Fortum leaves Russia without turning off the lights

The Finnish energy company urgently sells all business in Russia.
The Finnish energy concern Fortum has decided to leave the Russian market. The company intends to sell its assets, including the Unipro energy company, and will also stop using its brand in the Russian Federation. Kommersant's sources note that there are many contenders for the enterprises - among them are the structures of Gazprom and Inter RAO - but agreements on the sale have not yet been reached. According to Kommersant, Fortum has offers to sell individual thermal power plants, but the company wants to go out of business entirely.

On May 12, the Finnish company Fortum announced that it had decided to sell Russian assets and ban the use of the brand in Russia. Fortum and its German subsidiary Uniper own the Russian generating companies Fortum and Unipro, and their portfolio includes 12 coal-fired and gas-fired thermal power plants with a capacity of 16 GW.

The Finns entered the Russian energy sector during the reform of RAO UES of Russia (liquidated in 2008) by purchasing TGK-10. Now Fortum also owns a 29.45% stake in TGC-1 (owns thermal power plants and hydroelectric power plants in the north-west of the Russian Federation, controlled by Gazprom Energoholding), wind and solar generation. The company estimated the book value of Russian assets at €5.5 billion. In the first quarter, due to geopolitical risks, Fortum already depreciated them by €2.1 billion.

In March, Fortum only talked about the suspension of investments in new projects in the Russian Federation against the backdrop of a special operation in Ukraine, but even then Uniper officially confirmed plans to sell Unipro.

Now Fortum announces “a controlled withdrawal from the Russian market”.

“The preferred option is the potential sale of Russian enterprises,” the concern explained, adding that the sale of Unipro would be resumed as soon as possible. The head of Fortum, Alexander Chuvaev, explained the decision of the shareholder by the difficulty of developing assets in the Russian Federation due to sanctions restrictions.

According to Kommersant's sources, negotiations on the sale of Fortum and Unipro are already underway, so far there are no firm agreements with anyone, but interest in assets is high. According to one of Kommersant's interlocutors, so far Fortum has received offers to sell individual gas thermal power plants, but the company wants to sell the assets only in its entirety. It is difficult to estimate the market value of Fortum, the cost of a stake in TGC-1 can reach 8.75 billion rubles, in Unipro - 74.5 billion rubles.

Kommersant's interlocutors call Gazprom Energoholding (which manages Gazprom's energy sector) and Inter RAO among the main interested parties. The latter has been negotiating the purchase of Unipro for a long time, but considers the asking price too high. Unipro and Fortum may also be of interest to NOVATEK as major gas buyers, according to Kommersant's interlocutors in the market. Unipro gas consumption in 2021 amounted to 10.3 billion cubic meters, Fortum — 7 billion cubic meters in 2020. Given the geopolitical situation, domestic consumers may become a significant part of the business for gas companies, while NOVATEK was interested in participating in thermal generation in the mid-2000s. Gazprom, Inter RAO, NOVATEK did not respond to Kommersant's request. Fortum did not provide further comment.

Kommersant's interlocutors in the market generally believe that a decrease in the number of active players in generation reduces the competitiveness of the industry, and hence the effectiveness of pricing. Fortum set the tone for the green transition, including bringing Vestas, the largest equipment manufacturer, to the Russian Federation and aggressively reducing construction costs. In addition, Fortum and Unipro were actively paying dividends, pushing the sector as a whole to improve corporate governance standards.

But Kommersant's sources believe that Fortum may still have to agree to the sale of assets separately, and entire parts of the business will not be able to find new owners, regardless of the potential discount.

In particular, in addition to the obvious geopolitical difficulties, there is a problem of selected renewable energy projects: refusal of them threatens with serious fines, while it is not clear "how interesting such a portfolio is to buyers in the absence of a technology partner and the risks of equipment maintenance." Unipro is ending the period of increased payments under power supply contracts, which will seriously reduce the company's profitability in the next three to four years.

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