FORTUM OYJ Fortum Oyj
Fitch Ratings' revision of the Outlook on Fortum Oyj's Long-Term Issuer Default Rating (IDR) to Stable from Negative mainly reflects the positive impact of the Uniper exit on Fortum's credit profile. Significant deleveraging resulted from the transaction in 2022, especially from the recovery of the EUR4 billion shareholder loan.
Fortum confirmed its focus on maintaining a prudent capital structure with long-term guidance on its financial net debt-to-comparable EBITDA of up to 2.0x-2.5x, which is consistent with our funds from operations (FFO) net leverage negative sensitivity of 3.5x. As a clean electricity generation company, Fortum benefits from a supportive power price environment.
Over the rating horizon we expect Fortum to apply high capex scrutiny, have positive pre- dividend free cash flow (FCF) and remain within our rating sensitivities with substantial leverage headroom.
Key Rating Drivers
Rating Scope: In 2022 Fitch deconsolidated Fortum's Uniper segment and Russian activities for rating purposes. While the Uniper divestment concluded in December 2022, the Russian business has not been sold and, given the uncertainty around its divestment process, we do not include in our rating case any disposal proceeds related to the Russian exit.
In April 2023 Fortum's Russian subsidiary was put under temporary asset management by Russia with a federal agency appointed as interim manager and exercising the powers of the owner, but without the right to dispose the company.
Favourable Price Environment: Following the 2022 Uniper divestment and considering the planned exit from Russia, Fortum's business reflects the profile of a clean generating company (genco) that is focused on hydro and nuclear. Additional activities represent around 15% of the EBITDA in our rating case. The company is now well placed to benefit from the strong fundamentals for clean generation. Fortum's higher hedged prices will support revenue in 2023- 2024, while Nordic electricity forward prices remain well above the historical average.
Financial Headroom: Fortum had FFO net leverage of 1.7x at end-2022. The deleveraging was driven by the Uniper exit (in particular by the recovery of the EUR4 billion shareholder loan) as well as by Fortum's strong performance in 2022. In our rating case we expect FFO net leverage to gradually increase to 2.7x by 2025 but remain well below the negative sensitivity of 3.5x for the current rating, also due to strong EBITDA higher than EUR1.5 billion and the gradual cash- in of outstanding margin calls at end-2022. Fitch does not consider any material disposal proceeds in its rating case.
The key factor for the stabilisation of the Outlook was Fortum's commitment to maintaining an adequate capital structure with credit metrics consistent with the 'BBB' rating. Following the Uniper exit (and the related losses), we now expect the company to apply high scrutiny in its capex allocation and to prioritise profitability over growth. We do not expect Fortum to entirely exhaust its financial headroom over the next few years and assume that FFO net leverage will remain comfortably within guidelines.
Prudent Financial Policy: In its March 2023 strategic presentation, Fortum reviewed its financial targets with the aim of adequately balancing financial strength, growth investments and dividend distributions. The company is now guiding to slightly higher net leverage of 2.0x- 2.5x versus below 2.0x previously.
Corporates | |
Utilities - Non US | |
Finland | |
Ratings | |
Foreign Currency | |
Long-Term IDR | BBB |
Short-Term IDR | F3 |
Outlook | |
Long-TermForeign-Currency IDR | Stable |
Debt Ratings | |
Senior Unsecured Debt - Long- | BBB |
Term Rating | |
2035 Climate Vulnerability Score | 27 |
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Applicable Criteria
Parent and Subsidiary Linkage Rating Criteria (December 2021)
Corporate Rating Criteria (October 2022)
Corporates Recovery Ratings and Instrument Ratings Criteria (April 2021)
Related Research
EMEA Investment-Grade Gencos to Boost Renewables Capex (April 2023)
Investment-Grade EMEA Generation Companies - Relative Credit Analysis (April 2023)
Global Corporates Macro and Sector Forecasts (March 2023)
EMEA Utilities Outlook 2023 (November 2022)
Analysts
Jaime Sierra
+49 69 768076 275 jaime.sierrapuerta@fitchratings.com
Yesmine Arousse
+49 69 768076 148 yesmine.arousse@fitchratings.com
Rating Report │ 3 May 2023 | fitchratings.com | 1 |
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The additional leverage flexibility is not meant to accommodate growth in the short term but rather to account for more volatile market conditions given the company's higher exposure to Nordic power prices as a pure genco. Fortum has returned to an explicit dividend policy and is setting a dividend payout ratio of 60%-90% of comparable earnings per share.
Rating Neutral Investment Plan: Fortum has budgeted total cumulated capex of EUR2.4 billion for 2023-2025, of which EUR0.9 billion relates to maintenance capex and up to EUR1.5 billion to growth capex. The growth capex includes EUR0.8billion of committed projects. In our rating case we assume growth capex to be allocated to renewable projects (EUR0.35billion; mainly Pjelax wind power plant project); (investments in hydro and nuclear (EUR0.35 billion; including the lifetime extension of Loviisa nuclear power plant); and decarbonisation projects (EUR0.1 billion).
For new-build projects, Fortum seeks to close power purchase agreements (PPAs) with industrial clients since it does not target new merchant renewable projects. The company has also established investment hurdles (project weighted average cost of capital of 150 bps-400bps) that are dependent on specific project characteristics.
Finnish Windfall Tax: The Finnish Parliament approved in February 2023 a law establishing a temporary windfall tax in the electricity sector. The tax applies to Finnish companies generating electricity or participating in wholesale or partly in retail sales. Pursuant to the law, the tax is 30% of companies' net profits generated from Finnish operations exceeding a 10% return on equity in 2023, while the tax becomes payable in 2024.
Manageable Refinancing Exercise: As of December 2022, Fortum had short-term maturities of EUR 4.1 billion which can be comfortably covered with cash on balance and undrawn committed credit facilities. Fortum expects to tap the bond markets in order to extend the average life of its debt and reinforce its financial flexibility. We view the refinancing as manageable based on Fortum's adequate liquidity position, low leverage at end-2022 and solid business profile.
Financial Summary
(EURm) | 2020 | 2021 | 2022a | 2023F | 2024F | 2025F |
EBITDA | 2,538 | 4,501 | 2,004 | 1,934 | 1,688 | 1,504 |
Funds flow from operations | 2134 | 3012 | 1875 | 1349 | 1191 | 1013 |
Free cash flow after acquisitions and | -348 | -1239 | 543 | 790 | -263 | -491 |
divestitures | ||||||
FFO interest coverage | 11.5 | 18.3 | 10.0 | 4.8 | 5.1 | 4.4 |
FFO net leverage | 2.7 | 2.6 | 1.7 | 1.6 | 2.1 | 2.7 |
F = Forecast
- Fitch deconsolidated in 2022 Fortum's Uniper segment and Russian activities for rating purposes. Source: Fitch Ratings, Fitch Solutions
Rating Derivation Relative to Peers
Fortum's closest peers are RWE AG (BBB+/Stable) and Statkraft AS (A-/Stable). Statkraft's rating includes a single- notch uplift that reflect government links, which we view as stronger compared with that of Fortum and the Finnish government. Fortum's debt capacity at 'BBB' is similar to Statkraft's, given their clean asset bases, which is mostly focused on the Nordics. Statkraft has a higher prominence of low-cost, flexible hydro-asset base (versus hydro and nuclear for Fortum), while Fortum is better integrated with its city solutions and customer solutions businesses, resulting in the same negative sensitivity at 'BBB' (based on Statkraft's Standalone Credit Profile).
RWE has a higher share of quasi-regulated business (50%-60%), but unlike Fortum it remains significantly exposed to thermal generation, and its implied debt capacity at 'BBB' would probably be broadly in line with Fortum's.
ERG S.p.A. (BBB-/Stable) benefits from much higher revenue visibility (generally through auctions or power purchase agreements), but it is smaller and lacks hydro generation and integration into supply. ERG has a slightly higher debt capacity than Fortum (positive sensitivity of 3.6x).
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Navigator Peer Comparison
Issuer | Business profile | Financial profile | |||||||||||||||||
Management and | |||||||||||||||||||
Operating | Corporate | Revenues | Asset Base and | Financial | Financial | ||||||||||||||
IDR/Outlook | Environment | Governance | Visibility | Market Position | Operations | Commodity Exposure | Profitability | Structure | Flexibility | ||||||||||
Alperia SpA | BBB/Negative | bbb+ | n | bbb | n | bbb- | n bbb | n | bbb+ | n | bbb+ | n | bb+ | n | bbb- | n | bbb | n | |
ERG S.p.A. | BBB-/Stable | a- | n | a- | n | bbb | n bbb | n | bbb+ | n | bbb | n | bbb- | n | bb+ | n | a- | n | |
Fortum Oyj | BBB/Stable | aa- | n | a- | n | bbb- | n bbb | n | bbb+ | n | bbb | n | bbb | n | bbb | n | bb+ | n | |
Orsted A/S | BBB+/Stable | aa | n | a- | n | bbb+ | n bbb+ | n | a- | n | bbb+ | n | bbb- | n | bbb | n | bbb+ | n | |
RWE AG | BBB+/Stable | aa | n | a- | n | bbb- | n bbb+ | n | bbb | n | bbb+ | n | bbb- | n | bbb+ | n | a | n | |
Statkraft AS | A-/Stable | aa | n | a- | n bb | n bbb | n | a- | n | bbb- | n | a- | n | bbb+ | n | a- | n | ||
Source: Fitch Ratings. | Importance | n | Higher | n | Moderate | n | Lower | ||||||||||||
Issuer | Business profile | Financial profile | |||||||||||||||||
Management and | |||||||||||||||||||
Operating | Corporate | Revenues | Asset Base and | Financial | Financial | ||||||||||||||
Name | IDR/Outlook | Environment | Governance | Visibility | Market Position | Operations | Commodity Exposure | Profitability | Structure | Flexibility | |||||||||
Alperia SpA | BBB/Negative | 1.0 | n | 0.0 | n | -1.0 | n 0.0 | n | 1.0 | n | 1.0 | n | -2.0 | n | -1.0 | n | 0.0 | n | |
ERG S.p.A. | BBB-/Stable | 3.0 | n | 3.0 | n | 1.0 | n 1.0 | n | 2.0 | n | 1.0 | n | 0.0 | n | -1.0 | n | 3.0 | n | |
Fortum Oyj | BBB/Stable | 5.0 | n | 2.0 | n | -1.0 | n 0.0 | n | 1.0 | n | 0.0 | n | 0.0 | n | 0.0 | n | -2.0 | n | |
Orsted A/S | BBB+/Stable | 5.0 | n | 1.0 | n | 0.0 | n 0.0 | n | 1.0 | n | 0.0 | n | -2.0 | n | -1.0 | n | 0.0 | n | |
RWE AG | BBB+/Stable | 5.0 | n | 1.0 | n | -2.0 | n 0.0 | n | -1.0 | n | 0.0 | n | -2.0 | n | 0.0 | n | 2.0 | n | |
Statkraft AS | A-/Stable | 4.0 | n | 0.0 | n | -5.0 | n -2.0 | n | 0.0 | n | -3.0 | n | 0.0 | n | -1.0 | n | 0.0 | n | |
Source: Fitch Ratings. | n Worse positioned than IDR | n | In line with IDR | n | Better positioned than IDR | ||||||||||||||
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- FFO net leverage falling below 1.5x on a sustained basis
- Significant improvement in the company's business profile (for instance coming from materially higher quasi- regulated earnings)
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- FFO net leverage above 3.5x and FFO interest coverage 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
Sufficient Liquidity: Like many other utilities in Europe, Fortum faced significant margin payments in 2022 due to high and rapidly increasing power prices. Fortum received liquidity support from the Finnish state in the form of a one-year bridge loan facility of EUR2.35 billion signed in September 2022 (of which only EUR350million was drawn at year- end). However, the repayment of the EUR4 billion shareholder loan and the EUR0.5 billion proceeds from the disposal of Uniper have significantly reinforced Fortum's liquidity position. The company has indicated that it repaid and cancelled the bridge loan in March 2023.
As of December 2022, Fortum had a cash balance of around EUR3.5 billion and EUR 4.5billion of undrawn committed credit lines due after 2023 to comfortably cover its short-term maturities of EUR 4.1 billion. In addition, the company states that it has the right to extend EUR1.6 billion of current maturities to 2024.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Climate Vulnerability Considerations
We are currently in consultation with our stakeholders on a proposal to support consistency and transparency in the way Fitch Ratings identifies and addresses potentially credit-relevant climate risks in its credit rating process. This
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Utilities - Non US
Finland
would include adding the section below to all Rating Reports. To learn more about the approach, and provide feedback, please see Climate Vulnerability in Corporate Ratings - Discussion Paper or contactclimate.vsfeedback@fitchratings.com.
The FY22 revenue-weighted Climate Vulnerability Score (Climate. VS) for Fortum Oyj for 2035 is 27 out of 100, suggesting low exposure to climate-related risks in that year. For further information on how Fitch perceives climate- related risks in the utilities sector see Utilities - Long Term Climate Vulnerability Scores Update at www.fitchratings.com.
Climate.VS Evolution
As of 31 December 2022
Fortum Oyj | Nuclear Generation - EMEA | |||
(Climate.VS) | Renewables (Hydro) - EMEA | Electricity Supply - EMEA | ||
Gas Supply - EMEA | Waste to Energy | |||
100 | |||||
80 | |||||
60 | |||||
40 | |||||
20 | |||||
0 | |||||
2025 | 2030 | 2035 | 2040 | 2045 | 2050 |
Source: Fitch Ratings
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Utilities - Non US
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Liquidity and Debt Maturities
Liquidity Analysis
(EURm) | 2023F | 2024F | 2025F |
Available liquidity | |||
Beginning cash balance | 4,051 | 716 | -264 |
Rating case FCF after acquisitions and divestitures | 790 | -263 | -491 |
Repayment of EUR1 billion Eurobond in February 2023 | -1,000 | ||
Total available liquidity (A) | 3,841 | 453 | -755 |
Liquidity uses | |||
Debt maturities | -4,125 | -717 | -7 |
Repayment of EUR1 billion Eurobond in February 2023 | 1,000 | ||
Total liquidity uses (B) | -3,125 | -717 | -7 |
Liquidity calculation | |||
Ending cash balance (A+B) | 716 | -264 | -762 |
Revolver availability | 4,500 | 1,500 | 100 |
Ending liquidity | 5,216 | 1,236 | -662 |
Liquidity score (x) | 2.3 | 2.7 | n.m. |
F - Forecast. | |||
Source: Fitch Ratings, Fitch Solutions, Fortum Oyj | |||
Scheduled debt maturities | 2022 | ||
(EURm) | |||
2023 | 4,125 | ||
2024 | 717 | ||
2025 | 7 | ||
2026 | 730 | ||
2027 | 17 | ||
Thereafter | 1,866 | ||
Total | 7,462 | ||
Source: Fitch Ratings, Fitch Solutions, Fortum Oyj
Key Assumptions
- EBITDA averaging EUR1.7 billion in 2023-2025, excluding the Russian business.
- Factoring in the Finnish windfall tax payable in 2024. Fitch would expect regulatory intervention to persist if electricity prices remain substantially above historical levels.
- Capex of around EUR0.8 billion per year, excluding the Russian business.
- Cash-inrelated to the settlement of margining receivables of EUR1 billion on a cumulative basis.
- Dividends at around EUR0.9 billion per year (90% payout ratio assumed for 2024-2025).
- No new M&A and no material disposal proceeds.
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Fortum Oyj published this content on 04 May 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 May 2023 12:12:42 UTC.
