Uniper SE (UN0) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the press call of Uniper. This conference is being recorded. In addition, there is simultaneous interpretation into English for this conference. [Operator Instructions] Fabienne Twelemann will now start the conference.

Welcome. Thank you, Ms. [ Zanders ] , and welcome from me as well to our press conference on the occasion of Uniper's business performance for the first 6 months of 2022. You will know how this procedure works. We have the opportunity to do this over the past few weeks -- 4 times -- few times. Now after our CEO will -- has presented the main developments over the last few weeks and months, you will have the opportunity to ask your questions. [Operator Instructions]. And now I would like to hand things over to Klaus-Dieter Maubach.

Ladies and gentlemen, Hello, everyone. A warm welcome from me as well to our press call for our results for the first 6 months of 2022. Our last press conference on July 22 was just 4 weeks ago. At that press conference, we presented to you the stabilization package for Uniper that was agreed on with the Federal Government of Germany and Fortum. I, therefore, like to briefly outline what has happened since, where we stand today and how developments since the beginning of the war in Ukraine are reflected in our numbers. Afterwards, I'll be happy to answer your questions. I'll start with the following preliminary remarks. For the time being, we're unable to issue a forecast for our financial performance in the remainder of this year, too much depends on how gas deliveries and energy markets develop. Europe's energy supply situation is far from easing, and the gas supply will remain extremely challenging this winter. This makes our business environment and business expectations are almost impossible to assess. Since mid-June, Gazprom has gradually reduced its gas deliveries to us. Since July 22, we've only been receiving about 20% of the amount that was contractually agreed on and ordered by us. Incidentally, we received these deliveries under contract at the White House transfer point on the German tech border. Gazprom, therefore, has a number of transport routes at its disposal to supply us with the volumes to which we are contractually entitled. Gazprom [ contempts ] to us that this is due to force majeure. Just like the German Federal Government, we do assume that Gazprom, if it wanted to, could considerably increase its gas deliveries through Nord Stream 1. Gazprom is also not currently using any alternative transport routes to deliver more gas. Although to our knowledge, this would be equally possible nor does Gazprom itself provide us with any replacement volumes at the White House delivery point that Gazprom itself could purchase on the spot market. This leaves us with the option of procuring our own replacements in order to supply our customers with agreed volumes at agreed prices. To date, Uniper has fulfilled all its own supply contracts with our customers in full. So far, we have not passed on our procurement problem to our customers, and we have every intention of continuing to do so if the gas industry and political situation allows. It is very difficult to predict, by the way, whether full deliveries will be resumed in the near future. We do not consider it impossible that the situation will remain as it currently is for the time being. As already said, despite these reduced deliveries, Uniper has fully supplied to customers at agreed on prices. However, we've had to replace a significant portion of the amount supplied to our customers with gas procured elsewhere, typically on spot gas markets and at prices that are currently very high. Gas prices have reached record levels on European trading markets, and they're now many times higher than they were 18 months ago. Both the actual tightening of gas imports and political uncertainties continue to put tremendous upward pressure on prices. This cancellation has had a correspondingly adverse impact on our liquidity and earnings. Our gas business with Russia has been making a loss on a daily basis since June 14, 2022. Depending on current gas prices and the amount we need to procure, our daily losses in a broad range and sometimes surpass EUR 100 million. By the end of June, losses of EUR 400 million had already built up. And to date, losses of EUR 3.8 billion have piled up. There is no end in sight of this development. For globally active foreign oil and gas companies, such losses might be variable. In Germany, on the other hand, there is not a single energy company that such a development would not bring to its knees. We should, therefore, keep one thing in mind in these times of war in Ukraine. We, at Uniper, have de facto become a pawn in this conflict. Prices no longer [indiscernible] demand on the energy markets, but an expression of concerns about the reliability of energy supply. They reflect the expectation of a permanent disruption in supply relations. Russia is not a reliable supplier. Rather, Russia is purposefully using shortage of gas supplies to challenge the unity of the West. The rising cost of gas procurement, not [indiscernible] the surcharge just passed, will hit companies and citizens hard in the coming months. At Uniper, this situation has brought us to the brink of insolvency even though the majority of our businesses are profitable. However, the losses from gas replacement procurement are so high that the other business areas cannot even come close to offsetting this. The agreement in principle of July 22 with the German Federal Government and Fortum is therefore a key milestone for stabilizing Uniper, and thus, Germany's gas supply. In view of the further deterioration of the underlying conditions, we've been working in recent weeks on the structure and specifications of this agreement. But the German Federal Government's credit assistance directly benefits our liquidity. The last few weeks have demonstrated that it was urgently necessary. So far, we've had to utilize about EUR 5 billion of the KfW credit line totaling EUR 9 billion. Our high liquidity needs are due primarily to purchases to replace reduced gas deliveries from Russia and to higher market prices. These developments determine our liquidity needs. Secondly, a temporary surcharge on the basis of Section 26 of Germany's Energy Security Law was amended and has been in effect since August 9. Hence, from October onwards, about 90% of the increased costs caused by reduced gas deliveries from Russia will be spread over many shoulders. The surcharges, therefore, important to avoid even greater disruptions on energy markets. Thirdly, there has been progress for Uniper's rating as well. On July 29, the rating agency, Standard & Poor's affirmed Uniper's investment grade rating. Due to the stabilization measures, it classifies Uniper as a government-related entity. Our rating is an important factor, especially for our trading business. Uniper's highly volatile market environment is reflected in the fact that the rating has a negative outlook. Our priority currently is to implement the agreement with the German Federal Government and Fortum. This is the first step in the foundation for everything else. What's in the immediate future? First, the agreement must be reviewed and approved at the European level. Secondly, after that, Uniper will hold an extraordinary general meeting, hopefully, this fall. Third, only after the general meeting's approval can be corporate law elements of the agreement be implemented. But today, we already have access to the expanded KfW credit line. It's clear that Uniper will restructure its gas portfolio, especially its long-term gas contracts with Gazprom. We're already working on it. At the same time, we remain a key player and partner of the European government in securing the energy supply. The following examples illustrate this. Gas storage facility. Uniper's gas storage facility store about 1/4 of Germany's natural gas, making us the country's largest operator of gas storage facilities. Gas supply diversification. Our imports to Germany also include pipeline gas from Norway, the Netherlands and Azerbaijan, as well as LNG, by ship to Germany. We're Germany's largest LNG trader with more than 350 cargoes last year and are interlinked with all commodity markets worldwide. When completed, our LNG terminal in Wilhelmshaven will be able to import nearly 1/10 of Germany's annual LNG needs. Everyone involved is making the work on this terminal a top priority. The objective is for it to enter service this winter. At the same time, we're moving forward with our plans to import hydrogen and ammonia at the same location in Wilhelmshaven and build an electrolysis unit to produce green hydrogen. In addition, our power business has numerous power plants that reliably supply energy. The German Federal Network Agency has classified many of them as system critical. Let's briefly look at our key earnings indicators after the first 6 months of the financial year. They, of course, reflect the situation we've had in the gas markets for several months. Our main performance indicators adjusted EBIT of EUR 564 million and the adjusted net income of minus EUR 359 million, were both significantly below the prior year period. So already apparent for the first half year of 2022, our earnings are being impacted alongside other effects primarily by reduced gas deliveries from Russia. Our operating cash flow and thus economic net debt also reflect the significant adverse impact of reduced gas deliveries from Russia. The IFRS net result amounts to a loss of more than EUR 12 billion. Slightly more than half of it, about EUR 6.5 billion, is related to anticipated future impact from gas curtailments. Additionally, the IFRS net result reflects impairments of totaling EUR 2.7 billion allocated to Nord Stream 2 loan and goodwill of the segment's global commodities and Russian power generation. The remaining part is related to the fair value valuation of hedge derivatives, which will be later on offset by positive gains on the underlying assets. I'd like to take this opportunity to emphasize that our business delivered as an overall solid operating performance. For example, our first half year power output in Europe was at a level similar to the prior year period, despite restrictions on the output of Maasvlakte in the Netherlands to further reduce its carbon emissions and the sale of Schkopau in October last year. As stated, the volatile environment doesn't permit a specific earnings forecast. For the current financial year, we expect significantly negative earnings. In particular, owing to the reduction in gas deliveries from Russia, we expect an earnings improvement in 2023 and aim to leave the loss loan beginning in 2024. But our message is that the stabilization package of late July means that we've taken the first step. This gives us security for the months ahead. We must now succeed in restructuring our portfolio of strong assets and contracts. The Uniper team is working very hard on this and the other issues mentioned. I now welcome your questions, and I will hand things over to the moderator for the Q&A session.

[Operator Instructions] The first question is from Christoph Steitz, Reuters.

I have 2 questions, one concerning LNG. I wanted to ask where are you in terms of your efforts with Canada to come to an agreement with that country? There were efforts with Goldboro for example, which haven't turned out successful. It's -- there could be further developments there, maybe you can comment on that? And the second question is about emergency stage. If the emergency stage is called according to the emergency gas plan, and we have a shortage of gas, could you yourself declare force majeure towards your customers? Because the question is, can you continue to honor your delivery obligations under those circumstances, which won't probably be the case. So maybe you can comment on these 2.

Okay. Let me start again. Your first question, LNG Canada. As you can imagine, we are in talks with many parties all over the world concerning the question how can we get LNG to Germany? There are contacts with Canada, as you rightly said, and I wouldn't want to dive deep into that topic here today. I think we will announce something once we have got agreements in place, and we don't want to speculate at this stage what future partnerships could look like. You can assume that we are not just looking at Canada, but also to other countries of origin to try and obtain LNG for Germany at attractive terms and conditions. Now concerning the emergency stage of the emergency plan, it's a good question you are asking. But it's speculation to a certain extent as well because the Federal Republic of Germany never had to declare this, and we don't know exactly how it will work. But I would assume that we would not declare force majeure towards our customers. I would have assumed that all gas molecules coming into Germany then and all gas molecules in the German storage facilities would be handled by the so-called federal load distributor. And the distributor would distribute the gas to the customers deemed to be priority customers. So we would then no longer have an obligation to our customers to fulfill our contracts. That will be taken over by the federal load distributor or federal load dispatcher. And the dispatcher, the distributor would then distribute the amounts to the customers as deemed correct. So as I said, I don't think we would be in a situation where we would have to declare force majeure in such a situation. I hope that makes it clear.

The next question is from [indiscernible].

Yes. I've got 3 questions. First of all, I would like to know whether the EUR 9 billion you're getting from KfW is enough because it will take some time until the surcharge will kick in? And then what amount have you notified to THE? And will you -- will the time be enough until you get the money? And then a question concerning Fortum. Is Fortum doing enough to save the company? And what's happening to the integration plans and the profit and loss transfer agreement? I mean the workforce are waiting for signals from Finland as to what the future will bring there, and they [indiscernible] really.

Okay. Will the EUR 9 million be enough? We have decided very consciously to inform publicly about where we stand today. I mean in hindsight, we can calculate very well what we've already clocked up in terms of losses because we know what quantities were not delivered to us, and we know the prices which we had to pay for the replacement volumes. That's the EUR 3.8 billion of -- from the 13th of June until today. So that is a date where we have hard figures on. And if we take the number of days and the level of losses, that amounts to an average loss of just over EUR 60 million per day. Now looking into the future, it's much more difficult to say. Why is that so? Because there are 2 factors, which we have experienced over the past 8 weeks, which fluctuate widely. One is the missing volumes. So what kind of curtailment are we seeing? And what amounts are we not receiving that's fluctuating. And the prices at which we have to obtain replacement volumes, that fluctuates as well. So the replacement costs vary in a very wide range. So I would find it difficult here today to give any forecast. But if we were to assume that the average replacement cost, we had over the last 60-plus days, if they would continue until the end of September till the surcharge kicks in, then for the whole period, from the 15th of June until the 30th of September, we would have clocked around EUR 600 million of losses. So that's -- so if we were -- if we assume that average continues until the end of September. I don't know whether that helps you or whether this gives you a sufficient data points. I mean it can vary with volumes and prices, so I don't want to speculate any further there for that reason. Okay, that's good enough for the first question. Your second question, yes, we have filed an application with THE. And I don't want to tell you what that application actually says, but you can assume that -- I mean you will have heard that EUR 34 billion has been applied with THE in total. And the bulk of that, more than 50%, is probably down to us. So much I can say. Then you asked about Fortum. First of all, the question, if I understood it correctly, is Fortum doing enough? Let me point out again that generally speaking, as far as our shareholders are concerned, our shareholders have seen value loss of more than 80%. If you look at the share price of Uniper at the beginning of the year, of more than EUR 40, which now -- that's down to EUR 7, that's a dramatic decline our shareholders had to accept. Our shareholders did not receive a dividend. The dividend we did pay was only a fraction of what we had paid earlier, although we had delivered very good performance. And our shareholders will -- this EUR 6.5 billion until the end of September will have to be borne fully by the shareholders. And even after that, they will have to bear part of the ongoing losses. The surcharge will only cover 90% of the losses. So our shareholders, I think, are making a substantial contribution already now in this critical phase of this company. And hence Fortum is doing a lot in this phase of the development. And I haven't even mentioned that Fortum has given us a credit line of EUR 4 billion and guarantees worth EUR 4 billion as well, which are very helpful. So they're making a great contribution to stabilizing Uniper. And coming to your last question, integration efforts. I believe I can say that when the energy price started -- the energy price crisis started and at the turn of the year, or in any case at the beginning of the year, it became clear to all of us here that a full takeover of Uniper by Fortum as was to be expected last year wasn't going to happen. And over the last weeks and months, this has become clearer. And a full takeover and integration into one group of companies, given what's been happening recently and given the participation obtained by the German government, most probably in the fourth quarter after the EGM, that will not happen in the foreseeable future, at least. I think that's clear. And I would assume that this question will be answered by Fortum over the coming weeks as well. At least I do not assume that we will be an integrated part of the Fortum Group anytime soon. Now what that means in detail for Fortum as still the main shareholder and what they will do and how they will exert influence on the things we are doing business-wise, that's a fair question. That's a question we have to answer. And -- but this is a question which will, first and foremost, have to be answered in Helsinki. I would assume that next week when we see the performance figures for the first half of 2022 of Fortum, we will hear what their plans are concerning this matter. I hope that answers your question.

The next question is from [indiscernible].

I've got 2 questions. One is about the future of your whole portfolio across the group. So what are you seeing in terms of nuclear in Northern Europe? And your business in Russia, what kind of changes could there be over the next few weeks and months? And my second question is quite aside from the stabilization package and the crisis, the low water levels at the Rhine, to what extent is that making coal deliveries more difficult to your hard coal-fired power plants? And what does it mean for the renaissance which coal is supposed to be seeing in Germany?

Let me start with the last question. I wouldn't talk about renaissance for coal. Don't get me wrong, but the coal-fired power stations, which we had to bring back online, they will not be shut down as originally planned. And this is all a response to this huge crisis we are seeing at the moment. And it's down to the fact that we have to do all we can to compensate the gas loss also on the power side. So I wouldn't call it a renaissance of coal. I believe it's a temporary issue, short-term temporary issue. We have to resolve now with a few coal-fired power plants, which were on standby anyway. What is correct, though, is that the low water levels are cause for concern, particularly at our power plants along the Rhine and the tributaries of Rhine. So Staudinger is a plant. And then supply to [indiscernible], that's happening by the Rhine as well or most of it. There are consequences for us already today, and we do hope that this situation will be resolved soon. So that we can get enough coal to the power plant sites in the coming winter when things will become even more relevant to get these plants up and running and to support the objective of replacing gas-fired generation in Germany. Now as far as our portfolio is concerned, our nuclear assets in Sweden are an important part of our portfolio, carbon-free power generation. That's something the people in Sweden actually want to continue, same as hydro there. That's a very important part and also lucrative activity -- business activity. So [indiscernible] reasons for thinking about any changes though. As far as our activities in Russia are concerned, it's already known that we already started last year, and we already announced that back in autumn last year that we intended to dispose of our Unipro shareholding, and I confirm that's still the case. But you can imagine that in the current situation, it is not easy to carry out such a transaction. So we will have to wait and see what's actually possible, and how we can bring this topic which we decided on way back forward.

The next question is by [indiscernible].

Mr. Maubach, a question on force majeure that you've mentioned. Have any legal steps been planned against Gazprom? Or is that a naive assumption in such a situation? And secondly, the payments to Gazprom, are you continuing to pay 100% to Gazprom despite the fact that you're only receiving 20% of the supply?

On your second question, no, we are only paying for the volumes we receive, and we only invoice the volumes that we received. That would be yet another thing to pay 100%. No, no, that's not happening. But the replacement procurement that is so expensive, and this is why we've run into this problem. But thank you for the clarification. There might have been a misunderstanding in my statement. On your first question, force majeure. Well, the situation is like this. Of course, we are considering and assessing legal steps -- all the legal steps that are possible. Usually, what you do is you look at the question, is there a breach of contract and to what extent is Gazprom violating the contract, there are different paths that you could pursue. You could have -- you could sue before a court. You could go to an arbitration court. There are different options. So from our point of view, and I've said this in my speech just now, we will follow the lead of -- leading politicians in Germany, what they express mainly that we're not looking at technical problems that prevent Gazprom from supplying us, but that rather the gas curtailment is being used as a political tool. Of course, we will use all of the means we have at our disposal to counter this. Gazprom with its actions brought our company to the brink of insolvency. And of course, we will now pursue all the paths which are possible and try everything in our might to hold them to their actions and pursue them with whatever is necessary.

The next question is by [indiscernible].

I have 2 questions. One question for clarification. You said Mr. Maubach in your interim report, the net loss would be more than EUR 12 billion. And out of those, EUR 6.5 billion are connected to expected gas supply disruptions. If I understand it correctly, the risk is -- that risk was hedged with a view to the future. But then I don't understand how more than half of the EUR 34 billion of additional costs can be created. Maybe I'm hung up theoretically, maybe you can explain that. And the cornerstone agreement, there is a provision that comes in after a loss of EUR 7 billion. So EUR 7 billion of a loss is that loss -- the net loss from the replacement procurements minus the operative earnings in other businesses? Then -- and if -- until the end of September, we are at EUR 6.5 billion already and is 10% of that you'll have to shoulder yourself, it won't be enough, correct?

Well, thank you for your questions. I'll try to explain, but if you have a follow-up question, feel free to ask it. Let me start with a backstop we agreed on with the Federal government and Fortum to the amount of EUR 7 billion. This is what we've agreed upon. Once we've -- well, first and foremost, what is meant by that? This is -- this covers the losses due to replacement procurements that I've just mentioned. So if you remember, I said we expect -- we can expect that the daily average losses for the 60 days past that they will continue to be that high until the end of September. Until the surcharge kicks in, then EUR 6.5 billion would be reached and then we'd be slightly below the backstop figure. However, it could also take a different turn. It could happen that the backstop amount is reached prior to that date or later. Maybe the backstop will be reached once we've already entered the surcharge period or before. Then the agreement sets out that once this backstop is reached, everything that goes beyond that there will be a shape and form that has been agreed on between the parties that this will not be -- this will not have a distributing effect on the shareholders. So in that case, there will not be any further dilution, a diluting effect. That is something we're talking about now, and there are a number of important framework conditions for that. Because as I said before, when you look at this surcharge situation and the question as to how gas customers can help us shoulder the burden, it's not only a matter of negotiating between Fortum and the Federal Government in Uniper, it's also something where the EU Commission takes a closer look and looks at subsidies from their part, et cetera. So we also have to consider their perspective and what is acceptable. Hence, the agreement will remain in play. It will not be -- it will not have a diluting effect if we go beyond the EUR 7 billion. The exact shape and form of that situation, that is still under discussion. The talks are ongoing. However, let me say this, due to the dynamic, the backstop, if it is reached earlier than we expected -- at the end of June, when we started the negotiations, we expected the backstop to not be reached at all. Or if at all, after these surcharge had kicked in, but now it's clear that it will be reached earlier. And the first question, I got it now. My apologies. Please repeat your first question.

Yes. The first question was about the surcharge, and you applied for EUR 34 billion. And you said at the same time, the net loss of EUR 6.5 billion, you mentioned, which go back to the hedging of the price risk. I don't see the -- it's the additional cost of replacement procurement, right?

Well, several factors come in here. In fact, you see part of this issue has already been processed, part has already been recorded by assessment, by assessing different scenarios. The EUR 6.5 billion, these are the different EUR 6.5 billion than the ones I'm looking at until the end of September, this is a different figure. When you look at the documents from today's [indiscernible] this morning, the bridge between the adjusted net income to the net income, there's another EUR 6.5 billion position. That's the IFRS valuation, and there are a number of individual factors come in for that figure. It's a different EUR 6.5 billion. We have to differentiate the 2. And the third figure you've mentioned is yet again a different figure. Namely, the question as to what we apply for as a compensation at the end of the day, that is something that you'll have to see over the period -- of the whole period of the surcharge, so 2022, 2023 until the beginning of 2024. Hence, it is a rather complex scenario and situation. And I fully understand that this is not so easy to consolidate, and it's not so easy to keep this clear because we're talking about different time frames and different issues, in fact.

Then I can only ask whether the EUR 6.5 billion, which are now included in the net loss of the group whether that covers the topic of covering replacement costs for this year fully.

I cannot answer that because I don't know what will come at the end of the day. In our calculations, we have assumed certain scenarios. We haven't published those scenarios, because I would not only disclose losses, but I would also disclose our procurement costs, and that's something I don't want to do. I don't want to tell the market at what prices Uniper is buying -- what the prices for our Russian -- for the Russian gas would have been. So I ask for your understanding that I don't want to delve into that any deeper.