Fortum Corporation: Financial Statements 2007
Fortum Corporation
Financial Statements 2007
A good year
- Fortum’s Board proposes a dividend of EUR 1.35
The year in brief
• Comparable operating profit EUR 1,564 (1,437) million, +9%
• Profit before taxes 1,934 (1,421) million, +36%
• Earnings per share EUR 1.74 (1.22), +43%. (EUR 0.46 from nonrecurring gains)
• Strong cash flow from operating activities EUR 1,670 (1,151) million
• 89% (84%) of the generated power was CO2-free
• Proposed total dividend EUR 1.35 per share
• Proposal to authorise the Board of Directors to decide to repurchase the company's own shares worth up to EUR 300 million
Key figures IV/07 IV/06 2007 2006
Sales, EUR million 1,320 1,254 4,479 4,491
Operating profit, EUR million 520 455 1,847 1,455
Comparable operating profit, EUR million
516
440
1,564
1,437
Profit before taxes, EUR million 501 448 1,934 1,421
Earnings per share, EUR 0.41 0.39 1.74 1.22
Net cash from operating activities, EUR million
345
92
1,670
1,151
Shareholders’ equity per share, EUR 9.43 8.91
Interest-bearing net debt
(at end of period), EUR million
4,466
4,345
Average number of shares, 1,000s 889,997 881,194
Key financial ratios 2007 adjusted*) 2007 2006
Return on capital employed, % 14.0 16.5 13.4
Return on shareholders’ equity, % 15.8 19.1 14.4
Net debt/EBITDA 2.2 1.9 2.3
*Adjusted for REC and Lenenergo gains
The year 2007 was characterised by high precipitation and mild winter temperatures. Throughout the year, a strong hydrological situation combined with low CO2 emission allowance prices led to low Nordic spot prices. Despite the challenging market conditions, Fortum improved its performance compared to previous year. The company’s financial position remained strong. Net cash from operating activities improved to EUR 1,670 (1,151) million.
In the first quarter, Fortum booked a gain of EUR 180 million after its associated company, Hafslund ASA in Norway, had sold shares in Renewable Energy Corporation (REC). This corresponds to EUR 0.20 per share in Fortum’s first-quarter result. In the third quarter, Fortum sold its stake in the Russian JSC Lenenergo for EUR 295 million. This resulted in a gain of EUR 232 million which corresponds to EUR 0.26 per share in Fortum’s third-quarter result.
Fortum participated in the share issue of the Russian Territorial Generating Company 1 (TGC-1) in the third quarter and maintained its 25.7% ownership. The total value of Fortum’s subscription was EUR 243 million.
In 2007, the Power Generation segment's achieved Nordic power price was EUR 39.7 (37.1) per megawatt-hour, up by 7% from previous year and clearly higher than the average spot price of electricity in Nord Pool, the Nordic power exchange. This was mainly thanks to Fortum’s consistent hedging strategy. The average spot price of electricity in Nord Pool was EUR 27.9 (48.6) per megawatt-hour (MWh), approximately 43% lower than the same period previous year.
Financial results
October - December
Group sales were EUR 1,320 (1,254) million.
Group operating profit totalled EUR 520 (455) million. Comparable operating profit increased to EUR 516 (440) million.
Sales by segment
EUR million IV/07 IV/06 2007 2006
Power Generation 685 667 2,350 2,439
Heat 439 381 1,356 1,268
Distribution 206 210 769 753
Markets 482 529 1,683 1,912
Other 21 19 81 78
Eliminations -513 -552 -1,760 -1,959
Total 1,320 1,254 4,479 4,491
Comparable operating profit by segment
EUR million IV/07 IV/06 2007 2006
Power Generation 363 289 1,093 985
Heat 120 95 290 253
Distribution 50 77 231 250
Markets -1 -8 -1 -4
Other -16 -13 -49 -47
Total 516 440 1,564 1,437
Operating profit by segment
EUR million IV/07 IV/06 2007 2006
Power Generation 363 290 1,125 980
Heat 121 119 294 264
Distribution 51 74 465 252
Markets 2 -18 12 -6
Other -17 -10 -49 -35
Total 520 455 1,847 1,455
January - December
Group sales were EUR 4,479 (4,491) million.
Group operating profit totalled EUR 1,847 (1,455) million. Comparable operating profit increased by EUR 127 million to EUR 1,564 (1,437) million. The Power Generation and Heat segments contributed to the increase.
The gain on the sale of Lenenergo shares increased third-quarter operating profit by EUR 232 million. The gain was booked in the Distribution segment’s operating profit.
Profit before taxes was EUR 1,934 (1,421) million.
The Group's net financial expenses increased to EUR 154 (103) million. The increase is mainly attributable to a higher average level of debt and a lower, EUR 7 (30) million, change in the fair value of derivatives.
The share of profit of associates and joint ventures was EUR 241 (69) million. The biggest contributor was Hafslund ASA in Norway. In the first quarter, Hafslund announced that it had completed the sale of 35 million shares in Renewable Energy Corporation (REC) at NOK 138 per share. As a consequence, Fortum booked a gain of EUR 180 million, corresponding to EUR 0.20 per share, in its first-quarter result. After this transaction, Hafslund still owns 70.4 million shares in REC. Fortum ownership in Hafslund ASA is 34%.
Hafslund is showing the fair value change in the REC shareholding through the income statement, while Fortum is showing the fair value change in equity. The cumulative fair value change booked in Fortum's equity and based on the remaining number of shares reported by Hafslund was approximately EUR 790 million at the end of December 2007.
Fortum received EUR 145 million in dividends from Hafslund in the second quarter. EUR 123 million of the dividends was due to the sale of REC shares.
Minority interests accounted for EUR 56 (49) million. The minority interests are mainly attributable to Fortum Värme Holding, in which the City of Stockholm has a 50% economic interest.
Taxes for the period totalled EUR 326 (301) million. The tax rate according to the income statement was 16.9% (21.2%), mainly due to the high share of profit of associates and the capital gain from the sale of Lenenergo shares. Excluding the share of profits of associates and Lenenergo sales gain, the tax rate was 22.3% (22.3%).
The profit for the period was EUR 1,608 (1,120) million. Fortum's earnings per share were EUR 1.74 (1.22). Return on capital employed was 16.5% for the year (13.4% for 2006), and return on shareholders' equity was 19.1% for the year (14.4% for 2006). In 2007 return on capital employed and return on shareholders' equity, excluding the REC and Lenenergo gains, were 14.0% and15.8%, respectively.
Market conditions
According to preliminary statistics, the Nordic countries consumed 397 (393) terawatt hours (TWh) of electricity in 2007, an increase of about 1% from previous year. During the last quarter the consumption was 108 (103) TWh, 5% more than the year before.
In the beginning of 2007, the Nordic water reservoirs were at the long-term average level. However, throughout the rest of the year, the reservoirs were above the long-term average. The fourth quarter started with the Nordic water reservoirs being 7 TWh above the long-term average. At the end of December, they were 8 TWh above the long-term average and 11 TWh above the corresponding level in 2006.
During the fourth quarter, the average spot price for power in Nord Pool was EUR 42.7 (44.6) per megawatt-hour or 4% lower than in the corresponding period in 2006. During 2007, the average spot price for power in Nord Pool was EUR 27.9 (48.6) per megawatt-hour, or 43% lower than in 2006. The low spot price was due to the strong hydrological situation and low CO2 emission prices for 2007.
During the fourth quarter, the average market price for 2007 CO2 emissions was EUR 0.07 (9.7) per tonne CO2, or 99% lower than in the corresponding period in 2006. During year 2007, the average market price for CO2 emissions was EUR 0.7 (18.5) per tonne, or 96 % lower than in the previous year.
During the second half of 2007, coal prices increased dramatically. Oil prices increased during most of the year and reached historically high levels, peaking close to 100 US dollars per barrel towards the end of the year.
In Germany, the average spot price for the fourth quarter was higher compared to the Nordic area, resulting in a net export from the Nordic area to Germany.
Total power and heat generation figures
Fortum's total power generation during 2007 was 52.2 (54.4) TWh, of which 51.1 (53.2) TWh was in the Nordic countries, representing 13% (14%) of the total Nordic electricity consumption.
At year end, Fortum's total power generating capacity was10,920 (10,913) MW, of which 10,775 (10,768) MW was in the Nordic countries. At year end, Fortum's total heat production capacity was 11,223 (10,883) MW, of which 9,381 (9,239) MW was in the Nordic countries.
During the year 2007, approximately 89% (84%) of the generated power was CO2-free. A preliminary estimate for CO2 emissions from Fortum’s own power plants in 2007 totals 10.4 (11.0) million tonnes, 0.6 million tonnes lower than in the previous year. The emissions subject to EU's emissions trading scheme were about 9.8 (10.6) million tonnes. Both figures include Fortum’s 308 MW share of the Meri-Pori power plant that was leased out in January 2007. The average volume of emission allowances allocated to Fortum's installations in various countries totalled approximately 8.1 million tonnes per year during 2005-2007.
Fortum's total power and heat generation figures are presented below. In addition, the segment reviews include the respective figures by segment.
Fortum's total power and heat generation, TWh IV/07 IV/06 2007 2006
Power generation 14.2 15.1 52.2 54.4
Heat generation 8.2 7.4 26.1 25.8
Fortum's own power generation by source, TWh,
total in the Nordic countries IV/07 IV/06 2007 2006
Hydropower 4.7 5.6 20.0 19.8
Nuclear power 6.7 6.4 24.9 24.4
Thermal power 2.5 2.8 6.2 9.0
Total 13.9 14.8 51.1 53.2
Fortum's own power generation by source, %, total in the Nordic countries IV/07 IV/06 2007 2006
Hydropower 34 38 39 37
Nuclear power 48 43 49 46
Thermal power 18 19 12 17
Total 100 100 100 100
Total power and heat sales figures
Fortum's total power sales were 59.7 (61.6) TWh, of which 58.5 (60.2) TWh were in the Nordic countries. This represents approximately 15% (15%) of Nordic electricity consumption during January-December. Heat sales in the Nordic countries amounted to 20.4 (20.1) TWh and in other countries to 6.7 (6.7) TWh.
Fortum's total electricity *) and heat sales, EUR million IV/07 IV/06 2007 2006
Electricity sales 697 667 2,370 2,437
Heat sales 352 299 1,096 1,014
Fortum's total electricity
sales *) by area, TWh IV/07 IV/06 2007 2006
Sweden 6.9 7.9 27.6 28.5
Finland 8.1 8.1 29.0 29.6
Other countries 0.9 0.9 3.1 3.5
Total 15.9 16.9 59.7 61.6
Fortum's total heat sales by area, TWh IV/07 IV/06 2007 2006
Sweden 3.1 2.6 9.2 9.3
Finland 3.4 3.3 11.1 10.7
Other countries** 2.4 1.8 6.8 6.8
Total 8.9 7.7 27.1 26.8
*) Nord Pool transactions are calculated as a net amount of hourly sales and purchases at the Group level.
**) Including the UK, which is reported in the Power Generation segment, other sales.
SEGMENT REVIEWS
Power Generation
The business area comprises power generation and sales in the Nordic countries and the provision of operation and maintenance services in the Nordic area and selected international markets. The Power Generation segment sells its production to Nord Pool. The segment includes the business units Generation, Portfolio Management and Trading (PMT), and Service.
EUR million IV/07 IV/06 2007 2006
Sales 685 667 2,350 2,439
- power sales 586 566 2,019 2,059
- other sales 99 101 331 380
Operating profit 363 290 1,125 980
Comparable operating profit 363 289 1,093 985
Net assets (at period-end) 7,148 6,734
Return on net assets, % 19.2 16.1
Comparable return on net assets, % 17.7 16.9
Gross Investments 84 174 390 240
Average personnel 3,475 4,147
The segment's power generation during the fourth quarter amounted to 12.2 (13.0) TWh in the Nordic countries.
In January-December, the segment's power generation in the Nordic countries was 46.1 (48.3) TWh, of which about 20.0 (19.8) TWh or 43% (41%) was hydropower-based, 24.9 (24.4) TWh or 54% (51%) nuclear power-based, and 1.2 (4.1) TWh or 3% (8%) thermal power-based. Although the availability of the Swedish nuclear power plants increased slightly compared to 2006, the prolonged overhauls and unplanned shutdowns had a negative effect of approximately 1.3 TWh on the nuclear power production. Less thermal power was generated due to the low spot price. In January-December, approximately 95% (89%) of the segment’s power generation was CO2-free.
At year end, the segment's power generation capacity totalled 9,560 (9,540) MW, of which 9,420 (9,400) MW was in the Nordic countries and 140 (140) MW in other countries.
Power generation by area, TWh IV/07 IV/06 2007 2006
Sweden 6.5 7.4 26.0 27.1
Finland 5.7 5.5 20.1 21.1
Other countries 0.3 0.3 1.1 1.2
Total 12.5 13.2 47.2 49.4
Nordic sales volume, TWh 13.7 14.5 51.8 53.9
of which pass-through sales 1.0 1.2 5.2 4.5
Sales price, EUR/MWh IV/07 IV/06 2007 2006
Generation's Nordic power price* 43.0 37.7 39.7 37.1
*) For the Power Generation segment in the Nordic countries, excluding pass-through sales.
Fortum Generation's achieved Nordic power price (excluding pass-through items) in the fourth quarter was EUR 43.0 per megawatt-hour, up by 14% from a year ago, thanks to hedging. During 2007, Fortum Generation's achieved Nordic power price was EUR 39.7 per megawatt-hour, up by 7% from a year ago, while the average spot price in Nord Pool was EUR 27.9 per megawatt-hour, down by 43% from 2006. The related sales volume was 12.7 (13.2) TWh in the fourth quarter and 46.6 (49.4) TWh for the whole year.
In the fourth quarter, the comparable operating profit of the Power Generation segment was clearly higher than in the corresponding period in the previous year. The higher achieved Nordic power price and increased nuclear volume generation contributed positively. This was partly offset by lower thermal and hydro power generation volumes.
In January–December, the comparable operating profit was higher than previous year. The segment's achieved Nordic power price was higher due to the higher hedge prices. Also increased hydropower and nuclear power generation volumes contributed positively. Poor performance in Fortum Service and the one-time effect from higher nuclear waste management costs reported in the third quarter decreased comparable operating profit.
In 2007, Fortum’s total CO2 emissions subject to EU's emissions trading scheme were 9.8 million tons, which exceeded Fortum’s CO2 emission allowance allocation for the year by 1.3 million tons. However, the Power Generation segment benefited from the insightful timing of CO2 allowance forward sales. Sales contracts made during or before the first quarter 2006 with a December 2007 delivery date contributed EUR 32 million in the fourth quarter results.
Fortum’s legal nuclear waste management liability is calculated according to the Nuclear Energy Act and will be confirmed by the Ministry of Employment and the Economy in early 2008. The future costs will increase mainly due to the new technical solution related to filling material for the tunnels in the final repository. The legal liability increased by approximately EUR 130 million. Fortum is obligated to contribute the funds in full to the State Nuclear Waste Management Fund to cover the legal liability. Fortum was granted periodising of the payments to the fund over six years. The decision was made by the Council of State in December 2007. Fortum booked a one-time effect from higher nuclear waste management costs in its third-quarter results.
In July 2007, the Finnish Government granted new operating licences to Loviisa nuclear power plant units 1 and 2. The licences were applied for by Fortum Power and Heat Oy in November 2006. For Loviisa 1, the new licence is valid until the end of 2027, and for Loviisa 2 until the end of 2030. The current licences, which were granted in 1998, expire at the end of 2008. Fortum’s Loviisa power plant has produced nuclear power for thirty years.
In 2007, Fortum’s Loviisa nuclear power plant exceeded the 8 TWh production limit for the second time in the history of the plant. Unit 2 reached an all-time high with over 4 TWh. The combined capacity factor for the two units at the Loviisa power plant was high, 95.4%.
Fortum is participating in the project to build the fifth Finnish nuclear power unit (Olkiluoto 3) with a share of approximately 25%. Teollisuuden Voima (TVO), the company that is building and owns the unit, has been informed by the supplier (consortium Areva-Siemens) that the unit will start operation in summer 2011.
In June 2007, Fortum submitted to the Finnish Ministry of Trade and Industry the Environmental Impact Assessment (EIA) programme regarding a new nuclear power plant possibly to be built at Hästholmen island in Loviisa. The Ministry gave its statement about the programme in October. Fortum compiles the actual EIA report based on this programme and the statements received about it. The EIA report will be submitted to the Ministry by summer 2008.
Heat
The business area comprises heat generation and sales in the Nordic countries and other parts of the Baltic Rim. Fortum is a leading heat producer in the Nordic region. The segment also generates power in combined heat and power plants (CHP) and sells it to end-customers mainly by long-term contracts, as well as to Nord Pool. The segment includes the business units Värme, operating in Sweden, and Heat, operating in other markets.
EUR million IV/07 IV/06 2007 2006
Sales 439 381 1,356 1,268
- heat sales 341 288 1,053 976
- power sales 69 68 202 198
- other sales 29 25 101 94
Operating profit 121 119 294 264
Comparable operating profit 120 95 290 253
Net assets (at period-end) 3,507 3,407
Return on net assets, % 9.3 9.6
Comparable return on net assets, % 9.2 9.2
Gross Investments 121 77 327 773
Average personnel 2,302 2,345
The segment's heat sales during the fourth quarter amounted to 8.3 (7.2) TWh, most of which was generated in the Nordic countries. In January-December, heat sales totalled 25.1 (24.7) TWh. During the same periods, power sales at combined heat and power plants (CHP) totalled 1.7 (1.7) TWh and 5.0 (5.0) TWh, respectively.
The Heat segment’s comparable operating profit during the fourth quarter was EUR 25 million higher than previous year. The weather was colder than previous year but the temperature was still above the long-term average. Colder weather and organic growth resulted in higher sales volumes. Also efficiency improvements in Poland improved the results.
The comparable operating profit of the Heat segment in the year 2007 was EUR 37 million higher than previous year. An efficient fuel mix had a positive impact on the results in Sweden. Also the acquisition of Fortum Espoo (E.ON Finland) and efficiency improvements in Poland improved the results.
Heat sales by area, TWh IV/07 IV/06 2007 2006
Sweden 3.0 2.5 9.2 9.3
Finland 3.4 3.3 11.1 10.7
Other countries 1.9 1.4 4.8 4.7
Total 8.3 7.2 25.1 24.7
Power sales, TWh IV/07 IV/06 2007 2006
Total 1.7 1.7 5.0 5.0
The number of district heating customers increased in 2007, thanks to successful new sales in all markets.
Distribution
Fortum owns and operates distribution and regional networks and distributes electricity to a total of 1.6 million customers in Sweden, Finland, Norway and Estonia.
EUR million IV/07 IV/06 2007 2006
Sales 206 210 769 753
- distribution network transmission 173 179 648 636
- regional network transmission 21 20 81 80
- other sales 12 11 40 37
Operating profit 51 74 465 252
Comparable operating profit 50 77 231 250
Net assets (at period-end) 3,243 3,412
Return on net assets, % 14.5 8.4
Comparable return on net assets, % 7.5 8.3
Gross Investments 118 76 237 313
Average personnel 1,060 983
In 2007, the volume of distribution and regional network transmissions totalled 26.0 (24.6) TWh and 18.1 (18.1) TWh, respectively.
Electricity transmissions via the regional distribution network totalled 14.9 (15.0) TWh in Sweden and 3.2 (3.1) TWh in Finland.
The comparable operating profit of the Distribution segment was EUR 50 million in the fourth quarter, EUR 27 million lower than previous year. The decrease is mainly due to costs for automatic meter installations in Sweden, and also due to the one-time price adjustment during the last quarter in Finland in order to reduce the difference to the regulated income level for the period 2005-2007. Fortum Distribution refrained from charging around 400,000 Finnish distribution customers the fixed monthly fee during December 2007.
The comparable operating profit of the segment was 231 million EUR for the whole year, EUR 19 million lower than previous year. The main reason for the decrease in 2007 compared to previous year was the EUR 13 million costs caused by the storms in the first half of the year. The new customer and billing system in Sweden continued to cause extra costs in 2007. Also automatic meter installations in Sweden and the one-time price adjustment during the last quarter in Finland decreased operating profit. The acquisition of Fortum Espoo (E.ON Finland) contributed positively to the segment.
The after-tax gain of EUR 232 million from selling the holding in JSC Lenenergo has been booked in Distribution segment’s third-quarter operating profit.
Volume of distributed electricity in distribution network, TWh IV/07 IV/06 2007 2006
Sweden 4.1 3.8 14.3 14.4
Finland 2.6 2.5 9.2 7.7
Norway 0.8 0.6 2.3 2.3
Estonia 0.1 0.1 0.2 0.2
Total 7.6 7.0 26.0 24.6
Number of electricity distribution customers by area, thousands 31 Dec 2007 31 Dec 2006
Sweden 871 865
Finland 591 580
Other countries 122 120
Total 1,584 1,565
Markets
Markets is responsible for retail sales of electricity to a total of 1.3 million private and business customers as well as to other electricity retailers in Sweden, Finland and Norway. Markets buys its electricity through Nord Pool.
EUR million IV/07 IV/06 2007 2006
Sales 482 529 1,683 1,912
Operating profit 2 -18 12 -6
Comparable operating profit -1 -8 -1 -4
Net assets (at period-end) 247 176
Return on net assets, % 6.9 -1.6
Comparable return on net assets, % -0.6 -0.8
Gross Investments 1 0 3 14
Average personnel 936 825
During the fourth-quarter, Markets’ electricity sales totalled 10.5 (11.5) TWh with sales for the whole year amounting to 39.6 (42.1) TWh.
The Markets segment's fourth quarter comparable operating profit was slightly negative, but improved from previous year. The improved year-on-year performance is mainly explained by lower electricity procurement costs. However, procurement costs increased from the third quarter driven by increasing Nord Pool wholesale power prices, leading to a sequentially deteriorating sales margin.
In 2007, the segment was unable to achieve a positive comparable operating profit. This was partly due to retail sales in Finland where consumer prices lagged behind Markets’ procurement prices (Nord Pool wholesale power prices).
The new customer and billing system in Sweden continued to cause extra costs in 2007.
Despite the tight price competition, Fortum's customer net flow in Finland was clearly positive in 2007, mainly due to increasing sales of environmentally labelled electricity products. Fortum is the market leader on the Nordic market in selling environmentally labelled electricity. Markets’ Nordic customer net flow in 2007 was slightly negative due to tightened competition especially in Sweden.
The SKI (Svensk Kvalitetsindex) customer satisfaction survey in Sweden and EPSI (Extended Performance Satisfaction Index) in Finland showed that the customer satisfaction among Fortum's customers improved clearly in 2007.
Capital expenditures, divestments and investments in shares
Capital expenditures and investments in shares in January-December totalled EUR 972 (1,395) million. Investments, excluding acquisitions, were EUR 655 (485) million.
POWER GENERATION
In September, Fortum participated in the share issue of the Russian TGC-1, subscribing to new shares in the company. The total value of Fortum’s subscription was approximately EUR 243 million. With this subscription, Fortum maintained its 25.7% stake in TGC-1 and its position as the second largest shareholder of the company.
HEAT
In July 2007, Fortum acquired the district heating company EC Wojkowice in Poland. The annual heat sales of the company total some 64 GWh and electricity sales 320 MWh. The company has 34 employees.
The CHP projects in Suomenoja, Finland, in Czestochowa, Poland, and in Tartu, Estonia, are proceeding. The preparations are continuing for the CHP plants in Värtan and Brista in Sweden and in Järvenpää, Finland.
The ownership of Vattenfall's heat operations in Pärnu, Estonia and Riga, Latvia, were transferred to Fortum in January and February, respectively.
In November, Fortum Värme received environmental permit for the biofuel-based CHP plant in Värtan. The environmental permit also covers the installation of flue gas condensers in the existing units at the Värtan plant and this work is already on-going.
DISTRIBUTION
Fortum sold its slightly over 1/3 stake in JSC Lenenergo for approximately EUR 295 million. The decision to sell the Lenenergo shares is in line with Fortum's strategy in Russia to invest primarily in generation assets. The current business of Lenenergo is electricity distribution in the city of St. Petersburg and the Leningrad region.
The investments in automatic meters in Sweden amounted to EUR 64 million in 2007.
Financing
During the fourth quarter, Fortum's net debt increased by EUR 10 million. At year end, the interest-bearing net debt stood at EUR 4,466 (4,345) million, resulting in a total increase in net debt of EUR 121 million for the year. The increase in net debt is primarily linked to capital returns and ongoing investment programme. In April Fortum paid dividends amounting to EUR 1,122 million. Net debt to EBITDA, excluding the nonrecurring gains, was 2.2 at the end of the quarter.
The Group's net financial expenses for the fourth quarter were EUR 37 (25) million and for the full year 2007 EUR 154 (103) million. The increase is mainly attributable to higher average net debt and somewhat higher average interest rates in 2007. However, net financial expenses include fair value gains on financial instruments of EUR 3 (6) million for the quarter and EUR 7 (30) million for the full year.
The average interest rate of Fortum's interest-bearing gross debt (including derivatives) in 2007 was 4.3% (4.1%).
Group liquidity remained good. Year-end cash and marketable securities totaled EUR 427 (157) million. In addition, the Group had a total of EUR 1.4 (1.3) billion available for drawings under committed credit facilities, including the EUR 1.2 billion syndicated revolving credit facility due in 2011 and bilateral overdraft facilities which are renewed on an annual basis.
During the year Fortum raised approx. EUR 850 million in new long-term financing to finance capital returns, maturing loans and the ongoing investment programme. The tenors of these financing arrangements varied between 5 and 10 years and consisted of a SEK 6.1 billion (approx. EUR 660 million) bond issue as well as bilateral loan contracts of SEK 1.75 billion (approx. EUR 190 million).
Fortum Corporation’s long-term credit rating from Moody’s and Standard and Poor's was A2 (stable) and A- (stable), respectively.
Shares and share capital
During 2007, a total of 787.4 (830.8) million Fortum Corporation shares totalling EUR 18,562 million were traded. Fortum's market capitalisation, calculated using the closing quotation of the last trading day of the year, was EUR 27,319 million. The highest quotation of Fortum Corporation shares on the Helsinki Stock Exchange in 2007 was EUR 31.44, the lowest EUR 20.01, and the volume weighted average quotation EUR 23.73. The closing quotation on the last trading day of the year was EUR 30.81 (21.56).
Relating to the 2002B share option scheme, a total of 3.0 million options for a total of EUR 58.9 million were traded during 2007.
A total of 5,199,412 (13,759,621) shares subscribed on the basis of share option schemes were entered into the trade register in 2007. The Board of Directors of Fortum Corporation has cancelled a total of 5,910,000 repurchased Fortum shares according to the authorisation given to the Board of Directors in the Annual General Meeting of Shareholders on 28 March 2007. The average price for the repurchased own shares was EUR 29.69, the lowest price EUR 28.60 and the highest price EUR 30.63. At the end of 2007, Fortum Corporation did not own its own shares.
After registrations and the cancellation, Fortum Corporation’s share capital is EUR 3,040,460,397.20 and the total number of registered shares is 886,683,058 (887,393,646) at the end of 2007. The share capital of Fortum Corporation increased by a total of EUR 17,678,000.80 (46,782,711).
At year end the amount of shares that can still be registered for under the share option schemes is a maximum of 0.2% (1,683,987 shares) of Fortum’s 2007 year-end share capital and voting rights.
At year end, the Finnish state's holding in Fortum was 50.9%. The proportion of nominee registrations and direct foreign shareholders was 35.8%.
Currently, the Board of Directors has no unused authorisations from the Annual General Meeting of Shareholders to issue convertible loans or bonds with warrants or to issue new shares. The Board of Directors has an authorisation from the Annual General Meeting of Shareholders on 28 March 2007 to buy Fortum Corporation’s own shares. The authorisation, amounting to EUR 300 million or 20 million shares, is valid until the next Annual General Meeting. In 2007, Fortum used this authorisation by repurchasing 5.91 million of its own shares at a total price of approximately EUR 175 million. These shares have been cancelled.
Group personnel
The average number of employees in the Group during the period from January to December was 8,304 (8,910). The number of employees at the end of the period was 8,303 (8,134).
Russia
Fortum’s main holdings in Russia stem from its past ownership in JSC Lenenergo, an integrated power and heat company in the St. Petersburg region. In late 2005, the company’s generation assets were spun-off and a regional generation company, TGC-1, was formed. JSC Lenenergo continued as a regional distribution company. In the third quarter 2007, Fortum sold its holding in JSC Lenenergo. The sale was in line with Fortum’s strategy in Russia of focusing on power generation. Fortum maintained its 25.7% ownership in the regional generation company TGC-1.
Fortum is evaluating opportunities to participate in share issues and ownership restructurings in the Russian power generation sector in order to further strengthen its position in the Russian wholesale power market.
In October, Fortum sold its approximately 0.7% holding in the Russian Wholesale Generating Company 5 (WGC-5) for EUR 28 million.
Events after the period under review
The Norwegian Renewable Energy Corporation (REC) is partly owned by Fortum’s associated company Hafslund ASA. Fortum shows the fair value changes of REC in equity. At year end, the cumulative fair value change booked in Fortum’s equity was approximately EUR 790 million. REC’s share price has decreased since the year end. Based on REC’s closing price on 29 January, the cumulative fair value change in Fortum’s equity would have been approximately EUR 400 million.
Outlook
The key market driver influencing Fortum's business performance is the Nordic wholesale price of electricity. Key drivers behind the wholesale price development are the Nordic hydrological situation and supply-demand balance, CO2 emissions allowance prices and fuel prices. The Swedish krona exchange rate also affects Fortum's reported results, as results generated by Fortum in Sweden are translated into euros.
Fortum's financial results are exposed to a number of strategic, financial and operational risks. For further details on Fortum's risks and risk management, see Fortum's Operating and Financial Review and Financial Statements.
According to general market information, electricity consumption in the Nordic countries is predicted to increase by about 1% a year over the next few years.
In mid-January 2008, the Nordic water reservoirs were about 9 TWh above the long-term average and 6 TWh above the corresponding level of 2007. In late-January, the market price for emissions allowances for 2008 was about EUR 20-21 per tonne of CO2. At the same time, the electricity forward price for the rest of 2008 was around EUR 44-45 per MWh and for 2009 around EUR 49-51 per MWh.
The first and last quarters of the year are usually the strongest quarters for the power and heat businesses.
Fortum Power Generation's achieved Nordic power price typically depends on e.g. the hedge ratio, hedge price, spot price, utilisation and optimisation of Fortum's flexible production portfolio – even on an hourly basis – and currency fluctuations. If Fortum would not hedge any of its production volumes, a 1 EUR/MWh change in the spot price would result in approximately a EUR 50 million change in Fortum's annual operating profit.
At the beginning of January 2008, Fortum had hedged approximately 70% of the Power Generation segment's estimated Nordic electricity sales volume for the year 2008 at approximately EUR 44 per MWh. For the calendar year 2009, approximately 25% of the Power Generation segment's estimated Nordic electricity sales volume was hedged at approximately EUR 46 per MWh. These hedge ratios may vary significantly depending on Fortum's actions on the electricity derivatives markets. Hedge prices are also influenced by changes in the SEK/EUR exchange rates, as part of the hedges are conducted in SEK.
The Swedish government has increased nuclear capacity and hydro property tax rates. It has also introduced changes in the Swedish CO2-tax. Fortum estimates that the additional cost from the tax rate increases and changes will be just under EUR 30 million in 2008.
Fortum's results in 2007 were good, despite challenging market conditions and low Nord Pool spot prices. The Group's financial position is strong. With its flexible and climate-benign production portfolio, Fortum continues to be well positioned for the future.
Dividend distribution proposal
The parent company's distributable equity as of 31 December 2007 amounted to EUR 3,119 million. 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 Fortum Corporation pay a cash dividend of EUR 1.35 per share for 2007, totalling EUR 1 197 million based on the number of registered shares as of 30 January 2008. Of this total dividend, EUR 0.77 per share is to be paid from Fortum’s recurring earnings. An additional dividend of EUR 0.58 per share is proposed in order to steer Fortum's capital structure towards the target.
Proposal of the Board of Directors to authorise the Board of Directors to decide to repurchase the company's own shares
The Board of Directors of Fortum Corporation proposes that the Annual General Meeting of Shareholders on 1 April 2008 will authorise the Board of Directors to decide to repurchase the company’s own shares by using non-restricted equity. The authorisation is proposed to be valid until the next Annual General Meeting.
The shares will be repurchased in order to steer Fortum's capital structure towards the target.
The maximum amount of shares to be repurchased is 15 million shares. In addition, the amount of funds used for the repurchases may not exceed EUR 300 million.
The shares will be repurchased through public trading of the securities on the Helsinki Stock Exchange, which means that they will not be purchased in proportion to the holdings of the shareholders. The repurchase price of the shares will be based on the public trading price of Fortum shares.
Shares repurchased by the company shall be cancelled by a separate decision of the Board of Directors.
The Annual General Meeting will be held on 1 April 2008 at 1:00 pm at the Finlandia Hall in Helsinki.
Espoo, 30 January 2008
Fortum Corporation
Board of Directors
Further information:
Mikael Lilius, President and CEO, tel. +358 10 452 9100
Juha Laaksonen, CFO, tel. +358 10 452 4519
The Board of Directors has approved Fortum's 2007 financial statements and Fortum's auditors have issued their audit report on 2007 on 30 January 2008. The financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the EU.
Publication of results in 2008:
Interim Report January-March will be published on 24 April 2008
Interim Report January-June will be published on 17 July 2008
Interim Report January-December will be published on 22 October 2008
Distribution:
Helsinki Stock Exchange
Key media
www.fortum.com
Information on the financial statements release, including detailed quarterly information, is available on Fortum’s website at: www.fortum.com/investors