Good comparable operating profit despite low prices and weak rouble

January−March 2014
• Finnish electricity distribution business sale completed
• Comparable operating profit EUR 477 (524) million, -9%
• Operating profit EUR 2,333 (477) million, of which EUR 1,856 (-47) million relates to items affecting comparability, i.e. mainly to the sale of the Finnish electricity distribution business
• Earnings per share EUR 2.53 (0.45), +462%, of which EUR 2.09 (-0.04) per share relates to items affecting comparability. The effect of the sale of the Finnish electricity distribution business was EUR 2.08 per share.
• Cash flow from operating activities totalled EUR 566 (467) million, +21%
• New organisational structure

*) Comparative period figures for 2013 presented in the interim report are restated due to an accounting change for Fortum Värme and segment reporting changes; see page 4 as well as Notes 2 and 4.
**) LTM, Last 12 months

Summary of outlook 

• Fortum continues to expect the annual electricity demand growth in the Nordic countries to be on average 0.5% in the coming years
• Capital expenditure guidance: EUR 0.9-1.1 billion in 2014, excluding potential acquisitions
• Power and Technology Segment's Nordic generation hedges: for the rest of the calendar year 2014, approx. 55% hedged at EUR 44 per MWh; and for the 2015 calendar year, approx. 25% hedged at EUR 42 per MWh
• Fortum's goal is to achieve an operating profit level (EBIT) of about EUR 500 million run-rate in its Russia Segment during 2015

Fortum’s President and CEO Tapio Kuula

”Industrial transformation is one of the key challenges today – its economical and social impacts affect both the declining traditional sectors as well as the emerging new areas. It is not enough to streamline operations and focus on only the essential. We must build the future with our own resources, as a continuing slower growth phase is expected in the global economy, and the general economic fundamentals offer little support. We will continue our focussed development of Fortum in line with our strategy. The sale of the Finnish electricity distribution business, which has now already transferred to its new owner, was a part of this. I firmly believe that the sale was a good solution both for our distribution customers as well as for Fortum.

In the first quarter of 2014, electricity consumption in the Nordic countries was lower than in the corresponding quarter last year. The decrease was almost completely due to the extremely mild weather. In Russia, in the areas where Fortum operates, electricity demand decreased marginally.

The exceptionally warm weather in the Nordic countries and low electricity prices burdened both Fortum's achieved price as well as heat, distribution and electricity volumes, and hence the result in the first quarter. Higher hydro production volumes contributed positively and partly offset the decline as Nordic hydro reservoirs normalised. In Russia, the comparable result was good despite the weakened rouble. Earnings per share were EUR 2.53; the sale of the Finnish distribution business impacted the earnings per share by EUR 2.08 per share. The cash flow from operating activities was strong.

In line with the conclusions of the assessment of the electricity distribution business in 2013, the Finnish electricity distribution sale was completed in March. Furthermore, the sale of the Norwegian electricity distribution business was announced in April and is expected be finalised during the second quarter of 2014. The work continues, and we are currently evaluating the possible future divestment of our Swedish electricity distribution business.

Looking at the overall operating environment for Fortum, it’s clear that the markets will remain challenging also in 2014. We can only ensure that the foundation for success is in place through our own actions. As for the intensified political situation, significant economic relations and connections established within trade and industry have a stabilising effect on general development. The EU and Russia’s interdependence in energy issues and in many other areas of business will hopefully add stability to the relations between the regions. For Fortum, the currently suggested gas price development in Russia and the weaker Russian rouble are challenging, but the company is making every effort to mitigate the negative impacts. Fortum is evaluating its targets on a continuing basis, and will do so also once the political and economic situation stabilises. The company will then estimate if there still are possibilities to achieve the current target or if a new target level should be set.

Changes to the EU energy and climate policy are likely to be seen in 2014. In January, the European Commission published a new proposal for the EU's climate and energy policy; the proposal is a step in the right direction, but overlapping targets remain. In Finland, the power plant tax (the former so-called windfall tax) was adopted as of 2014, but it will enter force only if the European Commission assesses the tax as being in line with the general tax principles and regime in Finland and that it does not include prohibited state aid. The Swedish hydro real-estate tax levels enforced in 2013 for the years 2013-2018 are also being challenged.

Fortum is well positioned to leverage new opportunities that may emerge in the market. We will continue to pursue growth, carefully considering and prioritising alternatives in line with our strategy. I consider Fortum to be well positioned among its peers and ready to seize opportunities that are a good fit with our strategic focus on low-carbon power generation, energy-efficient combined heat and power (CHP) production and sales as well as innovative customer offerings."

Efficiency programme 2013-2014

Fortum started an efficiency programme in 2012 in order to maintain and strengthen its 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.

At the end of 2014, the cost run-rate is targeted to be approximately EUR 150 million lower compared to 2012, including growth projects.

If headcount reductions are needed, Fortum seeks to limit redundancies whenever possible. The assessments will therefore be done at a unit level.

At the end of March, Fortum had divested non-core assets of approximately EUR 300 million since the start of the efficiency programme. At the end of 2013, the company had been able to decrease its cost run-rate by approximately half of the targeted EUR 150 million and working capital efficiency had been improved. The programme is proceeding according to plan.

Assessment of the electricity distribution business

In March, Fortum completed the divestment of its Finnish electricity distribution business to Suomi Power Networks Oy, owned by a consortium of Finnish and international investors. The total consideration was EUR 2.55 billion on a debt- and cash-free basis. Fortum's one-time sales gain of approximately EUR 1.85 billion corresponds to EUR 2.08 per share. The sales gain is booked in Fortum's Distribution Segment in the first quarter of 2014 (Note 6).

The decision to divest Fortum's electricity distribution business in Finland is linked to last year's strategic assessment of the company's future alternatives for its electricity distribution business. Fortum originally announced the completion of the assessment and the sale of the business in December 2013.

Fortum is currently evaluating a possible divestment opportunity of distribution business in Sweden. The outcome is dependent on the market development and development of national regulation.

In April 2014, Fortum agreed to sell its Norwegian electricity distribution business. Fortum expects to complete the divestments during the second quarter of 2014 after the necessary regulatory approvals as well as customary closing conditions have been met.

Restatement related to IFRS changes and the new reporting structure

As of 1 January 2014, Fortum applied the new IFRS 10 Consolidated Financial Statements and 11 Joint Arrangements standards. The major effect of this reassessment relates to Fortum Värme, operating in the capital area in Sweden, which is treated as a joint venture and thus consolidated with the equity method (Note 2). Comparative information for 2013 presented in this interim report has been restated accordingly.

The segment information for 2013 has been restated due to the change in the organisation from 1 March 2014.

Presented figures have been rounded and consequently the sum of individual figures may deviate from the sum presented.

Financial results

January–March

In the first quarter of 2014, Group sales were EUR 1,473 (1,654) million. Comparable operating profit totalled EUR 477 (524) million and the reported operating profit totalled EUR 2,333 (477) million. Fortum's operating profit for the period was affected by non-recurring items. The sale of the Finnish electricity distribution business as well as an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production and nuclear fund adjustments amounting to EUR 1,856 (-47) million (Note 4).

Sales by segment

Comparable operating profit by segment

Operating profit by segment

The share of profit from associates in the first quarter was EUR 72 (78) million, of which Fortum Värme represents EUR 44 (49) million. The share of profit from Hafslund and TGC-1 are based on the companies' published fourth –quarter 2013 interim reports (Note 12).

The Group’s net financial expenses were EUR 64 (65) million. Net financial expenses included changes in the fair value of financial instruments of EUR -3 (-2) million.

Profit before taxes was EUR 2,341 (490) million.

Taxes for the period totalled EUR 86 (86) million. The tax rate according to the income statement was 3.7% (17.6%). In Finland, the corporate tax rate was decreased from 24.5% to 20.0% starting 1 January 2014. The tax rate, excluding the impact of the share of profit from associated companies and joint ventures as well as non-taxable capital gains, was 20.6% (21.3%).

The profit for the period was EUR 2,255 (404) million. Fortum's earnings per share were EUR 2.53 (0.45), of which EUR 2.09 (-0.04) per share relates to items affecting comparability. The earnings per share impact from the sale of the Finnish electricity distribution business was EUR 2.08 per share (Note 6).

Financial position and cash flow

Cash flow

In the first quarter of 2014, total net cash from operating activities increased by EUR 99 million to EUR 566 (467) million, mainly due to realised foreign exchange differences turning to positive EUR 182 million, which were offset with a lower EBITDA. In addition, there was a decrease in working capital of EUR 65 million in the first quarter of 2013. Capital expenditures decreased by EUR 48 million to EUR 162 (210) million. Proceeds from divestments of shares totalled EUR 2,502 (35) million mainly from the divestment of the Finnish distribution business. Total net cash used in investing activities was positive EUR 2,387 (-67) million. Cash flow before financing activities, i.e. financing, increased by EUR 2,553 million to EUR 2,953 (400) million. Realised foreign exchange gains and losses of EUR 74 (-108) million were related to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries.

Assets and capital employed

Total assets increased by EUR 325 million to EUR 23,673 (23,348 at year-end 2013) million. Cash and cash equivalents increased by EUR 1,724 million, which was mainly attributable to the Finnish distribution divestment. Assets of distribution Finland, amounting to EUR 1,173 million, were presented in Assets held for sale at the end of 2013. The total impact of translation differences on intangible assets, property, plant and equipment as well as on participation in associates and joint ventures was negative EUR 340 million.

Capital employed was EUR 20,033 (19,183 at year-end 2013) million, an increase of EUR 850 million. The increase was due to the higher amount of total assets, EUR 325 million, and a EUR 525 million decrease in interest-free liabilities.

Equity

Total equity was EUR 12,207 (10,124 at year-end 2013) million, of which equity attributable to owners of the parent company totalled EUR 12,109 (10,024) million and non-controlling interests EUR 97 (101) million.

The increase in equity attributable to owners of the parent company totalled EUR 2,085 million and was mainly from the net profit of EUR 2,251 million for the period, including a gain of EUR 1,850 million from sale of the Finnish distribution business and translation differences of EUR -231 million. The dividends decided on at the Annual General Meeting on 8 April 2014, totalling EUR 977 million, are not reflected in these interim financial statements.

Financing

Net debt decreased during the first quarter of 2014 by EUR 2,955 million to EUR 4,838 (7,793 at year-end 2013) million.

At the end of March 2014, the Group’s liquid funds totalled EUR 2,989 (1,265 at year-end 2013) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 198 (113 at year-end 2013) million. In addition to the liquid funds, Fortum had access to approximately EUR 2.2 billion of undrawn committed credit facilities.

The Group's net financial expenses during the quarter were EUR 64 (65) million. Net financial expenses include changes in the fair value of financial instruments of EUR -3 (-2) million.

Fortum Corporation's long-term credit rating with both S&P and Fitch is A- (negative outlook).

Key figures

For the last twelve months, net debt to EBITDA was 1.2 (3.7 at year-end 2013) and comparable net debt to EBITDA 2.5 (3.9). Fortum is currently financing Fortum Värme, and these loans are presented as interest-bearing loan receivables in Fortum’s balance sheet. However, there is a target to refinance those loans during 2014-2015. If these loans are deducted from the net debt, the last-twelve-months comparable net debt to EBITDA was 1.9 (3.4 at the year-end 2013).

Gearing was 40% (77%) and the equity-to-assets ratio 52% (43%). Equity per share was EUR 13.63 (11.28). For the last twelve months, return on capital employed totalled 17.9% (9%) and return on shareholders’ equity 26.8% (12%). Both return on capital employed and return on equity were positively affected with the capital gain from the sale of the Finnish distribution business.

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, 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, due to the increase in production volumes and CSA payments.

The continued global economic uncertainty and Europe's sovereign-debt crisis 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 for electricity in the short term. In Fortum's Russian business, the key factors are economic growth, rouble exchange rate, the regulation around the heat business and further development of electricity and capacity markets. Operational risks related to the investment projects in the current investment programme are still valid. 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 SEK and RUB. In the Nordic countries, also the regulatory and fiscal environment for the energy sector has added risks for utility companies.

Nordic market

Despite macroeconomic uncertainty, electricity is expected to continue to gain a higher share of the total energy consumption. Fortum continues to expect the annual growth rate in electricity consumption to be on average 0.5%, while the growth rate for the nearest years will largely be determined by macroeconomic development in Europe and especially in the Nordic countries. The new 650-MW Estlink-2 interconnector between Finland and Estonia increased market coupling between the Nordic and Baltic countries.

During the first quarter of 2014, the price of oil appreciated, whereas coal and EUA ended close to their opening levels. The price of electricity for the upcoming twelve months clearly decreased in the Nordic area, whereas in Germany it was largely unchanged.

In late April 2014, the future quotation for coal (ICE Rotterdam) for the rest of 2014 was around USD 78 per tonne, and the price for CO2 for 2014 was about EUR 6 per tonne.

In late April 2014, the electricity forward price in Nord Pool for the rest of 2014 was around EUR 28 per MWh. For 2015, the price was around EUR 30 per MWh, and, for 2016, around EUR 30 per MWh. In Germany, the electricity forward price for the rest of 2014 was around EUR 34 per MWh and for 2015 EUR 35 per MWh.

In late April 2014, Nordic water reservoirs were about 4 TWh above the long-term average and 10 TWh above the corresponding level of 2013.

Power and Technology

The Power and Technology's Nordic power price typically depends on such factors as hedge ratios, hedge prices, 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 and Technology 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 Power and Tehnology will be affected by the possible thermal power generation volumes and its profits.

The ongoing, multi-year Swedish nuclear investment programmes are expected to enhance safety, improve availability and increase the capacity of the current nuclear fleet. The implementation of the investment programmes could, 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 of associated companies.

Russia

The generation capacity built after 2007 under the Russian Government's Capacity Supply Agreements (CSA – “new capacity”) receives guaranteed capacity payments for a period of 10 years. Prices for capacity under CSA are defined in order to ensure a sufficient return on investments. The issue of prolonged CSA payments from 10 to 15 years have been under discussion in the Russian government; however, no official decisions have yet been made.

Capacity not under CSA competes in the competitive capacity selection (CCS – “old capacity”). The capacity selection for generation built prior to 2008 (CCS – “old capacity”) for 2014 was held in September 2013. All of Fortum’s capacity was allowed to participate in the selection for 2014 and the majority of Fortum’s power plants were also selected. The volume of Fortum’s installed capacity not selected in the auction totalled 132 MW, which is approximately 4.6% of Fortum’s total old capacity in Russia.

The Russia Segment's new capacity will be a key driver for earnings growth in Russia as it is expected to 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 the age, 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 CSA. 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 value of the remaining part of the investment programme, calculated at the exchange rates prevailing at the end of March 2014, is estimated to be approximately EUR 0.4 billion, as of April 2014.

The Russian result is impacted by seasonal volatility caused by the heat business' characteristics, with the first and last quarter being clearly the strongest.

After completing the on-going investment programme by mid-2015, Fortum’s goal is to achieve an operating profit level (EBIT) of about EUR 500 million run-rate in its Russia Segment during 2015 and to create positive economic added value in Russia. The segment’s profits are impacted by possible changes in gas prices, currency exchange rates and other regulations. The currently suggested gas price development and the weaker Russian rouble make the approximately EUR 500 million operating profit level (EBIT) goal more challenging for the Russia Segment, but the company is making every effort to mitigate the negative impacts. Fortum is evaluating its targets on a continuing basis, and will do so also once the political and economic situation stabilises. The company will then estimate if there still are possibilities to achieve the current target or if a new target level should be set.

In 2013, the Ministry of Energy stated that heat reform should be developed before changing the current electricity and capacity market model. Therefore, at the end of the year, the Ministry of Energy proposed a new heat market model (for public discussion), which is supposed to ensure transition to economically justified heat tariffs by 2020 and attract investments into the heat sector. The new regulation concept is at an early stage and expected to be further developed during 2014.

According to a forecast made by the Russian Ministry of Economic Development, Russian gas price indexation will not take place as of July 2014. However, year-on-year gas price growth is estimated to be 7.6% in 2014.

Distribution

In April, Fortum agreed to sell its Norwegian electricity distribution business. The decision to divest the electricity distribution business in Norway is linked to the 2013 strategic assessment of the further alternatives for the company's electricity distribution business. Fortum expects to complete the divestment during the second quarter of 2014. after the necessary regulatory approvals as well as customary closing conditions have been met.

Fortum is preparing for a possible sale of the Swedish electricity distribution businesses. The decision to complete the process is dependent on market development and development of national regulation, among other factors.

The work to define the Swedish network income regulation model for the next regulatory period 2016-2019 has been ongoing, and a first proposal from the Energy Market Inspectorate was given in March. Details, however, is expected to be set during the autumn 2014.

Capital expenditure and divestments

Fortum currently expects its capital expenditure in 2014 to be approximately EUR 0.9-1.1 billion, excluding potential acquisitions. The Finnish distribution business is included in the figure until the end of the first quarter 2014. The annual maintenance capital expenditure is estimated to be about EUR 400-500 million in 2014, below the level of depreciation. Capex for electricity distribution in Finland has been approximately EUR 150 million annually.

Fortum will gradually decrease its financing to Värme during 2014-2015. At the end of 2013, Värme's share of debt totalled approximately EUR 1 billion.

Taxation

The effective corporate tax rate for Fortum in 2014 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 reduced from 24.5% to 20% as of 1 January 2014.

The Finnish Parliament approved the power plant tax (the so-called windfall tax) in December 2013. It will be enacted later and will be applied from the beginning of 2014, provided that the EU Commission approves it. Fortum has filed a complaint on the tax to the Commission, arguing that it is not in line with general tax principles in Finland and that it constitutes illegal state aid for those plants that are not subject to the tax. If implemented, the estimated impact on Fortum would be approximately EUR 25 million annually.

Hedging

At the end of March 2014, approximately 55% of Power and Technology's estimated Nordic power sales volume was hedged at approximately EUR 44 per MWh for the rest of 2014. The corresponding figures for the calendar year 2015 were approximately 25% at approximately EUR 42 per MWh.

The hedge price for the Power and Technology's Nordic generation excludes hedging of the 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 segment’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.

Dividend payment

The Annual General Meeting 2014 decided to pay a dividend of EUR 1.10 per share for 2013. The record date for the dividend was 11 April 2014, and the dividend payment date was 22 April 2014.

Espoo, 28 April 2014
Fortum Corporation
Board of Directors

Further information:
Tapio Kuula, President and CEO, tel. +358 10 452 4112
Timo Karttinen, CFO, tel. +358 10 453 6555

Fortum’s Investor Relations, Sophie Jolly, tel.+358 10 453 2552, Rauno Tiihonen, tel. +358 10 453 6150 and investors [at] fortum [dot] com (investors[at]fortum[dot]com)

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 2014:
- Interim Report January-June on 18 July 2014 at approximately 9.00 EEST
- Interim Report January-September on 23 October 2014 at approximately 9.00 EEST

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.