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Welcome to the RWE conference call. Markus Krebber, CFO of RWE AG, will inform you about the developments in the first quarter of fiscal 2020. I will now hand over to Thomas Denny.
Good morning, ladies and gentlemen. Thank you for joining Markus and myself in our conference call on RWE's results for the first quarter. I'm pleased to be here with you today and want to thank you for welcoming me to the investor and analyst community. I'm very much looking forward to working with you all, as we continue our journey along RWE's path to providing renewable and flexible energy for sustainable life. And of course, I hope to meet all of you in person soon. And with that, let's move on to our earnings results. In light of the new steering models we presented to you at the Capital Market Day, we have restated the previous year's figures according to the new group structure. In order to compare like-for-like, we have provided pro forma figures, meaning that assets taken over from E.ON are included for adjusted EBITDA and EBIT for the full year 2019. Furthermore, we have published the detailed generation data also on a pro forma basis on our website. Let me now hand over to Markus.
Yes. Thank you, Thomas, and also a warm welcome to everybody on the phone. I really hope you are all well given the current challenging situation around COVID-19. Fortunately, in our business, we have seen limited impact from the pandemic so far. From an operational and financial point of view, it has been a good start into the 2020 fiscal year. We increased our adjusted EBITDA in our core business by 16% year-on-year on a pro forma basis to EUR 1 billion. Adjusted EBITDA of the RWE Group stands at EUR 1.3 billion for Q1. We confirm our full year guidance, including our target to increase the dividend payment to EUR 0.85 per share for this year. And we are also well prepared to weather this crisis financially. Besides our long-term hedge program, which ensures long-term earnings visibility, we have no short-term financing requirements and sit on a comfortable liquidity position. Even after the seasonally high liquidity requirement in the first quarter, which were driven by the purchase of CO2 certificates and cash outflows from variation margins, our position in cash liquidity and marketable securities stood at above EUR 4 billion at the end of Q1. In addition, we currently have undrawn credit lines of more than EUR 1 billion and our EUR 5 billion revolving credit facility. The timing effects of variation margin and the seasonal buying of CO2 certificates are the main reasons for the increase in net debt to EUR 8.7 billion. The latter is a typical pattern in the first quarter. Most credit rating agencies recently revised our credit rating. Moody's has changed the outlook to positive, and Fitch confirmed BBB flat with a stable outlook. We also received positive recognition in the sustainability rating by CDP and have been awarded with a B rating. This is above the average of all participating companies, and we are delighted that our day-to-day work in making the energy transition happen is well recognized. You will have seen our announcement that this year's AGM will switch to a virtual format given the current situation. It will take place on June 26, and I can reconfirm our dividend proposal for fiscal 2019 of EUR 0.80 per share. Let's now move on to the details of the first quarter. In our core business, adjusted EBITDA increased by 16% to EUR 1 billion as a result of a good performance in all segments. Broadly speaking, the very good weather conditions increased earnings from Offshore and Onshore Wind/Solar. The commercial optimization of our power plant dispatch and the resumption of the GB capacity payments increased the results of the Hydro/Biomass/Gas segment. And the Supply & Trading division continues to put in a strong performance. However, it's not on a level with last year's exceptional performance. Ladies and gentlemen, in the first quarter, our wind and solar business made good progress towards our growth target for 2022 and beyond. Installed capacity increased to approximately 8.9 gigawatts, and our expanding development pipeline offers good prospects for future growth. Looking at the details, our 151-megawatt U.S. onshore wind farm Peyton Creek has been fully commissioned, and tax equity financing was raised. Investment decision to proceed with our 342-megawatt Kaskasi project paves the way for the next offshore wind farm off the German coast. Contracts with our main suppliers, namely Siemens Gamesa Renewable Energy, Bladt Industries and Seaway have been signed. Offshore construction work will start in Q3 2021. Furthermore, we have entered Taiwan's offshore market via a strategic partnership with Asia Cement Corp. The partnership is for our Chu Feng offshore wind development project, which intends to participate in the next grid allocation round in Taiwan offshore auction. The project has a planned installed capacity of up to 448 megawatts and will be located off the Northwest coast near Hsinchu City in the Taiwan Strait. With an installed capacity of 8.9 gigawatts and with around further 2.9 gigawatts under construction, we are well on track towards our target of more than 13 gigawatts in 2022. Our construction program is also progressing well. And so far, we have only seen a small impact from COVID-19. On Slide 6, you can see the main projects currently under construction. At our Triton Knoll offshore project, we achieved an important milestone when offshore construction work started in Q1. As previously mentioned, the final investment decision for the Kaskasi offshore project has been taken, and the preparation phase has started. The Clocaenog Forest onshore wind farm is in the commissioning phase and has already received payments from its 2-sided CfD, but final COD will only be reached after final remediation works are completed. Only then it will be reported under installed capacity. At Cranell onshore site, everything is well on track, and we expect full commissioning in the current quarter. At our huge onshore wind project, Big Raymond, we have experienced disruptions in the turbine supply chain due to COVID-19. We therefore currently expect some delay, but COD is still expected in Q4 2020. Construction work at our 250-megawatt onshore projects, Scioto Ridge, is well on track. Point of interconnection has been energized, and turbine erection has commenced. From the U.S., let's move over to Australia in the Limondale Solar project. Installation has almost been completed, and the next step is to prepare the grid connection. However, also due to COVID-19, we are currently experiencing slight delay of a few weeks. COD is now expected for Q4 this year. With that, we can now move on to the details of the individual segments. The Offshore Wind division realized an adjusted EBITDA of EUR 431 million. Year-on-year, this is an increase of 31%, thanks to higher wind speeds. Gross cash investments in Q1 amounted to EUR 160 million mainly driven by Triton Knoll construction work. In our Onshore Wind/Solar division, we see a similar development in Q1 resulting in an increase of adjusted EBITDA to EUR 209 million. Besides portfolio additions of approximately 380 megawatts year-on-year, better weather conditions also helped to increase adjusted EBITDA by 20% in total. Most of our gross cash investments are for the U.S. onshore project, Big Raymond; the 126-megawatt Cassadaga project; as well as Scioto Ridge projects. All are due to be commissioned by year-end. The Hydro/Biomass/Gas segment had a good start to the year as well. Adjusted EBITDA nearly doubled to EUR 270 million mainly based on the following. Firstly, higher earnings from the commercial optimization of our power plant dispatch in volatile markets. Secondly, the income from British capacity payments contributed EUR 42 million in Q1 2020, while in Q1 2019, they were suspended. Let me also highlight that in the T-4 auction held in Q1 for delivery in 2023 and '24, we successfully secured payments for 6,544 megawatts of capacity. The auction cleared at GBP 15.97 per kilowatt per year. Moving on to the earnings development of Supply & Trading. Once again, the segment kicked off the year with a strong Q1. Adjusted EBITDA amounted to EUR 170 million on the back of a strong trading performance and good results from the gas and LNG business. We didn't expect Supply & Trading segment to replicate the exceptional performance of the first quarter of previous year. Ladies and gentlemen, having now reported on the core business, let's move on to the Coal/Nuclear segment. The overall positive Q1 trend also continued here. Adjusted EBITDA increased to EUR 282 million. Earnings improved on the back of higher realized wholesale prices and an updated production plan. While we saw an impact from the production restriction at the Hambach mine in 2019, we now have clarity going forward due to the lignite phaseout agreement. Nevertheless, we need to consider implications from the implementation of the accelerated exit plan. Moving on to adjust -- to the earnings drivers down to adjusted net income. Adjusted net income amounted to EUR 603 million in Q1 due to the high adjusted EBITDA of RWE Group. However, we had an unexpected negative effect of around EUR 150 million in our financial result. Since our long-term liabilities consist almost only of provisions, we need a financial asset portfolio and derivatives to manage our leverage, FX and interest exposure. And here, we have been hit from the COVID-19 market turbulences. We experienced losses in the financial asset portfolio and negative mark-to-market valuations of FX derivatives. Adjustments in tax are applied with a general tax rate of 15%, in line with expected midterm tax level for RWE Group. And now on to the adjusted operating cash flow, a new KPI for the new RWE, now that RWE stand alone and its distributable cash flow is no longer applicable. The adjusted operating cash flow shows the impact on net debt from operating activities. It is adjusted for special items and other effects that balance out over time. The utilization of nuclear provisions is not included. We consider this as a financial cash flow since when the nuclear provisions are utilized, they are refinanced by our financial debt. In Q1, the adjusted operating cash flow of EUR 672 million results from the high adjusted EBITDA as well as a cyclical pattern in working capital that we typically see in Q1. As mentioned earlier, in Q1, the change in working capital of around minus EUR 400 million is characterized by the purchase of carbon certificates. Furthermore, in Q1 2020, we have an increase in accounts receivables from the high levels of generation from wind and solar. The repayment for the British capacity market from 2018 and '19 as well as a reduction of gas inventory partly offset this. For the full year 2020, we expect to end up with a positive change in working capital due to the resumption of the British capacity market as well as lower gas inventories compared to year-end 2019. Turning to the details on the development of net debt. Net debt increased to roughly EUR 8.7 billion in Q1, first and foremost, due to the timing effects from hedging activities. Variation margins and CO2 provisions accounted for an effect of roughly EUR 1.8 billion. This is driven by the realization of commodity transactions for which we had received variation margins in earlier years as well as further variation margin payments on the back of lower commodity prices in Q1. This is partly offset from the positive effect from changes in provisions, in particular, pension provisions. Losses from planned assets due to COVID-19 are more than compensated for an increased discount rate for pension provisions. We see a leverage factor of around 3x net debt to EBITDA at year-end. However, further volatility in commodity prices and interest rates could temporarily drive this slightly above 3x. But if this is the case, we are confident it would not be permanent and that we would return to our target level in the medium term without an impact on our planned CapEx program. Finally, moving on to the outlook for fiscal year 2020. As I already said, we confirm our outlook for this year. Adjusted EBITDA for the RWE Group will range between EUR 2.7 billion and EUR 3 billion; adjusted EBIT between EUR 1.2 billion and EUR 1.5 billion. For adjusted net income, the range is EUR 850 million to EUR 1.15 billion. The dividend target is EUR 0.85 per share for fiscal 2020. And with this, I conclude my remarks, and I'm now happy to take your questions.
Thank you, Markus. [Operator Instructions] And operator, please now start the Q&A session.
[Operator Instructions] Our first question comes from the line of Alberto Gandolfi from Goldman Sachs.
And Thomas, welcome. And Markus, congratulations for the recent very good news. I'll stick to 2 questions. The first one is data points indicate that, at least, in Europe, this year, we could see a 30% reduction in wind installations compared to, let's say, the forecast that we had back in January. You seem to talk about very limited disruption to your addition plans for 2020. Can you maybe talk about execution risk more in depth? Are your construction sites working? Do you see any bottlenecks in the supply chain? Any risks? It looks like there's a big dichotomy between large developers, like yourselves, and smaller developers, which actually may suffer big reduction in additions this year. So I'm trying to gauge risk in execution and scale advantage here. The second question, yesterday, we saw a big institution effectively exclude -- saying that they sold out their position out of RWE. They're basically putting an exclusion list because of your ongoing exposure to lignite. I was wondering if this move might actually accelerate your portfolio restructuring plans and a faster exit from this activity.
Yes. Thanks, Alberto. To your first question, I mean, we are in constant dialogue with all our suppliers for the different sites. And I mean, discussing also to move equipment from one to the other where it's needed more, and we have some flexibility since we run a big portfolio. So we are really, I mean, doing it together with them. And I mean, as I said, for the construction program we have this year, we only see the 2 projects, which I highlighted, where we only see very little delay so far. And I mean, many of the -- especially on the turbine side, have already taken on construction again on their major sites in Asia, but also Europe and the U.S. So from what we know today, I don't see more consequences than we highlighted in this call. Of course, if the COVID crisis kind of worsens again, I mean, we don't know because it's new for all of us. But what we can judge so far, it is, as you said, very rightly, only very, very limited. But I mean, we are in an uncertain and unchartered territory here. But we are confident that we don't see this year very relevant consequence. And also when you look further out to the projects we are planning for next year and the year after, if the crisis doesn't worsen or come back even bigger than we have seen it, the consequences also on the construction will be very little. Now the other question you said, I mean, on the big institution, yes. I mean I also made it clear towards the press that, I mean, we were in constant dialogue, and we're fighting for a different view because we think the transformation of RWE is very profound and also very swift. We have saved 50% of CO2 emissions over 7 years, 90 million tons on an annual basis. I think the criteria, which we are chosen by Norges is suited to judge whether a company transforms in line with the energy transition or not. I mean they have 2 criteria. We need to be below 10 gigawatts of coal capacity. This is what we fulfill. And then you need to be below 20 million tons of coal. I mean if we source it from a third party, it's not a problem. If we do it ourselves, it's a problem, and it's difficult to understand. And also, I mean, the clear focus only on coal, I mean, for the environment, it shouldn't matter whether the CO2 emissions come from oil and gas or from coal. So -- and I mean, when you think the broader term ESG, it's not only the E, it's also the S because if we would fulfill Norges' requirement, security of supply in Germany could not be insured. That's totally clear also from the recent announcement of the Bundesnetzagentur, where they said RWE is very close to actually dominating the margin. And they want us to shut, I mean, half of our drum capacity immediately. It's socially not acceptable, not only for the economy overall, but also on the HR side, on our people side. And ESG also includes the governance part. And I mean, we are fine. Everybody should keep his own house in order. So it doesn't actually trigger any other changes to the lignite phaseout plan. But where changes where we potentially pick up our activity is to ensure that the regulators and the politicians step in to define clear ESG criteria. And I think the European Commission is heading exactly in the right direction because what you should judge is where are people contributing to, I mean, the energy transition. And we are investing more than 85% of our CapEx in projects, which are currently already fulfilling the green criteria of the European Commission. What Norges actually does is an endpoint of time assessment of where a company is today, but that doesn't have the energy transition.
The next question comes from the line of Peter Bisztyga from BofA Securities.
So 2 for me. One, just to follow up on the discussion about renewables. So there seems to be a lot of talk about post-COVID economic recovery, fiscal policy, focusing on renewables and other sustainable investments. But I'm not sure I've actually seen anything concrete. So I'd be interested in your views as to what, if any, concrete policy steps you think are plausible in the regions in which you operate. And my second question is on coal exit. Can you give us an update on when we should expect to draft law? Do you think there's going to be any changes to what you agreed in January? When do you think it will go through parliament?
Yes. Thanks, Peter, for the questions. On the renewable side, also from our view, it's too early to judge. I mean you have 2 different, I mean, very strong voices, both talking their own books. I mean some want to delay anything, which is directed towards the green energy policies and the Green Deal of the European Union and also maybe delaying another CO2 reduction path in Europe. The other camp is asking for the opposite that all the fiscal spending should be put into the energy transition. I think I mean, since we don't know how this crisis will evolve further, it's -- I think, I wouldn't go with one or the other camp, I mean, because it's too early. The only thing which we know is, I mean, COVID is a threat. Climate change is also a big threat, and climate change doesn't go away just because of COVID. So I think we need to wait what very specific measures are. We currently don't see, I mean, other than which we know before the crisis. And how the political dynamic will change in Europe, we need to wait for. It's too early. So our base case is actually that we continue with our program. And I think, even a change here or a step-up of activities will not change our program in the short term. At least from Germany, I mean, when you look here at the recent news, it's more positive. I mean the German government has now confirmed that they increased the offshore targets by 5 gigawatt to now 20 gigawatts by 2030. They are now taking action to get support from the communities for onshore wind and solar installations. So I think there is still an ongoing dynamic to support also the energy transition on a more technical detailed level where it is needed. So this is positive. On European level, I mean, I think we need to wait after the crisis, how also the political dynamics actually will be afterwards. So to answer your question again, I mean, so we don't see any specific action that has changed by now. Coal exit, we still expect the legislatory process to be finalized before the summer break. That was reconfirmed by the German government, so we expect that the law passes parliament before the summer break and that we signed a contract with the government before the summer break. Content-wise, nothing has changed. I mean we have a term sheet agreed. And now it's a question to implement the term sheet in the contract, but nobody has so far reopened the content, and we don't expect it.
The next question comes from the line of Deepa Venkateswaran from Bernstein.
I have 2 questions. So the first one is on the Taiwan project. Maybe if you could talk a little bit about it. And what is the timing of the auction that you expect? From memory, perhaps this project didn't -- it already has an approval, but it didn't win the beauty contest then. And the second question is on your adjusted financial results. Would it be possible to comment about what your expectations for the full year are? So should we sort of assume your EUR 100 million guidance at the CMD, plus the EUR 150 million? Or do you expect any other to unwind? And it would also be helpful, I think, for future to have some idea of how these items have progressed in the past because I don't think we were focusing on financial results for the old RWE. But now your dividend is due to a payout, so that would be helpful, some transparency.
Yes, Deepa, let me start with the second question, the adjusted financial result. So we -- for us, it's really a -- it was an unexpected extraordinary one-off item. We shouldn't expect the same in the future. And it was really because we have seen the severe market turbulences on the FX and the interest rate side. It had 2 elements, the minus EUR 150 million. Around EUR 100 million of that were really losses in the financial asset portfolio. I mean as I said in my speech, we actually usually run a financial asset portfolio because we have overall lower net debt target and when you sum up all our provisions, and this is not only invested in government bonds, it has also a credit element, so corporate bonds and others. And here, we have seen losses. And part of that portfolio was actually needed for the payment of the CO2 certificates, which is a typical pattern in the year, so we had realized losses. So that shouldn't -- we shouldn't see the same again. And the other element is only a mark-to-market loss on the FX swap side. And here, I mean, as you know, with FX swaps, you have an inherent interest rate element. And we have seen very huge interest rate movement. I mean the curve was steeper. The curve -- the difference between U.S. and euro change. So there was a mark-to-market change here. That could also revert over time. But I mean, as you said, the base case now should be that by year-end, we have -- not the minus EUR 100 million we have guided at the beginning of the year, but we have maybe an additional minus EUR 150 million. Thomas will talk you through the Taiwan time line.
Could I just follow up? Why do you have FX derivatives? Is it for hedging your U.S. renewable exposure? Or because you don't have any loans or anything? So what is this FX position, Tom?
Yes, that is exactly -- I mean, that is exactly the problem, Deepa, because if the debt side would not be provisioned, we would typically start funding with a perfect duration mix. Our British pound and U.S. exposure was partly taking U.S. dollar and British pound once. But we cannot do that because our debt side is fixed euro-denominated by provision. So we have to manage the FX risk of our U.S. dollar and British pound exposure by swaps. And that is the background. So the more we utilize our provision, the more we are able to also manage our FX exposure by just, I mean, raising bonds in different currencies, which would be much better.
And let me take your question on the Taiwan project. So the project, as you know, is in development stage. The exact timing of the auction is unclear, but we expect it at the end of the current year, maybe beginning of next year.
Our next question comes from Lueder Schumacher from SocGen.
Also 2 questions from my side. The first one is on hydro, biomass and gas. Obviously, very good performance capacity market income. It comes about 40% of the improvement. Where does the rest come from? Is it all gas optimization? And -- but related to that, are you seeing that the German peers are also struggling with predicting the new load profiles, and hence, there's perhaps even sustained demand for balancing power and ancillary services? Ideally, if you could give us a EBITDA breakdown on that, but I'm not holding my breath, but would be great. Second question is on -- just a follow-up on the financial result. You said this was a realized loss you had. So even the turnaround in equity markets since the 31st of March will not have helped you there. So that is a one-off item as you described it, and we should not make any adjustments for a market recovery since. Is that correct?
Yes. Thank you, Lueder. On the financial result, EUR 100 million of the EUR 150 million was realized. The rest is on the mark-to-market of the swaps not yet realized. It remains to be seen how the relative interest rate development is for the rest of the year. And the EUR 100 million was realized because we typically know that we need significant liquidity in the first quarter due to the purchase profile of our CO2 certificates. And we had to realize part of that portfolio, so EUR 100 million are realized. On a hydro, biomass and gas, it is actually not from the balancing and ancillary service side. It's really the optimization of our dispatch. And when you see this significant market volatility, as we have seen in the first quarter, you have the interesting situation that lignite doesn't -- and hard coal doesn't run, but the margin is hedged. It's not only price hedged, it's also volume hedged. And then you have, I mean, for the flexibility, a higher dispatch from hour to hour on the more flexible side, so hydro and gas. So you real -- you make your profits on the coal and nuclear side, even without producing. And you make additional money from the very flexible technology, and that was what we have realized here in Hydro/Biomass/Gas.
Okay. Would it be fair to say that the improvement that is not due to the capacity market is from that activity?
Yes, that's true. I mean you have -- I mean, the half of the improvement was from the capacity market and the other half from what I've just explained.
The next question comes from the line of Vincent Ayral from JPMorgan.
So I would like to do a follow-up actually there just to be sure. So -- on the question from Lueder. So what we did, in effect, is make more money on the lignite and coal. They have been put into the hydro/biomass because you basically switched the generation tool to basically produce the volume you had sold, and just to be sure I understand that clearly. And other question would be regarding the outlook for gas and LNG. You've posted good results here in Q1, yet gas prices are quite weak. And there are some question marks regarding LNG outlook. What is your view there? What is your exposure? How much have you locked of your full year results and guidance on this side of the equation, just to understand if there is any risk there or if actually we should consider this as a, I mean, half-done deal?
Yes. Thanks for the question. The first one, yes, your understanding is absolutely correct. I mean as you describe it, that is what happened. On the second, gas and LNG, we are not exposed to the absolute level of gas and LNG prices. So also we don't run very long-term illiquid contracts, which are not partly then backed by other deals or hedges. So there's no implicit profile of the gas and LNG P&L, which we know. So it's other than maybe with other companies who can tell you exactly that they have already locked in significant gains or potentially also losses. That's not the case. I mean it's a full mark-to-market P&L also of that business here for the illiquid part, with significant reserves as you would also do it in trading in banks. So there is no profile locked in. I mean we start -- we continue to trading to optimize. So we should, from now on, for the second quarter and the rest of the year, with our better knowledge, assume a normal cost of business in trading and gas and LNG.
The next question comes from the line of John Musk from RBC.
Two questions. Firstly, on the variation margin outflow. I'm not entirely clear. Was that EUR 1.8 billion in isolation? Or is there a couple of other things in that EUR 1.8 billion? And then how should we think about how that might progress over the balance of the year given all the moving commodities? I think the balance was something around EUR 2.2 billion when you last spoke to us. So obviously, most of that has now flowed out of the business. And then secondly, can you give us any sort of number for the overall weather impact on the Q1, obviously, particularly in renewables? And I guess, alongside that number, depending on the scale of it, how confident are you now in the outlook for the year? Is there any thought in your mind that you might be towards the upper end of that outlook given the strong Q1 that we had?
Yes, John. Thanks for the question. On the variation margin side, it's -- the EUR 1.8 billion is really purely variation margin, but that has 2 elements. One is the variation margin, which we have to hand back when we actually realized the transaction. That was especially for the carbon certificates, which we had to buy in the first quarter. That was maybe half of the effect. And so that was expected, that was foreseen. And the other half was from the hedges for the future. And here, the outflow was driven by the low gas and CO2 prices, so by the commodity price environment. If you assume we go back to price levels at the beginning of the year, we would actually expect the half of the EUR 1.8 billion to flow back this year. If you expect prices to stay exactly where they were at the 31st of March, we should not expect any variation margin movements after Q1. But I think, I mean, also when you look at the net debt, I mean, half of the EUR 1.8 billion was expected. The other one is a pure timing effect. So when you look at our projection until the end of 2022, where we are confident with our net debt target, including the existing CapEx program, it comes now earlier. Of course, we need some time that earnings picks up if it doesn't flow back. So we are not so much -- I mean, I'm not at all concerned about that part because it doesn't matter so much whether it comes this year or it comes '21 or '22. And that's why I said in my speech, it's a timing effect and we are not concerned, and it will not affect our CapEx program. So -- and you have seen that prices recovered partly in Q2, so part of that could come back. And maybe that gives you an indication how we think about it. And I'm still pretty relaxed about the net debt situation. And we have not seen unexpected or unforeseen or unplanned effects also in Q1. Of course, we have seen timing effects, but that would have come over the next 3 years anyhow. On the weather effects, overall, I mean, we have 2 segments. I mean the EUR 100 million in offshore is a pure weather effect when you compare it to the pro forma figures of last year. But last year, we were slightly below average. So maybe, I mean, without better knowledge, it's 50-50. So 50% is normalization, 50% is above average. And the increase we have seen in the result in onshore wind and solar is 50% additional capacity, 50% weather effect. And there are also maybe half normalization of the weather effect and half better weather conditions across our fleet. I mean it's -- I think your question is absolutely right, with this very good Q1, should we now expect that this segment will end up the -- will end the year at the upper end of the range, but since we are still exposed to a lot of effects, also weather, I think it's always too early in -- after Q1 to already give an updated quantitative guidance. But the qualitative message is with the full year guidance on segmental level, but also on net income level, we, now after the first quarter, feel very confident.
The next question comes from the line of Sam Arie from UBS.
Well, Markus, in your last answer, you kind of took the question out of my mouth. I was going to ask you about kind of Q2 and the rest of the year. But perhaps, I could just ask you a bit more info on that, if I say it this way. I mean I think in recent weeks, we've all been sort of very focused on what could be the negative COVID impacts across the sector. What you're presenting today shows that, within the mix, there are also some positive impact. You talked a lot about the optimization of the trading position and your -- overall, your Supply & Trading numbers are pretty as good well this year. So I'm just wondering how much of that -- is this where we were in Q1? And how much of those positives you think carry on through the year and simply your thoughts on them. And then just a quick second question. I think you gave us your 2023 numbers on the hedging, which you've said EUR 26 after carbon costs. And I know in the past, you've sometimes talked about what your total cash production costs are in the lignite business. And I wonder if you could just update what you think the cash production cost will be in '23 to compare against that EUR 26 hedged position, which is put in place today.
Yes. Arie, thanks for the 2 aspects. I mean first, the optimization and trading benefits we have seen in Q1, they are realized. So they will not -- I mean, they will not kind of revert. But now speculating whether we see as volatile situations as we have seen them in Q1 for the rest of the year that we could expect even more benefits. I mean that's a bit too early. Let's see how the year goes. But I mean, you should not expect that the positive effects here in optimization and trading in hydro, biomass and gas from the first quarter will revert in the rest of the year. They are realized. The question on 2023, I mean, the EUR 22 cash cost we have given, I think, 3.5 years back, they were, I mean, calculated based on the portfolio of lignite that time. I mean we are now closing significant capacity. And we have to implement cost measures to bring cost down in line with it. So providing you with cash cost per year, I think, is not very reasonable because they will come down over time. They will look not very good in '23 because we have closed 3 gigawatts of capacity, but we have not brought the cost down yet because that will take a bit more time to bring the cost down. So that's why we have given the EUR 600 million midpoint guidance for coal and nuclear for 2022. And I mean, you can now calculate with the volume and price differential between '23 and '22, that we lose around, I mean, EUR 700 million, EUR 750 million in margin. And I mean, you will end up with a 0 to EUR 200 million, which we have guided for '23 if you already assume additional cost savings. But we're going to see later also additional cost savings. They will actually start next year already when we start closing capacity on both sides, lignite and nuclear. So from now on, we will probably not guide any cash cost anymore, but we would clearly guide you in absolute EBITDA terms. And the current guidance is, I mean, you're going to expect midpoint EUR 600 million in '22 and something between 0 and EUR 200 million in '23 and beyond. And maybe I can take the opportunity, I mean, just to clarify. I think it should be clear for everybody, but the significant drop in hedge prices in '23 comes from the closure of 0 carbon nuclear production. The underlying hedge prices has not changed so much. But of course, we lose carbon-free capacity. And that, of course, reduces the spread between outright prices and carbon.
The next question comes from Ahmed Farman from Jefferies.
Just 2 from my side. Actually, you already touched upon the net debt, but there's quite a sort of a big difference between where the net debt came in, in the Q1, and I guess, what's sort of implied by your targets for the full year. So I'm just hoping if you could help us a little bit with the bridge on -- over sort of how you see between now and the end of the year. And I guess, you already touched upon a bit on the variation margin there. So that's the first question. Second question, just coming back to, I guess, the sort of the COVID impact for the year. I mean you've clearly talked about sort of the positives and, clearly, a very strong performance. But could you share us what's -- give us -- share with us a number for what has been, I guess, the incremental sort of additional cost increases that you have seen in the first quarter because of the sort of population containment measures? And how do you see that over Q2?
Ahmed, on the net debt side, we have now EUR 8.7 billion at the end of Q1. And when you take the midpoint guidance for the core business and you believe that we are at 3x net debt to EBITDA, EBITDA needs to be somewhere around EUR 7 billion at the end of the year. So we are maybe 1.7% above that. What we can assume that is our operating business will produce as much cash as it's needed for the net investments, which will still come for the rest of the year in the dividend payment. So where are -- where is the gap coming from? I mean on the working capital side, we should expect a significant swing. And I mean, of course, gas inventory is always unknown at the end of the year. But when you look at the full year, the working capital -- negative working capital effect in Q1 from buying CO2 certificates will level out for the full year. And also the increased receivables from very strong wind production will level out over the rest of the year. So we're going to be left net-net with the reversal of the capacity payments, so we get more than EUR 200 million from the capacity payment, which were in the P&L last year, but we got the cash this year. And we expect lower gas inventory because that was really more or less at peak at the end of last year, and that effect could also easily be EUR 200 million or EUR 300 million. So the swing in working capital from the end of Q1 until the end of the year of around, I mean, almost EUR 1 billion is a reasonable assumption. And then when you look at the market price movements, which is a pure timing effect, we have in Q1 2 elements. They're around EUR 800 million variation margin, which I explained a minute ago. And then we have a positive effect on the pension side, which is also not, I think, a lasting one because it was purely driven by the significant increase in AA bond spread at the end of March. So that will also partly revert. So this is maybe net-net EUR 0.5 billion. And that reason is a pure timing effect, which, I mean, you can also -- the net of variation margins and the pension side, I mean, everything is driven by interest rate movements and commodity prices. If that also normalizes over time, we talk about maybe EUR 0.5 billion reversal. So -- and then you are very close to the EUR 7 billion that we have some minor effects on other things. But I mean, we are very confident if markets normalize or stay as they are today that we're going to end up at the EUR 7 billion. But I also want to make the point, we don't -- I mean, we cannot foresee market developments entirely, so it's very uncertain. So commodity price and interest rate development will have an effect on our net debt figure. But if that is above the 3x, it's a pure timing effect, and we are still confident it will, over the planning period until 2022, not have a negative effect on our growth and CapEx program. And last thing, I mean, you know that we still have plenty of financial flexibility because the -- our E.ON stake is worth much more than we actually need to cover the mining liabilities. COVID, it's very difficult. I think I mean, the additional costs we have seen in the P&L in the first quarter from COVID are close to 0. The real effect we have seen are the EUR 150 million in the financial result, EUR 100 million realized, EUR 50 million mark-to-market. And I mean, for this year, I would actually expect that we potentially see some rescheduled maintenances of our conventional fleet. So we actually -- we're maybe double-digit lower cost than actually planned for. But of course, we then have to do them next year. So it's maybe then a shift between this year and next year, but nothing which is so significant that I need to highlight it for the guidances of the segments today.
The next question is from Rob Pulleyn from Morgan Stanley.
So thank you for that color on the net debt moves there, Markus. Could we please just clarify what you assume in the net debt guidance around a couple of those moves, i.e., to be specific, is there any reversal of this half of the variation margin included in the net debt guidance? And also is there any asset rotation inflows included in the net debt guidance? I assume not, but just checking. And secondly, just for the avoidance of doubt for everyone, could you please remind us how much of the cash inflow from 2018 on variation margin remains on your balance sheet to unwind in future?
Rob, the easiest one is on the net investment program. So we like to focus on the net investments, and that should be EUR 2 billion, EUR 2.5 billion for this year. There are some disposal gains included, and the programs have kicked off. I mean we are now testing the markets for 2 potential disposals. COVID had not yet an effect on that time line, and we think we can accomplish them this year. But we still have -- as I said, when you look at the pure net debt figure, we have lots of financial flexibility if we have here negative effects on the timing. So nothing where we are concerned about. Next one is on the variation margin assumptions. I mean if you want to nail me down to give me one scenario, which would bring the net debt to where you expected at the end of the year, I can pick one. And one is, are you going to expect the reversal of the nonrealized part of the variation margin, so half of the EUR 1.8 billion? And I expect the reversal of the positive effect of the pension side. That is an assumption, which is then a swing of around EUR 0.5 billion positive net-net, which would bring me to the 3x net debt to EBITDA at the year-end. On the question on what remains on the balance sheet, I'm reluctant to answer that because it's only part of the equation. We are very much focused on variation margins, but we have other non-variation margin elements on the balance sheet, which are also referring to our hedging and, of course, our sales activity. We sell a lot of gas and power to retailers uncollateralized, so you have positive mark-to-markets on other aspects. But you only focus on the variation margins, which we pay to exchanges or get from exchanges. Actually, the net-net picture is a totally different one. So -- and that is -- so it has other elements of how our net debt balance will look like because there are realization profiles of uncollateralized deals, and it's very difficult because it would give you the wrong picture. I think when you want more guidance, what I said in March at the Capital Market Day, if you assume power and commodity prices being constant at year-end level, the negative effect from backflow of variation margin for this year would be around EUR 800 million to EUR 1 billion. That's what we actually have seen in Q1 already. Everything else is just the timing effect for later years.
The next question comes from [ Pyor Zygolovsky ] from Citi.
I have 2 questions. One, do you -- have you seen any changing of the financial conditions for the renewable project financed through the -- project finance you might be looking? I know you do most of it through your balance sheet, but has that changed? And does this have an implication on the -- we're seeing in light of the COVID crisis, we'll see a change of the valuations of the renewable projects at a multiple megawatt hour? You just mentioned you will try to do 2 disposals this year. So will that be done at slightly different valuations?
That was one question. Do you have another one? Or is that the only one?
That's the only one.
Okay. Thank you. To be very, I mean, straight, no, we have not seen any effects from the current situation. But that might also be the case because we currently run very limited project financing activities. If -- I mean, the only one that was, I mean, already locked in was on the Triton Knoll side. And on the other where we do financing is on the tax equity side of our U.S. projects. Their activity has -- is going as -- I mean, business as usual. So we have locked in the one for Peyton Creek. I mean we are well underway with the tax equity providers for the other projects, which will be commissioned this year, very close to finalizing the deals also there. And conditions for this financing is -- I mean, since it's fully collateralized, I mean, not exposed to the current situation anyhow. So the one we got was as expected.
[Operator Instructions] We have a follow-up question from the line of Deepa Venkateswaran from Bernstein.
So this is about the 2023 guidance that you'd given in the CMD for the lignite nuclear division. I was just wondering whether the hedge margins or anything would lead to any different view in terms of how you're seeing spreads developed in outer years. Or this is exactly -- or alternatively, did you already know about this, and that is precisely why you gave the guidance that you did give?
Yes. Thank you, Deepa. No. I think you know our hedging approach to carbon, very long time until 2030. The fuels also are far out. I mean we are now hedging fuels into the 2023, '24 area already. So even the current market situation and price movements has -- have not changed the view of the 2023 profitability. I mean if situation stays as they are, of course, they will then kick in later years. But I mean, we should expect that one day, power demand and prices should also normalize. But '23 has not changed between CMD and today.
All questions have now been answered.
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