E.ON SE (OTCPK:EONGY) Q2 2022 Earnings Conference Call August 10, 2022 6:00 AM ET
Company Participants
Verena Nicolaus-Kronenberg – Head of IR
Leonhard Birnbaum – CEO and Chairman of the Management Board
Marc Spieker – CFO and Member of Management Board
Iris Eveleigh – Head of Competition and Antitrust Law
Conference Call Participants
Aaron MacNeil – TD Securities
Rupert Merer – National Bank
Jeff Osborne – Cowen & Company
Michael Glen – Raymond James
Craig Shere – Tuohy Brothers
Chris Souther – B. Riley Securities
Rob Brown – Lake Street Capital Markets
Greg Wasikowski – Webber Research
Verena Nicolaus-Kronenberg
Dear analysts and investors, welcome to our first half results presentation. Many thanks for taking the time today to listen to us in such a still dynamic market environment. I’m here with Leo and Marc today, who will guide you through our most recent developments. As always, we’ll leave enough time for questions after the call.
Many thanks, and over to Leo.
Leonhard Birnbaum
Thank you, Verena. A warm welcome also from me as well. Now the first half of 2022 was obviously strongly impacted in every respect by the Russian war against Ukraine. And the energy industry has been spotlight since the end of February. But even though it was less visible to the public, the current energy crisis has really actually started during Q4 last year.
So what are my messages for today, which then Marc will elaborate in detail? It’s first, despite the massive challenges we are facing, I would start with a positive sentiment. Today, we are, in Europe, much better prepared as a society than we were a few months ago.
Second, we at E.ON, we have done our part to get there. We have taken responsibility. We are helping our customers across Europe. We’re also helping regulators and politicians to master the extraordinary challenges in the short term.
Third, we are also helping to find a remedy in the long term by further accelerating the energy transition. E.ON has pushed ahead with its growth strategy in parallel to outstanding crisis management, and we can show you today tangible progress.
This is, however, I would just mention it here, an extraordinary achievement by our employees. And last, we have delivered a successful second quarter due to our resilient operations, and we can reiterate our group guidance for ’22 and our promise for dividend growth of up to 5% annually until 2026 and further growth beyond.
But now in more detail. We are better prepared because in the past few months, politicians and the energy industry have been lining up to an extraordinary extent, and we have lived up to our responsibility. We have worked intensely together and under high pressure to overcome the current energy crisis.
The short-term crisis is not solved. However, we are in a better position. Gas storage facilities have continued to get filled. Strategies for crisis management have been worked out on a national and on a European level. Critical decisions have been made very fast and efficiently. Legislative changes has been delivered. Diversification of supply has been tackled. And we at E.ON, we have made our contribution to be part of the solution.
Now governments have shown an unprecedented pace in introducing and adapting energy policies to respond to the current challenges. And it is reassuring that while being fast, politicians have resisted the temptation to fundamentally challenge the functioning of market mechanisms. The key to create an incentive to save gas is to set a clear and unfortunately, a higher price signal. This is the template for most of our markets.
On the flip side, governments have also understood how important it is to support customers and to protect suppliers to stabilize the retail markets, and this means that a higher energy price signal needs to go hand-in-hand with relief somewhere else.
Being now the country with the highest absolute exposure to Russian gas volumes, Germany has implemented a solution that ensures direct financial support for the importers of Russian gas while offering an instrument to pass through the prices without a long delay. This has prevented a collapse of the market.
In particular, the new surcharge to allocate the additional cost upon consumers is important. This surcharge allows that the increased replacement cost of Russian gas deliveries can be distributed evenly and predictably to all customers nationwide. And with that instrument, the government is preventing that only those customers whose suppliers happen to be affected by the lack of supplies from Russia get the full burden of the additional cost.
Marc will explain to you the financial impact from this new regulation in a minute. I consider this to be a really constructive solution that we can actually manage quite well. Additionally, we have seen upgraded support schemes helping vulnerable customer groups such as in the U.K. and in the Netherlands, as well as tax reductions as instruments to ensure affordability.
Finally, we also appreciate the EU member states have committed to reduce gas demand by 15% over the coming winter, and the combination of all of these measures makes us confident that we can master the short-term challenges. We at E.ON have been taking responsibility, and we have been strongly involved in the legislative conversations with the government throughout this period, and we have had the opportunity to support with our expertise.
We’re also helping our customers where needed. And for stressed customers, we have payment assistance programs and we work together with agencies, counseling centers, welfare offices to advise customers and work together to find fair solutions where this is still needed.
So much for the short term, and many people seem to be overwhelmed by these short-term challenges. Yet, we must also assure that the energy transition, now more than ever, moves forward. The energy world of the future consists of sustainable and decentral energy solutions, physically and digitally connected. Otherwise, it will not work.
And with our growth strategy based on sustainability and the digitization, E.ON is part of exactly this future. We have, therefore, continued to work consistently on the implementation of our new growth strategy during the crisis. And clearly, the major growth delivery for the group will come from our network business, where we are growing our power RAB by at least 6% annually under 2026 and further growth beyond.
But I would also like to give you a few examples from our other business segments. Demand has never been higher in our Retail Solutions business, which is driving the decarbonization of private households and mobility. We see people striving to become more independent. Increasing energy prices are a natural driver of that. Payback periods for investments in solar panels or heat pumps have shortened for more than 10 years to only 8 or even 6 years, respectively.
And in the first half, we have been able to increase our revenues in this area by 40% year-on-year, backed by a strong demand development with a clear target to achieve more than €1 billion revenues over the full year.
Already in the first half of this year, we sold roughly 22,000 new residential solar and battery storage solutions and 40,000 modern heating systems, and that makes us the largest supplier of energy solutions to decarbonize private households in Europe. And this achievement has clearly also exceeded our expectations.
Next to our solutions for residential customers, we see also more and more industrial clients and cities asking for sustainable energy solutions. Via our Energy Infrastructure Solutions portfolio, we offer a variety of products from heating and cooling to waste heat recovery and energy efficiency management. That makes us the best partner in offering integrated solutions and is resulting in EBITDA growth of 23% year-on-year, coming actually from a high starting base, not based on a low starting base. Again, an outstanding and great achievement.
We’re also progressing on the digital front. We are significantly expanding our broadband business. As announced in July, we are establishing a joint venture with Igneo Infrastructure Partners for the rollout of high-speed broadband infrastructure in Germany. and a new 50-50 joint venture plans to provide high-speed broadband connections to more than 1.5 million households and wholesale customers. We are looking forward to a great partnership with Igneo.
At the same time, we have also not forgotten about our housekeeping topics. We have finalized the migration of all U.K. retail customers to our new IT platform. And whilst that is no news to you, we obviously have also shut down respective IT systems. This is a remarkable success, and it was, again, delivered during the pandemic and during the energy crisis, a huge complement to the U.K. team.
So before now handing over to Marc for more detail, let me summarize the positive messages for you as investors. The visibility on short-term market interventions by politics and regulators has increased significantly. The growth opportunities from the energy transition for E.ON materializes faster than anticipated, and we are consistently implementing our growth strategy, which we presented last November.
And last, the resilience of our business model and the professional attitude of our whole organization once again becomes evident. We are confident to deliver our results despite the turmoil in the market. We keep our guidance for the full year. And finally, we are absolutely committed to delivering year-over-year up to 5% dividend increases for our shareholders.
And with that, over to you, Marc, for more detail.
Marc Spieker
Thank you, Leo, and a warm welcome from my side as well. Despite the challenging market environment Leo said, we are delivering what we promised operationally and financially. And on that basis, I can reconfirm our confidence to the successful delivery of our financial targets going forward.
Why do I continue to be so confident? Well, we’ve made significant progress year-to-date in our core business, so that I’m very confident in our 2022 delivery. On top, our financial position is improving with increased financial leeway for long-term growth. Finally, German legislation to encounter the crisis of specifically German gas importers is now visible and clear. And for us, it will result in a very limited, temporary cash effect, so very well manageable for us.
Let’s start with our year-to-date operational performance. As usual, with a group EBITDA of €4.1 billion in the first 6 months, we are fully on track to deliver the expected recovery pattern that we announced as of Q1. The main drivers, to remind you, are the realization of synergies as well as additional efficiencies, investment-driven business growth and tariff increases in our energy retail business.
Turning to our network business. It has been performing particularly stable during times of energy crisis. Here, we were able to achieve an EBITDA of €2.7 billion. Price-driven effects from network losses continued to play a role in the second quarter. Nevertheless, we have also seen how the recovery for network losses from last year are already starting to kick in, and this underscores that any short-term earnings impact from that end will be economically neutral for us at the end.
Synergies in the networks business are on track just as the expected recovery of network results in Germany. The milder weather during the first half led to a temporary high double-digit million euro burden due to lower wheeling volumes. Also, this effect will nevertheless be recovered over the next years according to the established regulatory mechanisms in our markets.
Let me move to our Customer Solutions business, which performed equally solid and provided about €1 billion of EBITDA to our first half results. Key to this achievement was our ability to successfully adjust end customer prices, reflecting the massive increase in wholesale energy prices.
It is worth highlighting that as of today, we are not seeing any material worsening in payment behavior. Of course, we are carefully monitoring our customers’ payment behavior, and we are constantly checking lead indicators such as increases in receivables and overdue receivables, changes to installment plans, insolvency rates, credit scorings, amongst other things. And as Leo already underlined, E.ON is doing its utmost to support customers in these difficult times who struggle with affordability issues.
Our solutions businesses benefited from increasing demand and another strong financial quarter. Leo laid it out, EBITDA for our Energy Infrastructure Solutions business grew year-on-year 23% and now stands at half-year EBITDA contribution of €330 million. Our retail B2C solutions revenue grew by 40%. Revenues are now already close to €600 million, and we are full on track to achieve our full year target of more than €1 billion in revenues.
Finally, our noncore business is, as expected, significantly below last year. Key reasons are the emission of the positive one-off from the nuclear production rights settlement and the phase out of the 2 nuclear reactors as of end last year. This was partly compensated by rising wholesale prices.
Moving on to our financial position. And with that, to my second point, our financial position is strong. On top, the seasonal recovery in operating cash flow is unfolding as we promised. Economic net debt has been reduced in the second quarter by €1.4 billion. The strong operational cash flow compensated net investments as well as dividend payments.
Furthermore, strong increase in interest rates results in a significantly lower pension provision, which includes a negative performance of our plan assets and particularly a value adjustment of our Nord Stream, one participation, which, as you know, is being held as part of our pension plan assets. Note that the asset value of Nord Stream 1 shareholding now stands at €0.5 billion. On that basis, we expect our debt factor to sit comfortably within the target range of 4.8 to 5.2x net debt to EBITDA by the end of this year.
In terms of long-term funding, we are in an equally strong position. We are already well covered for this year. We may look to start prefunding 2023 depending on market circumstances, and we will also start to look at additional markets beyond euro benchmark bonds to further broaden our investor base.
Now to my third message, the visibility on our largest market, Germany, has increased considerably. The surcharge stipulated in Section 26 of the Energy Security Act has been detailed out now in an ordinance, which became effective on August 9.
For E.ON, its implementation will have fairly limited financial impact. How will this exactly unfold? Let me put it into context first. Out of our 14.2 million energy sales customers in Germany, only 2.3 million or around 15% are gas customers. Operationally, we will continue to receive our gas from our wholesale suppliers as contracted.
The extra costs incurred by them for replacing Russian gas will be temporarily aggregated by a well-established intermediary, Trading Hub Europe. This intermediary will ask all German retail suppliers like us to collect a specific surcharge per kilowatt hour from its gas customers, covering the additional costs.
The surcharge is currently estimated to be between €0.015 and €0.05 per kilowatt hour for every gas customer, and that amount is going to be detailed during the course of the next 1 or 2 weeks. We expect Trading Hub Europe to publish the exact level of the surcharge actually during next week.
We will implement the surcharge towards our customers within Q4 by way of a regular price adjustment, so payment — and payment to Trading Hub Europe is expected to start in December. Financially, this is, hence, just a pass-through item for E.ON. We expect a very limited and temporary impact on our working capital and, actually, no material impact on our earnings.
So to sum it up, E.ON continues to be in an operationally and financially strong position to manage the impacts of this energy crisis. Let me close my part with our 2022 guidance. We fully reconfirm our confidence to achieve our guidance for 2022.
For our Energy Networks business, I already mentioned during our full year presentation that depending on energy prices and their impact on network losses, we may end the year at the lower end of our segment guidance range. Based on how prices have developed during the first half of this year, we now confirm that our Energy Networks earnings will, in fact, turn out at the low end of the €5.5 billion to €5.7 billion range. Be reminded in this context that this is of temporary nature and will be fully recovered in subsequent years, just as we are already, this year, recovering network losses from last year.
Our Customer Solutions business is well on track. Price increases have been implemented as planned. Our guidance in that business includes higher-than-average risk buffers for a potential volatile second half of the year. And all in all, this backs up our high confidence level on guidance achievement also for that segment. Rising energy prices finally have a positive effect on our noncore business with a remaining open position of roughly 1 terawatt hour. We hence upgrade our noncore guidance by €200 million to €0.8 billion to €1 billion, reflecting the mark-to-market of this open position.
We have delivered an excellent operational performance during the first half of this year. Thanks to that, we can again comfortably reconfirm our group guidance for the full year. The single biggest risk for the delivery of our group guidance remains an unusually cold winter in combination with tight gas supply. As said, for this reason, our guidance includes higher-than-normal risk provisions for the remainder of the year. Therefore, rest assured that we will deliver what we promised even during these challenging times. And with that, I hand back to Leo.
Leonhard Birnbaum
Yes. Thank you, Marc. Ladies and gentlemen, so you see we have been able, during the first half of this year, to really successfully master short-term challenges, unprecedented short-term challenges in the market.
And for energy supply, for our customers, for our E.ON and for you as our shareholders, we stay equally committed to deliver the solutions to the long-term challenge, which remains a sustainable transformation of our energy system. As an obvious result of the crisis, this transformation is already accelerating, and I am happy that the entire industry has started to work together to solve the problems associated.
The politics is moving. Under the label Repower EU, the European Commission aims to mobilize up to €300 billion to end EU’s dependence on, not only Russia, but fossil fuels in general. And at the same time, to accelerate the expanded transition to sustainable energy.
In this context, the overall renewable energy target for 2030 has been increased from 40% to 45%. To achieve that, the EU solar strategy has doubled for the voltaic capacity targets by 2025 by introducing a legal obligation to install solar panels on new public and commercial buildings as well as on new residential buildings.
This is a real effort, but all of that needs to be connected to the grid, which requires sufficient infrastructure. But even more, 10 million tonnes of domestic renewables hydrogen and 10 million tonnes of imported hydrogen are to replace natural gas, coal and oil in hard-to-decarbonize industries and transport sectors by 2030. Again, a significant increase and again, something that requires sufficient infrastructure.
I could go on. But for E.ON, all of this means further tailwind and the confirmation of our strategy. Without our infrastructure and without our digital solutions, green electricity or green gas will not reach the customers. And this is the core of our business at E.ON.
And with that, over to Verena for Q&A. Thank you.
Verena Nicolaus-Kronenberg
Many thanks to Leo and Marc for their insightful presentations. Before we now move to the Q&A session, I just wanted to share a brief personal announcement with you. After 5 years of exciting IR work both at Innogy and E.ON, I have decided to make the next step within E.ON and focus more on 1 of our 3 strategic pillars: digitalization.
As of October 1, I will join the E.ON Digital Technology team as Managing Director, Finance. To ensure a smooth transition, the new Head of Investor Relations, Iris Eveleigh, has already joined the team and is very much looking forward to personally get to know you over the next weeks during our roadshow activities. So please join me in wishing Iris as a warm welcome in her new role. And just so that you are able to already connect a face to the name, Iris is joining me here on stage.
Marc Spieker
Many thanks, Verena. And of course, let me take this as an opportunity now also to add some further remarks. First of all, Verena, I would like to thank you for all your efforts within the Investor Relations team during the integration of E.ON and Innogy over the past years. You have successfully positioned E.ON on the capital markets as a sustainable, digital and growing company, in particular, with the Capital Markets Day in 2021.
In turbulent stock market times, industry times, and when I look at Innogy, [baked, envelio], so corporate times, you ensured the trust of investors. At the same time, I’m very much looking forward to working together with Iris in her new role. Iris joined E.ON in 2007. Over the past 15 years, she’s gained extensive experience in various management functions. She’s also demonstrated pretty successfully how to manage extremely complex and time-critical projects such as the entire antitrust clearance for the E.ON-Innogy combination.
I am sure with that skill set, Iris will be an outstanding ambassador for E.ON in the capital markets and a trustful steward for you, our investors.
So please also join me in wishing Iris a warm welcome and all the best for Iris and Verena in their new roles. Thank you.
Iris Eveleigh
Thank you very much, Marc and Verena. I’m very much looking forward to meeting you all and discussing with you our E.ON story in these truly exciting times.
Verena Nicolaus-Kronenberg
Many thanks, Marc and Iris. And yes, now let’s start the Q&A session.
Question-and-Answer Session
A – Verena Nicolaus-Kronenberg
So we have, already, irregular setup. I saw that Carmen already instructed you how it all works. It would be great if you could just turn on your camera when you are speaking so that we can see you here on the stage. And the first question now comes from Wanda from Credit Suisse. Wanda, over to you.
Wanda Serwinowska
Congratulations on your new role. We will be missing you. Two questions from me. The first one is on the Reuters headline, which says that basically E.ON is open to discuss the nuclear asset life extension. Can you just clarify on the technical possibility? Is it possible, from the technical point of view, given the nuclear fuel mobility and the maintenance that was skipped, if I’m not mistaken?
And the second question is can you comment on the bad debt risk? What — I mean, what have you seen so far given that you started passing through a higher commodity cost?
Leonhard Birnbaum
All right. Wanda, on nuclear. First, it is technically possible. In the specific case of Isar II, we have also announced that we would be in a position to extend production for a certain period of time without EU fuel rods. So in that sense, there is an option.
But whether this is a relevant option depends on a political decision, which needs to be taken. You all know that there’s an ongoing stress test on the energy market situation, energy networks or system, maybe energy system situation is the best word, which is supposed to come to results in the next weeks. And based on that stress test, the government has to evaluate whether given the risk position, risk-reward position, which becomes visible in the stress test, they want to revise their position on the end of the nuclear lifetime at 31st of December 31.
As it currently stands, 31st of December is kind of like the end. But in case the government would come to the conclusion that it would be desirable to change that position and they would approach us, we would certainly engage in such discussions. But I would not like to speculate, like, how long, when and how and whatever in detail.
It’s now — and we have been adamant and crystal clear in the market, it’s now up to politics to make up their mind and make a decision. We can obviously support to what extent we can support. We have communicated to the government, but now it’s a political — it’s really a decision of politics that they have to take. And on bad debt?
Marc Spieker
Yes, Wanda. On bad debt. So you certainly remember from our past calls that already, throughout the last 2, 2.5 years, we have been provisioning at exceptionally high rates for bad debt. And that means that in some of the markets, which almost doubled on a constant price level, our provisions for bad debt.
We are now seeing rising steeply prices. With that, you should expect that we maintain just the same rate. And with that, the absolute levels will continue to grow, just reflecting higher prices. What is essential for us is how much of those provisions actually being used?
And so what — effectively — cash, effectively, needs to be written off. And those levels are still at historically low levels. And so that’s why we are continually taking prudent provisions for that. And we are putting a lot of operational effort on enabling our call centers to react and accommodate for our customers. But it’s also clear that we’ve seen unprecedented activities from governments to provide support to vulnerable customers. So it is a topic which we closely monitor, but we haven’t seen yet a risk materialized.
Wanda Serwinowska
Can I just quickly follow up on the nuclear? I mean, I saw some headlines in Isar II can work for another 3 months at the end of March if you lower the load factor. But the question is, if you need to run it for a longer period of time, how long would you need to wait for more fuel to come and of new fuel to come? Do you have any view on that? I know it’s a highly speculative question at this point.
Leonhard Birnbaum
Yes, it’s very specific. So the reports are true. We can extend the lifetime of Isar by a few more months at a slightly reduced load. Then eventually, we would need to put in new fuel if production beyond a few months would be required and requested.
But as I said, that is something that politics now first need to get their hands around. We would assume that we would be — that suppliers would be quite flexible. But again, that is not a relevant discussion unless we get a very short-term signal from the government. And if not, then the 31st of December is where it stands.
Verena Nicolaus-Kronenberg
Thank you, Wanda. And the next question comes from Oscar from Santander. Oscar, the floor is yours.
Oscar Nájar Ríos
Congratulations for your new role.
Verena Nicolaus-Kronenberg
We cannot hear you properly, Oscar.
Oscar Nájar Ríos
Yes. Now I put a microphone. Sorry. Congratulations for your new role. Hopefully, you enjoy it. Just 2 quick questions. A follow-up from the previous 1 regarding the nuclear impact. I mean this is not relevant for valuation, but just a technicality. If there is a — the postponing of the closure of the nuclear plants, could that impact your €801 billion EBITDA target? I mean if that could have a very tiny, tiny, a small impact, but just to know it.
And the most important question for me is supply orders. You have said that EIS is included in — that is included here has been going very well. 23% increase in EBITDA, that the rest of the business are going well. But the total amount has decreased more than 60%. So what is going wrong here? Is Romania is still very weak? When is going to improve the pure supply margin in this division? And what are you expecting for the full year? And for 2023, there’s going to be a recovery to normal levels of the rest of the businesses?
Leonhard Birnbaum
Yes. On nuclear, I think that’s very fast. There is no impact over a lifetime extension. No relevant impact on lifetime extension on 2022 numbers period, yes. And we have no numbers for 2023, because right now the plan is the current law, which means end of production. I think that is all on nuclear. Now on supply, Marc?
Marc Spieker
On supply, I mean, you specifically asked for Romania. So on Romania, indeed, we saw a weak first quarter that brought the business deeply into losses. We also reported back, as of Q1, that a new regulatory framework had been put in place in order to deal with the current crisis situation, and we do see that this framework actually works.
If you look at our isolated Q2 results, they have stabilized, breaking even again. So we are seeing mildly small but positive contributions from Romania during the second quarter, and that’s the basis for our confidence that we will continue to see an improvement and also a recovery of some of the losses, which we have been incurring during the first quarter. So in that sense, stabilization, that’s the first step, already delivered. And we do expect that the recovery will also materialize as we expect.
Verena Nicolaus-Kronenberg
Thank you, Oscar. And the next question comes from Deepa from Bernstein. Deepa.
Deepa Venkateswaran
Congratulations, Verena, and all the best for your new role.
Verena Nicolaus-Kronenberg
Thank you.
Deepa Venkateswaran
My 2 questions. Maybe I’ll start with the net debt. Marc, if you — if the interest rates and commodities stay where they are, where do you expect net debt to be?
And particularly, what should we expect for working capital? I mean, typically, you see a reversal of the first half working capital. So just wanted to know whether the surcharge or any of these things moves.
And the second one, Leo, more broadly on the nuclear you’ve talked about Isar II, but maybe just taking a step back. I know the State of Bavaria is very keen. But what do you think about the remaining nuclear plants that you have outside Bavaria? Is there a chance? Or I’m not aware of a stress test, but could you maybe talk about nuclear’s future in general in Germany?
Marc Spieker
Deepa, let me start then with the economic net debt forecast. You need to understand that in the current volatility environment, it doesn’t make any sense now to give you a guidance on — a point guidance on an absolute value.
What we can reassure you is that we will be comfortably, comfortably within our range of 4.8 to 5.2. What we do see is a considerable volatility in interest rates, which then impacts discount rates in the level of — the exact level of pension provisions. We do see that plan asset performance is quite volatile in both directions, strong recovery just now since the closing.
We also see that rising inflation rates will, already this year, then also have an impact on the inflation assumptions for wages and their impact on pensions. So that will be partly compensating.
So there are a lot of moving parts. I think that’s the message. But generally, the net effect of all of those moving parts will be that our economic net debt relative to our levels a year ago will be considerably lower, and that’s why we are so comfortable about being in our guidance range.
And where exactly at the end of a closing in December we will be? On working capital, here, actually, we are quite confident that with all the management focus we have put on that during the last years, that we have fairly good control over it. And hence, you have seen the recovery that we promised already this year and also the impact from the [EnSaG] law in Germany is fairly limited. All that is a reflection of how we are managing our working capital. So on that end, actually, I’m pretty, pretty confident that we will manage it at the normal seasonal levels and no additional impact from the crisis.
Leonhard Birnbaum
Yes. And Deepa, now I was smiling when you said, can you comment on the general future of nuclear in Germany. That’s a really difficult one at this point in time. But maybe, if you like additional information, we have 3 nuclear stations yet under operations. You know that one from EnBW, which is also in the South in Baden-Württemberg in Neckarwestheim; one in Bavaria, which is Isar II; and one in Northern part of Germany, Emsland owned by RWE.
Now you also know that we have an ongoing stress test. Now the stress test can actually come to 2 different solutions. It can show — I mean, it can show no risk for supply or it can show risk for supply. But it could — if it were to show, let me call it, situations in which security of supply would be in danger, that could be on 2 grounds.
Number one, kilowatt hours missing. In which case, there would be a perspective for all stations that provide in kilowatt hours. The second one would be grid stability issues, which would be specifically an issue for Neckarwestheim and Isar, which are both located in the South, where we have less production, less renewables, less wind and higher demand. And therefore, it could also be an outcome that the stress test says we need specifically the 2 Southern stations, Neckarwestheim and Isar. And actually, I would put them both in the same bucket. I would differentiate between the 2.
Or it could show we have both: we have a kilowatt hour and stress situation again, which would be, as an outcome, the same. All stations would then be needed to the extent possible. So now I don’t want to speculate what a stress test is going to show because this will become public in the next weeks and then you will see it for yourself.
In any case, if there is a future for German nuclear beyond the 31st of December, clearly, Isar’s going to be part of that. Now you also mentioned that Bavaria is especially keen on that. Yes. Why? Because if you look at dispatchable guaranteed production in the South, it’s actually quite limited. And if you take out gas, for obvious reasons, then it’s extremely limited what they have. And therefore, obviously, Bavaria, from a security standpoint, sees a higher need than others and is, therefore, very keen..
Also, obviously, the political party ruling Bavaria is a different one from that in Berlin, which also plays a role. Yes, so that is it. Now the future in general you have to see if the government decides that the risks are unacceptable and if they decide that they would like to see an extension, then the question is which ones for the next winter? Or do they want to see something longer? We will discuss that if and when we are confronted by them with that.
Verena Nicolaus-Kronenberg
Thank you very much, Deepa. Wow, quite some questions on nuclear. So maybe some others also on our core business. Next one in the chain is Rob from Morgan Stanley. Rob. Please go ahead.
Robert Pulleyn
I’m going to keep with the theme and ask one question on nuclear and then move to the core business. So on nuclear, you mentioned around the extension at Isar II into 2023. Would you be willing to say how much terawatt hours could be eked out of these fuel rods before they need replacing? And how long fuel — and how long fuel rods — new fuel rods would take? I mean, we’ve heard estimates of 12 to 18 months, which of course, would potentially make that relevant for the winter after next, but of course, also, we’d need to get going.
And the second one on the core business. Could we get a little bit more clarity around the moving parts in networks, i.e., how much technical losses have been recovered from last year that Marc alluded to? How much the weather impact was? And also, could you provide a bit of color as to how you can have clarity on what the technical losses will be in 4Q given the amount of volatility and everything going on?
Leonhard Birnbaum
Rob, if you allow, I cut a little bit the topic of nuclear here. So we have no specific plans for next year for the production. We have no terawatt hours, no whatever orders in place. Because, first, now a political decision needs to happen, whether this is relevant at all.
And before this political decision has happened, I would not like to speculate on upsides, downsides, costs, timelines, terawatt hours, et cetera. So please understand that we don’t think it’s wise to now get into a wild guessing game. What might come out of the stress test might also come out that the government just sticks to its position.
So apologies for being a bit black and white now, but I think we need to set the record straight here. Currently, 31st of December 31, everything is over. If these changes, we can discuss and then certainly, we will also provide you with an update eventually, but one step after another. Marc?
Marc Spieker
Yes. Rob, on network losses and impact from mild weather. So mild weather was particularly, of course, initially during the first quarter, where we saw both Swedish and German networks businesses specifically, a burden or a deviation from a normal temperature expectation, high double digit. So €90 million, €100 million, which is, in both, markets recoverable by network regulation. So again, that’s a time shift. That’s not a value impact.
When it comes to network losses, price-driven deviations, and that’s what we are talking about essentially. Same mechanism, as you know. I just want to nail that down again and again. So it’s not economically neutral. We had seen last year, as prices had already been steeply on the rise throughout the second half of last year, we saw about a €200 million burden last year. Large part of that is already being recovered this year. As prices have continued to increase, we see another €150 million, €200 million amount, which we would expect on the basis of prices during the first half.
That is sensitive. So if prices continue to stay at the currently very high levels, we will continue to build up network losses. But again, that’s all something then for recovery in subsequent years. Where we stand, and that brings us to the low end of the guidance, is that we recover a large part of last year, but incur between €100 million and €200 million across the markets during this year, additionally on top of what we saw last year.
Leonhard Birnbaum
With a net effect of €100 million, minus.
Marc Spieker
Yes, net effect cannot — if you compare prior — how do results this year compared to last year, that’s actually not such a big difference. It’s a large — net — gross impact occurred last year. And this year, we see, already, a recovery, so that the absolute impact last year versus this year is, up until now, not such a big difference, actually.
Robert Pulleyn
Okay. I think I followed all the moving parts. Given your understandable answer on the first question, and I respect that, could I just ask a separate core question then, which is U.K. retail look particularly strong in 2Q. Is there any particular drivers there that we should be aware of?
Marc Spieker
What you should — principally should have expected, and that’s what we promised as of Q1 and what we’re not delivering is the recovery, which we — have been seen. So you had seen that rising prices have been dampening our margins during the first quarter. We have now implemented a number of price increases, and so that greatly increased our margins.
I also talked already about Romania, that we have seen now all the — where there are regulatory mechanisms, adjustments in the mechanisms to be visible and clear and it worked. And also, that helps to stabilize the margins in both markets. So it’s predominantly a reflection of what we are seeing in the energy retail market in terms of recovery that we expected, admittedly, already as of Q1.
Verena Nicolaus-Kronenberg
All right. Thank you, Rob. And next question comes from Peter from Bank of America. Peter?
Peter Bisztyga
Yes. Congratulations, again, Verena.
Verena Nicolaus-Kronenberg
Thank you.
Peter Bisztyga
So 2 non-nuclear ones, so you’ll be pleased to hear. So first one on gas exposure. It looks like you’re now pretty much fully protected in Germany by [EnSaG] in the case of every one of your counter-parties or indeed, yourself, have to buy replacement gas in the market. But are there any equivalent mechanisms to shield you in other European markets that depend on Russian gas, so where you’ve got big exposures. For example, Italy and Czech Republic, Slovakia, so that’s my first question.
And then secondly, on the U.K. Those — the Don’t Pay campaign that started. I think there’s only about 90,000 people signed up so far to cancel direct debits on the 1st of October. I’m just wondering, is that something you’re worried about? And is there anything that you can do about it? Because I can imagine, we obviously have a few thousands or few tens of thousands of people not paying their GBP 4,000 bills, so it starts to get material. So comments on that would be appreciated, please.
Marc Spieker
Sure. Yes. Peter, let me kick it off. On gas exposure, we have followed a clear strategy of both kind of reasonably diversifying, but then also concentrating on names, which either are automatically protected also by rising prices, i.e., that immediately benefit and hence, there is economically no counter-party issue and/or where players are basically state-owned and hence, have a strong government backing.
In that sense, I see our counter-party portfolio across the markets now significantly derisked. By the way, Uniper is by far not our biggest exposure, but also to have that now managed and taken care of, I think, takes — de-risks our counter-party portfolio significantly.
Leonhard Birnbaum
But I think, actually, Marc, really, we are saying increased visibility is positive. I mean, we had issues, how would it work in Hungary, in Romania. You specifically asked for other markets. We have found solutions there.
In the Czech Republic, we are seeing a solution which is similar to the Article 26, which we are introducing in [Foreign Language] [EnSaG], which we’re introducing, which Marc talked about. In Italy, we have seen now that the spread between TTF and PSV can be included in the regulated tariff. So we have to say — what we said in our speech, we have a much higher visibility on what governments are doing. And largely, it supports our ability to pass through the price increases, which I think is essential for functioning of the markets, obviously, otherwise, like, what would we talk about?
And so we are actually quite positive about what we have seen over the last 3 months. So increased visibility sounds kind of like technical. It means we are really positive about the increased visibility, which we are seeing. And I don’t take…
Marc Spieker
On direct debits, actually, we have touched upon that in the past. The — historically, the direct debit ratio in the U.K. is much lower than in our other markets. And so actually, historically, we have been focusing on increasing that share in the U.K. over time. And so we have been actually running direct debit campaigns already in the past. Probably it’s not in the situation being picked up, but it’s something which follows our strategy that, looking forward, we want to increase the share. Be reminded, roughly in Germany, our direct debit share in the B2C portfolio is above 90%, 95%, yes. In the Netherlands, the same. In the U.K., we are, I think, in the 60s somewhere. I think we stood at 65% as of Q1. I don’t have the exact numbers where we are now. That’s a reflection of that strategy, which actually has been a strategy already for quite some years.
Peter Bisztyga
Sorry, Marc, the question on direct debit is more in the U.K. There’s a campaign to get people to just cancel them and not pay their bills from the 1st of October, which remains to be seen how much momentum that campaign will get. But it’s been in newspapers. So just interested to know whether that’s something that can — worried it could become material and how you manage that kind of risk.
Marc Spieker
Well, I think this is generally the increased risk that we have been talking now for a number of quarters that with rising prices, affordability will become a topic. I mean it’s not surprising that we regard these kind of illegal initiatives is the wrong answer.
But it’s clear and actually, we see decisive government actions in all our markets, that the topic of vulnerability has to be dealt with. And in that sense, I would not now get extremely worried about such a campaign.
What gives us confidence is that all governments across all markets are doing both at the same point in time, reconfirming market mechanisms, while at the same point in time, taking care of vulnerable customers. That’s the equation which needs to be followed. I don’t want to now judge and qualify on every individual single campaign, which has been running.
Verena Nicolaus-Kronenberg
Thank you, Peter. And next question comes from James from Deutsche Bank. James?
James Brand
A couple of questions from me. Firstly, on the pass-through mechanism, on Article 26, the Federal Ministry of Economics put out quite useful Q&A on their website yesterday. One of the questions was how do you deal with fixed price contracts that do not allow additional charges or increases ? And the response in the Q&A was we’re currently examining the question. So i.e., don’t quite know how that’s going to work.
So my question for you is how many of your customers do you have on fixed price contracts that — roughly, that don’t allow any additional charges or increases? And how much of a risk is that for you? I guess you already said that your guidance incorporates lots of contingencies. So I guess it’s not a risk for the guidance, but it would be useful to understand a bit more about how we should think about that risk.
And then I had a kind of possibly a 2-parter on just bad debts on the retail side. The first question is what’s your average lag between kind of selling energy and people paying for it? And then, apologies, the second part is kind of a third question, I guess, is what’s the total level of provisions you’ve accumulated for bad debts, if you have that number?
Leonhard Birnbaum
James, maybe on the fixed price contract. There is a clear political understanding that the surcharge, the additional cost should be allocated indiscriminately to all customers in a uniform way.
Now the original provision that has been written here is kind then was a bit vague on that one. And so there is a discussion right now ongoing, which is why the Q&A was so vague here, that the law should be amended in September to make it explicit and also fixed price contracts are included, which in average across the German industry, because we did, obviously, a data gathering effort as an industry, not as E.ON, is around 25%. I think it’s something like that.
Now so you should expect — I mean, so I would say right now, I would expect fixed price contracts to be included in the end, but that requires a further legislative action in September. And now I just hand over for the other questions to Marc.
Marc Spieker
Yes. You asked on provisions on…
Verena Nicolaus-Kronenberg
Bad debt.
Leonhard Birnbaum
Provisions for debt.
Marc Spieker
Provisions for bad debt. Current level for those provisions across the group stands at €1.4 billion out of my head, and that’s a number which, obviously, every quarter, is growing. And it’s a number which also reflects then how it’s distributed across markets, the way of how our contracts are set up. We talked about the billing mechanism, direct debit or not. And so expect that largely, that is actually attributable to the U.K. Your second question was on — please help…
James Brand
The average lag between supplying energy and people paying for it, if there is one. There might not be one.
Leonhard Birnbaum
Yes. Sorry. I think actually, depends a little bit on the markets. But usually, we have monthly installments. We have a profile that usually, in the winter, if we have equal installments, obviously, we are collecting less than what is being distributed, but then we recover that in the summer.
So in that sense, you can’t say there’s a general lag. So we bill monthly, but we have a certain profile in which we gain something. And then in some months, we gain something. In some months, we lose something.
Verena Nicolaus-Kronenberg
And next question comes from Alberto from Goldman.
Alberto Gandolfi
Congratulations on your move. Two questions on my end. Quite short-term questions, I have to say, but there’s lots of moving parts. So the first one is on customer solutions. Could you please tell us how you have hedged your expected volumes for this coming winter?
So I’m wondering if what are you assuming in churn rate? Are you long? Are you short? A couple of terawatt-hours short could cost you €400 million, €500 million and a couple of terawatt long would actually give you €400 million, €500 million. So I’m trying to understand how you are risk-managing the coming winter.
The second question is on the network business. Just to be extremely boring, and I’m sorry about that. But the €2.65 billion EBITDA you achieved in the first half, can you tell us what that number would be if we normalized volumes, I guess, it’s plus €100 million, and if we normalize network losses recovery and network losses? So I’m trying to understand what is the underlying.
Because you’re supposed to deliver something like €2.8 billion, €2.9 billion EBITDA in the second half to make guidance. And you still are going to incur, if I understand right, €150 million, €200 million network losses, most of which will probably have been Q1 and Q4. So I’m just trying to understand. I see some risk to the €5.5 billion. That’s where I’m coming from. So if you could give us maybe the clean number for the first half and any sort of breach to go to the full year, that would be extremely helpful.
Marc Spieker
Yes. Alberto, both fair questions. On the first one, the answer must be short. And I guess you will understand that’s commercially sensitive. So we will not be telling how exactly we are going to manage our position running into the winter. But you should expect we will manage our position very well. That’s on the first one.
And on the network business. Look, we came out with a guidance at the start of the year, assuming normal temperatures and certain network losses, but also recovery, as I explained earlier, and that was a guidance of €5.5 billion to €5.7 billion. So we expect delivery in that range to be a delivery in a normal environment.
And of course, every year, you have some ups and downs. What we do see this year, and that’s why we are guiding now towards the low end, is that at the current very high prices, the network loss is price driven, we can expect that we will already mitigate and compensate for that in the current year. But our initial guidance is actually a fair yardstick for you to assume what a normal year should be delivering.
Verena Nicolaus-Kronenberg
All right. Thank you, Alberto. And yes, looking at the time, we are almost coming to the end of our call. I take 1 additional question from Vincent from JPMorgan.
Leonhard Birnbaum
You are mute.
Verena Nicolaus-Kronenberg
Vincent, we cannot hear you. If that is not working, then yes, I would say that concludes our call. Many thanks for your interest in E.ON. And of course, I mean, the whole IR team is available for you to answer any further questions, both today, and we are also on roadshows with Leo and Marc, over the coming days. So yes, I’m looking forward to our continued discussion. And yes, say goodbye for now.
Leonhard Birnbaum
Thank you very much.
Marc Spieker
Thank you.
Leonhard Birnbaum
Bye-bye.
Verena Nicolaus-Kronenberg
Bye.
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