Dear ladies and gentlemen, welcome to the E.ON's half year 2020 results conference call. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to Dr. Johannes Teyssen, who will lead you through this conference. Please go ahead.
Yeah, I just wanted to do a brief introduction here. This is Verena. Hello, everybody. A warm welcome from my side before I hand over to Johannes. Many thanks for joining our H1 results call today. I'm here with actually Johannes and Marc, who will guide you through our business development and outlook, and with that, over to you, Johannes.
Thank you, Verena. Good morning, very warm welcome from my side. We are happy, and I repeat that we are happy to provide a detailed and positive view about yet another successful quarter and outlook of E.ON. My extremely positive stance comes from very concrete and specific reasons. First, in Q1, we had informed you that we have adjusted our procurement book for our commodity sales business in order to reflect the risks from lower volumes in the retail business due to COVID-19. Now, after the second quarter, we have gained enough evidence that this adjustment that we already took will take us well through the entire year. Hence, we do not expect major further downsides from this beyond what we had already guided for as at Q1.
Second, with regard to payment behavior, we are gaining increasing confidence that our concentration on highly stable countries clearly pays off, also in times of unprecedented crisis. From a group point of view, we have not seen a material increase in our working capital due to COVID-19. With payment moratoria across our markets now largely being withdrawn, we are confident to manage the risks from bad debt without any significant economic implications for the group. Third, as flagged to you with our Q1 reporting, wheeling volumes in our network business have obviously been negatively affected by the pandemic. The financial implications are fully in line with the sensitives that we provided to you with Q1. We therefore can confirm that the majority of those technical lower earnings for this year will be fully recovered in future year.
E.ON is economically fully protected in this respect, and no material economic downside is visible. Consequently, we see E.ON's non-recoverable financial exposure to the pandemic being limited to only about 2% of our 2020 EBITDA. That's it. Nothing more, 2%. Let me highlight that we experienced strong underlying operational performance during the first half of this year. All our businesses run smoothly, are actively managed, thus we can fully deliver on our promises, even in times of remote work and all other implications. Marc will elaborate later on our actuals and demonstrate how solid the underlying performance was. Let me just stress that as in past years, E.ON's financials do not include material one-offs from provisional releases or similar unsustainable effects. During the second quarter, we have also continued to tick off numerous boxes relating to the integration of Innogy beyond our own expectations.
With that, we have further strengthened the financial and strategic profile of our group. Our investment proposition that we presented to you in March remains fully intact. We regard the update of our guidance for 2020 as a pure technical adjustment, because it's all realizing just a bit later. The material proportion of pandemic effect has now been processed for E.ON. We are highly confident to be able to manage the remaining uncertainty for the second half of the year within the guidance range. With that, I also reconfirm both our midterm targets and our dividend guidance. For your reference, our midterm 2022 EBIT target remains in a range of EUR 4.6 billion-EUR 4.8 billion, if the adjusted growth rates are applied to the new guidance midpoint.
4.6 billion-EUR 4.8 billion in 2022, where there is no pandemic effect, all synergies are being realized, and we are normal state of business. This translates into a very strong growth trajectory that Marc will later talk about. The strong operational performance continues to underpin our commitment to grow the dividend by up to 5% per year. With the strategic repositioning of E.ON that we have now completed this year, we continue to see a high resilience of our portfolio, also in the current COVID-19 crisis, also in the second warmest year on history. On top of that, Germany and the EU are committed to a carbon-neutral continent in 2050. COVID even accelerated the path, which comes along with huge opportunities for E.ON.
We are convinced that the course for the future energy world is set now, E.ON is committed to contribute, drive this change, and create value for our investors. Turning to page two. The economic stimulus programs and packages approved by the EU and the German federal government fully confirms E.ON new strategic positioning. Both will provide substantial additional investment opportunities in our core business, particularly the area of customer-centric energy infrastructure and networks. Our strong market position in Europe and our local reach will support this. From the EUR 310 billion grants of the EU Recovery and Resilience Facility, more than EUR 160 billion, that's more than half, will be allocated to the countries in which E.ON is active. A third of these investments are earmarked in our [audio distortion] energy infrastructure.
They allow a tremendous amount of new investments that create a historic opportunity to transform Europe into a carbon neutral, sustainable continent and to support our cause at E.ON. This potential directly translates into further growth opportunities for our Energy Networks business. Already in May, with the Q1, we indicated additional into energy infrastructure investments of EUR 500 million for climate protection economic recovery. This is now even more certain, and it allows us to upgrade our targeted power RAB growth now to an annual rate of 4%-5% until 2022, and with that increase our CapEx guidance for Energy Networks by EUR 200 million already in this year compared to the plan that we presented to you at the Capital Market Day in March. We are committed to this investment plan, and we are ready to participate in the EU recovery process. Let me highlight just some specific opportunities.
First, the conversion of our cities into sustainable carbon-neutral neighborhoods. This includes urban mobility, housing, heating, and cooling. Our most recent project in this field is the Milan Innovation District, a project which aims to equip an entire urban district with innovative, sustainable energy solution. E.ON, a German-based company, was selected as the energy partner for this outstanding project and will develop tailor-made innovative energy solutions to operate this area in a climate-neutral way. Second opportunity is the full exploitation of hydrogen as an energy carrier of the future. Hydrogen has the potential to be a game changer in the complete decarbonization of industry, transport, and housing. E.ON will support the market ramp-up at all stages of the value chain, from production, storage, distribution, to end usage by our customers for decarbonization of the various sectors by 2050.
Today, we at E.ON already have 50 hydrogen projects in different stages of development, focusing on industrial application, decarbonization of heavy transportation, grid injection, and hydrogen transport. Let me here highlight some examples. Here in North Rhine-Westphalia, we make our gas distribution networks H2 ready. Our aim is to mix natural gas with green gas in our distribution network via decentralized power to gas plants by connecting them to the plant's hydrogen transport network. In our SmartQuart project, we are building a supply system in a small municipality of Kaisersesch in Rhineland-Palatinate. Here, electricity from renewable sources is first converted into hydrogen using power to gas technology, and this hydrogen is fed into a microgrid and can be used to supply local buses or to generate heat. In another town, Meschede, we develop a neighborhood solution comprising of a PV system for electricity generation.
Electricity that cannot be used immediately will be stored long-term in a lithium ion and short-term battery at a hydrogen-based infrastructure. Those examples are only a few out of our huge pipeline of hydrogen-related projects that we are currently focusing on. Thirdly, we have a tremendous wave of new expectations of customers to our networks, the call for new connections, and that allow us further growth. Turning to page three. Next to growth and energy infrastructure, performance. It's a core element of our capital market story and our company's ambition. We have made specific promises at our capital market day, we are delivering now. One of the promises is the delivery of the EUR 740 million synergies by 2022. Despite COVID-19, we are fully on track to deliver this plan for 2020 and beyond.
We have now successfully completed the first wave of many of so-called sprinter phases with around 1,000 FTEs already signing voluntary leave agreements. This is completely in line with our pre-COVID-19 expectations, even despite the potential impact from corona. We are confident to achieve similar acceptance rates for the upcoming program waves. During the last quarter, we have also successfully managed to conclude all remaining steps of the Innogy transaction. This achievement was not a given in these particular times of remote working, travel restrictions, and social distancing. We have completed the full legal integration with the squeeze out of the remaining 10% minority shareholders in Innogy. We have transferred Innogy's renewable assets to RWE.
In addition, during the initial step of this organizational integration that we are now fully focusing on, we discovered even more working capital optimization potential as originally planned for with the corresponding positive impact on economic net debt. Marc will elaborate in detail on those potential on additional working capital optimization. All remaining remedies that we had received from the European Commission have now been signed and are just awaiting regulatory clearance, which we expect during the next weeks and months at Q4 the latest. The economic impact of those disposals is even better than we originally had planned for, with disposal proceeds approaching EUR 1 billion, and again, corresponding positive effects on our economic net debt. Another, I would say, rather positive surprise is that effects of change of control clauses feared by some market observers did not occur.
On the contrary, with the exception of three rather small cases, which are not significant in material terms, we did not experience any meaningful effect from change of control. In some cases, we were even able to extend partnerships considerably. In this context, we are also extremely happy to say that in late July, we successfully concluded a memorandum of understanding with the Slovakian government to acquire RWE's 49% stake in VSE in Slovakia, and thus now will become a market leader in Slovakia with 1.5 million customers. Just to remind you, the corresponding RAB of this business amounts to roughly EUR 0.5 billion . With this, we strengthen our footprint in Central Eastern Europe, especially in Slovakia, with its role as a strong economy. I turn to page four. Performance also goes along with efficiency and customer satisfaction.
In this context, we are pushing E.ON's digitization in all business to make our company faster, leaner, and ready for the new energy world. Recently, we entered an agreement with SAP to build a new process and technology platform for our network operations. This cooperation will define the industry standard for the future. It means fully redesigned and standardized customer processes in the network businesses, for example, regarding billing, fast exchange, and consistency of data. This process will be fully digitized and will allow a cheaper, more agile handling of business across all jurisdictions. Quite obvious, by the way, it's fully cloud-based. On the supply side, combining cost and service leadership is essential for a competitive position. In our main markets, we are thus addressing this by the introduction of new fully digitized and cloud-based platforms. In Germany, this platform is fully done.
We have already started to migrate now all customers on it. As of today, we have successfully migrated 1 million of our customer accounts on this platform already, fully in line with the plan to have 4 million customers on the platform by end of year, and the majority of all German accounts within the next two years. In the U.K., we are continuing our cooperation with Kraken Technologies, the leading cloud-based platform in the U.K., to migrate all npower and E.ON's B2C and SME customers onto this new E.ON Next platform. As planned, we have even now started migrating the first npower customers in July and target to finalize the completion by mid of 2022, including all E.ON U.K. customers. We are at a migration rate of more than 10,000 customers per day, smoothly and quickly. With these examples, let me convey a clear message.
Everything under our control is progressing according to plan, and yes, we deliver against our pledges. Our operations and our strategy have proven full resilience. The second quarter brought, as expected, clarity on all levels and gives us now high confidence for the second half of this year. We do not observe, and that is a clear message, we do not observe any fundamental impact, sustainable impact from COVID-19. Assuming that we will not face a severe, hard, new lockdown across the continent in our main markets, we believe that the largest part of pandemic effects have been processed by E.ON in the second quarter and is fully included in our outlook.
Despite the historic COVID-19 pandemic, and which is sometimes forgotten, despite a historically warm winter extending into Q2, the second warmest since 1870, E.ON proved its resilience and the resilience of its new strategy and delivered a robust, strong first-half result in the midst of the deepest recession since World War II. The acquisition of Innogy is fully on track and proceeding rapidly, and we will achieve and deliver the planned synergies. We fully confirm our midterm targets and our dividend promise, and our long-term strategy is underpinned by European economic stimulus packages, which offer us additional growth opportunities in core markets beyond our expectation. Marc will now guide you through the corresponding numbers in more detail. Marc, over to you.
Thank you, Johannes, and good morning, everyone. Johannes has already pointed out that the reason for our guidance update is largely relating to a higher visibility with regard to the COVID-19 effects that we have qualitatively presented in Q1 already. As we have gone through the lockdown phase, and most probably the trough of the economic downturn, we are now observing a gradual recovery throughout all our markets and therefore have a much higher visibility on the full year impact of the pandemic. All effects that have materialized by now fall into the buckets which we indicated to you during our Q1 reporting already. Although we were not able to quantify their ultimate impact in all cases, we provided some sensitivities to help you estimate the potential impact. You know, and Johannes has stressed that we want to stand for transparency and reliability.
It is therefore important to note that all of these sensitivities can be fully confirmed from today's point of view. As of Q1, we stated that we reached the lower end of our initial EBIT guidance range of EUR 3.9 billion-EUR 4.1 billion. The guidance back then included the impact from selling back overhedged volumes early on in the crisis. This resulted in locking in a high double-digit million EUR loss, which is now gradually being realized in our P&L across the full year 2020. We also reported as of Q1, additional bad debt provisions in a low double-digit million EUR amount. With the second quarter now behind us, we have a much better visibility on how the pandemic affects our business. It is therefore important to note that as a consequence of the increased visibility, we are now moving back to our traditional approach to providing a full year guidance.
Remember that as of Q1, we could only include those COVID-19 related effects which had materialized as of April. For the remainder of the year, we had to refer to sensitivities. Today, we are moving back to what you usually get from us, an all-in commitment to delivery within the updated guidance range. This explicitly includes the expected COVID-19 related impact for the entire year. Whilst consumption was depressed by an average of 10% since beginning of the crisis in most countries, it has now recovered to just about - 5%. We expect this to be a good proxy as an average for the group for the remainder of the year, since not all sectors and countries will recover equally fast. Only in case of a further severe economic disruption in our main markets, we would consider adjusting our guidance accordingly.
From today's point of view, we do not regard this in any way as likely. Let's now go through the adjustments step by step. On the Services, we reconfirm our Q1 approach and still feel comfortable to be well-positioned for lower demand for the rest of the year. Hence, no change. COVID-19 related bad debt provisions as of H1, have only marginally increased compared to Q1 levels. We are now at just EUR 35 million in total due to COVID-19. Let me be clear. Even though it is recorded in our earnings, this is almost entirely related to so-called expected credit loss, i.e., it has only provisional character. In fact, we have not faced any major default so far. In Energy Networks, we now expect a full year impact from lower wheeling volumes in the magnitude of around EUR 150 million.
This amount is almost fully recoverable under the regulatory regimes in the upcoming years. In Customer Solutions, we expect a further comparatively small impact from lower volumes on a full year basis. Please note, large parts of the new effects that were not already included in our Q1 guidance are recoverable and hence economically irrelevant. We therefore expect the non-recoverable impact from COVID-19 to be limited to just around 2% of our 2020 EBITDA. I would also like to stress that our guidance does not include any material one-off effects like provision releases. We do also not see ourselves exposed to any material FX movements. Given the robust midterm outlook for our company, we have also decided not to implement countermeasures that would affect our future earnings potential. Let me move on to the next page and elaborate a bit more on our operations and the specific impact from COVID-19.
I'll start with our Networks division. Since the beginning of the crisis, we observed a decrease of wheeling volumes in Germany of approximately 10% on average. This translates into an impact of approximately EUR 100 million for the first half of the year and the trough of the economic downturn. This is, as mentioned, fully in line with the sensitivity we have given earlier this year when we expected a 10% demand contraction to affect 2020 operating earnings by a low to mid double-digit million amount per month. Assuming a gradual recovery until year end, in line with the assumptions expressed earlier, i.e., a -5% development for the remainder of the year, we expect an additional financial impact of approximately EUR 50 million for the second half of the year. Be reminded that for the entire group, our Networks earnings are largely secured by regulatory mechanisms.
Most relevant, lost revenues in Germany from 2020 will be recovered in the period between 2022 and 2024. Due to the specific dispersion of volume losses from COVID-19 across our markets, we can confirm that almost the full reported impact of EUR 150 million will be recovered in the future. Now take a closer look at the payment behavior of our customers. Across the portfolio, we do not see any noticeable deviations for our receivables compared to normal levels, except for the U.K. Even including the U.K. though, the total increase in receivables compared to normal benchmark levels is around EUR 100 million only. Let me repeat. The total recognizable impact from COVID-19 on our receivables, and therefore on working capital, is limited to just about EUR 100 million as of today. This is the result of our stringent receivables management.
Furthermore, in Germany, the share of direct debit retail customers is around 80%, while it is even higher in the Netherlands. We are carefully monitoring any deviation of our customers' payment behavior. To be on top of things, we look at lead indicators such as increase of receivables or overdue receivables, change of installment plans, insolvency rates, and credit scorings, amongst other things. We are also, and continue to be, carefully observing the counterparty risk for the conclusion of new contracts in the B2B segment in case insolvencies should shift into 2021. Of course, we still cannot rule out major insolvencies after governmental support schemes run out and the liquidity situation of the economies worsen. Currently, we have no indication for significant bad debt buildup. Apart from that, we do feel comfortable to manage any further negative impact within our new 2020 guidance range.
Turning to the next page, eight. Before elaborating on the H1 performance, let me make some introductory remarks. The accounting integration of the Innogy transaction has now almost been finalized. The purchase price allocation for the Innogy acquisition was provisional in respect to, e.g., the final determination of the fair value of Innogy's assets. With our H1 reporting, we made two adjustments relating to the purchase price allocation. Firstly, we have harmonized underlying interest rates for selected leases. Secondly, we have adjusted for more recent information on remaining useful lives of certain fixed assets in our Energy Networks segment. The effects of the two adjustments are both non-cash. To make sure that comparability is maintained, we have also adjusted the pro forma numbers for 2019 accordingly. I will compare our results to these adjusted pro forma data. Let me now come to the strong underlying H1 performance of our business.
EBIT in the first half came in at EUR 2.2 billion, which is a decline of 7% compared to pro forma earnings of the same period last year. Unsurprisingly, the effects from the COVID-19 crisis impacted EBIT in the second quarter. The reported year-over-year decline for the group is almost entirely due to the effects relating to the pandemic. Adjusting for COVID-19, our earnings would actually have been even slightly up year-over-year. This is a remarkable performance, as our Q1 actuals were significantly negatively affected by extremely mild weather conditions, amounting to a low triple-digit million earnings impact across the group. We were able to fully compensate for these adverse weather effects due to a number of operational and cash-effective countermeasures that we imposed immediately. Looking at the segments, earnings in Energy Networks are down approximately EUR 250 million compared to H1 last year.
Roughly EUR 100 million of that decline results from COVID-related lower volumes in our German and Central Eastern European operations. In addition, lower weather-related volumes in Germany resulted in a decrease of the operating result already in the first quarter. Let me remind you, the decline from both corona and weather will be almost fully recovered within the coming years. The lower Swedish WACC in the new regulatory period added almost another EUR 80 million to the decline in the first two quarters. Our Customer Solutions segment performed very well in the first half of the year. EBIT is up slightly compared to pro forma EBIT of H1 2019, thus overcompensating the negative COVID effects as well as the decline in Q1 due to mild weather in all markets. Adverse COVID effects in our Customer Solutions segment added up to roughly EUR 100 million.
This includes the realized loss from the sellback of excess volumes at lower spot prices in the side of a mid to high double-digit million amount, as well as bad debt provisions mainly in the U.K. of roughly EUR 35 million. We had some margin relief on the regulated tariff customers in Romania and additional upside in Poland due to the expected normalization of regulatory and energy procurement conditions. Be aware that with regard to the second half of the year, the additional earnings contribution in Customer Solutions will be limited in absolute terms. In line with the usual seasonality, the bulk part of earnings has been generated in H1. Especially in the U.K., the seasonality is usually very pronounced towards the first six months. In addition, our migration efforts regarding the E.ON Next platform will mainly impact the remainder of the year.
H1 earnings of our non-core businesses are largely unchanged year-over-year. The increased contribution from our nuclear operations resulted from higher hedged prices that overcompensated negative effects from the purchase of further production rights. The result of our Turkish upstream joint venture was negatively affected by a write-off of certain legacy projects and a adverse FX development. Let us have a brief look what the earnings development means for our bottom line. Our adjusted net income came in at EUR 933 million for the first half of 2020, down 11% versus pro forma 2019, reflecting the decrease in our operating results. The financial line and minorities are largely unchanged compared to previous year. Our group effective tax rate stays unchanged at 25%. Let me now turn to the development of our economic net debt, and with that, move to page 10.
Economic net debt temporarily increased to roughly EUR 43 billion at the end of the first half. In line with adjustments in our earnings line, the harmonization of discount rates for financial lease contracts reduced our net debt by about EUR 0.5 billion. We have adjusted the year-end net debt figure by that amount already. As anticipated, the net debt level in Q2 has been affected by extraordinary effects linked to the completion of the Innogy transaction. Most importantly, we accounted for the cash payment in relation to the squeeze-out of Innogy minorities. In addition, the second quarter brought about the promised payment of our dividends for fiscal year 2019. Looking at our cash flow from operations, we still see a lower cash conversion compared to our full year target. Nevertheless, this is fully in line with the expected seasonality of our Energy Networks and Customer Solutions businesses.
Relative to Q1, we already see a significant seasonal recovery in our working capital by around EUR 1 billion positive. This recovery will continue as planned during the second half of this year. Pension provisions increased by roughly EUR 800 million over year-end 2019, as a result of an increase in the defined benefit obligations, in line with a meaningful decrease in pension discount rates of 10 basis points in Germany and 40 basis points in the U.K. At the same time, the performance of our asset portfolio significantly improved during Q2, but did not reach the values as per year-end 2019 yet. The increase of economic net debt to more than EUR 43 billion represents an anticipated peak.
For the remainder of the year, we expect economic net debt to improve back again towards the level which we recorded at Q1 stage, i.e., around EUR 40.5 billion. Moving to page 11. I would now like to update you on some of the moving parts that are relevant for the development of our economic net debt in the future. First of all, as I said, we expect a further seasonal normalization in the cash flow from operations for this year. Moreover, we have now signed all remedy disposals. We expect all of them to close during the second half of 2020. Economic impact is even better than we anticipated, with total disposal proceeds now resulting in almost EUR 1 billion reduction in economic net debt.
Please also note in this context that the agreed purchase of shares of the Slovakian network company VSE will not result in a further cash out, as this has already been covered by our agreements with RWE. Finally, in the context of our successful integration work, we were also able to increase the size of our working capital optimization program by an additional EUR 0.5 billion , on top of the already flagged potential. With the first result of the program, we have identified additional and concrete measures. On this basis, we are confident to beat our original ambition and delever even further. We expect to see the first benefits of this program to materialize in 2021 already. Let me now shortly flag another step in the integration. With the squeeze-out now being effective, the reporting obligation for Innogy consolidated financials ceases. No Innogy financials standalone going forward.
All financing activities are being centralized and consequently, Innogy's remaining rating contracts will be canceled. Still, we are committed to all our stakeholders and therefore intend to provide Innogy's bondholders the option to switch to E.ON in due course. Let me summarize the updated outlook for 2020. We now expect an EBITDA between EUR 6.8 billion-EUR 7 billion, an EBIT between EUR 3.6 billion-EUR 3.8 billion, and an adjusted net income between EUR 1.5 billion-EUR 1.7 billion. Let me repeat. The update is solely due to the adverse impact from the COVID-19 crisis. The outlook does also not include any material one-offs such as provision releases. We adjust our 2020 EBIT guidance to reflect the impact of COVID-19 on our business until year-end.
This implies that we do not expect any further severe lockdowns due to the pandemic with material adverse effects on our markets where we operate network and retail operations. Of course, we cannot rule out major insolvencies going forward, but let me repeat, currently, we have no indication for significant bad debt buildup, and we feel comfortable to manage any further negative impact within our new 2020 guidance range. Reflecting the updated outlook, we also adjust the segment outlook for Energy Networks for the COVID impact that we now expect. Be reminded that roughly EUR 150 million lower network earnings in 2020 as a result of lower distributed volumes will largely be recovered in subsequent periods. Investment opportunities in the networks business are manifold.
Johannes has pointed out earlier that with a committed CapEx increase of EUR 0.5 billion, we can enhance the power regulated asset base growth guidance for the portfolio to 4%-5%. The increase of more than EUR 100 million in the CapEx budget of Energy Networks in the second quarter after a similar increase in the first quarter to now EUR 3.4 billion is a reflection of our commitment to these attractive investment opportunities. Coming to the end of my presentation, I will now spend some time on our financial framework. As you know, this is the compass for our decision-making as a management team. The most important and overarching element of this framework remains the dividend and our commitment to an annual dividend growth of up to 5%, which I reiterate today. While the outlook for 2020 has been updated, we do not see any indication that corona impairs the midterm robustness of our business.
For that reason, we have high confidence in our midterm financial plans, specifically for 2022. We've adjusted our compound annual growth rates for our midterm plan to the updated 2020 guidance and now expect an 11%-13% CAGR for our EBIT translating into a 17%-22% compound annual growth rate for our earnings per share. Be reminded, when interpreting these cumulative average growth rates, that the earnings increase will be back-end loaded. This is particularly due to the regulatory cycle and the corresponding implementation timeline of synergies in our networks business. Assuming the midpoint of the 2020 guidance, this continues to translate into absolute values of EUR 4.6 billion-EUR 4.8 billion for EBIT in 2022. For our EBITDA, this means between EUR 7.6 billion-EUR 7.8 billion by 2022. Please note that the financial framework has not been updated to reflect the earnings recovery in our networks from 2022 onwards.
We will include these effects in our next midterm planning and present to you in our updated financial framework in March next year. Regarding the remaining element of our framework, we continue to expect an average cash conversion rate of roughly 95%, and we reiterate our capital structure commitment of a strong BBB/Baa rating, representing a midterm debt sector target of around five times. With these final remarks, I would like to thank you very much for your attention and hand over to Verena for the Q&A session.
Many thanks, Johannes and Marc, for your presentation. Dear analysts and investors, we will now start the Q&A session. Please be reminded of the two questions per person rule. With that, over to the moderator. Thank you.
The first question is from Deepa Venkateswaran, Bernstein. Your line is now open.
Thank you very much. I had two questions. Firstly, on the digitalization. I think this is probably the first time you're talking about digitalization on the network side. Just wondering whether there are any new IT investments or anything that are planned around this that we should take into account. You're only adopting the Kraken system in the U.K. Could you just talk about what you're doing in Germany? Is that your own digital attacker platform, and how is the testing going on that? My second question is on hydrogen. I think pretty much every company is talking about hydrogen, including Uniper, for instance. It's a bit confusing for us to understand exactly in this configuration, given that now you are much more of a power network company, where exactly you will fit in into the hydrogen.
Is it more on the Customer Solutions, B2B solution side? Is that where we should think about most of your efforts, or is it about converting the little gas grids that you have to be hydrogen compatible? Just some guidance on which part of this entire hydrogen value chain will you concretely focus on. Thank you.
Deepa, thank you for the questions. I start retroactively. We think first and foremost, the hydrogen question offers a tremendous opportunity for our gas distribution networks. In the traditional world, their usage would have shrunk over years and years. With hydrogen in place, we believe that they will get a strong second life and even over time may experience growth that we never expected. Secondly, you are right. A lot has to do with applying hydrogen into the customer context. I would not look there so strongly from the B2B customer side. The retailer side is more on the B2B and city solution side, where very specific and concrete applications will occur, and we're using them. I gave some examples. On the digitization side, you referred to our efforts on the digital platform in Germany.
Modular system consisting of lots of applications that we have customized together. Big pieces are Salesforce applications and powercloud applications, a specific German provider that is extremely agile and great. Yes, those systems are tested, and we believe they deliver similar opportunities as a Kraken platform in the U.K. We still opted for the Kraken platform in the U.K. because all those things you need to adapt to regulatory circumstance and all our efforts were focused on Germany, and now just shrinking them away and using some for the U.K. would have been a waste of effort and just be a delay in all, and therefore, we opted for the Kraken platform. Which, however, we believe should deliver similar stuff. On the network side, I think the network side is the most far back in digitization.
Again, please understand, we are talking about the customer end of digitization of Energy Networks business. All the technical applications we obviously try to safeguard and keep away from the Internet as much as possible, because there we need to defend cybersecurity. We all know the circumstances in the Ukraine, we are highly alert to defend our systems there. On the customer side, it's a big piece and there nobody yet has a true standard for the industry. With SAP here, we can create that. Marc, do you have any numbers as far as investment into the network side is concerned? I don't think it will change the outlook for 2021, 2022 or anything. We'll do within our budgeted plans, I don't have specific numbers in mind.
Yeah, hi, Deepa. This is Marc here. Indeed, if you look at the facts and figures, so to say, the share of investments related to digitization of the network is still a minor part. On top of my head, we talk about roughly EUR 100 million currently per year. That share is gradually increasing. Part of the additional investments which we have highlighted already as of Q1 will increasingly also tie to opportunities and for the digitizing our network. That number you should expect will grow continually over time.
It will be reflected also in regulation and will be recovered.
Okay. Thank you.
The next question is from Wanda Serwinowska, Credit Suisse. Your line is now open.
Good afternoon. Wanda Serwinowska, Credit Suisse. two questions from me. The first one on hydrogen. You mentioned that you converted a part of your pipeline in Germany. Would you be able to talk about CapEx, how much you spent on that one? Do you expect hydrogen to contribute any material part of your earnings over the next few years?
The answer, it's not yet, neither on the CapEx side nor on the return side, it's yet material. 50 projects, I believe, will make us one of the leaders in Europe as far as doing research and applications demonstration projects. None of them yet has a material impact on CapEx and return, I expect, rather in some later years. You need to front run, know the technology, apply it. We receive lots of also subsidies for the CapEx side from public funds. I would not yet in your models include material numbers there, and we will update you March next year when we see more on the CapEx side. For today, it's immaterial for the corporate CapEx numbers.
Thanks. The second question is on the economic net debt. You mentioned that you expect the economic net debt to reach the Q1 level by the end of the year. On the page 11 in the presentation, you mentioned a few items that we should consider over 2020, 2022. Would you be able to talk about which of the items will happen in H2 2020? I think you mentioned that working capital optimization it will start in 2021. How about ARO reduction? What should we incorporate in our models for H2? That would be very helpful if you could help us to bridge how you reach basically EUR 30.5 billion at the end of the year. Thanks a lot.
Hi, Wanda. This is Marc here. Just to make it simple in the beginning, what you should include in your model. We are expecting that we will be moving back to the level of Q1. Again, be reminded, as of Q1, our economic net debt stood at around EUR 40.5 billion. What is then driving the improvement relative to the H1, the EUR 43 billion, is mainly two factors for 2020. Number one, we reconfirm today the seasonal recovery of our operational cash flows. We expect for the second half a cash conversion approaching 140%. With that, we will be highly free cash flow positive in the second half. Secondly, we assume closing of the remedies with a contribution of up to EUR 1 billion.
These are the two factors for 2020 which will bring it back towards the level of Q1. Again, as always, movements in discount rates on pensions can go one or the other way. Also be reminded here again, look through short-term volatility in that respect. These cash outs are very long-term.
Can I ask a very quick follow-up on the transaction effect?
As an exception, yes. One more question.
Thanks. What has driven the change? Before you were looking at the -EUR 0.5 billion, and now it's basically at 0. What has changed, if you could just explain? Sorry if you explained it during the call, I may have missed it.
Look, it's a combination of things. Partly that the remedy disposal processes were above our expectation, partly due to some elements from the accounting integration. It's a number of effects, but that at the end add up to EUR 0.5 billion , and that is what we have reflected on page 11 now.
Thank you very much.
You're welcome.
The next question is from Peter Bisztyga, Bank of America Securities. Your line is now open.
Yeah. Hi, it's Peter Bisztyga here. Two questions from me. Firstly, can you discuss whether you expect your Customer Solutions division to fully recover back to your previous expectations for 2022? Your sort of updated CAGR numbers suggest that you do. That's my first question. Secondly, Fortum has been selling district heating assets for crazy multiples, 25 to over 30 times EBITDA. I was wondering if you have considered monetizing any of your own district heating assets, and if not, why not? Thank you.
I think simple answers. The first is yes. It's fully reflected and expected. The Customer Solutions will deliver the planned income in 2022. We don't see material downside. We rather see some upside due to quicker digitization and cost decline and/or increasing competitiveness in the market with growing customer numbers. The second is no. We believe that this asset-based infrastructure business on the customer side, district heating and cooling, is providing huge growth opportunities. Heating and cooling will play a major role in decarbonization, and being capable of handling that in a superior manner will drive value. We believe we are better equipped to do so. We have a number of patents for low-temperature heating networks. We have specific knowledge on mastering that.
We bring in our deep experience from Sweden, from Germany, and we are capable of growing the business, and therefore, we don't believe it would create sustainable value for our shareholders if we were to dispose it. We rather intend to grow the business.
Okay. Very clear. Thank you.
Peter, with regard to your question on financial outlook for Customer Solutions, hard to answer on a generic question, will we move back to previous levels? Question is what is for you previous? Maybe just generally, to give you some guidance in that respect. Quite obviously, we do expect a recovery of our margins in Customer Solutions. The mix and the nature will be completely different to the past. I think to just make that transparent, look at the U.K., which for this year we expect it to be loss-making. As we laid out, we will see a significant recovery in the U.K., but that is not based on hope on recovering margins, but it is only based on the self-help measures which are under our control, and that is massive restructuring.
With it, our profitability in the U.K. will recover, but in terms of mix and composition, it will be completely different to what we had four or five years ago, i.e., a much lower cost base, to cope then with much lower margins. The second answer I would give is that, of course, we are continually investing in decentral infrastructure, in our Customer Solutions business as well. That is at an increase in absolute increasing contribution from decentral infrastructure will come to play here as well. The mix will be different. In our interpretation, much more robust and resilient than in the past.
Okay. Understood. Thank you.
The next question is from Sam Arie, UBS.
Thank you very much. Good morning, everybody. Good afternoon, I guess, in Germany now. I wanted to, yes, just say thank you for the presentation. I think the way you set out your assumptions of guidance and so on is now very clear. I just want to ask a question on the Green Deal and sort of stimulus recovery plans that you mentioned, and then one on COVID risks going forward, where I think you can help us a lot. Firstly, for the Green Deal and for the European energy spending plans, it just all starts to look like really fantastically large numbers. I have to admit from our side, it's still a bit unclear exactly how all of those big numbers will eventually feed through to activity on the ground for utilities.
I know Iberdrola and Enel have spoken about a process in which they are proposing projects to the Spanish and Italian governments, and then the governments feed those into the EU, and the EU will choose which projects it wants to support and so on. I just wanted to ask, is there a similar process going on in Germany? How does it work? Can you talk in any more detail about the kind of quantum of investment that might come through that channel and how it would actually work? For example, would it be grants, subsidies, loans? Would they give money to projects that go into regulated assets or in the unregulated? I think in general, just any more you can share with us on how all of that good stuff at the European level can turn into financial impacts for you would be super helpful.
On the other side, the risk question on COVID, I think is a bit simpler. You've given very helpful numbers today, but I think some people are worried that the real change in payment behavior after COVID hasn't started yet. For example, in the U.K., we've still got the furlough scheme in place. Unemployment, I think it's just under 4%, but the experts are saying that when furlough expires in October, we might see that climb towards 10% by the end of the year, which would be massive, and we might see similar effects in other countries in Europe. I'm just wondering, can you talk about the kind of range of possible COVID impacts you can see if these bleaker unemployment forecasts come through? That would be very helpful. Thank you.
I think the last one, Marc will pick up. Let me reiterate, when I read this morning on the screen, people were highlighting a negative deviation of our guidance. What I see is that we confirm basically our guidance and just now put numbers to the technical correction of network income. I would translate it also, we have created the expected value in our network business, EUR 150 million this year. Just by regulatory reasons, we receive the cash for it in later years. IFRS tells us how to do that. If I look through that, which I would propose for investors to do, because the value is there and will be received, I think there is not truly a negative guidance correction. It's just a technical adjustment to the regulatory circumstances.
I believe we have been so extremely explicit in Q1 about this network effect, how it works, and we confirm that and just put a precise number to it. Even the number everybody could have done by itself by looking how we labeled that in Q1. Looking now at similar reporting in Enel, Iberdrola, Engie, EUR 150 million numbers, surprisingly for those big companies, is quite similar, I guess. All of them confirm that they will be recollected in later periods. I believe every investor should have very deep knowledge now about things. The Green Deal, I think I fully support what you claim from our competitors. Yes, we also qualified projects, and there is no clarity yet in any jurisdiction how they'll precisely unfold.
I believe those companies that have projects ready that can be then delivered short-term, so within the next 24 months, they will have clear preference because all those countries want to spend that money, and they will only be able to spend that money if they have project ready and not dream up stuff. For example, in Poland, we have very specific plans ready to just change district heating from coal to gas or even cleaner sources. We run district heating and cooling networks in more than 20 major Polish cities. It is meaningful, and we have plans ready, and we will expedite those. We thought they would run in later years. I think some of them we will try to qualify now. If we then receive, I expect in many cases, rather grants and loans. That we need to wait and see.
We also will try to tap into Italian funds. We also try to tap into German funds. It's also a meaningful number for Germany, and we have projects ready for that. Yes, some will, might even go into regulated assets. In some cases, too early to say. The upgrade of the Czech, the Slovakian, the Hungarian, Romanian networks and the connection to Europe could also be funded and subsidized through that program. It's too early to say how they'll precisely unfold, but we believe that that will work. Marc, will you say something to the default risks?
Yeah. The risk undoubtedly is there. I talked about the provisions which we have taken by now. With it, we feel comfortable that we are able to manage the second half with the uncertainty which is still out there. Next to that, I would just like to stress again that it's not just looking at macro. It is also decisive how you manage around it. This is why, would it be with your country scoring that the U.K. scores pretty low in terms of recollection quality. If I look at our operations, I'm quite comfortable that even in a market like U.K., we will do a good job in order to mitigate as much as possible those effects. We are also already for, by now, three, four months, very restricted in terms of contracting, i.e.
should insolvency slip into 2021, it's not so much a question what your exposure was at the start of the pandemic, but how you contracted since the start of the pandemic. I think here we have been very stringent as well. Where overall, we see ourselves within the guided ranges which we have put out now, positioned well to weather it out. Risks undoubtedly are there.
Okay. Really helpful on both questions. Thank you.
The next question is from Alberto Gandolfi, Goldman Sachs.
Thank you. Hi, everybody. Thanks for taking my question. The first one is on RAB growth and capital structure. You're narrowing to 4%-5%, so I can see your degree of confidence on growth in this activity is clearly growing. Can I ask you if this is reflecting the new German climate target, which is kind of already Green Deal style policy? Or if you see further upside from it, and more specifically, do you believe the current capital structure is already well set up to fund those incremental potential investments and to support this type of further growth? Or do you think you need, and you're open to rotate assets or even perhaps maybe ask shareholders for some help to basically capture all this growth coming from green net zero policy? The second question is a little bit boring. I apologize in advance.
Your slide 12 has range for EBIT and EBITDA. When I look at the divisional one, there seems to be quite a lot of volatility as well on holding costs, which are actually quite a big driver for the earnings. It looks like your mid-range on EBIT, if I'm not mistaken, is something like EUR 400 million. Low end would be -EUR 200, upper end -EUR 600. I know sometimes it's just the way you calculate value at risk by division. Can I ask you, should there be much of a volatility in this line or not in the EUR 400 million? Can you tell us how much you think your synergies/cost cutting could evolve this holding cost line from now to 2022? Thank you so much.
Yeah, Alberto, this is Marc here. I guess I take an attempt at both of your questions. Let me start with the regulated asset base. Yes, indeed, we now narrowed the growth range to 4%-5% against the background of our optimism, which is not hope, but based on concrete investment opportunities, which we are signing and implementing. With regard to the capital structure, as in the past, I think it's unlikely to assume that we will, even including the Green Deal, now see from one year to another that CapEx will skyrocket. Those things will unfold over quite a number of years, this is why you should rather expect us to gradually, year-over-year, increase then our CapEx numbers in line with it. For that, our capital structure is perfectly set up.
I also would like to remind again, about a number of initiatives which we have kicked off with very concrete measures and to improve working capital, lower our asset retirement obligations, and so on and so forth. We feel perfectly comfortable about the triangle of investing or the two sides of the equation of investing while at the same point in time leading up to our dividend commitment and to grow the dividends annually over time. With regard to volatility in corporate headquarters. There is actually not so much volatility which we expect in that line. In a normal year, I think in this year it's a bit a question as we are dissolving the innogy SE organization and allocating it during the second half to various operating businesses and so on.
There is some overlap here internally where FTE at the end will be allocated and how that will translate into synergy deployment in this year. Usually, there's fairly little variation in this line.
If you refer to the non-core, don't forget, it's also the PreussenElektra business and the Turkish business is included there. The headline or the number for the headquarter will not have a variation of EUR 100 million or something. I think there we have very precise ideas of what we spend on that.
Thank you.
Yeah. There, Alberto, it's just important what you referred to. Non-core, as Johannes said, that is worse. That's our PreussenElektra in Turkish business. With the runoff of PreussenElektra, that actually the volatility there will also be pretty limited because it's a limited amount of things going forward. Corporate headquarter, as I said, is in a normal year, fairly visible and stable for all year.
Thank you.
Okay.
The next question is from Ahmed Farman, Jefferies, your line's now open.
Yes. Hi, good afternoon, everyone. Just two questions from my side. Could you please provide us with some details on the number of employees you have on the furlough scheme in the U.K. and the benefit of that in the first half results? Secondly, I'm just wondering if you could give us a little bit more context on your bad debt provisioning. How does it look like, sort of as a % of revenue, if possible? How does that compare to your normal historical run rate and experience from the previous financial crisis? I just think it would be helpful to sort of get that context. Thank you.
Yeah. Hi, Ahmed, this is Marc here. On the first one, FTE on furlough scheme U.K., we will get back to you after the call. I don't have that number now here with me. With regard to bad debt, on a group average, we are between 0.6%- 0.8% of revenues with regard to bad debt. This is why for the first half, we said that we booked provisionally an additional EUR 35 million due to COVID-19. That this comes on top of a usual run rate, which I think is good in all of our earnings reported and guided and whatnot, of EUR 150 million. The usual run rate for the first half would've been around EUR 150 million. On top of that, we have taken provisions for an additional EUR 35 million, which are largely related to the U.K. Yeah. On average.
Thank you. Yeah.
0.6%-0.8% in a normal year.
Thank you.
You're welcome.
The next question is from Vincent Ayral, JP Morgan. Your line is now open.
Yes, good morning. Afternoon, everyone. Sorry to come back again on the bad debt. It's an issue we try to understand. You said a bit earlier that if the exposure goes into 2021, it depends on your contractors. I'll be very interested in having more details to understand that, how you can mitigate this risk into 2021. That would be very interesting. The second question is just to be sure I understood properly. Towards the end of the presentation, I think you said that your guidance date does not include the clawback on the networks. Did I understand properly? Estimate would be maybe about EUR 50 million of EBIT to add up to the guidance, when you have to date. Could you please confirm if this is reasonable? Thank you very much.
Yeah. Vincent, the first question I got it, the second one I'm not sure.
The second one, I think I got the question. As you know, obviously, we say that we will recollect the lost income in tranches between 2022 and 2024. Marc has explicitly said that we didn't positively upgrade the 2022 guidance for that expected return because you need to do a full-fledged planning update to do so. That we only do with mid-term planning. Obviously we will then include more visibility in spring next year. Just to change the single number off the line didn't feel appropriate, but it just adds strength to our message because it's just an upside that we have not updated, but we don't feel confident to update a full guidance just based on a single number. That is the reason why Marc made that remark. Just take it as an expression of strength and belief, not more than that at this point.
Marc, the first question?
Yeah, with regard to bad debt, Vincent, obviously I don't want to educate our competitors about how we run our business. I think what you should imagine is that when it comes to contracting, specifically on the B2B, but also the small and medium-sized enterprise segment, that we follow a very granular credit risk assessment. Granular means that we differentiate really hundreds of different industry and business sectors, and apply differentiated cost for credit risk. That framework, obviously we adapted very fast with the outbreak of the pandemic. That simply means that for a number of sectors, take event business, take hotels, and so on and so forth, the expected credit margins have significantly increased.
From that, you should conclude that our contracting for those businesses, which are particularly exposed to the crisis, will either meaningfully go down or margins will meaningfully increase, so that on average, from economic point of view, when it comes to 2021, that should provide for an additional shield against any bad debt exposure.
Okay. Thank you very much. Just to clarify, this is related to B2B, not B2C.
No. On B2C, honestly, we have not seen again, except for the U.K., but their also receivers now are coming back. As I said, we are, for example, tracking as a KPI the requests for installment plans. Yeah. Just that you're aware of how closely we are managing that. There is no material inbound anymore at this stage, where customers on the B2C side ask for installment plans also. Be again reminded that 80%-90% in our core markets are on direct debit. On the B2C side, I have to say, I'm least concerned.
Thank you very much.
The next question is from Rob Pulleyn, Morgan Stanley. Your line is now open.
Yes. Thank you. Robert Pulleyn from Morgan Stanley. Given the interest in hydrogen, could I ask what E.ON's views are on the economics of hydrogen's uses, and therefore what we should be bearing in mind following and needing to believe for this theme to really take off? That would be super useful from a high level. Secondly, if I could just follow up on the EU recovery funds. You mentioned district heating projects, which sounds pretty interesting. May I ask about EV infrastructure projects? Are there any of those in the pipe, and is that a material opportunity for yourselves through the recovery fund? Thank you.
The last one, yes, we will include those in the ready to deliver project list, the EV charging infrastructure, specifically the fast charging infrastructure, DC based. Again, we need to see which ones will be picked up by the governments. On the hydrogen side, I think what we see here is we expected hydrogen, if you look a year back, we expected hydrogen to only play a major role and be economic almost in the next decade. Now with steep decline on the cost side expected on the electrolyzer side and a bigger pickup, we believe there will be niches where hydrogen can be competitive and already in the foreseeable future, talking about one, two years. For example, in the point-to-point heavy traffic segment.
We believe if it's not just dispersed logistics, if it's a point to point, like in the automotive sector, those things can be economic as we see them with the decline of costs. Same is true for some use cases. Admittedly, they're more subsidized on the chemical and the steel industry. We already now test the inclusion in the district heating systems and the local systems, but those are not yet approaching the economics. We need to wait and see. We don't have a hit list here which sector will come first, but maybe it helps you to look at the equation.
Thank you for that. I'll turn it over.
Okay.
Okay. Last question from James.
Yes. Hi, it's James Brand from Deutsche Bank. I had two questions, one on hydrogen again, and one on dividends. When we're thinking long-term, I appreciate there's a lot of hydrogen investment opportunities across your broader portfolio of businesses, but when we're thinking long-term about gas distribution, does it really come down to a question around whether you want to fully go down the hydrogen route for heating in households, or whether you decide to rely more on heat pumps and biomethane? It's because it seems like the big investment driver for gas distribution over the long term is whether when you fully shift to hydrogen, you have to put in plastic pipes across the whole of that network. I guess the question is that also how you see that trade-off for gas distribution around future investment?
Secondly, when do you think we actually get to a point where that decision is made? Because it seems like potentially that point is quite a long way in the future. Maybe it's in the late 2020s or even early 2030s before we get to that actual point of making that decision. That's the first question. Secondly, on the dividend, how you talked about the dividend at the strategy update and also at the Q1s, if I'm remembering correctly, is that the up to 5% growth each year that we should think about, unless there's any kind of major disruptions, we should think about that as being 5%. Given how you're talking about the guidance change today as not really being a change in outlook, more a technicality. I'm not asking you to necessarily provide a full year dividend growth number now.
When we're thinking about the dividend for the full year, we're thinking about the guidance change that you put through today. Should we still be thinking very much that this is business as usual, and then we should be having the 5% more in our minds than something less? Thanks.
The nice question always goes to the CFO. The dividend goes to the CFO. For the heating question, that is quite tricky. When we look at new builds, we focus totally on heat pumps. I don't think any green or other gas will play a major role in new build housing. However, if you look on an existing old, not so well isolated, even if you update the isolation, it looks like high heat pumps will play a limited role there, and you need gas. We think expecting a full hydrogen in the existing infrastructure could be far too costly there. You're absolutely right, then you need to upgrade the full infrastructure even within the house. Therefore, we believe we may see there a role of, let's say, blended gases that are significantly more green, but not pure hydrogen.
This is how I look on the heating sector. We will see, let's say, more greenish gray gas in existing infrastructure. We will see electric heat pumps pretty much eating the cake in new infrastructure. Marc, now to the final dividend question.
Yeah. Let me just maybe add to the hydrogen topic, James, because I don't really think at the end it's a black or white, this or that. For E.ON, that's great news. A considerable element in the role of hydrogen will be that it's going to happen in regional and local clusters where you make sure that you're able to reuse, enable hydrogen to actually run base load, and so on and so forth. I think that is a huge strength for E.ON with our regional and local footprint, that we are able particularly to monetize from the multitude of decentral opportunities, which is then not only hydrogen, which then can be covered with gas networks, with heating networks, and so on and so forth. That is our strength to leverage this infrastructure in and around municipalities.
I wouldn't even expect during the future that there is a black or white, this or that. It will probably be always a combination in regional clusters. On the dividend. Yes, indeed. We said that the up to 5% is a question on our confidence about particularly the economic development in 2020. As you could take away from our intervention so far, our confidence is increasing, but it's not yet the time to nail down now where in that range we are. We are taking a very confident look also at the second half, and this is all what I would say then also to our dividend.
Yeah. Many thanks to everybody for all your interest. I know there is still a queue for further questions. We will follow up on them directly after the call. You know there is also an endless call and how we dealt with it last time. You will be first next time. That's how we deal with it from that side. The IR team will follow up for now and stay healthy. Hopefully see you soon and goodbye from E.ON.
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.