Risks and sensitivities

Fortum’s financial results are exposed to a number of financial, operational, strategic, and sustainability-related risks. Fortum is exposed to these risks both directly and indirectly through its subsidiaries, associated companies, and joint ventures.

Risk update at the end of 2020

Fortum’s financial results are exposed to a number of financial, operational, strategic, and sustainability-related risks. Fortum is exposed to these risks both directly and indirectly through its subsidiaries, associated companies, and joint ventures. The principal associated companies and joint ventures are Teollisuuden Voima Oyj (TVO), Forsmarks Kraftgrupp AB, Kemijoki Oy, TGC‑1, and Stockholm Exergi AB. For more information about the risk exposures, please see each respective company’s annual report.

On 26 March 2020, Fortum became the majority shareholder of Uniper. Fortum consolidated Uniper into Fortum’s balance sheet as of 31 March 2020, and the income statement from the second quarter. However, Uniper remains a separate listed company operating under German law and regulations; Uniper has its own risk management systems, including a set of risk policies defining the risk management organisation principles, processes, and responsibilities for managing risks. Therefore, Uniper does not directly apply the risk management systems applicable to Fortum’s other divisions and corporate functions. The risk management systems of Uniper, including the key principles and processes, are materially in line with those of Fortum. The target is to further align the risk management systems going forward.

For more information about Uniper’s risk management systems and risk exposures, please see Uniper’s annual report for 2020.

In December 2020, Fortum presented the updated strategy for the whole Fortum Group. Fortum and Uniper have agreed to co-operate in a number areas including physical trading and optimisation of Nordic hydro operations, jointly developing a portfolio of solar and wind projects in Europe, and a joint growth strategy in hydrogen. In addition, Fortum has announced a number of growth areas for future investments and has initiated a strategic review of the heating and cooling businesses in the Baltics and Poland, it’s 50% stake in Stockholm Exergi, and the Consumer Solutions business. The ability of Fortum to deliver on its strategic targets and achieve the expected benefits depends on successful portfolio restructuring and co-operation between the two companies.

Fortum is exposed to power, emissions, and fuel price movements and volume changes mainly through its power and heat generation. The profitability of outright production assets, such as hydro, nuclear, and wind power generation, are primarily exposed to fluctuations in electricity prices and volumes, whereas the profitability of coal and gas fired generation assets depend on the spread between the electricity price and the emission and fuel prices.

In the Nordics and central European countries, power prices and, consequently, the amount of profitable production, exhibit significant variation on the back of several factors, for instance, but not limited to weather conditions, outage patterns in production and transmission lines, CO2 allowance prices, fuel prices, as well as the power demand.

Uniper has long-term gas supply contracts which generally include the possibility for the customer and the supplier to adapt contractual terms to changed market conditions. This entails the risk that suppliers will impose contractual changes and/or new conditions that are detrimental, but also represents an opportunity as renogiated conditions may be beneficial for Fortum.

For Fortum’s Russian businesses, the key drivers are economic growth, the rouble exchange rate, regulation of the heat business, and the further development of the electricity and capacity markets. A key profitability driver is the received capacity payments based on the CSA contracts and CCS auctions. The main part of Fortum’s generation capacity built after 2007 is entitled to CSA payments for approximately 10 years after commissioning of each new unit (approximately 15 years for renewable generation). The received capacity payments vary, depending on the age, location, type, and size of the plant, as well as on seasonality and availability. The CSA payments are adjusted for, among other factors, the Government bond yield, the rate of return, the consumer price index (CPI), and re-examination of earnings from the electricity-only (spot) market (done every three and six years after commissioning of a unit). In addition, thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning.

The energy sector is heavily influenced by national and EU-level energy policies and regulations. Fortum's strategy has been developed based on scenarios of the future development of the regulatory environment in both existing and potential new businesses and market areas. The overall complexity and possible regulatory changes in Fortum's various operating countries pose risks and create opportunities for the energy, environmental management, and consumer businesses. Fortum analyses and assesses a number of future market and regulation scenarios, including the impact of these on different generation forms and technologies in the development of its strategy.

Fortum has cash flows, assets, and liabilities in currencies other than the euro and is therefore exposed to fluctuations in exchange rates. Currency risk arise mainly from physical and financial trading of commodities, existing and new investments, external financing, and shareholder loans within the Group. The main currency exposure is toward euro/Swedish krona, euro/Russian rouble, and euro/British pound sterling, arising from Fortum’s extensive operations in Sweden, Russia, and the United Kingdom.

Fortum is currently rated BBB with a negative outlook by both Standard & Poor’s and Fitch credit rating agencies. The key risk factors that could lead to weakening credit metrics and a rating downgrade include a continuing decline in European and Russian power prices, lower-than-expected amounts received from planned divestments, and an increase in leverage. A lowering of the credit rating, in particular to below investment-grade level (BB+ or below), could affect access to capital markets and the increase cost of new financing. Uniper is also currently rated BBB with a negative outlook by Standard & Poor’s. A downgrade from the current BBB investment-grade rating to BBB- or below could negatively affect liquidity as it would trigger counterparties’, especially in the trading business, right to demand increased collateral, which would need to be provided via liquid assets or bank guarantees.

Energy generation, storage, distribution, and control of operations is a complex process and therefore accidents can occur. Any unwanted operational event (which could be caused by e.g. technical failure, human or process error, natural disasters, sabotage, or terrorist attack) can endanger personal safety or lead to environmental or physical damage, business interruptions and possible third-party liability. The cost of repairing damage can be high, especially in the Group’s largest units.

Fortum’s business activities involve the construction, modernisation, maintenance, and decommissioning of power plants or other energy industry facilities. There is a risk that construction costs exceed planned costs or construction delays occur as the result of regulatory or permit issues, failure of key suppliers, being unable to obtain permits, or as a result of Covid-19 causing the discontinuation of the project. Asset projects also face environmental, health, and safety risks. Asset project risks may realise both for Fortum’s own assets projects, or projects carried out through joint ventures or associated companies. The most significant asset projects which are still exposed to significant risks are Datteln 4, Nord Stream 2, and Olkiluoto 3.

During 2020, the Covid-19 pandemic resulted in new and partly unexpected risks as societies and governments across the world implemented drastic measures to contain the spread of the disease. Although the impacts for Fortum have so far been limited, the exposure to risk and uncertainty in all risk categories has increased compared to the 2019 year-end situation. If the Covid-19 pandemic continues longer than expected or results in a more severe economic downturn than anticipated, results will be negatively impacted, as the hedge level for future years is lower. The main risk factors include lower commodity prices and decreased demand, credit defaults and delayed payments, project delays and increased risk of operational incidents or prolonged maintenance as a result of travel restrictions, absence of key personnel, as well as difficulties in obtaining key materials and spare parts.

Fortum is closely monitoring the development of the pandemic and its effects on our operations so that we can quickly respond to changes and continue to ensure the safe and reliable delivery of electricity, heat and related services.

For further information about the risks, see Fortum’s Annual Report for 2019 and Fortum’s Annual Report for 2020, to be published in week 11 at the latest.

Financial risk management in Fortum

Commodity market and fuel risks

Fortum’s business is exposed to fluctuations in prices and availability of commodities used in the production, transmission and sales of energy products. The main exposure is toward electricity prices and volumes, gas prices and volumes, prices of emissions and prices and availability of fuels. Fortum hedges its exposure to commodity market risks in order to reduce volatility in cash flow and to increase the predictability of future results.

Sensitivity according to IFRS 7

Sensitivity analysis shows the sensitivity arising from financial commodity derivatives as defined in IFRS 7. Sensitivities are presented with most descriptive measure about the risk management and usage of derivatives in Uniper segment and other Fortum’s segments.

Fortum, excluding Uniper

In Fortum, excluding Uniper, derivatives are used for hedging purposes with hedge accounting applied to most hedging strategies. Sensitivities in the table below are calculated based on the electricity position as of 31 December 2020 (31 December 2019). Positions are actively managed in the day-to-day business operations and therefore the sensitivities vary from time to time. Sensitivity analysis includes only the market risks arising from derivatives i.e. the underlying physical electricity sales and purchases are not included. Sensitivity is calculated with the assumption that electricity forward and futures quotations would change 1 EUR/MWh for the period Fortum, excluding Uniper, has derivatives.

+/- 1 EUR/MWh change in electricity forward quotations, EUR million Effect 2020 2019
Effect on profit before income tax +/- 1 4
Effect on equity +/- 58 49


In Uniper, derivatives are used mainly for hedging, but also for proprietary trading purposes. Hedge accounting is not applied in Uniper for commodity derivatives.

Commodity price risks in Uniper are measured based on a value-at-risk approach with 95% confidence interval and take into account the amount of open position as well as the prices, their volatility and the liquidity on the respective markets. Value- at-risk figures are supplemented by stop-loss and volume based indicators. When necessary, additional portfolio-specific restrictions are set.

Based on the current Uniper portfolio, as of December 2020, the calendar year based, weighted value-at-risk, which takes market liquidities into account and ignores correlations between years, was EUR 463 million for financial and physical commodity positions covering next three years.

Electricity price and volume risks

Fortum is exposed to electricity market price movements and volume changes mainly through its power and heat generation.

In the Nordics and central European countries, market prices and, consequently, the amount of profitable production exhibit significant variation on the back of several factors, for instance, but not limited to weather conditions, outage patterns in production and transmission lines, CO2 allowance prices, fuel prices, as well as the amount of electricity demand. Electricity price risks in the Nordics and central European markets are mainly hedged by entering into electricity derivatives contracts on exchanges such as the Nasdaq Commodities exchange or the European Energy Exchange as well as directly with counterparties active in the energy and financial markets.. The ability to efficiently implement hedging strategies is dependent on a well-functioning and liquid derivatives market. There is a risk of decreasing liquidity of especially Nordic electricity derivatives on the Nasdaq Commodities exchange. Alternatives including use of OTC derivative contracts and correlated products traded on other exchanges are used to mitigate this risk. The Generation segment and Uniper segment have separate hedging strategies covering several years in the short to medium term. Hedging strategies are continuously evaluated as electricity and other commodity market prices, the hydrological balance and other relevant parameters change. Hedging of the Generation segment’s power sales is performed in EUR on a Nordic level covering both Finland and Sweden, and the currency component of these hedges in the Swedish entity is currently not hedged. Uniper’s Nordic power hedging is performed only in Sweden and the currency component of these hedges in the Swedish entity is hedged.

In Russia, electricity and capacity prices are the main source of market risk. Capacity from newer units is sold under capacity supply agreements where the price is set by the Russian Federation to ensure the return on investments. Capacity from old units has been sold until 2024 via capacity supply auctions which have already been conducted.

Electricity price exposure is partly mitigated through regulated fixed-price bilateral agreements, but the majority of electricity sales is exposed to spot price risk. In the short-term, electricity prices and volumes are mainly impacted by changes in industrial demand, gas prices and weather-driven demand changes. As a result of the Covid-19 pandemic and temporary restrictions in the oil and gas industry following the OPEC+ decisions, closure of many factories and industries caused a significant decline oil production, followed by lower electricity consumption.

Gas prices and volumes

Long-term gas supply contracts of Uniper generally include the possibility for the customer and the supplier to adapt contractual terms to changed market conditions. This entails the major risk for Uniper that suppliers will impose conditions that are detrimental. In order to limit the risk, negotiations are conducted by the most experienced employees utilizing all available internal and external expertise.

A deterioration in the economic situation or upheavals in the market for LNG could lead to a lower than planned utilization of the long-term capacity booked in the regasification plants in Uniper’s LNG business and make it necessary to set up provisions for onerous contracts over the entire remaining booking period. Uniper strives to further increase the utilization of this booked capacity and thus improve the revenue situation.

Emission and environmental value risks

The European Union and the United Kingdom have emissions trading schemes to reduce the amount of CO2 emissions. In addition to the emissions trading schemes, there are other trading schemes in environmental values in place in Sweden, Norway and Poland. Part of Fortum’s power and heat generation is subject to requirements of these schemes. There is currently no trading scheme in Russia for emissions or other environmental values. However, Russia has announced intentions to comply with the Paris Agreement, but there is uncertainty related to how and when a possible carbon market could be implemented.

The main factors influencing the prices of CO2 emission allowances and other environmental values are political decisions and the supply and demand balance. Fortum hedges its exposure to these prices and volumes through the use of CO2 derivatives and environmental certificates.

Fuel price and volume risks

Power and heat generation requires use of fuels that are purchased on global or local markets. The main fuels used by Fortum are natural gas, uranium, coal, various biomass-based fuels and waste. The main risk factor for fuels that are traded on global markets such as coal and natural gas, is the uncertainty in price. Prices are largely affected by demand and supply imbalances that can be caused by, e.g. increased demand growth in developing countries, natural disasters or supply constraints in countries experiencing political or social unrest. For fuels that are sourced on local or regional markets, such as bio-fuels, the volume risk in terms of availability of the raw material of appropriate quality is more significant as there may be a limited number of suppliers. Due to the current sanctions, there are also risks related to imported fuels from Russia.

The exposure to fuel price risk is mitigated through fixed- price physical delivery contracts or derivative contracts. The main fuel source for heat and power generation in Russia is natural gas which is partially regulated limiting the price risk exposure. Long-term gas supply contracts are concluded with gas suppliers to ensure gas availability for power plants.

Liquidity and refinancing risks

Fortum's business is capital intensive and there is a constant need to ensure efficient financing. Fortum maintains a diversified financing structure in terms of debt maturity profile, debt instruments and geographical markets. Liquidity and refinancing risks are managed through a combination of cash positions and committed credit facility agreements. The credit risk of cash positions has been mitigated by diversifying the deposits to high-credit quality financial institutions and issuers of corporate debt.

Fortum Corporation is currently rated BBB with a negative outlook by both Fitch and Standard & Poor’s (S&P) rating agencies. The key risk factors which could lead to a weakening credit metrics and potentially trigger rating downgrade include a continuing decline in European and Russian power prices, lower-than-expected amounts received from planned divestments and an increase in leverage A lowering of credit ratings, in particular to below investment grade level (BB+ or below) could affect access to the capital markets and increase the costs of new financing.

Uniper, a separate listed company operating under German laws and regulations, is currently also rated BBB with a negative outlook by S&P. The negative outlook on Uniper’s rating reflect the negative outlook on the BBB rating of Fortum, which serves as a cap for Uniper’s rating. A downgrade of Fortum’s rating could lead to a corresponding downgrade of Uniper’s rating. A downgrade from the current BBB investment grade rating to BBB- or below could negatively affect Uniper’s liquidity as it would trigger counterparties’ – particularly in the trading business – right to demand additional collateral which would need to be provided via liquid assets or bank guarantees. The related risk is measured, monitored and managed against a given limit.

Fortum is targeting to maintain at least its current rating and to strengthen its financial profile and to improve its business risk profile. Fortum and Uniper maintain an active dialogue with credit rating agencies to ensure understanding of Fortum and Uniper’s aligned strategy and planned measures which target to achieve a financial and business profile that supports the current rating.

Currency and interest rate risks

Fortum’s debt portfolio consists of interest-bearing liabilities and derivatives on a fixed- and floating-rate basis with differing maturity profiles. Fortum is exposed to cash flow risk from changes in interest rates mainly from interest-bearing liabilities and derivatives on a fixed- and floating rate basis. Additionally changes in general interest rate levels may have an impact on discount rates of various provisions like pension provisions and asset retirement obligations causing changes in amount of interest-bearing debt and finance net, but without a cash flow impact. Fortum manages the interest rate exposure through a duration mandate of the loan portfolio excluding leasing liabilities and provisions, and cash flow at risk limit. Fortum uses different types of financing contracts and interest rate derivative contracts to manage the interest rate exposure and evaluates and develops the strategies in order to find an optimal balance between risk and financing cost.

Fortum has cash flows, assets and liabilities in currencies other than EUR and is therefore exposed to fluctuations in exchange rates. Currency exposures are divided into transaction exposures (foreign exchange exposures relating to contracted cash flows and balance sheet items where changes in exchange rates will have an impact on earnings and cash flows) and translation exposure (foreign exchange exposure that arises when profits and balance sheets in foreign entities are consolidated at the Group level).

The main translation exposure is toward EUR/Russian Rouble ("RUB"), EUR/Swedish Krona ("SEK") and EUR/British Pound Sterling ("GBP"), arising from Fortum's extensive operations in Russia, Sweden and the United Kingdom. Fluctuations of the RUB, SEK and the GBP against the EUR could have an adverse effect on future results and equity when consolidating and translating results and net assets in Russian, Swedish and UK affiliates into euros. Translation exposures in the Fortum Group are generally not hedged as the majority of these assets are considered to be long-term strategic holdings.

Transaction exposure arises mainly from physical and financial trading of commodities, existing and new investments, external and internal financing and shareholder loans within the Group. Fortum hedges major transaction exposures on a local level in the reporting currency of each legal entity in order to avoid exchange differences in the profit and loss statement. An exception is the Generation segment’s hedging of power sales in Sweden where the currency component is currently not hedged.

Centralised treasury functions in Uniper and the rest of the Fortum Group separately coordinate currency risk management and execute external hedges consisting of currency derivative contracts, which are matched against the underlying future cash flow according to maturity. Derivatives are used exclusively to hedge existing foreign exchange risks, not for proprietary trading.

Counterparty and credit risks

Fortum is exposed to counterparty risk whenever there is a contractual arrangement with an external counterparty including customers, suppliers, partners, banks, clearing houses and trading counterparties.

Credit risk exposures relating to financial derivative instruments are often volatile and include both the replacement risk and the settlement risk. Exchange-traded derivatives are cleared through central clearing parties (CCPs) or through clearing banks while OTC derivative contracts are concluded directly with a number of different counterparties including energy wholesalers and retailers, utilities, trading companies, energy companies, industrial end-users and financial institutions active in the financial and energy markets.

Due to the financing needs and management of liquidity, Fortum has counterparty credit exposure toward a number of banks and financial institutions. The majority of the exposure is toward Fortum's key relationship banks, which are highly creditworthy institutions. Fortum also has exposure to the Russian financial sector in terms of deposits with financial institutions as well as to banks that provide guarantees for suppliers and contracting parties. Deposits in Russia have been concentrated to the most creditworthy state-owned or controlled banks as well as affiliates of the key relationship banks.

Credit risk exposures relating to customers, suppliers and trading partners is spread across a wide range of industrial counterparties, energy companies, government and municipal entities, utilities, small businesses, housing associations and private individuals over a range of geographic regions. The risk of credit losses in the electricity and heat sales business in Russia is deemed higher than in Fortum’s other operating countries.

In order to manage counterparty credit risk, Fortum has routines and processes to identify, assess and control exposure. Credit checks are performed before entering into commercial obligations and exposure limits are set for larger individual counterparties. Creditworthiness is monitored through the use of internal and external sources so that mitigating actions can be taken when needed. Mitigating actions include demanding collateral, such as guarantees, managing payment terms and contract length, and the use of netting agreements.

More detailed information about Fortum's financial risks and risk management is described in the company's Financial Statements 2020.

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