Fortum Oyj (FORTUM) Earnings Call Transcript & Summary

Welcome to the Fortum Half Year Financial Report 2022 Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Good morning, everyone, and welcome to Fortum's webcast and news conference on our first half results for '22. My name is Pauliina Vuosio, and I'm Head of Executive Communications at Fortum. This event is being recorded, and a replay will be provided on our website later today. Here with me in the studio is our CEO, Markus Rauramo; and our CFO, Bernhard Gunther. They will then together present Fortum's first half '22 figures and the group's performance. After the presentation, we will open up for Q&A over the teleconference. So with this, I will now hand over to Markus to start.

Thank you very much, Pauliina. Today, I will start with some reflections on our operating environment, which has been unprecedented. As the war continues in Ukraine, it has substantial direct and indirect implications on Fortum Group, especially on our subsidiary Uniper. Uniper has accumulated tens of millions of euros in losses every single day since Gazprom began to curtail gas flows in mid-June. I cannot stress enough how severely this has put Uniper's future at risk and impacted also us at Fortum. Last month was marked by intense negotiations aiming to serve -- save Uniper and to protect Fortum as a shareholder. And 5 weeks ago, the German federal government, Uniper and Fortum agreed on a stabilization package for Uniper that addresses Uniper's losses. I will later run you through what has been agreed. At the same time, we see commodity prices on record highs, also in the Nordics, consuming an unhealthy amount of liquidity in this volatile market environment. This is the way the markets are designed, but the development is a concern to energy intense industries, households and also to utilities. Given the nature of our low-cost, low-carbon generation portfolio, a high and volatile environment presents significant benefits as well as challenges to Fortum. But we need to think about the market more broadly as well as our own interests. I will address the need for both immediate and long-term solutions to the issue momentarily. I will close with our agenda going forward with the ambition to bring Fortum Group to stable footing. Bernhard will then walk you through the numbers in more detail. But let me now start with a look at the operating environment. As Fortum, we find ourselves at the center of an unprecedented geopolitical crisis in Europe, following Russia's attack on Ukraine and the decision of the Russian government to use energy as a weapon. We must acknowledge that the implications of the Russian invasion have materially hit Fortum Group. Fortum has traditionally had exposure to Russia directly with our investments in mainly gas-fired generation in the Euros and Western Siberia as well as in Russian wind and solar. Fortum's business has played an important role in the Russian market. And until recently, we have had constructive relations with those stakeholders there. The attack on Ukraine changed all that. However, we are most exposed to Russia through our investment in Uniper. As you may remember, for Fortum, this was an investment in Nordic CO2-free power generation and an investment into the European energy transition where Uniper's strong position in natural gas and security of supply would play a key role. Nevertheless, Uniper's global commodities business as a central player in German gas markets has been a major importer of Russian gas into Germany. And now Russia's aggression has turned this strategic choice into a liability we must turn around. Today, we are also affected by the extreme prices and volatility that increasing supply fears drive on the continent and in the Nordics. The situation is challenging to consumers and politics. And unfortunately, it is only expected to intensify towards winter as low Russian gas flows could cause severe demand rationing in Europe. The skyrocketing commodity prices are also affecting the Nordics, where increasing power prices are now prevalent not only in the spot markets, but also in forward prices across the curve. As high prices are a concern to all societies, governments are discussing ways to soften the impact. The measures under consideration mainly include price caps, tax rebates and direct subsidies. In some countries, however, political interventions like additional taxes on the profits of energy producers have been introduced. So far, these so-called windfall profit taxes are not on the agenda of Nordic governments. At Fortum, these challenging times underline our responsibility for security of supply and the clean energy transition. In this respect, our priority in the short term is to maintain the high availability, efficiency and safety of our Nordic fleet and to continue to play a key role in delivering low carbon electricity to the region. We look forward to the start of regular production of Olkiluoto 3 nuclear power plant expected in December and the construction of Finland's first floating LNG terminal at our Inkoo harbor. To sum it up, the geopolitical crisis is an unprecedented challenge for our modern European societies and our customers. It has created an unprecedented level of risk for Fortum Group. We had to act fast and in the best interest of our group, which we have done. Given the gravity of the situation, let me recap the major developments that led to this predicament and why we made the choices we did already last winter. In August last year, Europe was coming out of COVID and commodity prices were supported by the rapid economic recovery, and there was tightness in the gas supplies to Europe. At the same time, our collaboration with Uniper was on a good track under Uniper's new management. Our focus was on defining our joint path towards closer integration and the execution of our strategy, rooted on clean power and increasingly clean gas was proceeding well. We announced that our Russia division would exit coal at the end of 2022 and that we had accelerated the coal phase out, both in the U.K. and in Germany. There was much to be pleased about. As the fall came, volatility and prices in the gas markets increased and with that, Uniper's collateral and margining needs increased as well. All the while, Uniper's gas business was making excellent profits, which prompted Uniper to increase their full year guidance. Fortum Group's financial position had improved following the closing of a series of divestments and our credit metrics were rock solid. All in all, we were in a good place financially, strategically and operationally. Then at Christmas time, the gas prices peaked at around EUR 200 per megawatt hour, and Uniper was in an acute liquidity crisis. The collateral and margining needs of the company stood at over EUR 10 billion, and we were faced with the very real concern that Uniper might not make it. Uniper's default would have meant in all likelihood collapse of the European gas markets, and it would have had severe impacts also on Fortum and the Nordic markets. Over Christmas and the New Year, we then agreed on a financing package for Uniper, together with the German state on KFW Bank. Fortum gave a EUR 4 billion loan and a EUR 4 billion parent company guarantee. The KFW Bank gave a EUR 2 billion alone. Now it is very important to note that at that time, Gazprom was delivering all the contracted gas volumes to Uniper, all of them, like they had done for the previous 50 years. So this was not an energy supply crisis. It was a liquidity crisis. Uniper needed capital to cover the collateral and margining needs, and these funds would be returned as the gas contracts went into delivery later in the coming months and years. Based on the information available there did not appear to be any risk of Fortum not getting the loan back. Then in late February, Russia invaded Ukraine and started a brutal war. This decision by President Putin fundamentally and irrevocably changed our relationship with Russia. We stopped our investments in Russia, started searching for alternative fuel sources and began preparing for an exit from Russia. I'm sure you all remember at that time. A couple of weeks after the war started, we published our highest-ever results, EUR 2.5 billion of comparable operating profit, half of which came from Uniper. Throughout the spring, while Gazprom continued the contracted deliveries of gas as before, EU countries started making preparations to secure supply in the event of a gas curtailment. Floating LNG terminals were chartered to increase imports, gas storage filling level requirements were set and legislation was passed to deal with different levels of emergency. As the parent company of the biggest importer of Russian gas, we faced heavy criticism over Uniper's continued imports from Russia despite the war. Our explanation that we could not discontinue these imports because the consequences to the German economy would be grave, did not land well. Then came mid-June and Gazprom significantly curtailed their gas deliveries. Uniper, on the other hand, was still contractually obliged to deliver gas to its customers and had to procure the missing volumes from the market at much higher prices. This crystallized significant losses and the spiral of reduced gas from Russia and increased prices resulted in those losses increasing. Germany had a law in place for exactly this kind of situation. It was intended for a gas provider to pass through the extra cost from having to buy the missing volumes from the market to customers. The German government, however, did not take this part of the law into use, thereby making it impossible for Uniper to pass through the higher costs. This left Uniper in an acute financial crisis. Unlike at year-end, this time, the cost was a gas supply crisis, resulting in extreme losses, not the lack of liquidity. With once depleting and fears of the gas curtailment being prolonged or even escalated, Uniper called on the German government to help. And finally, on the 22nd of July, after intense and constructive negotiations, we were able to announce the stabilization package negotiated between Fortum, Uniper and the German government with the help of the Finnish government to provide financial relief to Uniper. Now before I recap what was agreed, I would like to point out that although we have an agreement to stabilize Uniper, we still have to agree on the terms of its implementation, get regulatory approvals, in particular from the EU Commission and sell the agreement in an Extraordinary General Meeting of Uniper. As a result of the agreed measures, the German state will invest equity to hold a 30% stake in Uniper. Fortum's current stake in Uniper will be diluted to 56% on the initial injection. As Uniper's majority shareholder, we acted to share the burden with the German government, knowing that Uniper's rescue was needed urgently and in the interest of Fortum and the Finnish state. Our initial proposal to ring-fence Uniper's German business into their own federal state-owned entity was not viable in this situation. We met our most critical requirement to stop the massive losses and cash bleeding at Uniper mainly by the agreement to introduce the levy from 1st of October, which will cover 90% of the losses. It was also important for us that Fortum does not have to contribute any additional capital beyond the EUR 8 billion in financial support that we already provided. This would have been politically and commercially unacceptable in Finland. All through the process, the support of the Finnish state as Fortum's majority shareholder has been particularly invaluable. In consideration of our liquidity support to Uniper, Fortum will have the right to exchange the existing EUR 4 billion shareholder loan into the convertible instrument, which would let us increase our stake on the same terms as the German government. This would protect us from further dilution and is an option that we can consider. If we do not exchange our shareholder loan, it will stay in place. With regard to the guarantees of EUR 4 billion that we provided to Uniper, let me highlight that they are not going to result in cash leaving Fortum unless Uniper defaults, which in context of the stabilization package and the reaffirmed investment-grade rating is much less likely. In addition, we have agreed to work with Uniper and the German government on a long-term solution to reform the wholesale gas contract architecture. We also agreed that the German government stands ready to provide further support if Uniper's losses due to continuing gas curtailments exceed a total aggregate amount of EUR 7 billion. This so-called backstop was another point that was very important to us and the Finnish state in negotiations. The rating agencies confirmed Uniper's BBB- rating and Fortum's BBB flat long-term credit rating in the light of the stabilization package. In a nutshell, this is what we agreed. The outcome is, by no means, perfect, but it is an outcome that ensures immediate stabilization of the situation at Uniper. It is a compromise that all parties could live with. Now over to the financial impact that we see in the first half year result. This has been a highly challenging year for us at Fortum Group, and the crisis is far from over yet. Uniper will accumulate and report substantial losses over the coming quarters as a consequence of the Russian gas curtailment. The amount of these losses will depend on the level of the curtailments, which, as you know, is going to 100% again at the end of the month. On the top row, you see that the Uniper segment is negative in absolute terms with the comparable operating profit of minus EUR 570 million. This includes EUR 403 million of gas curtailment losses from mid-June '22 onwards, but also intra-year earnings shifts into later quarters through the well-known carbon phasing effect and the shift due to gas storage optimization that we highlighted in Q1. When it comes to the reported operating profit, the Uniper segment is impacted by EUR 12 billion of items affecting comparability. This reflects 3 things: The anticipated gas curtailment losses until October of more than EUR 6 billion. Most of this is expected to settle in Q3 and affect comparable operating profit. Number two, changes in fair values of non-hedge accounted derivatives; and thirdly, impairments for fixed assets from the Uniper segment's Russian subsidiary, Unipro, Bernhard will provide more insights on this shortly. On the bottom row, you see that the Fortum segments, excluding Uniper, delivered solid results. The generation segment profits from strong physical optimization and from the increasing price environment even after allowing for our prudent hedging strategy. In a nutshell, Fortum stand-alone is prospering and performing. Having said that, I move to the next slide. Now in the context of what we have seen in the first 6 months of the year, let me highlight a very important topic, the current state of futures traded markets. The rise of the Nordic future prices to the current unprecedented levels has caused the collateral and margining requirements of market participants to increase rapidly. This is the case irrespectively, whether you run a purely speculative position or whether you are a generator with underlying power production and asset fleet. In general, trading markets provide transparency and liquidity, reduce counterparty risks and give most efficient hedging possibilities. But in the current environment, margining requirements for the existing deals exceed manyfold the potential earnings. Consequently, market participants who do not have enough cash to cover margining requirements have to reduce or even stop trading in the futures market. This reduces marketplaces liquidity and increases the volatility as a vicious circle. To illustrate this development, let me give you an example. The Nordic 2023 future system price has increased by 500% since February. At the same time, liquidity on the NASDAQ commodities has reduced by 60%. So while prices -- the '23 prices have gone up sixfold and market participants, collateral requirements have followed suit, the liquidity in the market has more than halved. Fortum Group's net margining requirements, including Uniper, at the end of March were approximately EUR 4 billion. At the end of June, there were about EUR 7 billion. And this week, they have increased to over EUR 11 billion. Our collateral requirements have not increased as fast as the market prices because we have reduced our positions on NASDAQ. Our hedging policy has not changed, but we are currently mainly hedging through bilaterals, which ensures hedging of our outright position. We are currently managing the liquidity situation. But if the prices continue to rise, there will be a point where we, as Fortum stand-alone, have to increase our liquidity reserves. Our stand-alone share of the EUR 11 billion that I just mentioned is slightly more than EUR 4 billion. Uniper's part is covered by the KFW financing. For Fortum's part, we have started discussions with Finnish state, how to manage this liquidity squeeze. It is obvious that the situation is challenging for power producers and consumers alike. Power producers like us cannot hedge in a meaningful way on the market. This means that in case bilateral contacts -- contracts are not an option, the predictability of the producers' earnings decreases. For industrial customers, electricity sales companies and private consumers, this means increasing exposure to spot prices. And finally, it means that despite highly profitable operations, power producers' ability to invest may be reduced because capital is tied up in these oversized collaterals. The situation case for short- and long-term solutions to make sure that we have a market that functions also under exceptional circumstances. In the short term, I urge our Nordic governments to ensure that working capital financing is available for market participants to cover collateral needs should they need it. The type of facility Germany has implemented through the state owned KFW Bank could be a model for the Nordics too. This would enable power producers to continue hedging and increase the liquidity in the market, which would likely help to curb the high volatility too. The longer-term solution is to look at the EU EMIR regulation which sets the legal framework for margining requirements. EU processes take time. Therefore, the discussions on how the implementation of the EMIR regulation could be changed, should be started immediately. Let me now close with our group priorities for the second half year. In essence, our priorities are divided in 3 steps. Most importantly, we have to stop the leakage, firstly, the drain of capital for margining has to come to an end, as I just discussed. Secondly, the negotiations of the details of the stabilization agreement with German government and Uniper have to be finalized to ensure that Fortum and Uniper returned to stable footing. In addition, Fortum and Uniper have to work tirelessly to reshape our businesses to respond to the current challenging market conditions. It will require further efforts to turn around, particularly Uniper's gas business. To achieve this, it has been agreed that Uniper with the support of Fortum and the German government will work on a long-term solution to reform the wholesale gas contract architecture. We know that the situation raises quite some uncertainty for all our employees, especially at Uniper. And we also want a clear perspective for Uniper employees. Everybody wants to know how Uniper should look like in the future. But there will be 2 major shareholders in the future, and we are just in the beginning of discussing this with the German government and have to learn what their plans are. But also Fortum will have to maintain its stand-alone competitiveness and to regain the trust of our stakeholders. In addition, we will finalize our exit from the Russian market. We have healthy interest from potential buyers in our businesses there. But as we have already pointed out in May, the outcome will, in the end, depend on the approval by the Russian government. Finally, we will review our strategy in light of the changed environment to overcome this crisis and forge a path towards a sustainable future. Fortum's CO2-free generation assets are needed more than ever. Having said that, over to Bernhard.

Yes. Thank you, Markus, and a warm welcome also from my side. Today, I will start again with an overview on our key comparables. As we had to record a substantial negative amount of items affecting comparability in the Uniper segment following the curtailment of Russian gas and the respective exceptional market price movements, I will run you through some reconciliations how this has impacted our P&L, balance sheet and cash flow. As the Uniper division is the main driver of the year-on-year delta and most of you will have followed their disclosure and investor call last week. I will comment the segments only on an aggregated level today, and then close with the outlook section. What you see here is the key financial overview summarizing the key comparable indicators of the consolidated Fortum Group. When looking at the financial situation of Fortum, please remember that the second quarter brought us into a completely different sphere with the gas curtailment losses and the now signed a term sheet with the German government supporting Uniper. Therefore, the consolidated group numbers show a mixture of the healthy Fortum stand-alone business and a distressed Uniper. In the foreseeable future, there will be no cash flows between the 2 in either direction. Consolidating Uniper into Fortum is still mandated by IFRS, but the resulting picture does not make much economic sense for the given reasons. And as you know, the rating agencies already look at both Fortum and Uniper in isolation. Therefore, today, let me focus on 2 KPIs representing earnings and cash flow for the combined group. Let me start with the comparable operating profit. At the half year stage, we are down by more than EUR 1 billion. This is fully explained by the Uniper segment. Next to a series of operational effects that Uniper explained in detail in their investor call last week, we saw substantial gas curtailment losses end of Q2 hitting comparable operating profit and a magnitude of roughly EUR 400 million. And as I explained in their call, there is more to come in the upcoming quarter, and this will also impact the comparable figures. Now turning to cash flow. Net cash from operating activities turned negative, which is in line with the earnings development, but also a consequence of liquidity measures taken by Uniper at the end of the last year to manage the liquidity situation. Please remember that cash conversion from comparable EBITDA to OCF has been above 130% in 2021. Therefore, this should not come as a surprise. Our financial position reversed accordingly with financial net debt to comparable EBITDA at 0.8x at the end of Q2. However, still well below our target level of below 2x. The 0.2x at year-end was also driven by the mentioned liquidity measures taken by Uniper and the group. The strong increase in commodity prices has naturally impacted P&L, balance sheet and liquidity. But before diving into the details, let's have a brief look on the segment overview. The reconciliation on segment level confirms what I said before, the year-on-year delta is fully explained by the Uniper segment as you can see here. What we also can see is that Fortum stand-alone is slightly up. Let me run you briefly through the segments. Fortum's Generation segment was up by EUR 112 million despite lower power generation in the Nordics, especially due to lower hydropower volumes. This was caused by lower inflows and lower reservoir levels during the first half of the year. The operational performance and production volumes for nuclear generation was solid and at the same good level as in the first half of 2021. The achieved power price in the Generation segment increased by EUR 10.3 per megawatt hour, up by 27% following very successful physical optimization and higher spot prices. This is a very strong performance considering that we already have fairly high hedge levels and we are negatively impacted by significant price differences in Sweden between the high system price and lower SE2-area, that's the Sundsvall area spot price with low liquidity. On Fortum's Russia segment, comparable operating profit decreased by 14% or by EUR 19 million. 2021 included a EUR 17 million positive one-off effect from the sale of the 116 megawatts CSA back solar power project to the Fortum RDIF joint venture. In addition, the CSA payments expired for Nyagan 1. In City Solutions, comparable operating profit was down EUR 70 million based on 2 effects. Firstly, operational, mainly as a result of clearly higher fossil fuel costs and CO2 emission allowance prices as well as lower heat volumes due to warmer weather, partially offset by higher power prices. Secondly, a structural effect from the divestments in Fortum Oslo Varme, the Baltic district heating business and the 2x 250-megawatt solar plants in India. In Consumer Solutions, comparable operating profits are flattish as higher electricity and gas sales margins were offset by higher cost. And finally, Uniper, we discussed this on the previous slide for further details. May I refer you to Uniper's publications. Now over to the P&L statement. What you see here is a reconciliation of the 6 months comparable operating profit all the way down to reported net profit. In essence, there are 4 elements to highlight. Impairment charges booked in Q1 are reflected in various line items. In the items affecting comparability, we have impairment charges and reversals of close to EUR 1 billion that are mainly Russia related. Please note that Uniper's goodwill impairment on their Russian assets is not taken by Fortum what, in essence, explains the difference between Fortum and Uniper's figure here. In addition to this, we have impairment charges in the share of profit and loss of associates and joint ventures, mainly on the TGC-1 participation. And in the finance cost, you find the impairment of the Nord Stream 2 pipeline receivable. Capital gains include the sale of Fortum Oslo Varme that we closed in Q2. Now to the elephant in the room. The changes in fair values of derivatives hedging future cash flow. In essence, this contains 2 elements: First, about EUR 5 billion related to various commodity hedges like power forward sales. As commodity prices surged, the hedge deals decreased significantly in value. However, the corresponding value of the underlying assets like power plants or inventories are not reflected here as their book values are kept at historic cost under IFRS. This mismatch is only temporary and will resolve over time as the products go into delivery and the positions settle. Therefore, this will revert. But please note, as commodity prices further surged since end of June, this effect might further increase in the short term. Second, the fair value changes also contain the EUR 6.5 billion expected losses related to the Russian gas curtailments for future delivery periods. This includes fair values of derivatives of gas forward sales that are no longer offset by positive mark-to-market values related to Russian LTC gas, the long-term contracts. It also includes provisions for onerous contracts that account for the impact of the Russian gas curtailments. And finally, a positive effect of EUR 2 billion the respective IFRS tax impact mainly from the fair value losses. Consequently, at this stage, half year operating profit is negative by EUR 11.5 billion. Now over to the balance sheet. The supply shortfalls of Russian gas and the sourcing of replacement volumes of the curtailed Russian gas created substantial losses for Uniper. These losses are now reflected in our result on a multibillion scale, partly as materialized losses and partly as impairments and provisions that will materialize as losses in coming quarters. The resulting negative net profit of EUR 11.5 billion reduced IFRS total equity to just EUR 1.3 billion. This might raise questions on our dividend distribution abilities going forward. On that, please note that dividend distribution capability is linked to the local GAAP equity and not to the consolidated IFRS group equity. The increase in derivative financial instruments is driven by the increase in commodity prices that had a significant impact especially in the Uniper segment. Please note that those are booked on a gross basis to the balance sheet. So all deals increase the balance sheets. Even though maybe the same product has been both sold and bought several times back and forth for the same time period. Looking at the net of margin receivables and liabilities, those are slightly down at half year stage despite higher prices due to our mitigation measures. Liquid funds decreased by EUR 3.5 billion, and I will elaborate on this on the next slide. The cash flow statement confirms what we've seen on the balance sheet. Liquid funds decreased by EUR 3.5 billion, what has been driving this? First, the net cash from operating activities turned negative. The main reason for the negative cash flow was the increase in working capital in the Uniper segment as it was impacted by payments for CO2 allowances and gas-related operational measures taken from -- taken to improve liquidity in the fourth quarter of 2021. These measures had a reverse cash flow effect in the first half of 2022. In addition, following the gas curtailment, Uniper has procured replacement volumes at high market prices, which also has increased working capital. Second, the net cash from investing activities is negative as the cash flow from divestments could not compensate for the increase in margin receivables. And third, the cash flow from financing activities decreased mainly related to repayments of commercial papers. The next slides show net debt and our maturity profile. As the upper graph shows, our financial net debt is up following the negative H1 operating cash flow. Consequently, our leverage target of financial net debt to comparable EBITDA reverted from the extremely low level of now to 0.8% and is still well below the target of below 2%. We currently have EUR 13.3 billion of gross debt at an average interest rate of 1.3% for the whole loan portfolio. The interest rate is slightly up compared to the last quarter as market rates have gone up. We had liquid funds of EUR 4.2 billion on group level and approximately EUR 1.1 billion of that on a Fortum stand-alone basis. With regards to the contractual maturities those are EUR 0.5 billion down as we paid back commercial papers in June. As well in June, we signed a new EUR 5.5 billion revolving credit facility at Fortum. Overall, the profile might appear a bit front-loaded, but you see on the graph that we have quite some extension optionality. And please remember that this is the consolidated picture. And there will be margin roll-offs in the quarter to come. Regarding our BBB rating. Due to the constantly developing external circumstances and increased uncertainties, we are in continuous dialogue with our rating agencies. In July, S&P and Fitch affirmed a BBB flat rating for Fortum with negative outlook. Following the announcement in July that Fortum Uniper and the German government have agreed on a comprehensive stabilization package for Uniper. S&P assesses that this support package for Uniper will prevent further incremental cost for Fortum and considers Fortum financial exposure as capped. Having said that, now finally over to the outlook section. This comprises in essence, 2 elements. On the right -- on the left side, the hedging part for the outright generation where Fortum's successful hedging has continued to create predictability and visibility. The hedge prices for the Generation segment increased for this year by EUR 3 and 2023 hedges are up by even EUR 4 versus Q1. Regarding Uniper's hedges, it is good to note that Uniper's hedge prices have changed in Q1 as they made some changes to its hedge price reporting. On the right side, there are some important indications. As highlighted before, Uniper's reported results includes anticipated future gas curtailment losses based on the situation as of end of June. In addition, we cancel our CapEx guidance for 2022 as the operating environment tremendously change and we will reprioritize some of our investment plans. Both at Fortum and Uniper. And finally, our tax guidance is unchanged, expecting a tax rate in the range of 22% to 25%, with this, I conclude our presentation, and we are now ready to start the Q&A session. Pauliina, over to you.

Thank you, Bernhard. We are now ready to start. Please state your name and company and kindly limit yourself to 2 questions. Operator, please go ahead.

The next question comes from Pasi Väisänen from Nordea.

Great. This is Pasi from Nordea. Well, to start with, I just actually looked at that would it be so that without this strong Russian ruble in the second quarter, your equity actually would have been negative in June, so is that right? And what will be the exact amount you are able to report on your own equity from this Uniper's EUR 8 billion convertible in the fourth quarter? And lastly, would you like to share some views regarding the investments and dividend policy going forward? And where is there kind of a need for the issue or raise new equity at some point of time?

Thank you, Pasi, for the questions. So I think there were 4 questions. The -- what was the FX impact on equity -- on equity, so maybe Bernhard can take those? And then I can talk about the dividend policy I need to raise equity. So with regards to dividend policy, our target is that our dividend policy is unchanged. So our target is to pay a stable over time increasing dividend, and that should be underpinned by our earnings growth. So that is what the policy says now. We will then, towards the end of the year and in the turn of the year, assess the situation with regards to our earnings and capital and balance sheet and so on, discuss with our Board, who will then make a recommendation to the AGM with regards to what to do with distribution of profits. So this is -- it is too early to say. I think the long-term direction is clear. Whether there is a need to raise equity at the moment, well, you have seen our numbers, net debt-to-EBITDA numbers and so on. And then with regards to the future losses, that would be accumulating from Uniper that they already provided for. So that impact, you can see in the equity now. Part of the -- a big part of the equity impact on equities, the changes in the fair values of the hedging instruments. And then how will this losses be handled. Well, you did mention the German government convertible. So that is the instrument that will then replace the current KFW funding in the capital structure. So it will be something that will give stability to Uniper's balance sheet. And then with regards to the accounting treatment and so on, I think Bernhard can comment on that, but that's something, of course, we will then come to once the final terms and conditions are agreed. But the term sheet sets out the big picture and the framework of the agreement, which brings the visibility, stability, liquidity and covers the losses until the backstop and then Germany has committed to handle the -- also amounts exceeding backstop in a non-dilutive way. And then, Bernhard, if you want to add something on the FX side and equity otherwise.

Yes. Obviously, the movement in the ruble exchange rate between Q1 and Q2 had a quite massive effect. And if you deduct this from Fortum's group IFRS equity, you would indeed end up with a negative number on just this stand-alone effect basis, yes. So -- but again, this has no relevance in the sense that any immediate actions also would be necessitated by that.

Yes, I hear you. So would it be kind of a clear assumption that you are going to book roughly half from that EUR 8 billion German convertible to your own equity in the fourth quarter?

We are -- it's far too early to say how this will be treated accounting-wise because we are still in the middle of the discussions with the German government of how the mandatory convert will look like. And only once we have agreed on the overall financial and legal mechanics, the accounting treatment can be assessed.

Yes. The next question comes from Vincent Ayral from JPMorgan.

Yes, and thank you very much for this presentation. So good questions asked just before. Actually, my questions are along the same lines trying to understand basically what is Fortum's exposure beyond the pure equity stake in Uniper. So when I hear what I hear, I have the impression that you do not necessarily have the option to convert the shareholder loan into the convertible, but it's kind of mandatory. So you don't get these provisions back, is it really an option? Is the question one. And when we are on the same thing, you got EUR 4 billion guarantee and this guarantee, could we get like insurance that indeed, you will get the way back on the guarantee? And that's quite key for me. The second is not directly on the loans to Uniper, but again, we're back to the balance sheet and dividends. You're saying that if I quote you, literally, the dividend policy is unchanged, but you and the Board will review it at the end of the year once we know what is the final bill on the Uniper? Is it indeed fair to assume that the rating agencies may want to see some efforts on the dividend, especially if they do not force you into a capital raise to keep the rating. So is it a fair assumption to work on some sort of dividend reset like EUR 1 or something like that?

Okay. So maybe I'll start with the -- actually the last question because that's -- it's a key question. So -- going forward, once we get more -- I mean we are now in an acute European energy crisis. So that's good to remember that we need to work on certain fundamental foundations to get them in place like documenting the stabilization package, giving clarity to the margining requirements by the exchanges and so on that are causing disturbance to the whole market. But of course, we are thinking about this simultaneously. And then in the medium and long term, we need to look at the 3 elements of balance sheet and growth and dividend, how to balance that. We see good possibilities to participate in the energy transition. To do that, we need a solid investment-grade balance sheet. That is clear. So utility, we need a lot of capital and then we balance these 2 elements with the dividend as well. And we know that we have long-term investors that appreciate the stable dividend yields. So these are the elements we take into consideration. It's not so that 1 party like rating agencies would fix 1 corner, and then we solve the rest. But we look at the total balance how we manage the system in the long term. With regards to the exposure, so we have the equity stake. That is 1 exposure. And then on the possibility to convert our loan into equity. So this is truly an option. This is what we negotiated. It has -- it gives us the possibility to convert at the same terms, which should be favorable terms. So it is valuable for us to have this option. And then it's in our discretion if we convert or not when the mandatory convertible comes to maturity, whether we will take a part of that. And with regards to the EUR 4 billion guarantee, now we have agreed that the German government will come in with a 30% stake into Uniper KFW has provided EUR 9 billion loan facility and German government, the EUR 7.7 billion convertible. So I'm looking at the guarantee against this backdrop. So how comfortable do I feel that the guarantee will not be triggered. So it would be triggered if Uniper would default. And we have all this layer of protection to actually protect Uniper from the financial difficulties and the market that it is facing of converting into then an actual financial problem beyond what has been agreed. And of course, we hear from the German government that they regard Uniper as a very important part of the energy infrastructure and have supported it already with these measures. I hope this helps.

Yes, yes. I mean, just here to a quick follow-up here, just to understand 1 thing. So basically, if I summarize, you're likely to convert the shareholder loan because it will be economically sensible given the strike price on the conversion that's Uniper. So this one is safe with Uniper. You should get the EUR 4 billion guarantee back and your main areas of exposure at the moment or capital requirement on the margining, which you're working on and potentially the backstop, which -- and our estimates will be triggered in the coming weeks even before October 1. Is it a good summary of the situation?.

With regards to the conversion, I go back to what I said earlier. So it is truly an option, but it's a foregone conclusion that we would convert it. We have that option. But we will make that decision then at the time when we get to the point of the possibility to convert or not. So we haven't made any decision. And of course, this could be an option in the money, but we will need to assess that once we get there. So no decision yet and no conclusion what we would do there. Then otherwise, you brought up the backstop as well. So that is an important part of the element of the term sheet in addition to the instruments that I already referred to. And that is 1 of the issues that Germany has to now work out that how -- what are the instruments and elements beyond the agreed backstop that how will Germany handle this in a non-dilutive way and at the same time, take care of the social implications for industries and consumers of the increased energy bill.

The next question comes from Wanda Serwinowska from Credit Suisse.

Wanda Serwinowska, Credit Suisse. Two questions from me. The first 1 is on the backstop, would you accept further that as a basically non-dilutive rescue for Uniper once the $7 billion backstop is reached. As Vincent said, I mean, it can be within the next few weeks. And another point is from what I understand the details of the term sheet are still being discussed, and they may be disclosed by the end of the year. So how are you going to address it in the communication with the financial market? Because for the time being, we don't really know how the $7 billion backstop will look like. And the second point is on the German economy ministry spoke, made some comments yesterday, who stated that they don't expect to see any need to adopt Uniper bailout package? I mean, I would argue that the outlook deteriorated massively since you started in the negotiations. I mean you look at the 10% of the losses that Uniper is responsible for, and it could be EUR 4 billion for next year. Any comment on that?

Okay. So I'll take a couple of points here, and Bernhard can add to that. So with regards to the backstop, it was agreed in the term sheet that beyond the backstop, then there will be a nonshareholder dilutive solution beyond that. And exactly what that will be. This is part of the data that have to be discussed. And as I said just a while ago, I think the other side of this question is that, how will the German society deal with the consequences? And maybe I'll just here lift the discussion up also to the bigger European energy crisis. So whilst we are here talking and it's completely fair to talk about the Fortum and Uniper consequences, but we are looking at the very serious energy crisis in our hands. So this kind of price level volatility, uncertainty and worry in the market is not good for Europe. So Europe needs a concerted effort and governments need to address the issues that we mentioned earlier. With regards to the details of the term sheet, of course, it is in our interest and everybody's interest that we work out the details as fast as possible. So we want to get to the final document as soon as possible, and that's what we are working for. And we'll then disclose details once we have the visibility -- and for the comments of the German ministries, then we have the term sheet agreed, and we are now working out the details. So exactly what they then referred to then I have seen the comments, but how I should interpret them, then I look at this through the agreed term sheet.