ENAKF - E.ON SE (EONGY) H1 2023 Earnings Call Transcript

2023-08-09 19:33:09 ET

E.ON SE (EONGY)

H1 2023 Earnings Conference Call

August 09, 2023 6:00 AM ET

Company Participants

Lars Rosumek – Head-Communications & Political Affairs

Leonhard Birnbaum – Chief Executive Officer

Marc Spieker – Chief Financial Officer

Conference Call Participants

Tom Kackenhoff – Reuters

Julia Demirdag – Montel

Christoph Steitz – Reuters

Philip Akoto – Energate

Jonas Jansen – FAZ Newspaper

Presentation

Lars Rosumek

Good morning, ladies and gentlemen. I would like to welcome you very warmly to our Press Conference for the First Six Months for E.ON SE. In addition to the participants to this press video conference, I would like to welcome all the guests, who are following us live through the social media channels and the website. Leonhard Birnbaum, the CEO, is here with us today; and Marc Spieker, the CFO. And as always, we will start by presenting the results of the past six months. And then afterwards, you will have the opportunity to ask questions.

I would like to pass the floor to our CEO, Leonhard Birnbaum.

Leonhard Birnbaum

Good morning from me as well. Hello. Lars, thank you for the introductory words. Ladies and gentlemen, we are currently perceiving less headwind at E.ON in our market environment. We are seeing an increase in calming of the energy markets. We are seeing average gas prices of the first half this year that fell by about 30% on forward markets compared with 2022. And at the same time, we are perceiving more tailwind for the energy transition.

In July 2023, the hottest months that has ever been recorded. The climate change is here, and it’s becoming more and more tangible. And in addition, the energy crisis has shown that we must move away from fossil fuels and design an independent, affordable and secure green energy supply. And that’s why the demand for sustainable energy solutions is growing. And at the same time, there is a growing understanding that the energy transition will only work with sufficient infrastructure. So when – if not now is the time to fulfill Europe’s commitment to the energy transformation and accelerate that transformation.

In spring 2022, we significantly extended the growth targets. The expanded installed capacity of solar and onshore is to be increased to 330 [ph] gigawatts by 2030. So in the eight years ahead, we have to accomplish twice as much as we have in the previous 15 years. So that’s the additional tailwind we are seeing. So less headwind, more tailwinds. What does it mean for E.ON? In the German distribution systems alone, we will have to connect about 6 million new facilities. And for this task, which we are now facing, E.ON are important and well positioned, but it also requires an appropriate and legally secure investment environment. We are in an environment that brings a lot of work and challenges for us, but also social responsibility and great potential, particularly growth potential, and in this environment, which is characterized by calming of the energy markets and – as well as immense need for investment in the transformation of our society, particularly for infrastructure.

In this environment, we’re again able to present strong first year – first half results. The adjusted EBIT – group EBITDA amounted to €5.7 billion. That’s 40% higher than the prior year figure. And E.ON is just following up on its good start to the year in the first quarter, which we communicated to you. And at this point, I can also emphasize that our growth prospects are better than ever. Why? Well, the – because in recent years, we have systematically shifted our customer business to decarbonization solutions for residential and business customers. And at the same time, the demand for sustainable energy solutions is arriving at our networks. We received connection requests for around 240,000 renewable facilities in Germany last year, more than twice as in the prior year.

And this trend is continuing in the first half of 2023. The numbers are increasing particularly for small PV systems we are seeing a real connection boom for small solar systems. And this huge demand makes it increasingly clear that the network expansion has to take place on an industrial scale. We have to be able to expand, strengthen and build networks as if on an assembly line, and that’s exactly what we are gearing E.ON towards. With our investments, we are making an important contribution to the decarbonization of our society, and we have, despite all the crisis of the past years, unabatedly moved forward with our plans. We invested a total of €2.4 billion in the first half of 2023 alone. That’s 40% more than our investments in the prior year period. And we have hired additional employees, 2,000 of them, to be able to do that because we -- well, we are creating new jobs on the basis of this growth. We are and we want to be a driver of the energy transition, and we need bright minds and many strong hands for this.

So in a nutshell, our strategy with the three pillars, sustainability, digitization and growth, is proving its worth. E.ON setup is paying off more and more and becoming more and more visible. And I’d like to take this opportunity to thank our employees that made this possible through their great work. Ladies and gentlemen, the increase in procurement costs for gas and electricity last year was an extreme challenge for us, but our long-term procurement policy enabled us to keep costs down for our customers for a long time by passing on price increases with a delay. We stood and still stand by our customers as a reliable partner and shielded them from the extreme price hikes on wholesale markets.

In addition, we optimized our procurement policy during this phase to enable to respond even better to volatility. And at the same time, we’ve always said that as soon as we see scope to lower our prices again, we will do so. And this is now the point in time where we will do so. In late summer, we’ll lower prices for millions of our customers in Germany by an average of 18% for basic electricity and supply and 28% for basic gas supply. And in recent months, we’ve already made price adjustments in other European markets, some of them quite extensive. We need to say these were markets where the price increases were passed on much more quickly because of the hedging reasons. Marc will go into more detail here in a few minutes.

We are thus keeping our promise to our customers. So we are investing in networks, we are supplying secure energy, and we provide price certainty both upwards and downwards towards our customers.

The increase in comp in our market environment reduces the uncertainties for the months ahead. This is also reflected in our business expectations. Based on our cautious assumptions and our overall positive first half performance in our markets, we are raising the forecast we communicated back in March, and Marc will comment on that as well in a minute.

The International Energy Agency’s latest assessment of market dynamics also shows that the gas markets have gradually calmed down since the beginning of the year. And the higher levels of the gas storage facilities in the main Asian and European markets give us cause for cautious optimism regarding the winter period. And the poor economic development in China is also playing a role here. So we won’t see a huge gas pool there. So the likelihood of a crisis next winter is much lower. I mean there are considerations under this is still conceivable, but they are becoming less likely. So the markets have relaxed.

But nevertheless, we are warning that we shouldn’t say the crisis is over, we are on the same level as before the crisis. We’re not. We are well above the last pre-COVID year in 2019. And I don’t think that we can return to that in the medium term, and that’s because we don’t have the Russian gas volumes anymore. So we need to continue to work on energy conservation. That’s the best way of making energy affordable for our customers and ensuring competition and giving the industry the competitive edge.

In the last months, the discussions on the European energy in parliaments have gained progress concerning the European market design. I believe that the glass is still half full, and we’ve communicated that. This is related to the original proposition of the EU Commission and also now with – after the first discussions with the parliament, it’s still half full. What’s positive is that the liquidity in the markets are also taken into account. And what’s also positive is that the political and regulatory will to improve the regulatory conditions for network investments is slowly becoming abound [ph] as well.

After the experience of the energy crisis, we need, as we said, an even more extensive and faster expansion of our energy infrastructures, especially the electric distribution networks. Every euro investment in renewables must come with €0.5 investment in [indiscernible]. For Europe and the energy transition, this represents an opportunity for economic driver and a sustainable path for our energy crisis. For E.ON, it offers enormous growth potential because we, as the largest distribution network operator, play a pivotal role in the transformation, and the energy transition needs players like E.ON that are willing to invest and lead the way.

At E.ON, we are aware of the demands placed on us and take responsibility. That’s why we plan to invest, as communicated back in March, a total of €33 billion in Europe’s energy transition until 2027, provided, of course, that the economic and regulatory conditions are right. And that’s why we are currently looking very closely at what the consequences of the even more ambitious targets of Germany’s Easter Package of legislation will mean for the network expansion. The indication we are seeing today in the German regulatory system are going in the right direction. So we need a return that takes account of the different market environment.

The proposals currently on the table are not sufficient and will not be sufficient to increase investment. We are placing a burden on our balance sheet here. And if we need to invest more, we need to be able to earn more. So we need a higher return that takes account of the increased interest levels. And that’s not the case in the – at the moment.

But we’re also growing because we have the right solutions for an accelerated energy transition. Let me give you a few examples from the current financial year. So the Energy Networks will soon connect the one millionth renewable energy system to E.ON’s network in Germany. So statistically, a PV system close to Berlin. Our investments in network infrastructure laid the foundation for green growth.

Another example, 110 kV line, that’s 110,000 volts between [indiscernible] between its substations in Flensburg, and we think that’s a good example. In the future, it will be able to transmit up to five times more green electricity than before.

Another example is the substation at E.DIS. And this will allow us to increase the ability to accept locally generated green electricity in Berlin’s outer suburbs as well as great capacity. So we do not just need to connect new facilities but also be able to transmit this electricity. And the same is true for large-scale commercial customers. We have similar examples in the Salzgitter region, Avacon for example.

In Customer Solutions, E.ON continues to invest in climate-friendly energy infrastructure. We have an energy recovery unit for Imerys. The unit uses the synthesis gas produced in a production process as an energy source to supply the facility as well as 40,000 private households in the region throughout the year.

So these are all lighthouse projects at this stage, but we want to make them standard. They make an important contribution to the competitiveness and decarbonization of the economy, and they are a substantial part of a heat transition as well.

And finally, digitization. This is a key prerequisite for us being successful with our growth strategy. It requires more sustainability. We are moving forward at high pace. We have migrated to more than 90% of applications from the data centers in the cloud. This is a success because the cloud makes our landscape more stable and secured. It forms the basis for modernizing our business processes and simplifies the development of new digital services for the energy transition. We will surely provide more information on this in the future.

Ladies and gentlemen, modernization expansion, digitization of Europe’s distribution grids will require investments of around €425 billion over the coming 10 years. That’s one estimate. Your electric – with the increase in expansion targets, which have been taken in account here, means that the sum can be higher. Germany’s distribution network alone are expected to need about €80 billion of investments until 2030. In other words, the energy transition success now requires an effort on a historic scale. It will require expertise, commitment and a lot of capital.

And let me reemphasize here, we need the right framework for investment. And the focus of the policymakers should be on achieving the targets that have been set. And for this to happen, obstacles will need to be systematically removed. In other words, bureaucracy will need to be reduced, reliable and appropriate investment conditions need to be established before the beginning of a regulatory period and planning approval procedures must be streamlined and accelerated.

And again, regulation in the network business must reflect the audit market environment which is characterized, and we welcome the efforts of the German Federal Network Agency to increase the return on equity, interest rate EK1 [ph] as a sign that this is going in the right direction, but this is only a first step, and they don’t go nearly far enough because the adjustment isn’t supposed to take effect until two years after the interest rates have begun to increase, and is it supposed to apply to existing installations. In view of the need to accelerate the energy transition, we now need forward-looking regulations that promote growth and ensure investment certainty legally secure decisions are now needed in a timely manner for appropriate return on equity and debt capital.

And that is the same is also true for other parameters like ExGen and the interest factor. And we are surprised to see that the decisions are being delayed. We hope that these decisions will be taken over the coming months. But it’s not just a question of the regulatory agencies whether or not we can deliver. It has to do with all the other authorities, building departments, for example, I was in the Ahrtal, the Ahr Valley recently in the two to three months after the floods, everything was possible. Afterwards, everyone forgot about what had happened and people just took care of their own silos. That way, if we cannot achieve things in the – even in the Ahr Valley, and everyone only looks at their own responsibilities only, then that’s not going to work.

How is that then supposed to work in a region where there is no flooding catastrophe. So do we need always floods to be successful? We have many regulations and laws that asking too much of the consumers, people shouldn’t be patronized but rather one over, people companies and especially these small business must recognize that there is something to gain from the energy transition for their everyday lives for the economic situation. So it’s about fair burn shedding, but also about the fair distribution of opportunities because when we at E.ON here energy transition, we hear above all opportunities, but that must be true for others as well. That’s why we’re taking the lead by expanding network infrastructure in order to enable comprehensive cross-sectoral decarbonization. And we assume that we will be rewarded for that rather than penalized. And in our customers, we go far beyond the sale of electricity and gas because here too, it’s about the energy infrastructure for and with our customers.

And with that, I would like to hand things over to you, Marc.

Marc Spieker

Thank you very much. Good morning from me as well. Leo, as you just mentioned, I would just like to stress what you said. We, at E.ON, have the answer to one of the most important challenges of Europe because we will help deliver the energy transition if people let us do so. And that’s why our growth strategy will be implemented. And in the second half, we continued our – the excellent development of our performance and the good environment had a positive impact on the results. So what does that mean? In view of our positive business performance and the greater transparency and better visibility of the market environment, we are raising our earnings forecast for the financial year of 2023.

But I’ll first turn to our six months results in detail. In the first half of 2023, we increased our adjusted EBITDA from €4.1 billion to €5.7 billion. Adjusted net income amounted to €2.3 billion, which is significantly above the prior year figure of €1.4 billion. Both our segments, that is Energy Networks and Customer Solutions laid the foundation for this increase by delivering a very good business performance. Our network business increased its adjusted EBITDA by almost €800 million to about €3.5 billion. We see a strong investment-driven growth in all regions, particularly in Germany.

In line with the energy transitions needs, a large portion of our investments went into strengthening and expanding as well as modernizing and digitalizing our networks. In addition, the network businesses to earnings performance was positively impacted by temporary effects as well, and this refers specifically to the subsequent compensation of increased costs for the procurement of grid losses in our European business as well as the so-called redispatch costs in our German grid business. These are ultimately pass-through items in our income statement. And that’s why these higher earnings from lower dispatch costs will be fully credited to our customers in subsequent years by means of network tariffs completely.

The earnings performance at our Customer Solutions segment was positive as well. It recorded an adjusted EBITDA of around €2.2 billion in the first half of the year. The increase is primarily attributable to the increasing calm on the wholesale markets and to the associated positive catch-up effects relative to the first half of 2022, which was difficult.

And as you know, we faced an extremely volatile and dynamic market environment, especially last year. We demonstrated that our employees have the necessary know-how and our business, the necessary flexibility to deal with such developments. We successfully secured and efficiently optimized our procurement.

As announced, we’ll pass-through lower wholesale prices by significantly lower prices for millions of our customers. And that’s why we expect this to have an adverse financial impact on this segment’s earnings in the second half of the year. In recent months, we’ve already been able to adjust prices in our markets. For example, we began to do so in the United Kingdom and in the Netherlands and Germany, we have so far reduced prices mainly in our regional companies. In late summer, we’ll extend the price reductions to our national brands as well. The energy transition offers our customer solutions business major growth potential. The demand for our sustainable energy solutions continues to increase.

Let me just give you a few specific examples. In the first half, sales at our future energy home unit rose by almost 50%. For instance, sales in the Czech Republic, Hungary, and Sweden, for example, almost doubled. We plan to increase future energy homes sales to €2 billion by 2027. Our E-Mobility business is making further advances as well. For example, our public charging infrastructure in Europe grew significantly in the first half of 2023. We also want to grow by entering into strategic partnerships like our home charging partnership with BMW. By 2027, we plan to increase our sales tenfold compared to 2022.

In addition to keeping our promise to reduce prices again as soon as the opportunity arises, we also stand by our announced investment plans. In the first half of 2023, we significantly expanded investments in our energy infrastructure and sustainable energy solutions. Compared to the previous period, investments were raised by almost 40% to €2.4 billion.

And for the remaining financial year, we believe that we are fully on track and assume that €5.8 billion will be invested this year. This underscores our ambition to be a key driver of the energy transition in Europe and Germany. Our growth is not only visible in financial figures, which Leo Birnbaum referred to, we also were able to increase our – the number of employees by 2,000 employees that means we’re not only investing into the energy transition through investments, but also by creating attractive jobs.

We also have the ambition to make these jobs more and more attractive. We are investing considerably in digital training of our employees in the first half of 2023, we spent a two-digit million Euro amount.

Ladies and gentlemen, I’d now like to turn to our financial situation. Our economic net debt rose from €32.7 billion to at the year-end of 2022 to €37 billion that was anticipated. This – the primary reason was our seasonally negative operating cash flow. This isn’t surprising and instead reflects the usual seasonal pattern of our business model, which you’ve always seen in our cash flow accounts. Our dividend payment was also a factor as well as higher investments.

Now, based on our strong first half earnings, we’ve raised our targets for full year 2023. Our forecast for the adjusted group EBITDA was in a range of €7.8 billion to €8 billion. And we now anticipate that the target range will be €8.6 billion to €8.8 billion. We expect the adjusted net income to be in a range of €2.7 billion to €2.9 billion, which corresponds to earnings per share of €1.03 to €1.11.

What now prompts us to reset our targets? Our original forecast assumes significantly higher wholesale prices and more market volatility than we’ve experienced so far this year. Our market environment is increasingly calming and we have better visibility on future developments, and this also reduces the risks for our business in the months ahead. The factors – these factors along with our strong first half operating performance, gives us the necessary confidence to raise our forecast for 2023.

But it’s very important to me to emphasize the following. In the second half of 2023, we won’t be able to rest on these current positive developments we do not want to do so. The good first half results are the foundation and an incentive for all of us at E.ON to move systematically forward towards our ambitious growth targets. But we continue to plan cautiously and factor in a possible deterioration in the market environment, especially in the fourth quarter.

Our adjusted forecast for Customer Solutions in particular shows you that we expect adverse impacts in the segment in the second half of this year. And in many markets, we do not anticipate hardly any more noteworthy earnings contributions because we are systematically passing on lower wholesale prices to our customers by reducing prices.

Ladies and gentlemen, I’ll conclude with a brief look at our medium-term plan. Our strong first half earnings and the accelerated pace of our investments keep us right on track. We stand by the growth path until 2027 and beyond that we’ve communicated. We want to invest a total of €33 billion in the energy transition until 2027. We want our Energy Infrastructure Solutions and green products to continue help our customers shape their personal energy transition, and we want to increase our dividend by up to 5% annually until 2027.

And with that, I’ll hand things back to Lars Rosumek and look forward to your questions.

Question-and-Answer Session

A - Lars Rosumek

Thank you, Mark. Thank you, Leo. And I now would like to open the Q&A session. [Operator Instructions] We already have three hand signals. Ms. Honing first, then secondly, Mr. Kackenhoff from Reuters and then Stefan Schulte [ph] in this sequence. Ms. Honing, please.

Unidentified Analyst

Yes. Thank you. I’m happy to be here. And I have three questions. One, concerning the price break. The Cartel Office has done this for the gas heating, energy and electricity. Have you received a letter from them as well? And then North Stream you said you wanted to hold your interest. Do you want to keep your stake there and how – what progress has been made with dewatering and corrosion progress? And then district heat. The German consumer watchdog is preparing lawsuits. Do you have any updates on that?

Leonhard Birnbaum

I’ll take the first and third question. Well, the tests – the test procedure, I think we have two 12 million electricity customers and 2 million gas customers. And we will always be looked at even if it’s only for comparison only. So the price breaks have been properly put into place and so we’re not concerned here. Now as far as district heat concern, that situation is slightly different. There’s no regulation there, there are contracts in place vary from region to region.

And of course, we have complied with the contractual stipulations, which vary from region to region, as I said. And therefore we’ve announced the – what the statement by the consumer watchdog, but we are fully transparent in our discussions with them. Marc?

Marc Spieker

Hello, Hello, Ms. Honing. Nord Stream 1, there’s no status change concerning Nord Stream 1 here. We are still a shareholder in the operating company and the company is still focusing on developing options on how to de-water the pipeline in wind time. That’s the status we have communicated previously as well. So no real news here.

Lars Rosumek

Thank you, Marc, Leo, Ms. Honing, and then Tom Kackenhoff, please from Reuters.

Tom Kackenhoff

Good morning, everyone. I have only one question really. Given the profits can the shareholders expect a higher dividend then announced? Do you see any scope for that? Will you review that in the autumn? What’s the status?

Leonhard Birnbaum

Mr. Kackenhoff, there’s a simple answer here. The dividend is presented by the supervisory board to the AGM after the annual results and prior to that we won’t speculate on that.

Lars Rosumek

Thank you. And then Stefan Schulte, please, from Batz [ph]. Mr. Schulte?

Unidentified Analyst

Hello. Good morning everyone. I have three questions, two to you Mr. Birnbaum and one to Mr. Spieker. The first concerning the heat transition. Yes, it caused a lot of headlines and will do so. How do you see the compromise that’s been found by the traffic light coalition? We want speed here always and the compromise will delay things by several years. How do you see that? What’s your take on that? Because we need a heat plan up until 2028. And then secondly, I’d like to be interested in a long-term forecast concerning electricity prices. You said the prior crisis level will never be seen again. But the economics minister, for example, once the renewables are expended, there would be reduced prices. And Mr. Kopfer from 50 Heads [ph] announced a strongly reduced prices towards the end of the decade. Can you confirm that or do you see that totally differently?

And Mr. Speaker, the third question to you, customer prices. You said millions will benefit. Can you be more specific? You talked about the basic tariffs. What about all the other numerous tariffs? Those are my three questions.

Leonhard Birnbaum

Very exciting questions. Thank you. Let me talk about a heat transition, first of all. As I said in my speech, you have to win, the citizens have them on board, and if you do not do that, then you run the risk of losing speed even. Even if you can be faster, yesterday or before yesterday, the numbers were published, so lower numbers of heat pumps and thermal insulation in buildings, and that was a sign of uncertainty.

So I believe the compromise is helpful because it – we are saying again, okay, we have to have the people on board. And there’s an objective reason for that as well because as a home owner, they were forced to react quickly without understanding how the environment was changing. And then now the compromise is that there will be a link with the – your local heat plan. And we believe that’s right, this kind of constellation would’ve even wished that the initial uncertainty would not have been created in the first place. And this result would have been presented from the very beginning. So yes, apparently there is now – there appears to be a delay, but in the long run I think it’s the right approach and that’s what the politicians are saying as well.

They have come to the same conclusion and that’s why the adjustments were made. Now, as far as the long-term forecast is concerned, it always depends on the year when you start and what period are you actually talking about when you say long-term. I believe, if you compare the situation with the peaks we saw last year on the gas and power price then we will definitely see lower wholesale prices over the coming years. And we are already seeing them.

But if you are saying that was the expression of a war situation, a special crisis, which won’t be permanent, and let’s compare it with a normal situation, then you need to ask when was the last normal year and I would say 2019 was the last normal year, the pre-COVID year 2020 with a lockdown. The numbers are totally distorted and 2021-2022 the Ukraine crisis already started.

So if you compare the figures with now and 2019, then even at today’s levels in one year contracts, the gas prices have tripled on the gas side and more than doubled on the power side. And if we are now saying we are not expecting long-term return to the pre-crisis level, then that would be a comparison with 2019. We no longer have the Russian pipeline gas, it’s being replaced by structurally more expensive LNG, and that takes us up to the price level and we are comparing – losing competitiveness compared with the other region. And that’s here to stay.

So the last good years haven’t been a good – haven’t been good years for Europe as an economic region because Europe has worsened its economic situation. So when you make these comparisons you have to be clear about what year you compare it to. And for end users, as Mr. Spieker will say, prices will fall because what’s interesting for them only is what they’re paying at the moment. And will that go up or down? I mean, those will go down with falling wholesale prices. That’s why we’ve announced price decreases.

Marc Spieker

Mr. Schulte, you asked about price adjustments. I need to say one thing first. We have more than 40 million customers across Europe with different customers and tariffs and so on. And unfortunately in a press conference, I cannot provide fully comprehensive price consultancy service here. So what I can say is that we will pass on the reduced wholesale prices to all of our customers in a fair way. And some countries, as I said earlier in the Netherlands, the UK this has already happened for almost all customers. In Germany the first big wave for customers for national brands will happen in September.

For the regional brands, we’ve already implemented that to a large extent. And then there are also individual customer groups who will not see this until next year depending on what tariffs they have and what contracts they have. And yes, there are also very few customers who are still – who still have the low pre-crisis tariffs. And there are some countries for that – some customers for that reason who will receive letters saying that their prices will go up. But that’s because they currently have contractual conditions that are lower than prior to the crisis. I cannot go into any further detail, but everyone who is an E.ON customer can rely on benefiting from developments of the wholesale prices. Thank you.

Lars Rosumek

Thank you very much, Marc. Now we have Ms. Zorga [ph] from Bloomberg. Ms. Zorga, please.

Unidentified Analyst

Can you see me?

Lars Rosumek

We hear you. We see you.

Unidentified Analyst

Thank you. Wonderful. I’d like to ask a question concerning the return on equity of the Federal Network Agency. You already expressed your concern and I would like to ask about the current status and whether you’ve already included that in your calculations and consultations. The next question is the following. People have asked whether nuclear power plants, whether you would continue operating nuclear power plants, can we use the old fleets or would new power plants be required in the future? Now, with regard to nuclear energy, and this is also a question that’s a European question, you have – are on a dispute with France concerning the power market reform, the role of nuclear power compared to hydrogen and other questions is still quite open. And I would like to – I would be interested in your opinion and how this dispute can be settled?

Leonhard Birnbaum

Now with regard to the return on equity, of course, we’re continuously trying to voice our opinion, our position, but I can’t give you the current status there. The distinction between old and new systems is not conducive. If you pay a higher return on equity for old – for new plants, then for old plants is an idea, but it doesn’t solve the problem because of the following three reasons.

It is not that the old plants have full financing for 40 years. Old systems, higher rates will also have an impact that’s why old plants also need higher rates. Now if you distinguish between old and new plants, you might think that’s great that the new plants get a higher return on equity, but that that’s only for this regulatory period. In a couple of years they will be old and will be treated differently.

And the third question that rises – is raised is what will this mean in the long term that the system has changed. And that’s why we feel that a lot has to be done. This is a proposal that shows that we have to move, but it doesn’t solve the problem. We also said that in regulation, it’s not just about the return on equity one, return on equity two, interest rate, but it’s also about other things. And the overall package is decisive. We’re engaged in these discussions as an industry, not just as E.ON, and we’re talking to the necessary committees and the necessary regulatory authority.

Now with regard to nuclear energy, there is no relevant debate in Germany, and I would like to end this debate really. I don’t see the opportunity of a political decision being taken and that this being relevant to Germany, and that’s why I don’t want to speculate. European level is completely different. Of course, there is a movement that France would like to invest in this type of energy that several Eastern European countries would like to invest for stability and price reasons. It would be good if we, in Germany, would be reluctant and not try to impose our path on others. It will certainly need not be crowned with success if we did that.

Now how the European – the German and French governments are going to settle what their – what the settlement of the argument will be, I don’t know. I don’t think it will be a good solution if we fight against each other. But if we close ranks, that’s better. French nuclear power plants will be required in the next decade. They cannot simply be replaced. I don’t know how the German electricity market will be stabilized. The French nuclear power plants will help stabilize the system in Germany as well because we’re part of the European system. We’re not an isolated market.

If you approach this discussion with the mindset that each do their part and make their contribution, it will be better, and we will be more likely to reach a result than if we try to convince the others, because the French will not convince us to commit to nuclear power plants, and we won’t make them stop using their power plants. And this is something that will have to be sorted out in the next few months.

Lars Rosumek

Thank you, Leo. We have a list of additional questions. The next one is from Julia Demirdag from Montel; Christoph Steitz from Reuters; Philip Akoto from Energate; and Jonas Jansen from FAZ, Frankfurter Allgemeine Zeitung. And the first one is Ms. Demirdag. Please go ahead.

Julia Demirdag

Hello good morning. I have a question. Now if I got you right, and when I read the report, in the first half, you had a decline in the sale of electricity and gas. And we’re able to offset this by good procurement that is trading – trading that’s a business that you have expanded and are continuing to expand, and price adjustments. Are these price increases in the first half? Could you provide us with some explanations? And in the report on one of the latter pages, I found a figure from continued activities that was a negative item of €1.7 billion. Could you explain this item to me? I didn’t quite understand that. Does that have something to do with PreussenElektra? Could you please explain this figure on Page 12?

Marc Spieker

Ms. Demirdag, I’d like to answer your question. I’ll start with the first one. You asked about the price and volume. Volume-wise, developments in our portfolio are affected by various effects, and it makes sense to look at the amounts passed through wield in our network. We see a similar development in most of the European markets. The amounts wield through or transited were 7 – 6% to 7% below the level of the years before COVID, before the crisis, 2018, 2019. And it’s a mix, of course, of savings conservation, but also decline in industrial demand, and we know that this was not only due to efficiency gains, but that customers simply were not able to produce because of the high prices.

With regard to price increases, I already gave an answer to Mr. Schulte [ph]. You have to bear in mind that in Germany, for instance, our group of customers had to be divided. Price increases are so high – movements were so high that we adjusted prices for the first customer group and then, at a later point in time, for the second customer group. Now these are those who saw a price increase in the second quarter. We now announced that prices will be reduced in September, especially for those customers for whom prices were raised last year, but also for those customers who received the price increase this year. For those, prices will be reduced at the beginning of next year. So all customers will participate, but those who had the price increases first will benefit from the price reductions first as well.

Now with regard to continued activities, I can only speculate with regard to the amount. But we can discuss this on one – in a one-on-conversation later. Now in the reported earnings from continued activities also include the mark-to-market development of our procurement contracts, that is derivatives that depending on the market price, these have to be assessed in the balance sheet. And depending on the volatilities – because of volatilities, there are a lot of fluctuations. And in the first quarter – half, we had a loss of 1.7 billion in the balance sheet. These are temporary effects, which then will be balanced out towards the end of the year or over time.

Lars Rosumek

And we have Christoph Steitz from Reuters, please.

Christoph Steitz

Good morning. I have two questions. One question to you, Mr. Birnbaum. You said that the crisis has not come to an end yet. Will it end ever in your opinion? And if so, when? Second question to you, Mr. Spieker. The current forecast suggests that you have almost reached the target of 2027 for the EBITDA. How will the earnings develop for the next few years? Will it be a stabilization, a lateral movement or a downward movement? Could you give us an overview over the next few years?

Leonhard Birnbaum

Very exciting question, Mr. Steitz. Now with regard to the crisis, I would intentionally move away from the topic of energy. I already said that the absolute energy price level will not decline in the foreseeable future. We will not reach the level of 2019. But regardless of that, we are engaged in a discussion saying that the crisis of the economy in Germany are also due to higher energy prices. That doesn’t cover the whole picture in my opinion. I already said that the competitive situation has deteriorated, but that’s not the only reason for the problems that we have in Europe and in Germany to a certain extent.

And we have a mix of the fact that we’re not innovative enough that we do not have sufficiently liquid financial markets, that we do not have a uniform digital market, that we have excess bureaucratization, higher costs. And a combination of all this has led to lower investments, which have a long-term negative impact on economic development. You don’t go far enough by simply saying that energy prices has to be reduced and that everything will be fine after that. That’s not the case. I’m going to use your question now as an opportunity to say that the crisis will only be over when we do not only focus on individual symptoms of the problem or partial aspects or the absolute energy price level. The crisis will be over once we are more dynamic and have a more forward-oriented position in the future.

I’m a bit emotional here. But if you look at what the European Parliament is doing with regard to AI, they’re discussing it and pretending as if it’s a threat that has to be regulated. And the result will be that it will simply be developed somewhere else. And we will have to see how the models that haven’t been created somewhere else will be adapted at a European level. That’s not acceptable. The crisis is over once we will be strong again. And this is not only an energy topic.

Marc Spieker

Yes. Mr. Steitz, concerning your medium – question about medium-term development, we’ve already said that during the first quarter and then throughout the full year of 2023. We’ve seen many one-off effects, redispatch costs, network losses and developments on the Customer Solutions side where we had very earnings in the first half year. But where the price adjustments will – mean that there will be hardly any EBIT contributions there. So 2023 is an extraordinary year. From today’s perspective, we do not need to change our midterm perspective. We affirm them, yes. What will change? Well, we will report on that as usual in March next year and give you an update on that.

Lars Rosumek

Thank you very much. The next, Energate. Mr. Akoto from Energate, please. Mr. Akoto, the floor is yours.

Philip Akoto

Hi, everyone. I hope you can hear me.

Lars Rosumek

Yes, we can hear you well. Thank you.

Philip Akoto

Mr. Birnbaum mentioned the Ahr valley. And I can remember that 65 million were to be invested in many substations there. You’ve said that this has become more difficult because the environment has changed there. Are these still the current plans? And is the money – that sum still enough? Or do we have a new situation there? You mentioned the flooding there. And my second question is Mr. Spieker mentioned eMobility that a lot of turnover could be achieved in – by 2027. My question there is, are you already in the money there in this segment? And if not, by when will you be profitable there? Or will E.ON profitable there?

Leonhard Birnbaum

Okay. Coming back to the Ahr valley, I need to praise our employees there. They are doing a great job there locally, and networks are being set up or rebuilt differently. We’re not rebuilding them in the same way as they were before. Of course, we still need to supply the homes there that are there. But the substations, for example, can be relocated from the difficult areas, or the connections be moved from the cellars so we can insulate them better. That was a problem we had. We couldn’t get to the connections and because the cellars were still under water, which meant the whole street wouldn’t be – couldn’t be supplied.

In the two to three months after crisis, everything was possible. We were able to say we need to do X, Y and Z, and then we were able to do it. And then after that, we were told, oh you need that kind of permit or you need that kind of approval. We need that to go through that process or this process. Well, things are still possible, but it’s taking a lot longer and that was my point. If even a flooding event like in the Ahr Valley can stop existing processes only for two to three months, then the energy transition is not going to happen.

We need to accelerate processes during the normal situation, and I’m seeing that even in the Ahr Valley, there are more and more problems with the delays now. I don’t want to complain about the public authorities here. But everyone needs to do their part. But if everyone always also only do their part, then we will have a problem. E.ON investments are enough, and we will do that but the speed at which we can make these investments will very much depend on how we can handle things locally. If it takes two years to get a plot of land, then we can only do the detailed design after two years, and we can only complete the job after four years.

And this happens in this kind of environment, that’s what I’m trying to say. I was there; I visited them to tell them we haven’t forgotten you because of the energy crisis. We still believe you’re important. We still think you’re doing a great job. And to be honest, I was shocked to hear how quick we went back to this normal operating mode. And therefore, I wanted to take this opportunity to comment on that here today.

And the other question was to you, Marc.

Marc Spieker

Yes, you asked about eMobility and the turnover and profits in this area. eMobility, you see that with a number of cars being registered, it’s still a low number but we are seeing a huge momentum there and it’s the same at E.ON as well. Overall, in eMobility, in our core markets, we’re looking at sales of a low three-digit figure – euro figure today. So if it increases by ten-fold, we will get beyond the €1 billion mark, that’s our strategic ambition as well. Is it already profitable this business area?

Well, you can imagine at this early stage with such a high growth rate, this business hasn’t reached breakeven point yet, but our expectations would be that across the markets, it will take three to four years for us to see the breakeven point. There are a lot of expenses at the beginning to build these markets, of course.

Lars Rosumek

Thank you. And then the next question is from the FAZ Newspaper, Jonas Jansen. Mr. Jansen?

Jonas Jansen

Hi everyone and thank you. Mr. Birnbaum, you already commented a lot about my – the question I was going to ask. But bureaucracy, red tape, you’re complaining – have been complaining about that for a long time. Do you still have hope that this will change? And if so, can we – can it be prioritized in any way and say for example, the accelerating permits, for example or documentation obligations will need to be reduced? Can you prioritize these things in a way for there to be some real change because you’re not the only one complaining? What’s your view from a company perspective?

Leonhard Birnbaum

Yes. Yes, you can become a pessimist if you look at the number of the bureaucratizing initiatives and look at the outcome and the results. First of all, the fact that we haven’t been so successful here yet should not mean that we shouldn’t keep on insisting. We should not resign here, that would be the final defeat.

And two, I don’t want to say let’s take care of permits only because that neglects the fact that we have problems everywhere, building authorities, for example. I told my CFO this morning, this – last week, the chimney sweep came to measure the humidity of the wood I’m using in our fireplace. So that’s stupidity. So the authorities are doing all sorts of things that are stupid and that’s why I don’t want to say let’s fix this problem because it leads people to believe that if we have solved that problem, we have solved the whole issue.

I could talk to you or give you examples for half an hour about the various authorities, security – IT security. But – and the various other departments and authorities as well, but we need to close at 11 o’clock here. So we need to tackle this issue. My basic optimism is, if not now, why – when? So the Chancellor is speaking about the new Germany speed. I believe he means what he says, but the authorities will have to play bold [ph] as well at a local level. But – so let me carefully say they haven’t fully grasped the situation entirely.

Lars Rosumek

Thank you. So indeed, it’s almost 11 o’clock now. We have a little more time, and there’s one question here from Mr. Schultenburg [ph]. Mr. Schultenburg?

Unidentified Analyst

Yes. Hello to – indeed, I try and be – yes, meet the 11 o’clock deadline. One question about prices. Herr Spieker said earlier on various times where there could be price increase or have been price increase and price reductions. I have now heard that E.ON has increased price at a certain point in time this year in June when the market was already moving in a different direction. Many didn’t understand that. So my question is why was that so? Why did you lag behind? What are the reasons for that?

And the second question is, Leo, flooding dementia is a good word, and I read an interview on Zeit online where you talked about innovation as well, where you focus that – on that. If you were to pick out one innovation for E.ON that would be the top topic for the next years, what could that be?

Leonhard Birnbaum

Well, okay, let me start with that question. Full digitization of our infrastructure, Germany-wide, that is the key innovation we need as far as I’m concerned. Why? Because the future energy systems, which we want to set up, can only be managed if we know the situation of the networks at any place at all times and can influence it. That’s totally different to the past. And for that reason, we need the ability to – on a regional scale, in real time, to know and understand the situation of the network at all times. So for that, we need a fully digitized system and need to use artificial intelligence as well. That’s an innovation.

So doing this Germany-wide and combining individual technologies. But it’s a totally different mindset that is required for this. And it’s a totally different way of thinking about technology. That would be the one innovation I would name if I’m only allowed to name one, but there’s more that’s required for us to be successful. The interview was about saving the world as a whole. And I said to that – to say the world as a whole will require more innovations. So – but that’s one I would name for – mention for E.ON. Okay. Marc, prices?

Marc Spieker

Okay. I want to be brief here. We have seen huge volatility over the last 18 months. We almost saw prices go up tenfold, and we increased or tripled prices, maximum. So our customers never saw the wholesale prices because we procure energy on a long-term basis. So we did this over a period of two to three years, procuring electricity. So that means across all of our customers, over a period of 12 months, prices can vary, but they balance out at the end of this period. And the customer received the price increase this year benefited from lower prices up until then.

So – and my last message here at this point is an example from my area as CFO. It’s the same with shares. You can always try and find out what the best price at a particular point in time is, and you go in and out, or you do it with an index product. You stick with your supplier, and then you – for this 12 or 18 months period, and then you benefit from the best result overall. It depends on the customer taste who – as to who wants what. The customers who are loyal again, we can assure them that they will – and this applies to all customers, they will be treated the same and will benefit from falling prices.

Lars Rosumek

Okay. Thank you very much. Mr. Schultenburg. There’s no further question here. It’s 11 o’clock or four past 11. So with that, I will close this press conference for the first half of 2023. So thank you for taking part. Thank you to you as well.

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E.ON SE (EONGY) H1 2023 Earnings Call Transcript