Financial outlook

From Fortum January-March 2018 Interim Report


At the end of March 2018, approximately 65% of the Generation segment's estimated Nordic power sales volume was hedged at EUR 27 per MWh for the rest of 2018, and approximately 45% at EUR 26 per MWh for 2019.

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 macroeconomic developments in Europe and especially in the Nordic countries. 

During the first quarter of 2018, oil prices increased while coal prices decreased. The price of CO2 emission allowances (EUA) increased significantly during the quarter. The price of electricity for the upcoming 12 months increased in the Nordics due to a weaker hydrological balance but decreased in Germany.

In late April 2018, the forward quotation for coal (ICE Rotterdam) for the remainder of 2018 was around USD 84 per tonne and the market price for CO2 emission allowances for 2018 around EUR 14 per tonne. The Nordic system electricity forward price at Nasdaq Commodities for the remainder of 2018 was around EUR 33 per MWh and for 2019 around EUR 31 per MWh. In Germany, the electricity forward price for the remainder of 2018 was around EUR 38 per MWh and for 2019 around EUR 39 per MWh. The Nordic water reservoirs were about 10 TWh below the long-term average and were 9 TWh lower than a year earlier.


The Generation 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, 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 will increase by approximately EUR 8 million.

On 9 March 2018, the Swedish Government presented the proposed legislation regarding the future of hydro-power following last year’s parliamentary Energy Commission. The proposed legislation says that all hydro-power should have modernised permits, but also states clearly that existing hydro-power need 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 and says that they shall be done in a manner that protects hydro-power and other infrastructure. The Government proposal also states that the industry should create a common hydro-power fund that will finance large parts of the environmental actions that will be 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 according their market share in hydro-power production. Fortum's share is expected to be 20-25% of the funds total financing.

On 3 July 2017, Fortum announced the decision by the Administrative Court in Stockholm, Sweden, related to Fortum Sverige AB’s hydro production-related real-estate tax assessments for the years 2009–2014. The Court decided in Fortum’s favour. The disputed amount for the five years was a total of SEK 520 million (EUR 53 million). Fortum will book the tax income (subject to income tax) only after the legal decision has entered into force. Hydro-power plants have been subject to a real-estate tax rate that has resulted in an approximately 12 times higher real-estate tax per kWh compared to any other production, due to different tax rates and different valuation factors. The tax authority has appealed the decision and the case is pending before the Administrative Court of Appeal.

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, the Swedish nuclear capacity tax was EUR 44 million. In 2018, there is no capacity tax. As stated in the Government’s budget, the hydro-power real-estate tax will decrease from 2.8% to 0.5%. The tax will be 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 hydro-power 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 low electricity prices, the tax values in 2019 would be clearly lower than 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, approximately 2 weeks earlier than planned, 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 price and the weather 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 are 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 increasing 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, have 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 from 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 is 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 2,483 MW, is allowed to participate in the CCS. 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, 175 MW, and for the year 2021, 105 MW.

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 at a price currently corresponding to approximately EUR 180 per MWh for a guaranteed period of approximately 15 years.

In December 2017, Fortum acquired three solar power companies from Hevel Group, Russia's largest integrated solar power company. All three power plants are operational and will receive CSA payments for approximately 15 years after commissioning at an average CSA price currently corresponding to approximately EUR 400 per MWh. The plants were commissioned in 2016 and 2017.

In June 2017, 1,000 MW of the bids of the 50/50-owned Fortum-RUSNANO wind investment fund were selected in the Russian wind auction. The bids are for projects to be commissioned during the years 2018-2022 at a price currently corresponding to approximately EUR 105-125 per MWh. The projects will be covered by CSA for a period of approximately 15 years.

The Russian annual average gas price growth was 2% in 2017. Fortum estimates the Russian annual average gas price growth to be 3.6% in 2018.

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.

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. There are strong grounds to argue that the aforementioned 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)

On 11 May 2017, the Administrative Court in Stockholm, Sweden, 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 has appealed the decisions. If the decisions remain in force despite the appeal, the negative impact on the net profit would be EUR 27 million (SEK 273 million). Fortum has not made any provision for this, as, based on legal analysis, the EU Commission’s view and supporting legal opinions, the cases should be ruled in Fortum’s favour. (Note 19)