Uniper SE (OTCPK:UNPRF) Q2 2022 Earnings Conference Call August 17, 2022 5:00 AM ET
Company Participants
Stefan Jost – Executive Vice President, Group Finance and Investor Relations
Tiina Tuomela – Chief Financial Officer
Conference Call Participants
Wanda Serwinowska – Crédit Suisse
James Brand – Deutsche Bank
Vincent Ayral – JPMorgan
Deepa Venkateswaran – Bernstein
Sam Arie – UBS
Piotr Dzieciolowski – Citibank
Operator
Dear ladies and gentlemen, welcome to the Analyst and Investor Conference Call of Uniper. At our customers’ request this conference may be recorded. [Operator Instructions] May I now hand you over to Stefan Jost, EVP Group Finance and Investor Relations, who will start the meeting today. Please go ahead.
Stefan Jost
Good morning, dear analysts and investors. A warm welcome to the Uniper interim results call for the first half of fiscal year 2022. I am sitting here with our Chief Financial Officer, Tiina Tuomela, who will take you through the interim results presentation today, starting with a brief summary of the highlights and then commenting on the key financials. As usual, there will be a Q&A session after the presentation. Tiina, please.
Tiina Tuomela
Thank you very much, Stefan. A warm welcome also from my side. Thank you for participating in our conference call today. Looking back over the past month, it is clear that the year 2022 will mark a fundamental turning point for the European energy system. Uniper as one of the largest European importers of frost and gas is massively affected by this parading shift since 14th of June or already 64 days ago, Gazprom has reduced its deliveries of Russian gas significantly below contracted volumes. This development resulted in enormous financial challenges for Uniper, which ultimately led to the need for a governmental stabilization package. In today’s conference call, I would like to focus on Uniper’s financial situation.
Starting with operating earnings. Here, the Russian gas containment had already quite a sizable impact in the first half of the year. This significantly weakened the planned increase in earnings in the second quarter of fiscal year 2022. Nevertheless, the Uniper Group achieved an adjusted EBIT of €265 million in the isolated second quarter, significantly higher than the comparable prior year figure. Q2 earnings were supported by catch-up effects from gas optimization. Also, European Generation delivered a solid underlying result above seeded by a high negative carbon phasing effect, a higher-than-planned earnings contribution from Uniper came on top.
Despite the solid performance of isolated Q2, adjusted group EBIT ended up in a negative territory of minus €564 million at the half year mark due to the already quite negative first quarter. Adjusted net income turned out better than adjusted EBIT with a loss of €359 million. Uniper already withdrew its earnings outlook for 2022 at the end of June due to the uncertainties surrounding gas restriction and gas prices. As this uncertainty prevails, I will not issue a new earnings rate for the full year to date.
What is clear is that Russian gas containments will lead to record losses in the third quarter as well as for the full year. As of October 1, the German government will enable gas importers, including Uniper, to pass 90% of the procurement cost for the missing Russian volumes in the final gas customer. This cost as true will be implemented via a general surcharge of around €0.0204 per kilowatt hour, set on Monday by the Market Area Manager Trading Hub Europe. This will dramatically reduce Uniper’s losses from Q4 onwards.
Overall, we must now classify fiscal years 2022 and 2023 as transition years. For 2024, we see light at the end of the tunnel. The funding from the stabilization package, a structural reshaping of Uniper’s gas portfolio and expected strongly reviving operating cash flows other decisive building blocks for giving Uniper a long-term business perspective again. When it comes to the stabilization bucket, the signing of the term sheet was an important milestone but we have still quite some work ahead of us. I will come to this in a bit.
Before I do, I would like to share with you some thoughts on Uniper’s positioning in a very challenging gas market environment. European gas prices increased significantly over the last 12 months. This is the result of a change in cash from gas supply strategy for Europe. This became apparent as early as 2021 when we were already seeing lower supply volumes and fill levels in gas from German’s storage facilities. And this strategy developed in a political weapon in the course of 2022. Just under 70 million cubic liters per day, Gazprom currently supplies only around 8% of the total natural gas flowing to Northern Western Europe. This is drastically less compared to spring of 2022, where the market share was still around 20% or up to 250 mcm per day. A major part of the gas is now covered by LNG. And at about 200 mcm per day, many LNG regasification terminals in Northwestern Europe are operating close to the capacity limits. New LNG import capacity is strongly needed.
Germany should be able to commission a first floating regasification terminal in Wilhelmshaven with significant participation from Uniper by the end of this gas winter season. The first FSRU has a capacity of 7.5 bcm per year which corresponds to 8% of Germany’s annual consumption. But it should be mentioned that decisions still have to be made to back up the reclassification capacity additions with LNG supply. And here, Europe is competing on a global scale with other regions of the world for LNG supply that cannot be increased in the short term.
Looking at gas storages, Europe is currently well on track to reach the short-term interim target of around 70% to 75% as of September 1. However, at least in the case of Germany, it will be challenging to reach the 95% filling level as of November 1, given the current gas curtailment situation. Demand reduction seems to be inevitable. While industry has already reduced its gas consumption around 14% until the end of July, private households have so far saw little demand reduction also because they are not yet fully exposed to the current market prices. According to the recent statement by the German regulator, households will be also required to save at least 20% in order to stabilize the system amidst the latest drop in Russian gas volumes.
Discussed measures include regulation that would only permit the heating of individual rooms. When it comes to the current situation of Uniper, we have been significantly affected by the reduction in Russian gas flows. Mid-June Gazprom prompted the supply volumes to only 40% of the contractual volumes. Since end of July, the volumes have even dropped further to now only 20% of the committed gas flow. Combined with the increase in the spot gas prices, the economic loss related to the reprocurement of the volumes has increased significantly over time.
At the half year point, the operating loss from Russian gas supply to a payment amounted to roughly €400 million. As of today, August 17, the operating losses related to the shortfall in Russian gas have increased already roughly to €3.8 billion and continued to grow with a run rate about €100 million per day mark. The corresponding effect on our liquidity and equity position, have been addressed in the government and financing stabilization package.
On July 22, Fortum, the German Government and Uniper signed the term sheet for a stabilization package to address the financial impact from Russian gas curtailment and to allow Uniper to continue operation as a system-relevant energy supplier. The package consists of three interlinked pillars. Let’s go through one by one and see where we stand today.
The first pillar aims at limiting Uniper’s ongoing financial crane by implementing a mechanism, which allows Uniper to pass on 90% of its losses based on the Section 26 of the German Energy Security Act under which the higher cost of procurement will ultimately be borne equally by all gas customers in Germany. Over the last weeks, German authorities have finalized the corresponding ordinance that further specifies the elements of that mechanism. The ordinance forces that the cost pass-through will be effective from October 1, 2022 until April 1, 2024. For Uniper, this means that we will continue to work on a structural reorganization of Uniper’s gas portfolio, particularly with respect to the cash from LTC contracts in order to tractionally derisk our portfolio with regard to Russian curtailment risks.
The second pillar of the stabilization package aimed at securing short-term liquidity by increasing the existing KfW credit facilities from previously €2 billion to now €9 billion. The package is primarily intended as interim financing until new equity as well as equity-like instruments from a rating perspective of injected. The current liquidity situation is significantly impacted by losses from gas curtailment. More so recently, we have had to turn increasingly to the exchanges to reprocure gas volumes when transactions are immediately cash settled. When it comes to the margining, net margin in paid increased moderately from €4.5 billion at the Q1 stage to €4.8 billion as of 30th of June. However, as Nordic prices spiked after the H1 cutoff date, net margining has increased above the €6 billion as of today.
Over the last weeks, we have successfully implemented the extension of the KfW credit line and have now access to the full amount. Given the rising liquidity needs, we have partly utilized the additional headroom. As we speak, we have drawn €5 billion from the €9 billion KfW credit line. We expect to further increase the utilization over the next weeks until all elements of the stabilization package are in place.
Coming to the third pillar. Straight equity and equity-like instrument in the total amount of up to €8 billion. Additionally, if losses from gas curtailment that cannot be offset by operating profits from Uniper’s other businesses exceed €7 billion. The German government stands ready for further support. This backstop mechanism is supposed to happen in a way that is not further dilutive to existing shareholders. As you know, the new equity is to be used to reduce KfW loan draw-downs. This equity injected by the state is essential for securing Uniper’s investment credit rating. The fact that S&P Global, meanwhile, affirmed Universe BBB- investment grade rating underlies the effectiveness of the stabilization bucket.
Due to the strong governmental support, including the 30% equity stake in Uniper, S&P considers Uniper now a government-related entity. This status has enabled Uniper to retain its investment credit rating despite an overall weaker stand-alone credit quality. The current BBB- rate comes with the outlook negative, reflecting the fact that details of the stabilization package are still to be approved as well as prevailing uncertainties surrounding gas flows, which in S&P’s view may necessitate an increase of the government package.
Talking about the next steps. We are now in discussion with the government to agree and specify the individual elements of the term sheet, such as interest rate, duration of the facilities, implementation of the backstop clause, as well as the exact conversion mechanism of the mandatory convertible instrument. An extraordinary general meeting will be held to approve the planned equity measures. We are currently aiming to hold the AGM in the fourth quarter. However, the date of the extraordinary general meeting depends on the outcome of the EU state proceedings. As soon as we have sufficient certainty we will be able to send out the invitation to the AGM. The signing of the term sheet on the stabilization package was a very important milestone for Uniper. And now there is still a lot of work ahead of us in the coming weeks to conclude a fully fledged agreement.
Let’s now focus on Uniper’s operating business in the first 6 months of 2022. Let’s move on to the development of our main operating indicators during the first half of 2022, which directly reflects the extraordinary environment in which we are currently operating. As usual, we will start with an overview of our physical gas storage levels on the left side. The continuing supply disruptions of Russian gas since June 14 for Uniper to utilize its flexible gas storage portfolio to mitigate further shortfall losses. Accordingly, reduce billing rates and partial withdrawals led to filling levels of 48% at the end of June. Despite further supply cuts by Gazprom, Uniper was able to resume storage injections since the first half year reporting date.
Over to the breakdown of generation volumes in our European Generation segment. We can observe an overall flat development year-on-year as production increases in hydro and coal are offset by shortfalls in gas and nuclear. However, it should be noted that the coal segment was able to fully compensate for the volume shortfalls related to the disposal of scope lignite fire power plant at the end of the Q3 2021 as well as regulatory generation restrictions affecting the Dutch Maasvlakte 3 power plant.
Hydro volumes slightly increased by 3%, following improved inflows in Sweden due to higher precipitation and snow melting. And unavailability of our Oskarshamn power plant Unit 3 in February 2022 led to a minor production decrease of 3% in the Swedish nuclear fleet compared to previous year. Meanwhile, European fossil generation shows only a slight overall increase of 2% compared to the first 6 months in 2021 and with gas-fired power production down 3%, while coal increased by 7%. This is a direct result of the current tight market conditions.
European wholesale gas prices continued to show sharp to new record highs, benefiting a fuel switch from gas to coal trends which we have already discussed in our annual results for 2021 and now being further fueled by the Russian-Ukraine war. Gas-fired volumes in our UK business have been additionally impacted by an unplanned outage to a storm damage in our Ukraine power plant Unit 7 back in February 2022. The segment, Russian power generation shows a material increase of around 17%. This positive development can be attributed mostly to three factors. Firstly, the recovered and still growing domestic electricity consumption; second, decreasing hydro generation in Siberia, benefiting the utilization of the Berezovskaya power plant; and thirdly, the full contribution of Berezovskaya Unit 3, which returned the service in May 2021.
Unsurprisingly, the strong increase in fossil-fired power generation in our Russian business also impacts our group-wide carbon emission which increased by 12% year-on-year. At the same time, emissions for the isolated European Generation segment actually decreased by 7%. This reflects the successful replacement and phase out of less efficient coal power plants. Our specific carbon intensity increased in the first 6 months of 2022 to around 489 from CO2 kilowatt hour compared to the previous year, which can also be explained by the higher utilization of coal units in Russia.
Let’s move on to the financial KPIs for H1. Overall, looking at Uniper’s financials after the first 6 months, we see as expected a significant decrease in the key metric. However, there are three important messages around those figures. First, as highlighted earlier, the major risk to Uniper’s earnings and liquidity has been addressed with the support of the German government. Second, the underlying business assigned from the Russian long-term gas contract is sound. This might not be visible at first site, but we will get to the underlying business drivers in a bit. Third, unprecedented high prices in combination with extreme market volatility have a strong impact on operating cash flows and net debt.
Having said that, let’s take a closer look at the KPIs on this chart. Uniper’s adjusted EBIT is negative by almost €600 million and thereby, down by more than €1.1 billion in a year-on-year comparison. However, we experienced a strong isolated Q2 with a positive adjusted EBIT of roughly €270 million, which is around €420 million higher than the last year’s second quarter. Due to somewhat increased depreciation, the negative swing year-on-year is slightly more pronounced for the adjusted EBIT than it is for the adjusted EBITDA. The adjusted net income generally followed the EBIT development but decreased only by roughly €840 million year-on-year. And it was positively impacted by lower taxes and remeasurement of provisions for hydro assets according to the higher interest environment.
Nevertheless, the absence of interest income from Nord Stream 2 somewhat offset those positive effects. The reported IFRS net income shows a loss of more than €12.3 billion. Already since Q3 2021, Uniper is experiencing a substantial divergence between the adjusted net income and the reported IFRS net income. Overall, there are three key drivers that led to this very significant gap between reported and adjusted earnings. I will come to this later. The highly negative IFRS net income consequently also leads to an equity deficit of €4.5 billion as per end of the first half year 2022.
Moving on, the operating cash flow amounts to minus €2.2 billion. And finally, the economic net debt ends up at around €2.1 billion, which is €1.7 billion higher in comparison to the year end 2021. As usual, we will now continue with a more detailed view on the key metrics, starting with the adjusted EBIT on the next slide. This chart highlights the key components of the year-on-year development of the adjusted EBIT. The overall delta for the first half year is significantly negative with minus €1.1 billion. The main driver being the losses related to Russian gas payment.
On June 14, Gazprom decreased gas flows to Germany via Nord Stream 1. Two days later, the growth payments grew to a level of 60%. Uniper needed to reprocure the missing volumes at significantly higher prices in the spot market in order to supply its customers. As mentioned before, the total number at the H1 stage amounts to roughly €400 million.
The second largest driver year-on-year is the well-known carbon-phasing effect. Even though CO2 prices have stabilized in 2022, they were still considerably higher compared to H1 2021. This led to significantly higher CO2 provisions at the H1 stage. This is a temporary effect that will, once again, fully reversed in Q4. As CO2 prices increase, we have to increase our CO2 provisions, leading to higher expenses within the year. Economically, we have hedged our CO2 exposure but the offsetting gains on our hedges are not recognized within adjusted EBIT until the hedge deal settle, which is in Q4. Given the increase in CO2 prices, the CO2 phasing effect reached €400 million in absolute terms which is about €250 million more than 1 year ago. The gas curtailment and CO2 phasing effects amount already roughly €650 million in total i.e., explain more than 50% of the recorded earnings decline.
With those two large effects out of the way, let’s have a closer look at the underlying business. European fossil generation is down roughly €160 million year-on-year, driven by disposal of our last European lignite assets coal at the end of Q3 2021, higher procurement costs and lower quality related to the replacement of frozen coal. Lower UK capacity income from decreased auctions, result from the current period. Higher optimization results especially from favorable clean dark spreads in Germany and higher clean spark spread in UK were largely offset by higher depreciation in 2022 as a result of write-ups for our fossil fleet at the year-end 2021.
In our outright generation business, results are down by roughly €70 million versus prior year. In the Nordics, our assets mainly suffered from significantly lower achieved prices, driven by deteriorating EPAD, i.e., electricity price area differentials. Those reflect the differential between Nordic system price and the price in the corresponding delivery zones.
Due to limited market liquidity, the exposure to EPAD cannot effectively be hedged, especially in the Sundsvall area or S2 area where Uniper’s Nordic hydro acid allocated, EPAD have reached historic lows, driven by oversupply and contested critic connections. This development resulted ultimately in significantly lower average achieved prices for our Nordic outright portfolio.
On a very positive note, our German hydro assets are performing very well. Despite slightly lower hydro volumes and buybacks of hedges, volumes caused by lower precipitation, Uniper’s German hydro assets benefited from the generally positive power price development and higher spreads for pump storage power units. After having separated effects from gas curtailment let’s have a closer look at the underlying performance in the gas midstream business.
Without the curtailment effect, the contribution from the gas midstream business would have amounted to roughly €120 million after 6 months which is about €100 million lower than the performance last year. If you remember, in Q1, we saw here a negative year-on-year deviation of €1.2 billion. Back then, we had highlighted that this would be only a temporary margin shift driven by the way how we optimize our storages. We can conclude that the back swing has materialized at the H1 stage.
Next, the international commodities business, which is down by nearly €200 million versus prior year after a very strong previous year when our U.S. and LNG business strongly benefited from volatile market developments during extreme weather events in the first quarter of 2021. With regards to our LNG business, as you know, there was an explosion at the Freeport liquefaction factory in the U.S.A. Due to the explosion LNG offtakes have been fully stopped until October. Afterwards, the operation will only partly be resumed until year-end. As we have long-term LNG offtake agreement with Freeport, our cargoes will be impacted as well. However, at the H1 stage, no cargoes were yet affected. Hence, there is no financial impact visible yet.
When it comes to our Russian power generation, we see a very strong performance with an increase in earnings by more than €80 million versus prior year. The business benefited from higher utilization of the fossil fleet and significantly higher day-ahead market prices, especially in the Siberian price zone. As hydro generation decreased, while energy consumption increased with the commissioning of a aluminum smelter. Furthermore, [indiscernible], CSA capacity payments contributed fully to this year’s earnings after its commissioning in May 2021, which overcompensated for the transfer of the Unit 7 and 8 of the power plant Surgutskaya from the CSA regime to the lower generated regime. Additionally, the current ruble development supported earnings by around €10 million. Finally, the other category, which amounts to roughly minus €50 million year-on-year and summarizes for the most part consolidation effects.
Over to the reported net income breakdown. Usually, we focus on the adjusted KPIs in our financial communication in order to clarify the underlying operating drivers. However, given the very extraordinary negative amount of around €12 billion and the underlying components, it is also important to understand the drivers of the unadjusted IFRS net income to avoid misinterpretations.
In total, there are three highly negative effects at play. First, the expected losses related to Russian gas attainment for future delivery periods are already reflected within the non-operating earnings as the mark-to-market from the corresponding hedge deal is to a last decree no longer offset by positive mark-to-market values related to Russian LTC gas. The corresponding amount of €6.5 billion has been determinated in accordance with IFRS rules as of 30th June and is based on the set of scenarios. Those losses will realize within adjusted earnings at the time when the deliveries actually take place.
Second, net impairments in the amount of almost €2.7 billion related to Russian innovation and the gas curtailment. This figure includes the full impairment of the Nord Stream 2 loan and the impairment of the goodwill as well the assets in Uniper in the light of revised country risk premium as well as lower growth assumptions for Russia at the end of Q1. In Q2, also a full impairment of goodwill within the segment, global commodities was recognized. The latter is fully related to the non-performance under the gas from LTC which also led to a corresponding growth rate decrease from 1% to 0.5%.
Third, like in the previous quarters, the IFRS net income is suffering from an asymmetric accounting treatment of hedges and underlying assets. As commodity prices have increased, the mark-to-market values of our sales hedge position have significantly decreased, which is reflected in IFRS net income. However, the corresponding appreciation of the underlying assets like inventories and power plants is not reflected within IFRS net income as those assets are capped at historic cost under IFRS. Therefore, the corresponding value gains from the underlying assets are not recognized until the assets go into the delivery. If prices decrease or latest once the delivery take place this mismatch is resolved.
Finally, there is an offsetting positive effect that is primarily driven by tax effects on the non-operating losses. Hence, in a nutshell, the minus €12 billion in IFRS net income driven by effects that either have been already anticipated, i.e., the potential economic impact from the cash flow payments and the impact done in the light of Russian energy crisis or are not reflecting the economic situation of Uniper, i.e., the orally familiar IFRS accounting mismatch when it comes to valuation and hedges and our underlying assets.
Next slide addresses the operating cash flow development. The operating cash flow after interest and taxes amounted to roughly minus €2.2 billion after 6 months or almost €2.6 billion lower than last year at this point of time. As mentioned in the full year call, Uniper implemented measures that improved OCF in Q4 2021 by approximately €2 billion in order to ensure liquidity for margining requirements in an already extreme market environment. This led to an extraordinary high operating cash flow of €3.6 billion at the year-end 2021 which will burden the cash flow rates for 2022 and 2023 as expected.
Looking at the reconciliation of adjusted EBIT to operating cash flow, it becomes clear that they are besides the already discussed operational development, two categories driving the overall OCF development. First, the item other with an amount of around minus €800 million. This category records primary all CO2-related provision and working capital movements. The high negative effects, reflects one of the main cash gearing measures around year 2021. The postponement of payments for CO2 certificates from Q4 2021 into Q1 2022. Accordingly, the OCF in 2022 is burdened by roughly €1 billion from this measure. However, this effect is partly offset by a high CO2 provision buildup in the first 6 months of 2022, which is burdening the adjusted EBIT, but not the cash flow and is therefore positively reflected in that category.
Second, changes in working capital with as well around minus €800 million. This category summarized all movements in our inventories as well as in operating receivables and liabilities. In the first half year of 2022, this category is primarily driven by inventory movements from the ordinary business like injection of gas in our storage and the buildup of coal inventories in pulp cases at elevated price levels.
Next, the development of the economic net debt. After 6 months of 2022, the economic net debt stands at €2.1 billion, which is about €1.7 billion higher compared to the beginning of the year. Obviously, the main driver here is the negative operating cash flow of minus €2.2 billion, which is overcompensating the main positive impact stemming from lower provision for pensions. Since the beginning of the year, inflation rates have increased to level not seen in decades. Accordingly, Central Banks supplied by significantly increasing interest rates. Rates used for pension measurements moved in Germany from 1.2% at the year-end, now 3.4% and in the UK from 2% to 4.1%, respectively.
Due to those higher discount rates, pension provision decreased by roughly €600 million. Net provision for asset retirement obligation on the other hand, increased by around €100 million. This was driven by an increase in the value of Uniper Swedish nuclear waste fund, so-called of assets due to downward trends in stock and bond markets during the first half of the year.
And now the final slide of today, where we would like to give you at least some flavor around future earnings prospects. Even though it might seem far away, it is not too long ago that Uniper concluded 2021 as one of its strongest fiscal years. Back then, we expected 2022 to turn out in a similar fashion. However, as a consequence of the gas curtailment and due to the resulting uncertainty, Uniper has to withdraw its 2022 financial guidance end of June.
So, how to think of 2022 now? When we had communicated the stabilization package on July 22, we have disclosed that the expected curtailment losses based on certain assumptions until October 1 would already exceed €6 billion. As you know, even in good years, Uniper’s other business cannot fill this gap. Furthermore, even though one can expect certain parts of our business, such as the dark spread portfolio to develop positively in the market environment of 2022. There will be also negative impact, i.e., related to already mentioned Freeport fire that will significantly affect our LNG business.
Having said that, there will be no new earnings guidance given today. However, based on the public information, it should be quite clear that Uniper will probably face a substantial loss between a mid to high single-digit billion figure when it comes to the operating earnings for 2022.
Looking at 2023, the picture will improve significantly, with 90% cost pass-through mechanism being in full swing and an overall less severe gap between gas sales prices and procurement costs, Uniper should be able to take a material step towards positive territory. However, as Uniper still has to bear 10% of the incurred containment costs, the breakeven point will most likely not to be reached until 2024.
When it comes to the year 2024, it is expected that the cost pass-through will end after April 1. However, due to the fact that only a small fraction of gas volumes has already been hedged for 2024, this year is more like a plant canvas for the future setup of Uniper’s gas business. It is clear that we cannot continue to apply the same concept that have been beneficial for us and our customers throughout the past years. Therefore, we are currently working intensively on redesigning the way how we run our gas midstream portfolio in order to fully mitigate gas containment risk going forward. This will have an impact on how we market our gas volumes to customers and therefore shape the future car system of Germany. Hence, there is a ample work ahead of us but Uniper is ready to take responsibility in reshaping the future gas system.
This brings me to the end of my presentation today. Now I’m looking forward to taking your questions. So Stefan, please?
Stefan Jost
Thank you, Tiina. We are opening the Q&A session now. And dear investors and analysts, as usual, please limit yourself to two questions each. Operator, the first question, please.
Question-and-Answer Session
Operator
And the first question is from Wanda Serwinowska. Please go ahead. Your line is now open.
Wanda Serwinowska
Good morning, Wanda Serwinowska from Crédit Suisse. Two questions from me. The first one is on the Freeport LNG terminal outage. Could you please quantify the expected losses? And then the second question is how the backstop of guaranteeing no dilution of shareholders beyond the €7 billion losses will work? I mean given where that TTF word curve is today versus 1, 2, 3 months ago, the losses might be higher than we previously expected. And more over your 2023 guidance suggest negative EBIT, so pretty obvious that the €7 billion threshold will be met. And if I may squeeze one more comment from you on the low levels of the Rhine River in Germany. I mean, where do you stand on the coal supply?
Tiina Tuomela
Hello. Good morning, Wanda and thanks for your questions. So the Freeport losses, so clearly will depend on the repurchase prices, but maybe to give you some kind of size, it is mid to high triple-digit number, what will, in a way will occur. But of course, we will come back to that later when we know how and when the port is back in operation and in which form. Then about the backstop I think this is really one of the key elements in the stabilization package what was agreed, particularly exactly for the reasons you mentioned that the prices, the curtailments, values in a move. So it was in a way it up, that there is kind of the toolbox. We have the loan element, we have the equity element, we have the cost pass-through element and this – then the backstop in a way, putting in place to have some kind of limit to the part what Uniper will carry. What is the exact element? So unfortunately, I cannot exactly say today because it is under discussion. I think the important part is that it’s not diluting the ownership of the current shareholders. And it is, in a way, also impacting to our equity in the accounting wise also to keep our ratios in good order.
Then to the Rhine, yes, we can also see it here in the levels are really, really, really low – and what we can see that it is impacting to our operation somewhat in the power plants. So how we dispatch, how we put operation, what is the maximum capacity of the power plant? So we are taking account the levels and also anticipate what is coming. What we can say is that in – so far, there are no significant impacts when it comes to the – our numbers. And our in a way, readiness is that we try to keep the call talk about 2 weeks stock reserve. So we have reserved for different roles and also that in some places, it is the Rhine way it comes, but also we use trains. So there are also other alternatives. But clearly something what we monitor and steer very, very closely.
Wanda Serwinowska
Thank you, Tiina. Just a quick follow-up on the back store because when we think about the potential measures, I mean, the equity – it’s no debt or additional credit line will not solve it. So the only thing that comes to my mind is basically 100% pass-through or some state aid. Is there any solution that I missed in my list or anything that you can share?
Tiina Tuomela
At the moment, unfortunately, I can’t share. I know we have very clever people from all side port, German government, Uniper, many advisers also looking. So we are working to make a good mechanism and in a way, we fulfill the purpose of the backstop clearly, very important element for us.
Wanda Serwinowska
And would you be able to basically confirm that neither that no equity would be a solution?
Tiina Tuomela
At this point of time, I would not like to speculate. So we have all the – all the option in the table, and it will depend the conclusions and negotiations what we have currently with all the parties.
Wanda Serwinowska
Thank you very much.
Operator
The next question is from James Brand, Deutsche Bank. Your line is now open.
James Brand
Hi, good morning. Thanks for the presentation. So I had two questions, but I might try a third thing as band got away with it. Firstly, I was interested in understanding how the tax works on these losses. You had €2.1 billion of other on your provisions, which you said was kind of mainly – I said in the slide mainly non-operating tax effects. So should I think of that as you get a €2.1 billion deferred tax assets that you can utilize over time? I presume it’s non-cash, you’re not expecting to actually get payments back from the government. So that was the first issue understanding the tax losses. Secondly, on the kind of bailouts and potential equity injections at the moment, minorities don’t have any rights as far as I understand it, to participate in that. It seems a bit harsh to be planning on potentially issuing huge amounts of equity at big discounts and not giving the 20% minority, any right to participate in that. Is that right? Or is there some possibility that minorities might have the option of participating in any convertible equity issuance? And then the third one, if I just may try and get away with it. On the levy, the $0.024 was that a bit lower than expected because I know you didn’t expect it kind of $0.02 to $0.03. But since then, the Russian deliveries had gone down and the gas price has gone up a lot. So I kind of had in my mind that might even be as high as 4, was that 2.4 lower than expected. Thank you very much.
Tiina Tuomela
Thank you, James, for the questions. So the first question related to taxes. So yes, those taxes on the losses are deferred, and it does not have the cash effect. And as the biggest losses are coming in Germany relates to gas curtailment. So – it is the 31% on tax loss, which impacts mostly this number. Then what comes to the equity and the minority in a way, participation. So currently, this convertible instrument is only for German government exclusively. So, no, in a way, mechanism at the moment which would in a way, take the wider shareholders into the account. Then the levy or surcharge of $0.024 per kilowatt hour, so from our point of view, of course, the calculation is not that transparent that we know how it is calculated. We know this is the value where the surcharge will start, but it will be updated on a three-month basis. I think what is from our point of importance is that relief of the 90%, and that will be adjusted accordingly. Accordingly, what is the curtailment value and prices. So, this is the mechanism which in a way is now tested, and I am sure that on the way it will be further defined.
James Brand
Thank you very much.
Operator
The next question is from Vincent Ayral, JPMorgan. Your line is now open.
Vincent Ayral
Yes. Good morning. Thank you. First question on the gas curtailment again. You have been talking about 3.8 million in a run rate of about 100 million per day or more. So, that would be about €8.4 billion of losses by the 1st of October. When we look at the impairment, you did at €6.5 billion being on the net income, that’s about €9.3 billion. And so, it means another €900 million only, it’s close to the €700 million you were expecting for Q4. Have you impaired anything for 2023, in your accounts on this H1 results? So, that will be the first question. And the second, I will come back, I mean obviously, on the backstop, we don’t have – we won’t have any visibility today on what could happen there. So, I will skip to the convertible here. You got up to €7.7 billion of convertible, but it is self-referencing the future Uniper share price and that puts – that’s a pressure potentially is trading and vaccinating the implied dilution. So, can we expect a minimum conversion price, or what is the support to the Uniper share price? What we are seeing is Uniper is willing to take responsibility here for shaping the German gas supply system, which was among other things, if you don’t mind, German politicians is taking the full responsibility and minorities are paying the full price. Is there any support to Uniper share price in this convertible coming? Is it something you are looking at with the authorities? So, these will be the two questions, and I will have last one then it seems to be on today for that. It’s good to see that your Russian division is doing well with the region of Berezovskaya. Now the question is, how can you repatriate this cash? And I come back to a question already asked before. Basically, what allows you to keep consolidating these activities? And what will be the threshold where basically you would not be able to do it anymore, I am talking here about Uniper. Thank you.
Tiina Tuomela
Thank you, Vincent, for the questions. So, the first one related to gas curtailment and the impact to our accounts. So, basically the €6.3 billion what we showed in our IFRS results, this is the anticipation of the losses as of 30th of June that was made with the different scenarios. So, as we know, containment prices might change. So, board of management made a set of scenarios with certain probabilities and in a way, calculated net percent value of those impacts. So, of course, this is the estimation and will be further defined. The other important impact is that, of course, the curtailment was also reflected to any items in our balance sheet. So, we had the impairments in Q1 made to not directly the curtailment but Nord Stream 2 and then the Uniper, but now also the global commodities in a way, LTC contract plus in a way, the goodwill written down. So, when it comes to the 2023, all impairments as of today also are done. Of course, if the assumption will change, we will look at that later then and reflect the current situation. So, then…
Vincent Ayral
Sorry, just to recap the answer, to be sure I understand. You are saying it was based on assumptions as of 30th of June. And when I did the math, it shows that it would already be materially too low and you say it will be updated further down the line. Is it a fair understanding? Sorry, about your answer.
Tiina Tuomela
So, it is fair to say that assumptions made on – in a way, reflect the closing balance sheet date. Of course, I think the scenarios will be updated. I wouldn’t put any in a way, exact number. At the time, the gas price was around €145 per megawatt hour for gas. We also used the higher gas prices. So, this is clearly challenging item to calculate and forecast, but clearly says that we anticipate losses from the gas curtailment. Hopefully, that gave some more clarity. But clearly, we will update in the Q3 and of course, the losses would occur on a daily basis. So, those are kind of cash impacting the €6.3 billion also the future looking. Then the question about the backstop. So, no, if I remember any more of that question.
Vincent Ayral
It was on the convertible, the backstop has been asked a few times, and you are not providing visibility there. So, my question was the convertible itself referencing future unit per share price. So, that means if the market anticipate the coming dilution, the share price goes down. And therefore, the software trend goes down and it’s even more dilutive. So, the question here is, is there any support any minimum conversion price, anything we can see coming? Is it something which has been accounted for by Uniper, the government has been set back. Can we expect something positive there with support to the share price?
Tiina Tuomela
So, clearly, I understand your concern, and we are looking at that topic also. The terms in general are still under discussion, including what is the exact convertible mechanism. So, unfortunately, I am not able to provide more information at this stage, but we will come back – we come back as soon as the whole stabilization package and the terms are agreed. Then the third question is related to Uniper and how do we consider that in our accounts, as presented, we will consolidate the accounts. And the basic reason is that, we still hold the controlling rights. So, we make the decision. We have the controlling rights. So, from accounting point of view, it is fine to consolidate. Clearly, this is also the item that we monitor and see that if there are new in a way, restriction coming on, but for the time being, still part of our group company.
Vincent Ayral
Thank you.
Operator
The next question is from Deepa Venkateswaran, Bernstein. Your line is now open. Deepa, your line is now open, you can ask.
Deepa Venkateswaran
Yes. Mute on here now. Sorry for that. I have still one question we can answer. It is on the backstop, but more around the mechanism of the set off of losses and profits from the other divisions. Just wondering whether it is based on your current year’s profits from the other division, or would it look at future profits is some kind of cumulative set of? And I am guessing the operating losses? And I was also curious that in the credit report from S&P, they don’t refer to this backstop. They talked about all the under measurements but not the backstop. So, I was just wondering is this a lower level of assurance to them because the [indiscernible] just wondering on is not talked about it and how loss from the other process level is taken in open?
Tiina Tuomela
Clearly, this backstop is an important topic for us and also for the investors, the – what is, in a way, said that this is the accumulated loss €7 billion, which cannot be offset from the profit. So, this is the basic mechanism. The backstop purpose is to be very positive to the company, but also for the shareholders. So, hopefully, this is giving the floor of how far this could go and drive also the stabilization and the share price development in the future. But unfortunately, today, I am not able to provide more details as this is fairly complex topics and under discussion. But clearly, your point and concerns will be taken account also in our discussions.
Deepa Venkateswaran
And when do you think we can have clarity around the backstop, because I think that clearly probably the most important to your shareholders? Is it before the AGM or what?
Tiina Tuomela
Yes, I think this is a very key element. We have these three pillars in the package and then the backstop. So, this is the full package and we need to take all the different elements into the account, get the EU approval for – from the state perspective. And then we will take the package to the AGM for the shareholders to decide. So, I think it is only when the full bucket is in a way all elements come through. So, it will be disclosed.
Operator
The next question is from Sam Arie, UBS. Your line is now open.
Sam Arie
Hi. Thank you. Good morning everyone. Can I check, you can hear me okay?
Tiina Tuomela
Yes, we can hear you, Sam. Good morning.
Sam Arie
Very good. Good morning and thank you for the presentation. I think I just want to start by acknowledging, I guess this is pretty exceptional situation, must have been very tough few months for everyone at Uniper. So, we really appreciate the extra patience and details that everything asked today. I think most of the questions have been covered already, but I just want to add one, if I may, on Unipro. And I think you enforce and have said in the past that you are now actively trying to get an exit from Russia. I just wondered if you could comment a bit more on whether at this stage you feel that there is going to be a viable way to exit from Unipro with any of that lease? And also a further related question, is it still fair to think that the kind of worst case outcome on Unipro would be that the shareholding isn’t worth anything, or are there any scenarios in which as a parent company, you could be called upon to cover any other liabilities at Unipro and then the value of it could become negative in some way?
Tiina Tuomela
Thank you, Sam. So, clearly, Unipro, as we can, first of all, all see that is performing greatly in the challenging environment and made very strong results. So, that clearly also has raised the interest for the asset in Russia. And while we started the process at the end of last year and put in the whole, but currently, we are evaluating options and figuring out because our strategic goal is to exit from Russia as we, in a way, communicated earlier. When it comes to the individual discussions with parties, so you surely understand that we can’t comment any detail how to take the account. There are – the regulation is changing and new elements are coming out. If we refer now the recent presidential decree related to energy assets, so I don’t think it really has fundamentally changed anything since in any case, the transaction to take place, we need to get the approval from Russian authorities. So, I think this was the case earlier and it will be the case now. But when we are at that stage, we will go through that formal process. And I am sure that as the asset is vital for Russia, performing well. So, it will soon or later, have a good news on that.
Sam Arie
It’s very clear. And the second part of my question, and I sort of acknowledge, of course, the performance is good at the minute. But I am just trying to check if there are scenarios where you could be, I don’t know, under a local obligation in Russia, I mean you could imagine, for example, operating an asset but due to sanctions and so on spare parts can’t be attained or servicing or maintenance can’t be turned, but you have an obligation to deliver and somehow as a shareholder, you get called on to somehow put more money in. Is that a scenario we should think about, or is the worst case scenario from your point of view for Unipro that is what, zero?
Tiina Tuomela
Yes. When it comes to the operation, so as for example, the Berezovskaya new plant and overhauls, usually, the bigger ones comes in a way later on. So, in that sense, we don’t foresee any big hiccups. What comes to the financial risk, I think it’s the impact to us is, in general, fairly limited and in many places, no. How external worse is, so not that much value you put on that one. So, I wouldn’t see that there is a big one of the risk for us.
Sam Arie
Okay. Thank you and thanks for everything else today, the kind of information in the presentation today.
Tiina Tuomela
Thank you very much.
Operator
The next question is from Mr. Dzieciolowski, Citibank. Your line is now open.
Piotr Dzieciolowski
Hi, good morning everybody. Piotr Dzieciolowski from Citi. Two questions from my side, please. So firstly, I wanted to ask you about the net debt. How do you think you will end up the year considering the kind of negative cash flow or the convertible? And is there anything else? And where this net debt needs to end up in absolute figures for the credit rating for you to achieve the credit rating you want? And second question, I wanted to ask about this indication for 2023. How much of these Russian losses you embed within this number and why these losses are treated different than the losses for the second half of the year where you simply impair them straightaway into your P&L?
Tiina Tuomela
Hello, Dzieciolowski, thank you for the questions. So, clearly, the net debt is burden in the short-term with additional loans. However, when we get the full packet in place, including the equity, so the net debt equity, we will call back to our normal level in our levels, and it would be compatible with our rating KPI. So, clearly, this is the one very important key parameter, how we look at the stabilization package and the different elements that we need to have our main KPIs so that we can keep the investment rating. Then the – sorry…
Piotr Dzieciolowski
No. That’s I understand, no problem. Let’s go to the second question.
Tiina Tuomela
Very good. The second question related to how we have, in a way, impaired. So, I think the €6.5 billion, what we indicated today in our results. So, it is the combination of the different scenarios at a specific date. So, basically because we are not able to say that what is the exact curtailment percentage of price. So IFRS in a way requires in that case, you look at the different scenarios and you put the different ways. And so this is the estimation done from that date. So, then what comes to the 2023, so I can’t exclude that there wouldn’t be any new number, but we need to look at that one when the day and the numbers are present. I think it is clearly very different when the stabilization package backstop is also in place. We know what would kind of element that is and also the surcharge. So, it will be a different scenario and losses in any case, should be lower.
Piotr Dzieciolowski
Accounting treatment because the losses for the next half year, you put through the non-operating elements. And into adjusted EBIT, you don’t show – I am not sure how the €6.5 billion we convert into the adjusted EBIT loss, which you are guiding for the second half of the year and then into ‘23. So, I just wanted to understand how you will treat these losses?
Tiina Tuomela
Yes, very good. So, basically, in our actual numbers, so like in Q2, so we have already incurred losses and the number was €400 million. If we were able to make the account today, so our incurred losses are €3.8 billion. So, that would be seen in our adjusted EBIT. So, basically, while the losses are realizing basically, the number is kind of transferring from the non-operating part to the adjusted EBITDA. So, the other one is in EBIT actual numbers and then other operating losses in a way, the anticipation of the – so the number, €6.5 billion should go down, whether we call…
Piotr Dzieciolowski
I understand. And €3.8 billion that relates to the second half of the year, right? And then beyond that…
Tiina Tuomela
Yes. Unfortunately, it is only up-to-date the number, so…
Piotr Dzieciolowski
Understand. Thanks very much.
Operator
This concludes our today’s Q&A session, I will hand back to Mr. Jost.
Stefan Jost
Alright. Thanks for your interest. And yes, this concludes the session for today. Thank you for joining us. Speak soon.
Operator
Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may disconnect.
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