CEO's review

How has Fortum responded to the uncertainty factors of the operating environment in 2011?

Fortum has been through a turbulent year, and the instability in the European economy, among other things, has added to the operational challenges. The economic uncertainty in the eurozone has weakened the outlook particularly in the financial markets for the immediate years ahead. For this reason, we have paid close attention to our cash flow and have kept our balance sheet strong and our liquidity good. We have also drafted a flexible action plan in case the outlook darkens. 

How did Fortum’s strategy guide the company’s activities in 2011?  

Leveraging the Nordic business, creating economic added value in Russia and building a platform for future growth are at the core of Fortum’s strategy. Our strategy guides our activities very specifically, and the execution of the strategy is supported by our strong competence in carbon dioxide-free hydro and nuclear power production, combined heat and power (CHP) production and in operating in the energy markets. Sustainability is a strategic cornerstone for us and also an integral part of our daily operations.  

In 2011, we made progress in many important areas. We have implemented our Russian investment programme with determination, and we’ve developed the production structure of the heat business in order to sharpen our focus on energy-and resource-efficient CHP production. At the same time, we are creating a new growth platform in France by preparing for the participation of the French hydro concession bidding. We’ve started mapping growth opportunities also in India, where we opened an office in February 2012. 

In Finland, Fortum has an approximately 26% interest in TVO’s Olkiluoto 3 nuclear power project under construction and in the new Olkiluoto 4 project, the bidding and engineering phase of which was launched in autumn. In Sweden, we have raised the output and improved the availability of nuclear power plants. 

How did Fortum achieve its sustainability targets in 2011? 

We achieved out climate targets, although the specific CO2emissions from our total energy production increased by nearly 10% from the previous year. The increase was due to the commissioning of new plants, which raised the relative share of our Russian mainly natural gas-based production in our total energy production. 

Our specific CO2 emissions from electricity generation in the EU were slightly less than in 2010. In a European comparison, Fortum’s specific CO2 emissions, including Russian operations, were among the lowest in the sector and about half of the average in the sector.

I am particularly pleased with the improved occupational safety. In 2011, we achieved our best record ever in injury frequency for our employees. Contractor safety also improved. Unfortunately, in December, the good progress was overshadowed by a fatal accident involving one of our contractors in Sweden. I would like to extend sincere condolences to the victim’s family and co-workers. The internal accident investigation has been completed and we will continue working with even more diligence to improve safety.

Sustainability is and will continue to be a cornerstone of our operations, and we can be proud of the fact that ourperformance in the area of sustainability has received a lot of recognition – also internationally. Among other things, our company was ranked the best utility in the world in the Carbon Disclosure Leadership Index measuring the management of climate issues. 

How did Fortum achieve its financial targets in 2011?

In summer, Fortum’s share price reacted strongly to the new Finnish Government’s programme, which proposes investigating the implementation of a possible windfall and uranium tax. Moreover, the programme noted that the Government will not make any new decisions-in-principle on nuclear power. 

However, the Government programme’s policies have not had a direct impact on Fortum’s earnings. Fortum’s full-year earnings per share as well as operating profit developed favourably. This is partially due to the non-recurring revenue from the divestment of operations outside the scope of our strategy. Fortum’s operating profit was also positively affected by IFRS accounting treatment of derivates mainly used for hedging Fortum’s power production. Our profitability is still at a good level and the structure of our balance sheet and our liquidity are strong. Because of these factors, Fortum is well positioned for the future. 

Hydropower and CHP production are key elements in Fortum’s strategy. Why does Fortum see potential specifically in these activities? 

Fortum has a long track-record and extensive experience in the design, construction and responsible use of hydropower. In fact, the company is one of the most significant hydropower producers in the Nordic countries. In 2011, we produced 72.7 terawatt-hours (TWh) of electricity; of which hydropower accounted for 21.0 TWh. Moreover, in many respects, hydropower is a very competitive production form because of its flexibility and eco-friendliness. CHP, in turn, is a very energy- and resource-efficient alternative for energy production, especially at Nordic latitudes, because its production capacity is the best during winter when the demand is higher. 

When will the investment programme in Russia start to produce a positive economic value added? 

Fortum continued its extensive investment programme in Russia in 2011 with the commissioning of three new units. The total output of the three units taken into commercial use is over 600 megawatts (MW) of our 2,400-MW investment programme in Russia. This new capacity, built under the Government’s capacity supply agreement, will receive guaranteed payments for a period of 10 years. The impact of the new units we have built is already visible in the 2011 comparable operating profit, which in the Russia Division increased from EUR 8 million to EUR 74 million. We will continue implementing the programme in 2012 with the commissioning of two of the three 418-MW units at the new Nyagan power plant. 

How has Russian electricity market reform progressed? 

Russia had liberalised most of the wholesale markets for electricity by the beginning of 2011, but the work is ongoing in areas like development of financial products and capacity markets. For Fortum, realisation of the market reform was one of the key reasons for investing in Russia, and, indeed, we now see that the reform has progressed as planned. 

Russia is also investing in energy efficiency improvements through several programmes and international collaboration. Russia’s heat markets are of interest to Fortum because of the huge potential for energy-efficiency improvements in the country’s heat sector. 

How has Fortum performed with its sustainability targets in Russia?

Sustainability is at the core of our operations also in Russia, but the most urgent targets of improvement there differ somewhat from those in the Nordic countries, for instance. In Russia, we have put significant effort into improving occupational safety and reducing conventional environmental impacts, like nitrogen oxide, sulphur dioxide and particle emissions, limiting emissions into waterways and improving energy efficiency. By raising energy efficiency, we also reduce specific CO2 emissions. In these areas, we have already achieved clear results. We have also switched to using a better quality of coal at the Argayash plant and improved efficiency in processing the wastewater from the ash basins at several of our power plants in the Chelyabinsk and Tobolsk regions. OAO Fortum’s operations recently passed the first phase of certification audit in accordance with the international ISO14001 standard.

How have the Fukushima nuclear accident in Japan and the ensuing political decisions in Europe affected Fortum’s safety culture and business operations?

The accident at the Fukushima nuclear power plant last year sparked a lot of discussions; the attitudes towards the accident and the decisions made because of it have varied in different countries. As a nuclear power company, safety is always our most important and the primary factor behind all activities in nuclear power production. Over the years, the prepardness for severe reactor accident management has been improved significantly at our Loviisa power plant and at our co-owned plants. Nuclear safety is also the specific focus in a significant part of Fortum’s research and development work. Based on this work, the Loviisa power plant’s safety and preparedness for severe accidents has been and will continue to be improved over the long-term.  

In the light of the safety evaluations by the Finnish Radiation and Nuclear Safety Authority and the EU-wide nuclear power stress tests, there are no critical safety-related changes in sight for Fortum-owned nuclear power plants. No significant new requirements, new threats or shortcomings requiring immediate corrective action were found in Finnish nuclear power plants. The results of assessments made in Sweden were similar to those in Finland. Based on the further assessment, the development targets to be selected later can be implemented within the framework of the Loviisa power plant’s annual investment programmes, and they will not have a significant impact on the plant’s availability. 

Climate change is a global challenge in need of solutions. For this reason, I believe that the world will continue to need nuclear power. Fortum’s nuclear power know-how is at a very high level internationally, and that’s why we view, e.g., the development of existing nuclear power plants as an interesting business area. 

How will Fortum develop its electricity grids and operations in preparation for storms and other natural phenomena?

The storm that raged in Fortum’s grid area in Finland and Sweden at the end of the year knocked out power for more than 200,000 households and caused considerable financial damage for the company. I want to express my regrets to our customers for the difficulties and the widespread power outages caused by this storm. Although Fortum had prepared for the storm by quadrupling the number of service technicians, the situation was exceptional compared to the forecasts. Since the storm, we have carefully analysed our operations and have mapped the areas requiring improvement. In a power outage situation, we must be able to serve a large number of customers more quickly, and that requires the implementation of, e.g., a text messaging service and improvements to our IT systems. Even though repairing the storm damage was successful in light of the difficult situation, we will continue developing also that aspect of our operations.  

Society’s growing dependence on electricity is another reason for the increasing importance of storm preparation. Climate- change is also expected to increase extreme weather phenomena. Fortum is setting a long-term target to cut the number of power outages in half and to double the number of customers currently within the scope of weather-proof distribution by 2020. It is possible to accelerate underground cabling, particularly in places most critical for operational reliability, in addition to which areal lines can be moved from the forest to the roadside. The weather reliability of the distribution network also can be improved by better management of adjacent forests and with grid automation.

Where will Fortum pursue growth in the future?

As I mentioned, we are committed to the extensive investment programme in Russia, which will increase our capacity significantly. Additionally, our investment programme in Europe will grow our electricity production capacity by a total of 800 MW and our heat production capacity by about 230 MW by 2015. We are exploring business opportunities also in India, which is one of the fastest growing markets in the world. Our growth platform there is based on our special expertise in energy-efficient CHP production, in which we can also use local biofuels. 

The focus of global economic growth is shifting to Asia. What is the outlook for the European energy market? 

There is still plenty of development potential in the European energy market, e.g., in market integration. I consider the market-driven development of the energy markets and stronger harmonisation of the rules of the operating environment to be very important. Efficiently functioning, broader markets benefit customers, society and the environment. They also enable the right investments in the right place, whether in bio, solar, wave or wind power.  

Fortum’s vision is that the future energy system is based on Solar Economy. How has Fortum prepared for such a sizable change in the energy system?

Fortum is already using production forms that are part of Solar Economy, such as hydropower and bioenergy. However, I believe that energy will have to be produced and consumed increasingly more sensibly in the future. In fact, the future energy system should be based on carbon dioxide-free electricity production and on energy security and efficiency. In our view the energy system will gradually shift from conventional electricity production technologies, exhaustible energy sources and fossil fuels towards  so-called Solar Economy. However, with the exception of hydropower, wind power and bioenergy, Solar Economy production forms are still very much in the development phase. Therefore, also Fortum is actively researching future energy production technologies, like biofuels for CHP production, and wave power. We envision good opportunities also in the direct utilisation of solar power, and we believe that we can develop concrete business in this area in the near future. 

What are Fortum’s development steps moving forward?  

Fortum’s strong balance sheet and productive capital structure enable us to be well prepared also for a more uncertain outlook. In the future, the relative share of electricity in total energy consumption will grow, offering Fortum more business opportunities. I believe that we have good potential to grow in line with our mission and strategy. 

The strong competence of our personnel has naturally been instrumental in implementing our strategy, and I want to take this opportunity to thank all Fortum employees for a job well done. And I want to extend a special thank-you to our customers. It is truly unfortunate that the winter storms resulted in some customers having to wait days – and in some cases even weeks – to have their power restored. We will do everything we can to serve our customers better also in exceptional circumstances like these.

Additionally, I would like to thank our shareholders for the past year. We will continue our work to grow shareholder value and to resolutely develop our operations in spite of uncertainty in the global economy.