38FE Fingrid 29

FINGRID GROUP – MANAGEMENT’S REVIEW 1.1.−30.9.2022

Stock Exchange Release 25 October 2022 at 11:45 EET

Fingrid follows a six-month reporting period as referred to in the Securities Markets Act and publishes Management Reviews for the first three and nine months of the year; the Management Reviews contain key information illustrating the company’s financial and other development.

The information presented in the Management’s Review relates to Fingrid Group’s performance in January-September 2022 and the corresponding period of 2021, unless otherwise indicated. The figures presented here have been drawn up in accordance with the International Financial Reporting Standards (IFRS). The Management’s Review is not an interim report in accordance with the IAS 34 standard. The figures are unaudited.

• Due to a high balancing power price, the company’s turnover reached record levels at EUR 1,243.4 (690.8) million. Operating profit excluding the change in the fair value of derivatives was EUR 86.5 (114.3) million. Accumulated grid service revenue was close to last year’s level. The termination of electricity imports from Russia significantly reduced the amount of cross-border transmission income compared to the previous year. The profit for the period grew significantly due to the change in the market value of electricity derivatives hedging loss power procurement.
• The strong growth in market-based costs continued in the third quarter, with costs at a significantly higher level year-on-year. 
• EUR 119.7 (0.0) million was recognised in the income statement in congestion income accumulating for Fingrid from electricity area price differences from Finland’s cross-border connections. The congestion income compensated for the strong rise in costs and therefore grid service fee increases were not needed.
• The company’s liquidity has remained strong.

Review by the President & CEO: “Fingrid’s focus is on managing the energy crisis and an emission-free future”

The exceptional situation on the energy markets has continued due to the war in Europe. The high price of gas has kept electricity prices elevated throughout Europe. However, the northernmost part of Europe has benefited from clean energy production, and Finland, too, has seen the price of electricity remain lower than in more southern areas of Europe. The exceptional situation has impacted Fingrid’s finances through a significant increase in market-based costs compared to a normal situation, and in increased uncertainty in costs. Large differences in electricity market area prices manifest as increased congestion income, which the company has used for cross-border transmission line investments and compensation of increased market-based costs. 

The energy crisis has heightened the uncertainty surrounding the availability of electricity in the coming winter. We released the first estimate of the adequacy of electricity in August. We updated the assessment at the start of October. The message is clear: as a result of major uncertainty, Finns should prepare for possible power outages caused by electricity shortages this coming winter. Finns have embraced the electricity saving campaign: electricity consumption has decreased in September by an average of seven per cent compared to the previous year. This will help with the winter’s power balance and improve the adequacy of electricity. Due to the unusual electricity market situation and dramatic increase in the price of balancing power, market participants concerns surrounding the collateral requirements of balance responsible parties has increased. Together with the authorities and market participants, Fingrid is working to find solutions for the presented concerns and next winter’s situation.

While we are focussing on managing the current crisis, we are also looking decisively into the future. Our investment programme has continued according to plan despite the challenging circumstances and we have been able to make progress on demanding transmission line and substation projects – on schedule and on budget. The most significant completed project was the Forest Line, which was completed at the end of September. It is one of Fingrid’s four north–south, 400-kilovolt main transmission lines. Construction of the Forest Line was begun in 2019 as part of Fingrid’s long-term development plan. The connection significantly boosts the electricity transmission capacity between northern and southern Finland, helping to efficiently transmit northern renewable energy production to electricity consumers. The Forest Line also enables investments in the current expansion of cross-border capacity between Sweden and Finland.

Key figures

€M	1−9/22	1−9/21	change %	1−12/21
Turnover	1,243.4	690.8	80.0	1,090.9
Operating profit*	86.5	114.3	-24.4	148.6
Profit before taxes	376.9	139.3	170.6	187.6
Profit before taxes**	75.5	106.7	-29.2	137.6
Profit for the period	301.4	111.3	170.7	150.1
Capital expenditure, gross	194.4	142.2	36.7	213.4
Net cash flow from operations***	630.6	155.0	306.8	242.2
Interest-bearing net debt	439.2	1,032.8	-57.5	938.5
Balance sheet total	3,312.5	2,348.3	41.1	2,559.5
Equity ratio %	24.6	25.9		25.3
* Operating profit excluding the change in the fair value of derivatives
** Profit before taxes excluding the change in the fair value of derivatives
*** Net cash flow from operations, after capital expenditure

• Profit before taxes excluding the change in the fair value of derivatives was EUR 75.5 (106.7) million. The decrease in operating profit is a consequence of a decrease in the reasonable rate of return compatible with regulation. This is a consequence of last year’s low interest rate level. The exceptional electricity market situation has significantly increased congestion costs and the power system’s reserve costs and loss power procurement costs, and decreased the imbalance power gross profit.
• Fingrid’s share of the congestion income from the cross-border transmission connections between Sweden and Finland and Estonia and Finland grew considerably to EUR 741.3 (129.3) million. EUR 93.3 million of the accumulated congestion income has been used for completed investment projects increasing the cross-border transmission capacity. Furthermore, a total of EUR 119.7 (0.0) million in congestion income has been allocated to turnover and other operating income to compensate for the dramatic growth in market-based costs.
• Net cash flow from operations has increased, mainly as a result of the growth in congestion income.

Main business events

• During January-September, with the exception of a few disturbances, the system security of Fingrid’s grid was good. The transmission reliability rate of Fingrid’s grid was 99.99995 (99.99997) per cent. As a result of a major power production deficit, Fingrid ran reserve power plants on 8 September to maintain the power balance. In addition, a frequency deviation occurred on 24 September 2022 in the main grid in connection with the commissioning testing of a major power plant, causing the frequency to fall to 49.43 Hz at its lowest. Power system reserves were activated in the situation and the frequency deviation did not endanger the stability of the electricity system. 
• During 2022, new electricity production of 1,182 megawatts has been connected to the grid. The volume of electricity production capacity based on wind power was 4,386 megawatts at the end of September, bringing growth to a total of 37 per cent year-on-year.
• Between January and September, electricity consumption in Finland totalled 59.6 (62.9) terawatt hours. In the same period, Fingrid transmitted a total of 52.6 (53.3) terawatt hours in its grid, representing 80.0 (78.0) per cent of the total electricity transmission in Finland. During this period, the electricity Fingrid transmitted to its customers amounted to 46.3 (47.8) terawatt hours, which represents 77.7 (75.9) per cent of Finland’s total consumption.
• Fingrid had 58 substation projects and 233 kilometres of transmission line under construction and a total of 680 km of transmission line in general planning. Investments in the review period totalled EUR 194.4 (142.2) million. After the summer, the company made investments decisions on a 400-kilovolt transmission connection between Huittinen and Forssa, a 110-kilovolt substation in Metsämaa and a 110-kilovolt substation project in Framnäs. These investments will support system security, allow more wind power to be connected to the electricity system in Ostrobothnia and connect significant electricity consumption to the main grid in southern Finland. 
• Guaranteeing the operation of the power system in disturbances and maintaining system security require both electricity consumption and production capacity, which can be used to balance the power system in disturbance situations. As a result of a significant increase in power system reserve costs and an increase in the costs of procurement of balancing power, imbalance power tariffs were raised as of 1 September 2022. The imbalance power tariff is currently 1.2 €/MWh and the tariff is equally large for balance responsible parties for both electricity production and consumption. 
• In August, Fingrid released an estimate of electricity adequacy for the coming winter and warned of possible power outages caused by electricity shortages. The warning is due to the war in Europe and the exceptional energy market situation, which have increased uncertainties related to the availability of electricity.
• Fingrid released a draft of Finland’s electricity system vision. The vision includes four separate future scenarios on electricity production and consumption development for the years 2035 and 2045. 

Legal proceedings and proceedings by authorities

Teollisuuden Voima Oyj (“TVO”) has lodged a request for an investigation with the Energy Authority on 25 May 2022 related to the claims by TVO that Fingrid has neglected its obligation to develop the main grid as stated in the Finnish Electricity Market Act and/or other applicable legislation, and that, as a result, it has placed unlawful restrictions on connecting the Olkiluoto 3 nuclear power plant to the grid, and that Fingrid is in breach of its administrative obligations linked to carrying out its public administrative task. Fingrid’s view is that the claims made by TVO are unfounded. On 26 August 2022, Fingrid lodged a statement of defence with the Energy Authority concerning the claims made by TVO in its request for an investigation.

Events after the review period

• The Energy Authority decides on the use of the congestion income received by Fingrid in line with EU regulation. A regulatory letter submitted to Fingrid by the Energy Authority on 5 October 2022 specifies the use of congestion income in 2022 and 2023. The decision concerning the use of congestion income is provided in conjunction with the company’s regulatory decision after each regulatory period. 
• On 12 October 2022, Fingrid announced that it would waive grid service fees for December 2022 and January, February and June of 2023. The goal is to, in future, use congestion income actively for investments increasing cross-border transmission capacity and to use them to cover operating costs to benefit Fingrid’s customers.
• The exceptional situation on the electricity markets increases the uncertainty of the company’s market-based costs. Area price differences in the Nordic power system will increase Fingrid’s share of the congestion income during the financial period. 

The company has not changed its earnings guidance from what is stated in the half-year report of 27 July 2022.

Further information:Jukka Ruusunen, President and CEO, Fingrid Oyj, tel. +358 40 593 8428Jukka Metsälä, Chief Financial Officer, Fingrid Oyj, tel. +358 40 563 3756

Fingrid is Finland’s transmission system operator. We secure reliable electricity for our customers and society, and shape the clean, market-oriented power system of the future.

Fingrid delivers. Responsibly. www.fingrid.fi