Fortum Oyj Corp Ord

Good morning, everyone, and welcome to Fortum's joint webcasted news conference on our first quarter results here today. Due to the COVID-19 situation, this event today is virtual with no physical attendance. My name is Ingela Ylves and I'm heading the IR team at Fortum. And in normal order, this event is being recorded and a replay will be available on our website after today's presentation. As Uniper now has become part of the Fortum group, we today present for the first time Fortum's financials, including Uniper's consolidated balance sheet. Our CEO, Pekka, and CFO, Markus, will go through the Q1 2020 figures and performance. After the presentation, we will open up for questions and answers. And as a reminder, you are also able to ask questions on our webcast chat. So without further delay, I hand over to Pekka to start.

Thank you very much, Inge, and dear investors, good morning. We published this result in the middle of historical uncertainty. We all know that the world will face a major recession, and nobody currently knows how deep and how long that recession will be. We are analyzing different strategic scenarios. We are, of course, in the middle of a very big strategic transformation with Uniper, and I can assure you that we are monitoring the economic situation caused by COVID-19 all the time and feeding that into the various scenarios for the different strategic options that we have. We are, of course, now a much larger company than before. Our top line, when consolidated with Uniper, will be one of the largest in the Nordic region. We will be the second largest nuclear producer in Europe, and we will be the third largest CO2-free electricity producer in Europe. In the middle of this uncertainty, we are happy to present Quite a solid set of results. All segments except city solutions had better or same result as last year in Q1 in 2019. Nordic power demand decreased by 3% in Q1. So there you see that COVID-19 did not have any major impact yet on the Nordic power demand. And actually, the April demand was even slightly higher than in April last year. What it did have a major impact, no, not COVID, but the weather had a major impact on heat volumes during Q1. So we had a very mild and wet and windy winter. As said, effects on power price demand were only limited, but on heat price demand, they were quite big, which is then seen in the city solutions results. So it was really the hydrology that pushed the prices down in addition to the other weather conditions, combined with weak commodities, which of course indirectly affect power prices also in the Nordic region. The spot price was down a lot in the quarter, 67 percent, which is of course a very steep drop in the short period of time. Our hedging has succeeded well, and that's why our achieved power price was down only 11% in the quarter. The CO2 price was also volatile. It dropped to around 15 euros per ton, but has since recovered to around 20 euros per ton. I will come back to the COVID-19 effects a little bit later in the presentation. Looking at the quarterly results, first of all, our comparable EBITDA and comparable operating profit both were roughly flat compared to last year. But then in items affecting comparability, we had 430 million euro sales gain from the divestment of Joensuu district heating. And there was also a one-time accounting item of 222 million negative sales which has to do with the consolidation of Uniper, and Markus will explain this in more detail. This item is non-cash. So all in all, when then including our share of Uniper's result, which was 469 million euros, we had a pretty strong start for the year in terms of net profit. It was one euro and five cents, and of course for one quarter this is an excellent result, though that for Uniper as an associated company this includes both Q4 and Q1. Without this non-cash item 222 that Markus will explain the EPS would actually have even been 130 but 105 is the reported EPS. The consolidation of Uniper has now changed our business profile quite a lot and that's why We have now put our financial targets under review, and our goal is that they will be revised by the end of the year. We now seek strategic alignment with Uniper. That is work that we want to do extremely thoroughly, and once we have conclusions on that work, then will be the time to publish new financial targets. What I do want to emphasize, though, is that we have not changed our dividend policy, and when it comes to balance sheet, our key driver right now is to secure our credit rating of a level of at least triple B. So those things, of course, have not changed in any way. And we will come back to more detailed financial targets once the strategic alignment with Unipro has been done. Some other highlights for the quarter. Of course, and I will comment Uniper again in a second, but we now own 73.4% of the company. It is now consolidated as a subsidiary. We have now appointed four out of six shareholder-nominated Uniper supervisory board members, including the chairman. So we have taken several important steps during the quarter in the Uniper project. Other highlights of the quarter, I already mentioned Joensuu divestment, where we booked a €430 million gain. We have now also closed what we have called Nordic Wind Capital recycling, and we expect to release €250 million capital. All of it will not be in Q1, some of it will be in Q3, but altogether €250 million capital to be released. We keep 20% ownership in this portfolio, but 80% has been divested. And then finally, one transaction which is perhaps financially a little bit smaller, but quite important demonstration of value creation possibility through technology investments, in this case electric mobility. We made a deal where we divested the majority of our Nordic charging network, EV charging network. We retained 37% ownership in that business, and this transaction valued this network at 140 million, which is significantly higher than what we had invested in it. So this has been excellent value creation. We have about 1,300 public charging points that we are operating and additional 1,400 charging points in Norway, Finland, and Sweden. So, again, enterprise value, 140 million for this fleet. We continue to operate EV charging services. We will be a smaller owner in physical infrastructure, but when it comes to the service and software layers and those aspects of the business, we definitely continue to be a strong player in EV charging going forward. Then back to power demand. I already mentioned that the Nordic demand was fairly stable in Q1. It was only down 3% year over year, so virtually no COVID-19 impact there. But in the larger European markets, there was clearly an impact, especially when you look at France and Italy here. that impact started in March. January, February was pretty much normal. On a quarterly basis, France was minus 5% and Italy minus 7%. But as you can also see from this chart in March, and it has continued to some extent in April, then the drop has been quite significant. There has been days and weeks where the drop has even been 15% to 20% in some markets. Here you see a risk map associated with the COVID-19 situation at Fortum. So far, the impacts have been very limited. There is virtually no direct financial impact in Q1 results. But then, of course, going forward, much of this will come indirectly. We will be facing a significant recession. and weak economic overall situation, of course, will most likely affect commodity prices. It will affect power demand, especially on the industrial side, not that much probably on the consumer side, but definitely on the industrial side. It could affect some maintenance and overhaul schedules of certain power plants. and it could also affect credit loss risks in case there are customers who are unable to pay. What I do want to say, though, is that as of this time, we have not seen any adverse material impact in terms of credit losses, but we just want to highlight this also as a potential risk since we are currently unable to estimate how deep and how long this recession will be. Uniper has also reported that COVID-19 has so far had only limited impact on their operations. All our power plants are running smoothly and this is, of course, very important for the security of supply for the society. Most of our employees have been working remotely for about two months now and currently, depending on the instructions by the authorities in different countries, we are looking at ways to gradually reopen some of the offices, but we are in no hurry. Safety first. Nordic hydro reservoirs were actually in the beginning of the quarter slightly below historical average. Then January and February were extremely wet, not only warm and windy, but also wet. And as you can see here, the orange color, which represents 2020, Throughout the first quarter, we had an extremely wet hydrology, almost record high. That continued until the end of the quarter, which is then seen in very high hydro production for the quarter. But then, now lately, the weather has been more dry. And as you can see here, as of today, the reservoir levels are actually pretty close to historical average. But – and this is important to note – The snow levels are high in northern Scandinavia, in northern Sweden, northern Norway, northern Finland also, and the spring flood is clearly delayed because the weather has been quite cold. So even though the reservoirs are currently on a pretty normal level, We do expect them to fill up pretty quickly when the spring flood really comes because, once again, snow balance is extremely high at the moment. Fuel prices have been on a downward trend. I want to emphasize that these are – what you see here are not spot prices. These are 2021 forward prices. Coal has been sliding down. Gas as well. Gas pot price has been really, really weak. But as you can see also, the forward price 2021 has been weak. What is important to note is that in 2019, Europe absorbed most of the additional LNG production in the world, about 50 BCM additional production or supply in LNG. But now, with weaker demand because of the economy and because of the fact that the storages are pretty much filled up in Europe, Europe's capacity to absorb more LNG is more or less saturated, and that affects how the market is behaving. I mentioned already the CO2 price development, that it dropped significantly as a result of the market uncertainty caused by COVID-19. After that, there was a certain recovery. And 2019 was, of course, if we look back at last year, which you see here on this slide, 2019 was the first year of operation of the market stability reserve, the instrument which continues to keep the market tight at least until the end of 2023. And considering all other changes in the market in 2019, the coal-to-gas switching worked, and we estimate that approximately 80 million tons of CO2 emissions was avoided due to coal-to-gas switching in Europe. One important thing to note for the CO2 market is that the 2019 UK CO2 allowances, which amount about 50 million Tons were not auctioned last year due to the Brexit uncertainty, but they will be auctioned this year together with the 2020 allowances, and this temporarily increases the supply in 2020. The MSR continues to remove a significant amount of allowances, about 370 million tons also during 2020, and this will make market much tighter during the coming years. Discussions on European Green New Deal are supportive to the EUA price, and we continue to be optimistic about this market because there are no indications that the European Union would be backing off from ambitious climate goals despite the coronavirus. What, of course, is important to note is that economic weakness will, of course, take away some of the demand. for CO2 allowances. Then if we go to electricity spot prices, this is, of course, a very sad picture. Here you see the dramatic drop that we saw. It started already in the fourth quarter last year, and it continued throughout the first quarter. And also the forward prices for the coming quarters have continued to slide down, not as dramatically as spot price, which once again has been driven by the weather conditions and commodities. But here you see a comparison between where the forwards were on the 3rd of February when we last published our result and where they were on the 12th of May, so there is further sliding seen. And similar sliding, but though not as strong as the spot price, can be seen in the forward prices for the years 2021, 22, and 23. They were throughout last year between 30 and 35 euros, and now they are around 25 euros. So there is quite a significant drop in forwards as well. Here you can see in graphical format – First of all, the drop in the spot price, which was, as said, strong, 67 percent in the quarter. But the fact that our hedging has succeeded well, our achieved price dropped only 11 percent. In Russia, the drops were also clearly visible, but significantly lower than in the Nordic power price. And then some brief comments on the divisions. Generation, first of all, improved significantly. Comparable operating profit from 2.23 to 2.35. The higher hydro generation, which was up 33% year over year, more than compensated drop in achieved power price. So we had 6.4 terawatt hours of hydro volume, whereas the volume was 4.8 terawatt hours a year ago. Nuclear generation volume was flat at 6.3 terawatt hours for the quarter. So pretty good quarter overall. And what I would also like to point out is that 100% of the generation of this segment in the quarter was CO2 free. Russia had another good quarter result on the same level, 99 million comparable operating profit. The Forex impact was only limited 2 million for this quarter. But here, of course, we have to remember that this is calculated on the average forex during the quarter. Currently, the ruble has weakened further. And, of course, that needs to be taken into account through the translational effect going forward when we are estimating the euro denominated result development of the Russian division. Operationally, a very good quarter. No adverse effects whatsoever. City Solutions had a tough quarter. Of course, part of the decline is coming directly from the divestment of Joensuu. That's about 10 million decline. The comparable operating profit went down from 92 to 58. So 10 million out of that comes from Joensuu. But the bigger part is coming directly from the fact that this was a record warm winter. which significantly took down heat sales. And heating and cooling business was 22 million negatively affected by both lower heat volumes and in Norway because of heat prices because Norway links heat prices to electricity prices and when electricity prices then also automatically heat prices dropped, which then caused this drop to the result. There was a smaller effect, and here is probably the only place where there's a direct COVID-related impact, but this was quite small in low single-digit millions in the recycling and waste business, which, of course, is very closely tied to industrial activity. We are treating hazardous waste created by industrial customers, and if industrial activity is weakened, then it does have an effect on this part of the business. So overall, weak quarter, but the difference between last year and this year can be directly attributed to these things that I just explained. Consumer solutions had, again, a great quarter, and I have to praise – the team in consumer solutions this was now the 10th consecutive quarter of improved results and the comparable EBITDA and comparable operating profit at 48 million and 32 million respectively were not only 10th consecutive improvement quarter but also record high quarter ever result wise in this business excellent work and then Finally, now we are going to start reporting a new segment called Uniper. We now own 73.4%. In this report, we only consolidate the balance sheet, but then from the second quarter onwards, we will also then consolidate P&L. We have, as I said, now nominated four out of six shareholder representatives, and now we expect deeper collaboration to start. We have started some tactical cooperation in some smaller projects already, but now we expect to start deeper cooperation. And as I said, we would like to, by the end of the year, create a strong strategic alignment between Uniper and Fortum. And very importantly, that alignment will then not only lead to asset strategies, focus areas for further investments, but it will also include ambitious decarbonization targets for the combined fleet of both companies. DAT-N4 has been discussed quite a lot recently. What we would like to point out is that, first of all, we are very pleased with the fact that Uniper has published quite an ambitious shutdown schedule for their old coal fleet in all their European operations. They also published a 2035 carbon neutrality target for the European operations, and they had a 21 percent decline in CO2 emissions last year. So we are pleased to see that the important decarbonization steps have been taken already in Uniper and more is clearly underway. When it comes to individual power plants like DATEN, it's very important to keep in mind that the European emission trading system covers all power plants and all industrial facilities in Europe. And there is a Europe-wide agreement that this system is the policy instrument that drives down emissions for power plants and all energy production, all industries. The whole idea in the system is that the supply of emission rights goes down year by year. And that means that gradually the least efficient facilities are pushed out from the market. And a central idea in the system is that the total amount of emissions is not determined by which individual plants run and which do not run. It is determined by the system itself. We are of the opinion that if Europe wants to achieve climate neutrality 2050, we need to increase our ambition level also in the policy instruments. And that's why we did welcome and we worked hard in the background to get MSR implemented, to get the linear reduction factor increased to 2.2 percent as it will be done in 2021. And we are still of the opinion that the ETS system should be further tightened. This is a systemic way to make sure that you really reduce emissions and not only transfer them from one place to another. And this also applies to DATEN 4, even though I understand very well that it sounds crazy to start a new coal-fired power plant in 2020, but the fact is that every single CO2 ton that DATEN produces will be part of the emission trading scheme, and an emission allowance will be bought for it, so it does not affect the total amount of emissions. It is the system that is determining that. So that much about DATEN. And ambitious climate targets. Our goal is to, by the end of the year, publish a strategic plan for the companies, Uniper and Fortum, together, and that will include ambitious decarbonization targets as well. Final note on Uniper's result. We are, of course, very pleased with the result development. They had a great Q1 result, and our share of profit from Uniper that we now report in this quarter, which is still an associated company basis, was 469 million euros. And I'd like to note that cumulatively we have so far booked already over 1 billion euro profit from Uniper. And that's, of course, a very good number. We are pleased with it and we are looking forward to now working together with Uniper in strategic alignment. And now over to Markus.

Thank you, Pekka. Okay, I will summarize the Q1 performance. If we start with the comparable operating profit, it was stable at 393 million. Generation was up on good volumes, and there was a negative impact from prices, but altogether 12 million improvement. Russia was stable. Power margins were lower, but heating tariffs higher, and then a very small FX impact on the quarter. City solution was down 34 million. It was driven by lower power prices, lower heat volumes, very, very warm winter exceptional conditions. Joensuu district heating was divested, which had the 10 million impact, which was mentioned. and then the lower profitability in recycling and waste solutions. Consumer Solutions continued its very good performance, improved 6 million year by year, 10th consecutive quarter of improvement. And then other operations flat. So I would say all in all, solid, reliable, stable performance. Then I'll move over to the income statement, cash flow statement, and some words about balance sheet as well. I'll pick up a few highlights from the income statement. First, if we start from the top and look how the comparable operating profit came together, sales declined in Q1 and also when you look at the right-hand side in LTM versus 2019. That was on the back of mainly lower power prices. in consumer solutions, but then correspondingly also the power purchase costs came down, and this resulted basically all other items stable. So this resulted in comparable operating profit being very stable in Q1 and also LTM versus 2019. If we then go down on the lines to items affecting comparability, so both in Q1 and And last 12 months, this includes a big item of 431 million sales gain from the divestment of the Joensuu district heating activities. Also, we record here the 222 million negative item from the recycling true profit and loss statement of the foreign exchange translation difference which we do now once due to that we changed the treatment in accounting of Uniper from associated company to subsidiary. So these two are the big items, very big positive from Joensuu, and then the one-time negative item from foreign exchange translation difference for the Uniper part. Then if we go further down, share of profit from associates, This is mostly Uniper. Altogether, Uniper's part was the 469 million out of the 479. The Uniper share includes our share of Uniper's Q4 and Q1 profit, which also includes the impairments that Uniper made. Fortum has then made a reversal of 449 million after-tax related to these impairments. So that is included here as well. And here we have utilized the fair value adjustment we did in the purchase price allocation in 2018. And from here on, we will now stop also the amortization of this fair value adjustment. So these big items all together bring the profit for the period to a very strong 938 million, and for the last 12 months at 2,086,000,000. euros. So strong performance on the income statement side. Then a couple of remarks on the cash flow statement. So if we start from the EBITDA, EBITDA also stable in Q1 and LTM. On the cash flow side, the paid financials and taxes are at the normal level. Then we had strong positive cash flow from the margin receivables due to that the market prices came sharply down. So net cash from operating activities in Q1 was very strong, $1,114,000,000, and for last 12 months, $2,378,000,000. Going further down on the table, CapEx was lower than last year. and last 12 months at 655 million, in line with the guidance we have given. Acquisition of shares at 844 million consists of the payment for the Uniper shares, which was at 2.58 billion, but that's the net of the cash that Uniper has of 1.3 billion. Also in the cash flow, you do not yet see the second tranche over 400 million of the unit per share acquisition. So this number mostly is a net of these three items. The whole purchase price for unit per shares, net of unit per cash, and then the 400 million second tranche payment that was only paid in May. Going further down, another big item, divestment of shares. So this is mainly due to the sale of the Yuen Su district heating business, where the purchase price was then over 500 million. And this brings then the cash flow before financing to 708 million for Q1 and 1.4 billion for the last 12 months. Finally, in Q1, the dividend was not paid during this period, so it was only paid in May, which then affected our liquid funds, but only after this period. Then moving on to the balance sheet where we have quite large changes. Balance sheet, first of all, increased from 23 billion to 68 billion. I'll pick up some things, some interesting parts from the balance sheet. Property plant and equipment increased by about 9 billion. to 18.7. So this is now Fortum and Uniper property plant and equipment combined. Correspondingly, participation in associates went down because previously we had recorded Uniper as an associate. Now it is treated as a subsidiary and we consolidate the balance sheet. On both sides of the balance sheet, share in both nuclear waste funds and nuclear provisions increased. This is due to the Uniper nuclear assets in Sweden. Then we had a significant increase in derivative assets and liabilities. This is driven by Uniper's financial contracts and also large increase in other assets and liabilities. The largest part is due to Uniper's trade receivables and trade payables, and there's further breakdown of Uniper balance sheet in the quarterly report. And finally, the last point I would lift up here is that liquid funds at the end of the period were strong at $4.1 billion. Good to remember, of course, that this was pre-dividend. Then we have some new definitions also, and we have the – following the consolidation of Uniper, we defined two new concepts of net debt. And this is really to have a sharp definition and include also the new items that are visible on the balance sheet. So if I start from the top, we have two concepts, financial net debt and adjusted net debt. The financial net debt consists of the interest-bearing liabilities, bonds, loans, instruments that have a maturity. We deduct the liquid funds and then we add the net, mainly the net of margin receivables and margin liabilities. So these are the daily cash movements of the daily settlements relating to our hedging transactions. And that gets us to financial net debt, which at the end of the period stood at 6.98 billion. This is quite close to the previous definition that Fortum has been using. But I would say that this is basically the debt with the defined contractual maturity. Then to make things transparent, we have then now introduced adjusted net debt, And what that includes, in addition to the previous, is basically the net defined benefit pension obligations, which stood at just a notch over $1 billion, and then the asset retirement obligations, where the big elements are the share in the nuclear waste funds and the nuclear provisions, and the net of these two is $314 million. It's good to remember, though, that what we comment in our notes is that there's a part of the funds that is unrecognized due to that we can only recognize part of the funds equal to the provisions. And then in addition, $775 million of other asset retirement obligations. So the total of these provisions is $2.1 billion, which brings our adjusted net debt to 9.1 billion altogether. We will follow both of these numbers very closely. We'll look at our indebtedness. Pekka mentioned the importance of access to capital and strong rating, so we are following all the time the key ratios important to rating agencies, FFO, net debt, net debt to EBITDA, and we'll come back to the definitions in due course. Regarding the Debt structure and maturity profile. Our ratings have been confirmed at the level of BBB flat. We have very good access to capital. As you have seen, the bond markets are open, and they are open in volume and strength. So the beginning of the year has been very strong performance. We have very little maturities, though, in 2020 and 2021. As you can see from the table, the maturity in 2022 is then the acquisition loan for the unit per transactions that we did this year. Average interest rate has come down to 1.7%, and for the euro loans, it's come down even to the level of 0.8%. And again, our liquidity situation is very strong with cash of $4 billion before the dividend payment and undrawn credit facilities in the quantity of $7 billion. Then we announced before the result release today that we will revise our financial targets, and this is due to the consolidation of Uniper. we need to redefine some definitions, for example EBITDA, and we need to look at what are the correct measures and how we follow the profitability going forward. Needless to say, we continue to target the BBB flat rating, so access to capital with an adequate rating, and of course to support also the sizable unit per trading activities is very important. The dividend policy remains intact. as you can see. And we will continue to follow tightly both divisional profitability and profitability of any investments that we would make. We will get back to the definitions of what are the correct measures then and appropriate measures for the balance sheet and also the profitability on a group level. And we will do that by year end. But again, I emphasize that all of these We follow multiple measures all the time and are in active dialogue with the rating agencies with regards to the balance sheet, and we follow the profitability very closely. Finally, to the outlook, we continue to expect that in the long run, demand growth in the Nordics stands at about half a percent. We have very good hedging levels, and that gives us visibility now for 2020 and 2021. For the remainder of the year, for the generation division Nordic hedges, we are hedged 85% at 33 euros. For Uniper's Nordic activities, the hedging ratio is even 95% at 28 euros. For 2021, for generation division, we have hedged 50% at 34 euros, up one euro from last quarter, and for Uniper, 70% hedged at 28 euros. So, again, providing good visibility into the short term. CapEx, excluding Uniper, we continue to guide at 700 million, and as you saw for the last 12 months, we were at 655 million. And needless to say, that rating is important, and we will take that into account when making any CAPEX decisions or future CAPEX plans. The comparable effective tax rate we expect to increase from the 2019 level, as the group now consists of countries where the tax rates are higher than for Fortum previously on average. And finally, I would say that it is clear that corona will impact the economy and our operating environment. We follow the situation very closely, and we do have the readiness to adjust our activities if needed. We have tight scrutiny on cost. We have scrutiny on capex, but also we have good liquidity and high hedge levels that give us visibility and time to adjust our activities if needed. With these comments, I open up for questions and answers.