Fortum Oyj (FOJCF) Q1 2023 Earnings Call Transcript
[Operator Instructions] The next question comes from Harry Wyburd from Exane. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my questions. So I’ll stick to the two. Firstly on Russia, can I just understand a little bit more about what the Russian government action means? So can you still sell the assets even if you don’t control them at the moment? And is there any long-term legal redress if the government management team basically damages the assets in some way that’s prejudicial to Fortum. That’s the first one. And then the second one, I just wanted to ask on the hedging for 2024, I think forward prices are about 70 as of now for 2024 for Nord Pool. And is there any reason why the hedging progress was quite limited in this quarter with a limited change in the achieve price just interested why weather hasn’t moved up [ph]? Many thanks.
Okay. Thank you for the questions. So I can start with Russia and then Tiina can maybe take the hedging question. Yes. So first of all, we strongly object what the Russian government has done with the takeover. We don’t see any grounds for what they have done. We have a well-maintained asset that has been producing energy. The argument that secures Russian Energy Security, we do not think is valid at all. Can we sell? We are the title holder. So in theory, we can sell, but of course, this – that the management has been taken over by the Russian government that will complicate things there. The bottom-line is that we will now pursue our legal rights both in Russia and internationally, for example, under the international investment protection treaty and others. So we will pursue our legal rights through these processes. Then for the hedging, Tiina?
Okay, thank you. Yes. So, the hedging for 2024. So the hedge percent is 45. And the hedge price €43 per megawatt hour. And if we look at the development from the end of the year, so the hedge percent is roughly the same, but the price has increased. And typically what we do the hedging, so we start the hedge roughly three to two years beforehand. So of course, the current hedge price in a way is the accumulation of the hedge has done earlier. And we can see also this in a way higher price reflected to the current situation. But I would say that this is quite typical level what we have at this time of the year. And of course, there’s time to time to end of 2023 when it goes to the delivery. So of course, it’ll depend at the end of the prices during this year.
Okay, thank you.
The next question comes from Iiris Theman from Carnegie. Please go ahead.
Hi, this is Iiris Theman from Carnegie. Firstly, can you share what kind of discussions you have had with credit rating agencies? Are they going to update your credit rating profile in the short term now that you will deconsolidate Russia?
Okay. Do, do you want to go ahead with if you had more questions so we can take them in one row?
Yes, I can go ahead with my second question. So on optimization premium, can you comment your Q1 level compared to Q4 and given that power prices volatility has increased, is it fair to assume that your optimization premium will be higher in the coming years than €2 to €3 in the past? Thanks.
Okay. So on a general level, we have continuous dialogue, of course with the rating agencies. So when we have a bigger news like Russia impairment and so on, we communicate with the rating agencies. We understand that from a credit point of view, the initial comments from the markets are that Russian deconsolidation is mild positive. We’ll see whether this has an impact on the ratings in the long run. But of course, from a country risk point of view, this reduces our overall contrast exposure. So now we are very focused on the Nordics, which enjoy very high ratings across the board. Then on the optimization premium, maybe if you want to Tiina comment that part.
Yes. Very good. Yes. So of course, the market volatility gives us an opportunity to really optimize our production against the market. And as the volatility has been higher, maybe even too high in the last year. So that has enabled us to get the good in a way margins. I think in the future, I think that there’s coming more in the market wind in the market and the volatility will prevail. And therefore it is good for the optimization, what is the exact level? So this is not what we have disclosed. But let’s say that possibilities for good earnings are still there?
Okay. Thank you.
Yes, and if I add to that, it is exactly this that the electricity demand is expected to grow massively. And in the short term, medium term, it is really the intermittent renewables that will then be the biggest addition to the market. So logically, there would be more volatility then what is the range of the volatility, it depends on the absolute price levels. But our portfolio – production portfolio is really well suited to support the energy system. And of course for us then to be able to optimize our portfolio, which is very flexible against that volatility. So we are in a very good position to both get financial returns and support the whole energy system in the future.
The next question comes from Pujarini Ghosh from Bernstein. Please go ahead.
Hi, thank you for taking our questions. So one question on your – on the Olkiluoto plant, which was recently ramped up. So in the first few weeks or months of operations, how are – how is the plant progressing? What observations do you have? And what do you think this plant means for the future of the Nord Pool system in terms of the EPADs and then the demand supply situation?
And my second question is on your PPAs. So you said in the past that you’re seeing interest for PPAs, both for your existing as well as new assets. So can you tell us a little bit about your hydro portfolio? Are you getting interest for PPAs from your existing hydro assets as well? And any color on that would be very helpful? Thank you.
Okay. I can start with the PPAs and comment generally, Olkiluoto and then Tiina, of course is in a great position to give deeper insight on that. But, for the PPAs, yes, definitely there is no interest as the liquidity in NASDAQ has dried up. And then both electricity producers and consumers want to hedge longer term, five, 10, even more years because of the big investments that have to be done for de-carbonization and electrification of the processes.
And over the years, how the PPA thinking has seemed to develop is that if you go a few years back, companies were seeking for additional renewable powers, additional wind and solar. Then of course, at some point you realize that it is intermittent as it is, and you can’t get steady 24/7 from renewables unless you then massively overbuy and thus get a profile. But then you have to buy a huge portfolio.
So ultimately, where we stand today is that the customer demands are more like 24/7, CO2 free. So it’s not specific that it necessarily has to be wind or solar or hydro nuclear as long as it’s CO2 free and reliable and affordable. So this is where we stand today. So under the PPAs that we are discussing, then it seems that customers are interested in a combination of renewable and wind and hydro. And this is the way we think it is going forward because the electrification and de-carbonization needs are so massive.
Then I’ll comment on Olkiluoto 3 and its impact on the EPADs and the market. I assume that we see the impact already. So if you go back just a year and then several years before that, there was a big difference between the – or there was a difference between Finnish and Swedish area prices. Now these have converged, so the Helsinki EPAD has come down significantly compared to where it was before, Olkiluoto 3 started. So my assumption is that the markets have taken Olkiluoto 3 production into account already.
And then on the ramp-up of the plant and all the test sequences then Tiina is in a good position to comment, although, of course, it’s not power fully unplanned.
Exactly. So Olkiluoto 3, finally is in commercial operation from 1st of May, and of course, the production plants could be seen in TVO sites. But basically, nuclear usually runs the baseload stabilized in a way, the market of course outages coming as planned and also informed the market. So I concur what Markus says, though, that the market – most probably have already reflected that in the prices. The one thing that maybe to add on is that, of course, the interconnection. So if the interconnections in a way are strengthened, so then, of course, the differences between the different area prices would stabilize in the future as well. But overall, of course, very, very good message and that also allows the renewables come to the market when we have the good base load on the market.
The next question comes from Wanda Serwinowska from Credit Suisse. Please go ahead.
Hi. Good morning. Wanda Serwinowska, Credit Suisse. Two questions from me. The first one is Tiina to you on the hedging in 2024, you said it’s in line with the usual levels. But when I check the hedging two years in advance, basically over the last five years you had around 55% hedging, so you are 10 percentage points below the five-year average. So my question is, why are you still at 45%? Is it the liquidity or you believe that €70 megawatt-hour is not attractive enough?
And the second question is on the Consumer Solutions, I know that you guys don’t provide any financial guidance, unfortunately. But anything on the development of Consumer Solutions this year because Q1 was clearly weak. It was a single-digit euro median amount EBIT performance. So anything for this year, or should we expect a reversal of the losses that you incurred in Poland? Thank you very much.
Yes. Hi, Wanda, thank you very much for the questions. So if I start with the development of Consumer Solutions and comment shortly the hedging, Tiina can add on that. But yes, this first quarter was extraordinary in the sense that it was partly Poland, but bigger part was actually that our customers on the retail and SME side had possibilities to change their contracts. And unfortunately, we were not completely able and we are not completely able to match with the hedging such abrupt moves that were caused by this volatility and high prices in the market.
So I would regard this as an extraordinary quarter and 2022 in my view is more reflective of what is the Consumer Solutions normal performance. So then there can be volatility between years, but that represents a more normal year. Then before that, we had 1.5 years ago, we had the difficult December with high prices and consumers not being so alert to their consumption, and we had the peaks especially in Finland on Independence Day and Christmas, which also cost us then problems with the hedging, but these are regard as situational and extraordinary.
On the hedging, it is indeed also there that, that are – we have some flexibility in our hedging ratios, and that is then reflective of our – of the organization’s views on the market and liquidity and so on. But no changes in our hedging policy or approach or principles as such.
I don’t know, Tiina, if there’s anything you want to?
Hello. Exactly. So definitely, as – if you look at the numbers, so it is lower than at the same time previous year. On the other-hand the price is now much higher and it’s good to remember that last year’s hedging ratio was developed also during the COVID years and the uncertainty what we had in the market. So I think it is a combination of our views and the liquidity and the overall market situation, but I would say that this is around the normal band and the hedging ratio, what we currently have.
Thank you very much. So Markus, if I can just follow-up, so on the Consumer Solutions, is it fair to assume that Q1 was a one-off? Or should we expect the full year to be weaker to some extent?
Yes. Let’s say that the coming quarters, unless there’s something similar happening, which I don’t foresee at the moment, then I would more look at last year in the remaining quarters, but that we would catch up what we lost in Q1 that – that I don’t see happening. But of course, we are obviously not guiding the result, but the last year was more representative of what Consumer Solution in normal conditions would do.
Thank you very much.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you, moderator, and thank you for your questions. It seems that the quarter was rather straightforward, as there were not too many questions on the result as such. And it actually also seems that despite this Russian situation, that also seems to be pretty clear. Of course, if there’s any further questions, then the IR team is more than happy to help on answering those.
But this means now that for those of you now participating here in English, we thank you. And then we still have some opportunities to take questions in Finnish. So for the international audience, thank you so much and have a nice rest of the day.