EnBW Energie Baden-Württemberg AG (EBK) Earnings Call Transcript & Summary

On EnBW's annual results 2022. And apologies, let me start again because I think you missed the introduction, but welcome, ladies and gentlemen. Thank you for joining us for today's Investor and Analyst Conference Call on EnBW's results 2022. It's my pleasure to welcome our new CEO, Andreas Schell; alongside Thomas Kusterer, our CFO. For this event is not only about presenting the figures of a business year, but also about the topic of far-reaching importance: Our significantly more ambitious climate targets, which we announced this morning alongside our results. Andreas will kick it off in a minute with all relevant facts on our SBTi-approved targets and our accelerated coal exit. And Thomas will provide you with details on the developments in our business and the environment we operate in. Afterwards, as always, we look forward to your comments and questions. And without further ado, I'll hand it over directly to Andreas. The floor is yours.

Thank you, Marcel. Ladies and gentlemen, a warm welcome from me, too. As Marcel already mentioned, I took over as CEO of EnBW for a month ago, and I'm truly impressed by how committed and experienced the EnBW team is, which represents a great basis for me to build on. And needless to say, I am also looking forward to our conversation today. I would like to start with the major topics from my perspective. Our operating result 2020 of about EUR 3.3 billion adjusted EBITDA is well above guidance. And also exceeds the circa EUR 3 billion recorded in the prior year. This is a very pleasing outcome in light of significant headwinds in 2022. This positive performance was only possible due to our highly robust business model and well-diversified portfolio along the entire value chain, which ensured stability, especially in volatile markets and times of great uncertainty. And certainly, not least, this success was driven by the impressive commitment of the entire EnBW team. As you know, sustainability is a key element of our business and compass for our strategic direction. In 2020, we published our climate neutrality goal for the first time. And now we set ourselves even more ambitious climate action targets, which we published this morning. We are aligned with a 1.5 degrees path for our own emissions approved by SBTi. Moreover, we added an SBTi-approved reduction target for indirect emissions in Scope 3. And all climate targets are confirmed by SBTi as aligned to the Paris Agreement. We intend to bring forward the phaseout of coal to '28 now. The implementation of these targets, of course, requires the accelerated build-out of renewable energies and grids as promoted by the German government. Against this background, we took important decisions on a number of large-scale projects, which underpin our ambition to speed up the energy transition. Let me highlight just the 3 of them. Firstly, we initiated the construction of 3 fuel switch projects from coal to natural gas with an overall capacity of 1.5 gigawatts, these new plants will make up for the intermittency of generation from renewable energies. Well, and secondly, we took the final investment decision for our 960-megawatt offshore wind farm He Dreiht last week. And thirdly, our team is progressing the transmission line, SuedLink, which plays a crucial role for security of supply by transporting electricity generated by wind offshore installations from the north of Baltic Sea to the south of Germany. A few key numbers regarding the acceleration of our climate transition plan. We are now Paris aligned with a 1.5 degree path for our own emissions approved by SBTi, and we intend to bring forward the phaseout of coal to 2028, and thus, by 7 years compared to our previous target. As such, we want to become coal-free already 10 years ahead of the formal legal deadline. We thus accelerate our path to climate neutrality in 2035 and expect to reach key milestones significantly earlier than previously planned. Already in 2027, we will reduce our own emissions by around 50% and therefore bring forward this target by about 3 years. We will reduce our own emissions by around 70% in 2030, which represents a new milestone in our decarbonization timeline. And we will reduce our own emissions by 83% in 2035, which specifies our climate neutrality goal. Ladies and gentlemen, important for the success of energy transition is a triangle. It's a triangle of expanding renewable energies and grid infrastructure, as well as the ramp-up of low carbon dioxide dispatchable power generation. Only if significant progress is made in all 3 of these fields simultaneously rather than sequentially, will we be able to realize the energy transition in Germany within the contemplated time frame. In this context, it is important to note that a successful transition to a carbon dioxide-free energy supply requires the appropriate economic and political framework. We, at EnBW will contribute to this overarching goal by allocating by far the largest share of our investment to precisely these areas. To accelerate the transformation towards a climate-neutral future, EnBW is continuing to invest at full speed in sustainable and system critical infrastructure. Net investments of around EUR 14 billion are now planned for the period of 2021 to 2025, an increase by EUR 2 billion compared to our previous target. Let's go into some details of our climate transition plan on the next slide. The developments of the past years have dramatically highlighted the vulnerability of energy supply. As already mentioned, the significantly earlier coal phaseout is only possible if we build up dispatchable generation capacity in the first place. Our fuel switch plans at 3 locations are the [phenomenon] for security of supply. Here, coal will initially be replaced by natural gas and in the medium term by hydrogen. The accelerated phase out of our remaining coal power plants with a generation capacity of around 2,000 megawatts will be finalized in 2028 instead of 2035. This will enable us to reduce our own carbon dioxide emissions by 70% in 2030 instead of the previous 50% target for this year. For the remaining coal-fired power plants, individual exit plans are being prepared. For partly owned sites, we will enter into talks for concrete solutions. The coal phase out, they will be implemented in a socially responsible manner, which means together with our employee representatives and in dialogue with our local partners. By 2030, gas transmission and distribution grids will be hydrogen ready. And in 2035, we plan to switch to carbon-neutral gases. On the next slide, let's take a closer look at our fuel switch projects. Last year, we made the final investment decision for 3 major fuel switch projects in Baden-Württemberg with an overall capacity of 1.5 gigawatts and a planned investment volume of EUR 1.6 billion. Conversion work is already underway at our sites in Heilbronn, Altbach/Deizisau and Stuttgart-Münster and completion is expected in 2026. These 3 projects represent a key element in implementing the energy transition in the southern part of Germany. The buildup of carbon dioxide reduced dispatchable power is necessary to ensure security of supply, especially in light of the earlier coal exit and until hydrogen is available at large scale. Further carbon dioxide reductions can be achieved by using climate-neutral gases or in the long run hydrogen for electricity generation. We expect to be able to operate with climate-neutral gases from the mid-2030s. At EU level, natural gas is recognized as an important bridging technology on the road to carbon dioxide neutrality. The inclusion of gas in the taxonomy takes this into account. Our 3 fuel switch plants meet the European Union Commission's taxonomy criteria for natural gas-fired plants and consequently are reported as taxonomy aligned. On Slide 6, referring to the already mentioned triangle, I would like to share the most relevant information on our offshore wind farm He Dreiht. For EnBW, as an experienced developer and operator of offshoring firms, our next offshore wind farm He Dreiht is a key milestone in the significant expansion of our renewables. As you may recall, in 2017, He Dreiht was the very first zero subsidy bit placed in an offshore auction worldwide. Therefore, the FID now taken, marks the confirmation of excellent teamwork over more than 6 years, which culminates in the implementation of this very important project. He Dreiht will be located in the North Sea around 90 kilometers northwest of the island of Borkum and 110 kilometers west of Heligoland. We already operate our offshore wind farms, Hohe See and Albatros nearby, He Dreiht will therefore benefit from this proximity and from our existing service hub and the coastal city of Emden. It will run on 64 Vestas turbines with a capacity of 15 megawatts each, which will be in the league of the most powerful in operation, reaching a total capacity of 960 megawatts. The investment volume for this offshore wind farm is about EUR 2.4 billion. COD is planned in the late 2025. He Dreiht will then supply approximately 1.1 million households with green electricity. Ahead of the start of construction, we will bring on board first-class partners by selling a minority stake of 49.9% to a consortium of Alliance Capital Partners, AIP and Norges Bank. EnBW will be responsible for the technical, administrative and commercial implementation during construction. After completion, EnBW will provide technical and commercial management, as well as maintenance and servicing. EnBW has also signed for long-term PPAs so far, the comprehensive PPA portfolio of 335 megawatts was concluded by financially solid offtakers, Fraport, Evonik, Salzgitter and Bosch. Moreover, in December 2022, we secured a EUR 600 million long-term financing from the European Investment Bank, one of the world's largest financiers of climate action and environmental sustainability. Ladies and gentlemen, let me now hand over to Thomas to guide you through the financial details of our fiscal year 2022. Thomas?

Thanks, Andreas, and welcome also from my end. On Slide 7, I would like to start with an overall picture of where we stand as of today. Before we go into details for fiscal year 2022. As Andreas pointed out at the beginning of the presentation, our financial performance was strong in 2022. Our adjusted EBITDA increased by 11% to EUR 3.3 billion, of which around EUR 2.2 billion they're derived from low-risk businesses and regulated FiTs and renewables. Our retained cash flow was up by 42%, and our net debt increased by only moderately 5%, which translates into a high debt repayment potential of 23% at year-end 2022. The most negative impact on our 2022 numbers derived from the curtailment of Russian gas supplies at our subsidiary, VNG, this is included in our adjusted EBITDA figure. As you might be aware, VNG had 2 supply contracts with Russian gas. These contracts were affected by counterparties failing to meet their supply obligations and by supply restrictions. And ultimately, the suspension of supplies via Nord Stream 1 pipeline. As VNG had already sold gas volumes at fixed prices until end of 2022, it had to procure gas at significantly higher prices on the energy markets. On October 10, VNG and [WIEH], the subsidiary of the former Gazprom Germania, now operating as Sefe, reached a settlement with regard to the contract for the supply of 65 terawatt hours per year. We have paid the full cost of the replacement procurement in 2022. At the same time, the contract which originally ran until 2030 was terminated at the end of 2022. At the beginning of December 2022, VNG resolved the residual risk for its contract with Gazprom export covering 35 terawatt hours per annum. As partial compensation for the expenses incurred, VNG received an amount in the mid-triple-digit million euro range from the government in Germany. In return, VNG withdrew its application for stabilization measures which are no longer necessary. The contract with Gazprom export expired at the end of 2022. The overall negative impact for EnBW for replacement costs at VNG, for missing gas volumes in 2022 amounted to a total of EUR 1.1 billion. In December, a resolution to increase VNG's equity by a maximum of EUR 850 million was adopted. EnBW and OEW paid in their pro rata share of this increase. The second largest shareholder of VNG consisting of 8 municipalities in Eastern Germany has until May 31, 2023, to exercise in whole or part its subscription rights to further VNG shares. Another area of focus in 2022, particularly since the start of the war in Ukraine has been liquidity. EnBW liquidity movements were elevated, but remained well within the risk scenarios analyzed. We strengthened our liquidity position substantially and proactively by entering new markets and using new financial instruments. With the issuance of our first promissory notes during the summer and the first U.S. private placement in November, we successfully expanded our investor's base. And we also added bank lines, issued commercial paper and actively managed our hedging position. Overall, we have significantly expanded and diversified the financing instruments, which are at our disposal. At year-end 2022, we had a strong consolidated cash balance with EUR 5.2 billion cash and additional sources of liquidity available, in total EUR 7.2 billion of undrawn credit lines to weather a potential resurgence of market volatility. Ladies and gentlemen, looking ahead, we expect a significant increase in operating earnings this year and forecast an adjusted EBITDA of between EUR 4.7 billion and EUR 5.2 billion. Our regulated business not only provides us with an attractive risk return profile, but also secures a high proportion of stable earnings. Furthermore, in our competitive business area, sales and generation, we hedge our margins for up to 3 years in advance. For 2023, we are fully hedged, which provides a very robust basis for earnings growth in 2023. And last, but definitely not least, the high replacement procurement costs at our subsidiary, VNG for missing gas volumes were a one-off in 2022. Let us now have a closer look at our 2022 figure. I would like to start with a look at our operating earnings on Slide 8. Adjusted EBITDA amounted to EUR 3.286 billion in financial year 2022, an increase of some 11% compared to 2021. 2022, the share of adjusted EBITDA attributable to taxonomy-aligned activities will exceed EUR 2.4 billion or 73%, compared with an under EUR 1.9 billion in the previous year. The increase was largely driven by higher earnings in renewable energies, which are fully taxonomy aligned. Let's now dive deeper into our operating segments starting on Slide 9. Adjusted EBITDA in smart infrastructure for customers increased significantly in 2022. This positive development was driven in particular by higher earnings with business customers at subsidiaries and our solar home storage business, SENEC. Milder-than-expected temperature and energy saving measures resulted in lower sales volumes with a corresponding sale of excess volume contributing positively to earnings. Moreover, in 2022, SENEC had a high growth rate, especially driven by higher sales volumes, which increased by 40%. Compared to the previous year, adjusted EBITDA of our segment's system-critical infrastructure on Slide 10, decreased by 17% to EUR 1.046 billion. The decrease was largely driven by higher expenses for credit reserve measures, including re-dispatch and reserve power plants to ensure system stability. Caused by the energy crisis, the number of deployments as well as the market prices increased sharply. However, the impact on the fourth quarter of 2022 was lower than assumed in the updated guidance of November 2022, mainly due to the warmer-than-average weather towards the end of the year. In addition, congestion revenues were higher due to the high electricity price differential between Germany and the neighboring countries, France and Switzerland. On Slide 11, let me turn to sustainable generation infrastructure. Adjusted EBITDA in this segment increased by almost 30% to EUR 1.935 billion in financial year 2022 compared to the previous year. The main reasons while we exceeded our forecast are lower-than-expected negative valuation effects and the higher overall earnings from trading activities. Moreover, the legislation on the windfall profit levy passed in December is in line with our initial assumptions based on technology-specific price caps. The proceeds from the sale of electricity generated from renewable energies, nuclear power, mineral oil, waste and lignite will be skimmed off for the period from December 1, 2022, to June 30, 2023 in order to finance the relief for end customers. Let's look in more detail at the results of the 2 components of this business segment, starting with renewable energies. Here, adjusted EBITDA rose by almost 40%, the first time over EUR 1 billion. The result of EUR 1.107 billion was achieved mainly due to the following 3 effects: First of all, we benefited from higher market prices; secondly, wind yields were higher than in previous year, which was well below average by historical standards; and finally, EnBW brought new solar farms into operation, which contributed to the increase in earnings. In thermal generation and trading, the exceptional market situation in 2022 with high commodity prices and volatility led to large offsetting effects, the positive effects dominating. The curtailment and suspension of gas supplies due to the war in Ukraine and the negative valuation effects on derivative financial instruments continued until the end of the year and had a negative impact on earnings. As already stated, the negative impact from VNG alone amounted to EUR 1.1 billion. However, these effects were offset by higher market prices and a positive earnings contribution from trading activities. Compared to financial year 2021, adjusted EBITDA from thermal generation and trading increased by 11% to roughly EUR 828 million, as in the grid area, security of supply also played a significant role to which our power plant fleet made an important contribution. This brings me directly to our electricity volumes generated in 2022 on Slide 12, which also include long-term purchase agreements and particularly owned power plants. EnBW's own generation of 42 terawatt hours was pretty much at the same level as last year's. Compared to 2021, generation from renewable sources increased due to more favorable wind conditions and higher generation from photovoltaics due to the addition of further solar products. On the other hand, hydropower generation was significantly lower than the previous year due to low water levels. The thermal generation plants', overall generation volumes decreased. Generation from coal-fired power plants increased slightly, while generation from gas-fired power stations decreased significantly. The proportion of total electricity generated from coal was 40%, while renewals accounted for almost 28%. This brings me to our closely watched key performance indicator, carbon intensity. In the wake of the Ukraine war, our thermal generation units, particularly those in the southwest of Germany, where needed to maintain security of supply, not only in Germany, but also in France, where a large number of nuclear power plants were unavailable. Due to the priority given to increasing gas storage levels in the second half of 2022, more coal had to be used to generate electricity instead of gas. These developments translated into a moderate rise of our specific CO2 intensity by 2.6% to 491 grams per kilowatt hour. This is at the lower end of our forecasted range for 2022 of an increase of 0% to 15%. Compared with the base year 2018, CO2 intensity in 2022 decreased by 11.5%. For 2025, we want to reduce our CO2 intensity by 15% to 30% compared to 2018. This means that we are still on track to meet our 2025 target. In 2022, our renewables capacity increased to 5.4 gigawatts compared to 5.1 gigawatts in the previous year, mainly due to the commissioning of our large-scale solar farms, Gottesgabe and Alttrebbin. This corresponds to about 42% of our total generation capacity as of end of 2022. And this brings me to our investments in financial year 2022 on Slide 13. As already stated during last year's conference calls, we primarily invested in the expansion of electricity transmission networks and renewables and thus with a strong focus on the energy transition. Total investments came to almost EUR 3.2 billion, implying a 12% increase year-over-year. System-critical infrastructure accounted for 60% of that. The total investment of EUR 1.9 billion in this segment enabled us to press ahead the expansion of our electricity and gas transmission and distribution grids. In this way, we are making a significant contribution to upgrading and expanding the grid-based energy infrastructure in Germany, the backbone of the energy transition. Furthermore, we invested around EUR 860 million in sustainable generation infrastructure, EUR 632 million attributable to renewable energies, mainly to the solar farms already mentioned and offshore wind. In early 2022, together with our partner, BP, we were awarded the rights to develop a 2.9 gigawatts offshore wind farm off the Scottish Coast. This means we now have a project pipeline of 5.9 gigawatts of offshore wind together with our partner, BP with FID expected in 2026. And the wind farms coming online between 2028 and 2030. And as Andreas mentioned before in 2022, we also increased the investment in our offshore wind farm, He Dreiht. In Thermal Generation & Trading, we invested EUR 228 million, mainly to advance our fuel switch projects. Investments in smart infrastructure for customers made up about EUR 341 million, and we are predominantly focused on further expanding our network of high-performance charging infrastructure for e-mobility. In just a few years, we have rolled out a substantial high-performance charging infrastructure. EnBW owns more than 800 charging locations, thereby operating by far the largest fast-charging network in Germany. Divestments came to around EUR 386 million in 2022. We sold a 49.9% minority stake in a portfolio of 16 solar farms with total capacity of 597 megawatts to a German insurance group. Furthermore, we exited from the offshore wind power business in the U.S. When looking at the taxonomy alignment of our CapEx, we also include investments into EnBW's equity-accounted entities. Of this expanded CapEx, some 83% were taxonomy aligned, which implies an increase by more than 12% points compared to 2021. On Slide 14, I would like to comment on the development of our retained cash flow. Compared to 2021, retained cash flow in 2022 rose by almost EUR 750 million or 42%. This improvement was driven by 3 factors: an increase in our adjusted EBITDA, especially in our Renewables business and trading activities, as well as in our customer business as described earlier; company's cash relevant earnings in our nonoperating result; and last but not least, provisions and accruals we booked as part of our operating results to cater for potential risks, especially in our customer segment and electricity distribution grids. And this brings me to the development of net debt on Slide 15. As Renewable Energy Act account balances are only held in escrow by the transmission system operator, we are not allowed to be -- they are not allowed to be used for operating purposes. From this operating date onwards, net debt excludes these account balances. We have restated the prior year figures accordingly. As of December 31, 2022, net debt amounted to about EUR 10.8 billion, which is some EUR 500 million above the level end of 2021. At the same time, working capital increased by roughly EUR 2 billion, predominantly to an increase in inventories. Net cash investments amounted to almost EUR 2.8 billion. The repayment at the beginning of January 2022 of 2 subordinated bonds, the nominal value of EUR 725 million and USD 300 million, respectively, increased net debt by about EUR 500 million due to a loss of 50% equity credit. At the same time, pension provisions decreased significantly by about EUR 2.4 billion, mainly as a result of the substantial increase in the relevant discount rate from 1.15% to 3.7% as of December 31, 2022. As you are aware, we manage our credit profile using the KPI debt repayment potential, which is the ratio of retained cash flow to net debt ratio. It's very similar to the matrix used by the rating agencies and is, therefore, very well suited for managing our investments and net debt, respectively. As a result, debt repayment potential of over 23% in the 2022 reporting year is well above previous year's figure of 17%. As illustrated on Slide 16, adjusted group net profit attributable to the shareholders of EnBW AG decreased by 19% to EUR 973 million. This development is mainly due to a decrease in our financial results, primarily due to a loss on marketing securities to market as a consequence of the negative capital market trends last year. In long term, we aim to pay out no more than between 40% and 60% of adjusted group net profit, subject to the approval of the Annual General Meeting to be held on May 3, our dividend proposal of EUR 1.10 per dividend bearing share is at prior year level. This corresponds to a payout ratio of 31%. This dividend proposal will allow for additional funds to remain in the company to finance our future growth and further strengthens our equity base. Ladies and gentlemen, let me conclude by presenting our guidance for financial year 2023 on Slide 17. For the segment, smart infrastructure for customers, we expect an adjusted EBITDA of between EUR 400 million and EUR 500 million. For the time being, we expect that volatility will decrease, and the market will return to more normal levels. In addition, we expect to see increased competition in the commodity business with consumer and business customers. For our new business areas, we are forecasting stable to slightly increasing earnings. In the segment system-critical infrastructure, we expect a significant increase in adjusted EBITDA. This is expected to be between EUR 1.6 billion and EUR 1.9 billion. The negative effects from 2022 for grid reserve and re-dispatch will no longer apply in 2023. Credit revenue will also increase slightly due to higher investments in projects included in the electricity and gas grid development plans. In the sustainable generation infrastructure segment, we expect an increase in adjusted EBITDA to between EUR 2.9 billion and EUR 3.2 billion through the end of 2023. Firstly, the Renewable Energies business is expected to be level with the previous year at over EUR 1 billion. On the other hand, 2 effects will make a slightly positive contribution to earnings. Generation volumes, particularly from runoff river were significantly below the long-term average in financial year 2022, we expect higher volumes in 2023; and we also expect a slight increase in our renewable generation capacity this year. On the other hand, there are effects that work in the opposite direction, a declining price level compared to 2022, and the windfall profit level, which could negatively impact the profitability of our renewables business if price levels increase again. Secondly, we expect a significant increase in our earnings in the Thermal Generation and Trading business in 2023. One reason for this is that last year's negative one-off effect at our subsidiary VNG no longer apply. At the same time, we expect a moderately negative impact from the windfall profit levy and the normalization of the wholesale market. Against this background, our full year guidance at group level for the current financial year is a significant increase in earnings of between EUR 4.7 billion and EUR 5.2 billion. This increase in earnings will enable us to make the energy transition even faster and more successful. In concrete terms, this means accelerating the expansion of renewals and our grid's infrastructure, where we'll invest even more than before. And with this, I would like to hand over to Marcel to kick off our Q&A session.

Thanks, Thomas. Thank you, Andreas. Ladies and gentlemen, we will now get started with our Q&A session. [Operator Instructions] Here we have Andrew Moulder, Andrew, do you want to go ahead with your questions? Andrew, it seems your microphone still seems to be put on mute. Okay, now he dropped. And let's try with Orlando Finzi. Orlando, can you hear us? Again, I think your microphone is still on mute. Orlando, if you can hear me. I think your microphone is still switched to mute. Now, we should be able to hear you. Hello Orlando? There seems to be a technical problem with Orlando's microphones. So we might try Andrew again. Andrew, can you hear us?

Good results. I just wanted to be clear on the guidance that you gave. It seemed to me really that the fact that it's up so much next year is really only because you don't have the VNG one-off this year. I mean, okay, grids is going to be better because you've had to pay some costs this year. But the big increase in the generation segment is really because you don't have VNG, the one-off, the EUR 1.1 billion. If you could just confirm that. And then just a couple of other questions. You talked about these hydrogen-ready plants. There's lots of utilities talking about hydrogen-ready plants. But I'm not really sure I understand the economics of hydrogen-ready plants. I mean what sort of power price do you really need to have in order to make a plant that's generating using hydrogen an economic proposition? I just want a little bit more clarity on that. I don't know if you can give me a sort of levelized cost of electricity or something else like that. Just to give me a feel for whether those things are actually economic. And then I also just wanted to ask you on He Dreiht. You talked about selling the 49%, but I noticed in your press release and also in your comments today, you didn't actually talk about how much you've sold it for. So I don't know if you could perhaps give me that information. And I'm also not 100% convinced that you're selling it at the best time really. I mean, because the people buying into the project are now going to be taking some risk until it gets built. You've also got a lot of merchant exposure still. If you waited until it was commissioned, there'd be no construction risk. You might have 600 megawatts of sold PPAs in place, so less merchant risk on the price there. And you could probably get a much better price from whoever is buying into the project than you could now. So I'm just not convinced now is the best time to sell. And maybe you could give me a feeling on that? And my final question, I guess this probably is perhaps more for Andreas. Originally, as I remember, you had a target to reach EUR 3.2 billion of EBITDA for 2025. I mean you've hit that already and you're going to be -- maybe up at EUR 5 billion or possibly even more next year. So does a new strategic plan in place, and obviously, with Andreas coming in as well, CEOs do tend to look at the strategy of the business and decide whether there should be something that should be done differently. So do we need a full strategic review? And if so, when might that be? So I'll stop there.

Andrew, many thanks actually for your questions. The first question, actually, I can only confirm actually what you just said as regards to the increase in earnings in our Power Generation segment. It's indeed due to the 2 topics you mentioned: It's VNG and it's less re-dispatch and expenses for security of supply reasons in our Networks business. So I can absolutely confirm what you just said. So that's the increase. Second question on hydrogen. Let me try to pick that one up. That's a difficult one because as of today, it's not economically viable to use hydrogen, and I think we all can just agree on that. It very much depends on the future development of the hydrogen market. And we assume that by 2035, so the mid of the next decade, we will have sufficient hydrogen available actually for these power plants at economically sensible prices. But it's certainly something that needs to be seen. And it's too early to really look into that. I mean, honestly, it needs to be at the price level you currently have for LNG. That's basically what it would mean. So it's a long way to go, certainly before we reach these price levels for hydrogen. As regards to He Dreiht, the sale of the 49.9%. And you will not be surprised to hear from me that we are not disclosing purchase prices. And as regards to the timing of the sale, I think, from our perspective, we have met the perfect timing actually with the sale. Yes, indeed, the investors are going to take the investment and construction risk. However, the market has evolved over the last couple of years and matured. And we do not see a significant premium between today and end of construction in the market. So from our perspective, to have a partner on board sharing construction risk on the one hand side, also sharing the CapEx during construction made every sense in the world to sell it as of today. And as regards to the PPAs, PPAs levels and amounts and volumes, the 335 megawatts were deliberate decision actually not to increase it further at this point in time because our trading is convinced that there will be better times, even better times compared to what we were able actually to close the PPAs in the near future. So we will gradually, over the next couple of years, increase this level to at least 450, potentially above 450 megawatts because we would like also to have some exposure to the market even in the mid and long term for He Dreiht.

Can I just come back quickly on He Dreiht? I just wanted to confirm those PPAs, they are sort of buy as generated, so there's no kind of volume written there. And also, given what we've seen about inflation and costs being increased, can you just confirm you've got all of the costs fully locked in for the construction of He Dreiht?

Yes, we've locked in all the costs actually for He Dreiht to start with. And secondly -- your second question was, help me again?

On the PPAs. Are you bearing volume risk or rather just...

I can only confirm -- yes, Andrew sorry. I can only confirm actually we're not bearing any kind of volume risk as regards to the PPAs. So the offtake is actually going to take the volume risk.

And the strategy questions?

Yes. Well, thanks, Andrew. When I started here, it was very clear quickly that EnBW is well positioned today. And when we look at 2025, this is very clearly within the paradigm within the frame of our midterm planning horizon. And that's why we're quite confident about our outlook towards 2025. However, to answer your question, it is also very clear that the year 2022 has made such a massive impact in the energy industry. And therefore it is very clear in the turn that we are going to take a look at our strategy. The work has already commenced on that. And I think we can say after internal discussions and conclusion, we will update you as we go along through the remainder of this year.

Okay. That sounds good. Can I just sneak in one more question? One thing you didn't mention at all in your presentation was Transnet. Can you just give perhaps a comment on how that's going?

Andrew, of course. It's working -- it's progressing well, as we assumed. We are in the middle of the process. And Andrew you know us, we will provide with further information when we come to a final agreement. But it's as we expected, actually.

I think we've got Orlando again. Let's give that a try if it works now with the microphone.

Excellent, I apologize. I'm on the mobile phone rather than the computer, for some reason that works. But thank you very much for the results and the updated climate strategy. And I just -- obviously, there's a lot to digest in what you've announced today. But I'd just like to -- I guess, to check in, in terms of the ambition to close coal generation by 2028. Obviously, there's an increased reliance on gas. And as we know, the supply of natural gas at the moment is not fixed, is not adequate. To what extent does your closure of coal rely on developments for the supply of natural gas, of LNG, to occur? Just want to understand that relationship and how you've integrated that situation into your decision-making.

Well, thank you very much, Orlando. I mean, to answer that question, we also need to look forward. We also said this morning that this depends and we're investing in that -- on the buildup of renewable energy sources, which we are confident we'll make up a much greater share of the energy supply by the year 2028. So by then, the energy that we will have to produce using dispatchable power, using for instance, fuel switch power plants, will be less and less and less. And therefore, our estimates is that we are able to cope and then get the supply of natural gas. And we've checked that as part of an internal study. And that's why -- that's when we were able not to look at the earliest time when we could exit coal, but at the time that makes sense from our viewpoint, and that's how we have concluded with the year 2028. So the intent is to use for less dispatchable power as possible and therefore consume less natural gas.

That's very clear. And then just to understand on that, how does this strategy also integrate with the government and their position on energy? Is there a high reliance there or decisions to be made? And then as a separate -- sorry, a separate question, when I look at the increase in CapEx as implied by this, there's obviously a potential to be pressure on credit metrics. And I just -- maybe just, Thomas, understand how you're thinking about again, you've been obviously very clear on credit ratings historically. And just to understand, with this new -- the new step up, if you like, to the challenge of a climate transition, how confident you are of being able to maintain the same? Thank you.

This goes very well with the expectations and expectations of our government with regards to the future energy buildup in Germany. And there are estimates that we need about 50 gigawatts of gas power plants by the year 2040, 2045, and 15 to 20 gigawatts of gas power plants post 2030. So with our 3 already announced fuel switch projects, we're playing well on that journey. And I think this will be seen very favorable by our government.

And Orlando, in regards to credit matrix. I mean, you've said it actually. I've always been extremely clear as regards to our ratings positioning, and that hasn't changed. So solid investment grade ratings is actually what we are looking for. And you can see when you look at our credit ratings, S&P as well as Moody's, and we feel very comfortable at that level. And that -- it's how we manage our business to stay at that level, not just today, but also going forward. So very clear. And it's doable, actually. I mean that was the second part of your implied question, if I may say so, Orlando. Can we do it actually with the CapEx ahead? Absolutely. We also have an increase in our underlying retained cash flow. So we are comfortable actually to be able to meet all the metrics we need to stay within the current ratings grid.

Before I call Andrew, again, let me just see if there's somebody else who would want to raise a question. That's not the case now. Andrew, over to you, with I guess, some follow-ups.

Yes, I just had a couple of just basic question. On the net debt, Thomas, you talked about restating it because the liquid funds for the year count are ring-fenced. That's fine. What if it moves the other way and actually you owe money to the EEG? Still include that as net debt? Perhaps you could just comment. I mean, I'm only thinking a little bit of EDF and the CSPE, which does move both positively and negatively. I assume the EEG does the same, but maybe I'm wrong, maybe it doesn't. So if you could just comment on that. And the second thing, I just wanted to ask on VNG and the capital increase. So if I understand correctly, you have already put the extra capital into VNG. And I think you said that the partners in VNG have until May to put their money in. So am I to assume you've put the whole EUR 850 million in and that you're waiting for them to decide? Because presumably, VNG needs EUR 850 million whether they put the money in or not. So where is the extra money going to come from if they choose not to put it in? And sorry, one other question on that. How would I see that all reflected in your accounts? Because obviously, VNG is fully consolidated. So I'm not actually sure I'll see anything in your accounts until then your third parties put money in and then your cash is going to go up.

Yes. And let me get started with the VNG question actually. What we did actually we put in another EUR 850 million. But we paid our share, that's EUR 630 million capital increase, and OEW paid EUR 40 million. So outstanding actually is the part of, which are 8 municipalities from Eastern Germany, and their share is still outstanding. And the question is actually would we pick up their subscription rise if and when they would not or only particularly actually, participate in the capital increase? And for the time being, that's not the case because we do -- for the time being, not see that VNG does need the additional CapEx if it would not participate in the capital increase, so -- to start with. And you can see it in increasing dividends actually going forward because, obviously, our share has increased in -- at least as of today, if we do not see any kind of subscription by our share has increased, so you can see there. And actually, we would also assume that the dividends going forward from VNG are going to go up because, I mean, we do still have an extremely solid business case in place with VNG, and we would assume that the earnings contribution from VNG is going to go up over the next couple of years.

Sorry, is the capital increase effect already in your 2022?

Absolutely. Absolutely. Yes, yes, yes, yes, sorry. I didn't appreciate that question actually. It is in. It's already -- it's included in our 2022 accounts. We've paid in December, actually. Your net debt question, as regards to the Renewable Energies Act. It's positive for the time being. If it would turn negative, it actually would be covered by the state. So we do not have actually any kind of obligation here. It would not increase our overall net debt positioning.

Thank you, Andrew. I think we have Orlando, again with follow-up questions, if I'm not mistaken. Orlando?

Can I just ask just on the new climate strategy, which is really encouraging. I'd just like to understand, in terms of putting that together, what the pressure points were the level of confidence in the targets? How do you -- can you -- obviously, the ambition is very high and commendable. But just want to understand the complexities of trying to construct that. Is there any sort of insight you can share with us from that process?

Certainly, it'd be my pleasure. We started last year, and I do think that we really have the experience and expertise inside EnBW to address such a question. Keep in mind, we are the one remaining energy utility company in Germany that is basically positioned across the entire value chain, which means power generation and trading, as well as grids and as well as customers. And therefore, it's very important for us to have a perspective. So what we did is, we did take a look into our own models and we did forecast the utilization, and therefore, also the -- the potential power generation in the outer years, also looking into trading prices, or projected trading prices. And then we basically came up, we combined basically the art of the possible together with the reality and concluded that the year 2028 was the right year for us. Now it's very clear, we now have to continue the discussions with some of our partners wherever we co-own power generation plants. These discussions have already started, and it's very clear as we go along. We will announce further details on our plans.

Thank you, Orlando. Does that clarify your questions?

It does. It's very helpful. Thank you.

So let me ask if there are any more questions. So now I don't see any raised hands, but let's give that another second. Okay. That does not seem to be -- no here, we've got somebody. Now, there we go. So let's have Richard Alderman, please. That doesn't seem to work. So Richard, maybe we'll try it again in a minute or 2. Let's have Calum Emslie, please. There seems to be a technical problem as well. Calum, can you hear us? No, it doesn't seem to work. Let's try James Sparrow, please. James, can you hear us? Switch on your microphone. Hello, James. Seems to be really unfortunate, Calum and James, we have you both in the webcast now, but neither of you is -- neither of you we can hear here in the room. That seems to be really unfortunate. So let's -- we have Richard again, Richard, let's try it with you. Richard, your microphone seems to be switched on, but unfortunately, we can't hear you here in the room. Look, if you have problems with raising or switching a microphone on, I know I had said that you're not supposed to use the chat, but we might as well turn that around. So if you put your question into the chat, we should at least be able to address it right now. Trying to be flexible here and answers many questions that you have now in the call. So we're going to give you a few seconds to type in questions, and then we're trying to address them this way. Okay. I think we have one question from a bit earlier, but that was from James, which I think we answered, on Transnet. And -- okay, there we've got the question that Richard had asked. So let me just repeat it. Can you please tell me if you need to see the coal foundation to reactivate in 2023 in order to meet the 2028 deadline? And do you have an outstanding cost or costing to be approved? Well, I think that the question -- behind the question is whether we had implicitly assumed that there would be a coal foundation to be put in place in Germany as part of our ambitions to become -- or to exit coal in 2028. And Thomas, do you want to take that?

Absolutely. Richard, many thanks actually for your question. And sorry, actually, that we do have some technical issues here. No, we did not assume that there is a coal foundation actually to be set up neither for a hard coal or for lignite. So no, that's not one of the underlying assumptions for our coal exit by 2028.

Thank you, Thomas. Now let me see if we have either more questions via the chat or if Orlando wants to give it another try, we might as well do that, because Orlando, it has worked on your end.

I think maybe the technology works better on a mobile device funny enough, than on the office computer. But anyway, that's my experience, but it's a very clever technology. Can I just check, obviously, I guess we're all very relieved the energy crisis has turned out the way it has so far, which is probably better than anyone feared. But obviously, it's not solved when we head towards next winter, where, obviously, a huge amount of effort has been made and remains ongoing to try and avoid crisis. But can I just ask, from an EnBW perspective, how you are prepared in case there is greatly increased volatility again? How you think it might impact you or not, given you have the knowledge now? Of course, given you don't have the same exposure to gas contracts that you did in 2022. But just to check on that because clearly, the problem, if you like, is not fixed yet. So we live with it and have to deal with it and it's uncertainty.

There's still uncertainty, Orlando fully agree. I think the energy crisis is not over yet, especially when you look at next winter. However, actually, from an earnings perspective, we shouldn't be impacted negatively by that. It's more of the question about the security of supply for next winter. I'm positive as of today because I mean, the volumes in gas storage are still extremely high. So I think we might be able to have really 100% of gas storage by the beginning of winter. And we need to ensure that we do have enough coal available. We do have inventory on stock, and we make sure that we do have enough coal that will get us through the winter. So I'm not that concerned in terms of earnings. Volatility will be there, might pick up again. And the rest of the security of supply with the LNG terminal is actually getting now online, we should be able to handle it. Does that answer your question, Orlando?

Yes, that's very helpful. And maybe I could just add on to the question there. Obviously, with the strategy to close coal in 2028. So obviously, you need to maintain it available before then. How do you -- in terms of achieving a balance of the right amount of stock of coal, stockpile of coal to generate, and then also thinking about running down, how would you get that balance? How do you strike that balance? Is that difficult? Or is that fairly manageable?

If we were to shut down our coal power stations tomorrow, it would be difficult. Not when you look towards 2028 for different various reasons. First of all, at that point in time, we should also have available by 2026, to be precise, our 3 gas power stations, which is certainly helpful. And those power stations still being on the grid -- in the market by 2028. We should be able actually to plan accordingly, to run down the respective coal stocks before we shut it down. And potentially, these power station might also go into grid reserve that needs to be seen. So we are not concerned about that. So I think we'll have the respective levels, coal levels in place actually to run them down by 2028, or actually to ensure that we do have enough coal for grid reserve. So no, we are not concerned about that. Certainly not.

I think we have another question from Calum here in the chat now who had problems using or unmuting his microphone, I guess. And Thomas, I'll put it straight to you, whether you could comment on the press reports about the German government looking to nationalize the electricity TSOs, whether we've been party to these discussions, whether we have a view on whether Germany should put together all the TSOs in one functional group, and whether we'd be prepared to only take a minority stake in that?

Yes. I mean, we are not party to these kind of discussions. We've heard that these discussions are, to a certain extent, ongoing, I'm not sure actually with scale and how serious that is. What we currently see and what was in the press is actually that the German government is currently talking about increasing its stake in TenneT. It doesn't actually have an impact on us as of today, also not on our process in selling down 49.9% in our TSO business, TransnetBW. So for the time being, we are relaxed about that and we do not see any need actually to get involved any further in these kind of discussions. Yes.

Calum, I know you don't have the opportunity to answer us directly, but I hope that we could address your questions. Now I'm not sure whether anybody else who would want to raise a question either via the chat or to come into the webcast. Just to give all of you the opportunity to raise any points. Here, we have Andrew again, Andrew, let's try that one final time, see if the microphone works on your end.

One thing just caught me actually. You talked about VNG being more profitable and bigger dividends going forward. But obviously, you've canceled those Russian contracts, which -- at the end of 2022. So I'm assuming, given current market conditions, it would have cost you a hell of a lot more to replace that Russian gas than the contracts you had originally. So are we really going to see profits increase from VNG and why?

Let me put it that way, actually, the 2 contracts we had with Russian gas. We are not that extremely profitable, as you might think of, firstly. Secondly, they were profitable, of course, but not to that extent you might assume. A better part of the VNG business is the regulated business, to start with. Secondly, we do have also another price level currently on the gas market compared to the years before. So overall, we do see actually a great opportunity to -- for VNG also going forward, even so they do not have the benefit of the 2 Russian gas contracts.

Thank you, Andrew. At least I'm not aware of any more questions either in the chat or people that have raised their hands, so I guess we're nearing the end of this call. So thank you, Andreas. Thank you, Thomas, for your answers and comments. And thank you to all of you here in the webcast for taking the time and also for your patience and your efforts to over try -- or overcome the technological challenges. It's a great pleasure to see you here in the stream, and we definitely look very much forward to welcoming you again when we present our figures for the first quarter 2023 on our next conference call on May 12. Until then, all the best and goodbye.