# Fortum Oyj Credit Trend Analysis (2021-2022) ## Step 1: Identify Relevant Industry Fortum Oyj is a Finnish energy company operating in multiple segments: - Electricity generation and distribution (regulated and unregulated) - Heat production and distribution - Gas operations - Nuclear power The company operates primarily as a **multi-utility** with both regulated and unregulated activities. Key characteristics: - Nordic regulatory framework (strong/adequate) - Diversified generation portfolio (nuclear, hydro, thermal, renewable) - Geographic presence in multiple Nordic countries - Mix of regulated distribution and unregulated generation **Applicable Methodology:** Primarily **Regulated Utilities** with some elements of **Unregulated Power and Gas**, given the significant nuclear and renewable generation assets. The company qualifies for analysis under the regulated utilities framework with adjustments for unregulated activities. --- ## Step 2: Calculate 2021 Adjusted_EBITDA **Starting point - Reconstruct EBITDA (2021):** - Profit from Operating Activities: €4,325 million - Add back: Depreciation & Amortisation: €587 million - Add back: Finance costs (net): €161 million (net of finance income) Base EBITDA = 4,325 + 587 = **€4,912 million** **Adjustments for 2021:** Per the operating profit calculation, there were "Items Affecting Comparability" of €2,897 million (primarily gains). Following S&P utility methodology, we need to normalize for non-recurring items: - Non-recurring gains in 2021: Capital gains (€2,673M) + Impairment reversals (€35M) + Other (€189M) = €2,897M - These items inflated 2021 profitability **Adjusted_EBITDA (2021)** = 4,912 - 2,897 = **€2,015 million** This represents sustainable operating performance before non-recurring gains. --- ## Step 3: Calculate 2021 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From the cash flow statement (2021): - Interest Paid (Operating): €147 million - Income Taxes Paid: €279 million **FFO (2021)** = 2,015 - 147 - 279 = **€1,589 million** --- ## Step 4: Calculate 2021 Adjusted_Debt **Debt components (2022-01-01, i.e., end of 2021):** - Non-current financial liabilities: €8,701 million - Current financial liabilities: €8,519 million - Total reported debt: €17,220 million **Less: Liquid Funds (cash):** - Liquid Funds (2021-12-31): €7,592 million **Adjustments:** - The data shows large derivative financial assets (€65,392M) and liabilities (€71,947M) in 2021, reflecting significant hedging positions for commodity price volatility - Following S&P utility guidance: we include net derivative position as debt-like (net short position) - Net derivative position: 71,947 - 65,392 = €6,555 million (net debt-like) **Adjusted_Debt (2021)** = 17,220 + 6,555 - 7,592 = **€16,183 million** --- ## Step 5: Calculate 2021 Adjusted_Debt / Adjusted_EBITDA **Leverage Ratio (2021)** = 16,183 / 2,015 = **8.03x** This elevated leverage reflects: - Large derivative liability position (commodity hedging) - Significant capital base for regulated operations - One-time gains inflating 2021 comparability (post-adjustment) --- ## Step 6: Calculate 2021 FFO / Adjusted_Debt **Coverage Ratio (2021)** = 1,589 / 16,183 = **0.0982** or **9.82%** --- ## Step 7: Calculate 2022 Adjusted_EBITDA **Starting point - Reconstruct EBITDA (2022):** - Profit from Operating Activities (continuing): €1,277 million - Add back: Depreciation & Amortisation: €566 million Base EBITDA = 1,277 + 566 = **€1,843 million** **Adjustments for 2022:** - Items Affecting Comparability: -€593 million (primarily losses) - These represent non-recurring losses that depressed 2022 performance Following normalization guidance: - Impairment losses: €905 million - Capital gains: €785 million - Derivative fair value changes: €393 million - Reclassification adjustments: -€1,102 million Net non-recurring items: -€593 million (net loss position) **Adjusted_EBITDA (2022)** = 1,843 - (-593) = **€2,436 million** The positive adjustment recognizes that 2022 had non-recurring losses offsetting gains. Comparable EBITDA reported as €2,436 million. --- ## Step 8: Calculate 2022 FFO **FFO = Adjusted_EBITDA - cash_interest - cash_taxes** From the cash flow statement (2022): - Interest Paid (Operating): €201 million - Income Taxes Paid: €167 million **FFO (2022)** = 2,436 - 201 - 167 = **€2,068 million** --- ## Step 9: Calculate 2022 Adjusted_Debt **Debt components (2023-01-01, i.e., end of 2022):** - Non-current financial liabilities: €3,658 million - Current financial liabilities: €4,127 million - Total reported debt: €7,785 million **Less: Liquid Funds (cash):** - Liquid Funds (2022-12-31): €3,919 million **Adjustments:** - Derivative financial assets (2022-12-31): €343 million (noncurrent) + €1,486 million (current) = €1,829 million - Derivative financial liabilities (2022-12-31): €756 million (noncurrent) + €3,973 million (current) = €4,729 million - Net derivative position: 4,729 - 1,829 = €2,900 million (net debt-like) **Adjusted_Debt (2022)** = 7,785 + 2,900 - 3,919 = **€6,766 million** **Key observation:** Significant delevering from 2021 to 2022, driven by: - Reduction in reported debt (from €17,220M to €7,785M) - Reduction in net derivative position (from €6,555M to €2,900M) - This reflects major operational changes and likely divestitures --- ## Step 10: Calculate 2022 Adjusted_Debt / Adjusted_EBITDA **Leverage Ratio (2022)** = 6,766 / 2,436 = **2.78x** --- ## Step 11: Calculate 2022 FFO / Adjusted_Debt **Coverage Ratio (2022)** = 2,068 / 6,766 = **0.3057** or **30.57%** --- ## Step 12: Classify Credit Trend ### Signal 1: Leverage Change **Change in Adjusted_Debt / Adjusted_EBITDA:** - 2021: 8.03x - 2022: 2.78x - Change: 2.78 - 8.03 = **-5.25x** Since -5.25x ≤ -0.2x → **Improving** ### Signal 2: Cash-Flow Coverage Change **Change in FFO / Adjusted_Debt:** - 2021: 0.0982 - 2022: 0.3057 - Change: 0.3057 - 0.0982 = **+0.2075** Since +0.2075 ≥ +0.03 → **Improving** ### Combined Assessment **Both signals are strongly aligned: IMPROVING** - Leverage improved dramatically (5.25x reduction, far exceeding the 0.2x threshold) - Cash flow coverage improved substantially (20.75 percentage points, far exceeding the 3pp threshold) - The magnitude of improvement is material and consistent across both metrics **Context supporting this assessment:** 1. Major strategic transformation: The company divested significant assets (particularly Russian assets per context of 2022 geopolitical events), as evidenced by the reduction in noncurrent assets (€49.4B→€12.7B) and total assets (€149.7B→€23.6B) 2. Normalization of derivatives: The sharp reduction in derivative positions suggests hedging was reduced or positions were settled 3. Improved operational metrics: Adjusted EBITDA improved from €2,015M to €2,436M despite lower reported profitability 4. Stronger free cash generation: FFO doubled on a smaller debt base 5. Better leverage metrics: Both absolute debt and leverage ratios improved substantially --- Improving