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Edited Transcript of UN01.DE earnings conference call or presentation 10-Mar-20 7:30am GMT

DUESSELDORF Mar 10, 2020 (Thomson StreetEvents) — Edited Transcript of Uniper SE earnings conference call or presentation Tuesday, March 10, 2020 at 7:30:00am GMT

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

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

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

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

Thank you. Dear analysts and investors, a warm welcome to our call this morning. Our CEO, Andreas Schierenbeck; and our CFO, Sascha Bibert, are here with me to guide you through today’s event. As announced, they will not only present the full year results today, but will also provide an update on Uniper’s strategy and financials going forward.

Looking at the agenda, we have divided today’s presentation into 3 sections. First, Andreas and Sascha will start with a quick roundup of Uniper’s full year results 2019, including recent highlights, and give an outlook for fiscal year 2020. Second, Andreas will brief you on the key essentials of Uniper’s strategic plans for the future as well Sascha will take over to explain the implications of the new strategy for our financial midterm plan. Finally, Andreas will end the presentation with the key takeaways followed by a Q&A session.

Let me now hand over to Andreas, please.

Yes. Thanks for the introduction, Udo. A warm welcome also from my side. Let me kick off the presentation today with a brief overview on the key development in fiscal 2019 and earlier this year.

Starting with the team. I’m very happy that Uniper’s new Board of Management is now complete. Mr. Hollander will succeed Keith Martin as new Chief Commercial Officer at Uniper with effect from June 1, 2020. And coming from our industry, Niek has management experience and financial and commercial trading and various awards over the past 2 decades. The same high level of experience applies to David Bryson who succeeded Eckhardt Rümmler as new Chief Operating Officer of Uniper in November 2019.

We are fully committed and enthusiastic to add a new chapter to Uniper’s successful evolution. And this is not only true for the Board, but also for our employees who are essential for Uniper’s future success story. Historical low turnover rates were below industry average and the recent award as leading employer in Germany are strong proof points that we are on a good track.

Second, performance. Driven by the expected strong returns in the fourth quarter, we reached all our financial targets, and Sascha will come to that. Keep in mind that we have raised the bar with our 9-months reporting. Uniper’s adjusted EBIT for fiscal year 2019 ended up at EUR 863 million, on par with previous year results and slightly exceeding the midpoint of our guided EBIT range. Adjusted net income will be a new financial KPI going forward. For reference, this figure amounts to EUR 614 million for fiscal year 2019. Overall, we are satisfied with our operating performance. Sascha will go into details in a minute.

Talking about performance, I would like to highlight the progress on our major legacy projects. Let’s start with Berezovskaya 3 in Russia. There has been significant development on site, as documented by the successful computer hydraulic test of the boiler as well as the rapid flushing of the pipe system. Nevertheless, the processes overall is slower than anticipated. Given the complexity of the project, insufficient headcount on site and our strict focus on quality and safety, the CoD will be postponed towards Q3 2020.

On Datteln 4, the picture is a different one. The project is progressing very well. The first on colligation to the grid took place already in December last year. Until then, we are successfully running load test. Thus, we expect the CoD to be already in early summer 2020 and, therefore, ahead of schedule. Yesterday, Datteln 4 has reached for the first time full load.

Going over to portfolio and strategy. Portfolio optimization continued also during fiscal year 2019. In 2019, Uniper closed the sale of its French business and sold the minority stakes of both the Italian LNG regasification company, OLT, and as well as the Brazilian energy company, ENEVA.

Looking at the first month of 2020, the new year might even have more momentum when it comes to shaping Uniper’s portfolios. We have a fast-track exit for our German hard-coal plants. Moreover, once the signed sale of our Schkopau power station will have been closed, Uniper will no longer have any lignite exposure in Europe.

Our plan for an accelerated phaseout of coal will be accompanied by new investments that are fueling the energy transition towards decarbonization. We will provide industry-leading energy solutions and security of supply. For example, the construction of the CHP gas-fired power plant in Scholven and the Ruhr area just have begun. In the U.K., we were very successful in national grid (inaudible) with stability service tender following last year’s breakout in greater London.

Last but not least, the shareholder side, starting with Fortum, our largest shareholder. We took note of Fortum’s announcement made on the 2nd of March. We are in continuous dialogue with Fortum at the Executive Board level. Intensified mutual focus has been on the credit rating. We have a joint interest and are working hard on maintaining the existing credit rating of both companies at the current BBB level.

Be it rating, coal exit or other touch points, Fortum has supported Uniper’s strategy and financial policy. As Fortum publicly stated not to go for a domination and for a profit and loss transfer agreement or squeezeout, in the next 2 years, Uniper management will continue to run the company independently for the benefit of all stake and shareholders. This includes our aim to pay out an attractive dividend. In this regard, we are happy to once again outperform our plan. The Management and Supervisory Board of Uniper will jointly propose the distribution of EUR 421 million at the upcoming Annual General Meeting in May.

Before I take you through the strategy update section, Sascha will provide a condensed overview of the key financial figures for fiscal 2019 and give an outlook for the current business year. Sascha.

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [4]

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Thank you, Andreas, and good morning from my side. In 2019, full year adjusted EBIT and EBITDA are broadly on previous year’s levels, driven by a strong fourth quarter, as indicated during the 9-months call.

In Q4 ’19, the strong gas midstream optimization result, the intra-year comp phasing effect and the reinstated contribution from the U.K. capacity market were the driving forces for the unusually high quarterly result. The adjusted FFO is also well within our guided range and significantly above previous year’s levels. Consequently, the dividend proposal based on the adjusted FFO minus maintenance CapEx is also above prior year as well as above the guided 25% CAGR from 2016 to 2020. The proposed amount of EUR 421 million equates to a 75% payout rate.

As mentioned by Andreas, we have introduced adjusted net income as a new financial steering KPI. We have taken on feedback that capital markets want meaningful and comparable numbers for tracking bottom line performance and then compare it within the peer group. We will keep our high focus on cash, but then the steering and reporting reverts to the well-known OCF, ICF and free cash flow rather than FFO. We will also continue to use adjusted EBIT to report operating profitability, however, recognize that the interest result and taxes need to be taken into account when talking about shareholder value.

Furthermore, the adjusted net income also has a strategic angle for us. A relevant portion of the earnings from our growth areas will be reported as interest income, and therefore, we need the adjusted income alongside the adjusted EBIT to have full transparency on value creation. The adjusted net income is calculated by taking into account economic interest taxes on top of adjusted EBIT. Therefore, you should generally see the same kind of non-op adjustments on both KPIs. Then adjusted net income was down by EUR 73 million to EUR 614 million in 2019, mainly due to a higher tax rate, while interest expenses has been on previous year’s level, as you can also see in the appendix.

Even though the difference between adjusted net income and unadjusted or reported IFRS net income in 2019 seems to be small, there are 2 large effects at play that almost net out entirely. In the reported net income, the IFRS net income, EUR 874 million of asset impairments were offset by positive derivative valuation effects. The impairments are mostly related to our fossil plants in the Netherlands and U.K. and reflects the development in the regulatory and market environment. As derivative accounting and impairments are considered nonoperational, both effects do not impact the adjusted net income.

Moving on to economic net debt, at the end of 2019, it amounted to below EUR 2.7 billion, slightly higher than at the beginning of the year. This is a strong result considering that we started the last quarter of ’19 with economic net debt of EUR 3.6 billion and then recorded a fourth quarter operating cash flow of EUR 1.2 billion. Our net debt-to-EBITDA multiple ended up at 1.7x, even below our target range of 1.8 to 2.0.

From a credit perspective, our metrics for BBB flat are rock solid. Nevertheless, following Fortum’s announcement to increase its share in Uniper to above 70%, S&P has put us on credit watch with negative outlook. As pointed out by Andreas, we are in a continuous discussion with the rating agencies to ensure that Uniper’s financial stability is appropriately reflected both from a stand-alone perspective as well as from a potential consolidated view.

Now over to the key drivers behind Uniper’s earnings development. Looking at the waterfall, most effects should be well known to you. The first effects are provisioning and, therefore, noncash items. H1 ’18 one-offs, this effect includes mainly bookings from the sale of the Ironbridge property as well as the net provision released in 2018 on a hydro asset due to [in-faulted] dismantling plan. These effects add up to more than EUR 100 million.

The second item is the only new effect in the waterfall and reflects primarily an increase in nuclear waste provisions, which are reviewed in regular intervals. Due to an increase in costs regarding the final storage of nuclear waste, provision increased in Q4 by about EUR 50 million. I think it is a good signal that in spite of this unexpected item, we still come out above the midpoint of the increased guidance range.

Due to the reinstatement of the U.K. capacity market scheme, we recognized a receivable in the amount of EUR 150 million. The corresponding cash was received in the first quarter of 2020. As we have also recognized some capacity income for the first 9 months in ’18, i.e. before the suspension, the year-on-year P&L effect is about EUR 120 million.

Higher outright volumes as well as the upward trend in the electricity prices has been increasingly reflected in our hedge prices amounting to above EUR 100 million. As negative effects, we saw unavailabilities at our plants Ringhals 2 and Maasvlakte 3. Those effects add up to between EUR 20 million and EUR 30 million.

The commodity business recorded higher optimization margins year-on-year. Gas midstream, with a strong year-end rally, repeated the strong performance of the previous year. The surplus comes mostly from the power trading. The Freeport LNG proxy hedge, well flagged with a delta of more than EUR 100 million, has substantially turned from a positive contribution in ’18 to a negative figure in ’19.

Finally, on Russia, the positive trend of the first half slightly weakened. Production volumes dropped in the second half to a more normalized level and prices went down, caused by a higher generation access in Siberia on the back of better hydro availability. However, overall, we’ll still see a positive development in Russia year-on-year, mainly driven by a higher [stay-ahead] market prices.

So to sum it up, the earnings decline that we recorded in the first 9 months versus previous year disappeared as expected. The underlying business was actually quite strong considering that we increased nuclear provisions by around EUR 50 million and did not benefit from prior year one-offs of more than EUR 100 million.

Now over to operating cash flow. The operating cash flow is now back to more normalized levels. The conversion rate of OCF over EBITDA amounts to 60%. Adjusting for the not yet cash effective U.K. capacity market, we would see a conversion rate around 75%.

Now to the reconciliation step-by-step, starting from EBITDA. Noncash effective items of roughly EUR 600 million are adjusted. This figure predominantly includes the buildup of provisions for emission allowances during 2019, pensions as well as the aforementioned increase in nuclear provisions. Therefore, the cash effective EBITDA amounts to EUR 2.2 billion, an increase of 15% compared to the prior year.

The provision utilization amounted to about EUR 950 million for full year ’19, almost half of which relates to carbon allowances, settlement with authorities for emissions caused by Uniper during 2018. The remaining half can be more or less evenly split across provisions for asset retirement and decommissioning, pension and personnel, onerous contracts in gas midstream and LNG.

Changes in working capital are mainly driven by our gas business, including inventory, as well as the receivable relates to the U.K. capacity market. Cash interest payments remained low, given our net debt composition, which is essentially free of borrowed money. The cash payments we see are mostly resulting from our lease contracts. After deducting the tax payments, we end up with an operating cash flow of EUR 932 million.

Looking back on the development of the OCF over the first 9 months and taking into consideration the extremely warm temperatures both in the beginning and in the end of 2019, the overall full year OCF result is a solid one, even though it is about EUR 300 million below prior year.

Now over to economic net debt on the next slide. As highlighted in previous calls, we have adjusted the definition of our economic net debt at the beginning of ’19 to ensure a symmetrical treatment of margining payments, which is also in line with the view applied by the rating agencies. Based on this new definition, the economic net debt reached EUR 2.7 billion at year-end ’19.

Looking at the individual effects in the waterfall, we see a positive cash contribution from OCF and disposals, which add up to EUR 1.2 billion. Investments, the dividend distribution in May and fulfilling financial obligations to Nord Stream 2 included in Others had an offsetting impact in the same magnitude. The main reason for the slight increase in debt year-on-year stems from higher pension provisions as a result of declining interest rates. For reference, the relevant interest rate for Germany declined from 2.3% year-on-year to 1.5%.

Now to our outlook for 2020 on the following 2 slides. We expect the adjusted EBIT to end up in the range between EUR 750 million to EUR 1 billion. Please note that we have narrowed our range compared to prior announcements to reflect the higher share of non-wholesale earnings as well as high-power hedge levels. I will dive into the main drivers on the next slide.

When it comes to the distribution of adjusted EBIT across the individual quarter, we expect a very strong Q1 2020 on the back of our gas midstream business, where the optimization gain shows strong tilt towards the first quarter in terms of financial settlement. Compared against 2019, the first quarter will also look better due to the reinstatement of the U.K. capacity market, which was fully geared towards Q4 in ’19 and is now linearly distributed in 2020.

For the adjusted net income, we plan a result in the range of EUR 550 million to EUR 800 million. Looking at the midpoint of both ranges, the adjusted net income applies a more positive picture compared to adjusted EBIT. This is driven by both a higher expected financial result as well as a lower tax rate. Going forward, we expect the economic tax rate to range from 20% to 25%. As of today, my best judgment is that in 2020, the rate will rather be at the lower end of that range. Finally, we increased our ambition regarding the dividend for fiscal year 2020 to EUR 500 million, which is once again above the communicated 25% CAGR growth path from 2016 to 2020.

Before I hand over to Andreas, let’s have a look at the major operating earnings drivers for the year 2020 on the next slide. This last waterfall for today highlights the main expected year-on-year effects from adjusted EBIT ’19 to 2020. As discussed before, we had a very positive contribution on the commodity side. Assuming a swing back to normal in 2020, this results in a negative effect in the higher double-digit ballpark.

On our existing fossil fleet, we expect a decline in earnings in the same magnitude. Main drivers are the U.K. — the market environment, especially regarding the spread development in U.K., but also due to a less favorable situation in Russia. Moreover, we will see the expiration of some long-term power contracts. A better availability of our Dutch Maasvlakte 3 power plant is a somewhat compensating element in this category. Looking on the positive drivers, we will see our 2 large asset projects, Datteln 4 and Berezovskaya 3, coming online and contributing a higher double-digit amount based on the updated schedules that Andreas mentioned.

The same magnitude is expected from our outright portfolio. The strong increase in achieved prices, in combination with slightly higher hydro volumes, has a positive impact well above EUR 100 million. However, at the same time, we will see lower volumes on the nuclear side due to the closures of Ringhals 1 and 2 as well as some extended maintenance, which brings the overall outright effect down to a higher double-digit number based on today’s forward prices.

As usual, the last category, Other, comprises a couple of different items on balance with the positive effects. Main effects stem from the lapse of the one-off nuclear provision buildup in Q4 ’19. So far on the year 2019 results and the outlook for 2020. And now we will share with you how Uniper wants to develop in the longer term, for which I now hand back to Andreas.

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Andreas Schierenbeck, Uniper SE – CEO & Member of Management Board [5]

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Thanks, Sascha. The transformation of energy industry is accelerating. And given the news on Uniper over the last week, I think we clearly demonstrated that Uniper is serious about actively shaping the future of energy world. I will present our new vision which will guide us on our way going forward. But first, let’s briefly have a look where Uniper stands today and how we got there.

Uniper’s development can be characterized as an evolutionary process and certainly a successful one. Since the spin-off in 2016, Uniper has laid the foundation to take greater advantage of future growth opportunities. In the first phase, 2015 to 2017, called tightening the ship, the company has taken significant measures to establish a solid financial base. Already back then, those measures gave Uniper confidence to announce an attractive dividend plan for the year 2016 to 2020, as evidenced of the expected financial improvements over the upcoming years.

And the ship was tightened up, and Uniper sailed the obtainment of trust that was coming from delivering on the promises made and on time to set to sail. So it’s a focus on pushing the large legacy projects forward. And on the further development of the gas business, the company moved ahead, in particular the projects that contribute to security of supply for specific industrial energy solutions.

Looking back on the development of Uniper since day 1, the shareholder value created is an obvious measure of success. However, there seems to be less clarity about Uniper’s remarkable achievements in other areas. Thus, let me emphasize that ESG, environmental, social and governance, has always been high on our agenda. The entire Board of Management takes responsibility for ESG with a dedicated role and functions to the COO, who also acts as Chief Sustainability Officer. Since day 1 of Uniper, we have implemented sustainability measures throughout the group.

Looking at KPIs like work and safety, employee inclusion, diversity, fluctuation and sickness rates, there have been significant improvement over the years. And yes, we are also aware of our carbon footprint and the responsibilities that comes from that. Some may be surprised to see that Uniper has actually decreased the carbon footprint of its European and Russian generation by more than 36% from roughly 74 million tons in 2016 to 47 million tons in 2019.

We will keep this in mind when we talk about the challenges of the energy transition for the world, for Europe and for Uniper. We’ll turn it by immense also for our company. We are not afraid that the contrary sees a huge opportunity. Uniper is a perfect place for people that want to do something to make the energy transition become a success.

Before we talk about the concrete things that we want to do, we need to have a common understanding about the destination of Uniper’s journey, which brings me to our long-term vision on the next slide. Our vision is simple, a commercially attractive portfolio driving towards carbon neutrality, an exciting workplace and excellent partnerships with customers and other partners. This is what Uniper’s new management stands for. The question is how to achieve this. And very much like Uniper’s story, energy transition itself is an evolutionary process, too. We know the future demands — depends on cleaner, more sustainable energy, and reliable energy supply cannot be transformed overnight.

Uniper is determined to create lasting change. In order to translate our new vision into a concrete strategy, we need to have clear ambitions in terms of decarbonization, bringing us to the next slide. There’s a consensus amongst large part of the European society that sustainability and the reduction of carbon emissions should be placed at the top of the agenda for the future. Just last week, the European Commission has proposed the European climate law, the so-called Green Deal, which will lead to a legally binding target for carbon neutrality by 2050 and set out the path to get there.

With this tailwind, politicians in many European countries are putting measures and laws and [freights], such as the bid to phase out coal in Germany or the reinforced EU Emissions Trading. However, there are other countries and jurisdictions outside Europe where the aim for decarbonization plays a somewhat different role, something that we need to accept and reflect in our ambitions.

Given our role as a generator and commodity midstream company, our stride for decarbonization cannot end at our own doorstep. You could include our customers’ footprints, especially on the commodity side, but there’s a difference in terms of controllability and influence between our own portfolio and the technology used by our customers. Therefore, looking at our 3 segments, European Generation, International Power and Global Commodities, decarbonization will happen at different times and at different speeds.

Starting with European Generation. By 2035, we aim to be net zero on carbon emissions from our European power portfolio. As you have seen over the last weeks, we have just taken significant measures to drive reduction from today’s 22 megatons to net zero in 2035. Obviously, there are further significant challenges ahead, not only around Datteln 4, but also around the decarbonization of our gas fleet, which I will talk about later on.

Overall, please keep in mind that net zero or carbon neutral includes the possibility to further emit carbon as long as it’s offset. Therefore, technology to capture carbon in order to store or to utilize it are viable options for reaching our goal. And while those instruments are far from being commercially attractive as of today, this might change in the future. From a pure technology view, Uniper has already a significant track record in the area of carbon capture and storage, be it in the CCS readiness of our plants or first CCS test on our plant site.

In Russia, the regulatory situation and the social context are fundamentally different from Western Europe. In contrast to the European approach, Russian energy policy gives no scope for incentives to take the front. However, we are fully committed to reduce environmental impact in the segment as well and see opportunities to do so. Specifically, we will invest in the modernization of 3 gas blocks with 800 megawatt each and by being — by doing so will improve full efficiency. Furthermore, we are planning to deploy the know-how and experience of decarbonization of our European plants onto the Russian stations in the future.

Finally, in our Commodities segment, we’ll be working towards a lower emission mix for our customers. These emissions are mostly related to the sale of natural gas. In order to achieve this, we were involving our suppliers in those efforts. As we have documented in the past, with initiatives like better coals, there’s a lot that can be achieved via cooperations and partnerships.

The easiest way to link our ambition of decarbonization with our strategy, let’s look at today’s portfolio from a perspective of carbon density to understand the challenges and the impacts for our business. There are 3 categories: coal-fired power generation; gas-based power generation, including gas midstream business; and carbon-free power generation.

Let’s start with the coal-based generation part, which contributed somewhat below 20% to the group’s earnings in 2019 and where we want to decrease our carbon exposure to limit our political, environmental and regulatory use. Our main agenda points are to execute our communicated exit plans in a way that is sufficient but also socially responsible, especially towards our employees. This involves developing new ideas and projects for the existing plants. In case of plants that we continue to operate over the next years, for instance, [Maasvlakte 3] and Berezovskaya, we will work on a way to improve the net carbon footprint.

The gas-based business is an area where we earn nearly 60% of our earnings today and where we intend to grow further. Helping our customers to move towards gas in the midterm is a key element of empowering the energy evolution. But at the same time, we need to be working on the decarbonization of this area in order to achieve our goals. Our existing infrastructure, competencies and partnerships are the perfect bases.

Last but not least, we have a business area that is already carbon-free, and this contributes about 25% of our earnings today. The message here is clear, we need to increase this part. We would like to mine the main spearhead of strategic building blocks in more details on the following slide.

Uniper is taking a clear and ambitious exit plan for its own hard-coal and lignite-fired power generation in Europe. Including our new Datteln 4 coal-fired power plant, Uniper currently has about 5,000 megawatts of capacity in Germany. By the end of 2025, our German coal-fired generation capacity is expected to be 78% lower. We plan to decommission 3 hard coal-fired power plant units at Gelsenkirchen-Scholven and Wilhelmshaven power stations with a total capacity of about 1,500 megawatts by the end of 2022. We’ll also decommission another 1,400 megawatts at Staudinger and Heyden sites by the end of 2025 at the latest.

In addition, we have concluded the sale of our only lignite-fired power plant in Schkopau in Eastern Germany to EPH, which is the sole lignite supplier to the power plants with [Uniper] shareholding effective October 2021. On 2026 in Germany, we will only operate Datteln 4, one of Europe’s most modern coal-fired gens, providing power to the (inaudible) region and powering (inaudible). End of operations may be 2038. In the U.K., the last of our 4 coal-fired units at Ratcliffe and East Midlands is planned to be shut down in autumn 2025 or even in 2024, as recently announced by U.K.’s Prime Minister. In the Netherlands, the government has set the shutdown date for Maasvlakte 3 at the end of 2029 without compensation.

In Russia, we operate our only coal-fired power plant site outside Europe. The Berezovskaya site in Siberia is home of 3 modern lignite-fired power plant units with a total capacity of 2,300 megawatts. The technical lifetime of the plant extends beyond to 2040. For the power plant sites affected by decommissioning, Uniper is developing forward-looking and sustainable transformation concepts for tomorrow’s energy world that will also open up long-term employment prospects.

The brownfield sites has a significant option value that we will leverage and use for new investments. We have development at Ratcliffe plant for the coal-fired power plant site, but also for existing sites with gas-fired power plants. In line with the decommissioning plan, the projects are at different stages of development. We intend to use our brownfield sites not only for our own investments, but also to cooperate with third parties in case of conversion of brownfields to smart energy hubs. A good example is our German site in Staudinger near Frankfurt. Even for the planned closure of the coal-fired power plant in 2025, vacant areas can be used here. Succession planning is underway to continue supplying (inaudible), the fleet using and new gas-fired 40-megawatt CHP plant. What is even more interesting is the location for data centers, which are heavy users of electricity.

The Frankfurt area is Europe’s largest network hub, and they have a lack of suitable locations. Here, Uniper would provide the cloud service companies with an uninterrupted power supply with air conditioning, using modeled-out CHP power plant in combining heating and cooling. Or another example is Ratcliffe, our site in the East Midlands. The U.K. government is supporting the development of the sites to make new structural investments in the Midlands. Uniper is pushing ahead with plans to obtain approval for the construction of a base to energy plant.

Another pillar of our strategy revolves around conversion of existing coal sites into gas-powered solutions. One prominent example so far is our Scholven site, that we will be able to supply power and industrial byproducts to our existing customers at the site from gas-fired generation. That brings me to the next section that centers around our gas business. Volatility is expected for our existing gas-fired generation fleet, and the coal and nuclear baseload capacity are leaving the system. Actually, we see 2 main effects. Firstly, we expect higher load factors and a further market price upside for our gas fleet. Looking at market prices, Germany clean spark spreads are slowly catching up within gas generation ahead of coal generation, suggestion — suggesting a stronger fuel switch. While 2019 saw already some significant fuel switch in the market, especially in the summertime, the load factors across our fleets will have significant upside potential.

The load factor of 50% in Russia does not look too bad at first, especially taking into account that the main income element are capacity payments. However, depending on the supply-demand development in the future, there are some additional potential in Russia. U.K. and the category Other, including Netherlands and Hungary, shows a load factor above 30%, which is also a result of the warm temperatures in 2019.

In Germany, our gas-fired fleet has a reserve scheme and not participating in the market. Therefore, we did not benefit from higher spark spreads as evidenced by a load factor around 3%. Should spark spreads continue to develop positively, we will get more and more confident to put the highly efficient energy plants back into the market. And market prices started to incentivize for merchant new build, which takes us to a second effort — effect on our gas-fired portfolio.

Higher renewables feed-in refers that channels are good and give us opportunities to offer products and services to the TSO, which brings us to the next slide, highlighting our growth areas in the gas business. When it comes to offering stability products for TSOs, our plants and sites are perfectly placed in system-critical regions. With our grid stability projects, we are actively contributing to the energy transition by enabling the expansion of renewables and ensuring security of supply.

One recent example is a successful bid in the U.K. Uniper has been awarded 4 6-year contracts to deliver grid stability services at our Killingholme and Grain facilities. For this purpose, we will use redundant steam generators at Killingholme and build 2 new synchronous compensation units at Grain, which will start delivering inertia services and voltage control to the grid from April 2021 up to 2026. In Germany, Irsching 6 is a well-known example where we use our existing gas site to build a plant that will serve as a safety cushion for the TSO from 2022 onwards. And we intensified working on similar projects. We have sites that are located in the system-critical areas. This is definitely a competitive advantage.

The second growth area are solutions for industrial customers. Just like we use our own sites, we can also help customers to convert their technology into less carbon-intensive systems. This includes gas-based district heating solutions and customer demand for steam. We have a list of opportunities that we look at in Germany and the U.K. and the Netherlands.

And finally, plant modernizations are to reduce emissions and to increase efficiency. We are doing this currently in Russia and earn adequate returns from the modernization program implemented by the Russian government. But we are investigating potential for more innovations at other sites in Europe as well.

With such a strong focus on gas-based technology, we underline our view that gas is a key enabler for the energy transition. Gas is a fuel for fast-tracking carbonization, but only can clean burning natural gas be used efficiently across many sectors, such as power generation, space heating and transport. It also has the lowest carbon abatement cost of any fossil fuel. Converting big segments of these sectors from coal and petroleum products to natural gas is the fastest and cheapest way for Europe to reduce its carbon emissions by up to 65%.

To grow our own as one of the largest gas midstream players in Europe with significant contractual and infrastructure assets, both in pipe gas as well as in LNG, we are well suited for a push-through with gas. And if we want a gas-based business to be part of Uniper’s portfolio all in the next decade, we have to find a way to make net zero possible, not only for us, but also for our customers. We believe that hydrogen will play a major role in that context. Our turbines are technically compatible to the units of hydrogen already today. However, the power plant is more than just a turbine, so that transition toward hydrogen will entail changes to asset structure.

In our core markets, huge amounts of new electricity are required. Countries like Germany will not be able to produce the volumes needed. Therefore, there will be a need to import hydrogen, which will provide business opportunities for midstream players like us. But hydrogen can also be produced climate neutrally from natural gas. We approached the topic of hydrogen technology open way. Uniper is engaged in several projects along the green hydrogen value chain, from production, via storage to combustion.

But to deal with carbonized gas and to make hydrogen as soon as possible a commercial viable supplement, regulation and legislation have to take actions and to relieve green hydrogen production from Renewable Energy Act levies in the way we face them in Germany. The announcement of the German federal environment minister to set quotas and to start subsidy programs to get hydrogen production started is a step in the right direction, but certainly not enough.

Next to the decarbonation of gas, we are focusing on carbon-free generation. Slide 20 gives an overview. Our carbon-free nuclear and hydro generation portfolio is well known and the core pillar of our business and long-term strategy. Carbon-free power production reached at about 25 terawatt hours per year, and that will hold for the next 25 years. For this, we have both the right assets and the right people operating them excellently. Uniper has an outstanding track record, not only regarding the already mentioned safety KPI, but also when it comes to efficiency of terms, of headcount or unplanned availability.

When it comes to the asset side, our concessions run into the 2040s for nuclear; German hydro, up to the 2050s; and Swedish hydrogen, if maintained correctly, literally run forever as concessions do not expire. Based on those assets, every EUR 1 increase in power prices increase our earnings by EUR 25 million. Even though the strong idle situations in Nordics has brought prices down lately, we still see significant upside potential for our core markets going forward based on the underlying fundamentals.

Aside from hydro and nuclear, Uniper has additional carbon-free power in its portfolio based on contractual assets known as power purchase agreement or PPA. Those are long-term offtake contracts with operators of renewable assets that enable Uniper to get access to renewable power without actually owning and operating the asset. As of today, we have signed about 10 different contracts with counterparties like EDP, ACCIONA and [Talasione] that gives us access to power produced by wind and solar. And this market is expected to grow further in the future. Subsidies are running out. And therefore, market-based PPAs are taking over the role of fixed regulated remunerations by providing long-term offtake agreements and, therefore, a stable earnings stream to developers, something they can use on when it comes to obtaining financing from banks for their projects.

Uniper is perfectly positioned to support renewables buildout by providing those PPAs to developers. We see our role in the growing PPR market as a midstreamer that measures the different needs of developers and customers. Developers want to sell large, long-running contracts that are either financially or principally based and potentially volatile in output; customers requesting green power supply rather preserve smaller, shorter running contracts that match their demand independently of current wind or sun conditions.

Uniper’s experience and capabilities in the commodity business to be the one bringing both sides together. Starting with our large customer base, we have the ability to provide flexibility and manage both volume and price risk. One prerequisite for doing this, our stable investment-grade rating, which has always been key to us. Increasing our exposure to large renewables going forward via contractual assets is one element toward decarbonization. At some point, the step from only contractual business towards physical renewable business is not as big. Therefore, we are also currently examining the commercial framework conditions for entering into the development, construction and operation of renewable energy steps.

The last slide summarizes the implications of our strategy for the company’s steering. We want to grow our gas and carbon-free portfolio, so we need a sound financial basis. Based on that foundation, we need to allocate efficient CapEx into growth that is focused on driving the energy evolution. At the same time, we will continue to optimize our maintenance Capex, but never at the expense of safety. As a result, we remain an attractive dividend payer without endangering our long-term success.

When it comes to financial steering, we need to adjust our KPI set to the new business. Contracts, under which we provide flexibility and balancing, are often regarded as leases. So that’s the corresponding earnings or interest income. Adjusted EBIT would not reflect those business streams. Therefore, we choose adjusted net income as the new KPI. Although when we put emphasis on decarbonization, we need to ensure that carbon intensity is part of our steering cost. Specifically, as part of our project approval process, each project is assessed in terms of ESG impact as well.

Which brings us to the nonfinancial KPI. As mentioned before, we have a very good record in that regard, and we need to continue to strive for excellence when it comes to taking care of our employees. In this regard, we have committed ourselves to further improve the safety of our employees and external contracts and the like by introducing a long-term combined TRIF then for total recordable incident frequency target of 1.0 in 2025, which is 33% below our current already very low combined TRIF of 1.5. This is an ambition in nonfinancial KPI.

When it comes to the level of ambition for our financial KPIs, I would like to hand over to Sascha now, who will lead you through the key elements of our financial midterms. Sascha, please.

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

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Thank you, Andreas. The following slides include key elements that will drive our financials going forward. However, I have to say that given the extreme uncertainties in global markets prevalent at the moment, we have refrained from condensing them into specific quantified earnings figures.

So on Page 23, let me start with a brief review of where we are coming from and what we achieved so far in financial terms. In 2016, we established a cash-based dividend KPI, the adjusted funds from operation, to have a metric that is linked to the operational performance of the company and defining our dividend capability. Adjusted FFO nearly doubled within 3 years based on the execution of the efficiency program, along with the reduction of the provision utilization, while at the same time, the earnings quality increased with the share of non-wholesale earnings now above 50%.

Furthermore, we have significantly reduced our economic net debt by 1/3 based on a comprehensive divestment program, coupled with tight CapEx and, accordingly, improved our S&P rating from BBB- to BBB flat. As a result of all of those improvements, we could deliver on the envisaged dividend CAGR of 25% per annum with a more than doubling dividend to now EUR 420 million for 2019 compared to 2016. In sum, a very successful development of the company so far that provided the basis for our new strategy.

The next slide summarizes the main target going forward.

In the years to come, we have the ambition to increase our earnings. Furthermore, we strive to change the earnings mix with a growing share of carbon-free generation earnings in line with our vision and strategy. The earnings growth will go hand-in-hand with an investment policy that is switching gears towards growth in order to enable the company to pursue its opportunities in the field of decarbonization.

We will support this with a comprehensive financial framework. Firstly, with a strong balance sheet, including maintaining our BBB flat rating. And secondly, with an investment framework that prefers investments in green power and green gas projects and, at the same time, incentivizes early payback and non-wholesale earnings.

And finally, we simplified our steering and dividend policy. As already mentioned, the adjusted net income will replace the adjusted FFO as a steering KPI. With the FFO gone, we also changed our dividend policy. Instead of a relative payout, we now set an absolute dividend with the ambition to grow it year by year.

Let’s now dive into the individual topics, starting with earnings on the next slide.

Following years of decline and then a stabilization in 2019, we have the ambition to grow adjusted EBIT and the adjusted net income. Now a few building blocks that underline our confidence to grow EBIT in the midterm.

On the business side, this is predominantly the commissioning of our legacy projects, Datteln 4 and Berezovskaya 3, this year. The full earnings contribution will then be available in 2021. Additionally, both the gas midstream as well as the LNG business are expected to improve midterm.

Another key driver will be outright prices. Based on forwards that were prevalent last week, there are good arguments that the currently low price level is not fundamentally sustainable and prices could rise once weather and hydro situations change going forward. On the other hand, it’s also fair to say that power prices have been rather unimpressed by the coronavirus so far. From today’s view, there are good chances that the [epidemic] will not have a lasting effect on the prices we will be achieving for the years 2020. However, Uniper’s financials are not immune if the economic damage turns out to be more than just a temporary dip.

That said, the hedge ratios in the appendix overstate the market risk we are currently exposed to as we have, a, significantly advanced our hedging activities in recent weeks; and b, we generally do not include proxy hedging, which is currently becoming more material.

On the negative side of our midterm earnings development, we expect that a continuous increase in renewables in Sweden and higher carbon prices are expected to take that toll on the earnings of our fossil generation.

Finally, we see a decrease in capacity payments, both in U.K. as well as Russia, where capacities will be dropping out of the CSA into the less attractive comp scheme.

When it comes to the adjusted net income, we expect a slight improvement in the economic interest result until 2022 and an even stronger growth until 2025 since an increasing portion of the earnings will end up as lease interest income in the P&L.

The tax rate, as I said, is expected to be in the range of 20% to 25%.

As you see, we expect the earnings to improve. But this is not only true in quantity, but also in quality. The share of carbon-free earnings that is today already around 25% is expected to grow further over the next years driven by higher outright prices, PPAs and ending long-term contracts on the fossil side.

Our investment plan is shown on the next slide. The investment plan from 2020 to 2022 documents a clear implementation of our strategy to empower the energy evolution with a strong increase of the overall CapEx level, well above the level of previous years.

Next to our ambition to keep maintenance and replacement CapEx on average below EUR 400 million per annum, we will invest more than EUR 1.5 billion in growth projects over the next 3 years. 3/4 of the EUR 1.5 billion will be invested in projects that enable the energy transition towards a low-carbon world. Those will be projects to replace coal-fired sites with efficient gas-fired sites, investments in projects that help our customers to get reliable, affordable and low-carbon supply of power, steam and other products and in projects that ensure grid stability.

Looking at the next year, the completion of the legacy project plays a significant role in our CapEx plan. However, already in 2020, we expect to invest more in new growth than in legacy projects, with Irsching 6, Scholven and U.K. grid stability being the main drivers. As highlighted by Andreas, we will also look at various projects in the renewables value chain.

As we place a stronger investment focus on decarbonization, we also updated our hurdle rate concept, which is one pillar of our financial framework summarized on the next slide.

The financial framework gives clear boundaries to keep the balance between dividend payment capacity, rating requirements and investment ambitions. Since our spin-off in 2016, the focus has been very much on a comfortable investment-grade rating and to position Uniper as a reliable dividend payer. We want to keep this but focus even more on growth investments in line with our new strategic directions.

Consequently, when it comes to investments, the climate footprint is now a key point for every investment decision. The new capital allocation or hurdle rate concept underlines this ambition. Thus, investments into projects with a strong decarbonizing element, here classified as green, face a lower surcharge of currently 100 basis points above WACC compared to other projects.

The underlying idea is straightforward. Carbon exposure is considered to be the main variable when it comes to the riskiness of future cash flows. Prior to this change, we added 300 basis points to any project, which is in the context of today’s interest rate environment, not delivering the right value steer. However, there are other aspects as well. We additionally include markups or discounts depending on payback periods, wholesale exposure or technology risk.

The next pillar of our financial framework is our credit rating ambition of a stand-alone BBB flat rating. That has a top priority and is unchanged. It is the license to operate and gives us the freedom to be active in commodity markets as well as in financial markets if required. Actually, we’re currently even conservatively positioned with respect to our target debt factor range of 1.8 to 2.0x as the starting point in 2019 is 1.7x.

The third pillar, the dividend, is shown on Slide 30. Until 2020, we envisaged and delivered on a dividend growth of 25% per annum. That will finally materialize in a EUR 500 million dividend target for fiscal 2020. This translates into EUR 1.37 dividend per share. I think it is of no surprise, especially after today’s presentation of our strategy, that sustaining a 25% CAGR growth path beyond 2020 is not an option. Given our growth ambitions, we also need to move away from a dividend policy that promises up to 100% of cash flows or maybe out of sync with operating earnings. However, we do look into our future with optimism and, therefore, want to continue growing the dividend, even though at a more sustainable rate.

Furthermore, we want to simplify the dividend policy and give absolute indications instead of payouts linked to earnings or cash. Following a proposal of EUR 421 million for ’19, we target to pay out EUR 500 million for 2020. Thereafter, strive for more growth.

Now I would like to hand over to Andreas for the summary of today’s session.

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Andreas Schierenbeck, Uniper SE – CEO & Member of Management Board [7]

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Yes. Thanks, Sascha. Before we come to the Q&A session, let me briefly summarize the main messages of our presentation today.

Firstly, we have recorded a strong performance in the fiscal — financial year 2019, especially if you look at the underlying business development.

Secondly, we know who we are, where we are and where we want to go. We have the vision of a clean energy portfolio that committed to a carbon net 0 target until 2035 for our European generation. We’re also working continuously on decarbonizing our global commodities and international power business.

We already started to work towards those goals. We are the first coal and lignite operator in Germany that has given a clear and concrete exit agenda. Going forward, we will spend almost EUR 1.2 billion over the next 3 years exclusively on projects that fuel the energy transition. We are providing flexibility and stability towards CSOs, industrial customers or via investments into renewables and clean energy.

Last but not least, we do have the right people, the right portfolio, and we also have the financial stamina to reach our goals. We have the ambition to grow earnings and dividends in the midterm as well and to step up growth investment in order to empower the energy evolution.

Now Sascha and I would like to thank you for your attention and start with the Q&A. Udo, please take it away.

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Udo Giegerich, Uniper SE – EVP of Group Finance & IR [8]

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Thank you, Andreas. Thank you, Sascha. We come now to the Q&A. (Operator Instructions) I hand over to the operator to start the Q&A, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we’ve received the first question, it is from Alberto Gandolfi of Goldman Sachs.

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

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I’m going to focus first on the fossil business. I mean 2019, you had more than EUR 500 million EBITDA and a EUR 200 million EBIT. So I was wondering if you can maybe help us out understanding how much comes from coal versus gas and if you can maybe help us navigate the main drivers. There’s a lot happening in these divisions with existing capacity phasing out. So I’m trying to understand how much EBITDA you might lose there. You already gave us the EBITDA from — or at least some expectations on new coal plants coming on. If you can maybe talk about the tightening of the Central European market in the next 2, 3 years against the long-term pressure from a higher share of renewables in the business. So it would be great to have the building blocks.

And the second one is on the recent and sharp move we have seen in gas prices and some of the risks that the oil move from yesterday could drive on gas prices. Is it really your global commodities and midstream business bulletproof? Or do you have any type of mismatch between oil-hub pricing? Or anything that you can envisage that might disrupt your portfolio a little bit what we saw pretty much in 2009 and 2010.

And if you can maybe also elaborate on the gas price, any concerns you might have. I couldn’t help notice in that on Slide 35, your hedging position for ’21 is actually relatively low compared to some of your competitors. So it’s still quite a bit of an open position. So again, first, fossil and the second, gas price.

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

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Alberto, good to have you on the call. You were speaking faster than I could even note your questions, so let me start with a few items that I think I catched and then you remind me what I missed.

So I think that the first one was on fossil earnings. I think you rightfully alluded to an EBIT to the tune of EUR 200 million and an EBITDA of EUR 500 million. And you asked how that splits down between coal and gas for 2019. Now on the EBIT, say, about 2/31/3, 2/3 coal, 1/3 gas.

Now then I think you moved on towards the outer years. Obviously, when it comes to coal, Datteln will be a key driver in that, with a partial contribution in 2020 and then a full contribution in 2021. I think in the past, we have indicated that a full year EBIT of Datteln is to the tune of EUR 100 million. I’m not going to speak about Russian coal now for a second.

Then I may have lost it a little bit, but I also noted that you asked about potential mismatches, ultimately impact from the oil price in the midstream business.

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division – Head of European Utilities Research [4]

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Yes, and the sharp decline in gas.

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [5]

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Sharp decline in gas. Now let me say the following. I mean being absolute on every exposure that we have in the house is difficult, but we are obviously very much alert to what’s going on. The classical oil index linkage in our long-term contract is something of the past. We don’t have that anymore. So there is no risk from that side.

In principle, we are also not dependent on the level of the gas price since as a midstreamer, we are basically making a margin in between procurement and selling, and the only thing you could say is that, that margin applied to a lower absolute level may lead to lower earnings, but I think that is not such a driving effect.

And then the third element is, obviously, in this entire complex of buying and selling, having different procurement sources, we do have certain flexibilities which the team is using if appropriate. And in that instance, a falling gas price may not only post risks but also opportunities.

Then I think, finally, you came back to hedge ratios, if I’m not mistaken, is that correct, Alberto?

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Alberto Gandolfi, Goldman Sachs Group Inc., Research Division – Head of European Utilities Research [6]

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Yes, if you can, but it might bridge the 2 [roles], so I’m happy to leave it aside. But I was noticing on Slide 35, as part of the gas question, that your hedging in 2021 is a bit below some of your peers. So I was wondering if you worry about the current correction in power prices and if you’re going to wait or if you’re going to continue to hedge as usual from here.

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [7]

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Yes. Two things. First of all, we have followed markets very closely when compiling that presentation, and we felt absolutely comfortable with the commodity complex, including rather declining forward prices, at least until somewhere around last week. Admittedly, yesterday also, why I stopped looking at the screen.

The second specific on hedge ratios. Now they are evident for outright. For spread generation, we don’t publish hedge ratios. I indicated in my speech that, in this case, given that here we show a cutoff of 31st of December, they may significantly understate the activities of the last weeks. So we have continued the direct hedging quite significantly. In addition, we also have proxy hedging which we generally do not include in that slide. So 2020, from a commodity exposure perspective, power generation is not a concern. 2021 is significantly more advanced than the slide may indicate. Where we do have open positions is especially in 2022.

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Operator [8]

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The next question is from Wanda Serwinowska of Credit Suisse.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [9]

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Wanda Serwinowska, Credit Suisse. Two questions from me. The first one is on your [2018] adjusted net income. You restated the figure adding EUR 150 million. Could you please explain it?

And the second one, your EBIT range, it’s EUR 250 million, if I’m not mistaken. Can you talk about the main drivers? What is the biggest risk? Or what is the biggest upside?

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

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It’s Sascha again. Could you repeat the second one? You’re all quite fast this morning.

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Wanda Serwinowska, Crédit Suisse AG, Research Division – Analyst [11]

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Sorry. Okay. On the EBIT range, if you could talk about where you see the upside, where you see the downside, because the EUR 250 million range at the EBIT line is quite wide, I would say.

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

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Okay. Let me start with the second one. I think that’s almost a standard discussion whether a guidance range is narrow or wide. Historically, we had a EUR 300 million range. That range is now EUR 250 million. So at least we narrowed it. But we still are conscious that things can go right or wrong either side.

In the past also, as the year progressed, we have been — narrowed the range and actually quite often updated and increased the range. Now for 2020, what can go right or wrong? Following on with — from the previous discussion, as of — speaking as of today, again, the hedge levels for outright, but also in case we have spread exposures, is very high. So I think that will be less of a material driver. Surely, we need to make sure that our large asset projects, Datteln and Berezovskaya, come online. And I think a bit of a question mark always is, when do optimization results, especially from the gas side, when do they actually settle? And it may be that it falls into a Q4. It may be — it falls into a Q1. But also there, we are reasonably optimistic. So my guess would be it is more asset projects than commodities in 2020. That then somewhat changes in terms of balance as we move to the outer years.

On the adjusted net income, 2018, ’19 or going forward, we have — I mean, we didn’t have an adjusted net income as a steering KPI for a long time, probably since the start of Uniper, but instead focused on EBIT and FFO. But I think most people externally and internally are still familiar with the concept going back to the E.ON times.

So the principle for adjusted net income is exactly the same as for the EBIT. We take out the nonoperational stochastic fluctuations also from interest and tax. On the tax, in 2019, we had a pretty high rate. And I expect that to normalize going forward. We talked about the range of 20% to 25%, with the best guess being that for 2020, we are at the lower end of that range. And for the interest result, which is already positive, we expect that to grow slowly until 2022, and then you will see a stronger uptick as more and more of the projects that are accounted for as financial leases can also provide positive interest income.

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Operator [13]

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The next question is from Deepa Venkateswaran of Bernstein.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division – Senior Analyst [14]

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I have 2 questions. So the first one is on the dividend policy. So I mean, the old policy was quite clear, that it was based on any surplus cash flows. And in the new policy, I note that you’re deliberately vague about not targeting a payout or anything specific. So how should we think about your dividend in ’21 or ’22, just as a rough guide?

And secondly, a more broader question. What do you see is the impact of lower oil prices on the hub gas pricing in Europe and, therefore, the impact on the German and Nordic forward prices which you would clearly be exposed to in ’21 and ’22? So any commentary. I do note that the amount of oil linked in your own contracts, but also elsewhere, has definitely reduced and LNG seems to be playing a bigger role, but just do you see even further scope for downside on the gas prices?

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

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Okay. I’ll take at least the first one and then hope that by the time I get to the second, I have some creativity in my mind.

So dividend. The policy, so to say, is an absolute one. And second, it is based on the ambition to continuously grow it. Admittedly, today, we have not set explicitly where to or at which rate. This comes along with our general caution to say too much for the years 2021 and 2022 given that I think we’re all digesting what’s happening in the current markets. But we’re increasing it to EUR 500 million in 2020 and then want to grow it thereafter. Maybe as the situation clears a little bit, we’ll provide a specific number for that.

Now lower oil prices, let me give it a try. So far, our reading is that, especially the Nordic power price seems to be driven by local climate issues, the hydrology or speculations regarding market [coupling], so there isn’t a very strong direct link to the oil price. However, I think the whole debate may change. That is not our base case currently in case. Lower oil prices are a sign of fundamentally lower economic activity, so if then a much lower demand should filter through to all markets, then I’d be surprised if power prices do not finally react to that. But currently, we do not see that yet in the Nordic market.

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Deepa Venkateswaran, Sanford C. Bernstein & Co., LLC., Research Division – Senior Analyst [16]

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And Germany?

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [17]

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Principally the same. I mean here, currently, as you know, we have — the fuel switch is quite important. One more gas-fired generation that is currently driving the merit order. But otherwise, principally the same.

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Operator [18]

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The next question is from Lueder Schumacher of SocGen.

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Lueder Schumacher, Societe Generale Cross Asset Research – Equity Analyst [19]

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A couple of questions from my side. The first one is on the coal exit. Could you just remind us where we are? It seems to have been driven out of the new cycle. But has there been any progress in terms of actually getting contracts signed and sorting out the details that were not quite clear yet at the time of the big announcements?

And the second one is just on the outlook for generation spreads. At some stage from the presentation, I said — you said with all the capacity closures that are happening, there should be upwards pressure on it. You even mentioned if there was enough, Irsching could come back. Somewhere else, I think Slide 24, 25, you mentioned that — 25 it was, lower fossil spread margins going forward as one of the earnings drivers. What is the outlook on clean dark and clean spark spreads? And what kind clean dark or clean spark spread level could you see Irsching coming back?

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Andreas Schierenbeck, Uniper SE – CEO & Member of Management Board [20]

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Well, thanks for the question. It’s Andreas speaking. Maybe I’ll take your first question about the coal exit to give Sascha a little bit more time to scour through his paper.

Regarding the coal exit, we have a situation that the law is not ready yet. There was a first reading on last Friday. If you follow the news, there is still some discussion going on between lignite and hard coal and the municipality gets the coal stations. So we don’t know if there will be any changes to the law or not, but of course, it’s just discussing. We’re expecting that the law — the final law will pass all levels in the first half year. So in the next 3 months, then we have clarity, how should it work, is there any changes on that.

For us, I think it’s pretty clear there’s a strong will to let Datteln for a run. We are running already at full load at the moment. We have [circulized] last year. We have all the conditions we need to operate the plant. So that’s from our side, we have a lot of clarity on that. We have committed ourselves to switch off our other units. We will participate in these auctions there for formal reasons. The first auctions are expected to be in summer. But here as well, the framework of that is not quite clear. It will come when the law has passed. But overall, the impact for Uniper, I think, it seems to be as indicated, so we don’t expect any major changes to the law and the framework which is impacting what we are doing.

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

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Already then on the spreads, I think the clean dark was on a downward trajectory, somewhere around the EUR 2 per megawatt hour mark. Clean spark, looking better, gaining, I think now double digits for peak load. Now clean dark, for us, at least in Germany, I think it’s not a key driver going forward. As you know, Datteln is basically in a different setting. Yes, we did talk about the potential for more gas in Germany and in Europe. Both opportunities emerging merchant, but also starting a discussion whether there shouldn’t be a capacity market at some point in time. For the time being, some key gas facilities of ours are in the reserve scheme, as you know. And I think we would seriously consider alternative option if we would see a clean spark spread on a sustainable level — on a sustainable basis in double-digit territory.

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Lueder Schumacher, Societe Generale Cross Asset Research – Equity Analyst [22]

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Okay. Can I maybe slightly rephrase that in a more general form? Do you see European power markets going tight over the next 2 years amid the capacity closures? Also the likely demand shock, we are going to get too big, that. Seems to be more unlikely option.

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Andreas Schierenbeck, Uniper SE – CEO & Member of Management Board [23]

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That’s an interesting question. Thank you for that. I think if you just put everything together, nuclear’s going out of the system in a couple of years. We have the coal exit. We have lignite phase-out, at least partially coming up. We expect that, that will tighten up the capacity in Germany definitely. We see it gets there because nobody is really investing because the framework is not wide. We see that if you put more and more renewables into the system, this is not a problem for 10%, 20%, 30%, but if you’re going about 50%, you need probably special contracts to have inertia in the system. So definitely, we assume that it will be tightened up.

On the other hand, there are mixed messages outside, somebody expecting the energy consumption or demand going down because of energy efficiency, as are expecting it up. But I believe, if you really go into electromobility, if you have more electric cars and all the other things, the demand will more going up instead of flatten out, which will increase the gap even more. So on that, from the economy itself, if you look at the news yesterday and today, I don’t expect any substantial impact on that. But I conclude with you, I expect there is a gap. There will be more demand. So that will be tightened up over the years. Still, they’re not reacting in Germany. We see what is happening in the U.K. So from that point of view, you can use that pretty good as an example how this is working.

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Operator [24]

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The next question is from Sam Arie, UBS.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division – MD and Research Analyst [25]

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Thank you for the presentation. I have a couple of questions here. The first on the credit rating. And I think you said something very interesting here. You said the Uniper side was rock solid but that you now also have to take account of the potential consolidated view. So my question is just if you think the consolidated view looks rock solid as well? Or if you see any risk that you might have to actually change some of the CapEx plans that you gave today in order to protect the consolidated view? And by that, I guess, what you mean is the Fortum credit rating. And then — that’s my first one.

And then the second one is just coming back to this — a question about how this Uniper Board is going to be set up going forward. I think Fortum said that if the deal closes as expected, then they would want more representation on the Board. And there are some signs that, that deal may be closing soon. So I just wonder if you’re able to say now what you’re thinking about Fortum’s request for Board representation or what the Board is thinking and if we should expect any kind of change at the AGM this year.

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [26]

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Sam, thank you for your questions. I’m starting with the credit rating question and then leave the second one to Andreas.

Now just repeating what I said or what I meant with respect to the rating, so starting stand-alone, I think we have an obvious very good debt factor in 2019. And we also have very solid credit ratios for the years to come, which we have shared with the agencies. So for the current rating, we have a comfortable margin on top of that.

Now I would not say — make any comment with respect to the Fortum situation. I think that is up to Fortum. Nevertheless, both companies have to think about a consolidated view as the rating agencies said that they will resolve the credit watch negative post the transaction. I don’t have information regarding the status of the transaction, but the 2 companies did work together when it comes to that rating topic. That’s where I would leave it.

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Andreas Schierenbeck, Uniper SE – CEO & Member of Management Board [27]

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Yes, this is Andreas. From my side in regards to Supervisory Board and representation and so on, we have, at the moment, representation of Fortum on the Supervisory Board. We are not involved in the closing process of the transaction from Fortum side, where you see a top message from Fortum as you’re aware of, so we don’t know when it will close and the timing on that. So please excuse us that we’re not making comments on that.

We’ve seen that as Fortum has addressed this topic about further representation as they are a bigger shareholder, but it’s a discussion — the Supervisory Board has to answer on that. Because they are elected for a longer period, I think up to 2021 — ’22. So of course, there are ways to change that, but it is something I think we have to ask the Supervisory Board how this plays out. The shareholders’ assembly is coming up. We will see what is the view on the agenda and how this whole thing will play out. But so far, we have seen support from the Fortum side about our strategy, our fiscal policy, our dividend policy. So I think going forward, we would see that it will more constructive talks and probably a good relationship going forward.

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Operator [28]

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The next question is from James Brand of Deutsche Bank.

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James Brand, Deutsche Bank AG, Research Division – Research Analyst [29]

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Two questions. The first one, I just wanted to circle back on this. So [literally] may not — may say it’s not a change in definition of adjusted net income, given it’s a new KPI, but you have in every single set of results provided in the appendices a guidance on underlying earnings which strips out the nonoperating results. And the new definition is very substantially more generous in terms of getting to adjusted earnings or adjusted net income than the last one, as the earlier questions about that EUR 150 million. So I was wondering, given how substantial it is and given that people have been focusing on it, maybe you could outline a little bit what the changes in approach are in terms of what you’ve done.

And then the second question is just a couple of quick ones, just on the guidance. So in terms of the guidance for 2020, I was interested in what ruble assumption you’d used. Obviously, it’s dropped quite substantially last couple of days. But then last year, you were quite cautious in terms of the assumption you used. So maybe it’s not that different from the spot rate, but maybe you could tell us what assumption you’ve used.

And then if you are, I was interested in kind of CapEx and net debt guidance for 2020, if you’re prepared to share that.

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [30]

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All right, James, now where do I start? Let me start in the middle with assumptions. Hopefully, I caught that correctly. Again, the explicit financial indications we have given today or partially the qualitative aspects that I shared with you were driven off a forward set of assumptions that was holding up very well, at least until last week. So we looked at both indications again and again, and it all fitted. So it is market-based, at least until very recently.

Now when it comes to CapEx and net debt, let me just look at the slide again. I think overall, with our earnings as well as cash flow ambition, I would, as of today, see a relatively flattish development of net debt over the foreseeable period. Now there’s always some risk to that because interest rates may move into a different direction and therefore changing the provisions. But simply based on cash in and cash out, I see a pretty flattish development for the time being.

On CapEx, we talked about EUR 2.7 billion of investments for the next 3 years. The majority for that on growth. And I think on Page 26, you also have the specific CapEx for the year 2020. Admittedly, you have to do a little bit of guesstimating how much that is explicitly, but it looks to me above EUR 1 billion for the individual year 2020.

Coming then back to the first question and the reconciliation, if you want, between underlying income and adjusted net income. Let me first repeat what I said previously and then maybe extend because the question does come back indeed.

So the idea of — sorry, of adjusted net income is the same as adjusted EBIT, i.e., give readers and us internally alike, for steering purposes, a bottom line earnings that reflects the business, and that is free of stochastic fluctuations. That is free of mark-to-market effects. One item that we have changed in adjusted net income versus the underlying net income are valuation effects that are related to the Swedish nuclear complex. There is an M to M valuation effect that was always in the non-op area, and there is a provision effect which used to be in the underlying net income but which is now taken out of the adjusted net income. So it’s now symmetrically treated. Both the valuation as well as the provision effects are not part of adjusted net income, and therefore you could say that the Swedish nuclear provisions are not impacted in that adjusted income other than the normal accretion.

Yes. The — what you should also keep in mind, please, when you simply look at the absolute amount of economic interest income is what I referred to, the strategic angle, i.e., we do have interest income from Nord Stream 2, and that is rising. And we do have an increasing amount of interest income from our new projects. So from that side, the composition also changes. But that is not a new definition, that is simply new income.

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James Brand, Deutsche Bank AG, Research Division – Research Analyst [31]

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Okay. Could I just ask how material the valuation effects were from the Swedish nuclear, given that that’s the kind of main change that you’ve highlighted? Was that anywhere near EUR 150 million?

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [32]

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Give me a second, James, I’ll try to look it up. People are saying, yes, indeed, EUR 150 million. I didn’t know it top of my head, but yes, it is.

I’m just being conscious of time. So let’s take — no, I can see that there are more questions coming. But our press conference is starting quite soon, so I apologize. We’re taking one more and then the rest, we have to take individually, unfortunately. So let’s please have one more question.

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Operator [33]

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The last question is from Vincent Ayral of JPMorgan.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division – Analyst [34]

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So to come back on the hedging. So the hedging was from that 15% for 2021, which is pretty low. You say you significantly increased it in recent weeks. So what is your overall hedging level as of today end price? That would be very useful.

Other question regarding gas and LNG. Obviously, everyone has been quite worried about what’s happening on the oil price and the potential impact on gas prices. European gas prices are still influenced by Asian gas prices, where you’ve got the Japanese crude cocktail. So there is a reason there to be somehow worried. You hint that you see a stronger outlook for gas and LNG. So just struggling a bit to understand this — how this works.

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Sascha Bibert, Uniper SE – CFO & Member of Management Board [35]

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Yes, let me take hedging once again. We will update the hedge ratios for the running year with our first quarter numbers. But let me maybe refine and say that the combination of both the direct hedging progression since the beginning of the year as well as the proxy hedging certainly adds to the displayed hedge ratios, not just in single digits, but in double-digit changes.

On gas prices and similar, I would agree with you that a long term, and we’re speaking multi, multiyear trend in the gas price downwards ultimately also wouldn’t be the best for our business. I talked about us making a margin, but nevertheless a prolonged decline in the gas price is probably not what we are looking for.

Nevertheless, anything in between, I think, is a different issue. We do have optimization potential. We do have both procurement options as well as a very strong customer base. And therefore, for the time being, this is something which we are observing but not overly worried when it comes to our financial targets. What we have to be conscious of is we have something in stock or inventory, be it coal or be it gas, there we may have valuation or impairment effects. But on the underlying business, as of today, we are still reasonably comfortable.

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Udo Giegerich, Uniper SE – EVP of Group Finance & IR [36]

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Okay. Thank you very much, dear analysts and investors. We will now close the full year analyst call, and we will you see you, hear you in the next days, on roadshows or on May 7 for the Q1 call.

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Operator [37]

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

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