Fortum Oyj Corp Ord

Good morning everyone and welcome to Fortum's webcast and news conference on our first quarter results for this year. My name is Ingela Ulves and I'm the head of IR at Fortum. This event is being recorded and we will post a replay of the call after this event on our website. With me here in the studio is our CEO, Markus Rauramo, and our CFO, Bernard Günther, who then together will present Fortum's first quarter 22 figures and the group's performance. Markus will also comment on the Russian situation. After the presentation, we will open up for questions in the Q&A session over the teleconference. There will also be an opportunity to ask questions on the chat. So with this, I will now hand over to Markus to start.

Thank you very much, Ingela. Today, I will start with our Q1 performance and our key developments. As the war continues in Ukraine, I will give you an update on our perspective on our Russian businesses. We'll briefly touch the disruption in global energy markets and close with our contribution to secure, reliable and affordable energy by engaging with governments, customers and suppliers. Bernhard will walk you through the numbers in more detail. I start with setting the frame, looking at the Q1 headline KPIs. Last time on this stage, I was pleased to present outstanding operational 2021 result across the group, following the very volatile market fundamentals with unprecedented commodity price levels. Since then, following Russia's attack on Ukraine, the developments in the operating environment have been even more dramatic. And it seems at first glance that we have not been able to maintain our high earnings level, but that we have had to take a substantial hit on our results. But before you jump to conclusions on our Q1 performance, let me address the main reason for the negative earnings in the first quarter. First, as a reminder, last year's Uniper-related Q1 earnings included the extraordinary positive effects from the cold spell in North America, which did not reoccur this year. Additionally, some of the gas margins shifted from Q1-22 into Q4-21 because of Uniper's operational measures to secure liquidity. This was highlighted and included in Uniper's Q1 guidance in February. Therefore, it was already anticipated that Q1 2022 was going to be generally below prior year level. Second, as Uniper announced in its profit warning some weeks ago, approximately 750 million euros of the normal earnings in Uniper's gas midstream business shifted to subsequent quarters of 2022. In March, Uniper seized the provided market opportunities and decided to shift earnings in order to create additional value. So what happened is that less gas was withdrawn from storage facilities in the first quarter than had been sold to our customers. Instead, the volumes were bought back from the market at higher market prices, hitting the Q1 result. This was done so that the gas in storage could be sold forward at a premium. These gains will materialize later this year. What we see is normal optimization activity at Uniper, but at current price levels, the magnitude of such a swing is substantial. However, this is not affecting the full year results and Uniper confirmed their result guidance for 2022 and could also keep more gas in storage in Q1. What comes to the operating cash flow, the figures are in line with the earnings development for the first quarter and reflect the liquidity measures taken in Q4-21, which now reversed in Q1. Our leverage is well below our target ratio of two times financial net debt to comparable EBITDA. Please note that the sale of our 50% stake in Fortum Oslo Wärme for roughly 1 billion euros that we disclosed in the end of March is not yet included. Similarly, Fortum's dividend was paid in April during Q2 2022. Bernhard will give more insights to this in his section. Now let me update you on our thinking on the Russian businesses. The ongoing brutal war in Ukraine continues to shock and outrage us all at Fortum. And our compassion is with the people who have been displaced or hurt by the senseless violence. As a company, we are exposed to the direct and indirect implications of Russia's invasion. There are several angles to be considered, but since the early days of the war, it has been clear and we have said that we will not continue to operate in Russia as before. So what have we done to manage and reduce our exposure to Russia? In addition to the previously announced investment and financing freeze in our Russian subsidiaries, we are preparing for a controlled exit from the Russian market with potential divestments as the preferred path. Also, Uniper has been preparing a possible divestment of its separately listed subsidiary Unipro and said that the process will be resumed as soon as possible. Exiting Russia may take some time, and under the current Russian law, any transaction would require an approval from the Russian government. So far, our heat and power activities in Russia have continued to run efficiently. However, due to existing sanctions imposed by Russia, our operations are subject to significant foreign exchange transfer restrictions, which limit the ability to transfer funds, including potential dividend distributions, out of Russia. You have also seen that we have recorded pre-tax impairments of approximately 2.1 billion euros related to the group's Russian assets. This includes Uniper loan to Nord Stream 2 and ownership in our assets in Russia. This is what we are doing with our operations in Russia and reflects how they are now valued. The other challenge is Uniper's commodities business, especially for gas. Uniper will not renew its coal import contracts after this year and will end the use and import of Russian coal in line with the EU sanctions in August. And when it comes to Uniper's existing long-term contracts for Russian gas, this will not be prolonged, but we will have to import natural gas from Russia also in the future, as this is a substantial building block for Europe's and especially Germany's security of supply. Any major interruption of this flow will have severe consequences for end customers and industrial production in Germany. I will come back momentarily to how we are supporting Germany's efforts to reduce the dependence. Having said that, I will move over to the market slide. After an extraordinary autumn and winter in 2021, the war and concerns over supply curtailments caused an upheaval in all commodity markets. The effects are most pronounced in natural gas, with the European front month gas prices spiking above 200 euros per megawatt hour in Q1. The high gas prices have also clearly increased both demand and prices of other commodities, coal, oil and power. The Nordic system price has strongly increased in the wake of continental European and UK power. Despite this increase, the spread to German power prices has grown both in delivery, but especially on the forward curves. German forwards continue to be set by the gas short-run marginal costs, which are impacted by significant volatility and uncertainty. Nordic spot prices still, more than Central European, exposed to low prices in case of wet and windy weather periods, which is reflected in the forward curve. Strong wind build-out, internal transmission net and interconnector restrictions and bottlenecks also affect the Nordic German spread. What we are experiencing in Europe today is a severe energy crisis with deep uncertainty about supplies and further rising prices. It is therefore no surprise that energy is fast becoming the most important policy area for our economies. The factors at play simultaneously range from security of supply to geopolitics, inflation and climate objectives, triggering short as well as long-term energy considerations. With markets, political developments and additional sanctions continuously in flux, this has created unprecedented short-term challenges for the entire sector in Europe, as well as far-reaching implications for the longer-term energy system and transition. In this situation, utilities will continue to play a crucial part in diversifying supply to the EU, investing in domestic clean production and in developing critical infrastructures to increase the system's resilience. Let me now move to how Fortum Group is positioned in this context. The EU is tackling the need for short and long-term transformation with the Repower EU plan. Policymakers demand an acceleration of the energy transition and have the ambition for energy independence. This is pursued by electrifying Europe, gas supply diversification and transforming industry. Our strategy supports these goals, in particular through our strong position in CO2-free power generation, security of supply and gas. Security of supply in power generation is key, especially in our market in Germany and the UK. We are ready to extend the use of coal-fired generation into coming winters to bolster energy security. But we will only do this if it is requested by the respective governments, as we do not want to compromise on our decarbonization ambitions. In addition, we are ramping up our CO2-free power generation. This year, we will get the addition of Olkiluoto 3's generation with our share of 400 megawatts. We have also applied for lifetime extension of our fully owned Lovisa nuclear plant until 2050. At the same time, we are proceeding with our investment in renewable growth, which includes the launch of our first Fortum Uniper wind and solar team project. Bielax Böle and Kristine Stad Nord Windparks with 380 megawatts capacity will be built in cooperation with Helen, the Helsinki city-owned utility. In addition to clean power, Europe will continue to need gaseous fuels. However, Europe's indigenous natural gas production is declining and there are limited pipeline import opportunities, as the production from the UK and the Netherlands is structurally trending down. Hence, demand will need to be managed down and LNG imports need to rise sharply. European gas prices are high enough to attract substantial LNG volumes to Europe and visibly erode demand. But the phasing out of Russian gas is likely to be a multi-year effort. Consequently, Uniper will build and operate Germany's first LNG terminal in Wilhelmshaven to diversify the country's natural gas supply sources. Uniper is supporting this project with its on-site projects in the short term and in the medium and long term in the form of the Green Wilhelmshaven project. Decarbonization of gas will be key. Therefore, the plan is to provide additional unloading and handling facilities for green gases, for example ammonia, in order to be able to utilize the full potential of this new infrastructure project. The green ammonia is either transported directly by rail or converted back into hydrogen on-site and can meet more than 10% of German hydrogen demand in 2030. But hydrogen will also have to be stored. Uniper has put the natural gas storage facility Krumhörn to the test for storing hydrogen as large volume hydrogen storage facility is essential for the energy transition and the development of a hydrogen economy. Additionally, Uniper lately signed another agreement to produce blue hydrogen at a site in Killingholm in the UK in large scale. We are also participating in projects that are most obvious to support the energy transition, the use of waste energy. In March, Fortum and Microsoft announced a unique collaboration project whereby Fortum will capture the excess heat generated by Microsoft's new data center region to be built in the Helsinki metropolitan area in Finland. The data centers will use 100 percent emission free electricity, and Fortum will transfer the clean heat from the server cooling process to homes, services and business premises that are connected to its district heating system. The waste heat recycling concept from the data center region will be the largest of its kind in the world. And with this, I will now hand over to you, Bernhard.

Thank you, Markus, and a warm welcome also from my side. As usual, I will start with an overview of our key financials. As exceptional market price movements continue, I will again run you through some reconciliations how the market volatility has impacted our P&L balance sheet and cash flow. As Uniper is the main driver of the year-on-year delta, and most of you will have followed their disclosure and investor call in previous weeks, I will comment the segments only on an aggregated level today and close with the outlook session. I want to start with our financial overview summarizing the key comparable indicators. Q1 comparable operating profit was predominantly affected by a significant €750 million earnings shift in Uniper's gas business, which turned Q1 earnings into a loss. However, as this is only a shift of earnings between quarters, it is consequently not affecting full-year earnings. As Uniper confirmed in their profit warning, the full-year result guidance remains intact. Also, net cash from operating activities turned negative, which is in line with the earnings development, but also a consequence of liquidity measures taken by Uniper at the end of last year. This was to manage the liquidity situation. It is now reverting to a certain extent. Please remember that cash conversion from comparable EBITDA to OCF has been above 130% in 2021. Therefore, this reversal should not come as a surprise. Our financial position reversed accordingly with financial net debt to comparable EBITDA at 1.0 times at the end of Q1, however still well below our target of below 2 times. The 0.2 times at year end was also driven by the aforementioned liquidity measures taken by Uniper and the Group. The strong increase in commodity prices has naturally impacted P&L, balance sheet and liquidity. But before diving into these details, let's have a brief look on the segment overview. Looking at the Q1 earnings figures, we see a substantial decrease in comparable operating profit. Nearly all business segments are down year-on-year due to various reasons, while obviously the largest deviation is related to Uniper. Let me start with generation. Comparable operating profit increased by €13 million with another strong first quarter. This is due to almost 7 euro per megawatt higher achieved power prices. And these numbers show strong physical optimization despite lower hydropower volumes due to lower inflow and lower reservoir levels at the beginning of the quarter. Russia, their comparable operating profit was down 39 million euros following the expiry of the CSA payments for NIAGAN-1, a lower Russian ruble exchange rate and the lapse of 17 million euro sales gain in 2021. In city solutions, comparable operating profit was down 38 million, mainly due to structural changes, including the sale of the Baltic district heating business and solar plants in India in 2021. The Q1 2022 result is also negatively affected by significantly higher fuel prices. Consumer Solutions was almost flat despite a very challenging market environment for retailers. And finally, and as mentioned before, Uniper. Here we see a massive decrease of 1.5 billion euros year on year. The decline in earnings is mainly attributable to Uniper's global commodities gas midstream business, in particular the already mentioned gas storage optimizations. In view of the current market environment, Uniper reduced its anticipated gas storage withdrawals in the first quarter to the benefit of future quarters. This resulted in a significant earnings shift of 750 million from the first quarter into the remaining quarters of 2022. Additionally, Q1 2021 took profit from one-offs like the cold spell in North America, which did not reoccur. For further details, may I refer to Unipass publications. And now over to the P&L. What you see here is the reconciliation between comparable and reported figures. In essence, there are three things I would like to highlight that are all linked to the situation in Russia and the development of commodity prices. First, the items affecting comparability. Operating profit for the period was impacted by nearly 2 billion euros of items affecting comparability. One component are changes in fair values of non-hedge accounted derivatives. They amounted to 1.1 billion euros and are almost entirely related to the Uniper segment, as Uniper has the strongest exposure to commodities. As commodity prices surged, these hedge deals decreased significantly in value. However, the corresponding value of underlying assets like power plants or inventories is not reflected here as their book values are kept at historic cost under IFRS. The mismatch is only temporary and will resolve over time as the products go into delivery and the positions settle. Therefore, this will revert. Additionally, the items affecting comparability include impairments of 830 million. And in Q1, we booked 275 million related to fixed assets and goodwill for Fortum's Russia segment and 555 million of impairments for the fixed assets from Unipro's Russian segment, Unipro. The second effect we see in P&L is in the share of profits or losses from associates and joint ventures. They turned negative as it includes now 150 million euros impairments related to Fordham's ownership in Russian TGC1 and 22 million of impairments for the renewables joint ventures in Russia. Third, in finance cost, you see a strong decrease of €956 million. The change in finance cost net mainly relates to the €1 billion impairment of Unipass financial loan receivable including accrued interest for the Nord Stream 2 pipeline project. The receivable was fully written down. Consequently, the corresponding €100 million of interest income will no more be recorded going forward. Now over to the balance sheet. The substantial increase in fair value of our financial derivatives further increased the balance sheet. The increase in commodity prices had a significant impact on the derivative financial instruments, especially in the Uniper segment. Please note that those are booked on a gross basis to the balance sheet. So all deals increase the balance sheets, even though maybe the same product has been sold back and forth and several times in the same period. One focus area in the last months has been to reduce the exposure to collateral and margin requirements as a major part of our hedges have been placed at traded markets. Therefore, Uniper increased the share of OTC deals that have limited or no margin requirements. This has been proven right as commodity prices further increased substantially, especially on the outer end of the curve, while margin receivables decreased. We are working closely together with Uniper, their business as well as their financing partners to make sure that the margin calls and the resulting liquidity risks are properly managed. Liquid funds decreased by 1.2 billion following the repayment of debt, but are still at a very healthy level. Now over to the cash flow statement. The cash flow statement confirms what we have seen on the balance sheet. The net cash delta of the change in margining receivables and liabilities is synchronized with the financing. The net cash from operating activities turned negative in Q1. This was on the one hand driven by the very low cash effective EBITDA in the context of gas storage optimization, where we shifted earnings to the later quarters, but also due to the reversion of the operational liquidity measures, mainly payments for CO2 allowances and gas that were undertaken by Uniper in Q4 to manage the higher margin requirements following the extremely high commodity prices and volatilities. The cash flow from investing activities for the last 12 months is clearly driven by the divestments and margin receivables. 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, intergroup loans and ultimately also operational measures within the commodities portfolio. The next slide now shows net debt and our maturities profile. As the graph shows, our financial net debt is up following the negative Q1 operating cash flow. Consequently, our leverage KPI of financial net debt to comparable EBITDA reverted from the extremely low level of 0.2 times to 1.0 times, which is still comfortably below our target of below two times. We currently have 13.8 billion of gross debt and an average interest rate of 1.0% for the whole loan portfolio. Looking at the loan maturity profile, this might appear a bit front-loaded, but please note that the increase in short-term liability is linked to our cash reserves as we wanted to increase and secure sufficient financial flexibility in these extreme commodity market situations. At the same time, our liquidity position is very solid, with liquid funds of approximately 6.4 billion euros. In addition, we have committed undrawn financing of close to 6 billion euros. So, overall, our liquidity position is solid. Regarding our BBB flat rating, due to the constantly developing external circumstances and increased uncertainties, we are in continuous dialogue with our rating agencies. In March, S&P put both Fortum's and Uniper's rating on credit watch negative, while Fitch kept Fortum at stable outlook. Our discussion continues with rating agencies and we await S&P to resolve the credit watch negative in due course. Let me finally now come to the outlook. Fortum's successful hedging has continued to create predictability and visibility. The hedge prices for our generation segment have increased for this year and also the 2023 hedges are up. Regarding Unipass hedges, it is important to note that Unipass hedge prices have changed in Q1 because they made some changes to the hedge price reporting. It is also good to note that the hedge prices shown here are only for outright volumes, meaning hydro and nuclear volumes. So gas or coal volumes are not included. The same also applies for Uniper. Regarding capex for 2022, we reiterate our capex guidance of approximately 1.5 billion, of which maintenance is expected to be around 800 million. For the year 2022, maintenance capex is accordingly at the upper end of the range as normal maintenance capex would be rather in the ballpark of 750 million. With this, I conclude our presentation and we are now ready to start the Q&A session. Ingela, over to you.