E.ON SE

XETRA:EOAN

Earnings Call Transcript 2020-Q1

[Operator]

Verena Nicolaus-Kronenberg, who will start today's conference. Please go ahead, madam.

[Verena Nicolaus-Kronenberg]

Many thanks. Dear analysts and investors. Welcome to our Q1 results presentation. Thank you for joining via telephone or webcast. Today, I'm here with our CFO, Marc Spieker. We will inform you about the operational and financial development in the first quarter 2020 and our outlook for the remainder of the year. .For the first time today, we will report on our combined operations as the innogy activities are now fully integrated in the reporting lines of E.ON. As usual, we will only highlight the main messages to leave enough room for questions. With that, over to you, Marc.

[Marc Spieker, CFO & Member of Management Board]

Thank you very much, Verena, and a warm welcome also from my side. Before I provide you with some color on the current situation in the context of corona, I would like to draw your attention to the highlights of the quarter. Let me emphasize that our expected time line for the merger squeeze-out of innogy being executed until autumn is unchanged. We are also making significant progress with the integration of the 2 companies. By now, we have appointed most management levels of the new E.ON, and most of the teams have initiated their work in the new setup. Today, I'll also reiterate the net synergy target of around EUR 740 million by 2022, which remains unchanged to our communication just a few weeks ago in March. In accordance with the newly created legislation in Germany, we have set May 28 as the date for this year's Annual General Meeting. For the first time in E.ON's history, this event will be held virtually without the physical presence of shareholders. The agenda includes the resolution on the dividend of EUR 0.46 per share for the 2019 financial year, providing the prerequisite for the dividend payout to take place on June 2. Financially, the first quarter has developed in line with our expectations, apart from the impact of an extraordinarily mild winter. Please note that the COVID-19 crisis did not have any material impact on our Q1 results. Investments into our regulated networks, which feed the long-term growth of our regulated asset base, could even be accelerated in the first quarter. CapEx for the segment has increased by roughly EUR 150 million on a like-for-like basis compared to 2019. This is in line with the commitments we presented at the Capital Markets Day. In our Customer Solutions business, we are continuously making progress as well. In all markets, except for the U.K., we have, again, gained customers, 150,000 in total during Q1 alone, half of that in Germany. During the same period, in the U.K., customer numbers were stable. Today, I can also confirm our 2020 full year guidance. Please note, however, that the guidance only reflects impacts from the corona crisis as of what we know today. I will elaborate on this later in more detail. Let me now make a few comments on the current COVID-19-related situation and how this affects E.ON. In addition to what we have already said in the context of our Capital Market Day, I want to give you an update on how we navigate through the crisis. Right from the start, we have implemented guidelines to support our staff with flexible ways of working, including a code of conduct for operations under crisis conditions. We were able to swiftly enable remote working for all employees whose work is not technically bound to a specific physical location. Of course, we are constantly reviewing location-specific concepts to also bring our people back into the office once lockdown regulations have been softened. Furthermore, we have taken very responsible measures in order to support and protect our customers. This starts with our no-disconnection policy to support the continuous access to electricity and gas for all our customers across our markets. On top, we offered extensive services during the crisis to help customers with payment plans and tariff adjustments. Most important, we are a resilient partner in operating the system-critical infrastructure of power and gas networks. I'm proud to say that we continue to deliver. Our networks are operating at the same reliability levels as normal. This is not a given in the light of social distancing requirements and also in light of an abnormal mismatch during the first quarter between renewables inflow on the one hand and lower electricity demand on the other hand. Given the current developments, politics, economy and society must prepare intensively and intelligently for the time after the crisis, when everything will be focused on reconstruction and recovery. We are convinced that right now, there is a huge opportunity to establish a sustainable energy system even more than before. Climate change will still be one of our greatest challenges, but, at the same time, we, as a key contributor to the system, can also benefit from it. The energy transition in Europe will only be successful if we create the right conditions for sustainable investments. For this reason, we continue to closely engage in the dialogue with regulators and governments, but also with suppliers and customers. Especially at this front, we argue for a relief in power prices for all customers. A quick recovery after the crisis will only be possible if energy remains affordable. That's why we argue for a cap on the renewables levy in the German electricity bill, for example, which is supposed to see a massive increase next year. Another topic is to simplify and to shorten approval procedures for green investments. The result will be accelerated specific investments into modernization of energy infrastructure, renewable energy production, climate-friendly heating and cooling and sustainable mobility. Those investments will create new local jobs and, at the same time, help to establish the new energy world. Our investment thesis is, therefore, unchanged. E.ON's networks and energy infrastructure are essential for society, and they are financially resilient. In this context, I would like to remind you of the protective mechanisms effective in the network regulation in almost all of our markets with regard to fluctuations in wheeling volumes. Page 4, gives you an overview of the different recovery mechanisms in our main markets. In our biggest market, Germany, for example, all volume-related revenue losses in 2020 can be fully recovered in the years between 2022 and '24. For the total group portfolio, more than 90% of our network's EBIT is protected by these mechanisms and will therefore only face timing effects. We will leverage this resilience by keeping our investment levels up even during the current crisis. While we delivered our planned CapEx during the first quarter, we now see the opportunity to step up our network investment plan for the full year by shifting even more funds towards investments backed by regulated returns. With that, let's turn to Customer Solutions on Page 5. You all know that the ramifications of the crisis are directly impacting energy demand. We have seen almost all European energy markets suffering from the lockdowns and the measures that have been taken by governments. Lower volumes in the B2B segment are only partially offset by a stable or rising demand in the B2C sector. Consequences for retailers are obvious: firstly, lower margins due to lower volumes; secondly, sell-back of energy that has been procured ahead of delivery at lower prices; and thirdly, an indirect impact due to a possible yet temporary change of clients' payment behavior. I have already talked about the promising developments in our B2C customer account numbers across the markets. I will now focus on the 2 main drivers for short-term profitability during the times of crisis, demand-related sell-back volumes and bad debt. Very early in the crisis, we have started to proactively manage our procurement position via sell-backs into the wholesale market. The full year impact that we locked in as of the end of April is a high double-digit million euro amount across all retail markets. With this, we feel that we are well prepared for the demand reduction in the remaining quarters. Please note that this effect is only partially visible in the Q1 numbers as the financial impact only becomes EBIT effective with the settlement of the underlying contracts. The second potential financial impact intensively discussed in the market stems from bad debt. The good news is that, so far, we have not observed any material change in payment behavior due to corona. There has been some minor adjustments in installment levels, but there is no material indication of delayed payments or even payment defaults so far. Let me be very clear. We are on top of those metrics. We have comprehensive lead-indicator-based dashboards in place across all of our markets. We have all payment and dunning-related processes under control, and we are well prepared to optimally manage any deterioration in payment behavior. But of course, I cannot rule out that payment behavior will ultimately deteriorate during the course of this year. In essence, we are aware of the particular situation. We observe our markets very closely. We have set up a commercial task force that is now operating in full swing and supporting the businesses in navigating through the uncertainty that we are facing. Let me, against this background, provide you with more granular information on our Q1 financials on the next few pages. The EBIT developments on Page 6 compare 2020 earnings relative to pro forma earnings of the same quarter in 2019. The pro forma 2019 EBIT figures entirely exclude the businesses that have been sold during 2019 like innogy's Czech gas grid or Slovakian operations as well as businesses that are part of the remedy disposals like the innogy Czech retail operations. Therefore, you can't compare these EBIT numbers like-for-like. EBIT in the first quarter came in at almost EUR 1.5 billion, which is a decline of 6% compared to pro forma earnings of the same period last year. Our financials of the period were mainly impacted by extraordinarily mild winter months compared to previous years. The first quarter in Germany was even warmer than the relatively mild first quarter of 2019. For example, February 2020 was the second warmest February since beginning of temperature tracking with being 4.3 degrees Celsius warmer than the long-term average. As a matter of fact, lower weather-related volumes for our Customer Solutions businesses translated into low triple-digit million earnings impact on group EBIT year-on-year. In addition, weather-related lower volumes in Energy Networks result in a further mid-double-digit million decline. Note that lost earnings in Energy Networks can be recovered over the regulatory period according to the same mechanism that I have elaborated on earlier. Furthermore, we quantify the corona-related impact on our first quarter numbers at a low double-digit million euro amount. Let me now come to the segments in detail. Earnings in Energy Networks are down 8% compared to Q1 last year. In our German network operations, lower weather-related volumes resulted in the decrease in the operating result. The decrease in the Swedish WACC in the new regulatory period added almost another EUR 50 million to the decline, as expected. Slightly higher regulated earnings in Central Eastern Europe, especially in Hungary and Turkey, could not fully compensate for the decline in Germany and Sweden. EBIT in Customer Solutions also dropped by around EUR 50 million compared to pro forma EBIT of Q1 2019. The decline is largely attributable to lower volumes as a result of the mild weather in all our markets. A further, but much smaller, negative impact results from the sell-back of excess volumes at lower prices due to lower energy demand as an effect of the recent economic crisis. Cost savings, especially in the U.K., could not fully compensate for these effects. Earnings of our noncore business increased by roughly EUR 20 million year-over-year as a result of the higher contribution from our nuclear operations. Higher hedged prices overcompensated effects from the purchase of further production volumes. Let us have a brief look what the earnings development means for our bottom line. Our adjusted net income came in at almost EUR 700 million for the first quarter of 2020, down 8% versus pro forma 2019. The financial line and minorities are largely unchanged compared to the previous year. Refinancing benefits and improvements in the minority line will have a more meaningful contribution in the last 3 quarters of this year. Let me now turn to the development of our economic net debt on Page 8. Economic net debt increased by around EUR 800 million versus the year end of 2019. This is almost entirely due to an expected seasonally low cash conversion in the first quarter. In our retail sales business, as every year, high energy consumption during the winter period causes a negative cash balance for us in Q1, as the cash inflow from installment payments is equally spread across the year. In our networks business, likewise, the redistribution of feed-in tariffs for renewable generators with high renewables productions in the first quarter in Germany resulted in a further temporary increase of our working capital. As every year, we expect these seasonal effects to reverse during the remainder of the year. Pension provisions improved by roughly EUR 300 million over year end 2019. The decrease of the defined benefit obligations as a result of an increase of pension discount rates was largely offset by the weak planned asset performance as of the end of the first quarter. Furthermore, the transfer of Nord Stream 1 to our pension fund has been executed and has led to an economic net debt relief of roughly EUR 1 billion in the first quarter. In the context of our net debt, I would also like to reemphasize our comfortable liquidity situation. With the early funding this year, we have already covered all bond maturities in 2020. In addition, we have proven our continued market access even during market turmoil, as evidenced with our last issuance, which settled early April. Given our liquidity on hand, the undrawn acquisition facility of EUR 1.75 billion, plus the undrawn syndicated credit line of EUR 3.5 billion, we feel very well positioned to cover all of our payment obligations more than 12 months ahead, including the squeeze-out payment. Be reminded that for the remainder of the year, the economic net debt level will still be affected by some extraordinary effects linked to the completion of the innogy transaction. Most prominent will be the already mentioned squeeze-out of innogy minorities, which will only be partially offset by other counter effects, such as the remedy disposals. Let us now take a look at the earnings outlook. Today, I confirm the guidance for 2020 of an EBITDA between EUR 7.1 billion and EUR 7.3 billion, an EBIT between EUR 3.9 billion and EUR 4.1 billion, and an adjusted net income between EUR 1.7 billion and EUR 1.9 billion. With a sizable negative impact from mild weather during the beginning of the year, we now expect to come in at the lower end of our earnings and net income guidance ranges. Let me clearly point out again our approach with regard to guidance in times of this unprecedented crisis. This approach was already the basis for setting our financial framework for the Capital Market Day back in March. As we do not have a crystal ball, we do not believe that it makes any sense to rely on a specific crisis scenario for the purpose of giving guidance for 2020. The reiterated guidance reflects the outlook for E.ON as of what we know today. We have reduced the outlook ranges for Customer Solutions by EUR 100 million for both EBITDA and EBIT, reflecting the adverse weather conditions at the beginning of the year in Q1 as well as a warm April, but also the sell-back losses on excess volumes for this business. Beyond this, be reminded that lower network earnings in 2020 as a result of lower distributed volumes will be recovered in subsequent periods. So even if the balance of the year would show a negative volume deviation in our networks business as compared to prior year, then this negative effect would only be of temporary nature. Please also note that increased levels of bad debt write-offs cannot be reasonably estimated. At this point, we do not see a material uplift of bad debt. We cannot rule out that this will change to the negative. Of course, we will provide you with updates at every reporting occasion, but, above all, we are focused on managing tightly our billing and debt recovery activities. As I said, we have also enacted a wide array of countermeasures and will decide on further countermeasures depending on how the crisis unfolds. On this note, and in line with the confirmed earnings outlook, we have also enacted measures to reduce investment levels in the commodity sales part of Customer Solutions while increasing CapEx by almost EUR 100 million in our German network operations. Let me, at the end, spend some words 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 the commitment to an annual dividend growth of up to 5%, which I reiterate today. While the outlook on 2020 still bears a lot of uncertainties, certainly more than in any normal year, we do not have any indication that the corona crisis impairs the midterm robustness of our plans. For that reason, we continue to have the high confidence in our midterm financial plans for 2022. We continue to expect a 7% to 9% compound annual growth rate for our EBIT, translating into a 10% to 15% compound annual growth rate for our earnings per share. Based on an average cash conversion rate of roughly 95%, we continue to focus on organic deleveraging over the midterm. With a midterm debt factor target of around 5x, we, again, reiterate our capital structure commitment of a strong BBB/Baa rating. 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.

[Verena Nicolaus-Kronenberg]

Many thanks, Marc. So as indicated, we will now move on with the Q&A session. [Operator Instructions] And with that, I hand back to the operator.

[Operator]

[Operator Instructions] The first question comes from the line of Deepa Venkateswaran, Bernstein.

[Deepa Venkateswaran, Senior Analyst]

So my 2 questions would be, firstly, on the U.K. turnaround and energy integration, just wanted to check if there's any impact of COVID, either positive or negative, in essence? Could you accelerate -- particularly for the U.K., could you accelerate the cost savings? Or any -- is there any fallout? And secondly, in terms of your full year guidance, I think you said on the call that you expect to be at the lower end of the guidance. Now given the warm weather, given there are still uncertain effects, if we had a situation where you ended up at the lower end of the segment guidance for networks and Customer Solutions, you would be missing the lower end of the overall guidance. So should I see this as risk? Or should I see that there could be some countermeasures that you already have that could help to fill the gap?

[Marc Spieker, CFO & Member of Management Board]

Deepa, thanks for your questions. With regard to the U.K. turnaround, at this stage, we do not see that the COVID-19 crisis has a material impact on the execution of our plans. That means, on the other side, that we cannot accelerate either. But I think the most important thing is that we do see the teams working against the initial schedule. And this means that we do expect, with the second quarter, to migrate the first customers from npower onto the new platform, which we developed in cooperation with Kraken Technologies. And I think that's a strong -- certainly in these times, the business sense there. With regard to full year guidance, I said that we do not have the crystal ball, and it's very difficult to predict how the recovery of the economy will exactly unfold during the next month. I think what is important to note is that whatever happens on the network side does not have any economic impact as the sensitivities, which we provided in the Capital Market Day, still uphold. Back then, we told you that for a 1% full year decrease in wheeling volumes, we would see a low to mid-double-digit million euro earnings impact, which would then nevertheless be recovered during subsequent years. So whatever happens on the earnings side in the networks business beyond the stage where we are, that would not have an underlying economic impact on us. Secondly, with regard to bad debt, I would say that is the second biggest swing factor for the remaining year. It is very hard to predict whether -- and also, actually, when any of that would materialize. As I said, in our Q1, but including April, we do not have a clear indication from any of our businesses that the situation is actually materially deteriorating. But as I said, our focus there is on operational excellence in order to mitigate any impact. And finally, on countermeasures, of course, we have enacted already a number of countermeasures in order to make sure that despite of the mild weather, and we already locked in losses from sell-backs, that we ensure that we are still in the guidance range, albeit at the lower end. But of course, we will observe that throughout the year. And depending on how the situation unfolds, we will, of course, also adjust the countermeasures. What I can say is that as of today, what we have not done is we have not taken countermeasures, which would impair future earnings capacity. Yes, so at some stage -- for example, cost to acquire for our Customer Solutions business -- at some stage, if you take these cost measures, then this will, on a like-for-like basis, have an impact on subsequent years. And for the time being, our countermeasures are focused on safeguarding 2020 while not impairing our future profitability.

[Operator]

The next question comes from the line of Wanda Serwinowska, Crédit Suisse.

[Wanda Serwinowska, Analyst]

Two questions. The first one is on your grid CapEx. You seem to be confident on the network CapEx guidelines. You increased it slightly. Is there any risk related to the social distancing or travel restrictions? And the second question is on the retail-specific loans solely for that. Would you maybe please comment on the customer behavior? Have you seen any direct debit cancellations? Have customers been contacting you on the late payments? And if you could give us a percentage of the B2C customers on the direct debit, that will be very, very helpful.

[Marc Spieker, CFO & Member of Management Board]

Yes. Wanda, on the grid CapEx, at this stage, with the agreed actions to soften the lockdown measures, we are very confident that we will be able to deploy CapEx this year. We have, even during the last 6 to 8 weeks, more or less delivered on plan. Of course, we have shifted some work as some civil works as they are easier to do than some work where social distancing is more problematic. But overall, in our network CapEx plans, we are highly confident. And this is not a hope, but it is actually proven by what we have delivered during the last 6 to 8 weeks. On customer behavior, as I said, on the payment front, we see limited impacts. We do see some the increased context with regard to adjusting installment payments, but from an overall perspective not really high or in any way alarming at this stage. We have seen that the order intake for our solutions business during the first quarter has still been quite robust. We need to observe now the second quarter, how that will continue. On the commodity side or for B2C, while we do see throughout the market a slight increase in demand, we have also noticed a slight reduction in churn, but I think this is now too early to say whether that's going to be a lasting impact for the year. I think overall, as I said, we have been able to increase our customer count numbers, again, by 150,000 across Europe and keep U.K. stable. So at this stage, I would say the situation in our Customer Solutions business is robust, given where the overall economy stands.

[Wanda Serwinowska, Analyst]

Can I ask a very quick follow-up?

[Marc Spieker, CFO & Member of Management Board]

Exceptionally one.

[Wanda Serwinowska, Analyst]

Yes, only one. Promise. Do you have, by any chance, the volume development in the B2B and B2C in April?

[Marc Spieker, CFO & Member of Management Board]

I can only basically refer you to what we overall observe in the markets, and this is then more or less also reflected in our numbers. So we do see that in Germany, for example, energy demand is down by around 15%. Keep in mind that April was characterized of warm weather as well. So actually, not all of that is corona-related. We still see our operations in Italy to be most affected in terms of energy demand, where we, in April, were above 20%. Overall, as our portfolio is somewhat less exposed to B2B, the impact for us is more limited. And if you look in our presentation on Page 5, where we tried to quantify and make that risk a bit more tangible for you, only 15% of our total volumes are exposed to volume fluctuations. And for those volumes, on a full year basis, we have more or less already adjusted our procurement position by 10%. And again, with that and also with the numbers, which I just quoted for April, we feel, at this stage, well positioned for the remainder of the year.

[Operator]

The next question comes from the line of Alberto Gandolfi, Goldman Sachs.

[Alberto Gandolfi, Head of European Utilities Research]

The first one is, again, on guidance. And I apologize in advance because they going to be slightly painful, but to make sure I understand, you have already confirmed the bottom end of the guidance, let's say, or towards the bottom end, including what you think the sell-back losses for the rest of the year will be. I guess my question is, can you tell us what type of demand estimate did you take to do that? So I was just trying to understand if maybe the volume deviation is bigger, you may have more losses to account for. And you said you took -- at the moment, it's premature to talk about bad debt, but would you agree that in this furlough period, typically, you wouldn't expect major bad debt? There's a lot of help coming from states, which are supporting small businesses and are supporting employment. But perhaps in the second half of the year, you may have a bit of a spike in terms of default rate and unemployment, which could put pressure on bad debt. So just trying to frame the guidance a little bit. And the second question is, Marc, if you can help us out a little bit, forecast net debt for the year. You have the innogy buyout, the dividend payment, but you had such a big working capital swing of minus EUR 3 billion in Q1. So is it fair, you think, to expect perhaps debt approaching more the EUR 41 billion than the EUR 40 billion? Or is there other elements we need to think about here?

[Marc Spieker, CFO & Member of Management Board]

Yes. Alberto, your questions are not painful. I think we are all having our specific challenges with the situation, which no one wanted and wished for. So with regard to the guidance, you're right that the sell-backs, which we have executed, are fully baked into our guidance. And with regard to what that covers, we're actually very explicit. As you can see on Page 5 in our presentation, we say that of those volumes, which are exposed to demand fluctuation, we have sold back to the markets, if you look at those numbers, close to 10% on a full year basis. So we do expect a full year demand contraction for those -- for this customer portfolio of around 10%, yes? So that means, of course, relative to the developments which we see in April that there we see a demand contraction, which is, of course, much higher. So that you can conclude that, of course, we do assume now a recovery. But this is the uncertainty which we all face. Yes, will it be a V, a U, a W, an L? This is what we need to closely observe. But at this stage, we feel well positioned with debt adjustment in our procurement book. When it comes to bad debt, I would agree with your observation or hypothesis that I would expect -- or I would not expect bad debt already during the second quarter, for example, to reach a peak. But it will depend very much on the recovery of the industry, how big any impact then during Q3, Q4 will actually be. If we see now a smooth track back to recovery, I do think that for a lot of businesses then insolvency can be avoided. And with that, I think payment plans, et cetera, can be agreed, where we then would talk about temporary working capital, but no ultimate losses. If we see a more adverse development in the recovery, that picture can be different. And hence, I do agree about the timing principally, but I would also not rule out from today's point of view that the outcome may actually not be that adverse and difficult as in a worst-case scenario you may imagine. With regards to economic net debt, indeed, there are a number of moving sectors in our Capital Market Day. We said that relative the year-end 2019 economic net debt of approximately EUR 39.5 billion, we would expect during this year an increase in economic net debt. As of now, we are above the year end 2019 level already. I think from the squeeze-out and the remedy disposals, net-net, I would still expect a negative balance. So that would actually call for a further increase in economic net debt. On the other side, we also see a number of volatile factors. You see the pension provisions, where our recommendation still remains look through short-term volatility, look for the long end with a 2025-year duration, and also when it comes, for example, to our mark-to-market position on energy derivatives, which may have or may not have a temporary cash burn due to margining. So there are some elements, which I do see, for example, negatively in our Q1 numbers, which can easily then turn back until the year-end. But from today's point of view, I would rather expect a further slight increase in our economic net debt.

[Operator]

The next question comes from the line of Peter Bisztyga, Bank of America.

[Peter Andrew Bisztyga, Head of Pan]

So just a bit of further clarification on how you account for bad debt, please. So at what point do you actually write off bad debt? Can you tell us what sort of write-off rate you had in Q1 compared to what you normally experienced? I guess, you're saying sort of pretty similar. And having just assumed normal levels of write-offs for the rest of the year or slightly elevated levels from Q1? So that's my first question. And then just on pensions, can I just clarify? The actuarial rate on these, is that based on AA bond yields or some other metric? And those have come down over the last month, I would say. So is it fair to say that, all else equal, the pension liability side of the equation has gone up since you reported Q1?

[Marc Spieker, CFO & Member of Management Board]

Peter, on -- I'll start with the second question on pensions. Indeed, our pension discount rates are calibrated against the basket of corporate bonds, which are not AA, but single A-rated. And this is why I'm looking at the combined effect of the risk-free rate and then corporate spreads. On a today mark-to-market, for example, pension provisions would look slightly higher, and this refers to the volatility, which I mentioned. If I look at the asset performance during the last 5 weeks, that has improved actually remarkably as well. So the net effect will not just, therefore, be the discount thing, but we have the offsetting asset performance. So this remains volatile. But again, look through that. It will not impact the way how we, short and midterm, allocate capital and decide to pay dividends. Secondly, with regard to bad debt levels, the -- I think we need to be aware of that the bad debt ratios vary significantly from market-to-market as the payment regimes and regulations in the market are simply different. On group average, our bad debt rate, which we typically see, is around 0.6% to 0.8% of total revenues. And this varies. In Germany, for example, it is significantly lower. And in the U.K., for example, it is higher. But on group average, this is the range, 0.6% to 0.8%. And during Q1 2020, we have not seen a material deviation from that historical average. And when I say historical, I'm looking back at the last 5, 6, 7 years. In euros, this means that in our P&L, you see in our Q1 numbers, around EUR 130 million of bad debt write-offs. But again, this is fully in line with the historical averages, which we have seen. And for our guidance, we have, at this stage, not assumed a material deterioration in that rate.

[Operator]

The next question comes from the line of Lueder Schumacher, Soc Gen.

[Lueder Schumacher, Equity Analyst]

Two very quick questions from my side. The first one is again on pension provisions. Marc, can you just break down the net improvement of EUR 300 million into the 2 main components? How much of this is due to the higher discount rate, the 40 bps you have? And how much is taken off from this improvement due to the weak asset performance? And these are obviously the 2 main lists, which will go probably into very different directions for the remainder of the year. So it would be good to have a starting point there. And the second one is, just a reminder on Slide 10, you said the cash conversion rate of 95% is excluding provision utilization for nuclear. Can you just remind us what that should be on average per year?

[Marc Spieker, CFO & Member of Management Board]

Lueder, on the cash conversion, we -- so first of all, again, to make the methodology here, we excluded cash-out for nuclear decommissioning as the nuclear provisions are included in our economic net debt. So whenever we use these provisions, it's converting a provision into a financial liability. And therefore, this cash outflow doesn't create any impact on our economic net debt. And the magnitude of that is, for this year and the midterm, you should assume around EUR 400 million of cash-out. That can vary from 1 year to another, but, as a run rate, EUR 400 million is fine. With regards to the pension provisions, I can't provide you with the specifics on our discount rates, which have increased in Germany, for example, from 1.3% to 1.8%. We are not disclosing now the specific performance of our CTA plan assets as well as then the on-balance and on a quarterly basis. Bear in mind also that in the U.K., for example, we are actually overfunded, so that changes there do not feed through our economic net debt, at least in a certain band. So this is all I can give you. The U.K. discount rates are actually even more volatile. They increased from 2% to 2.6% as of Q1. But as Peter earlier observed, this discount rate has come down a bit if I look at rates as of last week.

[Lueder Schumacher, Equity Analyst]

Yes, the discount rate has gone down a bit, but also the hit you took on the weak asset performance should also have improved a lot. So I wasn't looking for sort of a breakdown, but, in general, how big was the impact from weaker markets? So we get an idea of the rebounds you would have seen since then.

[Marc Spieker, CFO & Member of Management Board]

We will -- next quarter, we will give you an update. And again, I can only recommend you don't overfocus on that. I think it's ill-allocated resources to conclude too much on our company.

[Operator]

The next question comes from Rob Pulleyn, Morgan Stanley.

[Robert John Pulleyn, Equity Analyst & Commodity Strategist]

Rob Pulleyn, Morgan Stanley. Thanks for the great presentation and all of the clarity you've given so far. If I could just ask 2 extra questions. The first one is, what risks should we bear in mind around your deal integration and synergies given the, shall we say, sociopolitical sensitivity right now about job losses in the wider economy? Is this a factor around the E.ON story at all? And then the second one, I think we appreciate all of your answers on COVID, but can we look a little bit beyond that, say, for the next 5 years. Regarding network investment for the electrification theme that E.ON has a play on, does management consider the company to be opportunity-constrained over this period or capital-constrained?

[Marc Spieker, CFO & Member of Management Board]

Yes, Rob, thanks for your questions. On the deal integration synergies, we do not see the delivery of synergies at risk. We are already far advanced with our programs. And we've seen a reasonable acceptance level in what we call the sprinter phase, so where employees can decide to leave early and receive an extra bonus for that. So we see a reasonable acceptance rate in line with previous restructuring programs. And this has, up until now, not been affected, for example, by COVID-19. So from that end, we do not expect, also not from the political side, that politicians will not intervene on the implementation on programs, which have been initiated actually years ago. On the midterm outlook, I actually see ourselves very well positioned. From this time, I see opportunities and capital well aligned. As you've seen for this year, we've decided to shift more CapEx even into regulated networks. We also announced this morning that, given the strong demand for new connections and electrification in Germany, that we will mobilize another EUR 500 million CapEx during the next years. And we are confident that this is, a, an opportunity; and b, that we have the funds to deliver on those while also, and this is, as I said, our compares, delivering on our financial framework with all its ingredients, including a rising dividend.

[Operator]

The next question comes from James Brand, Deutsche Bank.

[James Brand, Research Analyst]

Most of my questions have been answered already, so I'll just ask one, which is also on the medium term. I was just wondering how you think the crisis, if at all, impacts on the medium-term competitive landscape in energy retail. It's obviously been an area that's been getting more and more competitive in recent years. Do you think the crisis shakes out some of the new entrants? Or maybe if it does, that's just temporary, and then we see another wave coming back in again?And then secondly, to that theme, if we do have a longer-lasting impact from the crisis than maybe some people are hoping for, and we do see kind of lower energy demand being sustained and higher bad debts over the medium term, how much pricing power do you think you have in retail to pass that on and to maintain margins? And I guess that ties in a little bit to the first question and how the broader competitive landscape evolves. But I appreciate it's quite hard to answer those questions at this point very early on in the crisis, but any thoughts you have would be pretty interesting.

[Marc Spieker, CFO & Member of Management Board]

Yes. It's a very relevant question, James, but I guess that's a bit like looking into the crystal ball. Generally, I do expect that competition or competitors, specifically the small ones, will be negatively affected as they typically are thinly capitalized. And this cost of capital in this crisis time is rising. They will also have to cope with sell-backs and so on. So those which are thinly capitalized will come under pressure. As we could show in all of our markets during Q1, we've been able, again, to increase our customer accounts. Even in the troubled U.K. market, keep it stable while preparing for the full migration of npower on to a new platform. But is it kind of -- I think it's an interesting piece of evidence. Will that hold for the entire year? Let's see. The other arguments, augmentation at low prices offers an entry point for competitors. At the margin, at least I don't think that competition will -- is likely to actually increase. Whether it will decrease on a pronounced way, too early to say. And anyhow, as we said in our Capital Markets Day, we are focused on setting our cost position and our IT architecture that we are able to operate profitably even in the current competitive environment. And with regard to pricing power, I think that is difficult to say. I think where, of course, we are having our eyes close on the ball is that where governments and regulation impose or trigger now a change in payment behavior. For example, in the U.K., where we do see government intervention for vulnerable customers and so on, there, of course, we expect that any negative impact will also find its way then at some stage back into regulated tariffs because you can't run a regulated market as a one-way street kind of impose all the negatives and never give some relief then for what the industry actually carries. But I think this is a bit of different angle of what you alluded to, but just to affirm that we are managing all angles of managing bad debt operationally as well as politically.

[Operator]

The next question comes from Vincent Ayral, JPMorgan.

[Vincent Jean Michel Ayral, Analyst]

I hope everyone is safe. A lot of questions have been asked, so I'll just stick to one. When we look at the midterm delivery plan, and these are CAGR growth adjusted for nonop and reflection of COVID impact as of 30th of April, so my question is quite simple. If we look at COVID, you've got potentially a volume impact negative in 2020, and you will have clawback effects to make up for the revenue shortfall in '22 plus. And so how do you account for that? You basically -- when you reiterate your guidance here, are you looking at correcting on both sides of the equation? In effect, what we could see here, it's potentially a higher EPS 2022 due to COVID net-net. So could you give us a bit of color just to understand in details how do you, say, define your guidance here?

[Marc Spieker, CFO & Member of Management Board]

Yes. Vincent, that one is easy and straightforward. Our midterm financial outlook, i.e., the midterm CAGRs, are based on the midpoint of our guidance and not the low end. And we have now -- and you should not expect now that with every quarter, we always fine-tune our midterm guidance. But the mechanics kind of on I said power network basis, which you allude to, are absolutely right. So if, for example, we should see during this year a negative -- a material negative impact from lower wheeling volumes in our networks businesses, then this would like-for-like -- or this we'll consider that with powers mean that with the recovery then in 2022, growth rates will actually increase. That's absolutely correct. But this is why we will not now kind of -- by confirming the guidance range, albeit at the low end, we do not now we adjust every quarter our midterm guidance. So look at the midpoint, apply the growth rates, and this is where -- and then you know what we expect -- where we expect it to be prior to the crisis. And when I say that we do not see our midterm blends impaired by the crisis, then this means that the absolute levels are unchanged. And it's too early today now to speculate around how regulatory mechanisms will then impact the growth rates and ultimately the absolute levels in '22. But of course, we will come back to you with more clarity once there is more clarity also in the market around that.

[Vincent Jean Michel Ayral, Analyst]

Just to follow up to make this clear. So basically, I'll take the big point of the guidance. I'll put my growth rate. That's the idea to get to 2022. But then I need to add a clawback for the networks and come up with an estimate there, slightly offset by whatever impact is remaining on the supply. But that's a net positive, so we should see a higher 2022 than at the time you created the guidance pre-COVID on absolute terms. Is it fair?

[Marc Spieker, CFO & Member of Management Board]

Again, it depends on the development of wheeling volumes. And if wheeling volumes for the full year will be down, then it is what you described. But again, I cannot provide you now the clarity on the if. But most importantly, the economic impact for us as a company and for our shareholders is neutral.

[Operator]

The next question comes from the line of Sam Arie, UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

My first question is hopefully very easy. The EUR 500 million that you wrote about in the release this morning of new green and stimulus spending, my understanding is that this is not an additional EUR 500 million on top of the CapEx guidance that we gave at the CMD, which I think was EUR 13 billion across the plan. Is that right? And then...

[Marc Spieker, CFO & Member of Management Board]

Sam, we have been -- yes. We have not specified the exact timing. We said midterm. Principally, you should think about this EUR 500 million on the network, i.e., of investments, into the regulated asset base as net-additive. Whether that is now all coming, until 2022, given the lead time of some new connection processes and so on, that can also then go into 2023 or '24. But be reminded of what we said when we presented our story in the Capital Market Day that a 3% to 5% annual growth of our regulated asset base that we do see this as a very robust growth assumption. And so it should not come as a surprise that as time unfolds that we do see additional potential and we'll make use of that potential.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Right. Okay. So some parts -- some small parts of that may come during the current plan, and then it may come also in 2023? And that's the idea behind the EUR 500 million?

[Marc Spieker, CFO & Member of Management Board]

I think what you should take away is that there is tangible evidence for the confidence, which we expressed in our Capital Markets Day, that the energy transition will offer a lot of opportunities for investments into the regulated asset base.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Yes. No. I'm just being very careful given that I have go on and model that EUR 500 million of CapEx or if I have the EUR 15 billion that's not to be goodwill into the CapEx already. And I think I'm understanding that this could be more faster of potential to rather than adding EUR 500 million to the CapEx we have in 3 years. I think that part, that's the effect?

[Marc Spieker, CFO & Member of Management Board]

Yes. Again, I don't want to make the conclusion for you. I think I've said what I said.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Yes. I got that right. So listen, let me just ask my second question. I think it's going to actually be easier. But the CMD, you talked about the EUR 13 billion CapEx. Maybe that should adjust slightly here now with the other projects you're talking about. You also talked about organic deleveraging to level around outside of EBITDA, which -- I mean I would assume that from today's presentation, you are still very comfortable with that overall outlook and the deleveraging. But you did say I suppose the net debt might be a little bit higher for various reasons this year, and you also talked about it, the risk, the earnings. I just wanted to check how comfortable you are with that sort of midterm deleveraging outlook, and if you start also looking at asset rotation that in some parts of the business that needs that even though CapEx is growing at the level of the opportunity.

[Marc Spieker, CFO & Member of Management Board]

The confidence level hasn't changed. It's why we reiterated our midterm targets clearly today. And as we laid out, but I don't want to repeat that, we're working on all the different levers and don't see that the initiatives, which have already been triggered, are impaired by the crisis on a midterm basis. And, hence, our commitment and confidence remains high in that respect.

[Operator]

The last question for today comes from John Musk, RBC.

[John Musk, MD of European Utilities Research & Analyst]

Perhaps sort of almost circling back to the beginning, just to make sure I understand this, and apologies if I'm being slow. But on the sell-back impact on Slide 5, where you've got the various percentages of what you've already sold back. So you indicate the high double-digit million impact. Is that for -- that is the full year effect as you stand today or are you going to increase that number as you sell back? Do you need to sell back more volumes to fully cover off the numbers in the first column in the top half of Page 5? So do you need to sell another 7% back to the market in Germany, for example? Just to clarify that. And then the second question on the other announcement that you highlighted at the beginning of the call around capping the renewables levies on customer bills, perhaps you could just explain a little bit how the mechanics of that or how you would want the mechanics of that to work. Is this something that you expect the government to pick up the difference? Are we to be expecting, under your proposal, some form of tariff deficit? How do you think people should pay for these renewable expenditures if it's not going to be the ultimate customer?

[Marc Spieker, CFO & Member of Management Board]

Yes. John, to clarify on the first one, and maybe I may, again, refer to Page 5 in our presentation, so those contracts where we are exposed to volume fluctuations for this part of the portfolio, we have adjusted our procurement position by 10%, full year basis. That is underlying the high double-digit million euro effect. This is, sort of, say, locked in as of today. Financially in our P&L, it will only, as the underlying is being settled are materialized, so by the end of the year, we expect that then this high double-digit million euro effect will have gone through our P&L.., assuming that on a full year basis the demand contraction is 10%. And that's all I can say. And whether that's going to be enough or not, we will all see. From today's point of view, we feel comfortable with the adjustment in our procurement portfolio in that way. But that doesn't mean that my comfort may change depending on how the recovery unfolds. On the renewable levy system in Germany, I will actually now give for everyone a long tutorial. So I will keep it very short term. But if you would like to have a follow-up, I'm happy to give that then on a bilateral basis. Essentially, the levy in Germany is determined: a, by the differential between the electricity wholesale price and the fixed feed-in tariffs; and secondly, by the overall renewable production relative to demand. In both sectors, this year mean that next year's levies will go through the roof because, a, electricity commodity prices have come down and with that differential between the fixed feed-in tariff and commodity prices, and the differential needs to be covered by the levy. And secondly, demand can only be expected to go down on a full year basis this year. And against that background, we will see a deficit for this year, which will then have to be recovered next year as well. And this is why it is already from today obvious that the levy will go through the roof next year. And this levy predominantly needs to be carried by midsized commercial and industrial customers as the large industrials are actually exempt from it. And those are particularly the industrial and commercial groups, which are affected by the COVID-19 crisis. And this is why we do see a strong political support in order to mitigate that increase. And the government itself last year introduced, with their CO2 reform package mid last year, a mechanism where they introduced higher CO2 pricing for heating and transport sectors. And already introduced the mechanism or, let's say, a legislative procedure how to lower on the pay system the EEG, the renewable levy. And so, actually, you don't need to implement a new legislation. You can just use the existing mechanisms in order to implement that. And the impact would be 2 things that what you want. Green electricity actually becomes a cheaper product. And with that, I think you further will get demand from a sustainability point of view that makes all the sense. And also from an economic recovery point of view, you provide for a very specific stimulus for those customers, who are, in particular, in need for this. And so we are actually optimistic that politicians in Germany will listen to that proposal and execute on this. I think more than bilaterally, I don't want to bore everyone with a tutorial on German renewables support schemes, which did not prove to be best-in-class. So I don't even think that anyone can learn something in a positive sense from that. And in a certain way, it's back-fixing the flaws from the past to avoid that they don't create even bigger flaws in terms of a crisis. All right. That seemed to be the last question.

[Verena Nicolaus-Kronenberg]

We are obviously happy to follow up on an investor Relations basis if there are any further outstanding questions. So just give us a shout, as always. And other than that, looking forward to seeing, respectably speaking to you in the course of the next events that we are doing.

[Marc Spieker, CFO & Member of Management Board]

Thank you very much. And stay everyone healthy, take care. And then probably it will still take time before we see each other, but I'm looking forward to at least then listening and talking to some of you bilaterally during the next days and weeks. Thank you very much. Bye-bye.

[Verena Nicolaus-Kronenberg]

Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This conference has been concluded.