Fortum Oyj

OMXH:FORTUM

Earnings Call Transcript 2021-Q3

[Ingela Ulfves]

Good morning, everyone, and welcome to our joint webcasted news conference on Fortum's third quarter 2021 results. This event is being recorded, and a replay will be available on our website after this event. My name is Ingela Ulfves. And with me here in the studio today are our CEO Markus Rauramo and our CFO Bernhard Gunther, who together will present our third quarter and 9 months figures. After the presentation, we will be ready to take questions from the teleconference.So with this, I now hand over to Markus to start. Please go ahead.

[Markus Heikki Erdem Rauramo, President & CEO]

Thank you very much, Ingela, and good morning also on my behalf. Welcome to our 9-month 2021 results call. After I first look on the headline performance indicators, I will go through the market drivers that have played a substantial role this quarter with outstanding movements in commodity prices, especially in gas. I will link this with our overall operating performance. Additionally, I will talk about how we are progressing with implementing our strategy and my view on our operating environment, and then hand over to Bernhard to walk you through the numbers in more detail.I start with setting the frame looking at the headline KPIs. This quarter definitely was a rather extraordinary one, volatile characterized by market fundamentals. At the first glance, we have a very strong group performance across the headline KPIs in the third quarter and first 9 months. Starting from the balance sheet. Most importantly, our leverage, defined as financial net debt to comparable EBITDA, has come down tremendously. We have substantially worked to strengthen our balance sheet. Following the sale of our 50% stake in Stockholm Exergi and our district heating business in the Baltics, we are way below our set leverage target of below 2x, which is paving the way for growth in clean energy and gas as highlighted in our December Capital Markets Day.In Q3, earnings could take profit from the strong increases in energy commodity prices that are supported by the ongoing economic recovery and constrained supply, reaching multiyear and new record highs during Q3. Q3 profit was operationally strong across the segments. Nearly all business segments are up year-on-year and could take profit from this development. But let me also highlight that it has been a challenge for the whole organization to deal with this market development, especially when it comes to maintaining security of supply for our customers and to keep financial liquidity high in order to finance cash requirements for collaterals caused by rising prices.Those of you who have followed the Uniper call last week, know that Uniper took a series of financial and operational measures, including some group support to safely navigate through this situation. To me, it shows that we are, as a combined group, even stronger than before. Those measures are also reflected in the operating cash flow that tripled in the isolated quarter and doubled in the first 9 months. Bernhard will give you further insights in the financial section.Looking at the 9-month earnings figures, we see substantial increases despite the fact that there are some consolidation effects at play that must be considered. On one hand, Uniper was fully consolidated starting from Q2 last year and has been included as an associated company still in Q1 2020. Comparable EPS for the first 9 months 2020 also included the Q4 2019 Uniper associated result. On the other hand, there are phasing effects at work in the Uniper segment caused by the strong increase in carbon prices, shifting profit into the last quarter. Even taking this into account, it has been an extraordinary quarter. To sum it up, strong group performance in a volatile commodity market with an organization giving its best serving our customers, working closely with our suppliers and maintaining our strong financial flexibility.Now over to the market fundamentals. Despite recent concerns about rising inflation and uneven access to COVID-19 vaccines, global economic recovery continues with the IMF forecasting 5.9% growth in 2021 versus 3.1% contraction in 2020. Energy commodity prices soared in Q3, supported by ongoing economic recovery and global supply constraints, especially in gas.Higher demand combined with longer-term negative investment trends and long-term -- short-term supply constraints created an unprecedented price rally. In course of the autumn, the gas market moved from oversupply to tightness and uncertainties ahead of winter sent gas prices to unchartered territory. Initially driven by supply limitations, coal prices were soaring on advancing demand recovery and bullish energy commodity complex.At the same time, CO2 prices continue to be supported by Europe's climate ambition and the EU's Fit for 55 package. Consequently, gas, coal and carbon prices underpinned the very strong price development in the European power markets. Continental power prices have given a boost to Nordic's spot price, which was also supported by low precipitation and less wind available. The spread to German power prices, however, is nevertheless quite large, especially in forward prices. Besides strong wind build-out, internal transmission net and interconnector restrictions and bottlenecks had an impact on the widening spread.But next to the pure market fundamentals, there is another dimension, the high energy prices are a concern to end customers having problems to cope with their utility bills, which is ultimately increasing the risk for political interventions. Additionally, the high energy prices are a threat to the economic recovery.Looking at the forwards, the market expects the tight situation to continue throughout the winter but forwards are at the more moderate level after the winter. For the Nordic market, my read is that the situation is by far not so severe as in Continental Europe as power prices are still on more moderate levels and because gas is not playing that often an important role in the Nordics.The gas market is the backbone for the energy supply in Continental Europe. As this is a mature market and well supported by gas storages, it can normally digest major swings in supply or demand. In just 1 year, energy commodity markets did a 180-degree turn from oversupply to tightness. Last year's oversupply in gas was [ exacerbated ] by COVID-19. But first signs of economic recovery in late 2020, early 2021, combined with the cold last winter, lifted prices and future demand expectations, then demand recovery continued but supply continued to lag behind.In Q3, supply tightness took center stage, making upcoming winter increasingly uncertain and accelerated commodity prices. LNG supply has a major impact on EU gas prices. Europe acts as a global LNG market balancer, with imports rising strongly when the global LNG market is loose and vice versa.Strong demand in Asia and Latin America pulled volumes away from Europe this year, leaving European LNG imports 23% and 26% lower compared to 2019 and 2020. The share of LNG in European gas supply decreased from 19% in 2019 to 16% in 2021. Additionally, the long-term trend of declining domestic production continues with the planned gradual ramp down in production, particularly in The Netherlands, further tightening European gas supply.Domestic production now contributes 18% of overall supply compared to 34% 10 years ago. Russian pipeline flows fell in 2020 in response to the oversupplied market and ramped up in 2021, although failing to reach 2019 levels. The share of Russian pipeline gas remains unchanged at 31% between 2019 and 2021. Norwegian supply has been relatively stable, representing about 25% of supply. Norwegian pipeline flows to Europe were affected by heavier-than-usual maintenance this year.Looking at the gas storage filling levels, the tighter supply picture is also reflected in comparably low storage inventories. But please note that Uniper storage physical filling levels are at 95% at quarter end, and therefore, close to prior year's level and around 20 percentage points above market average, showing how serious we are about security of supply for our customers. But there is strong increase -- the strong increase in gas prices also shows that security of supply is core, that it is not for free and that it belongs back on the European agenda. How this translates into earnings is shown on the segment split, which I will now go to.Q3 is normally seasonally a weak quarter. Looking at the isolated quarter, the overview of the comparable operating profit on a divisional level shows clearly that the year-on-year deviation is determined by our 2 biggest segments: Generation and Uniper, especially the gas business. The main effect in the isolated quarter comes from Uniper segment's global commodities gas business that was significantly above previous year. Additionally, generation and also City Solutions show a strong uplift based on good operational performance and market fundamentals. Russia and Consumer Solutions were netting out despite stronger underlying performance. Bernhard will give further details in his section.The overview of the 9-month comparable operating profit on a divisional level shows, in essence, again, 3 things. Nearly all segments have been contributing positively year-on-year. Uniper is the main driver for the result improvement following a strong first and third quarter, but also based on the highlighted full consolidation in Q2 2020.Generation and City Solutions show a strong uplift based on strong underlying performance. What the picture does not show is that the Russian division posted a stronger underlying performance with higher prices and volumes. To sum it up, I'm very satisfied with the performance across the group.Before I hand over to Bernhard, let me give you a brief overview on where we are with our strategy execution. With our strategy, we are securing a fast and reliable transition to a carbon-neutral economy by providing customers and societies with clean energy and sustainable solutions. We have defined our 4 building blocks in our joint strategy: number one, transform our own operations to carbon neutral; two, strengthen and grow in CO2-free power production; third, to leverage our strong position in gas to enable the energy transition; and fourth, partner with industrial and infrastructure customers.So how are we progressing with all of this? First, we are moving fast on our decarbonization ambitions. In Russia, we have been progressing to discontinue the use of coal in Fortum Russia by the end of 2022. In Q3, we closed the divestment of the Argayash coal-fired CHP that is still needed for security of supply for the region. And we will, in the next step, switch the fuel of the Chelyabinsk CHP-2 unit from coal to gas.Last time at this stage, I highlighted that we have been able to announce the accelerated closure of almost 40% of our coal-fired capacity -- generation capacity in Europe within less than 1 year. Today, I'm happy to say that we closed the group's lignite chapter in Germany with the closing of the divestment of Uniper's Schkopau lignite plant. This is another major step on our way to reduce our carbon emissions in Europe by 50% until end of this decade.Gas will play a critical role in the energy transition. The decarbonization of gas will be a key element to decarbonize the energy and coupling sectors. With our gas business, we are well positioned to ensure reliable and flexible gas-fired power generation to enable increasing the share of renewables in the system.Uniper has a strong position in gas midstream in Europe, including procurement, storage, trading and sales. We want to build on this position and secure increasingly clean supply of gas for heat, power and industrial processes. Natural gas will be gradually replaced with clean hydrogen. Uniper takes major steps in building a substantial hydrogen portfolio.Second, we are ramping up on renewable growth. We want to drive profitable growth without compromising on Fortum's dividend and financial strength. Fortum has been a front runner in creating clean energy generation for decades. We recently won a major share in the latest Russian wind auction to build 1.4 gigawatts of wind with our joint venture partner, Rusnano, for 2025, 2027. We secured 15 years of CSA-backed contracts exceeding our hurdle rate of weighted average cost of capital plus 100 basis points.We are also progressing with our existing 1.8 gigawatt of existing projects, 1.3 gigawatts are in operation or under construction and 500 megawatts still under development.When it comes to renewables projects outside Russia, I can say that things are moving in the right direction, but we will not compromise on our value creation targets.Third, we strengthened our balance sheet substantially. In third quarter, we closed the divestments of our 50% ownership in Stockholm Exergi and the sale of Baltic district heating, contributing altogether proceeds of EUR 3.6 billion.With these successful divestments, we have yet again demonstrated that we are constantly creating value for our shareholders and that we deliver on our strategy and our priority of maintaining a financially strong group.Our leverage of currently 0.6x financial net debt to comparable EBITDA is clearly inside our target of below 2x, underpinning our credit rating of BBB flat with stable outlook. We have good access to capital and capital markets with our liquid funds of EUR 6.2 billion and undrawn credit facilities of EUR 3.7 billion at the end of Q3.When it comes to how we will redeploy this capital, let me briefly reiterate what I have said last time at this stage. We are looking for a balanced growth, that is the triangle based on earnings power with stable and over time increasing dividend and a stable investment-grade rating of at least BBB flat, that is necessary in our capital-intensive industry, having to secure access to low-cost debt. All those elements should mutually support each other and not have one of these corners dominate.After the successful strengthening of the balance sheet, the question is where to best deploy our capital. This will be growth in clean energy and gas. Having said that, I want to address some topics regarding Uniper on the next slide. Uniper has proven to be a valuable addition to the Fortum Group. The earnings development in recent years has been strong following the recovery of commodity prices, and Uniper has demonstrated its ability to embrace change in sync with market dynamics.We are progressing on our One Team's initiatives with determined steps. A joint organization has been established at Fortum's Generation segment for the Nordic hydro and physical trading optimization with 400 employees. The new organization will become effective in the first quarter of next year.We're also combining our forces under Uniper in developing One Team's for renewables and hydrogen. This is taking shape. Joint teams have been staffed and the business is being developed. As we are achieving promising initial results from cooperation so far, we have further extended this work across Fortum's and Uniper's businesses and functions.One of the latest examples is that we have joined forces in nuclear decommissioning services, which is one of the obvious collaboration fields, creating value for both companies in the combined group. So as experience has shown, working together as 1 group is making us stronger, faster, more efficient and more profitable.In order to drive efficient execution of our joint strategy and value creation, we have also explored possibilities for further harmonization across the group beyond cooperation, for example, on cultural harmonization. This is a comprehensive process which will take its own time. We entered the process with no predefined outcome and we'll take all aspects into account.As many of you have been asking about our ownership and dividend, let me also comment on those. As you know, we have no restriction nor obligation to buy shares in Uniper. At the end of 2020, our ownership was around 76%. Since July this year, after the share price increased above the EUR 30, EUR 31 level, we have not been buying any more.On the dividends, I can confirm that Fortum Group's dividend policy is intact. Regarding Uniper, it is still premature to discuss any dividend matters, but it is certainly prudent to carefully weigh the dividend against growth ambitions, financial position, cash flow and rating. The recent volatile market dynamics further enhance the need to carefully consider the matter.With this, I conclude my part and hand over to Bernhard for the financial section. Bernhard, please?

[Bernhard Gunther, Chief Financial Officer]

Yes. Thank you, Markus, and a warm welcome also from my side. As usual, I will start with a financial overview on our key comparables. As this quarter has been quite exceptional in terms of market price movements, I would additionally run through some reconciliations, how the market volatility has affected our balance sheet, P&L and cash flow. This will then be followed by the usual view on the segments, financial net debt and outlook. So starting with the key financial overview, summarizing some indicators on the comparable level.Let me begin with the obvious. What you see here is a substantial increase across all KPIs following market fundamentals. First, looking at the isolated Q3, in the 2 left columns, one would normally expect a slightly negative summer quarter as power generation is quite low, while costs are flat and operating cash flow tends to be low as well as we build up gas inventory over the summer for the winter season. But this quarter, we saw, as most of you know, extraordinary market fundamentals, providing us with opportunities to optimize our portfolio.Second, the 9-month figures are not quite comparable to the 2021's as they are affected by the consolidation of Uniper to the income statement from Q2 2020 onwards. Consequently, the LTM column on the very right is probably the best representative indicator for the Fortum Group. From there, one can see the current level of comparable EBITDA at EUR 3.6 billion, and this is somewhat above what I showed you in the previous quarters. The same applies to comparable EPS being at EUR 1.90 per share, in essence, driven by the improved market conditions.Our financial position has improved following the closing of a series of divestments that Markus mentioned before. Our credit metrics are rock solid with financial net debt to comparable EBITDA being at just 0.9x and accordingly, well below our target of below 2x. Depending on the market development and working capital movements in the Uniper segment, we might see some change towards year-end.Having said that, let me address what is not so obvious on this slide. The strong increase in market prices gave us, and especially our Uniper segment, major opportunities to optimize the portfolio. This had some unusual consequences. First, the strong increase in market prices did not only impact sales but it also impacts the fair value of our financial derivatives and as a consequence -- or which are a consequence of our hedging and risk-mitigation activities. Those values went up by a factor of 10x, tripling our balance sheet to EUR 164 billion, and that's compared to year-end 2020.Second, what you can see on our balance sheet, as most of our hedges are placed as traded markets, the collateral and margining requirements we have to post have gone up substantially. Uniper faced significant variation margin calls in the third quarter. Uniper worked closely with their business as well as their financing partners to make sure that those calls and the resulting liquidity risks were properly managed.In order to achieve this in the most efficient way, Uniper relied on a broad set of tools, including commercial papers, bank loans, intra-group loans and ultimately, also operational measures within the commodities portfolio. The very high operating cash flow that you see in our numbers in the third quarter also reflects those measures undertaken by Uniper.Third, when it comes to the reported figures, the picture looks different to the comparable figures as those changes in fair values are also reflected in the reported numbers. I will guide you through this on the next slide. What you see here is a reconciliation of the 9-month comparable operating profit all the way down to reported net profit. At first glance, this waterfall makes easily transparent that there are, in essence, 2 drivers for the mismatch in comparable and reporting -- reported figures, and those are both Q3-related. None of the drivers is new to you, but the magnitude of some is unprecedented.First, there's a positive impact, that's the capital gains of the closing of the divestments of our 50% stake in Stockholm Exergi and of the Baltic district heating of, in total, EUR 2.6 billion. As these are one-offs, we adjust for those.Second, another item affecting comparability is the change in values of derivatives that are used for hedging future cash flow, mainly in the Uniper segment where hedge accounting is not applied. Other Fortum segments are applying hedge accounting and thus, the volatility in valuation is balanced versus equity there. As commodity prices have surged, the hedge deals have significantly decreased in value. The loss from hedge instrument valuation amounts to roughly EUR 7 billion for Uniper stand-alone. However, the corresponding value of Uniper's underlying assets, like power plants or inventories, is not reflected here as their book values are kept at historic cost under IFRS. This mismatch is only temporary and will resolve over time as the positions settle. Therefore, it is expected to revert. Consequently, at this stage, 9 months operating profit is negative with EUR 2.6 billion. Including associates and finance cost, the 9-month profit before income tax is negative at EUR 2.4 billion. Please note, as Stockholm Exergi has been divested, the associated result will be correspondingly lower going forward.Finance costs include interest expense on our loans, but also the accrued interest income from Nord Stream 2 for Uniper. Income tax is significantly positive as a consequence of the recorded fair value losses.Now over to cash flow on Slide #13. The strong increase in market prices brought funding requirements for collateral and margining to extreme levels, as most of our hedges are typically placed at traded markets. Hedges are necessary to reduce the price risk and to have predictable cash flow and earnings over time. A certain volatility in margining receivables and liabilities is, therefore, part of this and normal course of business. With commodity prices and their volatilities reaching unprecedented levels, the corresponding margining requirements for the done hedges have gone up substantially, especially Uniper faced significant variations in their margin calls over the last weeks. This is reflected in the change in margin receivables, in the net cash from investing activities and in the change in margin liabilities in the net cash from financing activities.Uniper worked closely with their business as well as their financing partners to make sure that those calls and the resulting liquidity risks were properly managed. In order to achieve this in the most efficient way, Uniper relied on a broad set of tools. This includes commercial papers and bank loans reflected in the change in short-term liabilities, bringing financing cash flow up, but also operational measures within the commodities portfolio having a positive impact on the change in working capital and ultimately on the operating cash flow. Consequently, the very high operating cash flow that you see in our numbers in the third quarter does also reflect those measures undertaken by Uniper. Therefore, please do not extrapolate the figure to the full year. And ultimately, Fortum was always able to provide intra-group loans to help through this extreme situation. For me, this is another example that a close collaboration between Fortum and Uniper makes us even stronger as well as more profitable and shows the advantage of being one group.Now over to the segments. Let's start with Generation. Comparable operating profit in Q3 increased by an outstanding 80%. This is the highest third quarter generation result since 2012. The result improvement was supported by the higher achieved power price of EUR 43.7 per megawatt hour with very successful physical optimization and higher spot price. While the system spot price increased up to EUR 68.3 per megawatt hour, the fairly high hedge levels and the hedge price below the level of the spot price dampened the effect on the achieved price. Higher hydro and nuclear volumes also contributed positively to the improvement.Let's now have a look at the development of the hydro situation on the next slide. In Q3, Nordic hydro reservoirs have been below average levels following low precipitation from the summer that continued in Q3 and led to a significant deficit in water reservoirs of 18 terawatt hours below long-term average. And please remember that the year started with a significant reservoir surplus of around 20 terawatt hours following a very wet 2020. The trend of low precipitation and low wind speeds has persisted broadly throughout the first 9 months of 2021, and we are still below average reservoir level. This development in context of high Continental European power prices had a major influence on Nordic spot prices, with high volatility considering that new interconnectors to Germany and the U.K. have been taken in use during the last 12 months. Looking at the forward curve, the development has been quite volatile. Forwards saw strong gains until mid-September, but change in weather forecast dropped prices back to the August level.Now coming to our Russia division. Russia is showing a solid underlying performance, especially on the isolated Q3. Power generation volumes increased due to higher consumption following the economic recovery from the COVID-19 pandemic. Comparable operating profit for Q3 was up 13% to EUR 45 million. The effect of the change in Russian ruble exchange rate was plus EUR 4 million for the isolated quarter and the net effect of the changes in CSA payments was slightly negative. Three units were entering the 4-year period of higher CSA payments, while the CSA period ended for the Tyumen CHP-1 and Chelyabinsk CHP-3. Additionally, we saw some correction to the CSA prices due to lower bond yields.On the 9 months, the comparable operating profit improved marginally. We saw higher power prices, while there was a slight negative effect from the CSA. And please recall that there was a positive effect from the solar transaction with RDIF in Q1. The 9-month ruble effect was minus EUR 19 million. So in ruble terms, there was a clear improvement in our Russian business.Now to City Solutions. Our comparable operating profit was negative in Q3, but improved clearly compared to the previous year following higher power prices. Almost all business areas improved from the previous year, especially in the areas of waste and metal recycling businesses. There was a slight positive result effect of the structural changes from the divestment of the district heating business in the Baltics as a result of district heating and cooling business typically is negative in the third quarter.Operating profit was affected by the tax exempt capital gains on the sale of the 50% ownership in Stockholm Exergi and the sale of the district heating business in the Baltics. As you know, this was very beneficial for the group's debt factor.On the 9-month numbers, heat sales volumes increased by 6% and power sales volumes increased significantly, mainly supported by a different production mix in the Finnish heat business in the first quarter and the commissioning of a new solar power plant in India. Comparable operating profit increased tenfold as a result of higher heat sales volumes in all heating areas, higher power prices and higher Norwegian heat prices due to the price link between heat and power prices there. We are happy to see an improvement in our City Solutions segment after a tough year 2020 that was both affected by mild weather and low prices and also by the COVID pandemic.Now coming to Consumer Solutions. In Consumer Solutions, we, after a comparable EBITDA improvement and 15 consecutive quarters, are now facing a challenging market environment with negative impacts on the rapidly increasing -- of the rapidly increasing electricity market prices combined with tough competition in the Nordic market, what ultimately resulted in a reduction in number of electricity customers during the third quarter. This could not be offset by the positive impact from value-added services, resulting in a comparable operating profit decrease by 28% quarter-on-quarter.On the 9-month, comparable operating profit is nearly flat, mainly driven by the lower number of customers and some negative impact of the rapidly increasing electricity market prices during the third quarter. This was partially compensated by increased unit margins coming from active development and improvement of our service offerings. The strategic review of the business announced in December 2020 is ongoing.And now last but not least to Uniper. As Uniper published their results last week, we can state some obvious general comments. Again, please note that Uniper has been included as associate in Q1 2020, giving some distortions when it comes to the first 9-month comparison. This holds true not only for the shown earnings but also for the volumes.Overall, I want to highlight that Uniper's underlying performance has been very solid. While looking at Q3 2021, we see an extraordinary positive effect from the trading business with Uniper upgrading the full year guidance. Earnings at the European generation surpassed the prior year figure. The business benefited above all from the commissioning of Datteln 4 coal-fired power plant in late May 2020 and the return to commercial operations of Irsching 4 and 5 gas-fired generating units. They also benefited from higher income from the U.K. capacity markets but suffered from the unavailability of Maasvlakte 3.A significant year-on-year earnings increase at Global Commodities is principally attributable to the gas business benefiting from a volatile rising prices in the current financial year. Additionally, higher earnings from the international portfolio have been supportive this year as well. Earnings at Uniper's Russian power generation were at the prior year level.And now over to financial net debt. Here, you find the changes in our financial net debt and main items of our cash flow during the first 9 months of 2021, showing 2 major items impacting financial net debt. First, the highlighted cash flow from operating activities that includes partly cash flow management activities to secure financial flexibility in the rising commodity complex that we saw this quarter. And second, the divestments made. Additionally, you'll see investments made of above EUR 1.1 billion and dividends paid in similar size to Fortum shareholders or minorities.With regards to the leverage target, our financial net debt to comparable EBITDA of below 0, we currently stand at 0.9%, underlining our rock solid credit metrics. We have currently EUR 11.7 billion of gross debt and average interest rate for this whole loan portfolio is 1.3%. And please bear in mind that Uniper has also some interest income from their operations.Now looking at the loan maturity profile, this might appear a bit front-loaded but please note that the increase in short-term liabilities is linked to our cash reserves as we wanted to increase our financial flexibility in this extreme commodity market situation. And you see, our liquidity position is very solid with liquid funds of approximately EUR 6.2 billion. Additionally, since the 30th of September, we have wrote over EUR 1.3 billion from the year '21 to '22, maturities in '21 also include loans of some EUR 660 million with no contractual due date.Now finally, coming to the outlook. Our successful hedging has continued, creating predictability and visibility. And you can see also here, again, the Uniper Nordic hedging numbers below the Fortum generation area.Regarding CapEx for 2021, we repeat what we've already communicated. Our total group CapEx is estimated to be EUR 1.4 billion for the whole year with maintenance around EUR 700 million. And please bear in mind that there may be always a bit of volatility between the years as we have not provided guidance for the normalized maintenance CapEx going forward.With this, I conclude our presentation, and we are now ready to start the Q&A session. Ingela, over to you.

[Ingela Ulfves]

Thank you so much, Bernhard, and thank you also, Markus, for your presentation. So as Bernhard said, we are now ready to take your questions, so we can begin the Q&A session. Moderator, please start.

[Operator]

[Operator Instructions] Our first question comes from the line of Vincent Ayral of JPMorgan.

[Vincent Jean Michel Ayral, Analyst]

I'll have actually a question regarding the comment you made on security of supply. We've seen very high volatility in the commodity markets, and you've raised the point of security of supply, renewables are not necessarily contributing and interconnectors held to a very limited expense. So when you look at this, what is the solution? Is it indeed CCGT and nuclear? And importantly, on the Nordic [ core ] side, do you think that changes to the market design are needed? You have, at the moment, merchants and [ outrun ] assets and developing on contracted renewables, so you have a conundrum in your equity story on what are you pushing for when you talk to the commission? So that's question number one.And related to this, it's the taxonomy. So you met with the EU Commissioner Mairead McGuinness to talk and [indiscernible] discussed. But [indiscernible] by the nuclear picking gas [indiscernible] his counsel and how do you think it's heading essentially on these 2 topics before the end of the year?

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. Thank you, Vincent. And the line started to get a bit bad in the end. But I got the first question about security of supply. I can well answer that. On taxonomy, you started to fade away. So apologies, and please then repeat if I didn't get that right. But if I start with the security of supply, I would start from that angle, that what the markets need is security of supply, affordable energy and clean energy. And I would say that we're in a good position to provide that today with our capacities. And we can see that we can answer the midterm and even ad hoc needs of security supply in the various markets we are operating. And I take on that ad hoc point that we see in some areas that the TSOs and regulators have to fix things quickly. We can respond to that. We can also provide midterm solutions with rotating assets and flexible gas as we are doing today.What we are encouraging the regulators to do is to build a predictable and long-term and visible path how we want the energy transition to happen. But I would say so that from our point of view, we can adapt to the different setups, then it's up to politicians and regulators, how do they find the societal agreement? Which type of energy system do you want to have? We will work in both.On the specific questions on, for example, CCGTs, it looks like, if you take the prospective German government, for example, increased ambitions in renewables, increased ambitions in coal phaseout will obviously result in the need for flexible gas that they have also vocally mentioned. And that's a good segue to the EU taxonomy. So yes, we indeed met with the commissioner. And we have been visiting Brussels starting with politicians locally and on EU level. And our key point is that we think that transitional gas and nuclear should be part of the taxonomy-aligned generation forms because they will be needed for the renewables penetration to happen.If we exclude transitional gas, make it difficult to finance, it will reduce the penetration of renewables. If we exclude nuclear, that will lead to -- automatically to less maintenance investments, less lifetime extensions, and that will impact the half of the current CO2-free generation, and that's why we are advocating both of these. We had good discussions with the commissioner and just encouraged the commission to come up with the delegated act and the taxonomy proposal in a fast -- with a fast timetable. Good discussions.

[Vincent Jean Michel Ayral, Analyst]

And just to follow up about [indiscernible] and the timetable for evolution of the taxonomy. We've seen some -- in some press articles potentially in coming weeks, so you talked about timetable. And could you clarify that there? And regarding predictable path for market design. Some politicians are actually asking for a change of design with potentially a long-term contract for 2 to 3 generation, that would be including probably nuclear and hydro. How do you see this?

[Markus Heikki Erdem Rauramo, President & CEO]

With regards to the data, the only thing I know is what the commission itself has said, that they would want to come out with -- their target is to come out with the proposal, I think, on this side of the year. So I understand that they're really working hard to get -- to table a proposal. That's -- we should ask the commissioner and commission about what they can do.With regards to how to overall think about the different production forms, what we like very much is the European approach on emission trading and that the Fit for 55 package includes more sectors. It has more ambitious linear reduction factor. This would be -- this is a good way. We have seen that the sectors in ETS have achieved their reduction targets. Of course, they will achieve their reduction targets because you're not allowed to emit more than what the ETS cap allows. We think this is a good example for now on the back of the ongoing COP26 discussions. This is -- this would be a model that has worked now, for example, for countries like Brazil, China, India, Russia, the U.S. Comprehensive emission trading systems, technology-neutrality, the efficient capital allocation would result, in our opinion, in low-emission reliable and low-cost energy systems.

[Operator]

[Operator Instructions] Our next question comes from the line of Lueder Schumacher of Societe Generale.

[Lueder Schumacher, Equity Analyst]

Lueder here. Three questions on my side. The first one is on Nordic power prices. On a relative basis, they seem to be artificially cheap compared to whatever you want, German power prices, coal generation costs. And I know you don't usually comment on calendar forwards because it's just an opinion. But what strikes me is spot prices because they always reflect the reality. Now there's normally a very strong correlation between Nordic day-ahead prices and Oslo day-ahead prices, which makes perfect sense as the amount of hydro in the system is determining prices.However, in Q3, this correlation has completely broken down. So we see Oslo and Norwegian spot prices still very high, which would be in line with the deficit we are seeing in hydro, reservoir levels. You mentioned earlier the 18 terawatt hours. But Nordic spot prices have come back a lot since October. I would be interested to hear your view on what's going on there. As I said, it's very long, very strong correlation that held for a long time and this has completely broken down in Q3 and afterwards.Next 2 questions are a lot more simple. I mean, Bernhard, thank you very much for taking us through all the adjusted items. Could you also tell us where you actually see adjusted net debt at year-end with all the numerous nonoperating results impacting the numbers and potentially reversing in Q4? So the year-end adjusted net debt level would be interesting.Then lastly, on the Russian wind auction, you did give us the IRR that you secured there. Can you also give us the exact level of the CSA payments you secured in that auction and also confirm that you actually have locked in all the component cost for the project already?

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. Maybe I'll let Bernhard start with the easy question of where the net debt will be at the end of Q4.

[Bernhard Gunther, Chief Financial Officer]

Yes. Lueder, this question does not come as a complete surprise to us, probably our answer won't either. So as you know, we don't guide net debt and especially after this volatile quarter in terms not just earnings volatility, but also the cash flow volatility, which we commented where we had also shifts, especially on the Uniper global commodity side between quarters. We just said we should -- you should not extrapolate the Q3 developments 1:1 to the full year. So sorry for that, but that's as much as we can say. So...

[Lueder Schumacher, Equity Analyst]

But Markus said it was a very easy question.

[Bernhard Gunther, Chief Financial Officer]

Yes. Well, it was easy because the answer was maybe a bit predictable. So -- and sorry to disappoint you there, but I think, if anything, the third quarter events were one more or less in terms of the -- how volatile our business can be and, of course, also how important it is to be a strong player.

[Markus Heikki Erdem Rauramo, President & CEO]

Yes. And obviously, this easy part is a little bit tongue in cheek as you all understand. But I think still, of course, we try to be as helpful as possible and the components and elements that are impacting those we know. And then the tricky part is that where will be the markets move during the quarter, what is the operational performance and so on. I think the key -- the really big key drivers are the capital rotation elements and then the short-term impacts from the hedging and resulting cash flows. These will be probably volatile in the quarter and working capital impacts.With regards to the first question about the Nordic power prices, if I start from the high level. So what is then driving the actual pricing is the supply-demand balance, the production costs, the Nordic -- the total Nordic production portfolio, if we take everything, looks very different compared to the Continental European one. So we do see, if you look at the different, both achieved prices and realized prices and short-term forward prices, we fully see the impact of the cost of -- marginal cost of condensing on the continent.And on the other hand nuclear hydro, wind, combined heat and power, both for industrial and district heating on the Nordic side. So very different kind of production portfolios leading to very different kind of bidding into the market. And then we know well that the -- if we take the big picture, Nordic versus Continent, the transmission lines, transmission capacity restrictions, these then ultimately will settle what the various area prices are.The same then goes for the Nordics. So there are certain price areas and how they're made up. You have the split within the countries. And between those areas, we have the same phenomena as we would have between the Nordics and the continent in the big picture. So depending on what the local dynamics are, that will result in the area prices and area forwards.On the -- you mentioned the decoupling between Oslo and Nordic, that I can't really comment, but I'm thinking from the bigger picture. I don't know if you, Bernhard, have a view on that.

[Bernhard Gunther, Chief Financial Officer]

Well, it's certainly some very recent trend. And as Markus said, I'm also not the expert on these market analytics. But what we have observed since the beginning of '21 is that there is a growing disconnect between the Norwegian, especially the Oslo price areas and the Swedish price areas. So also related with the additional interconnector capacities that theoretically, of course, should then spill over across the whole Nordic copper plate.And we see basically that there seem to be congestion effects. And as far as I'm aware also, Svenska kraftnät has conceded those. And there -- sometimes there seems to be a kind of curtailing of capacity between east and west flows, between Sweden and Norway. And this is another factor to this overall fragmentation of the Nordic copper plate that we have been observing in recent years.Maybe just for your final question, Lueder, on the Russian wind auction, so the CSAs there for new capacity are RUB 2,600 going up to RUB 4,200 per megawatt hour. That's the inflation adjustment.

[Markus Heikki Erdem Rauramo, President & CEO]

And on the -- you had the question about the comfort on the supply. So yes, that would be normal for us that when we place a bid, either we have secured contracts or, let's say, for this type of a situation where we talk about 2025, '27 volumes, we have good comfort that we get supplies at the levels which then correspond to the mentioned project returns with these prices. So yes, we have comfort that we can make these returns.One thing I'd note and actually, they are -- so our hurdle rate is to [ add ] plus 100 basis points and projects can return more than that, which is also the case here that we are targeting more and the WACC takes the country risk into account. What is then positive with the prices that Bernhard mentioned, I think this was a real milestone in Russia because now for Russian industries and industries -- international industries operating in Russia, this means affordable competitive green energy.And you have seen that we have signed many contracts already for our wind power in Russia, Shell, Baker Hughes, Magnitogorsk, InBev, Sberbank, et cetera. And now in our recent trips to Russia, we are getting increasing and high interest actually to sign on green electricity. So I'm very happy about our ability also to speed up the decarbonization in Russia and helping the Russian industries who are suppliers to European customers and European and global industries green their business as well.

[Operator]

Our next question comes from the line of Iiris Theman of Carnegie.

[Iiris Theman, Financial Analyst]

I have a couple of questions, please. So firstly, you reported a strong growth in hydropower volumes year-over-year despite much lower hydro reservoirs in Sweden and Finland. So what was the reason for this? And what is the outlook for Q4 in terms of hydropower volumes?Then secondly, how did your optimization premium included in your ASP calculation developing generation if we compare to ForEx up for Q2? And can you remind us what is the level where your optimization premium has been on average in history?And thirdly, I think in the Q2 call, you talked about a bit higher cost base for Q3 in Generation. So how did these materialize? And what do you expect in terms of costs for Q4 in Generation?

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. I can start with a couple of questions. The last question, I didn't really catch so maybe we -- if you can repeat that question, please?

[Iiris Theman, Financial Analyst]

Yes. I think in the Q2 presentation, you talked about a bit higher cost base for Q3 in Generation, so how did this materialize?

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. If I start with the strong growth in hydro, how would it match with the generally hydro reservoirs being lower, so if you look at the whole Nordics, then the lion's share of Nordic reservoirs actually is Norway. So much, much bigger than Sweden, and Sweden is bigger than Finland. So what the overall situation in the Nordic hydro reservoir is not something that necessarily is the case for any individual producer. So our situation with our reservoirs may be different.And with regards to Q4 hydro volumes, this is the same situation that there is a deficit compared to the long-term average, which has been narrowing a bit now in the recent weeks, but then our situations may be different. So we are not giving a forecast on the volume for the current quarter. The optimization premium, that actually developed well. And the physical and financial, historically, it's been, we've said, a couple of euros, EUR 2 to EUR 3. And I would say that, that again, we are in the higher end of that optimization area. It's worked very well. And there are 2 factors: one is the volatility of prices, and the other one is that are our assets available? Are they flexible? Can we utilize the volatility when the situation is there? And we have been able to do that.With regards to generation cost base, I don't know, Bernhard, if you have...

[Bernhard Gunther, Chief Financial Officer]

Yes. I think, if I understood you correctly, so the line is unfortunately not too good. It's -- you're referring to the Q2 remarks we made on Generation cost and what we said there is because it was a relevant driver in the quarter-on-quarter comparison in Q2, and we explained that a significant part of it is of a kind of nonstructural, nonrecurring nature, and this is something we just can confirm. So it's not that you have increasing cost base as a major driver of explanation of quarter-on-quarter results in Generation currently.

[Operator]

Our next question comes from the line of Peter Bisztyga of Bank of America.

[Peter Andrew Bisztyga, Managing Director]

Yes. So 3 questions for me. Firstly, your EUR 6 billion of liquid funds, I guess, would normally be very inefficient use of capital in what's still a negative rate environment. Is the reality now that you need that level of liquidity to manage commodity price volatility, particularly given that you now own Uniper. So how should we think about that, please?Following on from that, I'm not sure I understand the situation with Uniper dividend. Are you suggesting that Uniper has some sort of liquidity issue and so it's better to retain the cash there? Or is there some other reason why you don't want them to pay you a dividend?And then my third question is your decision to stop buying Uniper shares in July suggests that you kind of think it's overvalued now. Can we take that to mean that we should not expect a minority buyout as long as the share price remains elevated?

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. I'll let Bernhard take the liquidity question. But with regards to Uniper dividend, this is not yet the time to have to actually opine on that, neither the company to present or shareholder to take a view on that. I noted the elements that are important. Longer-term question, how much returns on capital? How much capital into growth? And indeed, the current liquidity situation, the current volatility is something that the company needs to take into account. With regards to the -- to my comment about not buying beyond the range of EUR 30, EUR 31, that's just a factual statement. What we have done, I'm not taking any view on whether we would be buying or not buying shares. For us, it is an economical consideration. The earlier comment about the DPLTA and squeeze out, that's just a comment that we have said that until the end of this year, we will not do those, but that has not been restricting us from buying shares. And the comment about the timing and the price is a factual statement.

[Bernhard Gunther, Chief Financial Officer]

Yes. Maybe then answering your first question, Peter, on the EUR 6 billion liquid funds. Yes, the liquidity swings have been massive for big commodity players, yes. So if you just take as a hypothetical example, somebody who might have a portfolio of 100-terawatt hours forward-sold gas, yes, and then the price goes up by EUR 10 per megawatt, that's EUR 1 billion, yes? And we have seen price movements, as you know well, in gas, which were far larger than EUR 10 per megawatt hour. So of course, it's -- in the long run, this is inefficient but, of course, in the short run, we think this is prudent liquidity management.

[Peter Andrew Bisztyga, Managing Director]

Can I just sort of maybe follow up on that, Bernhard? You've got very good liquidity because of the disposals that you've done. If you hadn't had that liquidity, would you just been able to rely on short-term loans, working capital facilities to fund that? Would there potentially be a problem over the last few months?

[Bernhard Gunther, Chief Financial Officer]

I think as we said, as a group as a whole, we have a pecking order of liquidity instruments, yes. And there are certain ones like your revolving credit facilities, which you would normally not draw without a reason. And there are others which you can easily tap into. And so we are in the comfortable situation, as you see from the numbers, that obviously we still had ample of water under the keel, but you also have heard that there were intra-group loans between Fortum and Uniper. So what I'm saying applies to the group as a whole.

[Operator]

Our next question comes from the line of James Brand of Deutsche Bank.

[James Brand, Research Analyst]

Just 2 questions from me. Firstly, on the net debt. I appreciate you don't want to give guidance for the full year, but there's some pretty unusual swings in net debt. And I was just wondering whether you can maybe comment on the influences on net debt at the 9-month stage, the new sorts or that you think will be temporary, whether they'll be temporary by year-end or not or whether they'll just be temporary at some point. It would be useful to have a bit more of an idea as to what might reverse the influence on the on the 9-month net debt.And then secondly, I was wondering whether you could share your views on biomass because it's a fuel that you don't really talk about, Uniper doesn't really talk about. There's obviously some debate out there as to whether biomass is really green or not. But in an environment where a lot of people are trying to get their heads around how we're going to be balancing energy systems, maybe a bit less relevant in the Nordics given you have a lot of balancing power anyway, but particularly pretty much all of the rest of Europe, how do we balance power markets in environments where we have lots and lots of very intermittent renewables? It seems like biomass is quite an interesting fuel. And obviously, in the Nordics, you've got a lot of trees. You've got experience yourself with biomass. Just kind of wondering what your views are on biomass and why we don't hear you talk about it more often.

[Markus Heikki Erdem Rauramo, President & CEO]

I could start with the biomass and if you take, Bernhard, take the net debt question. It's a good question actually. So if you look at the Nordic and Finnish energy mix, biomass plays a very big role. So it comes either directly in district heating, cogeneration of heat and power and also on the industrial side. So for example, modern pulp mills are huge factories that churn out power and pulp and other side products. So biomass in the Finnish context plays a very big role. And I think biomass should be definitely recognized as part of the fuel sources for different processes.Then looking at the European level, we talk about 5,000 terawatt hours of annual gas use, 3,000 terawatt hours of electricity use and a big need to electrify the society in order to reach the climate goals. And all the forecast I'm looking at are predicting that this comes through, first of all, massive phasing out of coal, lignite and partly nuclear, unfortunately. And then the energy amounts will be replaced mostly by renewables, solar and wind. And we talk about huge volumes. And then to balance that out for the flexibility, then gas would be the midterm supply of flexibility, gas-fired power generation.Not to forget that when we -- again, coming back to the taxonomy, gas is important, but nuclear is important to have in the taxonomy because out of the CO2-free power we have today, almost half is nuclear. So that will be needed as well regionally where biomass is available. Unlike in the Finnish context, it comes largely as a side product, whether we talk about sawing goods or pulp, then all the rest, the bark, lignin, et cetera. That doesn't translate into other byproducts, turns into energy, to power and heat, and tree branches, trunks, et cetera, are used in the -- typically in the district heating production. So whether it's totally applicable, absolutely. But in the big picture, the big really moving parts for Europe are renewables: gas, hydro and nuclear.

[Bernhard Gunther, Chief Financial Officer]

Yes. Maybe then briefly on your first question around net debt, I can maybe provide some helpful guidance on the various moving parts in this. So without giving a guidance on the net debt number. And I think the -- basically, the difficulty to predict net debt for year-end is that in operating -- or cash flow from operating activities, in this one component, you have both, well, an element, we do know, but we do not guide, which is the swings in the inventories and receivables and liabilities from the Global Commodities business, which this quarter were extraordinary and to some extent will have a swing back in following quarters, not just Q4. And the second element, of course, is the overall nature of the Global Commodities business, which on a quarter-by-quarter basis is not easy to forecast. Of course, Q4 normally is a stronger quarter than in a typical year Q2 and Q3 would be, but we have seen this year how fast this can change. So these are the moving parts. All the other component parts of the net debt equation or the waterfall you see on our Page 20 in the presentation, they are pretty stable, predictable and don't move wildly between the quarters. Of course, if there would be further divestments closed in Q3, this of course might also influence the divestment number.

[Operator]

Our next question comes from the line of Sam Arie of UBS.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

I'm kind of way down the order for questions, so -- I mean most of the topics we would want to ask about being covered, but perhaps I could just dig in for a little bit more detail on the situation with Uniper. And I think if you forgive me, there are sort of 3 questions I want to ask there and as follows: So I think, number one, apart from the sort of minor simplification benefits, which you've talked about before for the kind of potential deduplication of management governance reporting and so on, is there any other benefit you can see in having a domination agreement or in buying out the minorities at the moment? And for example, is there any large-scale restructuring decisions that you think are interesting but which would not be possible for you to implement under the current status quo? That's my first question.The second one, and maybe Bernhard, this is one a bit more for you. But given the possibility of co-investment now between Fortum and Uniper, share in the CapEx cost on different projects and intra-group loans, which you talked about today, is there actually any issue at this point around cash pooling between Fortum and Uniper? So I suppose what I'm saying is, from the Fortum point of view, does the level of dividend from Uniper actually matter very much to you in your financial planning? I'm not asking for guidance on what the Uniper dividend would be, obviously. But just wondering whether it makes a difference for you now what cash comes in from the Uniper dividend or whether you could just balance your financial needs with tweaking the rate at which Uniper coinvest in certain projects or the rate at which they pay back into company loans and so on?And then my sort of third question is, if there's no significant additional benefit for now and if cash pooling isn't an issue, just wondering if you've considered extending the moratorium that you had on further action with Uniper, which expires at the end of this year. And I wish that would be a way to provide the market with a bit more clarity about your plans.

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. Thanks. I think I'll take the first and third question and let Bernhard take the second question. With regards to what potential benefits could there be, well, we do have 2 listed companies. When we cooperate, we do have to deal with 2 different processes and reconciliation in between. So simplification sounds maybe simple and easy, but there is a lot of potential on that front with not having to have double processes. But we can well manage like we are today in the de facto group and people are making huge progress on the cooperation and on the one streams, which have been very successful.Would we extend our previous statements that we have said? This is what we have said for the time being. So I wouldn't go beyond what we have said earlier and the information we gave today.

[Bernhard Gunther, Chief Financial Officer]

Yes. So on this whole aspect of -- I think the gist of your question was about, well, does Fortum need the unit per dividend to -- for whatever Fortum needs on a group cash position, be it paying a dividend or else? No, we are not dependent on this. Short answer.

[Samuel James Hugo Arie, Managing Director and Research Analyst]

Interesting. Not dependent, but like is it an important factor for you? Or is it basically now offset by these other ways so you have flexibility, co-investment and then intra-group loans?

[Bernhard Gunther, Chief Financial Officer]

It's -- in that context, it's not an important factor.

[Operator]

Our next question comes from the line of Louis Boujard of ODDO BHF.

[Louis Boujard, Analyst]

First question on the generation business, maybe. I understand that in the Q3 part of the very good performance, that [ wonderful ] expectation anyway, is related also to better volumes, notably in nuclear on top of hydro and the capacity to catch some short-term price into the spot market. My question would be the following, notably on nuclear for next year, for instance. What would be the level of maintenance program? Is it already completely fixed? Or do you have latitude eventually, depending on the market evolutions? And would it be higher in terms of potential outage than at least here in 2021? Or eventually lower or relatively aligned, so that we can see if you have capacities to eventually keep on taking advantage of spot prices next year on these assets?The second question would be out of curiosity regarding the accounting treatment and notably for the fact that you cannot apply hedge accounting or you cannot apply hedge accounting on the positions you may have. In my understanding, part of the reason for it is according to a detail because of the fact that, eventually, the hedge might not be perfect. Is it indeed the reason for that? And my question also would be, if you were to make a full integration of Uniper, et cetera, would it mean that you might eventually have a new way to have more capacity to apply hedge accounting on these elements going forward?And one last question regarding Consumer Solutions, notably regarding the evolution that is under pressure for this quarter. Obviously, we understand that the current market condition is not the best one for these kind of assets. How do you see it evolving in the future, considering the pure volatility in the market and relatively high market prices? I'm not going to ask regarding your thinking on the position of this asset because you clearly stated that it is still open discussion on this point.

[Markus Heikki Erdem Rauramo, President & CEO]

Yes. I can start with a couple of questions. And the -- with regards to the nuclear maintenance, if we look at the long term, then we need to do maintenance and lifetime extension investments into the nuclear and the annual variation depends then on what kind of outages you have. I think our IR is happy to give the details that are announced and they are published a couple of years ahead in the Nordic core, what kind of outage days we have this year and next year. So maybe Ingela and team can give color on that later.With regards to the pressure on the consumer business, I think a kind of a secular pressure right now is the -- are the high and volatile prices. So that's something that has not happened, I mean, to this extent for some time. The other pressures, high competition, new type of entrants, new type of products, this is something we are, of course, familiar with and we have been very successful and we are well positioned to do good business in this area with our value-added products with the efficiencies we have gained with Hafslund. So I would say we are in a very strong position in the Consumer Solutions business and the volatility we now saw was something unprecedented. And I know that our customer service centers have been taking a lot of calls from concerned customers asking what happens to their invoices and so on. And also the corona had an impact on how we actually sell new contracts, so the type of shopping mall sales, sales on streets and so on. These were more difficult in corona times, and I assume that, that will eventually normalize.And I could let Bernhard answer this, but I will just shortly comment on the hedge accounting that what we try to do, and I'll let you take the technical part, but we try to exactly give the visibility through the adjusted or comparable EBIT numbers or comparable operating profit numbers. So you can do a lot of work on hedge accounting, but if you can give the same visibility with the comparable number, then I think that the whole point is to give a number that reflects the underlying business, and that's what we do there. Do you want to talk more about hedge accounting?

[Bernhard Gunther, Chief Financial Officer]

Well, let's ask back. I mean do you have further questions regarding this hedge accounting or is it answered?

[Louis Boujard, Analyst]

No, no. It's okay. You can -- we can -- I can go with later if you want.

[Operator]

Our next question comes from the line of Deepa Venkateswaran of Bernstein.

[Deepa Venkateswaran, Senior Analyst]

I had 2 questions. One on gas and basically the green taxonomy. So I think you've mentioned transitional gas. Would you mind clarifying what you mean by transitional gas? Is that just new gas plants that are hydrogen-ready? Or are you, in that definition, including all existing gas assets and so on?And second question for Bernhard. Sorry again to come back to the CFO and net debt. I mean, clearly, in the way the margin is being accounted for, the margin payments, et cetera, are not forming part of net debt, but all the optimization activities like the working capital, et cetera, is benefiting the net debt definition. So I just wanted to clarify, your cash flow from operations in this quarter has increased by EUR 2.3 billion, out of which EBITDA was close to EUR 600 million, and then you had working capital. What's the remainder? And presumably, all of this should unwind right? I mean the cash conversion should be more closer to normal. So could you just clarify that?

[Markus Heikki Erdem Rauramo, President & CEO]

Okay. I can start with the gas taxonomy. It's a really good question. Our point on the gas -- transitional gas inclusion in taxonomy is that we need flexible gas plants that are clean, gas-ready and that run low-running hours annually, but they provide the security of supply, and they provide the flexibility to match with the massive volumes of renewables that must come into the market. These systems cannot take the required amount of renewables if there isn't something that flexes. That's the point there. So, yes.

[Deepa Venkateswaran, Senior Analyst]

Is it more the H2-ready plans or something like because today's gas plants aren't really clean. So there has to be some new thing or I suppose in Germany, CCS is impossible. So does that, by definition, applies to new plants?

[Markus Heikki Erdem Rauramo, President & CEO]

Yes. The point is about -- my key point is about the new plants that are required for the transition to be possible. And of course, we are in continuous dialogue with the OEMs who are developing the turbines and engines and solutions for increasing the clean gas. But also we know realistically that we are some way until we get there. So this is a really big question for the society and for the politics, how to build this pathway. But honestly, I'm really concerned that if we make a taxonomy that becomes very binary and excludes the elements that are required to make the transition happen, we're not going to see the transition that we want.

[Bernhard Gunther, Chief Financial Officer]

Yes. So Deepa, to your question on net debt and, yes, operating cash flow, working capital, of course, you're right, the receivables and payables from margins are not part of the net debt equation. The cash flow is. It also -- and those parts of the cash flow, which are driven by operational measures, are part of this. So we think it is fair to represent it, but this is exactly why we added or attached the caveat that the cash flow for the third quarter is exceptionally strong because also business levers have been pulled to improve cash generation and liquidity. And therefore, the extrapolation is not that easy. So if you -- I think if you look at our table on Slide #13 or the even more comprehensive material in the interim report and compare '21 versus '20 and especially the 2 3rd quarters, you get quite a good feel for how much variability there can be out of these specific measures we have taken, and yes.

[Operator]

[Operator Instructions] Our next question comes from the line of Lueder Schumacher of Societe Generale.

[Lueder Schumacher, Equity Analyst]

Just a very quick follow-up on my side. Disposals, you haven't spoken about this yet, i.e., disposals still to come near yet so many book gains flowing in, in Q3. When can we look forward to the next lot of book gains? I would have thought Customer Solutions, it's not the best operating environment at the moment. So this might be slightly longer-term issue. But where are we on the remaining district heating assets? Are the sale processes that are well underway? And maybe can you give us any idea about the time line there?

[Markus Heikki Erdem Rauramo, President & CEO]

Yes. So these are not -- by definition, these are strategic reviews and not divestment processes. So we are assessing what would be the best strategic future for these assets, whether it's Consumer Solutions or Polish district heating business. And that's exactly what we are doing.With regards to the philosophy on why certain assets are under review. If you take area, our priority zone, our Baltic businesses, Stockholm Exergi, these were businesses where we had invested heavily, decarbonized the assets, optimized them. And we had done the majority of the work we can do. And then we started to think that could there be a different kind of ownership structure or future for these assets. We have many assets which have potential to be decarbonized. And there's a lot of work to do, a lot of work we can do add value, optimize. So I would just categorize assets in 2 different buckets.

[Operator]

And there are no further telephone questions at this time. Please go ahead, speakers.

[Ingela Ulfves]

Thank you so much, moderator, and thank you, everyone, for your questions. We do have some questions on the chat. But in order to be conscious of time because we are now already 1.5 hours into this, then what I suggest is that those questions, if you can redirect to us in the IR team, then we will come back to you on those. Most of them have been touched upon already. So in that sense, we are then happy to continue the discussion with you directly. But at this point then, we would thank everyone for your participation here today, and on behalf of Fortum, wish you all a very nice rest of the day. Thank you.

[Markus Heikki Erdem Rauramo, President & CEO]

Thank you very much. Have a safe and good day.

[Bernhard Gunther, Chief Financial Officer]

Bye-bye.

[Markus Heikki Erdem Rauramo, President & CEO]

Thank you.