RWE AG

XETRA:RWE

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the RWE Conference Call. Markus Krebber, CFO of RWE AG, will inform you about the developments in the first quarter of fiscal 2018. I will now hand over to Gunhild Grieve.

[Gunhild Grieve]

Thank you very much. Good morning to everyone on the phone and to those who are joining us via webcast. I'm joined here by Markus Krebber for the presentation on the first 3 quarters of fiscal year 2018.As with our previous presentations, we will concentrate on RWE stand-alone. In order to focus on your questions, we have kept it short. So let me hand over to Markus.

[Markus Krebber, CFO & Member of the Executive Board]

Thank you, Gunhild, and good morning, ladies and gentlemen. Our Q1 figures show that we had a good start to fiscal year 2018, despite the weak performance of our trading business in Q1. Our Conventional Power Generation segments, Lignite & Nuclear as well as European Power show only a moderate earnings decline in the first quarter, also we still expect a greater reduction for the year as a whole.Our net debt declined by approximately EUR 1 billion compared to end of last year. This is a result of the high inflow of variation margins in Q1. We confirm the earnings outlook for RWE stand-alone for the full year 2018. However, let me briefly explain why the outlook for the IFRS group figures for 2018 will not be valid anymore. According to IFRS accounting standards, we will disclose the assets which will be transferred to E.ON at closing of the announced innogy transaction as discontinued operations in the course of 2018. These are mainly innogy's grid and retail businesses. Let me emphasize, on a like-for-like basis, our expectations for 2018 for the IFRS figures have not changed. For our stand-alone view on RWE, no adjustments to our earnings guidance is necessary.In March, we presented the agreement with E.ON to sell our stake in innogy in exchange for a wide range of assets, which will transform us into a leading integrated renewables and conventional power generator. The execution of the transaction is going ahead as planned.E.ON has published a takeover offer for innogy's outstanding shareholders on the 27th of April. Last Thursday, innogy issued its reasoned statement. The executive and supervisory board of innogy declared that they deemed the offer price of EUR 40, including dividends, appropriate in financial terms. This was also confirmed by the fairness opinions of 3 investment banks. Innogy's management did not issue a recommendation for the offer, as they could not assess the relative value compared to the E.ON RWE transaction due to a lack of information on our agreement with E.ON.However, the German financial regulator, BaFin, evaluated the relative fairness of the offer to innogy's minority shareholders in relation to the grid asset swap between E.ON and RWE, with its approval of E.ON's offer document.The assessment of BaFin was made on the basis of a full disclosure of all contracts between E.ON and RWE, valuations by independent auditors and other relevant internal documents of the companies, as required under German capital market law.Overall, innogy's reasoned statement does not affect the transfer of our majority stake in innogy to E.ON. We continue to work on the swift execution of the transaction.The merger control proceedings with the major regulatory bodies have been kicked off. We mentioned in March, we expect these to last until mid-2019. As soon as the regulatory approvals are in place, the first closing step will take place. Another important step was the agreement in principle reached by E.ON, innogy and RWE, together with unions last Friday, which de facto rules out forced layoffs. This is a good basis for further discussions and the preparations of a fair integration process. We believe that a trustful and constructive cooperation between the companies can reduce uncertainties with regards to the execution of the transaction.In this respect, we also do not see potential asset disposals in the interest of either innogy's employees or current and future shareholders. In the first quarter, we were also able to close the disposal of the Hungarian lignite operator, Matra, as we focus our conventional generation activities on our core markets, Germany, U.K. and the Benelux region.Ladies and gentlemen, in December 2016, the Federal Constitutional Court declared that the operators of nuclear power plants should be compensated for damages of the early exit of nuclear power in Germany. The court gave the federal government the task to come up with a compensation law by mid-2018. Recently, a draft law by the ministry of environmental affairs became public, which envisages compensation. We welcome that the government is addressing the matter following the ruling of the Constitutional Court. We assume that we will be compensated for stranded investments as well as the generation volumes of our Mülheim-Kärlich plant, which we will not be able to either use in our plants or sell to other operators. Based on the draft law discussed by politicians, we now, all in all, expect to receive compensation payments of up to a medium triple digit million euro amount.Slide 4 shows the development of our adjusted EBITDA. For RWE stand-alone, it amounted to EUR 299 million. The decline is mainly driven by the weak performance of our trading business in Q1 2018, which compared to a very strong Q1 in 2017. The adjusted EBITDA does not yet include the innogy dividend of EUR 683 million, which we received at the end of April, and which will be included in the H1 figures.Slide 5 provides the details of the performance of the Lignite & Nuclear division. The earnings decline of EUR 33 million for adjusted EBITDA is moderate compared to the expectation for the full year. We expect a more pronounced margin decline in the coming quarters. The quarter-on-quarter comparison shows only a moderate decline since we experienced lower nuclear volumes and margins in Q1 2017 due to outages.Looking at the full year 2018 outlook. We still expect adjusted EBITDA to be between EUR 350 million and EUR 450 million.The European Power division realized only a slight decline in earnings. Adjusted for nonrecurring items, earnings were actually up year-on-year.The earnings decline from lower margins in Q1 was more or less offset by the income from the U.K. capacity market. However, we do not expect capacity payments to make up for the shortfall in margins for the year as a whole. Hence for 2018, as a whole, we confirm the outlook we gave in March.This brings me to our current hedge position on Slide 7. The strong decline in fuel spreads since the beginning of the year had only a limited impact on our hedge position for 2018 and '19, as we are almost fully hedged. As a result, the hedge price for those years stayed broadly flat compared to the improved level at the end of last year. For 2020, we have a much higher open implicit fuel hedge position. Hence, the current hedge price is approximately EUR 2 lower compared to the end of last year, as generation spreads have fallen. We show, for the first time, our hedge position for 2021. We are hedged more than 30%, mainly via an implicit fuel hedge, and by that we keep the upside from -- of improving generation spreads.From now on, we will provide additional information on our hedged CO2 position. The average hedge power price for our outright position can only be understood when the corresponding hedged carbon prices are taken into account. In an environment of stable CO2 prices, this information was not relevant to understand the economics of the business. This has changed with the recent dynamics of the carbon and power prices. The carbon hedge prices for 2018 to 2021 of EUR 28 to EUR 29 per megawatt hour correspond with average hedged CO2 prices of approximately EUR 5 to EUR 6 per [ tonne ]. Let me also remind you of our long-term carbon position, which we have financially hedged through the end of 2022. In other words, change in carbon prices should not affect our generation margins for the next 5 years.On Page 8, you can see the development of fuel spreads until the end of Q1 2018, which are relevant for our hedge prices you saw on the previous slide. After the strong improvement of fuel spreads, which peaked during the Jamaica coalition negotiations due to anticipated coal capacity closures, they started to come down after the talks failed. Since the beginning of the year, we have seen a further strong decline in clean dark spreads to levels seen a year ago. We believe that spreads at current levels are fundamentally undervalued, especially in outer years, and see some potential for recovery.Now on to the earnings development of Supply & Trading on Slide 9. Trading performance was weak in Q1, expressed by an adjusted EBITDA of minus EUR 24 million compared to a very strong contribution in Q1 2017 of EUR 146 million. Business was in the normal volatility of the division, and we remain confident that the business will deliver as expected for the full year 2018. For the year as a whole, we confirm our guidance, given in March, to reach an adjusted EBITDA of between EUR 100 million and EUR 300 million.Ladies and gentlemen, Slide 10 provides the earnings drivers down to adjusted net income. Our adjusted net income amounted to EUR 78 million in Q1 2018. Besides the typical adjustment of the nonoperating results and the corresponding tax position, we have mainly corrections in the financial result. The reported financial result will show a higher volatility in future due to the new accounting rules of IFRS 9. According to these rules, the mark-to-market valuation of certain securities have to be accounted for in the financial results, while in the past this was shown in the OCI.As this disclosure distorts the underlying financial results, we will adjust for this effect in the reconciliation of adjusted net income. In Q1 2018, the effect amounted to minus EUR 26 million. Now on to our distributable cash flow on Slide 11. The reconciliation from adjusted EBITDA to distributable cash flow is dominated by the seasonal development of the operating working capital in Q1. This is mainly driven by timing effects, since we purchased most of our required CO2 certificates in the first quarter of the year. This will revert in Q1 once the certificates for emissions in 2017 are delivered to the national clearing authorities.Changes in provisions and other noncash items are also impacted by the accounting of CO2 emissions. While the recognition in provisions run throughout the year, the utilization takes place in Q2. Furthermore, Q1 showed a very low utilization of our nuclear provisions.In the first quarter, we already accounted for the full year effect of the equity British pound hybrid payment, which amounted to EUR 60 million. Last year this was reflected in Q2. As you are all aware, the distributable cash flow in Q1 2018 does not yet include the dividend of innogy. In April, we received EUR 683 million for fiscal year 2017. The details of the development of net debt are shown on Slide 12. At the end of March, it stood at EUR 3.5 billion, approximately EUR 1 billion less than 3 months ago. This is mainly a result of a high inflow of variation margins in Q1 2018. Once the derivatives will be realized, this cash effect becomes part of the generation margin but will reverse as an outflow of variation margin. We expect this mainly to happen in 2019 and thereafter. Consequently, we adjust our outlook for net debt for RWE stand-alone for the end of this year to be moderately down compared to the end of fiscal year 2017.This brings me to our RWE stand-alone earnings outlook for 2018 on Slide 13. As already mentioned at the beginning of my presentation, we can confirm our earnings outlook for the year as well as our target to pay a dividend of EUR 0.70 for fiscal 2018. With this, I conclude my remarks and we are now happy to take all your questions. Gunhild, please?

[Gunhild Grieve]

Thank you, Markus. As everybody knows our 2-question rules, I will try next time not to repeat it.

[Operator]

[Operator Instructions] First question is from Vincent Gilles of Crédit Suisse.

[Vincent Gilles, Head of the Utilities Research]

I got 2 questions, please. Page 7 and 8, inevitably. You started helping us bridge the slides you gave at the end of fiscal year '17, where 2020 was at EUR 31 per megawatt hour -- excuse me, EUR 29 -- [ EUR 38 here ] -- I'm correct -- EUR 29 now. Basically, can you help us bridge, you started, but can you develop what you were saying on the bridge between the price we had at the end of last year and the price we now have on outright power? Because obviously power prices move, spreads move, but it will be very helpful for us, maybe, to get a better grip on what we should expect for the rest of the year, is [ basically ] my question. And the second thing is on Page 8, the spreads. Okay, fine, we can see what happens. What is your expectation of what may happen? Implicitly what I'm asking you is what is your expectation on carbon prices in the next 6 to 12 months?

[Markus Krebber, CFO & Member of the Executive Board]

Yes, thanks for the questions. So first, I mean, maybe let's spend some time on implicit fuel hedging, and you ask to bridge the development between the EUR 31 we showed at last -- end of last year, now the EUR 29. I mean, actually it corresponds exactly with Page 8 because what you see here for the blended spread for calendar year '20, that it came down from around, over the last 3 months, around EUR 6 to now around EUR 4. So this is exactly the EUR 2 we lost because when the power position is not fully hedged, so which is the dark blue on to -- on page 7, and it's not fully hedged but then it's the shaded one, then we are still exposed to developments of the blended spread we show on Page 8. Now maybe the right question could be, why haven't you used the environment and have hedged the outright position already, so sold the power at that prices? The big problem for us is, given the size of our position, that we have to decompose the different legs. We know exactly that we are very exposed to CO2. That's why we hedged CO2 very early when we think we should hedge at these price levels. That is why CO2 is already financially hedged until 2022. The second leg is hard coal. The hard coal markets are very liquid. So we can protect ourselves and, especially, Lignite & Nuclear, from falling hard coal prices by going short hard coal. To really use the power market 3 years in advance is a very big constraint liquidity-wise. So the alternative would not have been selling what we turned into a blended spread position, selling it outright but keeping it entirely open, and that would mean we are exposed to CO2 and also other developments. So -- and what we said and you can see, in 2019, where spreads were very healthy, also during the last quarters, we used for full liquidity to sell power to close everything. 2020, we keep the position now open because we think, especially for '20, the spread, the average spread, are too low on the forward market. That is not what is needed in the physical markets in order to bring enough capacity online to produce electricity which is needed. And we are not willing to close a position at prices which we don't think are appropriate. And we have seen a very similar picture, I think, 1.5 years ago when we started to explain the implicit fuel hedge. I think too much of the, let's call it, closure fantasy during the Jamaica coalition talks has disappeared. I think we will see some action also in the early '20s and markets will be tighter. And currently, that is not reflected in the forward financial power markets, and that's why we keep the implicit fuel position open. We expect to benefit from the recovery in the spreads. Your second question on carbon prices, I mean, that is very difficult. I mean, I have individual discussions with many of you about the carbon market. It's very difficult to analyze the carbon market fundamentally because it's more behavioral theory or games theory. What happens when you really run into the shortage, this physical supply shortage next year and what probably utilities will change in their hedging behavior and whether industrials are selling, willing to selling their surpluses into the market, the question is at what price levels. So we don't have an RWE house view on the carbon market, but we know the relevance for our economics, and that's why we said let's protect the company against the downside risk for carbon, and we are very happy that we could hedge the position until 2021 at price levels of EUR 5 to EUR 6 now. And maybe one last aspect to that, I think that is important why we now disclose the carbon hedge. In the outright position, the most relevant one is lignite. And as we have made clear on our Capital Market Day, on a full cash flow basis, cash contribution basis, so including maintenance CapEx, we need power prices after carbon of EUR 22 to break cash -- to have a cash breakeven, including maintenance CapEx. And if you now compare the EUR 29 with the EUR 5 to EUR 6, that was even a better hedge than keeping the position open because with EUR 40 today, at EUR 15 carbon and the intensity of lignite is 1.1, 1.2, the spread we have implicitly hedged here is even higher than waiting for power prices being at EUR 40, but especially driven by carbon prices of EUR 15. So lignite position is better off with EUR 29, EUR 5.50 than with EUR 40, EUR 15, and that to really understand it, that's why we decided to disclose our carbon hedge from now on.

[Operator]

The next question is from Deepa Venkateswaran of Bernstein.

[Deepa Venkateswaran, Senior Analyst]

I have 2 questions as well, the first one actually following up on the previous one on hedging and second one on the labor agreement. Maybe I'll start with the second one first. So the agreement that yourself and E.ON have with the unions, do you think that, that is sufficient to generally give the employees of innogy confidence? Because innogy management team are clearly demanding for 3 additional things, I think best of both worlds and some independent appraisals, et cetera. So your view on whether this is kind of sufficient and legal proceeding. And secondly on the hedging, so if I am looking at an open year, say, that 70% of 2021 or a year like 2022, you've given us one piece of information that you're financially hedged for carbon. But what would this really mean? So for instance, if you stick to the EUR 40 power price, EUR 15 carbon, so for the open position in a year like 2020, is it then the equivalent of saying, look, if you think you've covered, say, 40% of your carbon exposure, that means you should take the market price of power, or the market price of carbon for maybe approximately 60%? And we have to, kind of, take a guesswork on where you've locked in your carbon price at whatever levels, so the remaining 40%, and a guess as to what kind of power price does that correspond to? So I just want to make sure how we should reflect your carbon hedging until '22 in this, and then obviously for an open year like '23 where you haven't hedged, it's whatever our guess is on carbon prices and power prices then, I guess.

[Markus Krebber, CFO & Member of the Executive Board]

Thank you, Deepa. Let me start with your first question then. I think, maybe, you know that I have also run a very big integration project before I joined RWE, and that was at [indiscernible] and Commerzbank, also 2 companies of the same size with a very concentrated workforce in one city. I mean, you can agree on certain things, but to really have a successful integration process, what you actually need is a constructive dialogue. And exchanging your views in public and trying to fix everything in contracts doesn't work. While it's not -- it works to a certain extent. We think what is agreed by now, especially with the agreement which was reached last Friday, which effectively rules out forced layoffs, gives enough certainty to now start the constructive dialogue and the joint integration of effort of the 3 companies. And then all other things will be sorted out over time. That is our view. And maybe it's better that you then, in future, hear less from the companies and we start working and not expressing our views in public. On the hedged position, more or less, your understanding is right. I mean, what we -- it is -- to be honest, it's very difficult to assess the position for '22, because we said we are financially hedged on the carbon side. So if you want to come up with your own calculation how it should look like 2022, you can only take the market average carbon intensity when you deduct the carbon price from the outright power price, because we had already financially hedged our higher-than-market average carbon intensity. The right question is, at what CO2 price? I mean, let me maybe come back, or the IR team, whether we are willing to disclose that. On '23, the entire position is open, but I also want to clearly tell you that we know how sensitive our economics is towards the carbon price. We were not surprised by the carbon rally in carbon prices, so we are prepared. Maybe we are also prepared beyond 2022, but I'm not willing to give you more details at this point of time.

[Operator]

The next question is from Sam Arie of UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

I have just 2 questions on different topics, actually. Firstly, on the trading results, I think it will be helpful to have a bit more color here on what's going on and where you -- what gives you comfort in still reaching your end-year guidance range. And obviously we do recognize trading can be up sometimes and down at others, but if you can help us explain sort of what -- a bit more about what drove the Q1 outcome and why you think that will come back during the year, I think that would be really helpful. And then the second thing were -- I just want to ask you is about the liabilities on the balance sheet, particularly the pension, and if you could just remind us kind of what the process is for the general increase in bond yields in the market to feed through into potential, kind of, revaluation of those liabilities. I know there are certain sort of milestones and points at which you will look again at the discount rates, but can you remind us what the timing is on the process?

[Markus Krebber, CFO & Member of the Executive Board]

Yes, Sam, the first one on trading, I'm -- unfortunately, I have to disappoint you. I cannot give you any color because the trading quarter in Q1 was very boring. It is totally different than the difficult situation we had in 2016. It's a volatile business. I mean, the EUR 25 million loss, after all cost of the division, is totally in line with the business model we run there. And we actually had a very similar quarter than this Q1 last year. But fortunately, in 2017, that was not the first quarter, it was the second quarter, so it was less obvious. So let's say, this year, the order of the quarters is different. And we are very confident that we will end up within the given range of expectations of EUR 100 million to EUR 300 million of EBITDA on an average of EUR 200 million. And as we have said before, we know that the market doesn't like this volatility, but we like the business because it constantly contributes to cash flow. So we will look through the volatility when we make decisions on dividend payments. The last one on pension. On pension, the discount rate is actually adjusted every quarter. And when you look at the group results and the stand-alone results, you will see that the group -- for the group results, the discount rate was lower by 0.1%, and for the stand-alone figures, it was stable at 1.9%. The simple reason is the duration of the liabilities of innogy. So for RWE, it was a constant discount rate, and that is the reason why the increase in pension provisions was less pronounced. It was only around EUR 0.1 billion, which was actually a loss on the asset side, given weak equity markets in Q1. And for innogy, we had both effects, the loss on the asset side and the lower discount rate.

[Operator]

The next question is from Peter Bisztyga of Bank of America Merrill Lynch.

[Peter Andrew Bisztyga, Head of Pan]

Two questions, please. Firstly, just going back to the implicit fuel hedge. I'm just wondering if it's adequately calibrated with respect to the bigger role that gas prices are having in setting forward power price at the moment. So I was just wondering if there's any kind of basis risk we need to worry about there. And then the second question regards to the E.ON asset swap. The offer document suggests that the deal will break if innogy sell any assets over EUR 150 million in value. Obviously, there has been a number of headlines suggesting that innogy have been approached for certain parts of their business. So I was just wondering if you could just outline what thoughts and concerns you have with respect to that, please.

[Markus Krebber, CFO & Member of the Executive Board]

Yes, Peter, thanks for the question. So there are no basis risks in the implicit fuel hedge when it comes to power prices, because the implicit fuel hedge is constantly adjusted to the price-setting fuel mix. So when the price-setting fuel mix changes because carbon or commodity prices moves, also the implicit fuel edge is constantly adjusted. So when gas becomes more price setting, the implicit gas part of the hedge increases. So the only exposure we have is to that blended spread we show on Page 8, but this blended spread can also change. I mean, it can, in some [ constellations ], have higher parts of gas, and others lower parts of gas being price setting. But as I said, it's constantly adjusted on a delta basis. On the second question, to sum it up, we are actually not concerned. What is right, as you read in the offer document, that if innogy sells more than -- a single asset worth more than EUR 150 million or accumulated more than EUR 450 million, then E.ON has a right to walk away. They [ can cease ] it, but they have the right. But it is totally clear that whatever decision the innogy boards take, the management board as well as the supervisory board, and the thresholds are exactly taken at the level where it needs supervisory board approval, the supervisory board needs to -- and also the management board needs to consider the interest of all stakeholders. And I mean, that these are the employees, but especially the shareholders, and the majority shareholder has a dominant part of the interest of the stakeholder groups. And it's totally clear that it's not in our interest to sell parts of the company. Two things are excluded from that, and these are the U.K. business, which is part of the merger agreement with SSE, and the Czech gas grid business. This is also excluded from these conditions. And also, Peter, I mean, Uwe Tigges has made very clear yesterday when they presented their results to the German press, I think it was not in the analyst call, which we couldn't follow, but in the press call, that they will -- that innogy will take care of the interest of the majority shareholder in every step they do from now onwards, as they have done in the past, actually.

[Operator]

The next question is from Alberto Gandolfi of Goldman Sachs.

[Alberto Gandolfi, Managing Director]

I also have 2, please. The first one is that looking anecdotally at what happened on May 1, like 17 consecutive hours of negative prices, I was quite curious to see -- I mean, this has already happened in the past, but clearly with growing renewables, it's going to happen more and more and more. So I was wondering what happens to your business on those days? I mean, what happens to -- clearly, your European Power, it's quite obvious, but can you make money out of it from trading? Or we just purely see this as a negative going forward for your business? And the second question is, do you have any thoughts on the likelihood by the European Union to upgrade the 2030 renewable targets and perhaps sticking to renewables? Are you considering any expansion into other markets? We are seeing loads of utilities are signing corporate PPAs from wind and solar in Spain, for instance.

[Markus Krebber, CFO & Member of the Executive Board]

Let me start with the second one because it's the easier one. Yes, I mean, we said we will come up with our renewables strategy when we had intensive discussions with the 2 renewable teams at innogy and E.ON, but in terms of focus markets or core markets, that is not only Germany, U.K. and the Benelux, it includes all of Europe and North America. So we will also look into the other markets as actually innogy's and E.ON's renewables business already do. On the negative prices, I mean, when power prices are negative, you don't earn any money from running conventional power generation. That is totally obvious. You have to shut it for the time being, which we have also done especially in these days. But you can make money from commercial asset optimization, and, maybe, I give you a little example how that works. On the forward markets, it's not clear, even in the week-ahead market, at which hours you have negative power prices. So you have a blended power price for a day or a week, and then people start buying and we start selling. And you lock-in an average margin and even it being very tiny, you don't make lots of money from hedging. But then you see the daily volatility. And in those hours where power prices are negative, you shut down your own power plant and you buy the power from the market and even getting money. And in the other hours where prices are higher, you bring on additional capacity where you earn additional money. So the higher the volatility in the market is, the more we can actually make. But the more concerning thing is that the average load factor of the conventional generation comes down, but we are addressing that with now also expanding into renewables.

[Operator]

The next question is from Lueder Schumacher from Societe Generale.

[Lueder Schumacher, Equity Analyst]

Two questions from my side as well, the first one is coming back to the rather popular topic of your clean dark spread position. You mentioned that they came back -- rather that they peaked just as the talks with the Jamaica coalition collapsed, but in your view, why have clean dark spreads come back, and what's going to reverse that? Because the whole idea of coal closures is not off the table, it's still there. So in your view, what are the main drivers for the clean dark spread going forward, and what was the reason for the decline? And the second question is on your variation margin, your rather good cash flow number. What was the underlying instrument there? I assume it will be carbon, is that correct?

[Markus Krebber, CFO & Member of the Executive Board]

Lueder, thanks for the question. The first one on clean darks. Yes, I fully agree that the topic of coal closures is not off the table. Maybe, it picks up when now the commission will start work, but it remains to be seen when it will start. First, they need to agree on the nominations. And what we have seen under the Jamaica coalition talks is that the system is now becoming so tight that when you talk about 5 to 7 gigawatts of additional closures, spreads will go up significantly. And currently, I think the market doesn't anticipate a single closure in the early 2020s, and that's maybe too optimistic on tightness. So we think at current spread levels, it's not worth hedging the position. On variation margins, I mean, in terms of instruments, I mean, as clear variation margins, fully cleared instruments, which commodity is this, I will not disclose, because by that, I would disclose maybe also some things we do long term for the company. I mean, what it shows -- and we said it's a temporary effect. In one way, that is right. In the other way, it also means when we realize this cash in the generation margin, it is still there. I mean, it's better than not having done the hedges. But in the line item variation margin, it will reverse by that time. But whether that was a long position in carbon or a short position in other things, I can't tell you.

[Operator]

The following question is from Ingo Becker of Kepler Cheuvreux.

[Ingo Becker, Head of Utilities Sector Research]

I have also 2 questions, the first on CO2. I think you said, many of us probably share that, that in the past, those [ futures price ] were rather behavioral than really fundamental and, I guess, many of us at the same time now are wondering if that has changed. You said you weren't surprised by the rise, which suggests somehow you might have taken or you will take a view here what is composing the current price. Maybe you can help us a bit understanding whether you think that currently is a rather fundamental price. And if so, what your logic would be, without really commenting on your position or going forward, just understanding where we are right now and possibly why. And the other question, sorry to ask this as well, but also interested in your view on the fuel spread chart on Page 8. Do you hold that it's truly predominantly the coal closure debate, or would you detect anything else that might have changed in the last few months in the market's forward assessment of the situation?

[Markus Krebber, CFO & Member of the Executive Board]

Yes, Ingo, thanks for the question. I mean, on CO2, it is very difficult. I mean, to be very honest, we don't have a view whether the EUR 15 we see today is the fundamentally right value, or it should be at EUR 20 or EUR 12, and where it should go next year when we run into the physical supply shortage, because you need to make assumptions: What has been done by utilities in terms of hedging, how will they change the hedging behavior when prices are higher and also at which prices are industrials willing to sell part of their surpluses. It's very difficult. I mean, I give you my personal view, I wouldn't be surprised that carbon goes even higher this year and even higher next year. On fuel spreads, I think what you have seen now with spreads coming significantly down, this is maybe even more than not only anticipating coal closures. What we showed on Page 8 at the Capital Market Day 1.5 years ago, was especially that the forward markets were underestimating or were depressed and they typically recover when it comes to physical supply over time. And that can be that there are more sellers than buyers in the market. And maybe that has come back to the market, because spreads are even lower now in the second quarter, even with absolute very high power prices. So maybe that has also a bit changed. But as I said before, we think even without any coal closures, spreads we currently see are fundamentally undervalued.

[Operator]

The next question is from Ahmed Farman of Jefferies.

[Ahmed Farman, Equity Analyst]

I actually also have 2 questions on Slide 7. So if I understand this correctly, the EUR 29 that you're showing will essentially be tracking the development in the spread. So I think, Markus, you just mentioned that the spreads have come down further in the second quarter. So could you just give us an indication of where that EUR 29 number is as of today, just directionally? The second point I have is on the light blue part of the slide. So when we calculate the carbon cost here, did I understand this correctly that we should be assuming the average market intensity for this part?

[Markus Krebber, CFO & Member of the Executive Board]

Answer to the second question is yes. You should apply the average market intensity because we have already hedged the overintensity. On the first question, I don't -- I can't tell you where the EUR 29 are currently. That's nothing which is decision-relevant. Which is more relevant is what we think is, compared to our fundamental analysis, current spread levels, whether they are over or undervalued. But I'm not so much focused on the average power price of the open position. I'm more focused on the power price of the hedge position and whether we hedge at the right point in time. So there is no daily update of this EUR 29.

[Operator]

The next question is from Dominik Olszewski from Morgan Stanley.

[Dominik P. Olszewski, Research Analyst]

Squarely within the 2-question rule, just one for me. Is it possible to quantify the value contribution that you saw from the commercial asset optimization team in Q1? I know in the past, you've benchmarked it and saying it provides something like EUR 2 to EUR 3 per megawatt hour of additional value. Is that something you're able to share?

[Markus Krebber, CFO & Member of the Executive Board]

Yes. I mean the commercial asset optimization had a good result in Q1. It was, maybe, a bit above average, but it was not of the very high level we have seen in 2017.

[Operator]

There are currently no further questions. [Operator Instructions] I haven't received any further questions.

[Gunhild Grieve]

Then I thank everybody for listening in to our call today. As always, the IR team is at your disposal for any follow-ups. Thank you very much. Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.