Fortum Oyj

Welcome to Fortum's webcasted news conference on our second quarter result here today both those of you who are here with us in Espoo, and those of you who are listening online. Please note that this event is being recorded and a replay will be available on the website after this presentation.

My name is Ingela Ulfves and with me here today is also Rauno and Måns from our IR team. Our CEO, Pekka Lundmark; and CFO, Markus Rauramo will present Fortum's second quarter numbers and performance, after which we will open up for questions-and-answers.

As a reminder you are also able to ask questions on the web chat. I'll now welcome Pekka to start.

Thank you very much, Ingela, and good morning everybody both here in Espoo and wherever you are. We are really pleased with the quarter.

We have improved results in all business segments. We had strong cash flow, and I would say that the result improvement is fairly broad-based; it's not tied to any particular single item as you will soon see.

We achieved this result improvement despite the fact that Nordic spot prices in the second quarter were down 9% year-over-year. Our teams did really strong result and good work in optimization for example of our hydro production, and as a result we had [achieved] power price which was €35 per megawatt hour up €1.90 from the year before.

The reservoir levels are on a higher level than they were a quarter ago which of course is now contributing to the hydro volumes. As a result, our comparable EBITDA was up 33% compared to last year, and comparable operating profit up 52%.

In the share of profits of associates and joint venture €461 million now we have for the first time significant contribution from Uniper it was €384 million and there of course we had to remember and note that €333 million out of that is non operative adjustment typically fair valuations of various instruments. This is very important to keep in mind also when you look at the earnings per share development in the quarter which was of course extremely strong [$0.69] per share.

There is again some items affecting comparability there that Markus will go through in more detail but if you exclude the effects of these items and then if you take away the non-operative adjustments from the Uniper contribution, we are still looking at very strong improvement in our EPS. We did have a very strong cash flow.

Cash flow €740 million again Markus will go through the details of the various components of the cash flow. And as a result of that cash flow despite the fact that we during the quarter paid about €1 billion of dividend our net debt to EBITDA has come down to 3.3x last 12 months EBITDA.

And once again, here we always have to remember that we are not consolidating anything from Uniper's EBITDA into our result. We have also finalized the Uniper purchase power price allocation and also on this one, Markus will go through the details.

When it comes to Uniper, we remain convinced that Fortum and Uniper together can take a leading role in the European energy transition. And working in close alignment, we would be stronger and better positioned to address the key challenges of the energy landscape in the future; affordability, sustainability, and security of supply.

The talks we held with Uniper during the spring, only strengthened this conviction. Following the controversy that many of you have seen around the Uniper Annual General Meeting in May, we have now met with Uniper Employee Representatives.

We have met with the new members of the management Board, we have met with the supervisory Board. And I'm pleased that we have now agreed that the discussions that we have put on hold after the AGM, we will now continue.

Now we need to see where these discussions take us. There has been a lot of confusion and also incorrect information in media, recently.

So it is now very important that we make quick progress in order to create clarity to all stakeholders as soon as possible. Then if I go back to our result and especially the water reservoirs which is an important driver, the warm start into the second quarter initiated spring inflows earlier than normal and that lifted Nordic reservoirs above long-term average already in the beginning of the quarter.

Then this was followed by warm April and rainy May and June. So water reservoirs actually stayed above the average throughout the quarter as you see on this chart.

The orange dotted line is the 2019 development - sorry, not dotted lines but the orange line with white circles is 2019, and the grey dotted the line is the reference level, the long-term average. At the end of the second quarter, the water reservoir levels were 6 terawatt hours above the long-term average.

While in the beginning of the quarter, they were about 2 terawatt hours below the average. So that shows how strong the development was during that quarter.

Now, the first couple of weeks of July have again been drier. So the very latest figure, which I believe is from yesterday, from the day before yesterday is 2 terawatt hours above long-term average.

Commodities, fuel price development, gas and coal are obviously the competing fuels in power generation in many parts of Europe and that's why their prices are typically quite intertwined. Coal has been actually more affected by the darkening global macroeconomic environment, and particularly Chinese weakness, as roughly half of the global coal demand is in China.

And just as one example of the development, coal for power demand, growth in China has essentially paused. There is currently no growth at all.

When it comes to gas, the prices have been more driven by the strong supply growth in LNG, that's the East Asian buyers have not been able to absorb and that has meant that Europe has been the market balancer. The storage is up, pretty high, about 80% at the moment.

And one very interesting detail is that this gas price collapse that you see on this screen has contributed to roughly 20% year-over-year decrease in coal for power demand in EU28, in the second quarter of 2018. Another player and a significant driver, obviously, on the power market, is the CO2 price development.

And the EUA price has held up very well, despite what you just saw on the coal and gas prices. And this is because of the tightening CO2 market, mainly through the market stability reserve, which has created all the put to market in deficits.

2019 is the first year of operation for the market stability reserve and according to the current decisions, the instrument will continue to keep the market tight, at least until end 2023. There is an agreed checkpoint in the system in 2021, when it will be discussed whether the 24% intake rate will potentially continue even after 2023 but, currently there are no decisions on that.

This is a very important driver. And just as one interesting detail, I already mentioned that this together with coal and gas prices is currently driving coal-to-gas switching.

But there were even temporary situations in Germany, where even the clean brown spread, CBS was negative, i.e. making gas go above lignite in merit orders.

That was a temporary thing. But it was interesting to note that that's really happened as well.

Nordic export price has been on the weak side lately. The improving hydrology is of course the main reason for the decline during 2019.

In addition, as I mentioned, decline in gas price created softness in German spot price, which also had an impact on the Nordic spot price market. But then when we look at the forwards, we can see on this chart, the lower right hand corner, that despite the weakness in spot price, both the Nordic and German forwards for the 2020 contract have held up quite well.

So the forward market is expecting recovery in prices. When it comes to the spread between the Nordic and German prices, in realization in spot price, the quarter was pretty much on the same level in both regions.

But actually the spread for 2020 has increased to €15 per megawatt hour and one key driver behind this is the CO2 price, which is of course supporting prices both in Germany and in the Nordic region but in relative terms, slightly more in Germany than in the Nordics. Here you have in graphical format, the price development.

Achieved price, as I said, up from 33.10 to 35, at the same time when the spot price was down 9%. On the Russian side, pretty good development, spot price up 15% in Rubles.

And our achieved price, which also takes into account the capacity payments and then translates this everything into Euros, was now 11% higher and actually this is now the fourth consecutive quarter, as you can see here where we had an improved achieved price in Europe and in Russia. Then before Markus continues quick comments on each of the segments.

Generation, first; of course, the achieved power price is strong driver here. But also in addition to this, the volumes had now good development.

We had 5.3 terawatt hours of hydro production versus 5.1 terawatt a year ago. And then, the nuclear development and nuclear availability was also in a very good level of 5.9 terawatt hours compared to 5.6 terawatt a year ago.

Another driver behind the result, which is not to be forgotten, is the Swedish tax decisions that we made a couple of years ago. And that is supporting the generation segments result with approximately €20 million this year compared to 2018.

City Solutions had also better results than last year. Of course, seasonally weak but EBITDA €31 compared to €23 last year.

This was, again, warmer than normal but not as extreme as last year. So that's supported the result a little bit.

Another positive thing was the improved result in waste and recycling business, which is obviously based on the old Ekokem acquisition. Of course, the return on assets in this business is not yet on a satisfactory level, 5.7% RONA.

Whereas in the generation business, which I actually forgot to mention on the previous slide, we had to pretty good 11.8% return on net assets for the last 12 months. The fleet in City Solutions is fairly new, which of course affects the RONA.

But I just want to say that we are not happy with this 5.7% level. Our goal is clearly that this would also, in the future, climb gradually towards target of 10%.

Consumer Solutions had another good quarter in a row. Our comparable EBITDA from €26 million to €34 million, and corresponding development in operating profit as well, we had higher product margins as a result of introduction of certain new products.

The competition remains very tough. Churn continues to be an issue.

But despite of high churn, we were able to, mainly through the introduction of these new products and other efficient operational execution, we were able to improve the result. And then of course, both in City Solutions and Consumer Solutions, we repeat the affluent synergy guidance.

In City Solutions, €5 million to €10 million to be achieved by the end of 2020, and in Consumer Solutions roughly €10 million to be achieved by the end of 2020. I mentioned already after the good first quarter in Consumer Solutions, that part of this improvement cannot be automatically extrapolated to the second-half of the year.

Now I repeat what I said earlier. This is just a word of caution.

We are optimistic about the prospects of result development, but please don't assume that it would continue quite this strong. Some of this is temporary.

And then on top of that, there are uncertainties regarding the development in Poland when it is still a little bit unclear to us how the proposed price regulation in consumer prices would be implemented, and how that would be potentially compensated to suppliers. That creates certain uncertainty for the second-half of the year.

And then finally, Russia, an excellent quarter EBITDA from €73 million to €107 million and operating profit from €37 million to €69 million. Several factors behind this higher power margin spread, higher CSA payments.

And on top of that, clearly, lower bad debt provisions compared to last year. All of this contributed to a pretty good result and last 12 months return on net assets, 11.7%, which obviously starts to be on a pretty good level.

So now I will ask Markus to continue. And then after that, we are ready for questions.

Markus?

Thank you, Pekka. So I will start by first summarizing the second quarter performance; very strong performance, comparable operating profit from €153 million to €232 million.

This was driven by better volumes in both hydro and nuclear, as well as better prices in generation. Russia improved on the lower bad debt provisions, higher power margins in CSA payments.

Also, City Solutions and Consumer Solutions, improved year-on-year. Segment other was impacted by the increased spend in business technology, including the internal and external ventures.

Other corporate function costs were flat year-on-year. For the first second-half, we can see the same development.

Generation, up, driven with prices and volumes. Russia improving on the back of higher margins, and CSA payments and lower bad debt provisions.

Recycling and waste solutions in Norway, improved City Solutions results and sales margins were higher in Consumer Solutions. All this resulting to that compatible operating profit, went up from €558 million to €640 million.

Then I move over to more of the technical parts. And first start with Uniper purchase price allocation.

We finalized the purchase price allocation during second quarter of this year. Uniper's balance sheet as of 30 of June 2018, has been used as the starting point for this purchase price allocation.

First, we take Fortum share of the good will on Uniper's balance sheet, €930 million, and derecognize that as it is not an identifiable asset according to IFRS. Potential future impairments of good will that existed on 30th of June 2018 in Europe's balance sheet book by Uniper will thereby be reversed to Fortum's share of profits of associates and joint ventures.

Then a free value adjustment of €613 million was made for the acquired assets and liabilities. This is relating mainly to political and regulatory risks that are reflected in the fair value of certain generation and production assets.

The fair value adjustment will be reversed to share of profits of associates and joint ventures over a period of 20 years, €30 million on annual basis. Fortum's second quarter share of profits from Uniper include a positive impact of €15 million from the reversal of the fair value adjustment for the first half of this year.

If Uniper would report negative impacts relating to this generation and production assets, then Fortum will assess potential need to use this fair value adjustment to reverse this negative impacts. In addition to this, there is comprehensive disclosure in our second quarter report in Notes 6 and 11, regarding the [PPA] and the revenue.

Then I'll move over to the key financials. To start from the top, sales EBITDA and comparable operating profit are up in all periods; in Q2, in the first-half and LTM versus last year.

When we go down on the table, operating profit is impacted by sales gains, nuclear fund adjustments and fair value changes and I will open this up on the coming slides. Uniper sales had a big impact on the share of profits from associates.

And I will also come back to this line in the coming slides. So finally, profit before tax, EPS and cash flow, improved significantly; also in all periods in the second quarter, in first-half and last 12 months.

Let me go deeper into the income statement. I'll start from the comparable operating profit line.

That was up. Then we have moments in the items affecting comparability.

This included impact from the regular nuclear technical update that is done periodically. Maybe the key thing to start with is that the underlying cost of the spent nuclear waste handling has reduced substantially.

And this means that the nuclear provision goes down. But as we are over funded, as you can find in our notes, that means that we can also recognize less of the fund assets.

And this results in a negative €54 million impact in items affecting comparability. And on the other hand because of the discounting and interest effect, we have a positive item in the net finances of €40 million.

Net impact from all of the changes in nuclear accounting and the underlying factors is not material. The underlying cost is coming down.

So overall, situation is very good. And the impact, as I said, is not material.

There is more comprehensive disclosure on this item as well in Note 14 of our quarterly report. One thing to note also is that in Q2, 2018, we had a positive impact from the sale of 10% stake in Helsinki production, which resulted in a €77 million sales gain.

Then if we go down, also in Q2, we had a very strong contribution from the share of profits from associates, €461 million, Uniper out of that was the total €399 million and that is already including then to €15 million impact from the fair value adjustment that we will then record periodically. Then moving over to the cash flow statement, cash flow was very strong -- strengthen by the dividends received and working capital.

If we look at second quarter of this year, we've received dividends of €165 million from Uniper, but also dividends from Stockholm Exergi TSE [indiscernible]. In this quarter we had positive working capital change of €233 million.

The same item was very strong in the first half of the year driven also by the change in settlements for futures, so totaling working capital change in the first half was €502 million. As we know this can be very volatile item due to the changes in the settlements.

All-in-all this resulted in very strong net cash flow from operating activities. And then if we continue down on the table, the first thing I would note there is on the last 12 months numbers we have CapEx of €696 million, this is including the communicated regular maintenance CapEx, some growth, not very much, and then the big part on top of this is the solar and wind investments.

As we have said that they also have potential to be recycled as we have done before. Then key item, if we go down is the acquisition of shares in the second quarter of 2018.

Uniper, this is also reflected in the full year 2018 numbers. Going further down, divestment those shares plus your Hafslund Produksjon had a big impact, and then the collateral that arrangement that we did in Q1 was released in cash visibility in the first half numbers.

So all-in all, all this is resulting in two very strong cash flow before financing activities, €527 million in Q1, €1.4 billion for the first half year and in last 12 months €1.2 billion. Then I'll move over to the balance sheet and funding key indicators and here we're focusing on optimizing our cash flow to deliver our balance sheet towards our target 2.5 times.

This is also to maintain our financial strength and flexibility. If we compare the numbers to 2018, full-year EBITDA up to [€1.63] billion and net debt because of the drivers that I went through and Pekka mentioned net debt actually went down to €5.4 billion.

And this means that the comparable net debt EBITDA has come down from the level of €3.6 to €3.3. Our liquidity is strong.

We have €1.3 billion of cash and cash equivalents, undrawn committed credit lines of €1.8 billion. Average interest is coming down now at 2.2% and on the maturity profile we have no maturities in 2020.

Then finally to the outlook, we continue to expect that demand growth for electricity in the Nordics is 0.5%. Our hedging levels have increased to 80% for the rest of the year 2019 at €33 and for 2020 up from 55% to 60% with the same hedging price level of €31.

We continue to guide the CapEx to be between €600 million and €650 million excluding acquisitions. The targeted cost synergies are well on track.

We are expecting €15 million to €20 million materializing City Solutions and Consumer Solutions gradually early this year and next year. The effective tax rate for the group remains at 19% to 21% more likely on the higher side and we continue to get the positive impact still by the Swedish tax reductions that will then end in 2020.

With this, we can move to Q&A. Thank you.

Thank you, Marcus and thank you Pekka. So we are now ready for the Q&A session.

We will start with potential questions here in Espoo and then continue to the teleconference participants. Any questions here in Espoo.

Okay. Thank you.

Operator, we are then ready for the questions from the teleconference. Please go ahead.

Good morning. Just a couple of questions.

One, you said that you want to move as soon as possible to get more clarity for stakeholders. What did you mean here?

A bit more color on your intent would be very useful. Second, we see that bad debt in Russia since you have material improved, but we don't have really industry the numbers.

Could you give us provisions you did in H1 or Q1, Q2 last year versus what you've done this year so we can basically put the number on that. That would be useful?

Another one on, you achieved power price and the spot; so you showed that the spot is basically at a lower level; I wanted to understand a bit how you managed to avoid the pitfalls getting too much impacted by that, so while the specifics on exactly new areas and just getting some color. And finally on the City Solutions, you say that part of the improvement is temporary.

You started to touch on that. Could you give us exactly the nature of this improvement and why part of it is temporary and that would be extremely useful for all of us?

Thank you very much.

All right. Thank you.

If I start from the Uniper and the clarity question, unfortunately after the AGM there has been a lot of confusing media reports including as I said a lot of also misleading or directly incorrect statements about various stakeholders views and intentions and so forth. And that's why it is really important that we know not through media but through constructive discussions with company's management and also very importantly with the personnel representatives discuss that how we look at the future of this company.

We continue to believe that working in close alignment these two companies could create tremendous value and play an important role in the European energy transition. I have a lot of sympathy for the personnel's concerns at the moment because they have seen all these confusing statements in the media and it is very clear now that that we sit down constructively with the company and talk about the future.

We have said very clearly that what type of different routes forward we see this is what we want to discuss with the company but very importantly we have agreed with them that now when the discussions continue that they are confidential discussions and we intend to keep our part of that promise and that's why unfortunately I will not go into any more details about what specifically we would add and we'll discuss.

Okay. I can't take the bad debt provision.

So we don't we don't disclose exactly what numbers they are about. But as I said this in our waterfall and also now text mentioned as one of the important factors so I would just describe that that's being one of the top factors in the Q2 delta.

And we mentioned the other as well the CSA payments and margins. And then we have to remember that we also recovered some of that received part of this is recovering the receivable that we had from the guaranteed supplier, that we eventually bought into the joint venture.

Then for the achieved power price, even once put this lower, good question. So the result is result of hedging on the physical optimization and the physical optimization we had a really good result now in the second quarter in June.

Then for the -- actually the temporary improvement was in Consumer Solutions and the driver there is that mostly and largely we hedge our consumer electricity sales back to back. So what we have sell we have hedge.

But some of the products, the minor share have pricing that is valid for the time being. So there is no set schedule when we would have price changes.

So when the procurement price from the market goes down and if the -- for the time being price stays longer than that price is going down we may get a temporary spread improvement. So this is basically this statement is assuming that if nothing else happens then we're not going to get this kind of benefit.

But of course going forward, whether the market prices go up or down that then drives what happens in the coming quarters. I hope this opens up a little bit.

Thank you very much.

It's [indiscernible]. I assume that it's that was my name.

Two questions on my side. One is straightforward on the accounting side.

Why don't you include the unit non-operating results with the items affecting comparability, because they well that they do affect comparability. So it would perhaps be useful to strip them out to allow comparability.

The second one is straightforward really, and relating to the various press articles we had. You said you don't want to comment on it, but if they are discussing investment restrictions in Russia with President Putin, the recent article in the FAZ so straightforward is your aim sooner or later to get a majority stake in Uniper ?

Okay, I can take the accounting question. So you are correct that we will record on it our share of Uniper’s net profit in our share of associate and joint venture income.

One reason is that that's where we according to our policies book the results. The other one is that we would not have full visibility into what are the items affecting comparability when we record the numbers.

So it would be also difficult for us. So this is a more straightforward way.

And then, then there is also good disclosure from Uniper. How they break up the numbers that is best to discuss then with Uniper.

Then when it comes to the Russian situation and our shareholding, we have said from the beginning that that we do not speculate on whether or not we would have an interest to buy more shares in the future. There is a lot of value creation that can be done even with the current shareholding, but we do not feel that the 50% restriction that there is in Russia or because of the drinking water supply operation in Russia is really in the interest of shareholders.

It is of a technical nature. We have in our own operations outsourced similar activity to a Russian partner.

This is in no way core to the Uniper’s operations and what the way we see the situation is that that it limits first of all our optionality. But it also limits other shareholders optionality.

In case, there wouldn't be shareholders that would like to sell their shares to us. So we do not believe that it is in the interest of shareholders to have the restriction there.

And that's why we have been working since it was put on us. We have been working actively with our partners in Russia with the authorities to find ways how to deal with the situation and that work obviously continues.

But then the second part of your question once again, about our plans to potentially buy more shares. Currently our hands are tied.

If the restriction is to be it is to be removed in the future that is then a new situation. But that is the question that we are not speculating on what we would do or would not do in the future.

That's great. Thank you.

Good morning and thank you for taking my question gentlemen. I would like to repeat the SocGen gentleman's question.

Take up your answer on that if restriction -- if restrictions in Russia were to be lifted. Do you then intend to acquire a majority stake in Uniper, still with market yes or no?

Thank you.

I did not -- my answer was that I do not want to speculate on that question. That restriction limits the optionality when it comes to our possibility to buy more shares.

It also restricts other shareholders optionality in case they would like to sell shares to us, but they do not speculate on the probability of number one, that restriction to be lifted. And in the theoretical case that it would be lifted, what we would do in that situation.

Thank you.

Morning. Just a couple of questions on your new associates please.

Firstly on, Olkiluoto 3, I saw that the target commissioning day had been pushed back to the mid 2020. And you also highlighted in the statement you have this agreement with Areva where TVO could receive up to 400 million of compensation.

Can you just remind us how the compensation works there? And if there are further overruns cost overruns for that project is a reversal on the hook for those, or could TVO be required to commit some funds to complete the projects if there were further cost overruns?

And then secondly, just on your new kit up the associate contribution for H1, it was obviously - it was up pretty strongly to about €40 million from pretty close to zero. What's driving that?

Because I could see that you highlighted some one-off negatives that you had last year but normally those new care associates don't really contribute any profits. So I was just wondering where that 40 million or so was one-off in nature, whether that was coming from something that might repeat in the future.

Thanks.

Yes. Okay.

I can take that one. So correct, the plant supplier came with the revised timetable basically pushing the PTO date half a year forward, and it has been communicated as part of the global settlement agreement with regards to settling the arbitration that there is a compensation mechanism whereby the plant supplier Areva-Siemens within pay compensation, but the exact details of the compensation haven't been given.

So I cannot comment that further as such. Then for the nuclear associates and their result the impact the basic setup is exactly as you indicated.

So from our nuclear associates, we get power at the cost. And the result of the associates should normally be close to zero.

So the major part of the positive impact is now coming actually from the technical updates at this time. So from time to time, there can be changes in the - in the nuclear provisioning, spent nuclear fuel cost and so on, and these may get reflected then in the results but overtime should be zero.

Thank you, Operator. Thank you for all the questions and thank you for participating.

If there are no further questions in the audience, I want to thank you all for participating here today and on behalf of Fortum wishing you a very nice upcoming weekend. Thank you so much.