic growth opportunities in our regulated and stable Austrian activities. Net debt, including non-current personal provisions, was reduced by EUR 192.4 million to about EUR 1 billion as compared to the 30th of September 2017. Gearing decreased from 38.5% to 28.4% during the reporting period.
Before we 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 dive comparison of EBITDA development per segment illustrates some key drivers of our performance during the first three quarters of 17/18. The generation segment records sound operating results, and the increase in the energy segment reflects the valuation gains on hedges at the 30th of June 2018. EBITDA in the network segment reflects the negative volume and price effects. Negative temperature effect is visible in the Southeast Europe segment. In the environment segment, EBITDA reflects a less dynamic development in the international project business. Please note that for purposes of this illustration, we have adjusted the graph showing the last year's EBITDA in Southeast Europe and the environment segment for the one-off, which I already mentioned.
The positive one-off related to NEK and the negative one-off related to the valuation allowance in inventories. This is a very general overview. Let's move on to the next slide, which covers the generation segment in more detail. The renewable generation in the segment was up by 10.2%. This increase was supported by stronger water flows and additional wind capacity. In contrast, thermal generation volumes declined by 24.7%. It was partly due to scheduled and unscheduled downtime at the Walsum power plant. I would also like to remind you that in the last winter, there was a strong demand for electricity in Europe due to the unusually cold weather. Based on our reserve capacity contracts with TenneT and APG, we received power requests in 110 days to stabilize the network in Southern Germany and Austria.
This is still a high level, although the amount was even higher in the year before, with 147 days during the first three quarters. Also due to the developments which I just described, revenues were up by 11.9%. Operating expenses declined due to lower use of primary energy carriers in line with the reduced thermal production. The results from equity accounted investments improved due to a higher earnings contribution from [Taboon] in Austria, which had suffered last year from an impairment. These developments resulted in a rise in EBITDA by 48% to EUR 124.9 million. Due to the absence of prior year's impairment loss recognized under corner other project, EBIT improved to EUR 85.3 million. On the next slide, I will continue with the energy segment. Energy sales volume showed contrasting 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 procured in our own thermal power plants. Lower production there, but also reduced natural gas trading activities, as well as the valuation of the hedges, led then to a decline in revenue. In total, revenue was down by 12.2% year on year. Operating expenses decreased due to lower expenses for primary energy carriers and natural gas trading as well as due to the valuation of hedges. The share of results from equity accounted entities with operational nature increased by 30.4%. This was due to the positive non-cash effect valuation of hedges recorded by our electricity and natural gas sales company, EVN AG, on the reporting date.
In total, these developments led to an increase in EBITDA by 17.4% to EUR 111.4 million and in EBIT by 26.5% to EUR 96.7 million. On the next slide, I will present the development in our network segment. The developments of our Austrian regulated business slowed as expected, based on lower tariffs for the natural gas distribution. In addition, network volumes and natural gas distribution declined due to the warmer winter and reduced use of the thermal power plants in Lower Austria. Based on these price and volume effects, revenue in this segment was down by 1.9%, whereas operating expenses increased due to higher upstream costs for network stabilization. In total, segment EBITDA declined by 11.6% to EUR 223.1 million, and EBIT was down by 18.8% at EUR 135.2 million. On the next slide, I will continue with the Southeast Europe segment.
To start with, the regulatory authorities made the following tariffs decision with the effect of the 1st of July 2018. In Bulgaria, the end customer price for electricity for household customers in EVN supply area were increased by an average of 1.4%, following an increase by 1.7% in July 2017. In Macedonia, the tariff decision reduced the end customer price for electricity by an average of 0.2%, following a reduction by 0.3% last year. Let me now continue with the performance in this region during the reporting period. As already mentioned, the substantially warmer winter had material negative impacts on network and energy sales volumes. In combination with continuing liberalization, these developments led to a decline in revenue by 4.6% to EUR 707.4 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 69.3 million. EBIT amounted to EUR 22.5 million. I would like to conclude my presentation of the segments with the environment segment. International project business was less dynamic in comparison to previous years. Still, progress on projects were as planned. For example, we were able to finish and hand over three wastewater projects in Macedonia. However, despite revenue growth in the domestic water and waste incineration business, the international projects remain the key driver in this segment. Therefore, in total, we are reporting a decline in revenue by 17.5% to EUR 125 million. Operating expenses also went down in line with the development of the international project business. In addition, the comparable prior year value was unusually high due to a necessary valuation allowance to inventories.
In the reporting period, EBITDA amounted to EUR 19.8 million, and EBIT amounted to EUR 2.7 million. Financial results amounted to minus EUR 0.2 million. In the international project business, we continue working on our current order book, which was about EUR 29 million at the end of June 2018. It consisted of five general contract assignments for the construction of wastewater treatment plant in Croatia, Macedonia, Poland, and the Czech Republic. In parallel, our efforts remained on the acquisition of the two new projects in Bahrain and Kuwait. We expect the final awarding of the contracts will be given by the local authorities still this year. I already informed you in our last conference call in May that we prematurely canceled a contract for a wastewater project in Budva and Montenegro. End of May, we already received a first installment of the amounts due.
There are regular meetings with the municipality of Budva and the Republic of Montenegro regarding the details of the termination of the contract. Finally, I would like to inform you about the change in segment, which will become effective in the fourth quarter of the current financial year. We decided to transfer our three thermal power plants in Lower Austria from EVN AG to EVN Abfallverwertung Niederösterreich GmbH, which is the company in charge of the thermal waste incineration plant in Dürnrohr. The company was renamed in EVN Wärmekraftwerke GmbH and became part of the generation segment. All these changes took place with effect of the 3rd of July, 2018. The main change is that we're starting with the fourth quarter, the thermal waste incineration business in Lower Austria will be reported in our generation segment. With this, I conclude the presentation of the segment.
In the next slide, I will continue with the development of our group cash flows. Group's cash flow remained nearly stable at EUR 507.2 million due to an improvement in the result before income tax and certain contrasting developments, such as the strong decline in impairments. Cash flow from operating activities remained strong, amounted to EUR 351.9 million, which, however, meant a decline of 7.5%. The development of working capital in the previous year was influenced by two contrasting one-off effects, the valuation allowance to inventories, and the reduction in liabilities resulting from the arbitration decision of the Walsum 10 power plant. In addition, the reporting period is influenced by the reclassification of long-term receivables related to the wastewater project in Budva to trade receivables. Previous years, the arbitration decision had a similar corresponding positive one-off effect to the reduction of investment for the Walsum project.
This also impacts the comparability of cash flows from investing activities, which are now amounted to minus EUR 239.4 million. The main focus of investment was on electricity and gas networks, as well as in park. Part of the group's liquidity was invested in mainly short-term financial assets, which is also now shown in the cash flow from investing activities. The cash flow from financing activities mainly reflects the dividend payment to the shareholders of EVN AG and minority shareholders, as well as the scheduled repayment of loans. The net change in cash and cash equivalents amounted to minus EUR 17.3 million. Please note again that the net debt was reduced to EUR 192.4 million during the first three quarters of the financial year. I would like to conclude today's call with the outlook for the group.
In our ad hoc announcement, which we published on the 2nd of August, we changed our outlook by saying that we expect the group net result for the financial year ending on the 30th of September 2018 to be at levels comparable to last year's group net result. The effects of valuation of hedges on the full year group net result will depend on energy prices of the valuation date of the 30th of September 2018. These are factors that could influence the group net result. Regulatory framework, the proceedings currently in progress in Bulgaria, the remaining proceedings on the Walsum 10 power plant project, as well as 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 nearly approximately EUR 400 million. Thereof, approximately EUR 300 million will be directed to Lower Austrian activities. I have now reached the end of my presentation of EVN results for the first three quarters of the 2017/2018 financial year. I'm now looking forward to answering your questions.
Ladies and gentlemen, if you'd 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 to state your questions. We have our first question for today from Ludwig Schumacher, who's calling from Erste Group in Vienna. Over to you.
Hi. Good morning. A couple of questions from me. The first one is on your guidance. Yes, you have lifted it, but nine months results are already above last year. A guidance saying your results will be round about the same level isn't really displaying an awful lot of confidence for the last quarter. Why are you so cautious on the overall guidance? Also, your previous guidance, before you lifted it, was somewhere in the region of EUR 200 million. You now come in for the nine months at EUR 273. There's only about half of that's accounted for by the hedge position. Where does the rest come from? Lastly, also maybe on the accounting changes, can you just maybe give us a few numbers of what will move from where to where, just to help with the modeling of that.
Yes. First of all, as you know, three quarters are three quarters. To discuss the overall yearly results, we will do after the books have been closed. As you know, the fourth quarter is always weak in our kind of business. We are expecting some upside potential regarding from the reserve capacity production. We will see how this will be compensated from other factors also. This is a tradition that we would not change our outlook, except we are having extraordinary things really locked in. The guidance we are giving now is based on the higher wholesale prices and therefore on the valuation of the hedges as I tried to describe. This is where we stick to. Regarding the rest of the increase, it is mainly the hedges, and the absence of impairments last year.
This is compensating the less scales volumes due to the weather effects, because the last year has been extraordinary regarding the situation in all three main markets. The change in the segments is more or less if you move the result of the waste incineration company, AVN, into the generation segment. This is quite clear and colleagues can give you later on the correct numbers for that. This is just a clear cut by shifting the entity to the generation segment.
Okay. Thank you.
Next up, we have Teresa Schinwald, who's calling from Raiffeisen Bank.
Hello, good morning. I have three questions. First, more of a clarification one, where if the EUR 38 million valuation effect was booked only in the third quarter or counts for the nine months or even fiscal year until the end of July.
It's simple. It is 30th of June. The valuation on this date. We will see the real value of the hedges on the 30th of September, which is in the future.
Okay. This is a year to date effect then.
Yes.
Year to end of June effect.
End of June, 30th of June.
Okay.
Value of the hedges on this date.
Okay, cool. Thank you. The other ones are more strategy and market separation related. First, could you please give us an update on the strategic reserve options schedule, when we can expect a decision given that the market separation is already in less than six weeks. The second thing.
Teresa, as you mentioned, as the separation is effective from the 1st of October, we are already approaching this date very fast. As I've heard from my colleagues, the ongoing tender procedure is very tough, and we are expecting a decision in time. Expect it in the upcoming weeks. Because we also have to be ready with the power plants till then and start the preparation now.
Okay. Thank you. The last one is more a general one regarding the #mission2030. If you or the industry has already identified areas to focus on in the near to midterm when it comes to investments and focus areas as presented in the government strategy.
Well, you know that the #mission2030 is a vision in a sense that it gives guidance where the government thinks the country should head to. They are now also challenged to develop a legal framework for that. This legal framework will be the framework for our investment decisions of the future. We think with the strategy which we were following in last years, that we are quite in line of this development in the sense of decentralization of production, renewable energy, and also strengthening of the grid to make all these things happen. Therefore, I think an integrated energy group like EVN with the broad infrastructure and the broad scope of energy activities is perfect to deliver results in this sense. At the end, we need a consensus also in the broader society how to fund all these strategic developments.
This is something which also the government and civil society has to deliver on, because at the end, this is also shifting in public money into this kind of investment.
Sure. Thank you. Thank you very much.
If anybody else would like to ask a question, please press star nine now. Please press star nine now to state your questions. We have a follow-up question from Lueder Schumacher from Société Générale.
Yeah. Just a quick question on the network cost. Is this just delayed passthrough? In other words, you did have higher costs that get the results down, but you will get them back in future years. Maybe also given that the carbon prices are going through the roof, what does it mean for your Walsum plant?
The first question, as you know, the regulation is exactly working on this, that you have kind of a framework for 5-year period, then the actual volumes were also reflected in the updating of the prices. This is a delay, as you mentioned before. We're fine with this, and as you might also add on, we are now discussing with the regulatory authorities regarding the updating for the electricity next regulatory period. This should be also a decision upcoming in autumn 2018. Regarding the CO2 emissions, yes, they are going up. The question is if this is affecting also the spreads or if wholesale market prices are also going up in this kind of sensitivity. This is what the whole market is observing very closely.
You're right, in Germany, there is the implication of the energy policy and of the wholesale price market is quite volatile these days, and we will have to see how the mid- and long-term trends will be consolidated here.
Okay. Thank you.
It looks like we have no further questions at this time. Back to you, Mr. Szyszkowitz.
Thank you all. Next call is regarding the full year's results.