The Russia Division consists of power and heat generation and sales in Russia. It includes OAO Fortum and Fortum’s over 25% holding in TGC-1, which is an associated company and is accounted for using the equity method.
|- power sales||150||135||331||297||590||624|
|- heat sales||47||60||173||192||324||305|
|- other sales||1||0||4||1||6||9|
|Comparable operating profit||4||21||52||55||74||71|
|Net assets (at period-end)||3,437||3,051||3,273|
|Return on net assets, %||3.5||2.9|
|Comparable return on net assets, %||3.5||2.5|
|Capital expenditure and gross investments in shares||126||192||207||267||694||634|
|Number of employees||4,272||4,497||4,379|
OAO Fortum operates in the well-developed industrial regions of the Urals and in oil-producing western Siberia.
The liberalisation of the Russian wholesale power market was completed by the beginning of 2011. However, all generating companies continue to sell a part of their electricity and capacity - an amount equalling the consumption of households and a few special groups of consumers - under regulated prices. During the second quarter, OAO Fortum sold approximately 83% of its power production at a liberalised electricity price.
The new rules for the capacity market, starting from 2011, were approved by the Russian Government. The generation capacity built after 2007 under the government capacity supply agreements (CSA – “new capacity”) receive guaranteed payments for a period of 10 years. Prices for capacity under CSA are defined to ensure a sufficient return on investments.
At the time of the acquisition in 2008, Fortum made a provision, as penalty clauses are included in the CSA agreement in case of possible delays. Possible penalties can be claimed if the new capacity is delayed or if the agreed major terms of the capacity supply agreement are not otherwise fulfilled. The effect of changes in the timing of commissioning of new units is assessed at each balance sheet date and the provision is changed accordingly (Note 18).
The capacity selection for 2012 (CCS for “old capacity”, built prior to 2008) was held in September 2011. The majority of Fortum’s power plants were selected in the auction, with a price level close to the level received in 2011. Approximately 4% (120 MW) of Fortum’s old capacity was not allowed to participate in the selection, due to tightened minimal technical requirements. The capacity will, however, receive capacity payments at the average capacity market price for two additional years.
April - June
The Russia Division's power sales volumes amounted to 5.1 (4.6) TWh during the second quarter of 2012. Heat sales totalled 4.2 (4.3) TWh during the same period.
The Russia Division’s comparable operating profit was EUR 4 (21) million in the second quarter of 2012. The comparison figure from 2011 includes a reversal of CSA provision of EUR 22 million. The positive effect from the commissioning of the new units in 2011 amounted to approximately EUR 17 (9) million, in the second quarter. The improvement was offset by the lower electricity price compared to the corresponding period last year. In addition, decreased capacity payments and volumes for the old capacity had a negative impact.
The operating profit was EUR 15 (21) million in the second quarter of 2012. It includes a gain of EUR 11 million relating to a divestment of heating network assets.
The commissioning of Fortum’s largest new investment projects in Nyagan have been somewhat further postponed and the company estimates the commissioning of Nyagan 1 to take place around the turn of the year and Nyagan 2 during the first half of 2013 due to construction delays.
Fortum will build the last two units of its Russian investment programme in Chelyabinsk instead of in Tyumen. The units are to be constructed at Chelyabinsk GRES. Within the scope of the project, Fortum also plans to modernise and upgrade the existing equipment of the power plant.
|Key electricity, capacity and gas prices for OAO Fortum||II/12||II/11||I-II/12||I-II/11||2011||LTM|
|Electricity spot price (market price), Urals hub, RUB/MWh||888||954||869||950||925||884|
|Average regulated gas price, Urals region, RUB/1000 m3||2,548||2,548||2,548||2,548||2,548||2,548|
|Average capacity price for CCS “old capacity”, tRUB/MW/month*||136||141||151||163||160||156|
|Average capacity price for CSA “new capacity”, tRUB/MW/month*||470||496||523||593||560||550|
|Average capacity price, tRUB/MW/month||202||174||223||194||209||218|
|Achieved power price for OAO Fortum, EUR/MWh||29.4||29.0||29.3||29.1||29.2||29.3|
|* Capacity prices paid for the capacity volumes excluding unplanned outages, repairs and own consumption|
January - June
The Russia Division's power sales volumes amounted to 11.3 (10.2) TWh during January–June 2012. Heat sales totalled 15.5 (15.3) TWh during the same period.
The Russia Division’s comparable operating profit was EUR 52 (55) million in January–June 2012. The positive effect from the commissioning of the new units amounted to approximately EUR 41 (16) million. January–June 2011 included a reversal of provisions of EUR 22 million. The improvement was offset by the lower electricity price compared to the corresponding period last year. In addition, decreased capacity payments and volumes for the old capacity had a negative impact.
The operating profit was EUR 63 (55) million in January–June 2012, and includes a gain of EUR 11 million relating to a divestment of heating network assets.
OAO Fortum'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, received capacity payments will differ depending on the age, location, type and size of the plant as well as seasonality and availability.
The return for the new capacity is guaranteed as regulated in the Capacity Supply Agreement (CSA). The regulator will review the earnings from the electricity-only market after three years and six years and could revise the CSA payments accordingly. CSA payments can vary annually somewhat because they are linked to Russian Government long-term bonds with 8 to 10 years maturity.
The commissioning of Fortum’s largest new investment greenfield projects in Nyagan has been somewhat further postponed. Fortum has ongoing discussions with its main contractor and Fortum estimates the commissioning of Nyagan 1 to take place around the turn of the year and Nyagan 2 during the first half of 2013 due to construction delays. This does not change the overall schedule or financial targets of the investment programme. In 2008, Fortum made a provision for penalties caused by possible commissioning delays, already. According to the agreement with the contractor, Fortum is entitled to adequate remedies in case of damages caused by contractor delays.
Fortum is committed to its EUR 2.5 billion investment programme in Russia, and the schedule of the programme is to commission the last new units in 2014. The value of the remaining part of the investment programme, calculated at the exchange rates prevailing at the end of June 2012, is estimated to be approximately EUR 800 million as of July 2012. Altogether, the investment programme consists of eight new power plant units, of which the first three units were commissioned in 2011.
After completing the ongoing investment programme, Fortum’s goal is to achieve an operating profit level of about EUR 500 million in its Russia Division and to create positive economic value added in Russia.
In March 2012, the Russian Ministry for Economic Development approved three of OAO Fortum's power plant units as Joint Implementation projects: one Chelyabinsk CHP-3 unit and two Nyagan GRES units. All of these units are part of Fortum’s extensive investment programme. The Joint Implementation projects, as defined in the Kyoto Protocol, will reduce carbon dioxide emissions in Russia, and Fortum will be able to use the related emission reduction units in the EU's emissions trading scheme or sell them on the market.