Fortum Oyj Corp Ord

Good morning, everyone, and welcome to Fortum's joint webcast and news conference for the investor community and media on our third quarter nine-month result for 2022. My name is Ingella Ylves, and I'm the head of investor relations 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 our CFO, Bernard Günther. The agenda is the following. Markus and Bernard will together present Fortum's figures and the group performance. And after the presentation, we will open for Q&A for investors, analysts, and international media over the teleconference. After this Q&A session, we thank the international audience and we then switch to Finnish and we'll take questions from the Finnish media. We have reserved a total of one and a half hours for this event with approximately one hour for the international audience and then the remaining 30 minutes for the domestic media. So with this, I will now hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to our Q3 and nine-month investor call, also from my side. Today, I want to address three topics that are of the highest importance for us and that we follow with great attention. I will start where I ended our last call. Our immediate priorities agenda is set to bring Fortum back to a stable footing. I will give you an update on how we are progressing and what our thinking is on the key elements. Second, our market and regulatory environment is in upheaval. We saw record high commodity prices in Q3. Even though they have come down, they are still at very elevated levels, also in the Nordics. This is a concern to energy-intense industries, households, and regulators alike. And as consequence, we are seeing political interventions. I will give you an update on the situation in the Nordics and share my reflections on the matter. And third, I will close with an overview of the operational performance of Fortum's continuing operations, which are the foundation for Fortum's future success. Bernhard will walk you through the numbers in more detail. He will give you a comprehensive overview of Fortum's continuing operations and explain the mechanics of the Uniper deconsolidation. Let me start now with our immediate priorities. You will remember these messages from our last call. In essence, our immediate priorities are divided in three steps. Most importantly, we had to stabilize our company following the direct and indirect consequences of the Russian war and the full curtailment of Russian gas to Europe. We have made substantial progress paving the way for a stable footing. First, we reached a long-term solution with the German government and Uniper to stabilize Uniper. The German state takes full control of Uniper and Fortum sells its ownership and at the same time gets back the shareholder loan and guarantees we provided to Uniper in total 8 billion euros. The divestment of Uniper is a painful yet necessary step to reduce the substantial risks for Fortum and to secure a new future. The agreed transaction is still subject to customary regulatory clearances and approvals by Uniper's extraordinary general meeting. Closing is still expected in the second half of December. Second, we agreed with our majority owner, the Finnish state, on a 2.35 billion euro bridge financing arrangement to ensure sufficient liquidity resources to be able to meet the increasing collateral requirements on the Nordic Commodities Exchange Nasdaq in context of further price spikes. As most of our liquidity still is tied up in Uniper, we had to take immediate precautionary measures to secure our financial flexibility. As the Nordic future prices rose to new record highs during the quarter, our collateral and margining requirements increased very rapidly. Third, As our joint path with Uniper is coming to an end, we have to ensure that Fortum Standalone has independent, robust and sound Standalone core operations. Today's published set of figures confirms that the Nordic clean generation is strong, is performing well and our teams on sites are delivering. And this is exactly what is needed, coming to the next step to get traction again and to regain the trust of our stakeholders in these unprecedented times. One objective is the announced exit from the Russian market. What I can say is that we have healthy interest and that we are progressing with the divestment, but we are not quite there yet. The outcome in the end will depend on the approval by the Russian government. Further, high on our agenda is to ensure access to capital markets. A successful return to the debt capital markets will be the basis for a prosperous development. The upcoming winter will challenge our societies and customers and us as a utility. My key focus is on safe and efficient Nordic operations to ensure security of supply for all of our customers. We are maximizing our efforts to achieve the highest possible availability of our plants this winter. Consequently, any regulatory intervention has to be carefully thought through. And finally, we will recalibrate our business by reviewing our strategy in light of the changed environment and forge a path towards a sustainable future. Fortum's CO2-free generation assets are now needed more than ever. As said, the foundation for a sustainable future and for any strategic ambition is to re-strengthen our financial position, which brings me to the next slide. In essence, there are two elements supporting the substantial re-strengthening of our financial position. First, and in the short term, the 2.35 billion bridge financing arrangement with Fortum's majority owner, the Finnish state. This protects us from financial distress in case we see substantial price hikes and respective margining costs in the Nordic markets again. It is effectively an insurance for us against another collateral squeeze that we as the management had to ensure. Therefore, we decided to draw on the first tranche of the liquidity facility to keep it in place in line with the terms and timeline set by the Finnish state. The loan terms are quite tough. The effective annual interest cost, including arrangement and commitment fees for the whole amount and duration, would be about 14%. The first minimum drawdown of 350 million of the loan triggers a directed share issue of 1% of Fortum's share capital without payment for Solidium. Solidium, which is the counterparty in the loan arrangement, is a company under state control. As a consequence, the state's shareholding would increase to 51.26%, correspondingly diluting the ownership of other shareholders. The directed share issue requires an approval by an extraordinary general meeting with a two-thirds majority of the shares and votes represented at the EGM. The EGM will convene later this month, on the 23rd. I know that some of you argue that this arrangement is not in the interest of the company and that other sources of financing would have been available at lower rates. I agree that the terms are tough, but we had to take precautionary measures, and this was our last resort at the end of August. The prices at Nasdaq commodities were setting new records every day with very thin liquidity and we were faced with multiple margining calls even per day with all our credit facilities drawn and a rating with negative outlook. We reached a point where it was not about minimizing interest rates, it was about ensuring Fortum as a major market actor in the Nordics. As such, I see the ability of our main shareholder to act as a lender of last resort as a strong, very strong signal towards our banks, bondholders, the rating agencies, but also towards our minority shareholders. In addition, I believe that the Finnish and Swedish states' actions were a strong signal of support for our Nordic markets and helped to calm down the situation and to stabilize the market. The second element on this slide, the divestment of Uniper, will strengthen our financial position longer term. On one hand, we will get half a billion euros for the sale of Fortum shares in Uniper, four billion euros from the repayment of the shareholder loan. In addition, our four billion euro parent company guarantee facility will be released. On the other hand, not visible on the slide, but tremendously important for our financial strength, we will substantially de-risk our business profile following our planned exit from Uniper. An exit from our Russian business will further strengthen the risk profile. These actions will enable us to re-enter the debt capital markets again. Please remember that until the closing of the transaction, Uniper is fully funded by the German state-owned KfW Bank. TFW provides Uniper, which requires liquidity support by increasing its existing credit facility to cover gas-related losses. Fortum is not transferring any cash to Uniper and is not affected by any further Uniper losses. The agreement with the German state ensures that the total loss for Fortum is capped on the equity level. As you know, the transaction is subject to certain regulatory approvals as well as an approval by the Uniper EGM regarding the equity capital injection. Uniper highlighted in its earnings call that they assumed this to happen during the second half of December. To sum this up, both agreements restrengthen our financial position in the short term and in the longer term pave the way for a sustainable future for Fortum. Now over to the market development on the next slide. The Russian war and gas supply curtailments have driven commodity prices high across the markets. The effects are most pronounced in natural gas, with the European winter gas prices now trading close to 120 euros per megawatt hour. This is a substantial decrease to peak prices in August when Nord Stream flows dropped to zero. Warm temperatures and high storage levels are obviously supporting this development. The high gas prices have increased both demand and prices of other commodities, coal, oil and power. The Nordic system price for power has strongly increased in the wake of continental European and UK power prices. The recent lower precipitation in the Nordics support Nordic spot prices to follow continental prices that are subject to gas short-run marginal costs. The deep uncertainty about supplies and further rising prices have become one of the most important policy areas 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, but also political market interventions. With political developments, market volatility and additional sanctions continuously in flux, the entire energy sector in Europe is faced with unprecedented short-term challenges. The current state of affairs also poses far-reaching implications for the long-term energy system and transition. In this situation, utilities will continue to play a crucial part in diversifying energy supply to the EU and investing in domestic clean production and in developing critical infrastructures to increase the energy system's resilience. To tackle the impacts of the energy crisis on societies, EU countries have agreed on a set of emergency actions. While crisis measures that help customers to deal with soaring energy prices are undoubtedly necessary, it is crucial to implement them in a manner that does not lead to exclusion of capacity from the market and and thereby even rationing of electricity. Therefore, it is utterly important that regulation sets the right incentives to ensure sufficient supply while at the same time impacting demand. This will finally ensure reasonable pricing. The price is also an important signal for the demand. Interventions such as price gaps can easily prevent needed demand reduction. We will do our part in the equation to ensure overall security of supply by maximizing our efforts for highest availability for the upcoming period. Looking at the situation in the Nordics, we see various measures to reduce demand in the short term and to increase supply for the long term. But we also see that governments are struggling with the implementation of the EU measures by December 1st. It is also unclear how the implementation could look like, This creates uncertainty to companies that are subject to the revenue cap. Consequently, it is very important that these energy crisis-related interventions are temporary and separate from the long-term structural reform of the power market design, which is about to start in the EU. Price and revenue caps and windfall taxes must not become permanent. Still one back, please. Yes, thank you. Consequently, it is very important that these energy crisis related interventions are temporary and separate from the long-term structural reform of the power market design, which is about to start in the EU. Price and revenue caps and windfall taxes must not become permanent as they would erode the energy industry's possibilities to invest in the energy transition in the longer term. For these investments to happen, companies need clarity and predictability and these regard carefully prepared and well-formulated regulation. The overall visibility and reliability of the regulatory environment is key. Now over to the operational performance in the first nine months. What you see here are the comparable headline KPIs for Fortum Group's continuing operations. So these exclude Uniper which we deconsolidate this quarter following the Uniper agreement with the German state. 2021 figures are restated. This quarter was definitely another extraordinarily volatile quarter, characterized by market fundamentals. Overall, we have had very strong group performance across the headline KPIs in the third quarter and first nine months. Starting from the balance sheet, and most importantly, our leverage, defined as financial net debt to comparable EBITDA, is at 2.6 times, which in the context of the circumstances still is fairly good. From this quarter, we introduce an additional KPI, financial net debt adjusted with Uniper receivable to comparable EBITDA. It includes the €4 billion shareholder loan receivable from Uniper that will be repaid upon completion of the transaction. This is at 0.8 times and well below our current target or below two times, indicating that our debt-bearing capacity will be robust once the deal is closed. Q3 and nine-month profit was operationally strong across the segments. Our Q3 earnings gained from the high power prices in the Nordics but the results are also the outcome of strong physical optimization in our generation segment. To sum it up, I am satisfied with the strong group performance in a volatile commodity market with an organization giving its best in serving our customers, working closely with our suppliers, and maintaining our financial flexibility. So with this, I conclude my part and hand over to you, Bernhard.

Thank you, Markus, and a warm welcome also from my side. Today I will start, as usual, with an overview on our key comparable numbers of Fortum's continuing operations, which excludes Uniper. Then I will briefly dive into the segmental overview and show you how this translates into our reported figures. As Uniper has been a substantial part of Fortum's balance sheet and income statement, I will guide you through the deconsolidation and show you how this has impacted our P&L and balance sheet. And finally, I will close with the outlook section. What you see here is the key financial overview summarizing the key comparable indicators of the Consolidated Fortum Group's continuing operations, excluding Uniper. All numbers in the first nine months and the quarter improved compared to previous year's figures. Today, let me comment on some of the KPIs of the continuing operations. Let me start with what is new. We introduced a new KPI. Markus just mentioned it. The financial net debt adjusted with Uniper receivable over comparable EBITDA. But at the same time, we are still reporting also our normal ratio of financial net debt to comparable EBITDA. We do this exercise to give you a better grip on what you should expect when the Uniper deal is closed. It is obvious that despite our strong operating cash flow, the closing of the Uniper transaction will be a game changer also for our balance sheet. Comparable operating profit. With the nine-month figures, the result is up more than 20%. This is mainly driven by the generation segment and the strong market price increase and the high price volatility. With regard to the earnings per share, let me highlight that this naturally includes our Russian segment. Here we have fairly high positive foreign exchange effects from ruble receivables and the closing of ruble hedges. Therefore, one should take this into account when analyzing EPS. And finally, to cash flow. Net cash from operating activities for Fortum's continuing operations is clearly positive and in line with the higher increase of the EBIT numbers. Let me highlight two observations in this context. First, with the deconsolidation of Uniper, the net cash from operating activities and the comparable EBITDA should develop quite simultaneously going forward. This is the case in particular compared to the past with Uniper as the seasonality in the gas storage business created substantial working capital swings. Second, looking especially on the nine-month figures, one can see an even stronger increase in the net cash from operating activities than the increase in EBITDA might indicate. The cash conversion is close to 100%. This is next to working capital effects, mainly driven by lower paid income taxes compared to the same period in 2021. The deconsolidation of Uniper has naturally impacted P&L and balance sheet. But before diving into the details, a brief look on the segment overview. The reconciliation on segment level confirms what I said before. The year-on-year delta is mainly explained by the generation segment, which obviously is the largest segment for Fortum standalone. Let me run you briefly through the segments on the nine-month reconciliation. Generation. Comparable operating profit is up by 255 million euros, despite lower power generation in the Nordics, especially lower hydropower volumes. The lower volumes were caused by lower inflows and below average reservoir levels. Currently, hydro volumes are three terawatt hours down versus the previous year. The operation performance and production volumes for nuclear generation were solid and at the same good level as in the first nine months of 2021. The chief power price in the generation segment increased by 13.4 euro per megawatt hour, that's 33% up, following very successful physical optimization and higher spot prices. This is a very strong performance considering that we already have fairly high hedge levels and are negatively impacted by significant price differences in Sweden between the high system price and the lower SE2 area spot price, additionally low liquidity. Russia. Comparable operating profit is broadly flat, which mainly is subject to the FX translation, despite the expiry of CSA payments for NIAGAN-1. City solutions. Comparable operating profit is down by €65 million due to two effects. Firstly, operational. mainly as a result of clearly higher fossil fuel and CO2 emission allowance prices, as well as lower heat volumes due to warmer weather, which one is only partially offset by the effect of higher power prices. Secondly, structural. We divested our share in Forte Muslo Verme, the Baltic district heating business, and our solar plants in India. Consumer solutions. The comparable operating profit is only marginally up, as the effect of higher electricity and gas sales margins were nearly offset by higher cost. And finally, one word on the other operations segments, not visible here, but worth mentioning. We divested our e-mobility business plug surfing and sold our remaining ownership in recharge and recorded tax-exempt capital gains of in total 6%. This is recorded in other operations in the third quarter 2022 results. As these are recorded as items affecting comparability, it is not included here. Now over to the P&L segment. This is a reconciliation of the nine months comparable operating profit for our continuing operations all the way down to the reported net profit. In essence, there are four elements to highlight. Impairment charges recorded in Q1 are reflected in various line items. In the items affecting comparability, we have impairment charges and reversals until now of 356 million euros. These are mainly Russia-related. The stronger ruble rate increased impairments by 35 million euros compared to the first half of 2022. In addition to this, we have impairment charges in the share of profit and loss of associates and joint ventures, mainly on the TGC1 participation. Capital gains include the divestment of our stake in Fortum Oslo Verma that we disclosed in Q2 and the divestment of recharge and plug surfing. Then we have the changes in fair values of derivatives hedging future cash flows. They are now 450 million positive, only a fraction of what we have seen before the deconsolidation of Uniper. The change in finance cost net relates mainly to foreign exchange gains from ruble receivables and the closing of ruble hedges. And finally, a negative effect of 391 million euros, which is the respective tax impact. Consequently, at this stage, nine months reported net profit was at 1.6 billion euros. Now over to the deconsolidation of Uniper. Starting from the helicopter view, from a cash flow perspective, the Uniper divestment results in a loss from the investment of slightly below 6 billion euros. This includes the purchase of their shares of approximately 7.2 billion, The sales proceeds of 0.5 billion to be received and the dividends of approximately 0.9 billion received during Fortum's Uniper ownership. This will ultimately impact the parent company, Fortum or YJ's equity. However, the equity remains at a sufficient level and does not require additional capital injections as we have said earlier. When it comes to the group's consolidated IFRS balance sheet and income statement, It is important to note the following. Any further losses at Uniper will not affect Fortum. In previous quarters, Fortum has recorded significant accumulated losses in the form of provisions and negative fair value adjustments from Uniper, mainly due to the Russian gas curtailment. Losses recorded by Uniper in its third quarter and onwards are thus not having any impact on Fortum Group's equity as these losses are offset by the deconsolidation effect. As you have seen, Fortum's financials for the continuing operations do not include any impacts from Uniper's operations anymore. Since these losses exceed Fortum's total loss from Uniper, there is a positive deconsolidation effect for the isolated third quarter. That's what we see on the next slide. Looking at the reported income statement for discontinued operations, there are two elements I would like to highlight. First, the deconsolidation effect is positive with 28 billion euros. It, on the one hand, includes the removal of Uniper's negative asset value on our balance sheet due to Uniper's losses and provisions from gas curtailment and the fair value of the derivative financial instruments. And in addition, it includes a positive effect of the expected sales proceeds of 0.5 billion. Second, The net profit from discontinued operations attributable to Fortum is positive in the magnitude of 5.5 billion Euro for the isolated third quarter due to the deconsolidation effect, while negative by minus 3.4 billion year to date, as we have already recorded higher losses in the previous quarters. On the next slide, I want to highlight some effects on Fortum Group's IFRS balance sheet. Due to the deconsolidation of Uniper, the total balance sheet has obviously changed significantly from more than $200 billion to some $30 billion. As the balance sheet as of end of June was not restated, I want to point out some obvious but important facts. Compared to Fortum's balance sheet as of 30th of June 2022, the deconsolidation strengthens Fortum Group's equity by approximately 5 billion euros, bringing Group equity to a level of 6.5 billion. Shareholder's equity is some 6 billion euros below the level we saw at year end. It was around 12 billion and therefore reflecting the financial loss from the Uniper acquisition in full. Compared to the balance sheet size now, this is on a solid level. But what you can also see is that the balance sheet is substantially de-risked. Just picking some line items. Derivative financial instruments on both sides are only a fraction compared to the level at the end of June, down more than 160 billion euros on both sides. Provisions are down by more than 90% for operations, nuclear and pensions. When it comes to our gross debt shown in the interest-bearing liabilities, it is only slightly down by about 1 billion euro as Unipass debt at the end of June was very low. Liquidity reserves amount to 3.7 billion euros. This is in context with the current commodity price situation sufficient to cover for even substantial increases in margin call and collateral requirements. In addition to liquidity, the credit facility from Solidium in place adds a further headroom of 2 billion euros. What does not show here is that Fortum's standalone liquidity position substantially improved compared to end of June as the net margining requirements came down due to our mitigation measures and decreasing prices. At the end of June, net margining was at 2.9 billion euro and has slightly decreased as prices have come down further and we have shifted hedge power volumes from the Nasdaq exchange to bilateral agreements. Now over to the financial net debt and the maturity profile. The upper graph shows the development of financial net debt. The starting point with the opening balance sheet at the beginning of 2022 includes 2.5 billion euros of Uniper debt that is drawn from the 4 billion euro shareholder loan. In addition, the starting point includes 2 billion of deconsolidation effects, mainly Uniper's liquid funds and margin receivables. During this year, Uniper drew down a further 1.5 billion. This, together with divestment effects and dividend payment, brings our financial net debt to a level of 5.8 billion. Following the signing of the new agreement with the German state, The €4 billion shareholder loan to Uniper is now recorded as a receivable. As Markus has mentioned, the new KPI for financial net debt to comparable EBITDA, including the receivable, was 0.8 times at the end of September. Once the Uniper deal is closed and we receive the €4.5 billion from Uniper, we will be well below our target ratio of below two times financial net debt over comparable EBITDA. Our gross debt is currently 12.9 billion euros with an average interest rate of 1.8% for the whole loan portfolio. The interest rate is up compared to last quarter as market interest rates have gone up and we drew the 350 million euro on the solidium loan at substantially higher interest rates. That loan facility will be used as a last resort or buffer and will only be further drawn if really needed. Liquid funds of 3.6 billion euros give us quite some buffer to manage power price swings without drawing on this facility. Overall, the debt maturity profile might appear a bit front loaded, but we have extension options for various financing facilities, which gives us flexibility regarding refinancing needs. Our rating still continues to be a key objective for us. Our BBB rating with negative outlook is unchanged despite the new deal with the German state, as it is still too early for the rating agencies to determine the full effect of the Uniper divestment. Rating agencies are waiting for the closing of the deal, further progress on the Russia exit, and eventually our updated long-term strategy, including investment and growth trajectory. So with this, over to the outlook section. The outlook section comprises, in essence, three elements, hedging, capex, and tax rates for continuing operations. On the one hand, the hedging part for the outright generation. Fortum's successful hedging has continued to create predictability and visibility. The hedge prices for the generation segment increased for this year by €11, and 23 hedges are up by €12 versus Q2. We also disclosed 2024 hedges for the first time. For 24, we have hedged 40% of the volumes at 38 Euro per megawatt hour. New this quarter is also the updated CapEx guidance. As you remember, we withdrew the CapEx guidance in the second quarter when Uniper canceled its results guidance. Now we are reintroducing a capex guidance for continuing operations for 2022, which is expected to be at 550 million euros, including maintenance. Maintenance capex continues to be in approximately 300 million euro range, which is clearly below depreciation level. And finally, our tax guidance. This has been updated to reflect the changes in the group structure, i.e. the deconsolidation of Uniper. For 2022, the range is expected to be between 21% and 23%, and for 2023, it's between 20% and 23%. With this, I conclude our presentation, and we are now ready to start the Q&A session. Ingela, over to you.