Financial outlook

Key drivers and risks

Fortum's financial results are exposed to a number of strategic, financial and operational risks. The key factor 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 thesupply-demand balance, fuel and CO2 emissions allowance prices as well as the hydrological situation.

The continued global economic uncertainty and Europe's sovereign-debt crisis weaken the outlook for economic growth in the mid-term, especially in the Euro zone. The overall economic uncertainty impacts the commodity and CO2 emission allowance prices and in combination with the strongerhydrological situation in the Nordic region could maintain downward pressure on the Nordic wholesale price for electricity in the short term. In the Russian business, the key factors are the development of the regulation around electricity and capacity markets and operational risks related to the investment projects according to the investment programme. In all regions, fuel prices and power plant availability also impacts the profitability. In addition, increased volatility in exchange rates due to financial turbulence might have both translation and transaction effects on Fortum's financials especially through the SEK and RUB.

Nordic market

Despite macroeconomic uncertainty, electricity will continue to gain a higher share of the total energy consumption. Fortum currently expects the average annual growth rate in electricity consumption to be about 0.5%, while the growth rate for the nearest years will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries.

The price of crude oil increased throughout the first quarter of 2012, whereas the coal price continued to weaken. After declining since summer of 2011, the price of CO2 emissions allowance (EUA) abated, and the price fluctuated between EUR 6.6 - 9.5 per tonne. The electricity forward prices for the upcoming twelve months declined both in the Nordic countries and in Germany during the quarter, mainly with a lower expected spot price for the summer.

In late April 2012, the electricity forward price in Nord Pool for the rest of 2012 was around EUR 34 per MWh. The electricity forward price for 2013 was around EUR 40 per MWh and for 2014 around EUR 41 per MWh. In Germany, the electricity forward price for the rest of the year was around EUR 47 per MWh and EUR 51 per MWh for 2013. At the same time, the future quotations for coal (ICE Rotterdam) for the rest of 2012 were around USD 102 per tonne and the market price for CO2 emissions allowances (EUA) for 2012 was about EUR 7 per tonne.

In late April 2012, Nordic water reservoirs were about 15 TWh above the long-term average and 29 TWh above the corresponding level of 2011.

Power

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 profitof the Power Division will be affected by the possible thermal power generation amount and its profit. The ongoing Swedish nuclear investment programmes over several years will enhance safety, improve availability and increase the capacity of the current nuclear fleet. The implementation of theinvestment programmes might affect availability. Fortum’s power procurement costs from co-owned nuclear companies are affected by these investment programmes by increasing depreciation and finance costs.

European-wide safety evaluations have been carried out post Fukushima. As part of the evaluations, so-called peer reviews were carried out in March 2012 in several European nuclear power plants,including the Loviisa nuclear power plant. The European Commission will submit a consolidated report of the national reports to the European Council in June 2012. Fortum believes that some additional safety criteria could be introduced for nuclear power plants based on the evaluations and that they could be implemented for the Loviisa nuclear power plant within the framework of the annual investment programmes.

According to the legislation in Sweden, nuclear waste fees and guarantees are updated at regular intervals. At the end of December 2011, the Government decided upon fees and guarantees for 2012-2014. The negative impact on Fortum’s comparable operating profit is estimated to be approximately EUR 15 million per year in 2012-2014. Nuclear fuel costs in all Fortum nuclear power plants are expected to increase in total by approximately EUR 15 million in 2012 due to the increased market price of uranium and enrichment.

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 and a special group of consumers (Northern Caucasus Republic, Tyva Republic, Buryat Republic) 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”) 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 competes in competitive capacity selection (CCS – “old capacity”). The capacity selection for 2012 was held in September 2011. The majority of Fortum’s power plants were selected in the auction, with a price level close to the level received in 2011. Approximately 4% (120 MW) of the old capacity was not allowed to participate in the selection due to tightened minimal technical requirements. It will, however, receive capacity payments at the capacity market price for two additional years. OAO Fortum's new capacity will be a key driver for earnings growth in Russia as it will bring income from new volumes sold and also receive considerably higher capacity payments than the old capacity. However, the received capacity payment will differ depending on age, the location, size and type of the plants as well as seasonality and availability. Especially the old capacity payments for CHP power plants are burdened during the summer period due to the temperature constraints evolving from lower heat demand.

Fortum is planning to commission the last new units by the end of 2014 of its EUR 2.5 billion investment programme. The value of the remaining part of the investment programme, calculated at exchange rates prevailing at the end of March 2012, is estimated to be approximately EUR 0.9billion as of April 2012.

The return for the new capacity is guaranteed as regulated in the Capacity Supply Agreement. The regulator reviews the earnings from the electricity-only market after three years and six years and could revise the CSA payments accordingly. CSA payments can vary annually somewhat because they are linked to Russian Government long-term bonds with 8 to 10 years maturity. Fortum currently estimates the commissioning of the new units Nyagan 1 and Nyagan 2 to be postponed by some months due to a construction delay. Fortum has made a provision (per unit) for penalties caused by possible commissioning delays, already in 2008. According to the agreement with the contractor, Fortum is entitled to adequate remedies in case of damages due to delays caused by the contractor.

Capital expenditure and divestments

Fortum currently expects its capital expenditure in 2012 to be around EUR 1.6-1.8 billion and in 2013-2014 around EUR 1.1 -1.4 billion, excluding potential acquisitions. The main reason for the high capital expenditures in 2012 is the cceleration of Fortum's Russian investment programme. The annual maintenance capital expenditure is estimated to be about EUR 500-550 million in 2012, approximately at the level of depreciation.

Taxation

The effective corporate tax rate for Fortum in 2012 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. In Finland, the corporate tax rate was decreased to 24.5% from 26% starting 1 January 2012. In March 2012, the Finnish Government announced that a so-called windfall tax will be introduced in 2014. The process to update the real-estate taxation values for the year 2013 is ongoing in Sweden. The update is done in a cycle of six years.

Hedging

At the end of March 2012, approximately 70% of the Power Division's estimated Nordic power sales volume was hedged at approximately EUR 48 per MWh for the rest of the calendar year 2012. The corresponding figures for the calendar year 2013 were about 45% at approximately EUR 46 per MWh. The hedge price for Fortum Power Division's Nordic generation excludes hedging of condensing power margin. In addition, the hedge ratio excludes the financial hedges and physical volume of Fortum's coal-condensing generation as well as the division’s imports from Russia. 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.