Fitch Ratings has affirmed Finnish-based Fortum Oyj's (Fortum) Long-Term Issuer Default Rating (IDR) at and senior unsecured rating at 'BBB'.
The Outlook on the IDR is Stable.
The rating action reflects the company's strong and well-managed generation fleet as well as its solid financial profile. We forecast funds from operations (FFO) net leverage on average at 2.2x in our rating case for 2024-2026, implying ample headroom under its tightened negative sensitivity of 3.3x. We expect Fortum to continue applying a high scrutiny over capex while we conservatively project dividends at the upper-end of the 60%-90% payout guidance.
The Stable Outlook also reflects Fortum's public commitment to maintain a prudent capital structure, with a long-term maximum level of financial net debt-to-comparable EBITDA of up to 2.0x-2.5x, which broadly translates into FFO net leverage of 2.5x-3.0x and is consistent with our rating sensitivities.
Key Rating Drivers
Lower Electricity Prices: In 2024 we expect lower Nordic power prices due to improved hydro balance, lower continental prices and still soft demand, while we see further downward pressure also over the next four years due to strong ambitions in renewables development. Fortum is materially exposed to the price trend, and while a material penetration of renewables could affect Fortum's load factors and prices, it would also create higher price volatility. We believe Fortum is well-positioned to capture premium prices based on its flexible hydro fleet (the company indicates EUR6-EUR8/MWh on its total production of about 45 TWh in 2022).
Normalising Generation Margins: We expect Fortum's total EBITDA to decline to about EUR1.2 billion by 2026, from a peak of about EUR2 billion in 2022-2023 due to extremely high power prices and healthy hedging. Despite normalising prices, we expect Fortum to generate positive pre-dividend free cash flows (FCF), based on its strong generation business (including district heating), integration with the consumer solutions segment (being one of the largest electricity retailers in the Nordic countries) and strict discipline for investments.
Strong Credit Metrics, Ample Headroom: Fortum reached a low FFO net leverage of 0.8x at end-2023 based on strong EBITDA and a EUR 1.8 billion cash-in of outstanding margin calls collected during the year. We forecast FFO net leverage to gradually increase to 2.6x by 2026, still well below the revised negative sensitivity of 3.3x. The leverage increase reflects our conservative assumption of 90% dividend payouts, i.e. at the maximum of the dividend policy range. A higher level of investments or lower-than-expected earnings could result in lower leverage headroom if not offset by a lower dividend payout.
Prudent Financial Policy: Fortum aims to maintain an adequate balance between financial strength, growth investments and dividend distributions. Its financial policy includes a maximum level of reported EBITDA net leverage of up to 2.0x-2.5x and a dividend payout ratio in the 60% to 90% range of comparable earnings per share, depending on financial performance and available investment opportunities. Following the strategic plan released in March 2023 (after the Uniper exit and the deconsolidation of the Russian business), we expect Fortum to maintain high scrutiny on capex allocation and prioritise profitability over growth.
Revised Investment Plan: Fortum's updated investment plan entails total capex of EUR1.7 billion in 2024-2026, compared with EUR2.4 billion capex in its prior plan for 2023-2025. This is due to lower uncommitted capex of EUR0.3 billion (versus EUR0.7 billion in the prior plan). Fortum sees current forward prices in the Nordic markets are too low to attract sizeable renewable investments.
Fortum's major projects comprise the Pjelax wind project (380 MW, to be commissioned this year), maintenance and productivity investments in hydro, the lifetime extension project of the Loviisa nuclear plant, and decarbonisation investments in district heating and cooling.
Rating Sensitivities Revision: Fitch has slightly tightened Fortum's debt capacity to reflect its medium-term business profile following the investment plan revision and the reclassification of its circular solutions segment as non-core, and to better align it with peers'. We have also revised Fortum's positive rating sensitivities to reflect that an upgrade of the rating would require an improvement of both its financial and business profiles, especially in relation to earnings predictability.
Management Focus on Business Risk: Fortum's management aims to improve cash flow predictability through a higher hedged share of rolling 10-year generation up to 20% by 2026 (from currently 15% for 2024-2033) and effective integration with supply, although we do not have many details on the actual matching of generation and supply. In addition, management launched an efficiency programme targeting a EUR100 million gradual reduction of its fixed costs by end 2025. While these developments are credit- positive we do not see them driving a material change in the company's credit profile over the rating horizon.
GRE Status Rating-Neutral: We applied our Government-Related Entities (GRE) Rating Criteria to reflect the Finnish state's (AA+/Stable) controlling 51.3% stake in Fortum. However, this has no rating impact as we do not assess precedents of support as 'Strong' nor do we expect a Fortum default to have any material financial contagion risk for Finland. We assess decision-making and oversight as 'Strong', due mainly to the state's commitment to retain control (minimum 50.1%). We thus rate Fortum on a standalone basis.
Derivation Summary
Fortum's closest peers are European generation companies RWE AG (BBB+/Stable) and Statkraft AS (A-/Stable on Under Criteria Observation, Standalone Credit Profile 'bbb+'). Statkraft's rating includes a single-notch uplift that reflect government links, which we view as stronger than that of Fortum and the Finnish government.
Compared with Fortum, Statkraft benefits from a large, low-cost, and flexible hydro-asset base and a higher share of long-term contracted revenues. Fortum's earnings are more exposed to Nordic power prices, while the company benefits from a strong CO2-free generation mix (well-balanced between baseload nuclear and flexible hydro) and its customer solutions provides some vertical integration.
RWE remains more exposed to thermal generation, but has a materially higher share of quasi-regulated business than Fortum, which ultimately leads to a slightly higher debt capacity for the German utility.
ERG S.p.A. (BBB-/Stable) benefits from much higher revenue visibility (generally through auctions or power purchase agreements), although it is smaller in size and lacks hydro generation and integration into supply. ERG has slightly higher debt capacity than Fortum (as reflected by the positive sensitivity of 3.6x at its BBB- rating).
Key Assumptions
Seventy per cent of 2024 volumes hedged at EUR47/MWh, and 40% of 2025 volumes at EUR43/MWh in line with management guidance
Fitch assumes achieved prices on unhedged volumes at EUR45 /MWh on average in 2024-2026
Annual electricity generation volumes expected by Fitch at about 48TWh in 2024-2026
EBITDA averaging EUR1.3 billion per year in our rating case for 2024-2026
Cost of debt close to 5% over 2024-2026
Capex of around EUR0.6 billion per year in our rating case for 2024-2026
Dividends at around EUR0.8 billion per year (90% payout ratio assumed by Fitch for 2024-2026)
No new M&As and no material disposal proceeds assumed by Fitch
RATING SENSITIVITIES
Developments That May Collectively or Individually Lead to Positive Rating Action/Upgrade:
FFO net leverage falling below 2.3x coupled with an improved long-term contracted position representing at least 50% of annual electricity production over the rating horizon
Developments That May Collectively or Individually Lead to Negative Rating Action/Downgrade:
FFO net leverage above 3.3x and FFO interest coverage cover below 5.0x, both on a sustained basis
Deterioration in the regulatory and operating environment (for instance with windfall taxes, energy price caps or similar measures considerably weakening credit metrics)
Liquidity and Debt Structure
Strong Liquidity: At end-2023, Fortum had a strong liquidity position comprising readily-available cash of around EUR4.2 billion, and undrawn committed credit lines of EUR3.2 billion, which comfortably covers EUR1.3 billion of short-term debt maturities and EUR1.3 billion of cumulative negative FCF (post-dividend) in our forecasts for 2024-2026.
Issuer Profile
Fortum is an energy company that is 51% owned by the Finnish state. Its activities include CO2-free power generation, the sale of electricity, as well as district heating and cooling. The company is one of the largest power generators and the largest electricity retailer in the Nordic countries.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
FORTUM OYJ 
