© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Dear ladies and gentlemen, welcome to the Analyst and Investor Conference Call of Uniper. At our customer's request, this conference will be recorded. [Operator Instructions]May I now hand you over to Udo Giegerich, who will lead today's meeting. Please go ahead.
Good morning, dear analysts and investors. Welcome to the Uniper interim results call for the first quarter of fiscal year 2020.I'm sitting here with our CFO, Sascha Bibert, physically in our office in Dusseldorf, which is a welcome change after almost 8 weeks of home office. Right after the presentation, you will have the chance to raise your questions. [Operator Instructions]Having said that, Sascha, please.
Good morning and welcome also from my side. And thank you for participating in our conference call today, which is very much appreciated. Through COVID-19, we unexpectedly experienced a new kind of working life and also some significant restrictions in our private lives. I hope that you and your families are holding up well in these challenging times.As I indicated to you already when we disclosed our full-year results on March 10 and now also communicated via the ad hoc release, Uniper did quite well over the first months of this year, as summarized on Page 2. Adjusted EBIT rose to EUR 651 million. Adjusted net income increased even stronger to EUR 499 million. Based on this performance, which was mostly driven by our gas business and largely expected, we confirm the outlook for 2020. With respect to our portfolio optimization and strategic plans, we continued to drive forward the development of the company. Green hydrogen is an important element in our plan to make Uniper's European generation carbon neutral by 2035. We want to play a decisive role in a future-sustainable hydrogen energy economy. For this, we are intensifying our collaborations with experienced and strong partners.In early April, Siemens and Uniper signed an agreement to jointly implement projects regarding production and use of green hydrogen along the entire value chain, and main focus are designs for the transformation of coal-fired and conventional gas-fired power plants. Another element of our strategy are projects to maintain or improve security of supply in individual markets. Just to name 2 recent examples: Uniper's engineering services business was contracted by the TSO TenneT to provide project management for the construction of a major high-voltage transmission line as part of the expansion of the German power grid, a project which is scheduled for full implementation in 2026, is one of a series of projects that will be launched soon to enable the grid to handle higher nodes of fluctuating renewable electricity. In Sweden, Uniper recently concluded an agreement with a domestic transmission system operator to extend its contracts for disturbance reserves. In this case, our gas turbines guarantee 100% ramp-up to full load within 15 minutes. The contract runs until end of 2024 and secures a healthy margin for our OCGT business in Sweden. In addition, we have signed a contract to upgrade one of the OCGTs and increase the capacity with an additional 37 megawatts. The earnings will come from the ancillary service market in Sweden and are expected to increase our margins for many years to come.With respect to our Board team, Niek den Hollander will commence on 1st of June as our new Chief Commercial Officer.Furthermore, I'm proud to say that the whole organization did a great job over the last weeks. Uniper is a company that operates critical infrastructure. Even in the crisis, we ensure reliable supply of electricity and gas. For this, we have adapted the organization of the personnel at the power plants and in our dispatch centers. Among others, shift changes now take place without direct contact between the teams. Generally, wherever possible, employees are working out of the home offices. At this point, we benefit strongly from the fact that our IT infrastructure and HR processes are already largely geared towards flexible and mobile working, thanks to modern cloud solutions.The fourth topic on the slide is shareholders. Since end of March, Fortum is Uniper's majority shareholder with a stake of almost 70%, up from previously close to 50%. Following the required approval of the Russian regulatory authorities at the beginning of March, Fortum was able to acquire shares of around 20% from the previous shareholders Elliott and Knight Vinke. According to Fortum, the acquisition of a further tranche of shares and voting rights of at least 1% and a maximum of 3.8% is expected to be completely shorted -- completed shortly. This change in the shareholdings is now also reflected in the composition of Uniper's Supervisory Board with its 12 members. Out of the 6 members to represent the shareholder side, 4 members are now delegated by Fortum, with 1 of them, Klaus-Dieter Maubach, being the new Chairman of the Supervisory Board. The remaining 2 shareholder representatives, Werner Brinker and Bernhard Gunther, are considered independent. On May 20, the new Uniper Supervisory Board members will have to be elected by the Annual Shareholders' Meeting, whereby a simple majority of the voting shareholders is required.Uniper will be one of the first companies in Germany to hold a purely virtual AGM and thus take advantage of a new legal framework. By this, the COVID-19-related health risks for employees and shareholders can be reduced to a minimum. At the same time, we will be able to meet the planned date of the AGM and thus implement a punctual payment of the proposed dividend of EUR 1.15 per share for the 2019 financial year.Based on the clear shareholder structure, we are in the process of gradually intensifying our corporation. After the initial priority was to secure the credit rating, the reporting lines have now been set up to enable Fortum to fully consolidate Uniper in its consolidated financial statements. According to Fortum, Uniper's strategy update on March 10 provides a good starting point for the strategic alignment and development of a joint vision for Fortum and Uniper. Overall, it has been an eventful first quarter for Uniper. Obviously, COVID has been the dominating topic, as reflected in the commodity prices presented on the next slide.Now on Page 3, let's start with the gas market. Gas prices have been on a downward trend for a while mainly due to mild winters both in Europe and Asia as well as increasing LNG imports. However, the corona crisis has further strengthened this trend by reducing industrial demand. The price curve depicts the forwards 2021 price. Looking at the spot price, the picture was even more extreme with prices trading below EUR 8 per megawatt hour. Suddenly, gas was cheaper in the midst of the winter season than it was in the preceding summer. Overall, this extremely low price level made storage withdrawals in Q1 less attractive, resulting in very high gas storage levels at the end of the winter season across Europe.Second, carbon prices. The effect of the corona pandemic hit the carbon market mid-March, with prices crashing by more than 20% month-on-month. The main bearish fundamental impacts were the reduced emissions from the power industry and aviation sector combined with daily EUA option volumes coming to the market. Nevertheless, carbon has partly recovered since end of March, driven by better sentiment; return of speculative players; and finally, EDF's announcement to prolong maintenance outages on the nuclear fleet, which are expected to support the load factors of fossil power plants across Europe. Accordingly, electricity prices in the Central and Northern European markets also showed a recent uptick in an overall heavily depressed environment. In the Nordics, the current low price levels in the spot market and in the front forwards are mainly driven by record-high snow and hydro reservoir levels that piled up in the course of the winter. Together with lower COVID-19-induced power demand, power prices are pulled down to marginal costs of hydro and nuclear plants.How did spreads develop? Generally, dark and spark spreads have recovered from their lows in 2019 on the back of dropping fuel costs. As mainly gas and carbon prices lost ground, spark spreads increased faster than dark spreads, accelerating the coal-to-gas switch. For Germany, we are closely monitoring this development in the context of our gas fleet and its potential to return back to the merchant market.Our operating indicators in Q1, on Page 4, are in essence a reflection of the commodity market environment. All 3 segments were substantially hit by an extremely mild winter plus lower demands due to COVID-19-related lockdowns.Starting with Global Commodities. Uniper's gas storage filling levels followed the overall trend in Northern Europe. At the end of March, our gas storage filling levels were 71%, significantly higher compared to previous years, which was already a record warm winter back then. This high gas inventory burdened the operating cash flow in Q1, as the capital was still locked on the balance sheet. At the same time, the partially extreme price constellation was one of the main drivers for the strong gas performance, something which I will elaborate on in a moment.Overall, the European Generation segment saw 29% less electricity. However, our hydro power plants performed well and showed an overall increase in production volumes of 6% on the back of higher precipitation in Sweden. Nuclear was down 13%, mainly driven by the closure of Ringhals 2 and unplanned outages of Oskarshamn 3 and Ringhals 1 and 3. Gas- and coal-fired power production was down 43% volume-wise. While COVID decreased general power demand per se, our fossil generation was additionally burdened by greater availability of renewables given the weather conditions, especially in Germany. Our Russian business has been mostly affected by the abnormal warm winter and the very good hydro conditions in the European zone and Siberia. Additionally, the first quarter in '19 had shown an extraordinary performance. Therefore, international power recorded an overall drop of production volumes by 12% in the first quarter of this year.The last paragraph -- or the last graph is a new one. Following the direction of our new equity story that centers around decarbonization, we include the carbon footprint as an operational indicator on a quarterly basis from Q1 onwards. Please keep in mind that we have 2 targets: a 2020-specific CO2 target of 500 gram per kilowatt hour for the whole of Uniper and a long-term target of net 0 carbon by 2035 for our European generation. In general, a process of decarbonization is a long-term journey, but looking on a quarterly basis at the carbon footprint gives some flavor which we are heading for in the shorter term. Given the development in our thermal generation in 2019, the decrease in CO2 was to be expected.Now turning to Page 5. COVID-19 had a negative impact on the commodity markets as well as our operational indicators in Q1. However, when we -- when it comes to financials, Uniper is quite resilient. Before we dig deeper into the Q1 financials and the outlook for the full year 2020, this slide summarizes the main aspects when it comes to understanding the financial impact of COVID on Uniper. Let's start with the liquidity situation. End of Q1, we had significantly more than EUR 1 billion on -- of cash on our accounts. In addition, we have committed financing line of EUR 1.8 billion, which is unutilized. Even more important than the size of the current liquidity buffer is the fact that there are no signs of upcoming risks that could eat up those reserves.Starting with the finance side of the balance sheet. As many of you know, our balance sheet is virtually free of borrowed money. Our net debt consists mostly of lease liabilities and provision for pensioned and asset retirement obligations. All of those have in common that they are very long in tenure and therefore will not need a refinancing anytime soon.On the earnings side, we have been largely hedged for the delivery year 2020 when COVID began to spread across Europe. At the end of March, our hedge ratios for 2020 were above 95%. As usual, you can find an overview of the hedge ratios and the hedge prices for the year 2020 to 2022 in the appendix of today's presentation. When you look at it, you might notice that we have increased the transparency in this area by giving concrete numbers for the achieved prices instead of ranges. Furthermore, you will see that we have markedly expanded the hedging since our last presentation, and today, we are even further than indicated on that slide. As you know, hedging, i.e., forward selling power, does not eliminate risk. It just transfers it. If the positions are hedged via the exchanges, the market risk is turned into liquidity risk, as we potentially need to provide collaterals. This is no issue given our mentioned liquidity situation. However, if the power is sold forward to individual customers, the market risk is turned into credit risk. While Uniper does not have a household customer base, we do have a strong B2B sales channel. In this regard, it is important to highlight that more than 90% of our customers are investment-grade rated companies, a large portion of those being municipalities with a high share of state ownership. Accordingly, as of today, we continue to have a very good credit and payment experience. We are also proud that close to 100% of our customers receive electronic invoices, something which helps incredibly in this environment.In the end, the most relevant risk from COVID in the short term concerns the timeline of our projects and assets in construction. Let's start with Berezovskaya 3, where we actually need to change the time line again. The introduced quarantine measures in Russia has had a significant impact on the project Berezo 3 that involves moving and coordinating a lot of people in a remote area. Starting in April, we could not keep up with our expectations in terms of qualified workforce on site. Therefore, we have to announce a further delay of the commissioning date to the end of this year. We continue to apply strict quarantine measures to avoid any impact on the running units as well as prevent any larger impact on the repair project in case of the infiltration of the virus on site.Regarding our other projects, we are sticking to the communicated timelines. Most notably, we continue to expect Datteln 4's COD in early summer. This project is close to the finishing line.Now let's get into the financials, starting with an overview of our relevant KPIs on Page 6.Adjusted EBIT and Adjusted EBITDA are more than twice as high as compared to the prior year. You may remember that Q1 earnings last year were particularly low with a weak start of the gas midstream business, a negative intra-year carbon phasing effect and no contribution at all from the U.K. capacity market. Therefore, it should not come as a surprise that Q1 2020 is generally above prior year. Nevertheless, the magnitude of the earnings increase is indeed extraordinary due to the strong contribution of the midstream business this year. The gas team did a great job in matching supply and demand in a downward-trending market, as we had already indicated in our full-year call in the context of the guidance for 2020. The downside is that, due to the aforementioned market situation, we left the winter season with even higher filling levels than last year, which was already back then affected by a very mild winter. Therefore, working capital increased further, reducing cash flow, which is broadly in line with previous year's level despite a strong increase in earnings. Accordingly, this translates into a very low cash conversion for the time being. But just like in 2019, the OCF is expected to revert to a more normal level over the next months.Adjusted net income is fully in line with Adjusted EBIT. And reported net income is coincidentally in line with Adjusted Net Income but down compared to Q1 2019, mainly due to market price-driven development of derivatives. It further reflects impairments of roughly EUR 160 million on generation assets resulting from the recent developments on the commodity markets.Moving on to economic net debt, nearly unchanged at EUR 2.7 billion. Accordingly, from a credit rating perspective, our metrics for BBB flat continued to be rock solid given our unchanged earnings guidance.Now let's break down the earnings on the next chart. Looking on the year-on-year effects, we have seen increases in both the generation as well as the global commodity segment even though the majority stems from our commodity activities being EUR 385 million in total. This is predominantly the contribution of gas midstream supported by positive developments in our power optimization but partly offset by impairments on inventories, especially in the subsegment COFL.So what has been the driving -- what has been driving the strong increase in gas midstream in Q1? This is, for the most part, the continuation of the strong year-end rally that we saw in Q4 2019. The basis was a volatile, but at the same time, downward-trending gas market since middle of last year. We observed price levels being half of what they have been a year ago, and recently, even the seasonality pattern was broken when gas and wintertime even became cheaper compared to last summer. This environment gave us the opportunity to better materialize the optionality of our fully integrated gas portfolio. As documented by our storage filling levels, the low spot prices in Q1 rendered withdrawals less attractive and even set the incentive to further inject gas over Q1. Therefore, instead of withdrawing, we saved the corresponding variable costs and fulfilled our delivery obligations by procuring spot gas from the hub. While this approach was overall value creating, there are a couple of aspects to keep in mind. If we would have an empty storage by now, we could capture the full summer/winter spread going forward by buying in summer 2020 and selling next winter, i.e., going through the usual storage optimization cycle. However, with a fuller storage now, we are not able to capture the same spread value over the next months. Hence, a significant part of the earnings in Q1 is to be considered a shift of margin from future quarters into Q1.Moving to our outright fleet with an effect of roughly EUR 50 million. As expected, we saw a strong increase in achieved prices of more than EUR 7 per megawatt hour on average. Volume-wise, we had higher hydro volumes in Nordic, but those were overcompensated by lower nuclear volumes due to the closure of Ringhals 2 at the end of 2019 as well as due to some unplanned outages in Oskarshamn 3, Ringhals 1 and 3. Fossil in European Generation is roughly EUR 80 million, up mainly due to 2 effects: first, the contribution of the restated U.K. capacity market of EUR 30 million; and then second, last year with a negative carbon phasing effect in Q1 of about EUR 50 million. Given the lower fossil production in Q1 as well as current carbon price development, this effect almost disappeared this year, resulting in a positive delta of EUR 50 million. Please keep in mind that both effects will disappear once we reach Q4, as this will help to understand our thoughts on the full year guidance later on.Russia is down EUR 20 million compared to Q1 2019. Two key effects: electricity prices normalized following lower demand and higher hydro generation. The category Other, approximately EUR 20 million, summarizes a series of effects which mostly revolves around costs of our generation business. So to sum it up, strong underlying business in the first quarter but with some intra-year phasing effect.Now over to operating cash flow on Page 8. On that slide, you can follow the reconciliation from Adjusted EBIT to operating cash flow. It makes 3 things transparent. First, the described low cash conversion driven by the changes in working capital. This will normalize over the course of the year, as the usual injection in summer into the gas storages will lead to lower working capital increases based on the high filling levels that we already have today. Secondly, we have a comparably low provision utilization. The overall EUR 90 million of provision utilization is almost evenly split across provisions for decommissioning; gas and LNG infrastructure; and Other, including pension and personnel-related provisions. Thirdly, 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.The next slide is intended to give you some more background on our relatively new KPI, Adjusted Net Income, Page 9. With our latest full-year reporting, we added Adjusted Net Income to our set of KPIs. The Adjusted Net Income of EUR 499 million for Q1 shows an even higher growth rate compared to the Adjusted EBIT. This trend is in line with the given outlook for the full year, where Adjusted Net Income is also expected to have a higher growth rate year-on-year than operating earnings. This effect was mainly driven by the economic interest result, which is both positive and expected to grow further. What are the key reasons for that?In structural terms, Uniper's balance sheet is free of borrowed money, as I said before. Aside from lease obligations, our net debt is dominated by long-term provisions. Due to the currently low market rates, the corresponding interest expenses are relatively low. Additionally, we have already a relatively high interest income from assets. We expect this interest income to grow over time, as some of our businesses in which we provide flexibility and security of supply will be accounted for as lease contracts so that the corresponding value generation will end up as interest income in our P&L. Finally, there are positive effects from the capitalization of construction period interest. This effect is particularly strong in 2020 due to our large legacy growth projects. A breakdown of the economic interest expense can also be found on Page 18 in the packet.The other 2 elements, i.e., the tax rate and the minorities, are straightforward. On the tax rate side, we generally expect a tax rate between 20% and 25%. Here we are towards the lower side in Q1 with 22%. The minority interests are largely driven by Unipro, where minority shareholders hold about 16%. If you apply this percentage to the Uniper results, you should be in the right ballpark. Given that Unipro's earnings were somewhat down in the first quarter year-on-year, the minority interest in Q1 are slightly less pronounced year-on-year here as well.Slide 10 documents the changes in our economic net debt. This quarter, those have been very limited. Economic net debt reached EUR 2.7 billion, slightly above the year-end level. Looking at the individual effects in the waterfall, we see a positive contribution from OCF adding close to EUR 120 million, offset by investments in the magnitude of EUR 140 million. Further, there is a decrease of pension provisions from around EUR 1 billion to EUR 950 million due to higher interest rates. Asset retirement obligations are slightly up based on net FX effects from Swedish nuclear provisions and finally, the category Other, which reflects an increase in financial leases.Now over to the last slide today, addressing our outlook in 2020. Across all 3 KPIs, Adjusted EBIT, Adjusted Net Income and Dividend, we reiterate our guidance given on March 10.So why are we not increasing our guidance on the back of this extraordinary Q1 result? First of all, we had anticipated that the year 2020 would be very much front-loaded towards Q1. As such, most of the underlying earnings drivers were incorporated in our full year guidance, and that includes also a very strong Q1 from gas optimization. In the end, the actual out-turn of Q1 might have been somewhat better than expected in total. At the same time, the next 9 months may look somewhat weaker as the COD of Berezovskaya 3 moves towards the end of year, for example. Also, even though our financials have been quite resilient towards COVID-19, we are not completely immune. Some risks will prevail, if you think, for example, of the ruble exposure going forward. Therefore, taking all those aspects together, chances and risks are fairly balanced over the whole year of 2020.Before coming to a close, let me give you a qualitative guidance again regarding the upcoming quarters. From today's perspective, I expect the Q2 stand-alone EBIT to be positive but not extraordinary. This would bring the first half figures quite close towards the full year target range. The second half of this year, however, will be weaker than last year so that for the total year, we are then expecting to be in the guidance range.So summing it up in final messages. A strong start into the year and the full year outlook confirmed shows the resilience of our company. The credit experience with our customers is very good. And a significant amount of our business is handled via exchanges, anyway. Power hedging levels are high, and therefore we are also in a good mood regarding not only the year 2020 but also beyond.Now let me hand back to Udo.
Thank you, Sascha. And we come now to your questions. [Operator Instructions]
[Operator Instructions] And the first question is from Deepa Venkateswaran, Bernstein.
So my 2 questions really are, firstly, on the gas optimization. The Q1 EBITDA, EUR 620 million, that's well above your long-term guidance for this division, for this particular segment at EUR 300 million to EUR 400 million, excluding Nord Stream. So I just wanted to understand, whether for future years, how do you see this performance? And should we actually assume some sort of a loss in the later quarters for gas optimization? And I guess the second question is for the -- could you quantify what is the impact of delaying the COD of Berezovskaya from Q3 to now the end of 2020? Yes.
Deepa, thanks for participating. Now your first one was on gas optimization, not fully surprising, and whether the experience we have would change how we guide in the long run. The answer to that is no. I think, the logic as well as some of the corresponding numbers that the team has used back in the gas deep dive and that you partially just quoted, they are still valid. On average, this is a good business however, not with an extraordinary margin, yes? On average, we are a middle man handling supply and demand, and therefore this guidance still holds. However, on average doesn't mean each and every year. It doesn't mean each and every quarter. So this was a particularly good quarter. I tried to indicate that this has also an element of shifts from later quarters. So in 2020, the gas midstream business may come out somewhat stronger than on a long-run average, but the long-run average is still a sensible guide going forward. With respect to your second question, delay of Berezovskaya from the end of the third quarter into end of fourth quarter, let's say low double-digit million, EUR 20 million to EUR 30 million, I would say, EBIT Euro.
The next question is from Peter Bisztyga of BofA Securities.
Yes. It's Peter Bisztyga from BofA here. I have 2 questions, if I may. Firstly, can you just give us an update on where you are with hard coal exit negotiations in Germany, where that process currently stands at the moment? And then secondly, can you just remind us whether your credit rating is linked in any way to Fortum? So I seem to remember, when Uniper was in sort of battle with Fortum, one of the concerns was that if Fortum was downgraded to BBB-, Uniper could lose the government one-notch sort of benefit that Fortum had and that Fortum -- that Uniper could get downgraded to junk. I just wonder if that is still something that you're concerned about.
Thank you, Peter. Hard coal, I'm not aware that there are still negotiations ongoing, as you quoted it. I think the government, at least for hard coal, clarified on what is about to come. I think the remaining uncertainty is now on the final stages of the legal decision-making, yes. And there COVID somehow came around the corner. My understanding and expectation is that this is to be resolved over the summer. The second one, being credit rating linkage to Fortum. Indeed. I mean credit rating was always important for us as it is for Fortum. Now I think that situation is technically resolved. Our rating -- it is resolved following the closure of the most recent share transaction, and the rating agencies have communicated accordingly. Our rating is capped by the rating of Fortum. However, there is no one-notch downgrade or similar. So we are capped at the Fortum level. We currently both have a BBB flat rating in S&P terms, with a negative outlook. And S&P was quite explicit what that means and why that is, but just for completeness reason. We are not floored by the Fortum rating. So our stand-alone credit worthiness is still very much important. And we very much look at that, engage with the agencies, but there is a linkage to Fortum via the cap.
The next question is from Alberto Gandolfi, Goldman Sachs.
It's Alberto Gandolfi. I have 2. The first one is again on Global Commodities, just to clarify one thing for the rest of the year and perhaps for 2021. You -- basically you've done more than EUR 440 million in Q1. And the typical annual figure could be, I don't know, between EUR 250 million and EUR 300 million. So and if I look at past quarters, typically Q3 is negative, but Q2 could be between EUR 40 million, EUR 50 million. And Q4 is also positive. So can you maybe be a bit more specific about the guidance for the rest of the year? And perhaps it's just not me getting it. And so where do you see the rest of the year? And should we assume the rest of this year very similar to what might happen in 2021, if you basically were to see the current situation of oversupply in the gas market continuing? And the second question is, can you maybe talk a bit about the value of combined cycle in this situation? I mean we're having a demand shock. We are having more renewables in the system in the next 2, 3 years. We are going to have less nuclear and less lignite and particularly in Central Europe. Do you think the value of ancillary services and the value of backup is going to go higher? And can you quantify that?
Alberto, let me take the first question, maybe broaden it a little bit because I can well imagine that this question of strong Q1 outlook unchanged -- how is the year developing? How does it fit? That is -- probably is one that quite a few have. And I'm partially repeating some of the comments I've made in the speech, but still nevertheless that helps. When we think about Q1, which again has been a good quarter, let's also keep in mind the comparison base. Q1 '19 was also weak. So it's a double effect. You have a strong Q1 '20 and you're comparing that with a weak Q1 '19. For example, Q1 '18, for what it's worth, is close to double of what Q1 19 was. Now with respect to specific effects, I alluded, for example, to CO2 phasing in the first quarter, which delivered a positive delta. By the way, that's in the -- mainly in the European Generation business. I alluded to the U.K. capacity market which was absent in Q1 '19. And yes, it's also the gas midstream business, which was particularly strong in Q1 '20 and which was rather weak-ish in Q1 '19. Furthermore, I talked about somewhat of an -- intra-year shift related to the fact that storages are pretty full. We have used some of the flexibilities that we have, and you cannot simply continue like that on the same level. So some of the optimization gains that we would classically expect in the second half will not be there, and therefore the second half for the gas midstream business will be weaker than before. And those other effects that I have mentioned, for example, CO2 phasing and also U.K. capacity market, they will meet a much higher benchmark in Q4 when compared with the fourth quarter of 2019. So we will see some shifts within the year. Q1 was strong but following a low benchmark. And overall, we then come from a very strong H1, yes, expectation as of today to a rather weak H2. And then this fits to the overall guidance. As of today, I would not read anything from that into the year '21. To be honest, that is simply too early. I don't know how the price constellations will be. And I don't know, accordingly, how we will position ourselves.When it comes to the value of combined cycles, in the context of nuclear production and lignite production down, yes. I mean logically that should really be the case going forward. In -- I think we have been waiting for that for quite some time, but it will eventually come, yes. Renewables are being built out. And most people would think that also COVID is not materially changing that. And at the same time, we are taking out capacity bit by bit. So the value of flexibility will increase, but it will not be easy because you have to be ready to capture attractive margins at very specified points in time, also a lot related to seasonality. So this will put a higher value on flexibility, but this will also put greater strains on the grid. And therefore, it would not be surprising to see more products, more needs to stabilize the grid, yes? And we have seen that in the U.K., where we talked about a tender that we won just a little bit ago. We already have certain regimes in Germany, that they may expand. We talked about an example in Sweden today. So yes, that will be a theme in the next years to come. And yes, but I'm not yet able to quantify that, Alberto. I didn't forget that part.
The next question is from Sam Arie, UBS.
Congratulations on a very good quarter and a very helpful presentation. I've got 2 questions. My first one is on the gas optimization. And I know you've talked about this a lot already, but I just want to check if any of the benefits, I guess, you're seeing at the moment could be potentially reversed or shared with Gazprom through that 3-year adjustment or true-up process. I'm just remembering the 800 million cash out that was linked to that process, I think, in 2016, and which was a bit of a surprise back then. So I just wonder if you can remind us where we are on that overall process and if there's any sort of part of what you've seen in Q1 that may not be permanent. And then my second question is a bit of a bigger picture question, but on weather you mentioned, of course, the record warm weather pattern in the Nordic region. And we may be heading to another record hot summer in Europe. And a lot of people think this is now not just the usual ups and downs in the weather but maybe a kind of structural change in the pattern that we see in Northern Europe. I'm sure you've looked at that question as well, so I just wondered if you could talk about how the business overall would be affected if it turns out that very hot summers and warm wet winters are the norm going forward for weather in Northern Europe, really interested to hear your thoughts on that.
Samuel, first one, gas optimization, something to be shared. I will obviously not speak about a specific counterpart, so let me be a little bit abstract but, hopefully, still somewhat helpful. So yes, it is true that, when you have a portfolio of long-term contracts, at certain points in time, you meet with your supplier and discuss terms and conditions. And that usually happens every couple of years. And we have met -- depending on the supplier, that happens at different points in time. I will say generally, at least volume-wise speaking, we are currently rather in a more quiet period with a limited amount of negotiations or arbitrations going on. So I think, for the larger part of our volume currently, terms and conditions are set. And that is why I would say there isn't a short-term effect to be expected, in the context of your question. What happens all the time in the gas optimization -- and this is not part of the renegotiation. That is simply part of the ongoing usage of the business relationship that you have, is that we provide flexibility to our customers, yes. And obviously, flexibility has a price. And then in certain environments, our customers use their flexibilities, and likewise, we have flexibilities in our contracts that we use. And the biggest flexibility simply comes from having a holistic position. And that holistic position includes owning physical assets, owning gas storage, where we can decide on how to optimize them best.Now weather in the Nordics. We tend to have indeed some unusual weather phenomenon as recently not only in the Nordics, also in other areas. Whether that is already sufficient to now establish a new trend for the years to come, that I don't know. What we can see in the Nordics is that, for a while, it seemed that the Nordic market in terms of demand was rather unaffected by COVID. And more recently, we see a first reduction. So they were rather a late follower in that respect. What we also see is that there were plans to expand renewables in the Nordics. I'm not aware that those have changed materially yet, but I think we need to watch the further COVID development and the prices, whether all of those plants are really economic in the current price environment. So coming back to weather: Well possible, but I have not yet seen an analysis that fundamentally supports that. I think, like the previous questions, if we have more extreme events, value of flexibility principally increases. And we are trying to find the right balance with our hedging approach.
Okay. So large, complicated questions, but I wonder if you'd permit me just quick follow-ups.
Sure, Sam.
So I think, a follow-up on the first one, on the gas optimization. Just I think, if I understand you rightly, then we shouldn't be worried about there being some kind of cash outflow coming related to contract true-ups in the next year or 2. Just to boil it all down.
Correct.
Good, okay. And on the weather point, we shouldn't be worried about any kind of impairment process on sort of the long-term value of the Nordic generation assets in the light of changed weather patterns.
Now you've specified your question slightly, and now -- and I need to take another turn. First of all, in terms of impairments, it is not the norm that one recognizes an asset impairment in the first quarter. Nevertheless, we have done that because we came to the understanding that the environment postulates a triggering event. And those impairments, by and large totaling EUR 170 million, say some EUR 20 million to EUR 30 million per individual station, so spread across our fleet, they come from a different price environment. So if you would now tell me, and I would expect that, that the long-term price and spreads trend is a very different one than I am currently using to model the value, then yes. Then we would have impairments, but we have taken our best view, and that is reflected in the number as of quarter-end. By the way, we also have to test inventory at all times. Any kind of impairment then flows through EBIT. That is part of the EBIT that you have seen.
The next question is from Vincent Ayral, JPMorgan.
So a question on the gas prices. You say that the storage level has been in-line, exceptional, more than last year. And we have some sort of gas glut of the moment and we'll [ have glut ] in the gas storage [ in just the ] season up to the summer. So we could have like a storage filled, absolutely full. I do see the situation on gas prices in the short term? Would be quite interested in having your view there as a gas specialist or gas [ empen pour ] in this specific context. Second is on Nord Stream 2. And the Federal Network Agency refused to grant exemption on Nord Stream 2. Basically there is an appeal. What is the likely outcome, from your standpoint, on this one? And what is at risk? Nord Stream 2 [ say, for instance, say ] that it would be difficult, if not impossible, to pay a dividend to you or to Engie if the exemption was not granted. So I would be quite interested in having any, some update on this specifically.
Okay. On the first ones, yes, I think everyone realized, unfortunately, I don't have the crystal ball, but if you're asking for a personal guesstimate and then you can remind me in our next quarterly call, I think the overall commodity complex in the shorter term is obviously reasonably bearish. We've talked about some reasons what could drive this upwards in the more mid- to long term. If I were to choose out of the commodity complex maybe one that has a better chance of revival, it could be gas. I mean, if gas moves, it moves fast. And we are currently seeing that we are coming close to the marginal cost of production, also LNG. So let's observe supply. Maybe we shouldn't be too bearish on the gas price. Let's see. Nord Stream 2, to my knowledge, the relevant agency, Bundesnetzagentur, has not decided yet. I also picked up certain press coverage. I think there was also an interview from Nord Stream. Let's just respect that. Overall, Uniper, we are a financing partner, yes, so we are not an equity holder in that project. And as a financing partner, we have a clear return on the investment that we have provided. And we trust on the company or Nord Stream to obviously finalize that project and then deal with any kind of challenges or opportunities that may come along in a decent way, but it's not upon us to decide on how to deal with those.
Understood. Could you address on the investment spend as a financing partner and the interest perceived of Nord Stream specifically?
Yes. I think, investment spend, we probably have talked about in the past. That's some 700 million. In terms of interest, I don't think we have been very specific. We were talking about a corresponding double-digit-million contribution to our earnings. And by the way, that is also part of the earnings that you will find in the economic interest. So it's -- I mean it's a decent return on a loan given, commensurate with the position that we have.
The next question is from John Musk, RBC.
Yes. Just one question actually left from me, which was to go back to the impairment. Can you just break those down a little bit for us? I guess I'm more interested in the fuel types than the geographies, but any detail you can give on where those assets were and what those assets were would be helpful.
John, now I know the answer, but I'm not sure [ whether it was passing ]. I think we have not broken down the impairment by station in our quarterly report. So let me try to wobble around and help you. So we are looking at a number in total of EUR 160 million, EUR 170 million. I said this is pretty spread across different facilities to the tune of mostly EUR 20 million to EUR 30 million. And we have them in different countries maybe a bit higher than the average -- something is ringing. It's not me. A bit higher than the average, for example, in Benelux, yes. So you do factually have a mix of thermal generation, coal and gas. I don't think there were any impairments on our outright fleet. Does that help, John?
Yes, that helps.
Thanks very much.
Okay. Last question, please.
Yes. Maybe that's the alarm that's ringing here.
The next question is from Lueder Schumacher, Soc Gen.
I particularly appreciate Slide 13 and actually giving us definite numbers instead of ranges. Two questions on my side. One actually related to your hedges. I might be getting something wrong, but it seems to be that your Nordic hedge volume has gone up from just 15%, as you disclosed, in March to 70%, 7-0. I can't recall you making this kind of jump in quarterly hedges ever before. Now is this an expression of your view on [ new input ] prices? Do you expect COVID-19 to have an impact on prices and volumes in 2021 as well? Just I know you don't usually comment more on hedges, but this is quite an extraordinary jump, and it would be helpful to understand it. And the second one is on the Berezo delay. You did mention an impact of, I think, low double-digit million. Is this just the lost revenue? Or is there also a penalty element there for not supplying the capacity on time?
Lueder, thank you. I'll start with the second one. I don't think there is any penalty involved in that. That is just the lost capacity payment. And by the way, I think the conference call from our friends from Unipro will also follow shortly.And then on the hedges, yes, I don't disagree with the math. And I tried to indicate that a little bit last time we spoke, in the full year results, already, that we have advanced quite a bit on hedging. And yes, that was especially prevalent in the year '21 because, I mean, that is then the next year that comes into delivery as we are in 2020 already. And now next to '21, we're obviously looking at '22 and possibly also at '23. Then also today, we are somewhat more advanced than the cutoff that is depicted on the slide. Now how to interpret that. I think it's a mixture of 2 things, and I'm not going to weight them. First, I think it is a fact that we are looking, at least for this time frame -- let's now not talk about prices in '25 or '26, but at least for that relevant time frame today, all of our views on a certain price in '21 or '22 is somewhat lower than it was pre-COVID, yes. I mean COVID and anything that followed from that has a real impact. It will lead to certain economic implications. It certainly has also changed the risk perspective in overall markets. So there may be an element of a view, but there's certainly also an element simply of risk management, yes. I mean we have -- obviously we run our commodity business with a limit framework, and then there is a commercial view within. In those markets we may come closer to the limits and then simply make sure that at all times our risk-taking is in line with our risk-bearing capacity. And having a year pretty open, like '21 was with some 20, 25 terawatt hours, and a hugely fluctuating price is then a risk position that you would want and need to afford. So it was both a certain element of view but has also a certain element of risk management, and both taken together has then led to the changes.
As we have the press call upcoming, we have to end Q&A now. Thank you very much for all your questions. For the -- all the open questions, please contact our Investor Relations team. My colleagues will answer your questions during the day.Thank you very much for participating, and see you in the half-year call in August then.
Thank you. Stay well.
Thank you.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.