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Fortum Corporation's Interim Report Q3 2012: A very demanding market environment - efficiency programme launched

19 October 2012, 09:00 EEST

FORTUM CORPORATION INTERIM REPORT 19 October 2012 at 9:00 EEST

  • Comparable operating profit EUR 220 (297) million, -26%
  • Operating profit  EUR 223 (314) million, of which EUR 3 (17) million relates to items affecting comparability
  • Earnings per share EUR 0.14 (0.23), -39%, of which EUR 0.01 (0.02) per share relates to items affecting comparability
  • Fortum has launched an efficiency programme to improve cash flow by more than EUR 1 billion during 2013-2014
  • Capital expenditure guidance updated: In 2012 around EUR 1.5 (1.6-1.8) billion, in 2013 EUR 1.1-1.4 billion and in 2014 EUR 0.9-1.1 (1.1-1.4) billion


January - September 2012

  • Comparable operating profit EUR 1,152 (1,294) million, -11%
  • Operating profit EUR 1,242 (1,823) million, of which EUR 90 (529) million relates to items affecting comparability; i.e. derivatives and the sale of Fingrid in 2011
  • Earnings per share EUR 0.91 (1.52), -40%, of which EUR 0.11 (0.49) per share relates to items affecting comparability; i.e. derivatives and the sale of Fingrid in 2011
  • Nordic power prices clearly lower compared to 2011

 

Key figures III/12 III/11 I-III/12 I-III/11 2011 LTM*
Sales, EUR million 1,140 1,144 4,325 4,494 6,161 5,992
Operating profit, EUR million 223 314 1,242 1,823 2,402 1,821
Comparable operating profit, EUR million 220 297 1,152 1,294 1,802 1,660
Profit before taxes, EUR million 148 240 1,037 1,696 2,288 1,569
Earnings per share, EUR 0.14 0.23 0.91 1.52 1.99 1.38
Net cash from operating activities, EUR million 111 277 983 1,141 1,613 1,455
Shareholders’ equity per share, EUR     10.89 10.05 10.84 n/a
Interest-bearing net debt
(at end of period), EUR million
    7,764 6,929 7,023 n/a
Average number of shares, 1,000s     888,367 888,367 888,367 888,367

*) Last twelve months

 

Key financial ratios 2011 LTM
Return on capital employed, % 14.8 10.4
Return on shareholders’ equity, % 19.7 13.1
Net debt/EBITDA 2.3 3.1
Comparable Net debt/EBITDA 3.0 3.4

 

Outlook

  • Fortum currently expects the annual electricity demand growth in the Nordic countries to be on average 0.5% in the coming years.
  • Power Division's Nordic generation hedges: For the rest of the calendar year 2012, 70% hedged at EUR 48 per MWh, for 2013, 60% hedged at EUR 45 per MWh, and for 2014 30% hedged at EUR 43 per MWh


Fortum’s President and CEO Tapio Kuula, in connection with the third quarter of 2012:

”The business environment is extremely demanding and the hydrological situation is putting additional pressure on Nordic prices, which are clearly lower than a year ago. At the same time especially the prolonged outages in Oskarshamn Sweden, has burdened the result significantly. Group comparable operating profit totalled EUR 220 million in the third quarter and was weak as we expected, but still unacceptable.

Fortum has therefore launched an efficiency programme in order to maintain and strengthen its strategic flexibility and competitiveness and to enable the company to continue to reach its financial targets. Targeted actions will increase the efficiency of our core processes and lead to cost reductions.

The economic situation in Europe and globally – and the uncertainty regarding its duration – has affected Fortum and its business operations. External pressures and cost increases affecting the company are making it necessary for us to further develop the efficiency of our operations. According to the European utilities (Eurelectric Gallup poll), political and market risks are currently the biggest risk factors in the power sector. In addition, discussion and decision making around EU emissions trading and CO2 emission allowances have created uncertainty concerning the future carbon market. Also in the Nordic countries, the political climate has become less supportive towards CO2-free generation not dependent on subsidies, i.e. hydro and nuclear generation. In economically uncertain times, political predictability and consistency would be more valuable than ever.
 
In order to ensure the company’s strategic flexibility and competitiveness, the aim is to improve the company’s cash flow more than EUR 1 billion during 2013 – 2014, by reducing capital expenditures, divesting non-core assets, reducing fixed costs and through focus on working capital efficiency. Unfortunately, the efficiency programme may have an effect on our personnel. If headcount reductions are needed, they will be implemented on unit level by using natural rotation, rearranging of vacant jobs and by retirement, whenever possible.
 
Fortum's purpose is to create energy that improves life for present and future generations, the aim is to build on our strong Nordic core business, create solid earnings growth in Russia and build a platform for future growth.”


Efficiency programme 2013-2014

Due to the increasingly demanding business environment, Fortum has started an efficiency programme in order to maintain and strengthen strategic flexibility and competitiveness, and to enable the company to reach its financial targets in the future.

The aim is to improve the company’s cash flow by more than approximately EUR 1 billion during 2013 – 2014 by reducing capital expenditures (capex) by EUR 250 - 350 million, divesting approximately EUR 500 million of non-core assets, reducing fixed costs and focusing on working capital efficiency.

Capex in 2013 will be EUR 1.1 – 1.4 billion and in 2014 EUR 0.9 – 1.1 billion. In the end of 2014, the cost run rate will be approximately EUR 150 million lower compared to 2012, including growth projects.

If headcount reductions are needed Fortum seeks to limit them, by using natural rotation and retirement whenever possible. The assessments will therefore be done at a unit level.


Financial results

July - September

In the third quarter of 2012, Group sales were EUR 1,140 (1,144) million. The comparable operating profit totalled EUR 220 (297) million. Group operating profit totalled EUR 223 (314) million. Fortum's operating profit for the period was affected by non-recurring items, an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production and nuclear fund adjustments amounting to EUR 3 (17) million (Note 4).

The share of profits from associates in the third quarter was EUR 7 (-2) million. The share of profits from Hafslund and TGC-1 are based on the companies' published second-quarter interim reports.

 

Sales by division

EUR million III/12 III/11 I-III/12 I-III/11 2011 LTM
Power 506 560 1,696 1,827 2,481 2,350
Heat 205 212 1,151 1,259 1,737 1,629
Russia 203 156 711 646 920 985
Distribution* 225 203 756 729 973 1,000
Electricity Sales* 119 139 501 695 900 706
Other 23 27 96 76 108 128
Netting of Nord Pool transactions -66 -99 -342  -615  -749 -476
Eliminations -75 -54 -244 -123 -209 -330
Total 1,140 1,144 4,325 4,494 6,161 5,992

* Part of the Electricity Solutions and Distribution Division

 

Comparable operating profit by division

EUR million III/12 III/11 I-III/12 I-III/11 2011 LTM
Power 201 268 764 850 1,201 1,115
Heat -11 -14 173 182 278 269
Russia -12 -16 40 39 74 75
Distribution* 57 62 216 246 295 265
Electricity Sales* 9 4 29 25 27 31
Other -24 -7 -70 -48  -73 -95
Total 220 297 1,152 1,294 1,802 1,660

* Part of the Electricity Solutions and Distribution Division

 

Operating profit by division

EUR million III/12 III/11 I-III/12 I-III/11 2011 LTM
Power 205 273 786 1,033 1,476 1,229
Heat -12 -10 221 280 380 321
Russia -12 -16 51 39 74 86
Distribution* 58 60 225 437 478 266
Electricity Sales* 11 6 33 9 3 27
Other -27 1 -74 25 -9 -108
Total 223 314 1,242 1,823 2,402 1,821

* Part of the Electricity Solutions and Distribution Division



January - September
 
In January-September, Group sales were EUR 4,325 (4,494) million. The comparable operating profit totalled EUR 1,152 (1,294) million. Group operating profit totalled EUR 1,242 (1,823) million. Fortum's operating profit for the period was affected by non-recurring items, an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production and nuclear fund adjustments amounting to EUR 90 (529) million.

Non-recurring items, mark-to-market effects and nuclear fund adjustments in January-September 2012 amounted to EUR 90 (529) million. Changes in fair values of derivatives hedging future cash flow accounted for EUR -8 (272) million. Non-recurring items totalled EUR 122 (275) million and were mainly related to the divestments of shares in power and heat operations.

The share of profits of associates and joint ventures was EUR 26 (72) million. The decrease from last year was mainly due to the lower share of profits from Hafslund ASA, and TGC-1 as well as the share of profits from Fingrid Oyj, which was divested during Q2 2011.

The Group’s net financial expenses increased to EUR 231 (199) million. The increase is attributable to higher interest expenses, mainly due to higher SEK interest rates and to higher average net debt in 2012 than during the comparable period in 2011. Net financial expenses were also negatively affected by changes in the fair value of financial instruments of EUR 16 (2) million.

Profit before taxes was EUR 1,037 (1,696) million.

Taxes for the period totalled EUR 195 (278) million. The tax rate according to the income statement was 18.8% (16.4%). The tax rate, excluding mainly the impact of the share of profits of associated companies and joint ventures as well as non-taxable capital gains, was 21.2% (20.8%).

The profit for the period was EUR 842 (1,418) million. Fortum's earnings per share were EUR 0.91 (1.52), of which EUR 0.11 (0.49) per share relates to items affecting comparability; in 2011 the impact of the sale of the Fingrid shares was EUR 192 million.

Non-controlling (minority) interests amounted to EUR 36 (70) million. These are mainly attributable to Fortum Värme Holding AB, in which the city of Stockholm has a 50% economic interest. The decrease compared to last year is mainly due to the minority's share, EUR 32 million, of the gain recognised in the first quarter 2011 from the divestment of Fortum Värme’s heat businesses outside the Stockholm area.


Financial position and cash flow

Cash flow

In January-September 2012, total net cash from operating activities decreased by EUR 158 million to EUR 983 (1,141) million. Capital expenditures in cash flow increased by EUR 55 million to EUR 919 (864) million. Proceeds from divestments totalled EUR  315 (574 ) million in cash flow. Cash flow before financing activities, i.e. dividend distributions and financing, decreased by EUR 448 million to EUR 345 (793) million. The strong SEK during the first three quarters had a negative impact on the cash flow through realised net foreign exchange losses amounting to EUR -233 (-215) million related to rollover of foreign exchange contracts hedging loans to Fortum Swedish subsidiaries.

During the reporting period, dividends totalling EUR 888 million were paid on 23 April 2012 using the cash and cash equivalents.   

Assets and capital employed

Total assets increased by EUR 1,147 million to EUR 24,145 (22,998 at year-end 2011) million. Non-current assets increased by EUR 1,266 million from EUR 20,210 million to EUR 21,476 million. The majority, EUR 1,057 million, came from the increased value of property, plants and equipment; due to the investments, strengthening Swedish krona and other currencies. The decrease in current assets was EUR 119 million, totalling EUR 2,669 million. The majority of the decrease relates to the lower trade and other receivables EUR 281 million and EUR 183 million decrease in assets held for sale relating to divestments closed during January-September. The decrease in current assets was partly offset with an increase in the amount of cash and cash equivalents, EUR 386 million.

Capital employed was EUR 19,120 (17,931 at year-end 2011) million, an increase of EUR 1,189 million. The increase was mainly due to the higher amount of total assets totalling EUR 1,147 million.

Equity

Total equity was EUR 10,239 (10,161 at year-end 2011) million, of which equity attributable to owners of the parent company totalled EUR 9,675 (9,632 at year-end 2011) million and non-controlling interests EUR 564 (529 at year-end 2011) million.

Financing

Net debt increased during the third quarter by EUR 344 million to EUR 7,764 (7,023 at year-end 2011) million.

In August, Fortum Corporation issued a EUR 1,000 million ten-year Eurobond under its EMTN (Euro Medium Term Note) programme. The bond carries a coupon of 2.25%.

At the end of September 2012, the Group’s liquid funds totalled EUR 1,117 (747 at year-end 2011) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 202 (211 at year-end 2011) million. In addition to the liquid funds, Fortum had access to approximately EUR 2.7 billion of undrawn committed credit facilities.

The Group's net financial expenses during January - September 2012 were EUR 231 (199) million. The increase in financial expenses is mainly attributable to higher market interest rates for the Group's Swedish krona (SEK) and Russian rouble (RUB) denominated debt and a higher total average net debt. Net financial expenses include changes in the fair value of financial instruments of EUR -16 ( 2) million.

Fortum Corporation's long-term credit rating from S&P, A (negative) and Fortum Corporation’s long-term credit rating from Moody’s, A2 (stable), remained unchanged.

Key figures

For the last twelve months, net debt to EBITDA was 3.1 (2.3 at year-end 2011) and comparable net debt to EBITDA 3.4 (3.0 at year-end 2011), impacted by EUR 888 million in dividend payments. Gearing was 76% (69% at year-end 2011) and the equity-to-assets ratio 42% (44% at year-end 2011). For the last twelve months, return on capital employed was 10.4% (14.8% at year-end 2011) and return on equity 13.1% (19.7% at year-end 2011). Equity per share was EUR 10.89 (10.84 at year-end 2011).


Market conditions

Nordic countries

Exceptionally high annual precipitation volumes inflated the Nordic water reservoirs and depressed the power prices during the third quarter of 2012. Average area prices for Fortum's key areas, Finland and Sweden (SE3), stayed above the system price from August through September.

According to preliminary statistics, electricity consumption in the Nordic countries during the third quarter was 80 (81) terawatt-hours (TWh), i.e. some 1.0 % lower than during the same period in 2011. This was attributable to lower industrial consumption, while non-industrial consumption was fairly flat.  In January–September, electricity consumption in the Nordic countries was 280 (282) terawatt-hours (TWh), i.e. some 0.5 % lower than the year before.

At the beginning of the year, the Nordic water reservoirs were at 95 TWh, i.e. 12 TWh above the long-term average. At the beginning of the third quarter, the Nordic water reservoirs were at 86 TWh, i.e. 2 TWh above the long-term average and 3 TWh above the corresponding level in 2011. Later-than-average snow melting contributed to water reservoirs during the third quarter. By the end of the quarter, the reservoirs were 109 TWh, 8 TWh above the long-term average and 5 TWh above the corresponding level in 2011.

During the third quarter, the average system spot price of electricity in Nord Pool was EUR 20.8 (36.0) per megawatt-hour (MWh). The average area prices in Finland were EUR 30.9 (43.4) per MWh, and in Sweden (SE3) 23.2 (38.1) per MWh. The hydrological surplus as well as maintenance related and unplanned restrictions in the transmission capacity created differences in area prices, pressuring prices particularly in the hydropower intensive regions. In addition, the spot price in Finland was impacted by the reduced import of electricity from Russia.

During January-September 2012, the average system spot price was EUR 29.2 (51.5) per MWh. The average area price in Finland was EUR 35.3 (53.4) per MWh and in Sweden (SE3) EUR 30.6 (52.1) per MWh. The Fenno-Skan 2 connection between Finland and Sweden was down from 17 February to 25 April, which affected Finnish prices during that period and widened price area differences.

In Germany, the average spot price during the third quarter of 2012 was EUR 43.5 (49.2) per MWh and during January–September 2012 EUR 43.0 (51.6) per MWh.

At the beginning of the year, the market price for CO2 emission allowances (EUA) was approximately EUR 6.6 per tonne. At the end of the third quarter, CO2 emission allowances closed at approximately EUR 8.0 per tonne. The highest quoted price during January–September was approximately EUR 9.5 per tonne and the lowest EUR 6.2 per tonne.

Russia

OAO Fortum operates in the Tyumen and Chelyabinsk areas. Both in the Tyumen area, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area, which is dominated by the metal industry, electricity demand increased marginally in the third quarter compared to the same period of the previous year.

According to preliminary statistics, Russia consumed 229 (226) TWh of electricity during the third quarter of 2012. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 172 (170) TWh.

In January-September, Russia consumed 753 (741) TWh of electricity. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 560 (553) TWh.

In the third quarter of 2012, the average electricity spot price, excluding capacity price, increased by 15% to RUB 1,143 (993) per MWh in the First price zone.

In January-September 2012, the average electricity spot price, excluding capacity price, decreased by 3% to RUB 988 (1,014) per MWh in the First price zone.


Events after the balance sheet date

European Commission

The European Commission published its final report on the nuclear stress tests on October 4. It was concluded that the design basis for the Loviisa nuclear power plant is proper in terms of external events. Additionally, Fortum has improved the safety of the Loviisa power plant with comprehensive measures for several decades. The implementation of the required actions at the Loviisa power plant can be done within the framework of the annual investment programmes and they will not affect the power plant’s availability.

Fortum's co-owned nuclear companies in Sweden, OKG AB in Oskarshamn and FKA in Forsmark, have submitted plans to improve safety by September 15th as was requested by Swedish Radiation Safety Authority, SSM. The authority expects to get the national plan ready by the end of year 2012. This plan will outline how SSM and Swedish nuclear licence holders will follow up on the stress tests required by the European Commission.

Fortum sees the harmonisation of safety requirements for nuclear power plants as necessary and considers it necessary that national authorities have supervisory responsibility. Nuclear liability should be implemented in the frame of the Paris convention and harmonised at European level.

Hafslund

Hafslund, an associated company of which Fortum owns 34.1%, announced on 16 October that their third quarter 2012 profit after tax will be negatively affected by NOK 551 million due to extraordinary write-downs and provisions. The company stated that this was a result of challenging market conditions and negative profit development within BioWood Norway AS and Bio-El Fredrikstad, and a tax provision following the development of an ongoing tax dispute. Fortum will book the share of the impact approximately EUR -25 million in its fourth quarter result.

Changes in Fortum Corporation's Management Team

Helena Aatinen, MSc Econ., has been appointed Senior Vice President, Corporate Communications and member of Fortum Corporation's Management Team. Helena Aatinen will report to President and CEO Tapio Kuula.

Anne Brunila, Executive Vice President, Corporate Relations and Strategy and member of the Management Team joined Fortum Corporation in September 2009. She will leave her position on her own request. Anne Brunila will continue in agreed development projects until spring 2013 and report to President and CEO Tapio Kuula.

The changes will come into effect on 1 November 2012.

Outlook

Key drivers and risks

Fortum's financial results are exposed to a number of risks i.e. strategic, political, financial and operational. The key factor influencing Fortum's business performance is the wholesale price of electricity in the Nordic region. The key drivers behind the wholesale price development in the Nordic region are the supply-demand balance, fuel and CO2 emissions allowance prices as well as the hydrological situation. The completion of Fortum’s investment programme in Russia is also one key driver to the company’s result growth.

The continued global economic uncertainty and Europe's sovereign-debt crisis weaken the outlook for economic growth in the mid-term, especially in the Euro zone. The overall economic uncertainty impacts the commodity and CO2 emission allowance prices and this in combination with the stronger hydrological situation in the Nordic region, could maintain downward pressure on the Nordic wholesale price for electricity in the short-term. In the Russian business, the key factors are the development of the regulation around electricity and capacity markets and operational risks related to the investment projects according to the investment programme. In all regions, fuel prices and power plant availability also impact the profitability. In addition, increased volatility in exchange rates due to financial turbulence might have both translation and transaction effects on Fortum's financials especially through the SEK and RUB.


Nordic market

Despite macroeconomic uncertainty, electricity will continue to gain a higher share of the total energy consumption. Fortum currently expects the average annual growth rate in electricity consumption to be 0.5%, while the growth rate for the nearest years will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries.

During the third quarter of 2012, the price of crude oil decreased steadily, whereas the decrease in the coal price stabilised towards the end of the quarter. The price of CO2 emissions allowances (EUA) weakened somewhat during the quarter. The forward price of electricity for the next twelve months came down both in the Nordic area and in Germany.

In mid-October 2012, the future quotations for coal (ICE Rotterdam) for the rest of 2012 were around USD 88 per tonne and the market price for CO2 emissions allowances (EUA) for 2012 was about EUR 8 per tonne.

In mid-October 2012, the electricity forward price in Nord Pool for the rest of 2012 was around EUR 39 per MWh. For 2013, the electricity forward price was around EUR 38 per MWh and for 2014 around EUR 39 per MWh. In Germany, the electricity forward price for the rest of 2012 was around EUR 47 per MWh and for 2013 EUR 47 per MWh.

In mid-October 2012, Nordic water reservoirs were about 8 TWh above the long-term average and 4 TWh above the corresponding level of 2011.

Power

The Power Division's Nordic power price typically depends on e.g. the hedge ratio, hedge price, spot prices, availability and utilisation of Fortum's flexible production portfolio, and currency fluctuations. Excluding the potential effects from the changes in the power generation mix, a 1 EUR/MWh change in the Power Division’s Nordic power sales price will result in an approximately EUR 45 million change in Fortum's annual comparable operating profit. In addition, the comparable operating profit of the Power Division will be affected by the possible thermal power generation amount and its profit.

The several years of ongoing Swedish nuclear investment programmes will enhance safety, improve availability and increase the capacity of the current nuclear fleet. The implementation of the investment programmes might, however, affect availability. Fortum’s power procurement costs from co-owned nuclear companies are affected by these investment programmes through increased depreciation and finance costs.

European-wide safety evaluations have been carried out post Fukushima. As part of the evaluations, so-called peer reviews were carried out in March 2012 in several European nuclear power plants, including the Loviisa nuclear power plant. The European Commission submitted a consolidated report of the national reports to the European Council in October 2012. Some additional safety criteria were already introduced after the spring-evaluations for nuclear power plants. The required improvements will be done within the framework of the annual investment programmes and planned maintenance.

Legislation in Sweden calls for nuclear waste fees and guarantees to be updated at regular intervals. At the end of December 2011, the Government decided upon fees and guarantees for 2012-2014. The negative impact from increased nuclear waste fees on Fortum’s comparable operating profit is estimated to be approximately EUR 15 million per year in 2012-2014.

Nuclear fuel costs in all Fortum nuclear power plants are expected to increase in total by approximately EUR 15 million in 2012, due to the increased market price of uranium and enrichment.


Russia

The Russian wholesale power market was liberalised from the beginning of 2011. However, all generating companies continue to sell a part of their electricity and capacity equalling the consumption of households and a special group of consumers (Northern Caucasus Republic, Tyva Republic, Buryat Republic) under regulated prices.

Capacity not under CSA competes in competitive capacity selection (CCS – “old capacity”). The capacity selection for 2012 was held in September 2011. The majority of Fortum’s power plants were selected in the auction, with a price level close to the level received in 2011. Approximately 4% (120 MW) of the old capacity was not allowed to participate in the selection due to tightened minimal technical requirements. It will, however, receive capacity payments at the capacity market price for two additional years. The same amount of Fortum’s old capacity, as in the selection for 2012 held in 2011, was allowed to participate for the year 2013 capacity selection.

The generation capacity built after 2007 under government Capacity Supply Agreements (CSA – “new capacity”) receive guaranteed payments for a period of 10 years. Prices for capacity under CSA are defined in order to ensure a sufficient return on investments.

OAO Fortum's new capacity will be a key driver for earnings growth in Russia as it will bring income from new volumes sold and also receive considerably higher capacity payments than the old capacity. However, the received capacity payment will differ depending on age, the location, size and type of the plants as well as seasonality and availability. The return on the new capacity is guaranteed as regulated in the Capacity Supply Agreement. The regulator will review the earnings from the electricity-only market after three years and six years and could revise the CSA payments accordingly. CSA payments can vary annually somewhat because they are linked to Russian Government long-term bonds with 8 to 10 years maturity.

The commissioning of Fortum’s largest new investment greenfield projects in Nyagan were somewhat further postponed during the second quarter of 2012. Fortum has ongoing discussions with its main contractor: Fortum estimates the commissioning of Nyagan 1 to take place around the turn of the year and Nyagan 2 during the first half of 2013 due to construction delays. This does not change the overall schedule or financial targets of the investment programme. In 2008, Fortum made a provision for penalties caused by possible commissioning delays. According to the agreement with the contractor, Fortum is entitled to adequate remedies in case of damages caused by contractor delays.

In June, Fortum announced its decision to build the last two 250-megawatt (MW) units of its Russian investment programme at Chelyabinsk in the Urals. Initially, the units were planned for construction in the Tyumen region in Western Siberia. The units are included within the sphere of the Capacity Supply Agreement originally agreed in 2008.  The new units are to be constructed at Chelyabinsk GRES. Within the scope of the project, Fortum also plans to modernise and upgrade the existing power plant equipment. Fortum is planning to commission the last new units of its EUR 2.5 billion investment programme in Russia by the end of 2014. The value of the remaining part of the investment programme, calculated at the exchange rates prevailing at the end of September 2012, is estimated to be approximately EUR 750 million as of October 2012.  
 
After completing the ongoing investment programme, Fortum’s goal is to achieve an operating profit level of about EUR 500 million in its Russia Division and to create positive economic added value in Russia.

A commission for heat business development has been set up by the Russian Government. Top priorities will be issues regarding heat regulation, centralized district heating and co-generation efficiency.

The Russian Government is likely to increase gas prices beginning 1 July 2013; the increase is expected to be 15%.


Efficiency programme 2013-2014

Due to the increasingly demanding business environment, Fortum has started an efficiency programme in order to maintain and strengthen strategic flexibility and competitiveness, and to enable the company to reach its financial targets in the future.

The aim is to improve the company’s cash flow by more than approximately EUR 1 billion during 2013 – 2014 by reducing capital expenditures (capex) by EUR 250 - 350 million, divesting approximately EUR 500 million of non-core assets, reducing fixed costs and focusing on working capital efficiency. In the end of 2014, the cost run rate will be approximately EUR 150 million lower compared to 2012, including growth projects.

Capital expenditure and divestments

Fortum has updated its capital expenditure estimate. Fortum currently expects its capital expenditure in 2012 to be around EUR 1.5 billion, in 2013 EUR 1.1 -1.4 billion and in 2014 EUR 0.9 – 1.1 billion, excluding potential acquisitions. The main reason for the high capital expenditures in 2012 is the acceleration of Fortum's Russian investment programme. The annual maintenance capital expenditure is estimated to be about EUR 500-550 million in 2012, somewhat below the level of depreciation.

Previous guidance: Fortum currently expects its capital expenditure in 2012 to be around EUR 1.6-1.8 billion and in 2013-2014 around EUR 1.1 -1.4 billion, excluding potential acquisitions.

Taxation

The effective corporate tax rate for Fortum in 2012 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 non-recurring items. In Finland, the corporate tax rate was decreased to 24.5% from 26% starting 1 January 2012. In Sweden, according to the budget proposal, the corporate tax rate will be decreased to 22% from 26.3% starting 1 January 2013.

The process to update the real-estate taxation values for the year 2013 is ongoing in Sweden and is expected to be finalised by the end of 2012. The update is done in a cycle of six years.

2012, the Finnish Government announced that a so-called windfall tax will be introduced in 2014.

Hedging

At the end of September 2012, approximately 70% of the Power Division's estimated Nordic power sales volume was hedged at approximately EUR 48 per MWh for the rest of the calendar year 2012. The corresponding figures for the calendar year 2013 were about 60% at approximately EUR 45 per MWh and the corresponding figures for the calendar year 2014 were about 30% at approximately EUR 43 per MWh.

The hedge price for Power Division's Nordic generation excludes hedging of condensing power margin. In addition, the hedge ratio excludes the financial hedges and physical volume of Fortum's coal-condensing generation as well as the division’s imports from Russia.

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 Nord Pool forwards.

Share of profits of associates and joint ventures

Write-downs and provisions, announced by Hafslund, are estimated to impact Fortum's results by EUR - 25 million or approximately EUR - 0.03 per share. The impact will be booked in the fourth quarter 2012 result according to Fortum Group's accounting standards.


Dividend Payment

The Annual General Meeting decided to pay a dividend of EUR 1.00 per share for 2011. The record date for the dividend payment was 16 April 2012 and the dividend payment date was 23 April 2012.


Espoo, 18 October 2012
Fortum Corporation
Board of Directors


Further information:
Tapio Kuula, President and CEO, tel. +358 10 452 4112
Markus Rauramo, CFO, tel. +358 10 452 1909


Fortum’s Investor Relations, Sophie Jolly, +358 10 453 2552, Rauno Tiihonen, +358 10 453 6150 and Janna Haahtela, +358 10 453 2538 / [email protected]

The condensed interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the EU. The interim financials have not been audited.

Publication of financial results in 2013:                
-    Financial statement bulletin for the year 2012 will be published on 31 January 2013 at approximately 9:00 EET
-    Interim Report January – March on 25 April 2013 at approximately 9:00 EEST
-    Interim Report January – June on 19 July 2013 at approximately 9:00 EEST
-    Interim Report January – September on 23 October 2013 at approximately 9:00 EEST

Fortum’s Financial statements and Operating and financial review for 2012 will be published during week 12 at the latest.

Fortum's Annual General Meeting is planned to take place for 9 April 2013 and the possible dividend related dates planned for 2013 are:
- The ex-dividend date 10 April 2013
- The record date for dividend payment 12 April 2013
- The dividend payment date 19 April 2013


Distribution:
NASDAQ OMX Helsinki
Key media
www.fortum.com

More information, including detailed quarterly information, is available on Fortum’s website at www.fortum.com/investors.