I need to analyze Fortum Oyj's financial position to estimate Moody's adjusted leverage trend for 2022. Let me work through the key indicators. First, let me understand what happened to Fortum in 2022. The company had massive losses from discontinued operations (-11.3 billion EUR), which appears to be related to the exit from Russian operations (Uniper). This dramatically changed the company's structure. Let me calculate key leverage metrics: **Balance Sheet Changes:** - Total Assets: 149,661M EUR (2022) → 23,642M EUR (2023), a massive decrease of ~84% - Total Equity: 13,665M EUR (2022) → 7,737M EUR (2023), decrease of ~43% - Total Liabilities: 135,997M EUR (2022) → 15,905M EUR (2023), decrease of ~88% **Key observations about the balance sheet transformation:** - The massive reduction in assets and liabilities suggests a major divestment/discontinuation - Derivative financial assets and liabilities collapsed dramatically (from 65.4B to 1.5B current; from 17.1B to 0.3B non-current for assets; similar for liabilities) - This is consistent with exiting energy trading/commodity positions related to Uniper **Profitability and Cash Flow:** - Revenue increased significantly: 6,422M → 8,804M (+37%) - Comparable Operating Profit improved: 1,429M → 1,871M (+31%) - Comparable EBITDA improved: 2,016M → 2,436M (+21%) - However, reported profit was devastated by discontinued operations losses **Cash Flow from Continuing Operations:** - Operating cash flow (continuing): 1,119M → 2,104M (+88%) - Operating + Investing (continuing): 608M → 3,568M (dramatic improvement) - This shows the remaining/core business is generating much stronger cash flows **Leverage Considerations for Moody's:** Moody's adjusted leverage typically focuses on: 1. Debt/EBITDA ratios 2. Debt levels relative to cash flows 3. Sustainability of earnings For the **continuing operations** (which is what matters post-restructuring): - The core business shows improving profitability (Comparable EBITDA up 21%) - Operating cash flows from continuing operations nearly doubled - The company has been significantly deleveraged through the disposal of Russian/Uniper operations However, looking at the equity position: - Retained earnings dropped from 10,062M to 6,467M due to massive losses - Total equity dropped 43% despite the asset disposal The key question is: what is the debt position of the **remaining** business? From the liability side, we can see: - Non-current financial liabilities: 8,701M → 3,658M - Current financial liabilities: 8,519M → 4,127M - Total borrowings decreased significantly But looking more carefully at the **continuing operations** structure: - The company separated out Uniper/discontinued operations - The remaining Fortum appears to be a smaller, more focused utility **Critical analysis for leverage trend:** The massive restructuring in 2022 makes simple year-over-year comparisons difficult. However, for Moody's purposes: 1. **Deconsolidation of Uniper**: This removed a massive source of risk, volatility, and potential further losses. From a credit perspective, this is generally positive for the remaining entity. 2. **Core utility profitability**: The comparable operating profit and EBITDA trends are improving, suggesting better underlying performance. 3. **Cash flow generation**: Operating cash flow from continuing operations improved dramatically. 4. **Balance sheet**: While total equity fell, the liability structure was also dramatically reduced. The derivative exposures (which were enormous and volatile) were largely eliminated. 5. **Discontinued operations losses**: The -11.3B loss and -10.9B operating cash outflow from discontinued operations represent the "cleaning up" of the problem. Once this is done, the remaining entity should have cleaner financials. However, there's a critical concern: **the equity base has been severely impaired**. The company went from 13.7B equity to 7.7B equity. If there's remaining debt that needs to be serviced by the smaller equity base, leverage ratios could actually worsen. Looking at the 2023 balance sheet more carefully: - Equity: 7,737M - Non-current liabilities: 5,784M - Current liabilities: 10,122M (but this includes trade payables, etc.) Financial liabilities specifically: - Non-current: 3,658M (other non-current financial) + 756M (derivatives) = ~4,414M - Current: 4,127M (other current financial) + 3,973M (derivatives) = ~8,100M - Total financial debt roughly: ~12,500M Against EBITDA of 2,436M comparable, this would suggest Debt/EBITDA around 5x, which is elevated. But comparing to 2022 on a like-for-like basis is nearly impossible due to the restructuring. **Moody's perspective**: Moody's would likely view this as a major restructuring event. The key question is whether the **forward-looking** credit profile is better or worse. Arguments for **Improving**: - Removed the Uniper/Russian risk which was causing massive volatility and losses - Core Nordic utility business has stable cash flows - Comparable EBITDA and operating cash flow trending up - No more exposure to Uniper's problems Arguments for **Deteriorating**: - Massive equity impairment reduces buffer for creditors - If debt wasn't proportionally reduced with assets, leverage ratios worsen - The -11.3B loss represents real value destruction Looking at the **continuing operations** cash flows and the disposal: - Proceeds from divestment of shares: 1,156M (2022) vs 3,816M (2021) - lower but still meaningful - The 2022 figure likely includes partial Uniper-related disposals Actually, re-reading the timeline: the annual report is for year-end 2022, with comparison to 2021. The massive changes in balance sheet from 2022 to 2023 (year-end) reflect what happened during 2022. The "2023-01-01" dates in the balance sheet are actually the end of 2022 (since the period is 2022-01-01 to 2023-01-01). So the massive asset reduction already occurred during 2022. This means by the end of 2022, Fortum had already: - Written down/disposed of most Uniper-related assets - Reduced derivatives from 82B+ to ~5.5B - Reduced total assets by 84% The question asks about the **trend for 2022** - meaning how did leverage evolve during 2022 and what is the forward trajectory? Given: 1. The core business profitability improved (Comparable EBITDA up 21%) 2. Operating cash flows from continuing operations nearly doubled 3. The disastrous Uniper exposure was largely removed (though at massive cost) 4. The remaining business appears to have more stable, utility-like characteristics However, the **absolute leverage** position at year-end 2022 is concerning because equity was severely impaired. If we look at debt/equity or debt/EBITDA for the remaining entity, it may not look great. But the question asks about the **trend** - is it improving, stable, or deteriorating? Given that: - The worst is likely behind (Uniper losses recognized, disposal largely complete) - Core operations are generating better cash flows - The risk profile has shifted from volatile energy trading/Geopolitical risk to more stable Nordic utility I believe Moody's would view this as **Improving** for the forward-looking credit trend, because: 1. The removal of Uniper eliminates a major source of potential future losses and volatility 2. Core utility operations are performing better 3. Cash flow generation is strengthening 4. The "clean" remaining entity is easier to analyze and likely more stable However, I need to be careful. The massive equity destruction (-5.9B in comprehensive income attributable to owners, with retained earnings dropping) means the company has less buffer. If debt levels didn't decrease proportionally, leverage ratios could be worse. Let me check: Total liabilities went from 136B to 16B, a much bigger proportional decrease than equity (13.7B to 7.7B). This actually suggests the liability/equity ratio improved from about 10:1 to about 2:1 in terms of total liabilities to equity. But financial debt specifically: Looking at just debt instruments... - 2022: Other non-current financial liabilities 8,701M + non-current derivatives 16,657M + current financial liabilities 8,519M + current derivatives 71,947M = huge derivative exposure - 2023: 3,658M + 756M + 4,127M + 3,973M = 12,514M The derivative exposure collapsed, which is good for risk but the "other" financial liabilities are still substantial. For a utility, Moody's would focus on sustainable debt/EBITDA. With comparable EBITDA of 2,436M and financial liabilities around 12.5B (excluding derivatives which are hedging-related), this is roughly 5x. But this includes derivatives that may be hedging instruments. Actually, for Moody's adjusted leverage, they would look at gross debt or net debt. With liquid funds of 3,919M, net debt would be roughly 8.6B against EBITDA of 2.4B, or about 3.5x. This is manageable for a utility. The trend from 2021 to 2022 in terms of continuing operations cash flows and profitability is positive. The removal of Uniper, while costly, improves the forward risk profile. I conclude the trend is **Improving** because: 1. Core business profitability and cash flow generation improved 2. The major source of risk and volatility (Uniper) has been largely removed 3. The balance sheet is now much less complex and risky (derivatives down massively) 4. Forward-looking credit risk is lower despite the historical losses Improving