Fortum Oyj Corp Ord

Welcome to Fortum's joint webcasted news conference on our second quarter results. My name is Ingela Ulves and with me here are also Mons and Rane from the IR team. This event is being recorded and a replay will be available later on on our website. As Uniper is a subsidiary of the Fortum Group, we are now for the first time reporting the group financials with the Juniper Consolidated Income Statement. Our CEO Markus Rauramo and Acting CFO Timo Karttinen will present the Q2 figures and go through the group performance. After that, we will open up for questions and answers. And as a reminder, you're also able to ask questions on our chat. So with no further comments, I welcome Markus to the stage.

Okay. Thank you, Ingela. And welcome also on my behalf to this half year report webcast. This has been a very special half year. COVID-19 affects businesses globally and many people and companies are struggling. Fortum as an international player is by no means immune, but so far we have managed to have only a limited impact. I am personally proud of the performance of our employees who have done a tremendous job and I can only say thank you. As this is my first result announcement as Fortum CEO, I would like to say a few words on my priorities before diving into our performance during the first half of the year. Fortum has developed substantially over the past few years and is now at the turning point. Following the major investment in the last this next phase of our corporate development will focus on creating value and delivering returns. Among our investments, Uniper is of course the most significant one. In March, we completed the majority transactions on Uniper, and as announced yesterday, we now hold a 75% stake in the company. In May, the annual general meeting of Uniper confirmed the reorganization of the supervisory board, with Fortum now having four representatives. I would like to remind you that we have ruled out a DPLTA or squeeze out at least until the end of year 2021. And we stand by that. So now that Uniper is a strategic subsidiary and the fifth segment of the Fortum group, it is only natural that my number one short-term priority will be to have a joint strategy for the group in place by the end of the year. I want to build a strategy on the strengths of both companies. focusing on what we believe will create the most value for the group and our stakeholders going forward. I strongly believe that by working together, we can accelerate the group's transformation to become a leader in the European energy transition. We will continue to reduce our coal-based production and pursue decarbonisation through growth in clean energy, both power and gas. We will also continue to develop solutions that help our customers to decarbonize and move to a more circular economy. And as part of our joint strategy, we will set new climate targets for the whole group. I'm pleased that the strategy process with Uniper has gotten to a good start. However, we will come back to this by the end of the year at our Capital Market Day, which is to be held in the beginning of December. At the same time, we constantly work to secure the financial strength and flexibility of the group, which in this COVID-induced uncertain market situation is even more important. Having a strong balance sheet and a solid investment grade rating of at least BBB flat continues to be a priority for Fortum. We are focusing on optimizing cash flow, maximizing our profitability, prioritizing our capital expenditure, and continuing the optimization of our portfolio. I will return to these topics later in the presentation. My third priority is to further strengthen our leadership culture and give clarity and a common direction to our people throughout the joint strategy. We have highly competent and driven people at both Fortum and Uniper, and I believe that when people feel that they are trusted and appreciated, they will excel. Our open leadership building blocks, believing in each other, wanting the best for each other, also make it possible to expect the best from each other. And then I move over to second quarter of 2020. Year 2020 will be impacted by COVID-19. Historical weakness, global GDP will decline, and it is still unclear how this will develop. And it is still too early to give any indication on the final impacts on Fortum. But we can say that this is a clearly disruptive situation. During the second quarter, the very wet hydrology continued, especially in Norway, and caused an exceptional 84% drop in the Nordic spot power price. The area price in Finland and Sweden also declined, but to a lesser extent. At the same time, the CO2 price clearly increased during the second quarter. While all of this widens the spread between the German and Nordic power prices, it also increases the potential for a rebound in Nordic prices once the hydrological situation eventually normalizes. The low power prices affected the results of the generation segment negatively, but our fairly high hedge levels clearly cushioned the impact and our achieved power price declined only marginally by 4%. The market uncertainty due to the COVID-19 pandemic continued, but has had hardly any effect on the Nordic power consumption and consequently very marginal impact on our Nordic operations. However, COVID impacted both our and Uniper's Russian operations. In Russia, Power consumption declined notably as a result of the pandemic and OPEC Plus decisions pushing down the electricity market price. Coupled with the weaker Russian ruble, the contribution from Russia's segment clearly decreased from last year. Uniper reported their Q2 results last week, and I want to highlight that I will not go into details on their business performance, because this was already extensively covered by Andreas and Sasha on August 11th. However, we now report Uniper as a separate segment in the Fortum numbers. The results of consumer solutions and city solution segments were stable. As Uniper now is a subsidiary to Fortum, we have also consolidated Uniper's income statement as of Q2 2020. In Q2 last year and still in Q1 2020, Fortum recorded its share of Uniper result as a share of profits as an associated company. It is important to note that our Q2 2019 result included the share of results from Uniper's Q1 2019 results. 399 million euros, not their Q2 2019. This means that the EPS is not comparable on a year-on-year basis due to the volatility in result between the quarters. It is good to remember that Q1 and Q4 are the strongest quarters and Q2 and Q3 weakest result quarters for Fortum and also for Uniper. In the first half of 2020, Uniper has contributed 65 cents to our EPS of 1 euro 40 cents, including all items. The change in working capital was mainly due to Uniper's trading and optimization business. And then to the Q2 highlights. Due to the ongoing COVID-19 pandemic, the exposure to risk and uncertainty in all risk categories has increased compared to the year-end situation. Although there has been certain stabilization and partial recovery of prices in the second quarter, market prices for Nordic electricity remain lower than at the beginning of the year due to lower commodity prices and European demand, as well as the extremely wet, warm and windy winter in the Nordics during the first quarter. Fortum's hedges, especially for the remainder of 2020 and for the year 21, will provide some protection against short-term fluctuations in the Nordic electricity and other commodity market prices. But if the pandemic continues longer than expected or results in a more severe economic downturn than anticipated, results will be negatively impacted as the hedge level for future years is lower. As I mentioned earlier, taking care of our financial strength and rating is a priority for us. At Fortum, we continuously evaluate and optimize our business portfolio as can be seen in the acquisitions and divestments we have made over the last few years. We will continue to do so with the aim of having a more focused business portfolio for the whole group in the future. Regarding our ongoing strategy, the work will continue throughout this year in collaboration with Uniper, with the aim to communicate the outcome for the consolidating group at our Capital Markets Day, planned to be held on 3rd of December. This year we have disclosed divestments amounting to 1.2 billion. That includes Joensuu and Järvenpää district heating, majority of Nordic wind portfolio and the recharge infrastructure. We are very satisfied, especially with the district heating transactions, as we have managed to sell them at attractive multiples. Joensuu 26 times and Järvenpää 34 times EBITDA. Some of these are already closed and some will be closed later this year. With these actions, we are increasing our portfolio focus and at the same time taking care of our balance sheet. During the second quarter, we also disclosed that we continue the review of our business portfolio related to our 50% stake in Stockholm Exergi. And we have initiated discussions with the city of Stockholm. We are now in discussions with the city as the other owner of the business. We have a shareholder agreement in place, the terms of which are not disclosed, but we are quite free to explore all options. And this is what we want to do, evaluate our possibilities, and only after that we will make decisions. The strategic review of our district heating assets and businesses in Poland and the Baltics continue as planned. And then over to the power demand development in our various operating regions. Impacted by COVID-19, power consumption has declined across Europe. In the central Western Europe, the decline has been about 10% for Q2 2020 compared to comparable period last year. However, in the Nordics, the impact has been negligible. In Russia price zone one, power demand in Q2 decreased 6% compared to Q2 2019, mainly due to the COVID-19 reducing economic activities and reduced oil production after OPEC plus decision. It is clear that there will be a recession in Europe, but how long and how deep, that is uncertain. And consequently, it is too early to say what the impact on power demand and consumption will be. Impact is likely to vary depending on country. Here we try to give a risk map of potential impact on our different segments from a recession following COVID-19. This picture we already showed last time in Q1. So this is basically repeating many of the same messages as the impact on group level has been limited so far. So far, we have not seen any impact in the form of credit losses. However, we will continue to monitor the situation very carefully. Only our Russia business has been hit through lower power demand. That also resulted in lower power prices, especially in Tyumen area, which is an oil and gas production area. So far, we have not seen there any impact in the form of credit losses either. Uniper already reported also that COVID-19 has had limited impact on their operations. Going over to the hydro reservoir situation, the Nordic reservoir levels at the end of July are clearly above normal. The Norwegian surplus and production pressure is the highest, while also the Swedish reservoir level is clearly above normal. Precipitation below normal level during spring reduced the inflows in Finland, where reservoirs currently are at the normal levels. The levels were around normal during the whole year 2019, but increased fast at the end of 2019 and in the beginning of 2020. The rapid change to exceptionally rainy, mild and windy weather started during the last weeks of 2019 and continued throughout January and February. Spring was colder than normal and precipitation amounts were slightly below normal. This did not have any significant impact on the overall surplus in Norway and Sweden, but in Finland, the spring inflow realized below expectations and reservoirs remained at normal level. In the beginning of Q2, Nordic reservoir level was at 11 terawatt hours above the long-term average, while at the end of Q2, the level was 9 terawatt hours above average. The production pressure continues to be extremely high and currently the level is 16 terawatt hours above the average. Then over to commodities. In Q1, coal prices have been affected by COVID-19 less than other energy commodities. But as COVID-19 induced demand destruction became more apparent during lockdowns, coal prices declined in Q2. Recovery only took place in the latter part of Q2 with most gains in the second half of June. Besides increasing LNG supply, coal has been affected by weakening global macroeconomic environment, increasing Chinese domestic coal production and increasing electricity production from nuclear and renewables in Asia. The structural reform of the Chinese coal sector has recently led to increase in coal mining capacity and lower appetite for imported coal. While China is relying on domestic coal, demand in traditional coal markets is muted. In the first half of 2020, year-on-year imports were down in India 22% and South Korea 10%. In addition, European coal stocks are high and imports are lower. With regards to gas prices, COVID-19 has made an already bad situation worse. Gas prices have been driven by very strong supply growth in LNG and weak demand in East Asia. In 2019, Europe passed the market with flexible gas demand and absorbed 95% of the increase in global LNG supply. In 2020, however, European storage levels are high and gas demand lower due to COVID-19 impact, so Europe's capability to absorb more LNG is saturated. In an oversupplied gas market, European storages have been absorbing excess supply. At the end of Q2, gas storage was 40% above the five-year average. But as injection rates decreased in May-June, the threat of reaching full capacity this summer has diminished. Ukrainian storage capacity also proved useful this year. Recent year's weak gas price trend has been driven by the fast increase of global LNG supply coupled with slower growth in Northeast Asia. Similarly to coal, weak gas demand in Asia is related to growth in power production based on nuclear and renewables and slowing industrial production. Then I move over to CO2. During 2020, CO2 and year-ahead gas price movements have been strongly linked by a coal-to-gas switching level. 2019 was the first year of operation of the market stability reserve, the instrument which continues to keep the market tight at least until end 2023. Considering all other changes in the market, in 2019, call to gas switching worked, and we estimate that approximately 80 megatons of CO2 emissions was avoided due to switching. The 2019 UK CO2 allowances were not auctioned last year due to the Brexit uncertainty, but will be auctioned this year together with the 2020 allowances. This increases the supply temporarily during 2020. The MSR, Market Stability Reserve, continues to remove a significant amount of allowances also during 2020 and will make the market much tighter during the coming years. And finally, discussions on European Green New Deal are supportive to the EUA price. And then to the Nordic spot and forward prices. It is important to distinguish the spot and front-end development from the longer-term products 2021-2024. The Nordic spot prices have continued to fall in Q2 with the strongest decline in hydro-dominated price areas, Norway and northern Sweden. During Q2, the further out forwards consolidated and saw a mild recovery owing to strong development in CO2. COVID-19 has caused power demand to fall in many European countries, but the Nordic power consumption has practically been unaffected. The German Nordic spread for 2021 delivery has increased from €11 per MWh during the start of the year to close to €20 per MWh in July, as the Nordic contract has become more influenced by continuing strong hydrological surplus and weak system spot price. If we then look at Fortum's performance in this environment, with spot prices decreasing from last year's Q2 levels by 84%, Fortum's achieved power price decreased only 1.4 euros from last year, well cushioned by our hedging. Lower economical activity lowered the Russian spot prices, which is also reflected in our achieved price of our Russia segment. Then I go over for a short review of the divisional performance. In generation, despite the 84% lower spot system price, the generation result declined only by 18 million. For the first half and last 12-month result, it was flat, supported by hydroproduction and hedges. And I'm very happy that generation division LTM Rona was over 12%. In Russia, power generation volumes declined by 23%, and heat production volumes by 7%. Lower oil production and overall economic activity following the implementation of COVID-19 restrictions in April and May had an adverse effect on power demand, while the supply from hydrogen generators was high in the second quarter. Heat volumes were negatively affected, especially by the warmer weather in the Chelyabinsk and Tyumen areas. It is good to note that Uniper's Russia operations are reported in the Uniper segment. Despite the headwinds we were facing, Russia division LTM Rona stood at exactly 11%. Then for city solutions, I start with Norway, where the district heating pricing is linked to the power price development, which in this market environment resulted in a clear negative impact on the heat prices in Norway. In the second quarter, the recycling and waste business improved results. We are very satisfied with the transaction to divest Joensuu and Järvenpää with multiples of 26 and 34 times EBITDA, respectively. Just to repeat what I said before, within City Solutions, we are conducting strategic reviews now for our district heating assets in Poland and Baltics, as well as looking at strategic options for our 50% ownership in Stockholm, Exergiin. In consumer solutions, financial results continue to improve and reach the 11th consecutive quarter of EBITDA improvement year on year. I'm very happy about the success and focus of consumer solutions and all of its employees. The electricity sales volumes increased by 2% mainly due to higher consumption in the Nordic household and Polish enterprise sector. Total sales revenues, however, decreased by 32% following the extremely low electricity price in the Nordics compared to the level in the second quarter of 2019. Competition in the Nordics continued to be intense with high customer churn. The COVID-19 pandemic increased market uncertainty, especially in the medium-sized and small enterprises sector. But so far, no major negative implications on the business, such as credit losses, have materialized. And finally, to Uniper. Uniper's energy trading and optimization business accounts for more than 90% of the Uniper group sales, which is the reason for the very high sales number of the Uniper segment. A substantial portion of Uniper sales arises from physical asset and contract portfolio optimization, which is accounted for on a gross basis. Let's shortly look at the bridge from Uniper numbers to Fortum numbers. There are two main points. Technically, you need to deduct the share of profits from associated companies as reported in Uniper's adjusted EBIT, as well as Fortum's 43% share of Oskarshamn from Uniper's adjusted EBIT. To get to the comparable operating results reported in the Uniper segment in Fortum's financials, it is very good to note that Uniper's EPS contribution to Fortum in first half 2020 amounted to 65 cents per share, including all items, and this is out of the total of one euro, 40 cents per share for Fortum first half. For the last 12 months, including Q2, the unit per EPS effect was 85 cents per share, including all items, and that's out of a Fortum total of two euros. With this, I would now hand over to Timo to go through the numbers in more details.

Thank you, Markus, and good morning to everybody online on my behalf as well. Let's first briefly go through the comparable operating performance for Q2 and the first half of the year. Markus already explained the bridge from Uniper reported adjusted EBIT numbers to this 27 million euros of comparable operating profit that we now for the first time include in our consolidated income statement. As we don't have any comparison numbers for historical periods, we will also not comment on the detailed performance, but rather, as Markus already did, refer to Uniper's own commentary and disclosure. Otherwise, all in all, our comparable operating profit for Q2 declined by 25 million euros to the level of 207. Generation segment was lower both because of lower prices and lower volumes. The stability of our achieved power price is a good testament to the quality and to the importance of our hedging activities in increasing the stability and predictability of the cash flows and the results. As already discussed, the COVID-19 pandemic had an impact in our Russia segment through lower volumes and then through also lower prices and margins. On the positive note, in Russia, as also elsewhere, At least at the moment, we are not seeing any signs of increasing bad debts because of the pandemic situation. The foreign exchange had a minus 7 million euro translation impact to our second quarter Russian results. And all in all, so we were 32 million euros below previous year. Consumer solutions was marginally up as discussed city solutions flat during the quarter. Then let's look at the first half year. Generation roughly flat, marginally lower, because the first quarter was better than last year. All in all, we had higher volumes, but roughly 3 euros per megawatt hour lower achieved price. For Russia, the first quarter this year was on the level of last year, so the decline in first half numbers really is coming from the second quarter results. On top of the items Markus already discussed, we have some impact in the Russian results also because of the lowering bond yields that have resulted then on lower average CSA payments. For the first half year, we had minus 4 million euro translation effect in the Russian segment euro numbers. Also, as you remember and as Markus discussed, the city solutions had a weak first quarter because of mild temperatures, low heating volumes, and especially the Norwegian heating operations where both the volumes were low but also prices were low because in Norway heat prices are linked to power prices. Also, as we divested the Joensuu district heating operations and that divestment closed, In the beginning of the year, that divestment had roughly 10 million euro impact on the first half-year results compared to last year. Consumer Solutions continued to deliver steady increase and improvement of the business. And once again here, even if these are first half-year results, we consolidate only the second quarter of Uniper here. Then moving over to the income statement. Obviously now, and as Markus explained, we have previously consolidated Uniper on the profits from associates line pro rata or ownership, and now we start to consolidate through income statement fully and cash flow, so of course the quarter-on-quarter and year-on-year comparisons will be difficult until we rotate over to after first quarter next year and when we will have four quarters of full consolidation behind us. We already discussed about the high levels of Uniper's sales activities coming from the contract portfolio and the fact that the large number of these asset and contract portfolio optimization transactions are accounted for on a gross basis. On top of that, certain items in Uniper's income statement have been regrouped when consolidating to Fortum's income statement. For example, sales numbers and materials and services are presented in Fortum's income statement based on contract prices instead of spot prices. This regrouping increased the sales of approximately 4.4 billion in Fortum Consolidated Income Statement compared to the separately Uniper reported numbers. In the items affecting comparability for Q2, we have plus 154 million changes in fair values of derivatives hedging for future cash flow. We have 69 million capital gains, and we also have plus 71 million net impairment charges and reversals. So all in all our profit for the period in Q2 was 379 million and for the first half of the year on a healthy level of 1.3 billion. Then let's go through the development in our financial net debt and the main components of our cash flow. First we have a bridge here explaining the impact of consolidating Uniper's net financial debt, and that consolidation happened at the end of Q1. Then we see that during first half, we created cash flow from operating activities before net margin liabilities of 1,020 million euros. Also cash flow from divesting activities of 790 million euros. The 790 million euros does not yet include the divestment proceeds of Järvenpää districating operations, which will add 375 million to the divestment cash flow as it closes. Then the total will be roughly 1.2 billion. These together cover and more than cover the paid investments during the first half year, or 1.77 billion euros. Consequently then, our financial net debt increased to the level of 7.77 billion euros, and the increase was due to the dividends paid out from the group. We continue to target to have a solid investment grade rating of at least BBB flat. We have good access to capital, and we have ample liquid funds. at 2.4 billion euros at the first half end and under-earned credit facilities of 5.4 billion euros. As said already, our focus on cash flows continues and we have already disclosed 1.2 billion euro divestments this year. Our total loan position at the end of Q2 was 9.25 billion euros. The average interest cost for that gross debt portfolio was at 1.7%, and the interest cost has been coming down due to cheaper new debt that we have taken. The average interest cost for our euro loans was at 0.9%. We have only modest amounts of maturities during this year and next year. For current year, roughly 600 million of short-term loans, and for next year, 500 million of bonds. And then finally, to outlook before questions and answers. For our generation segment, Nordic hedges, we have 85% hedged at 34 euros per megawatt-hour for the rest of 2020, and 65% hedged at 33 euros per megawatt hour for 2021. For comparison, one quarter ago, we reported 50% hedged at 34 for 2021. So that means that we have been able to increase next year's hedges in our generation segment by 15 percentage points and losing only one euro in the average hedge price. Uniper correspondingly has reported their nudic hedges at 90% for 29 euros megawatt hour for 2020 and 80% at 28 euros for 2021. For Uniper segment, we also have already available for the 2022 hedges currently at 40% and 24 euros per megawatt hour. For the CAPEX, we continue to estimate the annual capital expenditure, including maintenance, but excluding acquisitions, to be at 700 million euro level. And good to remember that this guidance does not include the Uniper segment CAPEX. For the income tax rate, we estimate the comparable effective corporate income tax rate to be in the range of 20 to 25, now as Uniper is consolidated. And this corresponds to also Uniper's separate tax guidance. So we continue to focus on the balance sheet. We continue to focus on the importance of solid investment rate rating and focusing on our cash flows. Now we open for questions and answers.