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Edited Transcript of FUM1V.HE earnings conference call or presentation 24-Oct-19 8:00am GMT

Q3 2019 Fortum Oyj Earnings Call

Espoo Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortum Oyj earnings conference call or presentation Thursday, October 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ingela Ulfves

Fortum Oyj - VP of IR & Financial Communications

* Måns Holmberg

Fortum Oyj - Manager of IR & Financial Communications

* Markus Heikki Erdem Rauramo

Fortum Oyj - CFO

* Pekka Ilmari Lundmark

Fortum Oyj - President, CEO & MD

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Conference Call Participants

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* Elchin Mammadov

Bloomberg Intelligence - Utilities Analyst

* Peter Andrew Bisztyga

BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director

* Piotr Dzieciolowski

Citigroup Inc, Research Division - VP

* Samuel James Hugo Arie

UBS Investment Bank, Research Division - MD and Research Analyst

* Vincent Jean Michel Ayral

JP Morgan Chase & Co, Research Division - Analyst

* Wanda Serwinowska

Crédit Suisse AG, Research Division - Analyst

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Presentation

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Ingela Ulfves, Fortum Oyj - VP of IR & Financial Communications [1]

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Join webcasted news conference on our third quarter results here today. Please note that this event is being recorded, and a replay will be available on our website later today.

My name is Ingela Ulfves, and with me here today are also Måns Holmberg from our IR team. Our CEO, Pekka Lundmark, and CFO, Markus Rauramo, will present our third quarter results, after which, we will open up for questions and answers. As a reminder, you are also able to ask questions on our webcast chat.

With this, please welcome Pekka.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [2]

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Thank you very much, Ingela, and good morning. Good morning, everybody who is watching this over the web and also here in Espoo. We are pleased to announce these results today. They are, for the most part in this quarter, good results. I'm happy to report a quarter where we actually increased our comparable operating profit by 59%. This, we were able to do despite the fact that the Nordic spot prices went down quite a lot, actually, 31%. But because of successful hedging, we were able to achieve a power price of EUR 35.70, which was actually slightly up year-over-year.

Hydrology, of course, is an extremely important thing that always affects our results. And I will show you the graph in a second, but it is now more or less on a normal level compared to very dry hydrology a year ago.

Very good development both in comparable EBITDA and comparable operating profit EBITDA, plus 28%. Operating profit, as I already mentioned, up 59%. And actually, this is even stronger when you take into account the fact that in the last year's Q3, we had a EUR 26 million sales gain from divestment of part of our Indian solar portfolio. So if that would be taken away from previous sales numbers, this improvement would be even bigger.

Our share of profits from associates and joint ventures was EUR 106 million in the quarter, and EUR 86 million out of this relates to Uniper. That EUR 86 million includes EUR 8 million of fair value changes and the rest is our share of Uniper's result. EPS at EUR 0.20. Items affecting comparability EUR 0.02, Uniper contribution -- no, sorry, EUR 0.02, of course, and the Uniper contribution, EUR 0.10. So if those 2 would be excluded, then it would mean that in a way, the Fortum EPS without Uniper and without items affecting comparability would have been EUR 0.12. And our comparable net-debt-to-EBITDA currently stands at 3.2.

Of course, the big thing is the Uniper situation that I will comment in a second. But in addition to that, a lot of other things are also happening. And I would like to here highlight one strategically important thing, which is our decision to exit coal here in our hometown, in Espoo, a few years earlier than originally planned. Our target is now that we would do a final exit in coal in by 2020. And this then supports obviously the carbon neutrality target that the City of Espoo has.

Then I thought I would repeat the main points about the transaction regarding Uniper. There is no new information that we would be releasing today. This is more or less the same that we published 2 weeks ago. But just to recap, we have signed an agreement that we will acquire earlier tonight biggest share in Uniper. That's at least 20.5%. There are some instruments that are still a little bit unclear as to how much exactly we will get, but we will get, as I said, at least 20.5%, which means that we will have at least 70.5% ownership. And this takes our total shareholding to EUR 6.2 billion -- sorry, our total investment to EUR 6.2 billion. And it means that the average price that we will have paid for these shares will be EUR 23.97.

We also said that we rule out the domination agreement for a period of at least 2 years, and the same applies also to any potential squeeze-out or delisting of Uniper from Stock Exchange. We did say that we intend to be represented on the Supervisory Board in such a way that this would correspond to our ownership. And that also includes the chairmanship position in the company.

And very importantly, we have offered commitments to the Uniper's employees. And we are now in dialogue not only with the company but also with the employee representatives. And we, of course, hope that we would be able to find a good solution that would also take care of the employee concerns, which I understand very well. There has been a lot of talks and speculations about the situation, which, of course, has caused uncertainty among employees, which is something that we all need to take very seriously. I'm convinced that this step will return stability and good focus back solely on business and the opportunities available to us. And this definitely, I believe, will be a good thing for the employees of both companies.

I would like to emphasize that this transaction is still subject to approval from regulatory authorities both in Russia and in the United States. We are in discussions with the Russian Federal Antimonopoly Service. I do not want to preempt their decision. But of course, we would not have signed and published this transaction unless we would be quite confident that there would be a way or ways to deal with the hurdle that we have had, at least, obviously how to give them the piece to work on a solution and then publish their decision in due time. We expect that we would be able to close this transaction by the end of the first quarter next year.

Once the transaction closes, we will consolidate Uniper as a subsidiary in our financial statements then after the closing has taken place. We have, of course, full financing available for this transaction both from existing cash resources and committed credit facilities under the (inaudible) Bank. And very importantly, we are committed to maintaining an investment-grade rating post this transaction, and not only that but then also to strengthen the financial profile of the group longer term. And this will provide appropriate financial stability and support for the whole group. And this also advised Uniper's credit rating, which is, of course, an extremely important thing. We are not only looking at our own credit rating, but we are also looking at Uniper's credit rating.

Now in this short presentation, I will not repeat the entire strategic rationale. I just say briefly that what we want to do is to create the leader in the European energy transition. In that transition, both decarbonization and security of supply are important things. In addition to this, the third part of the so-called energy trilemma is the importance of making sure that affordable energy is available to consumers and businesses across Europe.

And Fortum and Uniper really have the strategic mix of businesses and assets required to successfully drive this transition from conventional to cleaner and, at the same time, more secure system. Fortum has, of course, a strong portfolio in low-emission assets. Uniper has an attractive portfolio in hydro, nuclear and gas assets and the platform for growth in many areas. We believe that these 2 companies complement each other exceptionally well in the energy transition.

Then if I move on to the next topic, which is water, reservoirs and hydrology, which is always extremely important when it comes to the power price development in the Nordic region, especially. As you remember, last year, the third quarter was extremely dry. And you can see here on this chart, it's -- the dark green color was the development of the reservoirs during 2018. And then the orange dotted line is this year's development. We started this quarter with 5 terawatt-hours above-average water reservoirs. Then the weather conditions were dry in July and in the beginning of August. That resulted in a bit lower-than-normal inflows. And as a consequence, water reservoirs then normalized during Q3. And at the end of the end of Q3, the reservoirs were 0.5 terawatt-hours below average but actually 9 terawatt-hours higher than a year ago. If we then take the very latest development, the beginning of October has been more on the dry and cold side. And the current -- the very latest situation is that we have about 2 terawatt-hours below average in Nordic water reservoirs.

Then commodities. First of all, coal and gas obviously are competing fuels in power generation. We have seen a lot of coal-to-gas switching during this year, which has clearly reduced emissions in European power production, which is a very good and encouraging thing. And of course, because these 2 fuels are competing, it means that their price development is also more or less correlated.

Coal has been more affected by the weakening macroeconomic environment, particularly Chinese weakness, because roughly speaking, half of the global coal demand is in China. Gas prices have been more driven by the very strong supply growth in LNG. And when that has been combined with flat demand in East Asia, that has created a situation where Europe is acting as the market balancer. And one consequence of this is that the storages are now extremely high, the field, 98%. And this has also been suppressing the gas front price, as you can see on this chart. Actually, the gas spot price during the quarter was really weak compared to, for example, this gas on a year ago. It was EUR 10.20 per megawatt hour in Q3 this year, whereas it was EUR 24.60 a year ago, so that's a 58% drop. Then the concerns about disruptions regarding, for example, the Ukraine/Russia gas transit agreement at the end of the year has kept the winter prices on a higher level than what the spot prices have been.

Then moving on to CO2. CO2 price peaked in July at approximately EUR 30 per share. And this is, of course, very strong development, as you can see on this chart. It was just a year or 2 year ago, we were at EUR 5 per ton. Now we peaked at EUR 30. And then after that, there was some decline, probably related to worries on a hard Brexit. In general, the CO2 price has held up pretty well despite the downward trend in both coal and gas. And there, probably the reason is the start of the market stability reserve in the beginning of this year. Then during the very last few days, again, as you can see on this chart also, the likelihood of a hard Brexit has substantially decreased. And then maybe that has a connection then to the very latest development of the CO2 price.

Of course, then the fuel prices in connection with the hydrology and CO2 price, they also then affect the Nordic price development. First of all, quickly improving hydrology is most likely the main reason for the Nordic spot price decline during 2019. And this is quite a strong decline compared to the third quarter last year. The average price was EUR 34.70 whereas it was EUR 50.50 a year ago. It was slightly higher in Finland because the water situation in Finland was more scarce than in the other parts of the Nordics. And that let us chair -- some of the Finnish price has been more than coupled with the Baltic price areas.

Then of course, the decline in gas price created softness in German spot prices, which also had an impact on the Nordic spot market. The forward market, however, is expecting a rather quick recovery from the current spot prices due to, again, as I mentioned, seasonally and higher gas prices for the winter. And that will support continental power prices and then indirectly, also Nordic prices.

Despite the weakness in the spot prices, as I said, the forward prices have held up quite well. And here, on the bottom right-hand corner, you see the 2020 forward price development for both the Nordic and German products. And as can be seen here, they have been moving sideways actually throughout this year. Actually, the spread between these 2 prices have increased a little bit from the beginning of the year. We were at EUR 11 to EUR 12 earlier this year, and now the latest credit is around EUR 13. Again, we don't give any detailed analysis or estimation if this will continue. But again, Nordic hydrology is always a strong component in this spread.

One detail that I would like to add is that we've been talking a lot about the increasing interconnections between the Nordic system and the European system. The biggest change there is that the so-called Cobra Cable between Denmark and the Netherlands was opened in September, and that adds 700 megawatts of interconnection capacity. So to date, we are at 6.7 gigawatts of interconnections. And this capacity is expected to increase to approximately 13 gigawatts by the end of 2023. And of course, this is a very complicated equation. But everything else equal, of course, the substantial increase in interconnections should have an effect, but it would lower the strength between these 2 markets. But I want to emphasize everything else equal.

I already commented the spot price development in the Nordics. Our achieved price was actually quite close to the spot price. It was slightly above EUR 35.70, and that was 3% higher than a year ago despite the fact that the spot price was 31% higher. So we had 3% higher achieved price on a 31% lower spot price.

The Russian price development has also been relatively encouraging. We have a 5% increase in the ruble-denominated spot price due to tightened supply-demand balance and the achieved power price, which then also exceeds account capacity payments. And the translational effect is actually quite much higher, 11% higher than a year ago.

Then I will move on to make comments on each division and I start from generation. Really good quarter, but of course, we have to remember that the comparison period a year ago was exceptionally weak in hydrology. Now this time, we had 4.3 terawatt-hours of production. Last year, we had 2.9 terawatt-hours. So this was a 50% increase in hydro production compared to last year. And the result combined reserve effect of the production volumes and the price actually meant that we doubled our comparable operating profit compared to last year. Nuclear generation volumes were also on a good level. They were slightly higher than last year, 5 terawatt-hours compared to 4.7 terawatt-hours.

In terms of achieved price, our last 12 months achieved prices is now at EUR 36.60, whereas full year 2018 was EUR 34.60. And I would also like to pay your attention to our return on net asset comparable runner, which is now on a pretty good level of 13% for this business.

As I also commented in the report text, City Solutions did have a weaker quarter. This was EUR 40 million weaker than a year ago. But again, here, we need to split this into different elements. EUR 26 million of this comes from last year's Indian solar divestment onetime gain. So EUR 14 million is the remaining difference. And of course, this is something we cannot be happy with, even though the second and third quarters are always seasonally quite weak in the City Solutions business. There were several challenging external factors such as fuel prices, CO2 prices, taxes that affected the result. But there were also internal operational matters that we, of course, did target to address as efficiently and as quickly as possible. So this is not a satisfactory result despite the external challenges that we were facing in the quarter.

Consumer Solutions, excellent quarter. Actually, of course, these numbers are much lower than in the Generation segment. But in relative terms, this improvement was even stronger than in the Generation business, 129% improvement in comparable operating profit in the quarter. This is driven by higher sales margins and improved performance now not only in the Nordic region but also in Poland. These higher sales margins are a result of the systematic and active development of the product and service portfolios following the Hafslund integration and subsequent development of the business. Overall, encouraging development actually now for the third quarter in a row for the Consumer Solutions business.

And then finally, the Russia business also developing. Well, we have a 33% improvement in comparable operating profit. This is supported, first of all, by ForEx exchange rate, about EUR 5 million out of the EUR 13 million improvement. And the remaining EUR 8 million is then split between result improvement both in the Heat business in Russia and, as I already mentioned, higher electricity margins. And again, here, I would like to highlight the comparable return on net assets percentage, which is on a pretty good level, 12.4%.

So ladies and gentlemen, that's my quick comment on the overall situation and the divisional performance. And now, I would like to ask Markus to continue from here before we take your questions. Thank you.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [3]

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Okay. Thank you, Pekka. So let's move forward. To summarize, Q3 results increased by 59%, as you heard, from EUR 96 million to EUR 153 million. This was driven by big improvement in generation on the back of higher hydro and nuclear volumes and higher asset prices. Consumer solutions benefited from higher sales margins and improved performance in Poland. Russia improved on the back of improvements in the Heat business, higher power margins and EUR 5 million of positive foreign exchange impact. Finally, City Solutions decreased by EUR 40 million, which is not what we would like to see. EUR 26 million out of this was relating to the profit from the previous year from the sale of the Indian solar business. Then we have the longer maintenance breaks in our combined heat and power, weaker performance in recycling and waste solutions and higher fuel and CO2 prices.

On cumulative basis, the results improved by EUR 139 million, from EUR 654 million to EUR 793 million. Generation improved cumulatively on the back of better prices and volumes. Consumer Solutions on higher sales margins and the active development of the product and service offering we have, which I'm very, very happy about. Russia improved altogether EUR 40 million with higher electricity margins and lower bad debt provisions, higher CSA payments. And City Solutions was down EUR 30 million. EUR 26 million out of this relates to the solar sale the previous year. And then unfortunately, the Q3 weaker operational performance offset the better performance in the first half. Segment other came down EUR 11 million, with the increased spend on business technology, including our ventures activities.

Then to the main points on key financials. Very happy to see that sales, comparable EBITDA and comparable operating profit improved in all of the comparison periods in Q3, year-to-date and the last 12 months versus 2018. If we go down the lines, the main focus would be on the cumulative numbers. And there, you can see that the share of profits from associates in the year-to-date numbers increased significantly. This is mostly coming from the EUR 534 million contribution from our share of Uniper results. Going further down, the EPS of EUR 1.27 includes EUR 0.11 for items for incomparability and altogether, EUR 0.60 of Uniper result impact.

What is especially strong is the net cash from operating activities year-to-date, EUR 1.75 billion. And also in the last 12 months, net cash from operating activities totaled EUR 1.79 billion. And I'll come to the details in the coming slides.

I'll now list a few points in the income statement. The sales and comparable operating profit improvement, I commented already, increased in all periods. Items affecting comparability, when you go down below, the comparable operating profit cumulatively negative EUR 127 million, including fair value changes and nuclear fund adjustments. In comparison, last year cumulatively, in 2018, the same line item was EUR 175 million positive, including the sales gain from Hafslund products shown and then fair value positive adjustments. Year-to-date 2019 profit stands at EUR 1.14 billion and last 12 months at EUR 1.34 billion.

Then moving down to the cash flow statement. Also here, I would focus on the cumulative numbers from Q1 to Q3 this year. EBITDA increased significantly to EUR 1.2 billion. Trade financials, taxes and others remain quite stable. And then we had a clear increase in dividends received from associates, EUR 239 million in the period, the biggest contributor being Uniper. Working capital change was a positive item of EUR 201 million. And then we had positive impact from the settlements of futures on the back of lower prices in the market of EUR 342 million. And this altogether comes up to net cash from operating activities of the previously mentioned EUR 1.75 billion.

Further on, if you go down, you will see that the change in cash collaterals, where the main contributor was the collateral arrangement we did earlier in the year, contributed altogether EUR 320 million. And after CapEx, after the other items, cash flow before financing stood at a strong EUR 1.59 billion.

The only other thing I would highlight in this table is from last year. The big item there was the acquisition of Uniper shares impacting both the cumulative Q1, Q3 and the full year 2018.

When it comes to balance sheet ratios, the development is positive. EBITDA up to EUR 1.68 billion and debt slightly down to EUR 5.36 billion. And this gives us a net-debt-to-EBITDA ratio of 3.2x, down from the 3.3 earlier and 3.6 where it stood at year-end. ROCE is at 9.0. Of course, that includes big items and Uniper results of nonetheless 9.0.

Our liquidity is very strong. We have EUR 1.4 billion in cash and undrawn committed credit facilities of EUR 1.8 billion. And we also have -- for the transaction, Uniper transaction, we have the EUR 8.3 billion underwriting for the transaction.

We are in discussion with the rating agencies. Investment-grade rating is our key priority. And altogether, the rating agencies are expecting to resolve the credit watch issue when the transaction closes and they receive clarity on the potential remedy measures. And we will come back to that at the time of the closing. The rating agency reactions are exactly what we had been expecting, and our commitment to the deleveraging is strong.

Finally to the outlook. We continue to expect demand growth to be 0.5% on average. With regards to the hedges, for the remainder of the year, the hedge level continues to be the same, 80% and at EUR 33. For next year, the hedge ratio increased from 60% to 70% and the hedged price from EUR 31 to EUR 33. And now we communicate for the first time the 2021 hedge ratio (inaudible) and at 35% at EUR 33.

Estimated CapEx for this year remains the same, EUR 600 million to EUR 650 million. And the targeted cost synergies from the Hafslund transaction are at the same level, EUR 15 million to EUR 20 million, gradually materializing during this and next year. And finally, the effective tax rate for this year is expected to be between 19% and 21%, likely in the higher end of that.

So with it, I think it is time to go for Q&A.

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Questions and Answers

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Ingela Ulfves, Fortum Oyj - VP of IR & Financial Communications [1]

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Thank you, Pekka, and thank you, Markus. We now open up the Q&A session, and we would start with questions here among the audience in Espoo. And then after that, we continue with the teleconference participants.

If you have a question, please raise your hand, and we will give you a microphone and then please state your name before the question.

No questions here in the audience. So operator, we are then ready for the teleconference questions.

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Operator [2]

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(Operator Instructions) We have a question from Wanda Serwinowska from Crédit Suisse.

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Wanda Serwinowska, Crédit Suisse AG, Research Division - Analyst [3]

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2 questions from me. The first one is on your net debt at the end of in 2019, if you could give us any guidance whether you see your net debt at the end of the year? And my second question is on the cooperation with the Russian sovereign wealth fund. If you could give us some numbers -- yes, some numbers because from what I saw in Reuters, the Russian sovereign fund is going to invest hundreds of million of dollars. How much do you want to invest? Where do you want to invest? And would there be any impact on your JV with Rusnano? And is there any time line there?

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [4]

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I can take the first one on the net debt. So as you know, we don't give guidance on the net debt. But you have seen that we have been focusing on the deleveraging. We are very conscious of prioritizing heavily our CapEx and OpEx with a key target to have an investment-grade rating, which is very important for us. So we continue on that same track. And this is one of our internal big priorities, but we will also be talking about this afternoon with our employees.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [5]

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Then your second question, I presume that you are referring to the letter of intent, nonbinding letter of intent that we published with the RDIF on Monday. And unfortunately, I'm not able to give you any numbers because this is really, really a letter of intent, nonbinding. It is a general declaration of willingness to cooperate in investment projects, their willingness to invest in certain projects that could be driven by us. Of course, renewables in general is one potential area. There could be other areas also, but there are no decisions, no binding commitment. So unfortunately, I will not be able to get into more details on this.

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Wanda Serwinowska, Crédit Suisse AG, Research Division - Analyst [6]

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If I could quickly follow up on the RDIF? So is there any time line when you'll announce something? Because it sounds as a big investment.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [7]

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No. This is not an arrangement that would have any specific time line.

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Wanda Serwinowska, Crédit Suisse AG, Research Division - Analyst [8]

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Will it be 50-50? Or this hasn't been decided?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [9]

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No. No. Nothing like that has been decided. It's a general declaration of intent to discuss and look for potential joint investment opportunities but not more than that.

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Operator [10]

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Our next question is from Vincent Ayral from JPMorgan.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [11]

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Just a few questions here. One, to come back to City Solutions. You talked about the higher fuel costs and the city cost there, one of the reason for the pressure you've seen there and taking corrective measures. So I'd like to get a bit more color on all of this. One of -- well, sub-question would be here, actually, normally, this should end up being passed through higher fuel costs in terms of costs. So how should we look at that? Should we be seeing some sort of normalization over the coming few quarters or at least the coming year? So that would be question one on the City Solutions.

And another one would be regarding the process for the Russian authorization. We've seen some comments made actually by Russia that this should be sold within the next 6 months. So what's exactly the process? Where should we be looking and when. That would be very, very useful to get some color on that?

And finally, regarding the long-term power hedging. You present a number of EUR 33 there. Clearly, we, in the consensus, are up to EUR 28. There are some regional premiums we had in the physical optimization at the end of the day. But the EUR 33, does it seem like pretty much in line or in (inaudible) with the current expectation of the market? Just to get some color there.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [12]

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I'll take the first 2 questions. City Solutions once again was, on comparable terms, EUR 14 million behind last year's results. And this was a result of several things, none of which were alone dominant in this difference of this, you would say. CO2 is one of the components, but it alone is not that dramatic. Of course, for our Generation business, the high CO2 price is positive. For the City Solutions, it in most cases means higher cost. But of course, the positives of high CO2 price in Generation business by a big margin outweighs the negatives that it has in the City Solutions business.

So it's not that big part. There were other things. There were taxes. There were fuel costs. There were internal operational things such as some prolonged outages, and also in the waste and recycling and base business, some cost overruns in certain projects. And again, none of these single components would be alone dominant in this EUR 14 million-ish, which we, of course, are now addressing.

Then as I said, we are hopeful about the Russian approval. I'm not able to give you a detailed time line. Our goal is that we would be able to close by the end of the first quarter. But again, we now need to let the authorities do their work.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [13]

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Okay. And when it comes to the hedging -- so historically, we start building step by step the hedging portfolio for the coming years. We don't take any special views vis-à-vis the market or the prices or have a strong opinion about that. The main target of the hedging is to bring stability to the cash flows and predictability, which especially now, when we have higher leverage, is important for us. And then technically, in the hedging process, what the organization is seeking is the optimal risk and return position. And then -- and they have certain flexibility around that target, taking into account the company's total situation.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [14]

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Thank you. Just 2 (inaudible) there. On the Russian authorization, I was not asking for a time line. Obviously, it is outside your control and you do not want to comment on that. Just to generally outline any specific steps in the process that we should be expecting, not to talk on behalf of the Russian authorities, just a normal process.

And regarding the hedging, I understand that. Now there are some area of premiums that are captured, physical optimization at a later stage. I just wanted to know basically what type of level do you see on news? So when we look at this EUR 33 at the moment and what you achieved at the -- what you have achieved through 2019, basically what type of premium you should add to the EUR 33 to get an idea of your trajectory regarding achieved power price for 2021.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [15]

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On the Russia process, there is nothing really special that we have done a preliminary filing to set an anti-monopoly service. And we are now discussing the next steps with the authorities. But again, this is in their hands now, including the details of the content of the process and then, of course, the final time line. And that's why this end of first quarter next year, it is not a commitment that we would be able to give on behalf of the authorities. That is our own internal goal and estimates.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [16]

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And with regards to hedging, thank you. It's a very good question, something I'm actually very happy about, which is the good availability we have had on our hydro fleet. And that in the coming years, if we assume that there will be even more volatility, this will become growingly important and valuable that we can capture the volatility through the physical optimization. So overall, I would say that the physical optimization, that brings us the most added value on top of the market prices, and then financial optimization plays a smaller part. But the exact numbers, as you know, we don't disclose.

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Operator [17]

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Our next question is from Elchin Mammadov from Bloomberg Intelligence.

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Elchin Mammadov, Bloomberg Intelligence - Utilities Analyst [18]

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I have 2 questions. One is on Russia. Uniper has been very strong, winning the new modernization capacity centers in there, but Fortum hasn't. I mean you did warn us in the past that your fleet is relatively new, and you don't expect any major wins there. But could you just talk a bit more about whether you expect actually to win anything new given that this modernization auction will be very important once your CSA payments roll off?

And the second question is on the renewables. That's been a story yesterday, I think, about Sweden, Norway planning to phase out onshore wind subsidies by 2021 because these renewables are reaching great parity. What does it mean for your business?

Yes, and if I can squeeze on the final question, it's about the City Solutions. I mean the results haven't been great, but they haven't been great for a while. Have you considered selling it? It's not a huge part of your earnings, so maybe you can focus on your generation business instead.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [19]

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Okay. Thank you. First, the modernizations opportunities in Russia. As we have said earlier, the fact that we did not participate in these tenders was a deliberate decision. And the reason is quite simple. Our fleet is very modern, and we did not really see there being a match between what was offered and what we had in our fleet. Uniper's situation was different. They decided to participate, and they also won some of those tenders. And again, we understand it very well from their point of view. And we, obviously, as an owner, support them in this part of the strategy execution.

The renewables market in the Nordics, it's clearly becoming a merchant market without subsidies. Wind is today already a good location. It's the most cost-efficient way of producing electricity, and we think it's a good development for the market that the subsidies are phased out. This is a positive thing for the overall market because it means that the different technologies can compete on market terms without having to worry about how the subsidy policies would develop.

Then City Solutions, it continues to be in the core of our strategy. We are in a strategic review of some assets there, as we have published earlier, some small assets in Finland and then our assets in Estonia. But I would like to emphasize that this is a strategic review. There is no decision to do anything, including any divestments. We are looking at multiple options for these particular assets.

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Operator [20]

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Our next question is from Sam Arie from UBS.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [21]

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I think we covered a lot of the questions on results. So I wanted to ask 2 wider questions. The first is on carbon, and you talked about recent softness in the EU carbon price that could be linked to Brexit issues. You also said you'd like to see a more comprehensive carbon tax or carbon price. But I'm interested, can you comment if you see anything really specific and concrete in the kind of near-term horizon that could help the carbon price? For example, do you think there could be further tightening in the EU scheme rules, an increase in the linear reduction factor? Or do you think maybe a carbon tax is going to mean that the EU ETS price could go to a higher level? I know you don't give sort of your own carbon price forecast, but I'm interested in your discussion on carbon, whether you see anything concrete that should -- we should factor when we think about where the ETS price is going next. So that's my first question.

And then the second one, apologies, going back to Uniper. I noticed in your release this morning, you talked about increasing your representation on the Board. That you added -- this should include the chairmanship, which I think I'm right in saying you haven't said in the previous call we have with you. I know there was some discussion, but I don't remember you putting that so explicitly in writing. So can I just confirm, is it your position if the deal with the activist is approved, then you decided you would like to replace the Uniper chairman? And then would that be something we should expect at next year's AGM? And do you think as far as related, if you have appointed the Uniper Chairman, and does that have any implications for whether the rating agencies will look at Uniper as an operationally independent company which can have its own credit rating or the opposite? So that's my second question.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [22]

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Okay. Thank you, Sam. Two quite different questions, and I'll start from the first one, which is the carbon market. Of course, in the big picture, we believe strongly that carbon trading and especially, volume-based system like ETS is the best way to most efficient -- in a most -- in the most efficient way to allocate the available resources to emissions reductions. So that's why we support this instrument 100%. And that's why we have said that we would welcome any measures to further tighten the system, either through tightening of the linear reduction factor. There will be a review, I think, in year 2021. And then the other possibility, of course, would be to make a decision that the 24% impact rate in the MSR would be continued after the year 2024. These are both measures that we are constantly advocating in our discussions in Brussels.

Then another thing which is even bigger, of course, is then that if there would be a possibility to widen the scope of the system so that when it currently covers a little bit less than 50% of the European CO2 emissions that we could perhaps include also decentralized heating, I mean, other than district heating, potentially transportation and even the rest of the emissions, for example, in the agriculture in the future. These are things that are easy to say, quite complicated to implement in practice. But I have noted with the trade interest, the comments from both the President-Elect of the European Commission and the German government that there are -- there is an interest to look at the waste, to how to expand the coverage of the ETS system. So we would support all these initiatives. Is there anything concrete that we would be able to say as to the likelihood and time scale. Unfortunately, not. But this work will definitely continue.

Then actually, we did say already at the time of the announcement that we do feel that once we get to over 70% position in our ownership, that it is only natural that we'll also request a chairmanship position. I don't think, Sam, that it was mentioned in the investor call, but it was mentioned in the media call later that same day.

Then what the implications of all this would be to how to deal with the rating question, I would ask Markus to take that one.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [23]

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Okay. So maybe I'll go back first to the Fortum rating. So as we have said, the investment credit rating for us is important, and it's a key priority, and we will take measures to manage our balance sheet and our leverage as needed. The dialogue with the rating agencies on all of these aspects is very good, and we follow their criteria very closely. And we note from the agency reports that they expect to resolve the credit watch for the both companies when the transaction closes and they receive clarity on potential remedy measures. We recognize definitely the importance of Uniper's rating for the company, for its business and for its trading activities. So we are absolutely conscious of this and take it into account.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [24]

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Markus, really helpful. Do you mind if I could just quickly ask on that last point about potential remedy? You -- I mean, I think on one of your slides today, is it Page 21, you talked about sort of ongoing actions to delever. But I don't think you said yet what those actions might be. So I mean, I'm sure that there's sort of general type of focus on cash flow and so on. But are you thinking of anything sort of more significant, like a new cost target or a new set of divestments or asset rotation?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [25]

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Yes. We haven't communicated specifically what those measures will be. But historically, we have a good track record actually on managing very actively our balance sheet, our portfolio and taking cost measures also if and when needed. So there have -- historically have been levers that we can use, and our organization is very on top of all of these issues. And operational excellence is our #1 priority at the moment. So prioritization of OpEx, CapEx, looking very constructively at the whole portfolio.

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Operator [26]

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Our next question is from Peter Bisztyga from Bank of America.

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Peter Andrew Bisztyga, BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director [27]

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So 3 questions, if I may. Firstly, regarding Uniper's reactions to your recent stake interest to 70%. I mean, we've just had a question saying that you're seeking a Chairman and appropriate Board representation, but Uniper seem be very hostile for this idea. So I'd like to ask you, what happens if Uniper refuse to give you the Board representation you hope for? What steps will you need to take? And then also more generally, how do you hope to restore the relationship with Uniper when each step you take seems to greatly frustrate them?

Second question, just on recycling and waste. I mean, that seems to have been a source of underperformance more than one occasion since you acquired [Ekokem]. I'm just wondering if you could elaborate a little bit further why market conditions there are poor relative to your expectations and what options you have to sort of fix that.

And then thirdly, the sort of RDIF letter of intent. I'm just wondering, is that a quid pro quo for your Federal Antimonopoly Service approval for your latest move on Uniper?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [28]

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Okay. Thank you. I'll start from the Uniper reaction. Of course, we cannot comment on Uniper's behalf at what they feel about the different steps. We have tried really hard for a long time to build a good relationship. And we are, all the time, in discussions with both management and also with the employee representatives. And one key reason why we now offer this, and actually, we are committed to these 2 years of no DPLTA, no squeeze out, no delisting is that this would now give both organizations time to really get to know each other and to create a joint vision, joint strategy. The discussions we have had earlier with Uniper have been, from this point of view, encouraging. They have strengthened our belief that there is definitely a good business case for the creation of a transition and a joint strategy. So I'm, still and continue to be, hopeful that once we get the clarity restored to the shareholding situation and when it is pretty clear that who is the main shareholder, that we would then -- we would be able to proceed on the strategic alignment, and then as I said, very importantly, on an agreement with the employee representatives that takes care and addresses the employees' understandable concerns.

Markus will comment the RWS question. But just to take the last question, there is absolutely no connection between RDIF and the Federal Antimonopoly Service process. These are 2 completely separate things.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [29]

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Okay. And on the recycling our waste solutions, my perception would be that it is more short-term volatility than structural issues. Actually, the opposite -- structurally, there is good support for the business. The volatility has come from treatment volumes. It has come from project margins, for example, in environmental construction. And this have not always been satisfactory, but things we think that can be corrected in the business. We are continuously developing. We are increasing our plastics recycling, metals recycling, focusing on the businesses that actually are trend-driven. And we work, for example, on pricing initiatives on improving our pricing and capacity utilization.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [30]

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Maybe if I add one thing, which is also very important, and that is that one of the fundamentals which is driving the profitability of the RWS business is the [gateway] development for waste. And that has clearly met our expectations. That has been positive. So these quarterly variations, and I think we had 1 weak quarter last year, 3 quarters were good. Now the first 3 quarters of this year were good, third quarter was weak. This is more related to the execution of certain construction, environmental construction projects than fundamentals in the business case on the waste treatment itself.

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Peter Andrew Bisztyga, BofA Merrill Lynch, Research Division - Head of Pan-European Utilities and Renewables and Director [31]

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Okay. And sorry, if I could just come back to the Uniper question. Can Uniper refuse to give you the Board seat that you're asking for? And if they do, what are your options?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [32]

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So this is something that we are now discussing with Uniper, so I do not want to speculate on the different alternatives in public.

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Operator [33]

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Our next question is from [Gerard Rin] from Institute and Financial Management.

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Unidentified Analyst, [34]

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So looking at Uniper's coal assets in the Netherlands, I was wondering what Fortum thought about the corporate image impact of seasoned compensation for closure of (inaudible) by the Energy Charter Treaty, especially given the rather low value of their asset as indicated by (inaudible) sale of a recent -- of a similar plant recently?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [35]

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Thank you. This question would actually be for Uniper comments, so I will only answer in a very general level. There has been interpretations presented or suggested that they would be resisting the coal shutdown in 2030 itself. But our understanding is that, that is not the case. The question is that what is the right level of compensation so that all the international commitments, including the international and energy treaty, which is a key international investment protection agreement, that how these are addressed in the correct way. So this is definitely not an attempt to resist lowering the share of coal in European power production.

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Operator [36]

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Our next question is for Mr. Dzieciolowski from Citibank.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [37]

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It's Piotr Dzieciolowski from Citi. I actually have 2 questions. The first one is on Uniper. You mentioned in the past that you buy mainly for the cash flow and for the dividends. That was initially that I remember. Does the potential consolidation of Uniper changes your view on the dividend stream from Uniper given the credit rating of both companies? Does this change in how the calculation?

And second, if the Uniper initially offer you interest in the early part of the asset, do you have or will you have -- what is the kind of influence you can have on potential disposal of Uniper assets, if there was, to -- because Uniper is, at the moment, preparing the strategy? Will you have influence on this and how you can really impose your potential kind of a future outlook on the company, what you intend to do? Will this be already present in the updated strategy that they're working on?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [38]

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I will take the second question, and I ask Markus to comment the dividend question. What we now really seek is a strategic alignment with the Uniper. And as I already said, the one key reason why we are committed to these 2 years of no domination agreement is that there would now be time to really create a joint vision and the joint strategy. That would then also be reflected in whatever asset strategy these 2 companies together would choose.

We are, as our starting point, interested in Uniper as a whole, so there are no predetermined conclusions as what kind of actions would be taken. This is something we need to discuss with Uniper jointly. Of course, what remains is the fact that the 30% is Uniper's generation, which is coal. All European countries are working on coal shutdown time schedules. This is going to be business as usual. We certainly support these initiatives. So there will be a time when coal will be out from the production mix. But all the other assets, we see quite a lot of potential in the long term. And this is something we want to now, in a constructive way, discuss together with Uniper's management, that how these 2 company strategies are aligned in the best possible way.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [39]

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And then with regards to the question about transaction dividend rating, et cetera, it's a very, very fundamental strategic question, of course. And any transaction, any investment, we consider how we make. Actually, its target is to increase value with the right risk-return fundamentals. So over time, what any transaction would target is to improve our profit, improve our dividend bank and stability, and it has to be done with the right risk and return level. And how that applies in practice is that the access to capital for us is very important. And to have the access to capital at all times, we need the investment-grade rating. So when we do something, we build our thinking around these fundamentals, risk-return, value creation.

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Piotr Dzieciolowski, Citigroup Inc, Research Division - VP [40]

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Okay. But basically, kind of reducing the dividend at Uniper will actually improve because you will start consolidating this. So I was just asking of the fact that the cash will stay at the holding level on a consolidated basis, and there would be no leakage to minority changes. I mean, it speeds up the deleveraging process. Is this on your mind?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [41]

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No, this is around your interpretation. We have not said anything about the dividend policy. We have been a supportive shareholder when it comes to Uniper's dividend policy, and we have no predetermined conclusions or opinions that it should be changed in any particular way.

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Operator [42]

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Our next question is from Sam Arie from UBS.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [43]

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Apologies for coming back on. But I'm just picking up this really interesting discussion about sort of joint strategy formulation with Uniper, and just reflecting that, I guess, next year is coming up, 5 years, 4, 5 years since last major Fortum strategy review. And a lot has changed since then, I guess, renewables, storage, carbon, the whole Uniper opportunity, which wasn't really visible when you did the last strategy review. I'm just wondering if you go through this process of aligning your approach with Uniper, are you thinking of refreshing the Fortum strategy? And in that context, is it possible that some business units that previously were seen as core could maybe become non-core? I'm particularly interested, for example, if you see the Customer Solutions as a long-term core activity for Fortum, and I assume that you and some other European utilities have decided not to participate in that part of the value chain. And I guess I could ask the same question about City Solutions as well. I know it's early days, but I'm just wondering if you can comment about the possibility that it might change your thinking on what's core versus non-core on the Fortum side.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [44]

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Sam, you are right. This is really early days for your question. But perhaps, what I would like to say is that when we talk about joint strategy work, it is not only for the Uniper part of the combined businesses. It is definitely for the Fortum part also. So we want to, together with Uniper, create a strategy for the combined group. Again, there are no predetermined conclusions as to what there should be and what there should not be. But in the theoretical case, that there would be any decision that something would not be core, that could be on the Fortum side, that could be on the Uniper side. This is not something that now we come in and create a new strategy for Uniper. We want to create, together with them, a strategy for the entire group.

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Samuel James Hugo Arie, UBS Investment Bank, Research Division - MD and Research Analyst [45]

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That's really interesting and helpful as an answer. Can you -- I mean, I guess, the question is, I assume you wouldn't do that kind of strategy thinking until you get the latest shareholder transaction approved. And yes, as you've mentioned before, the rating agencies are going to sort of come to their view about the future credit rating for the business when that transaction is approved. So will the rating agencies have some visibility of your future thinking on strategy before they have to kind of conclude their watch period? Or are you able to kind of come up with a strategy review somehow in parallel to the current approval process such that maybe Q1, Q2 next year, we might see the deal approval and the new strategy at the same time? I'm just thinking how does that work.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [46]

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We have had already or had already last spring, pretty constructive strategy discussions with Uniper, and we also then started several cooperation initiatives. And already then, I was quite hopeful that the creation of a joint vision and strategy is entirely possible when recognizing that we want to address all 3 aspects of the energy dilemma and very much not forgetting security of supply. So we are ready to continue this discussion at any time, and this is irrespective of the time schedule of the closing of this transaction.

And again, Markus will then comment the credit rating question. But they are also -- of course, a very important part of this all is the commitment of no DPLTA for at least 2 years, no squeeze out, no delisting for 2 years. That really will give us and both organizations the time to really create the joint strategy without having to worry about this type of structural things at the same time.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [47]

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And again, to go back to the rating agencies, so first of all, the dialogue is good. We think we understand the criteria and the requirements. We respect that Uniper needs a strong rating for its trading activities and to run its business.

For us, the investment grade rating is a key priority to give the access to funding, and we have the readiness to take measures to manage our balance sheet and our leverage what is in our control, and that we have taken into account when considering and implementing any transactions.

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Operator [48]

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Our next question is from Vincent Ayral from JPMorgan.

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Vincent Jean Michel Ayral, JP Morgan Chase & Co, Research Division - Analyst [49]

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Yes, just bouncing back on your last comment regarding the security of supply. It's quite keen in energy transition. And I would be interested in knowing what is your main argument for getting a fair compensation on basically the asset that will help for the security of supply through the first stage of the transition, and which are pre-existing. So I'm talking about existing, for example, CCGTs in this case or in hydro versus the Europe energy strategy you're seeing, okay, with good incentive for new investments. What existing is there already? So I'd like to understand a bit on how do you look at it and if you're acquiring Uniper, you're -- also as a way to increase and to purchase existing assets that can bring facility. What is your vision regarding all this will be compensated by Europe in the coming 10 to 15 years?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [50]

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Well, thank you, that's an excellent question, and it's impossible to give a detailed answer. But on a general level, of course, we all, I guess, would agree with the fact that when Germany shuts down nuclear and when coal is being pushed out as well, that means that despite the fact that solar and wind will increase a lot in volume, we are going to have to accept the fact that the role of the strategic importance of gas as a provider of flexibility will increase. And that will be extremely important part of the equation.

Now then the question will be that, what will be the right remuneration mechanism for this? This is something that is currently being discussed. The fundamental principle in the European Energy Union has been that it would be predominantly energy only. But then it means that the regulators and politicians would really, really have to let that market work and accept things like scarcity, I think. And that why we give investors sufficient comfort. More gas-fired investments will most likely be needed. Existing assets would most likely need more running hours. How exactly that is to be compensated if energy-only will not work, that is something that must be a discussion. That discussion is ongoing, but I do not want to preempt our position in this because this is definitely going to be one of the very important aspects that we want to discuss together with Uniper's management going forward.

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Operator [51]

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There are no further questions at this time. Please go ahead, speakers.

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Ingela Ulfves, Fortum Oyj - VP of IR & Financial Communications [52]

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Thank you, operator, and thank you for all these questions. We do have some questions on the chat. So I hand over to Måns now for a few questions.

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Måns Holmberg, Fortum Oyj - Manager of IR & Financial Communications [53]

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Yes. The first question is from Sebastian Rötters, Urgewald. And he asks, now that Uniper is probably becoming a subsidiary of Fortum quite soon, will Fortum make sure that all power plants of Fortum and Uniper will be closed by 2030 at the latest to be in line with the Paris agreement, in line with the situation in Finland? And would you agree that the slower phase-out strategy, the plant inauguration of Värtan four and Uniper's announced Energy Charter Treaty in Netherlands represent a reputational risk for Fortum and [Tepe Gas] coherence of its climate efforts?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [54]

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We are -- as I said, we are supporting -- as I have said many times, we are supporting ambitious climate growth for Europe. And hopefully, the new commission would be executional, as an Official carbon neutrality target for Europe. And our suggestion is that then the EPA system would be adjusted accordingly so that the linear reduction factor would be increased after -- latest after 2030, but hopefully sooner than that. So that, that would then drive the market on using market mechanisms towards full climate neutrality for the ETS sector by 2050.

We all know that there are currently different realities in different countries. We are ready at any time to discuss the right mechanisms for very ambitious coal phase-out time schedules. Currently, it seems that the German government will continue to have 2038 as a target, and that target will then include a ramp-down schedule for the coal capacity that would be in the system for each year. I do not honestly think that we, as a company, will have that big possibilities to influence German government decisions in this respect as to how much coal will be used.

Absolutely, coal, since it needs to go, it needs to be phased out. It's not a future technology. It needs to go. And of course, in today's environment where people, for a good reason, are concerned about climate change, using coal is always a reputational risk, and it continues to be a reputational risk as long as it is used. That's why we need to increase renewables. We need to replace coal by gas to the extent security of supply is needed when renewables are not there. This is all part of our strategy, and the Uniper investment does not change this a bit.

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Måns Holmberg, Fortum Oyj - Manager of IR & Financial Communications [55]

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Okay. Thank you. Then we have one last question, Steve from [Enrinolder]. And he asks, when you fully consolidate Uniper, will you be giving an economic net debt number as the German companies typically do? With the consolidation of Uniper, do you target any specific economic net debt-to-EBITDA ratio?

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [56]

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Yes. We currently have our own financial KPIs. Uniper has their own financial KPIs, and we will come back to these issues at an appropriate time if needed.

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Ingela Ulfves, Fortum Oyj - VP of IR & Financial Communications [57]

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Thank you so much, and with these questions and this discussion, we now conclude this session here today. Thank you for your very active participation, wishing you all a very nice rest of the day.

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Pekka Ilmari Lundmark, Fortum Oyj - President, CEO & MD [58]

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Thank you.

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Markus Heikki Erdem Rauramo, Fortum Oyj - CFO [59]

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Thank you.