Fortum Oyj

OMXH:FORTUM

Earnings Call Analysis

Fortum reports mixed Q1 results with strategic strides in clean energy

Fortum faced a challenging first quarter in 2024 with a decline in comparable EBITDA to EUR 622 million and operating profit to EUR 530 million, attributed primarily to lower spot and hedge prices. Despite these setbacks, the company saw an increase in net cash from operating activities to EUR 538 million due to favorable changes in working capital. The Consumer Solutions segment showed recovery with improved electricity sales margins. The company continues to invest in clean energy, shutting down its last coal unit in Espoo and advancing the Pjelax wind farm. Fortum maintains an annual optimization premium guidance of EUR 6-8 per MWh, despite a strong double-digit figure this quarter.

Introduction to Fortum's Performance

Fortum reported its financial results for the first quarter of 2024 with an emphasis on several critical metrics and achievements. The warm welcome was extended by Ingela Ulfves, Head of Investor Relations at Fortum, setting the tone for the detailed breakdown provided by the CEO Markus Rauramo and CFO Tiina Tuomela.

Financial Overview

The key financial figures for continuing operations showed a decline in comparable EBITDA to EUR 622 million and a decrease in comparable operating profit to EUR 530 million. The primary reason cited for the lower results was the decline in spot and hedge prices. Despite these decreases, net cash from operating activities rose to EUR 538 million, driven by changes in working capital. The balance sheet also saw slight improvements, with the financial net debt to comparable EBITDA ratio strengthening to 0.3x over the last 12 months.

Generation Segment Highlights

The generation segment faced lower achieved power prices compared to last year, influenced by favorable weather conditions like above-normal precipitation and milder than usual temperatures in February and March. However, higher hydro volumes and the commissioning of the Pjelax wind farm provided some support. The company's strong optimization efforts resulted in a robust double-digit optimization premium above the annual guidance of EUR 6 to EUR 8 per megawatt hour.

Consumer Solutions Rebound

Fortum's Consumer Solutions segment reported a strong recovery after a challenging year in 2023. The segment benefitted from improved electricity sales margins amid more stable market conditions. This segment's success reflects broader market stabilization and the company’s strategic adjustments.

Credit Rating Upgrade

A significant highlight for Fortum was the upgrade of its credit rating. S&P increased Fortum's long-term credit rating to BBB+ with a stable outlook, while Fitch Ratings affirmed a BBB flat rating with a stable outlook. This upgrade underscores Fortum's committed efforts to strengthen its financial position and focus on clean energy.

Strategic Litigation and Arbitration

To protect its assets and shareholder rights, Fortum initiated arbitration proceedings against the Russian Federation seeking compensation for the unlawful seizure of its Russian assets. This legal move reflects the company’s proactive approach to safeguarding its investments and legal rights.

Strategic Implementation in Clean Energy

Fortum continues to implement its strategy focused on delivering reliable and clean energy. The company is making strides in electrifying district heating, which not only provides cleaner heating solutions but also enhances flexibility in the energy system. The Espoo Clean Heat program highlights these efforts, including shutting down the last coal-based district heating unit in Espoo ahead of schedule.

Renewables and Future Outlook

The renewables segment turned positive, with contributions from test generation volumes at the Pjelax wind farm. Additionally, Fortum expects to lower its fixed cost base by more than EUR 50 million by the end of 2024, contributing to a total target reduction of EUR 100 million by the end of 2025. Fortum's outlook remains positive as it continues to leverage its strategic focus on clean and reliable energy, optimizing its asset portfolio and maintaining a robust financial position.

Market Dynamics and Future Projections

Fortum's analysis of market dynamics suggests continued stability and low gas demand. Despite geopolitical tensions in Ukraine and the Middle East, gas supplies remain stable. However, the Nordic power market experienced significant spot price volatility, with notable spikes in January due to cold weather in Finland. Moving forward, Fortum anticipates persistent volatility driven by increasing renewable power generation and rising electricity demand. The company maintains its guidance of an annual optimization premium of EUR 6 to EUR 8 per megawatt hour, despite quarterly fluctuations.

Earnings Call Transcript 2024-Q1

[Ingela Ulfves, executive]

Good morning, everyone. A warm welcome again to Fortum's joint webcast and news conference for the investor community and media on our first quarter '24 financial results. My name is Ingela Ulfves and I'm Head of Investor Relations at Fortum. As always, this event is being recorded and a replay will be available on our website later today.With me here in the studio are our CEO, Markus Rauramo, and the CFO, Tiina Tuomela. Markus and Tiina will present the group's financial and operational performance and strategy implementation during the first quarter. And after the presentations, we will again open up for questions. So with this, I hand over to Markus to start.

[Markus Rauramo, executive]

Thank you very much Ingela, a warm welcome to our investor call also from my side. I will start by going through our first quarter performance and strategy execution, and also talk about market fundamentals and development. After that, Tiina will tell you more in detail how this turned into results in the first quarter of 2024. Let me now start with the quarterly highlights.The winter during the first quarter of 2024 in Continental Europe was mild, which in combination with healthy LNG supply and steadily increasing renewable power generation added to the downward trend of the European gas and power prices. Even if January was cold in the Nordics, and led to higher spot prices, especially in Finland and the Baltics, February and March were somewhat milder than usual. Decreasing continental European power futures and above normal precipitation levels lowered the prices of Nordic power futures.The lower Nordic power prices are also reflected in our first quarter results. The achieved power price was at a good level, but significantly lower than a year ago. At the same time, we managed well with our optimization, and the achieved price was supported by a strong double digit optimization premium above the annual guidance of EUR 6 to EUR 8 per megawatt hour. So the generation segment's result reflects the lower achieved price, but was however, supported by higher hydro volumes and commissioning volumes from Pjelax wind farm.Another positive highlight is our Consumer Solutions result. After a difficult year in 2023, the segment had a strong first quarter with more normalized results, mainly driven by higher electricity sales margins in more stable market conditions. In March, S&P upgraded Fortum's long-term credit rating to BBB+ with stable outlook while Fitch ratings affirmed our long-term rating of BBB flat with stable outlook.We are extremely satisfied with S&Ps upgrade, as it reflects our systematic efforts to strengthen our financial position and our strategic focus on clean energy. In February, Fortum initiated arbitration proceedings against the Russian Federation to claim compensation for the unlawful seizure of our Russian assets in order to protect our legal position and our shareholder rights. As we announced in April, Fortum has gone through the SBTi due diligence process, after having submitted its official commitment letter last year to finance potential future investments in clean energy, we launched our refinance framework in January.Then a few words on our strategy implementation. One of our strategic priorities is to deliver reliable and clean energy. Electrification of the district heating not only provides clean heating, but it's also a source of flexibility for the whole energy system. Our Espoo Clean Heat program is based on the same priorities, and we started to build more emission free and flexible district heating in Espoo. In addition, we closed down our last call for our district heating unit in Espoo, Finland in late April. This means that our heating and cooling business will phase out coal 1-year earlier than planned. Further Finland's last qualifier the condensing plant, Meri-Pori, was transferred to the national production reserve aimed for emergency situations as of 1st of April.Fortum's biggest and Finland's third largest wind farm 380 megawatts in Pjelax in Ostrobothnia has been gradually commissioned and we will start commercial operations in July through a power purchase agreement with the Finnish energy company Helen. Our second strategic priority is to drive decarbonization of industries, such as steel, chemicals, battery factories, datacenters, electric mobility, and the heating sector. For this, we build preparedness for an electrification and growth phase longer term.We actively facilitate such industry projects and offer a clean and stable power for industrial customers to meet their decarbonization targets as decarbonization drives power demand. This provides us with growth opportunities, longer term through investments in new clean energy production. As one example, we announced a new PPA contract with the Swedish federal alloy producer Vargon Alloys in April.We have and are developing several sites across Finland for various industrial purposes, including data centers. We have sites in different development phases in Poori, Inga, Rauma, Orimattila, and Nurmijarvi, just to mention a few. We are pleased to facilitate site development and offer a large scale stable and CO2 free power from different sources, from hydro, nuclear and wind to decarbonize industries.Within the scope of our third strategic priority to transform and develop, we continued our efficiency improvement program with the target to gradually lower annual fixed cost by EUR 100 million, excluding inflation by the end of 2025 with full run rate from the beginning of 2026. The Consumer Solutions business and our IT unit concluded their change negotiations, which resulted in redundancies of approximately 70 people. As a new milestone, we expect to reduce our fixed cost base by more than EUR 50 million which is included in the EUR 100 million by the end of 2024.Next I will go through our main figures very shortly. These are the familiar compatible headline KPIs for Fortum Group's first quarter of 2024. All numbers in this presentation are for continuing operations if not otherwise mentioned. Compared to the previous year, with high power prices, the first quarter comparable operating profit was lower, mainly due to lower spot and hedge prices. On a positive note, our hydro volumes increased, our optimization premium was very good, and the consumer solutions business improved clearly.I want to say a couple of words about the optimization premium. In this quarter, the realized optimization premium was double-digit and thus above our guided level of EUR 6 to EUR 8 per megawatt hour. It is good to note that there will be fluctuations between the quarters. Changes in the guarantees of origin materialize with the delay and the guidance of EUR 6 to EUR 8 per megawatt hour is on an annual level.Our operating cash flow improved compared to last year and was EUR 538 million in the first quarter. And finally the balance sheet and most importantly our leverage defined as financial net debt to comparable EBITA, it was at 0.3x for the last 12 months, which is a slight improvement from 0.5x at the end of last year. We have updated our outright portfolio volume to be 47 terawatt hours going forward. This increase is due to increased volumes coming from the Olkiluoto 3 nuclear power plant and the Pjelax wind farm in Finland.Tiina will go through in more details regarding the consequences of this. Then a couple of words about the commodity markets. Here, you can see the main commodities. So a few words on the market development. The European gas market remained stable also in the first quarter of 2024. Gas demand remains low, supply is stable and storages are well filled. However, gas prices continue to be sensitive to security of supply risks that are tangible amid the geopolitical situation in Ukraine and the Middle East.In Nordic Power, we have seen quite some volatility lately. January started with very cold and dry weather, especially in Finland. Owing to a tight power balance in the beginning of January, the daily spot price rose to EUR 890 per megawatt hour in Finland and Estonia, which further stimulated the discussion on fit for purpose market design model. In Finland, the highest hourly price was close to EUR 2,000 per megawatt hour.During the rest of the quarter, the weather was milder which normalized market conditions, Nordic Power consumption was approximately 395 terawatt hours for the last 12 months, an increase of approximately 10 terawatt hours compared to last year which is almost 10% in the quarter and approximately 2.5% in annual consumption during the first quarter.So Nordic Power consumption has increased fast in the first quarter, and we are now back at previous levels around 400 terawatt hours per year. Generally, we expect the Nordic spot price volatility to continue. This is a natural consequence of gradually increasing intermittent power generation and growth in electricity demand. The spot price in Q1 was EUR 58.5 per megawatt hour. This was approximately 30% lower than in the previous year, but approximately 70% higher than the pre-crisis levels i.e. the average in 2017 to 2021. So with this, I end my part and hand over to Tiina for more details.

[Tiina Tuomela, executive]

Thank you, Markus. Good morning everyone also on my behalf. I will now go through our financials in more detail. Let's start with the key financials.So let me first comment on some of the comparable KPI for our continued operations. In the first quarter, our comparable EBITDA declined and amounted to EUR 622 million. Also, the comparable operating profit declined and was EUR 530 million in the first quarter. The main reason for the lower result were lower spot and hedge prices.Comparable net profit decreased from EUR 483 million to EUR 430 million. It is good to note that our net finance costs are now lower. While in the previous year, they were impacted by the Solidium bridge loan. As you see, our comparable EPS in Q1 was EUR 0.48 compared to EUR 0.54 in the previous year. For the last 12 months, the comparable EPS, which is the base for the dividend, stood at EUR 1.22 per share.Looking at cash flow, net cash from operating activities increased from EUR 474 million to EUR 538 million despite the lower EBITDA. The main reason for this was the positive impact from the change in working capital. Our balance sheet strengthened somewhat with the slight improvement in our leverage. The ratio for financial net debt to comparable EBITDA was at 0.3x for the last 12 months.Now over to the segment overview. Let's look at the waterfall of the comparable operating profit for our segments. Compared to the previous year, the generation result decreased while both Consumer Solutions and the other operations segment improved. The main reason for the decline in the generation segment were the lower spot and hedge prices. At the same time, Hydro volumes increased and the quarterly optimization premium was clearly better. The result of district heating business improved mainly due to the lower fuel and CO2 costs supported by more electricity-based heat production in Finland.The renewables business result turned positive in the quarter, driven by test generation volumes from the Pjelax windfarm. Comparable operating profit in the Consumer Solutions segment increased in more normal levels. As power price normalized, also the consumer behavior has changed and churn is lower. The result improvement was mainly due to the higher electricity sales margin and higher sales margin for value-added services, while at the same time, the gas sales margin was lower. The higher electricity sales margin resulted mainly from better profitability in non-spot related contracts.As you might remember, in 2023, this business also suffered from the regulated electricity price caps for end users that was set by the Polish government. This regulation is not implemented anymore in 2024. The other operation segment, the comparable operating profit improved by EUR 6 million and was negative by EUR 25 million. As part of the ongoing organization changes, the efficiency improvement measures, internal charges for enabling function services and the lower IT cost had a positive result effect part of which was offset by lower earnings in the Circular Solution business.Then a few comments on our financial position, debt and liquidity. Our financing position is very strong and this supports our objective to maintain a credit rating of at least BBB flat. When balancing between leverage, investment and dividend, we keep this in mind. As Markus already said, we are very pleased that S&P now upgraded our investment grade rating to BBB. This shows that our hard and systematic work both on financials and on our strategy execution is recognized also by rating agencies.Next, let's go through the reconciliation of our financing net debt in the first quarter. In the opening balance sheet at the end of the last year, our financing net debt was EUR 942. In the first quarter, the operating cashflow was EUR 538. This effect was slightly offset by investment of EUR 114. There was no dividend payment in the quarter as the first dividend installment was paid in April.The change in interest-bearing receivables amounted to EUR 44 million and FX and other effects total EUR 34 million. So, at the end of the first quarter, our financial net debt was EUR 528 million and I said the ratio for financial net debt to comparable EBITDA was at 0.3x for the last 12 months. Looking at our debt portfolio and the maturity profile, I want to highlight a few things.Our maturity profile continues to be very balanced and there are no large maturities in any single year. All in all, our gross debt excluding leases totals EUR 5.7 billion. At the same time, our liquidity position is strong. We have ample liquidity reserve of EUR 8.2 billion, with EUR 4.9 billion of liquid funds and EUR 3.3 billion of undrawn committed credit facilities and overdrafts.With the strong liquidity position, we will continue to optimize our cash and credit lines. The overall objective is to have sufficient and optimal liquidity, while at the same time, trying to minimize funding cost. We are constantly monitoring and adjusting our liquidity based on various scenarios to ensure sufficient liquidity in order to meet required needs.The cost for our EUR 5.7 billion alone is 4.4%, while the interest income that we get for our EUR 4.9 billion liquid funds is 3.9%, which means that the net interest costs are in good balance. So with this, over to the outlook section. The outlook section comprises in essence four elements: guidance for outright hedges and optimization premium, tax rate, CapEx guidance, and our fixed cost reduction program. But first a short reminder that our outright volume has increased from 45 terawatt hours to 47 terawatt hours.The reason for the increase is Olguiloto3 and our Pjelax wind farm, which now is operational. This also slightly increases our sensitivity to power prices, while it does not impact the optimization guidance. With new volumes in Finland, the split of Fortum's blended price has also changed. So based on the price areas of our normalized outright generation fleet is now approximately 46% in Finland, 37% in Sweden SE3 area and 17% in Sweden SE2 area. Previously, the split was 40-40-20.Actual outright volumes naturally vary and depend on various criteria such as outages, hydrology and other market dynamics. Last year's outright volume was 44.4 terawatt hours and already included approximately 2 terawatt hours volume from Olkiluoto 3. So from now on one should assume 1 additional terawatt hour. Also Pjelax wind will increase our outright volumes by almost 1 terawatt hour on an annual level when fully in use.We are consolidating the Pjelax wind farm as Fortum has a 60% maturity ownership while Helen has the 40% minority. Pjelax will sell 65% of its generation based on a 12-year pay has produced PPA starting from the beginning of July.And then over to the hedges. At the end of first quarter 2024 the hedge price for the remainder of 2024 was at EUR 43 per megawatt hour and the respective hedge ratio was 70%. In the previous quarter the hedge price for the full year 2024 was EUR 47. The main reason for the 4-year or lower hedge price for the reminder of the 2024 is that the hedge price for the first quarter was clearly higher and those products have been now delivered. The hedge price for 2025 is 1 year lower at EUR 42 euros and the respective hedge ratio increased by 10 points to 50%.Despite the first quarter optimization premium was double digit, we continue to guide the optimization premium at the annual level of EUR 6 to EUR 8 per megawatt hour on an annual level and for the total volume of 47 terawatt hours. While the guidance is for the annual level, there might be quarterly variations.A short recap of our guidance for capital expenditures. Our capital expenditure for 2024 is expected to be EUR 550 million. This includes maintenance CapEx but excludes potential acquisition. Capital expenditure for the next 3 years, 2024 to 2026 is expected to be EUR 1.7 billion, including maintenance and excluding potential acquisition.Annual maintenance CapEx is expected to be approximately EUR 300 million which continues to be below our depreciation level. Our tax rate guidance is also unchanged. We expect the comparable effective income tax rate to be in the range of 18% to 20%. And also as mentioned before, we target to reduce our annual fixed cost by EUR 100 million excluding inflation gradually until the end of 2025 with full effect from the beginning of 2026.We now complement this guidance as we say that we expect to reduce our fixed cost base by more than EUR 50 million already by the end of 2024. This was all for my presentation and we are now happy to answer to your questions. So with this, Ingela back to you.

[Ingela Ulfves, executive]

Thank you, Tiina, and thank you, Markus. So as Tiina said, now we are ready for the Q&A session and let's begin. Moderator, please go ahead.

[Operator]

[Operator Instructions] The next question comes from Harry Wyburd from BNP Paribas Exane.

[Harry Wyburd, analyst]

Two, please. So first, can I dig into the optimization premium a little bit. And if you could give us some color as to why it was double digits. Are there any specific circumstances maybe the cold snap in January that drove that. And then you also mentioned that the guarantee of origin pricing impacts of the lag.So given that that's been going down, am I correct to assume that that will have a gradually negative effect on your optimization premium as you go through the year. And then in the longer run has there been a change in mix here. Are you expecting to make more of your optimization premium from outside of the guarantee of origin prices.And then the second one's on the state shareholding. So I think on the last conference call, you mentioned that the government was due to announce some kind of new ownership policy statement. So I wondered if you could update us on whether there have been any developments on that front.

[Markus Rauramo, executive]

Okay, good morning everyone. Good morning Harry. Thank you for the questions. So if I start with the question on the state. So we are still waiting for the new ownership policy document to be published. So we have no news on that. That is to be expected. But we have been waiting as you have been also for some time. So no information more on that one.Then with regards to the optimization premium. So as we have said earlier it's a function of 3 different main categories. One is the physical optimization when we are running mainly the hydropower. Second one is the grid services, the ancillary services, inertia, frequency control, upward regulation, down regulation. And then the third in order of magnitude is the guarantees of origin of various types. So this is a function of all of these 3.And the cold snap as such did not in its own right did not impact. So -- but the volatility around it. So the absolute price level is not the driver for the optimization premium. But the volatility and how well we are able to capture that.Then on the point about the GOOs with a lag. So yes if nothing else would happen and GOO prices would be lower. Yes that would have an impact in its own right. But as I said it is the third largest element, and I would say structurally when you are asking about the change in mix.If we continue to see the penetration of intermittent renewables into the system, this will lead to more volatility which would lead to structurally higher optimization. And at the same time there will be less and less dispatchable capacity. One practical example is that we now closed SO1 coal fired CHP in Suomenojan in Espoo and we are adding the Pjelax 380 megawatt wind park into the system. And this is happening gradually across the Nordic system. So structurally there will be more. And then depending on the prices of various elements this have their own impact.

[Operator]

The next question comes from Wanda Serwinowska from Fortum.

[Wanda Serwinowska, analyst]

Wanda Serwinowska from UBS, not Fortum. Two questions from me. The first one is on the Olkiluoto 3 maintenance. The maintenance outage has been prolonged by 1 month according to TVO. So can you please help us understand what is the potential impact? Have you hedged the volume? Did you need to buy them back because I think it will be a question for Q2?And the second question is on the cost cutting. Tiina, you mentioned EUR 50 million by the end of 2024 before inflation. Can we get a net figure, including inflation, so we can understand what is the real impact on your earnings in 2024 versus 2023?

[Markus Rauramo, executive]

I think these are both questions that Tiina is an expert on answering. So why don't you go ahead, Tiina?

[Tiina Tuomela, executive]

Thank you. So Olkiluoto 3 outages, as you said, so now there is a 1 month delay and the reasons being that, of course, this is the first outage after the commissioning of the plant. So a lot of, in a way, checking works and also learning how the new power plants operate. What comes to the impact? So of course, what are the production volumes? So we also follow the UMMs, what TVO will give. Of course, we will have our own assessment when we do our hedging policy. So we make certain assumption how much the nuclear is available and then -- and also the hydro volumes. So if we look at our hedging percentage for the rest of the year, 70%. So as a portfolio basis, we have not fully hedged. So I don't anticipate any major impact from that.Then the cost cutting program, so yes, we are hard and working with the program and it is progressing in the schedule and according to the plans. Now, what we also indicated as a proof is that by the end of 2024, we have reduced the recurring base by the end of year by EUR 50 million. Unfortunately, what is the final impact will depend on the inflation rate. And we have seen that the inflation has slowed down. But of course, it remains to be seen how the inflation will develop. If the inflation continues to be higher, so then of course, the absolute level might not be reduced to our comparison year 2022. Of course, if the inflation is lower, so then the level will be reduced compared to 2022. So I would follow the general inflation. And luckily, we see now the slowing down at the moment.

[Markus Rauramo, executive]

If I -- yes, sorry, Wanda, yes if I just add to that. So the Nordic wage inflation, for example, has been more modest than it has been in Continental Europe. So it's not been such a big factor. So I would say when we think about, okay, what could impact negatively the cost base would be that somewhat, let's say, low single-digit wage inflation and then decided growth efforts that we are doing. So for example, on hydrogen, we are doing some development. But these are then limited and very carefully assessed that what do we do there. But the big picture is that we will be taking our cost base down during this year and next year. And then there will be some select additions. But all in all, we are targeting a significant cost reduction.

[Wanda Serwinowska, analyst]

And is there any chance you can give us the 2023 cost base? Because the EUR 100 million is based on the EUR 1 billion in 2022, but the inflation was very high in 2023. So any chance you can help us understand what would be the -- what would be the EUR 100 million in 2023 money? I know we don't know what the inflation will end up in 2024, but it would be good to understand what is our starting point, including the inflation in 2023?

[Tiina Tuomela, executive]

Well, this is exactly the reason we gave the reference point and have taken the reference point as a 2022 where the inflation was more on the normal level. So I would use that as a reference. Also 2023, so we made a major internal restructuring. So I think that year's cost base was also impacted some one-off items like writing down of the IT project and also internal restructuring costs. So unfortunately, direct comparison number is difficult to get from '23. But 2022 is a good base of this roughly EUR 1 billion cost base.

[Operator]

The next question comes from Deepa Venkateswaran from Bernstein.

[Deepa Venkateswaran, analyst]

I had 2 questions. So you talked a little bit about data centers and demand. Could you explain what kind of conversations you're having with these data center owners? Are you talking about supplying from your existing nuclear and hydro or is it dedicated projects? How are they looking at additionality? And do you expect to see a premium on these data center-type TPAs? So that was my first question.And secondly, a question to Tiina on the liquidity. I mean you're sitting on almost EUR 5 billion of cash. Is that the right level of liquidity that your business needs or could you optimize some of your borrowings and you reduce that wedge between financial expenses and income?

[Markus Rauramo, executive]

Yes. Okay. So if I start with the data centers, I'd say it is a mix. The demand is a mix. So the very near-term demand is CO2-free power. Some are demanding or some would like to buy additional renewable power. And then still, the data centers will have to need -- will have to fill their whole 24/7 need, which means that then they will be buying from the market, the rest of the profile. I would say largely, if I think about the kind of total portfolio that we see on the demand where data centers are a part of it, I would describe it so that it's really mostly 24/7, or let's say, 90%, 95% electricity demand. So our customers are indicating some but not very much flexibility. And this is driven by that the demand is coming from steel, other metals, chemicals, synthetic fuel production and then data centers and battery factories. So typical Nordic heavy process industries.And there is the CO2-free requirement for some of the businesses. There are even tighter or very tight requirements for RFNBO-compliant power. And as the requirements are tighter and tighter, also the supply is scarce, which, to your question, yes, it leads to higher premiums. So the tighter the original requirement or tighter the matching requirement, then the premiums get higher and higher.Then maybe I'll characterize it also so that especially on the U.S. road shows, we've got a lot of questions that what kind of data center demand is there. And in the U.S., there have been huge premiums for clean power. That seems to be different in the Nordics because there is actually a good supply of clean power and there's good supply of guarantees of origin. So then, as you know from the market, we talk about different level for the premium compared to the U.S. where there is a lot of fossil power available and less so 24/7 availability of CO2-free power.And then, Tiina, if you want to take the liquidity question.

[Tiina Tuomela, executive]

Yes, I'm happy to take. So our liquid funds at the end of first quarter was EUR 4.9 billion, additively, quite a high level. But it is good to remember that, for example, the dividends, what we now have announced so the payment will come during the year. And also, if we look at our loan maturity profile, so there will be a loan repayment possibilities during this year to adjust the level. Also, I think there are still quite a bit of uncertainties in general in the market. So it is good to have enough liquidity. But of course, we will assess based on our new risk framework where we test our liquidity to the different kind of scenarios that what is the optimal level when we look at the liquid funds and the cost and the risk scenarios. So we will optimize and follow up this carefully.

[Deepa Venkateswaran, analyst]

So just a follow-up. So you are open to not refinancing the loans that are coming up, right, for maturity? So you're open to that not refinancing that?

[Tiina Tuomela, executive]

That's correct. So we will assess and there is some opportunities if we look at the loan profile, so adjust. But we haven't made any decision yet, so we will communicate later.

[Operator]

The next question comes from Artem Beletski from SEB.

[Artem Beletski, analyst]

So the first one is related to generation and you mentioned that the district heating earnings improved and you complained about the business in Q4. Could you maybe talk about the magnitude of improvement, what you have seen? I know that is quite seasonal business and whether you have digested more expensive fuel cost on that side.And the second one is related to Consumer Solutions. I think you made record earnings in Q1 and the business is improving clearly compared to tough year in 2023. Is your rough guidance of maybe EUR 100 million EBIT on annual basis for this operation still valid? Or do you see more potential there?

[Markus Rauramo, executive]

Okay. I can start with the cost earnings. So I would say now if I look at this Q1 compared to other more representative Q1s, there is some delta and that is mainly coming from like comparing good years to this one is that when prices come down, then we do have still a share of fixed-term contracts. And then the price resetting happens with some delay and our procurement already is enjoying lower energy cost. So here, we talk about an impact that is not huge, but it's still like single-digit millions. So the -- referring back to a couple of years back, maybe not the EUR 100 million level yet, but in that proximity, would be kind of a normal year.Having said that, the volatility spikes will continue to impact this business. So it is difficult to hedge the consumer energy consumption because basically, our consumer business is giving the consumers an option to use electricity, but it's not like an industrial PPA. This is the fundamental issue that differentiates the consumer and industrial businesses. So this is more prone to the impacts of the price volatility.And then for the generation, we haven't quantified the district heating difference. But indeed, you pointed to one of the key factors there. So we have now gone through the expensive fuels and the related CO2 costs. And now we are actually well on the track of electrifying the Espoo district heating business. And this is the area where we have been making our investments into the electric boilers and hot water storage and heat pumps and that continues to be the case.But there's still a lot of work to be done on that area. And gradually, also the Microsoft data centers will come online and will start to produce the excess heat that we will then use in combination with air-to-water heat pumps and the electric boilers that we are building now. So more to come on that side. But we did not quantify that -- what is the magnitude.

[Operator]

The next question comes from Harrison Williams from Morgan Stanley.

[Harrison Williams, analyst]

Two from me. And firstly, I was hoping to get a little bit more insight into the seasonality on that optimization premium. And I think you've guided that EUR 6 to EUR 8 as an annual target. So if we've seen the double digit in Q1, firstly, can you outline whether that is the expectation going forward for that quarter and year? And then what does that mean for the kind of seasonally less volatile summer months? Should we expect to be significantly below the bottom end of EUR 6? So that's the first question.And then the second question I had, just you mentioned the Microsoft data center, which you have the district heating contract with. Do you have a guide on when that is expected to ramp up? And do you know what the power purchase agreement or if there is one is in place? Or have you been having these conversations with Microsoft?

[Markus Rauramo, executive]

Okay. So maybe I'll give a general answer on the seasonality part, and Tiina can then complement if she feels like that, and then I'll take the Microsoft question. So I would say, historically, it is the case that we saw higher power prices and more volatility in the winter months. But if I look back at -- this is my own gut feeling more than scientific answer, but that the summer months or the mid of the year has also become more volatile and prices are not necessarily coming down the way they used to because the dispatchable energy is out. We have less and less of that. Okay, hydro remains. But of course, that's lower season for the output. The nuclear outages are in the summer and then the impact of the renewable generation is relatively even bigger in those months.So we have also seen volatility in the summer months. So my gut feeling says that we don't see a huge seasonal profile, as you could expect. But obviously, when we say that we now had double-digit optimization premium, and we keep the annual guidance to EUR 6 to EUR 8. That logically means that we expect then less than what we saw now for the remaining quarters. But I think the key point is that we are comfortable to keep the EUR 6 to EUR 8 guidance for the optimization premium. And we see, as I said actually in my earlier answer, I see structural developments actually supporting the value of optimization.Then for the Microsoft plants or the data centers coming online, then this will come -- this will scale up during several years. And I think actually, I would need to refer to Microsoft's own guidance on that, what they are saying. So I'm not the best person to speak exactly how they will ramp up. And why I say that also is that we have for our decarbonization of our district heating in Espoo, we are not reliant on that these data centers happen at an exact time. So this -- the expansion will be driven by Microsoft's own clientele and what is the need for data services there. And this is why we have built the -- when we are connecting the data centers, we are actually preemptively building then the electric boilers and the air-to-water heat pumps and the water storages so we can manage the decarbonization regardless of what is the exact timing of the data center buildup.For the PPAs, as you have seen, we have not announced a PPA with Microsoft. So as far as I know, they have not yet procured the energy for these data centers, but I wouldn't know if there is something that they have not announced. But we have the contract on being the heat off-taker. So that's kind of our firm part. And then previously, the site development that we did in Espoo, Kirkkonummi and Vihti.And then I refer back to what I said earlier in my presentation, which is that we continue to develop sites for industrial use, including data centers. And this is actually a way where we can help the energy-intensive industries from various sectors to actually speed up their processes quite a lot. So I have seen external evaluations and assessments that this could speed up location of new business up to 3 to 4 years even when we do site preparations and permitting, zoning, negotiating with landowners and making sure that there are grid connections available. So I think this is something that is actually very good for all parties involved.Tiina, anything you want to add on the seasonality of the optimization premium?

[Tiina Tuomela, executive]

Well, I think you covered really well the -- it is the weather-related and the availability-related topic. Maybe what comes to the environmental value, so of course, that will follow the market prices. And there's a certain lag because usually, we try to sell them beforehand. So if the prices go down or up, so it will follow, but there is a certain delay. But the majority, of course, is the physical optimization part, which dominates the premium.

[Harrison Williams, analyst]

I'm sorry, just one follow-up on that optimization premium. So when you gave the EUR 6 to EUR 8 guide was the double-digit in Q1 included in that, which was kind of implicitly imply maybe, or is it excluded, which would then imply that there is a bit of a downgrade to Q2 to Q4? That would be great.

[Markus Rauramo, executive]

No, when we did that, we didn't open it up and we assume that there will be variance between the quarters. So I think this could be expected. I think there were 2 points why we took this up. One is just to be transparent that actually, it continues. So the volatility is there and the grid service need is there and the [ GOs ]are selling. And also just to underline that the EUR 6 to EUR 8 is a solid number.

[Operator]

The next question comes from Louis Boujard from ODDO BHF.

[Louis Boujard, analyst]

Two questions on my side. Maybe just would like to come back a little bit on the math in the first quarter for the hedge price and the premium that you mentioned. In fact, I think that you said that your previous hedge price was at EUR 47 per megawatt hour. It's now EUR 43 per megawatt hour and most of it is related to the fact that your hedge was much better in the 1Q, which means implicitly that your 1Q hedge is closer to EUR 56, EUR 57 per megawatt hour. And you have a capital price of EUR 63 per megawatt hour. So that means that the premium would be 6 and you say double-digit premium, so I don't know where I missed something. Is it something that you can elaborate a little bit on this topic in order to have a better view and a better grip on what would be the optimization premium in the first quarter? And what has been the actual hedge price in the first quarter?And maybe the second question would be, once again, on the premium, but more likely on the Guarantee of Origin. I was wondering if you could let us know what would be the level at this moment in terms of pricing and also how you see it evolving with the development of the final demand, notably from the data center, if it's going to be an element that could help in the evolution of this premium going forward.

[Markus Rauramo, executive]

Thanks, Louis, for the question and good calculation. So the thing that is then hard to evaluate is actually what is the unhedged volume. And like Tiina said earlier that we don't -- I mean, well, you have seen that our hedging -- the hedge ratio has been 70% and it continues to be 70%. So the missing part from the calculation is that, okay, what was the result on the unhedged volumes and then the optimization premium that we don't communicated earlier.But we -- yes, so we try to be very precise and scientific about our optimization premium because for that, it's really important to understand it well because this is a business area that actually has or, let's say, business feature that there will be a need for and we have competencies and possibilities to do business in that area. So I think this is an issue we will come back to in the coming quarters. How do we create more flexibility? How do we add more either demand or supply capacity that we can optimize. And here, I come back to what I said earlier about Pjelax 380 megawatt wind park and then the electric boilers and heat pumps in the district heating system. So these kind of combinations on a system level will have value going forward, but more about that later.Then on the GoOs, let's say, generally speaking, the pricing varies quite a lot. So you may see one price quoted on various screens. But like I said earlier, the more scarce the element that you need to procure. So let's say, if we go to hourly matched our quarter hour matched RFNBO compliant supply, then the price for that can be very different from what we see quoted as a kind of a generic hydro or generic nuclear GoO. So I would say here's an area also that we'll develop and probably we need to discuss a bit in more detail or give kind of structural color on what all does this look like. But here, I would say generally that we have a uniquely good portfolio actually to supply what is needed, both from an operational point of view for our customers and then from a compliance vis-a-vis different regulation that our customers want to meet.Sorry about the complicated answer, but there are so many different levels of the GoO pricing that we see even in the PPAs that we have done. So it can be something very different than what you would probably think of when you see the screen prices.

[Operator]

The next question comes from John Campbell from Bank of America.

[John Campbell, analyst]

I wanted to return also to the optimization premium. So I think you mentioned that the premium will eventually factor in lower Guarantee of Origin certificate prices with a lag. Perhaps could you give us an idea of when you expect that lag through? I assume perhaps you were able to hedge some of your GoO prices in advance. That was my first question.I'm also interested in new nuclear. Does any -- does Fortum basically have any updates on that one? And the third topic, I think I'd like to ask about sort of PPAs from a practical perspective. I think the hope is that Fortum or anybody else in the Nordics would be able to sign a PPA at a premium to the wholesale price.Sort of thinking about it practically, how would we know from the outside if you were to ever hypothetically announce an agreement that it was actually a good deal, shall we say, versus the wholesale price? Because the one you disclosed, for example, in April didn't contain any other details other than the 0.4 terawatt hours. Those are my 3 questions.

[Markus Rauramo, executive]

Okay. So well, I can take all of these 3. I'll take a quick one and Tiina can add more color. But on the first point, yes, the impact comes like in any other product that you, like, forward trade, the impact will eventually come with a lag but I would actually change the lower to just different whatever the price may be, that impact comes with a lag. So you will -- in this quarter, you will see an impact of GoOs actually traded in the history. And in the next quarter, we will again see the same thing. So whether the prices go up or down, they come through with a lag. And that depends on how much we do of this, either you could call normal short-term hedges or longer-term PPAs. But this is basically a flow business.Then on the new nuclear, I'd say on the technical side, we continue to develop our understanding. So we are visiting existing nuclear power plants and construction projects across the world so that we understand the technology and we continue to have discussions in EU and with the Swedish and Finnish governments on the topic. The interest for new base load in Sweden and Finland seems to be very kind of -- it continues. And the governments are working on developing their view on capacity mechanisms and the nuclear legislation to actually allow for scalability and series production.The change point, I would say, we see in EU. So now in EU, both commentary and then on a policy level, now EU starts to open the doors for nuclear. So nuclear starts to be now recognized as a solid CO2-free form of production. And the tone of voice from my point of view has changed markedly. Then in practice, we see this point in that EU in its market design reform, as we call it, it was an evolution, not a revolution. But one of the points was that it allows EU member countries to develop capacity remuneration mechanisms and basically is supportive for that.And then the final point on the PPAs. So yes, we don't -- at least until now, we don't publish the details on single PPAs. But our basis is that we take the implied forward curve for whatever maturity we are talking about. And our principle is that the NPV of a PPA has to be better than the implied forward curve. So basically -- and if that would change, then I think we would tell that then there's some logic -- some kind of industrial logic into it. But this has been the principle that it's the implied curve. So when we are like I would go -- basically, I would be part of approving each longer-term PPA or at least be informed, so then we will look at what is the implied curve and that the NPV is better through this.

[John Campbell, analyst]

Could I just follow up, sorry, on the optimization premium? So I understand your point that these things operate with a lag. But I'm just trying to think from the perspective of perhaps at the higher prices are feeding in now. Do you have a view on when perhaps the lower prices could start to feed in and whether that would affect the EUR 6 to EUR 8?

[Markus Rauramo, executive]

Well, I was kind of trying a little bit maybe like sideway trying to say that everything you see quoted on the screen isn't reflective of what actually happens in the Guarantee of Origin pricing. So we may be looking at kind of a more simple product, but when we go into, for example, RFNBO-compliant Guarantee of Origin with hourly matching or even quarter hour matching, then the price may be very different. That's why I'm saying that I'm not necessarily saying that the prices are coming down. Some prices may come down, some prices may be on different levels.

[Ingela Ulfves, executive]

Thank you, everyone. This was the last question we had in the queue. So I want to thank you all for your participation here today. And as always, we wish you all a very nice rest of the day and especially everyone now in the Nordics, I guess, who are celebrating the Vappu. So wishing you a cheerful Vappu. And as we have a public holiday tomorrow, enjoy the 1st of May celebrations. Thank you and bye.

[Markus Rauramo, executive]

Thank you.

[Tiina Tuomela, executive]

Thank you.

[Markus Rauramo, executive]

Have a good day.

[Tiina Tuomela, executive]

Have a nice Vappu.