Morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first half of the financial year twenty seventeen-twenty eighteen. 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 Siskorowicz.
Good morning, and welcome to the conference call on EVM's results for the first half of the twenty seventeen-twenty eighteen financial year. Having finished the first half of the twenty seventeen-twenty eighteen financial year, I'm pleased to inform you today about the solid business development, especially in view of the external factors, which influence our activities. After the unusually cold winter last year, temperatures were milder this winter, especially in Bulgaria and Macedonia, had a particularly negative impact on energy sales and net loss volume in our Southeast Europe segment. In Austria, the temperature related energy demand was below the previous year. However, it was still colder than the long term average.
The demand for reserve capacity remained high. As you know, we have been providing reserve capacity contracts to transmission grid operator for the past 7 years. During last winter, for the first time, our entire thermal capacity in lower Austria in the amount of about 1.1 1.1 gigawatts under contract to Southland Germany. In that respect, I can inform you that 430 megawatts of our thermal capacity are currently under contract to stabilize the networks in Austria from May until September 2018. In the regulated networks business in Austria, our 2nd quarter was already influenced by the lower new gas tariff applicable as of the 1st January 2018, which was determined according to the lower rate average cost of capital that implies in the new 5 year regulatory period.
On the positive side, renewable production benefited from strong water flows and the continuous expansion of our wind power capacity. Our solid positioning with a high share of regulated and stable activities forms the basis of our earning power and strong capital structure. This is also reflected in our external ratings. Both agencies, Moody's as well as S&P, have confirmed the ratings for EVM in April 2018. We rated R- by S&P with a stable outlook.
The rating for Moody's is A2, and they raised the outlook from stable to positive. Our goal for the future is to maintain ratings in the A range. Let me now continue with the key financials of the first half of our financial year. The group's total revenue declined by 4.9 percent to €1,200,000,000 Positive factors such as the increase in renewable electricity generation and higher heating sales were unable to fully offset the revenue decline. Reason for the decline include a decrease in thermal electricity generation below the higher prior year's level, lower revenue from natural gas trading as well as value related volume effects in the Southeastern Europe.
Low revenue was also recorded in the international project business. When comparing actuals with prior year's results, please bear in mind the absence of the following one off effects. Last year's results were influenced by the agreement reached with the Bulgarian electricity company, NEG, which had a positive pretax effect of EUR 42,000,000. This was contrasted by the valuation allowance on inventories of €45,500,000 recognized last year to the remaining aggregate components from the former thermal waste utilization plant project number 1 in Moscow. Based on these developments, we are reporting today a moderate decline in EBITDA by 2.1% to EUR 470,800,000.
The group's EBIT was up 6.5 percent to EUR 340,300,000. This increase reflects the fact that in the previous year, EBIT contained an impairment loss on the Kona Ara hydropower plant project in Bulgaria. Financial results recorded a slight improvement by 1.1 percent and amounted to minus CHF 25,100,000. In total, group net result was by 1.9% lower at €229,400,000 Now I would like to move to the next slide, which provides some information regarding the group balance sheet structure. Supported by our strong operating performance, our key balance sheet indicators improved again in comparison with the values reported of 30 September 2017.
Net debt, including noncurrent personnel provisions, was reduced by EUR 85,000,000 to EUR 1,100,000,000. Gearing decreased from €38,500,000,000 to €30,200,000,000 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 direct comparison of the EBITDA development per segment illustrates some key drivers of our performance during the first half year twenty seventeen, twenty eighteen. The Generation segment recorded some operating results.
However, negative temperature effects are visible, especially in the Energy and the Southeast Europe segments. EBITDA in the network segment also reflects negative volume and price effects. 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 last year's EBITA in Southeast Europe and in the environment segment. Those adjustments refer to the one off, which I already mentioned, the positive one off related to NEC and the negative one off related to the valuation allowance to inventories.
With this general overview, let's move on now to the next slide, which covers the generation segment in more detail. As already mentioned, the development of the electricity generation from renewables was supported by stronger waterflop and additional wind capacity. Therefore, our renewable production in segment was up by 12.9%. Based on our reserve capacity contracts, which were in place during winter 2017 2018, we received power requests on 100 days to stabilize the networks in Southern Germany. This is almost the same level as the 110 days last year.
However, thermal generation volumes in the segment declined by 30%. On one hand, there was unscheduled downtime at the Valvolcan 10 power plant due to a special inspection during the reporting period. And on the other hand, I would like to remind you that in the last winter, there was a strong demand for electricity in Europe due to the unusually cold weather. If you have a negative one off effect in the segment last year, but also due to the development which I just described, revenues was up by 9.7%. Operating expenses declined due to the lower use of primary energy carriers in line with the reduced thermal production.
The results from equity accounted investees improved due to a higher earnings contribution from Verbund Inkersverken. Based on these developments, EBITDA was 35.1 percent higher and amounted to €104,200,000 The absence of prior year's impairment loss on Kona Adar the On next slide, I will continue with the Energy segment. The Energy sales volume showed contrasting development, both electric and heat sales rose during the reported period. The increase in electricity was supported by higher sales to industrial customers, and the growth in heat sales mainly resulted from network consolidation measures. In turn, natural gas volumes declined in view of warmer weather conditions.
The main driver of revenue development in the Energy segment is the marketing of electricity produced in our thermal power plants. Lower production there, but also reduced natural gas trading activities led to a decline in revenue. In contrast, the evaluation of hedges as of the balance sheet closing date and the heating business had positive effects. In total, revenue was down by 3.6% year on year. Operating expenses decreased due to lower expenses for primary energy carriers and natural gas trading.
The share results from equity accounted industries with operational nature decreased by 4.4%, which was mainly due to temperature related negative volume developments recorded by our electricity and natural gas sales company, EVN KG. In total, these developments led to a decline in EBITDA by 7 0.8% to €85,700,000 and in EBIT by 9% to €76,000,000 On the next slide, I represent the developments in our Networks segment. Volume and price effects slowed the development of our automated business. Higher electricity distribution volumes were unable to offset the drop in natural gas distribution volumes, which resulted mainly from the reduced use of the thermal power plants in Lower Austria. The decline in revenue also partly reflects the reduction in natural gas tariffs.
As you know, the 1st January 2018 marked the beginning of the new 5 year regulatory period for gas distribution networks, which provides for a lower weighted average cost of capital and therefore lower tariffs. Operating expenses were due to the higher upstream costs for network stabilization such that in total segment EBITDA was down by 3.4% at EUR 183,300,000 and EBIT was down by 6.5% at EUR 123,700,000. On the next slide, I will continue with the Southeast Europe segment. The performance of our activities in Brukeri and Masythonia was negatively influenced by substantially warmer temperatures during the winter period 2017 2018. Therefore, net revenue and energy sales volumes remained below prior year's level.
The decline in volumes also reflected in lower revenue, which was decreased by 5.2% to EUR 513,800,000. Besides that, last year included the agreement with NEC about the settlement of pre finance costs for renewable energy with a positive effect on a pretax level of EUR 42,000,000 on operating expenses. This has to be considered when comparing figures. In total, EBITDA in this segment amounted to EUR 46,400,000. This corresponds to a decline of 56.3%.
Based on a I would like now to present my presentation of this segment with the environment segment. As already communicated in the Q1 of the current business year, the international project business was less dynamic in comparison to the previous year. And this development persists in the 2nd quarter revenue of the environment segment decline despite some growth in the domestic thermal waste utilization and drinking water business. And total revenue was down by 22.1% and amounted to EUR 82,500,000. The operating expenses declined in line with the development of project business.
In addition, the comparable prior year's value was unusually high due to the valuation allowance to inventories related to the former thermal phased utilization project, plant number 1 in Moscow. In the reporting period, EBITDA amounted to EUR 16,700,000 and EBIT amounted to EUR 5,100,000. Financial results amounted to minus EUR 300,000. We continue working on our current order book, which was about EUR 35,000,000 or EUR 4,000,000 at the end of March 2018. It consists of 6 general contractor assignments for the construction of wastewater treatment plants in Croatia, Macedonia, Poland and the Czech Republic.
For the new projects in Basheim and Kureydd, we expect that the final awarding of the contracts will be given by the local authorities still this year. I would also like to use the opportunity and inform you that in May 2018, our German subsidiary, WTE Watergrasser Technik, prematurely canceled the contract concluded with the municipality of Budva, Montenegro, for the construction, financing and operation of a wastewater treatment plant and asked the municipality to take over the largely completed facility and to pay the entire amount of the receivable resulting from the termination of the contract. This step was taken in relation to the municipality's continued failure to meet payment obligations. The claims by WTE VASOSTEDECMI are covered in part by the guarantee of the Republic of Montenegro and in full by further guarantees provided by the municipality of Budva and by the Federal Republic of Germany. In the meantime, discussions municipality of Budva and the Republic of Montenegro have started.
With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our group cash flows. Gross cash flow rose by 3.8 percent to EUR 438,400,000 due to the improvement in the results before income tax. Cash flow from operating activities remained strong and amounted to €253,900,000 which, however, led to decline of 3.2%. The development of working capital in the previous year was influenced by 2 compressing one off effects, the valuation allowance to inventories and the reduction in liabilities resulting from arbitration decisions for the balance of 10.5%.
Previous year's arbitration decision had a similar corresponding positive one off effect through the reduction of the investment for the Val Santo project. This also impacts the comparability of cash flow from investing activities, which now amounted to minus €196,700,000 The main focus of investments was on electricity and gas networks as well as wind parks. Besides the part of the group's liquidity, it was invested in mainly short term financial assets, which has also to be shown in cash flows from investing activities. The cash flow from financing activities mainly reflects the dividend payment for the 2016 2017 financial year as well as scheduled repayments of loans. The net change in cash and cash equivalents amounted to minus EUR 61,100,000.
Please note again that the net debt was reduced by €85,000,000 during the first half of the financial year. Would like to conclude today's call with an update on the outlook for the group. I would like to confirm the outlook which we have been given last December. Assuming average conditions in the Energy business environment, group net result for 2017 2018 should return to a normal level that reflects the average of 2015 2016 into 2016 2017 financial years. There are factors that could influence the group net result, including regulatory framework, the proceedings currently in progress in Bulgaria, the remaining proceedings over the Wasson 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 Rauza, which remain the basis for sustainable and stable earnings. All in all, we plan to invest nearly approximately €400,000,000 thereof, approximately €300,000,000 will be directed to our lower Austrian activities. Expansion of our wind capacity is on track. During the Q3 of this financial year, we are commissioning the summer end windpack, which will increase our installed capacity to 3 14 megawatt.
Our next goal is 3.70 megawatt, which we aim to reach by the end of the 2019 2020 financial year. Based on that, we will pursue our medium term target of 500 megawatt in installed wind capacity subject to appropriate framework conditions. In line with such investment strategy, we remain committed to our integrated business model along the value chain of energy business. We believe that our integrated business model proves to be particularly silent in the current uncertain and challenging market environment. I've now reached the end of my presentation for Igor and Fritzale for the first half of twenty seventeen-twenty eighteen financial year.
I'm now looking forward to answering your questions.
And we have our first question from Lueder Schumacher, who's calling from Societe Generale.
Good morning. A couple of questions for me. The first one is on the impact of balancing power first half this year compared to last. Can you just remind us of the numbers there and the reduction, of course, which has an influence on the result. The second one is more of a broad question, it's really on the factors you mentioned that could influence the group results.
You mentioned the regulatory background. I guess I mean, can you remind us what are the big uncertainties there? I would have thought that most issues would have been fixed already. And on the other three points, kind of what kind of ranges or sensitivities are we talking about if things go in your favor versus if they are not, just to get an idea of the sensitivity we're talking about here?
Okay. Thanks a lot. First of all, as you have seen, we have been contracting all our thermal capacity these years to the German grid operator tenant, yes? So this is the biggest space in the recent 7 years have contracted there with this 10 19 megawatts. On this basis, yes, we have also a bigger amount of fixed compensation coming from there.
Total, it is a low double digit EBIT contribution coming from this kind of contract, something which will change also because the system is going to change with the coupling of the Austrian grid to the German grid. And therefore, we are expecting a decision by the Austrian grid operator, RPD, during the summer for the 1st October. And regarding the second topic you mentioned, I just have to remind that annually in Bulgaria and Macedonia on the 1st July, then in Paris for the next year will be announced. And therefore, this is always a certain period of uncertainty. And regarding the Moscow activities, which we mentioned, As you know, our activities there are now limited by the operation of the waste incineration plant number 3.
This contract will end in 2020, and we receive all payments in full compliance with the contract. In addition, we also operated 2 sewage sludge full cogeneration plants there. And the upside potential refers to the waste incineration plant, number 1, which, as you will remember, we are not able to realize despite a valid contract. But there are no new developments on these issues. Regarding Vyazone, as we know, we have the NN arbitration proceeding with the general contractor, but we also have discussions regarding how to settle outside of the court and maybe after the Q3 results or in December, we can give you more information about that.
Okay. Very clear. Can you just remind me of the balancing power in the first half last year? You said low double digit million for the first half this year. How much was that last year?
It's almost in the same range, but the thing which has changed that we have a bigger base and 10 days, and this year, they were called 100 days. So here, the base of calling is less than the year before. Therefore, on the we are in a certain range of double digit EBIT contribution there. And as you can imagine, this is really a competitive environment also, so I don't to go into deeper details here. Okay.
Thank you.
And our next question comes from Lucas Kosbar, who's calling from Kepler Cheuvreux. Over
to you. We lost Lucas.
Mr. Koff, it could be yes, we can hear
you. Sorry.
Over to you.
Thank you. So with the approaching split of the joint electricity pricing with Germany, from a current perspective, what are the likely impacts on each of your divisions? And coming back to the previous question from my colleague, Is there now a long term contract in place with Tienit?
Good point. No. Due to the new regulation, the Austin grid operator, Abiquis, is in charge to ensure the reserve capacity. We have started a procedure that we want to get contracted volumes up to 5 years. And this procedure is underway, and we expect that it will there will be a decision over the summer.
Okay. And regarding the impact on the divisions?
Well, this is not easy to answer. On One Way, as an integrated energy group, we are on both sides. So if energy prices wholesale prices will go up in the Austin market, it will give the producing side an upside. But of course, on the end customer side, there is also an issue how to adapt prices here. And there's a difference between industrial prices and holdout prices there.
Under the bottom line, I think, it will be neutral for us.
Okay. And may one more question, if I may. There's a regulatory review coming up in SCE. What do you expect coming there from this side?
Well, this is very hard to judge also. It will be a short term decision at the end of June, and we will make it public when information is gathered. As you know, they have quite well established regulatory frameworks, question mark is how they fill in the numbers and if they also take the responsibility for the consequences of regulatory framework. It is every year a very sensitive period.
Okay.
And we have a question from Theresa Schoenvaert, who's calling from Raiffeisen Bank. Hello, good morning. My question is referring to the Austrian Energy Strategy Mission 2,030, which was announced to be finished in June. Do you have an update on that, on the discussions and the potential closure?
Well, if you follow the debate in Austria, you have seen that the government is trying to give a perspective regarding what has to be achieved in the year 2030. And it is a very ambitious concept, reflecting also the targets of the Paris climate change contract. And what the government has announced is that in the autumn, they will start to discuss what kind of measures have to be really taken and also the legal basis for that have to be ensured. What we think is worthwhile to debate is that they are not talking about electricity or energy anymore in the sense of the energy industry. They have now also acknowledged that the traffic part regarding the climate change targets is 1 which is even on a higher priority than it has been in the past.
And therefore, let's see what this is really what kind of change this will bring for the society therefore, for us as market participants. As an energy value integrated company in the biggest province of Austria, I think we will get some challenges, but also some business opportunities because who else than us is able to realize wind power in a big dimension? Who else than us is able to build a grid, which is able to offtake the produced energy? And at the end, we also have a very broad customer base, which we can service the different possibilities to produce energy, but also ensure the overall security of supply.
Thank you very much. Thank you. And our next question comes from Vu Nguyen, who's calling from Praxis
Partners. Good morning. Just a very quick question, please, on the guidance for this year. I understand that the net result guidance, you guide to an overachieve of the last 2 years, which is roughly RMB 200,000,000. But in the first half, you already do more than that, RMB 29,000,000.
So I just wonder, is there any reason why the results shouldn't be much higher than the average over the last 2 years? Are you foreseeing any headwinds in the next two quarters that make you so cautious and conservative in your guidance? Thank you very much.
Well, as you know, in the energy business, we are a cycle business. The winter is over great. Let's see what the summer is bringing. As we have discussed before in our call, there are a lot of different issues where decisions might come up in the next half year. And therefore, we want to be very conservative in our guidance, also reflecting the group structure and the positioning in the capital market.
And therefore, let's see if we know more after the Q3 or if we have to go down autumn to close the books and then adapt if something is adaptable. In this minute today, in this call, I confirm our expectations as we have announced them for the year.
And we have another question from Richard Alderman, who's calling from Macquarie. Over to you, Mr. Alderman.
Good morning. Following on for Vu's question, can I just ask about the balance sheet and how you see any balance sheet targets over the next year or 2? You're generating solid free cash flow and de gearing at quite a pace. So do you envisage looking for more organic CapEx growth opportunities? And how do you think of that in the context of any cash returns or dividend returns to shareholders?
Well, as you have seen over the last years, they have quite strongly reduced the net debt, and we are comfortable more or less, with the level regarding the activities we are having as we are now seeing the net debt which is EUR 1.1 1,000,000,000 What I also tried to highlight is that we're still investing strongly in existing businesses, mainly in lower Austria. This is on the group level, EUR 400,000,000 and on the lower Austrian level of around EUR 300,000,000, not just for 1 year, but also on average for the upcoming years. So on this basis, we are taking advantage of our position working in the stable and regulated activities in Lower Austria. We have a very stable dividend policy, which I think is in line with these activities and the group performance so far. This is I would not go further than this.
Consensus has net debt falling quite rapidly even with your investments. So do you think there's some scope to discuss the dividend policy going forward?
I think from this point, the investments in grid renewables and water need to be funded, and we want to do this on the level of the net debt relations as we see them now. It's a little bit going up and down. We don't see a big change in the overall international policy in this moment. Thank
you. Okay. It looks like we have no further questions now. Back to you, Mr. Syskovitz.
Thank you for joining today's conference call. I kindly invite you to dial in again on Thursday, 23rd August, when we are presenting the results for the 1st 3 quarters of the 2017 2018 financial year. Goodbye and thank you.