Fortum Management Discusses Q1 2013 Results - Earnings Call Transcript

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 |  About: Fortum Oyj (FOJCF)
by: SA Transcripts

Fortum Corporation (OTC:FOJCF) Q1 2013 Earnings Call April 25, 2013 9:00 AM ET

Executives

Markus Rauramo – CFO

Analysts

Nathalie Casali – JPMorgan Securities Inc.

James Brand – Deutsche Bank

Patrick Hummel – UBS

Benjamin Leyre – EXANE

Robert Schramm-Fuchs – Macquarie Research Equities

Emmanuel Turpin – Morgan Stanley

Vincent Gilles – Credit Suisse

Christopher Kuplent – Merrill Lynch

Sanna Kaje – FIM

Florence Taish

Operator

Good day and welcome to the Fortum Corporation Q1 2013 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Markus Rauramo. Please go ahead, sir.

Markus Rauramo

Hello and good after to everyone and welcome to Fortum’s Q1 conference call. My name is Markus Rauramo and I’ll go straight into the slide number three. When looking at Fortum’s results for the first quarter, we can see that sales grew somewhat and that the comparable operating profit was on the same level as in Q1 last year. Profit before tax was EUR559 million which results in an EPS of EUR0.45. Net cash from operations totaled EUR646 million. It strengthened although Swedish krona impacted negatively on the cash flow.

Then moving to highlights, I’d like to highlight the following topics from the first quarter results. Group comparable operating profits was good and totaled EUR650 million. The efficiency programs that we launched in late 2012 as well as the strategic assessment of the electricity distribution business have proceeded according to plan.

Nuclear availability was good except in Oskarshamn 1 which is still close for maintenance. In the end of March we completed the final construction works and tests and Nyagan 1 was taken into commercial operation. After completing unit one, we have now had a thorough analysis and we estimate that Nyagan 2 will be commissioned by the end of 2013 and Nyagan 3 escalated by the end of 2014. However, there is no change to the overall schedule or financial targets of the investment program, EUR500 million run rate EBIT during 2015 is unchanged.

Sustainability is an important part of our strategy and everyday work. That is also why sustainability key performance indicator results are reported and followed in a monthly basis both by the management and the Board of Directors from the beginning of this year. During the first quarter, market conditions were mixed. In the Nordics, the power consumption grew somewhat mainly due the non-industrial sector. Nordic water reservoirs were lower than the long-term average but clearly below last year’s all time high levels. I’ll come back to them in my next slide.

Nordic spot prices were 10% higher compared with the first quarter last year. The volatility of the CO2 emission price was mainly due to the European parliament environmental committees meeting and vaulting as well as news flow concerning back loading.

In Russia in the Tyumen area where industrial production is dominated by the oil and gas industry, the electricity demand increased approximately 4% while in the Chelyabinsk area, which is dominated by the metals industry, electricity demand decreased by approximately 3%, mainly to decreasing demand from the steel industry. The spot price excluding capacity price increased by approximately 10% while the gas price increase approximately 15% compared to the same time last year. Regarding what the risk was, the situations have changed substantially.

At the beginning of the year, the record was we’re at 85 kilowatt hour, i.e., 20 kilowatt hours above the long-term average. By the end of the first quarter, the levels had declined to 35 kilowatt hours, which is 6 kilowatt hours lower than the long-term average and 21 kilowatt hours slower than the year before.

The level of the reservoir was support electricity price development in Q2 or Q3. However, if the situation continues, it will also impact to higher production volumes negatively.

During the first quarter of 2013, the average system spot price of electricity in Nord Pole varied between less than GBP40 to more than GBP50 per megawatt hour. The negative result of the European parliament floating was clearly a disappointment, and this reflects in the forward price stage which is in the picture, the dark blue line from 2013 onwards.

During the first quarter of 2013, the average system spot price of electricity Nord Pole was GBP42 per megawatt hour. This is an increase of 10% compared to the same period in 2012 in Russia. In Europe, the spot market increased for so and so at 10%.

In the power division, they achieved Nordic power price declined 3% compared to the first quarter last year. While in Russia, we were able to reach an increase of 4%.

All in all, we can say that the first quarter result was good. The power in Russia division’s comparable result is the decline, and I will come back to that in the division reviews.

While looking at fuel and CO2 emission allowance prices, we can say that the general economic activity has reflected in the price development. Commodities have generally lost ground throughout the year so far, pressurized via container like their economic environment and right in supply.

Oil prices have fallen about 7.5% from the beginning of the year. Carbon, which I will come back a little bit later on, touch new lows in mid-April following the European parliament rejection. This is after a volatile Q1. Coal prices keep moving at the bottom of the recent range in the low to mid [inaudible] on abundant supplies and sluggish demand.

And then I’ll move over to financials. When comparing the comparable and reported brackets by division, I’d like to highlight the following. Power division is comparable. Operating profit was EUR03 million. The report was 263 million. The difference comes from the non-recurring item, fair evaluation impacting negatively 41 million. Last year, the operating profit those are included in sales of 47 million from the sale of small hydro.

The heat division’s reported operating profit was EUR175 million for the first quarter of 2013. In 2012 we have EUR214 million which included EUR58 million of sales from the investment.

And then I’ll go through the results division by division. In power division, the combined effects of lower hydro volumes and the lower achieved bar price, although increased nuclear and thermal volumes had a negative impact of approximately EUR20 million during the first quarter in 2013 compared to the corresponding period of 2012.

During the first quarter, operating cost increased by approximately 17 million mainly due to higher Swedish krona and higher taxation values concerning Swedish hydro assets which will be confirmed in July 2013.

The nuclear availability was good in all units, except Oskarshamn. The unit was shut down in December 2012 due to failure in the period like debt of emergency this will generate. And according to current data, the unit, they are shut down until the end of May of 2013. Both the country has been running smoothly. I think month to monthly production from the unit was the highest since the plan started commercial operations in 1985.

[Inaudible] commissioning advance from its power upgrade from 900 or 96 megawatts to 1,120 megawatts started in March. The new upgraded capacity output is expected to be in operation in May. And the last work with frequency was the lowest ever for our own personnel and the contractors in power division.

The heat division’s comparable operating profit, those are being EUR170 million in the first quarter was good compared to the corresponding period of 2012. The increase is mainly attributable to the higher volume since we have lower peak cost and stronger Swedish krona.

In the first quarter 2013, the new field Klaipeda combined the heat in power plant in Lithuania reached full capacity operation and the plant was taken into commercial operation.

In Russia division, the comparable operating profit decreased in the first quarter of 2013 compared to Q1 last year. The positive effect from the new units commissioned in 2011 in the first quarter of 2013 amounted approximately EUR29 million in the first quarter.

The main reasons for the decrease results were lower heat volumes which were a result especially in warm winter in 2013 in the Chelyabinsk area and the investment of anything that were gasses in 2012. In addition, the good hydrological fixation in Russia pressured electricity spot prices. The Russian government increased gas prices by 15% and the spot electricity price development have been approximately 10%.

Regarding the ongoing investment program, we estimate the commissioning of [inaudible] you would take place at the end of 2013. That country will be finalized at the end of 2014 at the latest.

This will likely have the investment with regards to both capital and operational expenditure and electricity sales as well as received capacity payment. The capacity payment is for the Nyagan unit. It will start at January 1st, 2015.

In accordance with the SCA terms, no penalties for unit three can be claimed before 1st of January 2016. There have been no changes in the overall schedule or financial target of the investment program.

Construction is to be completed by the end of 2014 and reaching about 500 million in the run rate EBIT during 2015. In 2008, we made a provision for penalties caused by basketball commissioning delays.

In addition, according to the agreement with the contractor, we are entitled to adequate remedies in case of damages caused by contractor delays. The process with demand contractor continues.

And I will move to distribution. Comparable operating profit was strong due to higher volumes and stronger in Swedish krona. As you remember, we announced in January that we decided the strategic position of our activity and distribution business.

The assessment has no impact on our electricity distribution, customers and excludes our electricity retail business. We expect to conclude the assessment during 2013.

It’s electricity sales, the comparable result was very good and totaled 15 million in comparison to last year when it was EUR9 million. This is viewed to the cold weather and the increased customer based which actually grew by 50,000 customers year on year. Also, customer satisfaction showed a positive result.

And then I’ll move to the income statement. Sales totaled almost 2 billion which is an increase of approximately 90 million compared to the first quarter of 2012. Comparable operating profit was EUR650 million, same as last year’s level.

Items affecting comparability negative EUR47 million including mainly non-recurring items, fair values, and nuclear fund adjustments. Last year we had sales gains that impacted this line positively. The share of profits of associates and joint ventures totaled EUR29 million. The increase compared to last year is due to [inaudible] improved result and that TGC-1 [ph] wasn’t included last year while their Q1 report was released later.

Then I move over to cash flow. Operating profits before depreciations was EUR772 million. No major divestments were done during the period. Financial items was impacted mainly by Swedish krona.

Low taxes in Q1 was mainly due to [inaudible] and tax returns. Net cash from operating activities improved by more than EUR90 million and totaled almost EUR650 million. Change in working capital was mainly driven by changes in inventories due to the cold winter and increased thermal production.

The last 12 months net cash flow was EUR1.475 billion and CapEx was slightly under that at EUR1.4 billion. Under the key ratios I’d like to highlight the net-to-EBITDA at 3.1 times. At the end of March 2013, we had EUR1.7 billion of cash and EUR2.7 billion of undrawn committed credit facilities. As you know, our return on equity and return on capital employed targets are 14% and 12% correspondingly. We did not reach these targets during the last 12 months.

Last autumn [ph], we launched an efficiency program. We can say that the program is proceeding well and according to plan. The background for the program is that business environments are very demanding. Costs have escalated and our target is to increase our speed and flexibility and to improve our cash flow by EUR1 billion. This is done by reducing CapEx by EUR250 million to EUR350 million divesting non-core assets worth of EUR500 million reducing fixed cost by EUR150 million compared to the 2012 levels in run rates by the end of 2014 and improving also our working capital. Our Board’s decision to review the strategic position of the distribution business does not change the basics of the efficiency program which will continue as originally planned.

Then I move over to our debt maturity profile. Net debt decreased during the first quarter by about EUR370 million to EUR7.4 billion. In March 2013, we issued 25-year bonds in Swedish krona with a fixed coupon of 2.75% and 100 points spread for the floating rate bond.

Then over to the outlook. We believe 2013 demand will be essentially flat before turning to a moderate growth in 2014. Electricity continues to gain share of total energy consumption. In Russia, our goal is to achieve an EBIT level of about EUR500 million run rate in our Russia division during 2015 and to create positive economic added value in Russia after the program is completed.

Nordic renewable energy supply and renewable generation in continental Europe have grown which have and will cost the increased price volatility. In addition to hydrology [ph], Nordic power prices are driven by shorter and marginal cost of coal condensing. The SRMC is sensitive to coal and CO2 prices. At the beginning of 2013, the market price for CO2 allowances [ph] was approximately EUR6.6 per ton. During the first quarter, the allowances [ph] traded between EUR3.5 and EUR6.5 per ton and cost at around EUR4.8 per ton.

In April, the European Parliament voted against the back loading of carbon emission allowances. We consider the rejection of the back loading as a disappointment and a setback for common European climate policy. There is an increasing risk that a European-wide market-based emission trading scheme will be replaced by other measures through which CO2 is priced in such as national carbon taxes, carbon price floors and other policy measures leading to a situation where there could be 27 different climate policies instead of one.

In fact, a situation making investment decisions on electricity generation becomes very demanding and total cost of energy would undoubtedly increase. Despite this negative outcome in the parliament, the commission is not withdrawing the proposal but it was referred back to the parliament environmental committee.

Then I continue with the outlook. Our CapEx guidance for the 2013 and 2014 is unchanged. Regarding hedging, we have hedged 80% for the rest of 2013 at approximately EUR45 and for 2014 the hedge ratio is 45% at the price level of EUR42. The effective tax rate for Fortum is estimated to be in the range of 19% to 21%. In Finland, the corporate tax is proposed to be cut from 24.5% to 20%, meaning that there would be a one-time effect for us that would be booked in that quarter of this year if the decision then takes place. In addition, the Finish government has announced that the so called windfall tax will be introduced in 2014. Our share would be approximately in the region of tens of millions [ph] of Euros.

As you remember in Sweden, the corporate tax was decreased from 26.3% to 22% starting from first of January 2013. And we booked [ph] a one-time effect in our fourth quarter last year. The process to update the real estate taxation values for the year 2013 is ongoing in Sweden and we expect this to be finalized by mid-2013. It is estimated based on the latest Swedish government budget proposal that our cost would increase by approximately EUR40 million in 2013 compared to 2012.

As a conclusion finally of the first quarter, I can say that the result was good and we worked very hard to achieve it. Market conditions in Europe are still quite challenging. We continue our focused work to reach our targets and we strongly believe in the future of low emission energy production and we will continue our daily work to accomplish our long-term strategy. We are in a good position when looking forward. We have strong competencies and a strong balance sheet. In our daily work, we emphasize safety both for our own personnel as well as our contractors.

Now, I’m very happy to answer your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will now take our first question from Nathalie Casali of JP Morgan. Please go ahead.

Nathalie Casali – JPMorgan Securities Inc.

Hi, good afternoon. I have three questions if I may. The first is about Russia. So the delays to Nyagan 2 and 3 are quite substantial. I calculate about EUR90 million to EUR100 million impact on comparable operating profit this year and next. Is that fair? Is that more or less what you expect? Secondly, on Russia again, there was a 17% increase in capacity payments for new capacity in the first quarter which is very high. Do you think this is representative of what we will get for the full year? And the last question is on nuclear capacity and hydro taxes in Sweden, I just wanted to clarify how much we expected in total in 2013? Thank you.

Markus Rauramo

Okay, so I thought with the Russian delays, I always thought from the end that we had difficulties with the timing of Nyagan 1 and we finally had to take over the rest of the project from our main contractor. We have done the assessment of the timetable and changed so that these timetables are firm and we can hold them. However, the overall target for the investment program in Russia is unchanged. So the target is to have the construction completed by the end of 2014 and to reach the EUR500 million EBIT run rate levels during 2015 for Russia division.

We haven’t given details on the EBIT levels on individual years, as such. And I think you can then do the calculation based on the information that we give also in the interim about the gas prices, power prices and CSA and CCS payment.

The increase in the CSA payment reflects the nature of the structure where the regulators take into account. Actually, the price component, the gas prices and overall reach on target under the program and the CSA is adjusted based on that so that the investor achieves and the targeted returns. So it’s a balancing factor.

And finally, the question on the Swedish taxes, the real estate tax assessment is done every six years on the values. And the previous periods power prices are impacting that. We anticipate that based on the information we have today, that there would be an increase in real estate tax that would have an impact of about 40 million compared to last year.

Nathalie Casali – JPMorgan Securities Inc.

Thank you. So just to compare on the last point, the total of the taxes paid in freed and hydro nuclear capacity, is that about 90 million last year in 2012?

Markus Rauramo

I’ll come back to that. But 40 million is the increase.

Nathalie Casali – JPMorgan Securities Inc.

Okay. Thank you.

Operator

We will now take our next question from James Brand of Deutsche Bank. Please go ahead.

James Brand – Deutsche Bank

Hello. Three questions, first one on cost reductions. When you originally announced the cost reduction target, you’re fairly vague in terms of the breakdown between different areas.

I was wondering whether now there’s been a bit more time for you to get into the program whether you could be more specific in terms of the split between business units or particular areas where you’re driving the savings? Second question is on the review of the distribution business, I was wondering whether you could give some more details on the key areas you’re looking at in terms of making a decision on what to do in that unit.

You’ve already said that you – it’s not a key focus area for the group. I was wondering what other areas you are looking at? And also, whether or not you could give any guarantee on when you’re aiming to make a decision this year or whether you want to leave it open at this point?

The final question is on carbon taxes. You mentioned that obviously with the European traded price account going very well that it might be possible that individual country’s interest in carbon taxes. Obviously, its early days following the failure of the votes become part, which have been very low for a while, and I was wondering whether there have been any discussion in any of the northern countries about carbon tax at all?

Markus Rauramo

Okay. I’ll start with the cost reduction. We have indeed basically taken approach that we have set the group level targets for the savings program. But the implementation has been pushed very deep into the organization. So we have engaged all of our divisions, units, group functions, down to individual team level so we can say that we have today 10,300 people working with this.

The expected impact both on making the group more flexible, simpler, saving the cost, this is all happening and the coming in exactly as we plan on how to expect it. So we are very happy with that.

It is coming in across the board. We follow it on a weekly basis and we have a very tight [inaudible]. But the results are seen basically across divisions. And then regarding the review of the distribution business like we’ve had when we announced the review and the assessment of its future strategic growth.

With that, the review will take the whole of this year. It selects the process. We have to look at many issues. And if there would be any transactions following that, as we said that the fail is also a possibility. If there would be any transaction or conclusions that we expect to happen next year at the earliest. So we said that this will take the whole of this year.

And then regarding the carbon taxes, very early we said just definitely after the parliament, and all in all, the vault attached only regarded the back loading. So it wasn’t the position as such on the excesses and existing system. It still functions. And I think it’s good to look back a few years. And also again I’ll note that’s the reason why there is a surplus of allowances is that we’ve had some very difficult economic times after the crisis in 2008, 2009.

The system work in such and that is in place. But we need to see that this view on having functioning European market versus national solution so that we continue to have one system instead of in the worst case 27 individual systems.

James Brand – Deutsche Bank

Thank you.

Operator

Our next question comes from Patrick Hummel of UBS. Please go ahead.

Patrick Hummel – UBS

Yes, good afternoon.

Two questions please, the first one on the Russia and the 2015 target of 500 million now with the delay of Nyagan 2 and 3. It sounds like there is a little to zero margin for error or further delays in the 2015 target.

So from today’s perspective, how comfortable can you still feel with that 2015 number? And would there be any meaningful penalties you would receive from the contractor if the commissioning of Nyagan 3 lives into 2015? And the second question regarding the distribution business, you say basically that you benefited from currency and also the volumes just to figure out what the sustainable part of the earnings increases in that division.

Could you give us a more detailed breakdown? And has there also been some benefit from the cost side in that division?

Markus Rauramo

I’m sorry I missed. Which division did you ask about?

Patrick Hummel – UBS

The second question on the distribution business.

Markus Rauramo

Distribution, yes. Okay. So if I take the Russia part first, we agree that Russia has been delayed too many times and we’ve certainly seen a very, very serious assessment of the situation.

Like I said, we have taken over the construction of Nyagan 2 and Nyagan 3, so we now have the main responsibility concerning your question about the penalties. We have also reviewed how we run projects. We have definitely taken stuff called the lessons we have learned here as well.

At the same time, we have to say that Nyagan is a very remote place, about 2,000 kilometers from Moscow. That is also one of the attractions. It is a place where the energy is needed, we are needed, our competencies are needed. We have customers with good back capability. And I think this is one of our skills to implement projects in new and difficult places. But we take this timetable extremely seriously and we are committed to that.

And then with regard to the earnings increase in distribution, probably this is the – to the good volumes. So the weather conditions are impacting that, also the customer numbers. What we did have also storm-related cost still in first quarter of 2012.

And that’s what’s around EUR13, EUR15 million, rather EUR10 million or so. We took the provision in fourth quarter 2011. But that was not quite enough to cover all of the cost that’s been occurred. So on a like-to-like basis, that is good to remember.

Patrick Hummel – UBS

Okay. Thanks very much.

Operator

Our next question comes from Benjamin Leyre of EXANE. Please go ahead.

Benjamin Leyre – EXANE

I guess, thank you, good afternoon. Two questions piece is quite pointing on dividend. They quite icky-beck the market on new dividends where you see between the 60, 80% payout and the stretch to going dividend. So I wonder which of the two would you think will prevail or you actually simply not expect any conflict to them as we do these two views on the [inaudible] going forward. And I guess this question is, are they more relevant that [inaudible]? What about this dividend policy.

And the second question related to Russia again, I wonder if they use Indie cost increase to expect in terms of CapEx perhaps on the Nyagan 2 and 3 plans which are being delayed. And so I think you can go there. Thank you.

Benjamin Leyre – EXANE

Okay. But the policy – the backbone again is that we have a business plan which is targeting the CPS growth. We are investing significantly. As the Nyagan 1 have been completed now and started operations in the end of March and receiving capacity payments first of April, we have 10 units that we are at the moment constructing, so new units are coming. And of course, looking forward we also look forward to making new investments and utilizing our competencies. So underlying business plan, underlying EPS growth and therefore targeting stable and increasing EPS and therefore for dividends as well.

We wanted to revise our dividend policy. Well, the Board revised the dividend policy so that we can then better take into account also the external circumstances, our investment needs, macroeconomic environment and volatilities in the market. So we think that this better reflects and it’s in even better synced with our business plan and the possibilities. But it is clear that our plan is to use our competencies and have a progressive forward-looking business plan. With regards to Russia, the revising of the timetable has no impact on our CapEx plans. So the CapEx plan stays the same.

Benjamin Leyre – EXANE

Thank you very much.

Operator

Our next question comes from Robert Schramm-Fuchs of Macquarie. Please go ahead.

Robert Schramm-Fuchs – Macquarie Research Equities

Oh, hi. Thanks for taking my question. I wanted to ask a couple of them if I may. Firstly, just wondered on Nyagan 1, had there been any result and compensation for delays there? Secondly, on Nyagan 2 and 3, are you confident that the provisions you made in the past are high enough to cover a potential penalty payment due to late commissioning? And thirdly, just referring to a statement Tapio made in the Q1 2012 conference call a year ago that the Nyagan 3 commissioning would be independent of Nyagan 1 and 2 so I’m just wondering what has caused this breakdown of this independency or why is Nyagan 3 now related to Nyagan 2 commissioning? And lastly, I just wondered, in the distribution division and disposal program, I noticed you’ve, I guess, spoken to a significant number of potentially interested parties, can you give us a bit of a feeling for what cost of capital prospective are buyers are employing for this business?

Markus Rauramo

Okay, thanks. So the Nyagan 1 situation with the main contractor, like we said the process is ongoing so we are entitled according to our agreements to compensation for possible delays but the process is ongoing so it’s too early to say about that. That discussion is work in progress.

With regards to Nyagan 2 and 3, the provision we have at the end of the quarter EUR173 million and that is totally adequately and correctly proportioned. So it covers our best view of the situation. Then with regards to Nyagan 3, clearly, these three projects, we are constructing basically doing the infrastructure at the same time and then building them in the order so that Nyagan 1 starts first, Nyagan 2 then, and Nyagan 3 after that, so they have to come one after another. But I would say also that now that we have the infrastructure in place, a very big part of the work has been done and when units, basically what it means is that unit number one could not run if the infrastructure didn’t work and after that it’s more just constructing the power blocks. But basically, the whole site is operational now.

When it comes to distribution, it is clear that for this type of an asset there is a lot of interest I can say generically that this environment of low interest rates and also the nature of the distribution business is something that attracts a lot of interest with regards to possible cost of capital of potentially interested parties that I cannot unfortunately comment.

Robert Schramm-Fuchs – Macquarie Research Equities

Understood. Thank you.

Operator

Our next question comes from Emmanuel Turpin of Morgan Stanley. Please go ahead.

Emmanuel Turpin – Morgan Stanley

Good afternoon everybody. I’d love to come back on the previous question on the dividend policy please. It was very helpful for you to update us on the new policy set up by the Board in terms of the ordinary dividend. It’s very clear that you are aimed to provide a stable ordinary dividend going forward. I’d love to go one step beyond because if we look at consensus estimates for EPS one year out, well we are almost already on the 80% upper limit for the payout. So when I read your statement about a pay [ph] of sustainable dividend but in the range of 50% to 80%, what is the most important part of the sentence? Are you going to be looking at stable as the most important and therefore even as you go above 80%, you’ll just basically go with it or is the Board thinking about the 80% limit as being rigid having already increased it from the old policy. That would be my first question. I appreciate it’s a bit semantic but it’s important in terms of doing our forecast.

Number two, you clearly, very clearly set it as a pair with an ordinary EPS due to your plan asset optimization program on possibly the disposal of distribution you will likely trigger capital gains. And I would like to know if you’ve discussed a framework as opposed to quantification but a framework of how you would look at potential exceptional distributions in case of capital gains, what would be your criteria? What would you look at? Thank you.

Markus Rauramo

Okay, so, first of all, regarding the 50% to 80%, so the idea with the dividend policy is that we talked about long term in average, so we’re not looking at one individual year. At the same time, when you asked about what is most important, we definitely acknowledge the value of stability. Having the stability both in our business but also the dividend. So we strive very hard but the fundamental is really that we work to produce good, stable and increasing EPS. Then depending on volatility and macroeconomics, power prices, fuel cost and so on there can be volatility between years and we want to have the possibility then to have the stability in place.

When it comes then to the question about how would we look at possible capital gains, when we look at the EPS, underlying EPS and capital gains, yeah, we would look at then our balance sheet and the situation, what are our future plans, investment possibilities and the whole operating environment. So we would take all of this into account and take the long-term view at the same time.

Emmanuel Turpin – Morgan Stanley

Thank you.

Operator

(Operator instructions) We will now take our next question from Vincent Gilles, Credit Suisse.

Vincent Gilles – Credit Suisse

Yes, good afternoon. I have two questions please. And the first one, just coming back to your efficiency program, could you please update us on the run rate of the cost savings and also the disposals, in other words, how much of the EUR150 million and EUR500 million respectively has been achieved so far? And my second question is under Nordic power market in general. In your forecast and models do you expect some thermal plants in the Nordic to be closed down in near to medium term due to them being uneconomical and this depressed power price environment. And related to this, how likely is it in your view that some sort of capacity payments could be introduced in the Nordic countries to prevent the closure of flexible capacity?

Markus Rauramo

Okay, first I’ll start with the efficiency program. So on the disposal side, we set the target of EUR500 million of disposals of non-core assets. EUR50 million has been achieved so far and good examples of what we have been doing in the past is the hydro assets thin graded [ph] cells [ph] and so on, so we have a pipeline and thought that that will fulfill this target.

On the run rate of the cost savings, we are not specifying that. But I would say that we are on good track to our team or target to achieve the run rate savings by the end of 2014. This is embedded in our divisional and unit and functional plans that the whole team is very committed.

And then when it comes to the question about the Nordic thermal plant and possible closures. What I can say about Q1 is that again with the Q1 environment in our portfolio both in cost of one unit and mercury have been running. So this is depending on the situation. And in our situation, I cannot comment further than that. And, of course, I’m not going to position to our competitor’s plan.

Vincent Gilles – Credit Suisse

Okay. Thank you.

Operator

Our next question comes from Christopher Kuplent of Merrill Lynch. Please go ahead.

Christopher Kuplent – Merrill Lynch

I have just a few questions left.

Firstly, I wanted to know whether you see any impact on your effective tax rate going beyond 2013 now that you are looking at lower capital tax rates in both Sweden and Finland.

Secondly the EUR40 million Swedish nuclear and hydro tax you, highlight it for 2002. Can I see that there is a full year impact for the entire year? And finally I just wanted to double check regarding that one, it’s all about taxes, I know, but regarding that one-off tax impact you forecast to get you in the fourth quarter of 2013 whether you already have an understanding of how big that would be.

Thanks very much.

Markus Rauramo

Okay. With regards to the effective tax rate, the guidance we’ve given now is based on today’s situation. So if the finished tax rate is coming down, that will have some impact on us as well. That, of course, depends on where profits are generated.

And then regarding the Swedish increase of 40 million, that is the full year impact and you can imagine that when we have taken an impact of that already in the first quarter, we have roughly a period.

And then your last question was, can you please repeat that?

Christopher Kuplent – Merrill Lynch

Regarding the one-off gain you are forecasting to book in the fourth quarter of this year on the level of corporate tax environment, can you already tell us how big you think that might be?

Markus Rauramo

It will be in some [inaudible]. So clearly smaller than what the impact was that we got from Sweden. So we have a different situation because of tax liabilities in Finland.

Christopher Kuplent – Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from Sanna Kaje of FIM.

Sanna Kaje – FIM

Yes, hi. It’s Sanna Kaje from FIM. I have a couple of questions. The first one is related to Russia, so I was just wondering about the adjustment to the capacity payments under the CSAs.

So how often are they adjusted based on the development of the power prices? And the second question is about your CapEx guidance, why is it unchanged despite the delays in the Russian investment?

Thank you.

Markus Rauramo

Yes. The adjustment in Russia when they’re all calculated and viewed. It’s done every tree on every 60. And with regards to CapEx guidance, we have given quite a broad range from 1 to 1.4 billion and what 1.1, none other than 1.1 in 2014. So that’s a range that gives possibilities and then also we do make significant prepayment and not a very big part of the total CapEx program is left, so 490 million at the end of this quarter is left of the total Russian CapEx program.

So a bulk of the total CapEx foundation, our next year is coming from elsewhere.

Sanna Kaje – FIM

Okay, about the adjustment, do the capacity payment, have they already been some adjustments or when do you expect those?

Markus Rauramo

Yes. It happened three years after commissioning of its plant.

Sanna Kaje – FIM

Okay. Okay. Thanks.

Operator

We’re going to have to take a follow-up question from Robert Schramm-Fuchs or Macquarie, please go ahead.

Robert Schramm-Fuchs – Macquarie Research Equities

H, thanks for taking my follow up. Just two more if I may. Firstly on the [inaudible] you presented there are quite substantially below normal at this stage of the year. I just wonder if you want to share with us your outlook for snow mail.

There’s a good chance that we will continue to see below average level over the coming weeks and months. And just secondly, I know that you ever cost that from 2.5% to just 4.1% quarter over quarter. Could you give us some color on what the main driver was of it and what the rate you expect to be going forward? Thank you.

Markus Rauramo

Yes. The Nordic hydro level can change very quickly depending on the overall weather conditions, on the rain, on the melting of the ice. The spring have been rather dry or very dry.

And then when the flood started, it came very quickly in one goal. In that, you cans see in the slide that I showed when in the last week, the suggestion that stabilize them then started to come up. But this is something that is very difficult to forecast. What we can say is that if this continues, then it will support Q2 and Q3.

The average cost of debt going down, that is something we have been anticipating if the interest rate stay at this lower level. Basically, it’s just a function of gradually, for example, floating legs that’s being on our edges rolling over. So we are going to watch the direction that’s the underlying rates or supporting.

I would say in the long run, we start to be at the very low end of what we could expect that’s a long term cause of debt. So as a proxy, I would rather use something around 5% on a long-term basis. We are at very unusually low levels.

But if you look at the four points that we have been issuing on the spread during the quarter for the 10-year bond in Euro within last year and 2.75 Swedish krona. This of course explains very well why the cost of debt continues to come down.

Robert Schramm-Fuchs – Macquarie Research Equities

Just to follow up, do you see potential for it to fall below 4% average costs in the coming quarter?

Markus Rauramo

I can’t really comment on that. That depends. But if the rates continue to stay extremely low, then there are still some rooms to go but not very much. You can look at the coupons of the debt that we have in our books. So I’ve got that ultimate with some kind of floor when we do keep about half of that in fix.

Robert Schramm-Fuchs – Macquarie Research Equities

Thank you.

Operator

You have a follow up from Benjamin Leyre of EXANE. Please go ahead.

Benjamin Leyre – EXANE

Yes, thank you very much. Two quick follow up. First one the Finnish government was making us to decrease the plan flow back on hydro and nuclear. But I actually do believe that the slower level will be implemented. And second point on Russia, I wonder what you read in the Russian government decision to price gas price by 3% in April which particularly shed some dollar and should target to increase gas price by 15% ever year.

So even if inflation becomes (inaudible), could that be really crossing the possibility that the generosity of remuneration for new plants have been revised only the [inaudible]. Thank you.

Markus Rauramo

Okay. So first of all with regards to the question about the windfall, yes it was revised down from 170 to 50. But we do understand that still it is unclear how this tax would be implemented. And it actually would concern. So our preference would be that it would then be concerning all power producers and not be selective.

And our understanding also is that that very selective tax would be very hard to implement. So we don’t know actually how this could be and would be implemented at this stage.

Regarding the Russian gas prices, we have of course followed that very carefully. And it is quite clear to us that the Russian government’s target is actually the reason of transparency [ph]. The timeline for that has been pushed forward. But that continues to be official target. So I think that is our view that that is what Russia is going towards. And from our point of view, the important thing is that when we have the most efficient capacities in the markets on the margin state [ph] and when the gas prices increase it will only improve.

Benjamin Leyre – EXANE

Thank you very much.

Operator

Our next question comes from Florence Taish [ph] of MSS [ph]. Please go ahead.

Florence Taish

Yes, hi. Actually, my questions are a little bit more long term. And I was wondering if you could give us maybe a little bit more details on your thinking for 2015 and in particular I’m just wondering about CapEx in that year given that the Russian program should be largely completed and in particular if you exit [ph] distribution, what impact that would have on your CapEx. I guess, the question is would you then be around the maintenance CapEx level that you give in the release, the EUR500 million to EUR550 million. And then the second question is on your hedging, again, it seems like you’re achieving prices that are somewhere around EUR5 above the forward prices and I was wondering if you’ve started to hedge for 2015 and at what level if you could give us some color on that.

Markus Rauramo

Okay, regarding CapEx, of course, we look at CapEx all the time against our cash generation capability. But we have a very good pipeline of projects that we could in the right circumstances implement. We have an excellent platform, good competencies. We have presence in growing markets in Eastern Europe in Baltics, Poland, Russia, and based on this platform we have good possibilities for growth under right circumstances. So we believe in a good future also for new projects. But, of course, we evaluate that very carefully. I don’t foresee that we would be going down to just pure maintenance CapEx levels.

With regards to hedging, we achieved better prices than the pure system price that you can see in [inaudible] so we got those off the area price – the price difference also on top of that which tends to be a couple of Euros and we do some finance restructuring typically where we get some addition on top of that. And that is actually then the hedging price that you see, so it’s not the pure system price that is visible there. We give the hedging ratios for 2013 and 2014, so at this point of the year we don’t yet start to disclose what our hedging is in 2015. But we have started also to hedge that year but we will get back to that later during this year in Q3.

Florence Taish

Okay. And so on the CapEx, how much CapEx does the distribution business take up at this point?

Markus Rauramo

The distribution takes about EUR300 million per year.

Florence Taish

And when you give that figure of EUR500 million to EUR550 million of maintenance CapEx, that includes distributions?

Markus Rauramo

Yes, that includes everything.

Florence Taish

So if you were to sell distribution, your maintenance CapEx would fall to EUR200 million.

Markus Rauramo

Not, no – so there is some growth CapEx. Like we have been highlighting also, the number of our customers is growing so we make also growth investments in the distribution area, but we don’t separate that as such. But part of the distribution CapEx is also for growth.

Florence Taish

Okay. Okay, great. Thank you very much.

Operator

(Operator instructions) As there are no further questions at this time, I would like to hand the call back to the speaker for any additional or closing remarks?

Markus Rauramo

Okay. Thank you very much. I would like to thank you all for participating in the call. And just to reiterate that we had a good quarter but we worked hard to achieve it. All of our 10,300 people are very committed. Market conditions are challenging but we will continue our focused work to reach our target and this goes definitely and especially for Russia. We believe that we are in a good position when looking forward; strong competencies, strong balance sheet, and we continue to implement our strategy while emphasizing safety both for our own personnel and for our contractors. Thank you very much for attending and have a good afternoon.

Operator

That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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