Fortum Oyj Corp Ord

everyone and welcome to Fortum's webcasted news conference on our second quarter 2021 results. My name is Ingela Ylves and I'm the head of IR at Fortum. This event is being recorded and a replay will be provided on our website later today. With me here in the studio is our CEO, Markus Rauramo, and for the first time also today, our CFO, Bernhard Günther, who then together will present Fortum's second quarter and first half year figures and the group's performance. After the presentation, we will open up for questions in the Q&A session over the teleconference. So with this, I will now hand over to Markus to start.

Thank you very much, Engel, and good morning also on my behalf and welcome to our half-year 2021 results call. I will first go through briefly the market environment, the highlights from the first half of the year and our overall performance. I will touch on our strategy and then hand over to Bernhard to walk you through the numbers in more detail. I start with setting the frame. The macroeconomic outlook is improving with the IMF forecasting 6% growth in 2021 versus a 3.3% contraction in 2020. Fortum managed the year 2020 reasonably well despite the general COVID-19 impact. Improvement from last year is thus not as steep as with some other market players. This stable underlying performance has continued. Power demand normalized in Europe Nordic demand did not drop in 2020 due to COVID. Commodity prices have increased lately, coal, gas and CO2. On the regulatory side, I'm very happy that the European Union is showing leadership with its ambitious Fit for 55 package, which will set the EU to the right path to reach climate neutrality by mid-century. The package outlines the tools to reach the 55% emission reduction target by 2030 and climate neutrality by 2050. Overall, we welcome the package. What is very positive is the strong focus on carbon pricing and the extended role for the EU ETS. Where we have main concerns is that the package is not technology neutral, but takes strong bias towards certain technologies like new RESS. The positive development has also reflected on the EU ETS price that has continued to set new records in 2021. Now I want to guide your attention on the key pillars of our strategy. We want to deliver sustainable financial performance and drive the clean energy transition. The determined execution of our transformation strategy continued during the spring and summer. We have taken substantial steps in active portfolio rotation and have further accelerated our decarbonization efforts. This has also been supported by solid operational performance across all segments. We deliver on our plans. First half year results have been remarkably solid. All segments are up compared to previous year. Just last week, Uniper reiterated their full year guidance which they have increased already in Q1 following an outstanding first quarter. One should not be irritated by weaker summer quarters as this is the nature of their business and the just described increase in commodity prices might even more pronounce the well-known seasonality. Second, we deliver on our strategy by continuing to optimize and rotate our portfolio. Our announced divestments now add up to 5.2 billion over the last 18 months. The efficient implementation of our chosen strategy has strengthened Fortum's balance sheet. The closing of all disclosed divestments will further lower our leverage this year, measured as financial net debt to comparable EBITDA well below our target of below two times. Thirdly, The execution of our decarbonisation strategy is also proceeding well. We set to end the use of coal in our Russia division by the end of 2022. In our Uniper segment, we disclosed the decision to accelerate our coal exit in the UK by closing the first block of the Ratcliffe coal-fired power plant as early as September 2022 and the remaining three units by the end of 2024, all ahead of schedule. And we have been successful in the call exit auction in Germany. And I will return to this in a moment. All of those mentioned efforts, strong performance, divestments and decarbonization efforts have not gone unnoted as both rating agencies, Standard & Poor's and Fitch, have now removed the negative outlook for Fortum. And we are very pleased that they revised their long-term ratings to BBB flat with a stable outlook. Then over to the headline KPIs. At the first glance, a fairly strong first half, but a weak second quarter. But before judging on our performance, let me highlight a series of relevant topics. First, there are some consolidation effects at play that must be considered. Uniper has been fully consolidated starting from Q2 last year and has been included as an associated company before. Comparable earnings per share for the first half 2020 also included the Q4 2019 Uniper-associated results. Second, in 2020, we had good performance despite COVID-19, which was not the case for all of our peers. Taking all this into account, the like-for-like comparison of the first half comparable EPS 2021 gives the clearest picture, showing an increase from 91 cents per share excluding the €18 from Q4 2019 to €1.03 per share. This is an increase of 13% for the first half. With regards to the leverage target of financial net debt to comparable EBITDA or below 2, we currently stand at 2.4, taking the earnings of the last 12 months into account. But the 2.4 does not include our latest announced disposals, and therefore this indicator will be materially better in the course of the second half of this year. Now over to the second quarter. Q2 profit was operationally solid across the segments. Those of you who have followed the Uniper call last week know that there are facing effects at work, causing comparable operating profit and the comparable EPS to decline on quarterly level. The decline in operating cash flow in the second quarter is due to income tax paid and the changes in working capital. Before we come to the next slide, one word on the Q2 reported EPS, even though that is not shown on this slide, but worth mentioning. The reported EPS was distorted by changes in fair value of negative 852 million, mainly because Uniper is not applying hedge accounting. And now over to the segment overview. The overview of the comparable operating profit on a divisional level shows in essence, again, three things. All segments have been contributing positively year on year. Uniper is the main driver for the increase based on the highlighted full consolidation in 2021. And generation and city solutions show a strong uplift. Same applies to consumer solutions. What the picture does not show is that the Russia division showed a stronger underlying performance with higher prices and volumes. But the weakness of the ruble covers the improved performance picture that we are nearly flat year on year in Euro terms. To sum it up, I'm satisfied with the performance across the group. If we look at the isolated quarter, the overview of the comparable operating profit on a divisional level shows clearly that the year on year deviation is determined by the Unifor segment. The main effect in the isolated quarter comes from the global commodities business international portfolio that was significantly below previous year. In the isolated Q2 2020, a significant positive hedging result settled that we did not see in the isolated Q2 this year. Generation and city solutions show a strong uplift based on good operational performance and market fundamentals. Russia and consumer solutions were flat despite stronger underlying performance. Bernhard will give further details in his section. Before I hand over to Bernhard, let me give you a brief overview where we are with our strategy execution on the next slide. Our priorities have been and are to strengthen the balance sheet, to decarbonize our portfolio and to drive profitable growth without compromising on Fortum's dividend and financial strength. Fortum has been a frontrunner in creating clean energy generation for decades, but has not been shy to invest in older, less efficient, fossil-based systems, but at low multiples. We invested in these platforms, converted them, cleaned them up, created state-of-the-art clean systems with the best available technology, and we are taking the next steps in building up renewables. We are following the same logic even today. After finalizing such a conversion successfully, we have to ask ourselves if we can further enhance the value of these assets or if, at this stage, Other investors are more appropriate and should we redeploy our capital? Over the past one and a half years, we have determinedly executed our strategic transformation and sold mainly district heating assets and businesses worth approximately 5.2 billion euros. Most recently, we announced the divestment of our 50% ownership in Stockholm Exergi, the sale of solar power assets in India, and close the sale of Baltic district heating. With these successful divestments, we have yet again demonstrated that we are constantly creating value for our shareholders and that we deliver on our strategy and our priority of maintaining a financially strong group. When it comes to decarbonization, we accelerated our ambitious coal exit plans. We target to be decarbonized as the whole group by 2050 in line with the Paris Agreement. In Europe, we are advancing fast. In our Uniper business in Germany, we were successful also in the third round of auctions for the closure of coal-fired power plants. The bid for the closure of Solven C power plant was accepted, which makes it the third success in three auctions held so far. And Uniper's third coal-fired power plant to be closed ahead of our previously announced already ambitious schedule. Uniper contributes one fourth of all capacity selected in Germany and more than from any other company. And as I mentioned already, we have been able to accelerate our decarbonisation in the UK as well. This means that we have been able to announce the accelerated closure of almost 40% of our coal-fired generation capacity in Europe within less than one year. This acceleration translates into a carbon emission reduction of up to 6 million tonnes. But we also recognize that the Russian activities need to be decarbonized over time. We announced in July a clear path to cease the use of coal in our Fortum Russia segment by the end of 2022, with an annual CO2 emissions reduction of approximately 2 million tonnes. We agreed to divest our Argajas coal-fired combined heat and power plant, and as we announced earlier this year, We switched the fuel of the Chelyabinsk CHP-2 unit from coal to gas. This leaves the group Russian operations with only one coal-fired power plant without a clearly communicated exit path, the Berezovska 3 power plant of the Uniper segment. So, what can we expect from us going forward? We are looking for balanced growth that is a triangle based on earnings power, with stable and over time increasing dividend and a stable BBB flat rating that is necessary in our capital intensive industry with access to low cost debt. All those elements should mutually support each other and not have one corner dominate. After the successful strengthening of the balance sheet, the question is where to best deploy our capital. This will be growth in clean energy and gas as highlighted in our December capital market day. And with this, I would now like to hand over to Bernhard with the financial section. Bernhard, welcome.

Yeah, thank you, Markus, and a warm welcome also from my side. Good to be here finally in person. Yeah, starting today. With a key financial overview summarizing our key comparables, what you see here is first in the middle columns you see a comparison of our half-year figures. These show a strong improvement across the KPIs mainly due to the consolidation of Uniper to the income statement which happened in Q2 2020. Second, there's the comparison of the full year 2020. versus the last 12 months on the right-hand side, and this should give you a better grip on where we are on our journey. As Uniper has been an associate before the consolidation in Q2 2020, the full year 2020 column includes five quarters of Uniper for all but the top three KPIs. Consequently, the LTM column on the right is probably the most telling indicator for the Fortum Group in its new form. From there, one can see the current level of comparable EBITDA of 3.2 billion euros. This is broadly in line with what I showed you a quarter ago, and the same applies to the comparable EPS being at 1.61 euro, driven by improved market conditions. Our financial position has improved following the series of divestments that Markus mentioned before. Standard & Poor's, as well as Fitch, corrected their outlook for Fortum Group to stable, recognizing the substantial delivery on our promises. And on a side note maybe, which is not on the slide, our reported, i.e. unadjusted operating profit for the period was impacted by minus 875 million euros. And these items affecting comparability mainly due to changes of fair values of non-hedge accounted derivatives, especially in the Uniper segment. And that's now good for going to the segments individually. First on generation. Let's look closer at the performance of our segment And with the biggest one of old Fortum, which is generation, we see a comparable operating profit in Q2 that increased by 13%. This improvement was supported by the higher achieved power price, which very successfully reflects our physical optimization and the higher spot price. This average power price was at 38.1 euro per megawatt hour. We also see slightly higher hydro volumes, which were beneficial. And in this quarter, there was a slight increase of our cost base, the main part of which was related to nuclear cost, both owned and co-owned. And part of this cost increase is just movement between quarters, while some of it is recurring. For example, higher depreciation and some higher fuel costs. While the spot power price increased by a stunning 143% in Fortum's power generation areas, the fairly high hedge levels and a hedge price below the level of the spot price dampened this effect on our achieved price. Now on to the reservoirs and the prices in the Nordics. On reservoirs, you see that the spot price has been on a relatively good level and there has been water in the reservoirs, so hydro production has continued on a high level. At the same time, the realized precipitation has been below normal. This was impacting the inflows, obviously. All in all, this reflects in the fact that water reservoirs have dropped from 21 terawatt hours above the long-term average at the beginning of the year to nine terawatt hours below the long-term average in early August. Then looking at Nordic power prices. When you look at the graph, it is important to distinguish the spot and front-end developments from the longer-term products in the outer years. Nordic spot prices as well as coal, gas and carbon saw a strong recovery during Q1 2021. This strong momentum has also continued throughout Q2. The Nordic spot price has been supported by both commodities and continental European power prices, as well as Nordic fundamentals, such as below normal precipitation and wind production. In addition, Nordic demand has increased by two to three terabyte hours compared to Q2 2020. The increase is only partly caused by cooler temperatures. Average system spot price was 41.9 euro per megawatt hour during the quarter, which is a good price level compared to the 5.6 euro per megawatt hour we saw a year ago. And this is exactly why we hedge, which is illustrated on this slide. What you see here at the top are the chief prices for Fortum's existing outright positions, but excluding the chief prices for the 25 terawatt hours of our subsidiary Uniper. And they, as you know, published their numbers a week ago on the 11th of August. Fortum's achieved prices in the generation segment are on the way up and compared to the volatility that we experienced over the last year, again on a very reasonable level. So I should compare the upper two quadrants left to right. Spot prices have been coming up substantially lately in the Nordic area. The Hydro situation is now below average as we saw on the previous slide, so this is a bit more dry situation now. With this, over to Russia. Here, the achieved prices have also been on the way up in Ruble terms as the market has been increasing demand-wise. But in Euro terms, we see a downward trend as the Russian Ruble came down. In ruble terms, the Russia segment achieved power price increased by some 7%. And this now brings me to the Russian segment performance. Q2 2021 showed power generation volumes increasing by 13% due to higher consumption following the economic recovery from the COVID pandemic and high temperatures in the second quarter of 2021. Comparable operating profit for Q2 was flat. This effect of the change in the Russian ruble exchange rate was at minus 2 million in the quarter. And the slight negative effect of the CSAs following three units entering the step-up period, where they get higher CSA payments, while there are two units who are now out of the CSA payments range. And there was, as shown on the slide before, the positive effect from higher power prices. For the first half year, the comparable operating profit improved marginally. In Q2, sorry, Q1, there was the positive effect from the solar transaction with RDIF and higher power prices, while there was a slight negative effect from the CSAs as described for Q2. And the ruble effect was for H1 minus 23 million. So in ruble terms, there was a clear improvement. As Markus already mentioned, decarbonization actions are also taken in Russia. First, we announced the transformation from coal to gas in our Chelyabinsk CHP2 plant. And second, we announced the divestment of our Argyayash coal plant Together means that we cease the use of coal in our Fordham Russia division by the end of 2022. Coming now to city solutions, where we are happy to see an improvement after they had a tough year in 2020, which was affected both by mild weather and low power prices, but also by COVID. For the first half of 2021, the comparable operating profit almost doubled, it's plus 91%, as last year was impacted by very weak market conditions. The result in H1C saw higher heat sales volumes in all heating areas, and in Norway, it was also helped by higher power prices, which have an influence on heat prices. The decline in comparable net assets is naturally related to the district heating divestments, we successfully concluded. From a strategic perspective, there has obviously been a lot of activity this year in City Solutions. As the largest transaction, we announced the divestment of our 50% share in Stockholm for 2.9 billion euros. The transaction is expected to close by the end of this year. Further, we announced the divestment of two of our solar plants in India with a total of 500 megawatt capacity for approximately 280 million euros. Closing of this transaction will happen in three tranches, with the last one expected in the first half of 2022. And in early July, we closed the divestment of our Baltic district heating business announced in March with a total consideration of 710 million euros. And as Markus already said, this obviously has a positive impact on our leverage. Moving on to consumer solutions, who showed good results again. So the EBITDA now improved for the 15th consecutive quarter in a row. If looking at the accumulated result performance, the competitiveness continue to strengthen with active development of the service offering, including digital services and products. And the strategic review of this business as announced in December 2020 is ongoing. Coming as last of the segments, but not least of the segments to Uniper, They published their results last week and we can repeat some obvious general comments. Again, please note that Uniper has been included as associate in Q1 2020, giving some distortions when it comes to the first six month comparisons. This holds true for the shown earnings, but also for the volumes for the first half. As a general comment, I would like to highlight that the underlying performance was solid. When looking at Q2 2021 in isolation, it's good to keep in mind that last year had an extraordinary positive effect from the trading businesses. This year, the Q2 IRFS result includes some negative CO2 related phasing effects that will be netted by the end of the year. As this effect is only intra-year, Uniper reiterated their full year guidance. Uniper's European generation business slightly improved from the previous year with better hydro and fossil business generation as Ershing 4 and 5 as well as Dutton 4 are now in operation. The results of Uniper's Russian power generation business UniPro were slightly above previous year's level with the commission of Berezovskaya III in May offsetting the expiry of the CSAs for the Chatorskaya and Yavinskaya power plants and negative impacts from the change in the Russian ruble exchange rate, which we discussed before. Finally, just a brief note related to the Russian merger control filing. In March 2021, Amendments to the Russian strategic investment law were approved and based on the law, Fortum is now allowed to own 100% in Uniper. And Uniper, as you know, is the majority owner of UniPro. Following this, Fortum has considered for the time being not to pursue the FAS merger control filing and will continue to further analyze those requirements of the filing process. will come back to this in due course now over to financial debt here you find the changes in our financial net debt and main items of our cash flow during the first half of 2021 showing an increase of 645 million euros mainly related to the dividend payment of almost 1 billion euro that were paid in Q2 2021. With regards to the leverage target of financial net debt to comparable EBITDA of below 2, we currently stand at 2.4, taking the last 12 months into account. But this does not yet include our latest announced disposals and therefore will be materially lower in the course of the second half of 2021. and very much in our target range. As said before, the credit rating agencies have revised the outlook on Fortum's long-term issuer default rating from negative to stable, reflecting our solid market positioning and delivering on our asset disposals. The bond maturity profile is rather balanced. Our liquidity position is very solid with liquid funds of approximately 1.7 billion euro. We have currently 9.8 billion euros of gross debt and average interest rate for this whole loan portfolio is 1.5%. And please bear in mind that Uniper has also some interest income from their operations. Now, finally, coming to the outlook. Our successful hedging has continued, creating predictability and visibility. And you can also see here again the Uniper hedging numbers below the Fortum ones. Regarding capex for 2021, we repeat what we have already communicated. Our total group capex is estimated to be 1.4 billion euros, of which maintenance is expected to be around 700 million euros. And please bear in mind that there may always be a bit of volatility between the years as we have not provided guidance for normalized maintenance cap-heads going forward. With this, I conclude our presentation, and we are now ready to start the Q&A session. Ingela, over to you.

Thank you, Bernard, and thank you, Markus, for both of your presentations. So I propose we begin the Q&A session. Moderator, please go ahead and start.

Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Our first question is from Deepa Waddenstein from Bernstein. Please go ahead.

Thank you. That's Deepa Waddenstein from Bernstein. I have two questions. So firstly, on the balance sheet, I think both of you have acknowledged that the balance sheet is really strong. So in that context, I was wondering why we need to sell these customer solutions to millions, particularly given that it's been exhibiting these very strong numbers quarter on quarter, particularly when the balance sheet is not strong and therefore is the game plan to pull out the minorities. And my second question, just a clarification on the emission reductions from UNIPR's early closures. Could you also quantify what might be the offsetting impact from the ramp-up of Basin 4 and Venezuela, out of the 6 million, how much might get eaten by the ramp-up of coal in UNIPR? Thank you.

Okay. I can start with the balance sheet question. Indeed, we have been actively rotating assets and releasing a lot of capital and it's a good question that why are we looking at other strategic assessments. The rationale for starting the strategic assessment for consumer solutions was that we are focusing our growth and development activities now on the platforms which we can scale up on European level and that means growth in CO2-free energy, renewables, solar and wind, increasingly clean gases and infrastructure and industrial solutions. We indeed have a really strong consumer solutions platform, and they have been doing a great job, 15 consecutive quarters of EBITDA improvement, but it's a Nordic-focused business. So the European competition has customers, the bigger ones, 10, 20, even more million customers And to get to that scale, that would be completely other thing. So we have the bigger scaling up possibilities in other businesses. Then the question on emission reduction. So the numbers I was referring to, these are like-for-like numbers. Obviously, new units coming online, they have an increasing impact on emissions. CO2 emissions and even bigger swings come then depending on what units of our existing fleet are running. And this we can see that production in European generation increased substantially with the market conditions that we had in the first half of the year.

Thank you. And our next question is from Artem Velatsky from SEB. Please go ahead.

Yes, hi, this is Artem from SEB. Thank you for taking my questions. I actually have two to be asked. So first, starting with generation and flagged higher cost base in Q2. I think Bernhard mentioned, for example, nuclear and depreciation topics. Could you maybe quantify what is the magnitude of basically increasing cost base and whether there are some temporary elements which shouldn't be continued or basically shouldn't be visible in coming quarters. And the other question is relating to Berezovsk as you highlight in the report is the only coal-fired power plant without communicated exit path. Should we expect some news on this front eventually or how we should think about basically Berezovsk situation?

Yeah, hello. I'm happy to take the first question. I think Markus will take the second one on Barrio 3. On generation and the higher cost base, as we said, you know, the significant part is about movements between the quarters, so it's not a structural effect. It's just an effect you see in a quarter-by-quarter comparison, which obviously is always, you know, the risk of the finer the the time-wise granularity of your comparison, the more these phasing effects might play a role. If you eliminate all these effects and the non-recurring elements, the overall cost effect that might be of a structural nature is in a very low double-digit million-euro amount, and there's also some non-cash in it, so depreciation effects of course are non-cash and this is also related to a harmonization in our accounting policies after the full consolidation of Uniper.

I can take the Berezovska question. So one fundamental difference between for example EU and Russia is that EU has had the emission trading system in place for a long time and Russia Whereas Russia is committed to the Paris Agreement, they have not stipulated mechanisms how to phase out the carbon-emitting activities. Now, we are, of course, committed to decarbonizing our activities across the board, being Paris Agreement compliant fully in scope 1, 2, and 3 by 2050. And what we heard now this summer is that Russia has really taken an active approach on decarbonization also, I think, vis-a-vis the European ambitions and the risk of carbon border taxes coming in place. Russia is talking about setting up its own emission trading systems and taxing carbon domestically. We'll see what happens, early to say, on that front, but I think our and Russia's actions and ambitions are aligned. but no stipulated timelines either on the Russian system or for the Berezovsky asset.

Okay, great. Thank you very much.

And our next question is from Vincent Irel from JP Morgan. Please go ahead.

Yes. Good morning, everyone. So I'm happy to see you've already gave some color on the OPEX side of the equation. I'll go back to Unifor to start with. So we still don't have any public policy on the UK dividend. versus CAF3 are remaining the last call for assets without path to decarbonisation. The balance sheet is to be delivered much early. So, clearly, we have to come back from the unique control. You said that you have no DTLPA planned before the end of the year. And the question then is, could you go about it a different way, like minority squeeze wells before the end of the year? Is it something which is rolled out? or if everything is rolled out until 1st of Jan, doesn't mean that everything is open on January the 1st. So that's question number one. Second, regarding the renewables, I keep looking at your WACC plus one investment threshold, which is especially low versus competition. When we think that most of your renewable developments are in Russia and India at this stage, so shall we see that actually you're looking at in Europe at some stage, because WACC plus 1% on the Russian WACC does not really ring like a very, very accurate proposition. And finally, if you could give us a call on the decision regarding nuclear waste depository, which is expected for the end of the month, that would be very useful. Thank you.

Okay, I think at least I spotted actually several questions or contemplations, but maybe I tried to at least part of them group together. So indeed the case is so that on the ownership side, we have not ruled out buying more shares in Uniper. And you have seen in the past quarters and announcements how we have progressed on that front. And the comment on no DPLTA, that of course still remains valid. We have made good progress on the cooperation work between Fortum and Uniper and we announced the One Teams activities and these have been progressing well. Then on the net debt EBITDA and cost of capital contemplation, maybe I'll let also Bernhard comment on that, but this is indeed something we have been addressing the whole problemacy to the build, operate, transfer models, partly rotating capital with leverage increasing the returns. But one important element, at least from my point of view, has been also that this way we can scale up the activities in the field of renewables quickly. So take example solar. We have scaled up from owning five megawatts up now to developing and commissioning 500 megawatts, and we need to scale it up from that. So the business model continues to develop all the time. Do you, Bernhard, want to continue from that?

Maybe just from a CFO's perspective, of course, we are always watching also what our competitors communicate in terms of the hurdle rates they apply. And I think it's also fair to say, if you look at the at the success we have in our project development plus the capex rotation or capital rotation in India and especially in Russia. So far I think this has been quite convincing. So we do feel comfortable with the hurdle rates we currently apply, but of course we are constantly watching as well.

Then there was a question on the nuclear. I think you're referring to the final depository of spent nuclear fuels. We want to communicate clearly that it's high time actually for Sweden to decide on how to take care of the final depository of spent fuel. So the nuclear operators cannot wait for long because the intermediate storages are full. So we need clarity.

Thank you very much. Just on the hurdle rate on renewable, just to be sure I understand. What you're saying is that the WAP plus one, the rate, which is lower than competition, you're clearly comfortable. It's a lower rate. You're comfortable with that. Did I understand correctly that it does not include overall as a return the thumb down element of your business model? Is it fair or did I understand wrong?

I think that's a fair description. It reflects the philosophy that we also want to differentiate between the low emitting and higher emitting investments we have, so differences in hurdle rates. And then we have indeed deployed different models on Balance Sheet, building in joint ventures, build, operate, transfer. So ultimately, what model we are using will then define what kind of outcomes and returns and result impacts we get.

And I think one might also add, I mean, I have not... recently checked all our competitors, but some of them with what they published, I mean, at least as far as I can remember, all or most of them at least start with a bandwidth of WEC plus one plus something percent. Yes, so some of them have a bandwidth. And what, of course, we would also still include as country risk elements or other project-specific risk elements on top of the pure um corporate finance back that you would derive yes so this is a the one percent is not meant to cover those obviously excellent thank you and our next question is from luder schumacher from society general please go ahead uh good morning good here um

Two questions and one request, if I may. The first one is on Nordic power prices. We now have spot prices that average more than 55 euros a megawatt hour. But the forward curve for the calendar contracts is still only at 39 euros a megawatt hour for 22 and even 32 hours. euros and megawatt hour fall 23. How do you explain this disconnect? Is the tightness in the system really just due to low hydro levels we're seeing at the moment and therefore just constrained to this year or could this actually slip further out into the calendar contracts bearing in mind the development in coal generation costs, where Nordic power prices are trading at a record discount to the cost of coal generation, bearing in mind what's happening with coal prices and CO2 prices. The second one is quite straightforward. On page 55 of your H1 report, you show gross investments in shares in subsidiary companies of 154 million. Does this by any chance include more shares in Uniper? And lastly, the request, as we are moving from the increasingly volatile reported to the comparable accounting world, can you maybe provide us with quarterly comparable numbers for 2020, i.e. the remaining quarters in terms of historical figures along the lines you do on page 51 in your report?

Okay, I can start with the Nordic Power Price. I would position it so that the spot prices are reflecting exactly the conditions in the market as we speak today at this hour. So that is reflecting the coal, gas, CO2, transmission capacities and demand-supply balances in the various areas. I would describe it so that we have a tight market, hydro reservoirs starting to be lower than average and not a lot of marginal availability in the system. And when we have, for example, low winds in the Nordics, you can see that in the prices. Then how I interpret at least the forward curve is that that reflects the same, but on a theoretical level, when you come to the coming quarters and coming years. So that is the market's best understanding of what these mentioned conditions will be in next quarter or next year. So all these factors together. Then what do I read from the commodity markets overall is that stronger gas, stronger coal, stronger CO2 and electrification of the society, these are all good things for us. So we have seen both the spot being higher and forward curves increasing, albeit clearly with the high spread between Nordics and Germany in the future periods. Then with regards to the Uniper shares in previous quarters, we have been And you have seen it in the reported numbers that we have been buying and increasing our ownership in Uniper. We have ruled out until the end of this year DPLTA or squeeze out, but we have not ruled out buying more shares in Uniper. Then the last question, maybe Bernhard got it, but I wasn't sure actually. I didn't quite get the question. Maybe you did, Bernhard.

Yeah, and then Ingelaar and Mons already assisted a bit because I wasn't sure either. Because obviously you're referring to numbers we have not published so far on comparable operating profit in 2020, or at least I would suggest, Ludo, that I will come back to you to to clarify what exactly it is you're looking for and then to help you if there's any kind of reconciliation that you would need on the result. Is that fair?

Okay. Yeah, that's fair. I think Rauno already knows. It's just the new concept of going down to the comparable net income, sticking strictly to the comparable world instead of the reported one, as you've done before. So if that is what we have to focus on in the future would be good to have the historical numbers.

Yeah. Okay. Then it's understood. Yeah. Because I think the comparable operating profit already was there before, but the new element is of course, comp net income. And yeah, we, we can try to help out there. Excellent. Thank you.

And our next question is from Peter Viscard from Bank of America Securities. Please go ahead.

Yeah, good morning. So two from me. First of all, you mentioned that this amendment for Russian strategic investment law had been approved and now you're technically allowed to own 100% of Uniper. But then, Bernard, after that, you said something else relating to some merger control application or something that you'd withdrawn. Can you just repeat that? Because I missed it and maybe sort of clarify exactly what you meant. And then the second thing just relates to this Swedish nuclear waste decision. Your report mentions a sort of potential 80 million euro per annum at cost relating to the delayed decision, but it's a little bit unclear whether that relates just to Oscarsham or the whole nuclear industry, and it's a bit unclear whether that's something that will kick in now or in 2024. So I was just wondering if you could provide some detail on exactly what that €18 million number means. Thank you.

Yeah, Peter, I think I take the first one and then Marcus the second one on Swedish nuclear waste. And in Russia, yes, I think you understand correctly the key step we had to take was the strategic investment law, which has been changed. And now from a Russian perspective also, we would be allowed to own 100% in Uniperp, who in turn is the majority shareholder of Unipro. Obviously, we don't own 100% in Unipro, but at least there would be no obstacles in Russia if we were to decide at a later stage, as Markus commented. The other thing is the merger or antitrust approval from a competition point of view, the so-called FAS or the Competition Authority in Russia. where we basically now do not pursue a filing. This would be necessary if we were to go into some sort of integration between Fortum's Russian operations and UniPro, which go beyond an arm's length principle, or if we were aiming for a kind of domination-like structure where we would instruct This is not possible technically anyway, because in between Unipro and Fortum, there's Unipair. And there, as you know, we don't have a domination agreement or a full 100% control anyway. So this is, I think, something that currently would be of no particular value to us. Therefore, it's on a low priority.

And then shortly on Swedish nuclear, you are correct. So it's not only concerning Oskarshamn, but it's concerning the whole Swedish nuclear, all Swedish nuclear operations, not only Fortums.

I'm sorry, that 80 million, can you just clarify where that additional cost comes from? And is that something that will kick in, I think you mentioned 2024 is when this all becomes a problem?

At least one angle there is that we are really facing a physical problem that the intermediate storage is actually filling up and I don't have to come back on more details but my understanding of the factual problem is that in Finland we have already decided on how to do the final depository of spent nuclear fuel and in Sweden that is not clear and then we can't either expand the intermediate storage before there is clarity on the long-term storage. So it will ultimately lead to less nuclear production if the intermediate waste storage becomes a bottleneck.

Okay. Thank you.

And our next question is from James Brand from Deutsche Bank. Please go ahead.

Good morning. Thanks for taking my questions. I have three questions, one of which is a follow-up on the topic that was just being discussed on this nuclear repository issue. So just to double clarify on the $80 million, the $80 million is an industry-wide estimate of the costs associated with Delaying the permanent nuclear solution, it doesn't relate to the points that in the statements you were making in the prior paragraph, which is that you might have to shut Oscarsham. I presume that would be an additional cost if it happened. And then secondly... How credible do you think this scenario is that you will have to shut Oskar Schama? And you're implying in the statement that if this government approval doesn't come through within the next two weeks, that that's what's going to happen. But presumably some kind of solution would be found where you could increase the storage on site. so I'd be interested in your perspective on that. That's question one, I guess a double parter. Secondly, on biomass and the kind of fit for 55 proposals, there were some proposals in there with some stricter rules on biomass, but I read that some of the Nordic industry or utility industry was a bit unhappy about that might impose some stricter rules. Does that affect you at all? Obviously, it's kind of selling most of your district heating, but Would you be affected at all by those stricter rules on biomass use that's being proposed alongside the 55 proposals? And then thirdly, I think it was potentially asked earlier, but I'll ask it a slightly different way. On the Uniper dividend, obviously they haven't clarified it yet. What's Fortum's perspective on that? You mentioned earlier your own dividend, and it was an absolute priority for you to maintain that, but then you're not necessarily dependent on the Uniper dividend. Would you like to see continued high dividends from Uniper, or is there some reason why you might support a lower dividend from Uniper? Thank you very much.

Okay, maybe I start with the biomass. So after the divestments of Stockholm Exergi, Joensuu, Järvenpää and the Baltic operations, we have little biomass exposure left. So little impact for us. Then the clear communication on the Swedish case. We're trying to make the point clear that there has to be a decision eventually. Nuclear plants have been running for decades in Sweden and in Finland, for example, What was decided to be done and planned already in the 80s was almost with one year accuracy then put into action in the 2020s with the decision to actually start the final depository. So we really want to make that clear point to all the nuclear operators in Sweden that a decision is needed. That's a societal responsibility. And then... I can comment on the Uniper dividend so that the key points that one would be considering is that what is the balance between growth, dividend payments, strength of balance sheet in Uniper and Uniper will make its decisions and proposals and we as owner will make our decisions when the proposals are there in due course. With regards to Fortum's dividend, we announced it typically, the board's dividend proposal to the AGM in connection with the full year results. So this is the alignment we referred to earlier, that we need to align the timing of these discussions and dialogue. Thanks very much.

And our next question is from from Carnegie. Please go ahead.

Hello. I have two questions. So firstly, related to generation. It seems that your optimization premium included in your ASP calculation was very good and perhaps higher than in Q1. So can you comment what supported your optimization premium? And is this something what supports also in Q3? Then my next question is related to net power generation next year in the Nordics. Do you expect some overcapacity due to O3 going online?

Maybe I take the O3 question and then Bernhard can take the optimization. So I assume actually referring to my earlier comment about the Nordic power market and power forwards, that the market takes into account the information in the Nord pool market that TVO is posting there. So I assume that the Olkiloto 3, both startup schedule and then the PTO, they are reflected in the forward prices. In the bigger picture, what has happened is that Sweden has been closing down nuclear capacity about the same amount as Olkiluoto 3 is bringing more to the market. So from a kind of Nordic balance point of view, nuclear is pretty equal. And what this would do in theory is that Finland would in theory need to import less than it has been doing in the last years, which has actually been quite a lot. varying from typically from one gigawatt to even three gigawatts, depending on the supply-demand balance and time of year. So this will make Finland a little bit less import dependent. And then do you want to take the generation optimization?

Your question on the optimization, so on top of the kind of average out-turn price, as hedged. I think it's no surprise that in quarters where we see a very high volatility of prices, also there are more opportunities for our physical and financial optimization. We do not reveal any specific numbers on it other than the bandwidth between one to three Euro per megawatt hour typically, and in good quarters, obviously, it's more to the upper end than the lower one. How this goes on in Q3, we will report in due time. So let's see how the markets develop. And one thing I learned in my many years being exposed to commodity trading, it's very hard to predict the future there, even harder than in most other businesses.

Okay, thank you very much.

And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. Our next question is from Jesper Stan from Bloomberg News. Please go ahead.

Hi, I'm just wondering if you could say anything about the change in fair values of the derivatives from union per segment, what that is related to?

Yeah. Yeah, happy to do so. So the derivatives whose change in fair value you see here are derivatives out of Uniper's generation and gas midstream business where they hedged their positions, but due to the reasons that they are constantly re-optimizing these portfolios under IFRS, they cannot be put into own use or hedge accounting, which would neutralize the mark-to-market swings of these hedges going forward until full realization. So we have basically an economically hedged position where our original position, be it a gas midstream or generation, realizes upon delivery, whereas the hedge every quarter swings with the market prices. And because This is how it's shown under IFRS. We think IFRS is exactly creating the opposite picture of the underlying economic position, which is hedged, but IFRS creates earnings volatility, and this is the reason why we adjusted. And this quarter, it has been a very large swing at Uniper because we had this high volatility of commodity prices. Did this help?

Yes, hello. Thank you.

And our next question is from Sam Erie from UBS. Please go ahead.

Oh, hi. Good morning, everybody. Thank you for the presentation today and all your helpful answers. A couple from my side, one hopefully very easy. You said in the report today that you spent a bit more money on Uniper shares, but I don't think you gave the actual percent stake that you now have. So I'm wondering if you could just confirm what your ownership stake is as of today. And if I've missed that in the papers this morning, my apologies. And then second one, maybe, Mark, is this for you, but coming back to your comments earlier on the disposal and asset rotation sort of portfolio management actions you've been taking, I mean, it seems you've been very disciplined there. You know, you're on track for your leverage target, but you're still looking at businesses that you might not want to own longer term. And I was wondering, with that in mind and your comments just now on a previous question, can you talk about Uniper's global commodity business and how you see that sort of fitting with your goals for the group longer term? Is that a core activity that you want to stay in, or is that something that... you know, in a few years time might no longer, you know, might be under review like the retail businesses at the moment. Thank you.

Yep. Okay. I can take these two questions. So you are correct in that we did not actually disclose what is our ownership percentage in Uniper exactly today. We have been buying shares as you have seen from the announced numbers earlier and you see that there are acquisitions of shares, but we don't give an exact number. I'll leave it at that, that we have not ruled out buying more shares. We have ruled out the DPLTA or squeeze out. Then with regards to disposals and global commodities, two key areas where we are focusing strategically is clean electricity and increasing the clean gas and the third leg, the industrial and infrastructure solutions. In both of these or in all of these three areas, we actually see that the regulatory, political, technical, technological and commercial fundaments make these all three areas very interesting for us because there are big growth and investment opportunities and great opportunities to use our competencies. So these are the three areas where we will pursue growth and which will be in our focus. Having said that, I will still make the point that this doesn't exclude either that even within these segments, of course, we may look at certain assets that may not fit an exact focus of ours. I'll take an example of these small hydro plants. So we have done rather significant transactions even in hydro, which we would probably define as very core to us, but then the core is large modern power plants that we can continue to optimize. And then the ones that have been in the single-digit megawatt scale, we have been happy to divest and sell to an owner whose focus is in that scale.

Interesting. Okay. Markus, would you mind just quickly if I ask you a kind of related follow-up question? But against this kind of focus on clean electricity, clean gas, you know, the general decarbonization theme that you're pushing through, you know, Ford's Amanda Uniper business. Just wondered if I could ask your opinion on a big, big project that's coming up in Russia. I think there was a question on this on your Q1 results too. But Rosnest has got this big Rostock development coming up. And they said in June they're now out there looking for contractors, to kind of get started on that whole project, which includes three and a half gigawatts of power generation and a high voltage transmission line and so on. I'm just wondering, what would your position be on sort of clean energy for an oil development? Would that fit your decarbonization priorities, or would you think of that as fundamentally fossil capex?

Overall, I'm very happy to see such developments, and this is in line with also what I took away for example, from the St. Petersburg Economic Forum. Russia is now taking decarbonization very seriously, and I assume that is because Russia wants to continue to export their products, their fuels, their technology and energy out of Russia, but understands very well that it needs to be decarbonized. I think something underpinning this is that During this economic forum, we signed four contracts for delivery of CO2-free electricity from our wind operations, actually to oil and gas players, amongst others, and technology suppliers. I'm happy about such an activity, and I'm happy that now Uniper is part of our family because Uniper's big business is origination, so stimulating supplies of increasingly clean energy stimulating and catalyzing demand of cleaner energy and then matching these interests and being able to absorb risk and run energy books and portfolios. That is our business. So compared to what Fortum was before, we have now completely different kind of abilities to participate and catalyze such activities.

Very interesting. I appreciate your comment. Thank you very much.

Thank you. And just as a final reminder, if you'd like to ask a question, please press 01. Our next question is from Luder Schumacher from Society General. Please go ahead.

Hi, just one follow-up question on my side. When I look at your power price hedges and Unipers, I do not get the impression that both units actually belong to the same company. Uniper was quite bearish and locked in low prices at an early stage. You, on the other hand, are quite open, so expressing a bullish view on power prices, and you do have exposure to surging power prices. So, is there any cooperation going on at all between both units, or are Fortum and Uniper just doing their own thing when it comes to hedging power prices?

a couple of angles there. So one is that if you look at the hedged price levels, then the Uniper and Fortum portfolios are in different price areas. So by definition, if the price is very there, even if we would hedge exactly at the same time, same amount, the hedge prices would be different. Then another angle is that the books you see today on the page here, this is a result of historical activities. So these hedges have started before we had one team's activities and before we had the type of cooperation between the companies we have today. So over time, one could assume that our views will converge and there will be a more coordinated approach on the hedging. But this is a result of history of different price areas, timing.

Okay, get the price areas. And what are you saying? There is cooperation going on now, but it will be a while until it's visible.

There's definitely cooperation going on because the Nordic Hydro was one of the announced one team's approach areas. So very core activity for us.

Thank you.

And there are currently no further audio questions. I will hand the word back to the speakers.

Thank you, moderator, and thank you all for your questions. So as we're done with the teleconference, we still have some questions on the chat, so I now hand over to Måns to ask those.

Yes, so the first question comes from Mika Majander, and he asked that you have 25% unhedged for 2021. Is it correct to assume the unhedged volumes to be sold at between 55 and 65 euro levels that we see in Nordpol?

Yeah, I'll take one step back actually on this one because it's a good question. So you have seen historically that the production volumes because of hydrology, they vary quite a lot. So you would not even normally expect that we would go close to 100% hedging levels because we may end up being over hedged. Then to the exact question, you are correct that whatever then is the spot price if it's unhedged. then it is the spot price that we will get, plus the optimization, plus everything else. But for the underlying production, yes.

And the area price, so there might still be, of course, a slight difference to the average spot price, because also we have our production in certain areas of the Nordics only.

Exactly. So I'm not making reference to the price level that Mika is indicating, but just saying that spot is what we receive if we sell on hedge to spot.

Then we have a question from Kim asking about our city solutions segment and the recycling waste and bio businesses there and if we have plans to grow that business.

The recycling waste solutions we have actually been growing so we have been investing in acquisitions over the past years and we continue to see interesting opportunities. One of those was, for example, the announcement on the Harryvalta battery recycling facility. So circular economy solutions is something. In addition to, we discussed IPCC report and climate change, but the smart use of materials is something that the society will need to focus on as well. So that gives the recycling waste solutions future possibilities.

Thank you. Then we have a question from Ola Vilnes of Montel, asking about our one team cooperation in the hydro optimization and physical trading, and asking if we also have plans to merge the financial trading of the two companies.

The plans that we have announced for the time being are the plans that we are working on, or the potentials. And I would say that In addition to the three one team areas in due course, we will look at the other possibilities to create value in other activities. But these are the three that we have focused on for the time being.

Thank you. And then we have one question with regards to the Fortum board of directors and their share ownership in Fortum and why is it so low?

I think that's a question that one would need to directly address to the board of directors. Actually, if I turn then to the Fortum management, there the requirement or expectation from the Finnish government ownership steering is that the companies where Finnish government has ownership, that the management should own one year salary worth of shares and I think that is to the large extent well delivered on Fortum's part. So as management we own substantial amount of Fortum shares. I myself own significantly more than one year salary worth of and I have been buying myself as well. And we have the Fortum four share program also where we incentivize the wider Fortum employees to acquire Fortum shares through the four shares program, which we are very happy about that the pickup has been very strong in the company. So share ownership of our employees is something we take very seriously.

Okay, thank you. And then there were two questions regarding the Swedish nuclear waste and then regarding the hedge levels, but I believe those have already been answered. So no more questions from the chat.

Thank you so much, everyone, for your questions and active participation here today. So this now concludes our Q2 presentation. And on behalf of Fortum, we wish you a very nice rest of the day. Thank you.

everybody for participating and great to be here together now physically with Bernhard. Absolutely. Really enjoyed it. Thank you very much. Bye-bye.