RWE Aktiengesellschaft (RWE) Earnings Call Transcript

Welcome to the RWE conference call. Markus Krebber, CEO of RWE AG; and Michael Muller, CFO of RWE AG, will inform you about the developments in the first half of fiscal 2026. I will now hand over to Thomas Denny. Please go ahead.

Thank you, Laura, and good afternoon, everyone. Welcome to RWE's conference call on our results for the first half of 2026. Thank you for joining us today. Markus Krebber, our CEO; and Michael Muller, our CFO, will start by taking you through the presentation. After that, we'll open the call for questions. Markus, over to you.

Yes. Thank you, Thomas, and a warm welcome to everyone. This year-to-date has been quite decisive and successful for us. I'm very happy with the continued progress we are making in strengthening our portfolio as well as in delivering our operational and financial targets. And with that, let's jump into the presentation. We have delivered an excellent financial and operational performance in the first half of '26 and therefore, raised our earnings expectations for the current year and for 2027. For 2031, we had already elevated our guidance when we announced the Amprion transaction. Market fundamentals continue to remain strong, structural demand growth, energy sovereignty and the necessary grid build-out provides significant investment opportunities for us. We are best positioned to capitalize on these market fundamentals. We have further strengthened our platform through the increase in our stake in the German electricity TSO Amprion to 55%. Our strong project pipeline and our portfolio of attractive sites perfectly position us to capitalize on the further growth catalysts ahead of us and to deliver upside to our current plan. Our agenda is clear. Disciplined investments based on financial strength, will deliver long-term secured earnings and dividend growth. Let's have a look at our financial performance. We have delivered an excellent financial performance in the first half of '26. Adjusted earnings per share stood at EUR 1.8, up more than 60% year-over-year, mainly driven by strong operational development of all business segments and the compensation payment in the Netherlands. Our trading business is back on track and has delivered a strong performance in the second quarter of the year. Strong performance in trading continued in July and August. As of today, we have already reached the midpoint of our guidance range to EUR 100 million to EUR 500 million. For the full year '26 and '27, we have raised our EPS guidance. The '26 target has been increased from EUR 2.55 to EUR 2.95. Our new '27 EPS guidance of EUR 3.15 fully reflects our 55% stake in Amprion and higher power generation margins. Let's now look at what is ahead of us. The fundamentals in our business remain strong. Power [ eMart ] is growing. In Europe and the U.S., demand is expected to increase by more than 10% on average by 2030. The key drivers are further electrification across transport, heating and industry as well as rapid growth in demand from data centers. At the same time, energy sovereignty has become a strategic priority. Europe, therefore, intends to significantly accelerate electrification. The European Commission has proposed almost doubling the share of electricity in total energy demand to 46% by 2040. The digital generation capacity alone will not be enough. The entire power system needs to expand the system significantly more renewable generation requires additional grid infrastructure, storage and flexible generation capacity. In Germany, loan transmission system operators expect with investments of more than EUR 360 billion by 2045. The conclusion is clear. These structural trends provide significant investment opportunities for us, and we are very well positioned to capitalize on these trends. We have superior delivery capabilities, a broad pipeline across regions and technologies and the portfolio of attractive sites. Our investment program perfectly reflects this. In addition to renewable and flexible power generation across our core markets, we now also includes regulated grid infrastructure. From '26 to '31, we plan to invest EUR 42 billion net across all core businesses. Our strict return criteria for new generation and storage projects remain unchanged. The IRR will be above 8.5% on average. For our grid investments, we target a return on equity of more than 80%. Our investment program will deliver strong and visible earnings growth with adjusted EPS growing at a CAGR of 10% from '25 to '31. Dividends will be increased in line with earnings plus 10% per annum. Let's now have a look at our strategic and operational delivery in the first half of '26. In June this year, we took an important strategic step forward. We increased our stake in the German TSO Amprion to 55% and added regulated grid infrastructure as a third pillar of our strategy. We closed the transaction at an attractive EV to RAB multiple of 1.07. And as we speak, we are in discussions to potentially further increase our stake. To be clear, this would not require an additional equity raise. Looking at our U.S. business through the settlement agreement with U.S. administration for our offshore wind leases, we achieved a value-preserving solution. The settlement now allows us to release capital from projects without a realistic path forward. We redeployed into U.S. energy infrastructure with an attractive risk return profile. Our USD 900 million financial investment in the LNG terminal is backed by a long-term tolling agreement and is expected to contribute earnings from 2031 onwards. An upside to our current plan with fully secured contracted earnings. We are also progressing well on our U.S. flexible generation strategy. By 2035, we target to build more than 3 gigawatts of gas generation capacity. The necessary grid connections will not be a constraint for us. Across our development pipeline, we have secured grid connections for up to 10 gigawatts that could be used for gas projects. This will enhance our customer offerings with baseload PPAs or behind the meter energy campuses. To accelerate our development, we have now entered into a USD 300 million turbine reservation agreement with [indiscernible]. Initial units can already be delivered for projects with commissioning in 2029. We expect to make the first FIDs by the end of this year. We also constantly streamlined our portfolio. As part of that, we have sold our Swedish wind activities at our offshore wind project under development in the Polish Baltic Sea. And just recently, we announced the sale of our U.S. distributed generation business. And we achieved further progress on the operational side. In the first half of the year, we have secured income for more than 15 gigawatts of capacity. With our successful awards in the U.K. [indiscernible] in the British T-minus 4 capacity auction and in the recent tender for capacity reserve in Germany. In addition, we have signed almost 1.1 gigawatt of new PPAs. As part of that, we have secured a new 500-megawatt PPA for an existing asset in the U.S. the largest contracting in our portfolio so far. With our FIDs, we have also continued to secure attractive earnings. On average, the [indiscernible] or FIDs that we made since the beginning of '25 was 9.9%. More than 750 megawatts of new capacity has been commissioned in the first 6 months of the year. By the end of H1, we had 10.3 gigawatt of projects under construction with a construction program being on trend. Let's now move on to look at further catalysts ahead. The investment framework in our core markets are attractive and provide upcoming investment opportunities. In Germany, auctions for new flexible generation are planned for '26 and '27. We are ready with more than 3 gigawatts of gas newbuild capacity available to bid. The future German capacity market will create further opportunities for our then existing portfolio of more than 6.5 gigawatts and potential new builds. In the Netherlands, more than 3.5 gigawatt of our capacity will be eligible for the capacity auction schedule in 2028. Earnings contribution from capacity markets, both in Germany and the Netherlands will be an upside to our 2031 guidance. Also the U.K. remains an attractive market. We have more than 2.5 gigawatt of eligible new build projects for AR, majority of which being offshore wind projects. And our portfolio of attractive existing infrastructure sites provide us with additional upside to our plan. We are further advancing the development of data center science. Two sites are nearing agreement over the next months. In July, 2 of our former nuclear sites in [ Gundremmingen ] and [indiscernible] have been selected as fusion energy hubs by the German Federal Ministry, one for magnetic, one for laser fusion technology. Accordingly, we will optimize the decommissioning process of these sites to adapt the continued usage of existing infrastructure for fusion technology. Let me conclude. Our capital allocation is and will be disciplined. Our balance sheet is strong, and we will maintain our leverage ratio at the lower end of our 3 to 3.5x guidance range. Our earnings growth is highly visible and the acquisition of Amprion adds further regulated earnings and visibility to our growth profile. 75% of our 2021 adjusted EPS is secured. We will grow adjusted EPS by 10% annually until 2031, and our dividend will grow accordingly by 10% per annum. And now over to you, Michael, for more insights.

Thanks, Markus, and also good afternoon from my side to all of you. Let's now take a closer look at H1 2026 financials. We delivered an excellent financial performance in the first half of 2026. Adjusted EBITDA stood at EUR 3 billion. This is an increase of more than EUR 900 million compared to the first half of last year. Offshore wind earnings increased by EUR 167 million to EUR 810 million. This was mainly driven by normalized wind conditions. Onshore wind and solar recorded an adjusted EBITDA of EUR 1.02 billion. Earnings increased by EUR 186 million, driven by the commissioning of new assets. Flexi Generation delivered an adjusted EBITDA of EUR 1.03 billion. Earnings were significantly up on the back of a EUR 332 million compensation payment for the production restriction of our [ AMS Hafen ] power plant in the Netherlands in 2022. Higher contracted capacity payments in the U.K. also contributed positively. Our Supply & Trading segment delivered an adjusted EBITDA of EUR 134 million. After a weak start into the year, our trading business is back on track and showed a strong earnings performance in Q2. As Markus mentioned, the strong performance has continued. And as of today, we have already reached the midpoint of our guidance range of EUR 100 million to EUR 500 million. Adjusted depreciation increased to EUR 1.2 billion. This reflects the organic growth and the commissioning of new assets. In addition, depreciation in H1 slightly increased to account for hyperinflation in Turkey, where our [indiscernible] power plant is located. The adjusted financial results improved to EUR 56 million. This was driven by higher capitalized interest. For adjusted tax, we applied the general tax rate of 20% for the RWE Group. Adjusted minority interest increased to minus EUR 216 million. This reflects Apollo's share in our [ Amgen ] stake and our partners share in the better offshore wind results and capitalized interest. Year-on-year, adjusted EPS increased by more than 60%. Adjusted income stood at EUR 1.3 billion and adjusted EPS at EUR 1.77. Adjusted operating cash flow was minus EUR 759 million at the end of H1, mainly driven by seasonal effects in working capital. Changes in operating working capital amounted to minus EUR 2.7 billion, driven by the seasonal purchase of CO2 certificates in the first quarter, an increase in accounts receivable and a decrease in accounts payable. Changes in provisions and noncash items amounted to minus EUR 1.1 billion, driven by changes in utilization of provisions and the cash flow of our phase out technologies. Net debt stood at EUR 15 million at the end of June. Cash investments amounted to EUR 6.3 billion. This includes the growth investments and EUR 1.7 billion for the share of the [indiscernible] acquisition that closed in June. The remaining stake of the acquisition will be closed in July. So additional EUR 1.9 billion will be reflected in the Q3 number of this year. Other changes in net financial debt had a positive effect of EUR 3.9 billion, mainly driven by our capital increase in June. Net debt at year-end is expected at EUR 15 billion, so on a similar level as at half year. Let me close with our earnings outlook. For '26 we've upgraded our outlook. Adjusted EBITDA is now expected to be between EUR 5.57 billion and EUR 6.35 billion. Adjusted net income is expected to range from EUR 1.95 billion to EUR 2.45 billion. The midpoint of adjusted EPS is EUR 2.95. Our guidance is based on commodity prices as of June 30 of this year. Our dividend target for the fiscal year '26 remains EUR 1.32 per share. This reflects our annual 10% dividend growth target. Let me summarize. We have delivered an excellent financial performance in the first half of 2026. Our adjusted EPS increased by more than 60% year-on-year, and we've upgraded our outlook for the year '26, '27 and '31. And now let me hand back to Tom.

Thank you, Michael. We will now start the Q&A session. Operator, please begin.

[Operator Instructions]. We will now take our first question from Alberto Gandolfi of Goldman Sachs.

I have these 2. The first one is on your Slide 9, where you seem to be talking about quite a lot of optionalities particularly in [ FlexGen ]. I wanted to ask you how much of this Slide 9 is included in your 2031 guidance? And can you give us a range? I don't know if we look at EUR 50 to EUR 100 kilobase capacity payment. There's quite a lot of capacity here that could be receiving compensation. And would you look at the capacity payment almost as a substitute to ancillary services? Or do you think it will be incremental to your profits? The second question is you can decide maybe to just reply to one part or the other, but there are 2 parts to the second question. It seems to me there's upside to the target returns that you are achieving both in renewables where you talk about 10% over the past 18 months, your guidance is above 8.5 million and you're now talking about above 8% ROE on Amprion, which is a little bit more than what you said last time when you bought the stake, but it's still very, very much below what [indiscernible] our tenant are reporting, which is more in the double digits. So I guess the question here is after this long introduction, if we were to mark-to-market renewables IRR to the current level of 10% and to double digit in line with the other transmission, could you give us a sensitivity in terms of million euro profit we could see by 2031? Or can you give us the building blocks so that we can do it?

Okay. Thanks, Alberto. This is quite a journey. So let me start with your first question, what is potential upside to the plan? So let me start short term. I mean not only focusing on Page 9, but in the short term, we clearly highlighted that trading is going very well in Q2 and also Q3. So -- but today, we have already reached the midpoint of the guidance and the midpoint of the guidance is what is reflected in our EPS target. So everything -- anything else from now on is on top. Second, if you look into the backup of the plan of the deck, you see our power price assumptions for the EPS guidance. That was, I mean, by the end of June, today's baseload '27 prices in Germany are more than EUR 10 higher. Long term, I mean, what is not included in the plan, I tried to highlight that in my speech is the U.S. offshore settlement and the investment in LNG, where we now turn, let's say, the stranded investment in the U.S. offshore lease in cash returning investments. This is not included into 2031 guidance. If we can manage to build up the Amprion stake, and I made clear, we don't need additional equity capital for that. That's not included. And we have now a pipeline of more than 3 gigawatt for gas new builds to be bid into the auction. So far, we have planned with 3. And the most prominent one that you asked for a number where I would like Michael to give you an assessment what that could mean is the capacity market income in the Netherlands and Germany and, of course, one-offs potential data center deals. So this is the entire upside we see to the plan. I mean don't -- we are typically very conservative, but you see us here very, very optimistic about our business going forward. Please understand that we don't update guidance real time. We do that. We either have an announcement like the Amprion deal or a strategy review, including the full governance cycle with our board as well. Michael, on the capacity market.

Yes. So first on the capacity market, let's start with your last question. If that is kind of substituting auxiliary income or it comes on top I would assume that comes on top, yes. I mean, yes, there will be some offsetting effects, but largely, that should come on top. I mean -- if you do the math and you just for a moment assume what the last U.K. auction realized and then convert that into Europe and apply that to the capacities, Markus mentioned to the 6.5 and 3.5. Obviously, since the German capacities also include batteries and pump storage, you assume some degrading factors. That probably brings you in the range of EUR 300 million to EUR 400 million.

Then I take the other part again, Alberto, on the uplift on IRRs. First on renewables, we continue to see higher locked in at FID compared to the 8.5% blended hurdle rate. Of course, the moment we lock something in that becomes part of the earnings guidance. So it's only for the not-yet FID capacity where you can expect the uplift if the returns stay where they are. And that is not the majority. I mean, at least, I would say, rough ballpark gut feel, 70% is probably locked in when it comes to 2031. So there's only a potential uplift on 30% of the investment volume. On the TSO side, so the numbers you mentioned for [ Elia ] and [ TenneT ], these are historic ROEs and also Amprion has achieved historic ROEs in that ballpark. But we are now entering a new regulatory regime from '29 onwards. You know that, that is under discussion, and we are here on the conservative side. I think investments above 8% are valuable in regulated business. But what can be in the end be achieved under the new regime with different levers for outperformance remains to be seen. So we don't want to stretch that too much, but we are confident we see above 8 now.

Our next question comes from Harry Wyburd of BNP Paribas.

Two, please. Firstly, on Amprion. So you mentioned the state build. Could you give us any color on how much of an additional stake you are in discussions to take on? And on equity raises, I noted that you said that would not need an equity raise. But if we extend the question more generally, clearly, the equity markets are being very generous right now. So would you consider equity raises for other operations, whether that might be greater opportunities in U.S. renewables, other very attractive strategic acquisitions that are accretive, et cetera. So would you still look to equity markets as a source of capital from here? And then second one, on the Louisiana and the gas turbine reservations that you signed in the agreement last week, should we just isolate those if we assumed high single-digit pretax ROIC on that, you'd be looking at around about 100 billion or so of EBIT. Is that something you're willing, Michael, thank you to give us a rough range for the capacity payments, could you help us a little bit with the agreement last week in terms of EBIT accretion that you might expect from that from 2031 onwards?

Thanks, Harry, for the questions. Let me start with the easy one. The second, your assumption is correct. That is ballpark the right figure. On Amprion, I mean -- our aim is clearly to collect further stakes at the same valuation level than we have paid for the first transaction. So it remains to be seen how many [indiscernible] we can collect them. I'm quite confident about smaller stakes, whether we can get bigger stakes remains to be seen. For the smaller stakes, that's probably part of the normal capital allocation and we have some headroom left on larger acquisitions, if they materialize, we will probably look for earnings accretive capital recycling. And that brings me to your second question. I currently don't see any strategic additional move, which would bring us into the question whether we want to raise equity. And one battle after another, I think we now also have to digest the move this year. So I can rule out for the foreseeable future, any bigger strategic move over capital raise.

And we'll now move on to our next question from Peter of Bank of America.

It's Peter Bisztyga here. A couple of questions from me. Firstly, on the upcoming journal CCGT auctions, I understand there's still some EU approvals that need to be finalized. Is that correct? And are there any concerns that the time line might get delayed at all? And also, how are you feeling about the competitive dynamics because there's now kind of a number of players kind of lined up to participate here. And across the 2 auctions, just interested to hear how you think the sort of dynamics might play out. And then also, can you just give us a little bit more color on whether [ Appian ] kind of is still part of your sort of financial assets portfolio? Or is it now kind of the core business? And if so, are you happy with how your provisions are funded? How are you thinking about that whole structure, please?

Peter, thanks for the question. So CCGTs, I mean it's not only CCGTs, it's a firm capacity auction. So we also expect OCGTs and turbines and other stuff to be bid in and being successful. On your question on time line and potential derailment from the European approval side, we don't expect it. What we understand is that the current design, which was taken to the parliament was degree with the European Commission and [indiscernible] to get the formal approval, which need to happen before the first auction results are communicated. No concern on our side here. Then the second question was on -- what was that?

Competitive dynamics.

The competitors -- yes. So I mean we are quite confident with our bids. We have started early secured good prices. Projects are far developed. We have a good understanding who would do what. So all pre-agreed with contractors and suppliers. And when I look at the last auctions where we have participated, I think we always had a good read of the auction dynamics. So I think, the flexibility, which is also provided with 2 options where you can play a bit with price levels, I think, can be a very good outcome for us. On -- I mean, Amprion is clearly a core segment, but your question was on E.ON, right?

Yes, basically.

So -- but I mean, Amprion, as we said, when we announced the transaction, will become a separate segment from next year onwards which is regulated business as a separate core segment. E.ON is not core. It's a financial investment. We use it as a funding our lignite provisions, but you also know when you look at the numbers that we currently have an overfunding of EUR 2 billion. So there's EUR 2 billion headroom from the [indiscernible].

And we will now move on to our next question from Ahmed Farman of Jefferies.

Two questions from my side. Just coming back to Slide 9 again. And thank you earlier for your earlier response where you very helpfully outlined provided some of the sensitivities around capacity market. I was wondering if you could give us a little bit more about the 2 data center sites nearing agreements that you mentioned on that side as well? Give us a little bit of more color on how we could think about the potential economics, the financial impact of that? And maybe also remind us where is the sort of the overall backlog or pipeline of such sort of opportunities today from your perspective? So that's my first question. Secondly, just interested in your views on the outlook for European power and gas market. Markus, you already alluded to that you guidance versus where the forward curves are, there's sort of a difference already what is behind your guidance and commodity prices. But I'm just more interested in any views that you may be able to share how you think the power and gas market may evolve as we move towards the winter.

Yes, thanks for the question. I mean on the data center side, since it's a very competitive environment here, we don't want to give more insight, just -- I mean, expectation management that we are making progress. But in terms of sites, potential partners and also economics, we will communicate the full details when the deals have been signed. On the overall question, I mean, we see strong demand. We now see the need to build what I like to call operational data centers in Europe, not to train the models, but which you need to have close to your customers to solve the latency problems. They are coming in big time. And also from new players, it's just a question of time. So we are we do one step after another. We don't want to rush into it. We take a very cautious approach but I'm, again, very optimistic like we already said in March this year that we're going to do one deal after another here. From our European pipeline, but I'm also optimistic about our opportunities to deliver U.S. energy campuses where we also have lots of interconnection agreements with existing sites, existing development projects and here, the discussions are also progressing very good. EU power and gas, I have no view on fundamentals whether the situation in the Strait of Hormuz is going to be resolved quickly or not. But -- so the level I have no clear opinion on I think we have now for the next month before we enter the full dialogue in the European Commission clarity about car markets and markets have calmed down. But going into winter, what I see is very tight system. I mean gas storages, especially in Germany, only filled to the level we have seen before or in the more times with Ukraine and probably the low -- we entered the winter with the lowest field level over the last decade. We also see that hydro reservoirs in Scandinavia and the Alps are not feeling like normal. It all hints into an environment where we should expect high volatility. Of course, we cannot predict how hard the winter is going to be whether we have a windy winter or not and whether we have disruption on other supply sides. But I mean, we should be preferred for a rough ride, which is typically for our portfolio, not a bad environment.