2011-07-19 08:00:25 CEST
2011-07-19 08:01:06 CEST
REGULATED INFORMATION
Fortum - Interim report (Q1 and Q3)
Results continued to develop well
Interim report January - June 2011
Fortum Corporation, Stock Exchange Release, 2011-07-19 08:00 CEST (GLOBE
NEWSWIRE) --
-- Comparable operating profit EUR 997 (990) million, +1%
-- Earnings per share EUR 1.29 (0.93), +39%
-- Financial position remained strong
-- Russian investment programme progressed as planned; second unit started
commercial operations
Key figures II/11 II/10 I-II/11 I-II/10 2010 LTM*
--------------------------------------------------------------------------------
Sales, EUR million 1,316 1,295 3,350 3,242 6,296 6,404
--------------------------------------------------------------------------------
Operating profit, EUR million 609 351 1,509 1,075 1,708 2,142
--------------------------------------------------------------------------------
Comparable operating profit, EUR 348 339 997 990 1,833 1,840
million
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Profit before taxes, EUR million 552 332 1,456 1,045 1,615 2,026
--------------------------------------------------------------------------------
Earnings per share, EUR 0.53 0.30 1.29 0.93 1.46 1.83
--------------------------------------------------------------------------------
Net cash from operating 410 422 864 943 1,437 1,358
activities, EUR million
--------------------------------------------------------------------------------
Shareholders' equity per share, 9.93 9.19 9.24
EUR
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Interest-bearing net debt 6.783 6.506 6,826
(at end of period), EUR million
--------------------------------------------------------------------------------
Average number of shares, 1,000s 888,367 888,367 888,367
--------------------------------------------------------------------------------
*) Last twelve months
Key financial ratios 2010 LTM
---------------------------------------------
Return on capital employed, % 11.6 13.8
---------------------------------------------
Return on shareholders' equity, % 15.7 19.1
---------------------------------------------
Net debt/EBITDA 3.0 2.5
---------------------------------------------
Fortum's President and CEO Tapio Kuula, in connection with the second quarter
2011:
“Our second quarter 2011 results realised according to our expectations and our
financial position remained strong. Both sales and comparable operating profit
increased year-on-year. The Nordic power consumption decreased slightly, while
the overall Russian power demand was slightly up in the second quarter of 2011
compared to the same period in 2010. The world-wide economic situation and
energy policy sentiment in Europe has created uncertainty in the market.
In light of Japan's Fukushima accident, it is understandable that the
heightened concern all over the world about the nuclear safety has implications
on nuclear power investments and their timing. For Fortum it is very important
that nuclear power has wide political and social acceptance. Safety reviews of
nuclear power plants and an open dialogue about the risks are necessary in
order to restore public confidence towards the industry.
In May, Germany announced plans to abandon nuclear energy by 2022, outlining a
reversal of its previous policy. The decision was made in the wake of the
Fukushima disaster aiming to replace nuclear power with renewable energy
sources. Phasing out nuclear power within a decade will be a challenge and may
affect the industry across Europe.
In June, the new Finnish Government announced its programme. The new policy
framework for the coming four-year period states that the Government will not
make any new decisions-in-principle on nuclear power. Furthermore, the
Government proposes to investigate a possible implementation of a windfall tax
and a uranium tax. The Government will also review support schemes for
renewable energy.
We must, however, not forget that climate change is - and will remain - a
serious global challenge in need of solutions. Curbing emissions and the
scarcity of natural resources are weighed against the increase in energy
consumption that is driven by population and economic growth. Energy efficiency
must be increased when bringing electricity and modern energy systems to a
growing number of people. On the other hand, the need to improve energy
efficiency emphasises the role of electricity and offers business opportunities
for Fortum. As investments in power and heat generation are highly capital
intensive, Fortum stresses the importance of a predictable and consistent
energy policy and operating environment.
Supported by our strategy, we are preparing for growth. Maintaining a strong
balance sheet that enables us to tap into attractive growth opportunities also
in the long run is a priority for us. A central part of our core competence is
emissions-free hydropower production, which has an important role in our
strategy also in the future. It is also needed to balance production and
consumption as electricity is gradually produced more with, for example, wind
and solar energy.
In addition to hydro- and nuclear power, our strategy builds on our deep
expertise in combined heat and power (CHP) production with a flexible fuel mix.
CHP-based district heating, cooling and smart grid solutions support the
development of sustainable and modern urban living. In the future, we will
continue to increase the utilisation of local biofuels and waste to reduce CO2
emissions and to improve resource efficiency.
Alongside our Nordic core business, our operations in Russia are continuously
growing. Russia is the fastest growing national economy in Fortum's current
market areas, and Fortum has committed to a sizeable investment programme in
the country. The building of new units in Russia is based on energy-efficient
technologies that save fuel and offer clear environmental benefits. We have
already inaugurated two new units in Russia and are currently finalising the
third unit. The two new units already contributed positively to the results.
Commissioning of new units decreases Fortum's risk for penalties caused by
possible delays' and thus we did a reversal of the provision, allocated to
these two units, made at the time of the acquisition.
Financial results
April - June
In April - June, Group sales were EUR 1,316 (1,295) million. Group operating
profit totalled EUR 609 (351) million. Fortum's operating profit for the second
quarter 2011 was affected by a EUR 76
(-15) million IFRS accounting treatment (IAS 39) of derivatives mainly used for
hedging Fortum's power production. The comparable operating profit, which was
not impacted by the accounting treatment, totalled EUR 348 (339) million.
The total of non-recurring items, mark-to-market effects and nuclear fund
adjustments in the second quarter of 2011 amounted to EUR 261 (12) million. Of
this total, EUR 192 million relates to the sales gain of the divestment of
shares in Fingrid Oyj.
The share of profits from associates in the second quarter was EUR 15 (15)
million, of which Hafslund ASA represented EUR -11 (12) million and TGC-1 EUR
30 (9) million. Share of profits from TGC-1 is based on the company's published
IFRS first quarter interim report. The share of profits from Hafslund is based
on the company's first quarter interim report including a write-down of
Hafslund shareholding in Renewable Corporation (REC) amounting to EUR 20
million based on the REC share price as of 30 June 2011 (see also Note14). The
effect of Hafslund's second quarter excluding REC is not included in Fortum's
second quarter results since the share of profits is based on the previous
quarter information.
Sales by division
EUR million II/11 II/10 I-II/11 I-II/10 2010 LTM
--------------------------------------------------------------------------------
Power 574 597 1,267 1,366 2,702 2,603
--------------------------------------------------------------------------------
Heat 322 301 1,047 952 1,770 1,865
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Russia 195 169 490 413 804 881
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Distribution* 215 200 526 480 963 1,009
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Electricity Sales* 183 327 556 964 1,798 1,390
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Other 19 16 49 21 51 79
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Netting of Nord Pool -150 -261 -516 -944 -1,736 -1,308
transactions
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Eliminations -42 -54 -69 -10 -56 -115
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Total 1,316 1,295 3,350 3,242 6,296 6,404
--------------------------------------------------------------------------------
* Part of the Electricity Solutions and Distribution Division
Comparable operating profit by division
EUR million II/11 II/10 I-II/11 I-II/10 2010 LTM
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Power 257 271 582 695 1,298 1,185
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Heat 25 33 196 165 275 306
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Russia 21 -9 55 7 8 56
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Distribution* 60 53 184 155 307 336
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Electricity Sales* 10 10 21 -3 11 35
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Other -25 -19 -41 -29 -66 -78
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Total 348 339 997 990 1,833 1,840
----------------------------------------------------------------
* Part of the Electricity Solutions and Distribution Division
Operating profit by division
EUR million II/11 II/10 I-II/11 I-II/10 2010 LTM
----------------------------------------------------------------
Power 271 280 760 747 1,132 1,145
----------------------------------------------------------------
Heat 25 35 290 194 303 399
----------------------------------------------------------------
Russia 21 -9 55 23 53 85
----------------------------------------------------------------
Distribution* 252 53 377 166 321 532
----------------------------------------------------------------
Electricity Sales* 23 23 3 -6 46 55
----------------------------------------------------------------
Other 17 -31 24 -49 -147 -74
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Total 609 351 1,509 1,075 1,708 2,142
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* Part of the Electricity Solutions and Distribution Division
January - June
In January-June, Group sales were EUR 3,350 (3,242) million. Group operating
profit totalled EUR 1,509 (1,075) million. Fortum's operating profit for the
period was affected by a EUR 249 (21) million IFRS accounting treatment (IAS
39) of derivatives mainly used for hedging Fortum's power production. The
comparable operating profit, which was not impacted by the accounting
treatment, totalled EUR 997 (990) million.
Non-recurring items, mark-to-market effects and nuclear fund adjustments in
January-June 2011 amounted to EUR 512 (85) million. Of this total,
non-recurring items totalled EUR 275 (50) million, which mainly relates to the
divestment of the district heat operations and production facilities outside
Stockholm and divestment of shares in Fingrid Oyj.
The average Swedish krona (SEK) rate was approximately 9% stronger against the
euro during the first half of 2011 than during the corresponding period in
2010. Power Division was burdened by the higher cost levels due to the SEK/EUR
ratio and the euro-denominated power sales. The strong SEK also had a negative
impact on the cash flow.
The share of profits of associates and joint ventures was EUR 74 (31) million.
The improvement from last year was mainly due to the improvement in the
contribution from TGC-1 and Hafslund ASA.
The Group's net financial expenses increased to EUR 127 (61) million. The
increase is attributable to higher interest expenses and to the change in the
fair value of financial instruments of EUR -3 (19) million.
Profit before taxes was EUR 1,456 (1,045) million.
Taxes for the period totalled EUR 232 (191) million. The tax rate according to
the income statement was 15.9% (18.3%).
The profit for the period was EUR 1,224 (854) million. Fortum's earnings per
share were EUR 1.29 (0.93). The effect on earnings per share by the accounting
treatment of derivatives was EUR 0.21 (0.02).
Non-controlling (minority) interests amounted to EUR 74 (32) million. These are
mainly attributable to Fortum Värme Holding AB, in which the city of Stockholm
has a 50% economic interest. The increase in the first half of 2011, compared
to the corresponding period in 2010, is mainly due to the minority's share, EUR
30 million, of the gain recognised in the first quarter from the divestment of
Fortum Värme's heat businesses outside the Stockholm area.
Cash flow from operating activities totalled EUR 864 (943) million. It was
affected by the realised foreign exchange gains and losses, which amounted to
EUR -251 (-277) million in January-June 2011. The negative currency impact
occurred during the first quarter. The foreign exchange gains and losses relate
to the rollover of foreign exchange contracts hedging loans to Fortum's Swedish
subsidiaries.
Fortum's financial key ratios for the last twelve months were: return on
capital employed 13.8% (11.6% at the end of 2010), return on shareholders'
equity 19.1% (15.7% at the end of 2010) and net debt to EBITDA 2.5 (3.0 at the
end of 2010). The comparable net debt to EBITDA for the last twelve months was
2.8.
Outlook
Key drivers and risks
Increasing global economic uncertainty and Europe's sovereign-debt crisis
weakens the outlook for economic growth and recovery. The key factor
influencing Fortum's business performance is the wholesale price of
electricity. The key drivers behind wholesale price development are the
supply-demand balance, fuel and CO2-emissions allowance prices as well as the
hydrological situation. The exchange rates of the Swedish krona (SEK) and
Russian rouble (RUB) also affect Fortum's financials. The balance sheet
translation effects from changes in currency exchange rates are booked in
Fortum's equity.
Fortum's financial results are exposed to a number of strategic, financial and
operational risks. For further details on Fortum's risks and risk management,
see Fortum's Operating and Financial Review and Financial Statements for 2010.
Nordic market
Fortum currently expects Nordic power demand to recover back to the 2008 level
by 2012-2014. Electricity will continue to gain a higher share of the total
energy consumption. Temperature-corrected power consumption in the Nordic
countries is still approximately 4% (16 TWh) lower than in 2008 on an annual
level.
Oil, coal and gas prices have decreased a few percentages during the second
quarter of 2011. CO2 prices, however, decreased by over 20 % at the end of the
quarter due to financial uncertainty in Europe and energy-efficiency proposals
in the EU.
In Germany, forward prices decreased by 5% at the end of the quarter as a
consequence of decreasing CO2 costs. Also Nordic forward prices decreased by
about 5 % due to decreased CO2 costs as well as increased water reservoir
levels.
In mid July 2011, the electricity forward price in Nord Pool for the rest of
2011 was around EUR 49 per MWh. The electricity forward price for 2012 was
around EUR 47 per MWh and for 2013 around EUR 47 per MWh. In Germany, the
electricity forward price for the rest of the year was around EUR 59 per MWh
and EUR 57 per MWh for 2012. At the same time, the future quotations for coal
(ICE Rotterdam) for the rest of 2011 were around USD 125 per tonne and the
market price for CO2-emissions allowances (EUA) for 2011 was about EUR 12 per
tonne.
In mid July 2011, Nordic water reservoirs were about 2 TWh below the long-term
average and 14 TWh above the corresponding level of 2010.
Russia
The Russian wholesale power market was liberalised from the beginning of 2011.
All generating companies continue to sell a part of their electricity and
capacity equalling the consumption of households under regulated prices.
The new rules for the capacity market starting from 2011 have been approved by
the Russian Government. The generation capacity built after 2007 under
government capacity supply agreements (CSA - “new capacity”) will receive
guaranteed payments for a period of 10 years. Prices for capacity under CSA are
defined in order to ensure a sufficient return on investments. Capacity not
under CSA will compete in competitive capacity selection (CCS - “old
capacity”).
In December 2010, the first CCS for the year 2011 was held in accordance with
the new rules of the capacity market. The new rules stipulate that capacity
payments under CCS are made according to available capacity instead of earlier
used installed capacity. This decreases the old capacity payments for CHP power
plants especially during the summer period. The original plan to decide the CCS
for the period 2012-2015 during the fourth quarter in 2011 has been changed and
now covers only the year 2012.
Upon completion, OAO Fortum's new capacity will be a key driver for solid
earnings growth in Russia as it will bring income from new volumes sold and
receive considerably higher capacity payments than the old capacity. In 2011,
OAO Fortum's weighted price of the old capacity is expected to be, on average,
approximately RUB 160,000/MW/month, marginally lower than earlier expected, due
to removal of the inflation correction for 2011. The price might, however,
differ due to the location of the plants and due to seasonality. The first and
fourth quarters have higher capacity income than the second and third quarters
due to the seasonality of the business. The payments for the new capacity are
currently estimated to be approximately 3-4 times higher than the average price
for the old capacity. The return for the new capacity is guaranteed, but might
vary somewhat because it is linked to the Russian Government long-term bonds
with 8 to 10 years maturity.
In light of the recovering post-crises demand and the development of the
Russian capacity market, Fortum has accelerated the schedule of OAO Fortum's
committed investment programme and is planning to commission the last new units
by the end of 2014. The value of the remaining part of the investment
programme, calculated at exchange rates prevailing at the end of June 2011, is
estimated to be approximately EUR 1.3 billion as of July 2011. The first two
new units started capacity sales in early February and June 2011. One more new
unit is estimated to start capacity sales in the third quarter of 2011.
The average regulated gas price increased by 15% from the beginning of the year
compared with the average price in 2010. The regulated gas price is expected to
remain unchanged for the rest of 2011. The regulated electricity price is
indexed to the regulated gas price and inflation on an annual basis.
OAO Fortum's efficiency improvement programme has proceeded according to plans.
During the second quarter of 2011, OAO Fortum reached its targeted annual
efficiency improvements of EUR 100 million compared to the level at the time of
the acquisition in 2008.
Capital expenditure and divestments
Fortum currently expects annual capital expenditure in 2011 and 2012 to be
around EUR 1.6-1.8 billion, excluding potential acquisitions. The annual level
of Fortum's capital expenditure in 2013-2014 is estimated to total EUR 1.1-1.4
billion. The main reason for high capital expenditures in 2011-2012 is the
acceleration in Fortum's Russian investment programme. The annual maintenance
capital expenditure is estimated to be approximately EUR 500-550 million in
2011, approximately at the level of depreciation.
In March 2011, Fortum divested its district heat operations outside the
Stockholm area in Sweden. The sales price was approximately EUR 220 million.
In addition, Fortum finalised the divestment of its 25% shareholding in the
Finnish transmission system operator Fingrid Oyj in April 2011. The sales price
was EUR 325 million.
Taxation
The Swedish Government increased the hydro property tax rates at the beginning
of 2011. The additional cost from the tax rate increase is estimated to be
approximately EUR 15 million in 2011.
As of 1 January 2011, taxes on fuels for heat production as well as taxes on
electricity were increased considerably in Finland. Tax increases are reflected
in end-user prices of heat and electricity, accordingly.
The effective corporate tax rate for Fortum in 2011 is currently estimated to
be 19-21% excluding the impact of share of profits of associated companies and
joint ventures, non-taxable capital gains as well as non-recurring items.
Hedging
The hedge price for Fortum Power Division's Nordic generation excludes hedging
of condensing power margin, i.e. hedging of Meri-Pori and Inkoo coal-condensing
power plants. In addition, the hedge ratio now excludes the financial hedges
and physical volume of Fortum's coal-condensing generation as well as imports
from Russia.
At the end of June 2011, approximately 70% of the Power Division's estimated
Nordic power sales volume was hedged at approximately EUR 45 per MWh for the
rest of the calendar year 2011. The corresponding figures for the calendar year
2012 are approximately 50% at approximately EUR 46 per MWh.
The reported hedge ratios may vary significantly, depending on Fortum's actions
on the electricity derivatives markets. Hedges are mainly financial contracts,
most of them Nord Pool forwards.
Profitability
The Power Division's Nordic power price typically depends on e.g. the hedge
ratio, hedge price, spot prices, availability and utilisation of Fortum's
flexible production portfolio, and currency fluctuations. Excluding the
potential effects from the changes in the power generation mix, a 1 EUR/MWh
change in the Power Division's Nordic power sales price will result in an
approximately EUR 45 million change in Fortum's annual comparable operating
profit. In addition, the comparable operating profit of the Power Division will
be affected by the possible thermal power generation amount and its profit.
Fortum believes that additional safety criteria could be introduced for new and
old nuclear power plants. In 2011, the division's costs are estimated to remain
roughly at the same level as in 2010 excluding the SEK translation and Swedish
hydro property tax effects. The impact of the expired Russian power import
contract is estimated to be approximately EUR -40 million for the full-year
2011. The Power Division's comparable operating profit is expected to be more
year-end weighted in 2011 compared to 2010, mainly driven by improved nuclear
availability and strengthened hydro balance.
The development of Fortum's result has been good. The company has managed its
performance well and kept its financial position solid in a demanding
environment. The strong balance sheet combined with a flexible, cost-efficient
and sustainable generation portfolio creates a firm basis going forward.
Espoo, 19 July 2011
Fortum Corporation
Board of Directors
Further information:
Tapio Kuula, President and CEO, tel. +358 10 452 4112
Juha Laaksonen, CFO, tel. +358 10 452 4519
Fortum's Investor Relations, Sophie Jolly, +358 10 453 2552, and Rauno
Tiihonen, +358 10 453 6150 / investors@fortum.com
More information, including detailed quarterly information, is available on
Fortum's website at www.fortum.com/investors.
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