RWE Aktiengesellschaft (RWE) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. Thank you for dialing in to today's investor and analyst call. Today, we are pleased to discuss 2 key pillars underpinning our Growing Green strategy. Today's topics are RWE's coal exit in 2030 and our step-up in U.S. renewables. Our CEO, Markus Krebber and CFO, Michael Muller, will guide you through the key points. and both will answer your questions afterwards. Markus, over to you.

Yes. Thank you, Thomas, and also from my side, a warm welcome. Today is really an important day in the history of our company. At our Capital Markets Day in November, we announced our Growing Green strategy. And at that time, we significantly upgraded our growth ambitions in green energy. And we set ourselves ambitious sustainability targets. One of these targets was to bring our emissions in line with a 1.5-degree compliant pathway. Today, I'm happy to report major milestones on both fronts. This morning, we signed an agreement with the German Ministry of Economic Affairs and Climate Action and the corresponding Ministry of the State of North Rhine-Westphalian to bring forward RWE's coal exit to 2030. And on Saturday evening, we announced the acquisition of Con Edison Clean Energy businesses, which significantly expands our U.S. footprint and growth ambition in the U.S. market. Let me start with today's news. European energy supply is in a crisis, and at the same time, climate protection remains one of the main challenges of our time, and there is a common solution to both. We must invest our way out of the crisis and thus accelerate the switch to more sustainable technologies. To do this, the right cost must be set, and we will be more sustainable, modern and competitive by the end of this decade. During the crisis, RWE is providing support with additional lignite capacity to plug shortfalls and increase security of supply. For this reason, we brought back 900 megawatts of capacity from the security reserve to the market at the beginning of October at the request of the German government. With today's announcement, we have agreed with the government that we will postpone the decommissioning of the 2 600-megawatt unit to March 2024. These units will be supposed to shut down over the near term. In total, it is 2.1 gigawatt more lignite capacity for a limited period. And naming the obvious, if Germany needs more electricity from lignite in the short term, it will ultimately need an earlier coal phaseout so that the country's climate targets remain achievable. And that is what we are doing, preparing to end lignite-based power generation in 2030, 8 years earlier than previously planned under the existing law and contract. Aside from that, the coal phaseout 2030 is a basis for bringing us on to a 1.5-degree CO2 emission path, the ambition we set ourselves at the Capital Markets Day last year. There are 2 clear prerequisites for the coal phaseout to be successful, massive build-out of renewables for low-carbon electricity generation and generation to ensure security of supply. On renewable energy, the government has started relevant initiatives to accelerate the build-out in Germany. Higher build-out target, higher offshore auction volumes and the ambition to accelerate permitting will lead to more renewable electricity generation by the end of the decade. On security of supply, the German government is creating an investment framework which covers the so much needed flexible backup generation such as hydrogen-ready gas plants. We are preparing for around 3 gigawatts of new flexible hydrogen-ready generation capacity in North Rhine-Westphalia on previous coal-fired power generation sites. These are ideally suited with existing grid connections. For our employees, the coal phaseout 2030 has great implications. Regulations that apply to date, such as the so-called [indiscernible] in case of early retirement or trainings to qualify for other jobs must be applicable. We stand up for the interest of our employees and strive for socially acceptable solutions. In addition to all that I just announced, one word on the foundation model. The option remains open. Further down the road, once the prices to an end and all parties involved have again free capacity, we agreed with the German government to look into a potential foundation solution. And now Michael will explain the financial implications from the accelerated coal exit.

Good afternoon also from my side. All of these will benefit from additional margins from the extended operations of the 1.2-gigawatt lignite capacity, which will operate in the wholesale markets. Due to the earlier coal exit, we have timings and operational effects that leads to an increase in mining provisions. Decommissioning costs post 2030 can no longer be accounted for as operating expenses but must be provisioned for. This is primarily an accounting effect. Accumulated cash-outs for recultivation will only increase to a limited degree. Overall, the provisions will rise by EUR 1.3 billion to EUR 6.3 billion. The increase will be booked in nonoperating results. We have finally reinvented our mining provisions with a portfolio of financial assets. Therefore, our mining provisions and related financial assets are excluded from RWE's net debt definition. The financial assets we currently use to cover these provisions at the [ Eon stake ] and the EUR 2.6 billion claim against the German government. Despite the increase, the liabilities will remain fully covered with the financial asset portfolio. The German government has reconfirmed the EUR 2.6 billion compensation payment and will support driving the EU approval proceedings. With the clarity on the accelerated coal exit, we expect the timely conclusion of the EU approval proceedings in the first half of next year. As mentioned by Markus, we stand up for the interest of our employees and strive for socially acceptable solutions. We will add EUR 0.2 billion additional restructuring provisions. And with this, back to Markus.

Yes. Thanks, Michael. Ladies and gentlemen, now to the second topic. Last Saturday, we have announced the acquisition of Con Ed Clean Energy businesses in the U.S. It represents a massive boost for our green growth in the United States, and this underlines that we are stepping up our commitment to accelerate the energy transition globally. Relative to our Capital Market Day, the U.S. has become even more attractive. It is one of the fastest-growing markets for renewable energy worldwide. There's a strong push to reindustrialize the U.S. economy. As a result, this will lead to a significant step-up in energy demand. There's also a massive push for green energy capacity build-out. And here, I'm talking about wind, solar, batteries and hydrogen investments. To get things going, the U.S. government has taken a decisive step and introduced the inflation reduction act. It offers an attractive, stable and long-term investment framework for our projects. One element of success is to have a strong market presence in the countries in which we operate. In the U.S., we have had a major foothold in onshore wind for years. By adding a good 3 gigawatts of mainly solar capacity with the acquisition of our U.S. portfolio almost doubled to more than 7 gigawatts. And with this, we take a leading position in the highly attractive U.S. market. This is important because size and diversification matters in the competitive renewables business. Our U.S. development pipeline also received a significant boost by climbing up to more than 24 gigawatts. And we expand our team with roughly 500 talented professionals from Con Edison Clean Energy business, who brings a wealth of experience with them. Together, we will accelerate growth in U.S. green energy. Together, we will add an average 500 megawatts per year on top of Growing Green. And now let me hand back to Michael for the financial side of the deal.

Yes. Thank you. The purchase price of the acquisition is based on an enterprise value of USD 6.8 billion, implying an attractive EBITDA multiple of 11. After closing, we expect the yearly EBITDA contribution from the acquisition of around USD 600 million. The transaction is net income accretive. And to be clear, that is after purchase price allocation and post dilution from additional shares. We are very pleased by the diversified portfolio of Con Edison Clean Energy business, providing a high share of secured revenues from long-term contracts. More than 95% of operating capacity is contracted with low-risk PPAs. The average remaining contract tenor is 17 years. The acquisition as well as future growth are fully funded through debt instruments and on capital -- equity capital measures. We are delighted that QIA, Qatar Investment Authority, is supporting RWE's growth ambition through the EUR 2.4 billion equity investment via a mandatory convertible bond. The bond has a maximum duration of 1 year, and the interest is 2.63%. Our dividend commitment remains EUR 0.90 per share at minimum. Synergies from the transactions should not be assumed. Our business is a people business, and we need the powerful team to realize our growth plan. And growth, that is certainly a good keyword for you, Markus.

Exactly. Due to the transaction, our green portfolio will be more than 55 gigawatts in 2030. And overall, a big benefit of this transaction is clearly the balancing of our global green generation portfolio by technology and by geography. In 2030, wind, solar and batteries as well as flexible green generation will total more than 55 gigawatts. Each technology will make up roughly 30%. And geographically, around 1/3 of installed capacity will be located in Continental Europe, 1/3 in the U.K. and 1/3 in the U.S. This balance will surely increase the robustness of our business. Taking everything into account for day's announcements will ultimately increase our resilience and the long-term attractiveness of our stock. We have a clear plan by 2030 and continue with investments into green technology, and we consistently execute our strategy. And this fills me with pride. And I thank our employees for their tireless efforts. For you, our shareholders, we are creating value by delivering on what we promised, profitable and green growth. And with the coal exit in 2030, I'm confident that we will also welcome new shareholders into our register. And now we are happy to take all your questions. Back to Thomas.

Thank you, Markus, and thank you, Michael. Operator, we can now start the Q&A session.

[Operator Instructions] The first question comes from the line of Alberto Gandolfi of Goldman Sachs.

So there's so much going on to talk about. I'll clearly stick to 2 as a usual rule. Congratulations on the deal. Clearly, a very interesting one. Maybe I'll start from actually something slightly different here. If I look at your previous November 2021 Investor Day and CMD, I know you're going to host one, I guess, with the full year results next year. But would you be able to elaborate a little bit on the underlying drivers of the key divisions. You're delivering 500-megawatt more a year just from the U.S. There's a legislation being drafted in Germany to accelerate speed up permitting. Now we are hearing that there's probably 45-gigawatt connection request of large-scale wind and solar year-to-date in Germany. You're probably a decent share of that. Energy prices are higher. Maybe you can talk about the EUR 180-megawatt hour cap. Is that confirmed? Yes, no? If so, I mean it looks like the EUR 4.3 billion, EUR 4.4 billion consensus EBITDA for next year and 4-ish going forward seems extremely prudent to say the least, not to talk about trading, CCGT. So I guess, can you tell us the key drivers against the plan? Besides rising interest rates, it seems to me that pretty much everything else has gone your way. Last but not least, an extra probably $10 an hour of lignite that my numbers could be per se, like EUR 600 million, maybe just for a year, but still, if you can talk about a little bit, this new world we are living in. And I'm not asking to front-run anything you're going to say next year. Just I would love to see how maybe, Markus and Michael, you're still thinking about the world today. The second question is a little bit more specifically on the U.S. 500-megawatt a year. If I assume a 100% success rate on the pipeline, it seems to indicate that if I'm not mistaken, now we're talking about a sort of an extra 7-gigawatt pipeline. So what I'm trying to understand here is this would be a 14-year conversion of the pipeline. Is there any reason why, is it because some projects are too early stage? Is it balance sheet? Is it permitting? Or can the 500 megawatts a year at some stage become 1 gigawatt and when?

Yes. Thank you, Alberto. I'm not sure whether the first one was a question, or you have actually already answered your question yourself because you mentioned the 3 driving -- the 3 drivers. One is, of course, on a gross basis, not only because of this acquisition, but all other aspects, there is more growth possible for us. Secondly, we probably see a very healthy cash flow generation over the coming years. But the unknown now is what will the windfall tax or however you call it price intervention will look like. And these are the driving factors. And we will need to wait until we have clarity because when we present something to you, it needs to be financially consistent. We don't want to show you something which is not fully thought through. These are the driving factors and we probably come out almost say, in the second half of next year, not with full year results because we are still in a very difficult year when it comes to energy supply in Europe ahead of us 2023. On the interest rate side, I'm not too sure whether interest rates are moving against us because you know that we have very long-lasting provisions. And when you look at the duration of the liability side, it is actually more or less the same on the asset side. So what we lose on the asset side, and please keep in mind that many of our prime assets especially in the U.K., are inflation to just offtake that we gain the same on the liability side. On the U.S., I mean the 100% success rate for a typical pipeline is too high. But of course, the pipeline will be filled up by new origination activities. But there is probably a good chance that when we have now finally looked into the joint business at the contribution from Con Edison in a couple of years out can be higher than 500 megawatts. So maybe after 4 years, can go beyond 500 megawatts but give us some time because we want to look with the joint management team of the U.S. business in the business plan and reconfirm our assumptions and when we come out. But I fully agree that it is definitely on most of the aspects, probably all more positive than expected.

The next question comes from [indiscernible] from Bernstein.

So I have a couple of questions on the topics that we're discussing. So firstly, on your Con Edison deal. How sensitive is the EBITDA and net income accretion to financing conditions? And how long do you wait to raise new debt, particularly if the base rate keeps on being high? And the second question on your lignite closure. So to what extent do you think the incremental EBITDA from the lignite extensions could offset some of the provisions increase? And so when you say that your provisions have increased by EUR 1.3 billion versus like year-end, is that actually driven by the higher cost of the accelerated closure? Or is it also offsetting some of the collision decrease versus last year given the increase in rates?

Yes. I think I take the question. Well, first on the EBITDA -- so the accretion. I mean on the financing structure widens the following. We have the purchase price. And obviously, with the mandatory convertible, we already have secured quite a bit out of that financing. On top, the Con Ed business, the Clean Energy business also has existing debt, which we hope we can transfer. Obviously, that needs to be seen, and that's why we also have a bridge in place for 2 years to be on the safe side, but we do envisage that we can keep that debt and transfer that going forward. So therefore, in the end, we talk about new debt to be admitted of around USD 1.8 billion. Now if you look at the current market environment, I think it's not the best timing to emit bonds. So therefore, I would foresee that we first await closing of the transaction and then look into the market and find the right timing when we then go to the debt market to finance the remaining part of the acquisition. On your second question around the provisions. I mean, first of all, as I described, most of the provision increase really comes from that shift. Previously, due to housing principles, we had activities post 2030 that could be shown as operating results. And since we don't have any operations now anymore, post 2030, we have to provision for those. But that doesn't change anything to the absolute cash flow numbers. So it's just a timing or a shift in -- a representation in the accounting numbers of the actual cash outs. There is a slight increase in cost because we have to slightly change the design of the recultivation, but the primary driver really is that timing effect. And earning-wise, as I mentioned, the increase in provision will be shown as nonoperating results that doesn't impact this year's results, at least not the adjusted EBITDA, while obviously, the additional income, we'll get from the additional operating hours will be shown in the adjusted EBITDA.

The next question comes from the line of -- I'm sorry if I mispronounce your last name, Piotr Dzieciolowski from Citi.

Congratulations on the transaction. I have 2 questions. One on the Lignite Foundation and the other on the transaction. So on the lignite foundation, I'd like to ask you, it looks like based on the forward curve, that there is all of a sudden a positive equity value in this business. How does this change your view on the possibility of creating this foundation? And would you consider also a breakup option to kind of eliminate lignite out of your operations? And the second on the Con Edison transaction, I was trying to get my head around the 17-year duration for the support schemes and also realized prices. Can you say anything about the average level of realized pricing in megawatt hour and how that will evolve? And in other words, is the EUR 600 million you're guiding to is going to be lower? And if so, how much over the next couple of years and medium term?

Piotr, thanks for the question. I'll take the first one. So where are we with the equity foundation? You know that it's part of the coalition agreement on federal level as well as on state level of North Rhine-Westphalia to look into that option. And as I've said, that remains on the table. We have 2 problems currently, one problem -- not problems. But one challenge is foundation solution is highly complicated. And so it needs a lot of work. And currently, everybody is busy on government side but, to be honest, also on our side, with the additional tasks we have with the energy crisis, I mean, on top of accelerating renewables and what we all do. So there is definitely no capacity resources to look into it. And we said, we're going to look into it at the moment we have resources because it's part of the political will to do it. And also, we said we are open for solutions. The other aspect you are raising is very important. I think it is -- of course, it is easier to give the government the lignite assets, so to say, for free and fund the provisions. When you have a positive value of the lignite operations of a couple of billion, the government paying us for that or implicitly paying us by not fully funding the provision is politically, of course, much more complicated. You are also implicitly hinting to alternative solutions and the foundation. Please keep in mind, whatever we do with lignite needs government approval. So I, again, would rule out anything that they're going to accept anything other than a foundation where they are involved. Other -- I think every other solution spinoff sales or what will be blocked because of the long-term task of renaturation and also, taking care of the effect on workers and regions. So in summary, we're going to work together on a potential lignite foundation solution when the crisis is in a state where we have on both ends, government and the company resources to do so.

So Piotr, I'll take the second question on the PPA and what is the implication for the EBITDA. I mean, first of all, you know that when we report the IFRS EBITDA, that also includes tax equity components of PTCs, ITCs and makers. So therefore, not the full EBITDA can be kind of translated directly into an average price. But indeed, if you do the calculations, you'll see that the average price of the PPA is higher than in the current environment. That's simply because they were concluded already a few years ago when price levels were still much higher. Concerning your question going forward, I think it's fair to assume a fairly stable EBITDA number that will grow in the years to come simply because we bring additional projects online that then over time should also increase the EBITDA contribution from the business.

Next question comes from the line of Ahmed Farman from Jefferies.

Congratulations. I was just hoping maybe we could sort of get some of your thoughts on the legislative process. And more at the level of Germany and any EU state related process that would be required for the new coal phaseout agreement. Any thoughts that you can share on the timing of that would be very helpful. And would it be sort of fair to think that once this legislative process is in place, that's after which we should probably sort of start thinking about the lignite foundation. So that's my sort of first question. My second question is actually on the U.S. transaction. I think you mentioned, with this you are adding supplementing your onshore wind fleet with solar assets. And I wanted to ask you, how do you think about this will add to portfolio resiliency in the U.S.? And how do you sort of think about the benefits of that in the context of this transaction?

Yes. Thank you, Ahmed. So the process is the following: we need 2 amendments. One is to the coal exit legislation to the law, where you have the end date for the closures of the unit that needs to come pretty fast because it has 2 changes. One is moving the exit date of the 2 600-megawatt blocks out because, otherwise, they would be closed the end of this year, and they should not be closed and then, on the other hand, bringing the exit date for the 3 -- 1 gigawatt unit to 2030. We see option for the government to put them into reserve if they cannot get the act together to build new gas plants. And then on the other side, we need to amend our contracts to reflect the changes, but that is, I think, just a formality. I expect here a swift process because it will only affect the RWE plans. This is an RWE-only solution. So the Eastern European lignite operator is not affected by this solution. So I expect the government work on it from today onwards, and we'll have it done by year-end. And on the EU state-aid approval process, so the delay you have seen and also, our dissatisfaction was actually the case since a year's time because it was clear that the new coalition would strive for the coal exit 2030. And the European Commission clearly said, I mean, look, if everything is in limbo, why should I approve anything because I need to prove the next step anyhow. So we wait for the final results. Now we have the final, final result. And here, the key expectation is that we see a very swift process, and solution in the first half of next year. But please don't interpret that, when that is done, we look into the foundation. Looking into the foundation is really driven by when do -- especially when the government has free resources to do so. I can clearly tell you they don't have people lucky overwork on all the additional tasks they have. On the U.S. portfolio, I would like to answer that twofold. One is, I would not so much stress that the U.S. business in itself becomes more resilient. We have better growth outlook. I come to that in a minute. But our overall portfolio, and you know the difficult situation we are in, here in Europe, our overall portfolio creates much more optionality for investments and by that, makes the overall company more resilient because we have a good split of them, 1/3 based in the U.S. by 2033, 1/3 U.K., 1/3 European Union. In the U.S. itself, we also like balancing the portfolio between the technologies. So we have a better solar platform now and also across regions because Con Ed is less active in the ERCOT market. We are very involved there. And by that, we have now a U.S. platform, which has a balanced growth outlook on the wind side as well as on the solar side but also across all the different states in the U.S.

The next first question comes from the line of Louis Boujard of ODDO.

Yes. Maybe I would like to come back a bit more in detail regarding the split, if possible, to what extent you can give us. And the EBITDA for next year, 2023 and the $600 million to be expected pro forma for the acquisitions between what could be related to the ITC, PTC, what could be related to the PPE contract and what could be rated eventually to the services and put on [indiscernible] down, but I don't think that is any form down to be expected in these figures. But if you could give a bit of appreciation of the share of this different stream of revenue in the EBITDA next year for these acquisitions. And also, regarding the cap to be expected EUR 180 per megawatt hour, of course, we understand that, that going to take the EUR 1.3 billion additional hit in terms of provisions. At the same time, you're going to be able to generate more cash flow with the lignite power plant in the short terms. So it seems likely that the EUR 180 per megawatt hour could be fair. But at the same time, government has the option to eventually put it at a lower level. In your view, what is the likelihood that the government will take this chance and will eventually put the cap at a lower level in Germany for the lignite power plant? And what is the likelihood of having hit that at the max level, 180?

Yes. So I take the first 1, on USD 600 million. So you can assume that roughly USD 100 million comes from ITC and then PTC and the makers, and the rest is from the operational business. The service business has only a minor contribution. So the primary part is really the operating assets.

Then on the second question on the cap. The devil is really in the detail because the cap on 180 doesn't tell you anything. It's a question whether it's an annual cap. It's quarterly, weekly, an hourly cap. This will all result in totally different incomes you can keep. There is a discussion of giving us also an upside above the cap to give right incentives. So let's wait. But I think if you calculate, on average, 180, that is probably what is needed to keep the most inefficient lignite plant in the market because the last thing you want with a cap that you actually lose capacity in the market in the con type situations. So -- but whether it's 180, 160 or 200, that in the end doesn't make a huge difference. And the more relevant driver is how is it calculated and how are the hedges considered. But from being a bit involved in the discussions and where the government wants to go, I think what we're going to see as an outcome is probably very reasonable. And as somebody has already said on the call, it will result into earnings, which probably are above street consensus in the case of RWE.