Hello, and welcome to the Investor and Analyst Call of RWE, hosted by Markus Krebber, CEO, and Michael Müller, CFO of RWE AG. I will now hand over to Thomas Denny to begin today's call. Thank you.
Thank you, Stefano, and good afternoon, ladies and gentlemen. Thank you for dialing in to today's Investor and Analyst Call. Today, we are pleased to discuss two key pillars underpinning our growing green strategy. Today's topics are RWE's coal exit in 2030 and our step up in U.S. renewables. Our CEO, Markus Krebber, and CFO, Michael Müller, will guide you through the key points, and both will answer your questions afterwards. Markus, over to you.
Yeah. Thank you, Thomas. Also from my side, a warm welcome. Today is really an important day in the history of our company. At our Capital Market Day in November, we announced our growing green strategy, and at that time, we significantly upgraded our growth ambitions in green energy. We set ourselves ambitious sustainability targets. One of these targets was to bring our emissions in line with a 1.5 degree compliant pathway. Today, I'm happy to report major milestones on both fronts. This morning, we signed an agreement with the Federal Ministry for Economic Affairs and Climate Action and the corresponding Ministry of the State of North Rhine-Westphalia to bring forward RWE's coal exit to 2030. On Saturday evening, we announced the acquisition of Con Edison's clean energy businesses, which significantly expands our U.S. footprint and growth ambition in the US market.
Let me start with today's news. European energy supply is in a crisis, and at the same time, climate protection remains one of the main challenges of our time. There is a common solution to both. We must invest our way out of the crisis and, thus, accelerate the switch to more sustainable technologies. To do this, the right course must be set, and we will be more sustainable, modern, and competitive by the end of this decade. During the crisis, RWE is providing support with additional lignite capacity to plug shortfalls and increase security of supply. For this reason, we brought back 900 MW of capacity from the security reserve to the market at the beginning of October at the request of the German government.
With today's announcement, we have agreed with the government that we will postpone the decommissioning of the two 600 MW units to March 2024. These units were supposed to shut down over the near term. In total, it is 2.1 GW more lignite capacity for a limited period. Naming the obvious, if Germany needs more electricity from lignite in the short term, it will ultimately need an earlier coal phase out so that the country's climate targets remain achievable. That is what we are doing, preparing to end lignite-based power generation in 2030, eight years earlier than previously planned under the existing law and contract. Aside from that, the coal phase of 2030 is the basis for bringing us onto a 1.5-degree CO2 emission path, the ambition we set ourselves at the Capital Market Day last year.
There are two clear prerequisites for the coal phaseout to be successful, massive build-out in renewables for low-carbon electricity generation and flexible generation to ensure security of supply. On renewable energy, the government has started relevant initiatives to accelerate the build-out in Germany. Higher build-out targets, higher offshore auction volumes, and the ambition to accelerate permitting will lead to more renewable electricity generation by the end of the decade. On security of supply, the German government is creating an investment framework which covers the so much needed flexible backup generation, such as hydrogen-ready gas plants. We are preparing for around 3 GW of new flexible hydrogen-ready generation capacity in North Rhine-Westphalia on previous coal-fired power generation sites. These are ideally suited with existing grid connections. For our employees, the coal phase of 2030 has great implications.
Regulations that apply today, such as the so-called scheme in case of early retirement or trainings to qualify for other jobs, must be applicable. We stand up for the interest of our employees and strive for socially acceptable solutions. In addition to all that I just announced, one word on the foundation model. The option remains open. Further down the road, once crisis comes to an end and all parties involved have, again, free capacity, we agreed with the German government to look into a potential foundation solution. Now, Michael Müller will explain the financial implications from the accelerated coal exit.
Thanks. Good afternoon, also from my side. RWE will benefit from additional margins from the extended operations of the 1.2 GW lignite capacity, which will operate in the wholesale market. Due to the earlier coal exit, we have timing and operational effects that lead to an increase in mining provisions. Decommissioning costs post-2030 can no longer be accounted for as operating expenses but must be provisioned for. This is primarily an accounting effect. Cumulative cash outs for recultivation will only increase to a limited degree. Overall, the provisions will rise by EUR 1.3 billion to EUR 6.3 billion. The increase will be booked in non-operating results. We're finally ring-fenced our mining provisions with a portfolio of financial assets. Therefore, our mining provisions and related financial assets are excluded from RWE's net debt definition.
The financial assets we currently use to cover these provisions are the E.ON stake and the EUR 2.6 billion claim against the German government. Despite the increase, the liabilities will remain fully covered with a financial asset portfolio. The German government has reconfirmed the EUR 2.6 billion compensation payment and will support driving the EU approval proceedings. With the clarity on the accelerated coal exit, we expect a timely conclusion of the EU approval proceedings in the H1 of next year. As mentioned by Markus, we stand up for the interests of our employees and strive for socially acceptable solutions. We will add EUR 0.2 billion additional restructuring provisions. With this, back to Markus.
Yeah, thanks, Michael. Ladies and gentlemen, now to the second topic. Last Saturday, we have announced the acquisition of Con Ed Clean Energy Businesses in the U.S. It represents a massive boost for our green growth in the United States, and this underlines that we are stepping up our commitment to accelerate the energy transition globally. Relative to our capital market day, the U.S. has become even more attractive. It is one of the fastest-growing markets for renewable energy worldwide. There's a strong push to re-industrialize the U.S. economy. As a result, this will lead to a significant step-up in energy demand. There's also a massive push for green energy capacity build-out, and here I'm talking about wind, solar, batteries, and hydrogen investments. To get things going, the U.S. government has taken a decisive step and introduced the Inflation Reduction Act.
It offers an attractive, stable, and long-term investment framework for our projects. One element of success is to have a strong market presence in the countries in which we operate. In the U.S., we have had a major foothold in onshore wind for years. By adding a good 3 GW of mainly solar capacity with the acquisition, our U.S. portfolio almost doubles to more than 7 GW. With this, we take a leading position in the highly attractive US market. This is important because size and diversification matters in the competitive renewables business. Our US development pipeline also receives a significant boost by climbing up to more than 24 GW.
We expand our team with roughly 500 talented professionals from Con Edison Clean Energy Businesses, who brings a wealth of experience with them. Together, we will accelerate growth in U.S. green energy. Together, we will add an average 500 MW per year on top of growing green. Now let me hand back to Michael for the financial side of the deal.
Thank you. The purchase price of the acquisition is based on an enterprise value of $6.8 billion, implying an attractive EBITDA multiple of 11. After closing, we expect a yearly EBITDA contribution from the acquisition of around $600 million. The transaction is net income accretive, and to be clear, that is after purchase price allocation and post-dilution from additional shares. We are very pleased by the diversified portfolio of Con Edison Clean Energy Businesses, providing a high share of secured revenues from long-term contracts. More than 95% of operating capacity is contracted with low-risk PPAs. The average remaining contract tenor is 17 years. The acquisition, as well as future growth, are fully funded through debt instruments and equity capital measures.
We are delighted that QIA, Qatar Investment Authority, is supporting RWE's growth ambition through their EUR 2.4 billion equity investment via a mandatory convertible bond. The bond has a maximum duration of one year and the interest is 2.63%. Our dividend commitment remains EUR 0.90 per share at minimum. Synergies from the transactions should not be assumed. Our business is a people business, and we need the powerful team to realize our growth plan. Growth, that is certainly a good keyword for you, Markus.
Okay, exactly. Due to the transaction, our green portfolio will be more than 55 GW in 2030. Overall, a big benefit of this transaction is clearly the balancing of our global green generation portfolio by technology and by geography. In 2030, wind, solar, and batteries, as well as flexible green generation, will total more than 55 GW. Each technology will make up roughly 30%. Geographically, around 1/3 of installed capacity will be located in continental Europe, 1/3 in the U.K., and 1/3 in the U.S. This balance will surely increase the robustness of our business. Taking everything into account, today's announcements will ultimately increase our resilience and the long-term attractiveness of our stock. We have a clear plan by 2030 and continue with investments into green technology, and we consistently execute our strategy.
This fills me with pride, and I thank our employees for their tireless efforts. For you, our shareholders, we are creating value by delivering on what we promise, profitable and green growth. With the coal exit in 2030, I'm confident that we will also welcome new shareholders into our register. Now we are happy to take all your questions. Back to Thomas.
Thank you, Markus, and thank you, Michael. Operator, we can now start the Q&A session.
Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. The first question comes from the line of Alberto Gandolfi of Goldman Sachs. Please go ahead.
Hi, afternoon, and thank you for taking my questions. So there's so much going on to talk about. I'll clearly stick to two as the usual rule. Congratulations on the deal. Clearly, very interesting one. Maybe I'll start from actually something slightly different here. If I look at your previous November 2021 Investor Day and CMD, I know you're going to host one, I guess, at the full year results next year. Would you be able to elaborate a little bit on the underlying drivers of the key divisions? You know, you're delivering 500 MW more a year just from the U.S. There's legislation being drafted in Germany to accelerate speed up permitting. You know, we are hearing that there's probably 45 GW connection requests of large-scale wind and solar year to date in Germany.
You're probably a decent share of that. Energy prices are higher. Maybe you can talk about the 180 EUR/MWh cap. Is that confirmed? Yes. No? If so, I mean, it looks like the EUR 4.3-EUR 4.4 billion consensus EBITDA for next year and four-ish going forward seems extremely prudent, to say the least, you know, not to talk about trading, the CCGTs. I guess, can you tell us the key drivers against the plan? Besides rising interest rates, it seems to me that pretty much everything else has gone your way. Last but not least, an extra probably 10 TWh of lignite, that all my numbers could be per se, like EUR 600 million, maybe just for a year. Still, if you can talk about a little bit, this new world we're living in.
I'm not asking to front run anything you're gonna say next year. Just, I would love to see how maybe Markus and Michael, you're thinking about the world today. The second question is a little bit more specifically on the U.S. 500 MW a year, if I assume 100% success rate on the pipeline, seems to indicate that, if I'm not mistaken, now we're talking about a sort of an extra 7 GW of pipeline. What I'm trying to understand here is this would be a 14-year conversion of the pipeline. Is there any reason why? Is it because some projects are too early stage? Is it balance sheets? Is it permitting, or can the 500 MW a year at some stage become 1 GW, and when? Thank you so much for bearing with me.
Thank you, Alberto. I'm not sure whether the first one was a question or you have actually already answered your question yourself because you mentioned the three drivers. One is, of course, on a gross basis, not only because of this acquisition, but all other aspects, there is more growth possible for us. Secondly, we probably see a very healthy cash flow generation over the coming years. But the unknown now is what will the windfall tax or however you call it, price intervention, look like. These are the driving factors. We will need to wait until we have clarity because when we present something to you, it needs to be financially consistent.
We don't wanna show you something which is not fully thought through. These are the driving factors, and we probably come out, I would more say, in the H2 of next year, not with full year results, because we are still in a very difficult year when it comes to energy supply in Europe, ahead of us, 2023. On interest rate side, I'm not so sure whether interest rates are moving against us, because you know that we have very long-lasting provisions. When you look at the duration of the liability side, it is actually more or less the same on the asset side.
What we lose on the asset side, and please keep in mind that many of our prime assets, especially in the U.K., are inflation-adjusted offtake, that we gain the same on the liability side. On the U.S., I mean, 100% success rate for a typical pipeline is too high, but of course, a pipeline will be filled up by new origination activities. There is probably a good chance that when we have now finally looked into the joint business, that the contribution from Con Edison in a couple of years out can be higher than 500. Maybe after four years, we can go beyond 500. Give us some time because we wanna look with the joint management team of the U.S. business in the business plan, and reconfirm our assumptions, and then we come out. I fully agree that it is definitely on most of the aspects, probably all more positive than expected.
Thank you, Markus. Thank you, Alberto. I think we can move on to the next question.
The next question comes from Pujarini Ghosh from Bernstein. Please go ahead.
Hi. Thanks for taking my question. I have a couple of questions on the two topics that we're discussing. Firstly, on your Con Edison deal, how sensitive is the EBITDA and net income accretion to financing conditions? And how long do you wait to raise new debt, particularly if the base rate keeps on being high? And the second question on your lignite closure. To what extent do you think the incremental EBITDA from the lignite extensions could offset some of the provisions increase? When you say that your provisions have increased by EUR 1.3 billion versus, like, year-end, is that actually driven by the higher costs of the accelerated closure, or is it also offsetting some of the provisions decrease versus last year, given the increase in rates? Thank you.
Yeah. I think I take the question. Well, first on the EBIT, so the accretion. I mean, on the financing structure-wise, it's the following. You know, we have the purchase price, and obviously with the mandatory convertible we are already have secured quite a bit out of that financing. On top, the Con Ed business, the clean energy business also has existing debt, which we hope we can transfer. Obviously, that needs to be seen, and that's why we also have a bridge in place for two years to be on the safe side, but we do envisage that we can keep that debt and transfer that going forward. Therefore, in the end, we talk about new debt to be emitted of around $1.8 billion.
Now, if you look at the current market environment, I think it's not the best timing to issue bonds. Therefore, I would foresee that we first await closing of the transaction, and then look into the market and find the right timing when we then go to the debt markets to finance the remaining part of the acquisition. On your second question around the provisions. I mean, first of all, as I described, most of the provision increase really comes from that shift. Previously, due to accounting principles, we had activities post-2030 that could be shown as operating results. Since we don't have any operations now anymore post-2030, we have to provision for those. That doesn't change anything to the absolute cash flow numbers.
It's just a timing or a shift in a representation in the accounting numbers of the actual cash outs. There now is a slight increase in costs because we have to slightly change the design of the recultivation, but the primary driver really is that timing effect. Earnings-wise, as I mentioned, the increase in provision will be shown as non-operating results. That doesn't impact this year's results, at least not the adjusted EBITDA. While obviously the additional income we'll get from the additional operating hours will be shown in the adjusted EBITDA.
Okay. Thank you.
Thank you, Markus. Next question, please.
The next question comes from, I'm sorry if I mispronounce your last name, Piotr Dzieciolowski from Citi. Please go ahead.
Hi. Yes, good afternoon, everybody, and congratulations on the transaction. I have two questions, one on the lignite foundation, the other on the transaction. On the lignite foundation, I'd like to ask you know, it looks like based on the forward curve that there is all of a sudden a positive equity value in this business. How does this change your view on the possibility of creating this foundation? And would you consider also a breakup option to kind of eliminate lignite out of your operations? The second on the Con Edison transaction, I was trying to get my head around this 17-year duration for the support schemes and also realized prices.
Can you say anything about the average level of realized pricing per megawatt hour and how that will evolve? In other words, you know, is this EUR 600 million you are guiding to is going to be lower, and if so, how much over the next couple of years and medium term? Thank you.
Yeah, Piotr, thanks for the question. I take the first one. Where are we with the equity foundation? You know that it's part of the coalition agreement on federal level as well as on state level of North Rhine-Westphalia to look into that option. As I have said, that remains on the table. We have two problems currently. One challenge is a foundation solution is highly complicated. It needs a lot of work, and currently everybody is busy among government side, but to be honest, also on our side, with the additional tasks we have with the energy crisis. I mean, on top of accelerating renewables and what we all do.
There's definitely no capacity, resources, to look into it. We said we're gonna look into it the moment we have resources because it's part of the political will to do it, and also we said we are open, for solutions. The other aspect you are raising is very important. I think it is. Of course it is easier to give the government the lignite assets to, so to say, for free and fund, the provisions. When you have a positive value of the lignite operations of a couple of billion EUR, the government paying us for that, or implicitly paying us, paying us by not fully funding the provisions, is politically, of course, much more complicated. You are also implicitly hinting to alternative solutions than a foundation. Please keep in mind, whatever we do with lignite needs government approval.
I again would rule out anything other than a foundation where they are involved. I think every other solution, spin-off, sales or what, will be blocked because of the long-term task of renaturation and also taking care of the affected workers and regions. In summary, we're gonna work together on a potential lignite foundation solution when the crisis is in a state where we have on both ends, government and the company, resources to do so.
Piotr, I take the second question on the PPA and what is the implication for the EBITDA. I mean, first of all, you know that when we report the IFRS EBITDA, that also includes tax equity components, so PTCs, ITCs, and MACRS. Therefore, not the full EBITDA can be kind of translated directly into an average price. But indeed, if you do the calculations, you will see that the average price of the PPA is higher than in the current environment. That's simply because they were concluded already a few years ago when price levels were still much higher. Concerning your question going forward, I think it's fair to assume a fairly stable EBITDA number that will grow in the years to come simply because we bring additional projects online that then over time should also increase the EBITDA contribution from the business.
Okay. Thank you very much. That's helpful.
Thank you, Piotr. Next question, please.
Next question comes from Ahmed Farman from Jefferies. Please go ahead.
Yes. Hi, thank you for taking my question. Congratulations. I was just hoping maybe we could sort of get some of your thoughts on the legislative process and the EU both at the level of Germany and any EU state aid related process that would be required for the new coal phase out agreement. Any thoughts that you can share on the timing of that would be very helpful. Would it be sort of fair to think that once this legislative process is in place, that's after which we should probably sort of start thinking about the lignite foundation. That's my sort of first question. My second question is actually on the U.S. transaction.
I think you mentioned, you know, with this you are adding, supplementing your onshore wind fleet with solar assets. I wanted to ask you, how do you think about this would add to portfolio resiliency, in the U.S.? How do you sort of think about the benefits of that, in the context of this transaction? Thank you.
Yeah. Thank you, Ahmed. So the process is the following. We need two amendments. One is to the coal exit legislation to the law, where you have the end dates for the closures of the unit. That needs to come pretty fast because it has two changes. One is moving the exit date of the two 600 MW blocks out because otherwise they would be closed end of this year, and they should not be closed. On the other hand, bringing the exit date for the three 1 GW units to 2030, with the option for the government to put them into reserve if they cannot get their act together to build new gas plants.
On the other side, we need to amend our contracts to reflect the changes, but that is, I think, just a formality. I expect here a swift process, because it will only affect the RWE plants. This is an RWE-only solution, so the Eastern European lignite operator is not affected by this solution. I expect the government will work on it from today onwards, and we have it done by year-end.
On the EU state aid approval process, the delay you have seen and also our dissatisfaction was actually the case since a year's time, because it was clear that the new coalition would strive for the coal exit 2030 and the European Commission clearly said, "I mean, look, if everything is in limbo, why should I approve anything? Because I need to approve a next step anyhow." We wait for the final result. Now we have the final result, and here the clear expectation is that we see a very swift process, and a solution in the H1 of next year. Please don't interpret that when that is done, we look into the foundation.
Looking into the foundation is really driven by when do, especially when does the government has free resources to do so. Carly, I can clearly tell you they don't have people actually overworked on all the additional tasks they have. On the U.S. portfolio, I would like to answer that, twofold. One is I would not so much stress that the U.S. business in itself becomes more resilient. We have better growth outlooks. I come to that in a minute. Our overall portfolio, and you know the difficult situation we are in here in Europe, our overall portfolio creates much more optionality for investments, and by that makes the overall company more resilient because we have a good split of then 1/3 based in the U.S., by 2030 1/3 U.K., one-third European Union.
In the U.S. itself, we also like balancing the portfolio between the technologies, so we have a better solar platform now, and also across regions because Con Ed is less active in the ERCOT market. We are very involved there. By that, we have now a U.S. platform which has a balanced growth outlook and on the wind side as well as on the solar side, but also across all the different states in the U.S.
Thank you, Ahmed. Next question, please.
The next question from Gonzalo Pluija of ODDO BHF. Please go ahead.
Yes, thank you. Good afternoon. Maybe would like to come back a bit more in detail regarding the split, if possible, to what extent you can give us and EBITDA for next year for 2023 and the $600 million to be expected pro forma for the acquisitions. Between what could be related to the ITC, PTC, what could be related to the PPA contract, and what could be related eventually to the services. Potentially if I'm down, but I don't think that there is any farm-down to be expected in these figures. If you could give a bit of appreciation of the share of the different stream of revenue in EBITDA next year for these acquisitions.
Also regarding the cap to be expected at 180 EUR per megawatt hour. Of course, we understand that they're gonna take the EUR 1.3 billion additional hit in terms of provisions. At the same time, they're gonna be able to generate more cash flow with the lignite power plant in the short term. It seems likely that the 180 EUR per megawatt hour could be fair, but at the same time, government has the option to eventually put it at a lower level. In your view, what is the likelihood that the government will take this chance and will eventually put the cap at a lower level in Germany for the lignite power plant, and what is the likelihood of having it set at the max level 180?
Thank you very much.
I take the first one on the $600 million. You can assume that roughly $100 million comes from ITC and then PTCs and the MACRS, and the rest is from the operational business. The service business has only a minor contribution, so the primary part is really the operating assets. On the second question on the cap, the devil is really in the detail because a cap on $180 doesn't tell you anything. It's a question whether it's an annual cap, quarterly, a weekly, an hourly cap. This will all result in totally different incomes you can keep. There is a discussion of giving us also an upside above the cap to give right incentives. Let's wait.
I think, if you calculate on average 180, that is probably what is needed to keep the most inefficient lignite plant in the market. Because the last thing you want with the cap that you actually lose capacity in the market in the current tight situations. Whether it's 180, 160 or 200, that in the end doesn't make a huge difference. The more relevant driver is how is it calculated and how are the hedges considered. From being a bit involved in the discussions and where the government want to go, I think what we're gonna see as an outcome is probably very reasonable. As somebody has already said on the call, it will result into earnings which probably are above Street consensus in the case of RWE.
Thank you very much.
Thank you, Louis. Next question, please.
The next question comes from Wanda Serwinowska of Credit Suisse. Please go ahead.
Hi. Good afternoon. Congratulations on the two deals. Two questions from me. The first one is on the load factor for lignite. From what I remember, Markus, you mentioned that as you were preparing for the shutdown of the lignite capacity, the mining was also amended. Could you please tell us what is the reasonable load factor that we can assume for the next two years? The second one is on the USD exposure. Can you remind us how you hedge it? Have you hedged the USD for the transaction? The very last one, if I may, on the revenue cap. As you mentioned that it's possible that the German government will put a cap above EUR 180. Would it be allowed? Because I thought that 180 is basically maximum and the countries can go lower, not higher. Thanks a lot.
Maybe start with the last one. Michael can take the other two because I have to admit, I have no assessment of the load factors. I think they run at maximum capacity, but it's more or less driven by how much coal we can actually produce a year. What the different load factors for the different technologies, depending on the efficiencies, I don't have it here with me. Maybe Michael has, otherwise you'll get the information from IR. On the cap, what are they allowed is they can set per technology, so most likely nuclear and renewables, lower caps. What is also allowed, not to set the cap higher, but to give operators a share of the upside above the cap.
That is needed because otherwise we have no incentive to act market rational. I give you one example. If you only get EUR 180 for the power, your function is to maximize output, and not maximize margin. When you maximize output, you don't care whether you take a unit on maintenance in April or in June or in November. When you maximize margin, it makes a huge difference. If you get upside above the EUR 180, you probably act market, more market rational. The other aspect is if you only get EUR 180 for your power and nothing of the upside, you have no incentive to sell power to above EUR 180.
You can sell it at EUR 180 to anybody and maybe to somebody who doesn't fall under the cap and can then market the power himself without having to transfer anything to the government. What is allowed under the Brussels rules is to let operators participate from the upside above EUR 180, not setting the cap higher. Michael, over to you.
Yeah. Thanks, Wanda, for the question. On the lignite assets, you should assume a load factor between 70%-75%. I mean, bear in mind, first of all, those units were due to be decommissioned by the end of the year, so therefore, at least in the year 2023, there needs to be some bigger provisions than usually. That's why the load factor is lower. Plus also, when you talk about the units in security reserve, they haven't run for three or four years, so now they're gonna return to base load. We are more conservative with respect to availability and first want to see how they actually perform. Therefore, a lower load factor is a reasonable assumption. Concerning the hedging, well, indeed, we have obviously hedged it.
I mean, the transaction itself, as long as the purchase price is in US dollars and also, the bridge is in U.S. dollars, so therefore, that is obviously a perfect hedge. The equity component, which comes from the mandatory convertible, we have swapped. That also here the FX risk is mitigated.
Going forward, for the EBITDA that you are getting in the U.S., can you please comment if you hedge it, if you leave it open?
No. What we hedge is only the translation risk. The EBITDA in the, in the current year, we don't hedge.
Thank you very much.
Thank you, Wanda. Next question, please.
The next question comes from the line of Tancrede Fulop of Morningstar. Please go ahead.
Good afternoon. I have two questions. The first one is on the returns of future projects. At your last capital market day, you guided for IRR for onshore wind, solar and batteries between 4%-7%. Regarding the 500 MW additional annual investments that you plan as a result of the deal, and given the Inflation Reduction Act, is it sensible to assume that you will exceed the 4%-7% range by around 100-200 basis points in the U.S.? This will be my first question. My second question regarding the incremental lignite generation in 2023, do you have the CO2 allowances or will you have to buy them in the market? Thank you.
Yeah. Tancrede, I take the questions on the IRR. Obviously you are right that with increasing interest rates, our WACC should also go up. And therefore, I think the number you should take is rather the 100-300 basis points on average, which we want to achieve above WACC. That should give you also a good number going forward in the current interest rate environment to approximate the results. Concerning the CO2, now this is an additional open position that we get, and that CO2 for the lignite units would need to be hedged the moment we sell the power into the market.
Here, since it's not clear how the availability is actually, and you know that currently also hedging causes you to have sufficient liquidity on your balance sheet, we currently, at least for the time being, wouldn't hedge those positions in forward market and rather sell them in the spot market. Obviously you would sell power and buy CO2 accordingly.
Okay. Thank you.
Thank you. Next question, please.
As a reminder, if you would like to ask a question or make a contribution, please press star one. The next question comes from the line of Sam Arie of UBS. Please go ahead.
Good afternoon, everybody. Thank you very much for another super helpful call. Congratulations on the announcements. I wanted to ask two questions and one probably for you, Michael Müller, on the U.S. deal. I think in the slides over the weekend, you said this would be net income accretive from the first year. Then if I understood correctly in the presentation today, you also said effectively EPS accretive from the first year, so kinda after factoring the issuance and the dilution. I just wanted to check with you how to get to that number.
If I start with a sort of EUR 600 million EBITDA and take out depreciation and the financial costs, I can get to a kind of net income contribution of about EUR 160 million, something like that. But that's assuming that there, at the end of the day, there isn't any tax to pay on the U.S. business. I just wanted to give you a chance to talk to us about kind of what's the tax exposure on that U.S. business, and if I'm right that there's no tax to pay, is that just now for the next year or two, or is that likely to be kinda indefinitely the situation? That's my first question.
Then second one, Markus, this might be for you, but only because I've already talked about it with Michael Müller at another occasion. I'm calling in from the U.S. today, and the most common question we're getting from U.S. investors at the minute is why are European companies not signing more long-term gas contracts to replace the Russian gas. I know you guys have signed a great contract with Sempra, but it's relatively small. I understand that, you know, you and other companies are probably reluctant to sign up for a lot of long-term gas contracts that would give you kind of purchase commitments into the 2040s.
My question, I guess, the reason I'm pointing this to you, Markus, is, you know, are there any discussions with government about how to allow industry to sign more longer-term gas contracts? And do you think there's any chance that, you know, governments will in some way step in and underwrite potential long-term downsides on these kind of contracts to enable you to sign more of them without taking too much risk in the portfolio? I just, I know it's a bit off topic for today's presentation, but it's a huge question in the market, so we'd love to have an update from your side on that as well. Thank you very much.
Yeah, Sam, maybe I start with the question on the financials. You did the right math. The transaction definitely is EPS accreted. If you come from the $600 million EBITDA, it leads you to a $150-$175 million net income, and that also then gives you the earnings accretion on an EPS basis. You are right. We have assumed a tax of zero, and that is basically because ConEd will exercise the step-in right. Therefore, we will have write-offs on all the taxes. Given that situation, we assume that also going forward, our tax position in U.S. business will be zero going forward. That will not only be for the current year, but also for the future years to come.
Yeah. On gas, look, you have to think it through from the import side, actually. You can only sign long-term gas contract deals when you have capacity to import it. Currently, the entire LNG infrastructure in Europe is already maxed out. You need to wait until you have access to new LNG import infrastructure. You need to have that for 15 years, because if you don't have 15 years' capacity bookings, you cannot get into a 15-year contract because you don't know where to bring your gas in case you cannot find other offtake. First comes the infrastructure and then the long-term contract, not the other way around.
Second aspect is, even if you have the infrastructure, if you are willing to pay the market price, the market spot price, you will always fill the infrastructure. Signing a long-term contract with potentially other price elements like oil index, JKM index, TTF index, Henry Hub index, is a question of portfolio risk management. I think you don't need governments for that. You find companies doing that. Sometimes I think the answer of the question is, if we would sign more long-term contracts, we would get more gas into Europe, and that is totally wrong. The question is the infrastructure needs to come.
The second element is then what kind of contract commitment you go into. We all know the contract commitments with oil index Russian supply contracts. I don't think we don't wanna repeat that, with long-term LNG contracts. If the infrastructure is there and you are willing to pay the market price, you will fill the infrastructure, you will get the LNG.
Markus, that's very helpful. Can I have a quick follow-up on that?
Sure.
Because I think some would say, you know, you also need the export infrastructure on the liquefaction side and from whatever country, you know, if it's the U.S., is gonna be sending us the gas. To invest in building out that capability, those companies need the contract.
I fully agree. I mean, that's.
It feels to me like there's a little bit of a chicken and egg problem.
Yeah, you are absolutely right. I mean, that one I forgot. Really relevant infrastructure on the liquefaction side will come 2025 onwards, so where the Qatari project and probably the first U.S. Gulf Coast projects will come. Let's see how much more we get. What is actually currently happening in the LNG market is, regardless whether other off-takers in China or India or Japan have their long-term offtake contract. The gas nevertheless goes to Europe. We probably see 1/5 of the LNG getting into Europe, which was not planned to get into Europe on an annualized basis. The global market is 500 BCM. When I look at current import rates and annualize them, we currently get around 100 BCM LNG into Europe. That doesn't come from additional liquefaction. It actually is a rerouting of LNG, which was bought by others.
Mm-hmm.
Last question then I'll jump off the line, but I really want to ask you this. There's a bit of a debate like which is the worst? Is this winter the worst crunch, or is the following winter going to be even harder? I'm just interested factoring in all these thoughts about LNG. Do you see this coming winter as the hardest point for Europe to pass through? Or is the following winter going to be even harder?
It depends on what flows you expect and gives you maybe reasonable expectations. Number one is, we're not gonna see an increase in Russian flows. Second, the LNG infrastructure will be built and upgraded as planned, and we will be able to fill the entire LNG infrastructure by the willingness to pay the probably highest price. If you assume these then, we're gonna get reasonably through the next winter, depending on how cold it is, how the nuclear situation in France is, and how much wind we have. You get out of the winter with storage fill levels somewhere around worst case 15, good case a bit above 30%. Then you miss the Russian flows, which we had last year, to fill the storage.
Under reasonable assumptions, I think that the winter 2023, 2024 will be much more difficult than the coming winter. Put it in other words, the government probably need to decide to take gas out of the markets in summer next year in order to fill the storages, and that will be more demand reduction than we currently see.
Very helpful. Thank you.
On a positive note, I think with all projects underway in Germany, our friends in the West and upgrading the infrastructure for better West-East flow, I would say that in spring 2024, we have the necessary LNG and gas infrastructure being built in Europe, that we don't have volume deficits anymore. We have enough to get everything we want. The question is where is the global LNG price?
Very clear. Thank you for all that.
Thank you for the numerous questions. Next questions please, operator.
The final question comes from the line of Alberto Gandolfi of Goldman Sachs. Please go ahead.
Thank you. I'm taking the privilege of having been the first in the queue. Only one and brief, please. Markus, I appreciate you said the price cap for power could be EUR 160, EUR 180, EUR 200. We don't know. It depends on the details. In terms of timing, how long do you think realistically that measure will stay in place if the geopolitical situation stays the same? And what will happen after that? You know, do we need to think about a new power market design? And do you think we're moving to a cost-plus framework? What will it do to your business? You know, more visibility better or concerns? How are you thinking about it? Thank you so much.
Yeah. This is all a lot of speculation, but I'm in a good mood today, so let's speculate a bit. So what we try to tell the government in all markets where we are active is please differentiate three aspects of the crisis. One is we have supply, physical supply shortage, not enough gas and power. Only way out investments. First rule, don't scare investors. Second, don't destroy functioning markets because we have. That is probably the most efficient way to allocate the scarce resource. Then you have the problem that you have to support certain parts of the society and business because they cannot afford the price level. Then you face the question where does the money come from?
By reallocating money and price caps and windfall taxes, you don't solve any solution because the underlying problem is physical. Some of them even think by changing market design and understanding merit order, they can solve the problem, which is not the case. Given that, I think the measures will be driven, when do we expect easing of physical supply shortages? I think probably early 2024 is a good assumption. Maybe mid-2024 when we have enough gas infrastructure being built, and hopefully also a better situation with the French nukes. Another alternative could also be that demand destruction does its job and we see significant lower prices much faster than we currently anticipate.
I wouldn't put the probability above 50%, but I wouldn't rule out that we actually see pretty fast, much lower prices because this demand destruction not only happens in Europe, it also happens outside Europe because we have so high energy prices around the world other than the U.S. On market design, everything I see is you have probably three elements which make sense and which is easy to transfer the current model to. For all marginal cost technologies, marginal zero cost technologies, so nuclear and renewables, probably two-sided CFD is the right market design. You have competition for the LCOE, but you also have clarity on long-term offtake, and I don't talk about just 15-year, but maybe a two-sided CFD inflation adjusted for the lifetime of the asset.
On the other hand, you need for security of supply, a proper capacity market, so for marginal gas plants, future hydrogen plant. The third element is you keep the merit order as you know it for the spot market and physical dispatch. That's probably the best market design we can get to. The alternative is getting fully back into a regulated asset base, but that actually needs regional monopolies because otherwise it's difficult to decide who actually builds what. It's much the more difficult to transfer into that. The one I just described, I think the U.K. market with two-sided CFDs capacity market is very close to potential future market design.
Thank you so much.
Thank you, Alberto. Are there further questions?
There are no further questions on the line.
Great. Thank you. Thank you everyone for dialing in today. I hope you got all the answers you expected or you wanted. If not, you know that the IR team is at your disposal any time. Thank you all for dialing in. Thank you, Markus and Michael, for being available today. I wish you all a great afternoon. Bye-bye.
Thank you. Bye-bye.
Bye-bye. Thank you for joining today's call. You may now disconnect.