Enerjisa Enerji A.S. (ENJSA) Earnings Call Transcript & Summary

Welcome to Enerjisa First Quarter 2020 Results Conference Call and Webcast. I now hand over the call to Michael Moser, CFO of the company. Sir, please go ahead.

[Foreign Language] and hello, everyone. This is Michael speaking. I hope you all are healthy. Currently, we all live in extraordinary times. And therefore, I will start today's earnings release not by summarizing our financial results of the previous quarters. This time, I start by reassuring all of you that we have taken all steps on time which deemed necessary to successfully cope with the COVID-19 crisis. In this respect, we are successfully doing our utmost in order to continue to serve our 9 million customers with uninterrupted electricity to ensure that the health of our more than 10,000 employees is protected, to protect our supply chain and to support our stakeholders, and to offer advice to regulatory bodies for efficient and effective crisis measures. We, as the market leader in this public service, strongly feel that it is our duty to go beyond the expected and all stakeholders appreciate our approach to stand up for the whole Turkish energy industry. Furthermore, we strongly feel that we owe to our shareholders to be prepared for any crisis scenario at any point in time, and the current corona crisis is no exception. Due to our generally prudent management approach together with our swift decision to very early implement measures to protect our business, we have shown already that we have taken the right actions, this at a time when the global crisis just has started to unfold. I am convinced that our strong position in this sector in Turkey will even be stronger relatively to our peers after the crisis. Another aspect of which I'm convinced of is that every crisis also causes opportunities and new chances. Also in this respect, we will be prepared if such opportunities will arise. So please let's go now to Page 3, and let me elaborate a bit more in detail how we see the current crisis impacting our business. One of the biggest, most direct and obvious impacts is the contraction of electricity consumption. This is mainly a result of businesses shutting down altogether or operating at reduced capacity. In Turkey, we currently see electricity consumption down by around 50% year-over-year, to 15% year-over-year. This is a very severe reduction, even surpassing the levels of the financial crisis in 2018. While this has, of course, direct consequences for upstream electricity generation business, downstream utilities are largely unaffected. On the distribution side, earnings recognition is not linked to consumption volume. Nevertheless, there will be a temporary hit to the distribution cash flow as invoicing volume will not be sufficient to cover our revenue requirements. The resulting undercollection will be corrected via the normal correction mechanism for such misestimations with the 2-year time lag, including a compensation for the time delay. On the retail side, earnings and cash will only be moderately impacted as our customer portfolio is skewed towards residential mass consumers whose consumption behavior is largely unaffected or even higher than before. With a reduction of electricity demand as well as significantly lower oil and gas prices, the electricity price in Turkey is also [indiscernible]. For our regulated business, the electricity price is regarded as uncontrollable and hence is a pass-through cost for our business. Nevertheless, a moderate negative base effect can be expected on the retail side as the regulated profit margin of 2.38% is applied to the procurement cost. General payment behavior in Turkey can be expected to deteriorate across all sectors and ours is no exception, also it starts at very high level. So far, we see only a very moderate increase in payment delays. However, further deterioration is expected as payment behavior usually develops with a certain time lag. Nevertheless, even with a further deterioration, we expect only a moderate earnings impact at year-end as potential increases in [indiscernible] provision expenses are generally offset by higher late payment penalty income. Turning to Page 4. We have not observed any material regulatory intervention to our business for the time being. Not surprisingly, the regulators' key priority is to ensure continuity of electricity supply. Temporarily, this means that we are asked to minimize planned outages, which delays our investment plan. As we are not yet in a high construction season, the effect is very moderate to date and can be largely compensated in the second half of this year. However, the longer these restrictions remain in force, the more challenging these become. Moreover, we are asked to minimize the disconnection of customers in case of payment delays, which potentially deteriorates payment behavior further. So far, and different to some other countries, Turkey has not announced any general utility bill payment postponement. However, Turkey temporarily suspended the possibility to legally enforce debt payments, which, again, potentially deteriorates payment behavior. Turkey has not implemented a full lockdown, however, some hotspot areas are quarantined. For these areas, which currently constitute only a very limited fraction of our customers, meter reading operations are not allowed, and invoices are, therefore, issued based on prior year consumption. All of this indicates that our sector is generally well protected by the regulatory framework and earnings will only be impacted moderately. However, uncertainty remains on the cash flow side going forward. Therefore, funding and general funding liquidity becomes key. Similar to previous crisis situations in Turkey, we observed a decrease in bank loan liquidity. Therefore, it's important to highlight that our current base case plan for this year is fully funded and requires no additional access to debt market. Moreover, we have secured additional and substantial emergency liquidity reserves via committed bank lines and adequate excess cash in order to remain fully flexible in case of any potential further deterioration. Regarding our adequate excess cash position, we are fully flexible to decrease again whenever we deem this as appropriate. Let me now come to our Q1 financials on Page 5. Overall, our Q1 results show a continuation of our strong earnings growth. Our bottom line benefited from lower financing costs on top of higher operational earnings. Our Q1 free cash flow is negative as expected, with significant CapEx payments spilling over from Q4 of last year. The level of the free cash flow is even more negative compared to last year due to the absence of one-off positive working capital reversals from our retail business last year. As a result, net debt has slightly increased quarter-over-quarter. Page 6, market environment. With respect to the market environment, inflation has remained stable at a level of around 12%, while interest rates have further declined on lower inflation expectations going forward. This further decline in interest rates has allowed us to continue repricing our existing loan portfolio at lower rates also in Q1 of this year. With regard to energy procurement costs, we have seen a moderate increase over the course of the first quarter as a result of significantly higher feed-in tariff costs, both due to high renewable energy volumes as well as further TL depreciation. In contrast to this, the regulator has slightly decreased tariffs in the beginning of the year, leaving average tariff level sufficiently high to cover system costs and keeping commercial and industrial tariffs high enough to restart the liberalization process. Now coming to a more detailed explanation on our operations, please go to Page 7. On the distribution side, investment activities appear to have accelerated compared to last year. However, last year's investment execution in Q1 was especially depressed in the ramp up to elections. As previous stated, the current restrictions on planned outage execution are delaying our original investment plans. Nevertheless, this is not yet very visible in year-to-date since construction season only begins with second quarter, as you know. Also, CapEx reimbursement in the first quarter has exceeded new investments, our RAB grew by just short of TRY 1 billion as the opening balance has been reevaluated by inflation. Efficiency and quality earnings have remained virtually unchanged on the high prior levels. For our retail business, regulated volumes continued to decline compared to last year as corporate consumers [indiscernible] consumptions about the last [indiscernible] tariff limit have switched to the liberalized market in the beginning of this year. More importantly, we have actively switched mid-corporate and SME customers with a volume of more than 1 terawatt hour from the regulated market into the liberalized market as profitability levels are, again, highly attractive. Coming to Page 8. Operational earnings have increased by 13% to TRY 1.3 billion. Different to previous quarters, growth was coming in more equal shares from our distribution and retail business with significantly higher liberalized retail market profits. On the contrary, we also see some first moderate impact of the current crisis and resulting payment behavior, deterioration on the retail side. Let's now dive into our distribution business, which is on Page 9. Operational earnings increased by 10%, while cash conversion significantly improved. Earnings growth was only moderate as financial income recognition this year is at a significantly lower nominal return rate compared to last year given the decreasing inflation expectations. However, as our RAB has significantly grown since the beginning of last year, year-over-year growth is still positive. As indicated before, efficiency and quality earnings remained on the already high level of last year. The composition of this earnings bucket only shifted slightly with less OpEx out-performance being fully compensated by higher P&L out-performance. Cash conversion significantly improved for several reasons. First, financial income, not yet cash effective, did not grow further as last year's CapEx was more or less in line with our initial CapEx allowance and therefore, no further overspending was added. Second, as a result of the current crisis, Turkey has allowed all companies to delay their net VAT payments by 1 month, leading to a positive one-off cash effect of around TRY 100 million in the first quarter of this year. And finally, other working capital increases are lower compared to last year as a higher portion of our out-performances was considered in the tariff calculation. And therefore, previous earnings accrual started to become cash effective, in line with the regulatory correction mechanism. Cash effective CapEx remained virtually flat between the years despite the increase in investment volume. The reason is that fewer payments built over from last year and consequently, the increase in investment volume has been offset by a lower portion of prior year payments. As a result of both, the free cash flow of the distribution business came close to remain positive despite and around TRY 500 million CapEx payments spilling over from Q4 of last year. Our Retail business on Page 10 showed a very strong earnings growth of 32% in the first quarter. As indicated before, this earnings growth was mainly a result of a tenfold increase in the earnings contribution of the liberalized market segment from TRY 10 million last year to more than TRY 100 million this year. As the switching of customers from the regulated to the liberalized segment requires efforts from various marketing channels, OpEx increased as well. Finally, we did not generate any significant earnings contributions from [indiscernible] this quarter. The outflow provision expenses started to increase as a result of moderately deteriorated payment behavior. At the same time, late payment penalty income did not grow further compared to last year as the late payment penalty rate was substantially decreased as a consequence of the lower interest rate environment. Cash conversion is significantly lower compared to last year, but closer to expected levels due to the absence of around TRY 500 million price equalization reversal that positively contributed last year. Now let me come to the bottom line development and outlook. As I indicated earlier, our underlying net income grew by 19% to TRY 352 million in the first quarter and therefore, exceeded operational earnings growth. Below operational earnings, the main effects were as follows: Net loan interest expense decreased by around TRY 50 million, thanks to our continued efforts to reprice our existing loan portfolio at lower rates also since the beginning of this year. This is, however, partially offset by an increase in the average loan volume as maturing bonds are replaced by loans. The revaluation expense of both our bonds as well as our customer deposits were significantly higher as inflation since Q4 of last year remained relatively stable, while it was sharply decreasing last year. Finally, our effective tax rate is now in line with the marginal tax rate of 22% in Turkey since we started to recognize a deferred tax asset for our holding company since Q4 of last year. Let's now come to economic net debt, which you find on Page 12. Our economic net debt has edged up to just short of TRY 11 billion in Q1, driven by a negative free cash flow after interest and tax. While free cash flow before interest and tax was roughly breakeven, especially interest payments were high in the first quarter, this is a direct consequence of our refinancing actions in the first 2 months of this year to utilize the opportunity of repricing our existing loan books at lower rates. First and foremost, such refinancing transactions lead to an interest accrual of prior periods becoming immediately cash effective. Accordingly, we see a shift from other, which largely comprises FX and interest accruals, to interest payments. Second, one-off prepayment fees of TRY 46 million pretax has been paid to complete these transactions. Since these costs are nonrecurring in nature and are economically amortized over the majority of the new loan, we have classified these costs as exceptional items in our P&L. Now let me turn to our outlook on Page 13. Despite the current market uncertainties, we want to be as specific as possible regarding our full year expectations. While our sector in general, and Enerjisa in particular, is extraordinarily protected against many of the current crisis effects, some uncertainty, of course, especially on the cash side, remains. We, therefore, want to provide you today with a floor expectation, consciously leaving the upper end open until further visibility is available. So you will hear from us. For our earnings, both top and bottom line, you should expect us to grow at least with inflation or stated differently to achieve at least zero real growth. For our distribution business, growth has limited this year as financial income recognition is impacted by both, a higher RAB level of at least TRY 9.4 billion at year-end, but also a lower nominal rate of return due to lower inflation expectations. Moreover, efficiency and quality earnings have already been at very high levels last year, leaving relatively limited growth potential for this year. On the retail side, on the other hand, significant growth is expected from the liberalized market segment, which already started to become visible this quarter. Our bottom line will benefit from the already achieved lower financing rates. However, average funding volume will be largely a function of how the current crisis develops over the next month. At year-end, our target remains to stay cash positive after interest and tax, which would translate into leverage remaining below 2x net debt to operational earnings. And finally, we confirm our dividend payout policy of 60% to 70% also for this year. Let me come to the compensation of overspend distribution CapEx, which you see on Page 14. Before opening the floor for your questions, let me end today's presentation with a further guidance topic that becomes increasingly relevant in the near future. The compensation for overspend distribution CapEx. Since we are now in the final year of the current third regulatory period, we now have sufficient visibility to provide you with a rough quantification of the compensation amount. With our already executed CapEx volume of the past full year as well as the planned CapEx for this year, we will have overspent on the regulatory's initial expectations by around 40%. Most of the overspend has been executed in the first years of this regulatory period, requiring significant compensation for time delays. If we add the 3 components of compensation: First, foregone financial income; second, foregone CapEx reimbursement as well as; third, compensation for delays, the total compensation amounts to around TRY 4 billion nominal at year-end 2020. Of course, this amount still varies with the actual CapEx executed this year as well as the actual inflation development until the year-end. However, both will not significantly change the total. This relatively large amount of cash will be collected within the first year of the next regulatory period via customer invoices and therefore, through the distribution tariff. The distribution tariff on a national level will be set by the regulator to reflect all system costs, including our and others from deviation regarding initial CapEx expectations. The national distribution CapEx for the third regulatory period is currently expected to be around 10% higher than initial expectations. Assuming this 10% overspend, the customer price would need to increase only very moderately by around 1.3% in the next regulatory period, which equals to around TRY 1 to TRY 2 per month per household. In the final step, the collections from all customers within Turkey will be reallocated via the price equalization system to distribution companies depending on their actual CapEx spending in the past regulatory period. Accordingly, we are expecting a significant further consolidation of our already low leverage at the start of the next regulatory period. Dear operator, we now can take all questions from the participants, and I would like to thank you for attending our call during these exceptional times, and I look very forward to seeing you, hopefully, in-person again in a healthy shape. And so I hand over now to you, operator.

[Operator Instructions] The first question comes from Ekaterina Smyk from Bank of America.

Sorry, because I got disconnected and I wasn't sure that it was referring to my first line. I have several questions. One of them is on the -- you mentioned that regulator end customer tariffs were decreased since the start of the year, while sourcing costs, in fact, increased. What was driving the decision of the regulator to lower end customer tariffs? That's the first question. The second question is on your outlook for 2020. I understand the whole unclarity around free cash flow generation, but I just want to understand what are your assumptions behind expectations of at least free cash flow neutral generation for the entire year? Do you assume some reversal of working capital buildup that you're currently booking in the distribution segment because of lower electricity consumption or you do not expect any recovery this year? And for example -- not recovery, the reversal of working capital buildup or you see this reversal coming in the next years. And this year, you will still be able to be free cash flow neutral, even if we are experiencing sort of a worst-case scenario in terms of working capital distribution. Maybe we can go with these two, and then I will ask the last question.

All right. Thanks for your questions, Ekaterina. I'll give it a try. Now the first one, I think I can clearly answer. You're right. We are talking at the same time about observing higher electricity procurement costs in the first quarter. And we have observed a lower retail tariff at the start of the year. However, don't forget that this lower retail tariff was set at the 1st of January. So before the actual quarter happens, with a certain under-expectation of how costs will develop over the quarter. And now we have the luxury of hindsight to actually observe what the costs were but the regulator did not have that luxury. So that is now something that the regulator needs to correct in the current quarter, as we speak, and has corrected in the current quarter. But of course, every quarter, the regulator again has the same difficulty of getting expectations right regarding electricity prices. And of course, in the current environment, this is particularly difficult. The main item, I guess, that the regulator underestimated for Q1 was the FX development and accordingly, the high [indiscernible] and tariff costs, which was nothing that -- could have been anticipated ex ante, before the crisis was unfolding, basically. So that's on the first one. On your second question regarding the outlook, let me detail it a little bit further. I think, let's for a second just assume we are in a normal year this year. In a normal year, what you should have expected is that our OCF would have increased further, simply by the regular growth of our business, both on the distribution side as well as on the retail side. No magic to it. With a higher regulated asset base also considered in the tariff calculation, distribution OCF would have improved. And on the retail side, we would have seen growth in OCF simply with earnings growth. That growth rate would have been negative in any case. Because last year, we have seen a very large reversal of price equalization effect. And of course, this effect would be absent this year. But nevertheless, our OCF base would have increased, and at the same time, we would have been able to increase also our CapEx plan and still remain cash positive at year-end. Now that the crisis happened and is unfolding as we speak, as we explained earlier in the presentation, we see 2 major challenges. The first one is that on the distribution side, we have a structure undercollection of our revenue requirements simply because our invoicing volume is too low because consumption volume has declined in Turkey, unexpectedly. So this is something that happens. And that unfortunately, under the normal correction mechanism on the distribution side, is only corrected within a 2-year time frame and therefore, nothing that will be reversed within this year. However, we do not know today to what extent this undercollection will happen for the rest of the year because we do not have the visibility of for how long and how large consumption falls short of initial expectations. On the retail side, it's a little bit more difficult. On the retail side, we are generally affected as every other sector as well by general payment behavior deterioration. That is also true for Enerjisa. So far, there is not much that we see. Like we said before, only a moderate increase in payment delays is observed in the first quarter, however, everyone can expect this to further deteriorate. How much it will deteriorate for our specific sector and our specific customers? That's a question that also we can't answer at the moment. But our expectation is, whatever the deterioration is, as long as we believe that restrictions under the corona crisis will be lifted bit by bit in the second half of this year, then a certain working capital buildup will naturally reverse. So that is still underlying our assumption of, let's say, a realistic target of being cash positive at the end. And then finally, we have the uncertainty of CapEx execution. CapEx execution right now, as we said before, is delayed simply because we are able, only to a limited extent, to execute planned outages and therefore, carry out our investments. Whether that remains also in the second half or whether we are able to compensate fully in the second half, and therefore, have also the planned cash out for this CapEx is also something that is simply uncertain at the moment. With all of these uncertainties, basically what we cannot answer right now is what our average funding volume will be over the course of the year. I think it becomes then more visible again towards the end of the year because at some point, everyone's base case is that crisis restrictions will be lifted eventually. However, especially now for Q2 and to a certain degree for Q3, there is uncertainty. We do not expect any liquidity restrictions from this uncertainty. However, funding volume is therefore not fixed. And that is just an uncertainty that we are reflecting also to our net income guidance.

Okay. Understood. And my last question concerns the overspend distribution CapEx reimbursement. So I mean I just want to understand this TRY 4 billion compensation that you're expecting to receive within the next year. Is that the amount that, for example, goes on top of free cash flow that I would, like, normally expect you to generate given my assumptions behind operational earnings and et cetera, or this volume will sort of like -- part of this volume will be coming by your usual cash stream. So is that like TRY 4 billion on top of free cash flow that I can add into my model or something else?

Okay. I think -- I'm not sure that I understand the difference between adding it to the free cash flow or treating as a usual cash flow stream. But in general, we are talking about a cash flow. So from an accounting perspective, this is something you will see in our OCF coming in. It is part of the tariff, and therefore, part of our collections via invoices depending on, let's say, the national spending behavior overall in Turkey. What we simply do not know for certain right now, how much of this amount will be collected by our own retail companies in our own regions and how much of it needs to come via price equalization from other regions in Turkey. That is then a question for the total tariff calculation once all the facts are there, and the regulator has the perfect hindsight to calculate the revenue requirements. So right now, we can only project this to a certain extent. But what we can at least, for ourselves as Enerjisa, project relatively well is the quantification for us. Because for us, there is not that much uncertainty left. We know what we have spent until the year-end 2019. We have a certain idea, a certain range of CapEx expectations for this year. And the only other piece in the puzzle that is missing for us as Enerjisa is then the inflation realization this year. Once all of these are known, then we know the amount, and it's then only a question of how this technically then is received. But from an accounting perspective, you will see this eventually in our OCF. And if you would not consider it so far in your model, then yes, this would be in addition to the cash you consider so far. Was that helpful?

Wonderful. Yes, yes. I mean -- I did have an amount, but sort of lower than TRY 4 billion of profit actually.

[Operator Instructions] The next question comes from Cenk Orcan from HSBC.

I have two questions. One is about an accounting change that I am seeing in your audit report footnotes. It is talking about start of, use of cash flow hedge accounting this year for hedging contracts on your power purchases in FX terms. I think something related to feed and tariff. Can you expand a bit on this accounting change? Has this impacted your reported profits for the quarters at all and what to expect going forward from this? The second question is about your reference to the inflation in your profit guidance. Inflation is largely a pass-through item, as we know in your business model. In other words, something relatively not very important among some other factors. But now you are guiding from an inflation angle, I understand this is a floor that you are providing, but just wanted to clarify the rationale here. So these are the two questions. And if I may add a small third one. Can we just confirm that this TRY 4 billion overspent compensation is not going through your P&L at all? And it's just a cash flow transaction.

Thank you, Cenk, for the questions. I'll give it a shot. Now regarding the accounting change that you mentioned. Yes, I can confirm. We had this accounting change as of the 1st of January. And this accounting change is regarding the start of hedge accounting for our hedge transactions that we use to hedge FX and power price risk on the retail side. Both are hedges that we have been doing already for years. So this is nothing new. And also in the past, that we have mark-to-market effects related to these hedges. However, in this quarter, there were particularly high positive effects to the tune of TRY 125 million pretax. So quite significant positive mark-to-market gains, however, on the unrealized portion of our hedges and therefore, temporary gains that then basically unravel as we realize those hedges. Now since this is a material amount, and since the IFRS standards now allow us for a little bit more flexibility regarding the application of hedge accounting, i.e., that we are not just allowed to apply hedge accounting for direct hedges but also for proxy hedges, if we are able to document hedge effectiveness to a high enough degree, we decided with this year to apply hedge accounting for these items and therefore, not realize these effects through our P&L, but only booked directly through equity through our comprehensive income. So you see those amounts in our audit statement, but you do not see these amounts being realized in our net income.

Can you repeat the figures, please. 100s -- TRY 100 million?

TRY 125 million pretax, if I'm mistaken, but you can see the exact amount also in our audit statements under comprehensive income.

Okay.

So really a substantial amount. And this should not surprise. I mean there was a large unexpected devaluation of the currency in the first quarter. And therefore, quite naturally, since we hedged that position, our hedges are in the money to a high degree and therefore, working in a way as intended. But as you know, what we do not intend is that these hedges lead to misleading performance reporting. And if we would just realize those TRY 125 million in our third quarter earnings, then this would, at least in our view, carry the risk of a misleading results presentation because people may then be likely to extrapolate from this high basis also into the further year which, of course, would not be the case. And therefore, we decided to take out these effects from our reporting, and that will also be the case going forward so that externally no one has to worry about such mark-to-market effects. But this will just be, let's say, noise in our equity until all hedges are realized, which always happens within the same year. So this is on the accounting change topic. Secondly, your comment is on inflation. Yes, I can confirm our intention to provide a floor in our guidance. So do not mistake our guidance as our expectation, our base case internally that we are now communicating to you, but rather as a kind of worst-case scenario, so that you have a feeling of what we could fall to in case, let's say, things are not improving from today's perspective. Then of course, your base case expectation for Enerjisa, like you said, should always be that we are growing just with inflation because inflation is a pass-through item. So exactly like you put it, since it's a pass-through item, that is in effect unless we have certain exceptional developments in any year. This should always be your lowest expectation of growth for any year. And this is not different in this year. Regarding the upside to inflation that we are comfortable to guide for this year. Like Michael indicated, you will hear from us at a later stage. Right now, we just do not want to give a concrete range to you because we see a relatively high likelihood and then having to revise this range at a future quarter and then in effect, this is also not helping the market. The other option, of course, is always to give a very large range. But if you give a very large range, then again, you could ask what does it really help anyone. So in that sense, at least in our opinion, we think it's helpful to at least give people a floor feeling, especially in such uncertain times so that people can take comfort from this floor. And from this floor on, you can then build your expectation for the year-end. Finally, on overspend compensation, what was your question again?

I just wanted to confirm that it has nothing to do with your P&L. It's not going to go through your P&L next year, but it's just a cash flow transaction? Is that the case?

Yes. That is the case. That is correct. And that is exactly why you see in every reporting period, this item, financial income, not yet cash effective because precisely for the reason that we are already accruing something in our earnings that is not yet cash effective. Once this compensation then comes, a large part of what we reported as not cash effective beforehand then becomes cash effective. This will not sum to 0, because things are continuing as we speak. And in all likelihood also in the first year of the next regulatory period, where we have a deviation between our actual CapEx and the regulators' expectations, so you always have a certain buildup of this position, always a deviation between earnings and cash. But the gap that we have been building up for the past 4 years then significantly closes again at the start of the next regulatory period.

Is that a regulation that the overspend amount is reimbursed in the first year of the following regulatory period? Is that regulation?

Correct. This is, strictly speaking, how the regulation puts this. I think, how the mechanism will then work once the tariff negotiations for the next period are over, we will then see as for all negotiations for a new regulatory system. This is, of course, one of the flexibilities that both parties can somehow use in order to, let's say, get an adequate negotiation result on the table. And as always, the more flexibility you have in the negotiation the better, especially if times are uncertain. So we regard this as basically a good negotiation position on our side because we have a clear receivable year that the tariffs need to deliver to us, and this is something we can also actively use in the current discussions.

The next question comes from Ekaterina Smyk from Bank of America.

Yes. I just -- I actually have a follow-up question on this overspend compensation and sorry to keep bugging you with this. It looks like that the estimated TRY 4 billion amount is -- and I think that you just mentioned, it's the total, not yet effective financial income over that period. And I mean for the past 4 years from 2016 to 2019, it totals like TRY 2.1 billion, TRY 2.2 billion and then another TRY 1 billion this year would actually give us around TRY 4 billion. But from the analyst presentation, from the times of IPO of Enerjisa, I remember that this financial income was split into 3 parts. One of them was immediately cash effective. The other was cash effective at the beginning of the next regulatory period, which is, I think, that this exact overspend reimbursement that we are talking about. But then there was this third component, which had sort of the cash effective within the 10-year CapEx reimbursement period, right? And if you split this financial income into these 3 parts in terms of total amount for the period, then this cash effective component, which becomes cash effective at the beginning of the next regulatory period, actually comes to half of this TRY 4 billion, like TRY 1.5 billion, TRY 1.6 billion. So I just wanted to confirm whether this is still the case or we are completely changing the methodology here?

Yes. Okay. I'll try to answer. I think it may be helpful to also have a follow-up on this to get into more detail in case necessary, but let me try in any case. You're right, the compensation mechanism works via both financial income that we have foregone, but also CapEx reimbursements that we have foregone and the inflation revaluation, which basically is reimbursed via CapEx reimbursements because the CapEx reimbursement amounts that we are getting every year are adjusted for inflation. So the CapEx reimbursement amounts that we are receiving every year are not 1/10 of the nominal original amount that we have spent, but of the real amount that we have spent back in actual, adjusted for inflation. And therefore, CapEx reimbursement always includes a compensation for the revaluation of inflation of your regulated asset base. That you're not getting to the full TRY 4 billion, if you're adding the 2 components is precisely because of the reason I said earlier, the gap between what we accrued in our earnings and what we are receiving on the cash side does not fully close at the start of the next regulatory period, because some of the compensation actually comes via CapEx reimbursement, which is over a 10-year horizon after CapEx has been executed. And therefore, this compensation is on a different time line than the compensation of financial income. Does that roughly make sense to you now?

Yes, yes, that makes perfect sense. I mean, it would be very -- I mean it would be helpful to have an off-line conversation, just like to deep -- into details, but I would assume that this TRY 4 billion will be sort of -- like partly comes with the usual -- it goes back to my original question, right? So part of this TRY 4 billion actually comes to Enerjisa via usual cash flows such as CapEx reimbursement and et cetera, and doesn't go on top of what one would have forecasted in the model. But yes, I mean, happy to take that offline. Thank you so much for explaining.

[Operator Instructions] There are no further questions over the phone. Dear speakers, we can now switch to the written Q&A.

Yes, then let's do that. And let's start with the question by [indiscernible], who is asking whether there are any competitors that significantly underspent during the third regulatory period? And if yes, then what happens if these companies have difficulty in compensating the reimbursement to the system? Yes. Okay. First of all, yes, there are companies that have underspent on their regulatory expectations. Otherwise, we wouldn't be coming to the 10% average overspending for the system. If our own is 40% and the national average is 10%. And -- and yes, you are right. Some of these companies may be, let's say, in financially difficult situation. We don't have full visibility on that because this is not public information. But I think this is generally an assumption that we can make. Do not forget that our collection for this compensation is not something that these companies have to pay back from money that they already received, but this is partially cash that will be collected by them with a higher tariff going forward. So our receivable is against invoices that are not yet collected, that will be collected in the first year of the next regulatory period with a higher tariff base, and then part of that higher invoicing volume simply belongs to us and needs to be reallocated to us. And this reallocation happens via the usual price equalization system in Turkey, which makes sure that there is only one national tariff that everyone in Turkey needs to pay. I hope that answers your question. Okay. Then let me start over again. Okay. Then starting with the first question from Juliana at Danske Bank. Juliana is asking whether the TRY 4 billion are to be received in 2021? Or some of the TRY 4 billion will actually be received via CapEx reimbursement over the next 10 years, starting in 2021? Our answer would be that, no, the TRY 4 billion indeed is to be received in full at the start of the next regulatory period. And yes, on top of the TRY 4 billion, some part of the inflation revaluation of our historical regulated asset base will be compensated via future CapEx reimbursement and is, therefore, on top of the TRY 4 billion. Second question comes from [indiscernible] from Akbank. He asked whether there are any players in the market that have underspent on their initial CapEx allowance for the third regulatory period? And if so, whether these companies would have any difficulty in compensating the required reimbursement back to the system? First answer would be that, yes, there are companies that have underspent on their initial CapEx expectations. Otherwise, we basically wouldn't get to the national average underspending of around 10% if our own overspending was 40%. And yes, I think we can assume, without knowing for sure, that some of these companies have underspent because of financial difficulties of not being able to finance the required investment volume. Nevertheless, for the reimbursement mechanism, it is important to understand that this is not cash that has already been or should have already been collected and is now a receivable to us, but that we have a receivable versus the system versus future invoices to be collected starting the year 2021, and that's just part of the future higher invoices need to be reallocated to us. So none of the companies are losing anything from today's perspective from today's balance sheet, but they simply will basically not own part of the invoicing volume that, in the future, they will issue to their own customers. Now turning to [indiscernible] question from Helikon. [indiscernible] is asking, why our financial expenses in the P&L in Q1 has been increasing from TRY 358 million last year to now around TRY 400 million despite the fact that we have refinanced our loan book at lower rates? I'm not 100% sure what number you're looking at, but I think what you're basically looking at is now the total financial results. In any case, there are two answers to be given. The first one is -- or Michael actually indicated this in his explanation of net income. There is a reclassification between bonds that we have repaid in the first quarter and refinanced via loans. So that if you just look at our loan book, then yes, overall, we have financed at significantly lower rates compared to last year. However, the loan volume overall was higher because we have replaced bonds with loans. So that is why net-net, you only see around TRY 25 million benefit on the loan side. On the bond side, you see, however, a significant increase in financial expense because of inflation revaluation. Do not forget how inflation revaluation works. Basically, for the purpose of the revaluation expense, we are looking at the inflation for the last 3 months, starting with October end of last year because the inflation is always with a cutoff of 2 months' time lag. This is in principle how CPI linkers are working, both on the bond side as well as on the loan side. So what we need to look at is, how this inflation moves between October end of last year and January end of this year comparing last year's, 2018, last 2 months, and first month of 2019, to the last 2 months of 2019, and the first month of 2020. What we will see, if we look at this is that, last year in the same period, inflation dramatically decreased from the peak level of 25%, down to, I don't remember the number, but it must be around 15%. So we had a decrease in inflation over this 3-month period of around 10%. While this year, inflation remains more or less stable and if I'm not mistaken, even slightly increased due to the base effect of last year. That is why the inflation revaluation expense on both our bonds, but also on our customer deposits in this quarter was significantly higher than last year and why you see an increase in the weighted average bond interest rate from 1.5% last year, which, of course, was an artificial number. I mean, this is not something that you would normally expect to the 14.8% this quarter, which is a more, let's say, realistic or usual number. Because normally, you should expect this number always to converge to inflation plus our spread on the bond. Our spread on the bonds is somewhere between 300 and 500 basis points. So if inflation is between 11% and 12%, then seeing 15% here as average bond expense is actually the normal number. So this is rather an absence effect from last year than an unusual effect this year. Okay. Now turning to the question of Andre from Wood. Andre is asking whether we can provide our midyear inflation estimates reflected in our financial income and RAB guidance for 2020? Yes, I think in that respect, I can share that our expectation is not very different from the market expectations, at least from the market expectation at the point in time, that we closed our financials. We closed our financials at end of March and at the end of March, market consensus for mid-year was, let's say, somewhere between 10% and 12%. So this is also what we are using in our, let's say, financials that we are presenting to you here today. [indiscernible] from Citi is asking -- I'm trying to read the question. In first quarter 2020, the company has posted very strong retail margins for the liberalized customers. Can you please comment what led to such strong performance? And if this level of margins are sustainable going forward? Now first, for this question and there's a second question to come. What is this driven by? This is driven by a relatively high margin between our procurement costs that we can realize in the wholesale market and the tariff levels that we see for commercial and industrial customers, i.e., the customers that we have switched from the regulators to the free market. If there is quite a margin in between, it simply means that we are able to offer at either the same level or a slightly lower level than the regulated tariff free market contract to the customer. The customer is very happy to take this offer as this is either on the same level or even a better level compared to the regulated market. At the same time, we are able to then procure the volume at significantly lower cost than the sales price. And therefore, the margin that we are realizing from such contract is significantly higher than what we would realize from a regulated customer. Nevertheless, of course, these are specific, let's say, market constellations where such contracts are possible. And depending on how regulated tariffs and procurement costs are developing going forward, such windows of opportunities can also close again. And obviously, the longer such a situation prevails in a market, the more attractive it also then becomes for other market entrants to enter this retail market and try to gain market share themselves. Of course, we, as the incumbents, are always in the best position to leverage on these opportunities because we are already there, these are already our customers and therefore, we always have the first mover advantage here. But you should not expect that the same level of profitability can now simply be extrapolated in all eternity and for the entire regulators volume that we have in our customer portfolio. So overall, I think in all likelihood and like we are guiding you in our outlook, we will see a very good performance by our free market portfolio for our retail business this year. But this is not necessarily giving you a guidance of how the situation continues thereafter. Second question is for the distribution business. What are your expectations on allowed returns or allowed CapEx for the next regulatory period? Also, when do you expect to submit your proposal to the regulator and when can we expect final determination of allowed returns in CapEx? From today's perspective, there is no news that we can provide you. In general, the exchange of data information, views and opinions are ongoing. Ongoing already for close to a year now and has not stopped today. So let's say, in general, for many, many items, the regulator is aware of the position of either individual companies or the sector overall via the sector association and we are partially also aware of some of the positions of the regulator. But the negotiations and discussions around this are ongoing, and we are currently not expecting these negotiations to complete before the end of this year. And I think this is now especially true since we are currently living through a crisis. And in this crisis, quite naturally, the priorities of the regulators are to cope with the crisis and any effects from the crisis much more than to now take a final decision on the next 5 years, especially with the uncertainty of the macroeconomic environment and the financial situation of the sector overall. Therefore, yes, from today's perspective, do not expect to hear back from us with tangible results until the fourth quarter. Another question from [indiscernible] from Ak regarding our underlying our underlying net income guidance. Why we have been relatively conservative in our guidance given that we see very tangible savings from our financial costs this year? I think this question is now similar to what we have seen before, and what I've responded to already. Yes, you are right that we already have very tangible savings from an interest rate perspective that we have locked in and that will be there for the entire year. So from this perspective, and you see this also in our guidance, we can very comfortably say that our average financing cost will be significantly below last year and below 15% even, we are quantifying this. However, where we do have uncertainty is on the financing volume side. And therefore, we currently do not know yet how much of this gain from the pricing side will be offset by volume increase potentially. Again, this is not something that you see right now, but that you may see now in the second and third quarter. And this is again, now I'm reiterating and repeating myself, this is why we want to give a floor guidance to you today rather than already giving you a concrete and narrow range for our bottom line for this year. I think that is so far all the written questions that we have received. Moderator, if we can please ask once more if there are any verbal questions. Otherwise, given the time, I would then close the call.

We don't have more questions over the phone. [Operator Instructions] There are no more questions. Dear speaker, back to you for the conclusion.

So thank you very much for listening, especially at these extreme times, stay healthy. We keep in touch, and we are very much looking forward to see you personally as soon as possible. So take care. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today's webcast call. Thank you for your participation. You may now disconnect.