FORTUM CORP FINLAND (FOJCF.PK) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.19.13 | About: Fortum Oyj (FOJCF)

FORTUM CORP FINLAND (OTC:FOJCF) Q2 2013 Earnings Conference Call July 19, 2013 9:00 AM ET

Executives

Markus Rauramo – Chief Financial Officer

Analysts

Benjamin Leyre – Exane BNP Paribas

Nathalie Casali – JPMorgan Securities Inc.

Robert Schramm-Fuchs – Macquarie Research Equities

Anne N. Azzola – Morgan Stanley & Co. International Plc

Patrick Hummel – UBS AG

Céline Chérubin – Natixis Securities

Zoltan Fekete – Credit Suisse Securities Ltd.

Andreas Thielen – MainFirst Bank AG

Ingo Becker – Kepler Capital Markets SA

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2013 Fortum Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Markus Rauramo, CFO. Please go ahead.

Markus Rauramo

Okay, thank you and good afternoon also on my behalf. I will go straight into our result presentation and to page three and start with some of our key figures from Q2. As you can see, our sales were up year-on-year, comparable operating profit up from €284 million up to €298 million. Earnings per share up to €0.35, and what we were very happy about is that the cash flow was strong. Net cash from operating activities was €400 million compared to last year’s €319 million.

Results of Q2, even considering the items comparable; the EPS was better than last year, also the same goes for the first half year, the same indicators were stronger than the year before, and finally, the same also for the last 12 months compared to the full year 2012.

I move onto page four and some of the highlights from the second quarter. Overall, we can say that our operational performance across the company was good. Availability was good. We were happy to see our nuclear performance improving. At the same time, the hydro volumes were clearly lower. We did proceed with our investment plans. We inaugurated two CHP plants, one in Lithuania and one in Finland. We did a small solar investment in India and increased district heating network presence in Tartu in Estonia.

During Q2, we have started the future assessment of the Inkoo coal-fired power plant. We have started the co-determination negotiations in Inkoo. The efficiency programme is progressing well and according to plan. We have continued the assessment of the electricity distribution business, and we continue to put high focus and priority on our customers’ sustainability and the well-being and safety of our personnel. We have been happy to see that the number of customers have continued to increase both in our Heat business and Electricity Sales.

Then I turn over to the market conditions in the second quarter. On page five in the Nordic countries, power consumption in the Nordic stayed on the same level as last year. The Nordic water reservoir levels started to normalize and the Nordic system spot prices were 35% higher compared to last year’s comparable period. The volatility around CO2-emission allowance prices continued during the quarter. We did get positive news from the European Parliament in July, where the backloading proposal was approved, but the final agreement is still needed before the backloading can be executed. In Russia, the power consumption both in Tyumen and Chelyabinsk area increased marginally, and spot prices developed positively 13% compared to last year’s Q2.

If we then move on to page six and look at the water reservoir development, as you recall from last year 2012, looking at the dark blue line in the picture, we had historically high water reservoir levels, which affected also the pricing last year. At the back-end of Q4, the reservoir levels started to come down and if we follow the dotted red line, we reach lows in the beginning of Q2, then the reservoir started to normalize, and now we are a little bit under the reference level. From our point of view though, the rain has been largely in South Norway, so not necessarily hitting our reservoirs as much as this picture would show.

On page seven, we see the system price, historical and the forwards as well. We are on clearly better levels this year than last year, €38 average Q2 compared to €28 last year. Forwards are around €35 plus/minus going forward. On top of this, it’s important to remember that we then get the earlier price differences and we do have a bit of financial structuring. So our achieved prices with today’s input would be higher than what you can see here.

Then I move on to the Nord Pool and Russian prices and achieved prices on page eight. As you can see from the top left hand corner, spot prices in Nord Pool year-on-year increased 36% to €38.7. At the same time, our achieved power price only increased 3%. This is due to our high hedging levels, which gives us the stability. So last year when system prices were lower, our achieved prices didn’t come down anywhere as close as much. In Russia, the spot price year-on-year increased 9%, and our achieved price now to follow on that, we were up 6% on year-on-year basis.

Then if we move on to look at the divisional performance and more closely the Q2, overall the group did better. Result increased from €284 million to €298 million. Power was down, we had lower hydro volumes and we also had the Swedish tax increases impacting us. In Heat, we had fuel inventory revaluations that were a positive last year. Otherwise, we had a warmer spring this year. Russia, positive €16 million up, and what I like to highlight is that in division Other, we had €12 million lower cost. This is in line with our €70 million, €80 million expectation for the annual cost in Other, and also reflects well the progress we have made on the efficiency programme.

Then if we move to page 10, .look at the happier January-June, the comparable operating profit on the group level, up by €10 million. We continue to see the same cost pressure for the half year on Power. There is impact from the Swedish tax about €20 million, foreign exchange about €10 million and also volumes are lower. In Distribution, the result up €36 million, we had some costs affecting the 2012 numbers and now the early part of winter was colder, so that improved the volumes in Distribution in this period.

Then moving onto fuel and CO2 allowance prices on page 11, prices for coal, oil and CO2, all weakened in Q2. The backloading decision was a positive decision from our point of view, but the final implementation that is still pending. So we will have to wait to see what happens there.

Then I move over to page 13 and take a closer look at the financials. The only thing in this table when we compare the comparable operating profit and reported operating profit, is stayed back from our hedged evaluations and nuclear fund adjustments, which made a €140 million difference between the comparable operating profit and reported operating profit during this year’s Q2.

Last year, we had hardly any items affecting the comparability, so the results were almost the same as, and the same goes for the first six months comparison between the comparable operating profits. Then if I move on to the division of numbers in Power, Q2 we had a slight decline in comparable operating profit, nuclear volumes up, thermal volumes up, power price slightly up, but hydro volumes were down. Overall, nuclear availability was good.

We started the Inkoo assessment during the first half, the lower water reservoir levels and inflow decreased the hydro generation quite significantly. We had higher operating costs, but they were partly offset by the savings in the efficiency programme. And as we’d expect, tax increases is putting pressure on the results as I mentioned earlier. If we move to page 15, look at Heat during Q2, we came down from €24 million to €11 million. We had the change in fuel inventories, lower Heat volumes in Sweden and also less income from electricity certificates sales. The operational availability and performance was good.

During the quarter, we have inaugurated two efficient CHP plants in Klaipeda and Järvenpää. First half, the operating profit was impacted by the lower power sales price and the same change in the fuel inventories. We have a good pipeline of ongoing investments, so there is more coming from Jelgava, Joensuu, Brista and Värtan. These are impacting our investments, as you can see, which are still on high level, both in last 12 months and 2012.

Then I move onto Russia. In Q2, comparing to last year, we got the result up from €4 million to €20 million. The new CSA capacity unit had a positive impact to the result of €34 million, compared to €17 million last year. For the first half year, we did have lower heat volumes due to the warm winter in Chelyabinsk area and also the fact that we divested the Surgut heat networks. Nyagan 1 was successfully commissioned in the turn of March-April and we get the CSA payments from 1st of April.

And finally, we just reiterate that we have the same target €500 million run-rate EBIT during 2015 from Russia division. We have still €490 million of the CapEx left. We did have some cost overruns in Chelyabinsk GRES due to the more difficult filing work and some cost overrun on the equipment side, but again, things that are under our control, which we did and fully were able not to forecast when we started , but Surgut is proceeding well at the moment.

Then I move on to Distribution, during Q2, results increased from €51 million to €60 million. We had positive impacts from increased amount of cable relocation and network relocation. Cost savings contributed positively for the P&L, stronger Swedish Krona, and then we still had storm costs during Q2 2012. During the first half, same factors; operationally, the successful rollout of the smart metering continued well, and as you know, we have started the strategic assessment of the Distribution business, which is also proceeding according to plan. For the LTM, the comparable operating profit was €356 million, gross investments somewhat over €300 million, and comparable RONA, nicely above 9%.

Then I move on to Electricity Sales, the result was in a good level. Result increased from last year’s €11 million to €13 million. We have been successfully increasing our customer base, also market conditions have been good, stable and predictable, and also Sales Trading gave us some positive impact. The same factors are impacting the half year. So overall, we are very happy what we are able to do on the customer front, and we have been rolling out continuously in new solutions and new services to our customers.

Then I move on to the income statement on page 19, I first look at the two left hand number columns, Q2 2013 and Q2 2012, sales up somewhat, expenses following that. We had a little bit less favorable production mix with less hydro and more nuclear, so more costly production, still comparable operating profit up €40 million. Items affecting comparability as we saw in the previous pages, €140 million compared to last year. Then we move down to share of profit from associates, mostly TGC-1, Hafslund. Financial expenses, a little bit higher than last year, increased amount of debt. Profit before tax went up to €388 million and therefore also the income tax expense higher than last year. That gets us to the net profit of €314 million in Q2 2013 and EPS of €0.35, and out of that the comparability items are about €0.12. So on a like-for-like basis, the EPS up as well.

The other thing I’d point out here is the items affecting comparability in 2012 and the LTM. There we had sales gains from Heat, from Surgut, from small hydro, and so on. And other thing that I would mention is that also here if you open the P&L a little bit more, in our notes, you can see that the personnel cost is coming down, and even if we are hit by external cost increases, taxes and so on, we have been able to mitigate that.

Then I move on to the cash flow statement on page 20, if we start from the first row, EBITDA, Q2 2013, €617 million. The non-cash flow items, divesting activity is mostly the fair valuations and nuclear fund adjustments. Then we have the financial items, €131 million, basically at the same level as last year. Taxes, more in normal level, we had high tax payments during Q2 2012. We get the funds from operations of €240 million and then we had a positive item from the change in working capital, €160 million improvement compared to last year’s around €110 million. So the total net cash from operating activities went up to €400 million, which was a good performance. CapEx a little bit lower than last year and then small acquisition of shares and other investment activities that gets us to cash flow before financing of €119 million.

Then moving onto the key ratios on page 21, what has been positive is that the comparable EBITDA has improved from 2011 to 2012 and to LTM where we are now at €2.443 billion. At the same time, though, due to our heavy investment pipeline, the interest-bearing net debt has increased to slightly over €8 billion and that gets us to comparable net debt-to-EBITDA of 3.3 times.

ROCE, which is above our target to be at three times or below that. Return on capital employed has improved from 2012 numbers to 10.5%, but still we are not at our target of 12%, so of course, we have high focus on improving this number. Return on equity is at 15.4%, which is above our target, but driven by the comparability items. Liquidity is good. We have credit lines totaling €2.2 billion and €1 billion of cash.

Then I move onto the efficiency programme on page 22, again reiterating the reasons, we want to increase our speed, improve our cash flow by €1 billion and improve our flexibility. We are reducing the CapEx compared to what we guided before the programme; divesting non-core assets, reducing working capital and reducing our fixed costs during 2013-2014. The programme has proceeded very well. Cost savings are happening at all levels. We have really good commitment in all parts of the organization, and also during Q2, we announced two divestments of non-core assets, Härjeåns Kraft and Infratek, and the sales gain from these will be booked into our Q3 results.

Then I move over to page 23 and our debt maturity profile. a couple of observations here, we have about €2 billion of maturities during 2013-2014. Like I mentioned before, we have good liquidity, €2.2 billion of undrawn credit facilities and €1 billion of cash. We have excellent access to the debt markets. We have been issuing close to €800 million worth of Swedish Krona, and euro, both fixed and floating rate notes up to 30 years at very competitive rates.

You can see on the slide that the average interest rate for our debt has come down from €4.5 to €3.9, and as we refinance the order loans, and we are borrowing at more competitive rates. There is still some room if rates would stay at these levels to come down, but not very much and we are, of course, dependent ultimately on the prevailing interest rate.

Then I move over to outlook on page 25. In the Nordic market, we expect that the annual electricity demand will continue to grow about 0.5% per year and as electricity will continue to gain share in the total energy consumption. In Russia, our goal is to reach the €500 million run-rate EBIT during 2015 in the Russia division. And the risks for our outlook remain the same, price of electricity and volumes, demand and supply balance, fuel costs, the hydro situation has a big impact on our volumes, power plant availability, of course, something that is fully in our hands and then the CO2 emission allowance prices.

Moving over to page 26, our CapEx guidance remains the same, €1.1 billion to €1.4 billion during this year and for next year €900 million to €1.1 billion. Our hedging is at good levels, where we want to be in. We are hedged 75% for the remainder of this year at €45 and for next year, we are hedged 50% at €42.

On the efficiency programme, our target is to improve our cash flow by €1 billion during this year and next year, and finally on the taxation, a lot of things going on. All in all the effective tax rate for Fortum Group is expected to be between 19% and 21% and we are still expecting that the Finnish Government will go ahead with the reduction of the corporate tax rate to 20%. If it happens, then it will have a one-time positive effect on our deferred tax valuation. This would be booked in the fourth quarter of this year.

The update of the real estate taxation value system ongoing in Sweden, we have rather good visibility on what it would mean for us. We expect about €40 million increase in our expenses and we have been taking this already during Q1 and Q2 into our numbers and it is visible in the Power division results.

And finally, the Finnish Government has announced that the so-called windfall tax that should be introduced in 2014, would be cut to €50 million from €170 million, which was the original target, but here we don’t have clear and final details about this.

I just like to finalize by saying that we will continue despite that we had a good quarter. We will put very high focus on efficiency. We continue the distribution assessment and we continue to push hard to get Nyagan 2 and 3, and Chelyabinsk GRES 1 and 2 into production in time as well as our other investments. We put high focus also on continuing to develop our customer base into the safety and sustainability of our own personnel as well.

With this, I’d like to open the floor for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll now take our first question from Benjamin Leyre from Exane. Please go ahead.

Benjamin Leyre – Exane BNP Paribas

Yes, thank you, and good afternoon. Benjamin Leyre from Exane. I would ask two questions, please. The first one on Finland on the so-called windfall tax, I wonder if from which you understand from your discussions with the government is it is quite credible for this to go ahead as soon as 2014 or not? And what’s the deadline as far as you understand for the government to move ahead on this, for this to be implemented as soon as 2014?

And second question on Russia and about the exchange rate, we’ve seen the Ruble being quite weak versus the euro. I wonder how much lower would Russian Ruble need to go for you to worry about reaching the €500 million target? And also can you help us understand to what extent you can actually hedge the Ruble exposure to maintain the euro results into your P&L? Thank you.

Markus Rauramo

Okay, let’s start with the windfall, as I said, we don’t have the final details, of course, we are of the view that tax rate should be uniform, credible and driving the right things. And for example, in this case, when this would be hitting the low CO2 production, we think it would send the wrong signal. Like said, we don’t visibility on what the final proposal would be like. With regards to the deadline, we would expect that rather soon, we should start to see the data as it could be implemented for 2014. And the budget is expected in August, so we would expect that it should be part of the budget. There should be a concrete implementable proposal there if it’s to be implemented in 2014.

With regard to the Russian Ruble exchange rate, overall, we do hedge the foreign currency denominated cash flows in our foreign operations. So we try to keep the exposure in the local currencies and with disposal activities that we have had, as you see, we reiterate our target. And when we look longer term at what is the actual economic exposure, our customers are also dependent on the currency rates and the competitiveness of the different countries.

So if we take to all the main exposures Russian Ruble, Swedish Krona. If the Ruble or Swedish Krona weakens, that will improve the international competitiveness of our customers. So it will have a natural offset and then it’s a bigger question that what determines ultimately the power prices. But economically, we see that this approach gives us a natural hedge. If there would be sudden very big movements, then of course, it might have an impact on immediate P&L impact in the very short-term, but in the long-term, the competitiveness dynamic should and has historically, of course, proven to offset the short-term impact.

Benjamin Leyre – Exane BNP Paribas

Thank you very much.

Operator

Thank you. We’ll now take our next question from Nathalie Casali from JPMorgan. Please go ahead.

Nathalie Casali – JPMorgan Securities Inc.

Hi, good afternoon. I have two questions. The first one is on cost cutting. Could you give us an indication of the impacts of cost cutting in the first half on EBIT in terms of euro million and are you confident or saying that your targets could be conservative. so the €150 million for 2015, do you think you could do better than that? Secondly, on the Distribution network sale, if this was to happen, which it seems like it is the main option now. How much do you plan to reinvest versus how much do you think you will keep to decrease leverage? Thank you.

Markus Rauramo

Okay. Let’s start with the cost cutting, like I said, it’s proceeding very well. I have to say I have been positively surprised, not so much about the numbers, but that we have been able to get everyone, 10,500 people in Fortum to work for the target. We don’t disclose the number or million of euros impact. I would say that, that it will be back-end weighted. So we have a two-year program and we wanted also everyone to develop solutions that are not just for the short-term for a couple of quarters, but that will have an impact not just in 2013 or 2014, but where we get permanently better, faster and more flexible solutions. So all the time we are working also to find things that will impact our 2015, 2016 numbers.

With regard to the conservativeness, we have the target €150 million run-rate saving by the end of 2014, so we don’t see any need to change that. What I would say is that already during this time, we can see that that when we unleashed the power of innovativeness and get the idea, it seems we can see that there are steps we can take beyond what we will do in 2013 and 2014, but those are the changes take time. When we take good time, we can implement more so with lower costs, so there will be less one-time type of cost and so on.

With regards to the Distribution assessment, I would say that the assessment is going on and we will target to complete the assessment during this year. If the conclusion would be a sale of Distribution, we understand that this is the most stable business and that gives us more balance sheet capacity than a riskier business. So earlier we have been saying that that if it would be divested, we’d probably have to take our net debt-to-EBITDA target down maybe half a turn to 2.5 would be something in the appropriate range.

That said, I would just remind that at the same time, we are investing in fairly stable businesses. So our new CHP plants, our Russian units, they are all enjoying either regulated income or income that is much less dependent on broad markets like Nord Pool, but rather operating in very local markets in the Heat business or then they get guaranteed payments like the CSA. So we are not moving from one end of the spectrum totally to another end of the spectrum if Distribution would be sold.

Nathalie Casali – JPMorgan Securities Inc.

Thank you.

Operator

Thank you. We will now take our next question from Robert Schramm from Macquarie. Please go ahead.

Robert Schramm-Fuchs – Macquarie Research Equities

Hi, thank you for taking my questions. I would like to know in terms of the Russian division, it seems there has been a small CapEx increase compared to prior planning, but it didn’t change Group guidance. So I just wondered if you could help us quantify increase in the Russian division CapEx?

And secondly, just following on from the previous question onto Distribution business, should it indeed come to a sale and should you conclude your assessment at the end of this year saying there should be a sale. What would then be the timeline for inviting bids and making the decisions, just sort of help us think about in terms of that scenario? And also with regard to Distribution business, what would be good comparable transactions that you are presently looking to for valuation across suites? And a final question I would have, do you have a timeline for the EU investigation to the Swedish hydro power plant property tax, and if so, could you share it with us? Thank you.

Markus Rauramo

Okay. If I start with the Russian division CapEx increase, yes, we have to increase the estimate in Russia, it’s some tenths of millions. So in the total to be €4.5 billion investment into Russia we talk about. There is small number in the totality and even for the new investments, not a very big number, so the total new investments are about €2.5 billion. Small number is disappointment to us. We’d like to be very accurate, but this is not something that would be material.

then for the Distribution, if there would be a sale what would be the timeline and so on. That is very premature to say. So we’ll start to do the assessment and then see what the conclusions are there. and until we have any decisions, then everything is just planning and theory until that. Just to get some ideas about comparable transactions less than 2012. So their networks in Finland I think that’s something that one can look at fast, of course, everything is always contingent upon market conditions and appetite and so on. So I wouldn’t draw too many conclusions from there either.

For the EU investigation into the Swedish tax, I cannot speculate on that timeline, but we are very happy that it’s being investigated, and like I said, we have been facing that. we are offsetting that with our efficiency programme. If there is more to come, of course, that means more work. That I can assure that our focus and our commitments to fight whatever comes externally is very strong, and hope that our management teams are committed to providing good results, no matter what comes from the outside. But we think it should be fair and logical, and it should – the taxes should be sending the right signals what to invest in, what to do, what do we politically want, for example, from different production methods. So we think to penalize the low CO2 production is not the right signal to send.

Robert Schramm-Fuchs – Macquarie Research Equities

Thank you very much.

Operator

Thank you. We’ll now take our next question from Anne Azzola from Morgan Stanley. Please go ahead.

Anne N. Azzola – Morgan Stanley & Co. International Plc

Thank you. Good afternoon. I have three questions. First one is on your Inkoo core plant. Could you help us quantify the potential impact at the EBIT level on full year basis if you were to confirm the closure? That would be number one.

Number two, you referred an increase in working cap, I mean, an improvement in working cap. Could you help us quantify which part of this is seasonal versus structural and the results of your implementation measures? And third question, I would like to come back to your comment on Slide number 9, with the improvement in Others, I am not sure I understood it correctly. You said that the reduction of those costs was the result of the cost cutting, is that correct? Thank you very much.

Markus Rauramo

Okay. On the Inkoo plant, the plant has not been very profitable, so the impact on us has been very marginal both ways. So if it would not exist, then the impact would also be rather small. So either way there would not be big impact, but this is premature. We are going through the co-determination negotiations at the moment and we will then see the outcome of that, and then the company has to think what the conclusions are.

In the working capital, yes, seasonally Q2 is a quarter where working capital should come down when customers are paying us the receivables we have from the colder period. It’s hard for me to exactly quantify how much is the non-seasonal impact, but if we compare last year, working reduction was about €110 million, and this quarter, €160 million. So that gives us, let’s say, a slight magnitude of what it could be. And then under the division Others, the cost reduction efficiency programme definitely had an impact on that.

Basically, in all of our group functions, we have been able to take the cost down. Also we had a move of – that had a slight impact also that the trading and industrial intelligence moved from Other to Power division that had a few million impact, but most of the reduction is actually reduced cost in the functions. And still back to the working capital, we have been just about what have we been doing. So we have been staying more uniform and closer attention to, for example fuel and metals across the board in the Group. We have been applying same practices and we feel that without even increasing our risk at all, we have been able to take inventory levels down and that has been a very strong performance from the team.

Anne N. Azzola – Morgan Stanley & Co. International Plc

Thank you.

Operator

Thank you. We’ll now take our next question from Patrick Hummel from UBS. Please go ahead.

Patrick Hummel – UBS AG

First one on the Nordic power price, actually, it has held up relatively well over the past months, and despite lower commodities, year-over-year and then also by hydro conditions and on quite a few days, Nordic has been even at a premium to the German, what’s your view why is the Nordic price is where it is and do you think it would be a sustainable situation that Nordic is at a premium at least during the summer half compared to the German price? And the second question relates to Russia, I mean, you now have the new unit commissioned and received more capacity payments, but if I exclude that reversal of the provisions, there hasn’t been any earnings growth at all in the division. Can you just help to reconcile what’s going on in other parts of the business in Russia, what’s actually the big drag on the earnings and why haven’t earnings increased more?

Markus Rauramo

Yes. Okay, so on the Nordic power price; I think overall, what we expect to happen is that the transmission capacities will continue to increase between the Nordic countries to the Baltics, to Germany, to UK, to Benelux countries. This is happening and we’d hope more of that to happen, because when the value are more flexible and very competitive, capacities will increase. and we are able to provide what the stability and the good base load capacities that Europe will be needing with the increased renewables.

So I think conceptually in a large scale, we expect that our price anchor will be larger and there will more convergence overtime technically. how that can place out every day, every hour and every week to power prices, that of course, is always subject to then the technical situation in various markets. but overall, I’d say technically, we expect that markets will converge and that will somehow translate into the pricing.

With regards to Russia, indeed, we got Nyagan 1 up and running, but we started, just in the end of March, we started receiving the capacity payments 1st of April. So we are now going to the normal start-up here. So, and I’d say also that even if we clean out the CSA provision, Russia improved its performance year-on-year. So we did come up.

We mentioned that the new units are contributing €34 million compared to €17 million in the comparison quarter, so they are doing better and better all the time, and as we have been expecting, the old capacities are under pressure and that’s been the thinking also of the Russian regulator. They want new competitive investments and gradually the old capacities will be pushed out quite naturally.

But the startup here has been normal, the startup has gone well as such. It’s been a long path for us. Nyagan has not been the easiest place to invest in total Greenfield projects, very far away from large 50s and therefore, we are happy and proud of the achievement of our team in Siberia.

Patrick Hummel – UBS AG

Okay. Thank you very much.

Operator

Thank you. We’ll now take our next question from Céline Chérubin from Natixis. Please go ahead.

Céline Chérubin – Natixis Securities

Yes, good afternoon. Just one, two, in fact, additional question, could you little bit elaborate more about the working capital, because the question was not only regarding the improvements you recorded for the Q2, but what we have to expect if part of this one is structural starting from now until the end of this year? That’s the first question. The second one is concerning your hedging volumes, you were mentioning that in the Q1 you were at 80% for the year 2013 and you're at 75% at the end of H1. Could you just elaborate a little bit about the difference regarding the volumes, which has been reduced from one quarter to another one, anything?

Markus Rauramo

Okay. For the working capital, I would put it so that the working capital for us is very dependent on the volumes and the temperatures and so on. So it depends on how much our customers are buying and there is a lot of seasonality in the working capital. Overall, we have high heat volumes in the cold season, with tight up working capital and then it again comes down when customers are paying and heat loads are less.

We have been, on the structure side, we have been getting some tens of millions benefit now from the work that we have done, and I think fuel profits where we have done even greater progress. We have found new ways of working and operating across the board. So we can implement these practices then further in our other businesses. But the push continues to be very tight on that side.

Then when it comes to the hedging levels from 80% to 75%, the 80% level is quite high for our base, so that is more of a result of low volumes and having hedged already for longer time before, and the 75% is something where we are and this is for the rest of the year, of course. So we always look at the rest of the year and the hedging profile, but we try to target in the close period fairly high hedging volumes to get the stability and even if the hedges as such stayed stable. But depending on the volumes and the forecasts, the percentage might be fluctuating.

On the hedging philosophy, still I would say that we are not speculative on the hedging. So the target is to get the stability, and predictability, and visibility in the cash flows. So we don’t take a lot of view whether the prices are higher or lower. We give our trading organization a band mandate where they can operate, but about the philosophy remains the same.

Céline Chérubin – Natixis Securities

Okay. Thank you very much.

Operator

Thank you. We’ll now take our next question from Zoltan Fekete from Credit Suisse. Please go ahead.

Zoltan Fekete – Credit Suisse Securities Ltd.

Hi, good afternoon. I have three questions please. The first question is on disposals. How much of the €500 million disposal of program has been achieved yet? You’ve announced several transactions so far, but I was hoping that maybe you could help us with an aggregate figure or a run-rate since the beginning of the program? And then the second question is on CapEx, the target for this year was €1.1 billion to €1.4 billion. If I look at the year-to-date run-rate, it’s just about €0.5 billion. Shall we expect a similar amount for the second half of 2013 too, which would mean that you end up around the lower end of your guidance range, perhaps even below that or shall we expect H2 to be heavier, significantly heavier in CapEx than H1 was? And then the last question is on taxes, could you give us an estimate of what you expect the one-off positive impact of the lower corporate tax rate to be on your 2013 full-year results? Thank you very much.

Markus Rauramo

Yeah. On the disposals, the question was that how much of the €500 million has been done, and number is about €100 million in the last quarter, we did Härjeåns Kraft and Infratek and then we have the (inaudible) divestment. So we are above €100 million with the disposals.

For the CapEx, indeed, we have about €500 million year-to-date and we have quite often had year-end weighted CapEx, so both of the projects are happening there and final bills get paid. So we continue to keep the same guidance €1.1 billion to €1.4 billion. And on the Finnish tax, the one-off impact is in the some tens of millions of euros. So we’ll see once we get there and if this happens, then it would be booked into Q4.

Zoltan Fekete – Credit Suisse Securities Ltd.

Thank you.

Operator

Thank you. We’ll now take our next question from Andreas Thielen from MainFirst. Please go ahead.

Andreas Thielen – MainFirst Bank AG

Yes, good afternoon. Firstly, on the Finnish tax or rather on the Group tax level overall, would you still say that in the light of that tax changes, 21% is the target range you are looking for. Secondly, with respect to Russia again, if I understand it correctly I mean, its possibly fair to say that margin on the old plants plus distribution negative given the payments you get for the new plants. For the €500 million target, is it necessary for these two elements to turn positive or to improve or is it sufficient just that you get the new capacities up in running to reach the €500 million target and linked to that do you also, would it be sufficient to see current capacity price payments staying or until 2015 to reach that target. And just one small thing, in the distribution business you said that the improvement is due to the relocation of cables, I have to admit that I failed to understand really how that’s just having a positive impact, if you could just explain. Thank you.

Markus Rauramo

Okay, so I think they were three questions. So if I start with the debt change, we have guided to the 19% to 21%, so even if the Finnish tax rate changes, of course, Finland is only a part of our operations, it could have a marginal impact. But I think the range might be in 21%, it’s quite an appropriate range and of course 20% would be inside that range. And this depends on all the different operating countries we are in. I think it gives a very good proxy. For the rest of €500 million what is required, current circumstances, current policies, and the investments. So we are not expecting or waiting for any kind of new decisions, any kind of new support. The policies that are in place are adequate, CSA payments as they are today, are adequate to reach that target. We have decided to implement the programs and run our operations and we will get there. Then for the distribution, the relocation of cables, if we get new customer connections, or we have situations where we will have to relocate for one of the other reason like indicating Stockholm, we are moving cables because there is new construction, new zoning and so on, then we get compensated for that and then this is, so it is income for the work that we have been performing.

Andreas Thielen – MainFirst Bank AG

Okay.

Markus Rauramo

Sorry for the ambiguity on that.

Andreas Thielen – MainFirst Bank AG

No, no. Thank you. And so that is rather infrequent, yeah, okay occurring.

Markus Rauramo

Yeah. It’s that our new customer connections are of course, something that is happening all the time.

Andreas Thielen – MainFirst Bank AG

Sure, yeah.

Markus Rauramo

So, we can get compensated for that. This relocation, we talk about a few million here in this specific case that we are referring to, but also the difference in increasing profit was not so negative, so this expense is part of that change, the €99 million difference year-on-year.

Andreas Thielen – MainFirst Bank AG

Thank you.

Operator

Thank you. We’ll now take our next question from Ingo Becker from Kepler Capital Markets. Please go ahead.

Ingo Becker – Kepler Capital Markets SA

Yeah, thanks. Good afternoon. Sorry I again, also have a question on Russia, could you maybe help us modelling this a bit better or understanding the numbers. the commissionings of Nyagan and Chelyabinsk that you have in front of you the remaining units and capacity numbers there, for that to make your €500 million EBIT target, does the CSA capacity payment have to rise about 600,000 rubles a month per megawatt? Or is it really just the capacity numbers coming in obviously remain the same, and also can you get some hint about what the fixed cost base will do. Should we assume, your current cost base as we see it in Russia, fixed cost base to be rather stable or would that increase with the commissioning of the new capacity, one would expect a letter. Secondly, can we assume that Russia takes the €100 million EBIT hurdle this year, and third question, if I may would be on Distribution, is there an alternative to selling distribution or is this given your debt levels and your targets for your debt the short-term outlook also for your dividend I guess is it an absolute necessity to sell distribution or if you don’t sell it, I guess the question is do you need or want to sell something else or is it really a yes or no question and you kind of feel hard to answer? Thank you.

Markus Rauramo

Okay. So on Russia, definitely it’s easy to help the modeling part there. So we have in the interim release. We have the tables as you know where we have the CSA payments per quarter for the new capacities, CCS for the old capacities. We have the gas prices, electricity prices, et cetera. So when you put these together, you assume certain activities spread for us, then you can see roughly how we get to that €500 million.

With regards to the CSA payment, how it works is that when investors like we and other investors who have invested in the CSA capacities have made the decision, but that the CSA structure basically guarantees a level of income for these new units.

And that if we make a higher spread on electricity, CSA payments will be smaller and vice versa. And the CSA levels are revised three years and six years after the commissioning of the units. So the CSA levels might change. But the basic idea is that we will be made whole regardless of what is happening.

When it comes to the fixed cost base in Russia, with the new units, yes, fixed cost base will of course increase like-for-like if everything else would stay the same. But the new units we are having will be very much more competitive and have lower fixed costs than all the units that exist today. Good to remember that all these units we have today in our suite are from 1929. and then we have that from the 30s and 40s. this also just to keep in mind, this also gives us a fantastic platform for future investments, if there would be further appetite for us to invest in Russia.

But of course, we want to make sure that investments are proceeding well. With regards to the question about the €100 million EBIT hurdles this year, whether it could be met, we stick to the €500 million run rates that are during 2015. So we don’t – as you know, we don’t give quarterly guidance for the group and we don’t guide divisional performance either.

Then for Distribution, this assessment starts from totally different angle. We don’t have any needs to divest anything to meet our debt targets. We are very cautious that we have been running a very big CapEx program; we have been investing €1.5 billion per year. we are now investing over €1 billion per year. so that we are not – in this kind of investment situation, we would have been too worried about being somewhat above our debt target levels when we know that we are investing in good projects where we will be getting good returns. but given the economic backdrop of course, internally we put a very tight screw on, and we are saying that that profitability has to be at the right level. so that’s why the efficiency programme. but the Distribution assessment doesn’t have anything to do with us having to delever the balance sheet as such.

So from that point of view, we have all options open. And with regards to divesting other activities, from the efficiency programme point of view, it’s important when we have over €20 billion balance sheet and a big number of assets. when we are building new assets, we have been this year either inaugurating or we continue to invest in more than 10 power blocks.

so when we are building new efficient unit, we all the time have to make sure that we have a manageable portfolio. so we continue to clean up the sales end of it. So this is more of a focusing effort than us being forced into having something. Sometimes, also we have these situations where we can crystallize value. we’d see that we have good operational performance, fully invested, very efficient good assets that could be more useful for someone else if they don’t exactly, if they’re not a part of our core portfolio or the geographically our business was.

Ingo Becker – Kepler Capital Markets SA

All right. Thank you.

Operator

Thank you. We’ll now take our final question today from Benjamin Leyre from Exane. Please go ahead.

Benjamin Leyre – Exane BNP Paribas

Yes, thank you. Indeed a couple of follow-up questions please. First one on Russia and Heat, as you indicated that the commission had been set in Russia to examine the Heat regulation. Can you please update us on where this stands, is it still very early or is it making a big progress? What is your feeling you get in terms of order of priority for the Russian politicians to move ahead on this quickly? And the second one, (inaudible) I’m wondering about what you would do with the proceeds of the purchaser disposal of Distribution if you decide to go ahead with these disposals? I wonder if when you are thinking about disposing the Distribution or a part of it, are you also in parallel assessing reinvestment opportunities to see significant signs of better investment opportunities or have you already identified where you would put the money or would that come actually after the end of the year once you’ve decided on Distribution? Thank you.

Markus Rauramo

Okay. On the Russia, Russia Heat commission, I would say that it is very early stages and as we expected or what we have said earlier that it’s a positive development from an infrastructure point of view absolutely, this is something that should have high attention. We know that the World Bank is focusing on it. Russian government is focusing on it. But this is something we expect that that is a process that will take many years. but I think the issue is why we acknowledge and people are aware of it. But we don’t expect any quick actions to happen from this. But this is part of the work we’re doing part of the – is being very integrated and very well connected in the societies and communities we work in.

Then for the use of proceeds question, if there would be a disposal of Distribution, like a little bit interested in the question regarding Russia. We have a great platform in Russia, in Poland, in the Baltics where we have existing customer base, we have Heat connections, we have good knowledge, good operative people, but all the assets. So with or without a disposal of Distribution, we have a possibility to invest significant amount of capital without having to expand into new areas. Of course, we are looking at that new opportunities as well. but if there would be a disposal part of the proceeds would go into continuing, utilizing our competencies in CHP, in hydro potentially also looking at possibilities in nuclear. Parts of proceeds like I said before probably would be used for debt reduction, so maybe half a turn on the net debt to EBITDA would be an appropriate level.

Benjamin Leyre – Exane BNP Paribas

Okay. Thank you very much.

Unidentified Company Representative

We will have time to take one more question. So the final question will go to the next one. If you then have the additional questions, please you can call IR, we are all here in. Thank you.

Operator

Okay, thank you. We do have a follow-up question from Mr. Thielen from MainFirst. Please go ahead.

Andreas Thielen – MainFirst Bank AG

Yes. just on one topic, when you were referring to the backloading decision by the EU, it sounded a bit like you would expect surprise movements once the decision has been finalized or put into legislation. Did I understand that correctly, so that you think that prices will go up subsequently as we have seen moves ups and downs since before and after the decision?

Markus Rauramo

Yeah. The answer is no. so I think, but at least we have seen from the external expectations that some movement, if the backloading would be finally approved, so nothing kind of dramatic on that front. I think the importance of it and why we are so vocal about it, is that it would send a signal that Europe wants to continue to develop a uniform one system how to drive the reduction of greenhouse gases, one approach to carbon and how we want to drive the system. We’d see the risk is and where we are heading right now is that there will be individual country specific solutions how to reduce CO2 output. it will be fragmented, less transparent, less predictable, which will mean less investment problems with availability from ones with availability for the network and base load power. So that’s why we feel that that it’s important for us to continue to encourage politicians to take the decision on backloading. But then also to set ambitious targets for 2015 on CO2 reduction to send the right thing of what should the industries and utilities be investing in.

Andreas Thielen – MainFirst Bank AG

Okay, thanks very much.

Markus Rauramo

Okay. Well, thank you very much everyone for taking the time to be here with us today. I really hope that now, you have a chance to take some time off. and I want to thank you and wish everyone a very good summer.

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