Fortum Oyj (FORTUM:HE), the Finnish state-owned energy company, has reported its financial results for the third quarter and the first nine months of 2024, indicating a strategic focus on decarbonization and maintaining financial stability. The company's comparable operating profit for Q3 stood at €158 million, contributing to a nine-month total of €921 million.
Despite lower spot and hedge prices affecting the Generation segment, Fortum has made significant divestments and is investing in sustainable initiatives, such as retrofitting the Czestochowa plant with biomass technology. The company remains committed to exiting coal by 2027 and is exploring nuclear plant life extensions while keeping leverage low and aiming to reduce fixed costs.
Key Takeaways
- Fortum's Q3 comparable operating profit was €158 million, with a nine-month total of €921 million.
- The company is exiting coal and investing in biomass conversion for the Czestochowa plant.
- Divestments include the sale of recycling and waste business to Summa Equity and the biobased solutions business to AM Green Technology.
- Leverage remains low at 0.4x, with a plan to reduce fixed costs by €100 million by 2025.
- Legal proceedings are underway to recover €800 million in intercompany loans from its former Russian subsidiary.
- Operating profit for Q3 reported at €768 million, with assets held for sale.
- Generation segment's profit fell due to lower prices, decreased hydro volumes, and higher nuclear costs.
- Consumer Solutions improved, driven by better electricity sales margins.
- Net debt decreased, and liquidity remains strong at €7.6 billion.
- Capital expenditure for 2024 is expected at €550 million, focusing on maintenance.
- Hedging strategy outlined, with a hedge price of €44 per megawatt hour for 2024.
- Discussions on PPAs ongoing, with no new long-term agreements signed in Q3.
- Fortum is confident in the Nordic system's ability to handle a projected 30% power demand increase by 2030.
Company Outlook
- Fortum anticipates a capital expenditure of €550 million for 2024, primarily for maintenance.
- The company aims to reduce fixed costs by €100 million by the end of 2025.
- Fortum is targeting a 10-year timeline for large plants in its nuclear feasibility study for SMRs.
Bearish Highlights
- Lower spot and hedge prices have impacted the Generation segment's profits.
- Finnish and Swedish industrial demand remains weak, affecting overall power demand.
- The Consumer segment's profit decreased due to reduced gas sales margins.
Bullish Highlights
- Divestments and sustainable investments are strengthening the company's decarbonization strategy.
- The company's leverage is low, supporting credit rating objectives.
- Strong liquidity position with net debt reduction and expectations of strong cash inflows in Q4.
Misses
- No new long-term PPAs were signed in the third quarter.
- Production costs for reference cases currently exceed Nordic forward prices.
Q&A Highlights
- Fortum is in discussions with Swedish and Finnish governments on regulatory frameworks to support full-load power market entry.
- The company plans to increase long-term PPA hedging ratios to a minimum of 20% by 2026.
- Legal proceedings are ongoing to recover €800 million from Forward Energo.
- Fortum is facilitating grid connections for large data centers in Finland, with identified sites for development.
- The company is monitoring optimization performance and maintaining medium-term guidance despite market volatility.
Fortum's earnings call reflected a company navigating a challenging energy market with a strategic focus on sustainability, financial prudence, and long-term stability. The company's efforts to decarbonize its energy sources, invest in new technologies, and maintain a strong financial position highlight its commitment to supporting the energy transition while delivering shareholder value.
InvestingPro Insights
Fortum Oyj's financial performance and strategic direction, as outlined in the earnings report, align with several key metrics and insights from InvestingPro. The company's focus on financial stability and decarbonization efforts are reflected in the data and tips provided.
According to InvestingPro data, Fortum's P/E ratio stands at 9.89, indicating that the company is trading at a relatively low earnings multiple. This valuation metric suggests that investors are currently paying less for each dollar of the company's earnings, which could be attractive for value-oriented investors considering Fortum's strategic positioning in the energy transition.
An InvestingPro Tip highlights that Fortum "operates with a moderate level of debt," which corresponds with the company's reported low leverage of 0.4x and its strong liquidity position of €7.6 billion. This financial prudence supports Fortum's ability to invest in sustainable initiatives and navigate market challenges while maintaining financial stability.
Another relevant InvestingPro Tip notes that Fortum "has maintained dividend payments for 26 consecutive years." This long-standing commitment to shareholder returns aligns with the company's strategy to balance growth investments with financial stability and shareholder value. The consistent dividend history may be particularly appealing to income-focused investors in the current market environment.
It's worth noting that InvestingPro offers additional insights, with 10 more tips available for Fortum Oyj. These additional tips could provide further context to the company's financial health and market position, potentially valuable for investors seeking a comprehensive understanding of Fortum's prospects in the evolving energy sector.
Full transcript - Fortum Oyj (FOJCF) Q3 2024:
Ingela Ulfves: Good morning, everyone. A warm welcome to Fortum's joint webcast and news conference for the Investors and Media on our Third Quarter and January-September '24 financial results. My name Ingela Ulfves, and I'm Head of Investor Relations at Fortum. As always, this event is being recorded and a replay will be available on our website later today. With me here in the studio are our CEO, Markus Rauramo; and CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance during the third quarter and first 9 months of this year. After the presentations, we will open up for questions in our Q&A session. I now hand over to you, Markus, to start.
Markus Rauramo: Thank you very much, Ingela. A warm welcome to our investor and media call also from my side. I will start by going through the key elements of our financial performance, market fundamentals and follow-up on our strategy implementation. After that, Tiina will provide more details, especially on the financials and how this turned into our results. Let me now start with the quarterly highlights. The third quarter is typically a seasonally low quarter with lower volumes and power prices. In July and August, Nordic spot prices were pressured by high precipitation, good nuclear availability and increasing wind and solar output. In September, drier conditions and nuclear outages due to both planned maintenance and unexpected technical issues increased the prices. On a very positive note, Nordic power demand has now recovered to the precrisis levels and nonindustrial demand is strong throughout the Nordics. During the last 12 months, power demand in the Nordics has reached 401 terawatt hours. However, Finnish and Swedish industrial demand is still lagging and we have seen more postponements or delays in industrial investments, especially in green transition projects. A couple of days ago, Fingrid, the TSO in Finland, published its latest power demand forecast where they somewhat lowered the expectation of demand growth. They expect power demand in Finland in 2030 to be 126 terawatt hours compared to their previous estimate of 131 terawatt hours. Today, annual power demand in Finland is approximately 85 terawatt hours. The lower spot prices affected especially the result of our Generation segment. But with a versatile and competitive CO2-free generation fleet, successful hedging and a good optimization premium, our achieved power price reached a good level and we recorded resilient results again. We continue with the strategy implementation. On our strategic priority, to deliver reliable and clean energy, we focus on optimizing and strengthening our core operations for power generation. As already highlighted in connection with our second quarter results, the Pjelax PPA became effective on the 1st of July. At our Loviisa nuclear power plant, we reached an important milestone in August in securing reliable Western alternative fuel supply as we loaded the first batch of nuclear fuel from Westinghouse. The lifetime extension of our Loviisa nuclear power plant is also progressing well. Most recently, we announced that we upgrade the automation of the turbine protection and control systems of both power plant units. Regarding longer-term power demand, we are very happy to see that there is demand for long power purchase agreements, also for nuclear power in other parts of the world. We are well positioned as the Loviisa lifetime extension provides an additional 1,000 megawatts of capacity for 22 years or approximately 177 terawatt hours of reliable CO2-free baseload power until 2050 that we can offer to our industrial customers. Fortum has, together with the other owners of our co-owned nuclear plants, decided to investigate extensions up to 80 years of the operating lifetime of the Oskarshamn and Forsmark nuclear power plants. Also, as announced today, Fortum's coal exit continues with the decarbonization in Poland at Czestochowa combined heat and power plant. We are committed to exit coal by the end of 2027, and we will now invest approximately EUR 100 million in Czestochowa's retrofit with biomass technology. This will decrease Fortum's coal capacity and further reduce our direct CO2 emissions. The investment starts now and is expected to be ready by the end of 2026. This has no impact on the current CapEx guidance. On our strategic priority to drive decarbonization of industries, we continued the development of several potential sites across Finland that can be offered to our customers for data center or industrial use. One of these is a site in Rauma, where we are developing a site for a sustainable synthetic aviation fuel, eSAF, planned together with Norsk e-Fuel and Port of Rauma. We've been very active in site development and now several sites are already reserved. On our third priority, transform and develop, progress has mainly been done regarding divestments of noncore assets and efficiency improvement. The strategic review of our Circular Solutions business took a huge step during the third quarter. In July, we signed an agreement to sell our recycling and waste business to Summa Equity for approximately EUR 800 million. Closing is expected to take place in the fourth quarter. In September, we signed an agreement to sell our ownership in Chempolis Oy, including all of Fortum's biobased solutions business and our shares in the holding company of Assam Bio Ethanol Pvt Ltd in India to AM Green Technology and Solutions B.V. The transaction will not have a material financial impact on Fortum Group's result. We continue our efforts in the efficiency improvement program with the target to gradually lower our annual fixed cost by EUR 100 million, excluding inflation by the end of 2025 and a full run rate from the beginning of 2026. Last week, we initiated legal proceedings against our former Russian subsidiary, PAO Fortum, to recover approximately EUR 800 million in intercompany loans, including interest. It is good to note that this legal case only has upside potential as there is no impairment risk. This process, which is separate from already ongoing arbitration proceedings against the Russian Federation, are expected to take some years. Then over to our main figures. These are the familiar comparable headline KPIs for Fortum Group's third quarter and the first 3 quarters of 2024. All numbers in this presentation are for continuing operations, if not otherwise mentioned. Considering all external factors, I'm satisfied with our performance. The result is well supported especially by our optimization. Last year, power prices were at the higher level. So this year, our comparable operating profit has declined both for the quarter and on a cumulative basis. The main reasons were lower spot and hedge prices, which mainly affected the result of our Generation segment. In the third quarter comparable operating profit at group level amounted to EUR 158 million. Our comparable EPS also declined both on quarterly and cumulative basis. Our operating cash flow decreased somewhat compared to last year, and was EUR 1.2 billion during the first 9 months and EUR 349 million in the third quarter. And finally, the balance sheet and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, leverage was at 0.4x for the last 12 months compared to 0.5x at the end of last year. Then over to the commodity markets. I want to say a few words about the market development. And here, you see the main commodities. European gas prices increased quarter-on-quarter but remained in the EUR 30 to EUR 40 per megawatt hour range during the quarter. The volatility within the quarter can be attributed to supply side risks like significant Norwegian maintenance, loss of Russian pipeline gas via Ukraine by December 2024 and weather impact on LNG supply. The gas price volatility was reflected in continental power prices, while the impact on the Nordic power prices was limited. In the Nordics, high precipitation amounts in July and August led to well-field hydro reservoirs in some of the key hydro areas. This resulted in very low spot prices in August before a gradual recoil upwards took place in September. In addition to that, good Nordic nuclear availability during the summer months and 3 terawatt hours higher Nordic wind supply in the third quarter contributed to the lower July and August spot prices. In late August and September, the Finnish power balance became very tight as Olkiluoto 2 phased and unplanned outage at the same time as large plan transmission restrictions from Sweden and Loviisa 1 maintenance took place. In Finland, the price also coupled strongly with Estonia on low wind days, especially after the S Link 2 transmission line came back online in early September after a long break. During periods with low Finnish wind power output, price spiked creating another month with high spot price volatility. And then over to the financial KPIs, and I hand over to Tiina for more details.
Tiina Tuomela: Thank you, Markus. Good morning, everyone, also on my behalf. I will now go through our financials in more detail. Let's start with the key financials. So let me first comment on some of the comparable KPIs for our continuing operations. The comparable operating profit for the third quarter amounted to EUR 158 million, and was EUR 921 million for the first 9 months. Looking at the last 12 months, comparable operating profit totaled EUR 1,280 million. In the third quarter, our comparable net profit and comparable EPS decreased. That was mainly due to the lower result in the Generation segment. The main reason for the lower result was lower spot power and hedge prices. Our comparable EPS for the last 12 months was at EUR 1.17 compared to EUR 1.28 in 2023, so slightly down. The only KPI which improved was leverage. As Markus already said, our leverage continues to be very low, being at 0.4x at the end of the third quarter. Let's move over to the income statement and look at certain items in more detail. As we have communicated, our own efficiency improvement program, you can see that our annual fixed cost are slightly about EUR 1 billion. The target is to reduce the fixed cost base by EUR 100 million, excluding inflation. Now the trend has turned and our fixed costs show a small decrease. Our actions to start to have an effect and the fixed cost base have slightly gone down. Items affecting comparability for the quarter turned negative from last year, however, was related to fair value changes. In the third quarter, our finance cost net was EUR 3 million positive and included net interest expense of EUR 5 million, offset by positive impacts from nuclear-related items. On a cumulative basis, finance cost net was also EUR 20 million positive, impacted by onetime items from the second quarter, i.e., interest income from the Belgium tax case which we won. We have managed to get some higher interest income for our cash. Simultaneously, our loan amount is lower compared to the year-end, which is reflected in lower interest costs. Taxes have been at the normal guided level this year, around 19%. And finally, just noting that in our balance sheet, we have now recorded the asset in the recycling and waste business of EUR 768 million as asset held for sale. Then over to the result waterfalls for comparable operating profit. Let's look at the waterfall at the third quarter comparable operating profit for our segments. Compared to previous year, the result for our Generation and Consumer segment decreased while Other Operations segment improved. In the Generation segment, comparable operating profit decreased by EUR 86 million to EUR 176 million mainly due to the lower spot and hedge prices. Lower hydro volumes due to lower inflow and somewhat higher cost for the co-owned nuclear production negatively affected the result further. The result contributor of the Pjelax wind farm was marginally negative. The district heating business improved its result mainly due to the higher sales price for power in Poland. In our Consumer segment, comparable operating profit decreased by EUR 4 million to EUR 6 million, mainly due to the lower gas sales margin, the effect of which was partly offset by the reduced scope of the regulated price cap for the end users in Poland. In Other Operations segment, comparable operating profit improved by EUR 22 million and was EUR 24 million negative. The result of Circular Solution business was flat. The main reason for the improved was higher internal charges for our services of enabling functions. When looking at the comparable operating profit for the first 9 months, the same trend continues. The Generation segment result declined while both Consumer Solutions and the Other Operations segment improved. The result deviation is basically related to the Generation segment. The Generation segment's comparable operating profit decreased by EUR 336 million to EUR 953 million. The main reasons for the decline in the Generation segment were the clearly lower spot and hedge prices, which was partly offset by higher hydro volumes. The result of the renewal business was positively impacted by the sales gain of EUR 16 million from the divestment of the remaining share in the Indian solar power portfolio of 185 megawatts. The result contribution of the Pjelax wind farm was slightly positive. The result of the district heating business improved mainly due to the lower fuel and CO2 costs, supported by more electricity-based heat production in Finland and the higher sales price for the heat and power in Poland. Comparable operating profit in the Consumer Solutions segment increased by EUR 33 million to EUR 60 million. This is mainly due to the higher electricity sales margin, a reduced scope of the regulated price cuts of end users in Poland and higher sales margin for value-adding services. This improvement was partly offset by lower gas sales margin in Poland and higher amortization of customer acquisition costs. In the Other Operations segment, the comparable operating profit improved by EUR 38 million and was EUR 92 million negative. The improvement was mainly related to higher internal charges for services of enabling functions and slightly higher earnings in the Circular Solutions business. Then some comments on our financial position, debt and liquidity. Our financial position continues to be very strong, and this supports our objective to maintain a credit rating at least BBB flat. When considering our capital allocation principles, we balance between leverage, investments and dividends, while always keeping the credit rating in mind. Next, let's go through the reconciliation of our financial net debt in the third quarter. The opening balance sheet at the end of second quarter, our financial net debt was EUR 851 million. In the third quarter, the operating cash flow was EUR 349 million. This effect was slightly offset by investment of EUR 140 million. The change in interest-bearing receivables amounted to EUR 4 million while FX and other effects totaled EUR 16 million. So at the end of the third quarter, our financial net debt was EUR 655 million, and the ratios for the financial net debt to comparable EBITDA is at 0.4x for the last 12 months. Looking at our debt portfolio and maturity profile, I want to highlight a few things. We use bonds as a primary source of our funding. Our maturity profile continues to be very balanced, and there are no large maturities in any single year. All in all, our gross debt, excluding leases totals EUR 5.3 billion. At the same time, our liquidity position is strong. We have ample liquidity reserve of EUR 7.6 billion with 3 point -- EUR 4.3 billion of liquid funds and EUR 3.3 billion of undrawn committed credit facilities and overdrafts. With the strong liquidity position, we will continue to optimize our cash and credit lines. The overall objective is to have sufficient and optimal liquidity, while at the same time, trying to minimize funding costs. The cost for our EUR 5.3 billion loan portfolio is 3.9%, while the interest income that we get for our EUR 4.3 billion liquid funds is 3.5%, which means that the net interest cost is in a good balance. When looking at our cash position going forward, I would like to remind that we paid the second tranche of dividend now in October and during Q4, we are expecting to get the proceeds from the divestment of the recycling and waste business, the settlement compensation from Vestas, the interest income from Belgian tax case and the proceeds from the divestment of our stake in the Indian 185 megawatts solar portfolio. So with this, over to the outlook section. The outlook section comprises in essence 4 elements: Guidance for our outright hedges and optimization premium, taxes, CapEx guidance and our fixed cost reduction program. First, a reminder that our annual outright volume is approximately 47 terawatt hours. Already in connection with our first quarter result, we disclosed new wage for our different price areas. Then starting with the hedges. At the end of the third quarter, the hedge price for the remainder of 2024 was at EUR 44 per megawatt hour and the respective hedge ratio was 80%. The hedge price for 2025 is at the same level than last time at EUR 42, and the hedge ratio increased by 5 percentage points to 65%. Today, for the first time, we disclosed hedges for the year 2026, 40% hedged at EUR 41 per megawatt hour. There are no changes to the annual optimization premium. It continues to be at the level of EUR 6 to EUR 8 per megawatt hour for the total volume of 47 terawatt hours. While the guidance is for the annual level, there might be quarterly variations. Our corporate tax rate guidance is unchanged. We expect the comparable effective income tax rate to be in the range of 18% to 20%. I also want to repeat that in Sweden, there will be a revision of the property taxes from next year. For Fortum, the increase of the property taxes will be approximately EUR 25 million for the years 2025 to 2030. This means that the increase is EUR 25 million from 2024 to 2025 and then stays on that level for the 5-year period, including 2030. Part of this cost will show up in our fixed cost line. Then a recap of our guidance for capital expenditures. Our capital expenditures for 2024 is expected to be EUR 550 million. This includes maintenance CapEx of EUR 300 million. As we disclosed the divestment of the recycling and waste business in July, we also lowered our capital expenditures guidance from 2025 onwards. The annual maintenance CapEx is expected to be approximately EUR 250 million in 2025 and onwards, which continue to be clearly below our depreciation level. The capital expenditure for the years 2024 to 2026 is expected to be EUR 1.6 billion. This includes maintenance and excludes potential acquisitions. Today's announcement of the Polish decarbonization investment does not change this guidance. Please note that if we would not disclose new investment projects, our total capital expenditure would go down over time towards EUR 300 million after 2026. We target to reduce our recurring annual fixed cost base by EUR 100 million, excluding inflation gradually until the end of 2025 with full effect from the beginning of 2026. The divestment of our recycling and waste business will reduce our group fixed cost base by approximately EUR 150 million. So from 2025 onwards, the new fixed cost base will be approximately EUR 850 million. Despite this, the cost reduction target of EUR 100 million is unchanged. And as I already mentioned, we expect to reduce our recurring fixed cost base by more than EUR 50 million already by the end of 2024. This was all for my presentation, and we are now happy to answer your questions. So with this, Ingela, over to you.
Ingela Ulfves: Thank you, Tiina, and thank you also, Markus, for the presentation. So we are now ready to take your questions. [Operator Instructions] So let's start the Q&A session.
Operator: The next question comes from Wanda Serwinowska from UBS.
Wanda Serwinowska: Two questions from me. The first one, can you please comment on the small modular reactor opportunities that Fortum currently see? Can you talk about the time line, the CapEx and when can we see the first EPS impact? That would be very helpful. And the second one, can you please comment if there has been any development on signing new PPAs with data centers?
Markus Rauramo: Okay. Maybe I'll leave the PPA question to Tiina. And on the SMR, so SMRs are part of our nuclear feasibility study. So we are studying both large conventional nuclear plants and SMRs. And an intermediate conclusion from our study is that there are large nuclear plants, conventional ones, available today. So several suppliers. It's a question then, are these all available in Europe, licensed for Europe. But on the SMR side, the first one that is part of our study that would be actually commercially available is probably the Z Hitachi (OTC:HTHIY) 300-megawatt plant that is now being constructed in Ontario for Ontario Power. And my understanding is that it should be ready in '28, '29. So when it comes to relevant technical offerings, we would like to first see an operating reference plant. So the bottom line is that today, there are operating large nuclear plants, but there isn't a relevant SMR operating. But from that, we take a conclusion that if somebody were to make an investment decision today, the time line is roughly 10 years, give or take, for a large plant for the planning and design and permitting and then construction in, let's say, neutral case theoretically. And then for SMRs, the SMR suppliers are targeting shorter time lines. But then the question is that is there relevant offering at the moment in the market. I hope that helps in quantifying that. And then for the potential EPS impact on it, we are investigating exactly technical feasibility, regulatory feasibility and commercial feasibility. And what we can say today is that the production costs on reference cases are clearly higher than what the Nordic forward prices are today. And that is why we are engaging both with the Swedish and Finnish government in discussion that what would be a regulatory and market design model to enable actually, full load power to come to the market. And this is what the [indiscernible] report in Sweden is partly answering. So construction time, loans, government guarantees to derisk construction as well as CFDs to give visibility on the cash flows. Whether these are enough, that remains to be seen, and we will get back to this and other things once we get more light from our feasibility study. So we cannot opine on that at the moment. And Tiina, do you want to comment on the PPAs?
Tiina Tuomela: Yes. So what comes to the PPA, so it is according to our hedging policy. We announced that we want to extend the hedging period where, of course, the longer-term PPA fits very, very well. Our target is to increase the long-term rolling hedge ratios at minimum 20% by 2026. What we can see that there's a lot of interest for the PPAs. However, currently, the period for the hedges are more like 5 to 6 to 8 years. But of course, while the bigger investment for the green transitions and the project is going, so there are also discussions with the longer-term hedges. For the third quarter, we didn't sign any new longer-term PPAs. But as said, we are working at the same time when looking at our overall hedging policy. .
Wanda Serwinowska: If I may, just 2 quick follow-ups, just clarification question. So Markus, on the SMR, it seems that Fortum doesn't have any material CapEx and it feels, you don't see it as a big CapEx spend in the foreseeable future. Is it right? And Tiina, on the PPA, has there been any development in the Microsoft (NASDAQ:MSFT) PPA, I think we are talking about a few terawatt hours. You signed on a heat offtake, but I haven't seen any announcement on the power price contract. And would you sign the full, I don't know if it was 5 or 7 terawatt hours with Microsoft?
Markus Rauramo: Yes. On the CapEx for any nuclear investments and any deliberation on that is somewhere in the future. So we will first do the feasibility study and then see if there are technical regulatory financial grounds to do it. And if we put new nuclear in the context of our current CapEx guidance, which is that in '24 to '26, we would be spending EUR 1.6 billion in total CapEx, which of EUR 200 million is unallocated. So that clearly indicates that if we were to do something, the CapEx would be small. . And we know that the new plants, the cost has been multibillion, even EUR 10 billion plus per unit. So then one has to think about what are the financing models for such full load power to come to the market. But that is something that we would need to opine on if and when we get to the conclusions of our feasibility study. .
Tiina Tuomela: To complement the Microsoft project. So in general, we can say that the project is proceeding well, when it comes to the environmental permits and permitting and as you mentioned, so the heat offtake is already signed, but what comes to the PPA, so that’s, of course, up to Microsoft how they like to proceed, which time and what amounts and with how many suppliers and what are the alternatives. Naturally, we are keen to discuss the PPAs on power with them as well.
Operator: The next question comes from Harry Wyburd from BNP Paribas (OTC:BNPQY) Exane.
Harry Wyburd: Okay. My question is a multipronged one on cash and balance sheet. So firstly, on the Vestas settlement, your press release was slightly cryptic. So I wonder if I could have a go at getting from you even roughly what kind of cash inflow we should be penciling in for that. I think the original claim was north of $200 million. I'd be interested in even if you could say whether it was in the same order of magnitude as that? And then given I think Tiina mentioned a lot of the cash inflows coming in Q4. I wondered if you could update us on where you see net debt landing at the end of the year, given that it was already relatively low in 3Q relative to full year consensus and you've got even more inflows coming in Q4? And then the final prong for the question is a perennial one. But given that you're probably likely to be an extremely, extremely low levels of net debt by the end of the year, has there been any further update on your thinking of use of balance sheet? I think on the last results, you said you would next review things at the full year Board meeting. Have there been any thoughts or view changes ahead of that and what you might do in terms of dividends -- special dividends, buybacks, even things like debt buybacks? And is there anything we should be assuming for use of balance sheet?
Markus Rauramo: Okay. Thanks, Harry, for the questions. So I'll probably take the first one and the last one. And Tiina, you already commented on the net debt items impacting that, but maybe you want to then recap that. Regarding the Vestas settlement. So part of the settlement was that we will not disclose exactly what it concern and what elements. But I would say that the $200 million number that you referred to, that was something that Vestas themselves actually had published. And that concerned several items, which is typical for such claims and the settlement then ultimately concern only part of those. But it's a settlement that from our point of view, I think for both parties, we felt that it's better to settle than go all the way through the arbitration. So a level where both parties were satisfied. Then on the views about the balance sheet. So I would say so that indeed, like both Tiina and myself said, so we have a strong balance sheet, and we have good liquidity. I would start from saying that with our leverage now being at 0.4x versus our like max target of 2 to 2.5, I would -- in these circumstances, I would rather be a little bit conservative and have liquidity and have the balance sheet so that if and when there is volatility and turbulence in the market, then we are in a position to hedge and we do not have constraints on liquidity. So being a bit conservative. Then when it comes indeed, so that we will be discussing with our Board in the end of the year, in connection with the year-end results about investments, balance sheet and dividends. So these are the 3 items that we are looking at. We are now following our dividend policy of 60% to 90%. And like we have said that if we have a strong balance sheet and not a massive investment pipeline, then we would be paying at the higher end of that range. Otherwise, we will opine on the dividend then with the Board, typically at -- in connection with the year-end results. And then, Tiina, if you want to comment on the net debt impacting items.
Tiina Tuomela: Yes. So the net debt at the end of third quarter, so was EUR 0.7 billion. And if we look at our loan maturity profile, so it’s very, very balanced and, of course, some option to also repay the loans. But if we look at the main cash flow items in the fourth quarter, so of course, the operating cash flow is to come also our investments. So now also some new investment in Poland, then need to remember that we also paid the second tranche of our dividends. And then to highlight that also some cash is coming. So of course, the proceeds from the recycling and waste where the consideration was roughly EUR 800 million. Then we have the Vestas income, interest income from the Belgium tax case, so roughly EUR 19 million. And then the proceeds from the solar – we made in solar sale of 180-megawatt platform. So EUR 33 million. So clearly strong cash flow for the last quarter. But we don’t give exact guidance, guidance for the – what is our leverage or the net debt at the end of the year, but indicating the strong last quarter, what comes to the cash flow.
Operator: The next question comes from John Campbell from Bank of America.
John Campbell: Two quick questions, if I can. I saw recently, I think a few days ago, you initiated legal proceedings against Forward Energo, basically your Russian sort of form assets of EUR 800 million. I'd like to know basically how confident are you of actually prevailing in this dispute considering that it involves Russia? And what recourse do you have if it doesn't necessarily work out as you hope? And then secondly, this is somewhat more of a theoretical question, but you discussed previously about Swedish nuclear and delays and SMRs, et cetera. I recently saw that EDF (EPA:EDF) was seeking up to EUR 4 billion of outside investment to help fund the U.K. Hinkley Point C. And Hinkley closure reported that it could be done via mandatory convertible bonds. I know I think your strategy is related to mostly Nordic markets, but is this at least an asset that you have considered or thought about? And again, I only asked mainly because of the sort of the long time frame that people are choosing to discuss Swedish nuclear.
Markus Rauramo: Okay. So on the legal proceeding against Forward Energo, so that's indeed the former PPA of Fortum. And this is concerning the intercompany shareholder loans that we gave. This is separate from the claims against the Russian Federation on the on taking over the management and not us being deprived of access to financial or production data or the management of the company. So separate from that. We cannot anticipate the outcome of the proceedings, but I would say generally that this is quite straightforward. Loans have not been repaid and interest has not been paid according to schedule, and this is why we need to go to the arbitration as stipulated in our internal loan documents. So from my point of view, a rather straightforward process. And then on the recourse, so that would be, from my point of view, in the normal course of business. So what happens if a debtor doesn't service their debt, according to process. On a high level, I would say that it's important that we protect our interests and of course, shareholders' interest in these cases. So any deprivation of our ownership rights and financial and operative rights, we need to follow these processes. Then for EDF project, of course, this is one of those that we follow from a technical point of view, closely that how are these projects going and we have, amongst many other plants visited also Hinkley Point and are in good dialogue with EDF. But our focus is on the Nordic Clean Energy and helping our customers to decarbonize and electrify their businesses. So from that point of view, the Hinkley Point case is not -- and U.K. nuclear is not relevant for us to help our customers. Otherwise, of course, interesting project to follow how that goes technically, financially and construction-wise.
Operator: The next question comes from James Brand from Deutsche Bank.
James Brand: A couple of questions from me. Firstly, on power demand. So you mentioned some power demand estimates at the beginning but I think you'd estimated in the past that you could potentially see up to 30% growth in Nordic power demand by 2030. I'm not sure that's still roughly your expectation or whether that's changed. The question is not whether we'll see that materialize or not, but if we do see that kind of power demand growth materialize, do you think the Nordic system can handle it? Because obviously, been quite a long discussion about nuclear in the Q&A. I agree you've like seen nuclear for 10 years, maybe 20 years. But there is a lot of renewables being built. So is that renewable capacity that's been built enough? That's the first question. And then the second question is on optimization. You look like you overshot your EUR 6 to EUR 8 target again in Q3. So you're quite comfortably overshot that for the first 9 months. Maybe you could just talk us through what's going better and why you're still reiterating the EUR 6 to EUR 8 medium-term target in spite of things clearly going better for quite a few quarters now?
Markus Rauramo: Okay. Thanks for the questions. I'll leave the optimization premium for Tiina. And on the -- can the Nordic system handle growth? Well, I referred to the -- to Fingrid's recent estimate, so that is indicating a really significant growth. These growth estimates, they match with what we hear from our customers and the customer interest pipeline, even with the delays and cancellations of projects, there are new projects coming into the pipeline. So it looks logical and kind of makes sense, steel, aluminum, data center, battery factories, hydrogen and hydrogen derivatives. So the decarbonization, electrification makes sense. Then a question that, okay, is Nordic a place to do it? Well, there is -- the system is basically clean. So there is clean, reliable and competitive energy available. Infrastructure, the roads, sports, electricity grid, telecoms grid, availability of very skilled workforce throughout the country, all the way from South to North Lapland, where you have big steel, big forest industries. So it's possible to locate big businesses in very many locations in the Nordics. So I would say the fundamentals are strong. And I say this from a global perspective, observing what's -- what are the possibilities in the U.S., Canada, Australia, Continental Europe and other places of the world. Then to your actual question that can the Nordic system handle it? Categorically, I would say, yes. So when I look at what Fingrid is doing, what SvK are doing and Statnett in Norway, I think they have -- from my point of view, and not, of course, being deep inside, but there seems to be a very realistic development of where they are focusing their efforts of building new transmission lines. Of course, there are bottlenecks. Of course, there are places where the system is being stressed. South Sweden is one example. There are bottlenecks of moving energy from North Sweden price areas to South Sweden. But all in all, the system from my point of view compared to many other places has the prerequisites that you can integrate many terawatt hours or tens of terawatt hours of new demand and new supply. Will it be easy? No. But is it possible? Yes.
Tiina Tuomela: All right. And then....
Markus Rauramo: Optimization.
Tiina Tuomela: Yes, continuing the physical optimization. So our guidance for the optimization premium still is from EUR 6 to EUR 8 per megawatt hour. And we have said that it might, and it varies between the quarters. But if we look at overall, the year, so that is still our assumption. At the same time, when we say that what is our kind of guidance based on? So the one very important element that what is the volatility in the market. And if we look at the volatility in the market, so we can see that in Finland, which has been a bit more restricted when it comes to the interconnection to the other markets, the nuclear availability issues in the third quarter. So the volatility has been still strong. However, in Sweden, we can see a bit lower volatility numbers at the moment, still higher if we compare the earlier years. The other driver for the optimization premium is the environmental values, where we see that for guarantee of origins for hydro, for example, have somewhat decreased a bit. Likewise, for the nuclear. And this is driven by that there is less and less coal condensing power production. So the demand for environmental values has been a bit lower. But still, I think the 6.8% is we are very comfortable to say that this is our guidance this year and going further.
Markus Rauramo: James, I’ll come back to the question that is RES enough. We can take different viewpoints on that. So the connection inquiries from RES developers are massive. So we talk about hundreds of gigawatts in Finland alone. So huge amounts. So one could say that, well, the problem is not having enough megawatt hours for the increased consumption. But then the question is that, okay, so we already have a volatile – we have the most volatile power price in Europe and Finland and is that good for industries and consumers? The answer is not. It’s not ideal. So it would be good to have full load power and flexible power. So RES is easy to build, but then it means more transmission grid, more connection points and more explanation of land use. So I would say we are advocating that there’s a balanced approach, which would provide all possible CO2-free power production into the system. Then it’s up to investors and sponsors and users, what ultimately gets built. But if it’s majority RES then it means that there has to be more demand flexibility than today. This requires consumers, batteries, everything, cars and industry much more integrated into managing volatility. And this is not something we see from the industries today. So still aluminum data centers and hydrogen production, at least on a theoretical level, all are requiring very steady power.
Operator: The next question comes from Daniel Haugland from ABG Sundal Collier.
Daniel Haugland: So my first question is in terms of the Other segment. Now that you have divested a material part of it, you also mentioned this change in internal charges. So I was just wondering, is it possible to say what approximately will be the annual run rate EBITDA or EBIT for this segment after the recent changes? So that is my first question.
Markus Rauramo: Do you want to go with the second question as well in the same go, so we take both?
Q - Daniel Haugland: Yes, sure. So the second question, you touched a bit upon it earlier, but I guess it's been a topic for some time. So it seems like you have a quite conservative leverage levels, both compared to European utilities and also to kind of your own history. And obviously, you mentioned that the Board will look at that at year-end. But just given your current plans for capital allocation, is it relevant to think that you are looking at acquiring generation assets from others also? Or is it mainly kind of distributing excess cash to shareholders that is on the table? That was my second question. .
Markus Rauramo: Okay. I can take the second question, and if Tiina, you want to comment on the Other segment. So it is true that in comparison to some other utilities, even that like max target level 2 to 2.5 looks low. But with the merchant exposure to the Nordic volatile power prices, the 2 to 2.5 equates to the FFO to the net debt ratios that the rating agencies require for a solid investment grade rating. So that's to start with. And then on the conservatism, otherwise, within that target, like I said earlier. So it is to be ready for -- partly for increased volatility and turbulence. So we want to be in a position of strength in those kind of situations. Then we have said that in our core operations, we are ready to selectively grow. So that can also mean in acquisitions if they are available. So in hydro, nuclear, in heating, consumer solutions, if there are opportunities, we would look at them as we have said earlier. And some examples of what has been the scale of such activities is the acquisitions in Consumer Solutions. These are not massive but directionally given indication of the type of synergetic, inorganic growth that we also would look at. And then, Tiina, if you want to comment on other?
Tiina Tuomela: Yes, gladly. So first of all, if we look at our Other segment, so that consists the Circular Solution businesses and then enabling functions and our innovation and ventures operations. And clearly, when the recycling and waste is divested, so the cost level for that part will go away from our numbers. So we have said that the remainder of the Circular Solutions business will stay with us, so the comparable EBITDA is roughly minus EUR 20 million, which consists of our turbine and generator services, then the battery recycling and other bio 2x activities or U.K. recycling and waste business. The other part is the enabling functions, which, of course, is now under very tight scrutiny when it comes to our cost levels, scoping. We do the activities what we already have also announced the IT. IT has done the reduction of the headcounts and we are monitoring our processes and improving our activities. If we look at the last 12 months number. So the EBIT is minus EUR 138 million compared to previous year, EUR 181 million. So there, you can really see the activities, what have been done and what will continue. .
Operator: The next question comes from Deepa Venkateswaran from Bernstein.
Deepa Venkateswaran: I had a follow-up on a couple of questions that have been already raised. So the first one is the ability of the grid to handle the load. Could you comment specifically on what you're seeing in Finland where the grid connection are available for large data centers and the 501 gigawatt scale. As you know, in some other countries like Ireland, Netherlands, it's impossible to get. So could you maybe give any market context on how Finland, in particular, is positioned at least from a grid connectivity perspective, is the TSO offering connections et cetera? And second question, I know that you've appreciated the interest in nuclear PPAs being signed in the U.S. I wanted to know, again, this is less specific about the hedging answer that Tiina gave, but more broadly, are you having more conversations about interest in both nuclear but also hydro PPAs to sort of balance this 24/7 clean energy, particularly from technology companies. So maybe if you can give some color on how the conversations are now versus a year back or 6 months back?
Markus Rauramo: Okay. Again, I'll pass the nuclear PPA question to Tiina and I'll take the question about the grid. So indeed, this, we identify also that it is important that both supply and demand can be connected. And let's say, again, I'm -- I have good confidence in that Fingrid and SvK are serious about connecting loads. So when we talk with them, there is definitely kind of a bigger understanding that decarbonization and electrification is something that are good things and they ought to happen. We have addressed it so that we have the site development. We have a specific site development team. We have identified in Finland, 13 sites. And grid connection is exactly one of the points we are addressing there. So finding places where new demand can be connected relatively quickly. And this would have applied to, for example, the Microsoft Kirkkonummi, Espoo, Vihti sites. So this was important for any data center operator. We didn't know about Microsoft when we were developing the sites but we were in discussions both with [Karuna] as the TSO as well as Fingrid as the TSO that we need to be able to tell an investor that they can connect their loads. And the same applies then to the site development. So we're trying to find places where we get some kind of more optimal locations than not for this connectivity. This was a little bit long unwinding explanation to just say that I have the comfort that also very large loads can be connected. And I think we, in our own materials that are in the monthly updated materials, I think we're saying sites with connections between 60 megawatt to 1.3 gigawatt. So we are saying that with certain confidence that this is possible.
Tiina Tuomela: Yes. And then continuing with the PPAs, and maybe starting first with the nuclear PPA. So as we know in the U.S., it is really the grid connection, which is limiting the kind of access and availability of the power. And therefore, there are solutions that have behind the meter directly to the sites and have the power directly from the nuclear plants. I think in Finland, we still have the strong network, and it’s possible to buy directly from the grid. However, we see this is a potential when we are also considering the lifetime extension. So Loviisa, we have already decided the lifetime extensions, but we are considering in Sweden, Oskarshamn and Forsmark, together with other owners, the lifetime extensions, also TVO is doing the environmental impact assessment of the potential extension of the lifetime of Olkiluoto 1 and 2. So of course, these capacities with the 20 – potentially 20 years more lifetime is a lot of energy, which could be utilized if so, so wanted for these purposes. The other trend, what we see is that this RFNBO so renewable fuel, nonbiological origin is one area where the – particularly, this clean transition project and green hydrogen projects are really interested in. And we are also looking at that possibility to how to best way to match our kind of what we provide for the customers and how to match that one. So certainly, something very interesting for the future in our PPA portfolio.
Operator: The next question comes from Harrison Williams from Morgan Stanley.
Harrison Williams: Just one from me. You mentioned in the presentation that you had reserved a number of sites for these industrial site developments. Can you just expand on that? Is that you having reserved the land? Or is that an industrial offtaker having reserved it with you pre-FID? And then if it is the latter, what is the hoped timeline that, that may be converted into, I assume, a power or offtake PPA. That would be great.
Markus Rauramo: Yes. So it is exactly the latter. So it’s industrial. So we have the sites already reserved or pre-reserved with the landowners and there is industrial interest. And then how – so this – we reserve the land for a limited time, which is not too long, so for a year to 3 years. And from that, then from an investment decision of an industrial investor to the electricity demand, I would say, between 2, 3, 4 years before there is increased demand. And on that note, so I repeat that when we look at how we see the demand coming from different sectors, still the outlook is that still aluminum hydrogen derivatives, data centers and battery factories, roughly in this order would be the demand increase. But having said that, the thing that seems to be happening quickest is the data center demand. So the need for new data capacity grows more linearly than, let’s say, new green steel or green aluminum or hydrogen projects.
Operator: The next question comes from Iiris from Carnegie.
Iiris Theman: This is Iiris from Carnegie. Two questions from my side. So firstly, what do you think is the current outlook for the power supply demand balance next year? And can you comment on the situation both for Finland and the Nordic region? And then the second question, Nordic power futures have recently come down a bit, both, I think, in the short and long term. So what are your thoughts on this recent movement?
Markus Rauramo: If I comment on the power prices. So the '25 calendar year system price at 40 and 26 at 40. This is -- when I look at what is driving that, so the continental commodities impact that. And we have seen, if you look half year back, there's been a significant rebound. So that gives support on the gas price, then it's the anticipated supply-demand balance in the Nordics. And the question is then, okay, so there are megawatt hours available, but how much 24/7 power is that available? So this should be reflective of what is the price required to have the full load power in the market. On the supply-demand side, the market has been well supplied by new renewables and Olkiluoto 3 but at the same time, there are capacity reductions. So one example is that we took out the last coal-fired CHP in Suomenoja of course, that's not huge. But eventually combined heat and power capacities are coming out. So less dispatchable full load power and more intermittent renewables in the market. So maybe I stop there. Tiina, do you want to add something on the picture?
Tiina Tuomela: No. I think that covered well the current situation.
Operator: The next question comes from Ingo Becker from Kepler Cheuvreux.
Ingo Becker: My question is somewhat related actually to the preceding one. You are mentioning increased solar and wind production in the system for lower prices. And I was wondering, given that you have made some comments on system prices for the next 2, 3 years, what your view is what the increasing solar and wind production will do to system prices, all else the same. Your own strategy is demand-driven renewals, but I'm still wondering what you believe might be the overall impact of increasing renewables in the system? And my second question would be what that might do to the optimization premium. We probably would need to argue that the environmental value of your optimization goes down as the system itself cleans up. And as you mentioned before, already seen prices for guarantees of origin coming off. But on the other hand, you're mentioning apparently, you're making money from the volatility, which seems to be still very good. And we could currently argue that, at least over the medium term, that volatility could increase. So I would be interested, as the second question, would you expect increasing renewals penetration to do with the optimization premium, net-net and all in? And maybe related to that, just clarifying something you said, Tiina. You said that the volatility in the system is still pretty good in different electricity areas within the Nordic system. I just wanted to clarify, are you benefiting predominantly from the volatility within the Finnish system, within the different Swedish systems? Or are you particularly so benefiting between -- from the volatility between those different areas?
Markus Rauramo: Okay. I'll leave the optimization premium and area of volatility to Tiina. On the, how does the increased supply impact the system. So my take is that we have a partial answer for increasing demand, which is renewables. So those can be built to a certain extent. Eventually, when there is more and more renewables, the question on land use and on building transmission capacity, the land use there and for solar and wind, this is a societal question that needs to be explained. So I would say that better to have a balanced toolbox available. Another -- or 2 other aspects is that we see little demand for pay-as-produced renewable. So somehow integrating renewables into a more stable or offering -- matching a customer profile, that is something we are thinking how to do that better because already today, we see that there is little appetite for that. And then the last element I wanted to bring here is that with the increased -- with inflation, with a global supply chain challenges for new equipment supplies, the question is that can new renewables be produced at an attractive LCOE and at an achieved power price that supports investments? And the short-term answer is no because we have seen that with higher interest cost and higher equipment cost, there are hardly any new starts of wind and solar. And then Tiina, if you want to finish with the optimization?
Tiina Tuomela: Yes, exactly. So renewables coming to the markets and even more so. So we have seen that, that increases volatility, yes. And I think this is the major driver also, the physical optimization. What we do is the driver for our optimization premium. Environmental values, I think there is a variation. So currently, we see a bit decrease in the demand. However, I think stay many system and customers also require environmental value. So I think this is more kind of a fluctuation of the time and the demand and the customers. Then about the optimization premiums, whether it is in the area or between the areas. So I would say mostly, it is in the area because the optimization premium is available where we have our own production. So we utilize that against and for the area to keep the balance -- to keep the balance of the system as well. .
Markus Rauramo: There was one thing I wanted to still raise that, okay, against the question of what does the increased solar and wind do to the system. So it increases the volatility if nothing else happens, and there is limited appetite for pay-as-produced power. But reflecting on that, our portfolio with flexible hydro, with reservoir capacity and stable nuclear full load production, it's a really good portfolio. So that's, at least what we see is that the customers, basically everybody's approaching us to ask for quotes for long-term and medium-term supplies of power, so volume and price indications. So we can see that for us, it's critically important that we take good care of our competitiveness, of our production cost and the availability of our assets. They clearly have high value for our customers today and going forward.
Ingela Ulfves: Thank you so much. And I think it's really good to end on this note. Thank you for the really active discussion and dialogue today. Very good questions. I'm especially happy that we were discussing the long-term prospects for Nordics power market and Fortum. Let's continue the dialogue then offline. Unfortunately, we are technically now limited to end at this point. But as said, we're happy to continue the discussions then outside of this call. Wishing everyone a very nice rest of the day. Thank you for your participation here today.
Markus Rauramo: Thank you.
Tiina Tuomela: Thank you.
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