Inside information: Fortum renews strategy to drive clean transition; new financial targets and dividend policy and more ambitious environmental targets
FORTUM CORPORATION INSIDE INFORMATION 2 MARCH 2023 AT 9:00 EET
- Fortum’s strategic priorities are to deliver reliable clean energy and drive decarbonisation in industries in the Nordics.
- Updated financial guidance to ensure credit rating of at least BBB and optimal financial flexibility for future growth: long-term financial net debt-to-comparable EBITDA of 2.0–2.5 times.
- Disciplined growth in clean energy with capital expenditure of up to EUR 1.5 billion during 2023–2025. Investment hurdles of project WACC + 150–400 basis points will be applied.
- Renewed dividend policy with payout ratio of 60–90% of comparable EPS. Fortum’s Board of Directors proposes a dividend of EUR 0.91 per share for the year 2022 corresponding to a pay-out of 75% based on comparable EPS of EUR 1.21 (excluding Russian operations).
- Tightened sustainability and decarbonisation ambitions with updated targets to reach carbon neutrality already by 2030, exit coal by the end of 2027, target for specific emissions and commitment to SBTi (1.5°C) and biodiversity targets.
The new strategy will be presented in more detail today in connection with the 2022 result webcast.
“Our new strategy is designed to deliver on our new purpose: To power a world where people, businesses and nature thrive together. It crystallises our value proposition to our stakeholders. We have a unique ability to reliably deliver clean energy from sources at scale. With our energy we help our customers to decarbonise their processes and societies to reach carbon neutrality in balance with nature,” says Markus Rauramo, President and CEO of Fortum.
Operating environment outlook
In the near term, the energy sector continues to be impacted by geopolitical tensions, general weaker economic outlook with higher inflation and interest rates, tightening regulation and volatile commodity markets.
However, in the mid to long term, electricity is expected to continue to gain a significantly higher share of total energy consumption. Electricity demand growth will increasingly benefit from decarbonisation of energy-intensive industrial, transport and heating sectors through direct electrification and clean hydrogen. The Nordic market provides clean and affordable electricity for decarbonisation, and Fortum is well positioned to drive this transition.
New Fortum
Fortum is today one of Europe’s cleanest power generators. Almost 90% of the Group’s EBITDA (year 2022 excluding Russian operations) originates from the company’s Nordic 45 TWh outright power generation, which is based on CO2-free hydro and nuclear power. This business is complemented by onshore wind and solar, district heating and cooling operations, electricity retail business and circular economy.
Fortum’s new strategy does not include the Group’s Russian operations and the company continues to actively pursue an exit from Russia, with a divestment as a preferred alternative. However, any potential transaction is subject to Russian regulatory and presidential approvals and is likely to take further time.
Fortum’s strategic priorities
Deliver reliable clean energy
Fortum’s biggest strength, and a continuing strategic priority for the company, is its ability to deliver reliable and clean energy at scale to customers and the Nordic energy system. Building on its assets and strong competence to optimise the highly competitive power generation fleet, Fortum continues to maintain and develop its best-in-class operations to constantly secure top efficiency and flexibility. Fortum will also continue to decarbonise and modernise its existing operations to ensure optimal value creation and to reach its environmental targets. Partnering with customers to deliver the power volumes they require with a stable price will also enable Fortum to better manage the impact of the volatile wholesale power prices in the Nordics.
Drive decarbonisation in industries
Decarbonisation of heavy industries is a key hurdle to address the way to carbon neutral and more sustainable societies. Development of technologies to replace fossil fuels in production processes is accelerating. With its strong position in clean power in the Nordics, Fortum will work to find solutions for industrial customers to lower their carbon footprint. The aim is to develop and build new clean power generation in partnerships with strategic customers and actively develop a project pipeline to enable future growth. Further, over time Fortum aims to explore opportunities in nuclear, for example in small modular reactors (SMRs), in cooperation with customers and partners. In order to drive the development of clean hydrogen in the Nordics, Fortum will explore projects together with industrial customers.
“Industries are confronted with challenges as they need to decarbonise and answer to their customers’ demand for cleaner products. As a leading provider of clean energy in the Nordics, we at Fortum want to be the partner of choice for industrial customers to help them achieve a competitive advantage by bringing clean products and offerings to the market. Consequently, enhancing customer-orientation and driving cost efficiency will continue to be an important element as we execute on our strategy,” says Markus Rauramo.
Selective growth with disciplined growth capital expenditure
Fortum will be prudent in its capital allocation, to carefully manage the current volatile and uncertain operating environment. At the same time, the company aims to take benefit of the prevailing good power market conditions.
Fortum’s growth initiatives will be selective and target clean energy and decarbonisation projects. To manage the balance between financial strength, growth and dividends, Fortum has estimated growth capital expenditure (excluding acquisitions) to be up to EUR 1.5 billion for the years 2023-2025. This includes ongoing investment projects, such as the Pjelax wind project and the lifetime extension of the Loviisa nuclear power plant in Finland. For its investment decisions, Fortum applies investment criteria such as investment hurdles of 150-400 basis points on top of project WACC. Investment decisions will also be evaluated against the company’s climate targets and biodiversity.
Financial flexibility with updated leverage guidance
Fortum remains committed to maintain a credit rating of at least BBB.
Following the divestment of Uniper, Fortum‘s balance sheet is strong and leverage has been reduced to a very low level, providing a substantial buffer to accommodate for the current uncertain and volatile market conditions. At year-end 2022, Fortum’s financial net debt-to-comparable EBITDA ratio was at a healthy level of 0.6 times (excluding the impact from Russian operations). Fortum intends to refinance the company’s loan portfolio in the bond markets in due course to extend debt maturities and further improve financial flexibility, which in turn will support strategy execution and growth in the mid-term. In affirming its commitment to a stable credit rating of at least BBB, Fortum would be comfortable with financial net debt-to-comparable EBITDA of 2.0-2.5 times in the longer term (earlier leverage guidance was to be below 2 times).
New dividend policy
The renewed dividend policy – a payout ratio of 60-90% of comparable EPS – reflects the potential earnings fluctuations of Fortum’s power generation portfolio. For the year 2022, Fortum’s Board of Directors proposes a dividend of EUR 0.91 per share which corresponds to 75% of the Groups comparable EPS of EUR 1.21 for continuing operations excluding impact from the Russian operations. Fortum’s previous dividend policy was to pay stable and overtime increasing dividends. The Board proposes that the dividend is paid in two instalments, in the second and fourth quarter of 2023.
“Fortum’s earnings profile can be more volatile than what we have seen in the past as it is even more a function of the Nordic power prices. With the updated financial targets, selective growth and the dividend policy, we want to steer the Group’s financial performance in a balanced way and create sustainable shareholder value. I want to highlight that even after the tough year with substantial losses and impairments, the Board is proposing a cash dividend, which is fully in line with our peers and at the mid-point of our new dividend policy,” says Markus Rauramo.
New more ambitious environmental targets
Fortum’s position as a leading Nordic clean energy company is now complemented by considerably enhanced environmental targets with the aim to be a leader in sustainability.
Fortum has brought forward its target to reach carbon neutrality (Scopes 1, 2, 3) by several years to 2030 and will exit all coal generation by the end of 2027. Fortum will also commit to set emission reduction targets based on the climate science (SBTi 1.5°C). This commitment assumes full exit from Russia. To measure the progress, mid-point targets have also been set for specific emissions at below 20 g CO2/kWh for total energy production and at below 10 g CO2/kWh for power generation by 2028. Fortum is already taking steps to reach the new environmental targets and examples of these include the Loviisa nuclear plant lifetime extension, increasing the use on hydro power and the ongoing decarbonisation projects in district heating.
Further, Fortum is now also committing to an ambitious biodiversity target to have no net loss of biodiversity (excluding any aquatic impacts) from existing and new operations (Scopes 1, 2) from 2030 onwards. In addition, the company will reduce its negative dynamic terrestrial impacts in upstream Scope 3 by 50% by 2030 (base-year 2021). Fortum will continue local initiatives, especially in hydropower production, and is committed to develop a science-based methodology to assess the company’s aquatic impacts during 2023.
"Companies with a strong sense of purpose do better and matter more. We are living up to our purpose by committing to considerably more ambitious environmental targets that extend beyond climate neutrality and take a firm stand in protecting biodiversity. We also want to be known as the company that cares about people and communities we live and work in and that are impacted by our supply chains, both locally and globally. This is measured by our commitment to safety and to advancing a just transition for all – and the integrity of our actions every day,” Markus Rauramo concludes.
Phased strategy execution to manage the short-term uncertainty in the operating environment
To enable the strategy execution and manage the current market uncertainty, phasing of the key priorities will be applied. It is important to ensure solid performance, thus, initial focus will be on optimising the best-in-class operations, focus on earnings and cash flow as well as returning to the bond markets to refinance the group’s debt portfolio. This requires balance between capital expenditure, balance sheet and dividends. Fortum will simultaneously build capabilities for future growth by exploring opportunities and developing project pipeline together with industrial customers. As a next step, the company could consider larger scale growth decisions that require increased capital expenditure.
Fortum Corporation
Ingela Ulfves
Vice President, Investor relations and Financial Communications
Further information:
Investors and analysts:
Ingela Ulfves, VP, Investor Relations and Financial Communications, tel. +358 40 515 1531
Rauno Tiihonen, Manager, Investor Relations, tel. +358 10 453 6150
Carlo Beck, Manager, Investor Relations, tel. +49 172 751 2480
Media:
Fortum News Desk, tel. +358 40 198 2843
Distribution:
Nasdaq Helsinki
Main media
www.fortum.com
Fortum
Fortum is a Nordic energy company. Our purpose is to power a world where people, businesses and nature thrive together. We are one of the cleanest energy producers in Europe and our actions are guided by our ambitious environmental targets. We generate and deliver clean energy reliably and help industries to decarbonise their processes and grow. Our core operations in the Nordics comprise of efficient, CO2-free power generation as well as reliable supply of electricity and district heat to private and business customers. For our ~5 000 employees, we commit to be a safe, and inspiring workplace. Fortum's share is listed on Nasdaq Helsinki. fortum.com
