Dear, ladies and gentlemen, welcome to the conference call of Ian SE regarding the presentation of Half Year twenty nineteen Results. At our customer's request, this conference will be recorded. May I now hand you over to Doctor. Stephan Schoenefuss, who will lead you through this conference. Please go ahead.
Thank you, operator. Dear analysts and investors, I wish you a very good morning and a warm welcome to E. ON's first half twenty nineteen results call. My name is Stefan Schonefort, and I'm sitting here with E. ON's CFO, Marc Spieker, who will present to you our results followed by the usual Q and A session.
Marc, the floor is
yours. Thank you. Thank you, Stefan. Good morning, dear analysts and investors, and welcome to our first half year twenty nineteen results call. We are looking back on another quarter with a solid operational and financial performance.
Compared to an exceptionally high base last year, EBIT is down 12% and adjusted net income decreased by 16%. The decline at this stage of the year has been expected by us. Earnings in 2018 were front loaded towards the first half, especially in the Customer Solutions segment. Economic net debt is up EUR 3,600,000,000 compared to year end 2018 as a result of the adoption of IFRS 16 and lower pension discount rates. With the first half of twenty nineteen now behind us, we continue to be fully on track to achieve our full year guidance, which is set at the EBIT level within a range of EUR 2,900,000,000 to EUR 3,100,000,000 and at adjusted net income level in a range of EUR 1,400,000,000 to EUR 1,600,000,000.
The preparation of the innogy takeover is approaching the end of the final inning. We expect closing in September. Before we dive into a more differentiated transaction update and the detailed financials for the first half year, I would like to touch upon key operational developments in both our Networks and Customer Solutions division. Let us start with the Networks business and focus on Germany and Sweden in particular. In both countries, allowed returns have come down or are announced to come down significantly for the next regulatory periods.
In Germany, the nominal return on equity decreased from 9.05% to 6 0.91% and is effective already since the start of this year. In Sweden, the allowed real weighted average cost of capital is supposed to decrease from 5.85 percent to a level of 2.16% starting next year. Lower allowed returns are to a large extent an adequate and hence rational reflection of the current low interest rate environment. E. ON is over time also increasingly benefiting from lower interest rates through lower corporate financing costs.
Furthermore, we would like to emphasize that regulatory returns do not equal achieved returns as the regulatory models allow for outperformance, such as operational cost outperformance through efficiency improvements or outperformance in procurement costs. Of course, there are limits as to how low regulatory returns should go. It is in the public's interest to have continuous to ensure not only uninterrupted power supply, but allow for the transition to low carbon or even carbon free energy systems to unfold. So the regulatory model has to incentivize long term investments and set adequate returns for this. Against this background, the adequacy of some of the recently applied regulatory parameters must be challenged.
One example is the risk free rate of the Swedish WACC formula. It moved from 4% to 0.9% and is now a mathematical reflection of the historic and forward looking 4 years average rates. I question whether this rate window of 8 years is adequate when we are looking at an investment horizon of 40 to 60 years. Similarly, I question the determination of the market risk premium in the German return on equity calculation, which moved down by 65 basis points in line with the lower risk free rate. Research suggests the contrary that there is a negative correlation between the 2.
The return on equity calculation for the 3rd regulatory period had been challenged in court by us and the industry. The Higher Court overruled the positive first instance decision and sided ultimately with the regulator. As a consequence of these two unfavorable developments, E. ON will further intensify the constant and constructive dialogue with politicians and regulators to ensure an adequate return environment in the markets where we operate. Our size and our efficiency make us a credible and sustainable counterpart for this kind of discussion.
Please also bear in mind that E. ON has been prepared to challenge the regulator in court if necessary, and we will continue to revert to this option as a measure of last resort. With this, I'm coming to our Customer Solutions business. Excluding the UK, we can confirm that the positive developments in the Energy Sales business remain intact also throughout the Q2 of 2019. For the first half, we now count more than 100,000 additional customers in Germany despite the fact that we started to raise prices during the Q2.
Our performance in Italy, where we are rather in a challenger position, is also promising with an additional 30 1,000 customers gained in the first half year alone. The situation in the UK, however, remains tough. We have seen massively increased customer churn due to the semiannual adjustment of the SVT price cap and its disconnect to current market prices. We managed to stop the customer losses in July, which is partly attributable to our new 100% renewables energy offering. With this innovative move, we are the 1st of the big 6 suppliers to make such an offering for the entire portfolio.
Financially, we continue to regard 2019 as the trough year. The clear target for our UK management team remains to become free cash flow positive by 2021 again. This includes smart meter investments of about GBP 100,000,000 per year. We keep repeating it, performance matters. Related to this customer focus and process excellence matter and are the crucial success in a very competitive market environment like the Energy Sales business.
Our wide ranging performance programs in Germany and UK are fully on track. They are especially targeted at massively reducing internal complexity and costs by the extensive digitization of our processes and therefore securing sustainable profitability. It is about reinventing the business and implementing new innovative product offerings like the 100% renewables offering in the UK. Regarding Npower, we are preparing ourselves for day 1 quite intensively. We will inform the markets shortly after antitrust clearance about what our exact strategy regarding Npower will be.
Let me reiterate here that we will not accept any option creating sustainable free cash flow drain for the group from the UK. Moving on to Prossen Elektra, we would like to update you that we have recently secured 10 terawatt hours of production rights from Waffenshall for our 3 remaining operating nuclear power plants. Thus, we managed to ensure the continuous operation of our remaining plants throughout 2019 beyond. As you know, we have been in court negotiations with Waffensal over the transfer of and compensation for remaining production rights in the nuclear power plant, Krummel, which we co own with Wattenshall. To speed up the process of transfer, we have agreed with Wattenfall on a preliminary price of €27.8 per megawatt hour for each production ride.
From an accounting point of view and due to our participation and therefore consolidation of Krummel, we will economically only be affected by half of this cost. Purchased production rights will be capitalized, and the corresponding depreciation charge will be based on consumption of the rights. Please note, the agreed price is only preliminary. The debate on the final settlement terms continues in court. Our position is that the large part can be taken out by us for free.
Even in the adverse case of a final negative court verdict, there would then be a good chance for us to get government compensation for the remaining unsold volumes in Crewe that would then be shared between Wattenshall and E. ON equally. We also advised that it has been agreed with Warthenstahl that more volumes can be transferred under the same conditions in the future, so that the operation of our nuclear power plants is secured until the expected shutoff dates. Next, I would like to share the latest developments on the transaction with you. As you may have heard, we have offered a set of remedies to the EU Commission in order to address its remaining competition concerns and thus speed up the transaction process.
Although any remedy hurts, we deem it a very sensible proposal. In the Czech Republic, we have offered to divest Innogy's retail business with an estimated EBIT impact of a low triple digit €1,000,000 amount. In Germany, we offered the divestment of certain electricity accounts, primarily pure electric heating customers as well as to withdraw from operating certain ultrafast charging stations. Both remedies together will have an EBIT impact of low to mid double digit €1,000,000 The divestment of D. ON's Hungarian Commercial Electricity Retail Business is, from a financial point of view, rather small with an EBIT impact of low single digit million.
We have already been approached by a range of interested buyers for these attractive assets. However, we will only start the divestment processes after closing. Meanwhile, the preparation of the innogy integration is ongoing with the first phase of the senior management selection process already completed and the second phase to be finalized at closing date. The net synergy target of EUR 600,000,000 to EUR 800,000,000 remains unchanged. As we are now approaching closing, please be aware that for legal reasons, we will not be able to update or comment on any pro form a figures for the combined entity.
We therefore refrain from mentioning any pro form a P and L or balance sheet KPIs in our presentation. Regarding the implementation steps of the transaction, we expect Closing 1 to take place in September. It should happen within 1 or 2 weeks from the day of the antitrust approval by the EU Commission. Closing 1 will include the transfer of innogy shares from RWE to E. ON, the capital increase at E.
ON and the closing of the public takeover offer. Additionally, there will be a cash transfer from RWE to E. ON in the amount of EUR 1,500,000,000 Please bear in mind that Closing 1 will immediately trigger a change in the accounting treatment of E. ON and innogy transfer assets. We will walk you through an illustration on the following slide.
Closing 2 will be a 2 step process with the transfer of E. ON Renewables assets and nuclear minority participation to Hepburn First, Innogy's renewables assets, the participation in Kellogg as well as the gas storage assets will be transferred in the second step. Moving to the next chart. Closing 1 will bring about some important changes not only but also in our reporting. This is why we want to educate you early on.
On this chart, we provide you with a schematic illustration of envisaged technical adjustments in E. ON's full year EBIT and adjusted net income guidance for 2019 after closing. First of all, with Closing 1, we will have to incorporate the additional depreciation charges from the purchase price allocation. These will be proportionally included for the remainder of the year 2019 into our EBIT guidance. The E.
ON Renewables and Transfer assets from Prossen Elektra will economically leave the group at the point in time of closing. The EBIT contribution will no longer be accounted for. Innogy's EBIT for the remainder of the year will become part of E. ON's full year guidance. However, Innogy's EBIT contribution will exclude any contribution from the Renewables business, their Kellogg participation and the gas storage assets.
Please also note that when including Please also be reminded that depending on the timing of the closing, P and L figures at the first combined reporting occasion may only include some weeks or even days of Innogy's results, while the balance sheet follows the reporting date principle and will therefore represent the full combined figures. Let me now focus on the financial performance in the first half of 2019 and move to the next chart. EBIT in the first half of twenty nineteen came in at EUR 1,700,000,000 which is a decline of roughly 12% compared to the very high base in the same period last year. Like in Q1, key driver of the decline in the first half year was the EBIT in Customer Solutions, which is down by almost EUR 240,000,000 compared to the same period last year. In 2018, earnings in Customer Solutions in Germany and UK were more front loaded than usually.
Thus, we clearly expected a more back end loaded distribution of quarterly results in 2019. Most of the decline in our Customer Solutions segment comes from the UK. EBIT there dropped by more than €113,000,000 compared to the same period last year, mainly as a result of the introduction of the ACT price cap. Despite the very challenging market development, our UK team remains fully on track to deliver a positive EBIT in 2019 as we guided for at the start of the year. EBIT in Customer Solutions Germany declined by roughly EUR 60,000,000 year on year, mainly due to higher network charges since the beginning of the year.
In Q2, we have already seen first positive effects of the price increases, which were implemented effective as of April. Further price increases were implemented effective as of July. All in all, our business was very successful in ensuring that the price increases had only negligible impact on customer churn so far. For that reason, we are fully confident to recover the negative impact from the Q1 during the remainder of the year in order to deliver a 2019 EBIT in our German sales business on comparable level to 2018. Earnings in Customer Solutions Other are down by more than EUR 40,000,000 in the first two quarters of the year.
The decrease results from slightly lower EBIT contributions in most of the other regions. Earnings are below prior year, mostly due to technical and temporary effects that will largely reverse in the remaining quarters. Earnings in Energy Networks are down by just 3% compared to the first half twenty eighteen. And our German network operations remain on track for a slightly higher EBIT year on year. In the first half of twenty nineteen, the positive effects from a higher regulated asset base and the excellent efficiency scores could only partly compensate for the lower return on equity in the new regulatory period and the non reoccurrence of a prior year's one off effect.
In Sweden, we continue to benefit from already implemented tariff increases, overcompensating for the weak Swedish krona and the divestment of our gas network, which took place in Q2 2018. Furthermore, higher allowed revenues in Slovakia on the back of high investment levels could not compensate for the lower allowed returns in Romania and a lower contribution of our joint venture, Innergisa Inevi. But also here, we expect that during the second half of this year, this trend will reverse and will be on par with prior year. EBIT in Renewables is up 17% in the first half of twenty nineteen. Positive contributions from our offshore wind farms, Ramtin and Arkona, and additions in onshore were partly compensated by the end of support schemes in Onshore U.
S. And Italy as well as a decrease in market prices. Earnings of our non core business increased by more than EUR 20,000,000 year over year. In Prose and Electra higher depreciation charges the non reoccurrence of positive one off effects in 2018 as well as volume effects due to plant outages overcompensated higher achieved prices. Contrary, the result of our Turkish generation business increased by more than EUR 80,000,000 on the back of operational improvements, mainly caused by higher hydro volumes and U.
S. Dollar denominated hydro feed in tariffs. Let us have a look what it all means for our bottom line. Our adjusted net income came in at EUR 885,000,000 for the first half of twenty nineteen, down 16% over previous year. The financial line is roughly unchanged compared to previous year.
Improvements in financial expenses resulting from maturing of high coupon debt instruments in 2018 are compensated by higher financial charges as a result of the first time application of IFRS 16. Let me now turn to the development of our economic net debt. Economic net debt increased by EUR 3,600,000,000 over the end of 2018, a further increase of EUR 1,300,000,000 over Q1 2019. This is mainly due to a seasonally low cash conversion of 45% in the first half that is largely a result of a seasonal high working capital. We expect these seasonal effects to be offset during the remainder of the year and continue to see a cash conversion rate of over 80% for the full year, in line with our guidance.
Furthermore, pension provisions increased by roughly EUR 700,000,000 over year in 2018. European interest rates have seen new record lows in the 2nd quarter. As a consequence, we had to lower our discount rates for pension provision significantly, 70 basis points in Germany and 60 basis points in the UK. That is a further decrease of 40 basis points and 20 basis points, respectively, compared to Q1. The lower discount rates led to a more than SEK 1,800,000,000 increase in the pension obligation in just 6 months.
Plan assets were able to partly compensate this effect and appreciated by €900,000,000 Other effects, including funding and FX effects, made up for the remainder positive of €200,000,000 Be reminded that the quarterly revaluation of our pension obligations is a pure technical accounting effect that does not have any impact on the cash out profile of our pension liabilities. Another major effect resulting in the economic net debt headline increase is the first time implementation of the new accounting standard IFRS 16, which has been well flagged already. The effect of the reclassification of leases increases economic net debt by roughly EUR 800,000,000 compared to year end 20 18. Roughly EUR 300,000,000 of this increase relates to our Renewables operations, which will be transferred to RWE. From a ratings perspective, the increase in economic net debt as a result of IFRS 16 has no impact on our rating metrics and on our debt bearing capacity.
All in all, the headline economic net debt figure on the first look has increased quite a bit versus year end and also versus Q1. However, I can reassure you that our debt level is in line with our strong BBB rating target, not only for E. ON as it is today, but also for the combined future E. ON. Following the solid first two quarters, we are fully on track to achieve our full year guidance.
With an unchanged operational outlook for the remaining 6 months, I confirm the guidance for 2019 of an EBIT between €2,900,000,000 and €3,100,000,000 and an adjusted net income of between €1,400,000,000 and €1,600,000,000 Let me now guide you through the outlook for the remainder of the year in a bit more detail. Starting with Energy Networks. We continue to expect full year EBIT to be slightly above prior year, with the well known effects being slightly back end loaded. In our German network operations, the positive effects from a higher regulated asset base as well as from the excellent efficiency scores will more than overcompensate for the lower return on equity for the new regulatory period. Again, here reminded that in the first half of twenty eighteen, we had a positive one off in the German Networks business, whereas for 2019, we are not expecting any material one off effect in our German Networks business.
In Sweden, we will continue to benefit from already implemented power tariff increases. Higher allowed revenues in Czech Republic and Slovakia on the back of high investment levels are expected to overcompensate in the second half, the lower allowed returns in Romania. In Customer Solutions, the full year EBIT development is mainly impacted by the SVT price cap in the UK. The impact of the cap will be less pronounced in the second half as we have adjusted our hedging policy according to the wholesale price observation period of the cap, while we suffer from the timing mismatch in H1. A mid double digit €1,000,000 EBIT contribution from the UK for the full year is therefore well in range.
In Germany sales, we will see further positive effects from the price increases that we have successfully implemented in April July, with full year EBIT expected to reach prior year's level. Earnings in Renewables should continue to benefit from new capacity, while the expiration of attractive support schemes or power purchase agreements will negatively impact results compared to prior year. This means that for the second half of this year, we do not expect any material momentum from the Renewables business. The non core segment, including our German nuclear operations and our Turkish generation, is expected to generate full year earnings on prior year's level. In Poisson Electra, higher cheese power prices will not be able to compensate for the additional costs from the purchase of production rights as well as the increase in the annual depreciation charges following the low interest rate environment.
The exceptionally high earnings contribution from Generation Turkey in the first half is expected to flatten out in the second half of the year. To sum up, despite the year on year lower first half results we remain on track to achieve our full year guidance. Today, we also confirm our dividend proposal of €0.46 per share for 2019. Now I would like to thank you very much for your attention and hand over to Stephan for the Q and A. Thank you, Marc.
Operator, please start the Q and A session and please remind all participants to follow the 2 questions only rule.
Yes, sir. Thank you very much. And we will now begin our question and answer session. From Alberto Gandolfi of Goldman Sachs. Your line is now open.
Please go ahead.
Thank you, operator, and good morning. Thanks for taking my questions. I stick to the 2 rules. The first one is on debt and leverage. Could you please provide the guidance for year end economic net debt or failing debt?
Can you maybe help us understand the components? Is there going to be a working capital swing in the second half of the year? What would be the mark to market today of the bund, which has come down further after the closure of the second quarter? Are we going to see the debt hovering above a €20,000,000,000 level for E. ON at year end and you would still be comfortable with leverage at that level, strong BBB in your own words?
And the second question is on Slide 8. It's a 2 part, but it's really one question. I'm trying to understand better what the technical adjustments are. I guess the question is, am I reading this right, the technical adjustments is a positive or it could be neutral effect? It seems a positive effect.
And it seems to be like 40 percent of the PPA blue bar. So in that bar, I understand you're not going to comment on PPA at this stage, but could you at least tell us if you have estimated that PPA over 10 years, 15 years or 20 year of life? That would be very helpful. Thank you so much.
Good morning, Alberto, and thank you for your questions. Let me start with the leverage outlook. I can confirm that we are fully confident to stay in our rating target, which is the strong BBB pre and post closing of the transaction. With regard to outlook for the remainder of the year, I can only give you an outlook for E. ON as a stand alone group.
As I mentioned, I can't give you no any pro form a guidance for the group as we are only a few weeks ahead of closing. We also said that we intend to issue some green bonds in the near future. So there are some capital market transactions that take this into account. For E. ON, stand alone, we expect from today's point of view that our economic net debt will be flattish compared to where we stand at the H1 level.
That includes that we will, by year end, execute the transfer of Nord Stream 1 into our CTA. What we do not do is now a daily mark to market of our pension provisions. The light for sensitivities in our annual report, which essentially is an 8% change in the pension obligation for every 50 basis points change. That is depending on the absolute level of rates. For complexity reasons, this is not a linear relationship.
But if you look at the change of rates during the first half and compare it to the sensitivities which we've provided, it actually is a quite close fit. And so you can rely on that for your own calculations if you want to make them. That much to the economic net debt. The IFRS technical adjustment, maybe first a comment. I know it's always tempting with such staff to kind of put out the rule and measure the millimeters and to then de deduct or quantify from that effect.
Please be cautious with that. This is an illustration. However, what I can say is that clearly, the technical adjustments are expected to be of minor nature. To be clear, they can be of both directions, and we are aware of effects already, which go both directions. But then the net impact will be we will not now guide upfront, but it's simply different interpretations of IFRS standards when it comes to discount rates for pensions, for example, and so on and so forth.
For the PPA, bear in mind that this is a process which we will only be able to finalize once we have access to innogy's books at this stage. It's actually an independent auditor who takes a privileged and confidential view on innogy data to which E. ON does not have access at all. And so I do not and can also not now give you a guidance for the asset lifetimes, which will be a mix from very short lived assets rather than the customer solution side to the more longer lived assets on the network side. But I think that is common wisdom.
You need to understand that I can't guide you more specifically.
Thank you.
You're welcome.
Thank you. The next question is from Deepa Venkateswaran of Bernstein. Your line is now open. Please go ahead.
Thank you. I had two questions. 2, one is Sweden. Can you elaborate what is the exact legal recourse that you have? My understanding is that right now there isn't really any appeal rights and there's also a challenge that the EU Commission has picked up with the Swedish government.
So maybe if you could talk about what are the legal options open to you, should you challenge it, which I presume you will if there is an option? And secondly, in terms of the impact of the remedies, I think you've given several high level numbers. I think my calculation interpreting your various triple digit and double digit numbers is around $190,000,000 to $200,000,000 Could you comment on whether that sounds about all right? And I guess you've reconfirmed your net synergy numbers, so there isn't therefore any direct impact of these divestments on the synergy?
Yes. Let me start with the last question, Deepa. So synergy target €600,000,000 to €800,000,000 is confirmed and is confirmed knowing the impact from the remedies, okay? So full confirmation, no adjustment due to remedies. 2nd, impact of the remedies.
I made it as precise as yet the situation can be. Try to boil it down to a €10,000,000 range. I'm sorry, as transparent and open as we try to be all the time, I cannot now be more explicit as what we have said, and that means a range of EUR 100,000,000 to EUR 200,000,000. And it's and after with our first closing and with our first reporting after closing, we can be more specific for the time you need to live with that range. In Sweden, formally, we have not received our tariff notification for next year.
This is why now publicly do not want to speculate around what measures we will take. Formally, we first await the notification. Materially, to be clear, we do not expect now any surprise from that as there is no discrimination in terms of the key parameters between the operators. But what I can confirm is that I see our Swedish team in very good and constructive dialogue with regulators and politicians. And so we are optimistic that Sweden for us will remain an attractive market where we would want to deploy capital.
But it is a dialogue which leads to results to tangible results before we can commit to the necessary CapEx in Sweden going forward, which we see the country needs in order to deliver on its energy transition targets. That is all what I would say on Sweden at this stage.
Thank you. Thank you. Then we go to the next question. It is from Lueder Schumacher of SocGen. Please go ahead.
Your line is now open.
Hi, good morning. Two questions from my side. The first one is going back to the first question I better raise on the full year net debt guidance for E. ON stand alone. If I understood you right, you said you expected it to be flat on H1.
I'm not quite sure if that included or excluded moving Nord Stream on into the CTA at the end of the year. I didn't quite catch this. And the related question to that is that why should it be just flat if you expect quite considerable catch up in the cash conversions for the full year compared to what you have seen at the half year stage? That's the first question. The second one is on well, on your guidance.
We you confirmed the full year guidance, but then again, it doesn't really exist anymore apart from some shaded areas. Now the accounting uncertainty, yes, I get that. But can you confirm that the dividend, the EUR 0.46 are excluded from the shaded areas and the uncertainty, So this will still be the case, whatever the numbers we look at for the full year.
Yes. Good morning, Lueder. I will work my way from your last question to the first. The €0.46 per share are a fixed commitment regardless of any developments in the earnings. But we also assured that and this is why we also kind of this time made a very detailed breakdown by segment and so on, and that you do see our operational segments working according to our expectation and continue to deliver operationally very strong.
So that is just a sign of confidence and comfort that we want to send to the Capital Markets with regard to our operations, specifically the Networks and the Customer Solutions business, which are to stay part of the portfolio. Talking about the portfolio and then moving on to the economic net debt question. First of all, Nord Stream 1 was included in my guidance. And I said flattish, so with the full impact of the trends of Nord Stream 1, there's good chances that we will actually go slightly down, yet there are moving parts as always. And this is why I refrain off from anything else than flattish.
You asked then why isn't it better? I think that refers to the composition of our portfolio and the specific situation we are in now with Renewables and Energy Networks. We have 2 very CapEx intensive growth businesses. And due to the transaction agreement with RWE, we also stayed away from capital rotation in our Renewables business, which we always said is part of the equation. And this is why in the second half, we will see the full rebound in terms of operational cash flow conversion, more than 80% that we guided for.
But on the other side, you will also see strong CapEx numbers in both segments, Energy Networks and Renewables. And that means that our free cash flow during the second half will not be materially positive.
Okay, very clear. Thank you.
Thank you. The next question is from Peter Bisztyga of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Yes, good morning. So two questions from me as well. First one, just on your illustrative schematic on Slide 8. It looks like from your shaded bars, the net income is going to be up more than EBIT as a result of this transaction. Is that deliberate?
Or is that just inaccurate power pointing? And also, would you sort of as an addendum to that question, would you expect EPS after the increase in the share count to also be higher under your on the recent technical adjustments? And then my second question was simply whether you've had any recent conversations with rating agent sees that have given you comfort that they will continue to ignore the significant increases in your pension provisions?
Hi, Peter. So starting with the economic debt chart, we deliberately included here a dotted line between EBIT and net income, which shall mean that the scale are not comparable. And this is why you should not conclude now with development. And also on the adjusted net income line, the shades can be I mean, it can be higher, it can be lower. It is just at this stage an update to say that these changes will come and that we will update you with the first combined reporting after closing on those.
With regard to rating agencies, rating agencies understand the nature of pension provisions and what discounting does to that. And this is why these movements in pensions provisions do not mean now 1 to 1 that suddenly you get kind of the same change in view that you would get if your financial liabilities changed in that way, 1st comment. 2nd comment, regardless of that, we see ourselves from the relevant metrics in a place where I can again confirm that we feel comfortable to stay in our rating target, which for EON standalone is the strong BBB rating. And I also said in previous calls that you should regard this capital structure target as a floor. I don't see potential going forward that we lower this, and you should take this into account when I say that I continue to be comfortable about our rating target also post closing.
Okay. Thanks very much.
You're welcome.
Thank you. The next question is from Chris Laybutt of JPMorgan. Please go ahead. Your line is now open.
Good morning. Thank you very much for taking my questions. 2 for me. Just first of all, in terms of the Swedish decision, I know that there are still final details to be trashed out. But could you give us an expectation maybe of, as things currently stand, what the financial impact might be next year for our modeling?
And then also in your pension liabilities in U. K, perhaps just an idea of when your next triennial reviews are on or occurring, sorry, and what your expectations might be for deficit repair given where the bond yields currently are? Thank
you. Thank you, Chris. Could you repeat the second question? I didn't fully get it.
In terms of your UK pension deficits, when your next triennial review is with the trustees of the pension fund and when you or what you might be expecting in terms of any potential deficit repair. I guess it's a key issue for UK companies given the actuarial reviews occur every 3 years. And that's I'm just wondering when the next trigger might be for that and what your expectations are.
Yes. So I think it wouldn't be wise now to debate my expectations in that respect publicly. But what I can tell you is that if you look at the funding status for UK pensions, that is approaching 100%. And why I do not see us in a specific situation of pressure, and then we will run the negotiations with the trustees as usual and will then inform the market about any outcome. But we should not expect now any dramatic or meaningful for our group accounts from these discussions.
On Sweden, if we take now the 2.16% real WACC as the preliminary outcome, then based on we guided for sensitivity for every 100 basis points, roughly EUR 50,000,000 to EUR 50,000,000 that means that for the drop in the real WACC, which we see, we see roughly a a decrease in total of EUR 100,000,000 and if I apply the math now, somewhere with €150,000,000 €200,000,000 for the allowed return. What you should keep in mind is that we also have the topic of carryover in Sweden, where if you look at the price increases, which we have carried out during last year this year, you should assume that, of course, we've got price increases also to derisk the topic of carryover. But we are all we are still in discussions with the Swedish regulators and politicians. And the outcome of those discussions will then have an impact on the phasing and kind of the tariff adjustment curve, which we would take during the next regulatory period. So that I cannot give you now I can give you kind of the effect for the change in the allowed return.
And then there is some uncertainty around that depending on the outcome of the carryover discussion and what that then means for the phasing of the tariff adjustment for the next 4 year period.
Yes. Okay. And so in terms of that
I cannot view and it is ongoing discussions, and I don't want to now comment on those, why we haven't come to a tangible conclusion.
Okay. Thank you very much for your help. Thank you.
Thank you. The next question is from Harry of UBS. Please go ahead. Your line is now open.
Thank you very much. Hi, Mark. Hi, Stefan. I have one question on my own and then one which is kind of a follow-up on Ludo's question earlier. So I'll do that follow-up question first.
Just coming back to Page 8, I think we understand that now, so thanks for the explanation. But can you just confirm whether at the end of the year, you will be reporting anything which is kind of comparable to current guidance? Or are you saying that the NDA numbers that you'll give will be comparable to the new guidance? And then if we look at the shading, they could be higher or they could be lower than where the existing guidance is. I'm just trying to get a sense of whether we'll ever see or will we see a number from you that we can compare back to the EUR 2.9 billion to EUR 3.1 billion for 2019?
So that's my first one. And then my second question is about closing 1. We're getting close now and you've confirmed the time line. And lots of people are asking about what might happen then to the energy minorities that you don't yet have? And I'm pretty sure you're not going to tell us what your plans are there, but it would be really helpful if you can explain a little bit the options that you're looking at.
And for example, in theory, is it right that if you went for a squeeze out within 3 months of closing that you could do that at the original offer price? Or are there other considerations that apply? And I suppose while we run that, can you just confirm exactly now what your percentage share holding for innogy is? So those are my 2. Thank you.
So it's good to hear that you know us by now, and hence the answer on the second question will not surprise you, I. E, that we will not now be more precise in the way how we will play our options. The options for the legal integration all stay intact from kind of do nothing or redomination agreement to various forms of squeeze outs. And we will only decide around those options around closing and then, of course, would immediately inform the market. Until then, I don't want to contribute to any speculation now of what we may or may not do.
On the guidance for 2019, so what you will get with the first reporting after closing is a revised guidance for E. ON according to the scheme presented on Page 8, which means then essentially in the new portfolio setup, I. E, this will then be, if you want to say so, a mixture of kind of E. ON stand alone up until closing and from closing onwards the future portfolio. Will that be made comparable?
I think yes, in the sense that we will educate you on the various impacts which we outlined here and that we give a precise segment guidance for our Renewables business. So you will definitely be in a position where you can kind of make sure that you compare apples with apples, if that was the question.
Yes, yes, that's exactly it. So thank you very much for that. On energy, I think I understood you won't comment. But on the other part of the question, I have lost a bit track now whether you're still able to be buying shares on the untendered line. So can you just reconfirm what your total synergy percentage is now including tendered and the other shares you may have?
Look, we went out with the information when we passed the 3% threshold and otherwise would inform the markets whenever it is suitable.
Okay. Not disclosed. All right. Thank you very much and apologies for pushing.
Thank you.
Thank you.
The next question is from Martin Bruff of Macquarie. Please go ahead. Your line is now open.
Hello.
Yes, we can hear you.
Hi. I just
had two questions. One, on the UK Retail business where you're offering the renewables tariff now, I guess that you're backing those by buying renewables guarantees of origin. And obviously, at the moment, there's more guarantees of origin floating around the European system than people unnecessarily have huge demand for. But if everyone goes down the route of wanting to offer more renewables tariffs, do you expect the possibility there might be a bit of a crunch in terms of the availability of those guarantees of origin and then you might start seeing the price of them going up? The second is just a more technical question, which is when you do the closing and then you're changing the technical guidance to strip out the renewables, etcetera, will you also be stripping out the businesses that you may be selling as part of the remedies?
I mean, will they be sort of called businesses held to sale going forward and therefore, the remedy impacts will be taken out? Or will you carry on booking the profits of those divisions or those businesses until such a time as you actually agree a future
sale? Yes, Martin, thanks for your questions. With regard to the green I call it now a green certificate question, I would abstain from making any assessment on the forward market for green certificates. But you should assume that we have a thought through sourcing strategy behind our commitment. But as always, for commercial reasons, we are not laying out our hedging strategies, also not for green certificates.
So for that reason, I need to stay vague in my answer. For the guidance question and for the Remedy assets in specific, you should expect that we will report them as assets held for sale as they do not qualify as discontinued operation due to their size and relevance in the respective reporting segments. So technically, it will be an asset held for sale.
Okay. Thank you. That's very clear.
Thank you. The next question is from Martin Tessier of MainFirst. Please, your line is now open.
Yes. Hi. Thanks for taking my two questions. The first one is on retail in the UK. Do you confirm us that your full year guidance of positive EBIT for this division includes the cut in frascad announced by Ofgem, which should be implemented in October this year?
That's my first question. And the second one is on your full year guidance. According to my calculations, if you want to achieve lower end of your EBIT guidance, H2 needs to be 13% above H2 2018 and 32% above H2 2018 to reach the upper end. Could you give us more color on how you expect to achieve such a good performance in H2? I mean, we have some information on Slide 12, but it seems quite challenging to me given the current situation in retail, for example.
Thank you.
Yes, Martin. Good morning. On your first question, the short answer is yes. Price adjustment is included in our guidance for positive profits. On the second question with regard to the full year guidance, I went through in my speech segment by segment the developments and levers which we see, and I think I was very precise there.
And so I would refer you actually to those parts of my speech, which we will make available as always subsequent to the call. Otherwise, the IR team can help you. But I think I went through every segment and gave very precise guidance for the second half.
Okay, very clear. Thank
you. Thank you. The next question is from Ahmed Sabmall of Jefferies. Please go ahead. Your line
is now open. Hi. Thank you for taking my question. Two questions. Actually, I wanted to start with Slide 5.
Could you just focus or quantify for us what are the sort of the P and L and cash flow effect you're expecting from this arrangement that you have reached Watanfalt for this year? And then if this was to continue for next year, what would be the effects assuming sort of the same sort of €27.8 per megawatt hour? That'd be very helpful. Maybe I just wanted to come back on net debt and just wanted to make sure that sort of understood what you said correctly. You said you now so you indicated $20,000,000,000 for the full year, including the CPA adjustment.
And if I remember correctly from the first half first quarter update, you mentioned EUR 18,900,000,000 indication, which was the net debt at the time. So you suggested that full year may be close to $18,900,000 But that was if I understand correctly, it was excluding the CTA adjustment. So am I right that the like for like sort of movement in sort of the net debt indication on a standalone basis is $2,000,000,000 And if so, I understand that $500,000,000 is from pension provision as has been the move. What is the remaining largely sort of a big shift in your expectations around the free cash flow? Thank you.
Yes. Ahmed, I'll start with the E and D question. Essentially, apart from discount rates, nothing has changed compared to our guidance as of Q1. So there is nothing that we want to convey in terms of free cash flow balance for the full year, I. E, as I said, cash conversion targets, CapEx and so on.
As Solent Direct, we see a slight increase in CapEx as we did a minor acquisition in Sweden. And we do see some more investment opportunities in our regulated networks business in Germany this year, more than we planned. But this is small €100,000,000 numbers. So essentially, operationally, fundamentally nothing has changed, and you should just take it as an update then on the current discount rate level. When it comes to Page 5, the nuclear production rights.
You asked for the P and L and cash flow impact. I will now make it very simple. I will not kind of now include any potential tax and so on effect. So just plain vanilla operationally, You should assume that for every terawatt hour produced, which is not backed up by production wise, which we already own, then a cost for that of $27,800,000 will occur in our P and L. At the same point on time, 50%, five-0% of that will flow back to us as we are a minority a co owner in the Krummel plant from which the production rights originate.
So in simple terms, just take the 27.8x50% multiplied with the production not backed up by already own production price. That means in terms of cash flow recorded, we will record whenever we buy a production bus, we'll record this as CapEx and we'll then kind of use or depreciate with the effective production. For 20 20. So if we did not come to a different outcome in the legal court proceedings, which currently is our assumption that we come to a different outcome. But if I now assume the worst case, so to say, and assume that Page 5 is also a representation for all further volumes to be acquired, then you basically need to multiply it next year more or less with our annual production, so roughly or for next year between 20, 25 terawatt
hours. Okay. Thank you.
Times again, then price times 50% times those volumes.
Thank you very much. I now hand back to the speakers for some closing remarks.
Yes. Thank you very much, dear analysts and investors for your questions.
Yes, we will see most of you tomorrow already again in London. I wish you a nice remaining day. I'll see you on the road. Thank you very much. Also, goodbye, and see you soon.
Bye bye.