Welcome to the RWE conference call. Michael Müller, CFO of RWE AG, will inform you about the developments in the first quarter of fiscal 2022. I will now hand over to Thomas Denny.
Thank you. Good afternoon from Essen, ladies and gentlemen. Thank you for joining the RWE Investor and Analyst conference call. Our CFO, Michael Müller, will guide you through our performance for the first quarter and the outlook for the current year. Before we start, let me thank you for the strong support in our recent AGM. We received tremendous positive feedback on our strategy in the weeks leading up to the event. Your vote at the AGM shows that the company is on the right path. Now, without further delay, over to you, Michael.
Yeah. Thanks, Thomas, and also good afternoon to all of you. Russia has been in war with Ukraine since February 24. We are all deeply shocked and condemn Russia's actions. In this situation, it is important that Western countries and companies stand together. At RWE, we are providing humanitarian support, for example, by accommodating refugees in housings in the Rhineland region, by donating money to aid organizations, and by releasing employees for aid services. We are also advertising vacancies for Ukrainian refugees. Above all, we support the German government in becoming independent from fossil fuel from Russia and strengthening security of supply in Germany in the short term. On behalf and in the name of the government, we have chartered two FSRUs. These ships can be used to import liquefied gas and feed in directly into the German gas grid.
As soon as the onshore infrastructure is in place, the import can start. The ships are ready for operation. At the same time, RWE is partnering in a project to build an LNG terminal in Brunsbüttel, and we are seeking new supply contracts for LNG, mainly from U.S. and Qatar. We want to build an import terminal for green ammonia right next to the Brunsbüttel terminal. We've also offered the German government the option to help with up to 3.5 GW of coal-fired capacity from plants already decommissioned in reserve or shortly to be shut down. It is now up to the German government to decide what happens next. However, this does not change our strategic direction. RWE stands by the coal phase out and supports the ambition by the German government to bring it forward to 2030 by investing significantly into renewable build-out.
In April, the EU has imposed a coal embargo for Russian coal. The British government already imposed sanctions in March, namely against Russian railways. As a result, we have written off the market value of our Russian coal contract of EUR 850 million. More details in a minute. From an operational perspective, the first quarter was a good start into the year, with earnings significantly above previous year. We recorded an Adjusted EBITDA of EUR 1.5 billion and an adjusted net income of EUR 0.7 billion. We confirm our guidance for the full year. Our expansion of green capacity is well underway, and we continue to be a driver of the energy transition with almost 90% of CapEx being EU taxonomy eligible. In the first quarter, we commissioned the 200 MW El Algodon Alto wind farm in the U.S.
Since April, our 857 MW Triton Knoll offshore wind farm has been fully operational. For our U.S. solar construction projects, we are expecting delays due to regulatory intervention for imports on solar panels into the U.S. In March, the U.S. Department of Commerce decided to initiate an anti-circumvention case that could lead to new duties on solar panels assembled in Southeast Asia. The import and delivery of photovoltaic modules from the Southeast Asian region has been largely halted, which affects the commissioning of 1.1 GW of solar capacity, including batteries under construction. In contrast, the so-called Easter Package, adopted by the German government, paves the way for a future wind and solar build-out in Germany. Even if there's still need for optimization and the parliamentary process is yet to come, it is a good basis to start from. In parallel, the Summer Package is already being discussed.
It will focus on completing the framework condition for the expansion of renewable energy. Finally, we were successful in the British capacity auction with 6.6 GW of flexible generation capacity. The auction cleared at GBP 30.59 per kW for delivery in the years 2025 and 2026. The good operational performance in Q1 drove earnings above last year's level and led to an Adjusted EBITDA for the core business of EUR 1.3 billion. Offshore wind, Adjusted EBITDA stood at EUR 420 million. Earnings were up on the back of the full consolidation of Rampion, as well as ramp up of the Triton Knoll wind farm. Furthermore, wind conditions were more favorable than last year, and power prices for unhedged volumes higher.
For the onshore wind and solar division, the most relevant year-over-year effect is the absence of the one-off effect. Last year's first quarter was negatively affected by the Texas cold snap. Adjusted EBITDA was EUR 318 million at the end of Q1 this year. Higher power prices for unhedged volumes and new capacities also drove up earnings. Adjusted EBITDA for the hydro, biomass, and gas division was EUR 263 million. The flexible generation business was up year-over-year due to a stronger short-term asset optimization and higher hedged margins. An outage of the Dutch gas plant Claus C has partially offset the increase. The plant was offline from the beginning of January due to a damage in the low-pressure steam turbine. Following repair works, the plant has been back in operation since the middle of April.
Supply and trading reached an Adjusted EBITDA of almost EUR 300 million due to a very strong trading result in Q1, which is above last year's level. Overall, the group's Adjusted EBITDA stood at EUR 1.5 billion, including the Adjusted EBITDA from the coal and nuclear division of EUR 207 million. Year-on-year, earnings in coal and nuclear are down in line with capacity closures. Before I come to more financial details about the quarterly performance, let me give you an update on where things stand for RWE in relation to the war in Ukraine. We at RWE have taken immediate actions to mitigate the risk in the portfolio and improve the resilience of the company, and we fully comply with sanctions. As a consequence of the U.K. sanctions, RWE has not accepted coal deliveries from Russia since the end of March.
The EU imposed further sanctions on the seventh of April, prohibiting the import of Russian coal from August. As a result of these regulatory interventions, we have written off the full market value of a hard coal contract with a Russian counterparty. The charge amounts to EUR 850 million and is reported in the non-operating result. The short position has been almost fully closed in the meantime. Our exposure from Russian gas contracts has been managed actively and the financial exposure has been reduced to less than 4 terawatt-hours. RWE has also taken measures to have sufficient flexibility to manage liquidity needs. We have successfully extended our existing EUR 5 billion revolving credit facility to 2026, and we committed another EUR 3 billion RCF until 2024 and have extended short-term credit lines.
Furthermore, we strictly monitor our all counterparties and reduce or cancel counterparty limits where necessary. Now back to the numbers on the quarter. Adjusted net income amounted to EUR 735 million, driven by a strong operational performance in EBITDA. Depreciation is as expected and in line with our growing green investments. The adjusted financial result is on par with last year, and tax is applied with a general tax rate of 15% for the RWE Group. Year-on-year, adjusted minorities were higher, mainly driven by a stronger EBITDA of offshore wind farms with minority partners, for example, Rampion or Humber. The adjusted operating cash flow stood at EUR 347 million at the end of Q1 and reflects the impact on net debt from operating activities. This is adjusted for special items and other effects that balance out over time.
In Q1, the adjusted operating cash flow is marked by the typical seasonal effects in working capital. Working capital increased due to the purchase of CO2 certificates, which will be handed in in the second quarter. Net debt decreased substantially to EUR 3.3 billion net worth at the end of the quarter. This was driven by a strong margin inflow and a decrease in pension provisions due to higher discount rates. Our net position from variation margins from power generation hedging stood at EUR 1.2 billion. This includes net variation margins from the sale of electricity, as well as the purchase of the respective fuels and CO2. Other changes in net financial debt also includes variation margin inflows from trading activities. Within the scope of our growing green strategy, we are heavily investing into our generation portfolio.
In the first quarter, we commissioned more than 200 MW of new capacity, including the project El Algodon Alto I mentioned at the beginning. As we speak, we have 5.6 GW of green capacity under construction across various technologies. In flexible generation, the 300 MW grid stabilization unit, which we are building at our Biblis site, is well underway. We expect to start operation in autumn this year. Offshore construction works started at our Kaskasi offshore wind farm off the German coast. The offshore substation is in place and we made good progress in installing monopiles. 25 out of 39 monopiles, including substation, are now in place. The wind farm is expected to be in operation at the end of the year. For 2022, we confirm our outlook. Adjusted EBITDA for the RWE Group is expected to be between EUR 3.6 billion and EUR 4 billion.
Adjusted EBIT is assumed to be between EUR 2 billion and EUR 2.4 billion. Adjusted net income will range from EUR 1.3 billion - EUR 1.7 billion, and the dividend target is EUR 0.90 per share for this year. With this, let me hand back to Thomas for questions.
Thank you, Michael. We'll now start with the Q&A session. Operator, please kick it off.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you want to cancel your question, please press star two. Please ensure your line is unmuted locally as you will be advised when to ask your question. The first question comes from the line of Peter Bisztyga from Bank of America Securities. Please go ahead.
Hi. Good morning. Thanks for taking my questions. Two from me. Firstly, you successfully blocked the Enkraft proposal for a lignite spin-off, or rather your shareholders did. I'm just wondering where that leaves you now regarding your options for that business. I guess really the question is, do you think discussions around a coal foundation could happen this year, or do you think the government has other priorities right now? The second question, I was just hoping you could provide an update on how you're currently hedged across your renewables and thermal and outright generation positions, and perhaps run us through the changes that you've made to your hedging strategy in light of you know current market volatility. Thank you.
Yeah, Peter, thanks for the question. Let me first talk about lignite. As you know, the German government in the coalition agreement has the aspiration to bring forward the coal exit ideally to 2030. We always communicated that we would support those discussions and would actually also be in favor. As you rightly implicitly said, the government currently has different topics to deal with. That's very clear. We need to see in which direction it is going. I mean, as I also said, even if we are now discussing with the government to potentially keep or bring back lignite capacity, we always made very clear both to the capital market, but also to the government, that we clearly want to stick to our strategy to exit coal and so, that this is not a flip in our strategy.
Talking about hedging of renewable and conventional generation, I mean, what is clear is that, in the current environment, we have to some degree revisited our hedging strategy. I mean, especially when you talk about gas assets, because I mean, you want to make sure that in case Russian flows would stop, you are not stuck with a short position if your gas assets don't get gas, but you have the obligation to deliver, and therefore we are more careful on the hedging of our gas assets. Secondly, I mean, you have seen the high volatility in the market. Also that kind of led us to reflect on the hedging of our positions. How does that fit to liquidity needs?
I mean, by and large, the hedging strategy is still intact, so that you can assume for this year, I mean, renewables are hedged 80%, so that's kind of the usual rate we have, given that there is some uncertainty around the wind. The conventional fleet is almost completely hedged. Then you can assume that until 25, that number then goes down.
Great. Thank you very much.
Thank you, Peter. Next question.
The next question comes from the line of Deepa Venkateswaran from Bernstein. Please go ahead.
Thank you. My two questions. The first is from the solar issue. Could you just let us know in case the ruling comes out in August and they confirm these tariffs, what does that do to the economics of those projects? How much, you know, how much will your CapEx go up? And can you revisit the PPAs that you may have already signed, or are the PPAs yet to be signed, in which case you can incorporate that? If you can just give a bit of color on the economic impact of what's going on in the U.S. That's my first question. Secondly, just on the coal contract that you've written off, can you explain what is the cash implication of this write off?
Presumably this is the coal that you may have burned otherwise in your Dutch coal plants. Is this basically saying, I mean, and clearly, if you're now going to procure it from other markets, that should be included in the marginal cost when you're bidding those coal plants, right? Is there a cash outflow either today or at some point in the future? Any reason to think why you won't be able to pass through higher coal costs when you're bidding that plant maybe because you've already hedged or something.
Yeah. Deepa on your first question with solar, I mean, it's too early to really judge. I mean, as I said, in April, we hopefully get some more clarity. So it's again, if in principle, the idea is agreed or disagreed, obviously, we hope the latter is the case, because what you're currently seeing is that, and that's also in the U.S., momentum is building up because people are realizing and also governments are realizing that this is putting the build-out of renewables in the U.S. at risk. But in August, we should have more clarity on if in principle, tariffs have to be paid. Then the second step is how high are those tariffs. That is yet very unclear. Therefore, also it's difficult to already say something now about the economics of the projects. Yeah. Second question around the coal contract.
Sorry. Is there any PPA pass-through? Can you revisit the PPAs for those projects, or have they not been signed, in which case you can price it, or are you stuck with these higher tariffs?
Yeah. I mean, Deepa, we typically don't reveal details on the individual PPAs. That also kind of depends side by side what we have done. Please bear with me that this is a little bit early to judge. Yeah.
Okay.
Second one on the coal contracts, I mean, what happened in principle is that we purchased coal for a longer period of time and hedged those volumes. If that's hedged via a spreads in our power plants or if it's hedged just financially in the market then to be converted later on. Now what happened is that, obviously with increasing prices, the delivery from Russia went into the money while the hedges went out of the money, and now we had to write off that in-the-money position, so the positive mark-to-market. From a cash perspective, you can assume that the cash effect will realize in the next four years to come, so until 2025.
Okay. That'll be it would have otherwise hit COGS, but now it's going already under an impairment. You'll have then the cash release over the next four years. Okay.
Yeah. Thank you, Deepa. Next question, please.
The next question comes from the line of Alberto Gandolfi from Goldman Sachs. Please go ahead.
Thank you, and thanks for taking my two questions. The first one is if you can share with us your expectations on the German renewable plan, what are the key risks to it? Or if you think that this Summer Package on permitting may actually allow a smooth implementation. I wanted to ask if by now you have tried to work out what potential market share you may be able to capture from this plan. I remember in the previous call, your Chief Executive said that you included very little from it in your current business plan, and, you know, we are estimating above EUR 250 billion investment for it. Germany could become one of the largest renewable markets in the world, and you're sitting right in the middle.
I was trying to gauge the upside opportunity for you. You already replied about lignite. I guess in this new framework, your portfolio would have to be adjusted for it. The question is more on the first part. Second question is on your business plan. I know you're not going to change it now, but I wanted to ask you if you can maybe elaborate on a couple of key assumptions. You know, everything has changed, you know, power prices, FX effects, renewable targets. If I put together the REPowerEU and the energy security crisis we are living in and the implications on power prices, I mean, is your current business plan relevant at all? Because the world seems to have changed dramatically.
You know, power prices that you assumed are way too low and the top-down market has changed a lot. I haven't seen a horde of new entrants. It's a bigger cake for the existing players, plus a few new ones, I guess. Where am I wrong with that? When can we expect an update to your future years? Is there any upside risk, basically, to your current business plan? Thank you.
Yeah. Let me start with Germany and the Summer Package. I think I mentioned that already previously in conversations, all the topics that are relevant are clearly on the agenda. As always, the proof is in the pudding. Now it becomes reality. So we really need to see how the ideas are really implemented into the final legislative proposal, and that will also be then decisive if there will be an acceleration. I mean, it's all about how many sites are being made available. I mean, if you look into the Easter Package, the good news is that indeed, with respect to offshore, they have now the ambition to free up additional sites. So that's leading in the right direction, but obviously the same thing has to happen also onshore for wind and solar.
That's yet to happen. Second topic is around speeding up approvals and also speeding up later litigation processes. That needs to be seen, which concrete measures will be taken. I mean, we are optimistic since all the topics are on the agenda, and as we already discussed with you, also the situation with the war in Ukraine has put even more pressure on the government to make sure that the build-out really happens. Honestly, while I'm optimistic and positive, it's too early to come up with a final judgment on this one. Therefore, the next question around market share, I mean, you can assume that at some point, our aspiration is to have a decent share in that growth to come.
As we already said, we have planned already to hire 200 people in Germany to do origination. More than 50 are already hired. We have set up seven or eight, no, seven regional offices. They are all rented, so people are already in. We are actually making upfront investments to make sure that we capture those opportunities, but also here. We make sure that everything we can do from our side is met, but we now need to see what the government is doing, and then I think it's time to reflect on potential upside.
Michael, forgive me. If I may interject for one second. When you said decent, just to be clear we're on the same page, is decent for you 2%-5%, 5%-10%, 10%-15%? I mean, just very broadly. Sorry to pin you down there.
Well, I won't say a number now here. I mean,
It's a try.
Yeah, it's a try. Yeah. I mean, the number shouldn't be too small because, I mean, we always said from our strategy, the focus should be to be relevant in markets, yeah. Because we believe and I mean, also, if you look at the results this year, where nicely the combination of conventional generations of flexible assets and renewables played out. In the end, in that future energy system, you want to make sure you have renewable capacities, you have flexible generation capacity, you have capabilities to structure PPAs to really bundle those capabilities. Therefore, if you are in a country, you want to have a relevant size or a decent size, as I said. I leave it with that. Yeah.
Finally, on the business plan, I mean, clearly, if you look at the number, the current environment could provide for upside, as you said. I mean, the price environment, but also, the ambition by the politicians. At the same time, as I said, I think the year 2022 will show how those ambitions are really implemented. I think we should have more clarity by the end of the year, what is really realistic. The same is true, I mean, the current environment also holds for lots of market insecurities, and, therefore, I would also like to see what happens first. Plus some of the margins you currently see in prices, you can't easily hedge. Yeah.
It's not yet the time to revisit that, but yeah, let's see what the future brings.
Thank you.
Thank you. Next question, please.
The next question comes from the line of Rob Pulleyn from Morgan Stanley. Please go ahead.
Yeah. Thank you. Thank you for taking the questions. Just to the first one, please bear with me. Given the news out of Russia this morning regarding sanctions on Gazprom subsidiaries in Europe, may I ask if gas supplies were interrupted due to this latest step by Russia, would the German government approach to German power prices then change regarding the risk of intervention, which I think we can agree thus far has not been high, but of course, that would be quite an extraordinary circumstance, which certainly from a probability perspective, seems to have moved up a notch. I'd be very interested in the perspectives there because obviously gas as a clearing price in the merit order is benefiting much of your business.
The second question, if I may, is regarding the reduction of exposure to Russian gas supply itself. May we just ask how RWE has reduced that exposure and if there is any cost associated with it, either in the non-operating result or flowing through EBITDA. The tangential question to that is that, does that might now mean that you are effectively long gas and can sell what you receive from Russia in the spot market? Thank you very much.
Yeah. Thanks, Rob. On your first question, I mean, we are now also investigating and carefully reading what the latest sanctions, which implications do they have. But our current read is that it is probably not too material. It doesn't have an impact on us specifically, so it's more a question on the German gas supply. I mean, maybe one read on the German government, which we think is very positive. We feel or we see that the German authorities more and more are realizing that or are turning the direction that they want to rely on the market as long as possible. I mean, look at gas. If you are a regulator and you want to start dispatching gas in Germany, that's just complex.
They realized that, ideally you keep the market as long as possible because the market will do the right allocation. Yeah. Therefore, what we currently observe is that German government is reluctant to intervene with the market as long as it's still working properly. Therefore, given that the impact of the latest sanction is to our minds or from our perspective, not material, and then we also have seen that gas markets have not reacted significantly, there is nothing I would be concerned of for the time being. Secondly, around the gas exposure, I mean, obviously with those are contracts, we concluded that are, I mean there are multiple contracts or multiple deals. They have all fixed prices. What we did, we managed them in the overall portfolio.
I mean, you suggested in the right direction, but obviously that's more in the overall portfolio and therefore, I can also not comment on details of cost and then what exactly the impact is. You can assume that is all incorporated in the portfolio and the numbers we have shown.
Okay. Thank you very much. I'll turn it over.
Thank you, Rob. Next one, please.
The next question comes from the line of Vincent Ayral from JP Morgan. Please go ahead.
Hi, good morning or good afternoon, actually. A few questions I had have been asked here. I'll ask for just one clarification and then a question regarding the guidance. When we're talking about you reducing your Russian gas exposure, it's been materially reduced. You say it's in the number reported. Are you talking here, we're talking Q1 P&L? Is it the total cost is already embedded in Q1 P&L? That would be my question number one.
If the answer is yes, actually looking at the way you're starting the year, what prevented you from upgrading your guidance at this level, apart from political considerations on the financial ones, you seem to be well ahead of the curve for this year, especially in trading, but also in, I would say even in a more classical generation activity. Could you give us a bit of color on the trajectory year- to- date and whether if things continue this way, you'll be considering an upgrade later in the year? Thank you.
Yeah. Thanks for your question. First, clearly, it's a yes. The EUR 850 million and the implication from the sanctions on the coal deliveries, it's all included in the Q1 results, so nothing more to come. I mean, on the guidance, as I said, yes, there is upside in the current environment, but we also see quite some uncertainty in the markets. Given that we are still early in the year, we are very confident with the current guidance. Plus, you also have to bear in mind that especially in wind and also in conventional and in gas, hydro, biomass, gas, typically the first and the last quarter are strong quarters that you see.
Finally, trading, I mean, while we all obviously are positive about the business, but there also can be substantial volatility. Therefore, we are only in Q1, and that's why we stick to the current guidance.
Thank you. I'll just follow up quickly on this one. As you know, we have a much more bullish view on the oil price, and I'm coming back on the comment made a bit earlier, where we agree. What's in your guidance in terms of oil price and commodity outlook could be seen at the start of the year as very conservative. As of today, it's outrageously conservative, at least for the next couple of years. Is there a point where you actually are forced to revise these underlying assumptions legally speaking, or is it something we could expect in the course of the year if the market remains the way it is? Thank you.
Yeah, I mean, you know, the way how to look at the guidance, obviously, we constantly take a view internally on what we see as numbers for this year, but also the years to come. Should a situation arise where our internal view is higher than the guided range, then obviously that would be something that would trigger a modification of our guidance. As I said, our current view is, given the uncertainties we still see in the markets, that we are very confident with the current guidance.
Okay. Thank you very much. I'll pass on.
The next question comes from the line of Olly Jeffery from Deutsche Bank. Please go ahead.
Thank you. Good morning, or sorry, good afternoon as well. Two questions. The first one please is just listening to the Uniper call earlier this morning, they were highlighting that Germany will be looking at potentially considering some form of windfall tax. I'm just wondering if you could speak to that, to say, you know, what's your current understanding of what is happening with that process in Germany vis-à-vis windfall tax? The second question is, it's just coming back to some buying and trading. I know you have this constant question, this question often over time, but just looking back over the last 13 quarters, you know, you've twice had an EBITDA below EUR 100 million, and then it was around EUR 80 million.
At what point, given that, you know, this division clearly seems to do quite well in this volatile commodity environment. You know, at what point would you start to consider your own expectations for what supply and trading division can deliver? Because the track record of the last 13 quarters would suggest that your guidance is very conservative. Thank you.
Okay, Olly. Thanks for your question. Windfall taxes, I mean, it is pretty difficult to judge here. I mean, you can just approach it conceptually. I mean, if you look, which companies are benefiting from the current situation, and that is clearly whenever you have unhedged outright positions. Now look at us. I mean, as we said, we have outright position in our fleet, but that is mostly hedged, so that's around lignite and nuclear. We have some positions around renewables that are also hedged. Plus, I would assume that the government is reluctant on putting windfall taxes on the technologies they actually wanna grow. Finally, you have then the hydro biomass gas assets, which are eventually spread assets.
Obviously here, the impact of higher prices is somehow dampened because also the fuel and CO2 prices have also increased. That's one thing. I mean, second thing obviously is, I mean, also the government clearly sees that the EUR 850 million write-off is a negative impact from the current situation on the company. So therefore, we need to see what happens in that area. Yeah. Finally, on your question around supply and trading, I mean, the difficulty with guiding supply and trading is the following. Basically, it very much depends on the situation in the market and also your view.
In a situation where we have a strong view of arbitrage opportunities, if current market prices substantially deviate from our fundamental view, that is obviously a situation where we are willing to take larger positions, and then there is also potentially upside compared to the guidance. At the same time, I mean, we haven't seen that in the last few years, but we have seen that, like, five years ago, the market was pretty flat. Boring. Yeah. In such a situation where you don't see arbitrage opportunities, we don't want traders to take positions. Then we're also happy if they just keep their hands off and don't take positions. Obviously, in such a situation, earnings could also be substantially lower. That's why in the end, it's kind of an asymmetric profile.
In situations where there are opportunities and also in situations where the desks are performing, there's additional upside. At the same time, we don't want to guide nor put the traders under pressure to be forced to take positions in situations where we believe it's not worth the risk capital.
Okay, thank you.
Thanks, Olly. Next question, please.
The next question comes from the line of Anna Webb from UBS. Please go ahead.
Oh, that's funny. I think that's me. It's Sam from UBS here, but I managed to dial in on Anna's code. Thank you, Anna, for getting me signed in. Michael, thanks for the presentation. I have a question on coal and one on gas. Apologies because I know that's not your focus at the moment, but it's where the questions are. On coal, just to follow up to Peter's question, actually. I remember that you had a release after the election or maybe after the coalition agreement last year, where you said you would expect clarity on coal by August of this year. I think some of us were thinking that would point to a natural update with your H1 results.
I just wanted to check if you still have that kind of timeline in mind, or would you say now it takes a bit longer, given everything else to see the shape of the outcome on coal? I make sure I let you have a go at that one, and then I'll give you my gas question in a minute.
Okay, Sam. Well, I mean, what we said is that we expect some more clarity in the course of the year. Actually, we were careful not to say it's gonna be the H1 or the end of the first half, because, I mean, in the end, you never know which direction the discussions are going, and it needs to be clear that you wanna have those discussions behind closed doors. I mean, in the current situation, I would argue, there's a positive side and there's a negative side.
I think the positive side is that indeed we are in very close conversations with the government on topics which is positive, very fact-based discussions around all the topics, but kind of the negative topic is that currently, obviously, the topic is less on coal exit or coal foundation. It's actually not on that topic. It's just about the short-term measures. Yeah. Therefore, I personally would not expect something by August because currently the priorities are at other topics. Having said that, it's clear that the topic is not off the agenda, but it's currently not the priority number one topic for the government.
That's really helpful. Okay, I'm 100% clear. Thank you. Can I go on to my gas question?
Sure.
Yeah, two questions. Excellent. Well, I mean, now we try and squeeze in three. Now my second one on gas is maybe a follow-up to the questions Rob was asking. I know this is now a very minor issue for you, and I recognize the exposure is small, but can you talk to us about this new German Energy Security Act? We had some discussion with Fortum earlier this morning on the same point. My understanding is that there's a draft going through parliament at the moment, which makes it very clear that if the German market did have to go at any point to curtailment, then the arrangements would be immediately that suppliers are off the hook for any contracted gas prices, and effectively the gas customer would have a choice.
They could buy from you at market prices, or they could not buy. I suppose basically what that says is if there's any curtailment, then the contract's void. Is that also your understanding of what the arrangements would be? Would it be right to think of that as, you know, a very sensible set of measures and a very positive from the point of view of, you know, the midstream gas business that you have?
I mean, Sam, to your question, I mean, clearly the intention of this Energy Security Act is to prevent that financial burdens with suppliers or our midstreamers in case of a stop of Russian flows, which I think is a positive signal. Having said that, if you look at the law, for us, it's not really clear how that exactly should work. From our perspective, there's still quite some questions on how that would operationally work. I mean, just give you a few examples. I mean, in the end, you're talking about tons of individual transactions, so how do you bring that back to the individual transactions? Plus it's a German law, but you also know we talk about international markets, so what happens to international deals you have concluded on international markets.
I think the intention is well thought. We're not clear yet how that would work operationally, and therefore also, judging what the exact implication of that law are, is very difficult for us.
Okay. Interesting. My assumption would be the more time goes by, the more detail we're going to get, and what's important here is the intention that you explained, which is to make sure that the midstream business is not kinda exploded.
Yeah. I mean.
That sounds like a.
No. That is clearly true. I mean, the government is clearly concerned about the situation and also tries to find mitigation measures to make sure that the market and the gas supply ultimately is working. That intention is clearly there. I mean, some of the implementations are not yet there where we want to have them. But you're right. I mean, I think it's good that they're taking the effort, that they have the right direction. As I said, we also appreciate very much that they realize that it's probably better to keep markets in place as long as possible, which I think is also a positive signal.
Really, really positive. Very helpful. Thank you.
Thank you, Sam. Next question, please.
The next question comes from the line of Piotr Dzieciolowski from Citi. Please go ahead.
Hi. Yes, good afternoon, and thank you for presentation. I have two questions. One of your competitors said this week that they see improved lignite spreads across the whole curve because the long end of the power curve also moved up. I just wanted to ask you, what is the duration of your hedges for the outright power in the lignite? And, you know, will you, and if so, at what point would you see some kind of a profitability uplift in this segment? Secondly, I wanted to ask you about the hard coal inventories in Germany, because when you look at the imports of hard coal to Germany, a lot of it, if not majority was coming from Russia. We know we're going to go to embargo in August.
I just wanted to ask, how do you see the situation? Is there a risk that going into the winter, some of the plants may not have enough coal simply to burn?
Yeah. Start with the lignite price. I mean, as I said, we are fully hedged in the current year, and we typically do hedging for the next years to come, so under 2025. Also the way how we hedge is typically first hedge kind of the exposure that we're different to the market, and then hedge the price setting spread at a later stage. So therefore, in the later years, there is upside where we have unhedged positions, but not in the near term. Secondly, obviously, you have to see if those margins are all hedgeable. So therefore, that's also a topic where we need to see how it really develops. Talking about hard coal.
Yes, you are right. I mean, quite a substantial part of German imports for hard coal has been from Russia. That has been stopped. I mean, other than the gas market where you need, at least in Germany, build up import facilities like regas terminals. We do have the import terminals and capacities for hard coal, and therefore it's more a question, how do you source hard coal on the global market. The global market for hard coal are much more liquid. We actually don't see a risk in getting hard coal. Obviously, prices have increased, but that shouldn't be a significant issue.
Also remember, Piotr, that our hard coal generation capacity has significantly reduced over the last year. It's not a key generation drive anymore. I think in the first quarter, we had 1.5 Terawatt-hour or so from hard coal only, so pretty small position.
Yeah.
No, I was just asking this as a regular, so I understand this. Thank you very much.
Thank you, Piotr Dzieciolowski. Next question, please.
The next question comes from the line of Tancrède Fulop from Morningstar. Please go ahead.
Hello, good afternoon. Thank you for taking my question. Just wanted to ask you about power plant dispatch and short-term asset optimization. It was a good performance last year, good performance in Q1, and yet your divisional guidance for the rest of the year is quite prudent. I wanted to understand what are the underlying assumptions which make you prudent for power plant dispatch and short-term asset optimization for the rest of the year besides the tougher comp.
Yeah. Thanks for the question. I mean, first of all, short-term asset optimization, as the name says, is short-term. That's nothing where you can have hedged something up front, but it actually very much depends on what happens in the prompt. That's the one aspect. Secondly, there's also some kind of seasonal pattern because short-term asset optimization typically benefits in situation where there's high demand and less supplies. Typically in Q1 and then Q4. Plus most of our quite a substantial part of that short-term optimization comes from gas assets.
As I said, I mean, on gas, we are somewhat more careful than otherwise because the worst thing, the last thing we want to have is sell our power and then fall short on gas and then have a short position on power. Therefore, that is something where we are more careful. Last but not least, I mean, you also saw that in the first quarter, we had an outage at Claus C. So unavailabilities at those elevated price levels can be substantial, and that is also a reason why we are more cautious on guiding that segment, being just at the beginning of the year.
Okay, thanks.
Thank you. Next question, please.
The next question comes from the line of Lueder Schumacher from Société Générale. Please go ahead.
Good morning, rather good afternoon. A very straightforward question on my side. You did mention earlier that Triton Knoll is already fully operational. Can you confirm if that is actually running on a CFD at the moment or if you're currently selling prices at market level?
Triton Knoll is fully operational, and capacity-wise, it's about half running on CFD and half is not yet running on a CFD.
How long is the other half that is not yet on a CFD running will be able to sell into spot?
Yeah. The start date is communicated on the Wellert webpage is April 1, 2023.
Excellent. Okay. Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from the line of Martin Tessier from Stifel. Please go ahead.
Good morning. Thanks for the presentation. I have a very general question. On the one hand, we understand that regarding a windfall tax, there is not a lot to take from you because you are mostly hedged, at least in the next two years. But on the other hand, we can read in the newspaper that Europe would like to reduce kind of a speculation on the commodity markets. I think that was yesterday, an article talking about this topic on the CO2 certificates. My question would be, do you think that your supply and trading business could be exposed to any taxation or profit expropriation? Anything.
I mean, talking about the discussions in Brussels, I mean, you know that there are quite different views. If you read the report, I mean, the commission is indeed happy with the current market setup, and that has been confirmed both by ACER and by ESMA on power and then gas markets and on EU CO2 markets. It is more that there are some member states, especially from the southern European countries, that are pushing against that. That needs to be seen in which direction it is going.
I mean, we are strongly making the point that markets are indeed working. I mean, in a situation of scarcity like we have it currently, the only way to get out of that scarcity is by either getting additional volumes in, so for example, LNG imports or by reducing demand. Therefore, kind of higher prices are exactly the right signal to make that happen. But that's more a political debate, and it's not up for me to judge what will happen in Brussels. But that doesn't necessarily have an impact on supply and trading. I mean, you know, we are acting internationally in global markets across various commodities. Obviously, we would like to see a market-based environment, and anything that would restrict those market activities would be negative.
Given the global reach both of commodities but also of activities, I'm not concerned about the current discussions in Brussels or in member states.
To add, in terms of global reach, I mean, trading is not only based here in Germany, in our headquarters, but we also have very strong trading operation outside of the EU and the U.K. and elsewhere.
Okay. Very clear. Thank you.
There are no further questions in the queue, so I will hand the call back to your host for some closing remarks.
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