Fortum Interim Report January-September 2015: Swedish co-owned nuclear write-down and low power prices impacted results negatively

FORTUM CORPORATION INTERIM REPORT JANUARY−SEPTEMBER 2015 22 OCTOBER 2015 AT 9:00 EET
 
July−September 2015, continuing operations
  • Comparable operating profit EUR 79 (147) million, -46%
  • Operating profit EUR -682 (113) million, of which EUR -761 (-34) million relates to items affecting comparability, mainly to the negative impact due to the decision of early closure of Oskarshamn nuclear units 1 and 2 in Sweden
  • Earnings per share EUR -0.74 (0.06), of which EUR -0.80 per share relates to the early closure of Oskarshamn nuclear units 1 and 2 in Sweden.
  • Cash flow from operating activities totalled EUR 151 (212) million, -29%
  • Fortum to participate in the Fennovoima nuclear power project in Finland with a 6.6 percent stake
  • Russia segment’s operating profit (EBIT) target level RUB 18.2 billion delayed by 2 to 3 years
  • Fortum's new President and CEO Pekka Lundmark started on 7 September 2015
 
January−September 2015, continuing operations
  • Comparable operating profit EUR 565 (715) million, -21%
  • Operating profit EUR -188 (712) million, of which EUR -752 (-3) million relates to items affecting comparability, mainly to the negative impact due to the decision of the early closing of Oskarshamn nuclear units 1 and 2 in Sweden.
  • Earnings per share EUR -0.28 (0.63), of which EUR -0.80 per share relates to the decision of early closure of Oskarshamn nuclear units 1 and 2 in Sweden. EPS for total Fortum, including the discontinued operations, is EUR 4.64 (2.91)
  • Cash flow from operating activities totalled EUR 896 (1,011) million, -11%
  • Fortum's Distribution divestment completed in June
  • Distribution business treated as discontinued operations from Q1/2015, consistent with IFRS 5
 
 
Summary of outlook
  • Fortum continues to expect the annual electricity demand to grow in the Nordic countries by approximately 0.5% on average in the coming years
  • Power and Technology segment's Nordic generation hedges: for the rest of 2015, approximately 65% hedged at EUR 36 per MWh; and for 2016, approximately 35% hedged at EUR 34 per MWh; and for 2017 approximately 15% hedged at EUR 33 per MWh.
  • The targeted operating profit level (EBIT) for the Russia segment, RUB 18.2 billion is delayed by 2 to 3 years. Previously the run-rate operating profit level (EBIT) was targeted to be reached during 2015 after finalising the investment programme.
 
Key financial ratios *
2014
LTM
Return on capital employed, %
19.5
25.8
Net debt/EBITDA
1.1
-0.4
Comparable net debt/EBITDA
2.3
-1.3
Comparable net debt/EBITDA without Värme financing
2.0
-1.4
* Key figure financial ratios are based on total Fortum, including discontinued operations
 
Key figures
III/15
III/14
I-III/15
I-III/14
2014
LTM
Sales, EUR million
661
861
2,495
2,955
4,088
3,628
Operating profit, EUR million
 
 
 
 
 
 
continuing operations
-682
113
-188
712
1,296
396
discontinued operations
0
36
4,395
2,066
2,132
4,461
total Fortum
-682
149
4,207
2,778
3,428
4,857
Comparable operating profit, EUR million
 
 
 
 
 
 
continuing operations
79
147
565
715
1,085
935
discontinued operations
0
36
113
200
266
179
total Fortum
79
183
678
915
1,351
1,114
Profit before taxes, EUR million
 
 
 
 
 
 
continuing operations
-818
61
-325
658
1,232
249
discontinued operations
0
34
4,393
2,063
2,128
4,458
total Fortum
-819
95
4,068
2,721
3,360
4,707
Earnings per share, EUR
 
 
 
 
 
 
      continuing operations
-0.74
0.06
-0.28
0.63
1.22
0.31
      discontinued operations
0.00
0.04
4.92
2.28
2.33
4.97
      total Fortum
-0.74
0.10
4.64
2.91
3.55
5.28
Net cash from operating activities, EUR million, continuing operations
151
212
896
1,011
1,406
1,291
Shareholders’ equity per share, EUR
 
 
15.54
12.67
12.23
 
Interest-bearing net debt (at end of period), EUR million
 
 
-1,936
4,790
4,217
 
Interest-bearing net debt without Värme financing, EUR million
 
 
-2,113
4,152
3,664
 
 
 
Fortum’s President and CEO Pekka Lundmark:
 
“This is my first quarterly report as President & CEO of Fortum, and I would therefore like to take this opportunity to give my first reflections on the company as well as the energy business. Whilst it is clear that the market needs a new direction, the range of factors that must steer the change forward are greater and more complex than ever before. The entire energy sector is going through a significant transition, and the reshaping of the energy markets will force utilities to develop new ways to capture value.
 
At Fortum, we are currently in an intensive business planning period to outline our future direction after the recent divestments of our distribution businesses. We are specifically looking into three areas: First, to decide the best way to increase investments in renewables. Second, to look for ways to grow faster in modern energy services for consumers, communities and businesses. And third, to keep our eyes open for opportunities as the restructuring of the energy industry proceeds. In addition, and equally importantly, we are continuing to look for ways to further improve the productivity of our existing fleet in order to stay competitive in the current low-price environment.
Our overall performance in the third quarter of 2015 was largely in line with the company’s own expectations. Exceptionally high inflow increased water reservoirs rapidly, corresponding to clearly lower electricity spot prices and a lower achieved price, which impacted the result negatively. This was, however, somewhat compensated by higher hydro volumes. In addition, the Heat, Electricity Sales and Solutions segment's as well as the Russia segment’s results were impacted by seasonal volatility caused by the nature of the heat business – the third quarter being typically weak. The third-quarter results were also strongly burdened by a non-recurring impact from the decision by OKG AB's extraordinary shareholders' meeting to close two of the oldest Oskarshamn nuclear units in Sweden before the end of their planned operational lifetimes. 
 
In August, we announced that we will participate in the Fennovoima nuclear power project in Finland with a 6.6 percent minority share. In September, we received a new order for ion exchange materials for purification of radioactive waters at the Fukushima nuclear power plant in Japan – an evidence of our broad competence. The discussions related to the potential restructuring of Territorial Generating Company TGC-1 will continue. At this time it is not possible to estimate the time schedule or outcome of the discussions.

Overall, I can state that the first two months at Fortum have been positive, a warm thank you for this to everyone in Fortum. We will continue our work in order to strengthen our leading position in the energy industry.”
 
Fortum’s Distribution divestment completed
 
In June 2015, Fortum completed the divestment of its Swedish electricity distribution business.
 
The total consideration was approximately SEK 60.6 billion on a debt- and cash-free basis, corresponding to approximately EUR 6.4 billion. Fortum booked a one-time sales gain of approximately EUR 4.3 billion, corresponding to EUR 4.82 per share, in the second-quarter 2015 results.
 
The transaction concluded the divestment of Fortum's Distribution, a process that began in 2013. The total consideration from the divestments in Finland, Sweden and Norway was approximately EUR 9.3 billion on a debt- and cash-free basis and approximately EUR 6.3 billion in non-taxable sales gains booked during 2014 and 2015.
 
IFRS restatement relating to discontinued operations
 
After the divestment of the Swedish distribution business, Fortum has no distribution operations.Therefore, as of the first-quarter 2015 interim report, the Distribution segment has been treated as discontinued operations, consistent with IFRS 5 "Non-current assets held for sale and Discontinued operations". The income statement, including other comprehensive income, cash flow statement and certain key ratios, has been restated for the 2014 comparative period. In the segment information, the Distribution segment is reclassified as discontinued operations.
 
Financial results discussed in this interim report are for the continuing operations of Fortum Group.
 
Financial results
 
July–September 2015
 
In the third quarter of 2015, sales were EUR 661 (861) million. Comparable operating profit totalled EUR 79 (147) million and the reported operating profit EUR -682 (113) million. Fortum's operating profit for the period was affected by non-recurring items, including the approximately EUR -784 million impact from the early closure of Oskarshamn nuclear units 1 and 2 in Sweden (Note 4 and 6).
 
Sales by segment
EUR million
III/15
III/14
I-III/15
I-III/14
2014
LTM
Power and Technology
377
495
1,282
1,568
2,156
1,870
Heat, Electricity Sales and Solutions
185
224
835
939
1,332
1,228
Russia
154
207
627
774
1,055
908
Other
28
14
86
42
58
102
Netting of Nord Pool transactions
-57
-67
-240
-301
-422
-361
Eliminations
-26
-12
-95
-66
-91
-120
Total continuing operations
661
861
2,495
2,955
4,088
3,628
Discontinued operations                            
0
130
274
578
751
447
Eliminations
0
-15
-31
-68
-89
-52
Total Fortum
660
976
2,738
3,466
4,751
4,023
 
Comparable operating profit by segment
EUR million
III/15
III/14
I-III/15
I-III/14
2014
LTM
Power and Technology
102
167
419
601
877
695
Heat, Electricity Sales and Solutions
-13
-4
55
55
104
104
Russia
0
1
132
102
161
191
Other
-10
-16
-42
-43
-57
-56
Total continuing operations
79
147
565
715
1,085
935
Discontinued operations
0
36
113
200
266
179
Total Fortum
79
183
678
915
1,351
1,114
 
Operating profit by segment
EUR million
III/15
III/14
I-III/15
I-III/14
2014
LTM
Power and Technology
-651
124
-332
537
855
-14
Heat, Electricity Sales and Solutions
-22
4
51
116
337
272
Russia
1
1
134
102
161
193
Other
-9
-16
-41
-44
-58
-55
Total continuing operations
-682
113
-188
712
1,296
396
Discontinued operations
0
36
4,395
2,066
2,132
4,461
Total Fortum
-682
149
4,207
2,778
3,428
4,857
 
 
January–September 2015
 
In January-September 2015, sales were EUR 2,495 (2,955) million. Comparable operating profit totalled EUR 565 (715) million and the reported operating profit EUR -188 (712) million. Fortum's operating profit for the period was affected by non-recurring items, including the approximately EUR -784 million impact from the early closure of Oskarshamn nuclear units 1 and 2 in Sweden and the approximately EUR -15 million impact from the cancellation of the Olkiluoto 4 nuclear power project, as well as an 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 25 (-70) million (Note 4). Total Fortum’s operating profit EUR 4,207 (2,778) million included the sales gain from the divestment of the Swedish electricity distribution business, approximately EUR 4.3 billion in the second quarter of 2015 (approximately EUR 1.9 billion from Finnish and Norwegian operations in 2014).
 
The share of profit from associates was EUR -15 (108) million. The decision on the early closure of Oskarshamn nuclear units 1 and 2 impacted the share of profit from associates by EUR -104 million (Note 6). Fortum Värme represented EUR 23 (42) million, the decrease was mainly due to the paid compensation for refinancing the interest-bearing loans from Fortum. The share of profit from Hafslund and TGC-1 are based on the companies' published second-quarter 2015 interim reports (Note 14).
 
The net financial expenses were EUR -123 (-163) million. Net financial expenses include changes in the fair value of financial instruments of EUR -14 (-10) million.
 
Profit before taxes, amounting to EUR -325 (658) million, was impacted by EUR -888 million due to the closing of Oskarshamn nuclear units 1 and 2.
 
Taxes for the period totalled EUR 80 (-92) million. Taxes for the period are positive as the write-down related to early closure of Oskarshamn nuclear units 1 and 2 will be tax deductible over time. Therefore, the tax rate according to the income statement was negative at 24.5% (14.0%). The tax rate, excluding the impact of the share of profit from associated companies, joint ventures as well as non-taxable capital gains, was negative at 25.6% (18.5%).
 
The profit for the period for continuing operations was EUR -246 (566) million. Earnings per share for continuing operations were EUR -0.28 (0.63). The impact on earnings per share from the early closure of Oskarshamn nuclear units 1 and 2 was EUR -0.80 per share.
 
Earnings per share for total Fortum, including discontinued operations, were EUR 4.64 (2.91), including the EUR 4.82 gain from the sale of the Swedish electricity distribution business and EUR   -0.80 per share due to the closing of Oskarshamn nuclear units 1 and 2 in Sweden. Earnings per share for total Fortum in 2014 were impacted by EUR 2.08 per share from the sale of the Finnish electricity distribution business (Note 8).
 
Financial position and cash flow
 
Cash flow
 
In January-September 2015, net cash from operating activities from continuing operations decreased by EUR 115 million to EUR 896 (1,011) million, mainly due to lower EBITDA. Realised foreign exchange gains and losses of EUR 249 (216) million were related to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries. Total net cash from operating activities including discontinued operations amounted to EUR 1,050 (1,310) million. 
 
Capital expenditures for the continuing operations decreased by EUR 75 million to EUR 347 (422) million. Net cash from investing activities for total Fortum was EUR 6,303 (2,677) million, including the impact from discontinued operations amounting to EUR 6,303 (2,619) million. Cash flow before financing activities for total Fortum increased by EUR 3,366 million to EUR 7,353 (3,987) million, including the net impact of discontinued operations of EUR 6,457 (2,917) million.
 
Fortum paid dividends totalling EUR 1,155 million in April. The net increase in liquid funds during the period was EUR 5,318 million.
 
Assets and capital employed
 
Total assets increased by EUR 1,224 million to EUR 22,599 (21,375 at year-end 2014) million. Liquid funds increased by EUR 5,266 million to EUR 8,032 (2,766 at year-end 2014) million, and property, plant and equipment decreased by EUR 2,431 million, both arising mainly from the divestment of the Swedish distribution business. The long-term interest-bearing receivables decreased by EUR 1,098 million to EUR 943 (2,041 at year-end 2014) million mainly due to the early closure of Oskarshamn nuclear units 1 and 2 in Sweden, and repayments by Fortum Värme.
 
Capital employed for total Fortum was EUR 19,969 (17,918 at year-end 2014) million, an increase of EUR 2,051 million.
 
Equity
 
Total equity was EUR 13,873 (10,935 at year-end 2014) million, of which equity attributable to owners of the parent company totalled EUR 13,806 (10,864 at year-end 2014) million.
 
The increase in equity attributable to owners of the parent company totalled EUR 2,942 million and was mainly from the gain on the divestment of the Swedish distribution business of approximately EUR 4.3 billion, the dividend payment for 2014, EUR -1,155 million, net profit of EUR -245 million for continuing operations for the period, and translation differences totalling EUR -104 million.
 
Financing
 
Fortum was net cash positive at the end of the period, as net debt decreased by EUR 6,153 million during January-September 2015 from net debt of EUR 4,217 million at year-end 2014 to net cash of EUR 1,936 million. Net cash without Fortum Värme financing was EUR 2,113 (net debt 3,664 at year-end 2014) million.
 
At the end of September 2015, the Group’s liquid funds totalled EUR 8,032 (2,766 at year-end 2014) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 94 (134 at year-end 2014) million. In addition to liquid funds, Fortum had access to approximately EUR 2.2 billion of undrawn committed credit facilities.
 
The net financial expenses in January-September were EUR -123 (-163) million. Net financial expenses include changes in the fair value of financial instruments of EUR -14 (-10) million.
 
On 5 June 2015, Standard & Poor's downgraded Fortum’s long-term rating to BBB+ from A- and affirmed the A-2 short-term rating. The outlook is stable. The long-term corporate credit rating was removed from CreditWatch, where it had been placed since 18 March 2015. The Fitch rating remained unchanged as A- (negative outlook).
 
Key figures
 
For the last twelve months, net debt to EBITDA was -0.4 (1.1 at year-end 2014) and comparable net debt to EBITDA -1.3 (2.3 at year-end 2014). Fortum is currently financing Fortum Värme, and these loans, EUR 177 (553 at year-end 2014) million, are presented as interest-bearing loan receivables in Fortum’s balance sheet. The aim is to refinance the loans during 2015. If these loans are deducted from the net debt, the last-twelve-months comparable net debt to EBITDA was -1.4 (2.0 at the year-end 2014).
 
Gearing was -14% (39% at year-end 2014) and the equity-to-assets ratio 61% (51% at year-end 2014). Equity per share was EUR 15.54 (12.23 at the year-end 2014). For the last twelve months, return on capital employed totalled 25.8% (19.5% at the year-end 2014).
 
Market conditions
 
Nordic countries
 
According to preliminary statistics, electricity consumption in the Nordic countries was 81 (79) terawatt-hours (TWh) during the third quarter of 2015. In January-September 2015, it was 278 (275) terawatt-hours (TWh).
 
At the beginning of 2015, the Nordic water reservoirs were at 80 TWh, 3 TWh below the long-term average and 2 TWh lower than a year earlier. At the beginning of the third quarter, water reservoirs were 15 TWh below the long-term average and 14 TWh below the corresponding period in 2014. During the quarter, reservoirs increased rapidly, due to exceptional inflow, and, at the end of the quarter, were at 9 TWh above the long-term average and 19 TWh above the corresponding period in 2014.
 
In the third quarter of 2015, the average system spot price of electricity in Nord Pool was EUR 13.3 (31.8) per megawatt-hour (MWh). The decline was mainly due to a high amount of precipitation and the late snow melt that made inflow peak at a time of seasonally low power consumption. In Finland, the average area price was EUR 30.1 (37.8) per MWh and in Sweden SE3 (Stockholm) EUR 15.5 (33.6) per MWh. The price in Finland decreased less, as the price area is exposed to hydrological pressure to a much lesser extent than Norway and Sweden.
 
During January–September 2015, the average system spot price was EUR 20.7 (29.2), and the area price in Finland EUR 29.3 (35.9) and in Sweden SE3 (Stockholm) EUR 21.7 (31.7).
 
In Germany, the average spot price during the third quarter of 2015 was EUR 32.8 (31.5) per MWh and during January-September 2015 EUR 31.1 (32.1) per MWh.
 
The market price of CO2 emission allowances (EUA) was at approximately EUR 7.1 per tonne at the beginning of the year and EUR 8.2 at the end of September 2015.
 
Russia
 
Fortum operates in the Urals and Western Siberia in the Tyumen and Khanty-Mansiysk area, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area, which is dominated by the metal industry.
 
According to preliminary statistics, Russia consumed 225 (226) TWh of electricity during the third quarter of 2015. The corresponding figure in Fortum’s operating area in the first price zone (European and Urals part of Russia) was 173 (175) TWh. In January-September 2015, Russia consumed 731 (733) TWh of electricity. The corresponding figure in Fortum’s operating area in the first price zone (European and Urals part of Russia) was 561 (562) TWh.

In the third quarter of 2015, the average electricity spot price, excluding capacity price, decreased by 4% to RUB (Russian rouble) 1,184 (1,233) per MWh in the first price zone. In January-September 2015, the average electricity spot price, excluding capacity price, decreased by 3% to RUB 1,146 (1,180) 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 57).
 
 
European business environment and carbon market
 
 
EU electricity market design
The public consultation on the new EU electricity market design was closed in early October 2015. Although the aim of the consultation is to collect input from different stakeholders, the European Commission has already stated quite clearly that its preference is to focus on further development of the current energy-only market design rather than going towards capacity markets. In particular, fixed capacity payments are not favoured because of their highly distortive nature. The Commission will put forward proposals for a comprehensive revision of the energy market-related legislation in 2016. In its response to the consultation, Fortum highlights the importance of more market-orientated energy policies, improved internal energy market governance, and a common approach to security of supply in the further development of the electricity market design.
 
EU emissions trading reform
In September 2015, the EU Council formally adopted the European Commission’s proposal to create a reserve to hold surplus CO2 permits under the EU Emissions Trading System, in the final stage of the legislative process. This means that the proposed Market Stability Reserve will become operational in January 2019 and will remove 12% of the net surplus each year, as long as it remains above 833 million tonnes. The EU Environment Council adopted the legislation on behalf of the wider EU Council.
 
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, prices of fuel and CO2 emissions allowances as well as the hydrological situation. The completion of Fortum’s investment programme in Russia is also one key driver to the company’s result growth, due to the increase in production volumes and CSA payments.
 
The continued global and European uncertainty 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 for electricity. In Fortum's Russian business, the key factors are economic growth, the rouble exchange rate, the regulation around the heat business, and further development of electricity and capacity markets. Operational risks related to the investment projects in the current investment programme are still valid. 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 (RUB) and Swedish krona (SEK). In the Nordic countries, also the regulatory and fiscal environment for the energy sector has added risks for utility companies.
 
Nordic market
 
Despite macroeconomic uncertainty, electricity is expected to continue to gain a higher share of the total energy consumption. Fortum continues to expect the annual growth rate in electricity consumption to be on average approximately 0.5%, while the growth rate for the next few years will largely be determined by macroeconomic development in Europe and especially in the Nordic countries.
 
During January-September 2015, the price of the European Union emissions allowances (EUA) appreciated, whereas the coal and oil prices declined. The price of electricity for the upcoming twelve months declined in the Nordic area and in Germany.
 
In mid-October 2015, the future quotation for coal (ICE Rotterdam) for the rest of 2015 was around USD 50 per tonne, and the price for CO2 emission allowances for 2015 was about EUR 8 per tonne. The electricity forward price in Nasdaq Commodities for the rest of 2015 was around EUR 26 per MWh and for 2016 around EUR 23 per MWh. In Germany, the electricity forward price for the rest of 2015 was around EUR 31 per MWh and for 2016 around EUR 29 per MWh. Nordic water reservoirs were about 9 TWh above the long-term average and 17 TWh above the corresponding level of 2014.
 
Power and Technology
 
The Power and Technology segment’s Nordic power price typically depends on such factors as 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 Power and Technology 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 Power and Technology segment will be affected by the possible thermal power generation volumes and its profits.
 
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 utmost importance.
 
The Swedish Government has increased the nuclear waste fund fee for the period 2015-2017 from approximately 0.022 to approximately 0.04 SEK/kWh. The estimated impact on Fortum will be approximately EUR 25 million annually. The process to review the Swedish nuclear waste fees is done in a three-year cycle.
 
In June 2015, the Swedish Parliament decided to approve the proposed tax increase of 17% on installed nuclear capacity. The tax was implemented as of 1 August 2015. The estimated impact on Fortum is approximately EUR 15 million annually, albeit corporate tax-deductable.
 
 
In August 2015, Fortum decided to participate in the Fennovoima nuclear power project in Finland, with a 6.6 per cent share, on the same terms and conditions as the other Finnish companies currently participating in the project. Participation will be carried out through Voimaosakeyhtiö SF.
 
OKG AB's Extraordinary shareholders' meeting on 14 October 2015 decided on the closure of Oskarshamn nuclear power plant units 1 and 2 in Sweden. For unit 1, it means that the unit will be taken out of operation and transferred into service mode after the applied environmental permit has been received, approximately during 2017– 2019. For unit 2, which has been out of operation since June 2013 due to an extensive safety modernisation, it means that the unit will not be put back into operation. The closing process for both units is estimated to take several years.
 
 
Russia
 
The generation capacity built after 2007 under the Russian Government's capacity supply agreements (CSA – “new capacity”) receives guaranteed capacity payments for a period of 10
years. Prices for capacity under CSA are defined in order to ensure a sufficient return on investments.
 
The capacity selection for generation built prior to 2008 (CCS – “old capacity”) for 2015 was held in September 2014. All of Fortum’s capacity was allowed to participate in the selection for 2015, and the majority of Fortum’s plants were also selected. The volume of Fortum’s installed capacity not selected in the auction totalled 195 MW (approximately 7% of Fortum’s total old capacity in Russia) for which Fortum has obtained forced mode status, i.e. will receive payments for the capacity.
 
In August 2015, the Russian Government approved changes in the CCS rules. According to the new rules, the CCS takes place annually for the next four years. The CCS for year 2016 takes place by the end of October 2015 and the CCS for 2017, 2018 and 2019 by the end of December 2015. 
The main feature of the new CCS model is an elastic demand curve (EDC).The parameters are set by the Government and the model features, for example, a bigger volume of capacity to be selected and paid (compared to the current model); a price cap to insure consumers against high CCS-prices; and a threshold to cover a capacity price collapse.
 
The Russia segment's new capacity will be 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 received capacity payment will differ depending on the age, location, size and type of the plants as well as on seasonality and availability. The return on the new capacity is guaranteed, as regulated in the CSA. 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.
 
In February 2015, the System Administrator of the Wholesale Market published data on the weighted average cost of capital (WACC) and the consumer price index (CPI) for 2014, which is used to calculate the sales price on CSA in 2015. The CSA payments were revised upwards accordingly to reflect the higher bond rates.
 
The value of the remaining part of Fortum's investment programme, calculated at the exchange rates prevailing at the end of September 2015, is estimated to be approximately EUR 0.1 billion, as of October 2015.
 
The Russia segment's result is impacted by seasonal volatility caused by the nature of the heat business, with the first and last quarter being clearly the strongest.
 
The targeted operating profit (EBIT) level of RUB 18.2 billion in the Russia segment is delayed by 2 to 3 years. The segment’s profits are impacted by changes in power demand, gas prices and other regulatory development. The economic sanctions, currency crisis, oil price and the surge in inflation has impacted overall demand. As a result gas prices and the electricity prices have not developed favourably as expected.  In addition, a regulation draft concerning the extension of CSA payments from 10 to 15 years has been submitted to the Russian Government, and a decision is anticipated, probably during 2015. The prolonged period is expected to have a neutral net present value impact. Previously the run-rate operating profit level (EBIT) was targeted to be reached during 2015 after finalising the investment programme.
 
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 the average exchange rates.
 
In 2014, the new heat market model roadmap proposed by the Ministry of Energy was approved by the Russian Government; the reform should give heat market liberalisation by 2020 or, in some specific areas, by 2023.
 
As forecasted by the Russian Ministry of Economic Development, Russian gas price growth is estimated to be 3.5% in 2015. 
 
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 for its continuing operations in 2015 to be approximately EUR 600 million (EUR 800 million in Q2 2015). The annual maintenance capital expenditure is estimated to be about EUR 300-350 million in 2015, below the level of depreciation.
 
During 2015, Fortum will gradually decrease its financing to Fortum Värme, the CHP joint venture with the City of Stockholm operating in the capital area in Sweden. At the end of September 2015, Fortum Värme's remaining interest-bearing liability to Fortum was approximately EUR 180 million.
 
Taxation
 
The effective corporate income tax rate for Fortum in 2015 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 August 2014, the Finnish Board of Adjustment of the Large Taxpayers’ Office approved Fortum Corporation's appeal of the income tax assessment imposed on Fortum in December 2013 for the year 2007. The Tax Recipients’ Legal Services Unit appealed the matter (Note 23). In December 2014, Fortum received a non-taxation decision regarding its financing companies for the remaining years 2008−2011, based on the same audit. This is in line with the Supreme Administrative Court’s (SAC) precedent decision. The Tax Recipients' Legal Services Unit appealed the decisions in February 2015, and the cases for years 2008−2011 are now pending the Board of Adjustment of the Large Taxpayers' Office decision. In line with the 2007 case, Fortum considers the claims unjustifiable.
 
In June 2015, the Swedish Parliament approved the 17% increase on the tax on installed nuclear capacity, re-proposed by the Swedish Government. The tax was implemented as of 1 August 2015. The estimated impact on Fortum is approximately EUR 15 million annually, albeit corporate tax-deductible.
 
On 1 October 2015, the Court of Justice of the European Union (CJEU) issued a preliminary ruling regarding the nuclear capacity tax in Sweden. The case was originally raised by OKG AB on the grounds that the levy violates the EU's Energy Taxation Directive. According to CJEU's preliminary ruling, the Energy Taxation Directive cannot be applied to the Swedish nuclear capacity tax. The final decision will be made by the Swedish court after hearing from OKG and the tax office. In Fortum's view, the current nuclear capacity taxation in Sweden is unfair and distorts competition.
 
Hedging
 
At the end of September 2015, approximately 65% of Power and Technology's estimated Nordic power sales volume was hedged at approximately EUR 36 per MWh for the rest of 2015. The corresponding figures for the 2016 calendar year were approximately 35% at approximately EUR 34 per MWh and for the calendar year 2017 approximately 15% at approximately EUR 33 per MWh.
 
The hedge price for the Power and Technology segment's Nordic generation excludes hedging of the 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 segment’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 Nasdaq Commodities forwards.
 
Fortum’s long-term financial targets
 
Fortum updated its long-term financial targets in March 2015. After the divestment of Distribution, Fortum's business has a somewhat higher risk profile, which requires a stronger balance sheet in order to maintain financial flexibility. The financial targets continue to reflect the long-term business nature of the company and give relevant guidance on Fortum's view of the company's long-term value creation potential and growth strategy.
 
The updated long-term financial targets are: Return on capital employed (ROCE) 12% and comparable net debt/EBITDA around 2.5 times.

The previous financial targets were: ROCE 12%, comparable net debt/EBITDA around 3 and return on shareholders' equity (ROE) 14%.
 
Dividend payment
 
The Annual General Meeting decided to pay a dividend of EUR 1.10 per share and an extra dividend of EUR 0.20 per share, i.e. a total amount of EUR 1.30 per share, for the financial year that ended 31 December 2014.
 
The record date for the dividend was 2 April 2015, and the dividend payment date was 14 April 2015.
 
 
Espoo, 21 October 2015
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
 
Fortum’s Investor Relations: Sophie Jolly, tel. +358 10 453 2552; Rauno Tiihonen, tel. +358 10 453 6150; Marja Mäkinen +358 10 452 3338; and investors@fortum.com
 
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.
 
Fortum's financial information in 2016
 
Fortum Corporation’s financial statements bulletin for the year 2015 will be published on 3 February 2016 at approximately 9: 00 EET.

Fortum’s Financial statements and Operating and financial review for 2015 will
be published in week 10 at the latest.

Fortum will publish three interim reports in 2016:
- January-March on 28 April 2016 at approximately 9:00 EET
- January-June on 20 July 2016 at approximately 9:00 EET
- January-September on 25 October 2016 at approximately 9:00 EET


Fortum's Annual General Meeting is planned to take place on 5 April 2016 and
the possible dividend related dates planned for 2016 are:
- Ex-dividend date 6 April 2016
- Record date for dividend payment 7 April 2016
- Dividend payment date 14 April 2016
 
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.