Financial outlook

The following outlook was published in accordance with Fortum's January-September Interim Report on 25 October 2016

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,
and 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-September 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, and both are now on higher levels than at the end of the third
quarter of 2015.

In mid-October 2016, the quotation for coal (ICE Rotterdam) for the remainder of 2016 was around
USD 78 per tonne, and for CO2 emission allowances for 2016 around EUR 6 per tonne. The Nordic
system electricity forward price in Nasdaq Commodities for the rest of 2016 was around EUR 37 per
MWh and for 2017 around EUR 30 per MWh. In Germany, the electricity forward price for the rest of
2016 was around EUR 37 per MWh and for 2017 around EUR 32 per MWh. Nordic water reservoirs
were about 4 TWh below the long-term average and 14 TWh below the corresponding level in 2015.
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, and 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 and 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 EUlevel
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. The Swedish Nuclear Fuel and Waste Management Co (SKB) will update
the new technical plan in January 2017 for SSM to review. The final decision on the new nuclear
waste fees will be made by the Swedish Government in December 2017. 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.
In Sweden, the key political parties (representing 75% of parliament) announced a new framework
agreement on energy policy in June 2016. It was decided that: (1) the tax on nuclear thermal effect
will be phased out over two years starting in 2017, (2) the regulatory framework for the nuclear
waste fund will be reformed in order to enhance yield, (3) the lifetime in the waste fee calculation
would possibly be extended from 40 to 50 years, and (4) the third-party liability for nuclear accidents
will increase, ratifying a decision made earlier. No date was mentioned for a mandatory nuclear
phase out, but a vision of a 100% RES power system by 2040 was stated.
In September the Swedish government presented the budget proposal for the coming years, which
included a timetable for the tax reductions in the energy commission agreement. The budget states
that the nuclear capacity tax will be reduced to 1500 SEK/MW per month from 1 July 2017 and
abolished on 1 January 2018. In 2016, the Swedish nuclear capacity tax for Fortum is estimated to
be approximately EUR 84 million. In 2017, the tax is estimated to decrease with approximately EUR
32 million due to the tax decrease and another EUR 5 million due to the premature closure of
Oskarshamn 1 in the middle of the year. In 2018, there is no capacity tax.
A decision was also made to decrease the hydropower real-estate tax over a four-year period
beginning in 2017, from todays 2.8% to 0.5%. The real-estate tax on hydro will, as stated in the
government’s budget, be reduced in four steps: in January 2017 to 2.2%; in January 2018 to 1.6%;
in January 2019 to 1.0%; and in January 2020 to 0.5%. In 2016, the Swedish hydropower real-estate
tax is estimated to be approximately EUR 115 million. In 2017, the tax is estimated to decrease with
approximately EUR 20 million.
In addition to the decrease in the tax rate, the hydropower real-estate tax values, which are linked to
electricity prices, will be updated starting 2019. The real-estate tax values are updated every six
years. With the current low electricity prices the tax values in 2019 will be clearly lower than today.
The process for renewing existing hydro permits will also be reformed, primarily in order to
safeguard small hydro.
The tax reductions are planned to be financed through a higher electricity consumption tax that will
mainly affect households. Electricity-intensive industries will be exempt.
In October, the Swedish Energy Agency is expected to make a concrete proposal on how to
increase the production of renewable electricity by 18 TWh in 2020-2030.
The work for increased transmission capacity both within Sweden and to neighbouring countries will
continue, as will efforts to promote a well-functioning retail market in the Nordic region.
All the above mentioned decisions are positive and a step in the right direction, as all production
forms are more evenly taxed. However, some questions remain regarding deployment of green
certificates for the 2020-2030 period. The decisions will not impact the nuclear closures that have
already been decided on in Sweden.
OKG AB decided in 2015 to permanently discontinue electricity production at Oskarshamn unit 1
and to start decommissioning after the 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.
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) of the calculation of
capacity payments was finally approved in June 2016. The decision was made 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. In September
of 2016, the long-term CCS for 2020 was 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 2,214
MW), for which Fortum has obtained forced mode status, i.e. it will receive payments for the
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 are expected in the fourth quarter 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. Fortum estimates the Russian annual average
gas price growth to be 3.6% in 2016 which is lower than the previous estimate of 4.9% because no
indexation of gas tariffs is expected during 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.
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
ortum currently expects its capital expenditure, excluding acquisitions, for its continuing operationsortum 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.
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.
At the end of September 2016, approximately 80% of Generation's estimated Nordic power sales
volume was hedged at EUR 29 per MWh for the remainder of 2016. The corresponding figures for
the 2017 calendar year were approximately 50% at EUR 28 per MWh, and for the calendar year
2018 approximately 30% at EUR 25 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