RWE Aktiengesellschaft (RWE) Earnings Call Transcript & Summary

Welcome to the RWE conference call. Markus Krebber, CEO of RWE AG; and Michael Muller, CFO of RWE AG, will inform you about the developments in the first half of fiscal 2022. I will now hand over to Thomas Denny.

Thank you, Jeff, and good afternoon, ladies and gentlemen. Thank you for joining the RWE investor and analyst conference call. We are well aware that it's quite a busy day for you. Therefore, we'll keep it short and give you enough time for Q&A later. With me, as said, is our CEO, Markus Krebber; and our CFO, Michael Muller, for the report on the first 6 months of the year. Now without further delay, over to you, Markus.

Yes. Thank you, Thomas, and good morning -- good afternoon to all of you, and it's good talking to you again after our summer break. RWE has delivered a very good performance in the first half of this year while navigating the European energy crisis. Due to the strong operational performance of all our core business segments, our core EBITDA stood at EUR 2.4 billion at the end of June, and group EBITDA was EUR 2.9 billion. We demonstrated the robustness of our business model and eliminated our financial exposure to Russian counterparties entirely. And furthermore, RWE is actively ensuring and enhancing security of supply in Europe by increasing power generation as well as by actively diversifying the gas supply to Europe and of course, by consistently pursuing our green growth program under our Growing Green strategy. We are right on track with our growth strategy. Our development pipeline is continuously evolving. We commissioned 1.2 gigawatts of new green capacity in H1, and a further 4.8 gigawatts is currently under construction. On the back of the strong performance of our core businesses, the outlook for 2022 has been raised to a group EBITDA of EUR 5 billion to EUR 5.5 billion and an adjusted net income of EUR 2.1 billion to EUR 2.6 billion. In the first 6 months of the year, all our core business segments flourished, driving the earnings for RWE Group. The German operations from Coal/Nuclear showed lower earnings year-on-year as expected. Our business model has proven to be robust and well balanced, and our steady investment into green capacity are paying off. Our generation fleet recorded a high deployment and delivered a very strong operational performance. And in a volatile market environment, the Supply & Trading business once again delivered an outstanding result. Moving on to Page 5 on how we are navigating the current energy crisis. By the end of June, we had entirely removed our financial exposure to commodity deliveries from Russian counterparties. This means there is no further financial downside since all financial implications have been fully covered in H1 earnings. German government has set up a scheme to redistribute the losses from the shortfall of Russian gas supplies to all gas consumers from October 1 onwards. We do support the scheme since it avoids the collapse of companies suffering incredible losses from Russian underdeliveries and subsequent chain reactions, which are difficult to control. RWE also suffered some losses in its gas business due to the shortfalls of contracted Russian deliveries. However, we have taken early steps to proactively manage our gas supply portfolio, and we are a financially robust company. We, therefore, want to show our social responsibility and share the burden. Hence, we do not intend to claim losses from the shortfall of Russian gas supplies. Moreover, I'd like to give you a final update on the coal write-off as a result of U.K. and European sanction. After final settlement, the total amount written off in the nonoperating result was EUR 750 million. Also with respect of coal, there is no financial exposure with Russian counterparties left. Everything has been reflected in H1 earnings. With regards to our hedging activities, we are clearly taking a conservative approach and prioritized derisking over earnings maximization. As such, we are, for example, avoiding commitments on electricity delivery obligations relating to the German gas fleet. And we have increased the internal buffer of unplanned unavailability of our fleet to avoid the risk of power buybacks in the current high price environment. For the avoidance of doubt, we do not expect any additional outages. This is just a precautious risk management measure. Finally, we continue to strictly monitor all counterparties. So far, we have not recorded meaningful losses from credit defaults. We are supporting the improvement of energy security in Europe. On the one hand, we contribute to higher utilization of our generation fleet. On the other hand, we will bring back additional generation capacity. At the request of the German government, we are preparing to bring back 900 megawatts of lignite capacity from the security reserve as of October '22. In the Netherlands, our 1.6 gigawatt Eemshaven biomass co-firing hard coal plant is back in full operations. This is a result of the Dutch government's lifting of restrictions from the Urgenda ruling at the end of June. We are also helping to diversify gas supply. This year, with more than 40 LNG cargoes, we have already provided 4x as many deliveries to Europe than the same period last year. Furthermore, we organized floating storage regasification units and will operate the FSRU in Brunsbüttel on behalf of the German government. Operations should start as early as the end of this year and require certain infrastructure investments. We are also engaged in further LNG import activities in the Baltic Sea in Germany. Besides floating regasification, we expect to take FID for the land-based terminal in Brunsbüttel in due course together with our partner, Gasunie and KFW. Operations are expected to begin 2027, and the planning includes the terminals prepared for green molecules in the long term. On the import side, we signed an MOU with Sempra for an additional long-term LNG supply contract from the U.S. from '27 onwards for 3 bcm annually. And finally, we are well on track in filling all our booked gas storages and meeting all fill level requirements. Let's move on to Page 7 and our core strategic agenda, our Growing Green strategy. We are making good progress with our investments in the expansion of green technologies. As we speak, we have 4.8 gigawatts of green capacity under construction. In the first 6 months, we have in total commissioned 1.2 gigawatts net. In offshore, we commissioned 500-megawatt of additional capacity in the U.K. For further growth, we entered the U.S. offshore market securing a 3-gigawatt seabed lease in the New York Bight auction together with our partner, National Grid. First turbine, first power. This is true for our Kaskasi construction site in Germany, where we celebrated its first power supply to the grid last week. If everything goes according to plan, the wind farm will start full operations at the end of the year. The onshore wind solar business has commissioned more than 600 megawatts in 6 months. And we have also seen capacity additions of 100 megawatts from batteries. The acquisition of the Magnum plant in the Netherlands will add another 1.4 gigawatts to our green portfolio. Additional value comes with its potential for hydrogen applications. Thanks to its construction design, Magnum is already hydrogen-ready today. The plant can be made technically capable of co-firing up to 30% hydrogen. Moreover, there may also be the possibility of converting Magnum to use hydrogen as its sole fuel by the end of the decade. Speaking of which, we have started construction of our first electrolyzer, a 14-megawatt electrolyzer plant in Lingen. And I'm very confident that we will see more news flow in the near future. To summarize what is clear, RWE is leading the way to the green energy world while navigating the current energy crisis. We have proven the company's resilience by benefiting from a technologically and regionally diversified business portfolio. In addition, we have eliminated the entire financial exposure to Russian counterparties and from Russian commodity supplies. With a wide range of activities, we are significantly contributing to improving energy security in Europe, meet with our generation portfolio by importing LNG and by setting up the infrastructure to import additional LNG directly to Germany and of course, with our steady new investments into green technologies. For the green build-out, we expect more than EUR 5 billion of investments this year. And with this, I hand over to Michael for the financial part of the presentation. Michael, please.

Yes, thanks, Markus, and also a warm welcome from my side. A strong operational performance in H1 drove operating adjusted EBITDA for the core business stood at almost EUR 2.4 billion and the RWE Group at almost EUR 2.9 billion. In offshore wind, adjusted EBITDA increased to EUR 632 million. Year-on-year, earnings were higher due to capacity additions, including the ramp in full consolidation for the full period. Furthermore, wind conditions were better than last year and power prices for unhedged volumes higher. For the onshore wind and solar division, adjusted EBITDA was significantly higher than last year mainly due to the absence of a one-off effect. In Q1, we took a hit from the Texas cold snap, which was only partly offset by book gains. This year, adjusted EBITDA was EUR 491 million. Higher power prices and new capacities and better wind conditions also drove earnings up. Adjusted EBITDA for the Hydro/Biomass/Gas division stood at EUR 755 million after 6 months of this year. The flexible generation business was up year-on-year due to stronger short-term asset optimization and higher margins. An outage at the Dutch gas plant, Claus C, has partially offset the increase. The plant was offline from the beginning of January until mid-April due to a steam turbine damage. RWE Supply & Trading reached an adjusted EBITDA of EUR 545 million due to a very strong trading performance. Adjusted EBITDA from the Coal/Nuclear division was EUR 501 million. Due to an intra-year timing effect and increased income from short-term asset optimization in the first half of the year, it has been particularly strong. Year-on-year, earnings from Coal/Nuclear were lower as a result of capacity closures. On the back of the strong operational performance, adjusted net income amounted to roughly EUR 1.6 billion. Depreciation was as expected and in line with our growing green investments. The year-on-year adjusted financial result is lower due to a higher interest rate environment and higher liquidity requirements in volatile commodity markets. In Q2, we received the dividend payment from our 15% shareholding in E.ON. For adjusted tax, we applied the general tax rate of 15% for the RWE Group. Adjusted minority interest increased in line with the higher earnings in the wind business. The adjusted operating cash flow was EUR 2.8 billion at the end of H1 and reflects the impact on net debt from operating activities. Let me remind you, it is adjusted for special items and other effects that balance out over time. The higher adjusted operating cash flow echoes the higher level of earnings. Changes in operating working capital -- operational working capital was positive at the end of June. The decrease from higher accounts receivable for power and LNG had a positive effect. Conversely, working capital increased from the selling of gas storages. This is temporarily offset by an increase of accounts payable from gas purchases. Net debt decreased to EUR 1.9 billion net [ worth ] at the end of June. This was driven by a strong operating cash flow and a decrease in pension provisions due to higher discount rates. In the first half year, we invested EUR 2.1 billion. Net cash investments include the payment for our lease in the 3-gigawatt seabed lease awarded at New York Bight. Our net position from variation margins from power generation hedging stood at EUR 80 million. This includes net variation margins from the sale of electricity as well as the purchase of the respective fuels and CO2. In the context of higher discount rates, pension provisions have decreased and were only partially offset by a negative performance on planned assets. For the full year 2022, we confirm the outlook we gave at the end of July. Adjusted EBITDA for the group is expected to be between EUR 5 billion and EUR 5.5 billion driven by the earnings increase in our core business. Adjusted EBIT is assumed to be between EUR 3.4 billion and EUR 3.9 billion. The adjusted financial results is now expected to be around minus EUR 450 million for the full year. The higher interest rate environment and the higher liquidity requirements stemming from volatility in commodity markets have caused this. This fits with the development we have seen in the first 6 months. Furthermore, higher gas prices will also require financing of higher gas inventories in storage facilities. In line with the earnings growth in our wind business, adjusted minorities are expected to be roughly minus EUR 350 million. Adjusted net income is forecasted to range between EUR 2.1 billion and EUR 2.6 billion. We have delivered a very good performance in the first half of the year and have demonstrated the robustness of our business model. On the back of a strong operating cash flow, we expect more than EUR 5 billion investments this year. Almost 90% of our CapEx in the first half of the year were eligible under EU taxonomy. Our investment discipline will stay a key driver to ensure value creation. Project IRRs typically exceed base WACCs by 100 to 300 basis points. And our growth is backed by a solid and strong investment-grade rating. Just recently, Moody's has confirmed the current rating. We will keep our dividend target of EUR 0.9 per share for fiscal year 2022, which allows us to continue investing in the green growth. And with this, let me hand you back to Thomas.

Thank you, Michael. We'll now start with the Q&A process. Operator, please begin.

[Operator Instructions] The first question comes from the line of Vincent Ayral from JPMorgan.

So a couple of questions. The first one is regarding the nuclear extension, which is highly discussed in Germany. Mr. Schulz made a comment again today. We believe it's highly likely, and I'd like to get a bit more color on retractors. Could it be extended from your standpoint? Can we bring back the reactors that were closed last year as well? And on the ones which are still running today, how much of the fuel rods do you have left for the coming winter? Can they run through the winter as the reactor of E.ON, for example? So we'd be quite interested in adding some color there and color as well on the framework for that. Would it be merchant? Or would you be basically receiving some sort of capacity payment would be -- so that's the first question on the nuclear. And the second is on [ PoliSci ] intervention. Rise -- deals are rising all the way through Europe. RWE seems more sheltered than a number of other players from these risks. But we'd be quite keen to hear your views there, especially in the U.K., where we have a change of leadership and where you have some exposure among other things on the blocks, if I may say. So those would be the 2 questions, please.

Yes. Thank you for the questions, which I can fully understand. But also, I mean, especially on all discussions, you have these politicians. It's difficult to comment in public, and this call is public. So let me keep it brief. On the nuclear extension, I don't want to engage in any kind of speculation what could be the political decision. You probably know that the German government has asked the TSO and together with the regulator to run a stress test result. Another stress test results are due within the next couple of days. And I think based on that, the government will take a decision what to do on the nuclear side. And please don't ask me what I think the outcome might be. I don't know. I don't have the basis information about the full overview of the stability of the grid and security of supply. The same actually is true on the windfall profit tax side. I think also that discussion is in the end of a political one. I think the arguments are all on the table. Difficult to determine what is windfall and which sector is affected. I mean, you have also many sectors benefiting from different developments. So in the end, we have to wait for the political decision and then we can communicate the consequences for us, but I don't want to engage in speculation what I think might happen.

I fully understand all that. But could you, on the nuclear, at least be factual about what technically how you can help basically, what is possible for you if you are asked to run the reactors, can you run them in Q1 next year on the existing roads? Are you technically able to bring back the older reactors, which have been decommissioned at the end of last year? This is just technically, what can you do if you are asked to help?

So I mean, technically, it also depends on the timeline. You have 3 elements. One is what could you make available if you simply run them also in the first weeks of the next year. And then maybe what you -- how long you could run them with one reconfiguration of the nuclear core. The second is new fuel roads. And the third one is potentially also bringing back capacity, which has already been closed or has totally different lead times. All this information is made available on their request to the government. They have to take a decision, and I don't speculate further.

Next question comes from the line of Peter Bisztyga from Bank of America.

Yes. So 2 questions from me. First one on your CCGTs. I understand that you've changed your future hedging strategy here. But I was hoping you could walk us through what the implications would be for those assets, particularly in Germany in the event that the government had to trigger an emergency in Q4 this year. So for example, have you unwound existing hedging on those assets? Or could you still have power buyback risks on those if they were curtailed? And would there be downside risk to your kind of revised guidance if those plants were unable to operate? So that's my first question. And then the second one, I might just try and approach the windfall tax question from another angle, which is could you give us some insight as to what your justification is why you shouldn't be windfall taxed in the U.K. on your ROP or renewables obligation power output because I think it's, from my perspective, difficult to argue that you're not going to be making a windfall on those older assets. So just interested to hear what justification you might be giving to the business secretary when you meet him this week.

Thank you, Peter. It's a nice try to approach the same question from a different angle, but I think all the arguments have been made. You want to have a stable and firm investment environment and not scare potential investments because rules are changed retroactively. And then the question is, I mean, how you determine what is a good and acceptable profit and what is a bad profit which should be taxed at a higher rate. I mean, if you have more profit, you're going to be taxed on a higher profit that you pay more anyhow. And I mean, what is the difference between providing energy to the public or to provide, let's say, online services, which have recorded high growth rates and huge profits under the corona situation while others have suffered. But let me leave it there. I don't want to go any further. And I think it's also all the arguments are in the public already in the discussions in the U.K. but also here in Germany. But it's now a political government question, and they have to take the decision. And then we deal with it. On the CCGTs and the hedging, I mean, you never want to be in a situation where you are curtailed on the gas supply side, but you still have the power delivery obligation and then you have to buy back in the market. And that's why we have adjusted our hedging policy to avoid that situation in any circumstance. So we have really reduced significantly the hedge ratios by, I mean, putting in higher buffers for unavailability but not hedging our CCGTs in Germany at all. So we don't expect -- I mean, the only financial implication you can expect is if power prices come down now, we would have made more profit hedging. So that is a foregone upside. But we do not expect that we are in a position where we have to see buybacks at higher prices and that we have downward trend in our guidance. We are here really with the guidance but also with our hedging policy on the very conservative side.

Okay. So just to be 100% clear, you're sort of comfortable that there's no exposure even in kind of Q4 this year on that front?

Correct, yes.

Next question comes from the line of Olly Jeffery from Deutsche Bank.

Two questions for me, please. The first one is just on the 900-megawatt lignite that could be coming back into operation in October. A couple of kind of points around that. First of all, what's your kind of base level expectation for how much you think that plant might run? On my numbers, I could potentially see that running a couple of terawatt hours. Is that how you see that? And then when you think about -- you look at the German Q4 power price, it's up to kind of EUR 500 a megawatt hour. If you look at the short-run marginal cost of lignite with mainly carbon cost there, you can see how you can get to quite a large spread that those lignite assets could get. And I was just wondering, do you all see that potential upside? And when thinking about the 2022 guidance, have you been quite conservative in how you thought about how much that lignite asset might run? And that's the first question. And then the second question is I'll go with this. The second question is, do you think that with some of the lignite assets potentially becoming more profitable and the issue around 2030 around closing lignite that the current environment makes it more easy to have conversations with government about potentially taking over the lignite assets at some point? It will be great to get your thoughts on both of those questions.

Okay. Olly, let me take the first question on the lignite. I mean, the situation as follows. The government has put the law in place that basically allows the government to bring back the capacity. And the government has also communicated its intention to bring -- to allow us to operate the lignite power station starting October 1. But there hasn't been a formal order yet. And therefore, for us, it's yet unclear what -- how that exactly will be designed. And that also includes the question for how long will they allow us or order us to run them and under which condition that is. Therefore, we are very reluctant about taking any assumptions around this one. And when you calculate the number for 2022, you also have to bear in mind, I mean, the costs are covered by the government for providing that service. But the moment you run them, half of your income is accounted against the cost. You would have -- you occur. So therefore, the upside we see in 2022 is not so significant. And that is also when you talk about the guidance, we haven't included a significant upside there because we also don't expect that to be so large in the course of the year.

And I take the second question, Olly, but maybe let me also comment on the forward curve. I think calculating profits using the power forward curve is, I think, not wise. Why? I think the forward curve is distorted by very low liquidity. And when you calculate the fundamentals, you should come out with much lower power prices. And I think the moment the market goes back to normal, we also should expect a normalization there or when you actually deliver the power in the [indiscernible], so the physical reality strikes. I think we see a reason -- more reasonable prices because in the end, I mean, seeing power prices, which is significant more than a marginal, very low efficient gas plant post CO2 emission prices is very difficult to justify other than you really expect a ban on gas-fired power generation and the market needs to clear with demand destruction. On the lignite discussion, yes, you can be ensured that we have ongoing discussions with the German government on many things, I mean, security of supply, gas as well as power, bringing back units. And we have also on the agenda the topic 2030 and everything which is around it. But please also understand that when you look at that from a priority point of view, the 2030 and foundation question is probably not top priority. But be rest assured that we have it on the agenda, but at the current point in time, there is no news we can communicate.

The next question comes from the line of Rob Pulleyn from Morgan Stanley.

Just 2 for me. The first one, if we're going to address this to Michael, the second quarter appears to have a large outflow in other changes in net debt. If we look at the slide versus where it was in 1Q, could you talk to the drivers of that? I presume it's something to do with variation margin flow. And as an ancillary to this question, you previously have given the variation margin balance for your explicitly hedged period, and it would be great to have an update on that number. The second question is not around nuclear. It is around gas storage and the Kelag business that you have. And I just wondered how the storage filling was going at that facility, and I believe the one you have in the Czech Republic as well? And how is the carrying value of that gas, which is surely rising with the gas price accounted for.

Yes. So Rob, on the first question, I mean, I mentioned that the balance for the variation margin from our hedging activities is only EUR 80 million at the end of the first half. So if you compare that against the year-end number of EUR 0.2 billion, we have seen an outflow on this one.

On the second question, Rob, I mean, our gas storage has currently filled more than 85% so far above the threshold for this point -- for the minimum threshold at this point in time. And we are very -- I mean, the check points are even filled at a higher level. So we will reach the minimum level without problems ourselves. To the question of the value, please keep in mind that, I mean, gas storage business doesn't work that you fill in gas, keep the position open, and you see where the price goes. The moment you inject, you typically sell on a forward curve and make a margin, and we account that mark-to-market. So you always have the fair valuation of what we have at gas storage business at the end of every quarter. So please don't expect huge upside here from having unhedged gas in gas storages. But of course, it's a huge burden, as Michael has said, on working capital because it carries a lot of liquidity needs.

The next question comes from the line of Martin Tessier from Stifel.