E.ON's (ENAKF) CEO Johannes Teyssen on Q2 2016 Results - Earnings Call Transcript

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E.ON SE (OTCPK:ENAKF) Q2 2016 Earnings Conference Call August 10, 2016 5:00 AM ET


Florian Flobmann - Head of Investor Relations

Johannes Teyssen - Chairman & Chief Executive Officer

Michael Sen - Chief Financial Officer & Member-Board of Management


Vincent Gilles - Credit Suisse

Alberto Gandolfi - Goldman Sachs

Deepa Venkateswaran - Sanford Bernstein

Peter Bisztyga - Bank of America Merrill Lynch

Ahmed Farman - Jefferies

Michel Debs - Citigroup Global Markets

Martin Brough - Deutsche Bank

Lueder Schumacher - Société Générale

Sam Arie - UBS


Dear, ladies and gentlemen, welcome to the E.ON First Half Results 2016. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Mr. Flobmann, who will lead you through this conference. Please go ahead, sir.

Florian Flobmann

Good morning, everyone, and welcome to our first half year conference call. We published our financial information at 7:30 this morning, and the files can be downloaded from our website. I'm joined in today's call by our CEO, Johannes Teyssen; and CFO, Michael Sen. Johannes will start off the presentation with giving overview including the focus on our spin-off and developments on our markets. After that, Michael will lead you in detail to our H1 financials. And at the end, we will have a Q&A session.

With that, Johannes, I would like to hand over to you.

Johannes Teyssen

Hello, ladies and gentlemen. Welcome to the first half 2016 conference call. As our shareholders voted almost unanimously in favor of the spin-off, this is the first time we now report a new structure. After this opening remark, let's now move on to our solid first half 2016 results.

Excluding the contribution from divested businesses, group EBIT was up roughly €100 million year-over-year. If we focus exclusively on our core business, EBIT was actually up approximately €200 million year-over-year. Strong EBIT increases in Customer Solutions and Renewables, together with a favorable development in the Corporate Functions/Other line more than offset the weaker result in the German Energy Networks. However, underlying net income came out at €600 million, €100 million below prior year if you adjust also here for the contribution from divested operations. Main driver for the lower result was an aperiodic tax effect in the last quarter.

With regard to the full year outlook, we are well underway to reach our earnings targets. Thus, we explicitly confirm the full year 2016 outlook for Future E.ON today. After the AGM vote, we had to test the book value of the Uniper assets. This resulted in overall burden of €3.8 billion and, thus, we show a negative result on a reported net income level. Michael then will detail the results in a moment.

Before he does so, I would like to firstly update you on the spin-off preparation, which we're quickly nearing the finishing line now; secondly, spend a few words on the recent progress on the nuclear storage discussions with the German government; and, finally, highlight recent developments in our core business.

Turn to chart 3. At our AGM on June 8, we achieved one of the most important milestones in the whole spin-off process. We are delighted by the approval vote and regard it as a strong sign of confidence in our decision to separate E.ON's portfolio into two much more focused and better-positioned companies. Furthermore, we were also explicitly and highly delighted that there have been no contestation during the one-month legal period after the AGM. And, thus, now the way is free for a relatively early listing of Uniper already in September.

The essential remaining more procedural step before the listing is the publication of Uniper's prospectus. Before the prospectus can be published, it needs to get a final approval from the German financial regulator, BaFin. There's lots of reasons why we cannot give you a precise day for the prospectus publication and the listing at the moment. However, we are in very close contact with BaFin and started the prospectus filings already some months ago and are making extremely good progress.

Before the prospectus publication, Uniper will publish its H1 figures on the 22nd of August and will also hold a conference call on that day. Yesterday, you received a Save the Date for that event. With the publication of the prospectus, the Uniper top management and IR team will then undertake very extensive road show activities and be on the road across Europe and the U.S. with support teams in parallel.

And it might not be the worst timing for Uniper to be listed. Commodity prices in the last quarter have recovered to a certain extent from the dramatic lows early this year, and we are seeing encouraging signs of supportive regulatory changes, notably the development regarding the UK capacity market and the additional auction coming up, and almost more importantly, the phasing out of the new tax and the high reduction of the hydro tax in Sweden.

Although and however, it's important to bear in mind that we are not selling the Uniper majority stake of roughly 53%. The current shareholders - our current shareholders already own all Uniper assets. And by spinning, we are not diluting existing E.ON shareholders by IPO'ing a stake in the subsidiary, but we're increasing the options for existing E.ON shareholders. We are giving them the 53% Uniper stake in a tradable format, and by this, they get the opportunity to adjust their exposure to the Uniper assets according to their preference. Going forward, the two companies are much more focused and will be managed in a value-creative way.

We also have an absolutely clear-cut corporate governance situation. There will be two wholly independent companies. After the execution of the deconsolidation agreement, our remaining minority participation in Uniper will be consolidated at equity. And we confirm today our clear commitment to dispose our remaining Uniper stake over the medium term. And we are able to further use our stake from 2018 onwards looking at the tax situation. Thus, in a few years, Future E.ON and Uniper will be completely separate companies. In a nutshell, the spin-off of Uniper is an enabler for our strategic ambitions, another way to finance legacy businesses.

That brings me to the next important topic, where we also might start to see the finishing line on the horizon, and I would say on the very near-term horizon, German nuclear. After the publication of the final recommendations of the commission so called, KFK commission, in late April, intensive, very intensive discussions between the relevant authorities in Berlin and the nuclear operators have started. In order to clarify the different issues, several work streams have been formed. And although the discussions take place in an, overall, constructive atmosphere, things are also getting tough from time to time as the sums and the issues that are at stake are very significant as you're all aware.

It goes without saying that we are doing our utmost to protect the interest of E.ON and our shareholders. Examples of important topics that we're discussing include: first, how to update the 2014 figures that have been used in the KFK report at the end of 2016 figures, and in the KFK report, standardized figures for the industry were applied and how do we split them exactly between the different operators and plants in an adequate way. These two examples I just gave you boil down the question how much exactly do the individual operators have to pay.

Another important topic is the exact and very clear and precise definition of the technical condition of the separation of duties and of the nuclear waste that has to be handed over to the authorities. This gives me the opportunity to reiterate our stance. Yes. We want to come to a solution on this, in essence, unlimited and uncapped risk as quickly as possible in view of shareholders' interest. And we are, therefore, also willing to pay the somewhat punitive premium quickly.

At this point, I would like to re-emphasize that regarding German nuclear, our full focus is on minimizing the political and financial risk. PreussenElektra is not and will not be a strategic business and is clearly non-core. We own it only because we are politically obliged to do so. Strategically, it will clearly belong to Uniper.

Regarding the overall process, the government is following a quite ambitious timeline. The government currently has the ambition to have the whole package of new laws and amended laws ready for a cabinet decision by the end of August or early September. This should also include a draft version of the private law contract which, for us, is absolutely essential as we made clear from the beginning on. After the expected cabinet decision, the parliamentary process is intended to start.

From today's perspective, the government is confident that the whole legal package will enter into force early next year. Regarding the size and the timing of the amounts we have to pay, we should have a final clear view after cabinet decision. What remains unclear is the content and also the timing of a final court decision of the nuclear fuel tax and the expropriation case. We are waiting for delivery of judgment of the court.

Turn to chart 4. After these updates on the spin-off preparation and German nuclear, I'm coming to our core business. Here, we'd like to start with an overview of recent regulatory developments in our German Energy Network business. Just last week, the cabinets here decided on a modernized incentive regulation ordinance. Its main content is the removal of the regulatory time lag for rewarding investments via yearly true-up of the regulated asset base for new investments. This is a very helpful improvement that we called for. It removes business centers for investments.

On the other hand, obviously hand-in-hand, the well-known expansion factor bridging this delay will be abolished. Further changes include an efficiency bonus for network operators with exceptionally high regulatory efficiency scores and the intention to significantly increase the transparency around the regulation. Thus, the regulator has to publish much more company-specific data in the future.

This modernized ordinance includes a number of sensible changes, however, with only limited impact on our overall German network earnings at least foreseeable. The improvements are today more a conceptual level and we need to learn how to monetize them. No change in system but just an application of the current law rules is a review of the allowed return on equity for the next regulatory period starting in 2018 for gas and then 2019 for power.

In mid-July, the regulator started the consultation with an initial proposal of 6.91%, which is obviously a significant reduction compared to the current 9.05%. Ceteris paribus, this would result in a significant reduction in all revenues and earnings. However, in the previous two reviews in 2008 and 2011, the initial proposed RoE was eventually increased by roughly 1 percentage point in the final consideration.

Also, this time, we will push hard to get better returns for our investments. However, we, of course, don't know whether we will be as successful with our arguments as during previous consultations. The regulator intends to publish its final RoE determination in September. The German RoE examples highlight that the low interest rate environment creates challenges for us, not only when it comes to our balance sheet and pension liabilities, but also on our Energy Network business, [indiscernible] somewhat expected.

Regarding political challenges, I think we also have to mention Turkey. Like many other people around the world, developments within Turkey worry me quite a lot, maybe less from a narrow E.ON perspective, but rather out of sympathy with the country and its people. Together with our local partner, Sabanci, we are closely observing the situation. So far, there has been no meaningful impact on our business, which we, from now on, report in our Energy Network segment besides the limited pressure on the Turkish lira. Looking more long term, however, political stability is, of course, a very important condition for a sustained engagement in Turkey.

Turn to chart 5, this brings me to our next core business, Customer Solutions, and unfortunately to the next political and regulatory challenges. I'm talking here about the Brexit and the final CMA conclusions. As a European by conviction, I have been deeply disappointed by the UK's decision to leave the union. I sincerely hope that for the implementation of the Brexit, reasonable solutions will be found that will preserve, to a large extent, the rules of the single market for energy in Britain. The likely financial impact of the Brexit on E.ON will be explained in more detail by Michael Sen.

The impact on our UK Customer Solutions business could especially come from weakening of the UK economy that is potentially triggered by the Brexit-induced uncertainty. These economic headwinds come at a time when our UK Customer business is already facing some significant changes from competitive and regulatory dynamics.

All new incumbents are observing severe competition by new market entrants. With our industry-leading NPS score, we feel in principle relatively well-positioned, and our aspiration would normally be to retain our customer base. However, the price advantages of the smaller competitors, which are buying relatively cheap at current wholesale price levels and which are not burdened by the ECO Obligation, is somewhat high. As the positive gross margin is one of our key principals, we are currently losing some customers. Our answer to this environment is even more rigor on cost, as well as the development of a new commercial strategy.

Against this challenging backdrop in terms of competition, the CMA published end of June its final report. We do agree with many aspects of the report, including the removal of the simpler choice component. This will allow us to bring more innovative new products and tariffs to the market to increase customer engagement. However, we strongly disagree with the CMA's belief that UK suppliers are exploiting any market power through making excessive profits. Thus, we are very skeptical regarding the introduction of cap on prices charges to prepayment customers as we believe it will be difficult to set and will likely lead to this customer disengagement.

The CMA view that a fair EBIT margin for an efficient supplier is 1.25% is not supported by us. Such a margin level does not adequately reflect the nature and the risk of our business. The majority of the measures proposed by the CMA should enter into force in April 2017. Of course, we have to wait for the exact configuration of the proposed measures before jumping to conclusions. While looking forward, we might have seen peak margins not only in Germany but also in the UK, but we also flagged that in the past already. Just as a reminder, also in Germany, competitive dynamics are significantly increasing as we indicated to you already in March.

On chart 6, I'll talk about the Renewable business. Here, we continue to make remarkable progress in deploying our excellent capabilities. At our Rampion wind farm, which is located 13 kilometers offshore in the English Channel and features 116 wind turbines with an overall capacity of 400 megawatt, the construction work progress progresses very well. We currently have two large construction vessels installing mono-pile foundations in the seabed. In July alone, we have installed 18, taking the total to 36. The project remains on time and within budget for completion in 2018.

For the offshore wind farm Arkona in the German Baltic Sea, we have taken the final investment decision end of April. Statoil will have a 50% stake in this 385-megawatt wind farm. E.ON will have responsible for building and operating the wind farm. Investment in the project will be more than €1.2 billion, and the wind farm is expected to be fully operationally in 2019. Rampion and Arkona are our last two projects that will profit from the traditional support schemes. Rampion will receive 1.8 ROCs and Arkona will get a fixed feed-in tariff of €184 per megawatt-hour for the first eight years.

Going forward, the support level will be determined in competitive tendering processes. In principle, we welcome this development as it provides the lowest cost approach for renewable deployment. We regard ourselves as very well-positioned in the offshore area. However, increased competition might also have an impact on margins.

But not only in European offshore, also in U.S. onshore, we are continuing to increase our footprint. Just a few weeks ago, we finalized our 20th wind farm in the U.S., Colbeck's Corner, located in Northern Texas, has an installed capacity of 200 megawatts and consists of 112 turbines manufactured by GE.

Interestingly, we have a long-term offtake agreement for the project that was purchased by our corporate customer, Digital Realty, a global operator of data centers. This provides an example for the new trend of corporate PPAs that we're observing, corporates that want to reduce their CO2 footprint and position themselves as sustainable companies.

This month we will begin construction on the next large U.S. onshore project. The Twin Forks wind farm will consist of 139 turbines with an overall capacity of 278 megawatt. It will be E.ON's third wind farm to be located in Illinois further diversifying our portfolio, which so far has a strong focus on Texas. Twin Forks is scheduled to reach full commercial operation in late 2017.

With this overview on chart 7 of recent developments in our three core businesses, I want to highlight that we are, on the one hand, making good progress especially in Renewables, and that, on the other hand, we're exposed to quite meaningful competitive and regulatory dynamics especially in a more medium-term perspective. Together with our current balance sheet situation, this calls for the rigorous application of the new financial framework, E.ON Focus, i.e., an absolutely strict focus on financial discipline and proper capital allocation.

I would like to end with following takeaways. Firstly, the Uniper spin-off preparations are quickly nearing the finishing line and the listing is to expected in September. Secondly, the discussions with the government about implementations are progressing. And also here, we might see the finishing line in September. Thirdly, our core businesses are well-positioned, delivering well this quarter, but are exposed to quite meaningful competitive and regulatory dynamics moving forward. And, finally, Future E.ON will continue to have an absolutely strict focus on financial discipline and proper capital allocation.

Thanks for your attention. Michael, over to you.

Michael Sen

Thank you, Johannes. Hi there. Good morning, everybody, and also a very warm welcome to our earnings call from my side. It's been a while since we talked and a lot has happened, both when we look at the global macro events or consider utility and E.ON-specific topics, many of which Johannes has touched upon already.

For Q1, we had to take a step back into the old E.ON world and its reporting structure. We are now back to the future and discuss Future E.ON, not only in the new structure presented at the Capital Markets Day, but also with a new look and feel of our slide deck.

Before leading you through some details behind our half year results, let me remind you that Uniper has moved into discontinued operations as being outlined in London following the go-ahead decision of our AGM in June. Please also keep in mind that Uniper, until listing and execution of the so-called deconsolidation agreement, is still 100% consolidated. This will have ramifications on our balance sheet, which I will discuss in a few minutes.

Let me start by saying that our group EBIT which, at face value, came in at €2 billion, slightly below prior year's figure of €2.1 billion, is a decent performance. If we adjust for the EBIT contribution of divested businesses in H1 of last year, EBIT on a like-for-like basis was actually up by €100 million year-over-year. Operating profit from our core divisions: Energy Networks, Customer Solutions and Renewables, the so-called core EBIT even increased by €200 million, which we deem a satisfactory result against the backdrop of the continuous numerous challenges in our operating as well as financial environments.

Key drivers were the strong performance of our Customer Solutions business, the contribution of our Renewables segments, as well as lower Corporate Functions and Other line which compensated for a decline in the Energy Networks segment and PreussenElektra.

Let me continue with some more color on the performance of our businesses. Our Energy Networks business in H1 2016 fell slightly short of its prior year performance with EBIT declining by 8% or €70 million year-over-year to €870 million. This was primarily driven by €100 million EBIT decline in our German operations, which relates, to the most part, to two nonrecurring positive effects in H1 of last year, i.e., the release of a provision and a catch-up effect related to changes in our equity consolidation. These two items accounted for a mid- to high-double-digit million euro effect and, thus, inflated the comps from last year on a like-for-like basis.

In addition, please remember that 2016 is the base year, the reference start year for the next regulatory period in German power grids, an effect that you have not seen to that extent in Q1, but which will become more visible in Q2. EBIT of our Swedish grid operations grew by nearly 20%, benefiting from the start of the new regulatory period on January 1 of this year and the absence of storm costs in this year. EBIT of our Eastern European grids and our Turkish at-equity participation remained, on aggregate, stable. In summary, profitability of our Energy Networks segment on a like-for-like basis has been flat in H1 2016.

Customer Solutions delivered a strong performance with EBIT up 25% to €660 million. This was driven by our UK business and the other regions in Europe. EBIT in the UK was up more than 30% or about €70 million in the first half of 2016. Earnings benefited from lower costs associated to the Energy Company Obligation scheme as well as fallen procurement costs for power and gas and some positive one-offs incurred in the first half of 2015. These effects were able to mask challenges from accelerated competitive dynamics in H1 of this year.

We work hard to counter competitive pressure with rigor on OpEx, accelerated customer retention programs, as well as improved service quality. Nevertheless, I would like to caution you not to extrapolate the strong H1 performance into the second half year. The benefit of lower ECO cost will be phasing out and wholesale costs are rising again. We're not fully hedged on the procurement side for power and gas, and rising wholesale costs would have an impact on gross margins. Decreasing numbers of customers will also take their toll with a more pronounced effect in the second half of this year. However, it is noteworthy to say that rising wholesale costs do not only have an impact on our gross margins, but also have the potential to pressure smaller new entrant suppliers.

While we see only limited operational impacts of the Brexit decision on our UK business, we, of course, see some headwinds stemming from the related devaluation of the British pound when translating UK earnings into euro. Despite a slight offset from interest costs on sterling-nominated bonds, we estimate that a 10% devaluation of the British pound could have a low to mid-double-digit million euro impact on our underlying net income. From a leverage perspective, the devaluation of the UK currency has a slightly positive impact on the euro value of our outstanding sterling bonds.

We expect the follow-up of the CMA investigation to add to the challenges in 2017. Most of the measures will be implemented after April 2017 and may lead to another negative low to mid-double-digit million euro effect on our EBIT. Overall, this could mean we have seen peak margins not only in Germany.

EBIT in the other regions rose slightly above €200 million in H1 2016, an increase of 50% above the prior-year period. This was mainly due to easy comps driven by an unusually mild winter, which negatively impacted the Swedish heat business in particular. Our Romanian business started off on a low base in 2015, while Hungary benefited from the exit of the loss-making gas retail business in 2016.

The EBIT contribution of our Customer Solutions business in Germany declined, slightly driven by competitive dynamics, but also due to the transfer of our wholesale customer business last year which is today residing with Uniper.

EBIT in Renewables was up €50 million over the same period last year. Key driver was the contribution of our offshore wind parks, Humber and Amrumbank, which were commissioned mid-2015 and added approximately €100 million of incremental EBIT versus the prior year. In addition, we realized a mid-double-digit million euro book gain from the sale of a 50% stake in our Arkona offshore park to Statoil.

Renewables earnings were held back by the drop in Onshore Wind and Solar. The reasons were tough comps in the first six months of 2015, driven by the disposal book gains of a smaller wind farm in the UK and the solar PV Park in the U.S., as well as a positive one-off effect related to the restructuring of an offtake contract in the U.S. Those items accounted for slightly more than a double-digit million euro amount negative price effect added to the actual EBIT decline. It should not come as a surprise that EBIT in our German nuclear business, PreussenElektra, declined on the back of lower achieved prices, obviously, as well as lower volumes related to the shutdown of Grafenrheinfeld in mid-2015. A positive offset came from lower nuclear fuel tax payments.

Let us now move on to the bottom line and see how group EBIT flows through into underlying net income. The economic interest result increased slightly in H1 over the same period last year while our net interest cost dropped by more than €30 million on the €1 billion bond maturity in January. It was unfortunately compensated by the other effects, adverse valuation from falling discount rates on HR-related long-term provisions other than pension play a role, but also the lower capitalization on interest during the construction time of large projects.

Our tax rate increased to 38%, driven by several aperiodic tax items that accumulate to roughly €100 million additional tax charges that relate to legacy effects of prior years but occur in 2016. Adjusted for these special items, our underlying tax rate would be in line with the previous guidance of 30%. As a result, our underlying net income declined by 28% to €600 million. However, please keep in mind that the 2015 figure of €800 million contained earnings from divested operations at the neighborhood of €170 million. On a like-for-like basis, the year-over-year decline would have been 8%, mainly driven by the mentioned special tax items that burdened 2016.

As I mentioned earlier, Uniper has been moved into discontinued operations following the go-ahead from the AGM. Uniper was moved into discontinued operation after that tremendous vote of 99.7%. As a consequence of this value, the Uniper assets had to be reassessed and led to a €3.8 billion of additional charges at Uniper's net income. The predominant portion, €2.9 billion, resulted from impairment charges, while €900 million came from the necessity to build provision for contingent losses. These charges were booked in Q2 and reflected in the discontinued operations line underneath the underlying net income.

Let us now turn away from book earnings and focus on cash earnings and cash conversion. Operating cash flow before interest and taxes came in at €2.3 billion in H1 2016, which is significantly above the prior year level of €1.9 billion. Key reason for that is the improved cash conversion ratio, which amounted to nearly 80% in H1 2016, in line with our midterm guidance of E.ON Focus.

After subtracting interest payments and taxes, operating cash flow amounted to €1.6 billion, slightly below the prior year period H1 2015 because we are also facing tough comps, the contribution of businesses which we divested in the last year. Free cash flow came in at €700 million, slightly significantly below the prior year level of €3.2 billion. Key driver obviously behind last year's strength was the significantly higher one-off, such as disposal proceeds of €2.5 billion versus €400 million this year.

Let me finally explain development and drivers of our economic net debt and discuss aspects of our balance sheet. Economic net debt of Future E.ON increased to €24.8 billion in H1 2016, up from €21.3 billion at the year-end 2015. Please note that this reconciliation is based on the pro forma year-end 2015 figure for Future E.ON. Also, the H1 2016 figure is a pro forma figure, if you so wish, and differs from the IFRS economic net debt figure of €25.5 billion, which is shown in the quarterly report.

The difference between these figures is the loan to Uniper for the setup of their right capital structure. From an IFRS standpoint, this figure is eliminated as an intracompany transaction, whereas it is from an economic perspective of Future E.ON, a financial receivable. Key drivers of this development, which we have been alluding to in London already at the Capital Market Day and we went through the items which are now materializing is, of course, the payment of last year's dividend of about €1 billion, a further decline of interest rates over Q2 which led to an increase in our pension provision by €2.3 billion.

In addition, items related for the setup of Uniper's capital structure affected E.ON's economic net debt position negatively. Examples are the acquisition of the stake in Nordstream 1 for €1 billion, and €300 million capital increase at Uniper. Those items are summarized under others. The sum of operating cash flow CapEx and divestments was fairly balanced for the first half. As usual, our CapEx spending was relatively low during the first six months with 40% for the full year budget. It was dominated by our Networks and Renewables unit which, combined, accounted for nearly 80% of the spending in the first half.

At our Capital Markets Day in London in April, we have been very candid about the expectation that the pro forma economic net debt and the debt factor at that point in time, 3.7, we showed was likely be directionally up over the course of the year. In the first half of 2016, economic net debt level implies an annualized debt factor of 5, when applied to the midpoint of our 2015-2016 EBIT guidance. We monitor this development very closely, in particular as we do not foresee major near-term changes to the current low interest rate environment and thus, may have to accept further headwinds on our leverage in the second half of 2016.

We also saw a reduction of our group equity in the first half to below €12 billion and versus the €9 billion pro forma equity at year-end 2015. Key drivers are the negative pension effect and the loss at Uniper. After subtracting minorities, our equity stands at roughly €10 billion. This figure includes 100% of Uniper's book value, of course, after the discussed impairment. Both debt factor and equity ratio underpins the tight situation of our balance sheet. It also sets the starting point for assessing the impact of the KFK solution.

As Johannes elaborated already, the German government has an ambitious time plan and aims for a cabinet draft by the beginning of September. This should provide strongly enhanced clarity regarding the impact associated with the derisking of long-term nuclear liabilities. The total costs associated to the KFK solution includes, on the one hand, the mentioned premium of, give or take, €2 billion-ish, north of €2 billion magnitude.

In addition, there could be a secondary impact arising from any reassessment of those nuclear liabilities that remain on our books post KFK solution. One important factor will be the real interest rate to be applied on these remained liabilities. Any adverse change could cause an additional revaluation effect which could weigh on our economic net debt.

We will continue to carefully assess the impact of KFK solution on our capital structure. I have stated at our Capital Markets Day as well as during our Q1 results call with regard to KFK that we are in the special situation, which we elaborated on during the CMD in London. This is clearly addressed within the E.ON framework, and there's also measures to be taken going forward.

So, while we will address the deterioration in our business and financial environment with internal measures as being laid out, such as rigor on OpEx and CapEx, the announced €4 billion to €5 billion capital rotation measures are also a measurement for the normal situation. I repeat, for what I've been saying in London, we are in the special situation, and I cannot rule out any capital measure to fund KFK solution as the situation evolves and we gain more clarity on the litigation in respect to the nuclear tax refund.

At the same token, there is, at this point, still no clarity with respect to the outcome of the nuclear fuel tax. We expect a decision for the remainder of 2016, and we will obviously monitor the timing of the decision carefully. But it is obvious that we need to stay flexible, to act prudently should a decision again be postponed while the KFK solution is moving ahead as anticipated.

Let me conclude with the confirmation of our 2016 outlook. H1 2016 results were in line with the guidance for fiscal year 2016, which we confirmed in our Q1 results on May 11. Therefore, we can again confirm the guidance for the current fiscal year, an EBIT of €2.7 billion to €3.1 billion and an underlying income of €600 million to €1 billion.

Before starting with the Q&A, let me remind you about our key operational and financial priorities that we outlined in our E.ON Focus at our CMD. It is all about focus, discipline and striving in exactly that order. It implies a rigorous management of our operating costs, a strong focus on a healthy balance sheet, efficient CapEx budget and stringent capital allocation, driven by a strong return and bottom line focus.

H1 2016 results showed that we are on a good path with respect to E.ON Focus. Both agencies affirmed our BBB+/Baa1 rating. We achieved some EBIT growth on a like-for-like basis. Our cash conversion was in line with midterm guidance, 80% cash conversion rate. Reported EPS was down year-over-year, but on a like-for-like basis, i.e., adjusted for divested operations last year and the usually high tax rate, we would even have seen an EPS growth.

Let me assure you, we will continue to work hard in the coming quarters to continue to achieve our midterm targets as laid out in the E.ON Focus framework. The finalization of the KFK with solution will, of course, be the key focus of H2 in the current fiscal.

With that, thank you for your attention. I would like to hand it over to Florian and open the Q&A.

Florian Flobmann

Okay. Then let's start the Q&A session. To give everybody a fair chance, I would ask you to limit yourself to two questions each. So, operator, let's take the first questions, please.

Question-and-Answer Session


We'll begin our question-and-answer session now. [Operator Instructions] The first question is from Vincent Gilles of Credit Suisse. Please go ahead.

Vincent Gilles

Yes. Good morning, everyone. Two questions are the following. The first one is - and I do understand it's not easy to answer, but should we assume that the write-down on the Uniper stake is the last one? Assuming that the environment doesn't change too much in the future. I mean, do you think you've been very, very cautious in the way you've been assessing the value of the stake, is basically the question I'm asking.

And the second one is, you mentioned in the past the €2 billion, obviously, which could or could not lead to increased capital. But you sounded even more cautious today by mentioning any reassessment has already been booked, which is in a way, slightly new. My question is, is it because your recent discussions with the government lead you to believe they will be tougher in the end than you assumed during the CMD or is it just me having paid no attention? Thank you.

Johannes Teyssen

I think I'm not certain I fully got the second one. First one is, this was, I would say, the last time that Uniper assets were tested in the E.ON books. And specifically, the lifetime expectation of coal-fired power plants and the value of gas storage facilities were tested, and after Paris and reflecting the last winter, were corrected. We had no indication after this quarter on the value of Uniper as a company, as a whole yet. There's no valid valuations out that could be used.

And that's now the question, what will the full Uniper's value be at the market, is something that we cannot and will not and may not speculate upon. And there, we don't have any assessment in our books. We have value attached to assets, not to the entity. And thus, I cannot speculate on the value of the entity and how that translates into the value of the assets. We need to wait and see what September will bring there.

For the second thing, you should not read any negative sentiment into our today's announcement on the present status of the nuclear debate. That would be a wrong interpretation. The progress I would say - I need to be cautious because nothing is final before everything is final. The negotiations were done in an, I would say, constructive - I call it constructive manner. And obviously, some ministries will like to think - see things a bit different, but overwhelmingly, I see the negotiations as constructive and somewhat positive.

As far as the remaining - if I take your question right - as the remaining liabilities are concerned, which is the deconstruction of the - demolish and deconstruction of the power plant, we have also no negative views. There's no new imposed rules, nothing negative from the government. The only thing that we always or we need to look in, we also need to discount those liabilities and those - after long-term liabilities are gone, are somewhat more short - not short, really short. But I'm talking about one to two decades.

And thus, we need to see what the right applicable interest rate will have to be to reflect those, but there's no negative pronunciation to the discussions on long-term liabilities, and there's no negative news on any shorter term obligations. It is just the open issue of the final setting of the rules and the final application of the appropriate interest line. But don't interpret anything negative in the announcement here.

Vincent Gilles

It's very clear. Thank you.


The next question is from Alberto Gandolfi of Goldman Sachs. Go ahead.

Alberto Gandolfi

Yeah. Hi. Good morning. This is Alberto Gandolfi, Goldman Sachs. Two questions on my side as well. Still talking about leverage. I hear a more cautious tone versus history as well and I was wondering to what degree the mark-to-market of the interest rates worry you on the pension provision side. There has been lag. I think a €2.4 billion increase since December last year, which is a big percentage increase versus your overall amount of pension provisions.

So, keeping all of these into account, you historically talk about maybe a need to fund the KFK €2 billion. But can you maybe throw also the provisions into the picture? I think that you made a brief comment on it, but maybe can you provide a sensitivity? Can you tell us what you expect in the next 6 months to 12 months if interest rates remain here? And how could you meet the shortfall from that perspective? So, that's the first question.

The second one is I mean a bit, perhaps, pointless to ask so, I apologize in advance. But with all these moving parts on your balance sheet, which is already on an economic basis, five times to net debt to EBITDA, it's difficult to talk about the dividend policy. I appreciate that. But maybe could you repeat or could you tell us what is your mindset whenever the dust settles and whenever you can tackle your balance sheet issues? And maybe we fast forward 12 months from here or 18 months from here, what do you think would be a sustainable payout ratio for Future E.ON, given the risk profile of the company assuming steady-state balance sheet? Thank you.

Johannes Teyssen

That's, I would rather say, not so difficult questions. The second question is an outright confirmation of the dividend policy we announced in London. There is no change. Nothing has happened in this quarter that changes management's view on what we announced, 40% to 60% payout on the underlying net income, in our dividend policy, I learned nothing in this quarter that's changing management's view.

As far as pension provisions are concerned, we said the special situation that Michael referred to that we believe calls for the appropriate capital measure, is the premium on the nuclear side. The premium is an insurance our investors get for decades to come that will be rewarded, we believe, rather short term in the share price if this long-term uncapped purely political risk goes. That calls for a compensation and I've heard from all investors I talked to that there is full understanding and a lot of support and that we should not get over - at odds with the government and don't accept it because it's in the interest of shareholders.

For pension changes, I don't see this management has no intention to address that issue through capital measures. And listen, you know how the rules are. These are decade-long obligations and we need to calculate them according to today's interest rate of 1.4% that is a driving measure. Will that survive decades to come? I absolutely do not believe that. I'm highly critical on ECB policy. It is just subsidizing state debt and that's about what it does. It doesn't help anybody. It doesn't help the real economy.

But we need to reflect it, but yes, we were surprised by the magnitude of more than €2 billion in the quarter but this is a fraction of the realities and we just have to live with it, but we don't think that debt leverage impact calls for anything on our side short term but the overall debt level - and Michael has been very explicit in London and every day afterwards, Michael, calls for the rigor we're always addressing. But maybe you want to add a few words for this?

Michael Sen

Thank you. Everything has been said. I just want to get something really straight. There is no incremental negative message or fact in today's quarter. Everything which is hitting the books today has been outlined at the Capital Markets Day. There were two charts, which was E.ON Focus, which guides us in the midterm vis-à-vis the targets we want to achieve. And then there was this chart where you had the box, special situation. Everything above that special situation said that there are already measures underway and should the situation economically or financially deteriorate, we will take measures which are in our control to also fulfill the targets of E.ON Focus.

So, only KFK calls for capital measures and in London already, we set 3.7 multiple on net debt over EBITDA. And we have been elaborating that for this fiscal, this is probably going to go up to north of 5. That is what we have been saying all along during all road shows, and this is now becoming reality so we are going to deal with it. So, no incremental negative news.


The next question is from Deepa Venkateswaran of Bernstein. Please go ahead.

Deepa Venkateswaran

Thank you. I have two questions. Firstly, on the capital measure. Michael, just wanted an update from you in terms of your thinking on the timing and quantum. Particularly, I picked up on something that you said about the KFK moving at a different space than the nuclear fuel tax judgment. So, could you just put that timing and the quantum? Because I remember that you often talked about the €2 billion kind of being the gap that you want to fulfill. So, I just wanted to see if that has changed.

And my second question is on the credit rating. I mean, given obviously the movement on the discount rate and so on, uncontrollable factors, which have led the net debt to increase, how do you view your aspiration of BBB+ versus, say, the cost that comes with an associated equity dilution from a capital raise? How do you put the benefits of a BBB+ versus the costs? Thank you.

Michael Sen

Okay. First of all, hi, Deepa. A very good question that you picked it up. Indeed, that was important. First of all, on the quantum, nothing has changed. The quantum is determined by the impact of the KFK. That is a general statement.

Now, what the exact impact is going to be, we will see if and when a solution is being struck with the government and then that's why we gave you the ballpark of the €2 billion-ish, or I said a little bit north of €2 billion-ish, and Johannes elaborated also of that so-called duration effect, right? Because the remaining nuclear liabilities, if the interim storage and final storage go over to the fund, we have the decommissioning. This has a duration of roughly between 10 years and 15 years, right?

And then, you have to look at how will you discount a liability with a duration of 10 years to 15 years because there are benchmarks out there in the market, which obviously, an auditor will impose on you to use. This is different to what we have today where you have liabilities of 80 years, 90 years, whatever, 100 years. There is no benchmark on that one. That's why there's such a complicated calculation. So, that is the quantum or the scope.

On the timing, it is obviously also dependent on when that agreement is being struck, and Johannes already indicated that we may be on the home stretch on this one, i.e., September could be if everything works right, could be a point in time. Now, I always said we also look at other sources of fund, but if things are being postponed, again to another year, obviously then I cannot wait, and then we would be ready to fire with the capital measure.

And that capital measure again is bound to the KFK solution only. I think Johannes elaborated thoroughly why this is a good thing. He, I think, made the comparison to an insurance premium, because at the end of the day, you are getting rid of an uncapped, unlimited liability hanging in our books for the next couple of years. This is what the premium is for, and that's why I think it's also prudent to ask the market to participate because the benefit will also be for the market. And don't forget, there might be also the omission of accretion going forward for the long-term liabilities.

Now, vis-à-vis the credit rating, everything is laid out in E.ON Focus. We had the BBB+/Baa1 rating confirmed only two months ago. And obviously, rating agencies do not only look at the quarter. They get a little more information that you guys have as they get the planning of the next couple of years. They looked into that one.

People are aware of challenges also in terms of interest rate changes, but also are aware on the, let's say, earnings power of our portfolio, of measures we can take, for example, on the KFK, on measures we can take on capital rotation, and then we'll take it from there. And therefore, I think we are striking the right balance of having not the cost of equity, which is an important measure compared to the rating, but the cost of equity compared to the benefit you get getting rid of in uncapped, unlimited liability.

Deepa Venkateswaran

Thank you.


The next question is from Peter Bisztyga of Bank of America. Please go ahead.

Peter Bisztyga

Yes. Good morning. Two questions for me, please. Firstly, just on your balance sheet. I'm just trying to understand the book equity position of E.ON. It looks like that at the end of the first half, E.ON had equity of €9.7 billion. And then it looks like Uniper is in at €12.5 billion as sort of asset held for sale. So, does that mean that E.ON ex-Uniper is sort of a negative €2.7 billion equity value? And if that's correct, what are the sort of practical implications of that? I mean, I guess one I can think of is that you can't issue any hybrid bonds, for example.

And then second question, it's easier. Your tax rate for sort of future years - I saw a headline from the press conference suggesting that's going to be 30% and E.ON had previously guided to a sort of range of 25% to 30% going forwards. Can you just talk about sort of what's changed there, please?

Michael Sen

Okay. Let's start backwards with the tax rate. I think, Peter, hi there, first of all. The 25% to 30% was all E.ON. Clearly, Capital Market Day, I said a normalized tax rate would be 30% out of the structure we have that has changed and, therefore, it's out there also in the market, a normalized tax rate of 30%.

Now, we have the 38% in this quarter, i.e., this tax rate, obviously, is applied for the full year. This is an aperiodic thing. Basically, what you see here is that tax audits are being conducted. This is beyond our control. Actually, this effect stems from a tax audit currently being conducted on legacy topics, i.e., looking at the calendar years 2004 to 2007, 2004 to 2007. That's how fast the tax authorities work. And, obviously, there were some findings and that findings leads to a tax charge - not in cash outflow - a tax charge of €100 million which then gets you to the tax rate of 38%. So, if we don't get any other incremental knowledge, that's the tax rate of this calendar year. So, so much for the tax rate.

And now, for the Uniper, ballpark back-of-the-envelope calculation, your calculation is right that the Uniper is at roughly €12 billion-ish. And then, obviously, we are left with a negative value. While we have been elaborating on that one also during the Capital Market Day, where I showed you the €15 billion at that point in time of Uniper within our €16 billion, things have now changed. You have the pension effect, you have the last dividend effect, and you have the write-off effect so, that leads to E.ON having maybe low book IFRS equity or even negative IFRS book equity.

That's why we said that should be the starting point when considering the KFK. And the KFK would be then if you so wish, net debt neutral if you fund it with capital measures. Yes, the market value, we believe, you believe, obviously IFRS book equity is an accounting topic of our assets. It's different. If we were, theoretically, to divest our Networks business tomorrow, obviously, we would have a huge booking. That low equity, obviously, is also a reflection of the historical asset values we have on the E.ON side.

But I guess, you guys understand that much better than many other stakeholders. That is also not the issue you are hinting at. The topic you are hinting at is does that limit your hybrid capacity. Yes, it does with one agency. Yes, there are not so many instances, if you look at historical and empirical data where maybe a company has tried to issue with negative IFRS equity. There are maybe ways around, but as a general statement, yes, it limits the hybrid capacity. I think that also was being said in London. I think it was even you or Deepa who asked that question. That's why we said it could be an option but we'll see how it develops going further if and when we know more or has more clarity on Uniper's value.

Johannes Teyssen

And we have never used hybrids because we were never seeing them very favorably. If we see the cost and the risks imposed in them, with change of opinions of rating agencies, E.ON was at all times rather skeptical on using hybrid structures.

Michael Sen

Absolutely. And one thing is also very important to consider. IFRS book equity does not determine any dividend payment capacity.

Johannes Teyssen

HGB capital - German capital is very different from that and if you look through the CMD papers, we have been quite explicit on the equity structure, also showing the book reserves that we see and that are quite obvious. And therefore, this is not keeping us up at night, I would say. Obviously, we have intentions to strengthen that over time with E.ON Focus, but that is not something that surprises this management or that keeps us up at night.

Peter Bisztyga

Got it. Thanks very much.


The next question is from Ahmed Farman of Jefferies. Please go ahead.

Ahmed Farman

Hi. Good morning, everyone. So, just first question on your medium term sort of EBIT outlook. And I appreciate you said that nothing really has changed in your thinking relative to the CMD. But you have talked about our peak margins in UK retail. FX hit today, also a hit in the German Networks business from the regulatory changes. I'm just trying to sort of understand, maybe if you could just update us on sort of your medium-term outlook, and maybe just highlight what are the sort of the offsetting effects, relative to sort of - and how do we reconcile this to what you said at the Capital Market Day?

And then the second point is on the balance sheet. And I take your point that the quantum here is going to depend on the nuclear deal itself. But within that, is it essentially still the premium - and when we think about the sort of the size and putting aside the nuclear fuel tax out, I mean, is it still the premium that is the sort of the key determinant or other factors, like you suggested the revaluation of other provisions can have an impact as well? Thank you.

Michael Sen

Yeah. Hi, Ahmed. First of all, I think we elaborated on that one when Deepa asked the question, we said we're going to update you if we have more knowledge. It is the KFK in total, because also, the duration effect of pension liability, obviously, is then going through your P&L and, obviously, also hitting your balance sheet, i.e., the net debt position. So, it will be both items yet the much bigger, the much larger item, obviously, is the premium as such, right? We're not talking about the duration effect being another €3 billion or €2 billion or what have you.

Johannes Teyssen

We always said €2 billion-ish for total...

Michael Sen


Johannes Teyssen

...and that wording stays intact today.

Michael Sen


Johannes Teyssen

So, don't interpret any new numbers or any total new horizon in there.

Michael Sen

Yeah. Absolutely. We just gave you a little more color on what the content is going to be as we have more clarity, as I've said, also with the auditors, do we have to apply benchmark interest rates while - beforehand, we had the methodology because it had no benchmark.

On the medium term, as Johannes said, nothing has changed. We laid out E.ON Focus in April. And if we had been talking about a medium-term framework at that point in time, we obviously already considered many developments which we also hinted at, at that point in time. The only thing is that some of them get more tangible. Will we also see some unknown unknowns on the way to medium term? Yes, and then it's on us. There, we also gave you the roadmap as to how we will act, what countermeasures we will take, could take.

So, from that point of view, nothing changes. And you should not extrapolate 2016, as I said on the German Networks, especially 2016 is the reference start year for the new regulatory period. So, for 2017, for example - and we said that also in London - we do expect Energy Networks in Germany to improve year-over-year.

Johannes Teyssen

And look, for example, the Swedish network, the outright allowed RoE has decreased. However, income from the network in the first year of the new regulatory period has increased. So, what we're flagging today is some development in market or regulatory environments and the size of this. First and foremost, it's a challenge on us and not something to just put into a model as such. It is what we need to answer to entrepreneurial doing.

Michael Sen

Which we do.

Johannes Teyssen

But, obviously, I think we are obliged and we should always flag, and we have been also on the retail side, even in London, even before London and every year, sure, we've been explicit. Yes, with decreasing wholesale prices, retail margins, in a lot of markets increased very significantly. And what that does is it induces new entrants to come. The positive development that Michael also mentioned is that some of these people just took bets on the rocket low wholesale level. And now watch out, it goes up.

So, we have seen these waves in markets also in the past. And I think we show some experience. We're not saying it's easy, but it's unto us to answer those challenges. But we will not, we never did, we will not now give a precise midterm outlook on any of the business. We just flex some developments, highlight them because it's our duty. Otherwise, you would guess we're trying to hide anything. We never do. The only thing we did is we highlight some developments in markets and our entrepreneurial reaction is in our hands, and we will report once we make progress there.

Ahmed Farman

All right. Thank you very much.


The next question is from Michel Debs of Citi. Please go ahead.

Michel Debs

Good morning, everyone. I have two questions, please. The first one related to Uniper. So, if I follow correctly what you've done, you took a book value of €15.5 billion when we last spoke in April. You impaired €2.8 billion, rolled off €0.8 billion and today, essentially, you have a value of about €11.6 billion. Is that correct?

Johannes Teyssen


Michel Debs

My second question is that if this is correct and you have Uniper on the books at just under €12 billion, that is an easy EBITDA of over 20 times and a dividend yield of under 2%, then it becomes possible that you may have to impair your second Uniper again once you have to market-to-market. And if that happens, I would like to know how much equity you have on the books in German GAAP and by how much that would be affected if you had to impair Uniper because I don't know how much you have Uniper at on the German book. Thank you very much.

Johannes Teyssen

For the calculation on the IFRS side, the starting point was €15.5 billion. This quarter result is a negative €3.9 billion. There is a pension also increase at Uniper of €0.7 billion. So, you come to something close - the upper €10 billion, close to €11 billion. And that is now leading into the calculation that you did. Now, as far as HGB's or German is concerned...

Michael Sen

Yeah. We usually - I mean, we don't talk about the HGB result or the balance sheet is to statutory account. But what we said is there is no issue in any dividend-paying capacity. Uniper, by the way, is in discontinued operations. So, the write-off on the local stat accounts also follows a different pattern again because, there, you have to go legal entity by legal entity.

So, they're totally two separate worlds between the IFRS world in the national accounting standards and the write-off there. First of all, all of you are right. Once there is delisting of Uniper, we have to do sort of a mark-to-market, not a real mark-to-market because you can still hold some sort of a controlled premium but, at least, we have to take the market value and hold it against the book value of Uniper and if the market value is lower than the roughly €11 billion today then, obviously, there will be an adjustment. If it is €11 billion, there's nothing. And if it's more, then we are all happy, right?

But that has nothing to do with the local stat accounts that this goes legal entity by legal entity. And the write-downs, which Uniper has taken now in the last quarter, were write-downs on individual assets in France, in the UK and in the Netherlands, right? So, it has not also touched - by the way, it wouldn't touch E.ON's local stat HGB equity anyways. But in that case, it did also not touch Uniper's local stat HGB, only the, obviously, the local stat account in those individual countries.

Michel Debs

So, please allow me to reformulate to make sure I have understood. What you're saying is that the German legal entity has enough equity to pay the dividend and that...

Michael Sen


Johannes Teyssen


Michel Debs

...and if there are write-offs in Uniper like there have been this quarter or if E.ON has to mark down Uniper in the future, the write-off that are on assets are done legal entity by legal entity and don't necessarily go all the way up to the legal entity paying the dividend at the top of the group. And, therefore, we shouldn't draw a link between that and your - and we shouldn't essentially put that in our forecasts when it comes to looking at your book equity. Is that what you're saying?

Michael Sen


Johannes Teyssen

That's what we're saying and we have been also look, again, listen to the record in London. We have been extremely expliciting and extinguishing between IFRS equity, local accounts, dividend-paying capacity rating, we have gone line-by-line and we have been very explicit, and there is no major surprise today. The only surprise I recall is the development, how fast the interest went in Q2. We expected a somewhat slower development over the year. But on total, nothing surprised us in this quarter.

Michel Debs

Thank you very much.


The next question is from Martin Brough of Deutsche Bank. Please go ahead.

Martin Brough

Hi. Yeah. I had a question around the nuclear provisions. Not so much the nuclear deal, but just the mechanism that you'll be using at the end of the year to review the nominal discount rate and the nominal nuclear inflation rate. So, I understand, obviously, you're using a discount rate already less than 1% real. But the nominal discount rates have a 4% and obviously, the nuclear inflation rate is over 3%. What sort of mechanism will you use to review both of those figures in the light of low market bond yields albeit serve shorter-dated bonds? And is there any linkage, in a way, with the inflation rate you're using and the nominal nuclear discount rate? Thanks.

Johannes Teyssen

Both have to do with each other. In a low interest environment, you also have regulatory, you can observe it in low inflation environment. And we follow the real and the real cost development that we see and we will revisit both numbers. And we always pronounce the delta, as you say, the real interest rate much more than the nominal numbers. And again, I don't expect total surprises on that. As Michael said, the duration effect will play somewhat a role because that's just a structural change. But again, this is a positive or that is the other side of the metal of the effect that we get rid of 150-year liabilities that nobody in hell can calculate for certain. And that those other liabilities are quite observable.

Also, on the cost side, they had a rough control. My colleague, Leo Birnbaum, is in charge. We are tackling those cost lines very aggressively now. And the positive part, in the past, we sometimes didn't know how to run the deconstruction efforts because we never knew how to get rid of the residing waste, nuclear waste. Now, the government pledges to us, they take it every other morning in their interim storage. And they are in charge to calculate what happens later. And for us, it is a relief that allows us to be much more cost-efficient, aggressive on that side and that will be reflected on our calculations going forward.

Martin Brough

Okay. Just in the market, it seems that the nominal bond yields are falling more quickly than forward inflation expectations, at least for those traded instruments that we can see and breakeven inflation. But would you expect that to translate to assumptions on nuclear or is there nominal inflation assumptions around nuclear not necessarily as linked to just generalized inflation?

Michael Sen

No. The regular method we use on nuclear, all things being equal that is a complicated model. That's why I said these are liabilities which runs for 80 years, 90 years, 100 years. There is no link to any market bond yield, what have you, because there is no bond with that sort of duration.

That's why it goes by a so-called nuclear-specific inflation rate, right, the inflation rate of that industry, of that company, which is pretty high. And that's why you also then have a high discount rate. And then, you get to a net-net or real - actually, it's more precise - a net interest rate which, on industry average, industry average is at 1%, and we have 0.9%. We used to have 0.7%. We have 0.9%. That is, by the way, one of the reasons why the 35% premium when applied to us is not 35% because we are more conservative also on that discount rate.

The phenomenon you are describing could be attributable once a deal is struck and then we look at the remaining liabilities because they have a duration of, as I said, 10 years to 15 years. And there, you get bond yields. But there, also, the nuclear-specific inflation comes to play because it's still a nuclear business.

Martin Brough

Okay. Thanks.


The next question is from Lueder Schumacher of Société Générale. Please go ahead.

Lueder Schumacher

Hi. Good morning. Two quick questions. On the book gains that have been impacting the Renewables business and also your sterling sensitivity. Could you actually give us actual numbers instead of various versions of double-digit million amounts? That's the first one.

The second one is on the nuclear fuel tax decision. You said you expected to be in the remainder of the year, but in 2014, we were told it's going to be 2015, then in 2015 we were told it's 2016. Is your view that we will get a decision before the end of December? Is it just hope? Is it a best guess or have you actually been given some kind of indication from the constitutional court of when they intend to finally make this ruling?

Johannes Teyssen

Second question, I take. The constitutional court is not doing private dialogues with parties. It has announced publicly that it intends to decide this case in the course of the year.

So, that is the speaker of the court has said so and that's the best know-how that we have. They have no indication to private lawyers that that is different. But it's already mid of August. We have not seen the decision. We just say we had hoped - we still hope that things fall together at the same time. But the regulatory development of the government could come to close in September, and at least there's some months to know what's happening in the court.

I don't know what these judges do. They don't talk to me. And we have no secret knowledge. Best thing is things will come at whatever day, but we cannot wait forever. And if they delay, they delay. They are eight independent judges that is just happen about them and they do what they want, but we just need to wait. And I'll answer the other?

Michael Sen

Yes. In terms of the bookings for Arkona, which we had in the first half of this calendar year is €50 million, €55 million-ish, which, by the way, is a very good message as we told you because we're doing a lot of then attractive projects, and therefore, not only derisk, also get an investor into that one. In that case, it was Statoil.

The one-off in the Renewables business in H1 last year was roughly €60 million. This was not only the sale of the parts but also that restructuring of that long-term contract, that PPA agreement. Now, when it comes to the whole Brexit topic, of course, we can be a little more precise that for the half year, it is roughly €30 million. So, for the full year, you can almost double it. That is sort of like an all-in effect.

Lueder Schumacher

That's great. Thank you very much.

Florian Flobmann

Okay. Operator, let's take the last question, please, because we're already quite advanced with the time.


Okay. So, the last question is from Sam Arie of UBS. Please go ahead.

Sam Arie

Thank you very much. Good morning, everybody, and glad that I managed to sneak my last few questions in. I have two on capital measures and cash balance. So, coming back to the capital measures question, can I just confirm that the funding gap, as you see it, is KFK only, i.e., can you rule out the need for any capital raise beyond what you might end up needing to settle for the surcharge with KFK? Or if you like, another way to ask the question is, if you were to end up winning the fuel tax case and if the fuel tax win was to exactly balance your agreed final surcharge to KFK, then would you still see a need to raise capital for anything else or, for that matter, divest assets?

Johannes Teyssen

We said we will take the nuclear fuel tax decision, other nuclear decisions into consideration when deciding the final thing what we want to do. And yes, we also said the only thing that defines the size of the capital measure is everything that has been impacted by this nuclear deal. Nothing else.

Michael Sen

Everything else, we do on our own.

Sam Arie

Okay. Thank you. And then, my second, if I can just put that in is on the cash balance that you described, I think, it's on page 12 of the chart. So, the cash balance has come out in the first half at negative €700 million. And that looks like it's after a €500 million use of provisions. So, I just wanted to check is that use of the nuclear provisions? And in general, can you just give us an update on how the use of nuclear provisions is comparing to plan so far? I know in the past, you've said that you might one day see an upside there. But can you just tell us how it is going so far?

Michael Sen

So, in general, I can say the uses of nuclear provisions is according to plan. There's no particular message, and therefore, that's about it. It's not for the nuclear only.

Sam Arie

Sorry, it's not - what was the last point, it's not for the nuclear?

Michael Sen

No, it's not for the nuclear in the sense of KFK. It is the regular cash out, the regular provision usage we have. This is obviously in the cash balance.

Sam Arie

Yes. And my question was that €500 million, if that is mostly use of nuclear provisions, that's quite a high number for the first half, is that right?

Michael Sen

Yeah, half of it is nuclear. Half of it is nuclear because we are at the half year. So, what do we have there as a number? €400 million, €500 million, so half of it is nuclear. Nuclear in general, in total, had something like €600 million. And the other one is, for example, for CO2 certificates.

Sam Arie

Okay. Perfect. All right. Thank you very much. Thanks for taking the last questions.

Florian Flobmann

Okay. So, thank you, everybody. If there are further questions, please give me or my team a call. We're going to be on the road on London, and then see you soon in London or around the other road show locations. Okay. And with that, I would conclude the call.


Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.

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