Low electricity prices and write-downs burdened continuing results – Dividend proposal EUR 1.10 per share

FORTUM CORPORATION FINANCIAL STATEMENTS BULLETIN JANUARY-DECEMBER 2015 3 FEBRUARY 2016 AT 9:00 EET
 
October−December 2015, continuing operations
  • Comparable operating profit EUR 243 (370) million, -34%
  • Operating profit EUR 38 (584) million, of which EUR -205 (214) million relates to items affecting comparability
  • Earnings per share EUR 0.02 (0.59), -97%, of which EUR -0.20 (0.25) items effecting comparability. Earnings per share including the effect from discontinued operations are EUR 0.02 (0.64)
  • Cash flow from operating activities totalled EUR 332 (394) million, -16%
  • Operating profit impacted by EUR -119 million write-downs and provisions for mainly Finnish coal-fired plants and Oskarshamn nuclear units 1 and 2 (O1 and O2) in Sweden 
January−December 2015, continuing operations
  • Comparable operating profit EUR 808 (1,085) million, -26%
  • Operating profit EUR -150 (1,296) million, of which EUR -958 (211) million relates to items affecting comparability
  • Earnings per share EUR -0.26 (1.22), -121%, of which EUR -0.97 (0.26) per share relates to items affecting comparability including total effect from Oskarshamn nuclear units 1 and 2. Earnings per share including the effect from discontinued operations are EUR 4.66 (3.55)
  • Cash flow from operating activities totalled EUR 1,228 (1,406) million, -13%
  • Distribution business treated as discontinued operations from Q1/2015, consistent with IFRS 5, divestment completed in June 2015
  • Fortum's Board proposes a dividend of EUR 1.10 per share 
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 2016, approximately 50% hedged at approximately EUR 33 per MWh; for 2017, approximately 20% hedged at approximately EUR 30 per MWh
  • The 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
2014
Return on capital employed, %
22.7
19.5
Net debt/EBITDA
-0.5
1.1
Comparable net debt/EBITDA
-1.7
2.3
Comparable net debt/EBITDA without Värme financing
n/a
2.0
* Key figure financial ratios are based on total Fortum, including discontinued operations
 
Key figures
IV/15
IV/14
2015
2014
Sales, EUR million
964
1,133
3,459
4,088
Operating profit, EUR million
 
 
 
 
continuing operations
38
584
-150
1,296
discontinued operations
-
66
4,395
2,132
total Fortum
38
650
4,245
3,428
Comparable operating profit, EUR million
 
 
 
 
continuing operations
243
370
808
1,085
discontinued operations
-
67
114
266
total Fortum
243
436
922
1,351
Profit before taxes, EUR million
 
 
 
 
continuing operations
20
574
-305
1,232
discontinued operations
-
65
4,393
2,128
total Fortum
20
639
4,088
3,360
Earnings per share, EUR
 
 
 
 
      continuing operations
0.02
0.59
-0.26
1.22
      discontinued operations
0.00
0.05
4.92
2.33
      total Fortum
0.02
0.64
4.66
3.55
Net cash from operating activities, EUR million, continuing operations
332
394
1,228
1,406
Shareholders’ equity per share, EUR
 
 
15.53
12.23
Interest-bearing net debt (at end of period), EUR million
 
 
-2,195
4,217
Interest-bearing net debt without Värme financing
 
 
n/a
3,664
 
Fortum’s President and CEO Pekka Lundmark:
 
“Fortum’s performance from continuing operations in 2015 was not satisfactory. Profitability declined and remained depressed throughout the year due to the very low electricity prices mainly driven by extreme hydro conditions and low commodity prices. The weak market in combination with an increasing cost burden, especially the nuclear capacity tax increase in Sweden, forced early closures of nuclear capacity. This led to extensive write-downs that further burdened our results. Fortum’s total operating profit, however, increased clearly due to the sale of the Swedish distribution business that completed the divestment of Distribution started in 2013.
 
2015 demonstrated again that Finland and Europe are not isolated islands unaffected by global economic cycles. The rapid decline in commodity prices (coal, oil) and increase of subsidised renewable production created an urgent need for the whole utility industry to transform and improve the industry’s competitiveness.
 
Fortum’s balance sheet is strong. At the end of 2015, net debt to EBITDA was -0.5 as Fortum was net cash positive by more than EUR 2 billion. Net debt decreased by approximately EUR 6.5 billion during 2015 as a result of the Distribution divestment. A strong balance sheet and good profitability are important to Fortum – they ensure flexible implementation of our strategy, create the capability to carry out our investments and provide the readiness to seize new opportunities as they arise.
 
In Russia, the multi-year investment programme is nearing completion with the commissioning of two units in Chelyabinsk. The first of the two was finalised in December 2015 and the last unit is planned to be commissioned during the first quarter of 2016.
 
Given the demanding market, I am, however, very pleased with the continued positive development in Fortum's stakeholder satisfaction last year. According to a survey the company conducted, Fortum’s reputation has improved and our investments in sustainability have received recognition. We now have a good base to continue building on. Our customers are – and will continue to be – our key focus area. As a result, both our customer base in electricity sales and heat has steadily increased.
 
In 2016, my priority in my role as Fortum’s CEO will be to lead the implementation of our new vision and strategy that we will present in more detail today. In order to further strengthen Fortum’s position in the utility sector, we will carefully analyse and seize the opportunities our strong balance sheet enables. We will also work on an agile, lean and efficient organisation in order to operate more competitively and flexibly as the forerunner of the industry.
 
Finally, I would like to thank our employees for their dedication and willingness to make Fortum an even better company in the current challenging operating environment.”
 
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 business, a process that began in 2013. The total consideration from the divestments in Finland, Sweden and Norway is approximately EUR 9.3 billion on a debt- and cash-free basis and approximately EUR 6.2 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 financial statements bulletin are for the continuing operations of Fortum Group.
 
Financial results
 
October–December 2015
 
In the fourth quarter of 2015, sales were EUR 964 (1,133) million, the decrease was mainly due to weak power prices and the Russian rouble. Comparable operating profit totalled EUR 243 (370) million and the reported operating profit totalled EUR 38 (584) million. Fortum's operating profit for the period was affected by approximately EUR -119 million from impairments and provisions, as well as non-recurring items EUR 1 (238) million, 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 -87 (-24) million (Note 4).
 
Sales by segment
EUR million
IV/15
IV/14
2015
2014
Power and Technology
440
588
1,722
2,156
Heat, Electricity Sales and Solutions
352
393
1,187
1,332
Russia
266
281
893
1,055
Other
28
15
114
58
Netting of Nord Pool transactions
-97
-121
-336
-422
Eliminations
-26
-24
-122
-91
Total continuing operations
964
1,133
3,459
4,088
Discontinued operations                            
-
173
274
751
Eliminations
-
-21
-31
-89
Total Fortum
964
1,285
3,702
4,751
 
Comparable operating profit by segment
EUR million
IV/15
IV/14
2015
2014
Power and Technology
142
276
561
877
Heat, Electricity Sales and Solutions
53
49
108
104
Russia
69
59
201
161
Other
-21
-14
-63
-57
Total continuing operations
243
370
808
1,085
Discontinued operations
-
67
114
266
Total Fortum
243
436
922
1,351
 
Operating profit by segment
EUR million
IV/15
IV/14
2015
2014
Power and Technology
-65
318
-396
855
Heat, Electricity Sales and Solutions
54
221
105
337
Russia
69
59
203
161
Other
-21
-14
-62
-58
Total continuing operations
38
584
-150
1,296
Discontinued operations
-
66
4,395
2,132
Total Fortum
38
650
4,245
3,428
 
January–December 2015
 
In 2015, sales were EUR 3,459 (4,088) million, the decrease was mainly due to weak power prices and the Russian rouble. Comparable operating profit totalled EUR 808 (1,085) million and the reported operating profit totalled EUR -150 (1,296) million. Fortum's operating profit for the period was affected by EUR -794 million impact from the early closure of Oskarshamn nuclear units 1 and 2 (O1 and O2) in Sweden (Note 6), other impairments and provisions EUR -124 (0) million as well as non-recurring items EUR 22 (305) million, 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 -62 (-94) million (Note 4). Total Fortum’s operating profit EUR 4,245 (3,428) million includes the sales gain from the divestment of the Swedish electricity distribution business, approximately EUR 4.3 billion (approximately EUR 1.9 billion from Finnish and Norwegian operations in 2014).
 
The share of profit from associates was EUR 20 (146) million, the negative impact came mainly from the write-down of Oskarshamn nuclear units 1 and 2, in Sweden. The impact on earnings per share from the early closure of nuclear units O1 and O2 was EUR -0.82 per share. Fortum Värme represented EUR 47 (67) 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 third-quarter 2015 interim reports (Note 14).
 
The net financial expenses were EUR -175 (-210) million. Net financial expenses include changes in the fair value of financial instruments of EUR -18 (-5) million.
 
Profit before taxes was EUR -305 (1,232) million.
 
Taxes for the period totalled EUR 78 (-143) million. Taxes for the period are positive as the group is in loss position. This is mainly due to the write-down related to early closure of nuclear units O1 and O2 units in Sweden. The tax rate according to the income statement was 25.4% (11.6%). The tax rate, excluding the impact of the share of profit from associated companies, joint ventures as well as non-taxable capital gains, was 23.5% (2014: 18.0%) (Note 10).
 
The profit for the period for continuing operations was EUR -228 (1,089) million. Earnings per share for continuing operations were EUR -0.26 (1.22), of which EUR -0.97 (0.26) per share relates to items affecting comparability, including total effect related to early closure of nuclear units O1 and O2. Earnings per share for total Fortum, including the effect from discontinued operations, were EUR 4.66 (3.55), including the EUR 4.82 gain from the sale of the Swedish electricity distribution business. 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 7).
 
Financial position and cash flow
 
Cash flow
 
In 2015, net cash from operating activities from continuing operations decreased by EUR 178 million to EUR 1,228 (1,406) million, mainly due to lower EBITDA. Realised foreign exchange gains and losses of EUR 292 (352) 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 1,381 (1,762) million.
 
Capital expenditures for continuing operations decreased by EUR 95 million to EUR 527 (622) million. Net cash from investing activities for total Fortum was EUR 6,268 (2,816) million, including the impact from discontinued operations amounting to EUR 6,303 (2,574) million. Cash flow before financing activities for total Fortum increased by EUR 3,072 million to EUR 7,650 (4,578) million, including the net impact of discontinued operations of EUR 6,457 (2,930) million.
 
Fortum paid dividends totalling EUR 1,155 million in April 2015. The net increase in liquid funds during the period was EUR 5,490 million.
 
Assets and capital employed
 
Total assets increased by EUR 1,392 million to EUR 22,767 (21,375) million.
 
Liquid funds increased by EUR 5,436 million to EUR 8,202 (2,766) million, and property, plant and equipment decreased by  EUR 2,485 million, both arising mainly from the divestment of the Swedish distribution business. The long-term interest-bearing receivables decreased by EUR 1,268 million to EUR 773 (2,041) million mainly due to the early closure of Oskarshamn units 1 and 2 in Sweden and repayments by Fortum Värme. At the end of 2015 Fortum did not have any loan receivables from Fortum Värme.
 
Capital employed for total Fortum was EUR 19,870 (17,918) million, an increase of EUR 1,952 million.
 
Equity
 
Total equity attributable to owners of the parent company totalled EUR 13,794 (10,864) million.
 
The increase in equity attributable to owners of the parent company totalled EUR 2,930 million and was mainly from the gain on the divestment of Swedish distribution business of approximately EUR 4.3 billion, partly offset by the dividend payment of EUR -1,155 million for 2014.
 
Financing
 
Fortum was net cash positive at the end of the period as net debt decreased by EUR 6,412 million during 2015 from net debt EUR 4,217 million to net cash EUR 2,195 million.
 
At the end of 2015, the Group’s liquid funds totalled EUR 8,202 (2,766) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 76 (134) million. In addition to liquid funds, Fortum had access to approximately EUR 2.2 billion of undrawn committed credit facilities (Note 16).
 
The net financial expenses were EUR -175 (-210) million of which net interest expenses were
EUR -152 (-165) million. Net financial expenses include compensation from prepayment of loans by Fortum Värme EUR 37 million and changes in the fair value of financial instruments of EUR -18 (-5) 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. On 17 November 2015, Fitch Ratings downgraded Fortum’s long-term Issuer Default Rating (IDR) and senior unsecured rating to BBB+ from A-, while affirming the short-term IDR at F2 with a stable outlook.
 
Key figures
 
At year-end 2015, net debt to EBITDA was -0.5 (1.1) and comparable net debt to EBITDA -1.7 (2.3). At year-end 2015, Fortum was no longer financing Fortum Värme.
 
Gearing was -16% (39%) and the equity-to-assets ratio 61% (51%). Equity per share was EUR 15.53 (12.23). For the year 2015, return on capital employed totalled 22.7% (19.5%).
 
Market conditions
 
Nordic countries
 
According to preliminary statistics, electricity consumption in the Nordic countries was 103 (104) terawatt-hours (TWh) during the fourth quarter of 2015. In January-December 2015, it was 381 (378) TWh. The full-year increase was mainly driven by higher industrial consumption in Sweden and Norway.
 
At the beginning of 2015, the Nordic water reservoirs were at 80 TWh, which is 3 TWh below the long-term average and 2 TWh lower than a year earlier. By the end 2015, reservoirs were at 98 TWh, which is 15 TWh above the long-term average and 18 TWh higher than at the end of 2014. Reservoir surplus compared to the long-term average increased further during the fourth quarter due to high precipitation and mild weather, which delayed snow accumulation. Snow reservoirs were approximately normal at year-end.  
 
In the fourth quarter of 2015, the average system spot price of electricity in Nord Pool was EUR 21.9 (30.7) per megawatt-hour (MWh). Mild weather reduced consumption and high water reservoirs put pressure on prices. In Finland, the average area price was EUR 30.6 (36.4) per MWh and in Sweden SE3 (Stockholm) EUR 23.0 (31.3) per MWh.
 
During January–December 2015, the average system spot price was EUR 21.0 (29.6). The decline was due to the highest annual inflow ever reported and correspondingly very high hydro production volumes as well as mild weather and low commodity prices.  In addition, wind power production increased during the year, impacting spot prices negatively. The average area price in Finland was EUR 29.7 (36.0) and in Sweden SE3 (Stockholm) EUR 22.0 (31.6).
 
In Germany the average spot price during the fourth quarter of 2015 was EUR 33.2 (34.8) per MWh and during January-December 2015 EUR 31.6 (32.8) 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 8.3 at the end of 2015.
 
Russia
 
Fortum operates 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, Russia consumed 275 (282) TWh of electricity during the fourth quarter of 2015. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 211 (214) TWh. In January-December 2015, Russia consumed 1,007 (1,021) TWh of electricity. The corresponding figure in Fortum’s operating area in the First price zone was 772 (777) TWh.

In the fourth quarter of 2015, the average electricity spot price, excluding capacity price, increased by 5% to RUB (Russian rouble) 1,178 (1,120) per MWh in the First price zone. In January-December 2015, the average electricity spot price, excluding capacity price, decreased by 0.8% to RUB 1,154 (1,163) 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 (pages 59-61).
 
European business environment and carbon market
 
Paris Agreement
In December 2015, a global climate agreement for the post-2020 period was adopted. All countries are obligated to prepare national contributions, including mitigation, adaptation and financing, to be reviewed every five years. The long-term goal is to keep the temperature increase well below 2°C above pre-industrial levels with efforts to limit it to 1.5°C.
 
The agreement increases long-term stability and predictability, encourages market-driven actions and reduces the risk of carbon leakage. Potentially, it can result in an accelerated low-carbon energy transition and new business opportunities. However, there will be no direct impact on CO2 price unless the EU decides to increase its 2030 target. The EU Heads of States will discuss the results of Paris and the possible consequences on EU targets and policies in March 2016.
 
EU emissions trading reform
In 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. 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.
 
EU power market development
The public consultation on the new EU electricity market design was closed in 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 the autumn 2016.  
 
State of the Energy Union Report
In November 2015, the European Commission published the first edition of the annual “State of the EU Energy Union” report. It included reports on each member states’ progress in implementing the EU energy and climate targets, and the key principles for the governance system to ensure implementation of the Energy Union in a transparent and predictable way. The report also underlines the EU’s ambition to continue the EU leadership in the transition to a low-carbon economy after COP21, and to ensure that the transition is socially fair and consumer-centred. Continuing geopolitical challenges are also noted in the report.
 
Circular Economy Package
In December 2015, the EU Commission also proposed a Circular Economy package aiming at better resource efficiency and high-quality reuse of products and recycling of waste. The proposal includes amendments to several waste-related directives and ambitious EU targets for reuse and recycling of all waste streams. The Commission is proposing a ban on the landfilling of separately collected waste and limiting the share of landfilled municipal waste to a maximum of 10% by 2030.
 
When waste cannot be prevented or recycled, using it for energy is preferred to landfilling. ‘Waste to energy’ can therefore play a bigger role in the EU energy and climate policy. The Commission will examine how the energy potential can best be exploited and will adopt a waste-to-energy initiative in the framework of the Energy Union during 2016.
 
 
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 CO2 emissions allowances, as well as the hydrological situation. The completion of Fortum’s investment programme in Russia is also a key driver in 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 of 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 and Swedish krona. 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. Electricity demand is expected to grow in the Nordic countries by approximately 0.5% on average in the coming years.  
 
During January-December 2015, the price of the European Union emissions allowances appreciated, whereas oil and coal prices declined. The price of electricity for the upcoming twelve months declined in the Nordic area as well as in Germany.
 
In late-January 2016 the quotation for coal (ICE Rotterdam) for the rest of 2016 was around USD 42 per tonne, and for CO2 emission allowances for 2016 about EUR 6 per tonne. The Nordic system electricity forward price in Nasdaq Commodities for the rest of 2016 was around EUR 19 per MWh and for 2017 around EUR 18 per MWh. In Germany, the electricity forward price for the rest of 2016 was around EUR 25 per MWh and for 2017 around EUR 24 per MWh. Nordic water reservoirs were about 9 TWh above the long-term average and 8 TWh above the corresponding level of 2015.
 
Power and Technology
 
The Power and Technology segment’s (achieved) 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.
 
In 2015, the Swedish Government 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 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 new assessment needs the approval of the Swedish Government.
 
In addition, 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 in 2016, albeit corporate tax-deductible. The future of the nuclear tax is subject to active political debate in Sweden.
 
In October 2015, OKG AB's extraordinary shareholders' meeting 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.
 
In August 2015, Fortum decided to participate in the Fennovoima nuclear power project in Finland with a 6.6%-share and on the same terms and conditions as the other Finnish companies currently participating in the project. Participation will be carried out through Voimaosakeyhtiö SF.
 
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. It receives guaranteed capacity payments currently for a period of 10 years. A draft regulation related to the time frame (in the future 10 or 15 years) regarding the calculation has been submitted for review to the federal executive authorities, and a decision is expected during first half of 2016. Prices for capacity under CSA are defined in order to ensure a sufficient return on investments. The received capacity payment will vary 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 2016, the System Administrator of the wholesale market is planning to publish data on the weighted average cost of capital (WACC) and the consumer price index (CPI) for 2015, which is used to calculate the capacity price on CSA in 2016.
 
The value of the remaining part of Fortum's investment programme, calculated at the exchange rates prevailing at the end of December 2015, is estimated to be approximately EUR 100 million, as of January 2016.
 
According to the new 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 capacity not selected in the auction totalled 195 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.
 
The targeted operating profit (EBIT) level of RUB 18.2 billion in the Russia segment is targeted to be reached during 2017-2018. 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 have impacted overall demand. As a result, gas prices and electricity prices have not developed favourably as expected. 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. The Russia segment's result is also impacted by seasonal volatility caused by the nature of the heat business, with the first and last quarter being clearly the strongest.
 
In 2014, the new heat market model roadmap proposed by the Ministry of Energy was approved by the Russian Government; if implemented 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 annual average gas price growth is estimated to be 4.9% in 2016.  
 
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 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.
 
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 for the year 2007 in December 2013. 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 20082011, based on the same audit. This is in line with the Supreme Administrative Court’s (SAC) precedent decision. The Tax Recipients' Legal Services Unit has appealed the decisions in February 2015, and the cases for years 20082011 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, 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 in 2016, albeit corporate tax-deductible.
 
Hedging
 
At the end of December 2015, approximately 50% of Power and Technology's estimated Nordic power sales volume was hedged at approximately EUR 33 per MWh for the year 2016. The corresponding figures for the 2017 calendar year were approximately 20% at approximately EUR 30 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 distribution proposal
 
The distributable funds of Fortum Oyj as at 31 December 2015 amounted to EUR 5,417,422,951.23 including the profit of the period of EUR 1,133,611,072.83. After the end of the financial period there have been no material changes in the financial position of the Company.  
The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 1.10 per share be paid for 2015.
Based on the number of registered shares as of 2 February 2016 the total amount of dividend proposed to be paid is EUR 977,203,749.50. The Board of Directors proposes that the remaining part of the profit be retained in shareholders’ equity.
 
Annual General Meeting 2016
 
Fortum's Annual General Meeting is planned to take place at 14:00 on Tuesday, 5 April 2016, at the Finlandia Hall, Mannerheimintie 13, in Helsinki, Finland.
 
Espoo, 2 February 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
 
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 Board of Directors has approved Fortum's 2015 financial statements and Fortum's auditors issued their unqualified audit report for 2015 on 2 February 2016. The financial statements bulletin has been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the EU.
 
 
Reporting, AGM, and Capital Markets Day in 2016:
 
Fortum’s Financial statements and the Operating and financial review for 2015 will be published during week 10 at the latest.

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

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
 
Fortum's Capital Markets Day is planned to take place on 16 November in Helsinki.
 
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.