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

Comparable net debt/EBITDA

-1.7

-0.9

* Key financial ratios are based on total Fortum, including discontinued operations

 

Key figures

II/16

II/15

I-II/16

I-II/15

2015

LTM

Sales, EUR million

768

794

1,757

1,834

3,459

3,382

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, EUR million, continuing operations

-5

229

370

745

1,228

853

Shareholders’ equity per share, EUR

 

 

14.92

16.76

15.53

 

Interest-bearing net debt (at end of period), EUR million

 

 

 

-934

-1,846

-2,195

 

 

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

Russia

182

211

431

474

893

850

Other

30

29

62

58

114

118

Netting of Nord Pool transactions

-69

-64

-189

-183

-336

-342

Eliminations

-20

-31

-54

-69

-122

-107

Total continuing operations

768

794

1,757

1,834

3,459

3,382

Discontinued operations                            

-

95

-

274

274

-

Eliminations

-

-11

-

-31

-31

-

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

City Solutions

7

11

65

68

108

105

Russia

34

35

113

132

201

182

Other

-18

-17

-34

-32

-63

-65

Total continuing operations

122

143

397

486

808

719

Discontinued operations

-

32

-

114

114

-

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

City Solutions

18

9

81

73

105

113

Russia

36

36

147

133

203

217

Other

-18

-17

-34

-32

-62

-64

Total 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

 

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).

Mark
et 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 CO
2 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 CO
2 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 CO
2 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 CO
2 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:
N
asdaq Helsinki
Key media
www.fortum.com

More information, including detailed quarterly information, is available on Fortum’s website at
www.fortum.com/investors.