Good morning, ladies and gentlemen, and welcome to the conference call on EVN's results for the first quarter of 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 and welcome to the conference call of EVN's results for the first quarter of the 2017/18 financial year. We are reporting today improvements in our results despite lower revenue. Generally speaking, the business development in the reporting period was characterized by different, partly contrasting factors. On the positive side, the renewable generation was strong due to favorable wind and water flows. In addition, we commissioned a new wind park in October 2017, which increased our wind capacity to 279 megawatts. Let me use the opportunity to update you on how we plan to proceed with our ambitious strategy to further expand our wind portfolio. Already this spring, we will reach 314 megawatts when commissioning our new wind farm, Sommerein. As the next milestone, we aim to reach 370 megawatts by the end of the business year 2019/20 financial year.
This will also be possible due to a special quota of subsidies, which was passed by the Austrian Parliament last year and was meant to reduce the waiting list of already approved projects such as ours. Thereafter, our midterm target is 500 megawatts. Subject to appropriate framework conditions, we will continue with our project pipeline, which still contains further well-advanced projects. After this brief update on our wind strategy, I will now return to the developments in the first quarter 2017/18. The demand for our thermal power plants remained high. They continue to play an important role in ensuring network stability. For the first time, all of our Austrian thermal power plants are contracted to support the 1,000 German transmission networks during the winter half year 2017/2018. The temperature-related energy demand declined during the reporting period. In comparison to last year, it was much warmer in Austria, Bulgaria, and Macedonia.
These weather effects, in particular, had negative impacts on our energy sales and network volumes in our Southeast Europe segment. Let me now continue with the key financials for the first quarter of our new financial year. The group's total revenue declined by 2.7% to EUR 590.9 million. The development of revenue was influenced by contrasting factors. Revenue recorded growth in renewable production, marketing of thermal power plants to ensure network stability, the heating business and the regulated network business in Lower Austria. These positive developments could not compensate the decline in the natural gas trading activities as well as lower energy and network distribution volumes due to the warmer weather in Southeastern Europe. In addition, there were negative valuation effects from hedges in the energy business. Finally, lower revenue was also recorded in the international project business as compared to last year.
The cost of energy expenses declined in line with lower weather-related demand for natural gas in Lower Austria, as well as for the energy in Southeastern Europe. In addition, there were positive valuation effects from hedges. The decline in revenue in the international project business was also reflected in a reduction of costs of materials and services. Based on improved energy business results, we are reporting today an increase in EBITDA by 5.4% to EUR 231.6 million. The group's EBIT was up by 32.5% to EUR 166 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 were down by EUR 3.2 million to EUR -11.8 million, which was due to the absence of prior year's positive non-recurring effects in the interest result. In total, group net result increased by 17.7% and amounted to EUR 112.2 million.
Now I would like to move to the next slide, which provides some information regarding the group's balance sheet structure. Supported by our strong operating performance, our key balance sheet indicators improved again in comparison with the values reported as of the 30th of September 2017. Net debt, including non-current personal provisions, was reduced by EUR 80.7 million to EUR 1.1 billion. Gearing decreased from 38.5% to 34.6% 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 overall picture of our good operating performance, as well as the negative weather impacts, are also reflected in the EBITDA development of the segments. Whereas the generation, energy, and network segments report improvements, EBITDA in Southeast Europe declined due to warmer temperatures.
In the environment segment, EBITDA went down compared to last year due to the development in the international project business. It is very general. Let's move on now to the next slide, which covers the generation segment in more detail. In the generation segment, renewable production benefited from highly favorable wind and water flows, as well as from the commissioning of another 10 megawatts in wind capacity. Therefore, renewable production in segment was up by 13.2%. Our thermal power plants in Lower Austria are again under contract for Southern Germany during the winter half 2017-2018. For the first time, all of our Austrian thermal power plants, which corresponds to a capacity of almost 1.1 gigawatts, are serving as a contractual reserve capacity.
During the reporting period, we received power requests on 46 days to stabilize the networks, which in the same number of the days as last year. Thermal generation volumes in this segment declined by 22.1%. On the one hand, there was an unscheduled downtime in 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 thermal generation capacities. Some French power plants were not available due to inspections, and demand for electricity in Europe was extraordinarily high due to the cold temperatures. Based on these developments and one-off effects last year, revenue in this segment was up by 29.9%. Operating expenses declined due to the lower use of primary energy carriers in line with reduced thermal production.
The results from equity accounted investees improved due to a higher earnings contribution from Verbund Innkraftwerke. Based on these developments, EBITDA doubled to EUR 48 million. The already mentioned absence of prior years impairment loss on Gorna Arda project is also positively reflected in the segment EBIT, which amounted to EUR 35.8 million. On the next slide, I will continue with the energy segment. Whereas an increase in the heat sales volumes partly compensated lower electricity sales volumes, natural gas volumes declined by 11.2% in view of warmer weather conditions. Despite these voluminous effects, the segment reported an increase in revenue by 8%. This development was supported by higher revenue from the heating business and the valuation of hedges as of the balance sheet closing date. In turn, operating expenses were higher, which was mainly due to the absence of positive non-recurring effects.
The share of results from equity accounted investees with operation in nature remained almost stable. It contains the earnings contribution from our electricity and natural gas sales company, EVG KG, which was slightly below last year's level. In total, these developments led to an improvement of EBITDA by 5% to EUR 48.5 million and on an EBIT by 5.2% to EUR 43.6 million. On the next slide, I will present the developments in our network segments. The network distribution volumes showed different developments in the reporting period. Whereas volumes in electricity distribution grids were up by 1.3%, those in the natural gas declined by 4.3% due to warmer temperatures. In view of positive tariff decisions taken by the Austrian regulator in the beginning of last year, revenue increased by 5.9%. Based on lower operating expenses, the EBITDA increased by 13.6% to EUR 98.3 million.
EBIT amounted to EUR 68.8 million, which corresponds to an increase by 18.5%. January 1, 2018 marked the beginning of a new regulatory period of natural gas distribution networks. Despite the appeal filed by several parties against the decision of E-C ontrol Austria will continue to have an advanced incentive regulation, which forms the basis of continued investments and efficiency gains in our stable regulated grid activities. Without going into every detail of the new regulation, I would like to explain its key parameters. The weighted average cost of capital, which defines the return on the regulatory asset base, was lowered to reflect the long-term interest rates levels. However, the regulator sets the weighted average cost of capital, the so-called WACC, of a company according to its efficiency. The WACC for average efficient companies was set by 4.88%.
More efficient companies can benefit from a higher WACC, which is the case of EVN's grid company. Furthermore, the WACC on new investments in hub is set at 5.2%. Finally, please note that the regulator has also lowered the general productivity factor from 1.95% to 0.67% per year. With the beginning of the new calendar year, the Austrian regulator has also determined new network tariffs. Electricity network tariffs for household customers are up by an average of 2.4%, whereas natural gas network tariffs are down by an average of 16.2%. The sharp reduction reflects the correction of higher network volumes in the past years and already considered the new level of weighted average costs of capital. The new tariffs will impact our Austrian network business as of the second quarter of this financial year. On the next slide, I will continue with the Southeast Europe segment.
The business development in Southeastern Europe was influenced by substantially warmer temperatures in both Bulgaria and Macedonia during the first quarter 2017/2018. Therefore, network and energy sales volume remained below prior years' level. The decline in volumes is also reflected in lower revenue, which decreased by 6.1% to EUR 239.9 million. Operating expenses declined in line with lower energy demand. In total, EBITDA in the segment declined by 35.6% to EUR 15.6 million. Based on a stable depreciation, EBIT amounted to minus EUR 0.2 million as compared to plus EUR 8.6 million in the previous period. I would like to conclude with my presentation of the segments with the environment segment. The development in the environment segment is influenced by the acquisition and realization of orders in the international project business. These activities are cyclical by its nature.
Whereas the international project business had shown a strong performance during the first quarter of the previous year, it was less dynamic in the reporting period. Therefore, revenue of the segment declined by 36.5% to EUR 41.8 million. The operating expenses also went down in line with the development of the international project business. Therefore, EBITDA amounted to EUR 7 million, which corresponds to a decline by 67.8%. In view of the stable depreciation, EBIT amounted to EUR 1.2 million. Financial results amounted to minus EUR 0.3 million. After having finished the first out of four wastewater projects in Macedonia during the reporting period, we were working on the realization of six general contractor assignments for the construction of wastewater treatment projects in Croatia, Macedonia, Poland, and the Czech Republic as of the 31st of December 2017. The order book was about EUR 40 million.
We are pleased to report today that we were awarded a new order for a general contractor project in Bahrain in January. The contract is expected to be signed in the coming months. As part of the project, our German subsidiary, WTE Wassertechnik, will extend the capacity of an existing wastewater treatment plant for the capital of Bahrain, such that in future, the plant will purify the wastewater of about 1.6 million people. In addition, the project includes the construction of a new sludge drying and sludge incineration plant. The contract value of this project is about EUR 170 million. The construction period will be 36 months, and after completion, WTE will be responsible for the operation of the plant for a period of 10 years. Please note that we will not act as an investor in this project and that we will not be required to provide any financing.
As you know, we are also involved in the tender process of another even bigger wastewater treatment project in Kuwait. Together with our Kuwaiti partner, we are a preferred bidder and are in exclusive negotiations. We expect that the tendering authorities will formally award the contract in the course of 2018. With this, I conclude the presentation of the segments. On the next slide, I will continue with the development of our group cash flows. Due to the sound operating performance, the gross cash flow rose by 17.2% to EUR 233.1 million. Cash flow from operating activities amounted to EUR 115.4 million, which corresponds to an improvement by EUR 90.1 million. This increase was supported above all by changes in working capital and the absence of non-recurring effects.
The comparable prior year value was influenced primarily by the reduction in liabilities resulting from the arbitration decision for the Walsum 10 power plant. Last year, the cash flow from investing activities included a similar corresponding positive one-off effect to the reduction of the investment for the Walsum project. In view of the absence of this effect, the cash flow from investing activities amounted now to minus EUR 133.2 million. The main focus of investment was on electricity, gas, and telecommunication grids. Besides that part of the group's liquidity was invested in the main short-term financial assets, which is shown in cash flow from investing activities. The cash flow from financing activities mainly reflects scheduled repayments of loans. Dividend payment took place in January and will therefore be included in half year's figures. The net change in cash and cash equivalents amounted to minus EUR 57.9 million.
Please note that the net debt was reduced by EUR 80.7 million during the first quarter of the financial year. I would like to conclude today's call with a brief update on the outlook for the group. I would like to remind you that the past financial year was influenced by a number of exceptional circumstances, which had a positive effect on group net results for 2016/2017. I would like to confirm the outlook, which we have given in December. Assuming average conditions in the energy business environment, group net results 2017/2018 should return to a normal level that reflects the average of 2015/2016 and 2016/2017 financial year.
There are factors that could influence the group net result, including the regulatory background, especially in Southeast Europe, the proceedings currently in process in Bulgaria, the remaining proceedings over the Walsum 10 power plant project, as well as the progress on the 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 in each of the coming financial years. Thereof, approximately EUR 300 million per year will be directed to our Lower Austrian activities. In line with such an investment strategy, we remain committed to our integrated business model along the value chain of the energy business.
We believe that our integrated business model proved to be particularly resilient in the current uncertainty and challenging market environment. I've now reached the end of my presentation of EVN's results for the first quarter of 2017/2018. I'm now looking forward to answering your questions.
Ladies and gentlemen, if you would like to ask a question, please press Nine followed by the Star key on your telephone keypad. If you wish to withdraw your question, please press nine followed by the star key again. Please press nine star now to state your question. Our first question comes from Mr. Peter Crampton, calling from Macquarie.
Good morning. Two questions, if I may. Firstly, looking at your guidance for this year and your Q1 results with net income up around 18% year-on-year, there's an argument that your guidance is too conservative. The second question relates to the balance sheet, which is starting to look very, very strong. I was just wondering what your thoughts were going forward, what you'd do with the quite substantial net debt headroom you have, whether we're looking a large acquisition or a step up more in dividend. Thank you.
Yeah, thanks, Peter, for both question. As you might expect, I'm not able to change any wording, yeah, which we were using, because it is still the first quarter of the ongoing year. On this basis, we are following quite closely how the weather and the supply is developing. On this basis, in regarding the already mentioned uncertainties on the external factors, we are very carefully drafting our words here. Maybe after the first half of the year, I can give you an update regarding the outlook for this year and regarding the dividend. The dividend, as you have seen, we have increased the dividend on the background of last year's exceptional years. Let's see how the year is developing, and we are still in the cycle of high investment, as I've mentioned before, with around EUR 400 million per year.
Majority goes into our core area in Lower Austria, I think this also has to be reflected in the overall positioning of the management.
Okay, perfect. Thank you very much for your answers.
Our next question comes from Lukas Kothbauer, calling from Kepler Cheuvreux.
Good morning, gentlemen. Thanks for taking my questions. Coming back to the gas network tariffs, which are down by 16% in Lower Austria, is it fair to assume a clean effect of about 3% resulting from the underlying change in regulatory parameters and the rest being a volume effect? Also, there have been impairments in the past when network tariffs were reduced. Is this off the table for this year in the network division? The third question, some days ago, ČEZ announced its sale of its assets in Bulgaria, resulting in the energy minister stepping down. Could you see EVN also pulling the trigger in SEE? Could you also see any implications on the regulatory framework in Bulgaria resulting out of the energy minister stepping down? Thanks.
Okay, I think very valuable questions. First of all, please take into consideration that the new gas tariffs are effective since the 1st of January 2018. Therefore, they are not already influencing the first quarter of our business year. It's the ongoing year from now on which is influenced by this gas tariff. This is a five years period, where now the main factors have been fixed and the WACC has been updated, therefore, during the current year, you will see the results and the influence, which will be seen in our results in the network business here. Regarding the second question, of course, we are following very closely the development in Bulgaria. As you can imagine, over the last 14 years, we have seen different periods, we are still expecting the decision of the ICSID Arbitration Court from Washington during 2018.
I'm sure they will give some guidance regarding the stability of the regulatory framework.
Thanks.
Our next question comes from Teresa Schinwald, calling from Raiffeisen Bank.
Hi. Good morning. Sorry for the delay. I have two questions regarding your outlook. First, for the operating results in Southeast Europe, what are you expecting for this year? You've been so graceful to provide us with the guidance on this segment in earlier years. My other question relates to your hedging outlook. You have more volatility in your hedging position valuation now. Could you provide us with some indicators? Related to that also, is there a change in your hedging strategy with the separation of the Austrian and German markets as of the fourth quarter of 2018?
Yes, Theresa. As we have mentioned in calls in the recent past, we are aiming at midterm result between EUR 40 million and EUR 60 million in Southeast. In this first quarter, beside of the temperature effect, we have a couple of other effects where we are negatively influencing the first quarter. I am still optimistic that we will be between EUR 30 million and EUR 40 million, even in this year, independent from ongoing decisions from regulatory authorities, which we are following very closely. This to your first question. To your second question regarding the hedging, we can confirm that of course, the volatility in the energy business is also influencing our short-term optimization, but it's very hard to give there an expectation because it's defined by the state of the balance sheet.
Therefore, we are conservative here, but I am not able to give you any expectation because this would be expectations regarding how the energy markets on the short-term spot markets are developing. We have not changed our hedging policies, but we are expecting higher wholesale prices in Austria, somewhere on average between EUR 2.5 and EUR 3 per megawatt hour. This is the more or less expectation by the experts in the industry.
Thank you very much.
At the moment, there are no further questions, I'll repeat once again that if you would like to ask a question, please press nine followed by the star key on your telephone keypad. Please press nine star now to state your question. There are no further questions at this time, Mr. Szyszkowitz.
Thank you again for joining today's conference call. Please join us again on Wednesday the 30th of May, 2018, we will present the results of the first half of 2017/2018 financial year. Goodbye.