2016-07-20 08:00:01 CEST
2016-07-20 08:00:01 CEST
SÄÄNNELTY TIETO
Fortum - Interim report (Q1 and Q3)
Fortum Interim Report January-June 2016: Operationally a good quarter, but weak power prices continue to burden profits
FORTUM CORPORATION INTERIM REPORT JANUARY−JUNE 2016 20 JULY 2016 AT 9:00 EEST
April−June 2016, continuing operations
• Comparable operating profit EUR 122 (143) million, -15%
• Operating profit EUR 67 (144) million, of which EUR -54 (1) million relates
to items affecting comparability
• Earnings per share EUR 0.06 (0.13), of which EUR -0.05 (0.00) related to
items affecting comparability. Earnings per share in the corresponding period
of 2015, including the effect from discontinued operations, were EUR 4.98
• Cash flow from operating activities totalled EUR -5 (229) million
• Fortum signed an agreement to acquire Ekokem Corporation
January−June 2016, continuing operations
• Comparable operating profit EUR 397 (486) million, -18%
• Operating profit EUR 437 (494) million, of which EUR 40 (8) million relates
to items affecting comparability
• Earnings per share EUR 0.43 (0.46), of which EUR 0.03 (0.01) related to items
affecting comparability. Earnings per share in the corresponding period of
2015, including the effect from discontinued operations, were EUR 5.38
• Cash flow from operating activities totalled EUR 370 (745) million
• Fortum completed its multi-year investment programme in Russia
• Fortum business structure reorganised and new Executive Management Team as of
1 April 2016
• Fortum acquired the Polish electricity and gas sales company Grupa DUON
Summary of outlook
• Fortum continues to expect the annual electricity demand to grow in the
Nordic countries by approximately 0.5% on average
• The Generation segment's Nordic generation hedges: approximately 75% hedged
at EUR 29 per MWh for the rest of 2016; and for 2017, approximately 45% hedged
at EUR 27 per MWh
• Operating profit level (EBIT) for the Russia segment, RUB 18.2 billion, is
targeted to be reached during 2017-2018. The euro-denominated result level will
be volatile, due to the translation effect
Key financial ratios* 2015 LTM
-----------------------------------------
Return on capital employed, % 22.7 -0.7
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Comparable net debt/EBITDA -1.7 -0.9
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* Key financial ratios are based on total Fortum, including discontinued
operations
Key figures II/16 II/15 I-II/1 I-II/1 2015 LTM
6 5
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Sales, EUR million 768 794 1,757 1,834 3,459 3,382
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Comparable EBITDA, EUR million
--------------------------------------------------------------------------------
continuing operations 209 228 566 624 1,102 1,044
--------------------------------------------------------------------------------
discontinued operations - 52 - 163 163 -
--------------------------------------------------------------------------------
total Fortum 209 280 566 788 1,265 1,044
--------------------------------------------------------------------------------
Comparable operating profit, EUR
million
--------------------------------------------------------------------------------
continuing operations 122 143 397 486 808 719
--------------------------------------------------------------------------------
discontinued operations - 32 - 114 114 -
--------------------------------------------------------------------------------
total Fortum 122 175 397 600 922 719
--------------------------------------------------------------------------------
Operating profit, EUR million
--------------------------------------------------------------------------------
continuing operations 67 144 437 494 -150 -207
--------------------------------------------------------------------------------
discontinued operations - 4,314 - 4,395 4,395 -
--------------------------------------------------------------------------------
total Fortum 67 4,458 437 4,889 4,245 -207
--------------------------------------------------------------------------------
Share of profits of associates and
joint ventures, EUR million
--------------------------------------------------------------------------------
continuing operations 38 22 105 80 20 45
--------------------------------------------------------------------------------
discontinued operations - 0 - 0 0 -
--------------------------------------------------------------------------------
total Fortum 38 22 105 80 20 45
--------------------------------------------------------------------------------
Profit before taxes, EUR million
--------------------------------------------------------------------------------
continuing operations 61 143 451 493 -305 -347
--------------------------------------------------------------------------------
discontinued operations - 4,313 - 4,393 4,393 -
--------------------------------------------------------------------------------
total Fortum 61 4,456 451 4,887 4,088 -347
--------------------------------------------------------------------------------
Earnings per share, EUR
--------------------------------------------------------------------------------
continuing operations 0.06 0.13 0.43 0.46 -0.26 -0.29
--------------------------------------------------------------------------------
discontinued operations - 4.85 - 4.92 4.92 -
--------------------------------------------------------------------------------
total Fortum 0.06 4.98 0.43 5.38 4.66 -0.29
--------------------------------------------------------------------------------
Net cash from operating activities, -5 229 370 745 1,228 853
EUR million, continuing operations
--------------------------------------------------------------------------------
Shareholders’ equity per share, EUR 14.92 16.76 15.53
--------------------------------------------------------------------------------
Interest-bearing net debt (at end -934 -1,846 -2,195
of period), EUR million
--------------------------------------------------------------------------------
Fortum’s President and CEO Pekka Lundmark:
“Some positive signs were seen during the second quarter, although the overall
business environment continues to be demanding. The end of the quarter was also
characterized by increased commodity market volatility partly explained by the
British EU exit vote.
Operationally, the quarter met our expectations, as availability in our plants
was good and ongoing projects progressed as planned. The comparable operating
profit was somewhat below last year, mainly because of lower achieved
electricity prices and lower hydro volumes compared to the second quarter of
2015.
We have now taken several important steps in the implementation of our new
strategy. The highlight of the quarter was the agreement to buy Ekokem
Corporation, a leading Nordic circular economy company specialised in material
and waste recycling, waste-to-energy, final disposal solutions, soil
remediation and environmental construction. Ekokem’s business is at the center
of one of the most powerful global megatrends: the reuse of materials to save
natural resources. The acquisition is a clear fit to Fortum’s business. It
diversifies our revenue streams while maintaining a strong link to our
traditional core – the energy system. Fortum obtained the required competition
clearances in July, and we expect to be able to finalise the deal during the
third quarter.
During the quarter Fortum also concluded the acquisition of the Polish
electricity and gas sales company DUON, as part of our strategy to grow in
electricity sales and related customer solutions. DUON offers us a good
platform in the large and fast developing Polish market. The integration of
DUON into City Solutions is ongoing.
In India, we have now defined the targeted scope of our solar investment
program. We plan to allocate EUR 200–400 million of our growth capital to solar
projects in the country, which offers some of the best solar resources
available as well as sound government support for development of the solar
sector.
In Sweden, the key political parties came to an agreement on energy policy in
June 2016. Two decisions were particularly important for Fortum. First, it was
decided that the tax on installed nuclear capacity will be phased out over two
years starting in 2017. And second, the hydropower real estate tax will be
decreased over a four-year period starting in 2017, from today’s 2.8% to 0.5%.
A well-functioning market in the Nordic region requires fair treatment of
different forms of production and the decisions were a good first step towards
this goal.
We expect the energy sector transformation to accelerate in the future. Ekokem
marks an important step in our capital reallocation after the divestments of
the distribution businesses, and the work continues. At the same time when we
lower the cost and improve the productivity of our existing operations, we will
focus on further organic and M&A growth opportunities.“
Fortum’s new vision, strategic cornerstones and updated financial targets
In February, Fortum launched its new vision, strategic cornerstones and updated
financial targets. The new vision and strategy targets growth and continued
profitability with a strong focus on clean energy, customers and shareholder
value creation.
The long-term financial target for return on capital employed (ROCE) has been
revised to at least 10%, while the target for comparable net debt to EBITDA,
around 2.5 times, remains unchanged. The dividend policy also remains
unchanged.
Fortum's strategy has four cornerstones: (1) enhance productivity of the
current fleet and drive industry transformation, (2) create sustainable
solutions for growing cities and urban areas, (3) increase investments in solar
and wind power, and (4) build new energy ventures.
Reorganisation of operations
Fortum has reorganised its operating structure as of 1 April 2016. The target
of the new organisation is to enable the implementation of the company’s new
vision and strategy. The new organisation consists of three business divisions:
Generation, City Solutions and Russia. In addition, two development units
focusing on growing new businesses were established: (1) M&A and Solar & Wind
Development, and (2) Technology and New Ventures.
The changes to Fortum's segment reporting are minor at this point and the
company will keep four reporting segments. The segments as of the second
quarter 2016 are: Generation (mainly the former Power and Technology); City
Solutions (mainly the former Heat, Electricity Sales and Solutions); Russia,
and Other, under which M&A, Solar&Wind Development, Technology and New Ventures
as well as corporate functions will be reported. Some businesses will be
repositioned due to the reorganisation, but because of the minor financial
impact, the comparable segment information for 2015 has not been restated.
Segment information for the first quarter 2016 according to the new
organisation can be found in the separate Quarterly information-excel published
in connection with this report.
Following the divestment of the Swedish distribution business, Fortum no longer
has electricity distribution operations. The Distribution segment was
reclassified as discontinued operations as of the first quarter of 2015.
The financial results discussed in this interim report are for the continuing
operations of Fortum Group.
Financial results
Sales by segment
EUR million II/16 II/15 I-II/16 I-II/15 2015 LTM
-------------------------------------------------------------------------------
Generation 384 404 851 904 1,722 1,669
-------------------------------------------------------------------------------
City Solutions 260 244 657 650 1,187 1,194
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Russia 182 211 431 474 893 850
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Other 30 29 62 58 114 118
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Netting of Nord Pool transactions -69 -64 -189 -183 -336 -342
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Eliminations -20 -31 -54 -69 -122 -107
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Total continuing operations 768 794 1,757 1,834 3,459 3,382
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Discontinued operations - 95 - 274 274 -
-------------------------------------------------------------------------------
Eliminations - -11 - -31 -31 -
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Total Fortum 768 878 1,757 2,078 3,702 3,382
-------------------------------------------------------------------------------
Comparable operating profit by segment
EUR million II/16 II/15 I-II/16 I-II/15 2015 LTM
----------------------------------------------------------------------
Generation 98 114 253 317 561 497
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City Solutions 7 11 65 68 108 105
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Russia 34 35 113 132 201 182
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Other -18 -17 -34 -32 -63 -65
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Total continuing operations 122 143 397 486 808 719
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Discontinued operations - 32 - 114 114 -
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Total Fortum 122 175 397 600 922 719
----------------------------------------------------------------------
Operating profit by segment
EUR million II/16 II/15 I-II/16 I-II/15 2015 LTM
------------------------------------------------------------------------
Generation 32 117 243 320 -396 -473
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City Solutions 18 9 81 73 105 113
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Russia 36 36 147 133 203 217
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Other -18 -17 -34 -32 -62 -64
------------------------------------------------------------------------
Total continuing operations 67 144 437 494 -150 -207
------------------------------------------------------------------------
Discontinued operations - 4,314 - 4,395 4,395 -
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Total Fortum 67 4,458 437 4,889 4,245 -207
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April–June 2016
In the second quarter of 2016, sales decreased to EUR 768 (794) million, mainly
due to lower volumes and a lower Russian rouble than during the corresponding
period in 2015. Comparable operating profit totalled EUR 122 (143) million and
reported operating profit totalled EUR 67 (144) million. Fortum's operating
profit for the period was impacted by items affecting comparability, including
sales gains and IFRS accounting treatment (IAS 39) of derivatives mainly used
for hedging Fortum's power production and nuclear fund adjustments for
continuing operations, amounting to EUR -54 (1) million (Note 4).
The share of profit from associates was EUR 38 (22) million, of which Hafslund
represented EUR 18 (14), TGC-1 EUR 18 (16) and Fortum Värme EUR 1 (-7) million.
The share of profit from Hafslund and TGC-1 are based on the companies'
published first-quarter 2016 interim reports (Note 14).
January–June 2016
In January-June 2016, sales decreased to EUR 1,757 (1,834) million. Comparable
operating profit totalled EUR 397 (486) million and reported operating profit
totalled EUR 437 (494) million. Fortum's operating profit for the period was
impacted by items affecting comparability, including sales gains and IFRS
accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's
power production and nuclear fund adjustments for continuing operations,
amounting to EUR 40 (8) million (Note 4).
The share of profit from associates was EUR 105 (80) million, of which Hafslund
represented EUR 32 (21), TGC-1 EUR 27 (28) and Fortum Värme EUR 45 (31)
million. The share of profit from Hafslund and TGC-1 are based on the
companies' published fourth-quarter 2015 and first-quarter 2016 interim report
(Note 14).
Net financial expenses were EUR -91 (-81) million. Net financial expenses
include changes in the fair value of financial instruments of EUR 2 (-11)
million and for January-June 2015 compensation from prepayment of loans by
Fortum Värme EUR 26 million.
Profit before taxes was EUR 451 (493) million.
Taxes for the period totalled EUR 62 (80) million. The effective income tax
rate according to the income statement was 13.9% (16.2%). The comparable
effective income tax rate, excluding the impact of the share of profit from
associated companies, joint ventures as well as non-taxable capital gains, was
18.7% (19.4%) (Note 10).
The profit for the period for continuing operations was EUR 389 (413) million.
Earnings per share for continuing operations were EUR 0.43 (0.46), of which EUR
0.03 (0.01) per share relates to items affecting comparability. (Earnings per
share for total Fortum in January-June 2015 including the effect from
discontinued operations were EUR 5.38).
Financial position and cash flow
Cash flow
In January-June 2016, net cash from operating activities from continuing
operations decreased by EUR 375 million to EUR 370 (745) million, mainly due to
higher income taxes paid, EUR 163 million and lower realised foreign exchange
gains and losses, EUR 75 million. In June Fortum paid income taxes in Sweden
totalling EUR 127 million regarding the ongoing tax disputes. The appeal
process is ongoing and based on legal opinion no provision is made, and the
payment is booked as a receivable (Note 22). Realised foreign exchange gains
and losses of EUR 128 million relate to the rollover of foreign exchange
contract hedging loans to Fortum's Swedish and Russian subsidiaries. Total net
cash from operating activities for January-June 2015 including divested
Distribution operations, amounted to EUR 899 million.
Capital expenditures increased by EUR 35 million to EUR 244 (209) million. Net
cash used in investing activities increased by EUR 710 million to EUR -641 (69)
million, mainly due to the acquisition of shares of EUR 113 (6) million and an
increase in loan and other interest-bearing receivables of EUR 576 million.
Acquisition of shares relates mainly to acquisition of the Polish gas and
electricity sales company Grupa DUON S.A. Increase in shareholder loans given
mainly to Swedish nuclear companies amounted to EUR 68 million. Increase in
other interest-bearing receivables of EUR 261 million relates mainly to bank
deposits, given as trading collaterals to commodity exchanges. Cash flow before
financing activities was EUR -271 (7,272) million. In 2015 the impact from
discontinued operations was EUR 6,457 million.
Fortum paid dividends totalling EUR 977 (1,155) million in April 2016. Payments
of long-term liabilities totalled EUR 808 (164) million including repayment of
a bond EUR 750 million in June.
Assets and capital employed
Total assets decreased by EUR 1,524 million to EUR 21,243 (22,767 at year-end
2015) million.
Liquid funds were at the end of June 2016 EUR 6,150 (8,202 at year-end 2015)
million.
Capital employed was EUR 18,552 (19,870 at year-end 2015) million, a decrease
of EUR 1,318 million.
Equity
Total equity attributable to owners of the parent company totalled EUR 13,258
(13,794 at year-end 2015) million.
The decrease in equity attributable to owners of the parent company totalled
EUR 536 million and was mainly from dividends paid EUR 977 million, the net
profit for the period EUR 383 million and translation differences EUR 125
million.
Financing
Fortum was net cash positive at the end of the period. Net cash decreased by
EUR 1,261 million to EUR 934 (2,195 at year-end 2015) million.
At the end of June, the Group’s liquid funds totalled EUR 6,150 (8,202 at
year-end 2015) million. Liquid funds include cash and bank deposits held by OAO
Fortum amounting to EUR 127 (76 at year-end 2015) million. In addition to
liquid funds, Fortum had access to approximately EUR 2.0 billion of undrawn
committed credit facilities (Note 16).
Net financial expenses in January-June were EUR -91 (-81) million, of which net
interest expenses were EUR -79 (-76) million. Net financial expenses include
changes in the fair value of financial instruments of EUR 2 (-11) million and
for January-June 2015 compensation from prepayment of loans by Fortum Värme EUR
26 million.
In June, Fortum signed a EUR 1,750 million syndicated Multicurrency Revolving
Facility Agreement. The committed facility will be used for general corporate
purposes and replaces the existing credit facility signed in July 2011. The
facility has an initial maturity of five years and Fortum may request
two one-year extension options.
Fortum’s long-term credit ratings were unchanged. Standard & Poor's rating is
BBB+ and the short-term rating A-2. The outlook is stable. Fitch Ratings
long-term Issuer Default Rating (IDR) and senior unsecured rating is BBB+ while
the short-term IDR is F2 with a stable outlook.
Key figures
For the last twelve months comparable net debt to EBITDA was -0.9 (-1.7 at
year-end 2015).
Gearing was -7% (-16% at year-end 2015) and the equity-to-assets ratio 63% (61%
at year-end 2015). Equity per share was EUR 14.92 (15.53 at year-end 2015). For
the last twelve months return on capital employed totalled -0.7% (22.7% at
year-end 2015).
Market conditions
Nordic countries
According to preliminary statistics, electricity consumption in the Nordic
countries was 86 (87) terawatt-hours (TWh) during the second quarter of 2016.
In January-June 2016, it was 203 (197) TWh, mainly due to colder weather.
At the beginning of 2016, the Nordic water reservoirs were at 98 TWh, which is
15 TWh above the long-term average and 18 TWh higher than a year earlier. By
the end of the second quarter 2016, reservoirs were 1 TWh below the long-term
average and 14 TWh higher than at the end of June 2015. Reservoir levels
decreased due to lower precipitation than the long-term average and higher
hydro production in Norway.
In the second quarter of 2016, the average system spot price was EUR 23.9
(20.7) per MWh. The average area price in Finland was EUR 30.2 (25.8) per MWh
and in Sweden SE3 (Stockholm) EUR 26.5 (21.1) per MWh. Both the system and the
area prices were impacted by the tightening of the hydrological situation and
commodity price volatility. This became even more evident towards the end of
the second quarter as the snow melting advanced. The area prices were also
impacted by the new 700 MW transmission line between Sweden and Lithuania that
has been in trial operation since February 2016.
During January-June 2016, the average system spot price was EUR 24.0 (24.4) per
MWh, with the area price in Finland at EUR 30.3 (28.9) per MWh and in Sweden
SE3 (Stockholm) at EUR 25.3 (24.8) per MWh.
In Germany, the average spot price during the second quarter of 2016 was EUR
24.8 (28.3) per MWh, and during January-June 2016 EUR 25.0 (30.2) per MWh.
The market price of CO2 emission allowances (EUA) was EUR 8.1 per tonne at the
beginning of the year and EUR 4.5 per tonne at the end of June 2016.
Russia
Fortum operates both in the Tyumen and Khanty-Mansiysk area of Western Siberia,
where industrial production is dominated by the oil and gas industries, and in
the Chelyabinsk area of the Urals, which is dominated by the metal industry.
According to preliminary statistics, Russian electricity consumption was 230
(230) TWh during the second quarter of 2016. The corresponding figure in
Fortum’s operating area in the First price zone (European and Urals part of
Russia) was 176 (178) TWh. In January-June 2016, Russian electricity
consumption was 510 (506) TWh and the corresponding figure in Fortum’s
operating area in the First price zone was 388 (388) TWh.
In the second quarter of 2016, the average electricity spot price, excluding
capacity price, increased by 3% to RUB (Russian rouble) 1,166 (1,132) per MWh
in the First price zone. In January-June 2016, the average electricity spot
price, excluding capacity price, increased by 3% to RUB (Russian rouble) 1,157
(1,127) per MWh in the First price zone.
More detailed information about the market fundamentals is included in the
tables at the end of the report (page 56).
European business environment and carbon market
Brexit’s impact on operating environment pending
The UK’s exit from the EU following the referendum in June 2016 is expected to
have a major impact on EU institutions and policymaking. The concrete impact of
Brexit cannot yet be foreseen and will largely depend on its practical
implementation. The upcoming negotiation process will inevitably require a lot
of time and attention from EU policymakers, likely resulting in less focus on
energy issues in the EU over the next two years.
Swedish political agreement on energy taxes
In June, a broad parliamentary agreement covering long term energy policies was
presented by the government and parts of the opposition. One of the key
elements of the agreement was tax reductions for the energy sector. The tax on
installed nuclear capacity will be phased out during the period 2017-2018, and
the real estate tax rate on hydro assets will be reduced over a four year
period starting in 2017, from today’s 2.8% to the regular tax rate on real
estate of 0.5%.
Finnish combined heat and power tax
In May, the Finnish Government decided to increase the tax on heating fuels
from 2017 onwards. The agreed tax model increases the tax on both the CO2 and
the energy content components. The new model is a clear improvement on the
original plan to double the CO2 tax of CHP generation applied to heat
production.
Outlook
Key drivers and risks
Fortum's financial results are exposed to a number of economic, strategic,
political, financial and operational risks. One of the key factors influencing
Fortum's business performance is the wholesale price of electricity in the
Nordic region. The key drivers behind the wholesale price development in the
Nordic region are the supply-demand balance, the prices of fuel and CO2
emissions allowances, as well as the hydrological situation.
The continued uncertainty in the global and European economies has kept the
outlook for economic growth unpredictable. The overall economic uncertainty
impacts commodity and CO2 emissions allowance prices, and this could maintain
downward pressure on the Nordic wholesale price of electricity. In Fortum's
Russian business, the key drivers are economic growth, the rouble exchange
rate, regulation around the heat business, and further development of
electricity and capacity markets. In all regions, fuel prices and power plant
availability also impact profitability. In addition, increased volatility in
exchange rates due to financial turbulence could have both translation and
transaction effects on Fortum's financials, especially through the Russian
rouble and Swedish krona. In the Nordic countries, the regulatory and fiscal
environment for the energy sector has also added risks for utility companies.
Nordic market
Despite macroeconomic uncertainty, electricity is expected to continue to gain
a higher share of total energy consumption. Electricity demand in the Nordic
countries is expected to grow by approximately 0.5% on average, while the
growth rate for the next few years will largely be determined by macroeconomic
developments in Europe, and especially in the Nordic countries.
During January-June 2016, oil and coal prices increased, while the price of CO2
emission allowances (EUA) declined. The price of electricity for the upcoming
twelve months appreciated in the Nordic area as well as in Germany, but both
are still on lower levels than at the end of the second quarter of 2015.
In mid-July 2016 the quotation for coal (ICE Rotterdam) for the remainder of
2016 was around USD 61 per tonne, and for CO2 emission allowances for 2016
around EUR 5 per tonne. The Nordic system electricity forward price in Nasdaq
Commodities for the rest of 2016 was around EUR 26 per MWh and for 2017 around
EUR 23 per MWh. In Germany, the electricity forward price for the rest of 2016
was around EUR 29 per MWh and for 2017 around EUR 28 per MWh. Nordic water
reservoirs were about 3 TWh below the long-term average and 8 TWh above the
corresponding level in 2015.
Generation
The Generation segment’s achieved Nordic power price typically depends on such
factors as the hedge ratios, hedge prices, spot prices, availability and
utilisation of Fortum's flexible production portfolio, as well as on currency
fluctuations. Excluding the potential effects from changes in the power
generation mix, a 1 EUR/MWh change in the Generation segment’s Nordic power
sales achieved 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 Generation segment will be affected by the possible
thermal power generation volumes and its profits.
In Finland, the technical plan and cost estimates for nuclear waste management
are updated every third year. The new technical plan was published in 2015 and
related cost estimates were updated during the second quarter of 2016. The
update had a minor positive impact on Fortum which is included in the result
for the second quarter of 2016.
As a result of the nuclear stress tests in the EU, the Swedish nuclear safety
authority (SSM) has decided to propose new regulations for Swedish nuclear
reactors. The process is ongoing. Fortum emphasises that maintaining a high
level of nuclear safety is the highest priority, but considers EU-level
harmonisation of nuclear safety requirements to be of continued importance.
In 2015, the Swedish Government increased the nuclear waste fund fee from
approximately 0.022 to approximately 0.04 SEK/kWh for the 2015-2017 period. The
estimated impact on Fortum is approximately EUR 25 million annually. The
process to review the Swedish nuclear waste fees is done in a three-year cycle.
However, as a result of the decision on early closure of nuclear power plants,
the Swedish Radiation Safety Authority, SSM, recalculated the waste fees for
the Oskarshamn and Ringhals power plants. The political energy agreement made
in June 2016 stated that the regulatory framework for the nuclear waste fund
will be reformed in order to enhance yield and the lifetime in the waste fee
calculation would possibly be extended from 40 to 50 years.
It was also decided in the energy agreement that the tax on installed nuclear
capacity will be phased out over two years starting in 2017. The tax was
previously increased by 17% as of 1 August 2015 and will hence have an
estimated impact on Fortum totalling approximately EUR 15 million in 2016,
albeit corporate tax-deductible.
In addition, the hydropower real estate tax was decided to be decreased over a
four-year period starting in 2017, from todays 2.8% to 0.5% and the process for
renewing existing hydro permits will be reformed, in order to safeguard small
hydro in particular.
OKG AB decided in 2015 to permanently discontinue electricity production at
Oskarshamn unit 1 and start decommissioning after permission for service
operation has been granted by the relevant Swedish authorities. The first two
stages of the decommissioning process were approved in June 2016. The date for
discontinued production and the start of decommissioning has been set to 30
June 2017. Oskarshamn unit 2, which has been out of operation since June 2013
due to an extensive safety modernisation, will stay out of operation. The
closing processes are estimated to take several years.
City Solutions
In May, the Finnish Government decided to increase the tax on heating fuels by
EUR 90 million annually from 2017 onwards. The negative impact on Fortum is
estimated to be approximately EUR 5 million per year.
Russia
The Russia segment's new capacity generation built after 2007 under the Russian
Government's capacity supply agreement (CSA) is a key driver for earnings
growth in Russia, as it is expected to bring income from new volumes sold and
also to receive considerably higher capacity payments than the old capacity.
The regulation related to the time frame (10 vs.15 years) regarding the
calculation of capacity payments was finally approved in June 2016. The
decision was to keep the current 10 year time frame, and Fortum will hence
receive guaranteed capacity payments for a period of 10 years from the
commissioning of a plant. The received CSA payment will vary depending on the
age, location, size and type of the plants, as well as on seasonality and
availability. CSA payments can vary somewhat annually because they are linked
to Russian Government long-term bonds with 8 to 10 years maturity. In addition,
the regulator will review the earnings from the electricity-only market three
years and six years after the commissioning of a unit and could revise the CSA
payments accordingly.
According to rules approved by the Russian Government in 2015, the competitive
capacity selection for generation built prior to 2008 (CCS, without capacity
supply agreements) takes place annually. At the end of 2015, the CCS for 2016
and the long-term CCS for 2017-2019 were held. The majority of Fortum’s plants
were selected. The volume of Fortum’s installed "old" capacity not selected in
the auction totalled 195 MW (out of 2,257 MW), for which Fortum has obtained
forced mode status, i.e. it will receive payments for the capacity. In 2016,
the CCS for year 2020 will take place.
In 2014, the new heat market model roadmap proposed by the Ministry of Energy
was approved by the Russian Government. If implemented, the reform should
provide heat market liberalisation by 2020 or, in some specific areas, by 2023.
In May 2016, the draft law on the heat reform was submitted by the Russian
Government to the state Duma (Parliament). The law still requires the consent
of the regional and local authorities before starting the reform in certain
pilot regions. The Parliament hearings will begin in the autumn of 2016.
The targeted operating profit (EBIT) level of RUB 18.2 billion in the Russia
segment is expected to be reached during 2017-2018. The segment’s profits are
impacted by changes in power demand, gas prices and other regulatory
developments. Economic sanctions, the currency crisis, oil prices and the surge
in inflation have impacted overall demand. As a result, gas prices and
electricity prices have not developed favourably as expected. As forecasted by
the Russian Ministry of Economic Development, the Russian annual average gas
price growth is estimated to be 4.9% in 2016.
The euro-denominated result level will be volatile due to the translation
effect. The income statements of non-euro subsidiaries are translated into the
Group reporting currency using average exchange rates. The Russia segment's
result is also impacted by seasonal volatility caused by the nature of the heat
business, with the first and last quarter being clearly the strongest.
Restructuring of TGC-1 according to strategy in Russia
In December 2014, Fortum, Gazprom Energoholding LLC and Rosatom State
Corporation signed a protocol to start a restructuring process of the ownership
of TGC-1 in Russia. The discussions have not yet come to a conclusion. It is
not possible to estimate the timetable.
Capital expenditure and divestments
Fortum currently expects its capital expenditure, excluding acquisitions, for
its continuing operations in 2016 to be approximately EUR 650 million. The
annual maintenance capital expenditure is estimated to be about EUR 300-350
million in 2016, below the level of depreciation.
Taxation
The effective corporate income tax rate for Fortum in 2016 is estimated to be
19-21%, excluding the impact of the share of profits of associated companies
and joint ventures, non-taxable capital gains and non-recurring items.
Hedging
At the end of June 2016 approximately 75% of Generation's estimated Nordic
power sales volume was hedged at approximately EUR 29 per MWh for the remainder
of 2016. The corresponding figures for the 2017 calendar year were
approximately 45% at approximately EUR 27 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 Nasdaq Commodities forwards.
Dividend payment
The Annual General Meeting decided to pay a dividend of EUR 1.10 per share for
the financial year that ended 31 December 2015.
The record date for the dividend was 7 April 2016, and the dividend payment
date was 14 April 2016.
Espoo, 19 July 2016
Fortum Corporation
Board of Directors
Further information:
Pekka Lundmark, President and CEO, tel. +358 10 452 4112
Timo Karttinen, CFO, tel. +358 10 453 6555
Investor Relations & Financial Communications, Sophie Jolly, tel. +358 10 453
2552, Rauno Tiihonen, tel. +358 10 453 6150, Marja Mäkinen, tel. +358 10 452
3338, Måns Holmberg, tel. +358 10 452 1111 and investors@fortum.com
Media, Corporate Press Officer, Pauliina Vuosio, tel. + 358 50 453 2383
The condensed interim report has been prepared in accordance with International
Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the
EU. The interim financials have not been audited.
Reporting and Capital Markets Day in 2016:
Publication of financial results in 2016:
January-September on 25 October 2016 at approximately 9:00 a.m. EEST
Fortum's Capital Markets Day is planned to take place on 16 November 2016 in
Helsinki.
Distribution:
Nasdaq Helsinki
Key media
www.fortum.com
More information, including detailed quarterly information, is available on
Fortum’s website at www.fortum.com/investors.
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