Financial outlook

From Fortum January-June 2019 Half-year Financial Report


At the end of September 2019, approximately 80% of the Generation segment's estimated Nordic power sales volume was hedged at EUR 33 per MWh for the remainder of 2019, approximately 70% at EUR 33 per MWh for 2020 (at the end of the second quarter 2019: 60% at EUR 31 per MWh), and approximately 35% at EUR 33 per MWh for 2021.

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 600-650 million in 2019. This includes solar and wind investments, which can be divested through the capital recycling business model. The maintenance capital expenditure in 2019 is estimated at approximately EUR 300 million, well below the level of depreciation.

In 2020, capital expenditure is expected to decline. 

Nordic market

Electricity is expected to continue to gain a higher share of total energy consumption. Electricity demand in the Nordic countries during the next few years is expected to grow annually by approximately 0.5% on average. The growth rate will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries and, in the longer term, also by the rate of electrification of industry, transportation, and heating.

During the third quarter of 2019 the gas price was at a low level, and also the front-year gas price decreased. Oil and EUA prices decreased, while coal prices increased.

In mid-October 2019, the forward quotation for coal (ICE Rotterdam) for the remainder of 2019 was around USD 61 per tonne and the market price for EUAs for 2019 at the level of EUR 26 per tonne. The Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2019 was around EUR 41 per MWh and for 2020 around EUR 36 per MWh. In Germany, the electricity forward price for the remainder of 2019 was around EUR 44 per MWh and for 2020 around EUR 49 per MWh. The Nordic water reservoirs were about 2 TWh below the long-term average and 2 TWh higher 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.

On 19 June 2018, the Swedish Parliament adopted new hydro legislation that came into force on 1 January 2019. In the new legislation it is stated that the industry shall create a joint hydropower fund to finance major parts of the environmental actions needed. A fund has been established with a total financial cap of SEK 10 billion to be paid over a 20-year period. The major utilities will contribute to the fund based on their share of hydropower production. Fortum's share is 23% of the fund's total financing. In addition to the new legislation, the Government issued an ordinance that came into force on 11 January 2019 to establish a national prioritisation plan for the revision of hydropower permits.

On 11 June 2018, the Swedish Administrative Court of Appeal gave its decisions on Fortum Sverige AB’s hydropower production-related real-estate tax assessments for the years 2009-2014. The court decisions were not in Fortum’s favour. Fortum applied for the right to appeal from the Supreme Administrative Court, but did not receive permission to appeal. As the Administrative Court, the Administrative Court of Appeal in Stockholm, and the Supreme Administrative Court have handled only the arguments concerning state aid, the case concerning the other legal arguments has now been transferred back to the Administrative Court. The disputed amount, excluding interest for the time period, totals approximately SEK 510 million (approximately EUR 48 million). Moreover, Fortum's Swedish companies have appeals for 2011-2016 pending before the Administrative Court relating to the real-estate tax rate for their hydropower plants and referring to the same legal grounds. Fortum has paid the real-estate tax in accordance with the legislation. If the final court decision is unfavourable to Fortum, it will not impact Fortum's results. In December 2018, Fortum Sverige AB filed a complaint to the EU Commission regarding the Swedish real-estate tax for hydropower plants for 2017 and prior years. Fortum has asked the Commission to investigate whether the Swedish legislation regarding the real-estate tax for hydropower plants and the Swedish court decisions are in line with EU state aid rules. 

According to the Swedish Government's budget proposal for the coming years, presented in September 2016, 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 2018, the tax for Fortum was EUR 65 million. In addition to the decrease in the tax rate, the hydropower real-estate tax values, which are linked to electricity prices, were updated in 2019. The real-estate tax values are updated every six years. In 2019, the hydropower real-estate tax for Fortum is estimated to decrease by approximately EUR 20 million from 2018.

City Solutions

In City Solutions, growth in cash flow and earnings is mainly achieved through investments in new plants and through acquisitions. Heat prices, fuel cost, availability, flexibility and efficiency of the plants, as well as gate fees for receiving waste are key drivers for profitability, but power prices and weather conditions also affect profitability. Fortum aims to create new businesses with potential for sizeable profit contribution, e.g. within the areas of waste and recycling and the bio-economy.

The development of Fortum Oslo Varme's business operations is estimated to require one-time integration-related costs and 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.

On 10 April 2019, the Swedish Government proposed new taxes on fossil fuels used for heat production in CHP plants. Consequently, the board of Stockholm Exergi has for the time being decided to decommission one of two units in CHP6 in Stockholm and to keep another unit only as a reserve to support security of supply. Stockholm Exergi expects to be able to limit the costs to SEK 150 million annually with these actions and optimisation of the district heat system. There is also a proposal for tax on waste incineration which, if realised, would increase the annual costs for Stockholm Exergi by SEK 100 million. The result impact will depend on the final legal framework of the tax and the waste supply contract structure. The final tax proposal is expected as a part of the national budget proposal to be presented in late October 2019.

In March 2019, Fortum announced that it had won the right from Solar Energy Corporation of India to build a 250-MW solar power plant in Rajasthan, India. The solar park will be entitled to a fixed tariff of 2.48 INR/kWh for 25 years. Commissioning of the plant is expected in the fourth quarter of 2020.

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 160 million, and the solar park will be entitled to a fixed tariff of 2.85 INR/kWh for 25 years. The plant was fully commissioned by 5 August 2019.

Consumer Solutions

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 capacity payments through CSA contracts are considerably higher than through the CCS auctions. Currently, Fortum's CSA capacity amounts to 2,368 MW. In February 2019, the System Administrator of the wholesale market published data on the WACC and the CPI for 2018, which were used to calculate the 2019 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. In addition, thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning. In 2019, no such increase in CSA payments is expected.

Fortum’s other Russian generation capacity, totalling 2,560 MW, is allowed to participate in the CCS auctions. The long-term CCS auctions for the years 2018-2021 were held in 2015, 2016, and 2017. All Fortum plants offered in the auctions were selected. The nominal CCS price was 111 tRUB/MW/month for 2018, 110 tRUB/MW/month for 2019, 115 tRUB/MW/month for 2020, and 134 tRUB/MW/month for 2021. The CCS auctions for 2022-2024 were held in August 2019. The nominal CCS price was 168 tRUB/MW/month for 2022, 171 tRUB/MW/month for 2023, and 182 tRUB/MW/month for 2024. The CCS auction for 2025 is expected to be held in November 2019. Fortum has 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 2018-2019, "forced mode status" was obtained for 195 MW; for the year 2020 for 175 MW; and for the year 2021 for 105 MW.

In June 2019, Fortum won the right to build 5.6 MW of solar capacity in Russian CSA auctions, in addition to the 110 MW won in June 2018. The power plants will receive a guaranteed CSA price for a period of 15 years, corresponding to approximately RUB 14,000 per MWh and RUB 15,000 per MWh, respectively. The plants are to be commissioned during 2021-2022.

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 were to be commissioned during 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. In December 2018, the wind investment fund made an investment decision on a 100-MW wind farm.

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 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 on a 50-MW and a 200-MW wind farm, respectively.

The Russian Government increased the gas price by 1.4% in July 2019. Fortum estimates the gas price to be increased by 3% in July 2020.

Other Operations

For information on the financial impact of the Uniper shareholding, please see Notes 6 and 11.

Income taxation

In 2019, 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, non-taxable capital gains, as well as tax rate changes.
In June 2018, the Swedish Government decided to lower the Swedish corporate tax in two steps, from 22.0% to 21.4%, effective January 2019, and to 20.6%, effective January 2021. 

Fortum has received income tax assessments in Belgium for the years 2008-2012. The tax authorities disagree with the tax treatment of Fortum EIF NV, which was later merged into Fortum Project Finance NV. Fortum finds the tax authorities interpretation not to be based on the local regulation and has appealed the decisions. The Court of First Instance in Antwerp rejected Fortum's appeal for the years 2008 and 2009 in June 2014. Fortum found the decision unjustifiable and appealed to the Court of Appeal. In January 2016, Fortum received a favourable decision from the Court of Appeal in Antwerp in which the Court disagreed with the tax authorities' interpretation and the tax assessment for 2008 was nullified. The tax authorities disagreed with the decision and filed an appeal to the Supreme Court (Hof van Cassatie) in March 2016. In April 2019, the Advocate General at the Supreme Court issued his opinion, which was in favour of Fortum Project Finance. In May 2019, the Supreme Court, however, annulled the decision of the Court of Appeal of Antwerp and referred the case back to the Court of Appeal of Ghent for full retrial. Fortum's appeals concerning 2009-2012 are still pending and Fortum expects the remaining years to follow the final decision for 2008. Based on legal analysis and a supporting legal opinion, no provision has been accounted for. The amount of additional tax claimed is EUR 36 million for the year 2008, EUR 27 million for 2009, EUR 15 million for 2010, EUR 21 million for 2011, and EUR 15 million for 2012. The tax has already been paid.

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 paid in 2016 and booked as a cost in the second-quarter 2017 results. 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. On these grounds, Fortum filed a summons application in December 2018 to the District Court of Stockholm in which damages are claimed from the Swedish state in these cases. Fortum also filed a request to initiate a mutual agreement procedure between Sweden and the Netherlands for the year 2012 (Note 18).