Strong results close a challenging year – Dividend proposal EUR 1.10 per share, and in addition extra dividend EUR 0.20 per share for 2014

FORTUM CORPORATION'S FINANCIAL STATEMENTS BULLETIN 4 February 2015 at 9.00 EET

October−December 2014
• Comparable operating profit EUR 436 (423) million, +3%
• Operating profit EUR 650 (507) million, of which EUR 213 (83) million relates to items affecting comparability and sales gains; mainly from the divestment of Gasum shares
• Earnings per share EUR 0.64 (0.52), +23%, of which EUR 0.25 (0.07) per share relates to items affecting comparability and sales gains; mainly from the divestment  of Gasum shares
• Cash flow from operating activities totalled EUR 452 (398) million, +14%
• Efficiency programme 2013-2014 successfully finalised
• Fortum announced its plans to increase its hydro portfolio by 60% through the restructuring of its Russian TGC-1 ownership. Subject to successful restructuring of TGC-1, Fortum is ready to take a minority stake in the Finnish Fennovoima nuclear project

January−December 2014
• Comparable operating profit EUR 1,351 (1,403) million, -4%
• Operating profit EUR 3,428 (1,508) million, of which EUR 2,077 (106) million relates to items affecting comparability, i.e. mainly to the divestment of the electricity distribution business in Finland
• Earnings per share EUR 3.55 (1.36), +161%, of which EUR 2.36 (0.10) per share relates to items affecting comparability. The main effect relates to the divestment of the Finnish electricity distribution business, totalling EUR 2.08 per share
• Efficiency programme 2013-2014 successfully finalised
• Divestments of the Finnish and Norwegian electricity distribution businesses finalised
• Cash flow from operating activities totalled EUR 1,762 (1,548) million, +14%
• Fortum’s Board proposes a dividend of EUR 1.10 per share, and in addition extra dividend of EUR 0.20 per share

*) Comparative period figures for 2013 presented in the financial statements bulletin are restated due to an accounting change for Fortum Värme and segment reporting changes (Notes 2 and 4).

Summary of outlook
• Fortum continues to expect the annual electricity demand to grow in the Nordic countries on average approximately 0.5% in the coming years
• Power and Technology Segment's Nordic generation hedges: for the 2015 calendar year, approx. 50% hedged at EUR 40 per MWh; and for 2016, approx. 10% hedged at EUR 39 per MWh
• The run-rate operating profit (EBIT) target for the Russia Segment, RUB 18.2 billion, is expected to be reached during 2015. The euro-denominated result level will be volatile, mainly due to the translation effect

Fortum’s President and CEO Tapio Kuula (till 31 January 2015)

2014 was a challenging year for Fortum. Power prices and global macro economic performance as well as the rouble weakness were obviously disappointing. In addition, the decline in commodity prices during the fourth quarter was unforeseen. Though commodity prices declined during the year, power prices declined less, one reason being the positive development of CO2 emission allowances market price.

Fortum’s internal transformation continued to further increase our efficiency and flexibility. Fortum was able to reach a strong result largely due to its successful execution of both the efficiency programme and divestments according to plan. Fortum’s 2014 results were good in a market dominated by negative drivers: low spot prices, a very weak rouble and warm weather. In the Nordic countries, electricity demand declined only somewhat, and demand in Russia was at the same level as in 2013. Comparable operating profit was EUR 1,351 million and cash flow was strong at EUR 1,762 million in 2014.

In Russia, Fortum finalised the third unit of the Nyagan power plant; the most extensive part of the investment programme is now complete. The run-rate operating profit (EBIT) target for the Russia Segment, RUB 18.2 billion, is to be reached during 2015, while the euro-denominated result level will be volatile, mainly due to the translation effect.

In March 2014, we broadened the management team as the divestment of the electricity distribution business strategically put the company in a new position; major divestment and investment programmes are still ongoing; and the company is reorganising and preparing for the changing European power markets in order to capture growth. This means that we need a wide range of competences covering strategy, M&A and corporate relations in the management team. In addition, after successfully finalising our 2013-2014 efficiency programme, we see that there is internal improvement potential to be reached.

With the restructured management team, we are able to further improve our performance and efficiency, unlock further synergies between various businesses and staff functions, and scrutinise our investment programmes in a way that gives the best returns in line with our strategy. 

Preparations for future growth are starting to take shape. The Finnish and Norwegian electricity distribution businesses were divested during 2014, and the divestment of the Swedish electricity distribution business is being prepared and evaluated. Furthermore, we announced in December that we aim to increase our hydro portfolio by 60% through the restructuring of TGC-1, Territorial Generating Company, in Russia. Provided that we obtain more than 75% ownership in TGC-1 hydro assets, we would also be ready to participate with a minority stake (max. 15%) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies currently participating in the project.

Increasing the share of hydropower is in line with our mission and strategy: We are committed to create energy that improves life for current and future generations. Therefore, we want to take a responsible approach not only short term but also long term. Through sustainable solutions and operations, we aim to deliver excellent value to our shareholders. This approach gives us a unique opportunity to be even more competitive. We believe that sustainable operations lead to good financial results, and give us a solid platform to increase shareholder value.

Fortum’s strategy is based on CO2-free production: hydro, nuclear and CHP being our core competencies. In order to grow in these areas, we strive to create added value through restructuring and acquisitions.

In addition to CO2-free production, we also consider the retail business important, and are committed to growth also in this area.

In order to continue to build on our strong Nordic core, an integrated European-wide market is a key priority – in hydro, in nuclear and in CHP. Creating a solid earnings base and growth in Russia continues to be equally important. 

We also aim to build a platform for future growth. Solar technology offers a clearly interesting and sustainable, CO2-free production form; we are currently researching and developing our solar technology competencies in India. In addition, we are, for example, studying and developing pyrolysis in Finland.

Even though the wholesale market prices for electricity have continued to decrease, various taxes, fees and subsidies are increasing end-consumers' energy costs. An predictable electricity market built on consumer participation and the utilisation of all the different energy value components as well as different producers is vital. The setup should be market-driven, commercial, predictable and harmonised in as big a geographical area as possible, and it should have enough physical transmission capacity as well as good cooperation between transmission system operators, grid companies, power exchanges etc. Giving environmental consequences the right price through CO2 would create an energy market that provides security of supply, competitiveness and environmental sustainability.

The key criteria and parameters for the European power market in the future are complex. Instead of promoting any single technology solution or innovation, it is most important to have a well-functioning, competitive market that gives producers and consumers access to competitive energy solutions.

The supply and demand balance is very critical on the power market. It is important to realise that there are different values associated with electricity, values like energy, capacity and how different production types contribute to peak capacity. The supply-demand balance requires the ability to respond; obviously, hydropower is excellent for this. For this reason flexible hydro is very attractive for Fortum.

There are many important market developments ongoing in the EU. A market stability reserve (EU MSR) is under discussion and preparation, but it will take some time before it can be implemented. The capacity remuneration mechanism is also under discussion; if and when that mechanism were implemented, it is important that it would be a technology-neutral, cross-border mechanism and that it would include both old and new assets. In addition, the CO2 reduction target for 2030 was accepted as 40%. This is the framework Fortum is actively working for in Europe, Brussels, and with key decision makers. 

Another big issue – in addition to the energy market development and the energy market model – is climate change. Unfortunately, it seems that we are clearly headed towards a global warming of more than 2 degrees Celsius. Some indicators show that we are actually heading towards a three to four-degree Celsius increase. The situation is hence extremely serious and will be much more so in ten years. We at Fortum have taken environmental issues and sustainability very seriously for several years. We are committed to climate change mitigation and give it a high priority on the company agenda.

Fortum is already in a very strong competitive position – whether measured by CO2-free production, competencies, portfolio, asset flexibility, cost structure, sustainability or safety.  We have a solid view on how to develop the company – both in terms of the near future and long-term sustainability – in order to achieve value creation, improving earnings per share growth, and, through that, a continued good platform for stable, sustainable and over time increasing dividends.

As of 1 February 2015, I have been on disability pension, and Fortum's Board of Directors has started the search process for a new CEO, covering both internal and external candidates. In the meanwhile, Timo Karttinen, CFO of Fortum, will also act as interim President and CEO. He has the support of a very well-functioning management team. It is of course sad to leave my CEO responsibilities in this interesting stage of Fortum's development, but if I get chosen to Fortum's Board of Directors, I will continue to work for the company and contribute to its success in this new role.

I would like express my gratitude to all Fortum employees for their engagement, hard work and cooperation during a year filled with challenges and changes. I have enjoyed our cooperation very much. Thank you!

Restructuring according to strategy in Russia

In December, Fortum and Gazprom Energoholding signed a protocol to start a restructuring process of their ownership of TGC-1, a Territorial Generating Company in Russia. TGC-1 owns and operates hydro and thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg. Currently, Gazprom Energoholding owns 51.8% of the TGC-1 shares and Fortum 29.5%.

As part of the restructuring, Fortum will establish a company together with Rosatom to own the hydro assets of TGC-1, while Gazprom Energoholding will continue with the heat and thermal power businesses of TGC-1. By utilising our present stake in TGC-1, Fortum would obtain a more than 75% ownership in the hydro power company. Rosatom would have a less than 25% minority holding in the hydro power company. The company would be consolidated to Fortum Group as a subsidiary.

Provided that Fortum obtains a more than 75% ownership in TGC-1 hydro assets, Fortum would be ready to participate with a minority stake (max. 15%) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies currently participating in the project.

Efficiency programme 2013-2014

The efficiency programme was successfully finished during the fourth quarter of 2014.

Fortum started the 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 was 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.

Assessment of the electricity distribution business

The decision to start a strategic assessment of future alternatives for Fortum’s electricity distribution business was made in 2013.

In March 2014, Fortum completed the divestment of its Finnish electricity distribution business. In May, Fortum finalised its sale of the Norwegian electricity distribution business. The sales gains from the both transactions were booked in Fortum's Distribution Segment in the first and second quarter of 2014, respectively (Note 6).

Fortum is continuing to prepare and evaluate possibilities to divest its distribution business in Sweden.

Restatement related to IFRS changes and the new reporting structure

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

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

In addition, as of 2014, presented figures have been rounded and consequently the sum of individual figures may deviate from the sum presented.

Financial results

October–December 2014

In the fourth quarter of 2014, Group sales were EUR 1,285 (1,390) million. Comparable operating profit totalled EUR 436 (423) million and the reported operating profit totalled EUR 650 (507) million. Fortum's operating profit for the period was affected by non-recurring items. Sales gains as well as an IFRS accounting treatment (IAS 39) of derivatives, mainly used for hedging Fortum's power production, and nuclear fund adjustments amounted to EUR 213 (83) million (Note 4).

Sales by segment 

Comparable operating profit by segment

Operating profit by segment

January−December 2014

In 2014, Group sales were EUR 4,751 (5,309) million. Comparable operating profit totalled EUR 1,351 (1,403) million, and the reported operating profit totalled EUR 3,428 (1,508) million. Fortum's operating profit for the period was affected by non-recurring items, mainly the divestment 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 2,077 (106) million (Note 4).

The share of profit from associates was EUR 149 (178) million, of which Fortum Värme represents EUR 67 (73) million. The share of profit from Hafslund and TGC-1 are based on the companies' published third-quarter 2014 interim reports (Note 12).

The Group’s net financial expenses were EUR 217 (289) million. Net financial expenses include changes in the fair value of financial instruments of EUR -5 (-16) million.

Profit before taxes was EUR 3,360 (1,398) million.

Taxes for the period totalled EUR 199 (186) million. The tax rate according to the income statement was 5.9% (13.3%). In Finland, the corporate tax rate was decreased from 24.5% to 20.0% starting 1 January 2014; the decrease impacted approximately EUR 0.09 per share the fourth quarter of 2013. In 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 18.8% (22.7%).

The profit for the period was EUR 3,161 (1,212) million. Fortum's earnings per share were EUR 3.55 (1.36), of which EUR 2.36 (0.10) per share relates to items affecting comparability. The earnings per share impact from the divestment of the Finnish electricity distribution business was EUR 2.08 per share (Note 6).

Financial position and cash flow

Cash flow

In 2014, total net cash from operating activities increased by EUR 214 million to EUR 1,762 (1,548) million, mainly due to the EUR 300 million positive impact of realised foreign exchange differences, which were offset by changes in working capital EUR -125 million. Realised foreign exchange gains and losses of EUR 352 (52) million were related to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries. Capital expenditures decreased by EUR 236 million to EUR 768 (1,004) million. Proceeds from divestments of shares totalled EUR 3,062 (122) million, mainly from the divestment of the Finnish distribution business and Gasum shares (Note 6). Proceeds from interest-bearing receivables included EUR 534 million paid by Fortum Värme. Total net cash used in investing activities was positive EUR 2,816 (-944) million. Cash flow before financing activities, i.e. financing, increased by EUR 3,974 million to EUR 4,578 (604) million.

The proceeds were partially used to pay dividends totalling EUR 977 million in April 2014 as well as payments of interest-bearing debt amounting to EUR 2,079 million. Liquid funds at year-end 2014 were EUR 2,766 (1,265) million.

Assets and capital employed

Total assets decreased by EUR 1,973 million to EUR 21,375 (23,348) million, which includes the decrease of non-current assets, EUR 2,412 million. Translation differences decreased intangible assets, property, plant and equipment as well as participation in associates and joint ventures by EUR 2,015 million and divestments by EUR 433 million.

Assets of the Finnish distribution business, amounting to EUR 1,173 million, were presented as Assets held for sale at the end of 2013. Liquid funds increased by EUR 1,501 million.

Capital employed was EUR 17,918 (19,183) million, a decrease of EUR 1,265 million.

Equity

Total equity was EUR 10,935 (10,124) million, of which equity attributable to owners of the parent company totalled EUR 10,864 (10,024) million. The increase in equity attributable to owners of the parent company totalled EUR 840 million and was mainly from the net profit of EUR 3,154 million for the period, offset by translation differences of EUR -1,320 million and paid dividends of EUR 977 million.

Financing

Net debt decreased during 2014 by EUR 3,576 million to EUR 4,217 (7,793) million. Net debt without Värme financing was EUR 3,664 million (6,658).

At the end of December 2014, the Group’s liquid funds totalled EUR 2,766 (1,265) million. Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 134 (113) 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 in 2014 were EUR 217 (289) million. Net financial expenses include changes in the fair value of financial instruments of EUR -5 (-16) million.

Fortum Corporation's long-term credit rating with both S&P and Fitch remained unchanged during 2014 and is A- (negative outlook).

Key figures

At year-end 2014, net debt to EBITDA was 1.1 (3.7) and comparable net debt to EBITDA 2.3 (3.9). Fortum is currently financing Fortum Värme, and these loans, EUR 553 (1,135) million, are presented as interest-bearing loan receivables in Fortum’s balance sheet. However, the aim is to refinance the loans during 2015. If these loans are deducted from the net debt, the last-twelve-months comparable net debt to EBITDA is 2.0 (3.4).

Gearing was 39% (77%) and the equity-to-assets ratio 51% (43%). Equity per share was EUR 12.23 (11.28). Return on capital employed totalled 19.5% (9.0%) and return on shareholders’ equity 30.0% (12.0%). Both return on capital employed and return on equity were positively affected by the capital gain from the divestment of the Finnish electricity distribution business as well as the divestment of the Norwegian electricity distribution and heat businesses.

Market conditions

Nordic countries

According to preliminary statistics, electricity consumption in the Nordic countries was 104 (103) terawatt-hours (TWh) during the fourth quarter of 2014. In 2014, according to preliminary statistics, electricity consumption in the Nordic countries was 378 (386) TWh. Industrial consumption was nearly unchanged, while non-industrial consumption decreased due to the exceptionally warm weather particularly during the first half of the year.

At the beginning of 2014, the Nordic water reservoirs were at 82 TWh, 1 TWh below the long-term average and 3 TWh lower than a year earlier. By the beginning of the fourth quarter, the reservoirs were 10 TWh below the long-term average, which corresponded to the level a year earlier. The year 2014 ended with reservoirs at 80 TWh, 3 TWh below the long-term average and 2 TWh below the level at the end of 2013. Precipitation during the fourth quarter was below the long-term average and well below the level the year before.
 
In the fourth quarter of 2014, the average system spot price of electricity in Nord Pool was EUR 30.7 (35.9) per megawatt-hour (MWh). The decline was driven by decreased cost of coal condense, which typically is the benchmark price in the Nordic market. Prices were also affected by high wind power generation volumes. The intense precipitation early in the quarter caused price volatility. High net exports continued, but imports from Russia increased. The average area price in Finland was EUR 36.4 (39.9) per MWh and in Sweden SE3 (Stockholm) EUR 31.3 (37.5) per MWh. The difference in area prices compared to the spot price was mainly due to the fact that Finland continued exporting power to Estonia, while high Swedish hydropower volumes and good availability of the Swedish nuclear power plants kept Swedish area prices close to the system level. 

In 2014, the average system spot price was EUR 29.6 (38.1) per MWh. In Finland, the average area price was EUR 36.0 (41.2) per MWh and in Sweden SE3 (Stockholm) EUR 31.6 (39.4) per MWh.

In Germany, the average spot price during the fourth quarter of 2014 was EUR 34.8 (37.5) per MWh and in 2014 EUR 32.8 (37.8) per MWh.

The market price of CO2 emission allowances (EUA) was at approximately EUR 4.8 per tonne at the beginning of the year and approximately EUR 7.3 per tonne by the end of December 2014. In 2014, the EUA daily close ranged between EUR 4.4 and EUR 7.5 per tonne.

Russia

Fortum operates in the Urals and Western Siberia 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.

According to preliminary statistics, Russia consumed 282 (274) TWh of electricity during the fourth quarter of 2014. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 214 (209) TWh. In 2014, Russia consumed 1,021 (1,026) TWh of electricity. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 777 (772) TWh.

In the fourth quarter of 2014, the average electricity spot price, excluding capacity price, decreased by 1% to RUB (Russian rouble) 1,120 (1,136) per MWh in the First price zone. In 2014, the average electricity spot price, excluding capacity price, increased by 5% to RUB 1,163 (1,104) 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 59).

European business environment and carbon market

EU 2030 climate and energy policy framework
The European Council agreed in October 2014 on the following energy and climate targets for 2030: at least 40% cut in domestic greenhouse gas emissions, at least 27% share of renewable energy as an EU-level binding target, and at least 27% improvement in energy efficiency as an EU-level indicative target.

An additional target for electricity transmission infrastructure investment was included in the framework. The EU Commission will prepare legislative proposals to implement the agreed 2030 framework during 2015-2016.

Fortum considers the framework as a good foundation, and it should enforce the role of emissions trading as the main instrument for emissions reduction.

EU's emissions trading scheme (ETS) reform
The Commission launched a stakeholder consultation on revision of the Emissions Trading Directive in December 2014. A decision on the market stability reserve (MSR) of the EU ETS is expected during the first half of 2015.

EU power market development
The Commission has indicated that it is in the process of developing a reference target model for capacity remuneration mechanisms (CRM). The first preliminary proposals are expected from the Commission during the first half of 2015. Countries choosing to implement CRMs should follow these principles. This would be important in terms of avoiding fragmentation in the internal electricity market.

However, a common EU-wide, competitive and strongly networked internal energy market, where also renewable energy is developed on a market basis, would not just improve competitiveness and mitigate environmental impacts, it would also improve the EU’s internal energy availability and security of supply.

EU Commission work programme
In December 2014, the newly nominated EU Commission published its strategic work programme for 2015. The first major initiative will be a Communication on the EU Energy Union in late February 2015. Among other issues, it should explain in more concrete terms how the Commission aims to tackle security of supply challenges.

In Sweden an agreement between the government and the opposition
In order to avoid a new election, the new government alliance reached an agreement with the former government. The “December Agreement” is valid until 2022 and will establish a new praxis enabling minority governments to get state budgets through the Parliament. The agreement also covers cooperation in three areas: energy, pensions and military defence.

Finnish nuclear decisions
In September 2014, the government issued a positive decision-in-principle (DIP) for the Fennovoima nuclear power plant. In the DIP, the government set an important precondition according to which Fennovoima has to have a domestic ownership (i.e. EU/EEA) of at least 60% at the time of submitting the construction license.

Ukraine crisis and EU sanctions
As a consequence of the situation in Ukraine, an amended list of EU restrictive measures against Russia entered into force during the autumn; the gas industry and nuclear energy were not included.

Lima climate conference
The United Nation's climate conference (COP20) in Lima, Peru, in December, made modest progress in international climate negotiations. The meeting agreed on the scope and format of the pledges, which countries will present during the first quarter of 2015, and compiled the elements of the Paris Agreement. The outcome, called Lima Call for Climate Action, also includes some references to carbon pricing and markets. In order to speed up the deployment of low-carbon solutions, market mechanisms and carbon pricing should be at the core of the future agreement.

Events after the balance sheet date

On 22 January 2015, it was announced that Tapio Kuula, President and CEO of Fortum Corporation, will go on a disability pension starting 1 February 2015. Tapio Kuula has been the President and CEO of Fortum Corporation since 2009. Fortum's Board has started the search process for a new CEO covering internal and external candidates. In the meanwhile Timo Karttinen, CFO of Fortum will also act as interim President and CEO.

On 22 January, Fortum's Nomination Board proposed to the Annual General Meeting that the Board consists of eight (8) members and that the following persons be elected to the Board of Directors for a term ending at the end of the Annual General Meeting 2016. To be re-elected: Ms Sari Baldauf as Chairman, Mr Kim Ignatius as Deputy Chairman, and as members; Ms Minoo Akhtarzand, Mr Heinz-Werner Binzel, Mr Petteri Taalas and Mr Jyrki Talvitie. To be elected as new board members; Ms Eva Hamilton and Mr Tapio Kuula.
 
In addition, the Shareholders' Nomination Board will propose that the annual fees paid for the term to be as follows: Chairman: EUR 90,000, Deputy Chairman: EUR 65,000, and members: EUR 45,000. The Chairman of the Audit and Risk Committee, if he/she is not simultaneously acting as Chairman or Deputy Chairman of the Board: EUR 65,000/year.

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 Fortum's Russian business, the key factors are economic growth, the 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 Russian rouble (RUB) and Swedish krona (SEK). 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 approximately 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.

During January-December 2014, the price of European Union emissions allowances (EUA) appreciated, whereas the oil and coal prices declined. The price of electricity for the upcoming twelve months declined in the Nordic area as well as in Germany.

In late January 2015, the future quotation for coal (ICE Rotterdam) for the rest of 2015 was around USD 58 per tonne, and the price for CO2 emission allowances for 2015 was about EUR 7 per tonne. The electricity forward price in Nord Pool for the rest of 2015 was around EUR 28 per MWh and for 2016 around EUR 29 per MWh. In Germany, the electricity forward price for the rest of 2015 EUR was around 32 per MWh and for 2016 around EUR 32 per MWh. Nordic water reservoirs were about  1 TWh below the long-term average and 1 TWh below the corresponding level of 2014.

Restructuring according to strategy in Russia

In December, Fortum and Gazprom Energoholding signed a protocol to start a restructuring process of their ownership of TGC-1, a Territorial Generating Company in Russia. TGC-1 owns and operates hydro and thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg. Currently, Gazprom Energoholding owns 51.8% of the TGC-1 shares and Fortum 29.5%.

As part of the restructuring, Fortum will establish a company together with Rosatom to own the hydro assets of TGC-1, while Gazprom Energoholding continues with the heat and thermal power businesses of TGC-1. By utilising its present stake in TGC-1, Fortum would obtain a more than 75 -per cent ownership in the hydro power company. Rosatom would have a less than 25% minority holding in the hydro power company. The company would be consolidated to Fortum Group as a subsidiary.

Provided that Fortum obtains a more than 75% ownership in TGC-1 hydro assets, Fortum would be ready to participate with a minority stake (max. 15%) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies currently participating in the project.

Power and Technology

The Power and Technology Segments Nordic power price typically depends on factors such as hedge ratios, hedge prices, spot prices, availability and utilisation of Fortum's flexible production portfolio, and currency fluctuations. Excluding the potential effects from changes in the power generation mix, a 1 EUR/MWh change in the 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 Technology Segment 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 long term 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.

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

In 2014, the Swedish Government decided to increase the nuclear waste fund fee from approximately 0.022 to approximately 0.04 SEK/kWh for the period 2015 to 2017. The estimated impact on Fortum would be approximately EUR 25 million annually. The process to review the Swedish nuclear waste fees is done in a three-year cycle.

The previously announced Swedish Government state budget proposal to increase the tax on the installed effect in nuclear power plants by 17% is currently on hold.

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 has been under discussion in the Russian Government; however, no official decisions have yet been made.

The capacity selection for generation built prior to 2008 (CCS – “old capacity”) for 2015 was held in September 2014. All of Fortum’s capacity was allowed to participate in the selection for 2015, and the majority of Fortum’s plants were also selected. The volume of Fortum’s installed capacity not selected in the auction totalled 195 MW (approximately 3.7% of Fortum’s total old capacity in Russia) for which Fortum plans to obtain forced mode status.

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 to also receive considerably higher capacity payments than the old capacity. The received capacity payment will differ depending on the age, location, size and type of the plants as well as on 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 December 2014, is estimated to be approximately EUR 0.2 billion, as of December 2014.

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

At the time of the acquisition of the Russian subsidiary OAO Fortum in 2008, the EUR 500 million run-rate level in operating profit (EBIT) target set to be reached during 2015 in the Russia Segment corresponded to approximately RUB 18.2 billion at the then prevailing euro-rouble exchange rates. As earlier communicated, the segment’s profits are mainly impacted by changes in currency exchange rates as well as power demand, gas prices and other regulatory development. Fortum is keeping its rouble-denominated target intact, but, mainly due to the translation effect, the euro-denominated result level will be volatile. The income statements of non-euro subsidiaries are translated into the Group reporting currency using the average exchange rates. Currently, the unfavourable exchange balance converts into a lower profit level in euros. However, every effort to mitigate the negative impacts is continuously being made.

In 2014, the Ministry of Energy proposed a new heat market model (for public discussion), which is supposed to ensure a transition to economically justified heat tariffs by 2020 and attract investments into the heat sector. In September 2014, the heat market reform roadmap was approved by the Russian Government; according to the roadmap, the reform shall give heat market liberalisation by 2020 or, in some specific areas, by 2023.

As forecasted by the Russian Ministry of Economic Development, Russian gas price indexation did not take place in October 2014. However, year-on-year gas price growth is estimated to be 3.5% in 2015.

Distribution

Fortum continues to prepare and evaluate for a possible sale of the Swedish electricity distribution business.

In Sweden, legal processes are under way concerning the appeal filed regarding the network income regulatory period 2012-2015. The Administrative Court in Sweden ruled in favour of the network companies in November 2013. The Energy Market Inspectorate decided to appeal the decision to the next final-law court, the Supreme Administrative Court, which still needs to decide on granting a leave to appeal.

The work to define the Swedish network income regulation model for the next regulatory period 2016-2019 is ongoing. In September 2014, the Swedish Government made a decision regarding the capital base ordinance; however, the details will be decided by the Energy Market Inspectorate. Decisions are expected to be made during the spring 2015.

Capital expenditure and divestments

Fortum currently expects its capital expenditure in 2015 to be approximately EUR 0.9 billion, excluding potential acquisitions (including Distribution segment). The annual maintenance capital expenditure (excluding Distribution segment) is estimated to be about EUR 300-350 million in 2015, below the level of depreciation.

Fortum will gradually decrease its financing to Fortum Värme, the co-owned power and heat company operating in the capital area in Sweden, during 2014–2015. At the end of December 2014, Fortum Värme's remaining interest-bearing liability to Fortum is approximately EUR 0.6 billion.

Taxation

The effective corporate income tax rate for Fortum in 2015 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.

The Finnish Government decided in June 2014 that it will not, after all, introduce a power plant tax (windfall tax) on nuclear, hydro and wind power built before 2004. The final decision to revoke the tax was made by the Parliament in November 2014, and the revocation entered into force on 1 January 2015.

In August, the Finnish Board of Adjustment of the Large Taxpayers’ Office had unanimously approved Fortum Corporation's appeal of the income tax assessment imposed on Fortum for the year 2007 in December 2013. The Tax Recipients’ Legal Services Unit has appealed in the matter (Note 21). In December 2014, Fortum received a non-taxation decision regarding its financing companies for the remaining years 2008-2011,based on the same audit. This is in line with the Supreme Administrative Court’s (SAC) precedent decision. The Tax Recipients’ Legal Services unit within the tax authorities has the right to appeal the decision.

The new Swedish Government proposed to increase the tax on installed nuclear capacity by 17% as of 2015 is currently on hold. Fortum's position is that the tax issue should be referred to an upcoming parliamentary energy commission in order to get a broadly established view on how the needs of energy and effect can be resolved. If implemented, the estimated impact on Fortum would be approximately EUR 15 million annually, however Corporate tax-deductable.

Hedging

At the end of December 2014, approximately 50% of Power and Technology's estimated Nordic power sales volume was hedged at approximately EUR 40 per MWh for the calendar year 2015. The corresponding figures for the calendar year 2016 were approximately 10% at approximately EUR 39 per MWh.

The hedge price for 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 distribution proposal

The distributable funds of Fortum Oyj on 31 December 2014 amounted to EUR 5,438,689,036.90 including the profit of the period of EUR 2,264,863,648.81. 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 2014. In addition, the Board of Directors proposes to the Annual General Meeting an extra dividend of EUR 0.20 per share be paid for 2014.

Based on the number of registered shares as of 3 February 2015 the total amount of dividend proposed to be paid is EUR 1,154,877,158.50. The Board of Directors proposes that the remaining part of the profit be retained in the company's unrestricted equity. The dividend and the extra dividend are proposed to be paid on 14 April 2015.

Annual General Meeting 2015

Fortum Corporation’s Annual General Meeting will take place at 14:00 on Tuesday, 31 March 2015, at the Finlandia Hall, Mannerheimintie 13, in Helsinki, Finland.

Espoo, 3 February 2015
Fortum Corporation
Board of Directors

Further information:
Timo Karttinen, CFO, Interim President and CEO, tel. +358 10 453 6555

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

The Board of Directors has approved Fortum's 2014 financial statements and Fortum's auditors have issued their unqualified audit report for 2014 on 3 February 2015. The financial statements bulletin have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting, as adopted by the EU.

Fortum’s Financial statements and Operating and financial review for 2014 will be published during week 10 at the latest.

Fortum will publish three interim reports in 2015:
- January-March on 29 April 2015 at approximately 9.00 EEST
- January-June on 17 July 2015 at approximately 9.00 EEST
- January-September on 22 October 2015 at approximately 9.00 EEST

Fortum's Annual General Meeting will take place on 31 March 2015 and the possible dividend related dates planned for 2015 are:
- Ex-dividend date 1 April 2015
- Record date for dividend payment 2 April 2015
- Dividend payment date 14 April 2015

Distribution:
Nasdaq Helsinki
Key media
www.fortum.com

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