Energy Fortum made billions in losses with derivatives, and it electrified the atmosphere at the press conference – Rauramo says losses are purely accounting

The risks of derivatives trading are monitored very closely, says CEO Markus Rauramo.

RussiaUniper and derivatives – in a risk cluster, which questions the CEO of the energy company Fortum Markus Rauramo now has to answer one by one.

The company released last year’s results on Thursday, and in a post-announcement press conference, analysts ’questions focused exclusively on these three issues.

If Fortum’s thousands of retail investors are confused about the risks, they don’t seem to be clear to the professional analysts who follow the company to the day. In addition, Finnish taxpayers’ money is at stake, as Fortum is mostly state-owned.

It is therefore appropriate to ask Rauramo to twist the risks that the company is now facing.

Let’s get started derivatives. A derivative refers to an investment product, the value of which may be tied to the price of oil or electricity, for example. Derivatives had a major impact on Fortum’s result last year.

The company’s comparable operating result for the full year was the best in Fortum’s history, EUR 2,536 million. Instead, the operating result was almost EUR 600 million negative.

The difference was mainly due to the fact that the decrease in the market value of derivatives owned by Fortum and its Uniper subsidiary has been eliminated from the comparable result. The market value of derivatives had to be reduced by a total of EUR 5.4 billion.

According to Rauramo, the losses caused by the derivatives were purely accounting and are due to the “asymmetry” of the accounting rules. The value of derivatives is determined at the market value on the accounting date, but the value of the underlying asset, such as natural gas, in the accounting cannot exceed its production or acquisition price.

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“Over time, when the contracts are delivered, the losses are eliminated,” says Rauramo.

According to Rauramo, this will happen “in the next few years”.

The energy market is in a very exceptional situation. What is the risk that derivatives will also become real, not just accounting losses?

“In the event that some of the agreements fail to materialize. If part of the gas were not delivered or we did not receive the gas we bought, or the counterparty with the cash collateral would not be able to repay it. These are normal business risks. ”

Derivatives can be used to take risks and earn returns, but Rauramo says that Fortum uses derivatives solely to hedge its performance against fluctuations typical of the energy market.

“Those derivatives have not increased the risk, but reduced it.”

In the Fortum Group, derivatives trading is concentrated in the subsidiary Uniper. The value of the Group’s derivative portfolio at the end of the year was EUR 82 billion, the majority of which was held by Uniper. Fortum’s market capitalization on Thursday was just over EUR 15 billion.

How well is Fortum aware of the risks of Uniper’s derivatives trading?

“We are following it very closely. We have four people on Uniper’s Supervisory Board, and Uniper itself has very strict risk control, ”says Rauramo.

Energy prices in Europe have skyrocketed in recent months. Therefore, in December, Uniper applied for a € 10 billion financing package to secure its liquidity needs in the near future. Of this, EUR 8 billion came from Fortum in the form of shareholder loans and guarantees.

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Uniper needed the money for increased collateral requirements. The need arises from the fact that Uniper sells gas under advance agreements, and some buyers require a security from the company in the event that it is unable to supply the gas it has promised. The security is typically determined on the basis of the market price of the gas.

Since December, relations between Russia and the West have escalated to the extreme, and the market is already speculating on the possibility that Russia will cut off gas supplies to Europe or the West will impose a Russian energy embargo.

Uniper buys gas from Gasprom under a long-term agreement. Half of the natural gas it sells is Russian.

How would the cash guarantees paid by Uniper be affected if Russia restricted gas supplies? Could this realize Fortum’s financial risks towards Uniper?

“Uniper procures gas worldwide, both pipeline gas and liquefied natural gas. Long-term sourcing is done on an ongoing basis. Uniper has both a large buying and selling portfolio. If for some reason there is a disruption in one direction, then we are looking for alternative ways to deliver the product that has been promised to the customer, ”says Rauramo.

“If gas supplies from Russia ceased, it would be a systemic problem. It would then be up to European decision-makers and market authorities to resolve the situation. “

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Rauramo says that Uniper has used part of the funding provided by Fortum, but does not say how much. He also says that in recent weeks, the company has sought to target sales to counterparties that do not require collateral.

“The number of our marginal positions is much lower than at the turn of the year, when there was a need for these large funding arrangements,” he says.

After thatwhen Russia launched an attack on Ukraine, Western countries have imposed exceptionally severe economic sanctions on the country.

Fortum is one of the companies in Finland with the largest exposure in Russia. The company has 12 power plants and renewable energy investments in Russia. The company will reduce the value of its holdings in Russia to EUR 5.5 billion. One-fifth of the last result, about half a billion euros, was generated in Russia.

One realized risk is Uniper’s contribution of almost EUR 1 billion to the Nord Stream 2 gas pipeline, which was put on ice by the West. The second is the collapse of the ruble seen this week.

“Income and expenses in Russia are in rubles, so the business itself does not involve significant currency risk. The question then is how the ruble-denominated result will be converted into euros. ”

The company also says it is preparing for the imposition of sanctions on its business.

“We are monitoring the situation closely. We do not do anything subject to sanctions, ”says Rauramo.

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