Fortum Interim Report Q1 2013 - Good first quarter - Nyagan unit 1 started commercial operation

FORTUM CORPORATION INTERIM REPORT 25 April 2013 at 9.00 EEST

January-March 2013

-- Comparable operating profit EUR 650 (654) million, -1%
-- Operating profit EUR 603 (739) million, of which EUR -47 (85) million
relates to items affecting comparability, i.e. derivatives and sales gains
-- Earnings per share EUR 0.45 (0.56), -20%, of which EUR -0.04 (0.10) per
share relates to items affecting comparability, i.e. derivatives and sales
gains
-- Strong cash flow EUR 646 (553) million
-- Assessment of the strategic position of the electricity distribution
business was started
-- New defined timetables for Nyagan unit 2 and 3 − target of EUR 500 million
in run-rate EBIT for the Russia Division during 2015

 

Key figures
I/13
I/12*
2012*
LTM
Sales, EUR million
1,991
1,901
6,159
6,249
Operating profit, EUR million
603
739
1,874
1,738
Comparable operating profit, EUR million
650
654
1,752
1,748
Profit before taxes, EUR million
559
655
1,586
1,490
Earnings per share, EUR
0.45
0.56
1.59
1.49
Net cash from operating activities, EUR million
646
553
1,382
1,475
Shareholders’ equity per share, EUR
11.82
11.48
11.30
N/A
Interest-bearing net debt
(at end of period), EUR million
7,433
6,523
7,814
N/A
Average number of shares, 1,000s
888,367
888,367
888,367
888,367

 

Key financial ratios
2012*
LTM
Return on capital employed, %
10.2
9.1
Return on shareholders’ equity, %
14.6
13.0
Net debt/EBITDA
3.1
3.1
Comparable net debt/EBITDA
3.2
3.1

*Comparative period figures for 2012 presented in the interim report are
restated due to an accounting change for pensions.


Outlook

-- Fortum currently expects the annual electricity demand growth in the Nordic
countries to be on average 0.5% in the coming years.
-- Capital expenditure guidance: EUR 1.1-1.4 billion in 2013 and EUR 0.9-1.1
billion in 2014.
-- Power Division's Nordic generation hedges: For the rest of 2013, 80% hedged
at EUR 45 per megawatt-hour (MWh); for 2014, 45% hedged at EUR 42 per MWh.

Fortum’s CFO Markus Rauramo

”Fortum's first quarter comparable result was good. Group comparable operating
profit totalled EUR 650 million and was at last year's first-quarter level. Net
cash flow from operating activities was EUR 646 million. The cash flow improved
compared to the first quarter last year, even though the stronger Swedish krona
(SEK) impacted negatively. The efficiency programme that was launched in 2012
has proceeded according to plan.

In the Power Division, the effect of increased nuclear and thermal volumes
combined with declined hydro volumes, due to lower water reservoir levels, and
a lower achieved power price impacted the comparable result negatively. Nuclear
availability was at a high level in all of the reactors except Oskarshamn 1,
which was out of operation for the entire quarter.

The Heat Division's comparable operating profit in the first quarter increased
compared to the first quarter in 2012. The increase was mainly attributable to
the higher volumes in Sweden, lower fixed costs and a stronger SEK currency. In
Finland, a new sales concept for bio-oil was launched; besides heat and
electricity, bio-oil will be produced in future CHP+ plants where pyrolysis is
integrated in the CHP production.

In late March, Fortum finished the final stages in the construction of its
Nyagan power plant unit 1 and, after thorough analysis, we now estimate that
the commissioning of Nyagan unit 2 will take place at the end of 2013 and
Nyagan 3 will be finalised at the end of 2014 at the latest. The overall
schedule and financial targets of the investment programme − planned to be
constructed by the end of 2014 and reaching about EUR 500 million in run-rate
operating profit (EBIT) during 2015 − have not been changed. The Russia
Division’s comparable operating profit declined in the first quarter of 2013
compared to the same period in 2012. The positive effect from the commissioning
of the new units was mainly offset by lower heat volumes.

In January, Fortum announced that the company is assessing the strategic
position of its electricity distribution business. The assessment is expected
to be finalised during 2013. During the first quarter, the Distribution
business area's comparable operating profit increased. The result increase is
mainly due to higher volumes because of colder weather than last year, a
stronger SEK and the costs related to the massive storm at the end of 2011 that
burdened the first-quarter result in 2012. Electricity Sales' comparable
operating profit in the first quarter of 2013 was very good. The result
increase was mainly the result of an bigger customer base as well as favourable
wholesale market conditions during the first quarter of 2013.

During the quarter, a plan to decrease the corporate tax rate in Finland from
24.5% to 20% as of 1 January 2014 was announced. The decrease would cause a
one-time positive effect. The Finnish Government also announced that the
planned so-called windfall tax would be cut to EUR 50 million from EUR 170
million. At the same time, the process to update and increase the real estate
taxation values for the year 2013 is ongoing in Sweden and is expected to be
finalised in July 2013.

In April, the European Parliament voted against the backloading of carbon
emissions allowances. Fortum considers the rejection of the "backloading" as a
disappointment and a setback for a common European climate policy. There is an
increasing risk that the European wide market-based emission trading scheme
will be replaced by other measures to price CO2, such as national carbon taxes,
carbon price floors and other policies, leading to a situation where there are
27 different climate policies instead of one. In such a situation, making
investment decisions on electricity generation becomes demanding, and total
cost of energy would increase. Despite the negative outcome in the Parliament,
the Commission is not withdrawing the proposal; it was referred back to the
Parliament’s Environmental Committee.

Customers, sustainability and safety are cornerstones in our daily work. The
safety of our own staff was at a very good level during the first quarter,
however, our contractors' safety performance need improvement. We have
therefore intensified the focus on safety work with our suppliers on all
levels. We met our sustainability targets on CO2 emissions, but were slightly
below in fuel efficiency and plant availability. What is satisfactory, is that
we clearly met the target-availability for our electricity customers, and that
the number of both our heat and electricity customers continued to increase.

We will continue with our daily work to accomplish our long-term strategy. ”


Efficiency programme 2013-2014

Fortum started an efficiency programme in 2012 in order to maintain and
strengthen its strategic flexibility and competitiveness, and to enable the
company to reach its financial targets in the future.

The aim is to improve the company’s cash flow by more than approximately EUR 1
billion during 2013–2014 by reducing capital expenditures (capex) by EUR
250–350 million, divesting approximately EUR 500 million of non-core assets,
reducing fixed costs and focusing on working capital efficiency.

Capex in 2013 will be EUR 1.1–1.4 billion and in 2014 EUR 0.9–1.1 billion. At
the end of 2014, the cost run-rate will be approximately EUR 150 million lower
compared to 2012, including growth projects.

If headcount reductions are needed, Fortum seeks to limit redundancies by using
natural rotation and retirement whenever possible. The assessments will
therefore be done at a unit level.

The programme has proceeded according to plan.


Restatement related to IFRS changes in pension accounting

Fortum is applying an amended IFRS standard for pensions as of 1 January, 2013.
Adoption of the new standard is done retrospectively and comparative
information for 2012 is therefore restated to reflect the change (Note 2). The
change had only a minor impact on Fortum’s financial results and financial
position; however, it reduced the equity by EUR 124 million as of 1 January
2012. The restated comparative figures for the year 2012 are presented in the
attachment to this interim report.

Financial results

January-March

In the first quarter of 2013, Group sales were EUR 1,991 (1,901) million. The
comparable operating profit totalled EUR 650 (654) million and the reported
operating profit totalled EUR 603 (739) million. Fortum's operating profit for
the period was affected by non-recurring items, an IFRS accounting treatment
(IAS 39) of derivatives mainly used for hedging Fortum's power production, and
nuclear fund adjustments amounting to EUR -47 (85) million.

The share of profits from associates in the first quarter was EUR 29 (-7)
million. The share of profits from Hafslund and TGC-1 are based on the
companies' published fourth-quarter 2012 interim reports; however, the share of
profits for TGC-1 fourth-quarter 2011 results were not included in the first
quarter of 2012.

Sales by division

EUR million
I/13
I/12
2012
LTM
Power
664
655
2,415
2,424
Heat
629
625
1,628
1,632
Russia
344
310
1,030
1,064
Distribution*
342
308
1,070
1,104
Electricity Sales*
262
247
722
737
Other
16
44
137
109
Netting of Nord Pool transactions
-188
-188
-503
-503
Eliminations
-78
-100
-340
-318
Total
1,991
1,901
6,159
6,249

* Part of the Electricity Solutions and Distribution Division


Comparable operating profit by division

EUR million
I/13
I/12
2012
LTM
Power
303
342
1,146
1,107
Heat
170
162
271
279
Russia
41
48
68
61
Distribution*
137
110
320
347
Electricity Sales*
15
9
39
45
Other
-16
-17
-92
-91
Total
650
654
1,752
1,748

* Part of the Electricity Solutions and Distribution Division


Operating profit by division

EUR million
I/13
I/12
2012
LTM
Power
263
368
1,175
1,070
Heat
175
214
344
305
Russia
40
48
79
71
Distribution*
136
117
331
350
Electricity Sales*
5
11
39
33
Other
-16
-19
-94
-91
Total
603
739
1,874
1,738

* Part of the Electricity Solutions and Distribution Division

The Group’s net financial expenses decreased to EUR 73 (77) million. Net
financial expenses were negatively affected by changes in the fair value of
financial instruments of EUR -2 (-7) million.

Profit before taxes was EUR 559 (655) million.

Taxes for the period totalled EUR 107 (119) million. The tax rate according to
the income statement was 19.2% (18.3%). The tax rate, excluding the impact of
the share of profits of associated companies and joint ventures as well as
non-taxable capital gains, was 20.6% (21.0%).

The profit for the period was EUR 452 (536) million. Fortum's earnings per
share were EUR 0.45 (0.56), of which EUR -0.04 (0.10) per share relates to
items affecting comparability.

Non-controlling (minority) interests amounted to EUR 51 (39) million. These are
mainly attributable to Fortum Värme Holding AB, in which the city of Stockholm
has a 50% economic interest.


Financial position and cash flow

Cash flow

In the first quarter of 2013, total net cash from operating activities
increased by EUR 93 million to EUR 646 (553) million. Capital expenditures
increased by EUR 15 million to EUR 287 (272) million. Proceeds from divestments
totalled EUR 37 (276) million. Cash flow before financing activities, i.e.
dividend distributions and financing, decreased by EUR 135 million to EUR 401
(536) million. The strong SEK had a negative impact on the cash flow through
realised net foreign exchange losses related to the rollover of foreign
exchange contract hedging loans to Fortum's Swedish subsidiaries. Realised
foreign exchange gains and losses were EUR -108 (-84) million.

Assets and capital employed

Total assets increased by EUR 974 million to EUR 25,535 million (24,561 at
year-end 2012). Non-current assets increased by EUR 299 million from EUR 21,677
million to EUR 21,976 million. The majority, EUR 319 million, came from the
increased value of property, plants and equipment due to investments and the
stronger Swedish krona and other currencies. The increase in current assets was
EUR 675 million, totalling EUR 3,559 million. The increase relates mainly to
the EUR 756 million increase in liquid funds and the higher trade and other
receivables of EUR 39 million. The increase in current assets was partly offset
by a EUR 99 million decrease in inventories.

Capital employed was EUR 20,322 million (19,420 at year-end 2012), an increase
of EUR 902 million. The increase was mainly due to the higher amount of total
assets, totalling EUR 25,535 million.

Equity

Total equity was EUR 11,170 million (10,643 at year-end 2012), of which equity
attributable to owners of the parent company totalled EUR 10,503 (10,040)
million and non-controlling interests EUR 667 (603) million.

Financing

Net debt decreased during the first quarter by EUR 371 million to EUR 7,443
(7,814 at year-end 2012) million.

In March 2013, Fortum issued two five-year bonds under its existing Euro Medium
Term Note (EMTN) programme. The total nominal value was SEK 3,150 million
(about EUR 376 million) consisting of SEK 2,000 million at a floating rate and
SEK 1,150 million at a 2.75% fixed rate.

At the end of March 2013, the Group’s cash and cash equivalents totalled 1,719
(963 at year-end 2012) million, including cash and bank deposits held by OAO
Fortum amounting to EUR 169 (128 at year-end 2012) million. In addition to cash
and cash equivalents, Fortum had access to approximately EUR 2.7 billion of
undrawn committed credit facilities.

The Group's net financial expenses during the first quarter of 2013 were EUR 73
(77) million. Net financial expenses include changes in fair value of financial
instruments of EUR -2 (-7) million.

Fortum Corporation's long-term credit rating with S&P was A- (negative).

In February, Fortum decided to terminate its current rating relationship with
Moody’s Investors Service. Moody’s had an A2 rating with a negative outlook. As
of April, Fortum and Fitch Ratings entered into an agreement. Fitch will
provide a rating of Fortum Corporation and any subsequently issued securities
issued under Fortum's EMTN-program. Fitch's current long-term issuer default
rating of Fortum Corporation is A-, negative outlook.

Key figures

For the last twelve months, net debt to EBITDA was 3.1 (3.1 at year-end 2012)
and comparable net debt to EBITDA 3.1 (3.2). Gearing was 67% (73%) and the
equity-to-assets ratio 44% (43%). Equity per share was EUR 11.82 (11.30). For
the last twelve months, return on capital employed was 9.1 (10.2) and return on
equity 13.0 (14.6).


Outlook

Key drivers and risks

Fortum's financial results are exposed to a number of strategic, political,
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 the
supply-demand balance, fuel and CO2 emissions allowance prices 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.

The continued global economic uncertainty and Europe's sovereign-debt crisis
has kept the outlook for economic growth unpredictable. The overall economic
uncertainty impacts commodity and CO2 emission allowance prices, and this could
maintain downward pressure on the Nordic wholesale price for electricity in the
short-term. In the Russian business, the key factors are 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 the 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 SEK and RUB.
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 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 0.5%, while the growth rate
for the nearest years will largely be determined by macroeconomic development
in Europe and especially in the Nordic countries.

During the first quarter of 2013, the price of coal and CO2 emissions
allowances (EUA) declined clearly. The forward price of electricity for the
upcoming twelve months increased in the Nordic area but decreased in Germany.
The Nordic prices for the rest of 2013 are clearly above the short run marginal
cost of coal-fired production, due to the low Nordic hydrological balance,
which is a result of exceptionally low precipitation over winter.

In late April 2013, the future quotations for coal (ICE Rotterdam) for the rest
of 2013 were around USD 80 per tonne, and the market price for CO2 emissions
allowances (EUA) for 2013 was about EUR 3 per tonne.

In late April 2013, the electricity forward price in Nord Pool for the rest of
2013 was around EUR 37 per MWh. For 2014, the electricity forward price was
around EUR 36 per MWh and for 2015 around EUR 35 per MWh. In Germany, the
electricity forward price for the rest of 2013 was around EUR 37 per MWh and
for 2014 EUR 39 per MWh.

In late April 2013, Nordic water reservoirs were about 7 TWh below the
long-term average and 21 TWh below the corresponding level of 2012.

Power

The Power Division's 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 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 profit of the Power Division will
be affected by the possible thermal power generation amount and its profit.

The several years of ongoing Swedish nuclear investment programmes will enhance
safety, improve availability and increase the capacity of the current nuclear
fleet. The implementation of the investment programmes could, however, affect
availability. Fortum’s power procurement costs from co-owned nuclear companies
are affected by these investment programmes through increased depreciation and
finance costs of associated companies.

Russia

The Russian wholesale power market is liberalised. However, 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 generation capacity CSA built after 2007 under government receives
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 Capacity Supply Agreements (CSA – “new capacity”) competes
in competitive capacity selection (CCS – “old capacity”). The capacity
selection for 2013 was held at the end of 2012. The majority of Fortum’s power
plants were selected in the auction, with a price level close to the level
received in 2012. Approximately 10% (265 MW) of the old capacity was not
allowed to participate in the selection for 2013, due to tightened minimal
technical requirements. It will, however, receive capacity payments at the
capacity market price for 2013.

The Russia Division'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 the age, location, size and
type of the plants as well as seasonality and availability. The return on the
new capacity is guaranteed as regulated in the Capacity Supply Agreement. The
regulator will review the earnings from the electricity-only market after three
years and six years, after the commissioning of a unit, and could revise the
CSA payments accordingly. CSA payments can vary somewhat annually because they
are linked to Russian Government long-term bonds with 8 to 10 years maturity.

Fortum has worked hard to resolve the construction delays in Nyagan; after
thorough analysis, the company now estimates the commissioning of Nyagan unit 2
will take place at the end of 2013 and that Nyagan 3 will be finalised at the
end of 2014 at the latest. This will optimise the investment with regards to
both capital and operational expenditures, and received electricity sales as
well as capacity payments. The capacity payments for Nyagan unit 3 will start
as of 1 January 2015. In accordance with the CSA terms, no penalties for unit 3
will be claimed before 1 January 2016.

In 2012, Fortum announced its decision to build the last two units of its
Russian investment programme at Chelyabinsk in the Urals. Initially, the units
were planned for construction in the Tyumen region in western Siberia. The
units are included within the sphere of the Capacity Supply Agreement
originally agreed in 2008 and are to be constructed at the Chelyabinsk GRES
power plant. Fortum also plans to modernise and upgrade the existing power
plant equipment.

The value of the remaining part of the investment programme, calculated at the
exchange rates prevailing at the end of March 2013, is estimated to be
approximately EUR 490 million as of April 2013.

After completing the on-going investment programme by the end of 2014, Fortum’s
goal is to achieve an operating profit level (EBIT) of about EUR 500 million
run-rate in its Russia Division during 2015 and to create positive economic
added value in Russia.

A commission for heat business development has been set up by the Russian
Government. Top priorities will be issues regarding heat regulation,
centralised district heating and co-generation efficiency.

In February 2013, the Board of Russia's Federal Tariff Service (FST) adopted a
decision according to which the wholesale gas price for industrial consumers is
to be decreased by 3% as of the second quarter 2013, compared to first quarter.
According to FST, this reduction follows the decrease in the estimated price of
Russian natural gas in Europe. The reduction in the gas price has been driven
by the price drop in heating oil, especially fuel oil, in Europe. Since the
beginning of 2013, wholesale gas prices (except private household and
industrial consumers) have been reviewed quarterly, following quarterly updates
of fuel oil and gas oil prices in the nine-month period in Europe. According to
applicable legislation, the price for natural gas will increase 15%
year-on-year.

Efficiency programme 2013-2014

Due to the increasingly demanding business environment, Fortum started an
efficiency programme in order to maintain and strengthen strategic flexibility
and competitiveness and to enable the company to reach its financial targets in
the future.

The aim is to improve the company’s cash flow by more than approximately EUR 1
billion during 2013—2014 by reducing capital expenditures (capex) by EUR
250—350 million, divesting approximately EUR 500 million of non-core assets,
reducing fixed costs and focusing on working capital efficiency. At the end of
2014, the cost run-rate will be approximately EUR 150 million lower compared to
2012, including growth projects.

The Board's decision to review the strategic position of the electricity
distribution business does not change the basics of the efficiency programme,
which will continue as originally planned.

Capital expenditure

Fortum currently expects its capital expenditure in 2013 to be EUR 1.1—1.4
billion and in 2014 EUR 0.9—1.1 billion, excluding potential acquisitions. The
annual maintenance capital expenditure is estimated to be about EUR 500—550
million in 2013, somewhat below the level of depreciation.

Taxation

The effective corporate tax rate for Fortum in 2013 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, a plan
to reduce the corporate tax rate from 24.5% to 20% starting 1 January 2014 has
been presented. The decrease would cause a one-time positive effect that would
be booked in the fourth quarter 2013. In Sweden, the corporate tax rate was
decreased from 26.3% to 22% starting 1 January 2013.

The process to update the real estate taxation values for the year 2013 is
ongoing in Sweden and is expected to be finalised in July 2013. It is
estimated, based on the latest Swedish Government budget proposal, that
Fortum's costs would increase by approximately EUR 40 million in 2013 compared
to 2012. The update is done on a six-year cycle.

In March 2013, the Finnish Government announced that the planned so-called
windfall tax, to be introduced in 2014, will be cut to EUR 50 million from EUR
170 million.

Hedging

At the end of March 2013, approximately 80% of the Power Division's estimated
Nordic power sales volume was hedged at approximately EUR 45 per MWh for the
rest of the year 2013. The corresponding figures for the calendar year 2014
were about 45% at approximately EUR 42 per MWh.

The hedge price for the Power Division'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 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.


Dividend payment

The Annual General Meeting 2013 decided to pay a dividend of EUR 1.00 per share
for 2012. The record date for the dividend was 12 April 2013, and the dividend
payment date was 19 April 2013.


Espoo, 24 April 2013
Fortum Corporation
Board of Directors


Further information:
Markus Rauramo, CFO, tel. +358 10 452 1909

Fortum’s Investor Relations, Sophie Jolly, +358 10 453 2552, Rauno Tiihonen,
+358 10 453 6150 and Janna Haahtela, +358 10 453 2538 / investors@fortum.com

The condensed interim financial statements have 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.

Publication of financial results in 2013:

-- Interim Report January – June on 19 July 2013 at approximately 9:00 EEST
-- Interim Report January – December on 23 October 2013 at approximately 9:00
EEST


Distribution:
NASDAQ OMX Helsinki
Key media
www.fortum.com

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