U.S. Markets open in 2 hrs 28 mins

Edited Transcript of UN01.DE earnings conference call or presentation 7-Aug-18 6:30am GMT

Half Year 2018 Uniper SE Earnings Call

DUESSELDORF Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Uniper SE earnings conference call or presentation Tuesday, August 7, 2018 at 6:30:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Christopher Jost Delbrück

Uniper SE - Advisor

* Udo Giegerich

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

Conference Call Participants

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

* Ahmed Farman

Jefferies LLC, Research Division - Equity Analyst

* Alberto Gandolfi

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

* Deepa Venkateswaran

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

* Dominik P. Olszewski

Morgan Stanley, Research Division - Research Analyst

* José A López

* Lueder Schumacher

Societe Generale Cross Asset Research - Equity Analyst

* Samuel James Hugo Arie

UBS Investment Bank, Research Division - MD and Research Analyst

* Vincent Gilles

Crédit Suisse AG, Research Division - Former Head of the Utilities Research

* Wanda Wierzbicka

Crédit Suisse AG, Research Division - Research Analyst

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

Presentation

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

Operator [1]

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

Dear ladies and gentlemen, welcome to the analyst and investor conference call for the first half result 2018 of Uniper SE. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Udo Giegerich, who will start today's conference. Please go ahead.

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

Udo Giegerich, [2]

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

Thank you. Good morning, dear analysts and investors, a warm welcome to Uniper Interim Results Call for the First Half Year 2018. I'm sitting here with Christopher Delbrück, our CEO; Klaus Schäfer -- our CFO. Klaus Schäfer, our CEO, is not with us. As you may have seen from our ad hoc news release on 1st of August, he is seriously ill. We wish him all the best in his recovery process and hope he will be back onboard soon. Thus, Christopher will lead you through our presentation today and answer all your questions after his presentation.

Having said that, Christopher, please.

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

Christopher Jost Delbrück, Uniper SE - Advisor [3]

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

Thanks for the introduction, Udo. And dear analysts and investors, a warm welcome, and thanks for taking part in the call.

Let me start with a few introductory remarks. Unfortunately, as we already announced last week, Klaus Schäfer cannot attend today. Our thoughts are with him and his family. We sincerely wish Klaus all the best, lots of strength, good recovery and to return as soon as possible. We, as a board, will manage jointly the company in his temporary absence.

After closing of the public takeover offer on June 26, Fortum is our new major shareholder with the stake of just about [the] 47% mark. Welcome to our shareholders group. This is the starting point to elaborate options to create value for Uniper, and thereby, indirectly for Fortum as a shareholder. A first visible step is the court appointment of Markus Rauramo, CFO of Fortum, as a new member of the Supervisory Board as one of fixed shareholder representatives after the E.ON representative stepped down as expected. As the discussions between Fortum and Uniper evolve, we will update you on significant outcomes, but keep in mind that we have agreed with Fortum not to comment on the ongoing discussions.

Now to Uniper's business and financials. The core of today's call is to update you on our operating performance and the way forward. Let me start with these essential topics of these first half of our financial year 2018.

Let me start that with the latest market trends and our strategy. First message: the market trend is giving Uniper tailwinds going forward. Lately, electricity market prices in Northwestern Europe climbed to the highest levels of the last 5 years. Compared to the previous quarter, our outright power hedging shows slightly higher achieved prices for 2019 and 2020, with further upsides due to mostly open positions in 2021.

Second message: several European governments are working on individual coal exit plans. We take an active stance. With our highly efficient power plant portfolio, we will continue to make an important contribution to system stability. We will continue to contribute to security of supply in our respective electricity markets. Currently, the only conventional, reliable, flexibly dispatchable alternative to coal and (inaudible) of course, is gas, and this is good for us.

Third message: our [pattern] of growth projects is filling up. We are heading closer to final investment decisions for new projects, which will primarily add to stable and long-term non-wholesale earnings.

Next bucket: earnings. Our half year performance is on track with our full year plan. Adjusted group EBIT shows a year-on-year drop of 35% to EUR 0.6 billion in the first half. As you remember, our second quarter EBIT in 2017 was supported by a EUR 0.3 billion insurance payment for our Russian Berezovskaya plant, which obviously did not repeat, thus we tag the outcome as solid. Above all, the gas business is stepwise back on track after a slightly disappointing Q1.

Our adjusted funds from operations, the key performance indicator for tracking Uniper cash generation was down 13% to EUR 0.6 billion, a strong performance in light of last year's number, which was benefiting significantly from the one-off insurance payment.

Finally, outlook for earnings and dividends. Half year result provide us with confidence to reach our goal for financial year 2018. The adjusted EBIT is expected to turn out between EUR 0.8 billion and EUR 1.1 billion.

We also reiterate our dividend plans. Firstly, in terms of concrete dividend guidance for 2018, it remains unchanged at EUR 310 million. Secondly, in terms of the medium-term dividend outlook, 25% CAGR for dividend between 2016 and 2020 is reconfirmed.

And with that, over to the details. As I said, the overall market environment is providing us with some tailwinds. The price trends in the commodity markets signal a growing global demand but are also driven by political uncertainties from geopolitical disputes. Long term, the fundamental outlook for our key commodities remain supportive.

The latest released International Energy Agency World Energy Outlook for its new policy scenario assumes that global energy use will increase by 30% until 2040, while, however, the share of predictable conventional generation capacity in Europe is shrinking. Short term, global gas and coal demand, above all from Asian market, seems robust.

Lower hydro availability in Northern Europe, some prolonged [standstill] of nuclear plants, for example, in Belgium, and air conditioning running at full speed also have an impact on current electricity prices.

Strong coal prices and rising CO2 statistical prices remain the main drivers for notable energy price increases. With the EU reform, the EU Emission Trading scheme has been revitalized. The price for a ton of CO2, which was at EUR 5 around a year ago, currently trades above EUR 17. From 2019, the number of newly auctioned emission trading certificates will be significantly reduced so that further price increases can clearly not be ruled out. This also [translated] into rising forward prices for our home [tariff] in the Nordic and German markets.

With respect to our hedging policy, we used the group's sound financial base, coupled with our strong view on market price, for room to maneuver. This is mainly true for our outright fleets with hydro and nuclear power generating some 25 terawatt hours annually. We have deliberately stepped on the brake in hedging our outright volumes in autumn last year to gain more of the expected price upside, and the recent price trend seems to prove us right.

Our outright hedge ratio is only marginally up since Q3 last year. At the end of June, the Nordic hedge ratio for 2020 of above 40% shows the upside potential. For 2021, our outright production still widely unhedged midyear. The benefit in 2018 of this is very limited as we are very well hedged here. For '19 and 2020, we see first positive effects as the average achieved price are starting to increase compared to the previous quarter.

Aside from the upside pressure of higher coal, gas and CO2 prices, structural market changes are likely to come on top. An aging conventional fleet and political intervention on the energy mix, the intervention on coal and nuclear power could lead to tighter or at least more volatile electricity markets. Above all, there's a lot of noise related to coal active plants in our major European core markets: Germany, France and The Netherlands.

Uniper actively [owns] a company coal-active plants. In terms of our total capacity in the Northwestern Europe of 26 kilowatts, 40% of our capacity is gas-fired and 30% coal-fired. Our current portfolio mix provide us with some flexibility to shift conventional power generation towards gas and to keep state-of-the-art hard coal-powered station in place or to provide some backup facilities.

In Germany, the coalition government has just installed a commission to provide solution for structural change in the regions depending especially on lignite mining and generation. Of course, this all should be seen in the context of one overarching theme: the energy transition.

While Germany is widely missing its goal for 2020, to raise share of generation for renewable energies to 40%, the new coalition raised the bar to 65% by 2030 instead of 50%.

A road map for ending coal-fired power generation with completion date is also planned to be set. Uniper's request, we must finally set the path into the energy system of the future and into an increasingly decarbonized world. This must be done in a legally secure and binding form with a sense of proportion and foresight and with lasting reliability beyond electoral periods. This requires a broad social acceptance, solutions for employees whose jobs are prematurely at risk and for companies which have historically invested and provided secure supply to the countries they operate in.

With the combination of a safety reserve, the (inaudible) now have an end date for the most modern coal-fired power plants and for gas-fired power plants as future-proof capacity mechanism with market elements. Even for 2020, German power generators could help to mitigate the gap in carbon emissions. If the government want to take a first step in the short term until the 24th U.N. Climate Change Conference in early December, we can envision this with the application of an existing mechanism as safety reserve.

Maybe 3 to 4 gigawatt of lignite and coal power plants could be available on short notice, which could then serve as a backup for a transitional period of a few years. When do we expect first meaningful news flow? Probably not before autumn 2018.

In France, the coal exit is far closer. Here, the government is working on a new energy policy that includes the permanent shutdown of all coal plants by 2021. EDF and Uniper are the only coal electricity generators. Uniper operates 2 sites with a capacity of 1.2 gigawatts. A legal draft framework or details are not yet fixed. So far, we have not come beyond general discussions in our discourse with government agencies.

Due to the short-term nature of the discussed plans, it is particularly important that there is clarity on how the government can [certainly] safeguard the retirement of our employees in the coal-fired power plants. The government simply pushes the idea of a coal exit through without consensus for the companies, we need to rethink our entire French business model.

Without coal-fired power plants, our capacity will be slashed by around 50%. We will be left with 2 modern gas-fired power plant and a recently started biomass power plant. And then with that comes our broad sales business with French SMEs and industrial customers as well as some renewable solar and wind capacity. So in terms of remaining size, we are an even smaller player next to giants like EDF and [Engie].

Of our European core markets, only The Netherlands has so far initiated an energy law with a specific coal exit date. The Draft Act, which is planned to be put into effect in autumn, sets the end date for using coal-generated power to 1st of January 2030. Coal-powered plants which cannot fulfill an efficiency threshold of 44% must be shut down at the end of 2024. Thus, our Maasvlakte 3 coal-fired power plants, which has been operating since 2013, exceeds the threshold and could go offline at the final deadline.

A second draft was published to introduce a price for carbon. The initial price set at EUR 18 per ton of current emissions. Unlike initial plans, a starting year has not been outlined in the Draft Act. Moreover, the new draft legislation does not provide for any compensation payments. This contradicts former signals from the political arena. Even one of the most modern coal-fired power plant in Europe cannot recoup its investment in only 15 years. We will take a stand here and defend the interest of Uniper and its shareholders.

Now back to our current business, and here, I limit myself to the most important topics. In terms of our large asset projects, [in] particularly Nord Stream II, continues to be spectated about in the press. The U.S. are still opposed to the project. On the other hand, the European Union is defending its independent European energy policy towards the U.S. The Nord Stream pipeline continues to get support from the German government.

The European Union wants to prevent U.S. influence on the mix of its gas suppliers, which includes pipeline gas and liquefied natural gas. More liquefied gas from the U.S. could help to diversify the energy supply of the EU.

In Germany, political discussion has been heating up lately that LNG injected via a first German regasification terminal should extend gas supply diversification. Two potential sites from the German North Sea coastline seem to offer the best conditions: Wolfenbüttel and Wilhelmshaven. Uniper will definitely track all commercial business opportunities arising on this for our gas business.

Despite the political issues, the Nord Stream II project is progressing as planned. Permits needed for the project has been received from Germany, Russia, Finland and Sweden. This is up to a root section of about 1,100 kilometers out of an overall pipeline length of 1,230 kilometers. The national permitting procedure in Denmark is still pending.

The laying of the first pipe in the German part of the Baltic Sea started at the end of July. Until the end of the first half of 2018, Uniper has financed EUR 0.4 billion of Nord Stream II project. This includes a EUR 0.3 billion of mezzanine loan and a EUR 0.1 billion bridge facility to secure Nord Stream II's financing needs until project financing is achieved with progress as well. No news on the other large asset projects: Berezovskaya 3 and Datteln IV.

Now from legacy growth to future growth options. Our industrial solutions business is starting to get traction. At one of the most important industrial clusters in the rural area with oil and chemical industry, we have signed a long-term contract with a basic chemicals company to supply processed steam for 15 years, the remainder being used for our heating business in the area.

Besides offering a smart technical concept, our long-established relationship with industrial customers in this industrial area and the existing brownfield site with gas supply link were key positives. This project is a starting point for replacing our coal-fired generation activities at the [Datteln] site.

The project comprises a newbuild of 2 gas [speed] turbines and a steam boiler, which should be up and running by 2022. Expected CapEx is low triple-digit million euro amount so exactly the size of investment project we are aiming for.

In Russia, investment opportunities to participate in the modernization program of public electricity production are heading closer. Advance legislation has been adopted. The plan is to modernize a total of 39 gigawatt of aging capacity. Prequalified generators will be allowed to put in old capacities in a series of auctions between the end of 2018 and 2025. These plants will be entitled to new capacity payment regime for a period of 15 years. It is planned that in November this year, in just about 3 months from now, 11 gigawatts of capacity will be tendered for modernization in the first and largest of several tendering routes. Renewed power stations are entitled to a new capacity payment regime, and the first round must be back on-stream between 2022 and 2024.

Unipro, our subsidiary in Russia, has several units which may potentially be prequalified for the auctions.

Participation in the modernization program clearly fits our strategy. It would give an opportunity to prolong lifespan of our assets and to obtain reasonable regulated returns on our investments. The planned series of auction allows us to have flexibility regarding asset management capabilities, financial resources and country risk management. As you can see, the implementation of our strategy is progressing, and we have attractive investment opportunities.

So much on the overall picture, now onto the discussion of the financials.

Slide 8 summarizes the performance of the important KPIs. As said earlier, adjusted EBIT is reduced by roughly 1/3, down to EUR 0.6 billion. In principle, the trend is in line with the picture that we saw in Q1, considering structural effects such as the deconsolidation of Yuzhno-Russkoye, capacity reductions and FX effects.

For Q2, these structural effects are even more pronounced due to the absence of insurance payment for the Berezovskaya 3 plant that we received in Q2 last year. Compensating have been higher capacity market payment in the U.K. as well as the tax relief on nuclear and hydro plants in Sweden. All these effects have been flagged when we gave the outlook for 2018 and should be no surprise.

Operating cash flow is significantly down compared to the first half of 2017. There are a couple of reasons for this: on the one hand, the reductions in the operational business was predominantly driven by the lapse of structural effects, which are partly compensated by a lower utilization of provision; and on the other hand, the cash conversion came down significantly due to more active working capital management between the years, also in effect, which we talked about already in the first Q1 call.

The picture will turn towards improved operating cash flow by the end of the year once we start withdrawing from our storages.

A brief word on the adjusted FFO. This is only slightly down compared to the first half of 2017 despite the lapse of the structural earnings and fully in line with our expectations as the adjusted FFO does not suffer from swings in working capital.

Finally, economic net debt significantly increased to EUR 3.3 billion. There are essentially 3 reasons for this. Firstly, the IFRS 16 effect of EUR 0.3 billion that we highlighted in our full year results call. Secondly, we saw increased margin requirement for our hedging activities. This is also a consequence of the price increase in the commodity complex and the resulting negative impact from existing hedging transactions. And finally, we paid a dividend to our shareholders. Assuming stable prices, we would not expect our economic net debt to deteriorate further during the year.

Let me now go into more details of the changes in earnings, cash flow and debt on the following slides.

Slide 9 gives you an overview of the key drivers in group adjusted EBIT. On the net adjusted EBIT reconciliation slide, you can find many of the effect that we have highlighted in our March outlook, albeit grouped a bit differently.

I'll start with what we have summarized as structural effects. This should be a sensible approach to enable a fair like-for-like comparison. Key effects where the absence of the Q2 insurance payment for Berezovskaya 3, roughly a EUR 0.3 billion effect. Secondly, the deconsolidation of the Yuzhno-Russkoye gas field with roughly a EUR 0.1 billion effect. There are some smaller effects such as the decommissioning of the coal-fired plant units, Maasvlakte 1 and 2 in The Netherlands and the closure of our Swedish nuclear plant, Oskarshamn 1.

On top of this, we saw weaker currencies, especially a weaker ruble, leading to downsides from FX translation. These structural effects add up to EUR 0.5 billion and were largely expected and well flagged. For an ordinary business perspective, clearly, a positive compared to H1 2017 are the effects summarized as regulation effects with now roughly EUR 0.1 billion. This category mainly covers 2 well-known effects: firstly, the known further cut in Swedish hydro and nuclear taxes; and secondly, we saw new capacity market payments in the U.K. in the first half following the start of the regulation in Q4 last year.

The next category comprises still negative price effects that we have in the outright portfolio. We continue to see pressure on our earnings coming from lower achieved outright prices. Our achieved price in Nordic as well as in Germany are some EUR 4 to EUR 5 per megawatt hour lower than in 2017. We currently see the effect at around EUR 50 million.

The contribution of our gas business is on its way to recover from the weak Q1 but not yet fully there. New in this waterfall but emphasized before, the hedge result from the project hedging of our Freeport LNG volumes that will go into delivery towards the end of next year.

In first half, we see hedging result in the mid-double-digit million euro territory that will further build up over the course of the year towards EUR 0.1 billion by year-end. You should be aware that these hedges were rolled in 2019, however, at far less favorable terms. Hence, in 2019, the hedges will produce a loss. As a consequence, the year-on-year delta into 2019 will be clearly above EUR 100 million.

In the other years, we expect this position to improve again and, of course, ultimately to be a profitable undertaking. Again, on the positive side, we have seen further cost savings in all segments. We're making good progress here towards finalizing our targets.

And finally, in the other bucket, there are various effects aggregated adding up to roughly [EUR 1.01 billion]. I will just name a few. Most affected here, the European generational segment. Firstly, a good profit from book gains and M&A transaction such as the sale of the Irish property and the disposal of the Dutch sales business, but more importantly, it benefited from a net provision release.

On the negative side, in Russia, we have seen pressure on the gross margin, especially in Berezovskaya region. Main reason, oversupply in the market, and hence, higher gas prices costs have not adequately translated into higher day-ahead prices. Last but not least, again, in Russia, there is a positive effect of similar size related to higher capacity payments.

Now over to cash flow. The cash conversion in this first half was clearly down to no support from the working capital side compared to first half 2017 levels. Two reasons for this. As a matter of fact, in Q4 2017, we started to more actively manage our working capital to reduce the volatility between the quarters Q4 and Q1. Consequently, the burden in the fourth quarter is less pronounced, but this also means the corresponding relief over the year is also less distinct. Normally, you should expect a low cash conversion in summertime when we inject our gas storages and high cash conversion in the winter quarters. Consequently, cash conversion is not expected to recover significantly before Q4.

Now let me walk you through the reconciliation line by line. First step is, as usual, adding back depreciation and then noncash-effective EBITDA items, which predominantly include the setup of provisions. Main driver here: the addition of provisions for emission rights and green certificates. These are provisions that we set up every year and that are utilized in the following year. In a stable CO2 price environment, this will be roughly the same magnitude.

To make this clearer, in a rising price environment, this logic has a positive effect on cash conversion as utilization of the provision dates back to lower prices and the creation to higher prices. In terms of actual cash out, more important, the provision utilization. In H1, this amounted to over EUR 0.5 billion. This breaks down into the following: first, utilization of decommissioning provisions, of which roughly 50% were covered by the cash fund and environmental certificates which together make up half of the total number; another 30% of the provision utilization was related to gas transport, LNG regas and gas storage obligations; and the remaining bit, the most prominent item, were personnel expense and restructuring provisions.

Let me enlarge on one special effect here. The closing of the Fortum transaction constituted a change control event with respect to the LTi program for the senior management. As a result, a high double-digit million euro amount linked to the (inaudible) tranches for 2015, '16 and '17 was expensed in July. Rest assured, our key financial KPIs will not be affected by this so also no implication for our dividend payment capacity in 2018.

Changes in working capital, no relief here as discussed at the beginning. Cash interest payments were limited based on low interest rates. Tax refund, positive EUR 23 million based on reimbursement of prepaid corporate income tax and trade tax.

With that, over to economic debt. On a reported number basis, economic net debt is significantly up compared to the year-end number. Let me just briefly run you through details of the first half developments.

Divestments. We've made a few further small disposals that, together, have over EUR 100 million positive effect on the economic net debt. These were the sale of (inaudible) 2 in Brazil as well as our retail activity in The Netherlands, which we had inherited from the split from E.ON. And mainly, we have sold our headquarter E.ON Plus end of last year. This deal settled early this year.

As already described, we have an operating cash flow of EUR 0.5 billion. The 5 first-time adoption of IFRS 16 led to an increase of liabilities by [EUR 0.3 billion], as already explained to you. This benefit we early adopted starting 2018, triggers that operating leases will have to be added on the balance sheet as liabilities. This is mainly related to gas storage leases.

CapEx was EUR 0.2 billion. 2/3 of this was related to growth and 1/3 to maintenance and replacement. Maintenance and replacement CapEx was mainly spent in the European Generation segment. Compared to first half 2017, those are 10% down. On a full year basis, we expect again to stay below the EUR 4 million level for maintenance and replacement investments.

The growth element was, to a large extent, linked to our 2 large asset projects: Datteln IV and Berezovskaya 3, still down 20% compared to first half 2017 and some growth projects at Maasvlakte 3 have been finalized. Please note that financing Nord Stream II is not part of our growth CapEx definition as it is part of the financing cash flow.

Margin and payments are one of the key drivers for the increase of financial net debt with EUR 0.4 billion. This is linked to the derivative fair values that are hard to forecast and hard to plan. And clearly, the other side of the coin is a rising commodity market where we already have some hedges in place, especially for our Nordic outright exposure. Once these or the money hedges settle, this collateral will come back.

The dividend payment, EUR 0.3 billion, became effective in Q2. In the other effect category, several effect are summarized. Predominantly, this includes the further plan, which financing for Nord Stream II. Furthermore, pension liabilities increased slightly, mainly due to slightly lower discount rates. This has been offset by lower asset retirement obligations.

So to summarize, economic net debt, significantly up, driven by higher-margin mix. So this brings me finally to the group outlook.

As you have seen, there are a few moving pieces, but still, the overall picture is roughly as we have been expecting it at the beginning of the year. Hence, we can reiterate the outlook we gave at the full year reporting stage. Adjusted EBIT range is confirmed at EUR 0.8 billion to EUR 1.1 billion. As a matter of fact, we currently see us developing -- develop towards the middle of the range. As usual, there are many uncertainties at the half year stage, which keeps us from narrowing the guided range at this point of time. Underneath, there are a few moving pieces that somewhat offset each other.

In terms of adjusted FFO, we also confirm our outlook range between EUR 0.5 billion and EUR 0.8 billion. Our dividend guidance for 2018 remains unchanged with the dividend proposal of EUR 310 million.

Thank you for your attention. And before we come to your questions, I will briefly hand over to Udo.

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

Udo Giegerich, [4]

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

Thank you, Christopher. So floor is now open for your question. (Operator Instructions) Thank you.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) The first question comes from Vincent Gilles, Crédit Suisse.

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

Vincent Gilles, Crédit Suisse AG, Research Division - Former Head of the Utilities Research [2]

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

Winston, call me Winston. Basically, 2 questions. The first one is on, you just finished your presentation, Christopher, on you think you're going to hit the middle of the range. But if you roughly calculate, it implies that H2 EBIT will be EUR 350 million. It was exactly what you achieved in Q1. Seems pretty low, given the picture you painted on power prices. And obviously, you must be making money in the heat of [Euro 4] days. So I know it's a bit silly to ask it this way, but are you being conservative? Is there anything we may be missing here if we just basically go for the middle of the range? I know you also said that you don't want to change the guidance at that stage, but a bit more color would be helpful, in other words. And the second question is on your hedging strategy. You explained in details that, obviously, you're only 80% hedged for 2018, which hasn't changed since the end of Q1. Should we assume that you are gradually going to look more like [Chevron] for example? Are you going to get into any given year with a lower level of hedging than in the past? What are you going to change in your policy, given your bullishness on commodity prices?

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

Christopher Jost Delbrück, Uniper SE - Advisor [3]

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

Thank you, Vincent. Now the 2 questions, I will pick up the first one. I think -- what are the, so to speak, risks on the forecast? Number one, I think there's a bit of uncertainty on the hydro availability in Nordic. And while the prices are nice, it can have also an impact on production volumes. Again, that might be a risk. And while we are a bit more conservative, we don't know how then the typical fall rain season falls out, and therefore, maybe that's one of the, what you would call, conservatisms. Secondly, we said also that our Gas Midstream business is, step-wise, coming back on track, but it's not yet there and still has to deliver an amount of work and value by the end of the year, where that is not 100% clear where we stand. So therefore, we reserve there a bit of a conservatism in terms of middle range. But let's see how it plays out. I mean, as we see the temperatures at the moment, the risk on the Nordic side actually is there. Secondly, on the question on the hedging strategy. I think what we said is -- made clear, we're not going to look like a, let's say, oil major with simply delivering everything into spot. But as you've seen before, we were relatively far hedged when we looked at our numbers in 2016 and hedged a lot also in '18, '19 and even into '20. And then basically, that hedging ratio is above what historically you could have observed when you follow the hedging path, which we had. So therefore, we slowed down our hedging, but again, it will not mean that we move into a specific like spot strategy. To be honest, we will not be giving you exact detail. That obviously would be a bit of a competitive disadvantage to our trading counterparties. So therefore, I will be reserved to be not specific on that point. But again, it will be slow.

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

Vincent Gilles, Crédit Suisse AG, Research Division - Former Head of the Utilities Research [4]

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

I would not ask for commercial details, obviously, but it's more a feeling that you believe that in the future, in the markets we see emerging now in Europe, it makes more sense to be less probably or more hedged than the past.

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

Christopher Jost Delbrück, Uniper SE - Advisor [5]

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

That is exactly the point. We always look at the value at risk we see, and we see upside from the power side, we do believe we should be hedging that. Therefore, again, we've had a slower rate of hedging than we have had maybe from '16 to the end of '17. But still, we will continue to hedge certain amount. That obviously is something where the stability then of cash flows in terms of rating are important also on a longer-term basis.

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

Operator [6]

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

The next question comes from Samuel Arie, UBS.

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

Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [7]

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

I have 2 questions. Firstly, on the German coal commission, you talked about a solution like the 2015 strategic reserves, which could be quite favorable potentially for you. And I was just wondering if you could spend a little longer on that idea and explain whether you -- what do you think the chances are of an outcome like that. I think in the previous example, operators got a contract and effectively paid to operate plants for a period before they came offline. And that could -- obviously, it sounds like that could be better than -- created a better outlook than you get under the current conditions in carbon price to those assets. So would love to hear a bit from you about that. And then secondly, on the Russian capacity auctions that you mentioned, some coming up quite soon. Is that something we would hear more about by Q3 or by the end of the year? Or when might we have news about the first round of auctions there?

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

Christopher Jost Delbrück, Uniper SE - Advisor [8]

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

Thank you, Sam. Let me start with the Russian question. And I think you're right, given that the auctions are coming up towards the end of the year, you'll be hearing more of that towards the end of the year. I think we also planned and announced we would do a deep dive on Russia towards the end of Q4. And then, obviously, we would like to incorporate those with modernization auctions look like but also [the multicom] auctions. And you might have noted that the [com auctions] also time-wise have been enlarged in terms of covering a larger number of years. And then the impact of that will be also on the midterm earnings profile and cash profile for our Russian activities, that's something we would be discussing towards the end of Q4. Obviously, for the German coal commission, it's a bit too early to tell whether there's actually a -- something which is going to come out. I think we started the discussion simply to also say that if somebody wants to have a short-term solution to help mitigate the gap for 2020, there is an option, a mechanism in place to actually do this short term. And therefore, simply people should not say there was no chance to do anything. There is a chance that some method would have been used, and I think that's the key reason why we basically made that statement. Obviously, looking like -- longer term, we'll have to see what the commission will come up with. We will be a constructive discussion partner on this one and -- but also make sure that we defend the interest of our shareholders.

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

Operator [9]

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

The next question comes from Deepa Venkateswaran, Bernstein.

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

Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division - Senior Analyst [10]

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

Two questions from myself as well. The first one is a follow-up on Russia. So just wanted to understand, in terms of the modernization, I think you mentioned that you're seeing some gross margin pressure and overcapacity. So what does -- why is this modernization needed, and would this not make the market probably even more oversupplied with more efficient plants coming in? So just wanted to understand maybe if there's -- this happening in a different region of the market. And what's the kind of CapEx per gigawatt that you're expecting to be spending for this modernization? My second question is on Nord Stream. You mentioned in your presentation that you're seeing a mix of headwinds and tailwinds. Can you just elaborate both of them? And do you expect any issues on this permit from Denmark in terms of trading any issues for the project?

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

Christopher Jost Delbrück, Uniper SE - Advisor [11]

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

Thank you, Deepa. On the Russian modernization, I think it's a bit too early to talk about CapEx numbers. I think the final standard costs being used to compare different bids are not out yet, so that's a bit of -- bit premature. We'll talk about that toward -- potentially towards the Q4 Deep Dive in Russia. And again, we have not taken any decisions internally, and thereby, it's a bit too early. Now in terms of the logic of the modernization program, one needs to understand that the program is -- makes eligibility for plants which are older than 40 years and [are] turbines at the end of their lifetime, reached the end of the lifetime. So the Russian overall fleet is pretty old. Now secondly, I think the -- it will be based [basically] on existing technologies so not necessarily will the overall average of the efficiency of the Russian fleet go up. And thirdly, that modernization will also lead to that -- certain sites, maybe 1 block or 2 blocks away of a site will be modernized, but the other parts of the capacity will be actually shut down. So we would rather expect that the total capacity in the Russian market after modernization will actually go down a bit. On Nord Stream II, I think the tailwinds are clearly the operational development of the project as we see it. Remember, we're just the financing partner, but we see it progressing, we see the pipeline works starting and most of the permits being there. The damage permit is still pending, currently have no clear view when exactly that permit will come. But again, as we understand it, Nord Stream is in constructive discussions with the government for all different scenarios. The headwinds, obviously, is the continued political pressure on the project. I mean, just to reiterate, I think what also has been said, this project is not about a choice either, or it simply increases the diversity of supply routes into Europe. There will be more LNG. There will be different pipeline routes. And all of that helps actually diversify the European supply. And therefore, again, for us, it's a bit harder to understand why there's so much political pressure against the project. But again, you can read yourself in terms of the news somewhere. We have to see how that will play out. And again, we assume that Europe will be talking with the U.S. on any kind of issues arising from this political opposition.

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

Operator [12]

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

The next question comes from Wanda Wierzbicka, Crédit Suisse.

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

Wanda Wierzbicka, Crédit Suisse AG, Research Division - Research Analyst [13]

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

Wanda Serwinowska, Crédit Suisse. Two questions from me. The first one is very simple one. If you could comment on the pricing in Russia? And the second one would be on your financial cost. It's pretty low, I must say. And is there any comment, what is your future cost of debt that you anticipate?

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

Christopher Jost Delbrück, Uniper SE - Advisor [14]

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

Okay. Wanda, on the first question, the price in Russia, obviously, what we have seen is there's a bit of a slump of demand, especially in the Siberian area around oil and gas production, partially due to also reduction of oil supply, which OPEC and Russia had agreed on. And that meant that, actually, higher fuel cost would not really pass through to higher day-ahead market prices. Again, that will partially, with the normalization of the situation, potentially reverse. But again, that's a short-term fluctuation, which we see at this point of time. It's a bit too early to see how that plays out in the next year. But we'll obviously monitor that situation. But it's driven essentially by lower demand on the power side. On the financials cost, you're right, it is low, but the interest rate in Europe are low. And again, we still have to see how the end of the program from the ECB is going to look like. We are currently -- we don't have any long-term debt, which you would see in the balance sheet, and we're utilizing a commercial paper program at the moment, which obviously has a very, very low interest rate. Now how will that look like going forward? We obviously have a bond, which we will -- which matures at the end of the year, and we're looking now in fall into our options, what we'll do with that bond, but it's a bit too early to say what the outcome will be on that one. Given the interest rate environment at the moment, it might be very sensible to do something a bit more long-term, but again, we'll play our cards somewhere in fall.

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

Operator [15]

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

The next question comes from Lueder Schumacher, SocGen.

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

Lueder Schumacher, Societe Generale Cross Asset Research - Equity Analyst [16]

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

Three questions from my side. The first one is on clean dark spreads. They have been recovering quite significantly since early June. I wonder if you could share your thoughts on exactly what the drivers are for these results. The second one is on carbon CO2. Obviously, price has been rallying quite significantly. In your view, are we already to level where the early fuel switch would be kicking in? And if not, where do you see this level? And the last question is on Russia. On this RUB 26 billion to RUB 28 billion guidance, do you also expect to make the middle of the range there? Or would this be a bit optimistic, given some volume and FX pressure?

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

Christopher Jost Delbrück, Uniper SE - Advisor [17]

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

I think on the -- let me start with the clean dark spreads. I think last time around, we had the questions whether the low dark spreads would remain forever on a EUR 1 level in Germany, and now we're actually seeing a recovery. I think it's a bit of a function also of how the market trades at the moment, who actually takes what positions, who churns what positions in terms of covering extrinsic value. I think on the way forward, we do expect the, let's say, the development to be positive for the clean dark spreads. Now a lot of that uncertainty around it as the -- especially the German coal commission will discuss, or there will be interim news out there. You might remember in the election year when the Green Party has actually said about [1 7] gigawatts of lignite to be shut down, suddenly, the 2020 spreads were blowing up. When they were not coming to government, they were collapsing again. So a lot is built on -- the volatility is built a bit on rumors rather than fundamentals. Fundamentally, with taking lignite out, you should see a improvement in the dark spreads on the way forward. Second one, on CO2 prices. There, obviously, we see a healthy level at the moment. Again, we also said we don't believe that this is necessarily the end of the development. On the CO2 prices, do we have a fuel switch? Now again, this is country-by-country specific. If you look at the U.K., which has already carbon tax floor, a lot of the fuels which is happening with extremely low, even negative dark spreads. In other countries, it's not as much. Germany has not reached the full point of it. The early point, yes, you've reached the early point. Definitely, that some very inefficient coal plants are running very, very few hours only, and gas plants are running more. But again, we're not yet in the territory where we would need to move in where that exact point is for a complete use which will actually depend really much on market and the existing technology. So there's no overall price I could give you for that one. On Russia, I think, as it's good practice, they basically gave the outline. But I would ask you, actually, there's a Russia call to more specifically speak with the Russian management on the exact positioning. And that will be not helpful for me here to talk about the guidance of the listed company. I've talked about the guidance of Uniper but not of Unipro at that point in time.

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

Operator [18]

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

The next question comes from José Lopez, Millennium.

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

José A López, [19]

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

I just had a question, one of the question was already asked, it was about the outlook for sparks and dark spreads in Germany because the forwards are, from my screen, they look negative. I'm not sure if that's low but more like negative. But that's been addressed. But the second question was, what's your view on the Dutch carbon tax proposals? Is that still going ahead? Or has that been canceled? What's the latest on that front?

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

Christopher Jost Delbrück, Uniper SE - Advisor [20]

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

I think the -- it is not canceled yet. I think the discussion is ongoing. But obviously, I mean, there's always intense discussion around it. You might remember, in the past, we -- there was a lot of discussion around the initial closures of coal-fired power stations, and there was energy to court where we agreed at some point to close MPP1 and MPP2, 2 blocks at Maasvlakte and then got more or less an insurance that we could run them undisturbed, our third one. That doesn't seem to be the case anymore. So there is a consultation ongoing at the moment, and we don't know yet what the outcome is, but it's still not off the table.

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

Operator [21]

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

The next question comes from Dominik Olszewski, Morgan Stanley.

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

Dominik P. Olszewski, Morgan Stanley, Research Division - Research Analyst [22]

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

First question, just on the provision release. Could you just maybe talk about that and just how to think about squaring? I think it's based on an expectation on lower peak prices and how we should square that off with your discussion about lower hedges into the future on power so just squaring that. And then could you just get a quick update on the Datteln and Berezovskaya projects?

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

Christopher Jost Delbrück, Uniper SE - Advisor [23]

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

Maybe, I think, on the first question, if you could be a bit more specific exactly which provision release part you meant? Happily starts with the update on [Berezovskaya 3]. On Berezovskaya 3 , there's actually not much news that [we've -- been] highlighted. The project is running largely on track. So thereby, we don't expect any changes to our guidance that will have that online in Q3 next year. And now maybe on the provision, what exact -- which provision release you meant?

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

Dominik P. Olszewski, Morgan Stanley, Research Division - Research Analyst [24]

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

[I meant] the provision release in hydro?

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

Christopher Jost Delbrück, Uniper SE - Advisor [25]

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

Okay. I think, essentially, we had -- we looked at a position where we had an obligation to restore certain plant asset, and we looked at it and reevaluated that obligation. We don't believe we have obligation anymore. And given that the market at the same time does not provide forward, we could release that provision. I think the background on it, it's a pump storage asset, which, you understand, also has relative limited value in the current market environment.

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

Operator [26]

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

The last question comes from Ahmed Farman, Jefferies.

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

Ahmed Farman, Jefferies LLC, Research Division - Equity Analyst [27]

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

I have 2 questions. I just wanted to start with net debt. [But] could you maybe share us with -- with us your expectations for the net debt for the full year? And maybe also talk a little bit about what sort of FFO to net debt you need for your BBB rating? My second question is on your growth strategy. If I look at Slide 6, your number of projects that I see are focused on Russia. So how do you think about sort of increasing exposure to Russia and a growth strategy which is quite -- seems quite focused on Russia in terms of increasing cluster risk, the returns in that country, and you talked about some political headwinds there as well. So just wanted to sort of get your thoughts around that as well.

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

Christopher Jost Delbrück, Uniper SE - Advisor [28]

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

Okay. Thank you very much for your questions. Let me first, I think, I did say in the call that in terms of the overall net debt, I was not expecting, or we are not expecting a significant change to the net position, provided prices don't increase significantly, i.e., the negative value of our hedges, and the margin requirements for our hedge positions would not increase significantly. Second part of your question, we expect -- we said we would keep our net debt to EBITDA in a range of 1.8 to 2.0. And then again, there's always usually a slight margin on that one but -- which means we're going to stick to that principle and try to stay within that respective range. In terms of growth of Russia, if the impression is that it is prioritizing Russia, I think then the impression is not correct. I think, of the overall activities, Russia plays a certain part but definitely not a major part of our growth initiatives. I think the project in the [arrival] area, industrial solutions is probably something which is quite important to us as well as other either capacity market-backed or contracted gas-fired generation opportunities. This will be probably make up to the predominant part of our CapEx going forward. But yes, we will still invest some further money into Russia. I think it's also partially to -- the modernization program itself is of a nature that you have to do maintenance anyway on the plants but with that modernization program, you actually get a return on that maintenance CapEx, which should be actually helpful for everyone. We would not be increasing our capacity in Russia. We think we would make some of our investments more profitable in maintenance, more profitable because we get a return on the maintenance investments, and that's the whole logic of that program.

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

Udo Giegerich, [29]

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

I think we've got one last and final question [in end]. Please, [Adolfo].

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

Operator [30]

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

The last question comes from Alberto Gandolfi, Goldman Sachs.

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

Alberto Gandolfi, Goldman Sachs Group Inc., Research Division - Head of European Utilities Research [31]

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

Two questions. The first on is, to go a little bit back on the clean dark spreads. Could you, perhaps, tell us what you are actually achieving? Because again, the baseload on the screen are negative. And maybe you can tell us what outlook do you expect forward? What do you think would be a fair level of spreads assuming just the closures of nuclear, I mean, ignoring what's happening with the coal commission right now? And what will be your contingency in a scenario whereby suddenly carbon goes higher, and coal becomes unprofitable, so you're not longer able to run coal, and over the medium term, gas plants come under increasing pressure from renewables. Where do you think your thermal fleet would fit into this power system? And the second question, I appreciate that you have an Investor Day coming at year-end and -- but on Russia, maybe if you could share, perhaps, the philosophy, what would be an attractive return for you to deploy capital there? And in terms of capital allocation, considering 39 gigawatt is a big commitment for the country, would you be willing to take as much market share as possible of that over and above perhaps what you have currently installed, will be willing to think about greenfields over there? And could this come to detriment of some other decisions on capital allocation? I'm thinking about long-term or medium-term dividend growth, for instance.

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

Christopher Jost Delbrück, Uniper SE - Advisor [32]

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

Thank you, Alberto. I'm happy to answer the questions. Now I think on the terms of the dark spreads, the nature of this is that we're trying to capture the flexibility value of our plants, right? What does that mean? We will look at situations. And we had situations the last 6, 7 months where there were dark spreads of EUR 8 to EUR 10 in Germany and where we obviously tried to hedge some of that volume. And then the dark spreads for, let's say, a 2019 delivery or '20 delivery becomes, one, you would buy back the hedges and thereby optimize it. Therefore, overall, that's part of optimizing our portfolio. And any specific achieved price at a specific point of time actually is meaningless. It's more or less -- it's the day before delivery, which is actually relevant. And thereby, we're not going to -- I mean, we never talk about the achieved prices in the summer fleet because simply it would -- especially also with hedging ratios, you would find very strange jumps where we would spend time on -- in discussion here. And therefore, no guidance on achieved prices in dark spreads. You said then what exactly is then a level? I think we would -- as we see it, you would have to look at what efficiency of plants. And obviously, the dark spreads, which is the average efficiency of a fleet in the different countries with very different ages and very different deficiencies, the newer plants will obviously capture a better spread than what the average itself is. Exact levels, we believe, again, in the runoff to a bit of the next decade, you probably see, given nuclear is retiring, and there is maybe lignite retiring, you will see increase in the spreads. But again, it looks volatile because it will be very much dependent on the respective renewable feed in. There's a lot of wind, a lot of sun or not, therefore, hard to say. But again, we believe there will be safely in the money. And I think that's what we can say. How do the plants fit into -- of the thermal generation will fit into the picture? Obviously, if we look at our fleet, we will also have some aging parts of the fleet, which will, until the end of 2030, step-wise, be offline. What we believe, number one, our -- the thermal generation will fit exactly where the industrial solution space is, i.e., where industrial customers need process steam and want to procure that through CHPs, those I think will be a future for the thermal fleet. Secondly, there will always be a backup required. Renewables plus a gas-fired generation fleet is the combination that is needed in [the] energy system. And therefore, our gas-fired generation especially, and also the more efficient coal generation will play this role for quite some time. And thereby, again, it will be a system stability, but this doesn't mean they're only going to run about 100 hours or so with more baseload going offline and then simply the question between adding renewables, adding then infrastructure, which is not in sync, there, we're playing a more important role than people actually might think. Now on Russia, let me just reiterate, we've not said we would be increasing our capacity. In Russia, we will be modernizing existing capacity and potentially could also then make use of the situation that maybe 1 or 2 blocks of a site is being modernized, and the other blocks which are not very efficient would then be shut. So could even look at a slightly decrease in capacity. But again, details need to be worked out, and we're not there yet. Does that impact? I think you've seen our -- in terms of impact, our dividend ability, so I think you've seen us prudently building up our investment. We have committed to a dividend path until 2020, which we definitely will stick to. Again, then, we will look and have a balanced discussion with you of the options, what we have, and what is then the trade-off between additional growth, which then creates afterwards additional funds from operation and a direct distribution of funds from operation or even the free cash flow operations. But again, at this point, we're not sacrificing our promise which we made to the market compared to what growth options are.

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

Udo Giegerich, [33]

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

Okay, then. Thank you very much for all your questions. And we hear you in the Q3 call in November 7, and have a nice summer, and see you probably also on the road show activities in September, then.

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

Christopher Jost Delbrück, Uniper SE - Advisor [34]

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

Thank you from my side.

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

Operator [35]

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

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