Good morning, ladies and gentlemen, welcome to the conference call on EVN's results for the first half of the financial year 2017/2018. 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 half of the 2017/2018 financial year. Having finished the first half of the 2017/2018 financial year, I am 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. This had a particularly 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. 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 seven years.
During last winter, for the first time, our entire thermal capacity in Lower Austria in the amount of about 1.1 gigawatt was under contract to southern 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 network business in Austria, our second quarter was already influenced by the lower new gas tariff applicable as of the 1st of January 2018, which was determined according to the lower rate average cost of capital that implies in the new five-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 EVN in April 2018. We are rated A- 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% to EUR 1.2 billion. Positive factors such as the increase in renewable electricity generation and higher heating sales were unable to fully offset the revenue decline. Reasons 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 weather-related volume effects in the Southeastern Europe.
Lower revenue was also recorded in the international project business. When comparing actual 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, NEK, which had a positive pre-tax effect of EUR 42 million. This was contrasted by the valuation allowance on inventories of EUR 45.5 million recognized last year to the remaining aggregate components from the former thermal waste utilization plant project number one in Moscow. Based on these developments, we are reporting today a moderate decline in EBITDA by 2.1% to EUR 470.8 million. The group's EBIT was up 6.5% to EUR 340.3 million. This increase reflects the fact that in the previous year, EBIT contained an impairment loss on the Gorna Arda hydropower plant project in Bulgaria. Financial results recorded a slight improvement by 1.1% and amounted to minus EUR 25.1 million.
In total, group net result was by 1.9% lower at EUR 229.4 million. 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 sheets indicators improved again in comparison with the values reported of 30th of September 2017. Net debt, including non-current personnel provisions, was reduced by EUR 85 million to EUR 1.1 billion, seeing decrease from 38.5 to 32.9 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 direct comparison of the EBITDA development per segment illustrates some key drivers of our performance during the past first half year, 2017/2018. The generation segment recorded some operating results.
However, negative temperature effects are visible, especially in the energy in 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 EBITDA in Southeast Europe and in the environment segment. Both adjustments refer to the one-offs, which I already mentioned, the positive one-off related to NEK and the negative one-off related to the valuation allowance to inventories. It is a 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 water flow and additional wind capacity. Therefore, 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, the thermal generation volumes in the segment declined by 30%. On one hand, there was unscheduled downtime at the Walsum 10 power plant due to a special inspection during the reporting period. 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. In view of a negative one-off effect in this 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 entities improved due to a higher earnings contribution from VERBUND Kraftwerke. Based on these developments, EBITDA was 35.1% higher and amounted to EUR 104.2 million. The absence of prior year's impairment loss on Gorna Arda project is also positively reflected in segment EBIT, which amounted to EUR 80.4 million. On the 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 selling volumes declined in view of warmer weather conditions. A 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 valuation 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 of results from equity accounted entities 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 7.8% to EUR 85.7 million and in EBIT by 9% to EUR 76 million. On the next slide, I will present the development in our networks segment. Volume and price effects slowed the development of our automated business.
Higher electricity distribution volumes were unable to offset a 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 of January 2018 marked the beginning of the new five-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 183.3 million, and EBIT was down by 6.5% at EUR 123.7 million. On the next slide, I will continue with the Southeast Europe segment. The performance of our activities in Bulgaria and Macedonia was negatively influenced by substantially warmer temperatures during the winter period 2017/2018.
Therefore, network 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 513.8 million. Besides that, last year included the agreement with NEK about the settlement of pre-finance costs for renewable energy with a positive effect on a pre-tax level of EUR 42 million on operating expenses. This has to be considered when comparing figures. In total, EBITDA in this segment amounted to EUR 46.4 million. This corresponds to a decline of 56.3%. Based on a stable depreciation, EBIT was down by 79.8% at EUR 15.1 million. I would like now to conclude my presentation of this segment with the environment segment.
As already communicated in the first quarter of the current business year, the international project business was less dynamic in comparison to the previous year. This development persists in the second quarter, revenue of the environment segment declined despite some growth in the domestic thermal waste utilization and drinking water business. In total, revenue was down by 22.1% and amounted to EUR 82.5 million. The operating expenses declined in line with the development of the international 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 waste utilization project plant number 1 in Moscow. In the reporting period, EBITDA amounted to EUR 16.7 million, and EBIT amounted to EUR 5.1 million. Financial result amounted to minus EUR 0.3 million.
We continue working on our current order book, which was about EUR 35.4 million at the end of March 2018. It consists of six general contractor assignments for the construction of wastewater treatment plants in Croatia, Macedonia, Poland, and the Czech Republic. For the new projects in Bahrain and Kuwait, 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 Wassertechnik, 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 reaction to the municipality's continued failure to meet payment obligations. The claims by WTE Wassertechnik 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 with the Municipality of Budva and the Republic of Montenegro have started. With this, I conclude the presentation of this segment. On the next slide, I will continue with the development of our group cash flows. Gross cash flow rose by 3.8% to EUR 438.4 million, due to the improvement in the result before income tax. Cash flow from operating activities remained strong and amounted to EUR 253.9 million, which however, had a decline of 3.2%.
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 arbitration decisions for the Walsum 10 power plant. Previous year's arbitration decision had a similar corresponding positive one-off effect through the reduction of the investment for the Walsum project. This also impacts the comparability of cash flow from investing activities, which now amounted to minus EUR 196.7 million. The main focus of investments was on electricity and gas networks, as well as wind parks. Besides the part of the group's liquidity 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 61.1 million. Please note again that the net debt was reduced by EUR 85 million during the first half of the financial year. I 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 results 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 that are currently in progress in Bulgaria, the remaining proceedings over 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 approximately EUR 400 million. Thereof, approximately EUR 300 million will be directed to our Lower Austrian activities. The expansion of our wind capacity is on track. During the third quarter of this financial year, we are commissioning the Sommerrain Wind Park, which will increase our installed capacity to 340 megawatts. Our next goal is 370 megawatts, 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 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 salient in the current uncertain and challenging market environment. I have now reached the end of my presentation for EVN results for the first half of 2017/2018 financial year. I am 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 followed by the Star key again. Please press Nine Star now to state your questions. And we have our first question from Ludwig Schumacher, who is calling from Société Générale.
Hi. Good morning. A couple of questions from 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 certainly the reduction, of course, which has an influence on the result? The second one is more of a broad question, really, on the factors you mentioned that could
Influence the group results. You mentioned the regulatory background. Can you remind us what are the big uncertainties there? I would've thought that most issues would've been fixed already. On the other three points, 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, TenneT. This is the biggest base we, in the recent seven years, have contracted them with this 1,090 megawatts. On this basis, 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 contracts. Something which will change also because the system is going to change with the coupling of the Austrian grid to the German grid. We are expecting a decision by the Austrian grid operator, APG, during the summer for the 1st of October.
Regarding the second topic you mentioned, I just have to remind that annually in Bulgaria and Macedonia, on the 1st of July, the tariffs for the next year will be announced. This is always a certain period of uncertainty. 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. We receive all payments in full compliance with the contract. In addition, we also operate the two sewage sludge cogeneration plants there. The upside potential refers to the waste incineration plant number 1, which, as you will remember, we were not able to realize despite a valid contract. There are no new development on these issues.
Regarding Walsum, as we know, we are there in an arbitration proceeding with the general contractor. We also have discussions regarding how to settle outside of the court, and maybe after the third quarter 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 of last year? You said low double-digit EUR million for the first half of this year. How much was that last year?
It is almost in the same range. The thing which has changed, that we have a bigger base and therefore a higher fixed component. In the last year, these power plants were called together, TenneT and APG, 110 days, and this year they were called 100. Here the base of calling is less than in the year before, therefore, we are in a certain range of a double-digit EUR EBIT contribution there. As you can imagine, this is really a competitive environment also. I don't want to go into deeper details here.
Okay. Thank you.
Our next question comes from Lukas Kofler, who's calling from Kepler Cheuvreux. Over to you.
We lost Lukas.
Mr. Kofler.
Hello?
Yeah. We can hear you.
Okay. Sorry
Over to you.
Thank you. With the approaching split of the joint electricity price in Germany, from a current perspective, what are the likely impacts on each of your divisions? Coming back to the previous question from my colleague, is there now a long-term contract in place with TenneT?
A good point. No. Due to the new regulation, the Austrian grid operator, APG, is in charge to ensure the reserve capacity. They have started a procedure that they want to get contracted volumes up to five years, and this procedure is underway, and we expect that there will be a decision over the summer.
Okay, thanks. 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. If energy prices, wholesale prices, will go up in the Austrian market, it will give the producing side an upside. Of course, on the end customer side, there is also an issue how to adapt prices here. There's a difference between industrial prices and wholesale prices there. Under the bottom line, I think it will be neutral for us.
Okay, thanks. One more question, if I may. There's a regulatory review coming up in SEE. 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 the 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 the regulatory framework. It is, every year, a very sensitive period.
Okay, thanks.
If anybody else would like to ask a question, please press nine star now. Please press nine star now to state your questions. We have a question from Teresa Schinwald, who's calling from Raiffeisen Bank.
Hello, good morning. My question is referring to the Austrian energy strategy, Mission 2030, which was announced to be finished in June. Do you have an update on the discussions and the potential for 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. It is a very ambitious concept reflecting also the targets of the Paris Agreement. Question mark will be how these targets can be achieved in time and budget. 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 one which is even on a higher priority than it has been in the past. Therefore, let's see what kind of change this will bring for the society and 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? At the end, we also have a very broad customer base there, which we can service with different possibilities to produce energy, but also ensure the overall security of supply.
Thank you very much.
Thank you. Our next question comes from Vu Nguyen, who's calling from Praxis Partners.
Have a 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 average of the last two years, which is roughly EUR 200 million. In the first half, you already do more than that, EUR 229 million. I just wonder, is there any reason why the results shouldn't be much higher than the average of the last two 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, and 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. Let's see if we know more after the third quarter or if we have to go down the 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.
Okay. Thank you.
We have another question from Richard Alderman, who's calling from Macquarie. Over to you, Mr. Alderman.
Good morning. Following on from Vu's question, can I just ask about the balance sheet and how you see any balance sheet targets over the next year or two? You're generating solid free cash flow and de-gearing at quite a pace. Do you envisage looking for more organic CapEx growth opportunities? 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, we 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 billion. What I also tried to highlight is that we are still investing strongly in existing businesses, mainly in Lower Austria. This is on a group level of EUR 400 million and on the Lower Austrian level of around EUR 300 million. It's not just for one year, but also on average for the upcoming years. 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. I would not go further than this.
Consensus has net debt falling quite rapidly even with your investments. 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 financial policy in this moment.
Thank you.
Okay, it looks like we have no further questions now. Back to you, Mr. Szyszkowitz.
Thank you for joining today's conference call. I kindly invite you to dial in again on Thursday, 23rd of August, when we are presenting the results for the first three quarters of the 17/18 financial year. Goodbye and thank you.