Uniper SE

XETRA:UN01

Earnings Call Transcript 2018-Q1

[Operator]

Dear Ladies and gentlemen, welcome to the Uniper conference call. At our customer's request, this conference will be recorded. [Operator Instructions] May I now hand you over to Udo Giegerich, who will lead you through this conference? Please go ahead.

[Udo Giegerich]

Good morning, dear analysts and investors. A warm welcome to the Uniper Interim Results Call for the First Quarter of Fiscal 2018. I'm sitting here with Klaus Schäfer, our CEO; and Christopher Delbrück, our CFO. In the next 30 minutes, Klaus and Christopher will lead you through our presentation. After that, you will have the chance to raise your questions. Having said that, Klaus, please.

[Klaus Schäfer, Chairman of the Management Board & CEO]

Thanks for the introduction, Udo. And dear analysts and investors, welcome on behalf of Christopher and myself. And thanks for tuning in, again. The frequency of news and speculations around Uniper is still intense. And therefore, before we come to the real purpose of today's call, let me just briefly comment on the status of the situation regarding Fortum. There seems to be more clarity now with respect to the way forward taken by the involved authorities in Russia. Recently, they had a Russian antimonopoly service, FAS, flagged at a press conference that the Russian governmental commission for investments gave Fortum a go-ahead on its plans to become a major shareholder in Uniper, albeit with the restriction of limiting its controlling interest in Uniper to below the 50% mark. Fortum has referred to this in a press statement as well. Details of the decision of Russian authorities are not available yet. Hence, it's also too early to comment on this new situation and potential implications any further. One thing, however, is clear. With that decision, we'll most likely get a new major shareholder, but not a majority shareholder. And we're also absolutely open to constructively work with our largest shareholder in the interest of creating value for Uniper and indirectly, thus also for Fortum. And also, while we see our independence as beneficial for the future development of Uniper, independence is not a value, per se. But at the same time, in the interest of our independent shareholders, control should only pass with an appropriate premium to be paid. Now as you know, Fortum's takeover bid has also brought activist hedge funds as new shareholders. And with respect to this, last Friday, we received a so-called request on agenda amendment from a single investor for our upcoming AGM on June 6 of this year. It aims at the appointment of a special auditor for the purpose to determine any violations of obligations and violations of the law by members of the Uniper board and determine any claims for damages. All acts and measures of the Uniper Executive Board, which have been on view since 20 September, 2017, in connection with the takeover offer by Fortum are to be examined with a special focus on the Russian situation. Such a rather broad, and therefore, costly indication brings distraction for the whole organization. Let me briefly qualify this. We've done nothing wrong on the proceedings with the Russian authorities. All contracts were made within the scope of the legally permissible or even legally required. Therefore, it cannot be in the interest of shareholders invested in Uniper with the fundamental belief in the company's attractive fundamental long-term upside and strategy. Now back to Uniper's business. The core of today's call is to update you on our operating performance and the way going forward. Let me start with the essential topics of the first quarter of our financial year 2018 on Chart 3. Our strategic and financial update last December has set the scene for 2018 and beyond. We also discussed our views on future market trends and how Uniper could benefit from these. Above all, we flagged changing market metrics and looming security of supply issues. In the just-ended winter season, we have seen some major price spikes in European electricity and gas energy markets. At the same time, European electricity forward prices are showing a robust upwards trend. This is also thanks to EU policy, with more emphasis on repairing a derailing Emissions Trading Scheme. Politicians have more emphasis to empower the EU ETS to reduce greenhouse gases faster, and rising global political uncertainties have been a booster for carbon price rises. Gas spot prices have been showing strong volatility during the latest cold spells. The urgency for Europe to secure new natural gas sourcing and additional conventional generation with high availability rates is rising. And our large-asset projects do bind to this story. I will give you an update on the status of these projects here in a few minutes. I will, of course, especially focus on explaining the changed situation with respect to our Datteln IV project, where we did publish an ad hoc statement to inform the financial market about the details of the repair concept. Now with regards to our Q1 earnings. The adjusted group EBIT shows a drop of 32% in the first quarter, primarily driven by well-known lapse of earnings from the disposed Yuzhno-Russkoye field, closed power stations and negative FX effect. At the same time, adjusted funds from operations, the basis for the distribution of our dividend, is up by 27%. And trend-wise, this outcome is fully in line with our planning for the financial year 2018. Also, Uniper's balance sheet stays in good shape. By the end of March, net economic debt was up by -- driven by the earlier adoption of the IFRS 16 rules. On a comparable basis, i.e., adjusting year-end numbers for the impact of these changes in IFRS 16, indeed, economic debt was down. Remember, former operating lease contracts are now incorporated as liabilities in our balance sheets. Also with regards to our balance sheet, last week, we did check off the last box in terms of getting the house in order. S&P has now finally granted us an uplift of our rating to the desired BBB with stable outlook, up from the BBB minus rating with a positive outlook. This is based on the successful deleveraging and the generally good shape of the company. Also, S&P assigned us with an improved business risk profile in light of the improving share of stable cash flows in the group business mix and the improved operating environment. Now on the outlook. We do reiterate our outlook for the fiscal year of 2018. Adjusted EBIT is expected to turn out between EUR 0.8 billion and EUR 1.1 billion. We also reiterate our dividend plans, despite the news on Datteln. A CAGR 25% growth path between the financial years 2016 and 2020 brings us to a rising dividend of around EUR 310 million for the financial year 2018. Now to the next slide. Let's take a quick look at our overall market environments, especially European electricity, gas and commodity markets. Electricity and especially gas energy markets price has signaled that the risk of market tightness is rising to an essential element of uncertainty. This is the development that we were pointing at upside potential at our Capital Market Day back in April 2016. Back then, we highlighted all the optionality we have on rising power prices of our portfolio, and power prices in Germany reached a low of EUR 20 per megawatt at that time. Spot prices in European electricity and gas markets are showing considerable volatility. Compared to the first quarter of the previous year, electricity wholesale prices have clearly moved in the right direction from our point of view. And the forward prices in the Nordic and German wholesale markets were up by 40%, year-on-year. The rising world market coal prices were the driving force of higher power prices [indiscernible] to the European electricity markets in the last year. This year, the sharp rise in the price of CO2 certificates has given a positive boost to the trend for wholesale electricity. Within a year, the price of CO2 almost tripled. And in the peak, it was around EUR 14. At Uniper, we clearly welcome this development. From our point of view, rising CO2 prices are still the most effective lever to push out all the emission heavyweights, in favor of low-emission technologies, out of the market. This is important, as European governments are still at early stages in terms of defining a legal framework for coal exits. At the same time, the call for security of supply and with the question of an appropriate remuneration is becoming louder. The EU already has above a dozen capacity mechanisms approved by the EU. In our view, only 3 of them really qualify as real capacity markets, as they also give investment signals, and those are the U.K. France and Ireland. Interestedly, the discussion is getting louder also in Belgium, where the exit from U.K. in 2025 will come under threat without adequate investment into new generation. Security of supply is also a driving story in the gas sector. And while temperatures in Europe this winter were overall on average, with winter kicking in late, volatility in global gas prices have increased this winter season. Only a few weeks of noticeably cold weather in February and March were enough to bring down European gas storage levels to a record low by the end of March. Filling levels were down to 19%, which is not far from technically induced minimum levels. And with respect to Germany, it was the domestic gas storage facilities that reliably serves the high demand. On average, about 40% of the German gas demand was served from these storages during this time. The market seems still to be quite relaxed with respect to the gas supplies for Europe, and summer/winter spreads are still low for the front year. But towards 2020, spreads are actually slowly widening. And this spread could widen further when flexible capacity is eliminated. You know that European gas production is declining, and especially in the Netherlands we'll be less able to counterbalance volatile peak demands. The large Groningen gas field, which operates as a large zinc supplier, has been politically forced to reduce the output. Therefore, it's essential that Europe expands and diversifies the scale of infrastructure to ensure security of supply for the future. And this brings me to the Nord Stream II project, which we cofinance alongside other European energy companies. On Slide 5. When we look at that on Nord Stream II, further operational progress was made in the first quarter and some key approvals were granted. All necessary permits needed for the project have been received in Germany and Finland. And this adds up to a route section of about 450 kilometers out of an overall pipeline length of some 1,230 kilometers. The national permitting procedures in the other 3 countries along the route, namely Russia, Sweden and Denmark, are proceeding as planned. Our financial commitment includes our share in the junior loan of about EUR 0.3 billion and further loan facilities to secure Nord Stream II's bridge financing needs until the planned project financing facility will be in place. By the end of the first quarter of 2018, Uniper's overall financial support for the project stood at $0.4 billion. What we can say now, we have not detected new bumps in the road on Nord Stream II's track to complete this large infrastructure project in the planned time frame. But for sure, we're also carefully monitoring, especially any U.S. sanctions that may try to affect this project. We do stay optimistic that the key project parameters we assumed will hold with attractive returns to Uniper in line with the risk/return assessment made at the time of the investment. The Berezovskaya plant repair project in Russia is progressing in line with time and budget. That is what we said on our last call, and that's still 100% valid today. To recap, recommissioning is expected in the third quarter of 2019. The budget comprises unchanged RUB 36 billion, of which RUB 17 billion have been spent so far. The preassembling of parts to the boiler is in advanced stage, taking place in a large assembly hall close to the plant. All parts and steel beams for assembling has been delivered to the site. And so to put it in a short sentence, we are happy with the progress. Now coming to our Datteln IV project. You will have noticed that we put out an ad hoc statement on this last night. Let me put this into context. As you will remember, we reported to you in December that component tests resulted in damage to the boiler of our brand new Datteln IV power plant in conjunction with the use of T24 steel. We discovered problems with welds in the boiler. And since then, we and the boiler manufacturer, Hitachi, have been examining the boiler and many of the 35,000 welds in the boiler walls. As it now turns out, the steel-related problems that we first noticed when firing up the boiler are more significant than we had hoped for. The sheer number of weldings that would have to be repaired would exceed any reasonable time frame. And thus, we analyzed several scenarios and have come to the conclusion that replacing the boiler walls is indeed the best option we have. For these new boiler walls, we will use T12 steel to avoid unforeseen substantial difficulties we have with the heavy-duty steel, T24. [ The top rate ] of close to 46%, the efficiency of the repaired power plant should be almost unchanged. However, this will mean further CapEx and a further delay of the commercial operation date. We're currently estimating the additionally needed CapEx for up and beyond the CapEx taken by the boiler manufacturer to amount to roughly EUR 0.2 billion. And the commissioning is now expected for summer 2020. Because of these changed assumptions, we also took an impairment of the book value of the plant of EUR 270 million. However, there's also some good news related to our Datteln IV power station since we last spoke to you. We had a positive court ruling regarding RWE's intention to cancel a long-term contract with Datteln IV. On the 12th of March, 2018, the relevant district court took a positive decision on the validity of the existing long-term contract, and fully confirmed Uniper's position. RWE cannot cancel Datteln IV electricity supply contract, and the court sees no groundings for contract price adjustments either. Obviously, the district court's allowed to appeal against this ruling. All in all, a mixed picture on our growth projects. We will obviously keep you up-to-date on the developments. But now I want to hand over to Christopher. Over to you.

[Christopher Jost Delbrück, CFO & Member of Management Board]

Thank you, Klaus. And a warm welcome also from my side to our 2018 first quarter results. I'll spend the next, roughly, 15 minutes talking about the development of the key financials for Q1 2018 and giving you an insight into our thoughts about the further developments in 2018. I'll kick it off by giving you some color on the development of our earnings, cash flow and debt position of the first quarter 2018. On Chart 7, you see the performance of these important KPIs summarized. Adjusted EBIT is reduced by roughly as 1/3, down to EUR 0.35 billion. The fact itself that we are below previous year should not be a surprise, as some parameters are well known to you, such as the absence of the contribution of the gas field Yuzhno-Russkoye that has been sold; also the coal-fired units Maasvlakte 1 and 2 in the Netherlands; as well as our Swedish nuclear plant, Oskarshamn 1, have been decommissioned. And we still face some headwinds from lower achieved prices on the hedges of our outright power production. All effects, while slight, as would be expected by our observers. Admittedly, our gas business has been weaker than we were hoping for, especially considering the weather conditions in March. But we will catch up some of this in the second quarter as not all of our March optimization activities have settled in Q1. This also holds true for our power optimization activities. Those earnings are also not yet fully realized in Q1, and we expect to catch up some of this in Q2. But please remember, the power market tightness of Q1 2017, driven by the nuclear outages in France, did not repeat in Q1 2018. Operating cash flow was down in a similar magnitude. However, I should highlight that we have been actively working on reducing working capital swings, which are now less pronounced between Q4 and Q1 than in the years before. Still, cash conversion is [ subtly ] above 100%, as usually, in the first quarter. A brief word on the adjusted FFO. This is clearly up and fully in line with our expectations. We are benefiting from lower utilization of provisions and positive tax effects. This provides comfort on the dividend guidance for the year. Finally, economic net debt slightly increased to EUR 2.6 billion. This is essentially the IFRS 16 effect of EUR 0.3 billion that we highlighted in our full year results call. So on a comparable basis, economic net debt is actually down, as it should in a normal Q1. Let me now go to the details of the changes in earnings, cash flow and debt on the following slide. Slide 6 gives you an overview of the key drivers in group adjusted EBIT. On this adjusted EBIT reconciliation charge, I'm roughly following the logic that we used for our detailed adjusted EBIT outlook from March. In essence, we have 2 categories that you should take into account. Firstly, for like-for-like comparison, here it's classified as structural effects, we have to take the deconsolidation of the Yuzhno-Russkoye gas field into account; the decommissioning of the coal-fired plant units, Maasvlakte 1 and 2 in the Netherlands; and the closure of our Swedish nuclear plant, Oskarshamn 2. These effects add up to around EUR 60 million and should not be a surprise. On top of this, we saw weaker currency, leading to downsize from FX translation of around EUR 30 million. Key weakness here was in the ruble and the Swedish krona. Secondly, from here, the ordinary course of business kicks in. Also not surprising, we continue to see pressure on our earnings coming from lower outright power prices. Our achieved prices are some EUR 4 to EUR 5 per megawatt hour lower than 2017, making this a roughly EUR 30 million effect in Q1. Additionally, we saw a negative price and volume effect in our spread fleet. And this is not that surprising, as Q1 2017 took profit from the massive nuclear outages in France, with cold temperatures and with weeks of limited renewable feed-in. This did not repeat again. Clearly, a positive compared to Q1 2017 are the effects summarized as regulation effects, with almost EUR 60 million. Next are a few smaller items, this mainly comprises 2 well-known effects: firstly, the known further cut in the Swedish hydro and nuclear taxes; and secondly, we saw first capacity market payments in the U.K., both well-known effects. The contribution of our gas business has been weaker than what the weather condition would have adjusted at the end of Q1. Gas optimization is down roughly EUR 0.1 billion compared to previous year's Q1. Three main factors are playing into this. Firstly, 2017 Q1 results still benefited from a follow-on effects of the renegotiation regarding the gas from LTCs. This is not the case for 2018 anymore. We will see this comparative effect further accumulating in the course of the year. Secondly, we were not able to monetize the full value of the optionality of our portfolio, even though this winter had its extremes in terms of temperatures and prices. However, remember, the year started very warm and when it turned cold again end of March, we were broadly hedged and were focused to ensure security of supply at lowest storage filling levels. Thirdly, there is a saving effect of around EUR 30 million, which hurts Q1 numbers but will flow back in the further course of the year. Finally, in the other bucket, our various offsetting effects aggregated. Let me shed some light on this. International power was pretty stable. Higher CSA payments in Russia were offset by lower generation volumes. The negatives in euro terms came from the already mentioned ruble weakness. The Global Commodities [ coal ] subsegment was overall unchanged compared to previous year. Within this overall small number, we saw 2 larger developments offset each other: a weak start of our coal-trading activities this year, compensated by our hedging result of our LNG activities. Here, we proxy hedged our 2019 LNG exposure linked to our Freeport volumes. With insufficient liquidity in '19 contracts we proxy hedged via 2018. This hedge will significantly benefit 2018 earnings, and hence, the effect will build up in the further course of the year. Finally, we have seen further cost savings, mainly personnel and IT-related. We remain slightly ahead of the savings curve, so no risks to the finalization of the cost savings program. Now over to cash flow. The cash conversion in the first quarter was 120%, clearly above 100%, which is typical for a Q1. What is driving this? And why is it absolutely, and in terms of conversion rate, lower year-over-year? Let me walk you through the reconciliation line-by-line. The first step is, as usual, adding back depreciation and then noncash effective EBITDA items, which also include the setup of provisions. In terms of actual cash out, more important, the provision utilization. In Q1, this amounted to around EUR 150 million. These break down into decommissioning provisions and environmental certificates, which make up around 1/3 of the total number. The decommissioning this quarter was largely related to utilization of provisions covered by the [ cash ] fund. Another 1/3 was related to the provision utilization covering gas transport, LNG re-gas and gas storage obligations. In the remaining bIT, the most prominent item were the restructuring provisions. The big positive kick for the cash conversion came in 2016 and 2017 out of the working capital for different reasons. But in principle, one key factor used to be the change of gas inventories from end Q4 to end Q1. What happened to Q1, 2018? At the full year reporting in March, I told you that the cash conversion is going to normalize. As a matter of fact, in Q4 2017, we started to more actively manage our working capital in order to reduce the volatility between the quarters Q4 and Q1. Consequently, the burden in the fourth quarter is less pronounced, but this also means that the corresponding relief in Q1 is also less distinct. Cash interest payments were limited based on lower interest rates, as were cash tax payments, with EUR 19 million. Now over to economic net debt. On a reported number basis, economic net debt is up compared to the year-end number. However, this is including the changes due to IFRS 16. If we adjust the year-end number by the EUR 0.3 billion increase, economic net debt, on a comparable basis, is slightly down by EUR 0.1 billion. The adoption of IFRS 16 led to an increase of the liabilities by EUR 0.3 billion. As planned, we early adopted starting 2018 figures, that operating leases will have to be added on the balance sheet as liabilities. This is mainly related to gas storage leases. Let me just briefly run you through the detail for the first quarter's development. I will start with divestments. As most of you might know, we have sold our headquarter here in Düsseldorf year last year. This deal has closed in Q1. With regards to the further course of the year, we have also made a few further smaller disposables that, together, has over EUR 100 million positive effect on the economic net debt. These were the sale of Pecem II in Brazil as well as our retail activity in Netherlands, which we had inherited through the split from E.ON. The cash from these will be shown in the second quarter of this year. As already described, we had then an operating cash flow of EUR 0.6 billion. CapEx was EUR 0.1 billion, 2/3 of this was related to growth and 1/3 to maintenance and replacement. As usual, in Q1, this maintenance and replacement number is a very low number, so don't multiply this by 4 to estimate the full year number. On a full year basis, we expect, 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 IV and Berezovskaya 3. In maintenance and replacement, the focus was on our fossil and hydro plants. Pension liabilities increased slightly, mainly due to slightly lower discount rates. In the other effects category, several effects are summarized, such as the increased bridge loans for Nord Stream II. Marshalling payments with EUR 0.3 billion also are slightly higher and are linked to the derivatives fair value that are hard to forecast and hard to plan. So to summarize, we are fine with our economic net debt, fully in line with our expectations and targets. Now a brief word on our rating upgrade that we achieved. We are pleased that we can now reap the benefits of the hard work and that we have achieved our targeted rating. Our clear financial policy that we set from the first day of our independence set the foundation to achieve our targeted BBB rating with stable outlook. Our swiftly implemented action plan to bring costs and debt down was, of course, also supportive. The rating upgrade with stable outlook reflects S&P's view of a reduced risk of a negative impact from a possible change in Uniper's shareholder structure on the company's credit quality. Furthermore, S&P has elevated Uniper's business risk profile. It has been positively affected by recent developments of power prices in Germany and the Nordics achieved cost savings; renegotiation of gas contract; and the successful sale of the Russian gas field, Yuzhno-Russkoye, in late 2017. So this brings us finally to the group outlook for 2018. We can confirm the outlook we gave at the full year reporting stage. Hence, we continue to expect adjusted group EBIT to be in the range of EUR 0.8 billion to EUR 1.1 billion. Please be aware the key segmental trends that we were guiding for are to materialize over the year. Generation, we guided for notably above 2017 levels. The segment is not yet up, but the picture is expected to change in the second half when the 2017 effects from our now decommissioned power plants fall away in the year-to-year comparison and the increased capacity payment in U.K. starts to take effect. Global Commodities, significantly above, this is also not yet visible. However, we expect the gas business to catch up in the course of the year. Power optimization to significantly reduce the losses in the year-over-year, especially in the isolated Q4. And last, but not least, the hedges in the LNG business to materialize. International Power, significantly below. We will see this effect next quarter in the year-on-year comparison as the bulk of the Berezovskaya insurance payment was booked in Q2 2017. To sum it up, we can confirm our outlook and reiterate the guided range. With regard to the adjusted FFO, we continue to expect the 2018 number to be significantly above 2017 levels, giving us sufficient comfort to hold on to our guidance for the increased dividend to EUR 310 million for the fiscal year 2018. Now let me finally comment on our 2020 dividend outlook. As Klaus earlier mentioned, we are confirming our 2020 target with respect to our dividend ambition. However, of course, the delay of Datteln IV bites into the 2020 prospects. The cushion of comfort we had behind the 25% CAGR 2016 to 2020 plan, implying roughly EUR 500 million of dividends in 2020, is less sizable now. But still, let me make it clear at this point, although the 2020 guidance is now less conservative, it is not danger-ed at all. Obviously, we are also working hard on all possible levers to mitigate the impact from Datteln IV to a certain extent. On the other hand, this is only a delay, and the Datteln IV plant is then expected to produce full earnings in 2021. Thank you for attention. And before we come to your questions, I will briefly hand over to Udo.

[Udo Giegerich]

Thank you, Klaus; and thank you, Christopher. You may have now the chance for questions. [Operator Instructions]

[Operator]

[Operator Instructions] The first question is from Vincent Gilles of Crédit Suisse.

[Vincent Gilles, Head of the Utilities Research]

I've got 2 questions. The first one is, I know you do not provide a sort of temperature-adjusted level of earnings or long-term sustainable level of earnings for your different divisions, but obviously, Q1 this year was a bit weird. As you mentioned, January was pretty warm, February was cold, March was in between. Volatility was spiky at some stage. So if you could help us. I know you give guidance, but if you could help us measure what we could consider as a long-term level for different KPIs you may want to share with us would be very, very helpful. And the second question is on -- probably to Klaus on -- you've entered into a dialogue with Fortum now. But without trying to be funny or whatever, what are you actually talking about with Fortum? You talk about the interest of your shareholders, with Fortum, being obviously one of your shareholders now. But it would be interesting for us to really understand what you are considering, industrial cooperation, exchange of information, whatever? Just to give a bit of flesh on this starting dialogue.

[Klaus Schäfer, Chairman of the Management Board & CEO]

Vincent, let me start with the second question. I think on the dialogue with Fortum, I think we are doing that since a couple of months now. I think we also said that we will not disclose sort of, like, the content of those discussions. And we actually signed a nondisclosure agreement to that effect. But obviously, sort of, like, one of the key issues is, and especially will be, the question of potential cooperation that we always said sort of, like, we are open obviously to those discussions to the extent that they will also benefit Uniper. Obviously, also acknowledging -- and I think that is then a question on the time line also of those discussions, that real discussions on the cooperation potential require the antitrust approval, both in Russia as well as in Europe. I take a simple topic, sort of, like, if you wanted to look at fuel procurement conditions for power plants, for example, then we would obviously only be able to share that if the antitrust approval is there. Given that, that is still taking some time and, sort of, like, we may have been on the time line, sort of, like, expecting a bit of a faster process on this one. But given that this is still, sort of, like, outstanding, that obviously delays the real discussions on that topic to a certain extent. And therefore, I would assume that they really pick up for the cooperation topics after, sort of, like, the transaction has closed. But again, that is obviously one of the key elements there. We also said that we would be looking at the interest of employees and a couple of other topics. But again, nothing changed our communication so far. But indeed, sort of for the real results, I think we need to wait for the antitrust approvals, and then we'll get working on that topic.

[Christopher Jost Delbrück, CFO & Member of Management Board]

And Vincent, from my side, I think the longer-term guidance, obviously, for the single quarter Q1 and Q2, this will always be fluctuating, based on the weather. And therefore, I think it would be very hard for me to give you any longer-term guidance on Q2 -- Q1 versus Q2, which would -- could in any meaningful way hold. I think for the full year what we did give in terms of guidance for segments' input, I think we said on the midstream part of the Commodity segment we gave a guidance on EUR 350 million to EUR 500 million on EBITDA. Again, then depending on the conditions, being the upper on the lower half. For European Generation, in our Deep Dive [ in fall ], then we also gave a clear indication that we expect earnings to rise through 2020 and now 2021 with the additional contracted generation coming on stream, especially then Datteln IV and also the improved price environment there, an increasing earnings trend there, but not a flat line, somewhat of an increasing trend. And thirdly, on the International Generation, I think if you were to look at this year and then add somewhere for the full year 2020, the RUB 13 billion to RUB 15 billion earnings on Berezovskaya 3 when it's fully operation, it should also give you a good feel for what the level there is. Now obviously on International Generation, there's 2 underlying trends there. Ruble, always with the question of how then what ruble rates in terms of translation to euro will be there. But on the ruble earnings, it gives a good -- a pretty good picture. Please keep in mind that then for 2021, also Berezovskaya 3 will be entering the phase of accelerated CSA payments so you should expect a jump from 2020 to 2021. And that's what I could give on the segmental basis. Again, a quarterly is not a number which is sensible to communicate. It will be fluctuating very much based on the weather.

[Vincent Gilles, Head of the Utilities Research]

Can I ask you in a slightly different way. Sorry, my question was probably badly put. If the weather had been the same as last year for Q1, would the numbers have been significantly different, higher or lower?

[Christopher Jost Delbrück, CFO & Member of Management Board]

I think, that's with -- if the numbers -- if the weather had been the same as last year, we would have been better in European Generation because the spread environment would have been better. It's -- secondly on the gas side, it was -- also would be better because again, some of these phasing effects which I mentioned, roughly EUR 30 million, would not have occurred, but rather have settled directly in the year -- in the first quarter. So yes, on those 2 segments, would've been better. I think weather did not play a role in the International Generation segment.

[Operator]

The next question is from Alberto Gandolfi of Goldman Sachs.

[Alberto Gandolfi, Managing Director]

A couple of questions as well on my side. Could you please talk about, in your -- the evolution of your gas business, and particularly, how you see the profitability of the gas business in right -- in light of, basically, as trends in oil versus gas? So what I'm trying to see is that are you going, at some stage, to suffer, because the squeezing margins, because oil prices have been stronger vis-à-vis gas? And as you answer that, would you mind elaborating also how some of your noncash EBITDA provision releases would be evolving on the back of that for, perhaps, the rest of the year? And the second question is about carbon. Could you maybe share with us your carbon hedging policy? How do hedge carbon? How did you do it in Q1? What's your policy for the rest of the year? And maybe if you can tell us why you hedged the way you do. So what's the rationale behind that?

[Klaus Schäfer, Chairman of the Management Board & CEO]

So let me change with the topic on the gas business. And I think just reiterating what we consistently, I think, said over the last month and probably even years. That unlike, sort of, like, many years before, where there was a strong exposure on the oil side, it was, like, the spread between oil and gas, that exposure is not there. And therefore, obviously, the, sort of, like, development of the oil price in terms of a direct exposure on the gas business, sort of, like, is not relevant. Obviously oil is such an input to the overall commodity complex and it drives our coal price and other things, therefore, it's clearly a commodity that we're watching, but not in that traditional link that you were used to in the gas business a couple of years ago.

[Christopher Jost Delbrück, CFO & Member of Management Board]

I think I would then take the second half of your question. I think you're referring to the noncash effects. If you refer to whether we have built provisions in our Q1 results for any potential negotiation, that's not the case. It's much too early to understand where we are in any discussion with our suppliers at the moment. Carbon hedging policy, I think let's differentiate between the area where we would be doing the small amount of proprietary trading that we do there. Simply, that is based on risk limits, and therefore, not be a hedging one. On the hedging side, we have looked, and if we do not have a strong price view, we tend to hedge completely the spread and thereby not hedge carbon separately. Now in light of the developments which we anticipate around the European trading emissions scheme, we have started also to pre-hedge certain volumes, CO2 volumes, for later years. Again, that is not a policy-based but a view-based decision. So we have secured certain volumes for later years, especially in the -- towards the end of the decade. And that -- but again, that is not a [ principal ] policy, that's a market-based view. And otherwise, the policy is if you do not have the strong market view, you would hedge policy-wise the spread and not any individual legs.

[Operator]

The next question is from Sam Arie of UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

A very simple one from me on Datteln IV and your dividend guidance. Your guidance implies, obviously, dividend growth from EUR 200 million in '16 to more or less EUR 500 million in 2020. But now you're expecting to lose, I guess, half the cash flow from Datteln IV in 2020, which I think could be something in the order of, like, EUR 40 million, EUR 50 million. So what I wanted to ask is, can we assume you were previously expecting to beat your dividend guidance by at least that amount? And -- or is there some other upside coming that you see that offsets the delay at Datteln? And then obviously, just to clarify, if there was another delay at that -- on that project and commissioning was to slip back, let's say, another 6 months, would you still be good with the dividend guidance? Or would further delays mean you have to look at that again?

[Christopher Jost Delbrück, CFO & Member of Management Board]

Sam, I think number one, let me just say what we did say when we -- in December, when we gave the dividend guidance. We said the 2020 number at that point of time was a conservative number for several reasons. We had taken the forward rate of the ruble, we had based that dividend guidance on a payout ratio of 75%. And again, some of the price effects which we were seeing happening already in December were not yet fully taken into account. Thereby, it was, yes, a conservative. And yes, as you rightly said, we will be losing some cash flow in 2020, given that Datteln comes in somewhere in summer 2020. We're still good with the guidance with that one. If there were a further delay on it again, a couple of months, it still would be good. Obviously, we still work and -- on mitigating it. And obviously, the price environment does help positively. And we don't see there is a real risk, again. A year's delay will be more difficult, but not the amount of time that you said.

[Klaus Schäfer, Chairman of the Management Board & CEO]

Sam, really to be clear, and I think Christopher said that, trust us, sort of, like, that we are obviously, sort of, like, working our butt off in terms of making sure that we can mitigate some of the effect until 2020. There is also still some time left. And again, we're looking throughout the whole organization in terms of mitigating that because we're not simply accepting the impact of such a topic. We'll obviously, sort of, like, try to make up for that to the extent possible. And therefore, sort of, like, there's also some further work that we need to do. But again, we don't simply accept those things. I think you know us, that we'll work on those kinds of topics, and we'll also do that this time.

[Operator]

The next question is from Deepa Venkateswaran, Bernstein.

[Deepa Venkateswaran, Senior Analyst]

My question is about the Nord Stream II project. You talk about the attitude towards the project being particularly contentious. You also talk about now having a moderate risk of U.S. sanctions. I think it was low earlier. So can you explain what happens if this project is terminated? Do you lose the EUR 400 million? Do you lose more than that? And do you -- I know you say you're optimistic about the project, but can you talk about if the worst thing happens, what actually does it mean for the company in terms of returns, financing, et cetera?

[Klaus Schäfer, Chairman of the Management Board & CEO]

Deepa, I think first of all, obviously, and I think I said that also, clearly, from everything that we see, both in terms of a market need; in terms of the, sort of, like, progress on the project; in terms of its environment, sort of, like, we are still very optimistic that the project will ultimately be built and that it will also, sort of, like, deliver urgently needed gas to Europe. Sort of, like, if we were not convinced about the strategic and the financial viability of the project, we should obviously not have entered that. And I said at the same time, we also do believe that the risk/return assessment that we did at the time of the investment decision, that also, that risk/return decision still holds true. I think, the sanctions topic, as such, also said, sort of, like, there is lots of, sort of, like, talk around Nord Stream II in terms of discussions at all levels, in the U.S., in Brussels and to a smaller extent also in Germany. On the other hand, I think in the past, everyone also had to be or was very careful in, sort of, like, putting sanctions on energy topics, at least also short-term energy topics. Let's not forget, sort of, like, to what extent Russian gas, sort of, like, makes up 40% in the European gas mix. And therefore, sort of, like, really targeting sanctions on such a very sensible topic, I think everyone will be extremely careful to ultimately do that. On the other hand also, we have some sanctions provisions in our contract, sort of, like, on Nord Stream II. I can, obviously, not disclose the detail here. But also, sort of, like, some protection, clearly, done from a legal point of view. And therefore, sort of, I can only reiterate what I said, sort of, like, in the scenarios that we see, I think the project should be fine and we should be fine as well. At the same time, we just say, you can, on such projects, sort of, like, not prepare for everything. And that's why I think we said that we're monitoring the topic, obviously, very intensively right now. But again, we, and I assume, sort of, like, also the other western partners that are involved into that, side-by-side with us, sort of, like, have a similar view here. And therefore, I think that's all I can say on that topic right now.

[Deepa Venkateswaran, Senior Analyst]

Sorry, I think you didn't actually answer my question. I am just asking about a scenario. If this gets terminated, given you've highlighted the risks in your report. Just a contingency. I agree that you may have an optimistic assessment. But if this were not to go through, then what is the implication?

[Klaus Schäfer, Chairman of the Management Board & CEO]

Then, Deepa, we would have to talk about the legal provisions in the contract which, as I said, offers like protection here. And again, these cannot be disclosed. But simply assume, sort of, like, that we have some protection out of the legal situation here. But again, I cannot disclose the contract. That is confidential.

[Operator]

The next question is from Lueder Schumacher of SocGen.

[Lueder Schumacher, Equity Analyst]

Two questions from me. The first one is on Datteln IV. I mean, obviously, there are some real quality issues there. Do you have any insurance or compensation claims either for the repair cost or the loss of income? That's the first question. And the second one is just on your opening statement, Klaus. I'm not sure if I got everything there. What exactly is this one investor asking for? And could this have any impact on timing? Could it delay anything in the process of Fortum acquiring the 47%?

[Klaus Schäfer, Chairman of the Management Board & CEO]

Let me start with the second one. I'm going to think that one investor, and again, sort of, like, it has been sent out so he can look up with this. But what he's asking for, is a special auditor, so-called [Foreign Language] in German. And therefore, you obviously then know, sort of, like, what the topic is. It doesn't have an impact on anything that's happening in the market. It's simply a challenge in there, rather, sort of, like, long and, sort of, like, a bit of a nuisance in terms of, sort of, like, analyzing everything that the Board of Management of Uniper has done over the last, sort of, like, 12 months, I guess in, September, 9 months, in terms of the takeover battle. I cannot speculate what's the interest of that investor in asking for that at the AGM. As I said, sort of, like, it's a backward-looking, it's a nuisance, sort of, like, it takes away time from management and it can also be quite costly. And I think if someone asked for that, ultimately, the cost of that audit would fall on our company, and therefore, I think you may take from my words, sort of, like, what my position is on, sort of, like, that proposal. I believe it's completely unnecessary, and therefore, I think that's what I can say about that. But again, it doesn't impact any, sort of, like, external proceedings or the [ cash ] whatsoever. It's just something that would have to be done internally here at Uniper.

[Christopher Jost Delbrück, CFO & Member of Management Board]

Now on the Datteln IV, I mean, as all contracts, there's always regulations around claims. I think what we have, in the interest of speeding up now the final restoration of the plant, we will postpone those discussions to a later point in time. Not now having a debate around that one would not be helpful for neither us or the supplier. Second one, the insurance of loss of income. When the project was started somewhere in 2006, there was no insurance of the loss of income. So not what we had in [indiscernible]. This was not done in 2006 for that project. Obviously later on, with the delays, you could not actually start a new insurance on that one. So the answer in that one is, unfortunately, no.

[Lueder Schumacher, Equity Analyst]

Sorry, and -- so no insurance against loss of income, but you could get compensated for part of the boiler repair cost. Is that correct?

[Christopher Jost Delbrück, CFO & Member of Management Board]

That's exactly, but that, again, what and how much is a speculation. We will postpone that to when the boiler's up and running. That will just distract us and the supplier in actually getting the boiler up and running.

[Operator]

The next question is from Dominik Olszewski of Morgan Stanley.

[Dominik P. Olszewski, Research Analyst]

Firstly, the [ SBD ] politicians have been reviving discussions on a minimum carbon price floor. So I was wondering whether you could discuss that, and your likelihood of such a measure finding traction. And then secondly, I'm intrigued by this LNG proxy hedging. I was just wondering if it's possible to get some detail on how that should evolve over the rest of 2018 in terms of earnings, and maybe some detail on it.

[Klaus Schäfer, Chairman of the Management Board & CEO]

Dominik, let me pick up the first one. I think on the minimum carbon price floor. I think -- I'm sure you took from my, sort of, like, speech and very much in line with us at, sort of, like, over the last years essentially, that I do believe that the European mechanism is, sort of, like, the right mechanism for CO2 because this will avoid, sort of, like, any distortions between individual countries, and it will, sort of, like, avoid obviously distortions in terms of the, sort of, like, power fleet usage, individual generation mix in individual countries. Therefore, I think that's the correct measure to be taken. Therefore, I'm also pleased by the positive reaction of the market to the changes that have been in Brussels on the ETS. And again, I think those signals to say that the price has increased to EUR 14. And let's see, sort of, like, what are further, sort of, like, price expectations going forward. Obviously, the higher, sort of, like, the normal ETS price goes, I think the less pronounced will be any discussion with a minimum carbon price floor because that then, obviously, becomes irrelevant. In terms of the key, sort of, like, proponent of the minimum price floor, I think that is both France and Netherlands with very different reasons behind that. I think in France, I think we all know that proposing a carbon price floor in the, sort of, like, name of environmental protection, I think it's far cheaper in France if you want to close the few remaining coal stations, the 5, I think, you will not, sort of, like -- should normally not advocate for minimum CO2 price floor with the implied impact on the power price in France. And without, sort of, like, putting out names, I think we all know who would be the biggest beneficiary of that. And therefore, it's a bit of a state subsidy in an EU complaint way that is being proposed there. Obviously, the Netherlands, it comes from the environmental -- and strong influence of, like, environmental policy or energy policy influenced by environmental concerns. I think the government is still debating various measures, including also the coal exit. And I think then we also need to see what's the impact really on generation in the Netherlands and what's also impacting -- or the impact on the market and potential, sort of, like, compensation claims from that as well. I think the discussion on the minimum price floor -- carbon price floor in Germany, that was visible last year with the greens potential in the government. I think that has now, sort of, like, been significantly reduced. And I cannot see right now, sort of, like, that proposal would gain traction in Europe. And therefore, if at all, it would become a very national event. And I think countries will be careful whether these national events indeed serve the interest of the country rather than, sort of, like, meaningless political proposals that don't really, sort of, like, hold up. Therefore, I'm not optimistic that we're going to see a lot of national price floors. And again, I'm rather optimistic that the European system will play out well and that the prices we'll see there will actually really lead to a European carbon policy, as should be the case.

[Christopher Jost Delbrück, CFO & Member of Management Board]

Okay, I was picking up the second question on the LNG hedge. And let me just start by reiterating, because not everybody might be familiar with it, with the LNG contract. We originally sourced gas out of the U.S. Gulf coast, out of Freeport. And I suppose that was to start up in Q4 2018, was the original concept. And we then basically hedged some of the exposures for the Q4 2018 and pre-hedged, i.e., proxy hedged, additional volumes towards 2019. Now the project has been delayed and is likely to start somewhere in Q3, Q4 in 2019, i.e., those hedges will not be needed to protect the underlying. Thereby, as we unwind those hedges, they will simply pay positively into earnings and cash. The hedges only then being on a basis between Henry Hub and TTF. Again, as we unwind those, they will be positively contributing to the earnings. Magnitude-wise, this can build up over the course of the year to a high double-digit million euro number. Also a reason why, overall, this segment, Global Commodities, will be significant above prior year.

[Udo Giegerich]

May we then come to the close of the question. Is there any particular question outstanding?

[Operator]

There are no further questions.

[Udo Giegerich]

Okay, then dear analysts and investors, thank you for your participation in the Q1 call. And see you in the -- or hear you in the Q2 call now.

[Klaus Schäfer, Chairman of the Management Board & CEO]

And we are doing roadshows in between and therefore looking forward to further investor interaction. Thanks a lot. Bye-bye.

[Christopher Jost Delbrück, CFO & Member of Management Board]

Thank you from my side as well. Bye-bye.

[Operator]

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