RWE Aktiengesellschaft (RWE) Earnings Call Transcript & Summary

Hello, and welcome to the RWE conference call. Markus Krebber, CEO of RWE AG; and Michael Müller, CFO of RWE AG, will inform you about the developments in the fiscal year 2021. I'll now hand you over to Susanne Lange. Thank you.

Good afternoon, ladies and gentlemen. Thank you for joining us for RWE's conference call on fiscal 2021 and the outlook for 2022. I'm joined by our CEO, Markus Krebber; and CFO, Michael Müller. Normally, our Head of IR, Thomas Denny, would be here. Unfortunately, he has tested positive for COVID. He's doing fine, but that does mean that he can't be with us here today. Thomas, we know that you will be listening, so we send you our best wishes for a speedy recovery. As we have already prereleased our preliminary numbers on full year 2021 and our guidance for 2022, we will focus today's discussion on the current situation and how that impacts our business. And with this, let's kick it off, and Markus, please.

Yes. Thank you, Susanne, and good afternoon to you all. I hope you are all safe and sound. The Russian invasion of Ukraine is truly shocking, and we are all deeply saddened. Headlines about a war in Europe should be a thing of the past. Our thoughts are with the people in Ukraine. This war marks the tectonic shift in European policies in, our military defense strategy, in our business ties with Russia and with respect to the European energy policies. The consequences will be far reaching both short term and in the long run. Before I come to that, let me start with a brief review of RWE's performance in 2021. 2021 was a very successful year for our company. We have exceeded our financial targets. Our green growth is forging ahead. We added 1.3 gigawatts of green capacity, and we currently have 5.6 gigawatts under construction. We were very successful in securing long-term growth in offshore wind with awards of 5 gigawatts in 2021 alone, namely our Dogger Bank South projects in the U.K. around 4 lease auction, Baltic II in Poland, the German cluster in the North Sea and the Thor project in Denmark. Also, the credit rating agencies acknowledged our strategic and financial strengths. In early '21, we received rating upgrades from Moody's as well as Fitch. And for our work in driving the energy transition, RWE was recognized for being in the top 15% of our industry in the 2021 Corporate Sustainability Assessment by Standard & Poor's. The annual assessment takes a close look at the environment, social and governance performance of companies. And we are particularly proud of being recognized for having the strongest improvement in our industry. For this, we received the Standards & Poor's industry mover award. Ultimately, all of this has also reflected our strong share price performance. We continuously outperformed the EURO STOXX utility index. And please be assured, we will continue with our clear focus on delivering shareholder value, particularly given the highly challenging and dynamic market environment. The Russian invasion of Ukraine will profoundly change our industry. Short term, the focus is clearly on energy security and ending the dependency on Russian energy supply. In order to increase the resilience of power generation and explore options for fuel switching, various European governments are looking into options to bring back or extend coal capacity. We are currently looking into our potential contribution, which could be up to 3.5 gigawatts. However, any measure would only be taken on request of the governments. Strategically, we aim to deliver on the agreed coal exit path and the potential acceleration to 2030. Other short-term meters include the diversification of biomass and hard coal supply as well as ensuring high levels at gas storage facilities before the beginning of next winter. The strategic objective for European energy policy is clear: sustainable and secure energy supply for Europe. We can expect that this triggers an even stronger push for the green transition and with our Growing Green strategy, this is exactly what we are delivering. To diversify gas supply, Germany now aims to build at least 2 LNG terminals, with a view to using infrastructure to import green molecules in the future. RWE is a strong partner in the development of Germany's first LNG terminal in Brunsbüttel. Our partners in the project are the German government represented by state bank KfW and Gasunie. In addition, we are looking into further options for green hydrogen, ammonia imports and import infrastructure. Flexible backup capacities are needed. And faced with the current situation, we believe that these will most likely run directly on green hydrogen. Given the current crisis, we have taken immediate action to improve the resilience of the company. Firstly, let me remind you that we do not have any assets, operations or people in the affected regions. Our direct physical commodity contract exposure to Russian counterparties is limited, namely a total of 15 terawatt hours of gas, of which 50% is scheduled for delivery over the next 12 months as well as a total of 12 million tonnes of hard coal, of which 2 million tonnes are outstanding over the next 12 months. And of course, we are actively managing the positions with a clear objective of reducing our exposure, where possible. We will not enter into new energy supply contracts with Russian counterparties. And we have ended all nonenergy supply business with Russian counterparties with immediate effect. The fuel supply of our own generation assets as well as our customers will be diversified, utilizing our global Supply & Trading business. Furthermore, we have increased our available liquidity, and we strictly monitor all counterparties and reduce or cancel counterparty limits, where necessary. For the future, RWE is strategically well positioned. Our Growing Green strategy is set. We will continue to execute it, and we will explore all options to even accelerate it where opportunities arise. Until 2030, we will spend EUR 50 billion of gross cash investments for the energy transition. By 2030, we will call 50 gigawatts of green capacity our own across wind, solar, battery, flexible generation and hydrogen. On the earnings side, our ambition is to deliver group EBITDA of EUR 5 billion in 2030. And we will rigorously execute our strategy even in these challenging times. We are currently building 5.6 gigawatts of new green capacity. The success in the New York Bight auction at the end of February marked our entry into the important U.S. offshore market. We are very pleased that we were awarded 3 gigawatts of leases, which we are jointly developing with National Grid Ventures. Also, our partnership with Tata Power Renewable Energy means a great deal to us. We are working closely in the Indian offshore wind market. The current situation may even trigger additional opportunities to accelerate our transformation. An accelerated push for green energy is a very likely consequence of the current situation We are further ramping up our own origination activities, where possible. In order to meet climate protection targets, the need for storage and flexible generation assets has become even more important. We believe a refinement of the strategy is needed so that the new builds will be powered with green molecules from the start. And finally, the faster build-out buildout of green import infrastructure, especially in our home market, Germany, creates additional opportunities. 2022 will be a decisive year, geopolitically as well as for the energy industry. The further development of the war in Ukraine is not predictable. Subject to this, we confirm our financial targets for 2022. We will rigorously implement our Growing Green strategy. And we will support European and German governments with all requested measures to support short-term energy security. However, we will stick to our climate protection targets, and we remain committed to becoming carbon neutral by 2040 and to embark on a 1.5-degree compliance CO2 reduction as rate -- as soon as possible. With this, I will now hand over to Michael.

Yes. Good afternoon also from my side. 2021 has been a very successful year for RWE. We clearly exceeded our guidance. The EBITDA of the RWE Group came in at EUR 3.65 billion, and adjusted net income reached EUR 1.57 billion. This is an increase of 25% compared to the previous year. We spent EUR 3.7 billion of gross cash investment on green growth and have 5.6 gigawatt of green capacity under construction. A KPI that shows our speed of transformation is our share of CapEx eligible under EU taxonomy. In 2021, almost 90% of our CapEx was eligible and we have started issuing green bonds as part of our sustainable financing. In 2021, we placed EUR 1.85 billion of green bonds at attractive terms. Despite the one-off effects from the Texas cold snap, all divisions put in a very good performance. Core EBITDA reached EUR 2.76 billion and exceeded our guidance. Supply & Trading delivered an outstanding performance. And due to a strong fourth quarter, the Hydro/Biomass/Gas and the Onshore Wind/Solar segment both delivered results above our guidance. With the strong momentum from the operational performance, adjusted net income also exceeded the guidance, reaching EUR 1.57 billion. Year-on-year adjusted minorities were higher, driven by the full consolidation of Rampion as well as the commissioning of Triton Knoll. The adjusted operating cash flow reflects the impact on net debt from operating activities. It is adjusted for special items and other effects that balance out over time. At the end of Q4, the adjusted operating cash flow amounted to EUR 1.5 billion. It largely stems from our strong results and is partly offset by negative effects in working capital. Trade receivables increased on the back of high commodity prices at year-end. Net debt decreased substantially to EUR 0.4 billion net worth at the end of the year. Adjusted operating cash flow and changes in provisions reduced net debt, but the primary driver for the decrease were timing effects from hedging and trading activities. Net cash investments of EUR 2.9 billion partly compensated this effect. In 2021, we recorded a net outflow of margins from power generation hedging in the liquid period of EUR 1.3 billion. This is shown in other changes in net financial debt and includes net variation margins from the sale of electricity as well as the purchase of the respective fuels and CO2. Our net position from variation margins for power generation hedging amounted to EUR 0.2 billion at the end of the year. Most of the remaining effects and other changes in net financial debt are margin inflows from trading activities as well as for the long-term CO2 hedges for our lignite generation business. The latter was driven by increase in carbon prices in the fourth quarter. For 2022, we assume that the leverage factor will be significantly below our guidance of 3x net debt-to-adjusted EBITDA as long as commodity prices are stable. With our Growing Green strategy, we are heavily investing into our green portfolio. As we speak, we have 5.6 gigawatts of green capacity under construction across various technologies. With 2.2 gigawatt, offshore wind takes the biggest share. Our Triton Knoll project will be fully commissioned over the next couple of weeks. 1.1 gigawatt of onshore wind will be added in Europe and in the U.S. 1.2 gigawatt of solar projects are under construction, primarily in the U.S. At our Biblis site, we are constructing a 300-megawatt OCGT to stabilize the grid. We won the right to build this project in a capacity auction held by the German grid operator. Furthermore, we are converting our Dutch power plant Amer to run 100% biomass. All projects will bring us to a green net capacity of 32 gigawatts. Our outlook for 2022 was upgraded a couple of weeks ago. Subject to the uncertainties in the context of the war in Ukraine, we foresee another strong performance, with an adjusted EBITDA for our core business of between EUR 2.9 billion and EUR 3.3 billion. Adjusted EBITDA for the RWE Group is expected to be between EUR 3.6 billion and EUR 4 billion. Adjusted net income will range from EUR 1.3 billion to EUR 1.7 billion. The dividend target is EUR 0.90 per share for this year. And with this, I hand back to Susanne.

Thanks. We will now start the Q&A session. And Josh, please, kick it off.

[Operator Instructions] Our first question comes from the line of Rob Pulleyn from Morgan Stanley.

Two questions, if I may. And I caveat it by saying, I appreciate it's pretty early days in how policies may change as a result of extraordinary circumstances you highlighted, Markus. The first question is you talked about new opportunities potentially in the green gases infrastructure, sort of, market. Could you maybe talk a little bit about how discussions so far have led in terms of green hydrogen, regas, gas storage? And of course, potentially, we were expecting CCGTs within the German power system towards the end of the decade to facilitate coal closure. I'd love to hear some color around this. And the second one, if I may, the existing plan, I think, remains for coal exit by 2030, and I appreciate that may change. But could you talk to the point of how you see that developing and whether this lignite foundation that's been suggested in the media would be part of that solution still?

Yes. Thank you, Rob. I mean it's indeed very early days, but I mean we are in constant dialogue with the government, and I think we have a clear understanding what the thinking is, and there's a full alignment. I mean if you look at the current situation, the theory of natural gas being bridged into the green energy world is now -- has a very big, big question mark. And I think you're not going to find anybody who will incentivize or support investments in this infrastructure. But what is the consequence? If you want to stick with your climate protection targets, you need to go much faster green. So we discuss now what needs to happen on the import front because it's clear that we cannot produce all the green electricity and the [ green ] molecules here in Continental Europe because we don't have enough space. So what I expect is that there is a much bigger support available for building this green infrastructure, building the H2 network, building ammonia import infrastructure, and of course, that can also trigger, which typically we have to hen-and-egg problem that you have faster investments in the countries of origin but also faster investments in the offtake like we would do with our investments in directly green fuel-run CCGTs or OCGTs. It's early days, but I mean, what I hear and what I expect is significant higher support budget from the government but also a significant acceleration when it comes to planning and permitting processes because that will not only help here. It will also help on the renewable side. So I mean our targets are strict, but it could be even possible that we implement them especially when it comes to Germany and Continental Europe even faster. And Germany has the biggest challenge of all countries, which means we need to get rid of the dependency on Russian energy supply much faster, and the government is willing to spend for that. And that means it creates a lot of investment opportunities for us as the best-positioned company in our home market. On the coal exit side, it's very early days. Again, I think we need to clearly distinguish short-term measures, and short-term measures could mean that we need to extend the lifetime of already closed or shortly to be closed units. But I think this, for the company, is -- we support the government wherever needed. But from a business perspective, it's not relevant. I mean it's not a strategic focus. I also expect the Russell Model to be value-neutral to us. I mean it will come at additional cost because we need to keep people for longer. We need to invest into the plant to keep them running. I think that needs to be compensated, but we should also not expect that we earn a lot of money from that, so it's neutral. So if you ask me, what I want it to be, we support the government on their request, their decision, their investment, their earnings, their CO2 emissions. And we stick to our phaseout plan. In the long run, 2030 or be it 2032, it will not be determined by the short-term measures but will be determined how fast we can actually turn green without the bridge fuel gas. And that is too early to tell. On the foundation, I mean you can imagine that everybody is now building -- implementing the right things but not thinking about structural solutions. But I mean if you read that the other lignite operator had to take state support, I think -- let's see. We probably see that when the worst is over, but that's not the right time today to discuss it.

Our next question comes from the line of John Musk from RBC.

I'll get 2 related questions for me, probably all stemming from the volatility we've seen in the commodity market. So firstly, on the very -- or the other movements in net debt, which is EUR 5.9 billion, can we perhaps split that out a little bit more? And essentially, I think you mentioned some numbers around the sort of physical power hedging. But can you let us know how much was related to carbon? How much was related to other trading of commodities? And potentially, where the balance now sits on those carbon positions, in particular? And then secondly, I know we're sort of almost at the end of Q1, but I just wanted to ask around the Supply & Trading business. Given all the volatility, is there anything you can say how that business has coped so far in the first quarter?

Yes, John, thanks for your question. I mean a quick answer to Supply & Trading. I mean you know that we don't comment on results in the course of the quarter. So therefore, apologize -- apologies if I don't say anything on Supply & Trading business yet. Related to variation margins, I mean you know that in this bucket, there are various effects. I mean the one I mentioned is the effect from power to variation margin for power generation hedges. And I stated that at the year-end, the balance was EUR 0.2 billion, so pretty flattish. But obviously, you have to bear in mind that as we progress, that number can evolve. Second element is from the trading activities, which also comes with variation margins. Typically, in the profile, more short term. And then you have the variation margins from the CO2 position, which obviously is a strategic position and, therefore, also longer-dated. And finally, we also have effects in there, like we mentioned, the other changes as, for example, the EUR 880 million of compensation for our nuclear assets in here. I apologize if I cannot comment on numbers. But I think it's fair to say that it's not expected that those variation margins will flow out immediately, especially on the CO2. That's probably more longer-term developments to be expected here.

So maybe just to see if I can press on how much you think will flow out. And obviously, you said significantly below 3x net debt. But can you quantify that at all?

No. Unfortunately, I cannot.

Our next question comes from the line of Vincent Ayral from JPMorgan.

You showed some information on the direct exposure on the Russia, Ukraine. Now Russia curtailing gas or coal supply seems to be quite an extreme scenario. I'd like to get a bit of views on this topic and what will happen if we ended in such a situation there. You're talking about 3.5 gigawatt of coal capacity expansion. We don't see any nuclear, for example. I understand it's difficult to get fuel rods on a short notice. But what if, indeed, there were no gas to flow from Russia? Could we foresee, for example, I don't know, France providing some fuel rods to Germany and basically nuclear being dusted off as a potential option? So that will be on the Russia, Ukraine. And the second is on the guidance and the commodity output. So you reiterated your guidance despite the recent events, but we understand that you use a pretty high commodity prices. I take that from your comments at the November CMD. Could you give us a bit more color there on the volume that were unhedged in renewal -- renewable lignite, nuclear, CCGT and what type of basically prices are you using there? It would be quite interesting for us to understand what's basically cooked in the guidance and basically outside that risk from either political intervention coming or not depending on this level.

Yes. Let me take the first question, Vincent, and then Michael will then comment on the second. Look, the energy balance in Europe, if you assume a stop of Russian delivery, need to be the distinguished between the different energies. I mean for coal and oil, I would not be so much concerned. And we see already today, in the market, huge adjustments. I mean nobody is willing to enter new contracts. And probably, let's call it, independence from Russian supply can be achieved over the course of this year, if needed, if wanted. It is a different picture for gas -- pipeline gas. But here, again, the European perspective is the right. I mean I don't want to comment on the French nuclear because I don't understand the safety situation. I can tell you that the German government has, 10 days ago, taken the option to extend our nuclear plants off the table. I think for good reasons because the lead time is too short to refuel them with new fuel rods. So it would not help within the next 15 months. And so -- and that is the period we definitely need to bridge. How we could balance? I mean you need to look at the power market and then the gas market. Power market, first. I'm not so much concerned about the power market because if you look into the options, how to save enough gas in the power market, you can bring back coal in Germany, partly in Italy and the U.K. Even France is talking about it, Netherlands and so on. I think we could make up a good part there. The rest is a bit more complicated. But if you go to an extreme scenario, we should also consider that maybe European exploration can be ramped up. I mean in the Netherlands, I mean, partly even with a bit more lead time in Germany and, in the U.K., a bit more. And then, of course, when we look into building LNG terminals, if you go for floating store, floating units, that can be done within the lead time of maybe 2 years, and we are also exploring like other European countries, all options here. But it will take some time. But it's -- yes, I think currently, I don't see the will that the European politicians will sanction energy supply from Russia. But of course, everybody is thinking about the option, and everybody needs to consider what happens if they stop delivering.

Yes. On the hedges, I mean let's start with the renewables. So our hedge ratio at year-end for 2022, obviously, was above 80%. And also for '23, it was above 70%. I mean the exposure we have there as merchant position is around 15 terawatt hours, as you know, plus or minus. With respect to the conventional generation, you know our hedge approach is twofold. I mean first, we try to convert it into an average portfolio. And then the second step, we would hedge the price setting spread. So the conversion into the average portfolio is pretty much done for '22, '23 and also '24. And then the hedge ratio for '22, obviously, also converting the price setting or hedging the price setting spreads is completely done and, as a rough indication, is probably 2/3 for the year '23 to come. So therefore, if you take that number, especially since we have converted the portfolio or hedged the portfolio to the average portfolio, the upside from gas, which is primarily currently driving the prices, is somewhat limited in the front years. Obviously, depending on the scarcity, what comes there may be some upside from price line in spreads. But please bear in mind, I mean, the current situation is very much driven by the current situation, and we need to see how much that really stays into the future.

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

The first one is to go back a little bit to this REPowerEU and particularly the German response to that. Could you tell us how much of the 50-gigawatt green net capacity by 2030 -- how much of that increase from, let's say, about 10 right now to 50 would be from Germany? So I'm just trying to figure out what the upside from a EUR 250 billion, EUR 300 billion potential investment plan in Germany. It seems to me you've put very little. So I'm just trying to gauge what could be your extra EBITDA, if you were to achieve, say, a 5% to 10% market share and if you think that 5%, 10% market share could be reasonable, too high or too low, perhaps, if you have any thoughts about that. The second question is on, obviously, certain customers have already faced close to 150% increase in power and gas bill. So we are seeing Europe moving very quickly to guarantee greater consumer protection. And in this context, do you think Germany might also implement a measure that could include a price cap or the windfall taxes? And if so, how many kind of terawatt hour do you think, over the next 2 years, could you share with us? I mean terawatt hour might be exposed to merchants. So just to see what the risk could be. I think it's about a couple of terawatt hour in hydro plus 25%, 30% of your renewable portfolio. Would that be a fair assessment?

Alberto, on the first one, I don't want to give you a gigawatt number, I mean, because we have not disclosed what our, I mean, average plan for the 50 gigawatt was. But I share your view that we have put in very little because when we announced the Growing Green strategy, that was before the government came with their acceleration plan in Germany. And also, I mean, our recent successes in offshore are beyond what we expected in the Growing Green plan. But now, speculating, we can do 5 or 10 more. It also comes to the question, how do we finance it? Is it only gross and net the same? Do we have more headroom there? I think it would be not diligent to throw out numbers now and -- without a credible financing plan and what that means in terms of value. But I mean as we have clearly hinted in the presentation, which we have given, in the long run, we see more upside clearly, from the achievements we have made over the last -- even weeks or months but also from what we see as European and especially German policies. And I also want to highlight that we have not put in any value in the 5 -- in the Growing Green platform, additional business from becoming a significant importer of green energy into Europe, into Germany. And I see that definitely as an additional -- very attractive business in the future, which will be, I mean, distributed, I mean, from scratch, right? Nobody is in that business today. On the consumer protection side, I think we clearly should expect measures because the social consequences, which will be felt over the next 2, 3 years where we see the higher prices rolling into consumables, will be significant. I mean we are clearly against price caps because price caps are hindering free markets, and free markets, they do their job. I mean as we currently see more LNG coming, consumers thinking about cutting their demand, which is all helpful to clear the market. So price caps should really be only the ultimate measure and probably only if physical markets break down. I think when you don't have enough physical supply and price signals don't do the trick anymore, then you can think about price caps but not before that because, I mean, then you lose the efficiencies of markets. But I think then it becomes a question of reallocation of taxpayers' money and maybe even higher taxes. And across Europe, I think I definitely expect windfall taxes. But look, I mean, Germany is an import country. We import a lot of energy. So we are, as a country, suffering from the situation. So we don't have huge windfalls. I mean you typically have windfalls when you have huge long positions in oil and gas or upstream positions, which is not the case here in Germany. And also for us, closing nuclear, I mean, lignite is very little and under compensation framework, and the renewables rerun, I mean most of them have fixed tariffs. So even with the windfall tax across Europe, I would say that the impact on us and our earnings is very, very limited, and it would, in the end, only take away upside, which comes above of the guidance, which we have given. So compared to our outlook, I don't see lot of risk.

Markus, sorry, would you allow me like a 10-second follow-up, if you don't mind, and just picking up on one sentence you said. I mean the world really did turn upside down in 2 weeks. So I should be one on the call with 10, 15 better relevant questions. But just on what you said, Germany is importing LNG. The country is suffering. There are other windfalls, long positions. Do you believe there is a debate -- I'm not asking what -- maybe what you think because it could put you in a tough spot. But do you believe there is a debate out there not to only tax utilities but to start thinking about taxing upstream oil and gas?

I cannot comment on that.

Our next question comes from the line of Lueder Schumacher from Societe Generale.

Lueder here. Two questions also from my side. The first one is on hedging, and I hope it's general enough so you are able to answer it. How much of your hedging is now done OTC? I guess most companies are increasingly moving towards the OTC market in order to avoid what are quite punishing variation margin outflows. Is there enough liquidity in the OTC market? And is the overall market still functional? I mean you see the kind of prices we are seeing and the variation margin requirement from exchanges. It must be -- well, I wouldn't be surprised if overall liquidity is drying up. So any kind of comment you can make on mix of hedging exchanges versus OTC and liquidity on both. The second one is on the Bloomberg headline that appeared earlier where you said that you might build provisions to cover risks for high energy prices. Could you elaborate on that a bit? Specifically, what risk are you referring to here? Because most business lines, you seem to have, if anything, positive exposure. I just wonder what scenarios this need for potential provision might be referring to.

Yes. I mean, Lueder, thanks for the question. Let's say I'll start with the latter one. I'm not aware of a comment we made on any provisions for higher prices. So therefore, I can't comment on this one. The second question you raised -- or the first question you raised around OTC versus exchanges, that's indeed a very relevant question. I mean the first element is around liquidity. I wouldn't say that we see limited liquidity because of people withdrawing from exchanges towards OTC. It's more that in these situations where you have huge moves, you typically see markets drying out, but that's equally true for OTC as for exchanges. Plus what we are seeing is that in those extreme scenarios, market participants are also driven by creating cash and not obviously by market perspective, and that obviously sometimes puts weird signals into the market. When you talk about OTC, I mean, yes, you are right. There is an opportunity to move some of the trades to OTC market in order to avoid initial margins being posted. But at the same time, you also have to be careful because, I mean, what you want to have is somehow a balance. I mean typically, when gas prices go up, power prices should also go up. And if you take, for example, our position, I mean, when gas prices go up, which typically should have an inflow of variation margins while when power prices go up, there is an outflow variation margins. And ideally, what you want to have is somehow a balance so that net, at the end of the day, you don't have outflows. So therefore, when we optimize our portfolio and positions, it is also looking at the overall net position and how we are exposed with those net positions. And the same is actually also true when you talk about exchanges because when initial margins are calculated, they also look at the exposure of the positions. And therefore, it's also important to have some netting or offsets in the positions we have at the various exchanges. So therefore, it's a little bit more complex than just taking a product OTC to avoid variation or initial margin calls.

It's Markus. Sorry. I mean it's good to have Thomas in quarantine with corona because he was not able to send me the Bloomberg article you are referring to. I mean I think they got it slightly wrong. We didn't say that we need to make provisions from high prices. I mean the comment was more what is -- if we see that counterparties fail or declare force majeure and we don't get -- they don't stick to the contract, and there, we said it could be but to a very limited extent, of course, that, that will cause losses if people don't fulfill their contractual obligations. Nothing to be worried about.

Okay. So it's just counterparty risk. That's great. Can I just go back with one follow-up to Michael? Can you give us a rough idea of the split of what the percentage of OTC as proportion of your overall hedges?

No. Lueder, Apologies, I can't comment on the exact split.

Our next question comes from the line of Peter Bisztyga from BofA Securities.

Yes. It's Peter Bisztyga here. Two questions from me, please. First one, it touches on a previous question. The European Commission mentioned that they were planning different market designs for the power market. There's this ASO document from a few months ago, sort of talks about potentially moving to average pricing. There's been stuff on potentially taking gas out of merit order. I was just wondering if you have any views on how realistic if the European Commission can actually implement across all 27 member-states a wholesale change to power markets or the reality that will just stay as we are today. So just your sort of personal views on that would be interesting. And then the other one is, again, a little bit of conceptual question. But we've heard that there's already been a handful of ESG funds that seems to have done a very rapid U-turn on their willingness to invest in defense. And I'm wondering if you've heard anything from your investors suggesting that a more relaxed approach to coal might be coming down the way given the social benefit of achieving energy independence in Europe. So again, just your personal views on that would be very much appreciated.

Peter, I mean, we haven't heard anything about investing in coal. Maybe that is going too far. Let's call it investing or supporting security of supply. Maybe we're going to see that, but I haven't heard about it. On the potential measures on European level, I think going to average pricing is almost impossible. That would mean a full reregulation. So an asset -- regulated asset-based type of model, which I think cannot be incremental, and I wouldn't support it. Taking gas out of the merit order, that is maybe a bit easier, but I don't know what purpose it would serve. I think it's also more complicated. I think the only measure -- the only real measure, I can see, which is also discussed among the different governments, is getting a price cap on gas. So if you run into very tight supply situations and have gas prices, let's say, above EUR 150 per megawatt hour, from which point price signals do not change the market because you attract as much LNG as possible and people try to save on gas as much as possible that you limit that and that it cannot go to, let's say, EUR 200, EUR 300, EUR 400. But that's the only measure, I think, is feasible and makes sense.

That's great. Just on the back on the sort of ESG question, I was wondering whether ESG investors would become more willing to own the shares of companies like RWE despite the fact that they're invested in legacy coal because you're contributing not just to the energy transition from renewables but also now to Europe's security supply and the social benefits there. But you guys seem like you might not have an answer to that one?

I mean what you have seen is that there is a clear trend of less black and white views but more supporting the transformation of companies. And I mean as we have seen with us being awarded the Standard & Poor's industry mover award, which recognizes exactly that, I think that -- and also the clear statements from Larry Fink and the entire BlackRock investment university behind it. It's not about calling good or bad businesses, good and bad companies but more appropriate transformation and inappropriate transformation, and we are clearly more the faster ones, and that could give us additional tailwind about what we do but also about the valuation levels because in the end, what we want to achieve, we want to close the valuation gap between us and other pure plays. And maybe the current situation can help that people accept, I mean, for a certain time with clear commitments, still some coal business, and maybe in future, the bad stuff is more the dependency on Russia but not national independence.

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

I'd just like to just start by acknowledging your opening statements, Markus, which I think was very, very well said. And then on to questions, I have one on coal and one on carbon. I guess, firstly, on coal, I'm wondering if you have a view, across Western Europe, how many additional sort of terawatt hours of coal production we might be able to find in total this year. I've got some data on coal generation in Europe last year around sort of 400-and-something terawatt hours. I'm wondering if that could end up being 500 or maybe more this year. I'm not sure if you have an exact figure in your head, but basically, I'd just love to hear any further comments on what you think are kind of spare production headroom is in coal across the European fleet and then, I guess, on your assets too would be very interesting. And related to that, I can't help asking if you still -- I think we should expect the EUR 500 million step down from '22 to '23 that you've been guiding for the coal nuclear business. So kind of a couple of general questions there on coal. And then, secondly, on carbon. I suppose I just want to ask if you think there's any coal production in Europe, which currently could run but does not run because of where the carbon price is. And then, I guess, do you think there is a case that we might see the carbon price somehow revisited, suspended, adjusted, at least in the power sector because I suppose 1 of 2 scenarios must be true, either the carbon price is so high that it is keeping some useful coal currently off the system or because of where the gas price is not having any effect at all, in which case, what's it there for, and it's certainly contributing to higher prices overall? So just love to hear your general thoughts on those 2 topics, spare coal, headroom and then what we do with the carbon price.

Yes. Let me start with the latter, and I'll come back to that at the end. At the current price level, I think the merit order is clear gas comes last. I mean coal hard -- especially hard coal but also lignite runs even at current carbon prices of close to EUR 80 because gas prices of EUR 100 per megawatt hour clearly make gas the least attractive fuel, including the carbon cost to produce to generate. On the coal generation, I don't have any number because currently, everybody calculates not terawatt hours. But gas, so how much gas can be saved by running more coal? And here, the decision is still out, and we are also in discussions with the government. What is the objective? Is the objective to bring back, usually to be closed coal capacity for reserve? So to ensure that you have -- if we have problems with gas supply, at least not a problem in the power sector, so you only have to deal with a problem in the residential heating in some industry sectors? Or is the objective to start saving gas immediately, which would mean you need to run this capacity which you bring back at more or less 5,000 hours a year? That would mean significant higher and also hard coal demand for Europe. That would also mean significant higher carbon emission, but you will start immediately saving natural gas. That decision has not been taken. But if they want to save gas, that also means we run into a carbon crunch because there are not enough certificates. Probably, we would need 50 million to 100 million tonnes a year more. But the decision is not taken. And I think it is, in the end, a political decision of what they think is the likelihood of a gas supply cut from Russia or sanctioning it. I have no opinion on that. I mean so far, what we read and what we hear, they probably go more the reserve way, that they say we want to have that capacity in urgent situation available, but we don't ask you to start running it at 5,000 hours immediately to save gas.

Thank you. Sam, does that answer your question?

I feel like I want to follow up with 10 questions, but I guess that's not the forum today. So I'll say thanks for that point and leave it there. But yes...

The good thing, Sam, we're going to find out over the next course of the week. It will be a very dynamic next, I think, 2 months.

Yes. I think very dynamic on the carbon scheme. And I think on coal, I think we'll definitely see -- our number was maybe 250 terawatt hours of additional coal across Europe versus where we were a year ago, but let's see where it ends up.

Yes. But I mean, it's -- I don't want to confirm the number, but please keep in mind that given the tight energy markets we are in and also fuel markets, don't take the fuel supply as a given. So you can easily run from a situation where you have no problems on gas anymore, but the hard coal situation is impossible to be met, right?

The cap on our number was the seaborne coal trade, is how much coal can we get into Europe. So let's see. Maybe we'll get more information in coming weeks.

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

Two quick questions from me. The first one is there is a lot of discussion about the need to simplify the renewables permitting process and to accelerate the renewables build-out in Germany. But have you seen any significant progress in terms of the discussion with the government since November last year? Because that's the time when you got the CMD. And my second question is on the coal exit in Germany. In the past, you stated that you expect the talks with the government in H1 2022. Is it fair to assume that any potential agreement on the accelerated coal exit could be delayed because of the current situation and the security of supply issues?

I mean on the first one, I can talk now for -- specific for Germany. We expect what they call the Easter package. So it's maybe a surprise Easter egg for everybody, where they're going to propose higher targets for renewable build-out, also making more seabed available for offshore, higher targets in terms of gigawatts but also the entire parts of accelerating planning and permitting processes and speeding up court proceedings. And at least for Germany, we expect clarity by April, so within the next 6 weeks. And I think given the situation we are in, the government is now willing to take even more harsh or propose more harsh interventions to speed it up. And we hear the same from other European countries. On the coal exit side, yes, I mean, the plan was to discuss the 2030 plan now. We were prepared for that discussion. And the week we wanted to start the discussion, the invasion of Ukraine happened. And of course, now we discussed ensuring security of supply, but the discussion around 2030 has stalled. I think at the moment, we are clear how we get through the next winter and what happens with the Ukraine-Russia situation, how that evolves. When it is more stable, then we probably pick up the discussions again. But in the end, the determining factor, whether we can achieve that or not is the first question you had is how -- where are we with accelerating the renewable build-out, and I would probably add also diversification of gas supply and infrastructure to import green energy in the future. They are the determining factors to achieve faster coal access. I mean we are definitely strategically up for that.

Our next question comes from the line of Deepa from Bernstein.

I had 2 questions, somewhat one is a new one and one is a follow-up to previous questions. So first one on storage. So I think the German government has said that they want to have 90 days of storage. Obviously, the cost of now filling up these storages has increased almost tenfold. So just wondering, from a working capital perspective, what does this mean? And I'm guessing is there funding available because I presume, I think, for overall Europe, we're talking about EUR 200 billion somehow to be found to put into storages? So just any views for Germany and RWE on that. Second question on -- just to follow back on the questions on windfall taxes and hedging, I think in the EU paper, they clearly say that they will only apply windfall taxes to actual windfall profits, so not to any hedged volumes. And I just wanted to go over the numbers, particularly, I think I lost some of the bits on the 2/3 converted for FY '23. So I was wondering if it's just possible to clarify what is your unhedged exposure for '22 and maybe '23. And should that 2/3 conversion matter at all in the principle of not taxing windfalls, if there is no profits?

Yes. Deepa, first one on the storage. If you look into the storage situation in the last years, you see that, I mean, usually, the storages are even by market forces filled close to 90% before we go into the winter. The significant lower storage level was, in the last year, driven by a certain behavior of individual players. And these storages and storage contracts were owned by Russian parties. And they did it here in Germany but also partly in the Netherlands and Austria. And the current legislation the government and the European Union will put in forces to ensure that this cannot happen again. And if somebody misbehaves like that, that they can't get access to the storages and cancel the storage contract. So net-net, I mean, we are currently in intensive debate what is the best and cheapest and most efficient way to implement it. But whatever the implementation is, the impact on companies like us and others who behave market rationale will be very, very limited in terms of working capital but -- and especially in terms of cost. So we don't expect a huge -- not a consequence at all. I mean on the windfall tax before Michael comment on the hedging ratios, I think what is very positive is that the EU guidance said it can only be implemented, I mean, from the point of decision onwards and not retroactively, and it excludes all hedged and sold-out contracts. And that also -- I mean when you know our policy and also the customer contracts we have long term, the impact will always be very, very limited on our business.

Yes, I would fully underline -- subscribe to what Markus said. And I mean it's, again, on the numbers, renewables at '22 above 80% and then '23, above 70%, so almost hedged. And on the conventional side, I think the key aspect is that converting our portfolio in equivalent portfolio or on the average portfolio in the country is also already completed for '22 and '23. And that is the aspect that could potentially increase earnings. So therefore, the impact of higher gas prices won't be there on our portfolio for '22 and '23. And therefore, I would also say on the conventional side, the impact of price increases is fairly limited and, therefore, also the risk of withholding taxes -- windfall taxes.

And just a follow-up, in your renewables, there's quite a lot of generation also, which is merchant in the U.S., right? So are these numbers for the -- and the 15 terawatt, could you just say what is the European volume within that because I'm guessing the U.S. isn't going to really put any windfall?

Yes. So when you talk about, I think, roughly 15 terawatts, and you can assume 6 to 7 of that is U.S., and the rest is Europe.

The next question comes from the Louis Boujard from ODDO BHF.

Maybe the first one would be regarding the agenda and, more specifically, the political agenda in Germany. We see that there is willingness to speed up into the renewable developments for very good reasons. According to you, what would be a normal timing agenda to put into legislation the willingness to get rid of some hurdles in the renewables development and to set new targets? Are we talking about a few months? Or are we talking about something like 1 year or even a bit more than that so that we can see where it could eventually trigger for you a decision to, indeed, speed up the investments and update your assumptions in the mid- to long term? My second question will be maybe still on the renewables since a lot of questions been asked already about clawback in gas and maybe more specifically on the corporate PPA market. Considering the current situation, do you see the market as frozen? Or do you see the market as completely booming with very significant potential for further growth in this field with very high-power market prices at this stage?

Yes. Thank you. I mean the government is present, and when it comes to Germany, the government is presenting the slate proposals around Easter time. If it follows the normal course of business, I think implementation will take until late summer, maybe autumn. And then it can -- it is effective end of the year. But it will take maybe another 2 years before you see the first effect, and the first relevant effect is maybe the second half of the decade. So it has long lead times. I mean they are also looking into a quick win, so to potentially move other capacity, which is currently in the permitting process, through it faster. So what -- that is, of course, limited. The PPA market is very active, and we see very good prices. Also, request for long-term contracts. And yes, I mean, situation is better than it has been 6, 9 months ago. But yes, too early to see whether that is for longer time or only driven by the current crisis situation. But the market is clearly there. I mean I can tell you, I never had so much senior request to discuss sourcing green energy like I had in the last 2 months.

Our next question comes from the line of Piotr from Citi.

I have 2 questions, please. So the first one, I wanted to come back to the lignite profitability in light of what the market has done, so CO2 going down and gas prices going up because yes, I remember from the history, you've always guided to a cap of EUR 200 million contribution from lignite from 2023 onwards. So is there any possibility that this number goes higher? And do you have some flexibility around the volumes? And what's the limiting factor there on the volumes and on the margin? And the second question, I wanted to follow up on this OCGT plant that you're building in this Biblis. Can you please explain the -- what type of returns are you getting? And what's the framework there?

Yes, let's start with the OCGT. As I said, that is a regulated income. So that was an auction where the grid operator auction capacity, so that capacity, once it's built, will be operated by the grid operator himself and also dispatched. And I mean you know that the IRRs that we guided for flexible generation at the Capital Market Day was between 6% and 11%. And obviously, the OCGT is also in that range. And to be fair, it is an attractive project. Secondly, around the lignite profitability, I mean, I would still stick to the current guided range because, like Markus said, I mean, in case we would be requested by the government to run additional capacity, that would be more on a kind of cost base or something similar, so nothing where we then would capture big upside from current market prices.

And just a follow-up on this one. So what do we see on your balance sheet? There's this big movement of the CO2 reserves that you have that you entered into this position years ago to basically lock in the value of a lignite asset, right, to hedge the exposure there. Why is it that on the kind of an asset side on lignite, you never change the outlook for the division, even though you kind of delivered the balance sheet to the right of CO2 over the last 2 years?

Well, look, at the CO2, we always communicated, this is a hedge. So what you obviously have seen with increasing CO2 prices, the margin of our lignite generation has suffered significantly. So the CO2 hedge is exactly put in place so that when you have increasing CO2 prices, some of that is passed through to the power price. And the element that is not passed through, that should be covered by the positive mark-to-market development of that CO2 hedge. So therefore, you should assume that to be a hedge for the longer term.

Let me make a comment to that, Piotr. I think your question is absolutely right. If the current market situation continues, it's maybe upside. But I mean for the value of the group and our strategic priorities, that has not a huge relevance. I mean for us, I mean, how we see the lignite business is we're going to run it as long as it is needed for security or supply reasons in very close alignment with the government. If we can achieve an earlier closure, we achieve an earlier closure. If we find structural solutions, we find structural solutions, but it's not about, I mean, making 50% more of what we have guided. That is not what is driving the value of RWE. The value is driven by our core business, by our green transformation and the investment program we have there.

Our next question comes from the line of Olly Jeffery from Deutsche Bank.

A couple of questions, please. The first one is going back to your exposure to Russian counterparties regarding gas and coal. Could you give -- or can you explain a bit further about the worst-case scenario where supplies are turned off and how much of that you think you might be able to claim as force majeure? Or is that not possible or too really to say? Just trying to understand what the ultimate liability exposure really is. That's first question. The second one is -- on 2 unrelated things to Russia. So one is -- and recently, in New York Bight where you guys have been successful, just your views on the pricing there and the prices paid. Was that kind of at the top end of what are you willing to pay, and therefore, we should consider expected returns that be relatively limited yet meeting your minimum criteria? And then the last question is on the EU ruling and mining compensation. Waiting to hear that for quite a while. I presume that's kind of going to be kicked into [ touch ] for the immediate future given everything that's happened. But what's your expectation on that as well?

Olly, what was the last one? On the state aid approval? Okay. Good. Michael is nodding. So first, on the Russian exposure. I mean we should not speculate on what could happen. I mean we are actively managing the exposure. We, of course, look also into potential scenarios to be best prepared what scenario will, in the end, come true. Of course, if it's a force majeure thing, then we could pass it on to our customers. But it's -- I think we are here in somewhere in -- on totally new territory. It's -- I don't want to speculate on that. I mean if you take the message that our Russian exposure is very limited, we actively try to reduce it as fast as possible. We don't enter into any new one. We are not reliant on that for fuel supply for our customers or our own assets. And whatever happened, I think -- we think that whatever the outcome is, even not a very nice one, it is absolutely manageable for the company. On New York Bight, I mean, please don't force me to tell you whether we are at the lower, mid or upper range. We don't want to give competitive sensitive information. But I can tell you, we are very pleased with the outcome when it comes to absolute prices, but we are also very pleased when it comes to relative prices, what we paid for this highly attractive side compared to the prices for others. So I mean we were already after the invasion of the Ukraine, but the U.S. team here, which is a bit more distant, had a nice evening and celebration after the results came out. And the last one on state aid. One thing is clear, whatever we do on our lignite portfolio, it will be very difficult to move and change the plan before we have clarity on the state aid. So I think it would be good if that can be accelerated because otherwise, our hands are tight, even in supporting the government on other measures. The problem is that DG Comp in Brussels has so many state aid approvals now, also stemming from the crisis before Christmas but also from this actual crisis that their desk is so full, but let's see what we can or what the German government can achieve in terms of timing there. So we have no clear expectation when we expect a result.

Our next question comes from the line of Ahmed Farman from Jefferies.

Two from my side. I actually, first, wanted to ask you about your long-term Russian gas contract, which you sort of referred to in the annual report. It does seem like in the past, you have been able to manage the price risk. But just wanted to just understand how sales contracting has worked on that contract in the past and anything you can say about sort of earnings contribution of that contract. That would be helpful. And any anything on minimum take-or-pay volumes. Then my second question is actually on your net debt slide. And just looking at it, I just sort of wondered if you could share anything about how relevant the sort of the variation margin is in the context of when rating agencies assess your credit metrics? Or when you look at your investment capacity, is this all sort of bankable fungible? Or is this sort of seen as a pass-through reversible item?

Ahmed, Michael will take the latter question. Let me comment on the gas supply contract. I cannot comment on, I mean, detailed commercial terms because this contract was also, as you know, subject to arbitration in the past. We have not received any deliveries under this contract for quite a long time. The contract is currently also not delivering. Without going into the details, but we don't expect that this contract will become a risk for us at all, not in terms of physical delivery, not in terms of commercial consequences. So it's, for us, like nonexisting.

Yes, Ahmed. Coming back to your question on variation margin and the impact on net debt, I mean obviously, we don't share with you the exact roll-off profile, but we obviously have them internally. And I mean if you look at the 3 categories, I mean, the variation margins for trading, obviously, they can quickly change depending on the position. So that's more difficult also for us to predict on hedging, and especially on CO2, obviously, we have a much clear -- a clearer view on the roll-off. And therefore, when we look at our headroom for investing, we obviously incorporate that into our net debt. So clearly, the margin inflow we got from CO2 has provided us with some additional headroom in the front years to invest into. That's clear. And that's actually also the benefit because it helps us to invest more upfront, and these upfront investments should then bring up EBITDA and FFO and, therefore, help us in the later half of this decade to have more headroom than to continue investing.

The next question comes from the line of Madeia Al Mehairi from ADIA.

Just a follow-up question on Lueder's question. I'm referring to same article in Bloomberg. So RWE will be forced to buy gas, I guess, from the market at high power price if Russia to stop the supply. So I believe the contracts are not current contracts. I think they are 2023 contracts. So if you can please give us more colors on this contract in terms of capacity and financial impact there would be.

Yes, we do it again, but I cannot convey new information. I mean it's 15 terawatt hours of gas, 15% to be delivered over the next 12 months. And please keep in mind, it's 15 terawatt hours in total, not per year. And 12 million tonnes of coal, 2 million to be delivered over the next 12 months. I think this is very limited exposure, but of course, the mechanism, if this contract is not fulfilled, is, of course, that we have obligations to our customers. Here then the question is whether we can also declare force majeure. That depends on what kind of contracts we have with our offtakers and how that is being settled and, of course, what is the price level in case you need to buy in the market. And the additional question is, I mean, as I have already said, we are actively managing the exposure. So without going into further details, it is relevant but not too relevant exposure. And we think whatever the outcome is over the next course of the month, it is clearly manageable for the company, and we leave it there.

Thank you. Being conscious of time, we have reached now the end of the call. If you have follow-up questions, the entire IR team is at your disposal. Thank you very much, and have a good rest of the day, take here and see you soon. Bye-bye.

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