Fortum Oyj Corp Ord

Good morning, everyone, and a warm welcome to our webcasted news conference on Fortum's full year results 2021. Just for the record, this event is being recorded and we will provide a replay after the event later today. My name is Ingela Ulves and I'm the investor relations head at Fortum. With me here today are our CEO, Markus Rauramo, and our CFO, Bernard Günther. Markus will start by commenting on our Russian businesses before moving into last year's performance. Bernard will then provide more insights into the full year 2021 results and the drivers. After the presentation, we will open up for questions from the teleconference. We have reserved one hour and 15 minutes for this webcast event today. So with this, I hand over to Markus to start.

Thank you very much, Ingela. Let me first address what has been on our mind over the last days and how we assess our Russian exposure. Following this, I will then guide you through the headline performance indicators and the market drivers that have played a substantial role, especially in the fourth quarter with outstanding movements in commodity prices. Additionally, I will share my view on our operating environment and link this to how we are progressing with our strategy implementation. Bernhard will walk you through the numbers then in more detail. I will start with setting the frame, looking at the geopolitical situation. I'm deeply saddened and concerned by Russia's attack on Ukraine. We all are at Fortum. As Europeans, we know from our history that military force is the worst way to solve political conflicts. Over the past week, we have already witnessed what great suffering the war in Ukraine is causing people. This cannot be justified. The war has also shaken the relationship between Russia and Europe profoundly. The damage done to the ties that we have built up over decades will be far reaching. As you know, Fortum has long business relationships and broad operations in Russia, so we are following the situation with the highest attention. In this critical situation, it is our duty to care and to focus on the well-being of our employees and our commitments to our customers. We are in the business of providing security of supply of energy, and our customers depend on us for power, gas and heat. also in Russia. All of our operations are currently running as normal, so we can fulfill our duties to our customers. At the same time, business as usual cannot continue. For now, we have stopped all new investment projects in Russia until further notice, and we will continue to reduce our thermal exposure in Russia. We are also, of course, closely monitoring the developments of sanctions. The situation is very dynamic and it is very difficult to predict the impacts on our operations in the future. Yet, it is obviously clear that we are complying with all applicable laws and regulations, including sanctions, and preparing for various scenarios. In case the escalation of events would hinder us from fulfilling our energy delivery commitments to our European customers, we would work with our respective regulators and governments to find a joint solution. In this situation, it is clearer than ever before that Europe urgently needs an energy transition and Europe needs to diversify its energy sources. We are actively supporting a sustainable and secure European energy supply through our investments into clean power, clean gas and flexibility. This morning's announcement On our decision to apply for an extension to the lifetime of our Lovisa nuclear power plant in Finland, Uniper's recently increased LNG imports and decision to resume planning of a hydrogen-ready LNG terminal in Wilhelmshaven in Germany are clear examples of this commitment. Before I move on to our annual results, let me just say that in this unprecedented situation, we are in great need of resolve and a new level of cooperation in energy across Europe. I want to thank our colleagues across Fortum and Uniper for their commitment and determination in securing energy supplies for Europe in these uncertain times. Then over to the results. 2021 was characterized by very volatile market fundamentals with unprecedented commodity price levels resulting in an outstanding performance across the group. On a full year level, we achieved highest comparable EBITDA, highest comparable operating profit and best comparable EPS ever in Fortum's history. Even though it is good to remember that we had some sales gains and consolidated Uniper first time fully in all quarters, the performance was very strong despite the very challenging market environment. Worth mentioning is also that due to the commodity price fluctuations, and IFRS accounting, our reported EPS shows a negative result. Bernhard will guide you through this in the financial section. Looking at the balance sheet, our leverage, defined as financial net debt to comparable EBITDA, has come down tremendously. We have substantially worked to strengthen our balance sheet and are way below our set leverage target of below two times. By deleveraging, we are well positioned to navigate through these turbulent times. Q4 Profit was operationally very strong, as nearly all segments could take profit from the strong commodities environment. On the flip side, our consumer solutions business suffered substantially from this market situation. It has been a challenge for the whole organization to deal with this extreme market development, especially maintaining security of supply for our customers and to keeping financial liquidity high in order to manage the collateral requirements caused by rising prices. Uniper took a series of financial and operational measures, including group support and an undrawn revolving credit line from the German state-owned KfW bank to ensure sufficient liquidity. Those measures are also reflected in the operating cash flow that doubled on full year and in the isolated quarter. In this context, let me highlight that we support Uniper management's proposal to put a stronger focus on liquidity and investment capacity and to cut the payout for 2021 to the minimum dividend under German stock cooperation law. At the moment, I don't see any reason for Uniper to pay a dividend going forward either. Fortum's dividend policy is to pay a stable and over time growing dividend. This is reflected in the dividend proposal of €1.14, which is a slight increase to previous year. To sum it up, strong group performance in a volatile commodity market with an organization giving its best, serving our customers, working closely with our suppliers, and maintaining our strong financial flexibility. Now, over to the underlying market fundamentals. As I said, it is obvious that volatility increased on all energy commodities last year. Energy commodity prices soared in the fourth quarter, supported by ongoing economic recovery and global supply constraints, especially in gas. Higher commodity demand combined with longer-term negative investment trends and supply constraints created an unprecedented price rally. Coal prices were soaring, and at the same time, CO2 prices reached record high levels. Consequently, gas, coal and carbon prices underpinned the very strong price development in the European power markets. Continental power prices gave a boost to the Nordic spot price, which was also supported by lower precipitation and less wind. The spread to German power prices is nevertheless quite large, especially in forward prices. Besides strong wind build-out, internal transmission net and interconnector restrictions and bottlenecks also affected the widening spread. Looking at the forwards, the market expects the tight situation to continue in gas and continental power markets until summer 2023. So, what is my read of this from a CEO perspective? The last 12 months crystallized four main trends that I partly already touched. I believe that amongst all the turbulence, these trends are still very valid. First, Europe is committed to be a front runner in reducing greenhouse gas emissions across all sectors to fight climate change and to accelerate the energy transition. Sustainability is the license to operate. Secondly, as Europe is accelerating the build-out of intermittent renewable capacities, replacing conventional capacity, the need for security of supply is becoming more obvious. Not just in the context of the current crisis, but also in the context of increasing electrification over time. Thirdly, given the decreasing investments in conventional fuels and capacity, supply imbalances and cost inflation drive an elevated price environment which is jeopardizing affordability. Fourthly, the current geopolitical situation suggests that the elevated price scenario is here to stay for the longer term. The market will further price in uncertainty and value security of supply. While some of our peers focus solely on the build-out of intermittent renewables, we took the conscious decision to focus on a fast and reliable transition to a carbon neutral economy. We provide our customers and societies with reliable, flexible and clean power and gas, addressing the ultimate needs in the transition. And we do this today, not in 10 years time. The core of our business is the strong hydro and baseload nuclear, making us the third largest CO2 free generator in Europe. We are also a significant provider of flexibility with our hydro, increasingly clean gas fire generation and our gas storage business. 2021 proved that our position as a major power generator in Europe and as a major provider of gas is needed in the European energy transition. We have a strong balance sheet and we have the resilience to weather the storm. Our priorities are to decarbonize our portfolio and to drive profitable growth without compromising on Fortum's dividend and financial strength. So how are we progressing against these targets? First, Fortum is a front runner in creating clean energy generation for decades. In addition to our already ambitious climate targets that cover scopes one and two, we set out our reduction target for scope three. which means indirect greenhouse gas emissions in December. We will reduce these emissions by 35% by 2035 at the latest. In Europe, we are advancing fast with our coal exit. In our Uniper business in Germany, we were successful also in the latest round of auctions for the closure of coal-fired power plants. The bid for the closure of the Staudinger 5 power plant was accepted making our subsidiary Uniper the biggest contributor in German Colexit auctions, more than from any other company. Secondly, we are ramping up our CO2-free power generation. This year, we will get the addition of O3 with our share of 400 MW. And in addition, we decided to apply for the lifetime extension of our fully-owned Lovisa nuclear plant. I will come back to this We are also proceeding with our investment in renewable growth, which includes the launch of our first Fortnum and Uniper wind and solar team project, Vielax Böle and Kristine Stadnor wind parks to be built in cooperation with Helen, the Helsinki City owned utility. We also want rights to build more renewables, both in India and in Russia over the next years that are backed by PPAs or CSA payments. However, as I said before, We have now stopped any new investments in Russia for the time being. Thirdly, we are providing security of supply to the grid operators in various forms, as well as to industrial customers. For example, in Solven, we replace an existing coal-fired power plant by a modern combined cycle gas turbine, and there are plans to reduce its CO2 emissions towards 2030 by converting from natural gas to hydrogen. Additionally, we will have a capacity of one gigawatt of electrolyzers in place by 2030, which shows that we can build on our first mover position in hydrogen. This morning, we disclosed that we have decided to apply for a lifetime extension for our 100% owned nuclear power plant in Lovisa in Finland until the end of 2050. We are going to offer 170 terawatt hours of additional CO2 free power for the European power markets over the lifetime extension. By applying for the extension, we want to support the achievement of Finland's and Europe's carbon neutrality targets, provide security of supply and competitive and sustainable energy. Over the last five years, we have invested some 325 million euros in the Lovisa power plant. Investments related to continuing operations and the lifetime extension are estimated to be 1 billion euros. With this, I hand over to Bernhard.

Yeah, thank you, Markus, and a warm welcome also from my side. As usual, I will start today with a financial overview of our key comparables. But as this year was a rather exceptional one in terms of market price movements, I will additionally run you through some reconciliations, how the market volatility has been impacting our P&L balance sheet and liquidity. To have more time for the Q&A session, I will comment the segments only on an aggregated level today and close with the outlook section. Starting with the financial overview, let me begin with the obvious. What you see here is a substantial increase across all KPIs following market fundamentals, as Markus has said. These give a comprehensive view on the strong underlying contribution that we have seen throughout the year, adding an even stronger fourth quarter, also in the light of the already good contribution we had in 2020. Our financial position improved following the closing of a series of divestments, as Markus said, and our credit metrics are now solid with a financial net debt to comparable EBITDA being at just 0.2 times against a target of below two times. As this is also driven by liquidity measures taken by Uniper and the group, the ratio is expected to reverse somewhat in the course of the year. The strong increase in commodity prices has impacted P&L balance sheet and liquidity. And before going into the details, let's have the short segment overview. Looking at the full year earnings figures, we see a substantial increase in comparable operating profits. Nearly all business segments are up year on year and could take profit from the market environment. What you see here are in essence three things. First, we could materialize on the commodity price increases across the group. This holds true for the generation business, with an outstanding surge in achieved prices and strong physical and financial optimization. The city solutions business gained from higher heat prices and volumes, and unipers gas business gained from the optionality in the portfolio. Russia also performed well, but we will see lower CSA income going forward. Second, like all retailers, we suffered from the high price levels in Q4 in our consumer solutions business, showing a negative year over year delta and a negative result in Q4. And third, there are some consolidation effects at play to bear in mind. And this is that Uniper was only fully consolidated from Q2 2020 onwards and was still included as an associate company in the first quarter of 2020. In the first quarter of 2021, Uniper contributed 711 million euros. We also announced this morning that we are discontinuing the strategic reviews of our Polish district heating business and our consumer solution business. We have decided that we will continue to develop these businesses as part of the group. Now over to the P&L. The strong increase in market prices gave us, and especially our Uniper segment, major opportunities to optimize the portfolio. Next, to the strong comparable earnings picture, it had a series of effects on our reported figures. These movements are not a source of concern, but rather a normal course of business running a commodities business. The main issue is the increase of the fair value of our financial derivatives impacting P&L balance sheet and liquidity. The rationale is the following. As we run the business in a prudent manner, we hedge to lock in cash flows and results to ensure continuous operations, financial liquidity, and to deliver on our promise of a stable and over time growing dividend. As commodity prices surged, the hedge deals decreased significantly in value. However, the corresponding value on underlying assets like power plants or inventories are not reflected here as their book values are kept at historic costs under IFRS. Consequently, the operating profit is negative for the full year. This is mainly driven by the Uniper segment as they have the strongest exposure to commodities. This mismatch is only temporary and will revert and resolve over time as these products go into delivery and the positions settle. Therefore, as we already saw in the last quarter, it will turn back and come as a profit. We adjusted for this like for any other one-off in the items affecting comparability. On the full year, there is a negative of 5.4 billion change in the fair values of derivatives, mainly again in the Uniper segment, as hedge accounting is applied only to a limited extent there. The other fortum segments are applying hedge accounting and thus the volatility in valuation is balanced versus equity. This effect is only partly compensated by the well-known capital gains of the divestments of our 50% stake in Stockholm X3 and the Baltic district heating, also included in the items affecting comparability. Last but not least, income tax is significantly positive as a consequence of the recorded fair value losses, while the comparable income tax rate was 24.2%. And now over to the balance sheet. Here, the increase in commodity prices had a significant impact on the derivative financial instruments, especially, again, in the unit per segment. Please note that those are booked on a gross basis to the balance sheet. All deals increase the balance sheet, even though maybe the same product has been sold and bought back and forth over again. Consequently, the substantial increase in the fair value of our financial derivatives made the balance sheet triple to roughly 150 billion euros from 57 billion where we were a year ago. As most of our hedges are placed at traded markets, the collateral and margining requirements have gone up substantially. Uniper faced a steep increase and volatility in variation margin calls in the third and fourth quarter last year. We are working closely together with Uniper, their business, as well as their financing partners to make sure that those calls and the resulting liquidity risks are properly managed. Consequently, interest-bearing liabilities increased in context of a series of precautious financing measures taken then. Additionally, Uniper relied on a broad set of tools and various operational measures within the commodities portfolio. Consequently, at year-end, we had 7.6 billion liquid funds plus undrawn credit lines providing additional headroom in these turbulent times. These measures taken are also reflected in the cash flow statement now on the next slide. In essence, the cash flow statement confirms what we have seen in the balance sheet. The net cash out of the change in margin in receivables and liabilities is covered by additional financing, the sales proceeds from divestments, and by a high operating cash flow. This operating cash flow doubled from roughly 2.5 billion in 2020 to close to 5 billion in 2021. This was mainly driven by a higher cash effective EBITDA due to higher earnings on the one hand, but also due to operational liquidity measures undertaken by Uniper, as we mentioned before, on the other hand. The cash flow from investing activities is clearly driven by the divestments and the margin receivables. One word on our financing activities. In order to achieve high liquidity in the most cost-efficient way, Fortum and Uniper used a broad set of financing tools, including commercial papers, bank loans, intra-group loans, and ultimately also operational measures within the commodities portfolio. The next slide now shows net debt and our maturities profile. As you can see here, our net debt declined significantly. Let's look at the major items impacting financial net debt. First, the highlighted cash flow from operating activities, including the comments I made to the previous slide. Second, the divestments made, and third, the investments paid. Dividends paid include the dividends to fortum shareholders and to the minorities. The minority part will reduce this year by approximately €100 million, assuming that Uniper's AGM will approve the minimum proposed dividend. As Markus highlighted, we do not see a reason for Uniper to pay dividends going forward. We see them rather focus on liquidity and growth in the coming years. So this will enhance our cash flow and have a positive effect on net debt. And I mentioned already before the overall leverage KPIs of 0.2 times net debt over EBITDA. So I'm not going to repeat it here. We currently have 16.1 billion of gross debt and an average interest rate on this of 1.3%. Looking at the loan maturity profile in the lower part of this chart, this might appear a bit front-loaded, but please note that the increase in short-term liabilities is linked to our cash reserves as we wanted to increase our financial flexibility in this extreme commodity market situation. At the same time, our liquidity position is very solid with liquid funds of approximately 7.6 billion euros. In addition, we have signed new RCFs of 5 billion euros and these are undrawn. So overall, our liquidity position is solid. And regarding our rating, We are in continuous dialogue with our rating agencies. Following the liquidity stretch at year-end, our rating was affirmed in January. And obviously, we now have a new situation with Russia, and our discussions continue with the rating agencies. Now, finally, coming to the outlook. Our successful hedging has continued to create predictability and visibility. The hedge prices for generations our generation segment, increased for this year, while it is at the same level in Q3 for the year 2023. The explanation for the decline in Uniper Nordic hedge prices is the use of proxy hedges, and as those proxy hedges moved out of the money, the hedge prices shown here went down. It is also good to note that the here shown hedge prices are only for outright volumes, i.e., hydro and nuclear hedges, so gas or coal are not included. The same applies also for the Uniper disclosures. Regarding capex for 2022, the level is expected to slightly increase compared to 2021, and our total group capex is estimated to be approximately 1.5 billion euro, of which maintenance is expected to be 800 million, roughly. For the year 2022, maintenance capex is at the upper end of the range of what we would call normal maintenance capex, which would be in the ballpark of 750 million euro. We have slightly narrowed the range for our tax rate guidance. At the same time, the tax rate is slightly increased as the result mix is shifting towards countries with a higher tax rate. With this I conclude our presentation and we are now ready to start the Q&A session. And Ingela, over to you.