Fourth quarter burdened by warm weather and low hydro volumes – Dividend proposal EUR 1.10 per share for 2013

FORTUM CORPORATION'S FINANCIAL STATEMENTS BULLETIN 4 February 2014 at 9.00 EET

October−December 2013
• Comparable operating profit EUR 493 (591) million, -17%
• Operating profit EUR 574 (623) million, of which EUR 81 (32) million relates to items affecting comparability
• Earnings per share EUR 0.52 (0.68), -24%, of which EUR 0.07 (0.03) per share relates to items affecting comparability and EUR 0.09 (0.22) per share to the change in the Finnish corporate tax rate in 2013 and the Swedish Corporate tax rate in 2012
• Cash flow from operating activities totalled EUR 376 (399) million, -6%
• All-time low hydro production, 3.9 (7.1) TWh
• Very warm weather in all regions
• In Russia, Nyagan 2 was commissioned and an agreement was reached with the contractor regarding construction delays in favour of Fortum
• Assessment of electricity distribution business completed; Finnish networks divestment process started

January−December 2013
• Comparable operating profit EUR 1,607 (1,752) million, -8%
• Operating profit EUR 1,712 (1,874) million, of which EUR 105 (122) million relates to items affecting comparability
• Earnings per share EUR 1.36 (1.59), -14%, of which EUR 0.10 (0.14) per share relates to items affecting comparability and EUR 0.09 (0.22) per share to the Finnish Corporate tax rate change in 2013 and the Swedish Corporate tax rate in 2012, which had a positive impact
• Cash flow from operating activities totalled EUR 1,836 (1,382) million, +33%
• Half way through the efficiency programme
• Electricity production at the Inkoo coal-fired power plant in Finland to be discontinued
• Fortum's Board proposes a dividend of EUR 1.10 per share  

*) Comparative period figures for 2012 presented in the interim report are restated due to an accounting change for pensions; see page 4 as well as Note 2.

Summary of outlook

• Fortum continues to expect that the annual electricity demand growth in the Nordic countries will be in average 0.5% in the coming years
• Capital expenditure guidance: EUR 0.9-1.1 billion in 2014, excluding potential acquisitions
• Power Division's Nordic generation hedges: For the 2014 calendar year, appr. 60% hedged at EUR 43 per MWh; and for the 2015 calendar year, appr. 20% hedged at EUR 41 per MWh
• Fortum's goal is to achieve an operating profit level (EBIT) of about EUR 500 million run-rate in its Russia Division during 2015

Fortum’s President and CEO Tapio Kuula

”In 2013, electricity consumption in the Nordic countries was slightly lower than last year at 386 terawatt-hours (TWh), even though non-industrial consumption partly offset the decrease in industrial demand especially during the first half of the year. In Russia, in the areas where Fortum operates, consumption was flat at 767 TWh.

The Nordic hydro reservoirs were below the long-term average and although the levels normalised towards the end of the year, they were still clearly lower than last year’s record-high levels. Precipitation was weak in Fortum’s operating areas during the first three quarters of the year; this put pressure on hydro volumes and thus impacted Fortum's results negatively.

The comparable profit declined compared to the previous year and totalled approximately EUR 1.6 billion, and earnings per share were EUR 1.36. The cash flow from operating activities, however, was strong with all divisions contributing. We made good progress in sustainability and safety in 2013. Fortum received a special award for innovation from the Global District Energy Climate Awards organisation and was ranked as the best company in the Nordic climate index. We had our lowest-ever total recordable incidents (TRIF) among our own personnel.

In December 2013, Fortum completed the strategic assessment of its electricity distribution business. The conclusion was that divesting the electricity distribution business is the best solution in order to further develop our company according to its strategy. We also consider it to be the best solution for the distribution business itself and for its customers. Focusing on electricity and heat production and sales, is estimated to give Fortum more strategic flexibility and to improve the company's long-term value creation.

In line with the conclusions of the completed assessment, Fortum agreed to sell its electricity distribution business in Finland to Suomi Power Networks Oy. The business is in very good shape and deserves to be developed further as a core business from its own standpoint. The buyer has a deep understanding of the social importance of infrastructure assets and is committed to developing reliable networks and services for the customers. We expect to close the deal during the first quarter of 2014; until then, work continues as usual in all business areas. Fortum is also evaluating the possible future divestment opportunities within the electricity distribution business country by country.

In 2014, we will continue our everyday work in serving our customers in all areas of our business. The year-end storms in Finland, Sweden and Norway tested once again our ability to serve customers in challenging conditions. We have continuously improved the reliability of our networks. The same trend can be seen also in the results of the recent customer satisfaction survey: Fortum improved its ranking in electricity sales, distribution and as a supplier of district heat.

Year 2013 was a year of inaugurations at Fortum. In Jelgava, Latvia, and in Järvenpää, Finland, we commissioned new biomass-fired CHP plants. In Klaipeda, Lithuania, we took into production a waste-to-energy CHP plant, while in Brista, Sweden, test-runs were started. Fortum also commissioned the world's first bio-oil production facility that is integrated with a combined heat and power (CHP) plant in Joensuu, Finland. In Russia, the gas-fired thermal power plant Nyagan GRES was inaugurated by President of Russia Vladimir Putin and President of Finland Sauli Niinistö. Units 1 and 2 are now commissioned, and both are receiving capacity payments. We will continue the determined implementation of our investment programme with three large units still under construction. With both existing and the new power plants, we continue to build Fortum's future growth.

The on-going company-wide efficiency programme continued to proceed according to plan, and we are approximately half way through. The work will continue; we are continuously working on reducing fixed costs and capital expenditures, divesting non-core business and focusing on working capital efficiency.

Looking at the operating environment for Fortum overall, it’s clear that the markets will remain challenging also in 2014. Only through our own actions can we ensure that the premises for success are in place.

Changes to the EU energy and climate policy are likely to be seen in 2014. It is crucial that determined measures to mitigate climate change are continued. However, in order to safeguard the competiveness of European industries and get the much needed investments into low-carbon energy production and infrastructure, the EU climate policy should be steered by a single CO2 reduction target post-2020, and the existing overlapping steering mechanisms should be removed. In January, the European Commission published a new proposal for the EU's climate policy and energy policy - the proposal is a step in the right direction, but overlapping targets remain.

Regarding the tax climate, the governments in Finland and Sweden have made positive and material decisions on lowering the corporate tax rates to stimulate businesses, beyond that, the overall tax climate has tightened considerably. Fortum has appealed several cases raised by the tax authorities that have been addressed retroactively and also some cases that have already been scrutinised.

In Finland, the power plant tax (former so called windfall tax) has been adopted as of 2014. It will be applied provided that the European Commission finds that it is in line with the general tax principles and regime in Finland and that it does not include forbidden state aid. The Swedish hydro real-estate tax is also being challenged.

We are pursuing growth, carefully considering and prioritising alternatives in line with our strategy. I consider Fortum to be well positioned among its peers and ready to grab emerging opportunities that are a good fit with our strategy focus on low-carbon power generation, energy-efficient combined heat and power (CHP) production and sales, and innovative customer offerings. Concentrating on electricity and heat production and sales is estimated to improve Fortum's long-term value creation.

To summarise, 2013 was a year full of activity as well as challenges; nevertheless, the result was satisfactory. The dividend proposal reflects Fortum's dividend policy to pay a stable, sustainable and over time increasing dividend that supports shareholder value and the company's strategy.

As a final point, I would like to thank each employee in Fortum for the hard work during the past year. I would also like to give  a special thank you to Chairman Sari Baldauf, who during my absence for months took an extraordinary role in advancing Fortum’s interests, and to CFO Markus Rauramo who acted admirably as my deputy, as well as to the entire executive Management Team for their strong commitment during this period."

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.

Capex in 2014 is expected to be EUR 0.9–1.1 billion excluding Värme. 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 December 2013, Fortum had divested approximately EUR 300 million in non-core assets since the start of the efficiency programme. The company has been able to decrease its cost run-rate by approximately half of the targeted EUR 150 million and working capital efficiency has been improved.

Assessment of the electricity distribution business

In December, Fortum completed the assessment of the future alternatives of its electricity distribution business; the assessment was launched in January 2013. After thorough consideration, the company concluded that divesting the electricity distribution business is the best solution for the business and its customers, Fortum's shareholders and the company's other businesses. During the assessment process all alternatives were carefully studied in order to find the best solution. Fortum is evaluating the remaining possible future divestment opportunities country by country. The outcome is dependent on market development and development of national regulation in the countries.

Also in December, as the first phase, Fortum agreed to sell its electricity distribution business in Finland to Suomi Power Networks Oy, which is owned by a consortium of Finnish pension funds Keva (12.5%) and LocalTapiola Pension (7.5%) together with international infrastructure investors First State Investments (40%) and Borealis Infrastructure (40%). The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum expects to complete the divestment process during the first quarter of 2014, subject to the necessary regulatory approvals as well as customary closing conditions. Fortum expects to book a one-time sales gain of EUR 1.8-1.9 billion, corresponding to approximately EUR 2.0 per share, in its Electricity Solutions and Distribution Division's first-quarter 2014 results.

A total of 340 employees will transfer with the business at closing with existing terms of employment. The sale has no effect as such on Fortum's approximately 640,000 distribution customers. Upon closing, these customers will transfer with the business with existing terms (Note 6).

Restatements related to IFRS changes in accounting

Fortum is applying an amended IFRS standard for pensions as of 1 January 2013. Adoption of the new standard is done retrospectively and comparative information for 2012 is therefore restated to reflect the change. The change had only a minor impact on Fortum’s financial results and financial position; however, it reduced the equity by EUR 124 million as of 1 January 2012. The restated comparative figures for the year 2012 are presented in the attachment to the first-quarter 2013 interim report.

As of 1 January 2014, Fortum will apply 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 will be treated as a joint venture and thus consolidated with the equity method. The company is currently consolidated as a subsidiary with a 50% minority interest (Note 2).

Financial results

October−December

In the fourth quarter of 2013, Group sales were EUR 1,590 (1,834) million. Comparable operating profit totalled EUR 493 (591) million and the reported operating profit totalled EUR 574 (623) million. Fortum's operating profit for the period was affected by non-recurring items, an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production, and nuclear fund adjustments amounting to EUR 81 (32) million (Note 4).

The share of profits from associates in the fourth quarter was EUR 39 (-3) million. The share of profits from Hafslund and TGC-1 are based on the companies' published third-quarter interim reports (Note 12).

Sales by division

* Part of the Electricity Solutions and Distribution Division

Comparable operating profit by division 

* Part of the Electricity Solutions and Distribution Division

Operating profit by division 

* Part of the Electricity Solutions and Distribution Division

January−December

In January-December 2013, Group sales were EUR 6,056 (6,159) million. Comparable operating profit totalled EUR 1,607 (1,752) million and the reported operating profit totalled EUR 1,712 (1,874) million. Fortum's operating profit for the period was affected by non-recurring items, an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production, and nuclear fund adjustments amounting to EUR 105 (122) million (Note 4).

The share of profits of associates and joint ventures was EUR 105 (23) million. The increase comes mainly from Hafslund and TGC-1. The share of profits from Hafslund and TGC-1 are based on the companies' published fourth-quarter 2012 as well as first-, second- and third-quarter 2013 interim reports (Note 12).

The Group’s net financial expenses were EUR 318 (311) million. Net financial expenses included changes in the fair value of financial instruments of EUR 16 (23) million.

Profit before taxes was EUR 1,499 (1,586) million.

Taxes for the period totalled EUR 220 (74) million. The tax rate according to the income statement was 14.7% (4.7%). In Finland, the corporate tax rate was decreased to 20.0% from 24.5% starting 1 January 2014. The tax rate change caused a one-time effect in 2013 of approximately EUR 0.09 per share. In Sweden, the corporate tax rate was decreased to 22.0% from 26.3% starting 1 January 2013. In 2012, the one-time positive effect from the tax rate change was approximately EUR 230 million of which EUR 34 million is attributable to non-controlling interests. The tax rate, excluding the changes in the tax rates, the impact of the share of profits of associated companies and joint ventures as well as non-taxable capital gains was 22.3% (21.2%).

The profit for the period was EUR 1,279 (1,512) million. Fortum's earnings per share were EUR 1.36 (1.59), of which EUR 0.10 (0.14) per share relates to items affecting comparability and EUR 0.09 per share to the change in Finnish corporate tax rate. In 2012, the impact of the lowered Swedish corporate tax rate was approximately EUR 0.22 per share.

Non-controlling (minority) interests amounted to EUR 75 (96) million. These are mainly attributable to AB Fortum Värme Holding, in which the city of Stockholm has a 50% economic interest.

Financial position and cash flow

Cash flow

In 2013, total net cash from operating activities increased by EUR 454 million to EUR 1,836 (1,382) million, mainly due to a decrease in working capital of EUR 296 million and realised foreign exchange differences turning to positive EUR 320 million which were offset with a lower EBITDA. Capital expenditures decreased by EUR 151 million to EUR 1,271 (1,422) million. Proceeds from divestments totalled EUR 210 (433) million. Total net cash used in investing activities was EUR -1,210 (-1,128) million. Cash flow before financing activities, i.e. dividend distributions and financing, increased by EUR 372 million to EUR 626 (254) million. Realised foreign exchange gains and losses of EUR 52 (-268) million were related to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries.

Dividends totalling EUR 888 million were paid on 19 April 2013 using cash and cash equivalents.

Assets and capital employed

Total assets decreased by EUR 141 million to EUR 24,420 (24,561 at year-end 2012) million. The net change in total assets was negative, even though capital expenditures and gross investments in shares (EUR 1,299 million) were higher than depreciation during the year (EUR 740 million). The total impact of translation differences on intangible assets, property plant and equipment as well as participations in associates and joint ventures was negative EUR 861 million. Cash and cash equivalents increased by EUR 291 million.

Presenting the Finnish distribution business as assets held for sale impacted the structure of the balance sheet, because all assets and liabilities belonging to those operations were presented separately on one line both in assets and liabilities (Note 6).

Capital employed was EUR 19,780 (19,420 at year-end 2012) million, an increase of EUR 360 million. The increase was due to the lower amount of total assets, EUR 141 million, and a EUR 501 million decrease in interest-free liabilities.

Equity

Total equity was EUR 10,662 (10,643 at year-end 2012) million, of which equity attributable to owners of the parent company totalled EUR 10,024 (10,040) million and non-controlling interests EUR 638 (603) million.

The decrease in equity attributable to owners of the parent company totalled EUR 16 million and is mainly arising from the payment of dividends totalling EUR -888 million, net profit of EUR 1,204 million for the period and translation differences of EUR -471 million.

Financing

Net debt increased during 2013 by EUR 35 million to EUR 7,849 (7,814 at year-end 2012) million.

During 2013 Fortum Oyj issued new long term debt in SEK and EUR amounting to approximately EUR 760 million (Note 14).

At the end of December 2013, the Group’s liquid funds totalled EUR 1,269 (963 at year-end 2012) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 113 (128 at year-end 2012) 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 2013 were EUR 318 (311) million. Net financial expenses include changes in the fair value of financial instruments of EUR -16 (-23) million.

Fortum Corporation's long-term credit rating with S&P was reaffirmed at A- (negative outlook) in December 2013. As of April 2013, Fitch Ratings provides a rating of Fortum Corporation and any subsequently issued securities issued under Fortum's EMTN programme. Fitch's current long-term issuer default rating of Fortum Corporation is A- (negative outlook), which was also reaffirmed in December 2013. Fortum decided to terminate the rating relationship with Moody’s Investors Service in February 2013. At that time, Moody’s had assigned an A2 rating with a negative outlook.

Key figures

At year-end 2013, net debt to EBITDA was 3.2 (3.1 at year-end 2012) and comparable net debt to EBITDA 3.4 (3.2), impacted by EUR 888 million in dividend payments. Gearing was 74% (73%) and the equity-to-assets ratio 44% (43%). Equity per share was EUR 11.28 (11.30). Return on capital employed totalled 9.2% (10.2%) and return on shareholders’ equity 12.0% (14.6%).

Market conditions

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries during the fourth quarter was 103 (109) terawatt-hours (TWh). The decrease was mostly due to mild weather, but also to lower industrial demand. In January–December, electricity consumption in the Nordic countries was 386 (391) TWh.

At the beginning of the year, the Nordic water reservoirs were at 85 TWh, i.e. 2 TWh above the long-term average. By the beginning of the fourth quarter, the reservoirs were up at 91 TWh, i.e. 10 TWh below the long-term average and 18 TWh below the corresponding level in 2012. At the end of the quarter, the reservoirs were at 82 TWh, which is 1 TWh below the long-term average and 3 TWh below the corresponding level in 2012. Heavy precipitation, mild weather and moderate consumption led to rapid normalisation of reservoirs. 

In the fourth quarter of 2013, the average system spot price of electricity in Nord Pool was EUR 35.9 (37.3) per megawatt-hour (MWh). Prices declined towards the end of the quarter. The average area price in Finland was EUR 39.9 (40.8) per MWh and in Sweden (SE3) 37.5 (37.5) per MWh. There was wide variation in area prices due to high precipitation and, consequently, high hydropower generation in Norway. Exports from Finland to Estonia increased after the Estlink-2 interconnector was commissioned on 6 December.

In January–December 2013, the average system spot price was EUR 38.1 (31.2) per MWh. In Finland, the average area price was EUR 41.2 (36.6) per MWh and in Sweden (SE3) EUR 39.4 (32.3) per MWh.

In Germany, the average spot price during the fourth quarter of 2013 was EUR 37.5 (41.4) per MWh and during January–December 2013 EUR 37.8 (42.6) per MWh.

The market price of CO2 emission allowances (EUA) dropped from approximately EUR 6.6 per tonne at the beginning of the year to approximately EUR 5.0 per tonne at the beginning of the fourth quarter, to which it also returned by the quarter-end. During January–December, EUA traded between EUR 2.8 and EUR 6.7 per tonne.

Russia

Fortum operates in the Urals and Western Siberia. Both in the Tyumen and Khanty-Mansiysk area, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area, which is dominated by the metal industry, electricity demand declined somewhat in the fourth quarter as well as for the full year 2013 compared to the same periods of the previous year.

According to preliminary statistics, Russia consumed 273 (284) TWh of electricity during the fourth quarter of 2013. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 207 (209) TWh.

In January-December 2013, Russia consumed 1,026 (1,037) TWh of electricity. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 767 (769) TWh.

In the fourth quarter of 2013, the average electricity spot price, excluding capacity price, increased by 10% to RUB (Russian rouble) 1,136 (1,037) per MWh in the First price zone.

In January-December 2013, the average electricity spot price, excluding capacity price, increased by 10% to RUB 1,104 (1,001) 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 62).

European business environment and carbon market

In January 2014, the European Commission published its proposal for the EU’s climate and energy policy for 2020-2030. As a part of the proposal the Commission proposed an emissions reduction target of 40% by 2030 which is in line with the political target to reduce emissions by 80.95% by 2050. It is positive that in the 2030 framework the main focus is now more clearly on reducing greenhouse gases. In addition, a new stability mechanism for the emission trading was proposed.

Contrary to the current policy, only an EU-level target is proposed for renewable energy. Fortum considers this as a step in the right direction, although this EU-level target is binding and therefore creates some overlapping with the greenhouse gas emissions reduction target.

Fortum's view is that a energy and climate framework based on one single binding target for CO2 and a non-binding target for renewables in 2030 would be a more cost-efficient solution to tackle climate change without compromising Europe's industrial competitiveness.

Fortum supports a technology-neutral approach both regarding climate policy and renewable energy, and the target for renewable energy (RES) should concentrate on promotion of research and development, innovations and demonstration, not on production. It is also important to integrate renewable electricity fully into the electricity market, as its amount and share will grow in the future. Increasing the share of renewable energy in the EU energy mix is a positive and desired development.

The EU carbon market was characterised by a significant surplus of allowances and therefore a low market price in 2013. The revision of the European emissions trading scheme (EU ETS) was lively debated throughout the whole year. After a lengthy process, in late 2013 and early 2014, the amendment of the emissions trading directive and changes to the auctioning regulation enabling the backloading of allowances from 2014-2016 to 2019-2020 were approved. The backloading concerns a total of 900 million allowances, is not expected to substantially increase the price. Backloading is expected to be implemented during the first half of 2014 and is the first step in the revision of the ETS. This revision aims at restoring confidence in the system and giving a price signal that encourages investments in low-carbon production methods.

The Commission released a proposal on the structural reform of the European Trading system (ETS) in January 2014. The proposal includes a market stability reserve, where the supply-demand balance is automatically managed by pre-defined rules from 2021 onwards. The proposal will be processed further by the new Commission and the Parliament.

Events after the balance sheet date

In February, Fortum announced that it will renew its business structure as of 1 March 2014. The target of the reorganisation is to strengthen Fortum's capability to execute the company's strategy in the fast developing operating environment. Fortum will report its 2014 first quarter financial results according to the new structure.

The new structure will consist of four reporting segments and staff functions. The four segments are Heat, Electricity Sales and Solutions, Power and Technology , Russia and Distribution. The staff functions Finance, Strategy, Mergers and Acquisitions, Legal, Human Resources and IT, Communications and Corporate Relations.

Matti Ruotsala is appointed Chief Operating Officer (COO) and will act as deputy to the CEO. Fortum's new CFO will be Timo Karttinen, who also will head the Distribution Division. Markus Rauramo will continue in a new role as Executive Vice President, Heat, Electricity Sales and Solutions, Per Langer as Executive Vice President, Hydro Power and Technology and Alexander Chuvaev as Executive Vice President, Russia.

New Executive Management members are Tiina Tuomela,  Executive Vice President, Nuclear and Thermal Power; Kari Kautinen, Senior Vice President, Strategy, Mergers and Acquisitions and Esa Hyvärinen, Senior Vice President, Corporate Relations.

Outlook

Key drivers and risks

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

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 the Russian business, the key factors are 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 will continue to gain a higher share of the total energy consumption. Fortum continues to expect the annual growth rate in electricity consumption to be in 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 increases market coupling between the Nordic and Baltic countries.

During the fourth quarter of 2013, the price of oil improved, 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 January 2014, the future quotation for coal (ICE Rotterdam) for the rest of 2014 was around USD 81 per tonne, and the price for CO2 for 2014 was about EUR 6 per tonne.

In late January 2014, the electricity forward price in Nord Pool for the rest of 2014 was around EUR 32 per MWh. For 2015 the price was around EUR 33 per MWh, and for 2016 around EUR 33 per MWh. In Germany, the electricity forward price for the rest of 2014 was around EUR 36 per MWh and for 2015 EUR 37 per MWh.

In late January 2014, Nordic water reservoirs were about 1 TWh above the long-term average and 1 TWh above the corresponding level of 2013.

Power

The Power Division'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 Division’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 Division will be affected by the possible thermal power generation volumes and its profits.

The on-going 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.

Capacity not under CSA competes in the competitive capacity selection (CCS – “old capacity”). The capacity selection for 2014 was held in September 2013. In the selection auction, the majority of Fortum’s power plants were 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 installed capacity. All of Fortum’s capacity was allowed to participate in the selection for 2014.

The Russia Division's new capacity will be a key driver for earnings growth in Russia as it will bring income from new volumes sold and also receive considerably higher capacity payments than the old capacity. However, the received capacity payment will differ depending on 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. 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. CSA payments can vary somewhat annually because they are linked to Russian Government long-term bonds with 8 to 10 years maturity.

Fortum estimates that the commissioning of the Nyagan unit 3 will be finalised at the end of 2014. The capacity payments for Nyagan unit 3 will start as of 1 January 2015, one year earlier than originally planned in 2008. In accordance with the CSA terms, no penalties for unit 3 can start to run before 1 January 2016.

The last two units of Fortum's Russian investment programme under construction are being built in Chelyabinsk instead of Tyumen, as originally planned. The units constructed at the Chelyabinsk GRES power plant, originally planned to be commissioned by the end of 2014, have been slightly delayed and are scheduled to be finalised during the first half of 2015 mainly due to extensive groundwork at the brownfield site. The delay will not cause any penalties. In addition, Fortum plans to modernise and upgrade the existing equipment of the power plant.

The value of the remaining part of the investment programme, calculated at the exchange rates prevailing at the end of December 2013, is estimated to be approximately EUR 0.5 billion, as of January 2014.

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 Division during 2015 and to create positive economic added value in Russia. The Russian Government’s earlier target to increase gas prices by 15% annually to reach netback price parity with European prices by 2018 has recently been changed. The forecast by the Russian Ministry of Economic Development now suggests much lower annual increases. The Russia Division’s profits are impacted by possible changes in gas prices, currency exchange rates and other regulations. The suggested gas price development and the weaker Russian rouble make the approximately EUR 500 million operating profit level (EBIT) goal more challenging for the Division, but the company is making every effort to mitigate the negative impacts. 

In 2013, the Ministry of Energy stated that a 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 to attract investments into the heat sector. The new regulation concept is at an early stage and expected to be further developed during 2014. 

Since the beginning of 2013, wholesale gas prices (except for private household and industrial consumers) have been reviewed quarterly. In February 2013, the Board of Russia's Federal Tariff Service (FTS) adopted a decision according to which the wholesale gas price for industrial consumers decreased by 3% as of the second quarter 2013, compared to first quarter. As of 1 July 2013, the Russian Government increased gas prices by 15% compared to June 2013, and in October 2013 they were further increased by 1.9% in order to reach the planned total increase of approximately 15% in 2013 compared to 2012. 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

Fortum has disclosed that it has completed the assessment of the future alternatives of its
electricity distribution business; the assessment was launched in January 2013. As a result, Fortum is evaluating the possible divestment opportunities country by country.

Fortum's electricity distribution business in Finland is to be sold to Suomi Power Networks Oy. The divestment process is expected to be finalised during the first quarter of 2014 subject to the necessary regulatory approvals as well as customary closing conditions. The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum expects to book a one-time sales gain of EUR 1.8-1.9 billion, corresponding to approximately EUR 2.00 per share in its Electricity Distribution and Sales Division's first quarter 2014 results. A total of 340 employees will transfer with the business at closing (Note 6).

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 is expected to come during the first quarter of 2014.

Capital expenditure and divestments

Fortum currently expects its capital expenditure, excluding Värme, in 2014, to be approximately EUR 0.9-1.1 billion, excluding potential acquisitions (including the Finnish distribution business until the end of 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. In Sweden, the corporate tax rate was decreased from 26.3% to 22% as of 1 January 2013.

The Finnish Parliament approved the power plant tax (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 December 2013, approximately 60% of the Power Division's estimated Nordic power sales volume was hedged at approximately EUR 43 per MWh for the calendar year 2014. The corresponding figures for the calendar year 2015 were approximately 20% at approximately EUR 41 per MWh.

The hedge price for the Power Division'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 division’s imports from Russia.

The reported hedge ratios may vary significantly, depending on Fortum's actions on the electricity derivatives markets. Hedges are mainly financial contracts, most of them Nord Pool forwards.

Dividend distribution proposal

Fortum Oyj's distributable funds as on 31 December 2013 amounted to EUR 4,151,029,137.59 including the profit of the period of EUR 477,747,032.48. 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 2013, totalling EUR 977,203,749.50 when calculated based on the number of registered shares as of 3 February 2014. The Board of Directors proposes that the remaining part of the profit be retained in the shareholders’ equity. The dividend is proposed to be paid on 22 April 2014.

Annual General Meeting 2014

Fortum Corporation’s Annual General Meeting is planned to take place at 14:00 on Tuesday, 8 April 2014, at the Finlandia Hall, Mannerheimintie 13, in Helsinki, Finland.

Espoo, 3 February 2014
Fortum Corporation
Board of Directors

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

Fortum’s Investor Relations, Sophie Jolly, tel. +358 10 453 2552, Rauno Tiihonen, tel. +358 10 453 6150, Janna Haahtela, tel. +358 10 453 2538 and investors@fortum.com

The Board of Directors has approved Fortum's 2013 financial statements and Fortum's auditors have issued their unqualified audit report for 2013 on 3 February 2014. The condensed interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the EU.

Publication of financial results in 2014:
• Interim Report January-March on 29 April 2014 at approximately 9.00 EEST
• 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

Fortum’s Financial statements and Operating and financial review for 2013 will be published during week 12 at the latest.

Fortum's Annual General Meeting is planned to take place on 8 April 2014 and the possible dividend-related dates planned for 2014 are:
Ex-dividend date 9 April 2014
Record date for dividend payment 11 April 2014
Dividend payment date 22 April 2014

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.