RWE AG (OTC:RWEOY) (RWE.DE), a leading energy company, has reported a robust operating performance for fiscal year 2023, exceeding financial targets and expanding its green capacity significantly. The company added 6.3 gigawatts of renewable energy capacity and reduced CO2 emissions by 27%, demonstrating its commitment to a sustainable energy future.
Despite a 30% drop in commodity prices since December, RWE maintains its 2024 earnings per share (EPS) guidance of €2.6, albeit at the lower end of the range. The company's long-term expectations are unchanged, with a clear focus on their mid and long-term EPS targets for 2027 and 2030.
Key Takeaways
- RWE AG's operating performance in 2023 surpassed financial targets with a 33% year-on-year increase in adjusted EBITDA to €8.4 billion.
- The company added 6.3 GW of green capacity, reducing CO2 emissions by 27%.
- RWE maintains its 2024 EPS guidance of €2.6 despite a decrease in commodity prices.
- Significant progress in the green portfolio expansion, including the acquisition of Con Edison Clean Energy Businesses.
- Adjusted net income for 2023 reached €4.5 billion, with an adjusted operating cash flow of €7.3 billion.
- Net debt increased due to significant investments in growth, yet the company confirms a dividend target of €1.10 per share for 2024.
- RWE is set to phase out coal and nuclear segments from 2024, impacting future adjusted EBITDA and net income reporting.
- The company expressed confidence in delivering earnings within the guidance range set during the Capital Markets Day.
Company Outlook
- RWE confirms its guidance for 2024, expecting adjusted EBITDA, EBIT, and net income at the lower end of the range.
- Long-term EPS targets for 2027 and 2030 remain a priority, with a focus on maximizing EPS quality.
- The company reassesses capital allocation to adapt to the evolving risk-reward environment.
Bearish Highlights
- Commodity prices saw a 30% decrease since December 2023, influencing the company's outlook.
- Weakness in flex gen earnings due to falling power, gas, and carbon prices, with profitability nearing a floor.
Bullish Highlights
- RWE has a high share of secured revenues in wind and solar, reducing power price exposure.
- Renewable projects for data center PPAs in the US and Europe show increased interest.
- The company is focused on bottom-line growth and potential options for capital allocation to maximize shareholder value.
Misses
- The company did not provide specific details on power prices or volume assumptions for 2027.
Q&A Highlights
- Discussion on the company's investment program and income streams, emphasizing fixed income streams from renewable investments.
- The closure of coal capacity and the impact on emissions and earnings were addressed.
- RWE is confident in its trading business guidance for the year despite market pressures.
- No current plans to sell down the stake in E.ON, but financial asset utilization strategies are being considered for the late 2020s.
- The company refrained from commenting on bid strategies for the UK government's AR 6 auction due to the sensitivity of the information.
RWE AG's financial and operational achievements in 2023 reflect a strong commitment to expanding its renewable energy portfolio and reducing its carbon footprint. As the company transitions away from coal and nuclear energy, it continues to actively manage its market price exposure and hedge strategies to maintain financial stability. With a clear vision for 2027 and 2030, RWE is poised to navigate the evolving energy landscape while delivering value to its shareholders.
InvestingPro Insights
RWE AG's strategic focus on expanding its renewable energy capacity and reducing carbon emissions is reflected in their financial metrics and market performance. According to real-time data from InvestingPro, RWE AG is trading at a low Price / Book multiple of 0.69, signaling that the company's stock may be undervalued compared to its book value as of the last twelve months ending Q3 2023. This aligns with the company's efforts to grow its green portfolio, which could potentially increase asset values over time.
The company's P/E Ratio stands at an attractive 5.18, suggesting that RWE AG's shares might be trading at a lower earnings multiple than some of its peers. This could indicate an opportunity for investors looking for value in the Independent Power & Renewable Electricity Producers industry, where RWE AG is a prominent player.
InvestingPro Tips also highlight that RWE AG operates with a moderate level of debt and has liquid assets that exceed short-term obligations, providing the company with financial flexibility to pursue its strategic objectives. These insights are particularly relevant given the company's ambitious plans for expanding its green capacity and phasing out coal and nuclear segments from 2024.
For readers interested in a deeper analysis, InvestingPro offers additional tips on RWE AG, which can be accessed at https://www.investing.com/pro/RWE. Using the coupon code PRONEWS24, users can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, to explore a total of 9 InvestingPro Tips that cover various aspects of the company's financial health and market performance.
Full transcript - RWE AG PK (RWEOY) Q4 2023:
Operator: 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 fiscal year 2023. I will now hand you over to Thomas Denny. Please go ahead, sir.
Thomas Denny: Thank you, Sergei. Good afternoon, ladies and gentlemen. Thank you for joining RWE's conference call on full year 2023. As always, our CEO, Markus Krebberl and our CFO, Michael Muller, will guide you through our presentation, After which, we'll start our Q&A session. And with this, I hand over to you, Markus.
Markus Krebber: Thank you, Thomas. And also from my side, a warm welcome to everyone. 2023 was a remarkable year. We have delivered a strong operating performance. We have significantly exceeded our financial targets. We have added 6.3 gigawatt of green capacity to our portfolio. And we have cut CO2 emissions by remarkable 27%. Since December ‘23, commodity prices have come down by around 30%, but we can keep our 2024 guidance, which we outlined in our CMD last year. We now expect to be at the lower end of our guidance range, which is about 5% below midpoint and translates into €2.6 earnings per share. We have a high share of secured revenues in our wind and solar business and consequently only limited power price exposure. And our flexible generation business benefits from an increasing share of secured long term revenues. Overall, we do see a faster normalization of power prices. Our long term expectations have not changed. We remain committed to our mid and long term EPS targets for '27 and 2030 as outlined at our CMD. Let me be clear, our focus is on bottom line earnings per share. Therefore, profitability of our investments is key. And in light of an evolving risk reward environment, we do constantly reassess our capital allocation. But please do not expect us to change costs on an ad-hoc basis because of short term developments. We have made significant progress in expanding our green portfolio. In ‘23, we even increased our investments and we closed the acquisition of Con Edison Clean Energy Businesses. Investments contributed to a strong earnings growth in '23. Adjusted EBITDA was up 33% year-on-year. And our green transformation continues to drive a significant reduction in CO2 emissions. Year-on-year, they are down 27%. Also long term, we have committed to a more ambitious CO2 reduction target in line with the 1.5 degree emission reduction pathway. The next milestone on our decarbonization path is the closure of 2.1 gigawatt lignite capacity by the end of March and a further 0.3 gigawatt by the end of this year. Since December last year, we have seen a significant decline in European gas and carbon prices. This has led to power prices dropping by around 30%. Thanks to the robustness of our earnings mix, we keep our full year guidance for '24, but we expect to be at the lower end of the range. For adjusted EBITDA, we now expect around €5.2 billion and for adjusted net income €1.9 billion. This translates into €2.6 earnings per share. In our wind and solar business, we have limited market price exposure. Our strategy is to lock in secured revenues in wind and solar long term through CFDs, feed and tariffs, PPAs and tax credits. And we actively manage our remaining price exposed volumes by applying hedge strategies. Diversification across various regions further reduces volatility. Page 7 of the presentation provides full transparency about the price exposed positions, generation margin and its sensitivities. Let's move on to the flexible generation business. Here, our long term market expectation have not changed. We see long term earnings growth and we see an increasing share of secured revenues reflecting the nature of the business, providing firm capacity and firm flexibility. For example, in Germany, we secured attractive margins in a tender for capacity reserve until 2026. And in the UK, recent T-4 capacity market auction has secured revenues of more than 400 million pounds for the '27 and '28 period. Our mid and long term targets for '27 and 2030 for flexible generation remain unchanged. What has changed is a faster than expected normalization of power prices in Europe. From 2024 until '26, we now expect an average adjusted EBITDA of €1.4 billion. Our investments in '23 have almost fully secured long term contracted revenues in line with our investment strategy. Only less than 5% of the wind and solar capacity additions in '23 have price exposure. More than 95% have long term contracted income streams. Our strategy will lead to an increasing share of contracted revenue for the entire portfolio. Also all wind and solar projects under construction will have the high share of contracted revenues. For all our offshore projects, which without CfD government offtake, we are targeting secured revenues via PPAs before commissioning. This is also true for our Danish offshore project Thor, similar to what we have done at our Kaskasi offshore wind farm in Germany where the full capacity has been sold via PPAs at attractive long term prices. Our investments will lead to attractive long term earnings growth, and the quality of our earnings will improve continuously. The share of secured revenues will increase further from our renewable investments as well as the earnings mix in flexible generation. And the portfolio will decarbonize in line with the 1.5 degree pass rate. Despite the faster normalization of the commodity price environment, our long term expectations have not changed. In light of an evolving risk reward environment, we do constantly reassess our capital allocation. With a clear focus on EPS growth, we do confirm our earnings per share targets for '27 and 2030. And now, over to you, Michael.
Michael Muller: Thanks Markus, and good afternoon from me. In 2023, the business performed extremely well. We clearly exceeded our guidance. Adjusted EBITDA across all core segments, especially driven by strong earnings from hydro biomass gas, supply and trading as well as significant capacity additions. Strong earnings also use strong cash flows to finance future growth. On the back of a strong business performance, adjusted operating cash flow amounted to €7.3 billion. Fitch and Moody's (NYSE:MCO) both confirmed our credit rating of BBB+ and Baa2 with a stable outlook, proving our solid credit quality. At the end of 2023, the European Commission granted stated approval for the €2.6 billion compensation for the earlier access from lignite fired power generation agreed in 2022. Subsequently, we received the first installments with a total amount of €700 million. For 2024, we confirm our guidance and expect it at the lower end of the guided range. Let's now take a closer look at the 2023 numbers. In offshore wind, adjusted EBITDA increased to €1.7 billion, mainly due to better wind conditions, capacity additions and higher realized power prices. Onshore wind and solar recorded an adjusted EBITDA of €1.2 billion. The increase is driven by capacity additions, including Con Edison Clean Energy Businesses. Lower realized power prices had a negative effect on results. Adjusted EBITDA of the hydro biomass gas business was €3.2 billion. The excellent result was driven by strong asset optimization and hedges conducted at attractive price levels. On the back of a strong performance, the supply and trading business reported an adjusted EBITDA of €1.6 billion. Last year's results were negatively affected by one off relating to sanctions on Russian coal deliveries. Year-on-year, earnings in coal and nuclear were lower due to more overhauls outages and the absence of production from our Emsland nuclear power plant after it was shut down in April 2023. Overall, RWE's group adjusted EBITDA stood at €8.4 billion. On the back of the strong operational performance, adjusted net income amounted to €4.5 billion. Adjusted depreciation increased in line with our growth investments. Adjusted financial results include the financial expenses from the consolidation of Con Edison Clean Energy Businesses’ debt. For adjusted tax, we applied the general tax rate of 20% for the RWE Group. Adjusted minority interest reflects lower earnings distribution to minority shareholders, given the decline in power prices. The adjusted operating cash flow was €7.3 billion and reflects the impact from operating activities on net debt. This shows the high cash conversion of our operating assets. Changes in operating working capital were mainly marked by a decrease in gas inventories in storage. Net debt increased due to significant investments in our growth. In Q1, we closed the acquisition of Con Edison Clean Energy Businesses and we invested a further €5.1 billion net in our green growth program, including the Magnum and JBM Solar acquisitions. Net cash investments include the proceeds of the divestment of the gas storage business in the Czech Republic. Other changes in net financial debt increased by €2.5 billion. This includes timing effects from hedging and trading activities, as well as cash inflows from the first installments of the lignite compensation. Our net position from variation margins from power generation hedging stood at €1.4 billion. This includes net variation margins from the sale of electricity, as well as the purchase of the respective fuels and CO2. For the full year 2024, we confirm our outlook as presented at the CMD 2023 despite a significant decline in power prices. We expect adjusted EBITDA, adjusted EBIT and adjusted net income at the lower end of the guidance range. We also confirm our dividend target of €1.10 per share for the fiscal year 2024. Our guidance range for the offshore wind is between €1.45 billion to €1.85 billion. Due to the recent decline in European power prices, we expect lower margins. The earnings contributions of offshore wind is expected to be at the lower half of the guidance range and below last year. For onshore wind and solar, our guidance range is €1.5 billion to €1.9 billion. We also expect lower margins due to decline in European power prices. However, capacity additions as well as the full year contribution of CEB will have a positive effect on the earnings. And we expect to close the year significantly higher than 2023, but in the lower half of the guidance range. Flexible generation is the renamed segment, which includes hydro biomass gas activities and the 30% shareholding in EPZ. Our guidance range is €1.8 billion to €2.2 billion and we expect full year earnings at the lower end of the guidance range. Lower margins from running the assets will be partly offset by slightly higher income from system services. For supply and trading, we assume normalized earnings after an outstanding performance in 2023. The guidance range is between €100 million and €500 million. As presented at the CMD 2023, we'll see the phase out of coal and nuclear business on an adjusted cash flow from 2024 onwards. The earnings from segment are no longer included in the adjusted EBITDA and adjusted net income. The adjusted cash flow for 2024 is expected to be between €300 million and €600 million. To sum it up, we are confident that we'll deliver earnings within the guidance range we set at the Capital Markets Day. And now, let me hand back to Thomas.
Thomas Denny: Thank you, Michael. We'll now start the Q&A session. Operator, please proceed.
Operator: [Operator Instructions]. And our first question comes from Rob Pulleyn from Morgan Stanley (NYSE:MS).
Rob Pulleyn: So first question, if I may, because I think some others may ask some of the other popular ones. So the first one I'd like to go with, are you guys seeing increased interest in renewable projects for data center PPAs in both the US and Europe? And could you put a bit of color around this in terms of PPA terms, duration, price and how much this is for a growth area for yourselves? The second one, as I'm sure everyone's very keen to hear, we know you've moved to an EPS commentary both in your prepared remarks and in pack, which, of course, chimes with lots of questions we receive on share buyback. But may we ask how politically viable it is to do this or even talk about it given the current negotiations around German capacity market and the government's desire for energy investments regardless of, of course, your choices of capital allocation and where you want to deploy capital? And thirdly, just to stretch it. Is it fair to say that the lignite emissions will be significantly lower in 2026 anyway given you've sold your implicit fuel hedge last year? And if you maybe just update on how long the explicit carbon hedge will keep those assets in the money?
Markus Krebber: On general sentiment in the PPA market, it has not changed. There is strong interest for PPAs in both markets. Of course, given that we have significant lower spot prices, I mean, there are discussions around price levels. But we have even in the last weeks months signed long term PPAs starting mid-20s at unchanged price levels. So the demand for green electricity is clearly there. I would currently say even stronger in the US, given that there is significant demand growth coming. And you have already seen that now given the limited, I mean, limited is probably the wrong word, but the not fast enough build out of renewables, now some even turn to nuclear, because it is needed to back this additional demand. Now the second one is, of course, probably the most interesting question, I mean, on the EPS side. We deliberately moved to EPS because that is in the end, which reflects our commitment to create shareholder value best. It's not about absolute earnings, it's about EPS. And then, of course, it's now an additional element of flexibility in what we do. We still believe in a very good investment program we have ahead of us. And please keep in mind that we have lot of flexibility in this investment program across regions, across technologies, but also in terms of timing when we invest and when not. And maybe just to add some color, we have promised at the Capital Markets Day that we at least yield on average an EBITDA yield of 10.5% is our investments. But what we have shown here on the slides, especially what we commissioned in 2023 that was higher, more than 200 basis points higher. So we were above 12.5% EBITDA yield. And now with capital allocation, of course, you need to look at what are your investment opportunities. Some questions are open, I mean, what happens to the PPA market, what happens after the election in all our core markets, when do we get clarity on the H2 gas planned framework in Europe, what happens to the supply chain channels. So you have a constantly evolving investment environment. And then we will constantly reassess it and take the decisions in order to maximize EPS. And we do that with a long term view. So it's not about pimping EPS for next year, it's really what is the right long term strategy in terms of capital allocation to increase and maximize EPS in the mid to long term. And that is what can be read into moving to EPS given that we have now a bit more higher uncertainty and a bit more cautious we want to add additional potential instruments and we are now committed to the EPS targets. Last question, sorry to correct, but the hedges are never relevant for dispatching of the plants. Dispatching is always done on spot prices. But you are right, we expect significant lower CO2 emissions in 2026 from our lignite fleet. First of all, we have to then close additional units but also given the renewable build out, we expect lower utilization factors of any fossil plant anyhow. If you now factor in the significant lower gas price and also potentially the effect of fuel switching, you can expect even further reduction of CO2 emissions compared to the old plant.
Operator: The next question comes from Peter Bisztyga from Bank of America (NYSE:BAC).
Peter Bisztyga: I'll stick to two. So the first one I'm sure I'm not going to be the only person to sort of labor the points on share buybacks. But what angle I want us to come at it from is that in the past, you've been quite opportunistic on M&A. So we had the Magnum transaction in the Netherlands, obviously, CEB. And I'm just wondering why that opportunity doesn't stretch to buying back shares when they drop to basically 40% below where the Street sees fair value. Just wondering what would have to happen to change your view on the relative value? And I'm not talking about EPS here, but just on the relative value of buying back shares at such a massive discount versus investing at a 10% or 10.5% EBITDA yield. So that's my first question. And then second one, thanks very much for the guidance on flexible power generation. It is quite a big downgrade versus where consensus was previously for 2025 and '26. So I think what would be really helpful for me and everyone would be what assurances can you give that your new guidance is somehow a floor and that it couldn't actually even go lower still? And the reason I'm asking that is because we're looking at forward curves and peak spark spreads on forward curves amount to negative in some geographies even for efficient or more efficient assets. And I know that those aren't necessarily the right things to be looking at. But clearly, it's causing some concern in the market about the future profitability. So if you could sort of draw a line or help us draw a line on the profitability in flex gen that would be very helpful. Thank you.
Markus Krebber: I mean, first on M&A. I mean, we have always differentiated our M&A strategy in two buckets. One, as you call, is opportunistic. I mean, like an offshore wind farm within development here and gas asset there. That is more part of the normal organic investment program where you see, I mean, individual smaller opportunities, which are even more attractive than your own developments and we go for that. The other aspect, I mean, CEB was a strategic acquisition to get us into the US and in solar to the market position we want to have. I would never consider buying your own share in the same bucket than M&A, that is something totally different here. It’s about long term EPS maximization. And if you cut -- you have to cut significant more out of your CapEx program, because you lose headroom and so on before you can buyback your own stock. So it's not a simple math. It's only simple if you look at one or two years ahead. But if you look long term, you have negative effects on EPS. And it's about, I mean, how to maximize that with a clear long term view. And as I said, we are committed and we will consider all potential options to maximize EPS by 2030. On flex gen, when you now look at the chart, you can see that we have this constant trend of increasing earnings, which are secured. And this is especially capacity market but also other reserve payments and service where we are confident and so on. And now you also see that we already expect a full normalization of power prices and that is what you already mentioned, the current spreads you can see on the screen for 25%. So we have the current curve in this assessment, because I think that is the best you can do. I mean, we never deviate in our planning exercise in the short term from the market. If there are significant further downside, I would say, clearly no. If you see for whatever reason significant demand drops or crisis, I mean, you can never rule things out, but it is definitely skewed to more upside than downside. It's very close to a floor now what we have put on that slide, very close to a floor.
Operator: Alberto Gandolfi, Goldman Sachs (NYSE:GS).
Alberto Gandolfi: The first one is on your 2027 assumption. Noted that you're focusing on EPS and maximizing growth on EPS at €3 a share. Is there any chance you could shed a bit more light, I don't know, for instance telling us that power price you're using you're assuming on your merchant generation, perhaps I don't know the volumes and exposed to or in general the total volumes by then, some more details on flex gen. So just some underlying assumptions to make everyone comfortable on the €3 a share. And the second question is, once again, on how we get to the €3 per share? So I'm just trying to understand the philosophy here. Markus, this is the first time I hear you stress so clearly several times that the focus is on EPS, that all potential options to maximize EPS growth are being considered. So there are two ways I can see of getting to €3. One is through investments. Let's say constant prices, of course. One is through investments. The other one is by reducing the share count. Reducing the share count has a very, very casting stone IRR, because it's the share price today, right? You don't need to take a view on long term power prices. So you could argue that reducing the share count perhaps is a safer, more visible and less risky approach to do that. I'm not saying that's going to be the entire capital allocation. But would you agree that getting to €3, if you wanted to reduce risk, you'd be fairly indifferent between investments reducing the share count, or perhaps maybe even more tilting towards the latter option?
Michael Muller: Alberto, let me start with the 2027 numbers. I mean, we don't reveal numbers here. But I mean, you can assume that we obviously did internal -- the math before confirming our guidance. So we looked at our assumptions, we took at the time of the Capital Markets Day and we took at current forward prices where they are and we also looked then, as Markus discussed, in the other income streams, namely the secured revenues from flexible generation. And that led us to the conclusion that the number fits. I mean, you also need to bear in mind that's why we put forward also on Page 7 and Page 8 the split of income how much of that is secured and how much is market dependent. So what you see is there's a large chunk of income that is already fixed via secured income streams and also with new investments clearly coming online until 2027 that share will increase. So therefore, that's the underlying rationale where we are confident in confirming the numbers for 2027.
Markus Krebber: Let me take the other one. Alberto, you are trying to push us now into something which would reveal a preference. I mean, life is not that easy. I give you -- I mean, I have -- I've said everything we wanted to say on the EPS focus, but let me give you one additional argument, which you could also not -- which would have to be considered. If you cut into the investment program, the company will look like different in 2030. And then it comes back to questions like how robust is the earnings profile, because with our investment we’ll reduce significantly CO2 intensity and we significantly increase secured revenues. So the company and also the potential valuation multiple in 2030 would change with cutting into our investment program. So we need to look at many, many, many different factors. And the promise we make today is we don't rule any of the instruments out and we look at maximizing EPS and quality of EPS in 2030 and '27, of course. I mean, it's not so long term but it's not something we're going to act on an ad hoc basis because of development of the last 10 weeks.
Alberto Gandolfi: And if I may test your patience. Is there a date we should be looking forward to when you may have to do a strategic update or you may want to do a mini update to the bigger CMD we have seen last year?
Markus Krebber: Yes sure. We communicate the moment we have to communicate something.
Operator: Deepa Venkateswaran from Bernstein.
Deepa Venkateswaran: I have two questions. Markus, I'm so sorry to not leave the topic of buybacks. But I noticed that in your comments, you stated that you're committed to bottom line growth, you won't change course due to short term development. Can you clarify a bit by what you meant by short term development, are you referring to your share price and are you expecting it to recover and therefore ruling out buybacks? So that's my first question. And second question is a bit on the flex gen earnings weakness. So obviously, the power prices have fallen but it is to a very large extent explained by the fall in gas and carbon prices. Therefore, I was just understanding if you can maybe share the math on the sensitivity, because it doesn't seem like the spot spreads were that high in November, and I don't see that. So is it because of some small outright exposure, such as biomass or something else that's driving this? And to your comment that you are very close to a floor, could you then explain why it may not drop further in case there is some outright element sitting within flex gen?
Michael Muller: Deepa, I go with the first one and I think the second one Markus already answered fully in his answers to previous question. I mean, on flexible generation, you are right. So the decline we are seeing is primarily on the Dutch side where we have the biomass assets but also gas assets that we at least for 2024 haven't hatched due to the winter, that was more kind of cautiousness due to spikes that could have happened if we would have gotten a tight winter. So look, you see a decline in clean spark spreads, you see a decline in clean dark spreads, that's obviously reflected in those numbers. But what you also see is that the volatility in the market has come down to a normalized level and that is also impacting the projected earnings of the flexible generation fleet.
Deepa Venkateswaran: Can I go for another question since you didn't explicitly answer my first one? So on the PPA pricing for solar, so you've identified that as being one of the projects where, as of now, you don't have a PPA. And it's obviously a larger project in terms of 15% of the capacity under construction. So how confident are you on kind of getting the right pricing for that project in order to meet your hurdle rates? And is there any tendency for data centers to be located in Denmark and therefore, you're even more confident on getting that price because of the data center demand?
Markus Krebber: So Deepa, we are confident that we can lock in the right price level because otherwise we wouldn't have taken FID on the project. And it's not only about the location, even power in Denmark can be marketed partly to Germany, because there's an high interest of additionality and the load profile of offshore compared to the load profile of, for example, solar. And then it's a question who takes a location differential and you can even partly [move] it to the customer. So the market is much bigger than only Denmark, that is why we are confident that we're going to close it before we see [indiscernible] the asset.
Operator: Ahmed Farman from Jefferies.
Ahmed Farman: I have a similar question, just one question from my side that you’ve sort of talked about. So it seems like a lot of -- that sort of it's going to depend upon how you think about the sort of the risk reward and opportunities on the investment side. So maybe we can just have some sort of broader comments on how the accelerated normalization in power prices, how is that -- has impacted or shifted your expectations between the CMD and today in terms of these risk reward or the returns available on the CapEx? And then my second question is, in particular, can we sort of get an update if you have sort of stress tested your existing valuations for -- of the operational assets for the current power price environment and if you're sort of comfortable with those valuations?
Markus Krebber: I think the second will be taken by Michael. On the risk reward side, the faster normalization has not changed our view on long term attractiveness. The only pint of salt there is how fast and what happens to the green PPA market here. So far, we have seen no effect on prices long erm. Let me give you an overview of what we think are clearing events for the evolving risk reward environment for our entire investment program. But of course, we have significant flexibility, as I said before. So of course, one, on the one hand side, it is about energy policy. So what's going to happen in the European Union, the UK and the US after this year's elections? Second is, how do the supply chain challenges evolve? And that is especially for the offshore business. So how confident are you with additional investments in offshore at which point in time? Does it take longer to clear the current difficulties in the supply chain or does it go faster? Third one is, when do we get clarity on the H2 gas investments in Germany, which would be a perfect portfolio fit? And we are in a poor position there, but it's currently in discussion between the German government and the European Commission. If that is clear as fast, I mean, we see significant chunk of very attractive investments. So these are the potential clearing events over this year. And of course, we also have to assess how big and where we want to invest and what are alternative measures to increase EPS.
Michael Muller: Concerning the value of the investments, I mean, at year end, we have done obviously an impairment test that hasn't led to any impairments of our book values. Obviously, forward prices have come down. But at the same time, you also know that valuations are done over the entire tenor of the assets. And as we mentioned, our long term expectations have not changed.
Operator: Meike Becker from HSBC.
Meike Becker: Two questions from my side. Maybe actually immediately connecting to your answer to the last question, if I may. Would I be right to read into your answer that you see something developing slower than you might have thought, such as you pointed to the German decisions on hydrogen plants and perhaps also developments on the offshore side? Is that the underlying driver of sort of like everything we've discussed so far? So if that perception correct, would be one question. And the second part of that question would really be the slightly softer changes in capital allocation. Is the US looking more attractive because of lower European power prices or not because offshore is still challenging? Is offshore in the UK looking more attractive with the [Indiscernible] [Brunsbüttel] portfolio rather than battery investment? So if you could sort of like what has changed what maybe between your investment opportunities that something might shift from one to the other bucket? And the second question is coming back to coal. If it is true that sort of like a [coal] discount as part of your share price, wouldn't be more disclosure, one of the absolute cheapest options to support the share price and isn't there -- I would say, there is no downside to it? So I'm just wondering whether there is something you can do that goes a little bit beyond saying that the share of coal is less than 10% by '26, '27, and isn't that a no regret disclosing that information?
Markus Krebber: So I think it's too early to say whether things have really slowed down. I'm still -- I mean, I'm typically an optimist. I think we probably see clearance from the gas investment framework in Germany before summer. But I mean, since we are not party of that process, it's between the German government and the European Commission, we have no insight. It could also go wrong. But so far, there is no indication. In general, I think -- I mean, I also -- and you know that we invested in all technologies last year. I said that the EBITDA yield is higher, 200 basis points higher than we have on average assumed. I wouldn't say that there is a certain bucket which is less attractive than expected currently. But the only thing where we're probably a bit more cautious is on how big the future commitments are in offshore, because you have these long lead times and without a very stable supply chain, you should not take too many risks. But since the portfolio is big enough to compensate that at very attractive returns, it is not per se the one reason to cut into the investment programs. But other than that, please don't read that we see more risk than before.
Michael Muller: And maybe on the coal disclosure, I mean, look, what are the two drivers for bringing down the coal exposure? One is the number of assets you have available and secondly is then the power price constellation if those assets have to run or run or not. Now starting with the first one, we now will close 2.1 gigawatt of capacity by end of March and a further 300 megawatts, further 300 megawatt unit by the end of the year, and that will clearly bring down emissions. At the time of the Capital Markets Day, we communicated the 2027 number because by that time, we also foresaw that in addition to the coal closures, we would also see a much lower utilization of the coal assets simply because of the build out of renewables. If you assume current power price levels, you could assume that the utilization of our coal is far lower, and therefore, also emissions come down. But having said that, the latter one is very dependent on actual power price constellations. And in case power prices rise again or we see tight winter, it may well be that emissions at least stay on the level where they are currently other then they ultimately drop towards 2027. So these predictions very much depend on the market. But it's clear that they will come down, and therefore, the 2027 target is also we're very confident to achieve that.
Meike Becker: Wouldn't it be worth at least a scenario. I mean, belaboring that point that you have done everything you can do and the rest is out of your hands plus/minus a few years, but sort of like a scenario or something on the point. But thank you, that was very helpful.
Operator: Harry Wyburd from BNP Paribas (OTC:BNPQY).
Harry Wyburd: So first one from me is on trading, which we haven't talked about yet, I guess [Engie] seems quite upbeat on trading and obviously [Engie] actually upgraded their guidance quite significantly. Is that something that reads across to you? You haven't really changed anything in terms of your outlook on trading. Is there something different about your trading business, which explains why you're being a little less optimistic, I think, than some of your peers? And then the second one, I want to ask a specific question on PPAs in Continental Europe on onshore and solar. Depending on who you listen to or which PPA index you look at, you get a lot of varying messages on whether PPA prices are actually moving up or down. So what are you seeing in Continental Europe, specifically with onshore PPAs? And if they are going down, would you think about reallocating capital to other regions where PPA prices are better?
Markus Krebber: Let me start with the second question, Harry. I mean, when you look at our markets where we do onshore and solar and the investments we have done, Poland, Germany, France, UK, these are all CfD markets. You have typically government auctions that we have been very successful there, many of them inflation adjusted. So I cannot comment on certain PPA markets. If you talk about, for example, solar Spain, it might be very difficult but this is not part of our investment universe.
Michael Muller: And talking about trading, I mean, I can't comment on our peers what they are doing just about ourselves. I mean it's just early into the year and therefore, we are very confident with the guidance we have given on trading.
Operator: Wanda Serwinowska from UBS.
Wanda Serwinowska: Wanda Serwinowska from UBS. Two questions from me. The first one is on the flex gen. Based on my industry checks, I understand that the power market conditions have been even worse in February with low forward spreads. I mean when I look at your accounts, you impaired part of the [CfDs] portfolio in the Netherlands. So does your outlook fully taken into account everything that is happening in the market. And if you could disclose what share of your €1.4 billion of EBITDA of the flex gen is basically locked in as of today? I think that would be very, very helpful. And the second question is, can you comment on the bankruptcy filing by Enviva (NYSE:EVA), which is one of your counterparty on the wood pellet side. What would be the potential impact on RWE?
Michael Muller: Wanda, I'm happy to take the questions, start with the latter one. I mean I don't expect an impact on us from the Chapter 11 process, anything further, I mean, we don't talk about anything with specific customers. Secondly, on the question around the flex market. First with the impairment. I mean when you look at the impairment, what you see is that in 2022, we had to turn around previously done impairments. So we actually added value again to those assets and we just basically now took it back to the initial level. So this is rather -- yes, so we're now back to kind of the normal level we had previously. So nothing specifically to read into this one about the future. Secondly, about the hedging. I mean you know that most of our gas fleet is in the Netherlands and in UK, and you typically can only hatch the assets there, say, a year ahead and that's also what we have done. So no further hedging in later years.
Wanda Serwinowska: One follow-up because if I look at the press, it says that RWE [Indiscernible] that Enviva still owes almost $350 million for the transaction. So can you confirm there's no potential impact on RWE?
Markus Krebber: You're talking about Enviva or…
Wanda Serwinowska: Enviva, I mean, there's the article in the Financial Times today and the Financial Times says RWE said Enviva still owes [$348.7] million for the transaction according to the [filing].
Michael Muller: I can't comment on that.
Markus Krebber: I mean, Markus here. So I can confirm what Michael said is that regardless how the situation of Enviva [evolves], we do not expect a negative impact on our earnings. Of course, if you have certain claims…
Wanda Serwinowska: And cash flow?
Markus Krebber: If you have certain claims, you bring them forward. But if you see a situation evolving negatively, you have ways to adjust your position, right? I mean, we have seen very similar things with -- I mean, in the crisis, not getting Russian gas. I mean, at the moment a supplier is not delivering, it depends on whether you simply still keep the position as it is and you hope for delivery or you start adjusting your position. We have a claim that is clear. We're going to bring that claim forward. But regardless what happened under the Chapter 11 situation, we do not expect any negative impact on our P&L.
Wanda Serwinowska: And cash flow, is the same or it's still too early to be said, because earnings on one side but cash flow is another side, right?
Markus Krebber: Same.
Operator: Olly Jeffrey from Deutsche Bank (ETR:DBKGn).
Olly Jeffery: I see one point of clarification, another a couple of questions. Just to clarify the comment earlier regarding long term expectations have not been changed. I presume it was on power prices. And if it is, is that on the long term 2050, we're talking 2027 and 2030? And then my other questions are with the three areas of share we're now talking about the 2027. That implies probably €2.3 billion net income on current share count, which is the midpoint of the guide. And just wondering how that gets to the midpoint because if we've maintained flex gen as where it was before, I can understand how you could get there, but I would have thought that the merchant renewable exposure would have dragged that number slightly lower. So could you just please explain why there's not more of a drag from the renewable merchant exposure? And then the last question is just on Thor -- on [Indiscernible] west and Nordseecluster projects, which have merchant exposure. Are they now less in favor given the move in commodity prices and perhaps more interested in developing, if you can, some of the [Indiscernible] UK CfD projects, if you're able to get a CfD?
Michael Muller: So let's talk first about the long term expectation. I mean, when we talk long term, it's '27, 2030, and also we previously talked about the value of assets that's obviously even longer and that hasn't changed. Talking about 2027, I mean, look, this is still pretty far out. So there is also -- yes, to some degree, not so much clarity exactly on how things exactly evolve. I mean if you do roughly the math, given that commodity prices have come down, maybe also compared to what we at that time assumed for '27, there is maybe some less income. At the same time, you have seen that the UK auction on flexible generation firm capacity came out extremely well, and that also contributes to 2027. So there's an offsetting effect in the positive direction. But as I said it's early days. And if we do the math, we are confident that we are in the range we guided.
Markus Krebber: Then on the Nordseecluster, so the offshore wind farms in Germany, I think you mean them where we are close to take a decision. The attractiveness of these assets have not changed. I mean, first of all, please keep in mind that commissioning of these assets is ‘28. And even after faster normalization, our outlook on prices, especially we're talking about PPA prices for these assets, has not changed. We are in constant dialog with potential offtakers. We have a good understanding where price levels are. And then, of course, it's always a question how competitive are these assets compared to others? And please keep in mind that we do not pay any [Indiscernible] [seabed] lease payments for them compared to what came out of the auction in Germany last year where we probably can expect next year load factors of these assets are excellent. So I think these are probably one of the best North Sea sites in Germany. The other question where you are hinting to also comparing them to the CfD assets in the UK is, of course, how much do you going to keep yourself and for how much you take on board a partner, but that is to be decided over the next time. But we see these assets as very attractive in our portfolio.
Operator: Piotr Dzieciolowski from Citi.
Piotr Dzieciolowski: I have two questions. So first one, I wanted to ask you about your current outlook for the CO2 market. At the time when you were closing your strategic results, you clearly had a negative view and you sold a lot of CO2, but you still own the lignite assets and also. So what do you think is required for the CO2 price to recover and what do you assume in your kind of mid term targets at a normalized level? And the second question I wanted to ask you was, we haven't talked about your E.ON stake for some time. I recall in the past, you said you would require -- you would need to sell entire stake for the tax purposes. I just wanted to understand if you are anyhow sensitive on the share price of E.ON with regards to your ownership of this stake, or you think it sits well within your structure of kind of matching with the [Indiscernible] liabilities that you have?
Markus Krebber: Let's talk a bit about the CO2 market. So we have a couple of factors which now put the CO2 price under pressure. One, of course, is the additional auction volumes by the European Commission to raise additional funds. I mean they have brought some auctions or significant volumes of auction forward, that is one aspect. And then -- but as important factor is the general economic muted activity, that is clearly seen. And we also know from some industrials, the moment the outlook for their activity is weaker, they stopped hedging, they stopped buying. So there is definitely lower buying activity. If you look at the market overall, we can probably look about two years of healthy supply in the auctions at current economic activity. But then we also know with the kick in of the market stability reserve on the reduced auction volumes that we're going to see very tight carbon markets from around '26 -- end of '25, '26 onwards. And since you can carry these certificates also into the future, it's a question when start people buying also for the tight situation '26, that is more a sentiment question. It's difficult to call. It can change very quickly. But yes, as I said, very difficult to call. So our view is healthy supply in the next two years, two and half years and then a significant tightening of the market. And it's, as I said, it's more a sentiment question but you're going to see that also reflected in higher prices. On the E.ON stake, just to remind you of the tax rules. The moment we go beyond 15%, we lose state tax advantage. The moment we go below 10%, we also lose federal tax advantage. We always said it's not a strategic investment we needed for coverage of the lignite provisions. So it could also be any other investment portfolio, financial asset portfolio. So far the tax advantages outweigh the concentration risk we have as one asset. So currently, there are no plans to sell it down. But the moment we start utilizing the lignite provisions, which is in the late '20s, then of course, we need to also [Indiscernible] [push] the financial assets.
Operator: We'll now take our final question today from Deepa Venkateswaran from Bernstein.
Deepa Venkateswaran: I had a question on Ar 6 parameters that were recently released by the UK government. Our math suggests that not all the permitted capacity, including your Norfolk project, will clear at an attractive price. And therefore, some projects will have to sit out unless the UK government increases the budget. I was wondering if you had any thoughts. And in general, would you be open to waiting out or do you need to win [Technical Difficulty]?
Markus Krebber: So I think that is now speculation. Who can participate in this auction, I think we're going to see clarity about that in the coming years -- in the coming weeks. So I mean, we're going to decide on our bid strategy and also what we think how good the auction volumes will be in the coming years where we have to take that decision. But Deepa, please understand that I cannot comment on our strategy, what we think might happen and what clears or not because that is of course a very sensitive information.
Operator: Thank you. And with this, I'd like to hand the call back over to Thomas Denny for any additional or closing remarks.
Thomas Denny: [Technical Difficulty] Bye-bye.
Operator: This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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