Fortum Oyj Corp Ord

everyone. My name is Ingela Ylves and on behalf of our IAI team, I welcome you all to Fortum's webcasted news conference on our third quarter results. Due to the COVID situation, we are wearing face masks today based on our internal instructions. This event is being recorded and we will publish a replay of the presentations after the webcast. With me here today are our CEO, Markus Rauramo, and our Acting CFO, Timo Karttinen, who will present Fortum's Q3 figures and the group's performance. After the presentations, we will open up for questions. This time, we have a different solution for the Q&A session, as we are using Teams now. If you plan to ask a question, please follow the event through the Teams link shown below on the webcast. You are still also able to ask questions on our webcast chat. And without further delay, I hand over to Markus to start.

Okay. Thank you very much, Ingella, and welcome also. on my behalf to this interim report webcast. The third quarter at Fortum was characterized by continued uncertainty caused by the COVID-19 pandemic. After a quieter summer, the second wave of the pandemic spread through our operating countries and requires continued perseverance from all of us. It is already clear that the whole year 2020 will be impacted by COVID-19. Although there has been recovery in commodity prices and certain economic indicators, the global GDP this year will decline and it is still unclear what the duration of the pandemic and final impacts on the economy will be. This is a clearly disruptive situation and as an international company, Fortum is by no means immune. However, so far, we have managed well and had adverse effects mainly only in Russia. And I want to say thanks to all of our employees who have been extremely dedicated and have done a great job during this difficult year. I am proud that we, for example, managed to run the large annual maintenances across our sites, given an example from Lovisa nuclear power plant, which was done safely and in a timely manner. During the overhaul in Lovisa, we had more than a thousand external workers on site and had a multitude of special arrangements in place to secure everyone's safety. Elsewhere in the company, all whose job description allows are working from home and we are putting efforts into ensuring everybody's wellbeing. For example, deploying new tools and developing our leadership practices to fit the new situation in line with our open leadership principles. During late summer and fall, we have been working hard on Fortum Group's new strategy and on identifying and detailing our cooperation opportunities and benefits with Uniper. I'm very pleased to say that we have been able to progress in the alignment to be well positioned to drive forward the European energy transition in the coming years. As listed companies, both naturally evaluate the elements of the joint strategic direction and cooperation opportunities in their own governing bodies, ensuring that they are in the interest of the respective company and all its shareholders and stakeholders. With that being said, I look forward to presenting the new strategy and targets for the whole group at our Capital Market Day on December 3rd, together with Timo Karttinen, and Andreas Hirenbeck, Uniper's CEO, who will discuss Uniper's strategy in the context of the Fortum Group being one of its five segments. Now I'll move forward and talk about our performance in the third quarter, which typically is the worst quarter for Fortum and seasonally weak also for Uniper. The year so far has been characterized by high hydrology, and low Nordic power prices, and the third quarter was no exception to that. The Nordic hydro reservoirs hovered around historically high levels, and especially the Nordic system price and Norwegian area prices were very low. In the Finnish and Swedish areas, prices declined clearly less, which is good since they are the most significant for us. The strong CO2 price supported the Central European power prices, and the spread between the German and Nordic prices remained wide. I already spoke about the impact on the pandemic on our operations. Out of Fortum's businesses, only our Russian operations continued to experience some adverse effects from lower power and heat demand. In the third quarter, our comparable operating profit was negative due to the negative results in our Uniper segment. The reason for Uniper's negative results was seasonality and a shift in profits between Q1 and Q3 this year. This is something we highlighted already in the previous quarters, so this was quite expected. It is also good to note that Uniper kept their full year guidance unchanged, so we expect Uniper's fourth quarter profit to be good. Nevertheless, Fortum's earnings per share for the third quarter were still positive at 23 euro cents, as the negative results of the Uniper segment were offset by the tax-exempt capital gain from the sale of the Ervenpää district heating business in August of this year. This type of portfolio optimization is a mainstay at Fortum, and we are also proceeding with the strategic reviews of our Polish Baltic and Swedish district heating businesses as planned. In all these cases, we are reviewing all alternatives, including possible divestments. Going forward, we will continue to put focus on our balance sheet and securing our overall financial strength. Equally, maintaining a credit rating of at least BBB flat continues to be a priority. Finally, I'm very happy to say that our last 12 month net profit was 1.8 billion and that translates to an EPS of two euros and three cents. Then I'll move over to the operating environment and make a few comments about that. If we look at the power demand, we can see that the demand recovered to 2019 levels in many areas in Q3. Nordics actually have been stable throughout the full year 2020. Central Western Europe, including Germany and France, were weaker in the second quarter. Demand in Russia has continued softer and was standing at minus 4% year on year in the third quarter. But overall good recovery and in the Nordics stable throughout the year. This year we have been talking a lot about hydrology, which has been somewhat exceptional in all quarters. If you look at this picture and follow the dotted red line against the average, which is the gray dotted line, you can see that the year started with very high reservoir levels. This continued in Q1, part of Q2, but then during Q2, the reservoirs came clearly lower than the historical average. But towards the end of the quarter, again, the reservoirs were above. In Q3, reservoir level started at nine terawatt hours above the historical average and ended at 13 terawatt hours above historical averages. And now we are even slightly higher entering the winter season. Looking at the commodities, coal started the year weak. The softness continued in the second quarter, but now in third quarter, there has been recovery back to the levels that we saw in the beginning of the year at $60 per ton. In gas, on the back of strong supply, mild winter, we saw a big drop in the first quarter, gas prices stabilizing in the second quarter, and then recovery in the third quarter on the back of the improved supply-demand balance and sufficient storage capacities in different areas. Looking at CO2, CO2 was softer in the beginning of the year, partly on the back of the strong go-to gas switch, on the back of lower gas prices. We saw a sharp recovery after the initial hit also caused by the corona pandemic, strong recovery in the second quarter. And in the third quarter, the sentiment in CO2 has been very strong. also on the back of the tighter EU emission targets proposed by the EU commission. And we even saw CO2 hitting historical highs at 30.5 euros. If we then look at how this all has translated into Nordic power prices, if you look at the beginning of the year, the combination of strong hydrology mild winter, this all pushed down the system price in Q1 and Q2. The high reservoir levels kept the Nordic system price low in the third quarter, and also put pressure on the front end of the forward curve, as you can see from the picture comparing August and November forward curves for 2021. But very good to look at the area prices. So when looking at the system, which is the bottom gray line and comparing that to Swedish area prices two and three and Finnish area price, the picture is very, very different. System price in Q3 has been at nine euros, Swedish area price two and Finnish area prices, which are the most relevant for us have been respectively at 25 and 33 euros. So quite a remarkable difference compared to the system price. This is important to follow. How have we then fared against this backdrop? Comparing third quarter year on year, Nordic system spot was down 74%, but Fortum's generation Nordic power price, the cheap price, was actually up 4%. In Russia, On Q3, in the markets, the spot has been flat on a year-on-year basis. Calculated in euros, our achieved power price is minus 16% on the back of weaker ruble and lower CSA payments. Then before moving over to Timo's part, I will shortly go through the divisional performances. Overall, I could say that generation has been stable. Q3 and cumulative results were at the stable level. In Q3, nuclear production was down 0.7 terawatt hours on the back of the scheduled longer outages. But on the better side, hydro production and achieved power prices were higher. On a cumulative basis, hydro production was actually up 1.5 terawatt hours, nuclear lower on the back of the mentioned longer outages and achieved power prices were slightly down, but compared to the market prices, our achieved price has been supported by the good hedge levels. One thing to note also is that in generation, the last 12 month RONA stands at 12.6. Then moving over to Russia. Russia third quarter was down 13 million, mostly impacted by the FX impact of 11 million. Power and heat production was lower year on year, but so was the bad debt provisions. So these more or less equaled each other out. On a cumulative basis, Russia is down 47 million on the back of lower volumes and margins lower CSA payments and FX impact. But last two-month Rona stands above 10% at 10.7. City solution in third quarter was stable. We had improved results in district heating business in Finland and Norway. And in Norway, the change in the Norwegian Krona exchange rate more than offset the negative impact of the lower power prices. The cumulative nine-month result was down 35 million, but that was on the back of the week Q1 with lower heat sales volumes due to the warm weather, lower power sales prices, and then as a result also lower Norwegian heat sales prices. And then it's good to remember that the successful divestments of Joensuu and Järvenpää do have a negative impact in the city solution business going forward. Consumer Solution continued its very good performance. The Q3 was up 2 million, and this was the 12th consecutive quarter of comparable EBITDA improvement. I can say that we have been able to handle Corona well. And even during these times, we have been launching new digital services and increasing our value added service customer base to record highs, so excellent performance from consumer. Then at the fifth division, again as a reminder, I will not go into more details and commenting on Uniper's operational performance, and consequently, I do not comment in detail the result development. Uniper published the Q3 report a week ago, And for further details, we refer to that and the presentations and webcasts that the company has had. But the general comments, I can state the obvious. The gas business followed the normal seasonal pattern with the weak third quarter. This was further pronounced by the intra-year optimization of the gas portfolio that was successfully and well utilized earlier this year, clearly improving the Uniper Q1 results while then resulting in a significant loss in the third quarter. I also want to shortly repeat the bridge from Uniper's adjusted EBIT to Fortum's Uniper segment operating profit. For Q3 this year, Uniper reported adjusted EBIT of 286 million negative EBIT, that we record in the Uniper segment as comparable operating profit as the loss of 307 million. The difference relates to that we have deducted Uniper's associated company results of 11 million from their EBIT as they at Fortum are reported below the comparable operating profit line. Also, as Oskarsham is a joint-owned company, we also make a correction for Fortum's share in OKG as Uniper fully consolidates it. 43% of Oscarsan profit is already reported in our generation segment. These corrections are done every quarter, which means that there will continue to be a difference between Uniper's reported adjusted EBIT and comparable operating profit as reported by Fortum in our Uniper segment. With this, I would now like to hand over to Timo, who will walk through the numbers in more detail. Timo, please.

Thank you, Markus, and good morning, everybody, and welcome to this call on my behalf as well. I will first go through our comparable operating profit performance in the third quarter. We do not have comparison numbers from last year for Uniper as we started to consolidate the comparable operating profit only in second quarter this year. Also, as said already, we are not commenting the details on the underlying performance in Uniper segment, but rather refer to Uniper's own commentary and disclosure. Uniper's contribution to our comparable operating profit in Q3 was clearly negative, with the impact of the seasonality especially related to the gas business. While Q1 there recorded very strong, obviously Q3 was clearly loss-making. Overall, our comparable operating profit for third quarter declined 329 million from 153 million last year to a loss of 176 million this year. As you remember, there has always been a clear seasonality in Fortum's quarterly results, first quarter and last quarter being the strongest and second and third the weakest. And now, obviously, Uniper's result seasonality will also play here. Uniper has also confirmed, as said, their earlier full year guidance, which would indicate a strong result in that segment for the last quarter. The result drivers in generation were lower nudic volumes, partly offset by higher achieved price. The relative stability of our achieved price is a proof of the importance of hedging to increase stability and predictability of cash flows and results. COVID-19 impact is visible in our Russia segment results, mainly indirectly as a consequence of lower oil production that then has resulted in low power demand, lower power margins and power volumes. The good news is that the COVID impact has been stabilising, and we have also had lower bad debt provisions than last year. Russian segment results this quarter are year on year mainly down because of the ruble exchange, with an effect of 11 million euros. Citi Solutions' profit was flat, while consumer solutions recorded their 12 consecutive quarterly profit increase. Then let's look at some other KPIs in our income statement. First a reminder, for some time now, year on year comparisons will be difficult due to the changes in how Uniper has been consolidated. So let's run first through that. In 2019, Uniper was consolidated pro rata ownership as an associate with one quarter lack in results. In 2020 first quarter, fortune results included two quarters of Uniper associate result, last quarter last year and first quarter this year. All in all, 469 million euros of profits from associates. And then from second quarter onwards, Uniper is being consolidated as a subsidiary. Then in the items affecting comparability for this quarter, we have approximately 290 million tax-free sales gain from our Järvenpää districating operations. So despite the negative comparable operating profit, our net profit was positive at 144 million euros. And even if the third quarter operating results are negative, When looking at the cumulative performance, our last 12 months net profit amounts to 1.8 billion euros. Then to our financial net debt and main items of our cash flow during the year. In third quarter, we updated our definition of net debt. Here is the pitch from start of the year level of 4.8 billion in financial net debt to the level of 6.7 billion when consolidating the Uniper debt at the end of first quarter. During the year, we have had cash flow from operating activities before net margin liabilities of roughly 1.8 billion. It's good to note that working capital fluctuations will continue to impact the quarterly operating cash flows. Cash flow from divestments has amounted to 1.2 billion, largest divestments being districting operations in Joensuu and Järvenpää, as well as Nordic Wind portfolio. These cash flows together have more than covered the paid investments of 2.3 billion. Major part of the investments are related to Uniper shares. We also have strategic reviews ongoing related to our 50% stake in Stockholm XRG and our Baltic and Polish district heating operations. The remaining cash flows after payments of investments have covered more than half of the paid dividends, so we have approximately 7.1 billion of financial net debt at the end of the third quarter. We continue to monitor and manage closely our net debt position and continue to strengthen our balance sheet. Our key priority is to have a solid development rate rating of at least BBB flat and the focus on cash flows continues. We have good access to capital and ample liquid funds of 2.5 billion and under on credit facilities of 5 billion euros. Our total loan portfolio at the end of the third quarter is 9.2 billion euros. The average interest for the debt portfolio is 1.7, and the average interest for the euro part is 0.9%. We have only modest amounts of loans maturing in the near future. This year, short-term debt of approximately 600 million, and next year, 500 million bond maturities. Finally, I will conclude with our outlook. In generation segment, the Nordic headsheet, we have 85% hedged at 34 euros per megawatt hour for the rest of this year. 75% hedged at 33 euros for 2021. For comparison, one quarter ago, we had 65% hedged at 33 euros for 2021. Now we also disclose the headsheet for 2022. which are at 40% hedged and at 32 euros. Uniper has likewise reported their Nordic hedges, and for 2021, they have 85% hedged at 28 euros. One quarter ago, they had the 21 hedges at 80% hedged at 27 euros. So we have been able to increase hedge levels for next year with relatively good prices. Please note that we have now updated our estimate for the annual capital expenditure, including maintenance and excluding acquisitions, to be on 600 million euro level, and it was previously on 700 million euro level. This guidance does not include capital expenditure in the Uniper segment, as we have given this originally in the beginning of the year on the old Fortum level. And finally, no change to the income tax level, so the estimated comparable effective corporate income tax rate remains to be between 20 and 25%. Now we would be ready for questions and answers.