Key drivers and risks
Fortum's financial results are exposed to a number of strategic, 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.
The continued global economic uncertainty and Europe's sovereign-debt crisis weaken the outlook for economic growth in the mid-term, especially in the Euro zone. The overall economic uncertainty impacts the commodity and CO2 emission allowance prices and this in combination with the stronger hydrological situation in the Nordic region, could maintain downward pressure on the Nordic wholesale price for electricity in the short-term. In the Russian business, the key factors are the development of the regulation around electricity and capacity markets and operational risks related to the investment projects according to the investment programme. In all regions, fuel prices and power plant availability also impact the profitability. In addition, increased volatility in exchange rates due to financial turbulence might have both translation and transaction effects on Fortum's financials especially through the SEK and RUB.
Despite macroeconomic uncertainty, electricity will continue to gain a higher share of the total energy consumption. Fortum currently expects the average annual growth rate in electricity consumption to be on average 0.5%, while the growth rate for the nearest years will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries.
During the second quarter of 2012, the price of crude oil decreased steadily, whereas the decrease in the coal price stabilised towards the end of the quarter. The price of CO2 emissions allowances (EUA) weakened somewhat during the quarter. The forward price of electricity for the next twelve months came down both in the Nordic area and in Germany.
The future quotations for coal (ICE Rotterdam) for the rest of 2012 were around USD 92 per tonne and the market price for CO2 emissions allowances (EUA) for 2012 was about EUR 8 per tonne.
In mid-July 2012, the electricity forward price in Nord Pool for the rest of 2012 was around EUR 34 per MWh. For 2013, the electricity forward price was around EUR 38 per MWh and for 2014 around EUR 39 per MWh. In Germany, the electricity forward price for the rest of 2012 was around EUR 45 per MWh and for 2013 EUR 49 per MWh.
In mid-July 2012, Nordic water reservoirs were about 2 TWh above the long-term average and 3 TWh above the corresponding level of 2011.
The Power Division's Nordic power price typically depends on e.g. the hedge ratio, hedge price, 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 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 amount and its profit.
The several years of ongoing Swedish nuclear investment programmes will enhance safety, improve availability and increase the capacity of the current nuclear fleet. The implementation of the investment programmes might affect availability. Fortum’s power procurement costs from co-owned nuclear companies are affected by these investment programmes through increased depreciation and finance costs.
European-wide safety evaluations have been carried out post Fukushima. As part of the evaluations, so-called peer reviews were carried out in March 2012 in several European nuclear power plants, including the Loviisa nuclear power plant. The European Commission is estimated to submit a consolidated report of the national reports to the European Council in October 2012. Fortum believes that some additional safety criteria could be introduced for nuclear power plants based on the evaluations and that they could be implemented for the Loviisa nuclear power plant within the framework of the annual investment programmes.
According to the legislation in Sweden, nuclear waste fees and guarantees are updated at regular intervals. At the end of December 2011, the Government decided upon fees and guarantees for 2012-2014. The negative impact from increased nuclear waste fees on Fortum’s comparable operating profit is estimated to be approximately EUR 15 million per year in 2012–2014.
Nuclear fuel costs in all Fortum nuclear power plants are expected to increase in total by approximately EUR 15 million in 2012, due to the increased market price of uranium and enrichment.
The Russian wholesale power market was liberalised from the beginning of 2011. All generating companies continue to sell a part of their electricity and capacity equalling the consumption of households and a special group of consumers (Northern Caucasus Republic, Tyva Republic, Buryat Republic) under regulated prices.
The new rules for the capacity market starting from 2011 have been approved by the Russian Government. The generation capacity built after 2007 under government Capacity Supply Agreements (CSA – “new capacity”) receive guaranteed 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 competitive capacity selection (CCS – “old capacity”). The capacity selection for 2012 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 the old capacity was not allowed to participate in the selection due to tightened minimal technical requirements. It will, however, receive capacity payments at the capacity market price for two additional years.
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, the received capacity payment will differ depending on age, the location, size and type of the plants as well as seasonality and availability. Especially the old capacity payments for CHP power plants are burdened during the summer period due to the temperature constraints evolving from lower heat demand.
The return on the new capacity is guaranteed as regulated in the Capacity Supply Agreement. 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.
In June, Fortum announced its decision to build the last two 250-megawatt (MW) units of its Russian investment programme at Chelyabinsk in the Urals. Initially, the units were planned for construction in the Tyumen region in Western Siberia. The units are included within the sphere of the Capacity Supply Agreement originally agreed in 2008.
The new units are to be constructed at Chelyabinsk GRES. Within the scope of the project, Fortum also plans to modernise and upgrade the existing power plant equipment.
Fortum is planning to commission the last new units of its EUR 2.5 billion investment programme in Russia by the end of 2014. The value of the remaining part of the investment programme, calculated at exchange rates prevailing at the end of June 2012, is estimated to be approximately EUR 800 million as of July 2012.
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 added value in Russia.
The Russian Government decided to increase the gas prices as of the beginning 1 July 2012; the increase was approximately 15%. On the other hand, prices for regulated electricity sales, heat sales and CCS capacity income will be indexed at rates lower than in 2011.
Capital expenditure and divestments
Fortum currently expects its capital expenditure in 2012 to be around EUR 1.6-1.8 billion and in 2013–2014 around EUR 1.1 –1.4 billion, excluding potential acquisitions. The main reason for the high capital expenditures in 2012 is the acceleration of Fortum's Russian investment programme. The annual maintenance capital expenditure is estimated to be about EUR 500–550 million in 2012, approximately at the level of depreciation.
The effective corporate tax rate for Fortum in 2012 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 decreased to 24.5% from 26% starting 1 January 2012.
In March 2012, the Finnish Government announced that a so-called windfall tax will be introduced in 2014.
The process to update the real-estate taxation values for the year 2013 is ongoing in Sweden. The update is done in a cycle of six years.
At the end of June 2012, approximately 65% of the Power Division's estimated Nordic power sales volume was hedged at approximately EUR 49 per MWh for the rest of the calendar year 2012. The corresponding figures for the calendar year 2013 were about 55% at approximately EUR 45 per MWh.
The hedge price for Power Division's Nordic generation excludes hedging of 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.