Fortum Oyj

Ingela Ulfves – Investor Relations Pekka Lundmark – Chief Executive Officer Markus Rauramo – Chief Financial Officer Mans Holmberg – Manager-Investor Relations

Artem Beletski – SEB Alex Leng – UBS Lueder Schumacher – Societe Generale Sofia Savvantidou – Exane Wanda Weirzbicka – Credit Suisse Vincent Ayral – JPMorgan Jose Lopez – Millennium Ingo Becker – Kepler Cheuvreux

Welcome to all of you, both those of you who are here with us today at our headquarters in Espoo, and those of you who are listening online. We are hosting a joint webcasted news conference on Fortum's Third Quarter and Nine Months Results here today.

Please note that this event is being recorded and a replay will be available after the webcast on our website. My name is Ingela Ulfves and I am the Investor Relations here at Fortum.

Our presenters today are our CEO, Pekka Lundmark; and our CFO, Markus Rauramo. And with me here is also my colleagues from the IR team Mans and Rauno.

Pekka and Markus will start by presenting Fortum's third quarter numbers and performance, after which we will then enter into the Q&A session. You are also able to ask questions online in the chat.

I now hand over to Pekka, who will start the presentation, please.

Thank you very much Ingela, dear investors, dear analysts, dear representatives of the press. The third quarter in Fortum is of course always seasonally weak.

This time it was characterized by volatile power prices, volatile commodity prices, volatile CO2 prices and especially, by one and dry weather. On the positive side, power prices were up significantly year-over-year, but of course this could not compensate the historically low hydro volumes that we had because of the dry weather.

On the positive side also clearly in the quarter were the results of the Russia division, which contributed to the overall results of the third quarter. As you have seen, we had comparable EBITDA of EUR 230 million, which is up 10% from last year and a slight increase in comparable operating profit to EUR 96 million.

What I want to point out though is that both EBITDA and EBIT figures here, the comparable numbers, they include EUR 26 million from the sale of the Indian solar stake, which is part of the capital recycling strategy as we call it where the idea is to be able to continuously invest in new projects to take advantage of our competencies in designing, building and operating power plants but not necessarily having to own 100% of them in the long run. This is our way of releasing capital, so that we will be able to reinvest that capital then into new projects.

And this gain of EUR 26 million is recorded in the profit of this quarter. Our EPS was EUR 0.05.

There are again items affecting comparability both this year and last year if both of them are eliminated, this would've been on the same level as last year i.e. EUR 0.06.

And of course what is very important, which is also connected to releasing capital in Indian solar is that we want to continue high degree of balance sheet discipline with focus on cash flow. This is really important, now especially after the unit transaction has been closed, which of course puts a stretch on our balance sheet.

Before market and result analysis, a quick update on some recent events. First of all, unit per after closing the transaction in June, we have taken steps to start working with the company.

And our CFO Markus Rauramo has now taken his seat on the Uniper Supervisory Board and he has been elected as Vice Chairman. Our current key priority remains to agree with Uniper's management on how to effectively cooperate in order to create value for the stakeholders of both companies.

Unfortunately, this is taking longer than we would like. But as you know we have agreed with Uniper not to comment on any specifics about the cooperation talk, so this is all I will say about this matter today.

Other events, at the end of the June, we won the right to build 250 megawatts solar power in Karnataka, India, this will be commissioned in 2019 and this is now exactly part of this capital strategy that I was talking about in the beginning. We released significant amount of capital booked EUR 26 million profit as a result of that transaction and now we are reinvesting this then into new projects where this 250 megawatts will be the first one.

Earlier in June, we also won a CSA auction in Russia to build 110 megawatts of solar to be commissioned in 2021-2022 and our jointly owned Fortum Rusnano joint venture investment fund – wind investment fund won the rights to build 823 megawatts of CSA supported wind capacity. These investments, some of them are pending, they will be done over time in due course.

This is right to build that capacity but each investment decision will be done separately. And just this week actually, we made an investment or the fund joint venture fund made an investment decision to build 200 megawatts.

And as we have earlier communicated, say tariffs for us in Russia are valid for 15 years. And our view is that they are on the pretty attractive level.

We have in our previous communications published what those tariffs are. To continue on wind we recently formally inaugurated 76 megawatts Solberg wind power Park in Sweden.

This park is co-owned by Fortum and Skellefteå Kraft in equal 50:50 shares. After these investments, we have now almost 300 megawatts of operational capacity, excluding the divested part of Indian solar and we have a pipeline of clearly over 1 gigawatts of new projects.

So this shows that when we have in our strategy been talking about the ambition to grow into gigawatts scale solar and wind that this is actually happening. In September, we inaugurated a multi-fuel combined heat and power CHP plant in Zabrze, Poland.

It is among our biggest capacity investments lately – new capacity build-up projects. This plant will provide district heating to some 70,000 households in Zabrze and Bytom and most importantly, it will replace the outdated purely coal-fired units in Zabrze.

The new plant has a production capacity of 140 megawatts of heat and 75 megawatts of electricity and the annual production is expected to amount approximately 730 gigawatts hours of electricity and 550 gigawatt hours of heat. In addition to Poland, we are taking active steps to reduce coal use in district heating also here in Finland and actually, just this morning, we published a decision to build a biomass fired heat plant here in Espoo with the capacity of 58 megawatts commissioning 2020 and this will enable the shutdown of an old coal-fired heat boiler also here in Espoo reducing significant emissions of the district heating system here.

We also just announced acquisition this is a small bolt on acquisition of metal recycling company in Finland, turnover of that company is EUR 40 million. So it's a small company but this is a small bolt-on which goes together with earlier Ekokem acquisition to strengthen and boost up the capabilities in our recycling offering.

And finally, I would like to welcome Arun Agarwal to Fortum and Fortum's management team. Arun has officially started last week and he will lead our strategic IT as well as digital innovation and transformation.

As several times we're speaking about the digitalization, artificial intelligence, many related technologies will fundamentally change many aspects of the energy system and we have a high ambition level there. We want to be the digital winner within the utility space and now we have a clear owner in the management team to drive this initiative for us.

IPCC report on climate change was published and this was of course – this is of course, something that needs to be taken extremely seriously. According to IPCC, there is a robust different between the impact of 1.5 degrees and 2 degrees scenarios and adaptation needs are much lower obviously, in 1.5 degrees scenario and therefore focus should be on pursuing 1.5 degrees.

But this is really challenging and requires a lot of actions. Major points in the report, which are connected also to our sector is that the global net sales to emissions should decline by 45% between the years 2010 and 2030, by 45%.

And our world should be net zero CO2 by 2050. Power sector should reduce emissions by 100% well before 2050 and of course, for us, an interesting and important note in this context is that according to IPCC, nuclear will play a bigger role also – actually a big role also in the future, according to IPCC full decarbonization will not be possible without nuclear.

Fortum calls for an ambitious EU climate strategy to reach carbon neutrality by 2050, focus should be on early action. A stable visionary and long-term political framework for the economy is a prerequisite for European businesses investing in low carbon technologies to remain competitive in the global market and as we have said several times, our opinion is that when it comes to polythene instruments, carbon pricing should be the key for reaching carbon neutrality.

And in addition to that, if we really want to go to complete carbon neutrality by 2050, most likely, we will also need market mechanisms to be developed to reward CO2 removal. Carbon pricing obviously, makes those who emit CO2 pay and that policy should be tighter and tighter every year.

But in addition to that, we will need mechanisms also for rewarding CO2 removal. Then I move on to the hydrology situation.

Q3 third quarter started with low precipitation and hot weather, which decreased water reservoirs further versus normal and on this chart, the brown colored line indicates 2018 and as you can see, throughout the quarter, we have been below normal levels the gray dotted lines represents the long-term average. weather changed in late August and in Norway, September and consequently also Q3 were the wettest on record in energy terms.

High precipitation was followed by rapid increase in water reservoirs there during September. However, still Norwegian reservoirs are below the normal level.

And at the end of Q3, Norwegian reservoirs were about seven terawatt hours before long-term average. And when you look at the smaller graph here on this slide, you can see that this increase in reservoirs during Q3 or at the end of Q3 happened more or less exclusively in Norway.

And this explains our challenging situation. Prices were pushed down by wet weather in Norway but our key countries Finland and Sweden did not get that much precipitation.

So the wet weather did not reach Sweden and therefore, water reservoirs have stayed on the new level and long-term average. At the end of Q3, Swedish reservoirs were six terawatt hours below the long-term average.

And overall, at the end of Q3, Nordic water reservoirs were 89 terawatt hours, which is 13 terawatt hours the hole Nordic below the long-term average and 10 terawatt hours lower than one year earlier. And the most recent reservoir figures – the most up-to-date figures are that we are currently minus 10 – minus 11 terawatt hours compared to long-term average, which is roughly 10 terawatt hours below the situation a year ago.

The Swedish reservoirs are currently five terawatt hours below long-term average. Then, I move on to commodities and I start from gas.

As you can see here, the gas prices were extremely strong during Q3 as the market was busy injecting it to gas, gas into storages, while LNG supplies to Europe have been low. Despite this uptrend and CO2 prices, which we have seen go coal to gas switching has been minimal in continental Europe as the tight gas market assort to reduce gas demand.

Asia keeps growing in LNG import here today growth in Asian LNG is 12% with major contributions coming from China. China where, year-to-date imports growth is 42%.

Coal prices have found support in Q3 from boosted European generation margins as a result of nuclear outages, low hydro levels and improved competitiveness against gas. Clear dark spread has been going clearly up in Europe.

In contrast to Europe, the coal market has been showing's signs of weakness lately as the Chinese public utilities have built high stock levels and authoritative sales to reduce coal imports. Some declines in Chinese coal imports in September minus 7% but still year-to-date, 11% higher than in 2017.

And then finally, on commodities, comments on CO2 price. We tightened linear reduction factor in the European emission trading scheme of 2.2% will cut supply more aggressively during 2021 to 2030, then the current trajectory of 1.74%.

However, even this is not enough for the Paris agreement emission level of even of two degrees global warming, let alone 1.5 is strongly recommended by IPCC. Consequently, our opinion is that latest in the next LRF review in 2024, the year you should align and further tightened the omission level.

The cumulative CO2 allowance surplus is currently around 1,600 million ton based on which the American market stability reserve you take away 24% of next year's auction volumes and put them into the MSR. And this decreases the total allowance supply and leads to an increased need for abatement.

The classical source of abatement is to switch gas in front of coal in the merit order, but despite a good development in CO2 prices favoring gas, the gas price, as we saw earlier, has increased so much that the actual switching volume remains marginal so far. The switching volume is of course, constructed so that the lower limit, which is currently around EUR 20 with current coal and gas prices shows competitiveness of inefficient goal – coal, versus efficient gas and high limit, which is around EUR 50 at the moment is the switching point from efficient coal to inefficient gas.

So this explains why this current level of CO2, which is around 20 or so is not yet driving any meaningful coal to gas switching. Power prices, the Nordic system price in Q3 was clearly higher than one year ago.

Mostly due to higher cost of thermal production, but also due to drier hydrological situation compared to last year. So we were clearly above last year's levels.

But as you can see here, it is the blue line in the annual graph, which is on the upper right-hand corner, the Nordic system price decreased with very wet weather, that downward price trend continued also in October. Nordic forward prices which is the – other graph on the right-hand side.

This is forward for 2019. They decreased from the peak at the end of August due to change to hydrological situation.

Short end of the curve has come down more with wetter hydrology but also full year 2019 has decreased a little bit. But steel price for 2019 is around EUR 10 higher than a year ago, driven by higher cost of thermal production.

German price was EUR 3 higher than Nordic price in Q3 2018, but German price was actually EUR 1.1 lower than Nordic system price during the first three quarters. But now looking at the recent development, the forward price spread between German and Nordic system price has increased clearly during Q3 as you can see in the graph.

As German price has got continuous support from increasing cost of thermal production, and at the same time, Nordic price has been depressed by wetter hydrology. The spread is actually pretty high at the moment.

It's about EUR 15, which can be compared to the long-term realized average of power price spread, which is about EUR 5. The spot prices, as I said, in Q3, increased significantly and we saw a very handsome growth of 77% in spot price between Q3 this year and Q3 last year.

Spot price for power was driven by higher coal, increased from US$87 per ton to US$99 per ton this year and of course, CO2 from nine to 19 but of course, achieved power price so limited upside due to the hedging levels that we had. And then on the Russian side, spot price was affected by weaker supply demand balance and achieved power price, which was slightly lower than a year ago was affected by a weaker rubel.

Here up, in a summary format, the key figures we had in Q3 sales 6% increase. I already mentioned the EBITDA and the operating profit numbers and also commented EPS.

One number to note is last 12 months comparable EBITDA, which is now EUR 1.474 billion, compared to EUR 1.275 billion in full year 2017. Then, before Markus continues, I will make short comments on each division and I start from generation, which of course, was the division that was heavily in this quarter impacted by low hydro production.

This was clearly the lowest production – hydro production quarter in Fortum’s history by quite a big margin actually. The Production was 2.9 terawatt hours, last year 5 terawatt hours.

This was partly – but only partly compensated by higher achieved power prices and lower taxes in Sweden. On a more positive note, all nuclear outages all eight units that we own either directly or indirectly through joint ventures, all eight units have now passed their annual outages, which means that we are now looking at a pretty stable production expectation for Q4.

Despite the weak Q3 in that generation division, year-to-date, the first three quarters, we are still looking at quite a handsome increase in comparable operating profit EUR 442 million, compared to EUR 317 million. City Solutions, I already commented earlier that the quarter was warm and consequently, our heat volumes were 10% lower than a year ago.

Of course, now as we have discussed earlier, the Hafslund Heat acquisition, the joint venture that we now are consolidating in Norway is increasing the seasonality of the City Solutions business since the heating business makes more or less all its profits in Q1 and in Q4. And that's why the result also this year was weak, roughly on the same level as last year.

Fortum Oslo Varme was EUR 11 million negative in the quarter. Last year, EUR 6 million negative, this comes from the fact that this year, it was consolidated for three months and last year, only for the months of August and September.

If this is eliminated then the rest of City Solutions despite warm weather actually improved their results. Consumer solutions was suffering from a continued high churn and very strong competitive situation.

We had increased comparable EBITDA, EUR 22 million versus EUR10 million but of course, then because of the Hafslund related depreciation, the increasing comparable operating profit was very low from EUR 5 million to EUR 7 million. Here of course, actions continue to renew the product offering, renew IT systems and integrated consolidated Fortum's Hafslund operations are ongoing and we of course, continue to stand behind the earlier communicated synergy targets that we have for this division.

Russia had and delivered a pretty good quarter comparable operating profit, EUR 40 million compared to EUR 26 million a year ago. This is good development.

This comes first of all from new units that are now in production compared to last year's Chelyabinsk GRES 3 is now in production. It was taken into use in November 2017.

It is not a CSA unit but it is of course, participating in the north market in a normal way, contributing to our results. And compared to last year, we now have 35 megawatts of wind operational in Russia and 35 megawatts of solar operational in Russia since the beginning of this year.

In addition to that there were other drivers behind a strong CSA payment development worth noting Nyagan 1 and Nyagan 2 units which have now entered the final four years of CSA payments with an increased level of compensation. So good quarter in Russia overall.

So that were short comments on the divisions and now I will ask Markus to continue before we take questions.

Thank you, Pekka. Okay.

So to summarizing, Q3 result up on a year-over-year basis EUR 3 million. Hydro volumes down significantly.

City Solutions, Consumer Solutions, flat when you look at the total result practically. Russia improved higher CSA payments, improved bad debt collection and positive contribution from new units.

And then in area other the profit from the sale of the majority of our solar activities in India had a EUR 26 million positive impact. So all in all, practically the same small improvement but with a very different structure compared to last year.

If we then look at the cumulatively year-to-date, we actually had an improvement of EUR 138 million. Generation made EUR 125 million of that improvement, even despite negative volumes, the better prices and lower taxes offset that significantly.

City Solutions, Consumer Solutions had a positive impact both divisions from the Hafslund consolidation. Russia negative but when you clean out the bad debt impact and foreign exchange impact, actually the underlying operations are positive.

And then other positive for the same reason as third quarter that EUR 26 million positive impact from the solar sale. Then I go into the cash flow statement, which has a lot of items quite busy.

If I start from the top, EBITDA up on all comparison periods, positive development there. In Q3, when we go down, Q3 had a positive impact from foreign exchange due to the rolling of our foreign currency internal loans.

Financial items on the surface are flat, but they are including various items, including the EUR 20 million loss that we had from the NASDAQ default fund. Working capital, negative due to the future settlements, due to electricity prices going up, slight change there.

CapEx is coming down as we have been communicating and acquisition of shares looking at Q3, of course, significantly lower because in previous periods we had Hafslund and Uniper large acquisitions. And then cash collaterals had a positive impact in the role change of cash collaterals due to that we are gradually having less and less hedging with forwards.

So the cash collaterals are being released. The other big items to note on the cash flow statement in the various periods are the Hafslund acquisition transaction last year, which impacted both acquisition and divestment of shares.

So you can see the large impact on both alliance. And then of course, in the first part of this year, the Uniper acquisition, which has a significant impact and finally, dividend payment in the first half of the year.

So these are the big moving parts in the cash flow statement. If we look at the key financial indicators and balance sheet indicators, EBITDA up significantly compared to 2017 versus the LTM, but also that up this leads to net debt EBITDA 3.6 times versus our target of 2.5 times.

But again, I would remind that if we would proportionately consolidate both unit per EBITDA and the debt then this ratio would be much closer to our stated targets. Liquidity is very good and the ongoing credit lines.

So financial position is strong, because of the higher leverage, as we have earlier communicated, we are very focused on deleveraging and meeting our financial targets moving towards the right numbers. We are prioritizing our CapEx, deep work is ongoing, continuously on debt and evaluation of our CapEx pipeline.

The focus on our business is with examples like the solar divestment and capital recycling, the sale of Hafslund production resulting in multi-hundred millions of capital being released. And then we are prioritizing our activities, we are prioritizing our cash flow and working all the time on the efficiency of the organization.

So the target is to deliver but also make room for limited selected investments into the future in comet being one example of those. Then finally to the outlook.

Hedging first of all for the remainder of this year, we have 80% hedged EUR 30, for next year, 65% hedged at EUR 30, and now for the first time, we communicate the 2020 level, we are hedged 35% at EUR 28. The CapEx estimate for this year is in the same range as we have earlier communicated EUR 600 million to EUR 700 million.

We are well on track for that the synergy targets from the Hafslund transaction our entity solution EUR 5 million to EUR 10 million and consumer solutions EUR 10 million. The tax – effective tax rate for the year is estimated to be the same as before, 19% to 21% and a reminder that we get both a positive impact from the hydro and nuclear tax changes in Sweden and that will continue the reduction until 2020, when we reach the targeted level.

And then demand growth is expected to remain at 0.5% and, we see that electrification continues and there is structural support continuously for our business through the strengthening of EPS, MSR, the interconnections between Nordics Continental Europe and then the closures in the continental European nuclear and decarbonization. With this, Pekka and I are now ready to take your questions.

Artem Beletski from SEB. Three questions from my side.

So first starting with newly Asia 2020 hedges. Is it fair to assume that source include quite limited amount of area price premiums so it’s basically a lot of system price, which is included there.

Then Secondly, what comes to Russia and CSA payments. So we have seen that let say rates have increased by 23% year-over-year and is it purely let say just kind of faster increase in pace related to near gone two unit and what is sort of your roadmap relating to the remaining units basically entering your sales and in terms of CSA income.

And as the last topic is let say, I just wanted to pick up your brains on this kind of the widespread what we’re seeing between Nordic and German power prices. I guess it has been one phenomenon during the quarter end CO2 prices are going up.

So do you expect this spread to basically tighten from this kind of EUR 15 what we’re seeing right now?

If Markus takes the CSA question, the hedge is – it is very much what you just said. So the market is significantly less liquid when we talk about the area prices.

But more details than that, we do not open up. When it comes to the spreads, Markus already briefly commented that the long-term average in realization is EUR 5, and now we are looking at EUR 15 difference.

We do not give out power price forecast so that’s why we do not give out spread forecast either. There are seven factors that are supporting price is getting closer to each other in the future and then there are factors that are driving for vital spreads.

The factors driving smaller spreads are clearly the interconnections. We are currently at 6,000 megawatts, between Nordics and the rest of Europe that will grow in a few years to 12,000 megawatts and everything else equal that should clearly drive the prices closer to each other.

But then of course, things like the nuclear closure in Germany will have a major effect on this and that will most likely push the spreads together of the direction. But the balance between these two is very difficult to say because then of course, the whole commodity price situation – coal price, gas price, CO2 price affects the balance.

And finally, as we know, the Nordic Hydrology plays a big role as we have recently seen.

Okay. I can take the CSA.

So again, as a reminder, the big factors are the case spot correction depending on who’re spot rates have realized. Then you have the six plus four year profile, which now starts to be a very significant factor.

The CPI index and the bond yields and two of these were positive in this quarter and two were negative and going forward, like-for-like, the profile has a big impact now in the coming few years. And the easiest way again to plot this is to look at what the commissioning dates of our units just a little bit of variation depending on when was the CSA agreement starting and when did we actually commissioned the units.

But as a pretty good proxy, you can follow the commissioning dates.

And then you should not forget the new solar and wind units, which are also receiving CSA payments now, which was not the case a year ago.

So the small acquisition you made in City Solutions, could you maybe talk about your thoughts regarding recycling business. Are you planning to expand further you’re basically offering and how Ekokem in general has developed operationally?

Ekokem has overall developed according to expectations. The result in Q2 was a little bit lower than expected because of some operational hiccups.

That recovered very well in Q3. So overall, we are happy.

We have a significant restrictions on our CapEx capacity at the moment because obviously, of the tight balance sheet. That’s why we are choosing in the recycling business strategy where we are now focusing on more regional growth and bolt-on acquisitions, and then we come back to this question later than that whether, in that case how the ambition level would be increased.

This is a very small bolt-on that adds some important capabilities in non-ferrous metal recycling, which have been lacking at Ekokem and there has been a clear need for that. It’s financially attractive, but a small make strategic sense.

And of course, in the upcoming Capital Market date that is only a few weeks away now we will open up the overall strategy a little bit more and we will also be talking about the role of recycling and circular economy in overall strategy.

Great. Thank you.

Okay, Sofia Savvantidou asks about all to lot three and about the timing and progress and current commissioning date, and also how the – if this will be then accretive to our earnings once it’s taken into use.

While the – since we are not the operator in all to lot of three, we are only a shareholder, we do not comment anything else than what they have commented and the official schedule is currently September 2019. But there has been a press release from TVL saying that the supplier will confirm a new schedule at the end of the year.

This is all we can say about we don’t have any of the information than this.

Thank you for this. Operator, we are now ready for questions from the participants at the teleconference.

Please go ahead.

Hi, Alex Leng from UBS here. Two questions for me.

First on hydro conditions, so we are few weeks into Q4 already, and you spoke about the latest data. So just wanted to ask if you have a sense from the current reservoir levels what year-end production could look like?

And second, Bloomberg reported yesterday that Swedish politics is in the deepest political dreadlocks ever seen, and they’re still waiting for new government to be formed after the September elections but clearly, we don’t know how this will shake out. But can you give us any sense of what the energy related issues at stake are at various political outcomes could affect you?

Thank you.

Okay. When it comes to the first question, unfortunately, we need to stick to our policy, which is that we do not publish production forecasts in advance.

Currently, as I said, the reservoirs including in Sweden are slightly below long-term average, but nobody knows how the weather will develop from here. So that’s why they would not be a point in producing any forecasts on that one.

When it comes to Sweden politics, I guess what you are after is what political risks there could be in connection with the next government, for example, two things like the energy, broad energy agreement that was put in place two years ago. We have not seen or heard anything that would put that agreement in jeopardy.

We have to remember that it was not a law that was only passed by the support of the current minority government in Sweden. It is a broad agreement where most of the opposition parties also supported it and the whole purpose of that agreement was to give long-term visibility to investors in both hydro and nuclear.

And this has been a very thorough discussion in Sweden that has led to this decisions and of course, it’s impossible to predict what the future will bring but at least we have not seen or heard anything that would risk this agreement.

Thank you.

Good morning. Two questions for me.

The first one going back to the spread between Nordic and German coal 19th. You mentioned a number of reasons why the spread is wide and so much but you haven’t mentioned the default of [indiscernible] (43:47) and the subsequent liquidation of it’s positions.

Now if you look at the chart between the German coal 19th and Nordic, when these positions were cut this is exactly when the discount blew out quite unusual EUR 15. We have are seeing now.

If all of this was caused by one off, how can we still be at these levels that – there’s just not enough volume being trading in coal 19th. I mean, how do explain that the gap which over the year tends to be rather stable has blown up so much and has not corrected yet.

That’s the first question. The second one is on the fuel switching range.

You mentioned the range of EUR 20 to EUR 50 a ton. The lower part does seem to be a bit low.

Could you share with us the kind of efficiencies for coal and gas plans you assume to come up with the number.

Can we have the numbers, Marcus probably has them the low efficiency and high efficiency that we have used in this calculation between EUR 20 to EUR 50. We don’t have the exact numbers here on the efficiency but this of course, in a question of what the use and there are different things.

What we are talking about when we talk about the spread is when we’re looking at very efficient gas versus very un-efficient coal. And then of course, everybody can do their own calculations.

So what kind of efficiency numbers do you use there. I think compared to what we have seen externally, yes, we have seen some ranges, which would be slightly – I mean starting slightly higher than our quality EUR 20.

But at least the fact is that we have seen very little coal to gas switching realize in Europe. So regardless of how you calculate, the end results seems to be at this levels of CO2, which obviously, peaked at EUR 25 and now has come down a little bit since then, that have not been enough to drive any significant switching with this increasing gas prices.

Marcus, if you take the…

I can take the NASDAQ. So first of all, of course, it was a very unfortunate event that happened and our understanding is that was due to the underlying movement of the spread.

The process at least it seems that it has worked according to regulation and NASDAQ’s own rules and that resulted in us taking then ultimately EUR 20 million loss through our participation in the default fund. But we are working on right now is then of course, to see what can be recovered of that position and then proper review of the processes to understand that how can things be developed together with the exchange to avoid this kind of situations.

Where the position is that we don’t know, we did participate in the bidding for that. That’s part of the design process.

But we didn’t win it and about start crafting Uniper have given their comments about whether they have it or not. But where it is that don’t know and who has it then?

And what are they doing with the position, we don’t know. So I cannot speculate on what is that positions impact on the spread.

Okay. Thank you.

Yes. Good morning.

Thanks for taking my question and thanks for answering the earlier question through the webcast. Two additional ones for me.

First of all, on the solutions business, as you have said, it’s become more seasonal transaction. Is there anyway that you could give us maybe that something you’ll do at the Capital Markets today but anyway you could give us sort of a metric that we can use what is a normal level of finalized for stability, whether it is an EBITDA or EBIT margin, we should look at or in term of capital employed or an absolute level of stability.

Just so we can have a feeling both City Solutions and Consumer solutions what is the annual trend, it will make it easier for us to be able to track whether the quarter is on track for the full year or not. And the second question is a little bit on what you have said around CO2 and in addition to penalizing the polluters, rewarding those that reduce you to emissions or those that are already clean.

I think this is sort of strongest infrastructure you could put in recent calls in terms of rewarding the cleaner generators as well. Just interested how does it tying with the comments you're making around sort of despite the fact that CO2 has gone up I don't know three, four times in the last 12 months, we’re still not at its switch in cost.

Why do you still see the CO2 price as the right mechanism for the carbonization when even though, it’s gone up so much? It's not triggering switching instead of say direct action of mandating closings of plants or mandating limits to annual CO2 emissions for individual plants.

Thank you.

Well, I take the CO2 and Markus can calculate that trend in City Solutions. The answer is actually pretty simple.

What we need – if we want to significantly and seriously reduce emissions in the world, we need simple, understandable market-driven policy measures. And we feel that cap-and-trade or ETS or whatever you want to call it is really delivering what it is designed to deliver because it is volume based, you define that what is the annual volume of emission right that are auctioned, and then that volume is every year driven down by this linear reduction factor.

So it is a tool that delivers exactly the result as it is supposed to deliver. So that's why we are now calling for a higher ambition level in the EU so that linear reduction factors among other things would be further tightened in the system.

So that it would be driving the European emissions towards the first to a degree and then 1.5 degrees target. We have also said that we feel that it would be very good idea to discuss how the coverage or the scope of ETS could be widened.

So that when it comes to heating, it could potentially include also decentralized heating, not only district heating and later even in traffic like the California and cap-and-trade system is including all of this. If you make it wide enough and then you have a strong enough linear reduction factor, it will achieve the result as you want and the problem is that when we have ETS, if within on top of that put a lot of overlapping policy measures, there's always a risk that this additional measures, whether they are forced closures or energy efficiency targets or S targets so whatever, the only thing that actually achieve is that they dilute the ETS effect but actually they don't to lead emission reductions – real emissions reductions because you are just moving the problem to another place.

A long answer but this is a really, really central question and these are the reasons why we are definitely in this camp that is calling for higher ambition level in EU and ETS being the central policy mechanism.

Okay. Then how to try to give some insights into how to view City Solution business, there are three big components.

The former district heating business that Fortum had. Then you have the all the Ekokem recycling and waste solutions and you have Fortum Oslo Varme.

These are in the comparable operating profit. On top of that, one should not forget, Stockholm Exergi, which is the component in the associated – income from associated companies.

All of this have quite a lot of profiles. So that makes the modeling already challenging.

2018 will be a fair proxy than for what the business looks like when other components are there. But what one has then take into account is the weather conditions.

What are the heating degree days? How volatile are the days and weeks, which then impacts the fuel mix, which impacts – are we using heat-only boilers, gas-fired and so on.

Electricity prices of course, play a role. And then you need to take into account that when you look at the returns on the surface, we do have acquisitions and old acquisitions all the way from [indiscernible] and to give an idea of what we are targeting as returns on a clean basis then the project returns that we are estimating for things like subset are in the low teens – low to mid-teens, even high teens depending on the project – when on the project IRR basis.

So here are some components that you can think to, but the reality is there are a lot of moving components.

And Sophie, yes, as you anticipated, we will provide more information about this at the Capital Market day.

Okay. Thank you, both.

Operator, before we continue with the next question, could you please repeat how to dial in and ask the question. There seems to be someone who is not able to login.

Thank you.

Hi, good morning. Wanda Weirzbicka, Credit Suisse.

Two questions from me. The first one is on the talks with Uniper.

When could we hear more about the talks with Uniper? Because every time we hear you and Uniper saying, "we do not comment."

The second question is on your wind investment in Russia. What is your CapEx per megawatt hour that you are looking at?

And what is the load factor that you are looking at in Russia?. Thank you very much.

When it comes to Uniper talks I think, I've said several times that we expect that these talks will take time. As I commented earlier, we would, of course, like them to proceed faster, but there is a lot of things to discuss.

And we have agreed with Uniper that we will not comment the content of the stocks in public before there are some concrete results that can be published. So this is the reason, but we have tried to anticipate the situation earlier by saying that this will take time.

We have to remember that we have only one quarter now behind us as an owner. Marcus is now on the supervisory board.

I think, he has had one meeting so far. So this is very, very early days still.

Then Markus can take the rest of the…

Okay. I can take the question on Russia.

So the CapEx was actually very competitive. It's comparable to European levels.

Of course, there are then balance of plant and so on that are always local conditions. But because of the size, and that was the idea of going to the joint venture with Regenero that we get the critical size to get the localization and we did get very competitive CapEx.

Then when it comes to capacity utilization factor, of course, we're looking – we're doing deep analysis on the sites and the joint ventures. We have had measurements for longer times.

We have had our own already first industrial wind site in Russia. And there are certain threshold levels in the CSA agreements that you have to meet for the capacity utilization.

And according to the publicly available satellite data and so on, the utilization practice will be well above those that are required. So all in all, good wind conditions.

Are we talking about 15% or 20%? If you can just give us a flavor or the load factor about we're talking about 30% – 20% just roughly?

What is the CSA flow?

The CSA is people at certain level, which is already in the area in the higher end in what you're commenting. And what we are estimating are above that.

What you can actually do if you want to do your own calculations, we have published an estimate of the achieved price per megawatt hour over to lifetime of this units. And the CSA contract obviously, is for capacity.

So it is the combination of these two factors. The load factor and the capacity that then leads to this price per megawatt hour.

And we have given in a range if you look at our earlier communications, we have for each contract first, for the 1,000 megawatts and for 830 megawatts. We have given a range as to how much we believe it will be in Russian rubles per megawatt hour.

So that hopefully gives you an idea.

Thank you very much.

This is Vincent Ayral from JPMorgan. I wanted to ask a question regarding the hedging again.

The level we see for 2020 at EUR 28 is a bit low. You said there is little liquidity on this outlook whether with rising power prices the demand for longer hedging could actually come – what is your view on this specific topic and if this type of approach is valid, why did we see more liquidity deadlock being towards the back end of the curve as end users may want to protect themselves.

That's the first question. The second question is regarding Russia CSA annual renewal investment.

Could you give us a bit of color regarding your approach towards country risk investments in Russia? Is it fair to assume that you have some constraints on the capacity to OpEx rate cash flow from producing investments and therefore, you have to consider local opportunities as an alternative?

Thank you very much.

Okay. With regards to the hedging, I would approach it actually from the point of view that we are hedging with the same principles as earlier.

There can be some volatility as we contract from what are the hedging levels at the given time. But the key point with our outright and very flexible position is to have the forecast stability in cash flows, because as we have seen in Q3, the variation between quarters and years can be very significant.

Well, today is actually system prices is EUR 33 or EUR 28 given we have started hedging already some time ago. For me, it’s not an abnormal level.

And then when it comes to the country risk approach, what we have said with regards to the Regenero joint venture is that we limit our exposure to increase their into RUB 15 billion, which equates to around EUR 200 million. So we are able to mobilize even 1.8 gigawatts through this joint venture with capital recycling with selected equity investments, and we will take big steps in renewables.

And to the dividend, we have no limitations as such with regards to taking dividend out. We have taken the first dividend now this year, no restriction.

The reason why we haven’t taken earlier is that we just completed actually the loan program of building the CSA capacities that we had won a long time ago when we entered the privatization in Russia. But of course, we have served the country risk in any country including Russia.

We are now as Markus said for the first time in a situation where we have economic possibilities to take dividends and that’s exactly what we have started to do. I would like to add one thing to this hedging level question.

Now, we publish for the first time 2020, and that was published at EUR 28, a year ago when we for the first time published 2019, we published that EUR 24. So there is actually if you take this for a measure there is a 4 EUR increase – 4 EUR increase in price.

Yes. Thank you very much.

Hello. Good morning.

Thank you for taking my question. Just an observation.

The issue with the EU ETS is that precisely, it’s not a market mechanism. Perhaps it’s a Soviet market mechanism, but it’s definitely not the free market mechanism.

It hasn’t entered that consequences. It has produces high wind for profits for the owners of legacy low CO2 assets, which ironically these profits can then be deployed to invest in dirty generators, which is what you’re doing when you’re trying to buy Uniper a company with a carbon footprint offer the 500 grams of CO2 per kilo, right?

So we’re seeing this across Europe that will definitely take coal of the system. They’re called mandatory coal closure dates in the UK, France, and the Netherlands.

Specifically in France your associate Uniper is complaining about these moves. How do you fell about Uniper for this patience to shutting down dirty generation in France given that you’re so concerned about climate change?

My second question is on safety. Now the gravity of the incidents in the St.

Petersburg heating network has taken a turn for the worse this past month with the deaths of two people to September. What actions are you representatives in TGK-1 taking or going to take to make sure that incidents like this stop.

I understand in the past there was an attempt to transfer this network to another operator who was willing to improve the safety, but that this was blocked by Fortum. Any thoughts about this situation given the events have took place at last month?

Thank you.

First of all the EU ETS, as I said earlier, that is a system that delivers exactly what it is designed to deliver. And, we are all for emission reductions and as I just said, we are calling for more ambitious targets for EU carbon footprint reduction.

And it would be perfectly possible to design the ETS system in such a way that it delivers pretty ambitious coal closure results if we just make the system tight enough and we would be ready to support that anytime. When it comes to Uniper, I’d like to quote Uniper’s management who are saying that coal condensing is a technology of the past in power generation.

It’s not a matter of when, but rather how – it’s not a matter of whether, but rather how and when that capacity is to be a shut down. I’ve said several times that we did not invest in Uniper, because of coal, because of the fact that 30% of their capacity is coal, because exactly as you said, several countries already have decisions on forced coal shutdowns, which we are of course, perfectly aware of the point in the Uniper invest – investment is actually to use the Uniper portfolio indirectly through our investment and our own portfolio to drive overall de-carbonization of Europe, Uniper has significant hydro capacity both in Sweden and in Germany.

They have significant nuclear capacity in Sweden and they have a very significant gas fired capacity, which will be needed in the de-carbonization when both nuclear and coal is to be shut down in Germany. So this is the overall logic as we have communicated several times.

Then when it comes to TGC-1 where of course, we are a 30% minority owner. So our possibilities to influenced there are clearly limited.

But maybe Markus…

Yes, I can just comment it. So that – first of all, our approach to safety is that – that is the number one thing.

And the first thing we are handling in any management team meeting in Fortum in any board meeting is actually safety. So yesterday, in our board meeting, we have been talking, the first thing for quite a long time is the safety on each individual incident that, that has been happening.

Our own safety track record is on a very good level. When it comes to own personnel, it’s excellent when it comes to contractor, that is the area that we are working on.

But our target for this year is to have a combined last work danger frequency of 2.1 incidents per million work hours and we are within that, which is a very, very good level. So, the focus is very high.

Then we wouldn’t test, we haven’t – before even when we have had very unfortunate events happening, we don’t comment on the individual incidents and happenings. but they’re always being investigated internally and externally.

Unlike Pekka said, depending on what is our influence on the joint ventures that are handled in a certain way, but I can assure that that safety is the paramount issue for us.

Our last LWIF figure for last year was 2.4, which is not bad in any international comparison. but our ambition level, as Markus said, is higher.

our target for this year is 3.19. We are currently at 1.9 unutilized.

So, we seem to be heading towards that target, but this is clearly, the most important thing in anything and everything that we do.

But thank you for highlighting the issue.

Yes. Thank you.

Good morning. I have two questions, one also on CO2 and one on the hydro conditions in the Nordics.

Can you share when you’re saying you’re supporting the ETS and working to convince EU for a tighter mechanism, can you share maybe the feedback you get in Brussels? Is the support for the scheme unbroken also amidst some price rise or do you sense changes there?

Related to that, if the acceptance level remains high, would you think that your mind lobby for the next step and taking the scheme global, currently Europe shares very high cost for running the scheme and as omissions are global, that would seem to be the plausible next effort on the European level. For hydro, just in terms of in your local insights there also maybe from metallurgical offices you are in contact with, do you sense any kind of more structural changes?

I’m perfectly aware that this is difficult to say after one summer, but does analysis go in the direction or is it just someone odd year and best thing is to expect as of next year is going to look much more normal as we used to, again? Thank you.

It’s very, very difficult to comment any potential kind of fundamental structural changes in the hydro condition. I mean there are mentionings about this in some of the climate change models suggesting that winter.

In winter times, we should have more rain in the future and the summer times, we should – it should be drier. But then the reality is that the individual fluctuations between years will, for a long time most likely, play a much more significant role than this.

That’s a very, very difficult – understandable, but very difficult question. When it comes to EU ETS, before I talk about the future, I would like to repeat one thing why in addition to being volume based; Cap-and-Trade is a good system, because this whole CO2 abatement is going to be an extremely expensive issue for the world.

And in a Cap-and-Trade, it is type of a system, which is volume based. The beauty of that system is that it directs the efforts to places, where you get the most cost efficient CO2 reduction.

That’s why we are saying that it is market based as long as we would be able to minimize the overlapping decisions by countries or that in any case to such extent that there are overlapping measures, then the effects of those would be neutralized as the current proposal is from the ETS. European Union is currently planning the 2050 climate strategy.

We have to remember that this ETS directive was just approved some time ago for the years 2021 – for years 2021 to 2030. And there are some checkpoints included in this directive now, for both linear reduction factor and the MSR intake rate.

And this is what we are focusing on right now to making sure that those checkpoints would lead to ambitious results and then we are of course, whatever our voice is worth, we are discussing with the right people about possibilities to extend the system, both sector wise to potentially cover decentralized heating and even may be traffic in the future, and very important point that you made that this system should somehow be connected to an international arrangement. This challenge of 1.5 degrees or even 2 degrees is something that there is no way EU can solve alone.

The only way that the world can really reduce emissions as much as really is needed would be through a major international agreement where a similar system would be taken into use in other key emitting countries. China is installing similar systems, which of course, is very good and already if we were able to get China to join that would roughly double the share of emissions in the world that are subject to some type of trading systems.

So we are definitely supporting all these developments.

Well, thank you.

Thank you, operator, and thank you, also for all the questions. We seem to have some questions still on the chat so I hand over to Mans now to ask those questions.

Yes firstly, we have a question from [indiscernible] do you plan any actions with your shares in TGC-1?

That is something that comes to other potential transactions also we simply do not comment. We are always keeping our eyes open for both investment and others structural opportunities but we do not speculate in advance that what they could do.

This is an overall policy, not only regarding TGC-1 it is true to all our holdings.

And then we have a final question from [indiscernible].Can you please give us an update on the timing of the upcoming modernization capacity auctions in Russia?

The modernization capacity auctions in Russia when it comes to our portfolio are quite much less relevant than for some other actors because our capacities so much newer, and so much modern, and so much more efficient in terms of load factor than basically any other operators in Russia. So the relative importance of this modernization auctions is less important for us.

But we have been trying to maintain in our Russian policy comments is that the original targets that the whole the CSA system has had, has included the ambition to shut down the oldest and most inefficient capacity and we would certainly hope that the capacity or the modernization auctions would not lead to a situation that we artificially prolong the lifetime of the most polluting and the oldest units because what we need in Russia is a good market balance between supply and demand and that should not be artificially affected through extensive modernization support programs. This is not to say that this program would not be needed at all, I'm not saying that but it just needs to be designed correctly.

So that it does not dilute the original purpose of the whole CSA program.

And significant focus on renewables?

Significant focus on renewables. We welcome of course, this wind and solar CSA and we would hope that when the CSA system in Russia is further developed, this system would be continued in the 2020s in addition to potential modernization.

Thank you, everyone. That seems to be it now for the Q&A session.

Then, I would have a last reminder finally and that is related to our upcoming Capital Markets day, that we will host here in Espoo on the 13 of November. And to remind those of you who still have not signed up, that there is still time to sign up during this week.

All information is available on our web, either do it through that or then, you can contact us at the IR team, and we will help you out. Thank you everyone, for your contribution here and your participation here today.

On behalf of Fortum, we wish you a nice rest of the day.