Fortum Oyj (FORTUM) Earnings Call Transcript & Summary

Good afternoon, everyone. A warm welcome to Fortum's webcast for the investor community and today's announcement of the historical and very significant strategic partnership and long-term PPA that Fortum and Google have signed. My name is Ingela Ulfves, and I'm heading Investor Relations at Fortum. As always, this event is being recorded, and you will find a replay on our website later today. With me here in the studio, as you can see, is our President and CEO, Markus Rauramo. Markus will briefly present the key strategic highlights and what this partnership and PPA means for Fortum. And following the presentation, we will then take your questions. We have reserved approximately 30 minutes for this event. So without further ado, I now hand over to Markus to start.

Thank you very much, Ingela. A warm welcome to this call also from my side. Today, Fortum and Google have announced a historical long-term strategic partnership that represents much more than a commercial agreement. It's a unique partnership that supports growth, competitiveness and long-term prosperity, not only for Fortum, but also for Finland. This extensive strategic partnership with Google is deeply founded in our 2 main strategic priorities: to deliver reliable energy to our customers and to drive decarbonization in industries. At Fortum, growing together with our customers is at the core of our strategy. We provide reliable energy at scale, and we work with our customers to support their growth and decarbonization ambitions. Long-term partnerships like this one are a concrete example of our strategy in action. In today's world, partnerships are essential for creating the conditions needed for investments in new power generation, while providing customers with a reliable and low-carbon energy. I'm particularly proud that Fortum can play a role as the energy partner in enabling Google's ambitions, as they expand their operations, create new jobs, invest in innovation and strengthen Finland's position as a leading destination for digital and AI-driven growth. I will very briefly go through the reasons why we invest in the Nordics and what the current power demand projections in the Nordics are. After that, I will present the main points of our agreement with Google. As we have been highlighting already for quite some time, the Nordics is a very attractive market for various industrial companies, including data centers to establish their businesses in. There are a few clear reasons. One is the power price level. There are large variations between power prices in Europe, while the Nordics have the most affordable prices. Central Europe has roughly doubled the power price today. Lower prices in the Nordics are enabled by the energy mix, hydro, nuclear and renewables with basically no fossil fuels. The energy mix also means very low carbon emissions. Further, our power grid is robust, and we have good infrastructure, for example, roads, railroads, harbors. There is an abundance of land and water areas and possibilities for waste heat recovery and use. We have also skilled workforce, just to mention a few credentials. Large-scale land areas also enable us to build more supply when power demand increases. The interconnection capacity between Nordics and Central Europe is expected to grow to more than 13 gigawatts by the end of this year. This means that more than 100 terawatt hours export and import possibilities between these energy markets. Cables are owned by the Nordic transmission system operators, the TSOs and are working automatically. This means that in case of potential market tightness, power flows in both directions. Then over to the very interesting topic, power demand projections and how power consumption could evolve over time. Power consumption is anticipated to increase significantly across various industrial sectors in the Nordic region. According to the latest TSO forecast, power demand is expected to grow from the current 400 terawatt hours to 550 terawatt hours by year 2030. By 2050, demand is estimated to increase even up to 975 terawatt hours per year, which means that annual demand will more than double from the current level. Naturally, the very long term is uncertain, but this gives an indication of the direction. The main take is, however, that certain sectors, especially data centers, are increasing demand already today, while other industrial sectors seem to grow further out in time. At Fortum, based on our discussions with customers, we continue to see robust underlying demand from various industrial sectors, and we believe that it well reflects power demand growth longer term. There is a lot of customer activity ongoing with a large amount of various planned industrial projects across the Nordics. Today's agreement with Google is one concrete proof point of this activity. Data centers are the most active sector right now, and they are also likely to have the fastest time to market, which is why we see power demand from data centers to increase before larger industrial projects. We are prepared to respond to this increasing demand. With this as a backdrop, let's have a look at what the strategic partnership with Google means. The strategic partnership agreement consists of 2 main elements: a long-term PPA, power purchase agreement and an MOU, memorandum of understanding. The agreement is related to the lifetime extension of the Loviisa nuclear power plant and has a duration of 22 years. The PPA starts in 2028 with a smaller capacity before it reaches 50% of the Loviisa plant's capacity during the years 2030, 2049. This PPA provides an important foundation for the future. It gives Fortum the long-term visibility and the economic certainty needed to invest the better part of EUR 1 billion in extending the plant's lifetime and improving its performance. This is the first large-scale nuclear PPA in the Nordics and also one of the first ones outside the United States. This is also Google's first PPA related to nuclear lifetime extension globally. Furthermore, this is one of the biggest, if not the biggest sales agreement ever signed by a Finnish company and definitely the biggest sales agreement that Fortum has ever made. Consequently, this is a very meaningful business agreement in many respects. We are very proud and very pleased to have been chosen as Google's reliable and trusted strategic partner. We have 2 reactors in Loviisa. So the PPA basically accounts for half of Loviisa's total capacity, i.e., 1 unit. As we have earlier said, the plant is expected to generate up to 177 terawatt hours of electricity during the extended lifetime. We are also very pleased that Google, like us, values the nuclear lifetime extension as a viable solution for fossil-free power. At Fortum, we believe that there is ample potential to increase renewable energy production as well as opportunities for lifetime extensions and capacity increases in nuclear reactors in the Nordics. For competitive reasons, we have not disclosed the price of this PPA. However, what we say is that the PPA supports Fortum's profitability targets, and it is expected to increase the group's comparable return on net assets RONA by approximately 1.4 percentage points over time when 50% of the plant's capacity is contracted, which is starting from 2030. During the years 2028, 2029, the PPA is based on smaller capacity. In addition to the PPA, we have also agreed on several other cooperation areas under a memorandum of understanding. This includes asset development, energy portfolio management, new build nuclear and site development. To enable sustainable future growth, Fortum will develop future energy solutions for Google related to new renewables, BESS and flexibility solutions. These include, for example, batteries and pumped hydro. We will together explore various models to manage and optimize Google's energy portfolio in Finland. As a first step, Fortum has signed an agreement with Google to optimize a new 94-megawatt battery storage system, which Google has contracted for to be located adjacent to Google's new data center in Kajaani. We're also looking into possibilities for nuclear new build in Loviisa longer term together with Google. It also means exploring the conditions required for future nuclear investments. Together, we will examine business models that could enable new nuclear power to be developed in Loviisa, where Fortum has already made preparations and acquired additional land for potential future projects. Already for a while, Fortum has developed various industrial sites to help our customers with their market entry. As part of the agreement with Google, we will, in cooperation with Google, look more concretely into their future needs for sites in the Nordics. We are very pleased that our strategic ambition to develop sites for our customers will start to materialize and that we are getting traction from our customers for powered land. This agreement is a good example of how we can holistically serve our customer in a strategic energy partnership. This partnership is not only good for Fortum and Google, it is also good for Finland. As Google today announced, their investments are expected to amount to as much as EUR 13 billion during the years 2027 and 2028, supporting more than 37,000 jobs nationwide and giving an annual boost of EUR 3.6 billion to Finland's GDP. For many years, we have spoken about the opportunities created by electrification and digitalization. We believe that Finland could become one of the leading beneficiaries of these powerful global trends. By combining low carbon and fossil-free energy, technological innovation and long-term industrial investment, we can strengthen Finland's competitiveness, create growth and jobs and build a more prosperous future. I'm sure that you will have several questions, so I will stop here, and we can start the Q&A session, and I will hand over to Ingela. Please, Ingela.

[Operator Instructions]

So thank you, Markus. And we are, as said, now ready for your questions. [Operator Instructions].

The next question comes from Harry Wyburd from BNP Paribas.

I'll reluctantly keep myself to the one question, although there are clearly loads more. I know you can't disclose the price, and I know you've agreed not to. What I'm going to do is run through some logic. And if I could ask if you could tell me if there's anything that's not logical that I'm saying here, and this is really going to help us understand the economics of this. So looking at the volumes involved, half of Loviisa is about 4 terawatt hours per annum. Your current net assets are about EUR 9 billion and 1.4% of EUR 9 billion, i.e., the uplift is around about -- would be around about EUR 130 million. So if I back the 4 terawatt hours into the EUR 130 million, that would kind of suggest a EUR 30 gigawatt hour uplift here? And then if we consider what the base could be [indiscernible] long-term prices plus the finished area premiums, I guess if we ignore the last couple of weeks when prices have moved a lot in July and August were probably around 50. So if we took a 50-ish base plus a 30 premium, you'd be looking at something around 80. I know you can't comment on the price, but maybe you could just comment a bit on the logic. Is there something that we've missed or miscalculated there? And then maybe last clause to it, you said over time, what does that actually mean? Is that the terminal uplift as in like at the end of the 22 years? Is it the middle? Could you give color on how it ramps or it's relatively flat?

Yes. Thank you for the good question. And I think this -- being a former CFO, this would be an approach that I would also take. But indeed, we have agreed with Google that we do not agree or do not disclose the commercial terms of the PPA. So the contract price, we do not disclose. What we have disclosed is that indeed, we expect the PPA to increase our comparable RONA by the mentioned 1.4 percentage points over time once 50% of the plant's generation capacity is contracted. And this obviously supports our long-term comparable RONA target, which is 14%. And we were -- at the end of Q2, we were at 11%. So really nicely supports that. I think a point there, what you were also kind of coming to is that this certainly differs from Fortum's customary financial hedging as this is really reflecting the long-term customer value rather than the short-term market pricing. The EUR 9 billion is indeed a recent number that we have published. But then when we get to the long-term perspective, then we cannot make forecast on the -- what the net assets would be going forward or the other parameters. But indeed, many of the parameters that you mentioned are the ones that we have communicated.

A ramp profile, anything you can say because what I'm, again, just conceptually aiming at here is it is a long ramp. What would effectively mean is you get to 1.4% RONA uplift at the very end of the PPA, but it might be less at the beginning? Or is it a relatively flat profile, and we should assume that you get the 1.4% RONA uplift from 2030, which is, as I understand it, is the first full year of the PPA?

So what we have -- what we have said is that, that we expect the agreement to increase the RONA by the -- approximately 1.4 percentage points over time once 50% of the plant's generation capacity is contracted. So basically, that's the formulation we have been using.

The next question comes from Pavan Mahbubani from JPMorgan.

Just following up on what Harry was asking about as well. So your LTM RONA, I think, has been around 11%. You guide to 14%, and this deal gets you about half of the way there. Can you talk about what we need to -- what we need to assume to get to the 14%? Have you embedded in similar deals like this or more data center PPAs? Or does it assume higher Nordic prices? Would be great to get some color around what we need to assume because I think the market or certainly I was below the 14% in the medium term.

Yes. Thank you. So the 14% is a long-term target. So we haven't defined exactly what time period that is. But we think that this is something that our business can achieve with our existing portfolio, including potential future investments, potential M&A transactions. And what we have announced already are our profit improvement targets that we have communicated earlier. But then the market pricing, we are not forecasting. But this is a long-term target, which we believe is achievable over the long run.

The next question comes from Alexandre Braunshausen from Bank of America.

Maybe just one clarification to start on Harry's comment. I think one of the questions he had that I don't think you've clearly answered is if the 50% capacity was reached over time. And to that, I think you've had conflicting comments if the 50% capacity reach was in 2030? Or would that be still more likely between 2030 to 2040. I think we've got conflicting comments in between your and the press release. And my question would be just on other data center deal actually disclosed this year an agreement with [ DayOne ] and with Nscale, which I think are both supposed to be 500 megawatts data center as well. So any update on progress with your discussion there would be super helpful.

Okay. Thank you. So sorry for being -- if I was unclear, the contract goes to 50% of Loviisa's capacity from 2030 onwards. So then it's 50% of Loviisa's capacity until the end of the contract in 2049. Then otherwise, on other customer discussions. So the way I would put it is that, like I said in my presentation also, so we see good interest from customers from various sectors, metals, steel, aluminum, mining, data centers, battery factories, hydrogen, e-mobility, electrified heating. And if we look at the TSOs forecast, actually, the bigger demand will come from other sectors according to their forecast than data centers. If we have material transactions, then we would announce them separately as we did today. Otherwise, we communicate our hedge prices and hedge ratios quarterly. And now we are getting towards the end of the year. So then we will also communicate the next year, so 2028 hedge ratios for the first time once we get to Q3 of this year. This, of course, also supports very nicely our target to have a rolling 10-year hedge ratio of 25% over our total portfolio. So in many respects, fulfilling many of our strategic KPIs and ambitions.

The next question comes from Wanda Serwinowska from UBS.

Congratulations on the deal that we have been waiting for 2 years. One question from me would be on the potential backlash in Finland because basically, the deal with Google takes about 5% of the baseload, and we know how precious the baseload is. The Finnish market is more or less balanced. So we also saw some initiatives by the Finnish government, which were not that favorable to data centers. So how do you think about potential impact on the end user customers? And if it's basically -- or is it can go for data centers, we will see many, many more deals like yours being signed up?

Yes. Thanks for the good question. So globally, there's a lot of discussion about the energy-intensive industries and what is the impact on the market. The big benefit in Finland and the Nordics is that there is great potential to increase also supply if and when the demand and, of course, profitable demand is there. And this is why we also today communicated in various events also with Finnish politics involved that we are very focused on making supply available when it's commercially feasible. That's why we have the 8 gigawatts of renewables in permitting and more in earlier stages of development. We have the target to develop 2.5 gigawatts of flexibility, either customer flexibility or our own flexibility and then further beyond that, also the pumped hydro. So that would be batteries and consumer flexibility, industrial flexibility, electrified heating and then the nuclear. So we have the new nuclear development program, feasibility study. We have acquired land in Loviisa. We put in an application for the Swedish nuclear -- government nuclear scheme. There is a very high demand prospect in the TSOs forecast underlying, and there is a good -- very good amount of potential supply also that can answer to that. Further on, what we see happening, for example, in the data center segment is that the investments are incremental. So they are not happening like there's not one huge investment coming in one go. But typically, the expansion is modular. And when building new wind takes about 2.5 years, new solar, about 1.5 years, batteries can be deployed faster. So with the pipelines of new supply, there definitely is an answer to increased demand. But in a very healthy way, as we have seen now recently, if there isn't profitable customer demand, then there isn't new supply coming to the market either. So I have quite good confidence in that the potential for energy-intensive investment is there, and they will be answered with new profitable supply.

Can I just follow -- clarify how many gigawatts do you have of renewables in permitting and how [indiscernible] by 2030?