Fortum Oyj Corp Ord

Good morning everyone and welcome to Fortum's webcasted news conference on our first quarter interim results. As always, this event is being recorded and you will find a replay later on today on our website. With me here today are our CEO Markus Rauramo and our CFO Bernhard Günther, who will present the Q1 figures and go through the group performance. After the presentations, we will then open up for the questions from the teleconference. So with further due, I hand over to Markus to start. Please go ahead.

Thank you, Ingella, and good morning also on my behalf, and welcome to our first quarter 2021 results call. I will first go through the highlights and our overall performance this year, and then hand over to Bernhard to walk you through the numbers in more detail. The start of the year has been very strong for Fortum Group, both financially and operationally, which I'm very happy about, especially the good availability in all of our operations. The performance of all our segments was robust during the three winter months, and we also saw a notable improvement in the market fundamentals across our operating areas. The Nordic hydrology is now closer to normal, EU carbon pricing has appreciated remarkably, and also in Russia the demand has picked up. But first and foremost, we have moved moved in a very determined way ahead with our strategy execution. As you may recall, I said in our full year webcast that I'm convinced that we could do more if we were closer, better and more effectively together with Uniper. And change of course starts with leadership. Both companies have since that made changes in the executive management and now we have a more diverse and pan-European leadership teams determined to push forward the clean energy transition together. A significant step on our joint path forward was this Monday's announcement on the three Strategic One Team cooperation areas that we introduced in December last year. Under the proposed plans, which we are now discussing with the employee representatives, Fortum would lead the operations of both companies' Nordic hydro assets in the future. That would mean that approximately 180 Uniper employees, mainly in Sweden, would transfer to Fortum. Uniper would take the lead in wind and solar business development in Europe, as well as the hydrogen businesses for the two companies. The proposed changes do not imply redundancies of jobs and all existing locations in the new joint operating models would remain in operation. The stronger alignment in governance and cooperation within the three focus areas will contribute significantly to the expected synergies that we have communicated before. A positive cash impact of approximately 100 million annually on a consolidated group basis. More than 50 million euros of these annual benefits are estimated to be achieved by the end of 2023, and the full effect of approximately 100 million would be reached annually in 2025. So, we are well on track with what we promised in December. In addition to that, I would also like to highlight that we are continuing our transformation, and we have disclosed divestments totaling 1 billion euros this year. The strategic reviews of our Polish district heating operations, the 50% stake in Stockholm XRG, and consumer solutions are still ongoing, and we will update you on this if and when decisions have been made. Then moving over to financial performance. Looking at the first quarter, all indicators are up, whether it's earnings, or cash flow. The winter season had its extremes this time and we could secure security of supply across the portfolios for our customers and we showed a strong portfolio optimization and strong quality in our operations. Both Fortum Divisions and Uniper have been delivering above previous year's levels, making this a really strong first quarter. The strong increase in comparable operating profit with close to 1.2 billion euros in Q1 was largely attributable to the full consolidation of Uniper as in Q1 last year Uniper was still accounted for as an associated company. The comparable EPS gives a clearer year-on-year picture as here Uniper was included in both quarters. Compatible EPS is up 3 cents per share, with Uniper contributing 51 of the 94 cents. But overall, the year-on-year effect is even more pronounced, as you recall that in Q1 2020, Uniper was included in our associated results with two quarters, Q1 2020, but also Q4 2019. Consequently, it's clear that Uniper delivered another extraordinary first quarter, this time. And again, this shows that our Uniper acquisition has been beneficial for Fortum Group. When it comes to operating cash flow, this was up in all segments. Now at over 830 million for the group, bringing also a leverage down to the targeted area of below two times comparable EBITDA. We are now at 1.9 times. Good to remember that dividend is not included in these figures as that was paid last week. One of the building blocks of our earnings stability and earnings picture are the hedging activities, which I will talk about now on this slide. What you see here is the achieved prices for our existing outright positions. but excluding the achieved prices for the 25 terawatt hours of our subsidiary Uniper. Fortune achieved prices in the Nordics are on the way up, and compared to the volatility that we experienced over the last years, again, on a very reasonable level. Spot prices have been coming up substantially lately into a region of above 60 euros per megawatt hour, as the supply situation is getting more balanced. But we are still in a wettish scenario, reservoir levels above average. Bernhard will elaborate more on this in the divisional section. With regards to Russia, achieved prices have also been up, as the market has been increasing, but in euro terms we see a downward trend, as the Russian ruble has weakened. Then over to the divisional results in a bit more detail. The overview of comparable operating profit on a divisional level shows in essence three things. All segments have been contributing positively year on year, but what is clear here of course is that Uniper is the main driver for the increase based on the highlighted full consolidation in Q1 of this year. Generation and city solutions show a strong uplift based on higher margins and the same applies for consumer solutions. What is not visible in this picture is that Russia division showed a strong underlying performance with higher prices and volumes. But the weakness of the Russian ruble then is covering the improved performance picture And we are nearly flat year-on-year in Euro terms in Russia division. But to sum this all up, I'm happy and satisfied with the performance across the group. All segments improving year-on-year. Then I move over to our strategy execution. One of the key building blocks of our strategy is to transform our operations to carbon neutral and and we are progressing well and ahead of our initial plan. With regards to the coal exit, in April, the Wilhelmshaven 757 megawatt power plant was awarded in the second tender of the German hard coal tender to exit commercial operation by December of this year. And this is one year earlier than initially planned, following the early closure of the hydrogen station at the end of last year. As we have communicated also before, our 900 megawatt lignite-powered power station Skopau, which is in eastern Germany, will exit our portfolio by October of this year as well. Our coal exit program goes hand in hand with our hydrogen activities. As the third largest CO2-free power producer in Europe and a strong gas player, we are one of the few players covering the full value chain from green electricity, running electrolyzers, having the know-how how to store and to transport hydrogen, and having the ability to structure off-take solutions for industrial customers. Lately, several early-stage hydrogen projects have been initiated with the ambition to establish national hubs for hydrogen across northwestern Europe. The most recent examples are the hydrogen hubs in Wilhelmshaven, Rotterdam, and Hamburg. But our focus is also to be actively involved in the debate in regulation and incentivization of hydrogen projects. One of our targets is on the ESG and climate lobbying. Influencing EU and national policies is important for us in order to achieve our ambitious climate goals. Because of this, we have decided to conduct a comprehensive review of our lobbying activities and practices, particularly in relation to climate policy during this year. As a part of the review, we will also clarify Fortum's lobbying practices and governance. Increasing the transparency of lobbying is an important principle for us. In addition, we will conduct a review concerning Paris Agreement alignment of lobbying of key energy-related industry associations, where Fortum is a member, in Europe, Russia and India. Also, the regulatory environment within the EU took several positive steps forward in the beginning of this year. Next to the tightening of the 2030 climate target to a 55% reduction of greenhouse gas emissions and a goal of climate neutrality by 2025, the first delegated act under the EU sustainable finance taxonomy was adopted. The final version saw a clear improvement regarding hydropower As the criteria are now aligned with the EU border framework directive, making the bulk of Nordic CO2 free hydropower eligible under the taxonomy. What does this then all mean for Fortum? A few words on taxonomy before I hand over to Bernhard. On this slide, you can see our understanding of the alignment of Fortum's assets and investments with EU taxonomy. Majority, as you can see, majority in this picture, majority of our earnings and capex are expected to be taxonomy aligned. This is good news. As initial versions of the taxonomy, as I said, we're about to exclude not only nuclear but also hydropower generation, what in essence is one of the most sustainable resources we have, built to last for generations to come. There has been quite a discussion on how to measure the alignment. When it comes to revenue or sales, this is obviously not the right measure for taxonomy alignment. How often would you optimize and de-risk your portfolio in the market does not tell you if you have a clean fleet or clean investments, and therefore that would be misleading. To achieve a common language and clear definition of what is sustainable, the EU taxonomy is expected to give clear guidance with a common classification system for sustainable economic activities to facilitate sustainable investments that contribute towards Paris climate target. Initial versions have been very narrow and biased towards certain emission-free technologies over others and therefore excluded majority of Europe's existing carbon-free technologies. The final version saw a clear improvement regarding hydropower as the criteria, like I said, are now aligned with the EU water framework. The EU decided to allocate more time to take decisions regarding nuclear energy and natural gas. Also, delegated act addressing waste to energy is not final yet. The eligibility of nuclear power and gas will be addressed in a separate complementary delegated act in the summer. The expert group on the Commission's joint research center concluded that nuclear power generation does not cause more harm than other forms of power generation, and Fortum expects that the Commission will respect the view of this scientific expert group. The debate is expected not to be only scientific, but also political. As for gas, we are glad that the Commission clearly highlighted the important role of natural gas in the energy transition. Flexible gas is needed to ensure security of supply on the path towards climate neutrality and we expect this role to be reflected in the upcoming legislation. Taxonomy is not only important for new investments but also for existing capacity with high maintenance investments. It obviously also has a spillover effect to other policy areas like R&D, funding, stated rules, etc., which underline the importance of getting taxonomy right. When it comes to our capex, the picture is rather clear. More than half of our 3 billion euros growth capex is envisaged for investments in renewables. Additionally, we are allocating growth capex for hydrogen and clean gas projects. When it comes to maintenance capex, Most of our roughly 700 million euros per annum are invested in taxonomy-aligned generation, like our hydro fleet. Having said this, I would now like to hand over to Bernhard, who will cover the financials and the divisional insight. Over to you, Bernhard.

Yes, thank you, Markus, and hello from me as well. Carrying on now with the financials, in Q1, we have made some changes to our reporting to better reflect and present the underlying performance following the full consolidation of Uniper. We introduced a couple of alternative performance measures, i.e., comparable net profit and also comparable EPS. These are aligned with Uniper's adjusted net income. We are from now onwards presenting both reported and comparable numbers in our interim report to give you a better grip on our underlying performance. Today's overview shows, on the one hand, the classical year-on-year comparison. This is distorted by the uniper consolidation effect up to the comparable operating profit level. Therefore, on the other hand, As a reference, we also show the 2020 full-year figure and cumulated last consecutive four quarters, i.e., last 12 months, to give you another good indication of the earnings level of the combined group. Comparable EBITDA was close to 1.5 billion euro in Q1 2021. As Uniper has been fully consolidated over the last four quarters, we see on an LTM basis now a comparable EBITDA level of nearly 3.4 billion euros. Comparable operating profit was better than previous year in all our segments, as Markus said, and as Uniper recorded an exceptionally strong Q1 2021, comparable operating profit totaled at 1.17 billion euros. Comparable EPS for Q1 2020 and 2021 was already explained by Markus. I would only highlight that the last 12-month number for EPS totaled 1.7 euro per share. We see also a strong cash flow, as Markus mentioned, of 0.8 billion for the quarter, and the last 12 months, 2.8 billion. And as already mentioned, again, the dividends of 995 million have been paid in Q2 last week, and the Baltic district heating divestment will be concluded in Q2 2021. It was, as you know, signed in March this year. Financial net debt over comparable EBITDA over the last 12 months was at 1.9 times, which currently is below our target level of 2 times. So we are on a good track here. In Q1 2021, divestments were 146 million euro. There was Russian solar, small Nordic hydro, and the remainder, respectively, second part of our surf yacht Nordic wind portfolio. As Markus already said, with this we have announced divestments of almost 1 billion already this year. Now, moving on to the various segments. Let's first look closer at the performance of generation. Comparable operating profit has increased by 14%. The result improvement was also supported by the higher chief power price of 37.2 euro per megawatt hour with successful physical and financial optimization. The overall system price in the Nordics increased by 173% in this quarter, and for the Fortum relevant price areas, it was plus 124%. Generation volumes improved due to higher hydro volumes. The hydro volumes were actually at the highest level for almost 20 years that we recorded in this quarter. On the reservoirs, you see at the top of this slide, last winter realized cold while the new NordLink cable increased the Nordic export capacity. This led to a generally high hydropower production in the Nordics and also high utilization of water reservoirs. Nordic water reservoirs compared to long-term average dropped from 20 terawatt hours to 14 terawatt hours during Q1. So, as mentioned, we are still in a red situation. Looking at Nordic power prices in the lower part of the slide, when you look at the graph, it is important to distinguish the spot and front-end development from the longer-term, i.e., 2022, 2023, 2024 products. The Nordic spot prices, just like coal, gas, and carbon, saw a strong recovery during Q1 2021. The Nordic spot price recovery was partly driven by commodities and continental European power prices. The average spot price was at 42.1 euro per megawatt hour during the quarter, which is almost three times last year's average price. However, also the Nordic fundamentals like cold winter, low precipitation, below normal wind production and the new NordLink interconnector played an important part in the price recovery. Nordic power demand increased approximately 7% compared to Q1 2020. And this increase has been substantial both in the spot and the forward markets, but clearly less pronounced on forward prices. I'm now moving on to our Russia segment. Here, our comparable operating profit increased marginally. The effect of the change in the Russian ruble exchange rate was minus 21 million euro, and we had positive effects. from 17 million euros from the sale of the 160 megawatt CSA-backed solar power project to the joint venture with the Russian Direct Investment Fund, higher power prices and higher heat volumes. The net effect of the changes to CSA payments was slightly negative. Three units were entering the four-year period of higher CSA payments, whereas the CSA period ended for two units. That's the Tumon CHP1 and the Chelyabinsk CHP3. And there were also downward corrections to the CSA prices due to lower bond yields. Fortum holds the largest portfolio of wind and solar power parks and projects of almost 2 gigawatt within its renewables joint ventures in Russia. 600 megawatt of the wind capacity is now operational. 495 megawatt under construction and 728 megawatt under development. In 2020, 550 megawatt of new wind capacity, including four wind power plants in the Rostov region and two in the Kalmykia region, started operations. Fortum also has 116 megawatt of solar capacity to be built, as just mentioned before. A 78 megawatt of this capacity is expected to be commissioned in the fourth quarter of 2021 and the remaining part in the fourth quarter of 2022. It's good to note that Uniper's Russia operations is reported under the Uniper segment. Now moving on to City Solutions. City Solutions, as you know, had a tough year in 2020 and was affected by both mild weather and low power prices, but also by COVID-19. In Q1 this year, compatible operating profit increased by almost 50%, higher heat sales volumes in all heating areas, higher Norwegian heat prices due to the price link between heat and power prices there, and improved results in the recycling and waste business. As mentioned with regards to the sale of the Baltic district heating business, we will book a tax-free capital gain of 240 million euros in Q2 when we close the transaction. During the quarter, we also commissioned part of the solar capacity in Jaisalmer in the Indian province of Rajasthan. The remaining 100 megawatt of the total 250 megawatt capacity is expected to be commissioned in Q2. Moving on now to consumer solutions. Consumer solutions continues to deliver better results and is showing a double-digit comparable operating profit improvement of plus 12%. So our comparable EBITDA result is now improving for the 14th consecutive quarter in a row. This improvement was driven by higher margins from power sales and value-added services. The higher margins are a result of active development of our service offering. And as already mentioned earlier, the strategic review of this business is ongoing. Now on to our largest segment, Uniper. As a general comment, we can state the obvious. In Uniper's global commodity business, the first quarter was characterized by periods of low temperatures in some of the world's regions, including parts of Asia, North America, as well as Europe. These colder temperatures increased demand for gas and power, which enabled Uniper to successfully optimize its international portfolio. This included both energy deliveries to the Asian markets, and sales of gas and power at higher price levels in parts of the United States. The European generation business benefited from the solid performance of the fossil fleet. Dublin 4 in full operation, Irching 4 and 5 being back on the market in Germany, and better availability of Mars Factor 3 in the Netherlands, as well as payments from the UK capacity market. The positive impact was partly offset by an infra-year CO2 emission rate phasing effect that shifted margins from the first quarter to the fourth quarter of 2021. The nuclear generation business in the Nordics was negatively affected by lower achieved prices. Unipers Russian business, Unipro, contributed positively to the comparable operating profit of the Unipers segment. Russian power prices were supported by growth in power demand, low hydro volumes and high exports. However, the result was negatively affected by the CSA period ending for the Shaturskaya and Yavinskaya power plants and the change in the Russian ruble exchange rate. Now, moving on to debt and funding. Here you will find the changes in our financial net debt and main items of our cash flow during Q1 2021 showing a decrease of some 600 million euros mainly related to the strong cash flow, so the decrease in net financial debt. Considering our rating, our financial net debt to EBITDA ratio for the last 12 months was 1.9 times at the end of Q1 2021, and therefore well in our envisaged range of below two times. And it's good to keep in mind that the dividend of almost one billion was paid out in Q2 on the 7th of May, which is naturally not yet reflected in these Q1 figures. The bond maturity profile is rather balanced. Regarding our maturity profile, we have a 500 million bond maturing at the end of May this year. Our liquidity position is very good with liquid funds of approximately 3.6 billion euros. We have currently 9.9 billion euros of gross debt and the average interest rate for the whole loan portfolio is 1.5% at the moment. So now moving on to the last slide, that's the outlook. Our successful hedging has continued with marginal decrease in our achieved hedge prices. Unipass hedges, as published by them last week, are 85% at €27 for the rest of 2021, 80% at €24 for 2022, and 35% at €21 for 2023. Regarding CapEx for 2021, we repeat what we have already communicated. Total group capex is estimated to be 1.4 billion euros, of which maintenance is expected to be 700 million, of which Uniper share is approximately 400 million euros. However, there might be some volatility between the years, and we have not provided guidance for normalized maintenance capex going forward. Finally, I also want to highlight that that bond yields in Russia will have an impact on the CSA payments for the ongoing year, as the bond yields have declined during last year. The drop is from 7.6% to 6.3%, and will accordingly lower the CSA payments. With this, I conclude our presentation, and we are now ready to start the Q&A session. Ingela, back to you.