Fitch upgrades Fortum to BBB+ with stable outlook

Investing.com -- Fitch Ratings upgraded Fortum (HE:FORTUM) Oyj’s Long Term Issuer Default Rating (IDR) and senior unsecured rating to ’BBB+’ from ’BBB’ on Tuesday, while maintaining a Stable outlook. The Short-Term IDR was also upgraded to ’F2’ from ’F3’.

The upgrade reflects Fortum’s sustained deleveraging since 2023 and expectations that the company’s funds from operations (FFO) net leverage will remain low at an average of 1.8x over 2025-2028. This is below the negative rating sensitivity of 2.3x at the ’BBB+’ level, which Fitch considers consistent with Fortum’s current business profile.

According to Fitch, Fortum is expected to maintain prudent financial discipline with FFO net leverage at 1.5x over 2025-2026, comfortably below the negative threshold for the ’BBB+’ IDR. The rating agency projects Fortum will generate positive pre-dividend free cash flow of around €0.3 billion annually from 2025 to 2028, even as power prices in the Nordic region remain low.

The Stable outlook indicates Fitch’s expectation that Fortum will balance dividend distributions and investments to adhere to its financial policy, keeping leverage below the maximum threshold of 2.0x-2.5x for reported EBITDA net leverage.

Fortum’s 2024 EBITDA was €1.5 billion, in line with Fitch’s expectations but below the previous year’s €1.9 billion, reflecting declining Nordic power prices and lower generation volumes from the company’s nuclear and hydro fleet. Despite this earnings decline, Fortum’s FFO net leverage decreased to 0.3x in 2024 from 0.8x in 2023, primarily due to the €0.8 billion divestment of recycling and waste assets and €0.3 billion from collected margin calls.

Fitch projects Fortum’s EBITDA to normalize at around €1.1 billion in 2025-2028. The company remains significantly exposed to Nordic electricity prices, which face downward pressure due to Finland’s renewable energy ambitions and abundant hydro resources in the region.

The special dividend of €0.4 billion announced for 2025 implies re-leveraging of 0.5x, which Fitch considers manageable given the low starting point.

Fortum’s annual capital expenditure guidance remains subdued, with investments for 2025-2027 totaling €1.4 billion, half of which relates to maintenance. This reflects a cautious approach due to unfavorable power prices and subdued electricity demand in the short term.

The company is focused on reducing business risk and improving cash flow visibility through increased long-term hedging, aiming to reach a 20% hedged share of rolling 10-year generation by 2026, up from 18% at the end of 2024.

Fitch applies its Government-Related Entities Rating Criteria to reflect the Finnish state’s controlling 51.3% stake in Fortum. However, this has no rating impact as the agency does not assess precedents of support as ’Strong’.

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