fortum-oyj-fojcf-ceo-pekka-lundmark-on-q1-2019-results-8211-earnings-call-transcript

Fortum Oyj (FOJCF) CEO Pekka Lundmark on Q1 2019 Results – Earnings Call Transcript

Fortum Oyj (OTCPK:FOJCF) Q1 2019 Earnings Conference Call April 26, 2019 4:00 AM ET

Company Participants

Ingela Ulfves - VP of IR & Financial Communications

Mans Holmberg - Manager of IR & Financial Communications

Markus Rauramo - CFO

Pekka Lundmark - CEO

Conference Call Participants

Artem Beletsky - SEB

Sam Arie - UBS

Lueder Schumacher - SocGen

Deepa Venkateswaran - Bernstein

Peter Bisztyga - Bank of America Merrill Lynch

Vincent Ayral - JP Morgan

James Brand - Deutsche Bank

Lars Paulsson - Bloomberg News

Piotr Dzieciolowski - Citibank

Ingela Ulfves

Hello everybody. It's my pleasure to welcome you today both here in Espoo at our headquarters and also online to Fortum's joint webcasted news conference on our first quarter results. Please note that this event is being recorded and a replay will be available afterwards on our website. My name is Ingela Ulfves and with me here is also Mans and Rauno from our IR team. Our CEO, Pekka and CFO, Markus will present Fortum's Q1 numbers and performance, after which we will open up for questions and answers. You are also able to ask questions on our webcast chat. I now hand over to Pekka.

Pekka Lundmark

Thank you very much, Ingela. Good morning dear investors both here in Espoo and over the web, great to have you join us again this morning. We are, for the most part, pleased with the results of the first quarter. There was a lot of volatility on the market, but despite that volatility, the Nordic power crisis, the spot price -- system price was up 22% in the quarter and that's, of course, a very positive development for us. On the other hand, hydrology continued to be fairly dry, it improved during the quarter, but overall, our hydro volumes were low and that obviously then affected the results and took away much of the positive effects of the higher prices.

When we look at the earnings per share, which were €0.38 per share, it's worth noting that there were items affecting comparability both this year and last year and if those 2 are eliminated from the calculation, we are looking at an EPS improvement from €0.36 to €0.42 in the quarter. Cash flow in the quarter was extremely positive and we agreed to do it so that Markus will open up this a little bit more in detail in his part of the presentation that what element this strong improvement consists of. When it comes to Uniper, first of all, we now reported our share of Uniper's profit in our numbers that was €49 million. This was Uniper's last quarter of the year 2018.

So, as you remember, we are now reporting Uniper with one quarter time lag. We are pleased that we have now restarted discussions with Uniper. As you remember, in February, Uniper announced that they are now ready for a fresh start in our relationship. These discussions have proceeded well. We are working in multiple different work streams. However, we have agreed with Uniper that we do not comment the details of the content of the discussions. So that's why we will not open that more than this in this presentation today, but once again on the overall level, we are pleased with how things have proceeded.

When it comes to the upcoming Annual General Meeting and especially the motions proposed by some other shareholders, I want to clarify that we are not a party to these notions and we will today stick to the same policy as we have had for some time that we will not speculate on what we would do at the AGM regarding these or any other proposals that there might be presented at the AGM. Once again, overall pleased with how things have developed with Uniper. And then the last point on strategy implementation. We noted this initiative in our Capital Market Day in November last year where we said that operational excellence is a key focus in our strategy going forward.

We mentioned in today's report just to give you some scope of what the ambition level is that we are talking about an improvement potential of a few 10s of millions of euros. Technology will play an extremely important role, digitalization investments, IoT, new technologies for efficiency improvements, flexibility improvements, demand-supply balancing et cetera really represent a key element in this and once again, we will open up this a little bit more in detail when the time goes forward, but we currently believe that we are looking at a few 10s of millions of euros of potential. Here are some highlights of the news flow during the quarter. I will not go through all of this, I will highlight a couple of things that you see on this slide.

First of all, as you will have seen, we've launched a €2.5 billion bond in the quarter. Markus will also go a little bit more in details about this, but this was the largest bond ever issued in Finland and of course, the important thing for us is that this not only takes care of the refinancing needs, but it also lowers our total financing cost. So this was a very positive thing. Then an interesting perhaps detail from result point of view, but we did launch a pilot together with a group of 23 pioneering companies, which is the first of its kind in the world. It's a marketplace for carbon capture and removal and capture and storage for a period of time.

So for example, this initiative will offer certificates, which will create a market for wooden building elements which capture and store CO2 for actually a long period of time. This is a very important initiative when it comes to the need to not only reduce CO2 emissions, but also create market-based solutions for CO2 removals. And the third piece of news that I would like to highlight here is battery recycling. In our recycling and waste business, we have 2 key focus areas when it comes to recycling of materials. The first one, we have talked quite a lot about that is plastic recycling.

We are running a major plastic recycling refinery here in Finland with good potential when the world wants to recycle more and more plastic. Another mega trend obviously will be electric vehicles and now we launched actually a new technology and a new solution that increases the recyclability rate of electric vehicle batteries from 50% to 80%. Of course, this market is still very small today, but over the coming years and decades, it will grow into a market that is estimated to be worth potentially tens of billions of euros. We are clearly an early mover in this one, but we believe that we are also looking at some quite interesting technology based competitive advantages here that we are developing together with our technology partners, technology that is able to put back into circulation.

For example, cobalt, nickel and other scrap metals that there are in the electric vehicle battery. Moving on to hydrology, the first quarter started with the cold and dry weather, but then towards the end of the quarter or actually already in February turned to mild, wet and windy weather for 2 months, February and March. Hydro reservoirs improved during the quarter, so that they are now closer to the reference level than what they were in the beginning of the quarter. In the beginning of the quarter, the water reservoirs -- Nordic water reservoirs were actually 9 terawatt hours below the reference level. At the end of the first quarter, they were 3 terawatt hours below and that's also roughly the situation as we are speaking today.

At the end of the first quarter, the water levels were 5 terawatt hours above last year's level and this delta has actually now continued to increase a little bit. So currently, we are roughly 7 terawatt hours above last year's level and this is of course very interesting and important. We do not predict the weather from now on, so all we can look at is what the numbers are today, but as you have seen, we have had now quite some time a situation where our hydro production volumes have been very low and this of course is now slowly improving the situation. Fuel prices in Q1 were on a downward trend.

There were several factors behind this. First one is Chinese coal demand, which was weak. That affects coal prices obviously globally, but then, another thing which did affect these prices during the quarter was the low LNG demand in Asia, which created a major flow in of LNG into Europe which pushed down gas prices and that created a situation where actually the coal demand for power generation decreased. That supported coal to gas transition or switching in power generation and this then further actually pushed down the coal price. So it was an interesting quarter from this dynamics point of view and then when you add the carbon pricing development, which is quite strong, we do have an interesting situation in front of us.

The carbon price obviously is now supported by the market stability reserve that started in the beginning of 2019 and now in April actually, we have seen carbon prices -- CO2 prices that have been above €27. So these prices have held up very well despite the downward spiraling both coal and gas prices and this has clearly had a supporting element to the power prices. With the current gas and coal prices, this famous switching band from coal to gas is now roughly from €18 to €37 when we look at the EUA price and with a price of 27, we are somewhere in the middle of that band. So that means that we are now and we have now complete evidence of this also that we are seeing much more switching than last year.

Nordic power prices in Q1, they were clearly as I already mentioned, higher than a year ago. Spot price Q1 was 22% up from last year, €46.90 versus €38.60. This is explained by the increased thermal production costs due to just mentioned higher emission prices. However, during the quarter, the mild and windy weather and then as I also explained, decreasing fuel prices lowered the spot price towards the end of the quarter. And of course, the hydro situation has contributed to this development as well. We started the quarter with very, very dry hydrology and then there was gradual improvement and high inflows during the quarter or at least higher than earlier, which then pressed the price down a little bit during the quarter, but overall 20% -- 22% higher prices than a year ago and then the always interesting comparison between German and Nordic prices.

This was an interesting quarter because actually the spread was negative, i.e., the Nordic prices were higher than German prices, €6 higher and as you can see in this picture there were situations in Germany where actually the power price was negative due to very high wind production, but then going forward, the other graph that you have on this slide, you see the forward price for 2020, that spread has held up pretty well on the €10 level. The historical average in forward prices I believe is somewhere around €6 per megawatt hour. That's the [7-year] average that we are looking at, at the moment. Here just briefly the prices in graphical format, the spot price, Nordic, up 22% and then of course a very important and positive thing was that our achieved price in the quarter was plus 14%, €38.40.

On the Russian side plus 12% development in spot price in ruble terms, but then the costs of forex when we look at the achieved power price, which then also includes the capacity price and translate that into euros, we had slightly 1% lower achieved price than a year ago. And then a few brief comments on each division. Generation division, first, we had as already discussed a quarter which had good prices, but clearly lower hydro volumes and this difference was actually quite significant, 25% lower production volumes. This was one of the lowest first quarters in our history in terms of hydro volumes, but then on the other hand, the low hydro volumes were compensated by good operational performance and what I would especially like to highlight was the load factor in nuclear production, which was actually quite close to 100% in the quarter.

Another number that I would like to highlight in the generation business is the last 12 months comparable return on net assets, which you can see here, which is now at 11%. So despite low hydro production, we have a pretty efficient production slate and portfolio that is able to produce 11% return on net assets. City Solutions does not have the same return on assets as Generation. We have currently 5.5% return on net assets. As we have discussed also in our strategy, this is one of the most important goals that we have is to improve this. One of the key elements or key contributors to the improvement targets is the recycling and waste business, which I already mentioned through the developments in plastic recycling and then a little bit longer-term in EV battery recycling but overall in the division, we had a reasonably good quarter, 5% improvement in comparable operating profit.

The recycling and waste business result did improve. We are pleased with that improvement, but then on the other hand because of weather, the heat volumes were 10% lower than a year ago. So that ate up quite a lot of the improvement potential that otherwise would have been there, but we did have an EBITDA of €137 million compared to €131 million, but once again, we are not satisfied with the 5.5% return on net assets. Consumer Solutions had a good quarter, 53% improvement in comparable operating profit. The gradual improvement coming through the Hafslund integration now starts to be visible in the results.

What I do want to highlight though that more than half of this improvement, which was [EUR9 million] in the quarter in comparable operating profit had to do with market conditions that will not automatically repeat itself. This is of course typical to this business that you have a price development and then you have structural development of your electricity contract base and I just want to highlight that this was really good quarter from this development point of view, and you should not automatically extrapolate this year-over-year improvement in the first quarter to full year results. That's why we wanted to highlight that, yes, the result is improving, but some of this improvement that we saw in Q1 may not automatically repeat itself in the coming quarters, but overall, we are pleased with the development in this business.

And then, the last of the 4 divisions, Russia, we had in euro terms 5% lower comparable operating profit than last year. This was mainly because of forex. Forex impact was €8 million. We had €5 million lower result than last year. So in comparable currency terms, there would have been a €3 million improvement. One thing that did affect the results. This is actually overall a positive thing is that we did last year transfer our heat distribution business in Chelyabinsk fthrough a 50:50 owned joint venture Yustek and that changes slightly now this year the seasonality of our Russian development because we transferred outside of our balance sheet a business that had a positive result in Q1 and Q4 and a negative result in Q2 and Q3 because of the typical seasonality in heat business and this had a negative comparable effect compared to the last year's Q1 result.

On an annual level, the effect of this change is fairly close to neutral. Other than that, we are pleased with the Russian development. We have a higher contribution from the renewables generation, Nyagan 2, which was not in the last [4-year] up step of the CSA payments last year is now there, that is supporting the CSA payments for this quarter and overall other operational matters in Russia proceeding well as well. So despite the currency rate and the temporary effect from this heat transport network transfer, we are pleased with the quarter. And now I would ask Markus to continue.

Markus Rauramo

Thank you, Pekka. Good morning also on my behalf. Okay, I will recap the Q1 with the waterfall. So if we start from Generation, negative impact from volume, positive from price. Both very large items for Generation for the quarter. For City Solutions, recycling and waste solutions improved. I'm very happy about that. Heat volumes because of the temperatures down, but the same price impact positive for City Solutions. In Consumer Solutions, higher sales margins but also continuing value added service sales. So all in all we are very pleased with how things are proceeding for Consumer Solutions.

In Russia, I would say -- I would characterize it more like that operatively, things are all the time going to the right direction. The new units are contributing, renewables are contributing, CSA payments are delivering. The negative items were the €8 million impact by foreign exchange and then the profile change now when we don't have the key distribution business in Chelyabinsk, but that again as Pekka said will neutralize itself over the year. So this happens between the quarters, so operatively actually also Russia was in green. And then finally on Other, negatively impacted by the higher incentive costs, that was an item and the other one was then that we continue to invest in R&D and venturing.

So these 2 together made the delta to previous year. So all in all, €3 million better on comparable operating profit comparing to last year. Then to the key financials. First, I'll give an overview and then I'll go to the income statement and cash flow statement in more detail. First of all, sales up but this had as you can see it from EBITDA and comparable operating profit little impact. I'll come back to that in a bit more detail. Then we had the fair value changes of derivatives, which then made the difference between the comparable operating profit and operating profit. So operating profit down, but this was a fair valuation issue. Share of profits of associates and joint ventures up driven by Uniper, but also contribution from Forsmark and Oskarshamn associated companies.

And with this, profit before income tax down, but on a comparable basis if we clean out the items affecting comparability, instead of EPS going down, it would be actually up from €0.36 to €0.42. And then we did have as Pekka already pointed out very strong net cash flow from operating activities, both for Q1 and last 12 months and I will go through that in a bit more detail. So on the income statement side, we had both sales increases in Generation and Consumer Solutions. The external impact is mostly coming from Consumer Solutions. So we have some organizational changes, which are leading to those internal [sales] from Generation to other divisions.

So externally, the top line increase mostly from Consumer Solutions and then also we have the corresponding materials and services increases. Then the main item -- otherwise employee benefits, depreciation, amortization and other expenses stable in the quarter. Items affecting comparability negative and this is due to the fair value changes of non-hedge accounted financial instruments. This is partly relating to nowadays also to the what we call now proxy hedging and then, basically repeating what was already on the previous slide, share of profit of associates and joint ventures, main impact Uniper and also then the nuclear fund valuation from Forsmark and Oskarshamn.

Finance cost was negatively impacted by the prepayment of the €1.75 billion bridge loan. That was a [EUR13] million item. And then finally, income tax expense, lower following the development of the taxable profit. On the cash flow statement side, we start from EBITDA. That was slightly up and then realized FX gains and losses stable in this quarter, last year positive item due to the rolling of the internal loans. Paid financial cost and taxis actually both came down, both the financials and taxes meaning that we paid less in this quarter than the year before. And then we had a very strong positive item from the daily settlements of futures. Prices came down in the quarter and that has a positive impact on us. The opposite happened last year. So you can see that the swings are massive as we also pointed out in the end of the year.

So they can go both up and down and the delta is very big. Change in working capital was now negative €22 million, last year €109 million. We actually had a decrease in receivables, so positive item, but also a decrease in payables. So net was minus €22 million. Last year, we had a big increase in receivables. All together for the year, [EUR186] million which then explains the 2018 number. Capital expenditure, €150 million versus €133 million last year. And then I would just point out to acquisition of shares and divestments of shares actually the 2018 and LTM, there we have the acquisition of Uniper shares and then divestment of [indiscernible] and the successful the capital recycling of our India solar business, which contributed [EUR8] million to the numbers last year.

Then we have an interesting item, change in cash collaterals and restricted cash, positive €310 million and the main item there is that we now made an arrangement where we have a financial institution counter party who places bonds with NASDAQ as security and that release the cash back to us which shows here. That means that on our balance sheet, you can see then the our indebtedness towards the financial institution and corresponding receivable from NASDAQ, but here an impact of a part -- the biggest part of the impact of this €310 million came from this arrangement. So these are the main cash flow items. Then I go over to the key financial indicators.

So we continue our focus on maintaining our financial flexibility, balance sheet strength and ensuring good access to capital. During Q1, we refinanced altogether €3.1 billion, the biggest part of that was the €2.5 billion bond. We issued 4, 7 and 10-year debt with average coupon of around 1.4% and part of that was swapped into floating rate. So the actual cost for us is even lower than that. We did an extensive roadshow, met over [60] investors and finally had way more than 200 investors investing, a total order book of €6.5 billion. So our feeling is that the market is there for us. There is high interest in Fortum debt also going forward. Leverage as you can see from the numbers decreased from 3.6 times to 3.3 times as we have also been indicating.

We expect this to go down and good to remember that this is excluding our relative share of Uniper EBITDA and our relative share of Uniper debt. So what we only show is the cost of the acquisition of the shares and then our part of the net profit of the company, which was the €49 million. Our liquidity continues to be strong. At the end of the quarter, we had €1.7 billion in cash. Of course, part of that was reserved for the €977 million dividend payment that took place on the 4th of April. In addition to that, we have committed credit lines, major part of that being our revolving credit facility of €1.8 billion.

Average interest coming down nicely, now at 2.2% and what I'm happy about is that also our next long-term debt maturities are only in 2021 and even that being €500 million. So we will continue our focus on operational excellence, on ensuring our business performance, prioritizing our CapEx and we will continue also to optimize our business portfolio as we have done before. Then to the outlook, we continue to forecast that electricity demand in the Nordics will grow at 0.5% on average. Hedges for the remaining part of the year, we have 75% hedged at €32. Levels are same as end of year for the full year, but now we have one quarter behind us and then we had a nice increase for 2020, up from 45% to 55% and the hedge price up from €29 to €31.

Now we are also including the impact of the proxy hedges into the hedge price, but not into the ratio. This is more for transparency reasons. They, of course, the impact has always been included in the achieved price. This inclusion had a minor impact on prices and just to put this into perspective, typically in the past, the physical optimization has been clearly bigger impact than the financial optimization or proxy hedging. CapEx guidance remains the same €600 million to €650 million. Synergies from Hafslund, which are nicely materializing, €15 million to €20 million during 2019-2020 and finally, the tax rate for the Group remains at 19% to 21%, most likely in the higher end of that for this year. I think we are now ready with Pekka to take questions. Thank you.

Question-and-Answer Session

A - Ingela Ulfves

Thank you, Markus. Thank you, Pekka. As I said, we are now ready to open up for the Q&A session. We will start again with the audience here in Espoo and then after that, we will continue with questions from the teleconference participants. For those of you here in Espoo that have a question, please state your name and your company before asking and also wait for microphone. We are ready. Please go ahead.

Artem Beletski

Yes, hi, Artem Beletsky from SEB. 3 questions from my side, So first start in the City Solutions and you Pekka mentioned that you are not satisfied with current returns, what the business is generating. How you are planning to address this matter? Are we talking about some potential organic investments what you're planning to do there, M&A or what are key steps on that front. Then the second question is relating to Russian CSA and we have seen growth of 4% year-over-year in Q1. What we should keep in mind looking at the profile proceeding [with] 2019 or basically what should be the development there? And the last one is just relating to proxy hedging, could you maybe provide some further color, whether it had -- has been any, let's say, the impact on hedge price has been clearly less than €1 per megawatt hour or what is the magnitude we are talking about there?

Pekka Lundmark

The City Solution question obviously would require quite much longer answer than what I'm able to do here. We did open it little bit up at the Capital Market Day, but it's really multiple elements. One key thing is the development of new solutions with higher margins and with less capital involved. I mean, new service-based business models. I already mentioned the EV battery recycling, the plastic recycling potential is looking really, really good as well and then of course we should not forget the traditional base business there is through new technology possibility to optimize the value chain better than what we've been able to do so far.

When it comes to district heating, obviously in some of the markets, we are fairly limited as to how much you can do price changes or price increases and in some cases, there are even higher taxes. So the potential there is limited, but also there it's important to note that even though the return on capital is not that good, it's often very cash generative because of the nature of the business, which is fairly stable, but our goal is through new products, new services, less capital intensive business models, new services also for district heating customers and then the applications of new technology to gradually improve the return on capital.

Markus Rauramo

Okay and I can take the Russian CSA and proxy hedge question. So first of all, just remember what are the factors that are impacting bond yields, the payment profile, the 10, 15-year that has been played back to 10 years, the spot impact and CPI impact and these factors, bond yields were -- had a negative impact this time, the 10, 15-year delta positive impact, spot positive and CPI positive.

For the profile, we are now entering the part where we get the highest payments and then gradually we'll get to the part where the CSA starts to -- to paid out and you can calculate roughly from when we have commissioned -- when we have announced that the units should have been commissioned the shape of the profile. For the proxy hedging, what we mean by that is that through the underlying commodities that are impacting our energy prices CO2, gas, German electricity, coal et cetera, we tried to simulate the position.

We use instruments, which may be liquid and -- but the -- to describe the magnitude, we have quite limited mandates and have always had like I said, the biggest part is coming from system, the area prices, physical optimization and then the financial optimization of proxy hedging has historically played the least role of these items.

Artem Beletski

Very clear. Thank you.

Ingela Ulfves

Thank you. There doesn't seem to be any further questions here. Maybe I add to the CSA just for this year that we have Nyagan 2 that came into the system from Q3 last year, which means that there will still be the impact then for Q2, but then -- this year, but then after that no further impact for [this] year just to clarify the impact on 2019. Yes. Thank you. Operator, we are now ready for the questions from the teleconference. Please go ahead.

Operator

[Operator Instructions] We have a question from Sam Arie for UBS. Your line is now open. Please go ahead.

Samuel Arie

Thank you. Good morning everyone and thank you as always for the presentation. I have 2 questions. The first one is on the hydro levels and I just wanted to ask, do you think the low levels you're seeing this year are fundamentally within the range of normal or could it be that we're seeing the start of some kind of long-term change in hydrology that's linked to climate change and when you talk to your experts about this, do you see any risk of an impact on underlying long-term value of hydro assets? I know that last year was a better year, this year was not so good, but I'm just wondering on the underlying long-term direction whether you see any risk there? And my second question is on Uniper. Understood that you are not commenting on the AGM. That's clear, but can I just ask looking a bit further ahead. If you gain control of the Uniper Board in 2022 through the natural rotation of Board seats that we're expecting, then does that mean in 2022 that you will be in breach of your agreement with the Russian authorities, i.e., at least in theory, then there will be a chain of control from the Finnish government through to the Unipro water processing activities and if so, is there a way to resolve that issue, that sort of 2022 issue without a domination of Uniper and Unipro and it'd be great if you could sort of talk us through how that works? Thank you.

Pekka Lundmark

Okay. 2 questions that are both actually quite speculative. The first one, we have not been able to identify any kind of fundamental change in hydrology that could be related to some long-term permanent changes. Of course, the climate scientists do say that it would be likely that one of the effects of the climate change would be that the precipitation levels in the Nordic region would increase, but this is, of course, gradual improvement. There is always going to be a lot of variation and during the time line that we've been looking at, I think it would be too much of a conclusion to say that we would have seen that okay now there are signs of real kind of long-term change.

So the answer to that question is no. Then Uniper, you are absolutely right that in 2022 through the natural rotation of the Supervisory Board seats, we are able to if we so wish take control of the Supervisory Board. It is too early to speculate that what that would mean for the current Russian decision. There is still long time to go until 2022 and as we have said multiple times, we believe that to quite large extent the issues that were identified by the Russian authorities as problems are of fairly technical nature and from that point of view, they should be solvable, but, of course, the decision clearly says that we cannot go over 50%, then how do you define actual control. There is multiple definitions and it's not possible to speculate on that one what would happen in 2022 unfortunately. So Sam, I'm not able to give you -- shed more light on this than that unfortunately.

Operator

The next question is from Lueder Schumacher, SocGen. Your line is now open. Please go ahead.

Lueder Schumacher

Yes, good morning. Few questions from my side. The first one is on the cash flow, the operating cash flow, you state in your results that the increase was mainly due to the change in settlements for futures, but if you strip it out, you are still looking at a 26% increase in operating cash flow. So are you just being conservative or are there just too many moving parts that early in the year to be a bit more optimistic for the full year outlook on the operating cash flow. And the second question is on Nordic power prices, you did point out in your presentation the unusually big discount Nordic prices have to Germany over the last few months, essentially since September last year compared to the historic spread. Now do you expect this to correct in 2019 or are there some structural problems that should prevent the normalization of Nordic power prices versus the German prices and lastly, just have you seen a normalization of hydro volumes in April?

Markus Rauramo

I can take the cash flow question, but Lueder, then I need your help, so can you please clarify a little bit what you meant full year outlook on cash flow, how do you mean?

Lueder Schumacher

Oh, just the way your result statement reads like it's the entire improvement of the operating cash flow is due to the change in settlements for futures. If you strip this line out of your cash flow statement on Page 17, you still get to an underlying increase of 26% in the operating cash flow, which I would say it's is still quite strong.

Markus Rauramo

Yes, al right, then, I'll try to open it up again. So if we look at the page with the cash flow statement. So the key items that of course the impact is the EBITDA. Then we have the FX gains and losses, paid net financial cost, income taxes, settlement of futures and change in working capital. So the biggest swing -- what we are meeting is that the biggest swing came from settlement of futures. This time around, actually the paid taxes and financials and also the change in working capital were clearly better than last year. So there are many moving elements, but of course, what reflects maybe mostly the operative side in the very short-term is the EBITDA, but we are working on all of these items. So also the actions we are taking on operational excellence, on the funding, overall working capital management, all of this should contribute then to the operative cash flow.

Pekka Lundmark

And then if I continue from the spread question, I think you mentioned that there would have been a discount actually in the Nordic price, but it was the -- I might have been unclear on that also in my presentation, but it was the other way around that in Q1, the Nordic price was higher than the German price and the difference was €6 and for the reasons that I described, the Nordic price was supported for example by the EUA's and especially in the beginning, high coal prices compared to last year, but then very much the hydrology was supporting the prices and at the same time in Q1, the German price was then clearly affected by, for example, the high wind production. So this caused the very high spread that actually went to the other direction in Q1 that has been the historical normal.

Also last year, the full year was different from the long-term average. The Nordic price for the full year was €0.50 higher than in Germany, the spread was €0.50. Historical average has been €5 to the favor of the German price in realization. Then of course, we do not give power price forecasts, so I'm unable to answer the second part of this question, I can only refer to the forward market that is currently indicating €10 spread for 2019. So that the German price would be higher than the Nordic price. Then the hydrology question and especially April, the difference to the reference level has stayed the same during April, i.e., 3 terawatt hours below the reference, but in relative terms comparing to the same time last year, the situation has improved, so that in the beginning of the second quarter, we were 5 terawatt hours above last year's level and now we are 7 terawatt hours above last year's level as we speak today.

Lueder Schumacher

Okay, thank you and just coming back on the second question, I probably should've been clearer, I was less interested in the spot prices, which of course can vary a lot. I was more interested in the calendar forwards where the spread has opened quite significantly since last September and I appreciate you don't make any price forecasts, but I mean the discount has widened quite significantly and you also mentioned this in your presentation compared to the historic spread which seems unusual. So unless you think that the default of NRC and all the implications from that, is there still an impact on trading behavior -- trading volumes in the Nord Pool that would explain such an increased discount compared to usual levels.

Pekka Lundmark

Actually, the discount was during last year especially when you look at the end of Q3 and beginning of Q4, it was even wider than what it is today and there we can all speculate how much this NRC incident had to do with that. Then, of course, we have our view, but we do not publish it in detail. The discount has actually shrunk after that, but again without giving out power price forecasts, we do not comment the kind of the future expectations on the spread. It is around €10 at the moment and there are multiple factors affecting it going forward. Interconnections between the Nordic and the German system, which obviously are being built, more interconnections, that should, everything else equal, should lower the spread. Then Nordic wind production increasing, Nordic wind production should widen the spread. Then in the same way, then the German added tightness to the market that will come from the shutdown of nuclear and then the potential implementation of the coal commissions's recommendations should also increase the spread. So there are multiple factors and we are certainly not going to give out our own forecast as to how these relative factors would affect the spread going forward.

Lueder Schumacher

Okay, thank you.

Operator

The next question is from Deepa Venkateswaran of Bernstein. Your line is now open. Please go ahead.

Deepa Venkateswaran

Hi, thank you for taking my question. I know that you've clarified that you won't speculate on proposals in the AGM from other shareholders, but I was just wondering in terms of the timing of your discussions with Uniper. I think earlier you said that the results would not be out before summer. So I was just wondering whether these other proposals mean that there is a change to the timing of your discussions with Uniper and you'll need to kind of conclude on something before May 22nd. And secondly, S&P has issued a report last week outlining that if you entered into a domination agreement to buy Uniper, they would downgrade you. Would you be able to comment on this and your balance sheet capacity in the context of a potential domination? Thank you.

Pekka Lundmark

We do not comment on speculative questions. Obviously, credit rating is something that is very important for us and it is very important for Uniper as well. So anything that we would do and this is totally irrespective of the Uniper decision, we would always give a high priority to taking care of our credit rating. AGM in Uniper's development is of course an important milestone, but it's only one milestone and the discussions that we're having with Uniper in multiple streams, many of them are of quite long-term nature in their effect as well. So we should not overestimate this one AGM as the only relevant milestone in this relationship. There will be many more milestones also after that.

Operator

The next question is from Peter Bisztyga of Bank of America Merrill Lynch. Your line is now open. Please go ahead.

Peter Bisztyga

Yes good morning. So a question also I guess of a speculative nature, but I was wondering if you had any preliminary views on the outcome of the Finnish elections. Is there anything in the policies of the Social Democrats or any other potential coalition members that signals any change in direction in energy policy or indeed in the government's attitude towards Fortum. So just interested in your thoughts there. And then the second question just on the first quarter results of the Russian division, I seem to remember last year in the first quarter, your profitability was down quite sharply year-on-year and part of your explanation was higher bad debts, but doesn't seem to be any evidence that's reversed this year. So I was just wondering if you could clarify that and also if you could actually quantify please, the impact on operating profit of this district heating JV please in the first quarter.

Pekka Lundmark

If I take the election question first obviously, we do not know what kind of government we will have. The negotiations are actually starting right now. What gives us confidence though is say a fairly wide agreement before the election on the general direction on especially the climate policy and its connection to the European Climate policy and the instruments like the Emissions Trading System and the related [spending] mechanism. So I am fairly confident that there would not be anything major coming from there. There could be smaller things though of course.

There is always going to be a question on taxation on multiple items in the energy value set chain, but something that would have a substantial impact on our future and our results I think it would be highly unlikely. And then, the second part of that question, could that somehow affect the government's policy towards Fortum, I would like to repeat that and this obviously has been confirmed multiple times by the government also that we are not a tool for the implementation of the Finnish government policy. We are a listed company with multiple shareholders, of course, the Finnish government being an extremely important one and the largest one, but we are not a tool in the Finnish energy policy.

Markus Rauramo

Okay, then I'll take the Russia questions. So actually in Q1, both this year and last year, the impact of bad debt was rather minor. There was a bigger impact in Q2 of last year by the default of [Chelyabinsk] guaranteeing electricity supplier, which cost us a bigger loss then. If I quantify the joint venture impact, I would put it that way that if we exclude the FX impact and the joint venture profile impact, then the result would have been positive for the division, but I wouldn't go further than that. There is a profile similar to the district heating profile that we have in our City Solution businesses.

Operator

The next question is from Vincent Ayral of JP Morgan. Your line is now open. Please go ahead.

Vincent Ayral

Yes, good morning. A follow-up actually on the district heating [Russian], you say that the overall impact [added] so it would be fairly neutral on the full year basis. So should we conclude that in negative earnings activity. So that's something I would like to understand. The second thing is, when we look at basically consensus expectations and the results posted, we see indeed that Russia was a bit of a miss, it can already from ForEx because people know the forex, they can measure it, so it's more related to the district heating and then therefore, we should have seen a beat on the net income from JV and associate. So where is this earnings from the heating? Has it been reported the net income from this heating JV in Q1.

And if not, we should expect it to be fully reported as part of the H2 -- in the Q2 results. So that's the question regarding this. The other one is regarding your cash flow, I will come back on this, I heard and I'm not sure I heard this thing all clearly that you've had an agreement for the settlement futures with on the NASDAQ commodity. I'd like to understand exactly what this means here. Could you explain us a bit more in details what is happening here. Is it like a sort of [digitization] is this impact in Q1 something we should deem as a recurring, yes or no. Thank you very much.

Markus Rauramo

Okay. I can take the 2 questions. So you are correct that over the year should be neutral both for us and both for the joint venture, but you can expect to see is the profile has a negative impact on the Russia division and it has a positive impact on the income from joint ventures and associates. So you are correct. It will have the offsetting profile between these 2 lines. Then for the agreement, the security spending agreement we have. So basically, we need to post the initial margin collateral when we are doing our hedging and this is the big element.

So we have had cash as collateral in NASDAQ. Now we are replacing that with securities that NASDAQ approves to replace that. So the cash came back to us. We have borrowed securities from a bank and now we are paying compensation for that. So effectively for us a loan and you can then see on the balance sheet both the debt and the receivable, but standard agreement, nothing special. It will -- there can be a small deviation on this item, but basically it's a large sum of money that has been there all the time for a longer time. So you will not see recurring positive impacts going forward. It can go both up and down, but the impact will be limited.

Vincent Ayral

Okay. So, if I summarize the second point, yes, this change should limit volatility on this item going forward. But regarding the heating Russia, the JV, you said we will see the offset, the net income JV and associates [for] that. Did we see it in Q1? Was it reported in your net income from JV and associates in Q1 and if it has been good, if it has not been, will we see it being reported in Q2 together with the Q2 numbers. Thank you.

Markus Rauramo

Like I said, you will see the -- let's say the mirror impact of the profile in both ends. Right, it is reported quarter by quarter both on the divisional comparable operating profit level and then in the income of joint ventures and associates and actually just want to specify a bit more. So if you look at the cash flow statement, you will see -- we will continue to see the settlements for futures continues to be volatile depending on the prices and this is the initial margins that we have posted that are then lower in the cash flow statement. So there will be -- this item has not been as volatile either than the item higher up that is impacting the operative cash flow. I hope that clarifies.

Operator

The next question is from James Brand, Deutsche Bank. Your line is now open. Please go ahead.

James Brand

Hello, good morning. I guess it's just turned afternoon for you, so good afternoon. A couple of quick questions. On points that you brought out in the results statement around firstly new taxes in Sweden and then secondly on the hydro power legislation, so looking for a bit more detail on both really, so on the fossil fuel taxes on CHP in Sweden, looks like you're saying that if it came in, it would be around €40 million. I was wondering whether you could tell us what's your share of that would be and also whether there is any scope to pass through any of those tax increases if they came in your kind of heating contracts. And then secondly on the water framework directive and to your comment that it could impact on your production levels. Any more details, I guess it's a little speculative at the moment, but any more comments or quantifications around that or the costs involved till the impact on production will be really interesting. Thanks.

Markus Rauramo

Okay. I can comment maybe on the technology of pricing in Sweden. So first of all, at this point, I would say that this is an issue that Stockholm Exergi still has to go through and look at it and its implications and what we have in Sweden is something called prisdialog and annually, the company will discuss with the customers that what is included in the prices, it's fair price, so does it cover the cost et cetera, et cetera and I would assume that this would be part of those elements there. So that's an issue that Stockholm Exergi will have to handle then in due course.

Pekka Lundmark

Perhaps worth pointing out that -- that is really the only heating business operations, only CHP operations that we have in Sweden, Stockholm Exergi and once again it's reported as an associated company. So it's not in our comparable operating profit and that number, which is in our report, which you referred to, that is the potential total Swedish effect through additional taxes.

James Brand

So I was just asking whether I noticed the impact was whole of Sweden, but whether you would be also detail what the impact would be on you and whether or not if it will be able to be passed through, if you have that information at the moment.

Pekka Lundmark

This, we are unfortunately unable to comment because, first of all, this is a matter for Stockholm Exergi and there are still a lot of unclarities around this situation and as Markus explained, there will be the so-called prisdialog that will then clarify the expected result effect on stock on Stockholm Exergi, but you can roughly calculate, if you take obviously the total CHP volumes in Sweden that what it just -- volume wise would be Stockholm Exergi is I guess 7 terawatt hours to 8 terawatt hours of heat roughly. So from there you can make some kind of a rough estimate. Exactly, that's very important to note that 90% of that volume is non-fossil mostly geologics due to the new bio-fired power plant that was inaugurated in Stockholm a couple of years ago and there is a plan by Stockholm Exergi also to phase out the remaining coal in Stockholm within the next next couple of years.

Then when it comes to the water -- hydro or water directive, what is the exact name of it, hydro -- water framework directive I think is the exact term to be used. I mean that discussion is still ongoing in the European Union. That's how that would be implemented. We are, of course, together with other Nordic hydro operators participating in that dialog and Sweden has already made some decisions about which we have also published earlier about [duration] of a fund that would take the responsibility of these obligations and this of course this discussion continues on the European level. So it's too early to speculate that if there would be any additional effects on this [wanted] to our operation.

James Brand

Is the risk from the water framework directive that you'd actually have to kind of stop using dams in certain areas or is it, what's the kind of technical implications of the proposal?

Pekka Lundmark

At least, when it comes to all those hydro power plants which are significant from our result point of view, we do not see any such risks. Then the totally different thing is then that, if there are cases where there would be from results point of view and from volume point of view insignificant small dams where it would actually make more sense from the overall system point of view to dismantle then, but this is something that would not have any effect on the big picture in terms of our hydro business.

Operator

The next question comes from Lars Paulsson, Bloomberg News. The line is now open. Please go ahead.

Lars Paulsson

Good afternoon. I have a question about Swedish nuclear and there's a big debate among the political parties at the moment with the moderates and the liberals, they really want to see more nuclear power rather than the shutdowns that are going on. Where do you see this debate going and would you be possibly interested in investing in new nuclear in Sweden? Thanks.

Pekka Lundmark

New nuclear in Sweden from an investment decision point of view is I have to say currently a very remote thought. We are focusing on running the existing power plants together with our partners and this is fully allowed by the agreement that was launched a few years ago. The discussion in Sweden is centering around the definition of the targeted system, whether they talk about renewable -- totally renewable system or a totally fossil free system. Of course, for us, who believes that nuclear needs to be a key element in the future energy system and is a key enabler for emission reductions, we very much like to talk about CO2 free in addition to of course renewables being important, but renewables and nuclear is really our focus, but once again, this should not be mixed with any desire to start building new nuclear in Sweden, which currently is from many different perspectives quite a remote part.

Operator

The next question is from Jonathan Dzieciolowski of Citibank. Your line is now open. Please go ahead.

Piotr Dzieciolowski

Hi, it's Piotr Dzieciolowski from Citi. I have 3 small questions, firstly from top of my head, I think this collateral on hedging effect was around [EUR600 million and you managed to receive €300 million] back in the first quarter, correct me if I'm wrong in these numbers. And then if there is still more of a collateral that will come back to you in form of cash going forward? Secondly, I wanted to ask you about the synergies on the Hafslund, how much have you already materialized and how much is there more to go in terms of kind of euro number and then on this new bonds, how much this new free bonds improve your financing cost in -- also in how much better conditions what you had before.

Pekka Lundmark

Thank you. If I take the Hafslund question and Markus takes the 2 other ones. As we have seen, our estimate is €15 million to €20 million gradually during 2019 and 2020. So that by the end of 2020 we would have achieved full run rate. More detail than that we are not opening up, but just as a reference, probably a safe way to assume would be that there would be a fairly linear implementation or realization of these synergies during these 2 years which [wouldn't] indicate that yes, there were something already in Q1 but not yet that much.

Markus Rauramo

Let me go on to the cash release, the collaterals and the cash settlement. So these are 2 different line items and on Page 17 of the presentation, you can see the change of settlements for futures. That item will remain, so that will remain volatile, now it was close to €300 million positive, last year €500 million negative. Then we have below the net cash from operating activities, we have the change in cash settlements and restricted cash, this was the level where we released the cash that had been posted as initial margin collateral for the hedging. So this is a more -- this has been a more stable amount this -- the volatility here will be clearly less than it has been on the settlements for the futures.

So we will not see a repeated impact -- the scope will [enlarge] of this arrangement, the scope is basically here. There can be small volatility. Then for the financing cost, so what we replaced with this [EUR2.5 billion] bond was a €750 million bond that matured that had a 6% coupon. So massive saving for that €750 million part. Then for the part of the bridge facility that we refinanced, there, the cost actually was very competitive. So not a big difference for that part, for the €1.75 billion. So then you can see that the average cost of our debt came down from 2.4% to 2.2%.

Operator

There are no further questions at this time. Please go ahead speakers.

Ingela Ulfves

Thank you, operator and thank you for all the questions. We seem to have some questions now on the chat, so I'll hand over to Mans now to ask those.

Mans Holmberg

Okay. So first we have a question from Michael Charlton from Banco Santander relating to IFRS 16 and if that had an material impact on the net debt.

Markus Rauramo

The answer is that the impact was quite limited.

Mans Holmberg

And then we have a question from [Tony Borgio] saying that environmental groups have argued that selling dirty plants is not the solution to fight climate change given the need to reduce greenhouse gases. In that respect, I understand they have written recently urging the Board to shut any dirty asset it may get control over in the future as a result of controlling Uniper. Would you care to comment on this approach?

Pekka Lundmark

Well, we had an extensive discussion with NGOs on this one at the AGM and obviously we support strongly ambitious climate goals. We support a carbon neutrality goal for Europe for [2050]. We believe that when it comes to power production, emissions trading should be the key instrument and the right way to do this whole thing would be market-based so that we would strengthen the linear reduction factor in ETS system, so that it would deliver the results on a market-based way. The beauty of the common trading system is that it does deliver exactly the desired result and then we would not need to make kind of plant by plant politically micro managed decisions on shutdowns.

Having said that, Fortum's own carbon footprint in European Union is very limited and we are actually as we speak we are dismantling one of the largest coal fired power plants that we have and we are of course going to continue on this path, but then when it comes to Uniper's assets, as I have said multiple times, Uniper is a listed company. They are now, of course, in discussions with authorities, especially in Germany about the implementation of the Coal Commission's recommendations that will lead to a emissions reduction schedule and coal capacity reduction schedule for Germany. In addition to that, in all countries where Uniper operates, there is a already a target year for the final year where coal can be used in energy production. So these reductions are happening with or without our involvement.

Mans Holmberg

And then we have a final question from Reuters News. Finland voted to ban coal in energy use by May 2029. Does that change your plans in any way for the remaining coal using assets? And which assets would need to close earlier than expected and what will you replace that generation with? Will you invest in new biofuel plants?

Pekka Lundmark

Well, we are investing in biofuels here in our home town as for district heating system. We have a goal already before this law came into force, we had a goal with our partner, the City of Espoo to make the city carbon-neutral in energy production by 2030. So this 2029 change is very little from that point of view. In district heating, coal can be replaced by multiple different sources of course biomass is one, but what we give a very high priority is recycled excess heat from especially data centers, hospitals et cetera and there is a lot of additional potential there.

Electricity through large scale heat pumps can also be used and we should not forget that the district heating system itself is a very good energy storage system as well. So this is the main source or the main user of coal in our system. In addition to that, we have one coal condensing part in Finland, which we own. It is mostly already today in capacity reserve and with very limited production volumes. So also from that point of view the 2029 decision has very little impact on Fortum.

Ingela Ulfves

Thank you so much everyone for your questions and your active participation here today. This now concludes our webcast on the first quarter results and on behalf of Fortum, I want to wish you all a very nice rest of the day and upcoming weekend. Thank you.

Pekka Lundmark

Thank you.

Markus Rauramo

Thank you.

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