UNPRF - Uniper SE (UNPRF) Q1 2023 Earnings Call Transcript
2023-05-06 13:55:19 ET
Uniper SE (UNPRF)
Q1 2023 Results Conference Call
May 04, 2023 02:30 AM ET
Company Participants
Stefan Jost - Executive Vice President of Group Finance and Investor Relations
Jutta Dönges - Chief Financial Officer
Conference Call Participants
Anna Webb - UBS
Luis Amusategui - Cygnus Asset Management
Sam Arie - UBS
Presentation
Operator
Dear ladies and gentlemen, welcome to the Uniper Analyst and Investor Conference Call Q1 2023 Interim Results. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
May I now hand over to Stefan Jost, who will start the meeting today. Please go ahead.
Stefan Jost
Good morning, dear analysts and investors. I would like to welcome you to this morning's conference call on Uniper's results of the first quarter 2023. I'm very pleased to also welcome our new CFO, Jutta Dönges, who is with me here today for the first time since joining Uniper's Board of Management as CFO on the 1st of March.
As most of you know, Jutta joined our Board of Management after leaving Uniper's Supervisory Board, where she has been a member since December last year. Jutta is a well-known leader in the finance community and has a strong and long track record in the capital markets, i.e., as Managing Director of the German Finance Agency in Frankfurt until last year.
Jutta will guide you through today's conference call and give you an overview of our key results of the first quarter 2023, the first quarter after Uniper's successful stabilization end of 2022. As usual, there will also be a Q&A session at the end.
Jutta, over to you, please.
Jutta Dönges
Thank you, Stefan, for your kind introduction. And also a warm welcome to all of you from my side. It's a privilege to be here as new CFO of Uniper and to guide you through our first quarter results for the fiscal year 2023.
Before doing this, let me simply say I am very much looking forward to work with you in the future and hope to be able to meet many of you in person soon.
Let me also share a few first impressions since taking office in March. The first weeks as CFO of Uniper has been intensive, exciting and highly motivating for me, getting to know a new organization, many new colleagues with exceptionally high expertise and motivation. This is especially true after Uniper experienced an extraordinary and stressful year 2022. Thus, it will be my focus to further stabilize Uniper and work together with my fellow colleagues to help leading this strong company into a new successful phase.
As a first step today, I am pleased to present you strong results of the first quarter '23. Before I dive into the numbers, let me give you a short overview of some important developments in the first quarter.
Uniper Supervisory Board has successfully completed the search for a new Board of Management during Q1 '23. Mike Lewis will become Uniper's CEO as of July 1 the latest. Holger Kreetz has taken over as new COO in parallel to my start as CFO on March 1. Niek den Hollander has decided to leave Uniper. His successor, Carsten Poppinga, will join Uniper as of October 1 as the latest. Uniper's new Management Board is fully committed to revive Uniper's strength and lead the Company into a successful future. We are focused on further stabilizing Uniper and working with full speed on the development of a new strategy.
Now let me give a short overview of the highlights of the first quarter '23. In the first quarter, Uniper made more progress in restoring its financial basis than one could have anticipated two months ago. Operationally, this is driven by two main effects: the optimization of our flexible asset base in a volatile market environment; and the sharp decline of the gas price, leading to Uniper in aggregate not incurring further losses in the first quarter '23 from procuring replacement gas volumes.
Adjusted EBIT came out at €749 million, following a weak and loss-making first quarter in the prior year. Also, adjusted net income advanced clearly into the profit zone.
In line with the sharp decline in gas prices since the fourth quarter '22, Uniper's financial obligation of having to replace missing gas volumes has also decreased significantly. In the current market environment, Uniper does not incur additional losses from replacement gas procurement due to reduced gas supplies from Russia. However, if gas prices were to turn significantly upward, the financial burden for Uniper could still weigh heavy on Uniper's financials with potential swings still in the billion euros range.
A potential need for additional capital injections in the next quarter cannot be completely ruled out at this point in time. Authorized capital of €19.5 billion is still available from the German government to compensate for potential losses from procurement of replacement gas volumes.
While the topic of additional state report is losing relevance, Uniper is progressing with its obligations from the EU state aid decision. As already communicated in our yearly results, Uniper has signed an agreement to divest its marine fuel trading business in the United Arab Emirates as well as its 20% indirect participation in the BBL gas pipeline. Uniper continues to fulfill all its disposal obligations stemming from the remedy measures of the EU state aid approval.
On the next slide, you can see the positive effects of falling commodity market prices and the good operating result on Uniper's financial recovery. Uniper Group's equity position materially recovered since its lows in autumn '22 and stands at roughly €11 billion at the end of Q1 '23. This brings us de facto back to the precrisis equity levels but swings against the back of the volatile market environments are still possible.
What were the main drivers here? Number one, the provisions in connection with Russian gas replacement, which are calculated using a scenario-based approach on the reporting date, have mainly been resolved on the back of the lower gas prices and the declining exposure over time; second, the bonds equity injection in Q4 last year; and thirdly, a derivative accounting that in times of falling commodity market prices has given a positive spin to the group's profits as the so-called accounting mismatch between fair value hedges and cost-accounted assets continuously decreased.
The downturn in the commodity market has also provided further relief to Uniper's liquidity situation. The net cash margin position has improved quarter-on-quarter by more than €3 billion and is now standing at shortly under €1 billion. By the same token, Uniper's available financing instruments continue to provide Uniper with headroom to maneuver in the market and to be prepared in case of adverse market effects. Current drawing of €3 billion from the €16.5 billion KfW facilities provide Uniper ample financing headroom.
Now over to the Q1 results in more detail. Let's start with the overview of Uniper's main operating indicators. First quarter '23 results reflect reduced demand for power and gas in our core European markets. The fact that Uniper nevertheless recorded such a solid operating result was primarily driven by effective hedging transactions and our successful trading activities in a downward but still very volatile market price environment.
Starting with our gas business. Contrary to concerns in the wider public, there was no physical gas shortage in Germany and Europe over the last winter which would have required for supply cuts. Gases from our gas storages in the past winter season was remarkably low in part because sufficient alternative sourcing, particularly through LNG, was available on the European gas market. The better-than-expected European gas supply-demand balance is reflected in spot prices that have continued to fall since early January.
On the financial side, this provides us with more flexibility for our operating activities. Compared to last year, we will need to invest less working capital to fill our gas storages for next winter. The capital requirement for margining from hedging activities, i.e., providing financial collaterals until delivery, is significantly lower than last year.
Our European generation business recorded a double-digit percentage decline in power reduction -- power production overall. But nonetheless, an extraordinary strong earnings contribution was therefore not volume-driven but driven by higher prices, spreads and portfolio optimization. More details in my remarks on earnings in a minute.
Our fossil-fired power plant supplies largely followed the trend of falling overall electricity consumption in Europe. The exception here, in the U.K., we were able to mark excellent use of the flexibility of our gas-fired power plant, which produced about 15% more in the first quarter of '23 in an exceptionally volatile market environment.
In Germany, Uniper has kept three coal-fired plant -- coal-fired power plants with a total capacity of 1.6 gigawatts on the market to support security of supply before these plants are scheduled to be taken off the market by April '24 at the latest.
The outright portfolio with hydro and nuclear recorded an overall double-digit decline in output. Lower water inflow volumes at the Swedish hydropower stations and a prolonged unavailability of the Ringhals four nuclear unit contributed to this decline. On the positive side, the German hydro fleet produced 8% more.
Overall, the lower power generation was accompanied by a reduction in our carbon dioxide emissions, which were also in line with the generated electricity 15 percentage lower than in the comparable prior year quarter. While '22 and '23 are influenced by the energy crisis, we continue to recruit on transforming our power generation mix and continue to follow our emission reduction path with great efforts in '24 and beyond.
Let's now move over to the key financials for the first quarter of 2023 financial year. The comparison numbers for the prior year are adjusted for the classification of our Russian power business as discontinued operations. The sound operating results in the first quarter of '23 reflect the improved business environment and allow Uniper to focus on the future. In contrast to the two previous quarters, the extraordinary earnings impact from the replacement procurement of Russian gas no longer had a visible effect on group earnings in the first quarter. Looking at adjusted EBIT and adjusted EBITDA for the first quarter of the '23 financial year, the earnings performance was positive overall and gets to the key results drivers on the next slide.
Operating cash flow in the first quarter of '23 developed in line with the development of operating earnings and stands at €727 million. Adjusted net income in the first quarter '23 improved by around €1.1 billion from a weak prior year figure. In the calculation of adjusted EBIT to adjusted net income, significantly higher economic interest expense was recognized compared to the prior year due to high financing requirements and higher interest rates.
As a side note, the income taxes according to the IFRS consolidated income statement are mainly related to the deferred tax assets -- to deferred tax effects which are not cash effective. Due to Uniper's large trading business with volatile price developments and cutoff-date valuations, the IFRS net profit again shows an enormous swing, this time with plus €10 billion, adding up to a net profit of €6.7 billion in the first quarter of '23. Declining gas and electricity market prices at the cutoff date are now acting as a material positive driver for the mark-to-market valuation of derivatives and, thus, for the group's net income.
Another major contributor to the very positive net income is the main reversal of a noncurrent provision for onerous contracts recognized in the previous year for possible losses in the gas portfolio following the complete discontinuation of gas deliveries from Russia, coupled with continuing obligations to customers revalued at the back of applied current price scenarios.
Nevertheless, given the prevailing significant risk in the commodity markets, it cannot be ruled out that commodity price surged again. However, this risk diminishes with each additional gas molecule delivered to our contract customers. After the economic net debt already showed a significant recovery as a result of the cash equity injection of the German government in December '22, the debt has now decreased further, fueled by a positive operating cash flow.
On the next slide, I will dive into the key drivers of adjusted EBIT. This waterfall graph clearly shows that the European Generation segment portfolio was by far the most important earnings driver for the adjusted group EBIT in the first quarter of '23. In general, it shows again that Uniper has been capable in harvesting additional earnings in a volatile market environment.
As a result of successful hedging and optimization transactions, we were able to lock in high spreads with our fossil power plants. The return of the Heyden hard coal-fired power plant to commercial operation in the third quarter of '22 had an additional positive effect. Also, the impact on earnings of the non-carbon trading effect during the year was significantly lower than in Q1 of the previous year as a result of relatively stable certificate prices and the lower demand for carbon emission allowances.
However, declining electricity prices and falling spreads, combined with a cautious hedging policy, should lead to a return to normal earnings developments in our spread portfolio in the coming quarters.
With respect to our outright power portfolio, above all, in Q1 '23, locked-in hedge prices have increased in Nordic hydro and nuclear businesses. The outlook here is also to the positive. While forward hedging ratios in our Nordic business was only slightly higher overall compared to the previous quarter, hedged prices in particular rose by about €5 per megawatt hour to €40 and €36 per megawatt hour for the years '24 and '25, respectively.
And for our Nordic business, this positive quarterly result was also supported by lower price distortions between the systemic price and the Swedish price zones, the so-called electricity price area differences or EPAD effect. In addition, flexibility was used in our Nordic hydro power plants to lock in attractive margins in the spot market.
The German hydro earnings contribution has also increased. Here, the support came from higher returns in the regulated business which is not reflected in the cost of merchant hedge price. The recorded very low average achieved prices in the first quarter of '23 reflects the costly hedge buyback last year to adjust for lower water availability.
Coming to the Global Commodities segment. Global Commodities delivered improved earnings compared to the previous year but remained a negative territory. The special effect from the gas replacement for Russian gas in the first quarter did not have a significant impact on earnings.
In the subsegment gas, relatively low gas supplies and timing effects resulting from the exceptional price developments of the previous year had a negative impact. Starting with relatively comfortable gas filling levels into the coming season, the gas optimization team has laid the foundation for some catch-up effects in the coming quarters.
The two Global Commodities subsegments, International and Power, made a high contribution to earnings in the first quarter. The increase stemmed mainly from the commodity power business with optimization and power trading, which benefited from the volatile market environment. The international subsegment continued the exceptionally strong performance of the prior year quarter. In particular, the global LNG business benefited from the market environment despite further burdens from the delayed resumption of contractually fixed deliveries from the U.S. LNG liquefaction hub, Freeport. Here, the U.S. operator had received approval from the authorities to restart at the end of February '23.
The earnings block Other in the first quarter mainly reflects the elimination of intersegment profits and valuation effects of carbon emission allowances used for fossil power generation, which are held in stock collectively until handed over to the National Emissions Trading Authority.
I would now like to turn to operating cash flow, coming to the operating cash flow, which came in at €727 million. In the quarter under review, operating profit and operating cash flow were on par with cash conversion of a good 100%. The working capital development is positive and has developed in line with the seasonal development of energy deliveries and withdrawals from our gas inventories. The item Other mainly contains the net impact of the provisions for carbon emission allowances.
Now to the latest figures of Uniper's economic net debt. At year-end '22, economic net debt stood at €3 billion. At the end of the first quarter '23, the net debt balance improved to €2.3 billion, in line with the positive operating cash flow.
Capital expenditure remained at the restrained level of the prior year. At the end of the reporting quarter, Uniper showed net financial position of just €11 million. Provisions for pensions decreased slightly in the first quarter. The overall discount rate increased only minimally compared with the reporting date at the end of December '22. The discount rate for Germany was 3.8%; and for the U.K., 4.9%. Asset retirement obligations, AROs, which had increased significantly in the previous year, mainly to the increase in nuclear provisions, were also stable in Q1 '21.
I would like to conclude my presentation with an update on the given outlook of the key earnings drivers for fiscal year '23. The outlook given in February '23 against the backdrop of incalculable earnings effects now appears rather conservative. For the outlook for the full year '23, we expect a strong earnings recovery compared to the last year resulting in a positive adjusted EBIT and adjusted net income for the group. This outlook will remain subject to market price developments during the remainder of the financial year '23 in an overall continuously volatile and uncertain business environment.
The financial impact caused by the replacement of Russian gas supplies will remain the decisive swing factor for Uniper's group earnings development in '23. We are working to further minimize the risk for the remaining obligations here. This development is, however, not fully in our own hands. For this reason, I will limit myself today to making a few qualitative statements on the outlook for the full year '23.
For the European Generation segment, we expect better results compared to last year following the recorded exceptionally strong first quarter. Drivers here are the high spreads we have locked in for the first half of '23 in particular.
For the outright business, we expect earnings to move up clearly above the weak levels in the recent -- of the recent year. This results from increased hedge prices, which should be less diluted by special charges and more flexibility to generate additional earnings in spot markets. We expect the Global Commodities segment to achieve a better operating result compared to last year.
In gas optimization, we expect catch-up effects for the remaining quarters following the optically weak result in Q1. However, we are unlikely to match the high prior year results due to negative follow-up timing effects in gas optimization.
Based on the excellent first quarter and the resumption of Freeport's LNG cargoes, the LNG business should contribute earnings well above normal. Overall, the good operating result in the core business and restoring the balance sheet is a very good basis for the new Uniper Management Board to be able to focus now on the future development of the Uniper business model.
At the top of my agenda for the upcoming weeks and months are in particular two topics. The remedy measures agreed between the German government and the EU Commission, in particular, the sale of specified assets by the end of '26 at the latest and the number of market opening remedies including to adjust our long-term gas contract portfolio are to be implemented as quickly as possible. The new Board of Management will present a renewed strategy to all stakeholders as quickly as possible in order to relay how Uniper can fulfill its mission long term as a reliable energy supplier in a strongly changing landscape, so please stay tuned for further announcement of Uniper in the next couple of months.
This brings me to the end of our presentation today. I hand back to Stefan.
Stefan Jost
Thank you very much, Jutta. And as always, we can begin the Q&A session now. Operator, I hand it over to you.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question today comes from Anna Webb from UBS.
Anna Webb
I've got two questions for you this morning. The first one, we know you don't give commodity forecasts, but it seems from looking at the forward prices that the worst of the gas crisis is now largely behind us. How does Uniper see things from here? Do you think current prices and forwards are close to a floor with upside risks from here? Or do you think there are scenarios in which gas prices continue to structurally decline through next winter?
And then my second question is on what you're thinking around -- is around the potential asset sales in Sweden. Is that definitely to go ahead or still under consideration? And if it does go ahead, what kind of time line should we be thinking about?
Stefan Jost
Thank you, Anna, for your question. And I think, Jutta, we can probably start with the second one, right?
Jutta Dönges
Yes. Anna, looking forward to meet you in person soon. Thank you for your questions. Let me start with the second one. Not sure what you are referring to. Asset sale in Sweden is not on our agenda. There are a couple of divestitures that have been agreed with the German government and also with the European Commission that we are working on, but there's no asset in Sweden on the list. Does that answer the question?
Anna Webb
Yes, I think so. Yes, I just think Fortum obviously has the right of first offer on some of your assets. So yes, just asking sort of what you're thinking about it from your perspective. But I think it's clear that you said that's not on the list.
Jutta Dönges
Yes. Okay. So -- but then I will continue with the first question, which was with regards to our outlook on commodity prices and whether we think that the worst of the crisis is behind us.
Well, obviously, the prices have come down significantly. We have obviously some sensitivities to demand in China. The weather is also something that has been in favor. We had a pretty mild weather. We also saw a saving that was higher than expected. And I think the European goal was -- or the European ask, let me put it that way, was 15%. And overall, we have seen that sales have been in the region of 20%. So those are the positive effects that brought down commodity prices, gas prices significantly. And that's also the reason why we have the high -- rather high storage level.
Going forward, it's really hard to predict. We are prepared, as I said, that in case of increased prices, which could well happen since markets are and remain volatile, we have the equity shield protection from the government still in place. So if there would be any further potential losses from curtailment, then we have this shield and accounting that from this aside, if there's any risk.
Operator
[Operator Instructions] We're going over to our next question, and our next question comes from Luis Amusategui from Cygnus Asset Management.
Luis Amusategui
I was wondering, you said that you will be giving an update on the disposal of the assets agreed with the European Union and German government later on. How is that process going? How do you envisage that problem because I see a bit of a conflict between some assets that, at the moment, could be quite valuable going forward? If I understand this correctly, at the moment, these assets will be closing down in 2030. So how is that process or negotiation going on with the German government on extending the potential life of those assets together with the process of selling these assets?
Stefan Jost
Luis, just to clarify your question on the link to 2030, can you please repeat what your question was with respect to 2030? We didn't get that.
Luis Amusategui
If I understand this correctly, I mean, you need to sell these assets by the end of 2026. And if I understand this correctly, these assets should be closed down at the moment, I'm not sure if all of them, by -- except one by 2030. But there is a possibility, I understand, that these asset lives may be prolonged, which would have an impact on those. How do you see that process going forward? And where are we at the moment on those potential changes -- I mean, the sale process, of course?
Jutta Dönges
Okay. Understood. Luis, good to get to know you, at least to hear your voice, and looking forward to meeting you in person. I understand that you are referring to Datteln 4, which is one of the assets on the list that has been agreed with the European Commission.
Luis Amusategui
Yes, all of them but, yes, in particular.
Jutta Dönges
Yes, exactly. So there are a couple of assets on the list, actually. For two of them, I think I mentioned that in the speech, we have signed SPAs in place, and we are actually looking forward to have the closing still in the coming weeks. So we are confident on this and that we can announce some progress rather soon. Then we have a couple of other assets we have started to set up the M&A process, obviously. And there are also some assets that we have pushed a little bit out to the time line. As you rightly said, the obligation is to fulfill until the end of '26.
And with regards to Datteln, we typically refrain from commenting on M&A processes, neither ongoing nor planned, until there's anything really to announce in terms of signing. But on Datteln, we will tackle that once it's there. And obviously, yes, as there is this closing down that you mentioned, this will impact the process. But that is something that we have to take care of then.
Operator
[Operator Instructions] Our next question comes from Sam Arie from UBS.
Sam James
As there are too many questions, I thought I'd just jump in with another one. Obviously, this is the first gas storage refilling season that we are entering with the new sort of mandatory limits or mandatory thresholds for the autumn on how full storage needs to be. So I was just wondering if that creates a new dynamic in the market over the summer because I suppose buyers have to buy up to a certain level by a certain time, and we've never had that mandatory threshold before. And I'd be interested in your comments on how you see that sort of dynamic playing out over the summer.
And also, if you can share with us any understanding of kind of what the consequences are if you don't meet the threshold? Are there penalties or you just have to buy at the last minute at whatever the gas price is? I know this is a relatively minor issue for you now, but it's important in the wider market. And I suppose you guys are very well positioned to explain this whole topic to us, I thought I'd ask your view there.
Jutta Dönges
Sam, good to hear you. Thanks for your question. Well, with regards to the mandatory fillings, we saw the dynamics definitely last year. We are in a comparably comfortable situation right now. We have shown the actual filling level, it's above previous years. And we also, in terms of comparing it to the Northwestern filling levels and to the German overall filling levels, Uniper's in a pretty good position. So this is not something that is of a -- not on the top of the list of our worst, I say.
What the dynamics will be, this is really hard to say. Currently, the summer '23 is -- looking forward, '23, '24, the winter season is very positive, so it makes commercial sense to inject as soon as possible. That's what we can see and say from our perspective today.
Sam James
And if for any reason you had an asset that -- I'm sure you wouldn't. But if there was an asset that didn't meet the threshold, is there a penalty here? How does that work exactly?
Stefan Jost
Yes, Sam, I think you know that, that is then going back basically to the net -- to the grid operator. And they basically have to take over the obligation to fill the storage then.
Jutta Dönges
Yes. But maybe just let me reiterate and add to this. We -- as I said, we are confident that this is not an issue from our perspective. And we will follow up with more details from our Investor Relations. Is that okay for you?
Sam James
Yes. Okay. Very helpful.
Operator
There are no further questions in the queue at this point in time. I will hand over the call back to Mr. Stefan Jost.
Stefan Jost
All right. Thank you, operator. Thank you all. Thanks for participating today, and hope to speak soon. We close the call. Thank you.
Jutta Dönges
Thank you. Bye-bye.
Operator
Ladies and gentlemen, thank you for attendance. This call has been concluded. You may disconnect.
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Uniper SE (UNPRF) Q1 2023 Earnings Call Transcript