Fortum Oyj

Ingela Ulfves - VP, IR & Financial Communications Pekka Lundmark - President, CEO & MD Markus Rauramo - CFO Mans Holmberg - Acting Head of IR & Financial Communications

Peter Bisztyga - Bank of America Merrill Lynch Wanda Wierzbicka - Crédit Suisse James Brand - Deutsche Bank Ingo Becker - Kepler Cheuvreux Vincent Ayral - JPMorgan Chase & Co.

Welcome to all of you. Those of you who are here with us at the headquarters in Espoo and those of you who are listening online.

We're happy to host a joint webcasted news conference on Fortum's second quarter results here today. Please note that this event is being recorded and a replay will be available on our website later on today.

My name is Ingela Ulfves and I am the Investor Relations Head at Fortum. With me here today I have our CEO, Pekka Lundmark; and our CFO, Markus Rauramo; as well as MÃ¥ns and Rauno from our IR team.

Pekka and Markus will start by presenting Fortum's second quarter numbers and performance, after which we will open up for questions and answers. You can also ask questions on our webcast chat.

I now hand over to Pekka.

Thank you very much Ingela. Dear investors welcome.

Welcome to this Q2 conference. Of course, the second quarter is typically for us seasonally weak, as is also the third quarter.

We make our money in Q1 and Q4. But I have to say that given the fact that Q2 is typically weak we are fairly satisfied with our performance in this quarter.

We have, of course, 40% higher comparable operating profit than a year ago which is a good achievement, of course, driven to a large extent by the strong fundamentals in the market. Power price development has been pretty good throughout this year.

Q1 was characterized by cold weather. Q2 was characterized by unusually warm weather, which is then, for example, reflected in the City Solutions' weak result in the quarter.

But, overall, 29% improvement in comparable EBITDA, and as I said 40% improvement in comparable operating profit is a reasonably good result for this quarter. Earnings per share €0.24, but there it's worth noting that there are €0.11 of items affecting comparability related to the divestment of our hydro stake -- minority stake in Norway, which I'll come back to in a moment.

If you take that away, in a way, the operational EPS would have been €0.13 for the quarter. In comparison, this is a little bit more complicated then, but if you want to kind of reconstruct a similar operational profit EPS for the second quarter last year, you would need to take away the items affecting comparability and then the one off for the Swedish tax rulings in Q2 last year and you would get €0.10.

So that's one way of kind of trying to reconstruct a big picture for the quarter in terms of EPS from €0.10 to €0.13 this year. We have been talking quite a lot about balance sheet discipline and I'm happy to report, and I will go into details in a second that we have actually done quite a lot of those things already in the second quarter that we talked about in the previous conference, in terms of improving our cash flow, strengthening our balance sheet, also looking at some potential divestments.

In regards to Uniper, and I'm sure that you have a lot of questions. I'd now like to take a moment to just quickly touch on the status on our ongoing discussions with the company.

As you know, on the 26th of June we closed our public takeover offer and thereby becoming the largest shareholder in Uniper with 47% stake. This process was clearly not without challenges.

But, to be clear, these challenges have by no means altered our long term view towards Uniper or our intentions as the largest shareholder. And as I have actually said since we first announced our intention to invest in Uniper, we intend to be a committed long term and active partner to the company.

Our objective remains to collaborate with Uniper in order to create value for both companies and all stakeholders. Now to make this a reality, we are actively working to reset the relationship with Uniper.

Since the closing of our public takeover offer, we have reinitiated talks with the Dr. Reutersberg, the chairman of the -- supervisory board of Uniper and Uniper operative leadership.

We have proposed Fortum's CFO, Markus Rauramo to join Uniper supervisory board and we are currently working with Uniper in relation to this appointment. We are confident that Markus would be an excellent and valuable member of the board and an ideal replacement for Mr.

Spieker who represented E.ON in Uniper supervisory board. Of course, to fully unlock the potential value of collaborative efforts will require more than just discussions.

This process clearly won't be finalized overnight, but it is our objective to make good progress in a timely manner and we will, of course, update you as and when appropriate. I would also like to address market noise and questions we have heard in relation to further increasing our stake.

Quite simply, the Russian regulatory decision limits our ownership to up to 50% of shares in Uniper. Therefore, all such questions are hypothetical and as you know we will not speculate.

That being said let me reiterate once again. We are pleased to have become a committed long term and active shareholder in Uniper and our focus is very much now on delivering the value potential of this transaction.

Then I would like to move to a completely different topic which I already briefly commented in my introductory notes and that is what we would call capital recycling in our renewables business. In June, two important things happened in India.

First of all, we agreed to sell 54% share of our solar power company operating for solar power plants with the capacity of 185 megawatts. We sold this share to two investment funds UK Climate Investments and Elite Alfred Berg, 40% and 14% respectively.

And Elite Alfred Berg has the option to an additional 16%, which means that we are prepared to sale -- divest 70% of our holding. And the purpose of this is to free up capital for further investments and that way enable us to continue to utilize our core competencies that we have developed in India.

We have an excellent team there that would be capable of building much more than what we currently have. The value of the divestment is €150 million and that will result in an impact -- a positive impact of about €20 million to be recorded in the third quarter result.

And as I said, we want to free up capital for further investment, so the next step followed immediately after this. We won the right to build another 250 megawatts of solar power in India.

This capital expenditure is slightly smaller than the amount of capital that we are now freeing up. It is about €120 million with commissioning expected in 2019.

Then moving on to Russia. In June, we won the right to build 110 megawatts of solar capacity with a guaranteed power price, which roughly corresponds to RUB14,000 per megawatt hour.

This would be -- and now we need to be careful. This would be, with today's exchange rate, roughly €191 per megawatt hour.

But what matters here is the ruble amount. We communicated some of these numbers before.

We had fairly conservative assumptions regarding some of the parameters that affect this calculation at that time. This is now our latest assumption with the current understanding of the parameters, and as I said, including the current exchange rate.

The Fortum-Rusnano 50-50 wind investment fund, also during quarter one, the right to build another 823 megawatts wind. Also here we believe that this is a good deal for a fund.

The price, if you calculate per megawatt hour, will obviously depend on the actual realized wind conditions and the load factor. But it's somewhere around RUB7,000 to RUB8,000 per megawatt hour, which would today's exchange rate correspond to €96 to €109 per megawatt hour.

These tariffs, including also for solar, are valid for 15 years. And these windfarms are expected to be commissioned during the years 2019 and 2023.

We have previously announced that we are planning a maximum equity commitment of RUB15 billion and from there you can pretty easily calculate that to be able to do all this, including the earlier announced 1,000 megawatt license to build, of course, requires first of all that all funding does not come from equity. There will be Russian local debt funding for a significant part of this.

And in addition to that, we are planning similar type of capital recycling as we would call it, that I just went through for India. The interesting thing is that we believe that these are good tariffs.

We have -- we are building a good industrial machinery for both wind and solar. And with these types of tariffs and the 15 year time horizon, of course, then gives us a lot of optionality as to how to maneuver our actual exposure in the future.

Another important step in the quarter was the divestment of the 10% nonstrategic minority ownership in Norway in Hafslund Produksjon. We are satisfied with the outcome.

We get sales price of €160 million and we will record a capital gain of €77 million or did record a capital gain of €77 million in the second quarter which corresponded to this €0.11 per share that I said earlier. Our intention is to continue to focus on our balance sheet.

Of course, through the Uniper investment we are significantly more geared, which is the reason for added discipline in our new investment decisions. We are also looking at possibilities to, as now these Hafslund Produksjon case shows, to potentially divest some less strategic holdings and a pretty high degree of scrutiny will be exercised when it comes to new investment decisions because, obviously, our goal is to keep investment grade in all circumstances.

Then when we go further in the market environment, of course, what is always important is the hydrological situation. And now as you may have noted, it has been extremely dry.

The orange line here represents 2018. In the beginning of the second quarter there was quite a significant deficit in the Nordic water reservoirs.

Then we got after a cold winter, a very sudden spring and the snow melted extremely quickly, which resulted actually in a surplus in the middle of the second quarter. But now since then, after the snow melted, there has been very little rain.

So now we are going into a deficit. Already the deficit was 7 terawatt hours at the end of the second quarter and currently it's already about 11 terawatt hours.

And of course, this is one of the factors that is behind the extremely strong price rally that we have seen on the Nordic power recently. But it is not the only factor.

The commodities continue, of course, to play a role. And the interesting thing, of course, for us is that during the second quarter all commodities did pretty well.

Oil price development was strong, gas price development was strong, coal price, driven by overall strong economy, strong demand and the Chinese supply cuts that we have seen resulted in stronger coal price which then of course increases the short run marginal cost for coal condensing having a connection to electricity prices. And then very importantly, the ETS, Emissions Trading System, is now clearly starting to deliver, as you can see, in this development.

Right now the price is about €16 per ton. This is about three times as high as it was a year ago.

So this is a strong development in just one year. And now when the market stability, the reserve we will start to bite in and kick in from the beginning of next year.

The market -- carbon market will be quite much tighter. And now when the European Commission published the amount of allowances in circulation you can from there calculate that the MSR effect will be that the amount of allowances that will be auctioned next year will be 40% lower than this year.

So that does mean quite a significant tightening for the CO2 market, which is clearly now being anticipated in the prices already. And the result of all this then is a strong power market.

As you can see here, the trend has actually been positive since the summer of 2015. The Nordic spot price in Q2 was €39, while it was €27.40 a year ago.

2019 forwards are at the moment slightly over €37. On this chart, in addition to the actual historical development, you have two forward curves.

The dotted line was the forward curve at the time when we published our first quarter result. And then the solid gray line is the forward curve as of today or yesterday, I think.

And there you can see that there is a strong improvement, especially in the 2019 and to some extent 2020 prices. And part of this is, of course, driven by the -- especially the short end is driven by hydrology, of course combined then with the strong commodities.

But this is overall very strong development and of course we should not forget that only two years ago -- slightly more than two years ago, the overall forward market, including for the years '19 and '20, were around €16. So now we are -- for '19 we are looking at €37 while it was €16, little bit more than two years ago.

Here you see basically the same in graphical format. Q2 spot price, up 42%.

Our achieved price was up 10%, €33.10 compared to €30 a year ago. On the Russian side what you actually see here is the effect of the ruble-euro exchange rate, despite having more or less stable spot prices than when -- the larger part, of course, coming from the CSA payments despite the fact that they were doing fine, the end result is still 10% lower euro denominated achieved price for the Russian segment, which is then clearly seen in the result of the segment.

Then if I move to numbers and I will make quick comments on each division before Markus then goes deeper into earnings bridges and balance sheet items. Couple of comments on the group P&L this time now focusing on the first half Q1 and Q2 that you have on this chart.

We have for the first half year now a 28% improvement in comparable EBITDA and 33% improvement in comparable operating profit. This is a development that we are in general pretty satisfied with.

Earnings per share year-to-date is €0.68 and in there we have €0.18 of items effecting comparability. So those taken away, it would be €0.50 for the first half year.

Generation segment. We have every reason to be pleased with the development I already went through the factors behind.

We have 95% improvement in comparable operating profit. We have, still despite the fact that it has been very dry, still for the second quarter we had slightly higher hydro production than a year ago.

And we had slightly lower nuclear production than a year ago, 5.6 terawatt hours versus 6.1 terawatt hours. And the main reason for this is the fact that Oskarshamn 1 was still running for the most part of the second quarter last year.

I think it was in mid-June last year when it was permanently shut down. So this item that is there affecting in a way the comparability will be gone then if at quarter.

But, overall, really, really good development in that Generation segment. It is fair to say that we are disappointed with the result in the City Solutions segment €21 million negative.

It's not something that we can be in any way proud of. There is a strong weather component in this.

If you take away the acquired Fortum Oslo, the Norwegian business, in the old Fortum Varme, our heat business, the volumes declined by 29% compared to the second quarter last year. 29% lower heat volumes and of course that has then a strong connection to the result.

What you will see also going forward is that the Hafslund transaction, and the fact that we now are running together with the city of Oslo district heating in Oslo, will actually increase the seasonality of the City Solutions business. Because the district heating, of course, Oslo is in the same way seasonal as the rest of the heating business is.

And now when there was an exceptionally warm second quarter, exactly the same seasonality then kicks in through the new Norwegian business for us and that accentuates the seasonality in the quarter. In addition to that, there where items in the recycling and waste business.

Most of them project implementation type of nature that also contributed to the weak result, which are then of course management issues that we are working on. The fundamentals of the recycling and waste business are healthy and the basic business, which is treatment of hazardous waste, is running as expected.

But, overall, seasonality of this business is expected to increase going forward. Consumer Solutions is pretty much following the plan that we have.

We are now focusing on the integration of the Hafslund business that we acquired. We are focusing on the development of the product portfolio, development of the IT systems.

And as I said in the first quarter report as well there is no reason to expect any kind of major improvement in the result yet this year. These are things that will then play a role in the longer term in the years to come.

We are now building together with Hafslund a new base and a solid foundation for this business. And our goal is then that that in the coming years you would start the result coming through in the numbers as well.

The Russia segment was also from one point of view a disappointment. Of course, there is the forex effect which was about €6 million.

In the euro result that was expected. But the unfortunate thing in the quarter was an insolvency of a power electricity customer.

Fortunately, something that is happening quite seldom in Russia. The last time we had anything like this happen was several years ago.

But this did affect through a bad debt provision the result of the quarter. What I can say, though, is that excluding the ruble and the bad debt impact, the result in Q2 2018 actually improved compared to previous year.

So from that point of view operationally we are not worried in Russia. But, of course, the fact that EBITDA went from €88 million to €73 million and comparable operating profits from €53 million to €38 million euros is a slight disappointment.

So those were my comments on the result and the divisions. And then if Markus continues before we move to Q&A.

Thank you, Pekka. I start with how we will report our ownership in Uniper.

To start with, the total acquisition cost was €3.7 billion and that was financed with existing cash of €1.95 billion and then we draw €1.75 billion from the acquisition financing facilities that we had arranged. The ownership will be reported in participations in associated companies and joint ventures and we will consolidate Uniper as an associated company from 30th of June of this year.

We will record our share, the 47% of Uniper's net profit in the share of profit of associates, and thus it will have the corresponding EPS impact and contribution. The dividend that we will eventually receive from Uniper it will strengthen Fortum's cash flow.

And as we know from already this year's paid dividend that would have corresponded to around 3.5% cash yield and next year's guided dividend level by Uniper would correspond to about 4%. The share of profits from Uniper will be reported with one quarter time lag as Uniper is publishing its results every quarter several weeks after Fortum.

And this is similar to us what was the case with Hafslund earlier when it was an associated company and also still with TGC-1. So consequently, the share of Uniper's Q3 profits will be reported in our Q4 interim report for the first time.

The reason why we will not report Q2 is that we did not own the shares until the very end of the second quarter. Also it's good to note that as Fortum has certain seasonality in its results, Uniper also has had historically a certain earnings profile, which has impacted historic the results.

So when you estimate Uniper impact on us, it is good to look at their earnings profile. Then I recap shortly Q2 and the first half of the year.

In Q2 comparable operating profit went up €44 million. Generation almost doubled even with less volumes compared to previous year.

In City Solution, volume down. Seasonal pricing impact was negative for Q2, positive for Q1.

And then recycling and waste solutions was weaker. In Russia, foreign exchange was a negative item as well as the impact of positive bad debt recovery last year and now the bad debt provisions that we've mentioned this year.

CSA payments were higher in the quarter compared to last year. First half of 2018 improved by more than €130 million.

Generation, positive impact from hydro volumes, positive impact from prices and positive impact from a lower taxes. The Hafslund consolidation impacted positively both City Solution as well as Consumer Solution.

And this offset some of the other negative impacts that both segments experienced. In Russia, for the first half year, the foreign exchange negative impact was €18 million and then the same bad debt impact positive last year, negative this year was impacting the result.

CSA payments positive and electricity margin lower. And this resulting in €558 million comparable operating profit.

Then I will touch the main items in the cash flow statement. There are three comparison periods Q2, first half year and then the last 12 months compared to 2017.

And the items actually are similar in all of these comparison periods. If we start from the top EBITDA, up.

Then we had positive impact in realized FX gains and loss through the rolling of our Swedish krona and ruble denominated loans. A negative impact from the futures settlement in working capital due to the increased prices.

This of course comes back then eventually when the trades are settled. CapEx was less in all periods, so we have had our CapEx scrutiny.

Uniper acquisition, of course, when we look at acquisition of shares that was by far the biggest item in the comparison periods. In the last 12 months we did also have the impact of the Hafslund transaction.

In divestment of shares, Hafslund Produksjon had a positive impact on Q2 and the first half of this year. Negative item was in the change of cash collaterals and that again is for the forward trades and due to the higher prices.

And as mentioned in connection with Uniper, we used €1.95 billion of cash and €1.75 billion of the three year acquisition loan. And this brings us to the -- some of the key financial metrics.

Due to the Uniper transaction, our net debt went up to €5.3 billion, but at the same time EBITDA has increased to €1.45 billion. Good to remember that there is no impact either on EBITDA nor on the debt from Uniper, so no contribution on the EBITDA.

Despite this non-contribution, the net debt/EBITDA is at a level of 3.6x, which we are okay with, even though it is over our stated target of 2.5x. Ratings, both from S&P and Fitch are now settled at BBB flat.

And with the new debt that was taken for the Uniper acquisition, our average interest rate going forward with the current rates will be about 2.5%, so clearly down from the level where it has been previously. Debt maturities are quite limited.

For 2018, we have €125 million plus then the CSA payables. We have maturities in 2019 of €800 million with €750 million bond maturing in March 2019 and hardly any maturities in 2020.

So maturity profile is very good, as well as the liquidity situation. Otherwise we have still significant liquid funds and committed credit lines.

The revolving credit facility maturity is in 2023, so liquidity is well secured. But due to this increased leverage, we have already communicated earlier that we will focus on moving the leverage towards our stated target.

In Q1, we defined the areas, CapEx, portfolio focus, fixed cost and working capital. And we have proceeded as we communicated in last quarter.

We have divested the share we had in Hafslund Produksjon. We have been active on the capital recycling side and we can say that we have had good CapEx and fixed cost control and this will continue to be areas that we focus on.

This enables us to continue to do selected prioritized investments, but with limited equity exposure. And the cash flow measures and cash flow discipline will continue in the coming quarters.

Then to the outlook. The hedge levels for 2018 and 2019 are 75% and 60% respectively, and the hedged prices have increased by €2 in both periods to €29 and €28.

CapEx guidance remains unchanged at €600 million to €700 million. The synergies that we are estimating for City Solutions and Consumer Solution from Hafslund consolidation remain unchanged.

Taxation, effective tax rate for 2018 unchanged at 19% to 21% and this is also taking into account changes in Swedish corporate income tax and we expect the demand growth to be unchanged at 0.5%. This is for my part.

And I think we are ready for questions and answers.

Thank you, Markus And thank you, Pekka. Operator, we are now ready to take the questions from the audience.

It's Peter Bisztyga here from Bank of America Merrill Lynch. Two questions from me.

Firstly, I'm just interested to hear if you've set any kind of change in the attitude of the Uniper management team towards Fortum? And you think the door is now open for a much more constructive alliance going forwards now that the deal is closed.

And then secondly, just regarding the weakness in waste and recycling in the City Solutions. How much did that contribute to the year-on-year deterioration in profitability?

And is this a new trends that we need to worry about?

Okay. First of all, Uniper's management has said also in public that they want to build a constructive relationship with us and we certainly share that goal.

As I said, this has been a long journey and it has not been without challenges. So now it's very important to reset the relationship and that's why we have initiated discussions with both the supervisory board and the management board.

And as I said, this will take time. But our fundamental investment case is unchanged.

We believe that there is a lot to be gained through good cooperation between these two companies, something that will benefit all stakeholders. So that is definitely our goal.

Then the City Solutions part. We do not disclose the number that how much that effect was.

But as I already said in my presentation, we do not believe that this is a trend. The underlying fundamental which is the robustness of the hazardous waste treatment business, which is the lion's share of the cash flow in that business.

It is -- healthy order book is their outlook for the coming years. Nothing has changed from the time when we decided to acquire Ekokem.

There is another part of the business which is more volatile, which is in a way project related. There is environmental construction type of projects which sometimes have implementation related issues.

We do not believe that this is a trend.

Wanda Wierzbicka, Credit Suisse. Two questions from me.

The first one is on Uniper. When vote on the appointment of a special auditor will place?

I mean, during the AGM of Uniper a vote was postponed. It's related to the action taken by the management of Uniper in Russia.

And my second question in on the power price CO2 outlook. I know that you don't comment on it.

But any comment on that would be very helpful.

If I start from the second one. Yes, you are right, we do not comment power price development, so that's why it's very hard to give a comment other than commenting the previous historical development which I did my best.

We all know the drivers quite well. But unfortunately all market actors will need to create their own models and own forecasts.

Then when it comes to the special audit question, that whole discussion is something that we are not going to have in public or comment here. That whole matter is going to be a private discussion between us and the company.

And a quick follow-up...

Sorry, if I just...

When can we hear more about the cooperation between Fortum and Uniper? I know that you signed a nondisclosure agreement.

But when can we hear something more apart from we are in talks?

The only thing I can say about that one is that you will hear in due course. Because as you also yourself pointed out that that we have a pretty strict nondisclosure agreement.

There is a number of topics that we can potentially discuss when it comes to cooperation. But we want to be very disciplined here that when there are news then we will publish them.

But just to calm down expectations, many of these things are of such nature that they will take time.

It's James Brand from Deutsche Bank. I just have three, hopefully, quick questions.

The first is on the ratings, which you've mentioned are being confirmed at BBB flat. I was wondering whether you'd made any commitments to the rating agencies to secure that rating around disposals that you are willing to kind of share with us.

The second question is on the CapEx that you're spending in the supply business and Consumer Solutions. Obviously, you'd highlighted in the past that you were going to be spending a bit more in that business and investing in that business had increased to €21 million for H1.

I was wondering whether there's anything you could share with us on how much you might be investing in that business over the next couple of years. And then thirdly on the heat business, you'd mentioned that there was this change in seasonal heat pricing that impacted the Q2s negatively.

I guess, presumably impacted to the Q1s positively. I was wondering if there's anything you could tell us about the magnitude of that seasonality so we can just have a bit of a better idea on how that might impact on kind of Q3 and Q4 this year?

I can start with the rating. So we have made no commitment.

So what you can read from the rating reports is what we have disclosed and discussed with the rating agencies. And as we have said, our target is to have a solid investment grade rating and the outcomes both from S&P and Fitch are what we had anticipated in connection with the acquisition and very much in line how they had guided when the different steps had taken place.

Then for the Consumer Solution, the CapEx increase is partly -- is due to actually that IFRS 15 makes as capitalized part of the sales cost. So that needs to be cleaned away.

When we talk about the increased CapEx and increased spending for developing the business it is substantial, but we have not disclosed the numbers there. But we talk about significant investment.

But that shows both on the OpEx and CapEx side of Consumer Solution.

Then when it comes to the seasonal pricing, what we are talking about is an ongoing development of the pricing models where the goal would be to make the pricing in district heating in the first place in Finland, but then potentially in other place as well in the future to be more demand driven. So that when the demand would be high, the market would be tighter.

Obviously, that should be reflected in prices. So in simple terms, prices should be higher in the winter and consequently most likely lower in the summertime, which then increases the seasonality.

And in addition to that this would create a platform for new services like demand response when new type of approach for product, packaging and pricing could be could be taken. You are right that there was a small positive effect in Q1 and a small negative effect as we highlighted in Q2.

These are not hugely material when it comes to the overall picture. And the reason why we mentioned this is that, this is a trend -- part of the overall trend that we are expecting in the business that seasonality is increasing Q2 and Q3 weak -- even slightly weaker than before.

Q1 and Q4 slightly stronger than before. But we are not disclosing the number.

And as I said, it is not huge. But it is there and that's why we mention it.

Ingo Becker from Kepler. I had Two questions.

First, you have always been pretty articulate when it came to the CO2 regime, you've always been a believer in it and I think building on it. Can you help us with your view on what you think is driving prices there and what you would expect in coming years.

The German think tank just lately suggested, despite the MSR, the systems to stay oversupplied, which would imply current prices are to an extent liquidity driven. You know there are many other views in the market contradicting that conclusion.

I was just interested in what your view is given your ongoing public support for the system also in the past. My second question would be on Uniper.

You are aiming to, as you say, reset the relationship with the company, with the management. How important in that reset is the current tap water license issue in Russia, which currently prevents you from going over 50%.

Is that crucial or do you find enough other areas to -- for a more constructive relationship at the 47% shareholding level?

Okay, thank you. I start with the CO2 and then Markus will jump in.

The fundamental point in our strategy, of course, is that we want to drive market driven decarbonization and that's why we are all for stronger carbon pricing as long as it is as market driven as possible. And we believe that a volume based cap and trade system such as the ETS system is the best solution for that.

And just to make sure that there are no misunderstandings, our investment on Uniper does not in any way change this fundamental belief. There's a lot of parameters affecting the market and of course we are not disclosing our own view.

In addition to what has been published, of course, is then the checkpoints that there are inbuilt in the system. In 2021, there will be a checkpoint when the MSR will be discussed, whether or not the 24% intake rate will continue or if it -- or whether it will fall back to 12%.

And then in 2024, there will be a checkpoint whether linear reduction factor will be discussed. The interesting thing there is that, that still today the linear reduction factor is not expected as it is today.

And even now strengthened, it's not expected to deliver emission reductions that would correspond to the Paris target for the European part. So that's why we are strongly recommending that a linear reduction factor should be tightened latest at the checkpoint at 2024.

There are very, very different views on the price development. There was one paper published yesterday where one analyst, as you may have seen, said that the price will go to 100 then there are -- there's totally different situation and the prices will be weak.

We are not disclosing our own views on this question. But, obviously, the old rule of thumb that we are using, which is that €1 and the price of carbon depending on hydrological situation will affect the Nordic power price somewhere between €0.40 and €0.80, closer to the upper end of that range when it's dry.

And closer to lower end of that range when it's wet, continues to be the case that we believe in. Markus do you want to add something to...

I think you said basically everything I had on my mind. But on top of that, just saying that.

What I assume and I think we assume that what EU is targeting with the ETS and MSR is that there is a meaningful price impact that would incentivize investment into clean energy production, but at the same time would not completely devastate the energy intensive industries. And that's why there are so many different levers that can be pulled in the system.

I think that would be my answer rather than even trying to give a forecast.

And it is a fair request from the energy intensive industries that there should be a level playing field and that's why we have strongly in our discussions with EU. We are strongly encouraging them to discuss with their counterparts in China, for example, as to how to potentially in the future make the systems interconnected or at least so that there would be a level playing field.

We are also supporting the initiative by the Finnish government that decentralized heating should be in the future included in emission trading as well. And now when European Union is starting to create their Vision 2040, we would really like to have a strong ambition level, little bit California style, where also traffic -- transportation would be in the system.

These are some of the visions that we are discussing in our lobbing efforts when making the systems stronger in the future. Then when it comes to Uniper and the water treatment license.

Our understanding is that, this license and the fact that it is there was the reason why, according the strategic investment law, the decision was that we are only allowed to buy up to 50% of Uniper. Now also the FAS in the antitrust ruling put the same 50% limit there.

And that may mean that if we, in the theoretical case, that in the future would be over 50%, there is a possibility that the new filing would be required. But, of course, from operational point of view, our understanding is -- but this is more for Uniper to comment.

But our understanding is that the role of tap water testing in the business is extremely small. We are doing similar type of activities at our power plants, but we have outsourced that to Russian counterpart there, so lot of companies were able to do that activity.

So our understanding is that it's not in any way strategic.

Vincent Ayral from JP Morgan. And number of question have been asked.

So I'll basically you bounce back on CO2 and linking that to Uniper. Since you've made you offer on Uniper, we've have seen a CO2 floor and obviously it is out of coal in Netherlands.

So what is your view basically on the actual valuation regarding these assets? Also note that Clean Dark Spreads, the ruble and number of things are being going south regarding the fundamentals on this name.

And this name remains still a net exposed to CO2. It's not yet neutral.

It will take a number of years. So is this a subject of concern regarding, first, valuation and second, regarding your strategy?

No, we are not concerned. I mean, many of these things we had in our assumptions when we built the investment case.

And the fundamental parameters that we have in that case they are valid. And of course, you need to remember that that there are also significant parts of Uniper that are not exposed to the spreads.

There is the whole Swedish business which is hydro and nuclear and then there is -- then there is the German hydro business which are all very significant and represent large capacity and volume in CO2 free production. So on a net basis, as I said, we continue to actually speak for a higher carbon price.

Power price development is very promising and our investment case, as we see it, holds -- continues to hold very well.

And regarding the comments on the Netherlands, the CO2 floor, the coal and as well the Datteln delay. Would you agree that all of this on a fundamental basis has been detrimental to Uniper valuation?

When it comes to things like Datteln and others, those are all for Uniper to comment and we are not going to second guess or make comments on their comments. They speak for themselves and we look at the company as a whole.

You mentioned the CO2 floor, their -- our opinion is that -- of course, the intentions are good, i.e. to create a higher CO2 price and that way stronger incentives for decarbonization.

Our concern is that if you start to get national CO2 floors without touching the overall ceiling cap on emissions, the only thing that you achieve is that you dilute the market in other part. So that's why we feel that the best way to develop the CO2 market would definitely strengthen the linear reduction factor in the system and then let the market work and find the places where it would be most economical to decarbonize.

That's exactly how that market works. Then, if there is no other way because of political pressure then to start talking about CO2 floors, then they should be regionally as wide as possible, preferably covering the entire ETS area.

Then you would achieve basically the same results that you would get higher CO2 prices.

Thank you, Operator, and thank you for all the questions. We have some questions on the chat.

So, I will hand over to Mans now to ask those questions.

Yes. So firstly we have a question from Andrew Moulder.

Do you expect to see the Russian 50% ownership restriction lifted or do you believe you can circumvent the restriction by implementing some kind of intermediate whole company structure?

That is not something that we want to speculate. And as I have said many times, we are happy with the 47% shareholding in Uniper.

There is a restriction that we have to live with and anything other than that we will not speculate on.

And then we have a second question from Michael Charlton, Banco Santander. Could you be a little bit more specific about when you expect to return to 2.5x leverage, as the time table being agreed shared with the rating agencies?

Yes. So the rating agencies have communicated what is their timeframe within their, let's say, review periods.

So we expect that we can show the direction and the activities that are leading to the appropriate levels. Then as a reminder also, it's not only the net debt to EBITDA, but it's a cash flow from activities versus net debt, so there are other ratios that we are looking at and also the decisiveness of our activities.

But there are not firm single data points that you can only refer to. So what I recommend is that you look closer at the -- at both the rating agency's communication on the subject.

But the direction is clear. So deleveraging, having the cash flow and capital use discipline, these are the internal measures we are focusing on.

Thank you Pekka. Thank you Markus, and thank you to the audience.

These were all questions for today. Just as a reminder, Fortum will publish its third quarter interim report on the 24th of October.

So we're looking forward to meeting up with all of you then at the latest. Thank you everyone for your participation.

And on behalf of Fortum we wish you all a very nice rest of the day and also an enjoyable summer. Thank you.