Fortum Oyj (OTCPK:FOJCF) Q2 2022 Earnings Conference Call August 25, 2022 4:00 AM ET
Company Participants
Pauliina Vuosio – Head of Executive Communications
Markus Rauramo – Chief Executive Officer
Bernhard Günther – Chief Financial Officer
Conference Call Participants
Pasi Vaisanen – Nordea
Vincent Ayral – JPMorgan
Wanda Serwinowska – Credit Suisse
Artem Beletski – SEB
Operator
Welcome to the Fortum Half Year Financial Report 2022 Conference Call. For the first part of the conference call, the participants will be in listen-only-mode. [Operator Instructions]
Now I will hand the conference over to the speakers. Please go ahead.
Pauliina Vuosio
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 Günther. 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.
Markus Rauramo
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 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 the 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 innovation have materially hit Fortum Group.
Fortum has traditionally had exposure to Russia directly with our investments in mainly gas-fired generation in the Urals 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 1Ukraine 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 the 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 lower 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 government.
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 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 €200 per megawatt hour and Uniper was in an acute liquidity crisis. The collateral and margining needs of the company stood at over €10 billion, and we were faced with a very real concern that Uniper might not make it.
Uniper’s default would have meant in all likelihood, a collapse of the European gas markets, and it would have had severe impacts also on Fortum and the Nordic markets. We could not let that happen. It was not in our interest nor anyone else’s to let that happen.
Over Christmas and the New Year, we then agreed on a financing package for Uniper together with the German state owned KFW Bank. Fortum gave a €4 billion loan and a €4 billion parent company guarantee. The KFW Bank gave a €2 billion loan.
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, that 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 both in 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 that time.
A couple of weeks after the war started, we published our highest-ever results, €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 or 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 grate ph 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 cause was a gas supply crisis, resulting in extreme losses, not the lack of liquidity.
With funds depleting and fears of the gas curtailment being prolonged or even escalated, Uniper code 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 seal 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 dilutive 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 €8 million in financial support that we already provided. This would have been politically and commercially unacceptable in Finland.
Alter the process, the support of the Finnish state as Fortum’s majority shareholder has been particularly in value of both. In consideration of our liquidity support to Uniper, Fortum will have the right to exchange the existing €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 €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 €7 billion. This so-called backstop was another point that was very important to us and the Finnish state in the negotiations.
The rating agencies confirmed Uniper’s BBB minus 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 curtailments.
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 €570 million. This includes €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 €12 billion of items affecting comparability. This reflects three things. The anticipated gas curtailment losses until October of more than €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 accounting derivatives, and thirdly, impairments for fixed assets from the Uniper segment, 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 six 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 here, respectively, 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 many fold the potential earnings. Consequently, market participants who do not have enough cash to cover margining requirements have to reduce or they may 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 six fold 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 €4 billion. At the end of June, there were about €7 billion. And this week, they have increased to over €11 billion. Our collateral requirements have not increased as fast as the market price is 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 €11 billion that I just mentioned is slightly more than €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 contracts are not an option, the predictability of the producer’s 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, our producer’s ability to invest may be reduced because capital is tied up in these oversized collaterals.
The situation calls 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 three 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 two 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.
Bernhard Günther
Yeah. 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 on the segments only on an aggregated level today and then close with the outlook section.
What you see here is the key financial overview is 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 they 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 two 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 two 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 €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 in the magnitude of roughly €400 million. And as I explained in the 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 0.8 times at the end of Q2. However, still well below our target level of below two times. The 0.2 times 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’s stand-alone is slightly up.
Let me run you briefly through the segments. Fortum’s Generation segment was up by €112 million despite 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 €10.3 per megawatt hour, up by 27% following a 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 €19 million. 2021 included a €17 million positive one-off effect from the sale of the 116 megawatts CSA-backed 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 €70 million based on two 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 2 times 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 six months comparable operating profit all the way down to reported net profit. In essence, there are four 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 €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 two elements: First, about €5 billion related to various commodity hedges like Power Forward sales. As commodity prices surged, the hedge yields 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 costs 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 €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 €2 billion, the respective IFRS tax impact mainly from the fair value losses. Consequently, at this stage, half year operating profit is negative by €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 results 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 €11.5 billion reduced IFRS total equity to just €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 sheet, 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 €3.5 million [ph] 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 €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 curtailments, 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 €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 €4.2 billion on group level and approximately €1.1 billion of that on a Fortum stand-alone basis. With regards to the contractual maturities, those are €0.5 billion down as we paid back commercial papers in June. As well in June, we signed a new €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 the 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 two elements. On the – 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 €3 and 2023 hedges are up by even €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 changed 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.
Pauliina Vuosio
Thank you, Bernhard. We are now ready to start. Please state your name and company and kindly limit yourself to two questions. Operator, please go ahead.
Question-and-Answer Session
Operator
The next question comes from Pasi Vaisanen from Nordea. Please go ahead.
Pasi Vaisanen
Great, thanks. This is Pasi from Nordea. And thank you for the presentation. Well, to start with – I just actually looked at that, would it be so [ph] that without this strong rational 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 €8 billion convertible into fourth quarter?
And lastly, would you like to share some views regarding the investments and dividend policy going forward? And whether is there any kind of need for the rights issue or raise new equity at some point of time? Thanks.
Markus Rauramo’
Thank you, Pasi, for the questions. So I think there were four 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 and 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 – 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, 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?
Bernhard Günther
Yeah. 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, yeah. So but again, this has no relevance in the sense that any immediate actions also would be necessitated by that.
Pasi Vaisanen
Yeah, I hear you. So would it be kind of the assumption that you are going to book roughly a half from getting that €8 billion [ph] German convertible to your own equity in the fourth quarter?
Bernhard Günther
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.
Pasi Vaisanen
Great. Thanks. That was all from my side.
Operator
The next question comes from Vincent Ayral from JPMorgan. Please go ahead.
Vincent Ayral
Yes. Good morning, 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 share [ph] alone into the convertible, but it’s kind of mandatory. So you don’t get the [indiscernible] back. I mean, is it really an option? Is question number one.
And when we are on the same thing, you’ve got €4 billion guarantee and this guarantee could we get like insurance that indeed, you will get the money back on the guarantee and that’s quite point 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 approach 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 €1 or something like that? Thank you very much.
Bernhard Günther
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 three 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 as the utility we need a lot of capital, and then we balance these two 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 one party like rating agencies would fix one 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 – to the exposure. So we have the equity stake. That is one 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’s – 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 €4 billion guarantee, now we have agreed that the German government will come in with a 30% stake into Uniper. KFW has provided €9 billion loan facility and German government, the €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 wouldn’t 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.
Vincent Ayral
Yeah, yeah. I mean, just to a quick follow-up here, just to understand something. 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 at Uniper, so this money stays with Uniper. You should get the €4 billion guarantee back and your main areas of exposure at the moment are capital requirement on the margining, which you’re working on and potentially the backstop, which now estimates will be triggered in the coming weeks and then before October the 1st. Is it a good summary of the situation?
Bernhard Günther
With regards to the conversion, I’ll 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 the 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 one 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 build.
Vincent Ayral
Thank you. Thank you very much.
Operator
The next question comes from Wanda Serwinowska from Credit Suisse. Please go ahead.
Wanda Serwinowska
Hi, good morning. Wanda Serwinowska, Credit Suisse. Two questions from me. The first one is on the backstop. Would you accept aside of that as a basically non-dilutive rescue for Uniper once the €7 billion is reached, as Vincent said, I mean, it can trade 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 up will look like?
And the second point is on the German economy ministry spokesperson 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 €4 billion for next year. Any comment on that?
Markus Rauramo
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 non-shareholder dilutive solution beyond that and exactly what that will be. This is part of the details [ph] 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 hear 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 a 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 – 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. Bernhard?
Bernhard Günther
Yeah…
Markus Rauramo
Go ahead.
Bernhard Günther
Yeah, referring to the comments of the BMV Comp [ph] And of course, the situation has worsened since the 22nd of July, but this is exactly what the backstop – was the purpose of the backstop in the term sheet is all about, yes? So the term sheet was based on an assumption prevailing at the 22nd and we anticipated that things could go yeah, either in a negative sense or develop in a positive sense. And the backstop was exactly brought into the term sheet to deal with such a scenario as we’re seeing it now.
Wanda Serwinowska
Can I very quickly follow up. I mean on the backstop, would you accept the additional debt as a measure because yes, you may argue that it’s not shareholder dilutive, but it basically destroyed the value of your investment?
Markus Rauramo
Yeah. I think the concept of dilution that is mentioned in the term sheet is economic dilution. And this is exactly the point you’re making. Additional debt might not be dilutive in the sense of voting rights, yeah, but it would clearly be economically dilutive. Therefore, we would not regard this as an appropriate measure to implement the backstop at least sustainably, yeah. Currently, of course, KFW is providing the kind of bridge financing.
Wanda Serwinowska
Thank you very much for the comments.
Markus Rauramo
Thank you.
Operator
The next question comes from Artem Beletski from SEB. Please go ahead.
Artem Beletski
Yes. Good morning. And thank you for taking my questions. I would like to ask first what comes to power hedging situation. And I think you mentioned in the call that you are now doing also some type of bilateral agreements with power consumers here in Nordics. So could you maybe talk more about whether it is quite meaningful and it is done basically at the same price, as what we are seeing in terms of forward for upcoming years? And just in general, whether your hedging policy has changed in general beyond Q2. So this is the first question.
The other one is related to Russia. So Russia’s book value has increased by more than €2 billion in the quarter due to a stronger ruble. Have you actually consider to do some write-downs there now in Q2 or maybe later on this year. And last one is just thinking about your balance sheet situation. Have you thought about potentially initiating some further strategic review processes, also given the fact that we have seen quite a strong development when it comes to power markets, power prices in Nordics?
Markus Rauramo
Okay. So with regards to power hedging and bilateral agreements. So the answer is that, yes, these volumes are meaningful. So basically, the same counterpart is that we would have been on the other side in the exchange we have gone directly to. And then – and I think this is a great question because this illustrates that it’s not – it’s not only us now in the increasing prices that would have the margining liquidity requirement. But when prices go down, then it’s actually the buyers who have the mirroring issue of having to post large collaterals. So this is a systemic issue.
What, of course, happens is that then we need to take counterparty risk when this happens, but meaningful volumes. So this comes to the – this then is a bridge to the question that is our hedging policy is the same, yes. So hedging policy continues to be the same. The purpose is to give visibility and stability to our earnings so that we have the, let’s say, 12, 24-month visibility. And then if prices more beyond that, then we have time to adapt our operations to those circumstances.
With regards to the Russia value increase and any need for write-downs, we did not then announce additional things compared to what we had already earlier said in Q2. And if there were a situation that we need to assess our impairment triggers, of course, we would do that, but no such triggers at the moment.
And then with regards to future strategic reviews, we don’t have such announcements at the moment. We are working to – we will need to work with the German government, then on –and Uniper on what is then Uniper’s way forward. And we need to look at what are the steps Fortum needs to take going forward to be – to continue to be a strong player in the energy transition, which, as I mentioned, we are doing as we speak. So we are not – we have definitely not – even in this situation, we have not stopped the development. We are building a 380-megawatt wind park in Pjelax-Böle, on the West Coast of Finland, €1 billion investments into Loviisa lifetime extension. Olkiluoto 3 is coming online. We have the largest data center heat offtake project with Microsoft and many others.
So the energy transition is something where we are participating and will participate. And on top of all of this, even in Finland, the first floating LNG terminal coming to our Inkoo Harbor. So many things happening at the same time.
Artem Beletski
All right. Very clear. Thank you.
Operator
Please state your name and company. Please go ahead.
Unidentified Analyst
From Goldman Sachs. Firstly, thank you for the presentation. It’s very helpful. I have two questions, please. The first one was on Slide 9, where you discuss margin requirements. And I think I had the numbers around right, that you were talking about €7 billion of margin requirements by the end of June. And if we were to look at current forward curves at €228 a megawatt hour, would that mean that the margin requirements that we would see on the recent power price rally have stepped up to an extent that they’re greater than the undrawn credit facilities you have which you highlight later in the presentation. Could you maybe just explain a little bit there, so I get a bit of a better understanding how much of the undrawn facilities, as well as the net margin requirements are Fortum specific and which ones are attached to Uniper?
And then the second question is that I appreciate you make the statement that any further support from the German government in regards to the stabilization package would have to come in a non-dilutive way. But as a majority shareholder, what is – what are the hard lines, what are the things that you’ll accept or won’t accept in regards to safeguarding Uniper and ensuring that its balance sheet is well capitalized for the current market environment?
Markus Rauramo
Okay. So maybe I’ll start with the majority shareholder view on Uniper’s stabilization package. And if you want to take Bernhard the margin requirement, which I’m happy to talk about as well, but I’ll give that to you. So as we said earlier, with regards to what happens beyond the backstop, the point is the economic dilution that this is a point where we need serious consideration that it’s not like endless where we can just expect that companies continue to buy gas at the high price and just sell it onwards without being compensated. That’s not a healthy system going forward.
So this non-dilutive backstop concept is an incentive also for the society to then take a decision that, okay, this is not only about Uniper and its stabilization package, but also the tools that even under the current laws can be used by the German government, – this is – so this is a bigger conceptual issue.
We have certain very key terms that I think are quite elegantly outlined in the term sheet and which we have communicated to the market. So it takes care of liquidity, it takes care of loss coverage. It takes care of the midterm backstop, and it then commits the parties to the long-term solution of how the German gas market structure should be then worked out in light of everything that is happening.
So it’s a really comprehensive term sheet for a very infrastructure critical company that Uniper is. We’re committed to this solution, and we’re committed to the principles, but it’s – we’re also committed to that. These are the cornerstones and guardrails of this agreement. Then I’ll hand over to – for the margining question for Bernhard.
Bernhard Günther
Yeah. So on the margining of the €7 billion end of June, the smaller part. So clearly, below half of that was Fortum related. So the bigger part was Uniper related. This has clearly gone up. But as Markus said, it has been under proportional, yes, because we also have been reduced – reducing our margin volumes and these recently newly installed €5.5 billion RCF is also partly destined to flatten out liquidity swings from such movements. So – and the margin movement between end of June and now middle of August, second half of August, it was the order of magnitude of €1 billion roughly.
Unidentified Analyst
Okay. Can I just have one clarification on the earlier point. It’s just that at the end the German government also has to defend the end user, the consumer, right, it’s taxpayers money that has been used here. I’m just trying to understand then, if they – how do they get – ensure that they’re getting value for the money that they’re putting in place in supporting Uniper. Surely, there has to come as a consequence of maybe selling off some of the assets to part fund or some other assortment solution that is ultimately valued is quite sizably destructive for value. Is there any other sort of insights that you can give there? Or is that as far as we can go?
Markus Rauramo
Yeah. Absolutely. This is a fundamental question. So I’ll make a comparison between Finland and Germany. In Finland, Finland decided to cut the gas supplies from Russia, electricity supply from Russia, coal supply from Russia, biomass supply from Russia. Cost gets past to the customers, consumers, industries, no compensation. Market economy works, supply/demand determine the prices and prices then impact the demand. So things work out in real time.
And I think what you’re kind of – what the first part of your question is kind of asking that, well, should the government or should a company or some companies carry the burden between some contractual price? And what is – what does it cost to procure something in the market and just continue to sell at earlier agreed but not market price. So we can ask ourselves that do we – should we – all the consequences of the war in Ukraine or any other calamity that we would face over time, should a company or should the government carry these costs? Or should we allow the market forces to work.
In Finland, we have chosen that market forces will work and then every consumer, every company decides how they react to this and take their own conclusions. And then you have the power of millions of consumers or tens or millions of consumers also behind the demand side. So maybe I’ll leave it at that.
So conceptually, this is what we need to talk about. There is no company – there’s no government that can carry the cost of this kind of magnitude. So there has to be a decision or so that eventually their customers have to face these prices.
Unidentified Analyst
Thank you. Thanks very much.
Markus Rauramo
Maybe a short procedural note. We are running out of time a bit. So please confine yourself to two questions.
Operator
Please go ahead.
Unidentified Analyst
This is Cathy Boimbala [ph] from Bloomberg. Just very quickly returning to your equity position, what is it today? And are you perhaps experiencing an equity deficit? How do you expect that to develop going forward?
And secondly, if you could give us any color on your talks with the Finnish government are those limited to managing liquidity only? Or is something else being discussed as well? Thank you.
Markus Rauramo
I can take the Finnish government part and maybe Bernhard can comment on the equity position. So I refer to discussions with the Finnish government regarding the liquidity needs for the margining. So this is what we are now raising and it’s not only Finnish government. We are raising this with the German government. They have addressed this through the KFW, much larger facility. We talk about €100 billion facility for KFW that they can use for liquidity purposes for the whole market, not only one company.
We are discussing with other Nordic governments. We are discussing with the exchanges. We are discussing about what could be done to make the regulation also more fit for purpose in this kind of situation. But with the Finnish government, yes, we are discussing this liquidity for margining topic and equity.
Bernhard Günther
Yeah, very briefly. Yes, of course, this equity could also turn into a negative number if there were to be higher losses at Uniper than what they anticipated in their Q2 results where they had these €6.5 billion fair value adjustments and onerous contract provisions. Again, under IFRS, of course, this is not a nice thing to have. Don’t get me wrong, but it doesn’t have any immediate implications.
Operator
Thank you. Unfortunately, this is all we have time for today. We have a few questions on the chat that won’t be answered in this event, but our investor and media relations teams are happy to help you with those. Over to you, Markus and Bernhard, for any closing comments.
Markus Rauramo
Thank you very much, Pauliina, and thanks, Bernhard for doing this together as always. And thank you, everybody, for asking the good questions. Once again, it would be great to be on the road with you, but good to have you online.
The backdrop for this Q2 is the attack by Russia on Ukraine and Russia using energy as a weapon. And this results then into European energy crisis. We are all worried about the price of energy. We are worried about the supply of energy, what happens in the winter. We have concerns about the future of critical companies.
In Fortum and Uniper, we are very committed into the efficient, reliable and safe operations of our fleet. And this is something where we have done good work, and I’m really grateful to all of our employees in Uniper and Fortum for the really great work that they have done. Our efficiencies and availabilities and safety has been very, very good.
We can also see from the Q2 comparable numbers that our businesses can perform well and can deliver good results in these circumstances. Then we have the big issue of the gas curtailment related losses and this is something we are handling together with Uniper and the German government, and we will conclude the documentation of the term sheet and establish a stable footing for Uniper. But we can say that the liquidity support has been there and is there as we speak in the form of KFW. I look forward to the next quarter. And in the meantime, we will work on delivering security of supply and reliability to you, to our customers, to the society.
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