Financial outlook

From Fortum January-September 2018 Interim Report


At the end of September 2018, approximately 80% of the Generation segment's estimated Nordic power sales volume was hedged at EUR 30 per MWh for the rest of 2018 (75% at EUR 29 per MWh at the end of the second quarter), approximately 65% at EUR 30 per MWh for 2019 (60% at EUR 28 per MWh at the end of the second quarter), and approximately 35% at EUR 28 per MWh for 2020.

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 electricity derivatives quoted on Nasdaq Commodities.

Capital expenditure and divestments

Fortum currently estimates its capital expenditure, including maintenance but excluding acquisitions, to be in the range of EUR 600-700 million in 2018. The maintenance capital expenditure in 2018 is estimated at approximately EUR 300 million, well below the level of depreciation.

Nordic market

Electricity is expected to continue to gain a higher share of total energy consumption. Electricity demand in the Nordic countries is expected to grow by approximately 0.5% on average, while the growth rate for the next few years will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries.

During the third quarter of 2018, oil, coal, and EUA prices increased. In mid-October 2018, the forward quotation for coal (ICE Rotterdam) for the remainder of 2018 was around USD 100 per tonne and the market price for EUAs for 2018 at the level of EUR 20 per tonne. The Nordic system electricity forward price at Nasdaq Commodities for the remainder of 2018 was around EUR 45 per MWh, for 2019 around EUR 37 per MWh, and for 2020 around EUR 34 per MWh. In Germany, the electricity forward price for the remainder of 2018 was around EUR 57 per MWh and for 2019 around EUR 53 per MWh. The Nordic water reservoirs were about 11 TWh below the long-term average and were 10 TWh lower than one year earlier.


The Generation segment’s achieved Nordic power price typically depends on factors such as hedge ratios, hedge prices, spot prices, availability and utilisation of Fortum's flexible production portfolio, as well as currency fluctuations. Excluding the potential effects from changes in the power generation mix, a 1 EUR/MWh change in the Generation segment’s Nordic power sales achieved price will result in an approximately EUR 45 million change in Fortum's annual comparable operating profit. The achieved power price also includes the results of optimisation of Fortum’s hydro and nuclear production as well as operations in the physical and financial commodity markets.

As a result of the nuclear stress tests in the EU, the Swedish Radiation Safety Authority (SSM) has decided on new regulations for Swedish nuclear reactors. For the operators, this means that safety investments should be in place no later than 2020.

The process to review the Swedish nuclear waste fees is done in a three-year cycle. In March 2017, the Swedish Government decided on the new nuclear waste fees for years 2018-2020. In October 2017, the Swedish Parliament decided on changes in the legal framework, impacting calculations of nuclear waste fees and the investment of the nuclear waste fund. In the revised legal framework, the assumed operating time for calculating the waste fee is 50 years, as opposed to the previous assumption of 40 years. The fund is now also allowed to invest in other financial instruments in addition to bonds. Based on these changes, the annual waste fees for Fortum are expected to increase by approximately EUR 8 million.

On 11 June 2018, the Swedish Administrative Court of Appeal gave its decisions on Fortum Sverige AB’s hydro production-related real-estate tax assessments for the years 2009-2014. The court decisions were not in Fortum’s favour and are contrary to the Administrative Court’s earlier decision. Fortum has applied for the right to appeal from the Supreme Administrative Court. The disputed amount, including interest for the time period, totalled SEK 520 million (EUR 51 million). In case the Administrative Court of Appeal’s ruling becomes final, there will be no impact on Fortum's results. In Sweden, hydropower plants have earlier been subject to a real-estate tax that has resulted in a per-kWh real-estate tax that was approximately 12 times higher compared to any other production form due to different tax rates and different valuation factors.

On 12 April 2018, the Swedish Government proposed legislation to the parliament regarding the future of hydropower following last year’s parliamentary Energy Commission. The proposed legislation states that all hydropower should have modernised permits, but also clearly states that existing hydropower needs to be protected to be able to play a key role in the future energy system. The proposed legislation also points to the classification of water bodies, demanding that they shall be done in a manner that protects hydropower and other infrastructure. The Government proposal also states that the industry should create a common hydropower fund to finance large parts of the environmental actions needed. According to the Energy Commission, the fund has a total financial cap of SEK 10 billion to be paid over a 20-year period, and the largest operators will contribute to the fund proportionately based on their respective market share of hydropower production. Fortum's share is expected to be 20-25% of the fund's total financing. On 19 June 2018, the legislation was adopted by the parliament, supported by a broad majority of six parties that agreed on the Energy Commission results.

In September 2016, the Swedish Government presented the budget proposal for the coming years, according to which the nuclear capacity tax will be reduced to 1,500 SEK/MW per month from 1 July 2017 and abolished on 1 January 2018. In 2017, Fortum's Swedish nuclear capacity tax was EUR 44 million. In 2018, there is no capacity tax. Further, the Swedish hydropower real-estate tax will decrease from 2.8% to 0.5%. The tax is being reduced in four steps: in January 2017 to 2.2%; in January 2018 to 1.6%; in January 2019 to 1.0%; and in January 2020 to 0.5%. In 2017, the tax for Fortum decreased by EUR 20 million to EUR 95 million. In addition to the decrease in the tax rate, the hydropower real-estate tax values, which are linked to electricity prices, will be updated in 2019. The real-estate tax values are updated every six years. With the current electricity prices, the tax values for the 2019-2024 period would be lower than they are today.

In 2015, the Swedish OKG AB decided to permanently discontinue electricity production at Oskarshamn’s nuclear plant units 1 and 2. Unit 1 was shut down on 17 June 2017 and unit 2 has been out of operation since June 2013. The closing processes for both units are estimated to take several years.

City Solutions

In City Solutions, stable growth, cash flow and earnings are achieved through investments in new plants and through acquisitions. Fuel cost, availability, flexibility, efficiency, as well as gate fees are key drivers for profitability, but also the power supply/demand balance, electricity prices, and weather conditions affect profitability.

The development of Fortum Oslo Varme's business operations is estimated to require integration-related one-time costs and increased investments over the coming years. The realisation of cost synergies is estimated to gradually start materialising from 2019 onwards, with targeted annual synergies of EUR 5-10 million expected to be achieved by the end of 2020.

Consumer Solutions

After the acquisition of Hafslund Markets in August 2017, a new business strategy for Consumer Solutions was approved by the Fortum Board of Directors in December 2017. The strategic objective is to establish Consumer Solutions as the leading consumer business in the Nordics, with a customer-centric, multi-brand structure.

Competition in the Nordic electricity retail market is expected to remain challenging, with continued pressure on sales margins and customer churn. To counter the market challenges and create a solid foundation for competitive operations, Consumer Solutions will continue its cost spend in developing new digital services for consumers.

The combined Hafslund Markets and Fortum Markets business, while largely complementary, has identified synergy potential, in terms of both revenue and costs. The short-term priority will be on achieving identified revenue synergies by leveraging established best practices and providing additional products and services to the whole customer base. The realisation of cost synergies will start materialising once the integration of Hafslund Markets is completed, expected in 2019, with cost synergy realisation gradually increasing over the coming years and targeted annual synergies of approximately EUR 10 million to be achieved by the end of 2020.


In the Russia segment, capacity payments based on CSA contracts are a key driver for earnings growth, as it receives considerably higher capacity payments than through the CCS auctions. Currently Fortum's CSA capacity amounts to 2,368 MW. In February 2018, the System Administrator of the wholesale market published data on the WACC and the CPI for 2017, which were used to calculate the 2018 CSA price. The CSA payments were revised downwards accordingly to reflect the lower bond rates. The regulator also reviewed the guaranteed CSA payments by re-examining earnings from the electricity-only market and revised the CSA payments upwards due to the lower earnings from the electricity-only market.

Fortum’s other Russian generation capacity, totalling 2,544 MW, is allowed to participate in the CCS auctions. The long-term CCS for the years 2017-2019 was held at the end of 2015, the CCS for the year 2020 in September 2016, and the CCS for the year 2021 in September 2017. All Fortum plants offered in the auction were selected. Fortum also obtained "forced mode status", i.e. it receives payments for the capacity at a higher rate for some of the units at the Argayash power plant. For the years 2017-2019, "forced mode status" was obtained for 195 MW; for the year 2020 for 175 MW, and for the year 2021 for 105 MW. The date of the CCS auction for 2022 has been postponed from 15 September to 15 December 2018.

In June 2018, Fortum won the right to build 110 MW of solar capacity in a CSA auction. The power plants are to be commissioned during the years 2021-2022 and will receive a guaranteed CSA price corresponding to approximately RUB 14,000 per MWh for a period of 15 years.

In June 2018, the Fortum-Rusnano wind investment fund (Fortum's ownership 50%) won the right to build 823 MW of wind capacity in a CSA auction. The wind parks are to be commissioned during the years 2019-2023 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000-8,000 per MWh for a period of 15 years.

As of January 2018, Fortum’s Ulyanovsk wind farm is listed in the registry of capacity. The 35-MW power plant is Russia’s first industrial wind park. It will receive CSA payments for a period of approximately 15 years after commissioning. The CSA price currently corresponds to approximately RUB 11,000 per MWh.

In December 2017, Fortum acquired three solar power companies. All three power plants are operational and will receive CSA payments for approximately 15 years after commissioning. The CSA price currently corresponds to approximately RUB 21,000 per MWh. The plants were commissioned in 2016 and 2017.

In June 2017, the Fortum-Rusnano wind investment fund won the right to build 1,000 MW of wind capacity in a CSA auction. The wind parks were to be commissioned during the years 2018-2022 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000-9,000 per MWh for a period of 15 years. In October 2017 and October 2018, the wind investment fund made investment decisions for the first 50-MW and second 200-MW wind farms. Power production is expected to start during the first half of 2019 and the first half of 2020, respectively.

The Russian annual average gas price growth was 2% in 2017. Fortum estimates the Russian annual average gas price growth to be 3.1% in 2018.

Other Operations

For information on the financial impact of the Uniper shareholding, please see the Uniper investment section of this interim report and Note 6.

In June 2018, Fortum won the right to build a 250-MW solar power plant in the Pavagada solar park in Karnataka, India. The capital expenditure is estimated to be approximately EUR 120 million, and the solar park will be entitled to a fixed tariff of 2.85 INR/kWh for 25 years. Commissioning of the plant is expected in 2019.

Income taxation

In 2018, the effective corporate income tax rate for Fortum is estimated to be 19-21%, excluding the impact of the share of profits of associated companies and joint ventures, as well as non-taxable capital gains.

On 11 May 2017, the Administrative Court in Stockholm gave its decisions related to Fortum’s income tax assessments for the year 2013. The court’s rulings were not in Fortum’s favour and Fortum appealed the decisions. Fortum did not make any provision for this. On 18 October, the Administrative Court of Appeal in Stockholm ruled in favour of Fortum related to Fortum's income tax assessments in Sweden for the year 2013. The assessment concerns Fortum's right to deduct interest relating to intra-group loans. The court confirmed that Fortum had sufficient business reasons for the loans and accepted Fortum's appeal. In July 2017, Fortum paid the additional taxes including interest for 2013, in total SEK 273 million (EUR 26 million) and booked them as a receivable. The repayment of this receivable will have a positive cash flow effect for Fortum. Fortum estimates to receive the payment during 2018. The Swedish tax authorities may apply for the right to appeal from the Supreme Administrative Court (Note 19). The court's decision was mainly based on Swedish legislative differences between the 2013 and 2009 legislations.

In June 2018, the Swedish government decided to lower the Swedish corporate tax in two steps, from the current 22.0% to 21.4% from January 2019 and to 20.6% from January 2021.

In March 2018, the Swedish Supreme Administrative Court decided not to grant leave to appeal to Fortum with respect to the interest deduction cases relating to the years 2009-2012. The unfavourable decision of the Administrative Court of Appeal from June 2017 therefore remains in force. The additional tax and interest, in total SEK 1,175 million (EUR 122 million), was booked as a cost in the second-quarter 2017 results and was paid already in 2016. There are strong grounds to argue that these decisions of the Administrative Court of Appeal and the Supreme Administrative Court violate EU law and fundamental rights under EU law. Fortum plans to make use of legal remedies which are available for breaches of EU law (Note 19).