RWE AG

XETRA:RWE

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the RWE Conference Call. Michael Muller, 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.

[Thomas Denny, executive]

Thank you. Good afternoon from Essen, ladies and gentlemen. Thank you for joining the RWE Investor/Analyst Conference Call. Our CFO, Michael Muller, 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 at our recent AGM. We received tremendous positive feedback on our strategy in the weeks leading up to the event. And your vote at the AGM shows that the company is on the right path.

Now without further delay, over to you, Mike.

[Michael Muller, executive]

Yes. Thanks, Thomas, and also good afternoon to all of you. Russia has been in war with the Ukraine since February 24. We're all deeply shocked and condemn Russians' 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 housing in the Rhineland region by donating money to aid organizations and by releasing employees for aid services. And we 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 2 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 imports 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. And 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 gigawatts 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. Our lead stands by the coal phaseout 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. And 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-megawatt El Algodon Alto wind farm in the U.S.

Since April, our 857 megawatts Triton Knoll offshore wind farm has been fully operational. For our U.S. solar construction project, we are expecting delays due to regulatory intervention for import of 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 holded, which affects the commissioning of 1.1 gigawatt of solar capacity, including batteries under construction.

In contrast, the so-called Eastern package adopted by the German government paves the way for future wind and solar build out in Germany. Even if there's still need for optimization and the parliamentarian 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. And finally, we were successful in the British capacity auction with 6.6 gigawatts of flexible generation capacity. The auction cleared at GBP 30.59 per kilowatt 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.

In 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-on-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/Gas division was EUR 263 million. The flexible generation business was up year-on-year due to a stronger short-term asset optimization and higher hedged margins. An outflow of the Dutch gas and outage of the Dutch gas plants Claus C has partially offset the increase. The plan was off-line from the beginning of January due to a damage in the low-pressure steam turbine.

Following repair works, the plant has been back in operations since the middle of April. Supply & 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/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 7th 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 nonoperating 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.

And 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 taxes 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 bells out over time.

In Q1, the adjusted operating cash flow is marked by the typical seasonal effect in working capital. Working capital increased due to the purchase of CO2 certificates which will be handed in, in the second quarter. Net debt is 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 megawatts of new capacity including the project at Algodon Alto, I mentioned at the beginning. As we speak, we have 5.6 gigawatts of green capacity under construction across various technologies. In flexible generation, the 300-megawatt 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 to EUR 1.7 billion. And the dividend target is EUR 0.90 per share for this year.

And with this, let me hand back to Thomas for questions.

[Thomas Denny, executive]

Thank you, Michael. We'll now start with the Q&A session. Operator, please, take it up.

[Operator]

[Operator Instructions] The first question comes from the line of Peter Bisztyga from Bank of America Securities.

[Peter Bisztyga, analyst]

So 2 from me. Firstly, you successfully blocked the Enkraft proposal for lignite spinoff. A lot of your shareholders did. And I'm just wondering where that leaves you now regarding your options for that business. And 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?

And then my 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 current market volatility.

[Michael Muller, executive]

Yes, Peter, thanks for the question. I mean, first -- let me first talk about lignite. I mean, as you know, the German government in the coalition agreement has the aspiration to bring forward the coal exit ideally to 2030. And we always communicated that we would support those discussions and it would actually also be in favor. I mean, as you rightly implicitly said is the government currently has different topics to deal with. That's very clear. But yes, we need to see in which direction it is going. But I mean, as I also said, even if we are now discussing with the government to potentially keep or bring back coal -- a lignite capacity, we always made very clear both to the capital market, but also 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 convention generation. I mean, what is clear that in the current environment, we have, to some degree, revisit our hedging strategy. I mean, especially when you talk about gas assets because you want to make sure that in case Russian flows would stop, you are not stuck with a short position if you are -- 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.

And secondly, I mean, you have seen -- watched the high volatility in the market. So also that kind of led us to reflect on the hedging of our positions. So how does that fits to liquidity needs. But 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. And then you can assume that until '25, that number then goes down.

[Thomas Denny, executive]

Thank you, Peter. Next question, please?

[Operator]

The next question comes from the line of Deepa Venkateswaran from Bernstein.

[Deepa Venkateswaran, analyst]

So my 2 questions. The first is on 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 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? So 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.

And then 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? So is there a cash outflow either today or at some point in the future?

And any reason to think why you won't be able to pass through higher coal costs when you're bidding those projects because of -- sorry, bidding that plant maybe because you've already hedged or something.

[Michael Muller, executive]

Yes. 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 again, if the -- 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 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. And then the second step is how high are those tariffs. And that is yet very unclear. And therefore, also, it's difficult to already say something now about the economics of the projects.

Second question around the coal contract...

[Deepa Venkateswaran, analyst]

Is there any PPA pass-through? So can you revisit the PPAs for those projects? Or have they not been signed in which case you could price it? So -- or are you stuck with these higher tariffs?

[Michael Muller, executive]

Yes. 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. So please bear with me that this is a little bit early to judge.

Second one on the coal contract. 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 spreads in our power plants or if it's hedged just financially in the market than 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 into the money position so the positive mark-to-market. So from a cash perspective, you can assume that the cash effect will realize in the next 4 years to come, so until 2025.

[Deepa Venkateswaran, analyst]

Okay, okay. And that will be -- it would have otherwise hit COGS, but now it's going already under an impairment, but you'll have then the cash release over the next 4 years. Okay.

[Michael Muller, executive]

Yes. Yes.

[Thomas Denny, executive]

Thank you, Deepa. Next question, please?

[Operator]

The next question comes from the line of Alberto Gandolfi from Goldman Sachs.

[Alberto Gandolfi, analyst]

Two questions. The first one is, if you can maybe -- 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. And 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 we are estimating above EUR 250 billion investment for it.

So Germany could become one of the largest renewable markets in the world, and you're sitting right in the middle. So I was trying to gauge the upside opportunity for you. And you already replied about lignite. So I guess, in this new framework, your portfolio would have to be adjusted for it. But 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. Everything has changed, power prices, FX, renewable targets. But if I put together the REPowerEU and the energy security crisis we are living in and the implications on power prices, I think, is your current business plan relevant at all, because the world seems to have changed dramatically, power prices that you assumed are way too low and the top-down market has changed a lot. And I haven't seen a horde of new entrants. So it's a bigger cake for the existing players plus a few new ones, I guess. But where am I wrong with that? And when can we expect an update to your future years? Is there any upside risk basically to your current business plan?

[Michael Muller, executive]

Yes. Let me start with Germany and the summer package. I think I mentioned that already previously in conversations, and all the topics that are relevant are clearly on the agenda. But as always, the proof's in the pudding, so now it becomes a 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 -- decided 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 Eastern 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. But honestly, while I'm optimistic and positive, it's too early to come up with a final judgment on this one.

And then for the next question around market share. I mean you can assume that our aspiration is to have a decent share in that growth to come. And 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 7 or 8 -- 7 regional offices. They are all rented so people are already in. So we are actually making upfront investments to make sure that we capture those opportunities. But also here, we make sure that the kind of the -- 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.

[Alberto Gandolfi, analyst]

Michael, forgive me, if I may interject for 1 second. When you said decent, just to be clear, we're on the same page, is decent for you 2% to 5%, 5% to 10%, 10% to 15%? I mean, just very broadly, sorry to pin you down there.

[Michael Muller, executive]

Well, I won't say a number now yet. But I mean...

[Alberto Gandolfi, analyst]

It's a try.

[Michael Muller, executive]

Yes, it's a try. Yes. But I mean, the numbers shouldn't be too small because I mean, we always said from our strategy, the focus should be to be relevant in markets, yes? Because we believe, and I mean also, if you look at the results this year, what is -- we're nicely the combination of conventional generation of flexible assets and renewables played out. And 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. And therefore, if you are in a country, you want to have a relevant size or a decent size, as I said. And so I'll leave it with that.

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. But at the same time, as I said, I think the year 2022 will show how those ambitions are really implemented. So I think we should have more clarity by the end of the year what is really realistic. And the same is true, I mean, the current environment also holds for lots of market on securities. 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. So therefore, it's not yet the time to revisit that, but yes, let's see what the future brings.

[Thomas Denny, executive]

Thank you, Alberto. Next question, please?

[Operator]

The next question comes from the line of Rob Pulleyn from Morgan Stanley.

[Robert Pulleyn, analyst]

Yes. Just 2. 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 perspective 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. And maybe we just ask how RWE has reduced that exposure and that if there is any cost associated with it, either in the nonoperating result or flowing through EBITDA. And 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?

[Michael Muller, executive]

Yes. 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 for a question on the German gas supply. I mean maybe 1 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 turning in 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 hugely complex. And they realized that, ideally, you keep the market as long as possible because the market will do the right allocation.

And therefore, what we currently observe is that German government is reluctant to intervene with the market as long as it's still properly working. So therefore, given that the impact of the latest sanction is to our minds or from our perspective, not material. And we also have seen that market -- 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, those are contracts. We concluded that are -- I mean there are multiple contracts or multiple deals, they have all fixed prices. And 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. But you can assume that, that is all incorporated in the portfolio in the numbers we have shown.

[Thomas Denny, executive]

Thank you, Rob. Next one, please?

[Operator]

The next question comes from the line of Vincent Ayral from JPMorgan.

[Vincent Ayral, analyst]

Two questions I had that had been asked here. I'll ask for just 1 clarification and then a question regarding the guidance. So when we're talking about you reducing your Russian gas exposure, it didn't materially reduce. You say it's in the number reported. Are you talking here, you're talking Q1 P&L that the total cost is already embedded in Q1 P&L. That would be my question number one.

And if the answer is yes, actually looking at the way you started the year, what prevented you from upgrading your guidance at this level apart from political considerations? On financial ones, you seem to be well ahead of the curve for this year. Especially in trading, but also in, I would say, even more classical generation activity. So could you give us a bit of color on the trajectory year-to-date of the whether if things continue this way, you'd be considering an upgrade later in the year?

[Michael Muller, executive]

Yes, Vincent, thanks for your question. So first, clear, it's a yes. So 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's a upside in the current environment, but we also see quite some uncertainty in the markets. And 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 -- in Hydro/Biomass/Gas, typically the first and the last quarter are strong quarters that you see.

And finally, Trading. I mean, while we all, obviously, are positive about the business, but there also can be substantial volatility. So therefore, we are only in Q1, and that's why we stick to the current guidance.

[Vincent Ayral, analyst]

Okay. Okay. I'll just follow up quickly on this one. As you know, we have much more bullish view on the oil price and I'm bouncing 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 [indiscernible] conservative for the next couple of years.

So 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 where it is?

[Michael Muller, executive]

Yes. I mean 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. And should the 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. But as I said, our current view is, given the uncertainties we still see in the market, that we are very confident with the current guidance.

[Operator]

The next question comes from the line of Olly Jeffery from Deutsche Bank.

[Olly Jeffery, analyst]

Two questions. So the first one, please, is just listening to the [indiscernible] earlier this morning. They were highlighting that Germany would be looking at potentially considering some form of windfall tax. I'm just wondering if you could speak to that to say what's your current understanding of what is happening with that process in Germany vis-à-vis with windfall tax.

And the second question is just coming back to Supply & Trading. I know you had this question often over time. But just looking back over the last 13 quarters, you've twice had an EBITDA below EUR 100 million and then it was around EUR 80 million. At what point, given the -- this division clearly seems to do quite well in this volatile commodity environment. At what point would you start to consider your own expectations for what Supply & Trading division can deliver because the track record over the last 13 quarters would suggest that your guidance is very conservative?

[Michael Muller, executive]

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, most of our -- we have outright position in our fleet, but that is mostly hedged. So that's around Lignite & 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 want to grow. And finally, you have the Hydro/Biomass/Gas assets, which are eventually spread assets. And 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.

Finally, on your question around Supply & Trading. I mean, the difficulty with guiding Supply & Trading is the following. Basically, it very much depends on the situation in the market and also your view. So in a situation where we have a strong view of arbitrage opportunities, so 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, and I think we haven't seen that in the last few years, but we have seen that 5 years ago, the market was pretty flat. Boring, yes? And in such a situation where you don't see arbitrage opportunities, we don't want traders to take positions.

And then we're also happy if they just keep their hands off and don't take positions. And obviously, in such a situation, earnings could also be substantially lower. And that's why in the end, it's kind of an asymmetric profile. So in situations where there are opportunities and also in situations where the desk are performing, there's additional upside. But 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 to risk capital.

[Thomas Denny, executive]

Thank you, Olly. Next question, please?

[Operator]

The next question comes from the line of Anna Webb from UBS.

[Samuel Arie, analyst]

That's funny. I think that's me. It's Sam from UBS here, but they don't have this code. So thank you, Anna, for getting me signed in. Michael, I have a question on coal and one on gas. And apologies because I know that's not your focus at the moment, but that's where the questions are. So on coal, just a follow-up to Peter's question actually. And 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. So I think some of us were thinking that would point to a natural update with your H1 results. And I just wanted to check if you still have that kind of time line in mind? Or would you say now it takes a bit longer given everything else to see the shape of the outcome on coal? So I'll let you have a go at that one, and then I'll give you my gas question in a minute.

[Michael Muller, executive]

Okay, Sam. Well, I mean what we said is that we expect some more clarity in the course of the year. And actually, we were careful not to say it's kind of the first half or the end of the first half because I mean in the end, yes, you never know which direction discussions are going, and it needs to be clear that you want to have those discussions behind closed doors. I mean, in the current situation, I would argue there is 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, yes? So therefore, I personally would not expect something by August because currently, the priorities are another topics. Having said that, it's clear that the topic is not off the agenda, but it's currently not the priority #1 topic for the government.

[Samuel Arie, analyst]

That's really helpful. Okay, I'm 100% clear. So can I go on to my gas question.

[Thomas Denny, executive]

Sure, you have 2 questions.

[Samuel Arie, analyst]

Excellent. Well, we now will try and squeeze in 3. Now my second one on gas is maybe a follow-up to the questions Rob was asking. And I know this is now a very minor issue for you and the recognized exposure is small. But can you talk to us about this new German energy security law. We had some discussion before earlier this morning on the same point. But 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.

And so I suppose, basically, what that says that if there's any curtailment then the contracts are void. Is that also your understanding of what the arrangements would be? And would it be right to think of that as a very sensible set of measures and are very positive from the point of view of the midstream gas business that you have?

[Michael Muller, executive]

Sam, to your question, I mean, clearly, the intention of this energy security law is to prevent that financial burdens are with suppliers or 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. So from our perspective, there are still quite some questions on how that would operationally work. I mean just give you few examples. I mean, in the end, you are 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. So deals you have concluded on international markets. So therefore, I think the intention is well thought. We are 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.

[Samuel Arie, analyst]

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 kind of exploded. That sounds like it does not...

[Michael Muller, executive]

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. So that its 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 taking the effort that they have the right direction. And 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.

[Thomas Denny, executive]

Thank you, Sam. Next question, please?

[Operator]

The next question comes from the line of Piotr Dzieciolowski from Citi.

[Piotr Dzieciolowski, analyst]

I have 2 questions. So 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. So I just wanted to ask you, what is the duration of your hedges for the outright power in the lignite. And will you and if so, at what point would you see some kind of a profitability uplift in this segment? And just 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. And we're going to go to embargo in August. So 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?

[Michael Muller, executive]

Yes. 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 until 2025. And also the way how we hedge is typically first hedge kind of the exposure that we are different to the market and then hedge the price setting spread at a later stage. So therefore, yes, in the later years, there's upside where we have unhedged positions, but not in the near term.

And secondly, obviously, you have to see those margins are all hedgeable. And 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. But I mean the coal market -- I mean, other than the gas market where you need at least in Germany build up import capability -- 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 markets and the global markets for hard coal are much more liquid. And so we actually don't see a risk in getting hard coal. Obviously, prices have increased, but that shouldn't be a significant issue.

[Unknown Executive]

But also remember just that our hard coal generation capacity have significantly reduced over the last year, so that's not a key generation to drive anymore. I think in the first quarter, we had 1.5 terawatt hour or so from hard coal only, but pretty small for this.

[Thomas Denny, executive]

Thank you, Piotr. Next question, please?

[Operator]

The next question comes from the line of Tancrède Fulop from Morningstar.

[Tancrède Fulop, analyst]

Just wanted to ask you about the power plant leasebacks and short-term asset optimization. It was good performance last year, a good performance in Q1 and yet your divisional guidance for the rest of the year is quite prudent. So I wanted to understand what are the underlying assumptions, which makes you prudent for plant dispatch and short-term asset optimization for the rest of the year besides the tougher comp?

[Michael Muller, executive]

Yes. Thanks for the question. I mean, first of all, short-term asset optimization as the name says, is short term, so that's nothing where you can have hedged something upfront, but it actually very much depends on what happens in the prompt. That's the 1 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 as typically in Q1 and then Q4. Plus most of -- quite a substantial part of that short-term optimization comes from gas assets.

And as I've said, I mean, on gas, we are somewhat 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. And 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 the reason why we are more cautious on guiding that segment being just at the beginning of the year.

[Operator]

The next question comes from the line of Lueder Schumacher from Societe Generale.

[Lueder Schumacher, analyst]

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?

[Michael Muller, executive]

Yes. So Triton Knoll is fully operational. And capacity-wise, it's about half running on CfD and half is not yet running on a CfD.

[Lueder Schumacher, analyst]

And how long is the other half that is not yet on the CfD running will be able to sell in the spot?

[Unknown Executive]

Yes. The [indiscernible] has communicated on their web page is 1st of April 2023.

[Operator]

[Operator Instructions] And the next question comes from the line of Martin Tessier from Stifel.

[Martin Tessier, analyst]

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 2 years. But on the other hand, we can read in the newspapers and -- that Europe would like to reduce kind of a speculation on the community market. I think that was yesterday, not talking of course about this topic on the CO2 certificates. So my question would be, do you think that your Supply & Trading business could be exposed to any taxation or profit expropriation. Anything?

[Michael Muller, executive]

Yes. I mean talking about the discussions in Brussels. I mean, you know that there are quite different views. And 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 gas markets and on CO2 markets. It is more that there are some members, especially from the Southern European countries that are pushing against that, and that needs to be seen in which direction it is going. I mean we are strongly making the point that markets are indeed working.

And I mean in a situation of scarcity like we have currently, the only way to get out of that scarcity is by either getting additional volumes into gas. So for example, LNG imports or by reducing demand. And 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 & Trading. I mean 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. But given the global reach, both of commodities, but also of activities, I'm not concerned about the current discussions in Brussels or even in the States.

[Unknown Executive]

And to add, in terms of global return in trading, it's not only based here in Germany in our headquarter, but we also have very strong trading operation out of the EU and the U.K. and elsewhere.

[Operator]

There are no further questions in the queue. So I will hand the call back to your host for some closing remarks.

[Thomas Denny, executive]

Great. Thank you for dialing in today. It has been a very quick, efficient call. As you know, the IR team is always at your disposal for further questions. So looking forward to speak to you in the near future. Have a good day. Bye-bye.

[Operator]

Thank you for joining today's call. You may now disconnect your lines.