Fortum Oyj (FORTUM) Earnings Call Transcript

Good morning, everyone, and warm welcome to Fortum's joint webcast and news conference for the investor community and media on our third quarter 2026 interim report. My name is Ingela Ulfves and I'm heading Investor Relations at Fortum. As always, there will be a replay on this webcast later today on our website. With me here in the studio are our CEO, Markus Rauramo; and our CFO, Tiina Tuomela. Markus and Tiina will together present the group's financial and operational performance. Now let's go to our presentation, after which we will take your questions in the Q&A session. So with this, I hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to this call also from my side. I will start by going through the highlights of our third quarter and our financial performance and then talk about market development. After that, Tiina will provide more details on the financials and how the operational performance turned into our results. Let me now start with the highlights. Our results in the third quarter improved compared to last year. At the same time, it is good to note that the third quarter typically is the smallest quarter result-wise and we generate most of the results during the first and fourth quarters. Before we dive deeper into the results, let's look at the highlights of the third quarter. Our power price in the third quarter amounted to EUR 45.5 per megawatt hour compared to EUR 46.1 per megawatt hour last year. The realized market price, i.e., the blended price in Fortum's generation areas was EUR 46 per megawatt hour, i.e., approximately EUR 10 up compared to EUR 36.7 per megawatt hour 1 year ago. The main reasons for the slightly lower achieved power price where lower physical value creation and a high hedge ratio. This year, nuclear generation was higher as there were fewer nuclear outage days compared to the third quarter last year. Weaker hydro conditions and allocation of hydro volumes to future periods resulted in somewhat lower hydro output. Our Hydro generation volume was 9.8 terawatt hours which is 0.7 terawatt hours more than in the third quarter last year. We maintain our full year guidance for the optimization premium intact. It is expected to be between EUR 8 to EUR 10 per megawatt hour. We continue to have a strong balance sheet and good liquidity. So our overall financial position continues to be very robust. Despite uncertainty, in the operating environment, we continue to see robust underlying customer demand from various industrial sectors, which we believe reflects the long-term power demand growth. One proof point of this strong customer demand is the 22-year nuclear lifetime extension PPA with Google that we signed in September. At the end of the June, Fortum also took a significant strategic step for growth in our Consumer Solutions business, as we announced the [indiscernible] shares in the Norwegian company, Elmera Group ASA. I will come back to more details on both of these next. In September, we signed the largest sales agreement in Fortum's history. It is also the first large-scale lifetime extension, nuclear PPA in Europe. The agreement provides economic certainty for the lifetime extension and power upgrades of the Loviisa nuclear power plant through 2050 and demonstrates the important role of nuclear power in meeting growing customer demand for reliable, low-carbon electricity. Alongside the agreement, we also signed a memorandum of understanding, covering potential future cooperation in renewables, flexibility solutions, nuclear new build and overall energy portfolio management services for Google. Then a couple of words about the Elmera PTO and process. We are very excited about this transaction. as the combination of Elmera and our Consumer Solutions business, will create a stronger Nordic business with greater capabilities to serve customers and create long-term value. We are very pleased that Elmera's Board of Directors and the whole management supported the deal and recommended the transaction to all shareholders. As we received the approval from the competition authorities in Norway already in September and achieved the 90% threshold at the beginning of October, the PTO process has been rather fast and is now being finalized in the coming weeks. On 23rd of October, we settled the voluntary cash tender offer for all issued and outstanding shares in Elmera, excluding Elmera's treasury shares. The total consideration was approximately EUR 463 million and represents almost 92% of all Elmera's issued and outstanding share capital. Elmera is now expected to be consolidated into Fortum Group and included in the Consumer Solutions segment from 31st October onwards. Next, we intend to carry out a compulsory acquisition of the remaining shares of the squeeze-out process. After that, Elmera will be delisted from Euronext Oslo Bors. In the previous results call, I went through the strategic rationale for the offer and how it supports our strategy and long-term value creation for our stakeholders. In short, the rationale is built around 4 key elements. Number one, there is an ongoing structural change in the electricity market, serving Nordic customers and small- and medium-sized enterprise customers. Number two -- three, this transaction creates value for our shareholders and other stakeholders. And number four, it makes us fit for the future. Together, we and Elmera will create a stronger Nordic platform with the scale, capabilities and financial strength required to remain competitive. The combination of the 2 brings together complementary businesses with a shared focus to deliver value to customers. By combining customer volumes, operational infrastructure, and expertise across the value chain. The combined business is expected to achieve meaningful cost efficiencies and operational synergies to the benefit of Nordic consumers. The combination also benefits employees by creating a larger and more resilient organization with greater resources, broader capabilities and increased opportunities for long-term development. Then I will move over to our main figures and financial performance. Let's look at our comparable headline KPIs for the group's third quarter and first 9 months of 2026. In the third quarter, comparable operating profit increased, while EPS remained flat. Our comparable operating profit totaled EUR 102 million, an increase of EUR 5 million. Comparable earnings per share amounted to EUR 0.08 per share. Operating cash flow increased slightly to EUR 134 million. Also for the first 9 months, all KPIs developed positively. Our leverage, measured by the net debt to comparable EBITDA ratio was 1.4x. Next, a few words about the market environment. Let's first look at the spot price and hydro reservoir situation for the Nordic market. It's good to note that this is not Fortum's reservoirs, but the whole Nordic market. At the beginning of the third quarter, the reservoir balance had a deficit of around 5 terawatt hours which then declined rapidly in July to reach a significant deficit of 13 terawatt hours by the end of the quarter. Nordic Day had prices in the quarter increased year-on-year. Prices in some areas even doubled, driven by the lower reservoir levels and stronger continental price signals. Finnish spot prices were a notable outlier as they slightly declined year-on-year. During August and September, there were low wind periods, when the entire Nordic market benefited from strong continental spot prices which were driven by surging gas prices. Nordic power demand in the third quarter increased by 1 terawatt hour year-on-year, as power consumption totaled 85 terawatt hours. For the last 12 months, power demand in the Nordics was somewhat above 400 terawatt hours. In September, Fingrid updated their demand forecast for the Finnish market. They anticipate slight growth for the coming years, mainly driven by increasing demand in the data center sector. In general, Finland is seen as 1 of the fastest-growing areas of Europe, measured by power demand growth. This concludes my part, and I would now like to hand over to Tiina to talk more about business performance.

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 figures. I will start with some of the comparable KPIs. Comparable operating profit for the third quarter increased from the previous year and amounted to EUR 102 million. In the quarter, comparable net profit decreased slightly to EUR 65 million. Consequently, our comparable EPS for the third quarter remained stable at EUR 0.08. Our cash flow during the quarter was EUR 3 million higher than in comparable quarter and totaled EUR 134 million. Then over to the segment result for comparable operating profit. Let's have a look at the third quarter waterfall Water segments. The main reason for the improvement in the group's comparable operating profit was higher nuclear generation. This was partially offset by lower physical value creation. The result in both Consumer Solutions and the other operations segment declined. In the Generation segment, comparable operating profit increased by EUR 29 million impacted mainly by the higher nuclear volume, partly offset by lower physical value creation. The result of this district heating business decreased somewhat, impacted mainly by reduced availability related to ongoing decarbonization project and lower power prices in Poland. This was partially offset by higher heat volumes in the Nordic. Comparable operating profit for Consumer Solutions decreased by EUR 9 million, mostly due to the lower sales margin compared to the extraordinary strong margin last year. In the other operations segment, comparable operating profit decreased by EUR 15 million, mainly due to the higher fixed costs, including certain one-off items. The result of the Circular Solutions businesses was slightly lower compared to the comparison period. When looking at the year-to-date performance, we see the same result pattern across segments. The group's comparable operating profit increased by EUR 55 million to EUR 729 million. The Generation segment's result increased while the result in the Consumer Solutions and Other Operations segment decreased. In the Generation segment, comparable operating profit increased by EUR 86 million, positively impacted mainly by higher spot prices and higher nuclear and hydro volumes partly offset by a high hedge ratio. The result of the district heating business increased mainly due to the higher volumes, higher sales price of power and new electricity-based production assets. This was partly offset by higher fuel costs and impacts from reduced availability in Poland. Comparable operating profit of the Consumer Solutions segment decreased by EUR 16 million to EUR 80 million, mainly due to the lower sales price sales margin compared to and higher fixed costs. In the other operations segment, comparable operating profit -- operating loss increased to EUR 86 million. The result of the Circular Solutions businesses improved slightly compared to the comparison period. Then over to the loan maturities, leverage and liquidity. Our financial position continues to be strong, primarily supporting our objective to maintain a credit rating of at least BBB. It naturally also provides a good financial foundation in this very turbulent market environment, but it also cuts the growth and shareholder returns. In these uncertain times with various geopolitical conflicts, this is a very good position to be in. At the beginning of the third quarter, our net debt was EUR 1,761 million. In the third quarter, operating cash flow was EUR 134 million and [indiscernible]. The change in interest-bearing receivables and margin amounted to EUR 43 million, while FX and other effects were EUR 29 million. The change in collateral debt was EUR 24 million. Consequently, at the end of the quarter, our net debt was EUR 1,811 million and the leverage ratio for the net debt to comparable EBITDA was at 1.4x. This does not take into the account the Elmera transaction of EUR 463 million which was paid last week on 23rd October. Looking at our debt portfolio and the loan maturity profile, I want to highlight a few things. At the end of the quarter, our gross debt excluding leases totaled EUR 4 billion. Our maturity profile is very balanced, and there are no large maturities in any single year. In 2028, a EUR 500 million bond will mature. Bonds are and continue to be our primary source of funding. We continue to have ample liquidity reserve of EUR 6.7 billion. At the end of September, these were split in EUR 2.3 billion of liquid funds and EUR 4.4 billion of undrawn committed credit facilities. The cost for our EUR 4 billion year loan portfolio is 3.4%, while interest income that we get for our EUR 2.3 billion year of liquid funds is 2.5%. The overall objective is to have sufficient liquidity while optimizing the balance between the debt and cash to minimize funding cost. Then over to the final section, the outlook. The outlook section includes guidance regarding our outright portfolio, capital expenditure and taxation. Let's start with the hedges. For the remainder of this year, the hedge price is EUR 43, and the hedge ratio is 80%. The hedge price for 2027 increased by EUR 1 to EUR 42, while the hedge ratio increased by 5 percentage points to 70%. The hedges for 2028 are now disclosed for the first time. The hedge price for 2028 is EUR 42 while the hedge ratio is 45%. We are including financial contracts and PPAs in these figures. And it is good to note that 2028 hedges include the share of the Google PPA for the first year of the contract. For the year 2026, we maintained the guidance for optimization premium estimated to be between EUR 8 to EUR 10 per megawatt hour. Predictability becomes more uncertain for the further out in time you go. Consequently, our longer-term guidance for the year 2027 and onwards is between EUR 6 to EUR 8 per megawatt hour. Taking into account all announced outages, nuclear output for 2026 is estimated to be below the normal level of 26 terawatt hours. Based on the current market information, we estimate that our nuclear volume will be approximately 23 terawatt hours in 2026. Previously, our estimate was between 23 to 23.5 terawatt hours. Our capital expenditure guidance remains unchanged. We have EUR 550 million committed for the year 2026. This includes maintenance, but excludes potential acquisitions such as the Elmera transaction. For the period from 2026 to 2030, the committed CapEx is EUR 2 billion, of which EUR 750 million is growth. Annual maintenance is expected to be EUR 250 million. The guidance for our corporate tax rate also remains unchanged for 2026. We expect the comparable effective income tax rate to be in the range of 18% to 20%. This was all for my presentation. And now we are happy to answer your questions. So with this Ingela, over to you.

Thank you so much, Tiina, and thank you, Markus. This was a rather straightforward quarter. Moderator, please go ahead.

[Operator Instructions] The next question comes from Harry Wyburd from BNP Paribas Exane.

So firstly, can we talk a little bit about the newly disclosed 2028 hedging. It's a little bit lower than I might have expected. And I just wanted to dig into it a bit. So -- if you look at the region premium inclusive prices over the last 6 months or so, they've been more like 45 and I guess you're going to have some, as you mentioned, some Google PPA in there. It help us understand roughly how many terawatt-hours of 28 do you expect from the Google PPA, which should help us weight things? And -- why is it 42? Is it because you laid most of the hedge late last year or very early this year. So any color you can give us on the makeup of 42. And then secondly, flipping things looking further forward, obviously, Nordic power prices is incredibly strong for 2027, 2028, et cetera. More so than would be purely explained by just the moves in gas prices and carbon prices. So I wonder, could you give us a little bit of a thought and diagnostic of what is driving forward prices up more to 3 years out. Is this a demand response? Or is this sort of lower hydro volumes echoing down the forward curve? Is it interconnects prices because we -- a neighboring region are going higher, just some color on why you think we're seeing such incredible strength in longer forwards? .

Okay. Thank you very much for the good questions. And I can start with 2028 -- behind Nordic pricing. But starting with hedging. So we do the hedging several years ahead, as you know, historically. So the hedge price is that you see today for 2028. These are a result of already some years of building up the hedging portfolio. So in looking at how have we come to the EUR 42 level. It's a result of going back a couple of years and looking at where the prices were then. Then on top of that, there's a piece of the Google transaction. And when we communicated the transaction, we didn't disclose the price, we gave the RONA impact and said that the deal starts in 2028 and then it goes into full effect in 2030. So it's now still a part of the volume for '28, '29 and then full effect for 2030. So these are the components that get us to the hedge price that we see now for 2028. And then, Tiina, about the Nordic dynamics.

Very good. So as we know, the Nordic system is very hydro driven. So I would say that the hydro situation is currently 1 of the main reasons. So -- at the moment, the Nordic reservoir levels are around 13 terawatt hours below the normal level. So I think this is the first indicator. Then of course, the Continental Europe's power price and also the gas price situation. So price is nearly double at least when it comes to the power in some market areas that has an impact also indirectly to the Nordics. And then the third one, of course, is what is the outlook for overall demand-supply situation and we see many data center projects coming on the lines, which obviously, they come step-by-step, not immediately. But probably, this is the assumption that how the overall kind of demand supply situation will impact. So I would allow these 3 reasons.

The next question comes from Rob Pulleyn from Morgan Stanley.

A couple of questions from me. So firstly, if we can take the data center angle on a different angle. So we saw that the finished supervisory agency instructed Google to cease work at the [indiscernible] and [ Kajani, ] if I'm pronouncing that correctly, sites. And I wondered whether this would have any impact upon your current contract, future contracts. -- or, in general, just data center development in Finland, given this -- there seems to have been all over the media, shall we say. Second question on a different angle. And is that you have a financial stake in Oskarshamn 3 which is obviously run by Uniper. And we were wondering, given obviously the life expiry of this particular plant as it stands, if there was any scope for extension there like you've done [indiscernible] which, of course, would create more volumes and more volume visibility over the coming years.

Okay. And same thing I can take the data center angle. And if you want to talk about the lifetime extensions in general, -- but starting -- so indeed, we have seen the environmental authorities and the supervisory authorities activities. I regard this as quite normal. So -- no impact on our contract, no impact on our future MOU either. So this is in the normal cost of business. Companies have to file and follow the supervisory authorities requests. Overall, I would say in that context that there's a very large portfolio of customer demand on our side coming from steel, aluminum, data centers and other sectors, prospects of hydrogen also going forward. And that's why we continue to talk about the robust demand in our customer portfolio. And we are responding to that also with our supply portfolio when customers need additional supply. So the Finnish fundaments continue to be very, very robust. And then over to Tiina, on [ OKGL ] lifetime extensions.

So lifetime extension is clearly in our focus being the 1 of the major value value driver. If we look at our current asset portfolio. So at Loviisa we have already approval to extend the lifetime. And now with the Google deal also this commercial support. In Oskarshamn well, like in Forsmark, so they are investigating the lifetime extension. The system is a bit differently. So there is a regular kind of regulatory check of the condition of the plant. So not similar process, but similar intention. Similar intentions to look how the lifetime could be extended. So that is on the planning.

Okay. That sounds reassuring on both sides. If I may, a quick follow-up. -- this might open the door on it. But if we could give an update on your position vis-a-vis Uniper's Nordic assets because obviously, we're getting close to the end of the year. When I think that this option you have sort of expires and sort of where the latest thinking is or anything you can add?

Yes. Thanks for the question. So we continue to with our position that if there is hydro or nuclear available in the Nordics, we are interested, and we would look at it for what we know now is that the German government has ticked for indications of interest publicly for the up to 75% of all Uniper shares. And this is something where we have said that this is not interesting for us. If nuclear and hydro are available, then we continue to be interested. But now the German government is assessing as far as we understand, the IPO track and the bilateral sale up to 75%, and we are not a part in that.

The next question comes from James Brand from Deutsche Bank. .

I was hoping I could sneak in 3. Firstly, you obviously completed the offer for Elmera now. I was wondering whether you could say, obviously, you haven't kind of announced a synergy target, but is there anything you can say about potential synergies or any kind of market some that they could be quite substantial. That's the first question. And the second 1 is on data centers. In Finland, as I understand that there's about 2 gigawatts that's under construction and at least another 1 gigawatt that looks very advanced and very likely to come through in the next kind of 2, 3 years. So around 3 gigawatts maybe 4. And I was just wondering whether you kind of said earlier there was robust customer demand for PPAs, but maybe you could just give a bit of an update in terms of your in discussions around PPAs with all of this capacity, these counterparties like contracting at this point? Or are they holding off? Is it interesting to kind of know what's going on there? And then thirdly, I was wondering whether you could give an update on the Finnish data center law. You gave a bit of an update on your last results call, but is that still kind of moving forward? Do you have any fresh expectations or whether that's likely to be coming through .

Okay. So 3 questions. I'll start with the Elmera. Tiina, if you want to take reflections on the DC law and grid prioritization and so on. And I can talk about the -- also the contracting pipeline. So starting with Elmera. So Elmera is almost 1 million customers. We have 2.3 million. So that is the expectation that there will be very meaningful synergies as we have had from previous transactions all the way to [indiscernible] Orange Energia. We will then disclose what our synergy targets are and what would be the expected time lines of those once we have then closed the transactions and on the delisting and go into into execution. We are targeting to benefit our stakeholders, our customers and the whole market with this. So this should give good results for everybody, better services, better quality, better results for us, good products for our customers. Regarding data centers, indeed, 1 way to track the progress is now to look at the construction companies order books and what is happening on that front, and we see indeed progress as you described in the sector. We are discussing with data center sector with hyperscalers, co-locators, Neoclouds here and globally about their interest, but also with the other sectors. Metals and Mining, steel, aluminum battery factories. And then on top of that, the as well as electric mobility increasing. So active discussion with all of the sectors and we will then update on the material transactions as they happen, like the Google transaction or otherwise, then quarterly in connection with the quarterly results, the hedge ratios and hedge prices but activity across the board, which does indeed feel very robust. And then, Tiina, if you want to talk about reflections on the DC and grid.

So indeed, a lot of interest on the data centers in -- overall in the Nordics. So -- and particularly, I think Finland has been the main focus in many of the companies. So I think 1 number or reflection on the overall Nordic is that there are projects around overall 10 gigawatts. And in Finland, Finland also those numbers, what you indicated. So many of the project going on. Of course, the other thing is that how many they will be completed in what timetable. This has, of course, then raised the concern that what is the availability and how to make all these projects to fit to the system,; provided also that other industrial projects are prior to advertise and make sure that they are getting to the access to the market. And therefore, there is discrete connection prioritization framework on the preparation, which is now planned to be online early next year. And many companies, including us, are giving the comments to the prioritization in a way, work. but we are a bit concerned that there is a kind of quite long time line when there would be an answer who gets or who don't get to the permit or access to the grid and it would be very important to, in a way, support now the growth, what is now seeing in many fronts, while, of course, taking care of that grid is stable and we get get the main projects in line. But at the moment, I think good progress overall. .