Fortum Oyj Corp Ord

Good morning, everyone, both here at the headquarters in Espoo and those of you who are watching online. A warm welcome to Fortum's joint webcast and news conference for the investor community and media on our full year results for 2022 and our new strategy. My name is Ingella Ylves and I'm head of investor relations at Fortum. This event is being recorded, and a replay will be provided later on on our website. With me here in the auditorium are our CEO, Markus Rauramo, and CFO, Bernard Günther, who will present to you today. Also, the IR team is present here with me today, and our new Fortum leadership team. The agenda is the following. Markus and Bernard will first present the result figures and the group's performance, and thereafter, Markus will update you on our strategy. Only after both presentations, we will open up for questions for investors, analysts and media, international media, both over the teleconference and audience here in Espoo. So there will not be any separate Q&A session after the result presentation. After the Q&A, we thank the international audience and then we switch to Finnish and we'll take questions from the Finnish media. We have reserved a total of two and a half hours for this event with approximately two hours for the presentations and for the international audience and then the remaining 30 minutes is for the Finnish media. As we highly value your opinions, we would very much like to have your instant comments and feedback on our new strategy. Therefore, we will conduct a short poll for our own use. This will be done both here in the audience and also with those of you online. So here in the auditorium, each of you find a small note with a QR code for this purpose. For everyone online, during the Q&A session, you will see three pop-up windows on your screen. So please be active and vote. Also a kind reminder to our guests here that you switch your mobiles on silence. And as a last comment, For the guests here, I am happy to invite you to a buffet lunch outside of this venue after the international call. So with this, I will now hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to our investor call, also from my side. Today marks an important milestone in Fortum's history. We have returned home and opened a new chapter as a prudent Nordic power generator and one of the cleanest energy companies in Europe. In 2022, we managed through unprecedented turbulences and can now close our books for 2022 with a robust set of financials. I will present our continuing operations that exclude Uniper. But to give you an understanding of the underlying earnings capability and performance of the renewed group, I will also show the headline KPIs, excluding Russia. Bernhard will walk you through the numbers in all details, as usual. In the second section, I will introduce our new strategy and give insights into how we will implement it and what the respective financial and environmental targets are. I will also present our new operating model and our leadership team. Finally, I will close with a summary. Now let's start with the financial statements for fiscal year 2022. Russia's attack on Ukraine and the decision of the Russian government to use energy as a weapon is an unprecedented challenge for modern Europe. For us as a group, the geopolitical crisis had two fundamental consequences. On one hand, it was a huge blow. The outcome is known. We had to acknowledge that the implications of the Russian invasion materially hit Fortum Group with substantial value deterioration of our Russian-exposed businesses, Uniper and Fortum Russia. We sold Uniper to the German state for a fraction of our initial investment, recorded losses of several billions of euros. At the same time, we recognized that the outcome could have been much worse, and we did receive our shareholder loan and our guarantees back. The value of our Russian assets has taken a toll in a series of impairments, as we recorded additional pre-tax impairments in the fourth quarter of approximately 990 million euros related to our Russia segment. This adds up to 1.7 billion euros in total for the year. Following Russia's attack war on Ukraine, we decided to pursue a controlled exit from the Russian market with potential divestments of our Russian operations as the preferred path. Completing the exit is likely to take further time, and there are still significant uncertainties, including regulatory approvals related to the ongoing divestment process. On the other hand, the fundamental relevance of our operations in the Nordics has increased significantly. I see two areas for our unique relevance. First, our responsibility for security of supply. Our customers and the society value this more than ever. In this respect, our priority in the short term is to maintain high availability, efficiency and safety of our Nordic fleet. Secondly, our responsibility for decarbonization and our opportunity to support demand growth in the Nordics. The current energy crisis is a supply crisis of fossil fuels. it has made obvious that Europe has to reduce its dependencies and to increase its efforts in decarbonization. Fortum has the right skills and capabilities to deliver zero-carbon power generation at scale and can attract new power demand to the Nordics, something only one or two players in the Nordic arena can match. Consequently, If we want to live up to our responsibilities, security of supply and decarbonization need to be in the center of our thinking. And it will pay off. Fortum is already now back on stable footing. Despite the substantial setback that we had to cope with in 2022, we managed to deliver a robust set of figures in our continued operations that underline the solid earnings power of our CO2-free Nordic hydro and nuclear fleet. We have regained a healthy financial position in this still volatile market environment, and we have also been able to reduce our gross debt significantly. One of the key drivers for this is the Nordic power price. Although the Nordic power system is largely decarbonized, it is not immune to skyrocketing commodity prices. Continental gas-fired generation is an anchor also for the Nordic power price. Increased power prices are now prevalent, not only in the spot markets, but also in forward prices across the curve. Uncertainty about gas supply availability in the new geopolitical conditions and the need to refill gas storages in preparation for winter drove European gas prices to levels that we have never seen before in the spring and summer of 2022. But prices started to ease with storage injections during the summer, and supply was stabilized with LNG imports. Lower gas prices in Q4, and consequently lower power prices, were supported by a mild autumn and warm beginning of the winter. With gas storages almost untapped, the market is much calmer now about the rest of the winter. And this is reflected in lower gas forward prices. The Nordic system price, both spot and futures, have declined strongly in lockstep with the continental European and UK power prices. And the 2024 product is currently trading at around 74 euro per megawatt-hour. Twenty-three products are currently trading between 60 and 90 euro per megawatt-hour for the rest of the year. Although we are talking about much lower levels than in the autumn, forward prices are still clearly elevated compared to the historical price range. The elevated prices shown on the previous slide are effectively the outcome of the supply-demand situation and challenges with gas supplies, but there has not been any major power blackouts. Despite the exceptional situation with historically high prices, the physical power market is and has been functioning. The cheapest form of power generation, which will fulfill the demand at the time, forms the power price. It is also good to remember that the well-functioning physical power market is the base for the derivatives market. 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 deal with soaring energy prices have undoubtedly been necessary, it is crucial to keep them temporary and implement them in a manner that does not lead to exclusion of capacity from the market and thereby even rationing of electricity. We should now shift the focus to long-term market development issues and ensure that we will have an electricity market framework that enables investments in clean electricity needed for the decarbonization of our societies. Therefore, we follow the process on the EU electricity market design with highest attention. Now over to the operational performance. What you see here are the comparable headline KPIs from Fortum Group's continuing operations. So these exclude Uniper, which we deconsolidated in the third quarter following the agreement with the German state. 2021 figures are restated accordingly. In addition, we show the underlying earnings excluding Russia across the earnings metrics. This is of importance for two reasons. First, we are clearly committed to exit the Russian market. To get a clear picture of the underlying performance of Fortum's core activities, one has to exclude the Russian operations to understand the underlying earnings power going forward. Second, we have no access to earnings or funds from Russia, especially when it comes to the funds available for dividend distribution. The metrics have to be adjusted with the Russian impact. The last quarter of 2022 was again another extraordinarily volatile quarter, characterized by extraordinary market fundamentals. Overall, we had a very strong group performance across the headline KPIs in both the fourth quarter and the full year. Starting from the balance sheet and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, it was at 0.4 times for the group's continuing operations and 0.6 times excluding the impact from Russian operations. It again improved versus the 0.8 times that we showed you last time. There are two reasons for this. First, the healthy operating cash flow in the fourth quarter. And secondly, the approximately 500 million euro sales proceeds we received from the Uniper transaction. The very low leverage provides a good starting point to continue to develop Fortum going forward. With regards to the earnings, the generation segment was operationally very strong in the fourth quarter, thanks to high power prices in the Nordics and successful physical optimization. Compatible EPS for continuing operations was €1.74 per share, and when excluding Russia, it was €1.21 per share, significantly up compared to 2021 restated figures. So, these are very solid results, considering that they exclude Uniper and respective losses of almost 6 billion euros from the Uniper divestment, and recorded impairments of 1.7 billion euros in the Russia segment, neither reflected, obviously, in the comparable EPS figures. Considering all of this, Fortum's board of directors is proposing to the 2023 annual general meeting a dividend of 91 cents per share for the year 2022. The proposed dividend of 91 cents per share is based on the compatible EPS for continuing operations adjusted with the Russian impact, as we do not have access to the Russian earnings and cash flow. The proposed dividend translates into a payout ratio of 75 percent. I will come back to the dividend policy in the strategy section. Going forward, we will calibrate the balance between dividend, growth capex and balance sheet strength, which has the highest priority for us. I want to highlight that even after the tough year with big losses and impairments, the Board is proposing a cash dividend, there have been external views that we can't pay or shouldn't pay a dividend at all. In this context, it is also good to note that Fortum Group's reported EPS, including discontinued operations, was negative 2 euros and 72 cents per share. But the book loss on our Uniper participation, which is driving this number, is just the accounting reflection of the share price decline our shareholders have already suffered in 2022. Therefore, we think it's right to focus on the comparable EPS for continuing operations adjusted for the Russia impact. It is true that the dividend proposal is a rebase from last year's dividend of 1 euro 14 cents per share. However, it still reflects our good earnings level and stabilized financial position in Fortum's continued operations. To sum it up, I'm satisfied with the strong group performance in a volatile commodity market during a very tough year. Our organization has given its absolute best in serving our customers, securing availability of power plants and maintaining our financial flexibility. So with this, I conclude my part in this first section 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 of our continuing operations, key comparable numbers, excluding Uniper. I will also give you some insights on underlying earnings, including our Russian operations. In addition, I will briefly dive into the segmental overview and show you how this translates into our reported figures. And finally, I will close the financial statements section with an outlook for 2023. What you see here is the key overview summarizing our key comparable indicators of the consolidated Fortum Group's continuing operations, as said, all figures excluding Uniper, as it was deconsolidated and classified as discontinued operation in the third quarter already. To have a fair reflection of the group's underlying earnings, it is sensible to exclude the Russian operations as our divestment process is still ongoing and the business operations in practice are disconnected from our group operations. Completing the exit is likely to take additional time, and there are still significant uncertainties, including regulatory approvals. That's why we show you the figures excluding Russia in a separate column for the fourth quarter and for the full year. Let me comment on some of these KPIs excluding the impact from the Russian operations. Comparable operating profit was up more than 50% on the quarter and up 38% for the full year. This is mainly driven by the generation segment due to high market prices, which increased the achieved power price. Also, physical optimization enabled by the power price volatility contributed to the good result. Earnings per share, excluding Russia for the full year, consequently increased by 26% in 2021. The increase is not as pronounced as the increase in comparable operating profit, as we had higher financing costs. Comparable EPS for the full year, excluding Russia, was 1.21 euro. And as Markus said, this is the base for the dividend proposal. And finally, cash flow. In 2022, net cash from operating activities increased by €985 million to €2.1 billion, mainly due to the improved comparable EBITDA, as well as the change in working capital and lower paid income taxes compared to the same period in 2021. Now over to the segment overview. The reconciliation on segment level confirms what I said before. The year-on-year delta is mainly attributable to the generation segment, which obviously is and will continue to be the largest segment in Fortum standalone. Let me run you briefly through the segments on full-year reconciliation. Generation. Comparable operating profit was up 477 million, despite lower power generation in the Nordics, especially lower hydropower volumes. The lower volumes were caused by lower inflows that left the hydro reservoir levels below average. Reservoir levels were clearly below average levels during most of the year, however, improved towards the end of the year, especially in the fourth quarter. For 2022, hydro volumes are four terawatt hours below the level compared to the year before. The operational performance and production volumes for nuclear generation were solid and at the same good level as in 2021. The chief power price in the generation segment increased by 17.1 euro per megawatt hour. That's up 40 percent, following very successful physical optimization and higher spot prices. This is a very strong performance, considering that we had fairly high hedge levels and were negatively impacted by the significant price differences in Sweden between the high system price and the lower SE2 area spot price in the Sundsvall price area with low liquidity. City solutions. Comparable operating profit was down by 107 million euros for two reasons. First, operational. Clearly, higher fossil fuel, pellet and CO2 emission allowance prices as well as lower metal prices that could not be offset by higher power and district heating sales prices. Second effect is structural. We divested rather large parts of our city solutions business, our share in Fortum Oslo Wärme, the Baltic district heating business, and our solar plants in India. To consumer solutions, the comparable operating profit went up by 45 million euros, mainly due to higher electricity and gas margins, as well as positive one-offs from gas storage sales. The positive effect was partly offset by higher costs and lower sales of value-added services. Also good to keep in mind that one reason for the big delta is that in the fourth quarter of 2021, the result was clearly negative due to higher electricity purchase cost and negative margins. And finally, one word to the other operation segments, not visible here, but worth mentioning. We divested our e-mobility business plug serving and our remaining ownership in recharge and recorded tax exempt capital gains of a total of 138 million euros in other operations, third quarter 22 results. As these were recorded as items affecting comparability, they are not visible here. Now over to the P&L. This is a reconciliation of the full year comparable operating profit for our continuing operations at the top all the way down to the reported net profit. Please note that as we have not discontinued the Russian operations, they are now included here. There are a series of elements to highlight. As you are aware, during 2022, we recorded a total of 1.7 billion euros of impairments in our Russia segments in the first and in the fourth quarter. The impairments affected several line items in the income statement, depending on the nature of the asset being impaired. Recorded impairment charges are thus reflected as follows for the full year. In the items affecting comparability, we have impairment charges and reversals of €905 million. Impairments recorded in Q4 were €535 million, including the effect from the change in the ruble rate. In addition to this, we have impairment charges in the share of profit and loss of associates and joint ventures, mainly from the TGC1 ownership. Capital gains include the divestment of our stake in Fortum Oslo Wärme that we have closed in Q2 and the divestment of recharge and plug surfing. Then we have the changes in fair value of derivatives from hedging. For the full year, these were 393 million euros negative. Last quarter, we had a similar size positive effect. If the high market volatility continues like now, it will also in future mean substantial volatility to this specific line item. However, it is good to note that this is only a fraction of the effect that we saw when still consolidating Uniper. Finance cost net of minus 193 million euros relates mainly to the net interest expenses and a series of effects from the Russian operations like expected credit losses, write-down of shares and foreign exchange gains from ruble receivables and the closing of ruble hedges. As you can see, we also have a positive effect of €556 million from tax loss carry forward related to impacts mainly caused by the Uniper divestment. Consequently, the 2022 reported net profit for continuing operations was at €1 billion. Now over to our financial position. On this slide, I have in essence three messages for you. First, our leverage situation is very good. Leverage decreased substantially following the closing of the Uniper deal in December 22. We received in total 4.5 billion euros, which comprise of the payback of the 4 billion euro shareholder loan and the approximately 500 million consideration for the Uniper shares. Second, The operating cash flow of €2.1 billion was very strong and also supported by our efforts to bring down our gross debt. We used most of these funds to repay some debt already at the end of 2022, which explains why our gross debt number at year-end is at €7.5 billion. And this is €5.4 billion lower compared to the previous reported €12.9 billion. And third, we have quite some financial flexibility on our debt maturities as we have options to extend approximately 1.6 billion euros of our loans with one year into 2024. Therefore, although at first glance our contractual maturities profile looks very much front-loaded, the financial position is rather good. Also note that we currently have sufficient liquidity reserves. Let me briefly run you through the reconciliation for the development of our financial net debt, visible in the upper graph on this slide. The starting point with the opening balance sheet at the beginning of 2022 includes 2.5 billion euros of Uniper debt and was the drawdown from the 4 billion euro shareholder loan. In addition, the starting point includes 2 billion euros of deconsolidation effects with mainly Uniper liquid funds and margin receivables. During the year, Uniper drew down a further 1.5 billion euros on the shareholder loans to a full amount repaid in Q4. The net effect is shown in the change in receivables you see. This, together with divestment effects, Fortum's dividend payment for 2021 and the consideration for the Uniper shares brings our financial net debt to a level of slightly below 1.1 billion euro at year-end 2022. As interest rates have gone up, And the interest rate for our debt portfolio is consequently up compared to our last quarter. This is also affected by the 350 million euros that we have drawn on the solidium loan at substantially higher borrowing cost. The plan is to repay the drawn €350 million and at the same time cancel the entire bridge financing loan of €2.35 billion by the end of March 2023. The credit rating still continues to be a key objective to us. Our BBB rating with negative outlook is still unchanged. In connection with the Uniper exit, our rating agencies communicated that they expect progress on the Russia exit and clarity on Fortum's new strategy, on which we today have provided an update. And Markus will come to this in a minute. We are in dialogue with the rating agencies and await decisions from them in the near future. So with this, now coming to the final outlook section. The outlook section comprises in essence three elements. Guidance on hedging, capex for 22 and tax rates. Over the years, Fortum's successful hedging of the outright generation position has created predictability and visibility. The hedge prices for the generation segment increased for this year by €9 per MWh to €58, and the hedge ratio was 75% at the end of 2022. Hedge prices for 2024 increased by €4 per MWh to €42, and the respective hedge ratio was 45% at the end of 2022. Our capex guidance for 2023 for continuing operations, we expect to spend in total 700 million euros in 2023, including maintenance capex, but excluding potential acquisitions. Maintenance capex will be approximately 300 million euros, which continues to be clearly below our depreciation levels. And finally, to our tax guidance. The windfall tax in Finland is an element that needs to be considered. Lately, the Finnish Ministry of Finance has lowered their estimate of the windfall tax being collected from Finnish industries from a range of 0.5 to 1.3 billion euros to now 0.3 to 0.4 billion euros. The final outcome will naturally depend on the power prices and result developments of the affected companies. Taking into consideration this temporary windfall, the comparable effective income tax rate excluding items affecting comparability for the group is estimated to be in the range of 21 to 24%. Excluding the windfall tax, the comparable income tax rate, again, without items affecting comparability, is estimated to be in the range of 20 to 22%. For 24, the comparable effective income tax rate, excluding items affecting comparability, is estimated to be in the range of 19 to 21 percent. With this, I conclude the first section of our presentation, and I now hand back Ingela to you.