Fortum Oyj

OMXH:FORTUM

Earnings Call Analysis

Stable Earnings, Strong Generation Segment

The company maintained stable earnings, tallying up to €2.4 billion, with flat comparable operating profit but a dip in net profit from €199 million to €147 million. Earnings per share fell slightly to €0.16, impacted by inflation adjustments in associated operations. The robust numbers were largely driven by the Generation segment's performance, which saw the achieved power price increase by €24.1 per megawatt hour to €72, despite spot prices plunging by more than half year over year. However, Consumer Solutions halved its results due to customer contract migration, and Other Operations fell due to a one-time gain in the previous period. The strong cash flow led to a net debt decrease, with leverage at a healthy 0.3x. Hedging strategies contribute to financial predictability, capital expenditure for 2023 remains at €700 million (excluding acquisitions), and the estimated effective tax rate ranges from 19% to 23%.

Financial Resilience Amidst Market Volatility

In the current volatile market, the firm has emphasized its robust financial position, highlighting improved balance sheet strength and liquidity, which affords it a degree of protection against potential market disruptions.

Growth and Investment Focused on Wind and Solar Development

The company remains focused on growing its renewables portfolio, specifically in wind and solar energy, a strategy that is firmly rooted in its long-term commitment to clean energy and sustainability. By engaging in the development process from the ground up, including site identification and contract negotiations, the firm ensures a high level of control and potential for profitability.

Strategic Review Driving Business Optimization

The company is conducting a strategic review to sharpen its focus, which may result in divestitures or the realignment of non-core assets. This strategic revision aims to streamline operations to concentrate on electrification, decarbonization efforts, and potential growth areas such as baseload power and hydrogen.

Firm Hedging Strategies in Place for Future Stability

With hedging prices set at €49 per megawatt hour for 2023 and €46 for 2024, and respective hedge ratios at 70% and 50%, the company is strategically positioned to maintain predictability and visibility in its generation segment.

Prudent Capital Expenditures and Tax Estimates

The company plans to maintain steady capital expenditures in 2023, totaling €700 million (excluding acquisitions), with a commitment to keep maintenance capital expenditures below the depreciation level. For taxation, the estimated effective income tax rate is projected to be 20-23% for 2023, adjusting down to 19-21% in 2024 once the Finnish windfall tax is excluded.

Active Engagement in Renewables and Evaluation of Hydrogen and Nuclear Ventures

The firm is not only investing in renewables for short-term gains but also actively evaluating investments in hydrogen and nuclear energy. Acknowledging the clear demand for hydrogen in industrial processes, the company recognizes the technological advancements needed for large-scale adoption. Similarly, for nuclear energy, the firm is engaged in studying small modular reactors (SMRs) and conventional reactors to contribute to a flexible, clean, and secure energy system.

Potential Acquisition Opportunities in Core Strategic Areas

Seeing value in the potential acquisition of Swedish assets comprising nuclear and hydro, which align with the firm's core strategies, the company is considering these assets for future growth.

Consumer Solutions Withstanding Pricing Pressures

Despite facing some margin pressure in its Consumer Solutions segment, the firm is proactively developing hedging products to align with customer contract changes. While unforeseen market conditions have introduced challenges, the company has expressed confidence in managing such situations and returning to profitable levels observed in previous periods.

Earnings Call Transcript 2023-Q2

[Ingela Ulfves, Head of Investor Relations]

Good morning, everyone. A warm welcome again to Fortum's Joint Webcast and News Conference for the investor community and media on our Second Quarter '23 Results. My name is Ingela Ulfves and for those who don't know, I'm heading the Investor Relations at Fortum. This event is being recorded and a replay will be provided on our website later today.

With me here in the studio, I have our CEO, Markus Rauramo; and our CFO, Tiina Tuomela. Markus and Tiina will present Fortum's second quarter and first half '23 figures and group's performance. After the presentations, we will then open up the Q&A session for your questions.

Okay. I now hand over to Markus to start.

[Markus Rauramo, Chief Executive Officer]

A warm welcome to our investor call also from my side. For the first time in a long time, we now have a more normal quarter for our core business. I will start by going through our second quarter events, then talk about our strategy execution, market fundamentals and development and then how this turned into results in the quarter and first half of 2023. After that, Tiina will walk you through the numbers in more detail. Let me now start by commenting on the second quarter.

The second quarter is typically a lower result quarter due to the seasonality of our business. Winter quarters yield higher results than the summer quarters. Q2 is typically also characterized by flooding caused by melting snow, which affects the hydro reservoirs and hydro volumes. This year in Q2, the Generation segment performed well and made robust results, while Consumer Solutions and the Other Operations segment were behind compared to last year. We progressed in our strategy execution and continued to reshape our organization to better support our renewed business structure.

Following the seizure of our Russian assets, we have now deconsolidated our Russia segment in Q2 and have fully written down all Russian assets. Today, we also announced that we will initiate a strategic review of our Circular Solutions business. In connection with the strategy launch in March this year, Circular Solutions was classified as a non-core business and the logical next step for us is to review what we will do with these businesses going forward.

The main part of Circular Solutions is our recycling and waste business, which comprises municipal waste treatment, plastic recycling, hazardous waste business and battery recycling business. We will look at all options, including potential divestments for the various businesses, and we expect that the strategic review can take up to one year. Then a bit more about strategy execution on the next page.

In the earlier quarters in 2022, I highlighted three key priorities and challenges that we had to solve in order to continue full speed with our strategy execution. These three issues were to conclude the Uniper divestment, exit from the Russian market and improve our financing balance and return to the bond market. We have now concluded all three objectives although the exit from Russia obviously was not the kind we would have preferred.

We have a solid financial platform with a strong balance sheet and low net debt, and our focus is now on profitability and building capabilities and pipelines for future growth to enable value creation.

Let's look at the strategic development during the second quarter. First, on our priority to deliver clean energy reliably. Our focus continues to be on ensuring uninterrupted supply of power to our customers and the societies around us. In this context, I'm very pleased that TVO's long-awaited third Olkiluoto nuclear power plant unit in Finland started regular power generation in April and commercial operation in May. This supports security of supply in the Nordics as it adds to the baseload capacity.

We will also continue our efforts to decarbonize our operations that are not yet carbon neutral, for example by building sustainable waste heat solutions. We will invest €225 million in decarbonization of our district heating as a part of the ongoing Espoo Clean Heat program. This means that we would be offtakers for Microsoft's waste heat from data centers that Microsoft is planning to build in Espoo and Kirkkonummi. The target is to cover approximately 40% of the heat demand in the Espoo area with this waste heat.

In June, our Consumer Solutions business acquired Telge Energi, one of the top 10 retail businesses in Sweden. This is a good fit to our business and increases our retail customer base. We expect to be able to finalize the transaction during the third quarter.

Then a few words on our priority to drive decarbonization in industries. During Q2, we signed new cooperation agreements within the sphere of our nuclear feasibility study with Korean KHNP and the U.S.-based Westinghouse Electric Company. In the feasibility study, Fortum explores the prerequisites of investing in new nuclear in Finland and in Sweden. We examined the commercial, technological, societal including political, legal and regulatory conditions for both small modular reactors SMRs and conventional large reactors.

On hydrogen, we are happy to have announced a joint FEED study with SSAB to explore the possibilities of producing hydrogen reduced fossil-free sponge iron in Raahe in Finland. Any possible investment decisions on these nuclear and hydrogen projects will be made at a later stage.

Finally, a few words on the ongoing internal changes. Our renew program has two objectives: to build an efficient and fit-for-purpose operating model; and to develop our culture and leadership to support strategy execution. Since we got our new leadership team in place in the spring, we are adapting the rest of the organization to the new business structure. This also enables us to take a more customer-centric approach. The implementation of the new operating model progressed in Q2 with the appointments of second level senior leadership. The next level appointments are now ongoing and the target is to have the entire organization fully operational by the end of this year.

Then to the markets. Although the Nordic power system is largely based on clean power, it is still affected by the volatility of gas, coal and carbon prices. As you recall, during spring and summer last year, we saw gas prices climb to unprecedented levels as Europe pushed refill gas storages in preparation for winter under extreme supply challenges and high uncertainty of their future development. In the fall, prices started to ease with higher filling levels in Europe, higher LNG supplies and curbed demand stemming from fuel switching and efficiency measures caused by the high prices. The winter period 2022-'23 was mild, which resulted in lower gas prices and consequently lower power prices. At the end of the first quarter this year, gas storages were approximately 55% filled and at the end of Q2, filling levels had increased to approximately 77%. At the end of July, they were already at 86%.

During Q1, it looked like the European gas market found a new balance. For most of Q2, this balance remained intact, but the reduction in Norwegian pipeline flows to the continent combined with seasonally lower LNG arrivals reminded us that the new European gas balance is very fragile. Although renewed concerns over security of supply in the short term halted the decline of gas prices, we didn't see any extreme price spikes. Thanks to the consistently good gas storage levels, the market is now much calmer about Europe's ability to meet the winter demand compared to last year.

As said, the lower gas prices reflect also on the power prices. The Nordic system price, both spot and futures, declined steeply, in sync with the Continental European and U.K. power prices. The products for the rest of the year '23 are currently trading around €57 per megawatt hour and 2024 around €55 per megawatt hour. Although we are talking about much lower levels than last autumn, it is good to keep in mind that forward prices are still elevated compared to the historical price range.

And then over to the second quarter financial KPIs. What you see here are the comparable headline KPIs for Fortum Group's second quarter and first half 2023 continuing operations. So these are excluding both Uniper and Russia, which are now both discontinued operations. The second quarter comparable operating profit was exactly on the same level as last year. And due to the very strong result in the first quarter, our first half year result was clearly higher than a year ago.

Our comparable EPS was lower in the second quarter, but in the first half of the year we clearly exceeded the 2022 performance. The operating cash flow improved in the second quarter mainly due to the higher cash released from working capital. And finally, the balance sheet and most importantly, our leverage. Defined as financial net debt to comparable EBITDA, it was at 0.3x for the last 12 months. The main reasons for the improvement are the good results and cash flow. The low leverage provides us a solid platform to continue to develop Fortum.

To sum it up, I'm satisfied with the group's positive performance in a continued volatile market.

So with this, I conclude my part in this first section and hand over to you, Tiina.

[Tiina Tuomela, Chief Financial Officer]

Thank you, Markus. Good morning, everyone, also on my behalf.

I will now go through our financials in more detail and will start with the development of the second quarter. With this, let's move to the key financials for our continuing operations.

As Markus already mentioned, the Russia segment is now deconsolidated and reported as discontinued operation as a one liner. So these numbers do not include anything from the Russian operations. So let me now comment on some of the comparable KPIs for continuing operations.

Our comparable EBITDA amounted to €344 million and was slightly down in the second quarter. On a last 12 months basis, it totaled €2.4 billion. The comparable operating profit was flat at €262 million in the second quarter while the comparable net profit decreased from €199 million to €147 million.

You will see that our comparable EPS in Q2 is somewhat lower than last year at €0.16. The reason for this was lower income from associated operation as a result of inflation adjustment in nuclear waste related provisions in Sweden. Our comparable EPS for the last 12 months was strong at a level of €1.43.

Also our cash flow was strong in both second quarter and in the first half mainly thanks to the good result and especially in the second quarter the positive change in working capital.

On dividend payment, in the second quarter we paid half of the €0.91 dividend for 2022. Despite the payments of €0.46, our net debt decreased from €0.9 billion to €0.7 billion due to the strong cash flow and leverage. The ratio for financial net debt to comparable EBITDA for the last 12 months decreased to 0.3x.

On a more technical note, I also want to highlight that at the end of June, the last tranche of Fortum's parent company guarantee facility of €1 billion granted to Uniper was released. This was the last outstanding obligation related to Uniper.

Now over to the segment overview. This one again shows that the result improvement was entirely subject to the performance of our Generation segment, which reported a comparable operating profit of €304 million. In the second quarter, we recorded a clearly higher achieved power price even though spot prices were significantly lower compared to the last year.

Our Generation segment achieved power price increased by €5.2 per megawatt hour to €57.5 per megawatt hour, driven by higher hedge prices. At the same time, the spot price is more than half compared to Q2 last year and declined from €97.9 to €44.5 per megawatt hour. However, the quarterly physical optimization premium was lower compared to last year.

Volume-wise, we were at last year's level. Hydro volumes were marginally lower while nuclear volumes were slightly higher. However, you need to note that volumes from Olkiluoto 3 are not as profitable as the other nuclear volumes and that Oskarshamn plant annual outage was longer than last year.

Consumer Solutions result halved to €10 million, mainly due to losses resulting from customer outflow from certain hedge contracts. This means that customers switch out from certain contracts either the spot contracts or to other service providers and this resulted in over-hedge position that created these losses. This was also the case in the first quarter of 2023.

And finally, very briefly on the Other Operations segment. The comparable operating profit decreased by €10 million to total minus €52 million. The main reason was that the comparison period was affected by a positive one-time impact from changes in pension fund arrangement in Sweden.

Now we move over to a waterfall of the first half of the year. This picture further highlights that the strong result improvement is entirely created by our Generation segment, which reported a comparable operating profit of €1,027 million. The result improvement derived from the higher achieved power price supported by a higher hedge price. In fact, the achieved power price in the Generation segment increased by €24.1 per megawatt hour to €72 per megawatt hour, driven by higher hedge price especially in the first quarter. This is great achievement.

For the half year, hydro volumes were down mainly due to lower inflows that left the hydro reservoirs level somewhat below average during the quarter. Also currently, hydro reservoirs are somewhat below the average. As for nuclear, I'm satisfied with the good operational performance and that the generation volumes were solid. The increase in volumes is coming from Olkiluoto 3.

For the first six months, Consumer Solutions result fell by €40 million to €16 million. A large part of the decline is related to losses from the customer outflow from certain hedge contracts as I explained on the previous slide. Consumer Solutions comparable operating profit was also negatively impacted by the Polish government's price cap implemented for end users in 2023.

And finally, on the Other Operations segment where the comparable operating profit decreased by €26 million and showed a loss of €83 million. This was mainly due to the structural changes in the Circular Solutions business and already mentioned positive effect of changes in pension fund arrangement in Sweden affecting last year's figures.

Now over to the balance sheet. First, as a reminder, the Russian assets have been fully written down and the €1.7 billion impairment has negatively affected equity. Further, there is a positive effect of €1.7 billion from a change in hedge reserves. A total dividend of €870 million corresponding to €0.91 per share was already recorded in Q2 despite that only first installment of €0.46 was paid. The second installment of €0.45 will be paid in the fourth quarter.

You might remember that last time we presented an illustrative balance sheet where Russian assets write-down was taken into account. Equity in that balance sheet was €8.1 billion. The major difference to this balance sheet are that the approximately €800 million dividend is now booked in full from equity while the Q2 result of approximately €400 million has increased equity.

As you can see, our gross debt has come down as we repaid some debt. At the end of Q2, net margin receivables amounted to €0.8 billion, which already is closer to historical levels compared to the levels we saw last year. We also continue to have sufficient liquid funds, €4.2 billion. So all in all, we can summarize that we have relatively clear balance sheet.

Then a few comments of our net debt and debt portfolio. Maintaining a solid credit rating still continues to be a key objective for us. We now have a more balanced situation and continue to have a good dialog with our rating agencies. Let's go through the reconciliation of our financial net debt during the quarter, which has further improved and strengthened, and that shows that our leverage situation is indeed very good.

In the opening balance sheet at the beginning of the quarter, we had financial net debt of €900 million. The operating cash flow was very strong at €657 million. This effect was slightly offset by investment of €192 million. The dividend payment amounted to €413 million in the second quarter. And the change in interest-bearing receivables was €149 million. So at the end of June, our financial net debt had further declined and was at only €745 million.

Looking at our debt portfolio and the maturity profile, I want to highlight a few things. First, we have rebalanced the maturity profile of our debt. In May, we successfully re-entered the bond market and issued €1.15 billion bonds for five and 10 years, after which we also repaid some loans. Consequently, our maturity profile is very balanced and there are no large maturities in any single year. All in all, our gross debt is approximately €6 billion.

At the same time, we have sufficient liquid reserves with €4.2 billion of liquid funds and €4.3 billion of undrawn credit facilities so our liquidity position is strong. We need to have a capability to, if needed, repay any maturity -- maturing short-term debt. Considering the strong liquidity, we continue to optimize our cash position and credit lines to manage any future market volatility and price situation. The overall objective is to constantly ensure an optimal balance between the balance sheet, investment and dividend.

Finally, as interest rate have gone up, the interest rate for our debt portfolio has consequently also increased somewhat. Going forward, the cost for our €6 billion loan portfolio is 4.5%. It is good to remember that we get some interest income for our liquid funds currently 3%.

So with this, over to the outlook section. The outlook section comprises in essence three elements: guidance on hedging, CapEx for 2023, and tax rates. Over the years, Fortum's successful hedging of the outright generation has created predictability and visibility. The hedge position for the Generation segment outright for the rest of the year 2023 was €49 per megawatt hour and the hedge ratio was 70% at the end of June 2023. The hedge price for 2024 increased by €3 per megawatt hour to €46 and the respective hedge ratio increased 5 percentage points to 50% at the end of June 2023.

Our CapEx guidance for 2023 is unchanged. We expect to spend a total €700 million and this includes maintenance CapEx, but exclude potential acquisition. Maintenance CapEx will be approximately €300 million, which continues to be below our depreciation level.

And then, our tax guidance for this year. Taking into consideration also the temporary windfall tax, the group's comparable effective income tax rate, excluding items affecting comparability, is estimated to be in the range of 20% to 23% for this year. Excluding the windfall tax, it is estimated to be in the range of 19% to 21%. For 2024, the comparable effective income tax rate, excluding items affecting comparability, is estimated to be in the range of 19% to 21%. And just as reminder, the Finnish windfall tax applies just for the fiscal year 2023. The actual outcome of it naturally depends on the power price and result development.

So, this was all for this presentation and then we are happy to answer your question. Ingela, over to you.

[Ingela Ulfves, Head of Investor Relations]

Thank you, Tiina and thank you, Markus. Okay. We are then ready for the Q&A session. So with this, I would hand over to the moderator to start. Please go ahead.

[Operator]

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

[Harry Wyburd, Exane BNP Paribas]

Two from me. Firstly, on the hedging for 2024. You've made a bit of progress there, but it looks like the achieved price is quite a lot better than you did in the first quarter. So I wondered if you could just comment on conditions for hedging there for the second quarter, please, or what you did in the second quarter.

And then secondly, just on your balance sheet capacity. So I guess that's improved this quarter and I guess it would improve even more if you did end up selling Circular Solutions. And you mentioned that you were in the progress of thinking about hydrogen and nuclear. I wondered if there's any update on how long you would wait to make those decisions on investment in hydrogen and nuclear. It's sort of notable that Centrica, for instance, in the U.K. announced an increase in their buyback and that triggered a very significant move in their shares. And I wondered whether there is any point at which you would consider different uses of that cash should you [fail] (ph) with that hydrogen and nuclear investments on both as well?

[Markus Rauramo, Chief Executive Officer]

Okay. I can start with the hedging optimization, Tiina may add to that, and then the balance sheet I will comment the growth prospects. But starting with the hedging then, the difference between the spot and hedged prices comes from the optimization. So that continues to be something we have a good possibility to do with our flexible hydro asset. So depending on market volatility and depending where the absolute price levels are, that will then impact how much of optimization proceeds we can get.

With regards to the balance sheet, it is indeed so that the balance sheet is now strong. Liquidity is good. Maturity profile is flatter. And we're very happy about that because the world has been a very uncertain place, continues to be volatile. So, we'd rather err a little bit on the careful side to be sure that we can weather any upcoming storms in the market that could come.

But for the longer term, this is very much in the strategic heart of our business. We think that the Nordic offers very good prospects for energy-intensive industries; steel, chemicals, battery factories and so on. So we do expect that there will be significant growth in electricity demand. We are looking to invest in renewables in the short term. So these investments could come quicker. We have projects that are well advanced.

On hydrogen, the demand is clear, so there are industrial processes that will need hydrogen. The question there is that at the scale required, technologies have not been so proven so far compared to the maturity of the [res] (ph) business. So there's a lot of work to do still on that front on the FEED studies that we announced with SSAB, but we are very interested in helping our customers actually achieve their decarbonization goals.

Then for the nuclear, there's work to do so we are studying SMRs, we are studying conventional reactors and the different aspects of those. We will then talk about the results of our feasibility study once we are ready with that next year. So we'll talk about the findings.

I do think that the energy system as such needs all the aspects. It will need a lot of clean megawatt hours from renewables, but they're intermittent so then baseload is needed and flexibility is needed as well and we are interested in providing all three.

Maybe Tiina, if there's something you want to add on the hedging and the achieved power price.

[Tiina Tuomela, Chief Financial Officer]

Yes. So the achieved power price in second quarter indeed was very good. As Markus mentioned, the physical optimization still remained very, very good level. I think what is remarkable that if we look at the spot price, so spot price more than halved. So it was nearly €100 per megawatt hour a year ago and now less than €50. So it also shows that the hedge price there was really well managed. Then what it comes to the 2024, I think that this is our systematic in a way increase the hedge position and has shown the result for 2024 very good, increasing the hedge ratio and the price and we will continue on that path.

[Operator]

The next question comes from Vincent Ayral from JPMorgan. Please go ahead.

[Vincent Ayral, JPMorgan]

So coming back a bit on capital allocation. So not talking about hydrogen and nuclear, but enquiring a bit regarding the possibility of potentially buying some of the Uniper assets in Scandinavia that were to be put on sale. So what's your view there? Would you be interested given you already have operations in some of these reactors or riverbeds? And do you think it is something likely to present as an opportunity in the coming 12 months or what is overall your view on that one?

Second and quick question is regarding the Circular Solutions. So you've seen margin pressure and basically some clients leaving your contract there due to the hedging. How long will this situation last for you? And what should we basically assume going forward? So basically when does this normalize would be my question?

[Markus Rauramo, Chief Executive Officer]

Okay. Hi, Vincent, thanks for the questions. So first about the capital allocation and Uniper. So, as you may remember from the past, we have the right of first offer if Uniper were to put these Swedish assets for sale consisting of indeed nuclear and hydro. And these are in the core of our strategy and businesses, so if such assets would become available, we would normally look at that in normal course of business. Then it's a question of what would be the price and terms and conditions of such a possibility.

The thing I have heard so far with regards to Uniper is that in their strategic update, they have said that these businesses are important for Uniper strategically. So I'm not aware of any activity from the Uniper side that these assets would be coming to the market. But if they were, we would surely look at them.

Then, on the Consumer Solutions margin pressure, indeed there was switching from higher cost contracts whether these are regularly resetting or then fixed one-year, two-year contracts. And we can see the challenge that our customers are facing if they have had contracts with €0.25, €0.30, even €0.40 or over per kilowatt hour fixed contracts. So people are then changing away from these contracts. They may be changing addresses or so on or contracts are being changed for various reasons.

I'm not surprised with such high prices when these contracts have been made and now prices being much lower. So I wouldn't be surprised in the long run if we would see extremely high prices that this kind of phenomenon would repeat itself. At least to some extent, we would be even better prepared than we are today. So we would continue to develop contract types that are better suited for the customers' needs so that we wouldn't have this challenge or the customers wouldn't have this challenge.

The other part is that we will continue to develop our hedging for the contract. So we need to find also ways to hedge that possibility that the customers have certain possibility to change these contracts. So we need to find matching hedging products, which will not be easy, but we are developing that all the time.

So, I would not expect in these market conditions that such a phenomenon would repeat itself to the extent today. So I look back at last year, I think we saw the profit levels of about €90 million comparable operating profit for Consumer Solutions. That I think is representative more of what Consumer Solutions can do in normal market conditions. Not forecasting what it could be in the future, but I think that's representative of the organization's capability.

[Vincent Ayral, JPMorgan]

Just a follow-up on that one regarding the timeline of normalization, because that was the specific question there. So these clients have moved away, and they seem to have an optionality to move away from these contracts. So do you have an idea of how long this could last until the contract renewal? So potentially some level of visibility on the normalization timeline, should we expect another three months, six months before these normalize? And when you have a normalization, will you just remove this type of optionality, because you have to commit on the supply side and you've just been squeezed and now out against? So just coming back to get further precedent there.

[Markus Rauramo, Chief Executive Officer]

It's honestly hard to say that how many months would this phenomena still continue, that I cannot exactly say. But I would say that the impact now is the result of the extremely high prices that we experienced last year and last winter. So people were really considering when prices for consumers were at €0.30 or €0.40 per kilowatt hour that do they take the risk of spot prices going even higher and being really squeezed or do they fix some certainty.

Then for the development of the products, this is truly something we need to think about. We need to have products that both help our customers to deal with their energy needs, but are also manageable so that they create the margins we need to run a profitable successful business where we can also deliver good service. So we are developing on both fronts.

There is some optionality, all of that we cannot and even don't want to remove. But then we need to have such products which are hedgeable so that we can be competitive for the customers. This is not -- this solution at the moment is not ideal as we can see from the results. It's not good for the consumer, it's not good for us either, but coming from very unusual conditions also.

[Operator]

The next question comes from Deepa Venkateswaran from Bernstein. Please go ahead.

[Deepa Venkateswaran, Bernstein]

I had two questions. I think the first one is could you talk a bit more about how you've managed to optimize and use the flexibility of your hydro given that you also had flooding and so on and the spot prices have been weak? So if you could talk about that and maybe at a later occasion maybe do a deep dive on this topic given that I think it's underappreciated by the market?

And the second question is on the heat project in Espoo that you announced in June. Could you maybe explain what's the revenue model underpinning those investments? Is it -- I know it's to replace your coal, but can we model some incremental revenues from those investments or how should we think about that particular €225 million investment to '27? Yes, those are my two questions.

[Markus Rauramo, Chief Executive Officer]

Okay. Hello, Deepa, thank you for the questions. I can start with Espoo, and Tiina, if you want to comment on the optimization as you know that business extremely well. So the idea behind the Espoo Clean Heat project is that we have the district heating system for the Espoo area and we have good visibility into what our customers are paying for the heat. So the pricing is stable and it does not change very frequently.

So the question for us is that how can we in a low emission and competitive way provide that heat. And historically, the way to do it has been to combine heat and power, so it's been biomass fired in the history, gas-fired, also some coal-fired capacities. So the idea for us is that we move over to actually utilizing waste heat from various sources; shopping centers, hospitals, all kinds of different real estate and processes thereby basically electrifying the system.

And the idea now with the Microsoft cooperation is that Microsoft is building big data centers in Espoo, Kirkkonummi and Vihti and they produce -- of course they use a lot of electricity, produce a lot of excess heat. And this will be the world's largest heat offtake project actually. And this will take the cost of the procured heat down compared to for example producing with solid fuels. So price will be lower, this will be CO2 free and then also Microsoft gets some income actually for the excess heat that they are producing. So cost down, CO2 footprint down, will be completely coal-free very quickly. In Espoo, we still have some left there. And then by 2030 we will be totally net zero with carbon overall in our system, that is our target, but the coal-free in Espoo much faster.

I hope that gives an idea of what is happening there.

[Deepa Venkateswaran, Bernstein]

Sure. Do you have any carbon pricing included in the heat? So is that another saving? Do you have to pay carbon for the heat generation?

[Markus Rauramo, Chief Executive Officer]

If there has been CO2 content, yes. So if there is CO2 in the fuels, yes. So this will be definitely a saving. Of course historically, we know where the CO2 emission prices were and where fossil fuel prices were. So historically, fossil fuels have been very competitive. We started already 10-year plus ago to shift very determinedly into biomass and then into heat offtake. So the long-term idea is that we're not incinerating anything, but really using the electrification of the society and taking then waste heat and utilizing that, circulating that through the district heating systems.

[Deepa Venkateswaran, Bernstein]

Okay. Thank you.

[Markus Rauramo, Chief Executive Officer]

And Tiina, on the optimization of hydro.

[Tiina Tuomela, Chief Financial Officer]

Yes, hydro optimization. So we have said that hydro optimization usually is €1 to €3 per megawatt hour, and of course the optimization potential is really related with the volatility in the market. And last year was extremely volatile, which at the same time in a way gave us opportunity to maximize the profit. This year, the volatility has been lower, so clearly what we see that it is also impacting and those kind returns were not possible, but still above the average.

I think the capability of our people I think it is to optimize the, in a way, seasonal where we, in a way, allocate the reservoir levels in the seasonal level and then now more and more is coming granular between the quarters and now even the daily balances. So, this is something what we have done for the long time and our people, in a way, constantly are on the pulse where to and how to in a safe way operate the hydro plant.

[Operator]

The next question comes from Artem Beletski from SEB. Please go ahead.

[Artem Beletski, SEB]

I actually have two to be asked. So the first one is just continuing on the discussion regarding optimization premium. As power prices have been normalizing, you are still able to generate above so to say historical levels premium on that front. Is it fair to say that this kind of €1 to €3 guidance is not valid anymore even if power prices go back to historical levels given the fact that, for example, share of renewables in the system is increasing and it increases volatility?

And the second question what I had was relating to Circular Solutions business that is put under strategic review. Could you maybe provide some further color on business performance? It appears to be struggling to some extent. So what are key reasons behind it and how do you see it in coming quarters so to speak? So should situation be improving due to some aspects?

[Markus Rauramo, Chief Executive Officer]

Okay. I can start with Circular solutions and again maybe I ask Tiina to continue to take the optimization part. So Circular Solutions, the background and strategic logic is quite clear. If we go back several years then we had multiple expansion opportunities and Circular Solutions business and recycling business was one of those and that was in a business environment where there was hardly any growth foreseeable in the Nordic market and electrification was not on its way.

Now when we look at our strategy, our geographical focus and where we could deploy capital in significant amounts and actually work with our customers. We see massive growth opportunity in electrification and decarbonization. And that's why our strategic focus is on renewables, it is on potentially new baseload, potentially on hydrogen. But this provides us massive opportunities and we have a big pipeline of customers who are interested in discussing long-term PPAs with us.

The Circular Solutions business is doing about €70 million EBITDA, the main part being the recycling and waste solutions. So compared to the original expectations that we had when we did acquisitions in the space, from my point of view, these expectations have been well fulfilled and we have developed actually new business areas also like battery recycling, we have expanded in plastics recycling, we are in the Bio2x solutions. In this business, we have the turbines and generators business. So, there are several avenues that provide very interesting opportunities in this space.

With regards to the strategic review itself, there are no foregone conclusions yet what that outcome would be. So we are looking at how would this business best fulfill its potential and what would be the good future for this business. So, we will come back to this when we are going forward then with the strategic review.

And then back to the optimization, Tiina.

[Tiina Tuomela, Chief Financial Officer]

Thank you. So the physical optimization so there is a direct link to the volatility of the market. And as more renewables are coming to the market, so you could assume that there is more potential to do that. But of course what is the constant level, it remains to be seen. But in general, I think hydro asset in general in this market environment is very valuable and therefore we are also developing maybe the short term so the batteries or the technical solution that the hydro can really flex and take those opportunities. But what comes to the new guidance, so we need to see a bit longer how the market goes forward.

[Operator]

The next question comes from James Brand from Deutsche Bank. Please go ahead.

[James Brand, Deutsche Bank]

Thanks for the presentation. I'm a bit quirky because I've got a cold, so excuse that. I had a few questions actually on optimization again. Don't want to overdo it on that topic, but it's clearly kind of a big focus area. So firstly, I was just trying to understand a bit better Q2. So in Q2, you've told us that the spot price is €44.5. It looked like the hedge price was just over €50 given that you obviously told us what the hedge price was previously and what it is for the rest of the year now and you achieved €57.5. So, it looks like your optimization is potentially very material in the order of kind of €8 or so on the achieved price. Is there anything else going on there or does that sound reasonably sensible as a way to think about it?

And then secondly, you made a comment in your discussion in the results release about achieved price. You said the SE2 area price difference had no impact on the achieved power price. So I was just wondering why that was?

And then thirdly, you talked about the flexibility of the hydro. Quite a bit of your hydros run-of-river. So I was wondering whether there's any way you could just quantify for us how much of your hydro generation is flexible in the sense that you could hold production back from one day to the next?

[Markus Rauramo, Chief Executive Officer]

Okay. So if I start with the optimization and flexibility and run-of-river versus reservoir, Tiina's area of expertise, but I think your logic is correct that there was nothing else, nothing special there and overall we try to keep things very clean and simple on the hedging and optimization front. But it is so that with these price levels and this volatility, the historical €1 to €3, that was in a very different market environment. But I think this is an area that going forward we will need to open this up more that what is the value of the flexibility in a market which we expect to be more volatile.

Take example Finland, now I think renewables is something at the level of 6 gigawatts or the like and in Finland overall there is hydro capacity of about 4 gigawatts. So things are pretty well working today. But if renewables multiply by 3 or 4 or 5, then the whole question about flexibility will become -- it will get different magnitude. So, we will discuss this, but also this is an issue that needs to be discussed on EU level and Nordic level and regulation overall and what kind of an energy system do we think we will need.

Then on the how much is flexible and how much is not, if you want to, Tiina, comment on that?

[Tiina Tuomela, Chief Financial Officer]

So basically our hydro we could say that maybe one-third is very flexible, one-third semi flexible and one-third run-of-river. But of course we are all the time developing and it's very difficult to say the exact value. But roughly half, if we will say so, has already now very good flexibility.

Then I think the question about the price area two. So that related last year when the system price versus the price area two really differed a lot and this year this kind of distortion was not that visible. So it was slightly down, but basically all the area prices were closer together. And last year the challenge was that if the hedging was done with the system price and then you sold to the area prices so there was a negative impact to the achieved power price. But this year, this was not the case.

[Operator]

The next question comes from Louis Boujard from ODDO BHF. Please go ahead.

[Louis Boujard, ODDO BHF]

I will come back on two topics maybe to try to get a bit more detail on this notably regarding, first of all, Circular Solutions strategic assessment. Maybe my first question would be on this topic to try to understand better why do you put it into strategic assessment. I have the feeling that in the beginning of the year you made some acquisition and development that are linked to the battery recycling systems. At the same time, you've seem with €70 million of EBITDA to get to relatively good critical mass here. And also it looks like according to Other Operation performance that probably currently on a [indiscernible] point of view, the performance is not that good. So why is it a good time now to go to the potential strategic assessment, which could mean a disposal of these assets?

And this question is linked to the next one because at the meantime, we have the feeling that on a net debt point of view, you are of course pretty clear. You have a very good cash flow generation, no short-term issue on a liquidity point of view and you have also a relatively limited CapEx plan in the relatively short term. So, is it really needed to do this kind of disposals? Because if we look at currently the prospect that you have in the longer term, we understand the nuclear that could be potentially an option for growth, hydrogen that could be also an option but it looks a bit far away. We understand as well in the answer that you provided that for the time being the options of Uniper and Scandinavian assets are also pretty unlikely at least in the very short term. So, why don't you want to start to speed up a little bit more your organic growth pattern at this point in time? Do you need to acquire any developer in order to be more aggressive into the traditional wind and photovoltaic battery systems in the Nordic area or can you do it on your own on an organic basis? This is my second question.

[Markus Rauramo, Chief Executive Officer]

Okay. Thank you, Louis, for the questions. So the background for the strategic review is again strategic focus. So really deciding what are the areas we are focusing on and then if something is not in the core of the strategy like we indicated already with the strategy update, then we look at what would be the best way to develop these businesses going forward, how do we make sure that these businesses fulfill their best possible potential. So this is what we are doing now.

The businesses are in good shape. They have good growth prospects in various areas. But like we indicated, our strategic focus is on the electrification, helping our customers with their decarbonization, growth in renewables, growth potentially in baseload and hydrogen. So this is about the continuous focusing of strategy and then finding the best possible parts for every business, whether they are part or not of our business portfolio.

Then for the renewables and what are the growth prospects there, so one aspect at least we need to take into account there is that typically a lot of the value is created in the development phase of renewables. And this is the approach we have taken so far. So, we are developing from site identification, from wind or solar radiation measurements, doing the land contracts ourselves, making PPAs with various parties. So starting from the very beginning of these processes.

And with this, we have developed already historically multiple gigawatts of solar and wind capacities and today we have at different stages of development also several gigawatts of wind and solar development. And then the question is that these potential investments, they have to meet our financial criteria. And if they do, then we will invest. And obviously as you can all see, we have also the balance sheet capacity today to make investments, but we will only do it if they are profitable.

And then for the developers, if we were to look at development companies, then I'd rather say that they should be early stage development because if they're very far developed, then typically the premiums would start to be high and thereby also the expected returns lower as we have seen in the market.

[Operator]

The next question comes from Sam Arie from UBS. Please go ahead.

[Sam Arie, UBS]

Markus, I was going to say I know you had some timeout earlier this year so I can also just say welcome back. It's good to have you back and of course we hope everything is 100% good with you. Then on to my questions and I think probably two questions at this point. We've been through lots of the detail with the Q&A so far, which has been very helpful. But Markus, one thing that I haven't picked up on and perhaps I missed some detail at the AGM. But can you just confirm for us if the Board has now renewed your contract as CEO and should we expect you to stay in the CEO seat for the next few years, or are we still waiting for the Chairman and Board to make a decision there? Apologies if that's been announced already, but I'm not sure I picked it up anywhere.

And then secondly, I guess we're probably, as I said, certainly at the end of the call. But I just wondered if we could take a few minutes to think about just more broadly performance of the share price this year, which has been very weak and obviously at least in my view seems to reflect the uncertainty people have about the commodity environment and general macro factors and where this all goes next. I suppose from our side, we were hoping that when you finally got out of Uniper, got out of the Russian assets, had the new strategy, explained the new dividend policy that there would be some kind of clearing effect there, some recovery in the shares. But you did all those things earlier this year and there has been no recovery effect, things have kind of got worse. So it seems that the Street is now looking at the business as sort of 80% generation and merely a pure commodity play applying a discount to reflect that. So what I'm interested in and to make sure there's a clear question. Can you just spend a minute to share your thoughts about how this plays out going forward? And if you see any way you can change the way the market thinks about the company now in the sort of post Uniper, post Russia phase, or if essentially the shares are going to be just tied to the power price for the foreseeable future?

[Markus Rauramo, Chief Executive Officer]

Okay. Hi, Sam, thank you for the questions. So thanks first of all for the nice words. So I was actually working remotely because of the treatment I had for three weeks so that was it. And actually with everything that was going on, I was really working remotely throughout that whole period. But thank you for noting that and very happy to have been in the office already for a long time.

Then with regards to the CEO contract, so actually in the Finnish context, any contracts, anybody of us, we do not have time limited contracts. So these are always for the time being and then it's up to the Board to decide if they are satisfied with the interaction and performance -- interaction with and performance of the management. So this evaluation happens on a continuous basis. And I would say that from my point of view, we are working very well and very closely with our Board and I interact with our Chairman on a very regular basis. So everything that we discussed here, we have discussed at length with our Board, most recently of course yesterday, but very good relationship from my point of view.

Then on the share price of course we follow the markets and we follow the share price. That's not something per se that we would start to comment. But what we focus on is our strategy and our strategy execution. And like I said earlier, the Nordic backdrop for an energy utility is very good. And our portfolio is CO2-free, flexible, really enabling our customers to run their businesses successfully and very competitive by the way. So, we are really well positioned to help our customers today and the Nordic backdrop is very strong for growth in energy-intensive industries. And we would like to think that we are very well positioned actually to grow in renewables, to grow in baseload and to potentially grow in hydrogen as well. So this is our focus, staying cost competitive, being able to create a growth pipeline.

What else we have observed is the inflation volatility, geopolitical turbulence that has been in the market. So just generally speaking and of course you know all these things, but this is what we at least pay attention to. But despite all this, I think the Nordic backdrop, the drive to curb climate change and thereby electrification and decarbonization are very positive strong trends for us.

[Sam Arie, UBS]

And also Markus, just to be clear, we're very pleased to see you continuing in your role and there was no negative connotation to my question. So I think and also I pick up our conversations, also support for you personally. So we wish you good luck with everything that you just laid out.

[Markus Rauramo, Chief Executive Officer]

Thank you very much for that. And I would say also credit to our great team and the newly appointed FLT, also the former and earlier members of the team. So we have seen the performance in the turbulent markets and we see the drive to develop this growth pipeline and good performance. So I feel very energized and I think we have a great team in the company. So very good spirit.

[Operator]

The next question comes from Olavi Kaskisaari from Alma Media Kauppalehti. Please go ahead.

[Olavi Kaskisaari, Alma Media Kauppalehti]

[Foreign Language]

[Markus Rauramo, Chief Executive Officer]

[Foreign Language] So Olavi may ask in Finnish or English. I said Finnish is okay. But once he asks, I will do a short English summary of the question also.

[Olavi Kaskisaari, Alma Media Kauppalehti]

I'll just do it in English.

[Markus Rauramo, Chief Executive Officer]

Okay.

[Olavi Kaskisaari, Alma Media Kauppalehti]

Could you just go a bit over on the possible investments in Sweden on the timeline and also on the magnitude? Essentially you have around €7 billion in capital right now. What would be a round amount that you would be comfortable of spending on the Swedish investments?

[Markus Rauramo, Chief Executive Officer]

Okay. So of our business, about half and half are in -- of the electricity generation; little bit more than 50% is in Sweden, little bit less than 50% in Finland. So we know the Swedish market really well. We are a large hydro and nuclear producer and we have also been developing renewables. So in the short term it would be natural that we would make renewable investments.

And then the nuclear feasibility study is actually addressing potential to grow in nuclear both in Sweden and in Finland. So this is a possibility that we are looking at and this feasibility study should be ready next year.

Then for the hydrogen part for the decarbonization and electrification of industries, for example steel making and chemicals, hydrogen would play an important part and this is something we are interested in looking at in the whole of the Nordics. So Sweden for us is a very core market and we have invested a lot in that market and continue to look at it with high interest.

[Olavi Kaskisaari, Alma Media Kauppalehti]

Would you still comment on like the magnitude of the investments? What kind of sums are we actually talking about? What would you be willing to commit to new investments in Sweden?

[Markus Rauramo, Chief Executive Officer]

So overall we have said that during the years '23 to '25, we have growth CapEx potential of €1.5 billion if we have good projects that fulfill our financial criteria. We haven't given geographical guidance on which markets that would happen in. So that depends then on the business potential, but we have not defined that how much would go into any geographical area.

[Ingela Ulfves, Head of Investor Relations]

Okay. So with this question from Olavi, we don't have any further questions now. So thank you all for your interest and for your questions and for your participation here with us today. And on behalf of Fortum, we wish you all a nice rest of the day. Thank you.

[Markus Rauramo, Chief Executive Officer]

Thank you.

[Tiina Tuomela, Chief Financial Officer]

Thank you.