Dear ladies and gentlemen, welcome to the Uniper Analyst and Investor Conference Call, Q1 2023 Interim Results. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions via the telephone. Please ensure to dial into the phone lines with the details provided to you. To ask the question, please press star one one on your telephone keypad. May I now hand over to Stefan Jost, who will start the meeting today. Please go ahead.
Good morning, dear analysts and investors. I would like to welcome you to this morning's conference call on Uniper's results of the first quarter in 2023. I'm very pleased to also welcome our new CFO, Jutta Dönges, who is with me here today for the first time since joining Uniper's Board of Management as CFO on the first of March. As most of you know, Jutta joined the Board of Management after leaving Uniper Supervisory Board, where she has been a member since December last year. Jutta is a well-known leader in the finance community and has a strong and long track record in the capital market. As Managing Director of the German Finance Agency in Frankfurt until last year. Jutta will guide you through today's conference call and give you an overview of our key results of the first quarter 2023.
The first quarter after Uniper's successful stabilization end of 2022. As usual, there will also be a Q&A session at the end. Jutta, over to you, please.
Thank you, Stefan, for your kind introduction and also a warm welcome to all of you from my side. It's a privilege to be here as new CFO of Uniper and to guide you through our first quarter results for the fiscal year 2023. Before doing this, let me simply say, I am very much looking forward to work with you in the future and hope to be able to meet many of you in person soon. Let me also share a few first impressions since taking office in March. The first weeks as CFO of Uniper have been intensive, exciting, and highly motivating for me. Getting to know a new organization, many new colleagues with exceptionally high expertise and motivation. This is especially true after Uniper experienced an extraordinary and stressful year, 2022.
It will be my focus to further stabilize Uniper and work together with my fellow colleagues to help leading this strong company into a new successful phase. As a first step today, I am pleased to present you strong results of the first quarter 2023. Before I dive into the numbers, let me give you a short overview over some important developments in the first quarter. Uniper Supervisory Board has successfully completed the search for a new Board of Management during Q1 2023. Mike Lewis will become Uniper's CEO as of July 1st, the latest. Holger Kreetz has taken over as new COO in parallel to my start as CFO on March 1st. Niek den Hollander has decided to leave Uniper. His successor, Carsten Poppinga, will join Uniper as of October 1st as the latest.
Uniper Board of Management is fully committed to revive Uniper strength and lead the company into a successful future. We are focused on further stabilizing Uniper and working with full speed on the development of a new strategy. Let me give a short overview of the highlights of the first quarter 2023. In the first quarter, Uniper made more progress in restoring its financial basis than one could have anticipated two months ago. Operationally, this is driven by two main effects: the optimization of our flexible asset base in a volatile market environment, and the sharp decline of the gas price, leading to Uniper in aggregate not incurring further losses in the first quarter 2023 from procuring replacement gas volumes. adjusted EBIT came out at EUR 749 million, following a weak and loss-making first quarter in the prior year.
Also, adjusted net income advanced clearly into the profit zone. In line with the sharp decline in gas prices since the fourth quarter 2022, Uniper's financial obligation of having to replace missing gas volumes has also decreased significantly. In the current market environment, Uniper does not incur additional losses from replacement gas procurement due to reduced gas supplies from Russia. However, if gas prices were to turn significantly upward, the financial burden for Uniper could still weigh heavy on Uniper's financials, with potential swings still in the billion euros range. A potential need for additional capital injections in the next quarters cannot be completely ruled out at this point in time. Authorized capital of EUR 19.5 billion is still available from the German government to compensate for potential losses from procurement of replacement gas volumes.
While the topic of additional state report is losing relevance, Uniper is progressing with its obligations from the EU State aid decision. As already communicated in our yearly results, Uniper has signed an agreement to divest its marine fuel trading business in the United Arab Emirates, as well as its 20% indirect participation in the BBL gas pipeline. Uniper continues to fulfill all its disposal obligations stemming from the remedy measures of the EU State aid approval. On the next slide, you can see the positive effects of falling commodity market prices and the good operating result on Uniper's financial recovery. Uniper Group's equity position materially recovered since its lows in autumn 2022, and stands at roughly EUR 11 billion at the end of Q1 2023.
This brings us de facto back to the pre-crisis equity levels. Swings against the back of the volatile market environments are still possible. What were the main drivers here? Number one, the provisions in connection with Russian gas replacement, which are calculated using a scenario-based approach on the reporting date, have mainly been resolved on the back of the lower gas prices and the declining exposure over time. Second, the Bund's equity injection in Q4 last year. Thirdly, a derivative accounting that in times of falling commodity market prices, has given a positive spin to the group's profits as the so-called accounting mismatch between fair value hedges and cost accounted assets continuously decreased. The downturn in the commodity markets has also provided further relief to Uniper's liquidity situation.
The net cash margining position has improved quarter-on-quarter by more than EUR 3 billion and is now standing at shortly under EUR 1 billion. Uniper's available financing instruments continue to provide Uniper with headroom to maneuver in the markets and to be prepared in case of adverse market effects. Current drawing of EUR 3 billion from the EUR 16.5 billion KfW facilities provide Uniper ample financing headroom. Over to the Q1 results in more detail. Let's start with the overview of Uniper's main operating indicators. First quarter 2023 results reflect reduced demand for power and gas in our core European markets. The fact that Uniper nevertheless recorded such a sound operating result was primarily driven by effective hedging transactions and our successful trading activities in a downward, but still very volatile market price environment. Starting with our gas business.
Contrary to concerns in the wider public, there was no physical gas shortage in Germany and Europe over the last winter, which would have required for supply cuts. Gas withdrawal from our gas storages in the past winter season was remarkably low, in part because sufficient alternative sourcing, particularly through LNG, was available on the European gas market. The better-than-expected European gas supply demand balance is reflected in spot prices that have continued to fall since early January. On the financial side, this provides us with more flexibility for our operating activities. Compared to last year, we will need to invest less working capital to fill our gas storages for next winter. The capital requirement for margining from hedging activities, i.e., providing financial collaterals until delivery, is significantly lower than last year. Our European Generation business recorded a double-digit percent decline in power production overall.
The nonetheless and extraordinary strong earnings contribution was therefore not volume driven, but driven by higher prices, spreads, and portfolio optimization. More details in my remarks on earnings in a minute. Our fossil-fired power plant supplies largely followed the trend of falling overall electricity consumption in Europe. The exception here in the U.K., we were able to mark excellent use of the flexibility of our gas-fired power plants, which produced about 15% more in the first quarter of 2023, in an exceptionally volatile market environment. In Germany, Uniper has kept three coal-fired power plants with a total capacity of 1.6 GW on the market to support security of supply before these plants are scheduled to be taken off the market by April 2024 at the latest. The outright portfolio with hydro and nuclear recorded an overall double-digit decline in output.
Lower water inflow volumes at the Swedish hydropower stations and a prolonged unavailability of the Ringhals 4 nuclear unit contributed to this decline. On the positive side, the German hydro fleet produced 8% more. Overall, the lower power generation was accompanied by a reduction in our carbon dioxide emissions, which were almost in line with the generated electricity, 15% lower than in the comparable prior year quarter. While 2022 and 2023 are influenced by the energy crisis. We continue to work further on transforming our power generation mix and continue to follow our emission reduction path with great efforts in 2024 and beyond. Let's now move over to the key financials for the first quarter of 2023 financial year. The comparison numbers for the prior year are adjusted for the classification of our Russian power business as discontinued operations.
The sound operating results in the first quarter of 2023 reflect the improved business environment and allow Uniper to focus on the future. In contrast to the two previous quarters, the extra extraordinary earnings impact from the replacement procurement of Russian gas no longer had a visible effect on group earnings in the first quarter. Looking at adjusted EBIT and adjusted EBITDA for the first quarter of the 2023 financial year, the earnings performance was positive overall. I'll get to the key results drivers on the next slide. Operating cash flow in the first quarter of 2023 developed in line with the development of operating earnings and stands at EUR 727 million. Adjusted net income in the first quarter 2023 improved by around EUR 1.1 billion from a weak prior year figure.
In the calculation of adjusted EBIT to adjusted net income, significantly higher economic interest expense was recognized compared to the prior year due to high financing requirements and higher interest rates. As a side note, the income taxes according to the IFRS consolidated income statement are mainly related to deferred tax effects, which are not cash effective. Due to Uniper's large trading business with volatile price developments and cut-off date valuations, the IFRS net profit again shows an enormous swing, this time with +EUR 10 billion, ending up to a net profit of EUR 6.7 billion in the first quarter of 2023. Declining gas and electricity market prices at the cut-off date are now acting as a material positive driver for the mark-to-market valuation of derivatives, and thus for the group's net income.
Another major contributor to the very positive net income is the main reversal of a non-current provision for onerous contracts recognized in the previous year for possible losses in the gas portfolio following the complete discontinuation of gas deliveries from Russia, coupled with continuing obligations to customers revalued at the back of applied current price scenarios. Nevertheless, given the prevailing significant risk in the commodity markets, it cannot be ruled out that commodity prices surge again. However, this risk diminishes with each additional gas molecule delivered to our contract customers. After the economic net debt already showed a significant recovery as a result of the cash equity injection of the German government in December 2022, the debt has now decreased further, fueled by a positive operating cash flow. On the next slide, I will dive into the key drivers of adjusted EBIT.
This waterfall graph clearly shows that the European Generation segment portfolio was by far the most important earnings driver for the adjusted group EBIT in the first quarter of 2023. In general, it shows again that Uniper has been capable in harvesting additional earnings in a volatile market environment. As a result of successful hedging and optimization transactions, we were able to lock in high spreads with our fossil power plants. Also, the return of the Heyden hard coal-fired power plant to commercial operation in the thirrd quarter of 2022 had an additional positive effect. Also, the impact on earnings of the known carbon phasing effect during the year was significantly lower than in Q1 of the previous year as a result of relatively stable certificate prices and a lower demand for carbon emission allowances.
Declining electricity prices and falling spreads, combined with a cautious hedging policy, should lead to a return to normal earnings development in our spread portfolio in the coming quarters. With respect to our outright power portfolio, above all in Q1 2023, locked-in hedge prices have increased in Nordic hydro and nuclear businesses. The outlook here is also to the positive. While forward hedging ratios in our Nordic business was only slightly higher overall compared to the previous quarter, hedged prices in particular rose by about EUR 5/MWh to EUR 40/MWh and EUR 36/MWh for the years 2024 and 2025, respectively. For our Nordic business, this positive quarterly result was also supported by lower price distortions between the systemic price and the Swedish price zones, the so-called Electricity Price Area Differentials, or EPAD effect.
In addition, flexibility was used in our Nordic hydropower plants to lock in attractive margins in the spot market. The German hydro earnings contribution has also increased. Here, the support came from higher returns in the regulated business, which is not reflected in the posted merchant hedge price. The recorded very low average achieved prices in the first quarter of 2023 reflects the costly hedge buyback last year to adjust for lower water availability. Coming to the Global Commodities segment. Global Commodities delivered improved earnings compared to the previous year, but remained in negative territory. The special effect from the gas replacement for Russian gas in the first quarter did not have a significant impact on earnings. In the sub-segment gas, relatively low gas supplies and timing effects resulting from the exceptional price developments of the previous year had a negative impact.
Starting with relatively comfortable gas filling levels into the coming season, the gas optimization team has laid the foundation for some catch-up effects in the coming quarters. The two Global Commodities sub-segments, International and Power, made a high contribution to earnings in the first quarter. The increase stemmed mainly from the commodity power business with optimization and power trading, which benefited from the volatile market environment. The International sub-segment continued the exceptionally strong performance of the prior year quarter. In particular, the global LNG business benefited from the market environment despite further burdens from the delayed resumption of contractually fixed deliveries from the US LNG liquefacation hub Freeport. Here, the U.S. operator had received approval from the authorities to restart at the end of February 2023.
The earnings block other in the first quarter mainly reflects the elimination of inter-segment profits and valuation effects of carbon emission allowances used for fossil power generation, which are held in stock collectively until handed over to the German Emissions Trading Authority. I would now like to turn to operating cash flow. Coming to the operating cash flow, which came in at EUR 727 million. In the quarter under review, operating profit and operating cash flow were on par with cash conversion of a good 100%. The working capital development is positive and has developed in line with the seasonal development of energy deliveries and withdrawals from our gas inventories. The item Other mainly contains the net impact of the provisions for carbon emission allowances. Now to the latest figures of Uniper's economic net debt.
At year-end 2022, economic net debt stood at EUR 3 billion. At the end of the first quarter 2023, the net debt balance improved to EUR 2.3 billion, in line with the positive operating cash flow. Capital expenditure remained at the restrained level of the prior year. At the end of the reporting quarter, Uniper showed net financial position of just EUR 11 million. Provisions for pensions decreased slightly in the first quarter. The overall discount rate increased only minimally compared with the reporting date at the end of December 2022. The discount rate for Germany was 3.8% and for the U.K., 4.9%. Asset retirement obligations, AROs, which had increased significantly in the previous year, mainly to the increase in nuclear provisions, were also stable in Q1 2023.
I would like to conclude my presentation with an update on the given outlook of the key earnings drivers for fiscal year 2023. The outlook given in February 2023 against the backdrop of incalculable earnings effects now appears rather conservative. For the outlook for the full year 2023, we expect a strong earnings recovery compared to the last year, resulting in a positive adjusted EBIT and adjusted net income for the group. This outlook will remain subject to market price developments during the remainder of the financial year 2023 in an overall continuously volatile and uncertain business environment. The financial impact caused by the replacement of Russian gas supplies will remain the decisive swing factor for Uniper's group earnings development in 2023. We are working to further minimize the risk for the remaining obligations here. This development is, however, not fully in our own hands.
For this reason, I will limit myself today to making a few qualitative statements on the outlook for the full year 2023. For the European Generation segment, we expect better results compared to last year following the recorded exceptionally strong first quarter. Drivers here are the high spreads we have locked in for the first half of 2023, in particular. For the outright business, we expect earnings to move up clearly above the weak levels of the recent year. This results from increased hedge prices, which should be less diluted by special charges and more flexibility to generate additional earnings in spot markets. We expect the Global Commodities segment to achieve a better operating result compared to last year. In gas optimization, we expect catch-up effects for the remaining quarters following the optically weak result in Q1.
We are unlikely to match the high prior year results due to negative follow-up timing effects in gas optimization. Based on the excellent first quarter and the resumption of Freeport LNG cargoes, the LNG business should contribute earnings well above normal. Overall, the good operating result in the core business and restoring the balance sheet is a very good basis for the new Uniper Management Board to be able to focus now on the future development of the Uniper business model. At the top of my agenda for the upcoming weeks and months are in particular two topics. The remedy measures agreed between the German government and the EU Commission, in particular, the sale of specified assets by the end of 2026 at the latest, and the number of market opening remedies, including to adjust our long-term gas contract portfolio, are to be implemented as quickly as possible.
The new Board of Management will present a renewed strategy to all stakeholders as quickly as possible in order to give leeway how Uniper can fulfill its mission long term as a reliable energy supplier in a strongly changing landscape. Please stay tuned for further announcement of Uniper in the next couple of months. This brings me to the end of our presentation today. I hand back to Stefan.
Thank you very much, Jutta. As always, we can begin the Q&A session now. Operator, I hand it over to you.
Thank you very much. Now we will begin our question and answer session. If you have a question for our speakers, please dial star one one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. One moment please for the first question. Our first question today comes from Anna Webb, from UBS. Please go ahead.
Hi. Thank you very much for taking my question. I've got two questions for you this morning. The first one, we know you don't give commodity forecasts, but it seems from looking at the forward prices that the worst of the gas crisis is now largely behind us. How does Uniper see things from here? Do you think current prices and forwards are close to a floor with upside risk from here? Or do you think there are scenarios in which gas prices continue to structurally decline through next winter? My second question is on what you're thinking around the potential asset sales in Sweden. Is that definitely to go ahead or still under consideration? If it does go ahead, what kind of timeline should we be thinking about? Thank you.
Thank you, Anna, for your question. I think, Jutta, we can probably start with the second one, right?
Hi, Anna. Good morning to you. Looking forward to meet you in person soon. Thank you for your questions. Let me start with the second one. Not sure what you are referring to. A asset sale in Sweden is not on our agenda. There are a couple of divestitures that have been agreed with the German government and also with the European Commission that we are working on, but there's no asset in Sweden on the list. Does that answer the question?
Yeah, I think so. Yeah, I just think Fortum obviously have the right first offer on some of your assets. Yeah, just asking sort of what you're thinking about from your perspective. Think it's clear that you said that's not on the list.
Okay. Super. I will continue with the first question, which was with regard to our outlook on commodity prices, and whether we think that the worst of the crisis is behind us. Obviously the prices have come down significantly. We have obviously some sensitivities to demand in China. The weather is also something that has been in favor. We had a pretty mild weather. We also saw a saving that was higher than expected. I think the European goal was or the European ask, let me put it that way, was 15%, and overall, we have seen that savings have been in the region of 20%. Those are the positive effects that brought down commodity prices, gas prices, significantly.
And that's also the reason why we have the high, rather high storage level. Going forward, it's really hard to predict. We are prepared, as I said, that, in case of increased prices, which could well happen since markets are and remain volatile, we have the equity shield protection from the government still in place. If there would be any further potential losses from curtailment, then we have this shield and don't think that from this side there's any risk.
Perfect. Thank you very much.
Very welcome.
As a quick reminder, if you want to ask a question, please press star one one on your telephone keypad. We're going over to our next question. Our next question comes from Luis Amusategui from Cygnus Asset Management. Please go ahead, sir.
Hi. Good morning, everyone. I was wondering, you said that you will be given an update on the disposal of the assets agreed with the European Commission and German government later on. How is that process going? How are you doing that problem? Because I see a bit of a conflict between some assets that at the moment could be quite valuable going forward and if I understand this correctly, at the moment, these assets will be closing down in 2030. How is that process or negotiation going on with the German government on extending the potential life of those assets together with the process of selling these assets?
Luis, just to clarify your question on the link to 2030, can you please repeat what your question was with respect to 2030?
Yeah.
We didn't get that.
If I understand this correctly, I mean, you need to sell these assets by the end of 2026. If I understand this correctly, these assets should be closed down at the moment, I'm not sure of all of them, except one by 2030. There is a possibility I understand that these asset lives may be prolonged, which would have an impact on those. How do you see that process going forward and where are we at the moment on those potential changes? I mean, the sale process, of course.
Okay. Understood. Hi, Luis. Good to get to know you, at least to hear your voice. I'm looking forward to meeting you in person.
Likewise.
I understand that you are referring to Datteln 4, which is one of the assets on the list that has been agreed with the European Commission.
Yeah.
Yeah.
W hich, yeah, in particular.
Exactly. There are a couple of assets on the list, actually, for two of them, I think I mentioned that in the speech. We have signed SPAs in place, and we are actually looking forward to have the closing still in the coming weeks. We are confident on this end that we can announce some progress rather soon. We have a couple of other assets we have started to set up the M&A process, obviously, and there are also some assets that we have pushed a little bit out to the timeline. As you rightly said, the obligation is to fulfill until the end of 2026.
With regards to Datteln, we typically refrain from commenting on M&A processes, neither ongoing nor planned until there's anything really to announce in terms of signing. On Datteln, we will tackle that once it's there. Obviously, yes, as there is this closing down that you mentioned, this will impact the process. That is something that we have to take care of then.
All right. Thank you very much.
As a reminder, if you want to ask a question, please press star one one. We're going over to our next question. Our next question comes from Sam Arie from UBS. Please go ahead.
Hi there. Thank you so much for the presentation this morning, and good to meet you too. Since I have too many questions, I thought I'd just jump in with another one. Obviously, this is the first gas storage refilling season that we are entering with the new sort of mandatory limits, mandatory thresholds for the autumn on how full storage needs to be. I was just wondering if that creates a new dynamic in the market over the summer, because I suppose buyers have to buy up to a certain level by a certain time, and we've never had that mandatory threshold before. I'd be interested in your comments on how you see that sort of dynamic playing out over the summer.
If you can, share with us any understanding of kind of what the consequences are if you don't meet the threshold. Are there penalties or you just have to buy at the last minute at whatever the gas price is? I know this is a relatively minor issue for you now, but it's important in the wider market, and I suppose you guys are very well positioned to explain this whole topic to us. I thought I'd ask your views there. Thank you.
Hi, Sam. Good to hear you. Thanks for your question. Well, with regards to the mandatory fillings, we saw the dynamic definitely last year. We are in a comparably comfortable situation right now. We have shown the actual filling level. It's above previous years, and we also in terms of comparing it to the northwestern filling levels and to the German overall filling levels, Uniper is in a pretty good position. This is not something that is on the top of the list of our worries, I say. What the dynamics will be, this is really hard to say. Currently, the summer 2023 is looking forward, 2023, 2024, the winter season is very positive, so it makes commercial sense to inject as soon as possible.
That's what we can see and say from our perspective today.
If for any reason you had an asset that, I'm sure you wouldn't, but if there was an asset that didn't meet the threshold, is there a penalty? How does that work exactly?
Sam, I think you know that is then going back basically to the BNetzA, yeah, to the grid operator, and they basically have to take over the obligation to fill the storage then.
Just let me reiterate and add to this. As I said, we are confident that this is not an issue from our perspective, and we will follow up with more details from our investigation. Is that okay for you?
Yes, okay. Very helpful. Thank you. Thank you for your comments. Appreciate it. Good luck with everything going forward.
There are no further questions in the queue at this point in time. I will hand over the call back to Mr. Stefan Jost.
All right. Thank you, operator. Thank you all. Thanks for participating today. Hope to speak soon. We close the call. Thank you.
Thank you. Bye-bye.
Ladies and gentlemen, thank you for attendance. This call has been concluded. You may disconnect.