Financial outlook

Outlook
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 January-September 2017, the oil price has remained on a clearly higher level than the previous year. The coal price has continued to increase. The price of CO2 emission allowances (EUA) increased during the third quarter of 2017. The price of electricity for the upcoming twelve months increased both in the Nordic area and in Germany.
 
In mid-October 2017, the quotation for coal (ICE Rotterdam) for the remainder of 2017 was around USD 92 per tonne and for CO2 emission allowances for 2017 around EUR 7.6 per tonne. The Nordic system electricity forward price in Nasdaq Commodities for the rest of 2017 was around EUR 30 per MWh and for 2018 around EUR 27 per MWh. In Germany, the electricity forward price for the rest of 2017 was around EUR 38 per MWh and for 2018 around EUR 37 per MWh. Nordic water reservoirs were about 1 TWh below the long-term average, close to the levels one year ago.
 
Generation
 
The Generation segment’s achieved Nordic power price typically depends on such factors as the 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 Generation segment’s Nordic power sales achieved price will result in an approximately EUR 45 million change in Fortum's annual comparable operating profit.
 
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 safety investments that should be in place no later than 2020.
 
The process to review the Swedish nuclear waste fees is done in a three-year cycle. The Swedish Nuclear Fuel and Waste Management Co (SKB) has updated the new technical plan for the SSM to review. The final decision on the new nuclear waste fees for years 2018-2020 will be made by the Swedish Government in December 2017. Based on SSM's proposal the annual waste fees for Fortum would increase by approximately EUR 8 million. On 1 June 2017, the Swedish Government submitted a proposal to the Parliament regarding the calculations of nuclear waste fees and the investment of the nuclear waste fund. According to the proposal the operating time for calculating the waste fee will be 50 years, as opposed to the current 40 years. The fund would also be allowed to invest in other financial instruments in addition to government bonds. The Parliament will decide on a new regulatory framework for the fund at the end of 2017.
 
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 decisions were in Fortum’s favour. The disputed amount for the five years was a total of SEK 510 million (EUR 53 million). Fortum will book the tax income (subject to income tax) only after the legal decision has entered into force. Hydropower 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.
 
In October 2016, the Swedish Energy Agency presented a concrete proposal on how to increase the production of renewable electricity by 18 TWh in 2020-2030 within the electricity certificate system, as part of the Energy Agreement. In April 2017, the Swedish Government decided that the increase will be carried out in a linear manner.
 
In September 2016, the Swedish Government presented the budget proposal for the coming years. One of the key elements was the proposal that taxation of different energy production forms should be more equal, and the tax burden of nuclear and hydro should be taken to the level of other production technologies. The budget states that 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 tax for Fortum is estimated to decrease by approximately EUR 32 million to EUR 52 million, due to the tax decrease, and by another EUR 5 million, due to the premature closure of Oskarshamn 1 in the middle of the year. In 2018, there is no capacity tax. The hydropower real-estate tax will decrease over a four-year period beginning in 2017, from today's 2.8% to 0.5%. The real-estate tax on hydro will, as stated in the Government’s budget, 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 is estimated to decrease by approximately EUR 20 million to approximately 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 low electricity prices, the tax values in 2019 will be clearly lower than today. The process for renewing existing hydro permits will also be reformed.
 
In 2015, 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, steady growth, cash flow and earnings are achieved through investments in new plants and through acquisitions. Fuel cost, availability, flexibility and efficiency as well as gate fees are key drivers in profitability, but also the power supply/demand balance, electricity price and the weather affect profitability.
 
In May 2016, the Finnish Government decided to increase the tax on heating fuels by EUR 90 million annually from 2017 onwards. The negative impact on Fortum is estimated to be approximately EUR 5 million per year.
 
Consumer Solutions
 
In Consumer Solutions, profitability is achieved through competitive product and service offerings, efficient operations, scale benefits in systems and operations as well as prudent risk management. As the Consumer Solutions segment hedges most of the market risk exposure, it is typically more exposed to short-term variations in power prices and demand than to long-term price trends. Short-term volatility, often caused by temperature, can have a substantial impact on power prices and on power demand.
 
The competitive environment affects the Consumer Solutions segment both through the sales margins of the products sold and the size of the customer base. The competition in the Nordic electricity retail market is expected to remain challenging, continuing to put pressure on sales margins. We have increased our focus and spend on developing new digital services for consumers, to reduce the effects of the challenging market conditions and to create a solid foundation for competitive operations in the future.
 
Russia
 
The Russia segment's new capacity generation built after 2007 under the Russian 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. Fortum will receive guaranteed capacity payments for a period of approximately 10 years from the commissioning of a plant. The received CSA payment will vary depending on the age, location, size and type of the plants, as well as on seasonality and availability. 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 and six years after the commissioning of a unit and could revise the CSA payments accordingly. In addition, the level of the CSA payments increases starting from the seventh year of the 10-year period.
 
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 with a price corresponding to approximately EUR 115-135 per MWh. The projects will be covered by Capacity Supply Agreements (CSA) for a period of 15 years.
 
The long-term Competitive Capacity Selection (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’s plants were selected. Fortum has also obtained forced mode status, i.e. it receives payments for the capacity at a higher rate for some of the "old capacity". For the years 2017-2019, 195 MW obtained forced mode status; for 2020, 175 MW; and for 2021, 105 MW.
 
The Russian gas price was increased by 3.9% in July 2017, which is expected to increase the annual average gas price for 2017 by 2.0%.
 
Capital expenditure and divestments
 
Fortum currently expects its capital expenditure, excluding acquisitions, to be approximately EUR 800 million in 2017. The annual maintenance capital expenditure is estimated to be less than EUR 300 million in 2017, well below the level of depreciation.
 
Taxation
 
The effective corporate income tax rate for Fortum in 2017 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 a Swedish income tax case.
 
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 decisions were not in Fortum’s favour. Fortum will appeal the decisions. If the decisions remain in force despite the appeal, the impact on the net profit would be approximately EUR 28 million (approximately SEK 273 million). Fortum has not made a provision as, based on legal analysis, the EU Commission’s view and supporting legal opinions, the cases should be ruled in Fortum’s favour. The assessments concern the loans given in 2013 by Fortum’s Dutch financing company to Fortum’s subsidiaries in Sweden. The interest income for these loans was taxed in the Netherlands. The Swedish tax authority considers just over a half of the interest relating to each loan as deductible, i.e. deriving from business needs. The rest of the interest is seen as non-deductible. The decisions are based on the changes in the Swedish tax regulation in 2013.
 
On 30 June 2017, the Court of Appeal in Stockholm, Sweden, ruled against Fortum related to Fortum's income tax assessments in Sweden for the years 2009-2012. Due to the decision of the Court of Appeal, Fortum booked a tax cost of 1,175 MSEK (EUR 123 million) in the second-quarter 2017 results. The booking did not have any cash flow effect for Fortum, as the additional taxes and interest have already been paid in 2016. The case concerns Fortum’s right to deduct intra-group interest expenses in Sweden in the years 2009-2012. Fortum restructured its operations and reallocated loans in 2004-2005 to ensure future operations. Fortum does not agree with the Court's decision and has applied for the right to appeal from the Supreme Administrative Court.
 
Hedging
 
At the end of September 2017, approximately 65% of Generation's estimated Nordic power sales volume was hedged at EUR 30 per MWh for the rest of 2017, approximately 50% at EUR 28 per MWh for 2018, and approximately 30% at EUR 24 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.
(Text from Fortum's January-September 2017 Interim Report)

26.10.2017