U.S. Markets open in 3 hrs 44 mins

Edited Transcript of UN01.DE earnings conference call or presentation 12-Nov-19 7:30am GMT

Nine Months 2019 Uniper SE Earnings Call

DUESSELDORF Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Uniper SE earnings conference call or presentation Tuesday, November 12, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Sascha Bibert

Uniper SE - CFO & Member of Management Board

* Udo Giegerich

Uniper SE - EVP of Group Finance & IR

================================================================================

Conference Call Participants

================================================================================

* Alberto Gandolfi

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

* Alex Leung

UBS Asset Management - Research Analyst

* Lueder Schumacher

Societe Generale Cross Asset Research - Equity Analyst

* Piotr Dzieciolowski

Citigroup Inc, Research Division - VP

* Pujarini Ghosh

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

* Sofia Savvantidou

Exane BNP Paribas, Research Division - Head of Utilities Equity Research & MD

* Vincent Jean Michel Ayral

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Dear, ladies and gentlemen, welcome to the analyst and investor conference call of Uniper. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Udo Giegerich, who will start the meeting today. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you. Good morning, dear analysts and investors. A warm welcome to Uniper's Interim Results Call for the First 3 Quarters of Fiscal Year 2019.

Today, our CFO, Sascha Bibert will guide you through the highlights of the third quarter of the current business year, and will commenting on essential numbers. This will be followed as usual by a Q&A session.

I hand over to Sascha, please.

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Thank you, Udo. Dear analysts and investors, welcome also from my side.

For the 9 months, adjusted EBITDA is down EUR 171 million while adjusted EBIT is lower by EUR 183 million. This does not come unexpected and is mostly driven by the well-flagged absence of positive 2018 one-off effects.

With regard to the isolated quarter, our third quarter results actually improved compared to the third quarter 2018 by around EUR 100 million. Given our underlying business, Q3 is in general the weakest seasonal quarter.

[Coal-fired] power generation is impacted by limited running hours due to higher renewables feed-in in the summer and generally higher planned maintenance. Our midstream business faces lower gas demand and, therefore, lower revenues during the third quarter, while the operational costs for infrastructure and personnel remained stable as they are more or less evenly distributed over the quarters.

Regarding Q4, we expect an exceptionally strong earnings increase year-on-year and a disproportionate positive impact in absolute terms compared to the prior quarters of 2019.

The decision of the European Commission to allow the U.K. to fully reestablish its capacity market scheme gives us the necessary comfort to now include the suspended payments into our earnings guidance for 2019. This effect is about EUR 150 million. Accordingly, we have increased our adjusted EBIT guidance for the full year, lifting the midpoint of that range by up -- by EUR 150 million to EUR 850 million.

Due to the increased visibility towards year-end, we have also narrowed the guidance range from EUR 300 million to EUR 200 million. This leaves us with a new corridor of EUR 750 million to EUR 950 million for full year adjusted EBIT. I will come back on the outlook at the end of my presentation, to also provide some context on the adjusted FFO and our dividend ambition.

Now over to the key developments concerning Uniper on Slide 3. Starting first with team, I'm very pleased to share with you that Uniper continues to record an outstanding health and safety performance for our own employees as well as for our contractors. For example, at our Dublin construction site, we can now look at close to 3.5 million accident-free work hours, a remarkable performance.

Additionally, we are very proud that in terms of significant uncertainty, our people are more convinced than ever that Uniper is the right employer for them according to our latest employee survey. We have improvement in our categories including diversity. Nevertheless, we have some remaining works as, for example, our people demand more clarity with respect to our way forward.

On-boarding for the Executive Board team is also progressing further. Since 1st of November, David Bryson has succeeded Eckhardt Rümmler as Chief Operating Officer of Uniper. David has worked for Uniper and formerly for E.ON for more than 10 years and has been responsible for the management of national and international asset operations. Therefore, our new colleague in the Board is not only very familiar with the business and our organization but also brings in a lot of operational management expertise, including work safety, business transformation and the leadership of multicultural teams.

I'm also very pleased that the Supervisory Board extended the contracts of both Eckhardt Rümmler as well as Keith Martin until end of January 2020 so that both can continue to support the company.

On our relationship with Fortum, our largest shareholder. In early October, Fortum entered into an agreement with the other 2 major Uniper shareholders, Elliott and Knight Vinke, in order to take over their shares in Uniper and increase Fortum's stake to more than 70%. According to Fortum, a closing of the deal is subject to regulatory approvals of Russian and U.S. authorities.

Meanwhile, we continue our constructive talks with Fortum. Fortum stated to rule out a domination, and our profit and loss transfer agreement was squeezed out for a period of at least 2 years. Therefore, the Uniper Management Board can and is actually obliged to run the company independent for the benefit of all stakeholders.

Moreover, for Uniper's performance, it is essential to bring our large asset projects onstream and to execute new projects. Datteln 4, one of the most efficient coal-fired power plants in Europe in terms of carbon emissions, is well on track for commercial operations in summer 2020.

In Russia, we were successful again in the recent modernization auction that took place in September. Keep in mind that Unipro had already successfully participated in the auction round in April with 2 800-megawatt gas-fired blocks. Based on the latest still preliminary result, Unipro will now modernize another 800-megawatt block. This makes a total investment budget of RUB 10 billion or about EUR 140 million, with commercial operation dates between 2022 and 2025 and new capacity market payments for a period of 16 years.

The recommissioning of Berezovskaya 3 remains a complex and challenging project. We do our very best to recommission this lignite power block by the end of Q1 2020.

We continue to optimize the portfolio and are pushing the group's strategy ahead. These initiatives will take account of the challenging political landscape. In Germany, the coal exit discussion progresses. A bill has entered the final phase of ministerial coordination, and we expect to see something before end of November. Next on the road map would be an approval by the Federal Cabinet of the Grand Coalition preferably before Christmas break.

Meanwhile, in the context of an ever-changing Brexit discussion, we are very pleased regarding the reinstatement of the U.K. capacity market. This does not only impact our earnings outlook in 2019 but also sets a stable framework going forward in order to develop plans for the modernization of our gas-fired fleet in the U.K.

Also, the Baltic Nord Stream 2 pipeline is setting closer to finalization. The last missing permit has now been granted by the Danish authorities. According to Nord Stream's plans, the gas pipeline should be commenced in 2020. With these start-up operations, Uniper and the Western partners are entitled to a cash interest payment, which will be clearly supportive for our free cash flow.

Let's turn now to the development of the daily business in the first 9 months of 2019. As usual, we start with an overview of the market environment. Uncertainties in the global economy and high supply of fossil fuels has been exerting pressure on commodity prices especially for oil, gas and coal. On the other hand, there's increasing pressure on politicians in Europe to speed up plans for faster emission reduction. After the EU allowances reached a 13-year high in the summer of 2019, prices have started to fluctuate at high levels. Electricity market prices were robust despite an adverse commodity price trend. The sharp drop in natural gas prices this summer led to the significant acceleration in the fuel switch of coal to gas.

So what's the big picture? The underlying upward trend in electricity and EU allowance prices remains intact in our view. The foreseeable shortage of reliable electricity capacities should be leading to a rising risk premium. This has been showing up in the clean dark and clean spark spreads, which have recovered from their lows.

Some operating KPIs for the individual segments on the next slide will shed some more light here. To recap 2 key roles of our gas midstream business. The profitability of Uniper's gas business is structurally not tied to the overall gas price level. The margin is generally earned in the winter season, in line with the physical withdrawal of storages. Accordingly, Uniper Global Commodities was able to take advantage of the options arising from the portfolio over the year. However, the positive impact will materialize mostly in Q4 when the physical withdrawal starts to kick in. Taking into consideration the locked-in margins for the next month, we are confident that the gas business will make a substantial contribution to Q4 earnings.

In the European Generation segment, a mixed picture emerged. Total electricity production declined 12% mainly due to a significant decline in the contribution of our coal-fired power plants. This was partly due to fuel switch towards gas, so our gas fuel generation benefited at the expense of our coal fleet especially in the U.K.

Additionally, the coal fuel generation was down as we had hardly any production in France due to strikes and the later disposal of the business as well as the unplanned outage of Maasvlakte 3 in the Netherlands based on the repair of a damaged turbine. This large power plant is back onstream since mid of October.

On the other hand, the volume of our hydro and nuclear power plants developed positively. After reporting a slight decline for the first half, production volumes were up 3% after 9 months. Aside from this positive volume effect, we saw the outright portfolio benefiting from rising achieved prices, a trend which is expected to accelerate.

International Power delivered a good performance. Unipro's electricity production increased by 3% in the first 9 months. The upward trend eased in the third quarter due to less favorable overall market conditions. Russian export to neighboring European countries were lively in the first half. Also, electricity price trend overall was positive, dampened by a strong hydro availability in the eastern price zone lately.

Now over to the key financials and some more flavor on the outlook for the rest of the year. This slide is basically a slimmed-down version of our H1 slide. Looking at the waterfalls, we are left with 2 groups of well-known effects. Guided means that we had already anticipated those effects when we gave our full year guidance back in March. The category, new, consists of the business development that was not reflected in the original guidance as it occurred during the year.

Let's go over the guided effects once again. 2018 H1 one-off effects include mainly the book gains from the sale of the Ironbridge property and a net provision release on a hydro asset due to an altered dismantling plan. These effects add up about EUR 100 million and will not change until year-end.

The Freeport LNG proxy hedge will lead to a more than EUR 100 million negative year-on-year effect on a full year basis, of which roughly negative EUR 80 million are reflected in the 9 months. The so far still negative effect from the suspension of the U.K. capacity market of roughly EUR 30 million will turn into a significant positive one in Q4, as highlighted.

Higher outright volumes as well as the upward trend in electricity prices that is increasingly reflected in our hedge prices amount to more than EUR 70 million year-on-year and will further accelerate in Q4. So we expect to end up significantly above EUR 100 million on a full year basis.

The gas business has been strong in H1 despite a weak start in Q1. This development has slowed down at the 9-months' mark, but we expect a very strong Q4 based on the locked-in margin from the optimization of our assets. The negative effect of the outage at Ringhals 2 is unchanged since Q1, however, the prolonged unplanned unavailability of Maasvlakte 3 increased the overall earnings loss from unavailability to EUR 50 million year-on-year

Finally, on Russia, the positive trend for the first half slightly weakened. Production volumes dropped in the third quarter to a more normalized level, and prices went down caused by a higher generation excess in Siberia.

So switching perspectives, why are we confident to achieve our ambitions on a full year level? Overall, we foresee the following 4 key effects in Q4 which will substantially contribute to the full year versus the 9-month actuals in absolute terms.

First, the gas margin will expand substantially. Second, the outright contribution will continue to grow. Third, for the U.K. capacity market, we will accrue for the outstanding payments from Q4 2018 until year-end 2019, in total, an amount of about EUR 150 million. Fourth, the carbon-phasing effect. Please note that while there is no carbon-phasing effect shown in the 9-month waterfall year-on-year, it does not mean that it does not exist anymore. The first 9 months are still negatively affected by carbon phasing in absolute terms. About EUR 200 million of -- are shifted from the first 9 months into Q4 when the hedging effect for higher carbon prices finally materializes within adjusted EBIT. However, as it was exactly the same case back in 2018, you do not see a year-on-year effect here, but it will have a significant impact on Q4 in absolute terms.

So to sum it up, the earnings decline is still strong in the 9 months versus previous year but expected. However, we will more than catch up in Q4.

Page 7 now provides a segmental view. In essence, this is the allocation of the various effects that I just highlighted to the segments. From a 9-months perspective, the segmental effects have hardly changed.

European Generation is still down EUR 123 million year-on-year. Hydro suffers predominantly from the lapse of the 2018 provision release, while nuclear is impacted by the outage of Ringhals in the first month of this year, however, both benefited from higher prices and volumes especially hydro in the isolated third quarter. Fossil is down due to Maasvlakte 3 outage, lower production of coal-fired generation, weaker spreads in the absence of the U.K. capacity market payments.

Global Commodities mainly impacted by a lower gas contribution compared to the picture we have seen in H1. The other subsegments are unchanged. Russia still up in the 9 months but on a slightly lower level than H1.

Now over to cash flow on Page 9 (sic) [Page 8]. The seasonal impact on our business is even more pronounced as we look at the operating cash flow amounting to minus EUR 277 million after 9 months in 2019. First, the operating cash flow reflects the rather low seasonal-driven adjusted EBITDA. In addition to that, the gas storages typically reach their physical peak levels end of September and so does the negative impact from working capital movements on the operating cash flow.

So you might wonder why the operating cash flow for the 9 months is below prior year even if adjusting for seasonal effects. In essence, the operating cash flow follows the EBITDA development. Furthermore, the price development on the gas markets led to higher working capital levels.

Looking at year-end 2019, we expect a significant upswing within operating cash flow based on the earnings expectation for Q4 as well as due to the start of the withdrawal season for our gas storages.

Now over to economic net debt on Slide 9. As highlighted in previous calls, we have adjusted the definition of our economic net debt in 2019 to ensure a symmetrical treatment of margining effects. Based on this new definition, the economic net debt is currently at EUR 3.6 billion. And looking at the individual effects in the waterfall, we start with a supporting EUR 0.3 billion impact from the disposals of OLT as well as our Brazilian and French business activities.

As discussed, the operating cash flow has been negative with EUR 0.3 billion, bringing the economic net debt up, so did the payment of the dividend in May. CapEx amounted [EUR 2.4 billion]. Close to 55% of this was related to growth and 45% to maintenance and replacement.

For maintenance and replacement CapEx, we expect on a full year again to stay below the EUR 400 million level. The growth element was, to a large extent, linked to our 2 large asset projects, Datteln 4 and Berezovskaya 3.

The main reason for the increase in debt are pension provisions, which went up by more than EUR 400 million since beginning of the year due to significantly lower interest rates also compared to H1, by the way. Opposite to that, asset retirement obligations came down EUR 0.1 billion in light of FX movements on the Swedish krona, which deteriorated since beginning of 2019. In the other effects category, several effects are summarized such as the increased loan for Nord Stream 2 in the magnitude of EUR 90 million.

Before we move to the outlook section, one remark on our debt factor of full year target. We feel continuously committed to keeping the ratio of economic net debt to adjusted EBITDA of 1.8x to 2.0x. However, this ratio may be higher than targeted as long as Uniper's target of achieving a comfortable investment-grade rating is warranted. In that respect, please do not expect us to stretch ourselves to an unhealthy degree just to make up for every increase of net pension liabilities or asset retirement obligation that is resulting from a rapid increased rate -- interest rate decline outside of our control.

Now over to the final slide. As pointed out at the beginning of our call, our adjusted EBIT guidance has been updated to now EUR 750 million to EUR 950 million, which meant that we increased the midpoint by EUR 150 million and narrowed the range by EUR 100 million.

With regards to the adjusted FFO outlook, we follow exactly the same approach. Accordingly, we changed our guidance on the adjusted FFO from previously EUR 650 million to EUR 950 million to now EUR 850 million to EUR 1,050 million, effectively lifting the midpoint from previously EUR 800 million to now EUR 950 million, obviously, the main driver being, again, the U.K. capacity market and less uncertainty around the full year forecast.

In the end, the positive impact from the U.K. capacity market does not only impact the adjusted EBIT and FFO but also the free cash flow from operations, which is the basis for our dividend.

So what does it mean for the dividend 2019? Uniper has committed to a payout ratio in the range of 75% to 100% of free cash from operations. To provide additional transparency, we translated this policy into a path in absolute terms starting with EUR 200 million for the fiscal year 2016 and a cumulative annual growth rate of 25% until 2020, which resulted in a dividend ambition of EUR 390 million for the fiscal year 2019. Over time, we then reconfirmed this figure at times with and without a U.K. capacity market. From today's perspective, we see some upsides for the dividend based upon the latest developments in the running year. We will make our final proposal with the publication of our full year results.

In this upcoming Q4 call, we will not only provide clarity on the dividend for 2019, but we also intend to give you an update on our equity story, therefore, please reserve a somewhat longer time slot for us on March 12. We will follow up with a more concrete announcement regarding the event in due course.

Having said that, I hand over to Udo for the Q&A session.

--------------------------------------------------------------------------------

Udo Giegerich, Uniper SE - EVP of Group Finance & IR [4]

--------------------------------------------------------------------------------

Thank you, Sascha. And then we open up the Q&A session. (Operator Instructions)

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) First question is from Alberto Gandolfi, Goldman Sachs.

--------------------------------------------------------------------------------

Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [2]

--------------------------------------------------------------------------------

The first one is on Global Commodities. I was noticing that you booked like EUR 1 million EBIT for the 9 months against EUR 57 billion of revenues. So it feels like -- so the question, I guess, is, is it really good use of capital to stick to a business with such a low margin and such a big risk? Is there a way to derisking the business to make it less cyclical? Are you fully committed to it? Does it -- do you really think it fits properly in the portfolio? And in your discussions with your largest shareholders, how basically do you portray this business to them? That's the first question.

The second one is more on the cash flow for Q4. Could you maybe provide a net debt guidance for year-end or at least perhaps help us understand how much of the cash flow generation could be perhaps in Q4? Because some of the 4 items you gave, like for instance, the U.K. capacity market, as I understand, the cash will be received only next year, if I'm not mistaken. So -- and there's also some items on the variation margins moving around, so if you can perhaps help us understand the cash flow for Q4 and year-end net debt.

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [3]

--------------------------------------------------------------------------------

Alberto, thanks for participating. You had 2 questions. The one was on Global Commodities. I think you're rightfully asking a somewhat provocative question, i.e., you're looking at the 9 months EBIT and then put that in relating to revenues. I think that figure's -- a lot that could be said. First, on revenues, I think in principle, it is not unusual for a somewhat trading-oriented organization to have a pretty high revenue in relation to the ultimate margin that comes out. You see that also on the banking side, which I think ultimately brings one to the conclusion that revenues is simply not a good indicator of any kind of profitability or business. On top of that, you know that there are different accounting approaches to show revenues from gross to net. For whatever reason, we have chosen the gross approach, and that also gives the impression of a somewhat higher revenue base.

When it comes to the true core of the question, which is around margins and risk, I think within Global Commodities, there are a number of self-spending and quite good businesses also with a super long track record. And I'm not going to talk about all of them but just to mention our gas midstream business, which Uniper and all its predecessor companies entertained for decades. I think that is a business with a good and fair margin, i.e., a margin for someone who is handling volumes between both suppliers and ultimate customers. And in the past, that gross margin has been communicated between EUR 350 million and EUR 500 million. We also have participations in there. And obviously, that Global Commodity team also provides services for our generation business. So from Uniper's perspective, and I don't have the slightest doubt that this is misunderstood by any kind of shareholder including Fortum, that is a core business in essence.

Second, on the Q4 cash flow, well, you can -- as always, you can take different turns at the number, but maybe I start with the message, and then you try to square the figures. The message is that the Q4 cash flow is expected to be very strong, [EUR 0.1 billion], and that the Q4 ending net debt is going to be lower than the third quarter net debt that we have recorded so far at EUR 3.6 billion. Now what are some moving parts for either of that? Yes, you're right, not every earnings element of our Q4 EBIT or EBITDA is going to be cash effective. Nevertheless, what I expect is that at year-end, looking at the full year, the cash conversion ratio, i.e., the relationship between full year EBITDA and operating cash flow, will normalize. And that simply means that for the Q4, you need an operating cash flow exceeding EBITDA.

And then second, let's just simply be aware on the net debt front that next to cash flow and some other moving parts, net debt has moved up because of those pension provisions which were triggered by a change in interest rates. As of today, and I unfortunately can't predict them, that looks somewhat better. I would just leave it there for today.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question is from Vincent Ayral, JPMorgan.

--------------------------------------------------------------------------------

Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [5]

--------------------------------------------------------------------------------

A follow-up on the question regarding the net debt. Just to get a bit more color regarding the [derivative] reversal line in Q4, your CO2, could you tell us what is the amount currently at the end of Q3? So when we try to estimate the net debt for the end of the year, we can apply a proper reversal there. That will be very useful.

And second question would be if we could get a bit more color on the coal exit compensation negotiation. You said that there'll be news flow at the end of the month. Where do you stand, assume that Datteln 4 may not be closed indeed? But what does it mean for Uniper on the annual assets there that you're basically negotiating on? And just give us the most detail that you can on these negotiations.

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [6]

--------------------------------------------------------------------------------

Thank you, Vincent. I think on net debt, when it comes to our targeted and assumed year-end number, honestly, that isn't much of a mystery. If you simply backward calculate from our adjusted EBIT guidance, I think depreciation is a pretty stable number. I think you have a good chance to get to an EBITDA. If you then take account that our debt factor targets, net debt to EBITDA is 2x, I think you practically have our targeted net debt. And in case you don't want to do the math yourself, you'll get to around EUR 3.1 billion or something like that, again, as a rough guidance.

On the coal exits discussion, indeed, for the industry, also for Uniper, a very important discussion that is currently within the ministers and then from cabinets to parliament. As of today, we simply do not have news, so I'm not in a position to comment upon that. I think we now need to let the politicians do their work and be a little bit patient.

Our focus and our view, quite honestly, hasn't changed, and I'm sure it has been said many times, but I just repeat it. Focus is on Datteln 4. And in the interest of the company but also in the interest of society, we are deeply convinced that this station should come online for economic and ecological reasons.

Yes, so I would leave it there. Yes, is it fine, Vincent?

--------------------------------------------------------------------------------

Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [7]

--------------------------------------------------------------------------------

I always wish I had more, but if it's all you can say at this stage, that's perfect.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

The next question is from Lueder Schumacher, SocGen.

--------------------------------------------------------------------------------

Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [9]

--------------------------------------------------------------------------------

Also 2 questions from my side, although there are many more. The first one is on Slide 9, where you sort of outlined the economic net debt. You said on divestments that the positive factor was EUR 300 million coming from OLT, Livorno and then the French activities, which adds up to EUR 300 million. Now you got EUR 400 million for OLT, Livorno. Does it mean you actually had to pay in order to get -- EUR 100 million in order to get rid of the French operations? That's the first question.

The second one is on -- well, I guess, also in the direction of Datteln 4 but perhaps a bit more general on the coal exit. You said, Sascha, that there would be something before the end of November. My question would be could you maybe elaborate on that, what should we get by the end of November? The whole framework, I thought the whole idea was that there are bilateral discussions between the government and RWE when it comes to the 4 gigawatts of hard coal closures, that there will be some kind of auctioning system. Now is this where we stand? In which case, all you had to do was not participate in the auction, and you'll find that Datteln 4 will always feel pressure from the government directly to come to a solution on Datteln 4 outside this auctioning mechanism.

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [10]

--------------------------------------------------------------------------------

Lueder, on the first one, divestment proceeds, i.e., cash-wise, yes, your math is correct. I think somewhere, we also have the disposal group, so you can see that is -- France was negative equity. So I have to confirm what you calculated yourself. On the coal exit, I simply can't go much further. Again, I understood the government time plan in a sense that towards the end of the year, we have a [lock]. Currently, we simply don't have any official news, so we have to wait until the talks are over, and we then have some kind of announcement. And then be it for hard coal, be it for lignite, we can draw upon our conclusions, but more I can really not say today.

--------------------------------------------------------------------------------

Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [11]

--------------------------------------------------------------------------------

Sorry, Sascha. We are mid--- almost mid- -- roughly in mid-November now. You said earlier that you expect something by the end of November. Can we conclude from this that discussions are quite advanced?

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [12]

--------------------------------------------------------------------------------

I think according to the time plan set by the government, we are now reasonably close to communication.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question is from Alex Leung, UBS.

--------------------------------------------------------------------------------

Alex Leung, UBS Asset Management - Research Analyst [14]

--------------------------------------------------------------------------------

First, a question around the Fortum development, thinking about how Uniper as a consolidated subsidiary could potentially look, assuming Fortum gets the approvals they need. Can you talk at all around the risk of a downgrade to a noninvestment-grade credit rating and the impact that would have?

And second, on a stand-alone level, you've spoken about the fact that, that should help drive a strong fourth quarter but also flagged some slowdown in Russia and gas optimization this quarter. And I know you haven't given 2020 guidance today, and we'll get an extended call in March, but do you have any visibility or comments on the broad direction of forces impacting 2020?

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [15]

--------------------------------------------------------------------------------

Alex, thanks for your questions. First one, which I understand effectively is a rating question. So, as of today, we have a strong BBB rating, and people call it BBB flat, stable outlook. However, we have a credit watch negative. That credit watch negative according to statements from S&P was linked to the announcement of Fortum with the intention to acquire more shares. I think we have repeatedly said, and I'm very sure that everyone has understood that, that a strong rating is simply a prerequisite to drive profitable business. And there is 0 change to that conviction and to the actions going forward, so we will do whatever we can to keep that rating. And I'm, again, comfortable that any participant, any stakeholder in that question has also understood this.

In terms of the stand-alone Q4, it wasn't specifically your question, but I think for the benefit of everyone else, let me just repeat and, if necessary, also put numbers to that, how we get from the around EUR 200 million EBIT to the -- just the mathematical midpoint of EUR 850 million for the full year, i.e., the EUR 650 million EBIT, and I guess the waterfall for EBITDA would be somewhat similar.

So out of the EUR 650 million, EUR 150 million comes from the U.K. capacity market. I think that's crystal clear. Then practically, I said that the carbon gains will be of similar magnitude as in Q4 '18, that it's EUR 200 million, so in total, EUR 350 million of the EUR 650 million. So we're missing EUR 300 million, and I would guess that is somewhat more than 2/3 is coming from the gas margin and something a bit smaller than 1/3 is coming from the outright price and volume effect.

When you think about the gas margin, in Q4 '18, we already had some EUR 170 million. I think there's a good chance that Q4 '19 is even stronger. Then you somewhat linked that to 2020. Indeed, that is something we need to think about and communicate when we discuss the full year result. I think I said March 12, it may actually be March 10, so there's no change in that date, so March 10 is the date. And then we try to stick the neck out and look out.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

The next question is from Pujarini Ghosh, Bernstein.

--------------------------------------------------------------------------------

Pujarini Ghosh, Sanford C. Bernstein & Co., LLC., Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

This is Pujarini from Bernstein. A couple of questions from my side. Given Fortum's imminent increase in the stake, and you [owe Fortum] more than 70%, can you elaborate a bit more on your constructive talks with Fortum? And also, how does this change your strategy and divestment policy going forward?

And the second question, on the coal-to-gas switching, how do you observe -- I mean what do you observe in your markets that you operate in for your own power plants? And the new Russian investments that you mentioned, what sort of IRRs do you expect from the gas investment?

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [18]

--------------------------------------------------------------------------------

All right. I'm still noting the questions. These were actually 3, but I'll try and if I forget something, then I'll do my very best. I think the first one was on Fortum constructive talks and how that impacts strategy. Well, my definition of a constructive talk is that you discuss the things that you need to discuss. And unless it's required that you keep it actually between the 2 parties, so I would stick to that.

In terms of strategy, we continuously share our strategy with all of our investors, and we will certainly also do that with Fortum, and we'll take on the feedback. But it is clear that we are an independent company with an executive management who has to drive the strategy by itself. And there is no change to that principal approach.

Now in terms of coal to gas, which -- it is not easy to always distinguish why you have more or less volumes for a given power station given that a number of effects come into play. You have maintenance and what have you. But what we have clearly seen, for example, is in the U.K. I'm not aware that there was bigger maintenance in the third quarter. Volumes were up by 6%. If you also take our whole fleet, there were a couple of moving parts, including maintenance and outage. But I mean we had a volume drop of 78% in the third quarter.

Please also keep in mind that in Germany, when it comes to thermal generation a lot of our facilities are actually in what I would call special regimes, yes, so they are not standing in the market on a merchant basis. Then finally, on Russia, expected returns, that is close to 14% IRR that we are expecting.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

The next question is from Piotr Dzieciolowski, Citibank.

--------------------------------------------------------------------------------

Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [20]

--------------------------------------------------------------------------------

I have 2 questions, please. The first one is on the Russian issue with regards to Fortum takeover of the remaining stake. So my understanding was that there is an issue with this water license in your facilities. So how do you think the issue will be resolved for Fortum to get the regulatory approval?

And the second is related to results. Can you tell us if anything changed on the outlook for your gas storage facilities given what happened in the market? Are you locking-in the higher winter-summer spreads for next year or this business can generate a little bit more money next year? How much was the contribution for this year? That would also be helpful.

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [21]

--------------------------------------------------------------------------------

All right. Let me start with what you call the Russian issue. I mean, from our perspective, first of all, we are a shareholder in a Russian business called Unipro. And thankfully, the Unipro is performing quite well. I believe they also have their call today, so they will go into the details of their financials.

Other than that, I think everyone has understood that there are certain restrictions coming from the laws on regulations in Russia when it comes to the takeover of a majority-owned company by a government, which applies to Fortum. And accordingly, Fortum is having certain discussions with the relevant authorities on what to do with that issue. However, we are not party to those talks, and therefore, I can also not comment how they may go about. I think what we were clear about is that when it comes to a transaction between our shareholders, there is simply no interference from our side. We will act in the best interests of the company.

Now in terms of storage, I mean you saw that in our pictures, and you can also read it in any kind of industry gazettes, the storages are currently full in Europe. They're full for Unipro. They're also full for other providers. And we expect quite a strong withdrawal in Q4 to the tune of, now again, speaking about the Uniper storages, to the tune of 20 to 30 terawatt hours. As of today, not knowing exactly how the weather will play out, the Q1 withdrawal then is on a more normal level.

Our margins that we are making over there, they are principally not based on spot prices but on forward prices, yes. So I don't see a huge amount of change for the storage profitability from our side, but it's good that they are -- that they're needed right now.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

The next question is from Sofia Savvantidou, Exane.

--------------------------------------------------------------------------------

Sofia Savvantidou, Exane BNP Paribas, Research Division - Head of Utilities Equity Research & MD [23]

--------------------------------------------------------------------------------

Two questions from me as well. One is just on the CapEx side. Obviously, some of your big projects like Berezovskaya and Datteln and Nord Stream sort of coming to completion and then some new growth projects like the ones in Russia coming in. Any thoughts on changing how you look at your dividend payout, because up until now, obviously, you've only been looking at maintenance CapEx and not growth CapEx. Any thoughts on looking at the overall cash flow going forward?

And the second thing is just looking at the mark-to-market on derivatives, which required quite a big positive number again in the Q3. Any guidance you can give us, one, for sort of the full year number; and two, how should we think of that in terms of cash conversion this year and going forward?

--------------------------------------------------------------------------------

Sascha Bibert, Uniper SE - CFO & Member of Management Board [24]

--------------------------------------------------------------------------------

First one was on somehow the relationship almost strategically between CapEx and dividend, i.e., ultimately, users of funds. I think that will be one of the core items we will have to think through when it comes to not only our strategy going forward but also our equity story. And I think we'll simply have to balance the 2 effectively. I cannot really imagine Uniper without an attractive dividend policy, on the one side; on the other side, this company also must need to have the resources to grow, ultimately, grow profitably, grow profits, grow cash flow. And we will strike the right balance.

I think you do see some indications of where things may be going, at least based on the strategic communication we had so far. We did invest in Irsching 6. I think the communication was that this is then investment amount up to EUR 200 million. This is a fixed time period and, therefore, reasonably quick payback, I think also attractive returns. Similar amount was invested in Scholven, again, ultimately a cash flow which is not fully merchant. And then yes, the third element was modernization in Russia. So I think they are a number of examples already today where we put money at work without jeopardizing an attractive dividend profile.

Now the next one, this is maybe a bit more challenging. You asked about the derivative movements, how that may actually play out in Q4, and then ultimately, what the linkage to cash is. Now I mean there's a reason why we have those derivative movements in a nonoperational line. The reason is it's simply not forecastable. It depends on the number of market developments which I can't see. When it comes to the non-op development, simply also be mindful that in Q4, we have the traditional impairment testing process but, as of today, I'm not knowledgeable about any developments.

Now going back to cash, which I think is important also when it comes to interpreting our debt. I did say before that I expect a cash conversion in the fourth quarter of greater than 100% relative to EBITDA, yes. And the EBITDA -- in case you have difficulties in translating EBIT to EBITDA, the EBITDA, if we use the mathematical midpoint of our EBIT guidance range, is an absolute number of I think EUR 850 million in the fourth quarter, yes? So I'm looking at an operating cash flow beyond that.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

There are currently no further questions. (Operator Instructions) We haven't received any further questions, so I hand back to the speakers.

--------------------------------------------------------------------------------

Udo Giegerich, Uniper SE - EVP of Group Finance & IR [26]

--------------------------------------------------------------------------------

Okay. Then thank you very much, dear analysts and investors. May I reiterate that the date for the full year call and the update on the equity story is March 10, not March 12, as we stated firsthand in the speech. So see you again on March 10, and please reserve a bit more time as usual as we'll give you an update on the equity story then. Thank you very much.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

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