Analysis: Fortum is about to hit your wallet

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The company is facing massive write-downs, writes Iltaleh's Mika Koskinen.

Analysis: Fortum will soon be in your wallet

Fortum is in the worst crisis in its history. Outi Jä[email protected] 16.7.2022 at 15:13

It is very likely that Fortum will have to rely on government crisis financing in the near future. Fortum's equity has shrunk significantly in a short time, but the heaviest blows are yet to come.

The company can hardly record losses and write-downs in equity without increasing equity. Then you need a lot of money, and a lot of it.

The main options are a share issue or capital loan. The share issue would hardly be of interest to anyone other than the state, which owns 50.8 percent of Fortum. A capital loan is therefore more likely, but from an investor's point of view it would be a bad option in the sense that it would stifle the dividend stream.

Fortum's shareholders' equity was still 12.95 billion euros at the end of 2020.

At the end of 2021, Fortum's owners' equity had fallen to 12.1 billion euros. The drop was mainly due to changes in the fair value of derivatives protecting the future cash flows of Fortum's German subsidiary Uniper.

At the end of the first quarter of 2022, Fortum's owners' equity had already fallen to 8.0 billion euros due to write-downs in Uniper and Russia.

Now the market is eagerly waiting for Uniper's and Fortum's interim reports. They will come in early August. At least from Uniper, which makes a shocking daily loss of around 50 million euros, harsh profit figures are expected.

The value of Uniper's shares – of which Fortum owns 78 percent – in Fortum's balance sheet is 6.5 billion euros. Today, the market value of Fortum's Uniper ownership is only 2.71 billion euros. The separation must be written down at some point. Such an arrangement from Germany is unlikely to lead to Uniper's share price recovering significantly in the near future.

Both Fortum and Uniper have announced that they are working to get rid of their Russian businesses. The value of Fortum's business operations in Russia is 5.5 billion euros.

The layout is a salesperson's nightmare. Who believes that Putin will let Fortum and Uniper out of Russia at or above book value?

And that's not all.

In January, Fortum granted Uniper internal group financing of up to 8 billion euros under normal market conditions. The financing arrangement consists of a shareholder loan and the parent company's guarantee. Are the loan collateral in order? More write-downs will probably also come from this financing arrangement.

Fortum's balance sheet (March 31, 2022) had short-term liabilities of EUR 146.89 billion, of which EUR 117.2 billion were derivatives.

At the end of March, Fortum's balance sheet had short-term interest-bearing debt of EUR 7.8 billion and long-term interest-bearing loan of EUR 7.0 billion. Liquid assets were 6.4 billion euros.

What's worse, Fortum has already sold almost all assets outside of its core business, such as the Nordic electricity grids. It invested the resulting billions in Uniper, which is now destroying Fortum's balance sheet.

It seems clear that Fortum's equity will be too small simply because the Uniper shares would be recorded at the current value. Now their value, valued at the stock exchange rate, would require a write-down of almost 4 billion euros, in which case shareholders' equity would drop to around 4 billion euros.

Uniper's equity is in even weaker oxygen.

In March, S&P Global Ratings placed the credit ratings of Fortum and Uniper on Credit Watch Negative. Fitch kept Fortum's long-term rating unchanged, which is BBB with a stable outlook.

Fortum tries tooth and nail to secure an investment grade credit rating of at least BBB level. However, one can well ask how long it will be possible under the current conditions.

The consequence of lowering the credit ratings would be that Fortum's loans would turn into junk loans and the interest rates on the loans would rise to new levels.

Fortum and the stock exchange price recovered slightly on Friday after investment bank Goldman Sachs raised Uniper's recommendation to hold level from the previous sell level.

However, the rise of a good couple of percent is little consolation for Fortum's shareholders, of which there are many in Finland. According to the Stock Exchange Foundation, at the end of March Fortum had more than 189,000 Finnish private owners, in which number it was the fourth largest national stock.

Fortum's stock exchange price has fallen from 26.99 euros at the end of last year to 11.68 euros. The company's market value, i.e. the total sum of all shares, is only 10.37 billion euros.

This is how the party leaders took a stand on the state company Fortum's Uniper problems at Pori's Suomi-arena in June this year. IL-TVTuppurainen: no additional costs for taxpayers from Uniper's crisis on 19.7. 16:21 EU and Azerbaijan agree on energy – alternatives to Russian natural gas 19.7. 17:19 Riikka Purra: Parliament and ministers to work because of the Uniper mess – “Ministers Marin, Saarikko, Lintilä and Tuppurainen coming forward” 18.7. 13:26 Perspective: Fortum closed its eyes to the Russian risk and now the company is in crisis 14.7. 16:56

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