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Edited Transcript of UN01.DE earnings conference call or presentation 7-May-19 6:30am GMT

Q1 2019 Uniper SE Earnings Call

DUESSELDORF May 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Uniper SE earnings conference call or presentation Tuesday, May 7, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Jost Delbrück

Uniper SE - CFO & Member of Management Board

* Udo Giegerich

Uniper SE - EVP of Group Finance & IR

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Conference Call Participants

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* Alberto Gandolfi

Goldman Sachs Group Inc., Research Division - Head of European Utilities Research

* Deepa Venkateswaran

Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst

* Lueder Schumacher

Societe Generale Cross Asset Research - Equity Analyst

* Peter Andrew Bisztyga

BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director

* Samuel James Hugo Arie

UBS Investment Bank, Research Division - MD and Research Analyst

* Vincent Jean Michel Ayral

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Uniper Conference Call. At our customer's request, this conference will be recorded. (Operator Instructions) I may now hand you over to Udo Giegerich, who will lead you through this conference. Please go ahead, sir.

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Udo Giegerich, Uniper SE - EVP of Group Finance & IR [2]

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Thank you. Good morning, dear analysts and investors, a warm welcome to the Uniper Interim Results Call for the First Quarter of the Fiscal Year 2019. I'm sitting here with our CFO, Christopher Delbrück. For the last time, Christopher will lead you through the presentation today and answer all of your questions. As always, please limit yourself to 2 questions each, and Christopher, please.

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [3]

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Thank you, Udo, dear analysts and investors, a warm welcome for my side. Thank you for tuning in for today's conference call. The frequency of news and speculation around Uniper is still intense, let's start with a certainly positive one. The search for Uniper's new CEO and CFO has come to an end.

As announced last week, we're happy to welcome Andreas Schierenbeck as Uniper's new CEO; and Sasha Bibert as new CFO. Both will begin their new roles on June 1st, 2019.

To have these 2 experienced managers on board is a very good and important signal for Uniper and its employees in this challenging market environment. Before we cover the usual topics in our presentation, I would also like to address the recent developments in context of our upcoming AGM.

Two of our major shareholders, Elliott and Knight Vinke, have submitted supplementary motions to the agenda of Uniper's forthcoming Annual General Meeting on May 22, 2019.

According to Elliotts' request, each of the managing board is to instructed to prepare the conclusion of a lawful domination agreement between Uniper SE as the controlled company and Fortum Oyj or one of its subsidiaries as the controlling company. In Knight Vinke's supplementary request it is proposed that the draft agreements for the spin-off of the International Power business segment be submitted to the shareholders by the Annual General Meeting 2020 at the latest. If this request has not reached the necessary qualified majority in the Uniper AGM 2019, the instruction of the preparation of the spinoff of the Swedish activities contained within European generation should be decided by the upcoming AGM as an alternative.

The Uniper Supervisory Board and Board of Management are preparing joint statements regarding both requests that are about to be published. Once released, these will be found together with all other related documents under the heading Annual General Meeting on the Uniper homepage.

Therefore, I will not comment further on those topics in today's call. With respect to Uniper's current talks at Fortum, there is no news today on the subject of future cooperation. My 2 colleagues on the Management Board, Eckhardt Rümmler and Keith Martin are leading this process for Uniper.

These discussions are taking place at various levels and are progressing well. What we see are options for joint external growth, which could complement our strategy. Concrete results are likely to be ready for communication not before late summer. Back to the core of today's call. I would like to shed some color on both our operating and financial performance for the first 3 months as well as on the way going forward.

Let me start with the essential topics of the first quarter 2019. We have made further progress in developing the Uniper portfolio. As part of our asset rotation efforts, we have concluded agreements with some of our nonstrategic interest in the Italian LNG regasification terminal OLT and our remaining interest in the Brazilian energy company Eneva. The sale of the latter had already been closed in early April.

The closing of the OLT deal is expected for summer. Both were purely financial investments but neither had a strategic value nor provided any benefit to -- for our remaining business portfolio. Proceeds in the realm of EUR 0.5 billion strengthen the group's financials and will be used to invest into new growth projects that focus on reliable non-wholesale cash flows. To recap, what is top of our agenda and in order to unlock more predictable new cash flow streams in the medium term, focus on the key areas of supply and industrial solution business, diversify and broaden the global reach within our gas business and to modernize our Russian fleet.

With regards to Russia, we can already flag that we were successful at the first auction under the new modernization program. Looking at the existing business in the first quarter of 2019, the seasonality of the first quarter results were significantly less pronounced than in previous years. The warm winter weather in Europe did not exactly help the trend. The group adjusted EBIT decreased by almost 50% to just under EUR 0.2 billion. One of the main drivers for the negative carbon phasing effect, which might sound familiar from last year's communication. Q1 suffered from higher carbon provisioning, while the offsetting positive hedge effects will materialize in Q4.

Further, aside from some other well-known effects, the warm winter took its toll on our gas business in terms of storage utilization. However, we expect a number of underlying business trends that will develop positively in the coming quarters. Among those are an increase in revenues from our outright fleet perspectives to materialize after Q1 driven by higher locked-in prices and volumes.

In the case of our Global Commodities business, we see higher gains from gas optimization LNG for the remaining 9 months of 2019. And finally, our business in Russia has been developing better than expected driven by higher volumes and prices.

This translates even to a raised outlook for our International Power segment. Given the above-mentioned developments, we expect the development in adjusted EBIT for the group to improve particularly in the second half of the year. Therefore, we confirm our outlook for the full year 2019 in terms of adjusted EBIT, adjusted FFO and dividend target, which translates into EUR 390 million for the fiscal year 2019.

Even though we keep our full-year guidance stable, the coming months will need attention. Key words are here, finalizing of the large asset projects, managing the withdrawal from coal-fired power generation and securing a fair compensation for Uniper and development of additional business potential as a result of current talks with Fortum. Let me now explain our asset rotation in more detail on the next slide.

Asset rotation is an important tool to open up additional financial headroom for further growth investments. The price of the sale for a 48% stake in Italian OLT Offshore LNG Toscana announced in March is approximately EUR 400 million. The sales price will be adjusted for payment already to be received before closing, so we expect final net proceeds to be around EUR 330 million.

We were able to sell all of the attractive conditions with a multiple of around 12x enterprise value EBITDA to the infrastructure player First State Investments. In addition, we have ended our engagement in Brazil, which we acquired from

E.ON as part of the spinoff by selling our 6% stake in Eneva. At the beginning of April, we participated in a secondary placement and successfully placed our Eneva package for EUR 76 million.

The closing for OLT will take place, as I said, by summer. The proceeds for Eneva will be booked in the second quarter. Proceeds from both divestments will be very welcomed, given the investment projects currently under development.

As part of our setting the sails strategy, the pipeline continues to fill with growth projects. Important flagship projects, our construction of a gas-fired power plant at our Scholven site in the heart of the rural region and the construction of a 300-megawatt system security gas plant in Irsching, Bavaria. Construction work on both projects is scheduled to begin in the current quarter.

Both power plants are expected to be connected to the grid in 2022. In Russia, we were successful on the first round of state auctions to modernize the domestic energy industry for the modernization phase between 2022 and 2024. Based on the preliminary results, Uniper has been awarded the contract to modernize 2 800-megawatt power plant units at the [Scholven] site in West Siberia, one of the largest thermal power plant sites in the world. Thereby, Uniper secured 24% of the total selected capacity of this auction round. The first block is to be connected back to the grid in 2022, the second block in 2024.

Overall, we expect CapEx in the amount of RUB 6 billion to RUB 7 billion to be spent on both projects. The final signing of the respective bidders is earmarked for the end of May.

Several Uniper plants have the potential to participate in further auctions including deeper modernization measures. The second wave of modernization auctions is expected to take place in September 2019 with a focus on capacity deliveries for the year 2025 and beyond.

The investment budget for all 3 power plant projects amounts to a total of around EUR 500 million. All 3 projects will strengthen our non-wholesale related earnings stream. The commissioning of our other large asset projects will also be an important topic and a significant source of earnings from 2020 onwards. We are continuing to work at full speed on the commissioning of our Datteln 4 coal-fired power plant. The project is fully on schedule for the plant commissioning in summer 2010. Around half of the boiler walls have been reassembled. The commissioning of the peripheral equipment around the boiler is largely completed.

In mid-March, the long term sales contract to RWE was once again confirmed by the responsible higher regional court, which proved our legal view that the existing contracts must be fulfilled by our customers.

On the subject of the planned German coal exit, I would like to briefly summarize the current situation.

A few weeks ago, Uniper and the Federal Ministry of Economics held the first round of high-level talks. The next step will be to enter into specific discussions with the government representatives to move a step closer regarding the legal specification and the desire to implement the Coal Commission's recommendations. The German government has the ambitious goal of reaching consensus with the affected companies by Autumn 2019.

The Nord Stream II Baltic Sea pipeline also remains at the center of a political debate. The opposition of various countries and governments, the project continues, while at the same time, the operational progress of the project has been considerably well. According to the operating company around 1,000 kilometers of the lines have now been laid.

At present, there are still only a few kilometers of pipeline missing to the Danish border near the Island of Bornholm. Denmark has not yet granted approval for the route around the island and is asking for alternative route options to be examined.

Now that the Danish authorities were additionally requested the operator to examine a third southern route, the authorities have received 3 applications for alternative routes. From our point of view, it remains to be seen whether and to what extent this will lead to delays in project implementation. For Uniper, as a pure financing part of the project, this does not have any immediate effects.

The financial commitment from our side remain unchanged with up to EUR 950 million. By the end of first quarter, loans of about EUR 650 million have been already drawn down by the Nord Stream II project company. Interest income is being earned on the loan provided.

The amended EU Gas Directive, which has been adopted by now does not effect the completion of Nord Stream II, but has certain implications. This is the first time that the EU has provided legal clarity for the operation of offshore gas pipelines.

For the pipeline section on German territory or in German territorial waters, the pipeline operator must comply with the regulatory requirements of the EU. This includes nondiscriminatory network access and tariff regulations.

Our main message is that Uniper's risk opportunity profile on this project has not suffered in recent weeks. A brief comment on our Russian lignite fire power plant, Berezovskaya 3. The repair of the power plant's unit is making sustained progress. Major system tests will be on the agenda starting in August.

We stick to our assumption that commissioning will take place at the end of the fourth quarter this year.

Now let's take a quick look at our overall market environment, especially the European carbon electricity and gas markets. The electricity prices in the Central and Northern European markets are in a robust shape. Now that oil and coal world market price has turned into a volatile sideways movement, rising carbon trading prices are acting as a decisive support for the development of European APC prices.

Basically, we've seen underlying bullish sentiments since higher CO2 prices are necessary for a coal to gas switch on a broad front.

The bullish short-term story supported by a generally significantly reduced auction volume. In addition, U.K. [sellers] are hedging their obligations for 2019 to a larger extent in light of the postponed no deal Brexit scenario. The price cap between the continental European markets and the Nordic markets recently widened a bit.

This has been accompanied by an improvement in Nordic Hydro reservoir levels towards long-term average levels, which make Nordic market participants a bit more relaxed on the availability of hydro.

In the long term, the Nordic hydro-based system should be more strongly connected to the firmly based continental European system by a rising number of interconnectors. The upward trend in electricity prices also increasingly reflected in our hedged prices of our outright fleet.

Compared with the previous quarter, the hedged prices for Nordic rose by EUR 3 in the outer year 2021. For Germany, the [weightily] hedged price for 2021 are even around EUR 10 higher than the hedged value for 2020. For the details, please refer to the outright power hedging slide in the appendix of today's presentation.

Gas prices in Europe were temporarily under strong pressure at the beginning of the year due to high of availability of gas. This was the result of warmer winter temperatures in both Europe and Asia.

Additionally, the Asian markets have covered a great deal in advance so that LNG imports [were moved] to Europe. The lower price levels rendered storage withdrawals uneconomical, resulting in very high gas storage levels at the end of the winter season.

At the end of March 2019, European storage facilities were still filled by more than 40%, this is 3x as high as it was at the end of Q1, 2018.

However, the structural trend for the rising demand from Asia remains intact as the latest rebound in gas prices have shown. What does that means for operating results? While the long-term earnings prospects would get a lot of tailwind from the latest market trends, Uniper's operational performance did not benefit from these underlying trends in the first quarter of the current financial year.

Due to the warm winter weather, we were not able to fully commercialize on the optionality of our gas storage facilities, which temporarily depressed our margins. On the power side, we see the positive impact from the upward trend materializing. Our hedged outright prices were marginally up in Q1, but the trend will accumulate over the course of the year.

I had been asked in Q3 last year whether we could increase transparency on operational figures throughout the year, and we for the first time now will start reporting quarterly operational figures. Uniper's gas storage filling levels followed the overall trend in Northern Europe. Accordingly, at the end of March 2019, our gas storage filling levels were at a very high level of over 50%, following record lower levels in the previous years.

This high filling level is

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with lower margins from withdrawals in Q1. Aside from the negative impact on adjusted EBIT, the high gas inventories further burden the operating cash flow in Q1 as the capital was still locked on the balance sheet. In the European Generation segment, electricity production declined in the first quarter. The outright business with hydro nuclear power plants showed an overall decrease in the production volumes of about 6%. Lower production was due to lower hydro availability in the Nordic market at the beginning of the year and lower availability of the nuclear plant Ringhals 2, where a generator is being replaced.

Our fossil-powered plants sold around 8% less electricity overall driven by mild and less volatile weather as well greater availability of renewables, the production from hard coal-fired power plants, especially in the Germany and the U.K., fell sharply in February and March.

This decrease was offset to a large extent by gas-fired power plant, which recorded a strong production growth in all markets due to lower gas prices, pushing their share in our fossil electricity generation to well over 50%.

However, similar to the development in the gas earnings, we expect a positive effect to materialize in the coming months due to the higher Hydro volumes in the next 9 months combined with higher achieved prices throughout the year.

International Power was the best performer within Uniper's 3 segments in the first quarter of financial year 2019. Electricity production in Russia increased by 8%, mainly due to an increasing demand from the system operator resulting from a tightening import/export balance.

Additionally, production suffered in Q1 2018 from some major overhaul activities that did not take place in Q1 2019.

With that, over to the key financials in the first quarter of fiscal year 2019.

I'll kick it off by giving some color on the development of our earnings followed by a breakdown of our cash flow and debt position in the first quarter 2019.

Adjusted EBIT is reduced by close to 50% to EUR 185 million. Adjusted FFO is essentially following the earnings development and therefore decreased significantly from EUR 560 million to EUR 240 million.

The cash conversion from adjusted EBITDA to OCF is just around 30% as the OCF does not only follow the decline in earnings but is further burdened by the working capital development. This is not the picture that we have experienced in the past at this point of the year.

In general, one should expect winter quarters showing strong earnings and cash generation based on higher gas and power demand, while summer quarters are rather characterized by limited earnings contribution due to higher renewables feed in and lower cash conversion as we build up inventory over summer. In 2019, this usual seasonal pattern is significantly less pronounced mainly due to the aforementioned carbon phasing effect as well as the impact of the warm weather on our gas business.

These 2 effects burden Q1 on top of the negative effects that we highlighted in our full-year guidance for 2019.

However, we expect to catch-up in the year-end 2019 in both in terms of adjusted EBIT and adjusted FFO. So from this perspective, no impact on our full-year 2019 outlook in regards to adjusted EBIT and dividend.

Finally, economic net debt is essentially unchanged on a level of EUR 2.5 billion based on our newly adopted definition, which includes receivables from margining.

To provide a transparent picture on the debt development, the prior year figure was adjusted as well. I will now dive into the details on the underlying drivers for earnings, cash flow and debt on the following slides, starting with the adjusted EBIT development year-on-year. On the adjusted EBIT reconciliation charge, I'm roughly following the logic that we used for our detailed adjusted EBIT outlook for March. Let me walk you through the waterfall line by line.

The first effect is carbon phasing. This is an intrayear CO2 phasing effect that will revert in Q4. This is not that surprising, as we have seen this effect already in Q3 2018 with a compensating gains of the respective hedges in Q4 2018. However, back in the first quarter of 2018, the phasing effect was still immaterial, so that we see a strong year-on-year effect when comparing Q1 2018 versus Q1 2019.

Let me remind you in detail of the mechanics that work here that make this effect as pronounced. In the normal course of business, we have to build up provisions for every tonne of CO2 that we emit during a quarter. The buildup is calculated based on the current spot price of CO2. In a time frame of rising CO2 prices, the provision buildup rises as well and so does the corresponding negative EBIT impact.

But as you know, we economically hedge the margin contribution before the generation 1 to 2 years ahead. This means we lock in the spread value by simultaneously selling power on the one hand and buying fuel and carbon on the other hand. Hence, if carbon prices increase, we have not only the mentioned negative impact from higher provisions at the same time, our economic hedges gain in value as they get into the money. However, the value gains on our carbon hedges are only shown in adjusted EBIT once the deals actually settle, which is in Q4 of each year. Until then, the positive development is only reflected within the unrealized mark-to-market results within our nonoperating earnings.

Consequently, the negative carbon effect in Q1 of roughly EUR 60 million will revert in Q4.

Our gas and LNG business suffered in the similar magnitude being down roughly EUR 60 million compared to prior year.

This effect includes the negative impact from the warm temperature on our gas business. Due to the decrease in gas prices, withdrawing gas from storages became less profitable, which resulted in higher gas filling levels and lower withdrawal margins.

Our hedging activities prevented us from seeing even higher losses here. However, we saw positive developments in the gas portfolio optimization that we expect to materialize in the following 9 months. Just like in 2016, downward trending and volatile markets tend to offer opportunities to extract value from our gas asset portfolio. Therefore, we expect our gas business to make up for those losses over the course of 2019.

On the LNG side, Q1 was affected by some more phasing effects that resulted from the different hedging instrument used to cover the underlying gas and oil exposure in LNG contracts. Similar to the carbon phasing, we also expect this negative effect to revert until year-end based on the development of the corresponding underlying deals that settle in the next month. The next effect in the waterfall is the regulation effect with a lower double-digit million impact. This is mainly the suspension of the U.K. capacity market payment that we saw last year and should not be a surprise.

The same slide, the effects from the Freeport LNG proxy hedge that we highlighted in our full-year guidance. This one had been substantially positive in 2018 in absolute terms and turns negative this year. Therefore, clearly, a more than EUR 100 million negative year-on-year effect for the full comparison, of which roughly EUR 20 million sit with Q1.

International Power is slightly up. Despite the year-on-year negative ruble impact, we took profit from higher day ahead market prices and at the same time, increased our production volumes compared to the first quarter, 2018.

Finally in the category other and which includes mainly effects from our European Generation business. Firstly, a rather negative picture on the production volumes as reflected here were the main drivers on the earnings being unavailability of Ringhals 2 as well as lower hydro volumes in Sweden and Germany.

Secondly, we suffered significantly from the ongoing strikes in France. In the case of Provence 4, we are not even able to conduct commissioning and test runs as this plant has been continuously under strike since last December. To sum it up, we see a strong decline in our earnings for Q1, however, at least EUR 90 million to EUR 100 million of those effects are expected to reverse until year-end.

Taking this into consideration, it becomes apparent that from an economic and operational view impact from the weak Q1 are less than it seems at first glance.

Now over to cash flow. Cash conversion from adjusted EBITDA to OCF in this first quarter was low, was clearly not typical for a first quarter. What's driving this? The waterfall makes this transparent. Let me walk you through the reconciliation line by line.

In the first step, we're adding back depreciation and then noncash effective EBITDA items, which also include the setup of provisions. Those have been mainly the addition for emission rights and green certificates. In terms of actual cash out, more important the provision utilization. In Q1, this amounted to around EUR 174 million. This is actually a EUR 25 million higher utilization compared to Q1 2018 level and predominantly a matter of higher utilization in the context of emission rights certificates for contracted power plants. When it comes to working capital, you would normally expect here the big positive kick for cash conversion that we have seen in the first quarters since 2016. What happened to Q1, 2019?

In the essence, the opposite happened to what you would normally expect. We have built up working capital across the major commodities, mainly driven by 2 effects. Due to the high inventory levels in our gas storages, the usual relief on OCF from withdrawing gas in Q1 was far weaker than in normal years. In absence of this positive contribution, other negative effects actually led to a net working capital increase in total. Among those negative effects was, for example, a buildup in coal inventory at power plants resulting from lower steam generation.

On the positive side, we should see less burden on the working capital, and therefore, less pressure on the OCF in the [either] quarters going forward, as storage levels are already on a very healthy level. Cash interest payments were limited based on low interest rates as were cash tax payments with EUR 14 million. Now over to economic net debt. Within our full-year 2018 presentation, we addressed the systemic, systematic impact of margining payments on the economic net debt definition.

Back then, we made clear that margining paid and margining received must be treated symmetrically in order to get an unbiased picture of the true debt position. In this context, we provided alongside our official economic net debt KPI and alternative economic net debt calculation, intended at that point of time only for information purposes.

Starting with Q1 2019, we changed the definition of our economic net debt to have this margining adjustment fully incorporated into our steering relevant net debt group KPI. In order to present you a like-for-like analysis of the economic net debt development, we need to apply the definition -- the new definition for the year-end 2018 value, as this is our reference point. Looking at the waterfall, you can see that the economic net debt of EUR 3.2 billion that has been reported for year-end 2018 amounts at EUR 2.5 billion based on the new definition. Starting from there, we had a positive impact on the economic net debt from the operating cash flow of EUR 0.1 billion earned in Q1. CapEx amounted to EUR 0.1 billion, 2/3 of this was related to growth and 1/3 to maintenance and replacement. As usual in Q1, this is a very low number so do not multiply this by 4 to estimate the full year number.

For maintenance replacement CapEx, we expect on a full year basis again to stay below the EUR 400 million level. The growth element were, to a large extent, linked to our 2 large asset projects, Datteln 4 and Berezovskaya 3. In the maintenance and replacement area, the focus was now fossil and hydro plants. Pension liabilities increased mainly due to lower discount rates. In the other effects category several effects are summarized such as the increased loan for Nord Stream II. So to summarize, we're fine with our economic net debt, fully in line with our expectations and targets.

Now over to the outlook section. We can confirm the outlook that we gave at the full-year reporting stage. Hence we continue to expect adjusted group EBIT to be in the range of EUR 0.55 billion to EUR 0.85 billion with the upside of materializing U.K. capacity market income.

On a segment level, the picture is broadly unchanged with one exemption. For our International Power, we increased our outlook from significantly below to on par. The recovery of day ahead market prices and improved FX rates versus our initial assumptions give us the confidence that the Russian business will deliver on previous year's levels. For the adjusted FFO, we confirm our outlook range between EUR 0.65 billion and EUR 0.95 billion. Consequently, we hold on to our guidance for the increased dividend recommendation of EUR 390 million for the fiscal year 2019.

In the next slide, I would like to give you some background on how to consider 2019 in the broader picture as 2019 is a special year in several ways. First of all, 2019 marks a low point in terms of adjusted EBIT contribution for Uniper, both historically but also going forward. This becomes apparent when we look at the most depositive earnings effects, which will materialize in the midterm until 2021.

Compared to 2019, we expect the adjusted EBIT 2021 as one to structurally benefit from positive effects on the magnitude of roughly EUR 600 million, pretty much all of which should sound familiar.

1/3 of the overall upside stems from higher achieved outright prices, taking into account both our current hedge prices as well as the current forward rates on the [old positions]. This impact, of course, is subject to price movements.

Given the development of the regulatory environment and the recent trends one might argue for further positive potential here. The rest of the asset effect is essentially not related to wholesale markets movements. We expect U.K. capacity markets to be reinstalled by 2021 or to contribute significantly above EUR 100 million EBIT, with about the same amount that we include for Datteln 4. The remaining chunk will be coming from via 3 wanted benefits from the CSA uplift by 2021. However, other Russian power plants will leave this CSA scheme, which brings us to the negative effect that we see for 2021. The lapse in CSA income is the major negative driver. Even though, we assume a partial offset from higher comp earnings. Also on the Russian side, we see a negative impact based on today's ruble forward exchange rates. As discussed in our deep dive call on Russia, we do not hedge the ruble exposure in the back, given their high cost. Hence, this negative effect depends on how the ruble FX will develop over the next 2 years. Finally, there will be some negative effects from shutdown of power plants. However, the positive effects significantly outweigh the negative ones by a roughly EUR 300 million, hence the structured earnings drivers that will kick in until 2021, primarily being higher achieved prices and commissioned legacy growth assets, indicate a significant uptrend in earnings hedged. Of course, a more detailed guidance on 2021 will be provided in the usual way as part of the full year 2020 presentation in Q1, 2021.

As for this development in the broader picture of our dividend and investment policy.

2019 is not only a turning point from an adjusted EBIT perspective, it is also the beginning of the second phase of our strategy. Looking back on the 3 years since foundation, we have been focusing on restructuring our portfolio, improving our cost base and optimizing our financing. All of this increased Uniper's stability and its financial headroom as represented by the stable investment grading that we have today. At the same time, we established a dividend policy and communicated a dividend growth path based on free cash flow. So far we were able to beat this dividend guidance each year while keeping the payout ratio at the lower end of the communicated 75% to 100% range. Adjusted EBIT-wise, we saw a decline for various reasons, some of them being structural, such as the sale of the Yuzhno-Russkoye gas fields, one of our bookends. At the same time, our cash-based metrics increased mostly due to a lapse of provision utilization. Therefore, while there was a definitely a decline in earnings quantity, there was also an alignment of earnings in our cash spread metric, reflecting an increase in earnings quality.

Overall, this first stage was the prerequisite to bring the company into a position from which it can actively shape its future business. This entrepreneurial freedom is, for example, reflected in our hedging decisions which are now rather determined by fundamental market views instead of financial constraints. But mostly, Uniper needs to focus now on the generation of further growth. Therefore, we consider 2019 as the entry point for the second stage of our strategy. During this second phase, Uniper will not only benefit from the financial malleability that was achieved by tightening the ship over the last years. Additionally, the aforementioned midterm upside will further increase our financial headroom as our cash-based metrics, adjusted FFO and FCF all will follow the earnings growth path. How will Uniper use this headroom for dividends and investments? While this will be obviously for the future management to decide, what we can say today is that the dividend targets of EUR 490 million for fiscal year 2020, i.e. the delivery of our 25% per annum growth path since 2016 remains valid. Our current strategy prioritizes investments into projects that are not exposed to commodity price risks. Investment decisions to come will be affecting the years beyond 2021. But as you know, this time frame is not a blank canvas anymore. Given our budget of an approximately EUR 500 million of CapEx that is reserved for already initiated growth projects that we touched upon at the beginning of this call.

Taking into consideration our communicated investments thresholds of at least 3% above cost of capital after tax and the fact that those complete projects will notably have a COD in 2022, the foundation for significant double-digit million euros contribution after 2021 is already laid. My days at Uniper are obviously in numbers, but I'm sincerely looking forward to seeing those projects and the organization grow in the future. Uniper has not yet fully realized its potential. It is my firm belief that the company in its current state is perfectly capable of delivering on its promises like it did from day one. Which brings me to the last part of my speech. Even though I knew the moment would come eventually, it really feels strange how quickly the time for finally saying goodbye has actually come. Given the fact that Sasha Bibert will enter office at the 1st of June, today's quarterly call is definitely the last one for me in the role of Uniper's CFO. But let me make one thing clear. I thoroughly enjoyed this part of my job where I could get in direct contact with you, being in conferences and road shows for the pleasure of discussing the matters of Uniper and the energy markets with you. I will miss this, but once I've settled into my new job, I might be actually looking for reasons to meet with you again. But there are a couple of things still left for me to do in my current role. One of them is answering today's questions. For that, I will briefly hand over to Udo now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Lueder Schumacher, Societe Gen.

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Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [2]

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Just 2 questions from my side. The first one is on the Ringhals 2. You did mention that a generator is being replaced there. How much of an outage are you expecting? And when should the plant come back online? The second one is on your working capital. That was largely due to, well, gas storage being full and also, less coal burns or coal stocks. Does it mean that we have to wait until Q4 until you -- we could expect the normalization in working capital and hence operating cash flow?

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [3]

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Thank you for the questions. On the first one, Ringhals we don't expect a very extended one. But I would refer you, we're not operating ourselves the plant to the market managers there, but we don't expect a prolonged outage there. Second question is on the working capital. Obviously, you don't have to wait for Q4, as we typically now -- #1, we see a bit of more colder weather in May, obviously, things will happen in terms of utilizing the gas in storage right now. Plus then the injection, which usually starts somewhere from the third quarter onwards will be less, given on the high volume in the storage. That should also start over Q2 and Q3 to improve. And last one, maybe one of the effects is there's also impact on the balance sheet based on our low sulfur marine diesel production in Dubai that has a significant effect on the working capital, which will actually revert already in Q2 and Q3. So a relief will be in sight much earlier than Q4.

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Operator [4]

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The next question is from Deepa Venkateswaran of Bernstein.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [5]

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I have 2 questions. The first one on non-stream. Would you be able to talk about what is the implication of the new EU Gas Directive on the economics of your loan? Does it change if the economics of the underlying project change at all? And secondly, thank you for the bridge that you kind of showed to 2021. I was wondering whether there was one other element that I was probably expecting you to put in there, is maybe a recovery in the Global Commodities division given that '19 probably is going to be at the lower end. Is that something that you see as a recovery? Or how should we think about any improvement in that division apart from the other part of the bridge, which I think had been flat before?

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [6]

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Thank you for the question, Deepa. On Norse Stream II, obviously, the response out -- how the project company will respond and whether that -- and which way the new regulation will be applied. I think I said in my speech that the chance of risk profile has not materially changed, we don't see a material change to the profitability from our side, i.e. on our loans given that the interest on the loans is the interest on the loans, not much has changed from our perspective. On the bridge of the 2020 on the commodity division, I think you're right that we are somewhere on the slightly lower one, but there is a bit of that one. But obviously, given that depends then a bit on how the gas business goes, develops in this range between [EUR 350 million] and [EUR 500 million], EBITDA levels we'll see a bit, maybe a bit of one, but not such a major one that would be on the bridge.

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Operator [7]

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The next question is from Sam Arie of UBS.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [8]

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As you said, a tough quarter and you did a very good job sort of setting out the ways in which cash flow can recover during the rest of the year. But obviously, today's results don't make it easier for you to hit guidance for the year. And I was just wondering if you can comment on what's your confidence level, if you like now, in the end year guidance? And potentially is there any risks then to the dividend? I know you've reiterated the guidance today, but has your confidence come down a bit? Should we expect a little bit more at risk around the guidance? I think the second question, but related to that obviously you've mentioned in the presentation that new management has been appointed. My understanding is they're not sort of in the building as yet. So can you just confirm if the new management team has had any involvement in today's presentation and reiteration of guidance? Or will they come later in the year with their own view on whether full year guidance can be met or not?

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [9]

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Number 1, I think the confidence level is good, otherwise we would have probably indicated something where we would be sitting in the range. We don't say something, we all know that it's always a midpoint which is the most likely view that we have targeted with good confidence on that outlook. Secondly, management. The new management CEO and CFO are not yet in the building, they've not started and correspondingly, they've not been involved. It would be unusual if they were earlier involved than that one. Again, you have to ask them if they change the guidance because the numbers are the numbers and not necessarily individuals, that board members who decide on what the outlook looks like. It's the organization provides the outlook. And therefore, I would not expect any changes at this point of time.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [10]

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In terms of your comment on the midpoint, I suppose I was thinking a bit more about the dividend. And is it right that the dividend will still just at the end of the year be calculated with the formula that you set out a couple of years ago?

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [11]

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Yes, it's all the midpoints. Again, a midpoint refers to ranges that we set and the dividend -- the additional level of what we want to propose and that is also unchanged. Again, I'll not have another guidance on saying what the payout ratio will be on that basis. I think the midpoint on the ranges and the ambition level between '19 will be obviously within the range that we have for the 75% to 100%. But I'm not giving any further details on that one.

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Operator [12]

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The next question is from Vince Ayral with JPMorgan.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [13]

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A couple questions on the commodity side of things. We can see that the coal generation in Q1 was down materially. We would be interested in any comments on the coal to gas switch you've seen and where do you see this going under the current environment? And the second point is regarding power prices where we see that basically you have achieved price is starting to be ticking up, but it's still slow. What gives you confidence that this will accelerate in the rest of the year? And anything on that would be a very welcome.

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [14]

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I think what we have indicated and that you see also in our operational figures, we have experienced coal to gas switching, you've seen in the numbers that our coal base generation has come down and the gas generation has come up. We're still talking about the inefficient coal being replaced in the market by very highly efficient gas plants. So that is happening obviously where we are right now. And that is helpful and that happens at the CO2 price around the EUR 25, EUR 26. I think when we last time discussed it in Q3 we had very high gas prices, so I could see [to the] price that we saw less switching. So can you see that now we're at the point where efficient gas replaces inefficient coal. But a bit more of a, let's say, either higher CO2 price or even lower gas price would be needed to have it on a broader, even broader scale. That gives us a bit of the confidence that the instrument CO2, number one, works; but secondly, also that in order to have a broader switching, some of those switching situations you would see -- need to see a bit higher CO2 prices still. On the power price -- achieved prices, you see that the slow tick-up, I think it's going to be how we've shaped quarterly hedging, which we don't see in the average numbers there. We expect simply a further uptick in the achieved price for 2019. For 2020 and '21, you've seen the increases and again, as and when we start locking in those positions, you would see also in the calculation a higher achieved price. I think when we gave the other outlook, the bridge to 2021, we assumed in that one if you were to take current forward prices on the unhedged position and then the achieved price on the hedged position that the average way would come out. So it does come and the year effect is simply due to having -- you've done quarterly shaping of the hedging of the quality products rather than yearly products and therefore, it's going to come over the rest of the year.

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Operator [15]

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

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Peter Andrew Bisztyga, BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director [16]

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Just 2 questions for me, kind of want to understand how your net income might evolve over the course of the year. So first one is, should we expect any reversal on that derivatives mark-to-market that you booked in the first quarter? And secondly, are there any capital gains on the sale of LNG Toscana?

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [17]

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Now forecasting that income is obviously for us the most difficult one, given it depends on how the prices will actually develop over the rest of the year. Now out of that significant EUR 700 million effect which you see currently, roughly EUR 400 million comes from unwind effects, i.e. the position that this capital will not come and again, we will not be subject to fluctuations going forward. So again, everything else being equal, at least those EUR 400 million should take. But again, the rest will simply have -- depending on how the market price will develop and again, with the current levels of the forwards this is essentially the impact that you see, but I wish I could forecast a quarterly development of oil prices. But unfortunately, I think that is very difficult. The second one is that, there is no book gain on the sale of the OLT project. That is roughly at the value that we have sold it.

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Operator [18]

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The next question is from Alberto Gandolfi from Goldman Sachs.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [19]

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So the first question is, what is your opinion about a potential, we might call it, breakup of Uniper? We have seen a couple of resolutions added to the AGM agenda that is talk about the spinoff of divestment of Russia and spinoff for divestments of Sweden. So my question would be, do you think shareholder value could be maximized if Uniper were to divest to I guess an industrial buyer, any of these 2 assets? And which of the 2 you think would be best or, let's say, more value enhancing for shareholders if you were to go that route? And the second question is, I haven't been able to quite find out what is the new compensation scheme for the management team, particularly CEO? I'm quite surprised to see an external hire and I was wondering what could be the incentive for new management to come over from another company, given all the discussions about potential domination or full ownership by Fortum. So I was trying to understand what type of package and incentives would the new CEO be under?

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [20]

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As usual, the tough questions. Number 1, I think on the breakup, I think I said initially in my call that the board of management and the advisory board are about to publish a joint statement on those motions. Obviously, I don't want to preempt that one. And therefore, please understand that I will not comment further, but you will see from the response what our view on that one is. I think the other discussion, we will have that during the AGM, where obviously we will be answering more detailed questions on that one. And the second one is equally difficult. I think the compensation of a management will be made public late in the compensation report next year. And therefore, I think we will have to wait until that time or have a direct question to the new CEO probably then in Q2 where you probably have a direct opportunity to talk to him and hear our motivation. We're just happy that the 2 of them have joined. Again, you've seen also our view that we believe that Uniper in its current form has a great future and, therefore, if I were to look at it from the outside, seeing what potential there is, what's the dividend prospects, what's the market prospect, a clear strategy laid out, I don't find it so surprising, that people find interesting. Again finally then the decision will be up to shareholders which way the company goes. But the company itself has very great prospects, so I'm not surprised that somebody from the outside would look at it and find, in fact, it's a working Uniper.

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Udo Giegerich, Uniper SE - EVP of Group Finance & IR [21]

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Okay, ladies and gentlemen, from my information we do not have more questions, therefore, thank you for all your questions and the contributions to this call, and see you then in August for the half year call. Thank you very much.

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Christopher Jost Delbrück, Uniper SE - CFO & Member of Management Board [22]

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Thank everyone.

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Operator [23]

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