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Improved electricity prices, but very low hydro volumes ended a challenging year - Dividend proposal EUR 1.10 per share

02 February 2017, 09:00 EET

FORTUM CORPORATION FINANCIAL STATEMENTS BULLETIN 2016 2 FEBRUARY 2017 AT 9:00 EET

FORTUM CORPORATION FINANCIAL STATEMENTS BULLETIN 2016 2 FEBRUARY 2017 AT 9:00 EET

October−December 2016, continuing operations

- Comparable EBITDA EUR 298 (315) million, -5%

- Comparable operating profit EUR 188 (243) million, -23%

- Operating profit EUR 202 (38) million, of which EUR 14 (-205) million relates to items affecting comparability

- Earnings per share EUR 0.16 (0.02), of which EUR 0.01 (-0.20) relates to items affecting comparability

- Cash flow from operating activities totalled EUR 150 (332) million

January−December 2016, continuing operations

- Comparable EBITDA EUR 1,015 (1,102) million, -8%

- Comparable operating profit EUR 644 (808) million, -20%

- Operating profit EUR 633 (-150) million, of which EUR -11 (-958) million relates to items affecting comparability. In 2015, the negative impact was mainly due to the decision on the early closing of two nuclear units in Sweden

- Earnings per share EUR 0.56 (-0.26), of which EUR -0.02 (-0.97) related to items affecting comparability including total effect from early clousure decision of two nuclear units in Sweden, EUR -0.82 per share in 2015  

- Cash flow from operating activities totalled EUR 621 (1,228) million

- Fortum completed its multi-year investment programme in Russia

- Fortum acquired Grupa DUON and Ekokem

- Fortum's business structure was reorganised and the new Executive Management Team took place as of 1 April 2016

- Fortum's Board of Directors proposes a dividend of EUR 1.10 per share

Summary of outlook

- Fortum continues to expect the annual electricity demand to grow in the Nordic countries by approximately 0.5% on average

- The Generation segment's Nordic generation hedges: approximately 60% hedged at EUR 30 per MWh for 2017 and approximately 35% hedged at EUR 26 per MWh for 2018.

- Operating profit level (EBIT) for the Russia segment, RUB 18.2 billion, is targeted to be reached during 2017-2018. The euro-denominated result level will be volatile, due to currency translation effects

Key financial ratios 2016 2015
Return on capital employed, % 4.0 22.7
Comparable net debt/EBITDA 0.0 -1.7

* Key financial ratios for 2015 are based on total Fortum, including discontinued operations

Key figures IV/16 IV/15 2016 2015
Sales, EUR million 1,143 964 3,632 3,459
Comparable EBITDA, EUR million        
continuing operations 298 315 1,015 1,102
discontinued operations - - - 163
total Fortum 298 315 1,015 1,265
Comparable operating profit, EUR million        
continuing operations 188 243 644 808
discontinued operations - - - 114
total Fortum 188 243 644 922
Operating profit, EUR million        
continuing operations 202 38 633 -150
discontinued operations - - - 4,395
total Fortum 202 38 633 4,245
Share of profits of associates and
joint ventures, EUR million
       
continuing operations 15 35 131 20
discontinued operations - - - 0
total Fortum 15 35 131 20
Profit before taxes, EUR million        
continuing operations 184 20 595 -305
discontinued operations - - - 4,393
total Fortum 184 20 595 4,088
Earnings per share, EUR        
continuing operations 0.16 0.02 0.56 -0.26
discontinued operations - - - 4.92
total Fortum 0.16 0.02 0.56 4.66
Net cash from operating activities, EUR million, continuing operations 150 332 621 1,228
Shareholders’ equity per share, EUR     15.15 15.53
Interest-bearing net debt (at end of period), EUR million     -48 -2,195

Fortum’s President and CEO Pekka Lundmark:

“2016 was a challenging year in many respects. The beginning of the year was characterised by increased commodity market volatility; especially coal and oil prices were very low. Nordic water reservoirs were clearly above the long-term average, creating pressure on electricity prices, and the British EU exit vote also created uncertainty. Late in the year, however, some positive signs were seen on the power market, mainly driven by improved commodity and emission prices, although the overall business environment still continued to be demanding. Although some European economies have started to recover, the industry's power demand is still too weak and commodity prices are too low and volatile to support a material increase in electricity prices.

In the fourth quarter of 2016 Fortum’s results continued to decline mainly due to significantly lower hydro production volumes. The hydro situation continued dry especially in our key areas in Sweden, but also the achieved power price was lower than in the fourth quarter of 2015. The decline was partially offset by strong performance in the Russia segment and improved availability and hence higher nuclear volumes, than in the fourth quarter of 2015.

A positive development in 2016 was the Swedish government’s budget proposal in September; it included the timetable for lowering the real-estate tax on hydro assets and for phasing out the nuclear capacity tax over the coming years. We are pleased with the swift decision and the finalisation of a timetable, which gives regulatory stability to operate the plants and plan the necessary safety investments. This is completely in line with what we have been advocating for, a regulation and taxation policy where the different forms of production are treated more equally.

Operationally, the year met our expectations, as availability in our plants was good and ongoing projects progressed as planned. We completed our extensive investment programme in Russia in the spring 2016, and the new capacity has been the key driver for the earnings growth in the Russia division.

In February, we published the key high-level elements in our strategy. We also adjusted our operational model to better enable strategy implementation. During the year we screened opportunities in line with our strategy. The acquisition of the Polish electricity and gas sales company DUON, wind power investments in Sweden, Norway and Russia, and the acquisition of Ekokem, a leading Nordic circular economy company, are important steps in the implementation of our strategy and give us access to new revenue streams independent of the Nordic power price. In addition, as we are continuously looking to optimise our production fleet, we divested the Tobolsk power plant in Russia.

We updated our vision and mission in the autumn. Our vision and mission go beyond just clean energy production, they express our commitment to fuel and resource efficiency and how we enable our stakeholders, customers and society to make sustainable choices. Our updated vision – ‘For a cleaner world’ reflects our ambition to drive the transformation towards a low-emission energy system and optimal resource efficiency. Our role is to accelerate this change by reshaping the energy system, improving resource efficiency and providing smart solutions.

We expect the energy sector transformation to accelerate in the future. At the same time as we lower the cost and improve the productivity of our existing operations, we will focus on additional organic and M&A growth opportunities. We have two phases in our capital redeployment. Priority one in phase one is generation consolidation in Europe – consolidation of assets and businesses within our core competence and giving us direct access to cash flows. Priority two in phase one is to take the competencies that we have today in our combined heat and power production and in the acquired Ekokem business, and widen the City Solution’s scope. The overall goal of phase one is to maximize our cash flow to enable both a competitive dividend and “phase two” investments into the future energy system. Phase two involves growing in solar and wind, and new internal or external energy ventures to take care of our long-term competitiveness.

I would like to thank all our employees and partners for their excellent work in 2016. Thank you also to our customers and shareholders for your continued trust in us. “

Fortum’s vision, strategic cornerstones and updated financial targets

In February 2016, Fortum launched its new vision, strategic cornerstones and updated financial targets. The new vision and strategy target growth and continued profitability with a strong focus on clean energy, customers and shareholder value creation.

The long-term financial target for return on capital employed (ROCE) was revised to at least 10%, while the target for comparable net debt to EBITDA, around 2.5 times, remained unchanged. The dividend policy also remained unchanged.

Fortum's strategy has four cornerstones: (1) enhance productivity of the current fleet and drive industry transformation, (2) create sustainable solutions for growing cities and urban areas, (3) increase investments in solar and wind power, and (4) build new energy ventures.

At Fortum's Capital Market Day in November 2016, the strategy execution plan was expanded in more depth. The redeployment of cash and the execution of Fortum’s strategy will take place in two phases, and a significant part of the redeployment is targeted to take place during 2017.

Phase 1: The goal for the first phase is to maximise cash flow through capital redeployment. The first priority is consolidation of the generation business in Europe. After this, and subject to the remaining financial headroom, also further organic growth and/or acquisition-based growth of City Solutions will be considered, mainly in Europe. The resulting cash flow will be used for two purposes: 1) implementing Fortum’s dividend policy; and 2) investments into Phase 2 as described below. In addition, Fortum will continue its cost and asset portfolio optimisation in all divisions, informing the market about these as they advance.

Phase 2: The goal for the second phase is to secure Fortum’s longer-term competitiveness. This has already started through wind investments in our Nordic and Russian home markets and through solar investments in India. The next steps will include solar-enabled system solutions, maximising the added value from waste and biomass as well as minimising fossil emissions. In addition, phase 2 will also include new digital services, services for active consumers, electric traffic, new storage solutions, and other potentially disruptive innovations.

Fortum also updated its vision and mission to cover a broader scope. “For a cleaner world” reflects the company’s mission “We engage our customers and society to drive the change towards a cleaner world. Our role is to accelerate this change by reshaping the energy system, improving resource efficiency and providing smart solutions. In this way we deliver excellent shareholder value.”

Reorganisation of operations

Fortum reorganised its operating structure in April 2016. The target of the new organisation is to enable the implementation of the company’s new vision and strategy. The new organisation consists of three business divisions: Generation, City Solutions and Russia. In addition, two development units focusing on growing new businesses were established: (1) M&A and Solar & Wind Development, and (2) Technology and New Ventures.

The changes to Fortum's segment reporting were minor. The company continues to have four segments. The segments as of the second quarter of 2016 are: Generation (mainly the former Power and Technology); City Solutions (mainly the former Heat, Electricity Sales and Solutions); Russia; and Other, under which M&A, Solar & Wind Development, and Technology and New Ventures, as well as corporate functions are reported. Some businesses were repositioned due to the reorganisation, but because of the minor financial impact, the comparable segment information for 2015 has not been restated.

Following the divestment of the Swedish distribution business, Fortum no longer has electricity distribution operations. The Distribution segment was reclassified as discontinued operations as of the first quarter of 2015.  

The financial results discussed in this financial statement bulletin are for the continuing operations of Fortum Group.

New Finnish GAAP requirement for financial derivatives

A new requirement issued by Finnish Accounting Board relating to accounting for financial derivatives was published 13 December 2016. The requirements have to be applied in 2016 separate financial statements for Finnish companies. Based on this requirement Fortum has chosen to apply IFRS principles for accounting financial derivatives in Fortum Oyj and its Finnish subsidiaries.

Applying IFRS principles means that financial derivatives are fair valued at each balance sheet date, which may create volatility in income statement and equity. The changes due to the new requirement has no effect to Fortum Group, but had a minor effect to net profit and equity of Fortum Oyj in 2016.

Financial results

Sales by segment

EUR million IV/16 IV/15 2016 2015
Generation 435 440 1,657 1,722
City Solutions 530 352 1,424 1,187
Russia 289 266 896 893
Other 31 28 121 114
Netting of Nord Pool transactions -129 -97 -384 -336
Eliminations -13 -26 -82 -122
Total continuing operations 1,143 964 3,632 3,459
Discontinued operations - - - 274
Eliminations - - - -31
Total Fortum 1,143 964 3,632 3,702

Comparable EBITDA by segment

EUR million IV/16 IV/15 2016 2015
Generation 116 173 527 680
City Solutions 105 80 238 209
Russia 100 81 312 267
Other -23 -18 -61 -53
Total continuing operations 298 315 1,015 1,102
Discontinued operations - - - 163
Total Fortum 298 315 1,015 1,265

Comparable operating profit by segment

EUR million IV/16 IV/15 2016 2015
Generation 87 142 417 561
City Solutions 63 53 112 108
Russia 66 69 191 201
Other -28 -21 -76 -63
Total continuing operations 188 243 644 808
Discontinued operations - - - 114
Total Fortum 188 243 644 922

Operating profit by segment

EUR million IV/16 IV/15 2016 2015
Generation 77 -65 338 -396
City Solutions 85 54 145 105
Russia 67 69 226 203
Other -27 -21 -76 -62
Total continuing operations 202 38 633 -150
Discontinued operations - - - 4,395
Total Fortum 202 38 633 4,245

October–December 2016

In the fourth quarter of 2016, sales were EUR 1,143 (964) million; the increase was mainly due to the consolidation of DUON and Ekokem into Fortum Group. Comparable EBITDA totalled EUR 298 (315) million. Comparable operating profit totalled EUR 188 (243) million and reported operating profit totalled EUR 202 (38) million. Fortum's operating profit for the period was impacted by items affecting comparability, including sales gains, updated provisions, and an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production, as well as nuclear fund adjustments for continuing operations, amounting to EUR 14 (-205) million (Note 4 and 6).

The share of profit from associates was EUR 15 (35) million, of which Hafslund represented EUR 9 (8), TGC-1 EUR 4 (-2), Fortum Värme EUR 25 (24) million and Oskarshamn (OKG) EUR -28 (-3) million. The share of profit from Hafslund and TGC-1 are based on the companies' published third-quarter 2016 interim reports (Note 14). The OKG impact comes from the new technical plan for nuclear waste management (Note 17).

January–December 2016

In 2016, sales were EUR 3,632 (3,459) million. Comparable EBITDA totaled EUR 1,015 (1,102) million. Comparable operating profit totalled EUR 644 (808) million and reported operating profit totalled EUR 633 (-150) million. Fortum's operating profit for the period was impacted by items affecting comparability, including sales gains, Ekokem transaction costs, updated provisions and an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production, as well as nuclear fund adjustments for continuing operations, amounting to EUR -11 (-958) million (Note 4 and 6). The year 2015 included a EUR -794 million impact from the decision on the early closure of two nuclear units in Sweden (Note 4 and 6).

The share of profit from associates was EUR 131 (20) million, of which Hafslund represented EUR 51 (39), TGC-1 EUR 38 (32), Fortum Värme EUR 66 (47) million and OKG EUR -30 (-107) million. The share of profit from Hafslund and TGC-1 are based on the companies' published Q4 2015 and Q1-Q3 2016 interim reports (Note 14). The OKG impact comes from the new technical plan for nuclear waste management (Note 17). Year 2015 was affected by the decision on the early closure of two nuclear units in Sweden, which impacted the share of profit from associates by EUR -116 million (Note 6). In addition, Fortum Värme’s share of profit in 2015 was lower mainly due to the paid compensation for refinancing the interest-bearing loans from Fortum.

Net financial expenses were EUR -169 (-175) million and include changes in the fair value of financial instruments of EUR -2 (-18) million. In 2015, net financial expenses included compensation of EUR 37 million from the prepayment of loans by Fortum Värme (Note 14).

Profit before taxes was EUR 595 (-305) million. Year 2015, was impacted by EUR -910 million due to the decision on the early closing of the two nuclear units in Sweden.

Taxes for the period totalled EUR -90 (78) million. The effective income tax rate according to the income statement was 15.2% (25.4%). The comparable effective income tax rate, excluding the impact of the share of profit from associated companies and joint ventures as well as non-taxable capital gains, was 20.0% (23.5%) (Note 10).

The profit for the period for continuing operations was EUR 504 (-228) million. Earnings per share for continuing operations were EUR 0.56 (-0.26), of which EUR -0.02 (-0.97) per share relates to items affecting comparability. In 2015, the impact of the decision on the early closure of two nuclear units in Sweden was EUR -0.82 per share.

Financial position and cash flow

Cash flow

In 2016, net cash from operating activities from continuing operations decreased by EUR 607 million to EUR 621 (1,228) million, mainly due to EUR 87 million lower comparable EBITDA, EUR 151 million higher income taxes paid, EUR -182 million lower realised foreign exchange gains and losses, and an EUR 131 million increase in working capital. The increase in working capital is mainly due to the daily cash settlements for futures in Nasdaq OMX Commodities Europe (Additional cash flow information). In June, Fortum paid income taxes in Sweden totalling EUR 127 million regarding tax disputes. The appeal process is ongoing and based on legal opinions, no provision is made, and the payment is booked as a receivable (Note 22). Realised foreign exchange gains and losses of EUR 110 (292) million relate to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries.

Capital expenditures increased by EUR 72 million to EUR 599 (527) million. Net cash used in investing activities increased to EUR 1,701 (35) million, due to the acquired shares of EUR 695 (43) million related mainly to acquisitions of Ekokem and DUON. The increase in other interest-bearing receivables of EUR 340 million during 2016 relates mainly to cash collaterals, given as trading collaterals to commodity exchanges.

Cash flow before financing activities was EUR -1,080 (7,650) million. In 2015, the impact from discontinued operations was EUR 6,457 million.  

Fortum paid dividends totalling EUR 977 (1,155) million in April 2016. Payments of long-term and short-term liabilities totalled EUR 1,031 (1,040) million including repayment of a EUR 750 million bond and EUR 115 million Ekokem loans. The net decrease in liquid funds was EUR 3,064 (increase of 5,490) million.

Assets and capital employed

Total assets decreased by EUR 803 million to EUR 21,964 (22,767) million.

Liquid funds at the end of 2016 were EUR 5,155 (8,202) million.

Capital employed was EUR 18,648 (19,870) million, a decrease of EUR 1,222 million.

Equity

Equity attributable to owners of the parent company totalled EUR 13,459 (13,794) million.

The decrease in equity attributable to owners of the parent company totalled EUR 335 million and was mainly due to EUR 977 million in dividends paid and the net profit for the period of EUR 496 million.

Financing

Fortum was net cash positive at the end of 2016. Net cash decreased by EUR 2,147 million to EUR 48 (2,195) million.

At the end of 2016, the Group’s liquid funds totalled EUR 5,155 (8,202) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 105 (76) million. In addition to liquid funds, Fortum had access to EUR 2.0 billion of undrawn committed credit facilities (Note 16).

Net financial expenses in January-December 2016 were EUR -169 (-175) million, of which net interest expenses were EUR -139 (-152) million. Net financial expenses include changes of EUR -2 (-18) million in the fair value of financial instruments and EUR 37 million compensation from the prepayment of loans by Fortum Värme in 2015.

In June 2016, Fortum signed a EUR 1,750 million syndicated Multicurrency Revolving Facility Agreement. The committed facility will be used for general corporate purposes and replaces the existing credit facility signed in July 2011. The facility has an initial maturity of five years and Fortum may request two one-year extension options.

Fortum’s long-term credit ratings were unchanged. Standard & Poor's rating is BBB+ and the short-term rating A-2. The outlook is stable. Fitch Ratings long-term Issuer Default Rating (IDR) and senior unsecured rating is BBB+ and the short-term IDR is F2 with a stable outlook.

Key figures

At the end of 2016, the comparable net debt to EBITDA was 0.0 (-1.7).

Gearing was 0% (-16%) and the equity-to-assets ratio 62% (61%). Equity per share was EUR 15.15 (15.53). Return on capital employed for year 2016 totalled 4.0% (22.7%).

Market conditions

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 107 (103) terawatt-hours (TWh) during the fourth quarter of 2016. In 2016, electricity consumption increased by 9 TWh to 390 (381) TWh, mainly due to closer-to-long-term average temperature compared to the warmer year in 2015, although modest demand growth was seen in the Nordic countries.

At the beginning of 2016, the Nordic water reservoirs were at 98 TWh, which is 15 TWh above the long-term average and 18 TWh higher than a year earlier. By the end of the year, reservoirs were 8 TWh below the long-term average and 23 TWh lower than at the end of 2015. Reservoir levels have decreased due to low precipitation in the Nordic area and high hydro production mainly in Norway during 2016.

In the fourth quarter of 2016, the Nord Pool average system spot price in Nord Pool was EUR 34.4 (21.9) per MWh. The average area price in Finland was EUR 37.5 (30.6) per MWh and in Sweden SE3 (Stockholm) EUR 36.7 (23.0) per MWh. The spot price realisation for the fourth quarter was clearly stronger than 2015 due to the deficit in the Nordic hydro reservoirs, colder weather than in 2015 and strong development in the commodity market.

In January-December 2016, the Nord Pool average system spot price was EUR 26.9 (21.0) per MWh, with the area price in Finland at EUR 32.4 (29.7) per MWh and in Sweden SE3 (Stockholm) at EUR 29.2 (22.0) per MWh. Nordic reservoirs turned from a 15 TWh surplus to an 8 TWh deficit during the year. 2016 was again warmer than normal, but less so than in 2015.

In Germany, the average spot price in the fourth quarter of 2016 was EUR 37.6 (33.2) per MWh, and in January-December 2016 EUR 29.0 (31.6) per MWh.

The market price of CO2 emission allowances (EUA) was EUR 8.1 per tonne at the beginning of the year. Throughout most of the fourth quarter and the whole calendar year the price fluctuated between EUR 4 and 6 per tonne and ended at EUR 6.5 per tonne at the end of 2016.

Russia

Fortum operates both in the Tyumen and Khanty-Mansiysk area of Western Siberia, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area of the Urals, which is dominated by the metal industry.

According to preliminary statistics, Russian electricity consumption was 287 (275) TWh in the fourth quarter of 2016. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 220 (211) TWh. In January-December 2016, Russian electricity consumption was 1,027 (1,007) TWh and the corresponding figure in Fortum’s operating area in the First price zone was 787 (772) TWh.

In the fourth quarter of 2016, the average electricity spot price, excluding capacity price, increased by 2.1% to RUB 1,203 (1,178) per MWh in the First price zone. In January-December 2016, the average electricity spot price, excluding capacity price, increased by 4.3% to RUB 1,204 (1,154) per MWh in the First price zone.

More detailed information about the market fundamentals is included in the tables at the end of the report (page 64-66).

European business environment and carbon market

Carbon pricing and emissions trading

The ratification of the global climate agreement adopted in Paris 2015, entered into force in November 2016. Preparation of implementation rules will take a couple of years, and the impact on the energy industry will become concrete only via legislation in different countries. The EU ratified the Agreement, but Russia’s ratification is not expected before 2020. Carbon pricing schemes are being planned in several countries. The start of the Chinese ETS in 2017 is expected to double the coverage of emissions subject to carbon pricing globally.

The EU Commission released an announcement on the implications of the Paris Agreement for the EU climate policy. The EU decided not to revise its climate target for 2030. Basically all EU climate regulation to implement the 2030 target was under review in 2016. The revision of the emissions trading directive (ETS) was under discussion in the Parliament and the Council, but adoption isn’t expected until late 2017 at the earliest or in 2018. Fortum and the electricity industry as a whole have highlighted the need to increase the ETS ambition and strengthen the market stability reserve mechanism.

Progress in implementation of the Energy Union

Year 2016 was the EU Energy Union's "year of delivery" with the release of three major legislative packages. The in early 2016 released "winter package" focused on security of supply and on heating and cooling (H&C). The new EU H&C strategy underlined the importance of decarbonisation of heating and cooling and the improvement of energy efficiency in the residential sector. The "summer package" contained a proposal for sharing the burden in the non-ETS sectors, i.e. binding national targets for member states to cut CO2 emissions in transport, buildings, agriculture and waste management in 2021-2030. The strategy has a strong focus on electrification of the transport sector while also recognising the role of biofuels. A broader "winter package" (Clean Energy for all Europeans) released in late 2016 completed to a large extent the legislative work in the field of energy. The winter package includes a renewal of the internal electricity market legislation, as well as energy efficiency and renewable energy directives with the intention to implement the related EU 2030 targets.

Swedish energy policy and taxation

The focus of the energy policy in 2016 was on the parliamentary energy commission’s work with the aim of developing a long-term energy policy for the period after 2030. In June, a broad parliamentary agreement for long-term Swedish energy policy was presented by the government and parts of the opposition. The agreement aims at a 100% renewable energy system by 2040, but with no actual limits regarding nuclear generation. The electricity certificate system will be prolonged providing for an additional 18 TWh of electricity from renewable energy sources during 2020-2030. The progress of the energy agreement will be followed-up every second year starting in 2018.

One of the key elements of the parliamentary agreement was the proposal that taxation of different energy production forms should be more equal, and that the tax burden of nuclear and hydro should be taken to the level of other production technologies. The tax on installed nuclear capacity will be reduced starting in July 2017 and totally abolished as of 2018. The regulatory framework for investment of the nuclear waste funds’ assets is suggested to be expanded to provide for a better long-term yield. The real-estate tax rate on hydro assets will be reduced from current 2.8% to the regular tax rate of 0.5% on real estate in four steps by 2020. In addition, a proposal for new hydro legislation is being prepared and is expected to be handed over to the parliament in autumn 2017.

Finnish energy policy and taxation

In late 2016 the Finnish Government published its energy and climate strategy in order to implement both the national energy and climate policy objectives of the Government’s strategic programme, as well as the EU 2030 energy and climate targets. The key elements are: increase the share of renewable energy to a minimum of 50% with a strong focus on bioenergy, launch of a limited support scheme for renewable electricity (2 TWh of electricity production is auctioned, based on technology neutral tendering, in 2018 - 2020), 30% biofuel blending obligation and some incentives for electric vehicles as well as a ban on the use of coal in energy production by 2030.

In addition, the Finnish Government decided to increase the tax on heating fuels from 2017 onwards. However, CHP continues to pay only 50% of the CO2 tax component, while the original aim was to increase it to 100%. The agreed tax model increases the tax on both the CO2 and the energy content components. The Government also decided to make an assessment during 2017 concerning the possibility to apply real estate tax rates applicable to power plants also to wind power. Currently windmills below 3 MW are in the scope of lower tax rates. The earlier announced mechanism to offset the indirect costs of the EU Emissions Trading System for energy intensive industries was also approved.

Outlook

Key drivers and risks

Fortum's financial results are exposed to a number of economic, strategic, political, financial and operational risks.

One of the key factors 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, the prices of fuel and CO2 emissions allowances, and the hydrological situation.

The continued uncertainty in the global and European economies has kept the outlook for economic growth unpredictable. The overall economic uncertainty impacts commodity and CO2 emissions allowance prices, and this could maintain downward pressure on the Nordic wholesale price of electricity. In Fortum's Russian business, the key drivers are economic growth, the rouble exchange rate, regulation around the heat business, and further development of electricity and capacity markets. In all regions, fuel prices and power plant availability also impact profitability. In addition, increased volatility in exchange rates due to financial turbulence could have both translation and transaction effects on Fortum's financials, especially through the Russian rouble and Swedish krona.

In the Nordic countries, the regulatory and fiscal environment for the energy sector has also added risks for utility companies. The main strategic risk is that the regulatory and market environment develops in a way that we have not been able to foresee and prepare for. In response to these uncertainties, Fortum has analysed and assessed a number of future energy market and regulation scenarios including the impact of these on different generation forms and technologies. As a result, Fortum’s strategy was renewed in 2016 to include broadening the base of revenues and diversification into new businesses, technologies and markets.

Nordic market

Despite macroeconomic uncertainty, 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 2016, oil and coal prices increased, while the price of CO2 emission allowances (EUA) declined. The price of electricity for the upcoming twelve months appreciated in the Nordic area as well as in Germany, and both are now on higher levels than at the end of 2015.

In mid-January 2017, the quotation for coal (ICE Rotterdam) for the remainder of 2016 was around USD 74 per tonne and for CO2 emission allowances for 2017 around EUR 5 per tonne. The Nordic system electricity forward price in Nasdaq Commodities for the rest of 2017 was around EUR 26 per MWh and for 2018 around EUR 23 per MWh. In Germany, the electricity forward price for the rest of 2017 was around EUR 34 per MWh and for 2018 around EUR 30 per MWh. Nordic water reservoirs were about 9 TWh below the long-term average and 19 TWh below the corresponding level in 2016.

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. In addition, the comparable operating profit of the Generation segment will be affected by the possible thermal power generation volumes and its profits.

As a result of the nuclear stress tests in the EU, the Swedish nuclear safety authority (SSM) has decided to propose new regulations for Swedish nuclear reactors. The process is ongoing. Fortum emphasises that maintaining a high level of nuclear safety is the highest priority, but considers EU-level harmonisation of nuclear safety requirements to be of continued importance.

The Swedish Government increased the nuclear waste fund fee from approximately 0.022 to approximately 0.04 SEK/kWh for the 2015-2017 period. The impact on Fortum is approximately EUR 25 million annually. 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) will update the new technical plan in early 2017 for SSM to review. The final decision on the new nuclear waste fees will be made by the Swedish Government in December 2017. However, as a result of the decision on early closure of nuclear power plants, the Swedish Radiation Safety Authority, SSM, recalculated the waste fees for the Oskarshamn and Ringhals power plants.

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 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.

A decision was also made to decrease the hydropower real-estate tax over a four-year period beginning in 2017, from todays 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 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 starting 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.

The tax reductions will be financed through a higher electricity consumption tax that will mainly affect households. Electricity-intensive industries will be exempt.

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. The government is expected to decide on the proposal in late March 2017.

In 2015, OKG AB decided to permanently discontinue electricity production at Oskarshamn unit 1 and to start decommissioning after the permission for service operation has been granted by the relevant Swedish authorities. The date for discontinued production and the start of decommissioning has been set to 30 June 2017. Oskarshamn unit 2, which has been out of operation since June 2013 due to an extensive safety modernisation, will stay out of operation. The closing processes are estimated to take several years.

City Solutions

In May, 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.

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 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 years and six years after the commissioning of a unit and could revise the CSA payments accordingly.

The Competitive Capacity Selection for generation built prior to 2008 (CCS) takes place annually. The long-term CCS for 2017-2019 was held at the end of 2015, and the long-term CCS for 2020 was held in September 2016. The majority of Fortum’s plants were selected. The volume of Fortum’s installed "old" capacity not selected in the auction totalled 175 MW (out of 2,214 MW), for which Fortum has obtained forced mode status, i.e. it will receive payments for the capacity.

In December 2016, a bill draft containing the main principles of the heat reform, approved by the Russian Government in 2014, passed its first reading in the Russian Parliament. The draft contradicts the Roadmap in some crucial points, e.g. it does not include the requirement of the price liberalisation across the whole country. Instead it requires the consent of both the regional and the local authorities before starting the reform in certain pilot regions. If implemented, the reform should provide heat market liberalisation in 5 or 10 years, depending on the Government-imposed criteria.

The targeted operating profit (EBIT) level of RUB 18.2 billion in the Russia segment is expected to be reached during 2017-2018. The segment’s profits are impacted by changes in power demand, gas prices and other regulatory developments. Economic sanctions, the currency crisis, oil prices and the inflation have impacted overall demand. As a result, gas prices and electricity prices have not developed favourably as expected. The Russian annual average gas price growth was 3.6% in 2016. Fortum estimates the Russian annual average gas price growth to be 2.0% in 2017.

The euro-denominated result level will be volatile due to the translation effect. The income statements of non-euro subsidiaries are translated into the Group reporting currency using average exchange rates. The Russia segment's result is also impacted by seasonal volatility caused by the nature of the heat business, with the first and last quarter being clearly the strongest.

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 below 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 non-recurring items.

Hedging

At the end of 2016, approximately 60% of Generation's estimated Nordic power sales volume was hedged at EUR 30 per MWh for the 2017 calendar year and approximately 35% at EUR 26 per MWh for the 2018 calendar year.

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 Nasdaq Commodities forwards.

Dividend distribution proposal

The distributable funds of Fortum Oyj as at 31 December 2016 amounted to EUR 5,203,674,879.03 including the profit of the financial period 2016 of EUR 779,867,542.66. After the end of the financial period there have been no material changes in the financial position of the company. 

The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 1.10 per share be paid for 2016.

Based on the number of registered shares as at 1 February 2017 the total amount of dividend proposed to be paid is EUR 977,203,749.50. The Board of Directors proposes, that the remaining part of the distributable funds be retained in shareholders’ equity.

Annual General Meeting 2017

Fortum's Annual General Meeting is planned to take place on 4 April 2017 at 2:00 p.m. (EET) at the Finlandia Hall, Mannerheimintie 13, Helsinki.

Espoo, 1 February 2017

Fortum Corporation
Board of Directors

Further information:

Pekka Lundmark, President and CEO, tel. +358 10 452 4112
Timo Karttinen, CFO, tel. +358 10 453 6555

Investor Relations & Financial Communications, Sophie Jolly, tel. +358 10 453 2552, Rauno Tiihonen, tel. +358 10 453 6150, Måns Holmberg, tel. +358 10 452 1111, Pirjo Lifländer +358 40 6433317, and [email protected]

Media, Corporate Press Officer, Pauliina Vuosio, tel. +358 50 453 2383

The Board of Directors has approved Fortum's 2016 Financial Statements and Fortum's auditors issued their unqualified Audit Report for 2016 on 1 February 2017. The Financial Statements Bulletin has been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the EU.

Financial calendar in 2017

Fortum’s Financial Statements and Operating and Financial Review for 2016 will be published during week 10 at the latest.

In 2017, Fortum will publish:

- Interim report January-March on 27 April 2017, at approximately 9:00 EEST

- Half-year financial report January-June on 20 July 2017, at approximately 9:00 EEST

- Interim report January-September on 26 October 2017, at approximately 9:00 EEST

Fortum's Annual General Meeting is planned to take place on 4 April 2017. The possible dividend- related dates planned for 2017 are:

- Ex-dividend date 5 April 2017

- Record date for dividend payment 6 April 2017

- Dividend payment date 13 April 2017

Nasdaq Helsinki
Key media
www.fortum.com

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