Fortum's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 4.14 | About: Fortum Oyj (FOJCF)

Fortum Corporation (OTC:FOJCF) Q4 2013 Earnings Conference Call February 4, 2014 9:00 AM ET

Executives

Tapio Kuula - Chief Executive Officer

Markus Rauramo - Chief Financial Officer

Analysts

Patrick Hummel - UBS

Benjamin Leyre - EXANE

Zoltan Fekete - Credit Suisse

Michael Ridley - Citigroup

Anne Azzola - Morgan Stanley

Philippe Ourpatian - Natixis

Ingo Becker - Kepler Cheuvreux

Sarah Laitung - JP Morgan

Emmanuel Turpin - Morgan Stanley

Operator

Good day, and welcome to the Full Year 2013 Fortum Corporation Earnings Conference Call. For your information today’s conference is being recorded. At this time, I would like to turn the conference over to President and CEO, Tapio Kuula. Please go ahead, sir.

Tapio Kuula

Okay. Thank you and welcome to this conference call. I am Tapio Kuula and together with me I have our CFO, Markus Rauramo. I hope that you have our material available because we are referring to different pages and I will start from page three, results and key figures.

Just to highlight some key figures; sales was down it was down both on annual level but especially during the fourth quarter. And one reason and I would say that main reason was that we had this year 30% less hydropower production than 2012, which was exceptional good year in that respect, but 2013, was a record low concerning hydropower production. And that also effected that on annual basis comparable operating profit was down as you can see 8% from €1,750 down to about €1.6 billion.

Also earnings per share was down from €1.6 to €1.36. But what we can be very satisfied is that net cash flow from operating activities that was good and increased significantly up to €1.84 billion.

And we are reporting our Board is proposing is €1.1 per share dividend to shareholders meeting. Somebody might read this as reflection of future prospect and objectives and I would say that it might be reasonable interpretation their all feelings.

If we go then to next page, you'll see some [readers] last year assess this was satisfactory resulting these circumstances especially strong cash flow. Low hydropower production, but nuclear power production was better than last year, especially because Olkiluoto [1, 2] and Forsmark with bit record high production also low (inaudible) nuclear power plant did well availability picked to 93%. There is still a lot to be done in Oskarhamn. We completed last year 7 power plant projects, what achievement five in Heat division and two in Russian pit to Nyagan power plant project.

Efficiency program is halfway through now and we can say that delivering good results. Markus will come more in detail to those but I would say that that clearly shows very strong evidence that we will reach the target.

We did bit strategic decisions concerning the distribution assessment, distribution network assessment and did also that agreement signing a Finnish distribution network divestment in December. And we expect that to be closed during the first quarter. And the process is under preparation for Sweden and Norway, no official decisions yet. We also closed or decided to close Inkoo coal-fired power plant.

Then if we turn to page number five and look at a bit about market conditions. In Nordic market we saw consumption to go slightly down. During the fourth quarter it went down 6 terawatt-hours that means that on annual level it was 5 terawatt-hours down so that actually the downturn rate happened during the fourth quarter.

Water levels which were very low during the fourth quarter or in the beginning of fourth quarter started to normalize during the December and that was very weak change. Nordic systems spot prices there were bit higher €7 per megawatt, higher than 2012. There was lively debate about the EPS CO2 rating system and finally we got the proposals also from European Union this January and the process is on [following].

In Russia the power consumption was I would say very stable. In Fortum’s operating area, it was only 2 terawatt hours down both on annual basis and during the fourth quarter from 209 terawatt hours down to 207 terawatt hours. Spot price developed positively about 10% on annual basis and 7% during the fourth quarter.

On page six you can see that rapid change in water reservoir levels compared to the reference level. And today we can say that we are very much on the strategic on reference levels.

Wholesale price can be seen and forward prices for the future on page six. And as you see at least in the history there has been a lot volatility, probably there will be volatility in the future as well. The other conclusion is that [hopefully] as we compare to the history of the current prices and including forward prices are on (inaudible) level.

On next page, page eight you can see spot price and spot price development in NordPool and Fortum’s achieved power price. NordPool spot price increased by 1%. We managed to increase our power price by 3%. And what is important here is that it seems to be that we are able to get better price standard, NordPool spot price especially when price levels are low. And one reason for that is certainly our production portfolio hydro power and [CHB].

In Russia, as already said, the spot price went up by 7% during the fourth quarter compared to fourth quarter 2012 and our achieved power price was up by 5%.

Then if we turn to page nine, and compare our different divisions during 2012 and 2013 during the fourth quarters, we see that power division was down by €174 million, quite significant delta.

But if we calculate, let’s say speculate a bit, and calculate that hydro power production was down by 3.2 terawatt-hours and if we would achieve the same prices as we achieved during the last quarter that would make €154 million. So that's really the main reason. Heat was up, Russia was up, Distribution slightly down and the main reason for that is (inaudible) storms which we had during the enter in November and during the December. We can say that approximately they cost about €20 million additional cost including customer compensations.

Then if we turn to the 2013 on annual basis and compare that to 2012, we see that all other divisions except the power division were able to improve their results and power division was down by €288 million. And if we again speculate or try to make excuses, we can compare hydropower production which was now down by 7 terawatt-hours, and let’s say that we would calculate that on annual basis on the price level, €45 per megawatt hour, you see that that is more €300 million, the delta. So I think that that is reason for excuse. Then on next page, you see fuel and CO2 allowance prices going forward; and I think there is nothing exceptional in those pictures.

So now Markus will continue with the financials and bit more detail information about different businesses. Please Markus.

Markus Rauramo

Okay. Thank you, Tapio. I will start with again comparing our comparable and reported operating profit on page 13. The main impact making the difference between these two is the fair valuation of our electricity hedges and the valuation of nuclear waste fund. and we can see that in Q4 the impact in reported operating profit was around €80 million positive and for the full year these items contributed some €105 million positive, and this was mainly in the power division.

Then I move over to divisional results on page 14. In power division, the Q4 results came down from 2012 with about €170 million. The results were negatively impacted by the all time low hydro production volumes; we also did have temporary restrictions and outages that were impacting that nuclear production. On the positive side, the power price was better than the previous year.

On the full year, the results came down around €300 million, the main drivers again the low hydro volumes, but also the increased hydro taxes in Sweden on the real estate and the write down in Inkoo.

We were able to mitigate fastly with decreased operating costs and we did have record high production in Olkiluoto and Forsmark, and Loviisa did god work. Return on net assets came down from level of 18% last year; it was close to 14% and the gross assessment leveling the division.

Then I take a closer look still at the hydro situation. In the graph on page 15, you can see the development in the reservoir balance sheets in Norway, Sweden and Finland from Q4 2012 until the latest quarter Q4 2013. We can see that we started with very high reservoir levels in Q4 of 2012 and that resulted in the very high hydro production in our end, more than 7 terawatt-hours. Gradually over the following quarters, the reservoir levels have gone down. We had at most spike in Q2 2013, but the downward trend continued until Q4 of this year. So, we had a very -- 2013. We had a very low situation with reservoirs which resulted in the beginning of the quarter for a low production for us.

Then in the very end of the quarter, the precipitation started to increase quite rapidly and volumes increased in the market pushing the prices down in the system price to levels around [13]. And that resulted all-in-all on the 3.9 terawatt-hours of hydro production for our sales.

On the following page, we take the further look into the precipitation over the last 14 years. And we start with the first part of the winter from week 46. And you can see that in most years actually the accumulative precipitation goes downward from the average or normal level. This past winter started quite normally for a few weeks, but then in the very last weeks of the year, we had a very sudden spike in precipitation. In one or two weeks, we went to 10 terawatt-hours compared to normal and eventually even to 15. And now reservoirs are at around 10 terawatt-hours, bigger or precipitation is 10 terawatt-hours bigger compared to normal.

Then I move to heat division on page 17. Q4 compared to 2012 was a little bit better. We had better availability and new CHP capacity increased the power sales. On the operative side, we inaugurated the Brista CHP plant and the Joensuu hydrolysis plant in November. On the other hand, we were negatively impacted by the warmer weather that burdened our heat sales.

The 2013 full year result was roughly at the same levels as 2012. We did get less income from sales of CO2 allowances, sales were decreasing. But the lower fuel cost contributed to increased profit. And altogether for heat division the year was good; we inaugurated five new production units during the year. The investments came down in line with our investment program from the level slightly below 500 million to close to 400 million.

Then moving over to Russia on page 18. The Q4 result was clearly better in 2013 compared to 2012. We had positive impact from the new CSA capacities and all-in-all CSA capacities close to €80 million and we got the construction delay compensation from our [EPC] contract of about €40 million.

We were negatively impacted by unplanned outages and also the Russian rouble obviously had an impact on our results. And when it weakened, it impacts the results negatively.

On the operational side, Nyagan 2 was commissioned and we started to receive CSA payment in the beginning of December.

When we look at the full year in Russia and the full year result was up almost $90 million and we had a positive impact from the CSA capacities totaling more than €160 million. On the negative side, the results were burdened by credit losses from company Energostream by €16 million. CapEx was down comparing to full year from a level of €560 million to €430. And return on net assets increased 2.7% to 5.2%.

Then I move over to dissolution, page 19. Q4 was down, it was negatively impacted by the warmer weather and then the storm cost that Tapio already referred to. Full year was roughly stable, results improved by €10 million. We still have some legal processes ongoing in Finland, but in Sweden the administrative court ruled in our favor and other network companies.

On the strategic side, we have concluded the assessment of the distribution businesses and we signed a deal to sale our Finnish networks with the value of 2.55 billion. We expect these transactions to be completed in Q1 this year and the other countries we will then evaluate case by case. The return on net assets stayed steady, close to 9% and investments came down slightly from €320 million to €260 million.

Then I move over to electricity sales. Q4 came down a few million’ the lower volumes impacted the results negatively. On full year, we saw an improvement of 10 million we had due to wholesale market conditions, our customer base increased and sales trading also supported the results.

Then I take a look at the income statement on page 21. In Q4, the sales came down and also our cost came down more than around 150 million that partially offset the decreased sales. Items affecting comparability improved by about 50 million (inaudible) electricity hedge fare valuations.

Share of profit of associates and joint ventures improved quarter-on-quarter and financially expenses were roughly flat. Income tax expense in Q4 2013 was clearly higher than 2012. In 2012 we had the Swedish tax rate change, which had a big impact on the valuation of the deferred tax assets in Sweden, tax liability, sorry. EPS came down from €0.58 to €0.52 on the quarter and on the full year they came down to €1.36.

On the cash flow side on page 22, if we start with the operating profit before depreciation we came down slightly on the quarter, as well as on the full year. The non-cash flow items, mainly the FX and interest rate hedge impact were higher negative €156 million and the financial items and FX gains and losses were impacted positively by the Swedish krona loan hedge that rolled over. Taxes were on a more, state taxes were in a normal level in 2013 around €70 million compared to the seasonally low number in 2012.

What was very positive was the working capital development, clearly better in Q4 ‘13 compared to 2012. And especially on the full year, the working capital performance was very good, which then resulted in the total net cash on operating activities for the year at €1.8 billion. So all in all, the business generated clearly more cash and at the same time we took the CapEx down inline with our guidance and used less of it.

Then to key ratios on page 23, EBITDA came down somewhat comparable EBITDA down to a level of €2.3 billion. At the same time, we were able to maintain our interest-bearing net debt practically flat. This resulted in a little bit higher comparable net debt to EBITDA at 3.4 times, which is above our target of 3 times.

The return on capital employed was 9% for the full year and below our target of 12% and the return on shareholder equity 12%, which also is below our 14% target. On the other hand, our liquidity is excellent, we have committed ongoing credit lines totaling €2.2 billion and we have €1.2 billion in cash.

Then I go over to the debt maturity profile on page 24. Maturity profile is around 2 billion maturities this year and 1 billion next year is very good. And when the [Swedish] distribution is then closed, this fits very nice into the debt profile.

On the bottom of the page you can see the development of our average interest rate. In the end of 2012, the average rate was 4.5% and that came down to 3.6% at the end of this year, so very competitive level.

Finally, on page 25 I will take a short look into our efficiency program performance. To start with, the target was to reduce our CapEx, reduce our working capital, direct non-core business and reduce our fixed cost with a run rate of €150 million by the end of 2014 compared to 2012.

We are now half way to the plan. The program has been proceeding very well according to the plan in all functions and all divisions. We have had cost savings that are visible throughout the company, working capital efficiency has been improved and we have divested non-core assets totaling approximately €300 million. We’re very pleased how the program is working and with the commitment on all levels of the organization.

Then I hand back to Tapio and to the outlook.

Tapio Kuula

Okay. Thank you, Markus and we turn to page 27. Fortum expects modest growth in Nordic power consumption probably about 0.5% annually and the reason for that is that electricity continues to gain share in total energy consumption. In Russia, we keep our target that we would be able to deliver €500 million EBIT level on run rate basis after 2015.

Of course we [admit] this is more difficult than we calculated and estimated in 2008 when we did the acquisition and announced the target and reasons being for example ruble exchange rate and also general economical situations. It hasn’t been as good as estimated which means that power demand hasn’t increased as market price has been on lower level et cetera, but this is indication that we don’t give that easily up.

Key drivers and risks, of course in this business they are normally of course demand and supplying situation, however this demand and supply situations for us as a company as we have seen hydrological situation obviously power plant availability, especially nuclear power plant availability and of course fuel and CO2 prices.

Then on next page we look at our CapEx estimate, which is therefore this year is about €1 billion including these [disproportions] during the first quarter, but excluding environment because new shareholders agreed. [Investing] for this year for the rest of this year is on the level of 60% and the price €43 per megawatt hour and for next year 2015 20% under price level €41 per megawatt hour.

And as much we’re still operating our efficiency improvement program is going well and we really believe that we will reach the target to improve cash flows at least by €1 billion during last year and this year.

Tax rate, we estimate that it will be for the group around 20%. And in Finland, their corporate tax rate came down from 24.5% to 20% starting from the beginning of this year. Finnish government accepted so called windfall tax which we have been discussing a lot from the beginning of this year subject to European Union Commission approval. And each [tax] will be implemented that will cost about €25 million additional cost to Fortum annually.

Then upon next page 29, you will see the structure of new management organization, which will be enforced 1st March. This is additional stock exchange release which we just announced before our annual results.

And what is the reason why we did these [changes], I would say that the main reasons are this new setup as we believe will improve our possibilities to implement our strategy. This also improves, I believe our performance further; for example, this gives opportunity to really try to find opportunities in the different businesses, especially heat electricity sales and solutions, hydro power and technology and nuclear and thermal power under our COO, which is new position and position for monthly [workshop].

We have also three new executive management team member, Tiina Tuomela who will be in charge of nuclear and thermal power, Kari Kautinen in charge of strategy and mergers and acquisitions and Esa Hyvärinen in charge of corporate relations. And especially I would say that to have Kari Kautinen and Esa Hyvärinen in our executive management team indicates that strategy is very much in our mind.

One good reason to do this change is also the target to widen the confidence and experience of our executive management team members. And one good example is obviously Markus himself, our current CFO who will be in charge of heat, electricity sales and solutions, so that we can say that Markus Rau will change from counting money to making money.

And how do we then if we turn to next page, page 30 how do we report in the future our business? And that will already start in April when we report our first quarter results. We will have five divisions as you see from the previous page, but we will have four reporting segments. So that hydropower and technology division and nuclear and thermal power divisions they will be reported together under power and technology. Heat electricity sales and solutions that is one segment and in practice that covers current Heat business as well as electricity sales both markets currently. Russia continues as it is and distribution continues including electricity distribution business, not electricity sales business which belongs to heat electricity sales and solutions.

And then finally sales, 31 [page] one of the Annual General Meeting that will be April and as asset report proposed dividend €1.1 per share and from that page you can also see dividend related dates in April 2014.

So that this covers the presentations and now together with Markus we are ready to try and answer your questions. Please go ahead.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). We will now take our first question from Patrick Hummel from UBS. Please go ahead.

Patrick Hummel - UBS

Yeah, good afternoon. Thanks for taking my questions. Two questions please. First one you said in your opening speech that your dividend proposal €1.1 per share should also be seen as an indication how you see the future or how your expectations look like for the coming year. So, I'm wondering do you expect the dividend to remain stable at €1.1 in the coming years, even taking into account your stated payout ratio target and the up rent of it i.e. 80% of the earnings. So would you expect that €1.1 per share to be within this 80% payout threshold?

And the second question relating to Russia, you already said before that the Russian outlook the €500 million run rate has become more challenging, now since November since Q3 results currency has also taken its toll and just the translation effect accounts for roughly give and take €50 million. So, I'm wondering why you still hold on to this €500 million, do you just want to get even closer to 2015 to have a clearer picture and to update us then or has there been anything incrementally positive that makes you still believe you can reach that €500 million target. Thank you.

Tapio Kuula

Yeah. If I start with the last question. Yeah of course it's easy to see that ruble exchange rate makes the target more difficult, but as I said that because there is still time investment program ongoing at (inaudible) we just don’t give up and we really try to find out ways to reach that € 500 million target even if it’s exactly as you said more challenging today even than it used to be some months ago. But of course you never know what will be then the exchange rate in the further.

The dividend level as I said certainly that indicates or at least that can be reached we can’t give promises, but that can be read in the way that it reflects our prospects for the future and certainly objectives for the future. And this is in line with our dividend policy as well. I don’t have the exact wording here now in front of me, but you see we’re stabled sustainable and rent wise increasing dividend and that is something we aim for and this is the reason why we are proposing €1.1 per share.

Patrick Hummel - UBS

And just to follow-up, what you said before on your payout policy of up to 80% of earnings that still holds as well?

Tapio Kuula

We keep the dividend policy of course. We can’t say that there are absolute limit. So for example this €1.1 I think of that is about 81%. So that we are pragmatic with these rules and we take other things into account as well. But this is the guiding dividend policy which we stick to.

Patrick Hummel - UBS

Okay. Thanks very much.

Operator

We will now take our next question from Benjamin Leyre from EXANE. Please go ahead.

Benjamin Leyre - EXANE

Yes, thank you, and good afternoon. My first question please, is on the Finland taxation. Can you please update us on your expected timing by which European Commission will approve or reject the [origination] tax that is being proposed by the Finnish government for this year?

And second point, can you also please update us on the timing for the growth action on the Swedish distribution activities and regulation and would that actually have some impact on the new modulation that you mentioned you really proposed regulator in the first quarter of 2014 for the following regulatory cleared. So we don’t really take into account contract amount (inaudible) or would you actually keep the previous model for now? Thank you?

Tapio Kuula

Okay, if I start with the Finnish (inaudible). So basically, the Finnish parliament approved the law, but it’s approved conditionally upon the European Commission approvals and said that when it is approved, it will then come in fourth quarter all year. We don’t know when the commission will have handled it, and we will see then how far into the year we can go, so that it would be implemented for the full year.

So it is during the year of course for the time being, we know that the impact for us would (inaudible) we have estimated around $25 million. But it is in the Commission’s hands.

Now for the Swedish decision regarding the regulatory situation and the transport period and what time. So when we had a positive decision in our and the other distribution company’s favor, we will then say if there is a further process on that, if there are the essential ones, but for us overall it was positive and it gives us upside.

Benjamin Leyre - EXANE

On (inaudible) side?

Tapio Kuula

We don’t estimate it at the moment. But let’s say it’s a substantial potentially. But I think that important thing was that they commented the value on the (inaudible) transition period. So we get into, we have a system that is more similar to other regulations, where the adjustments are done on a faster basis and also the quarter could be on the weighted cost of capital.

Benjamin Leyre - EXANE

Thank you.

Operator

We’ll take the next question from Zoltan Fekete from Credit Suisse. Please go ahead.

Zoltan Fekete - Credit Suisse

Hi good afternoon. This is Zoltan Fekete from Credit Suisse. Three short questions from me please. The first one on the Russia. In the statement you mentioned a €6 million negative impact for Q4 summing from the devaluation of the ruble, could you please give the corresponding number for the full year of 2013?

And the second question on Power. The hedging ratios for the current year and year plus one seem to be lower compared to previous pattern. Is this is a lasting change in your hedging strategy or just a reflection that you are expecting the recovery in Nordic power prices this year or the next?

And the last question would be on working capital and cost saving could you please elaborate on your working capital dynamics and on what it is you are doing different compared to previous years? Thank you very much.

Tapio Kuula

Okay. If I start with a follow-up question and while Markus is looking whether you can find the proper exchange ratio or not. I would say that hedging volumes and levels for the rest of the year 60%, I would say that that is very much the normal level which we are having. One could say that 2015 is bit lower than we have had in the history and of course that is done on purpose. We always try to get the best possible outcome taken into account the market situation, price levels [together] so that there are no change fees in the hedging policy, this is the current situation and I said that this can be right quite rapidly as well.

Markus Rauramo

Okay and I can continue with the Russian ruble. I can take a simple example, the comparable operating profit for 2013 was €156 million. Just to give a ballpark that if the ruble changes 10% and we would have the same ruble results than you would get the corresponding €15 million impact on that then I think on a theoretical basis you can apply the same to our operations going forward on a static basis. But what I would remind is that of course if the ruble would continue to devalued steadily and in a more controlled way that will improve Russia’s external competitiveness and can have a positive impact on power consumption. As we know very well from for example coming from Finland in the market and Sweden with the krona the impacts of the external currency rates are dynamic.

What comes to the working capital your question on the dynamics, it is dependent on sales absolutely and that we can see with the warm weather that has an impact on for example customer receivables, which now had a positive impact on us. So the question was that have we done differently, we have taken very proactive approach on for example looking to our different operational countries, to our coal inventories and we have overall -- we are more aligned now than we were before on coal inventory levels, we have been able to release with amounts of capital through these actions.

One thing that has a permanent impact in addition to different types of working is setting foreclosure decision which is being implemented and that has an impact of some tens of millions on a permanent basis into our working capital.

Zoltan Fekete - Credit Suisse

Thank you.

Operator

We'll take the next question from Michael Ridley from Citigroup.

Michael Ridley - Citigroup

Yeah, good day. So, I wanted to ask about the distribution asset sale, sort of two questions. Firstly on the timing, but secondly, are you going to adjust your leverage target of 3 times, because for me an asset sale really increases your business risk? And I was wondering when you're going to reduce your leverage to compensate that increased business risk going forward. Thank you very much.

Tapio Kuula

Okay. What we have said about the distribution process timing that it will take about probably this year. We like to do that prudently as we did for Finland and especially of course Sweden is big process. So that we don't have exact time planned and it depends how the process continues. And obviously we haven't done any official decisions yet. Concerning our balance sheet structure, we have said that we might review a situation after distribution assessment and that might be then about after one year.

Michael Ridley - Citigroup

You might hold to your leverage target in a year’s time, is that what you’re saying?

Tapio Kuula

Yes, yes.

Michael Ridley - Citigroup

Okay. Thank you.

Operator

The next question is from Anne Azzola from Morgan Stanley. Please go ahead.

Anne Azzola - Morgan Stanley

Good afternoon. Thank you for taking my question. I have three questions. First, on the cost cutting, you disclosed you achieved half of your €150 million target improvement. Can you please give us some granularity in terms of which division were affected by this improvement, is it mainly power or is that some of that benefit going into the distribution division? Also, were there any cost of implementation associated to that benefit which will explain that we would have higher impact next year than €75 million increase?

Second question on Russia, sorry to go back to that. Last week press reported that Fortum with other European companies met with Russian authorities and press reported concrete potential measures such as tax breaks and accelerated amortization policy. Is that some of the measure that could be put in place that would help you achieve your current target? And third is concerning your effective underlying tax rate for 2013. We read that at 22.3%, slightly hurt versus last year and slightly higher than your target range, if you could please comment on that? Thank you?

Markus Rauramo

Okay, if I start with the cost cutting question and the granularity. Yes, we follow it very carefully; we have implemented also the program in all teams, all divisions. So actually, the results of the cost cut come in all divisions and all functions, so it has been very well and evenly divided. There has been very little one-time cost, but we have done it, we have taken advantage of stopping doing things, we have stopped projects and we have taken advantage of natural rotation and attrition. So, the one-time cost has been very limited. And you can see the one practical implication is number of staff coming down on a year-on-year basis about 500 people, so we are now below 10,000 in total.

The second question, I wasn’t quite sure about referring to, can you repeat the second question, tax rate but can you elaborate?

Anne Azzola - Morgan Stanley

Okay. So my second question was concerning the press report following your meeting with Russian authorities. Press was mentioning lower tax rate and accelerated amortization for your Russian assets. Is there anything linked to that?

Tapio Kuula

Okay. I will take the second question, as they have reported in Russia. We met Russian Deputy Prime Minister which was last week and that we have very I would positive construction -- constructive discussion about power reform. And obviously I think that indicates us that they are ready to listen foreign investors.

What we were of course underlying is that promises will be kept. And I think that we got quite good answer to that. And we also discussed about gas price situation, which hasn’t been following expectations in that sense that the cash price hasn’t increased as much as estimated in the past. And of course that has some impact for profitability, especially profitability, good efficiency, new power plants with high energy efficiency. I personally of course also especially discussed about need for heat reform which is important for Fortum. I think there is quite good understanding about that need as well.

Markus Rauramo

Yeah. On the tax rate, no, we haven’t calculated any of that impact into our forecast. And that is at this stage something that is in the plan. And otherwise, we have been commenting and guiding on the operational performance. So if that changes then one-time impacts and of course impacting the tax rate and not operating profit line?

Anne Azzola - Morgan Stanley

Thank you.

Operator

And I’ll take the next question from Philippe Ourpatian from Natixis. Please go ahead.

Philippe Ourpatian - Natixis

Yes, good afternoon. I have two follow-up questions. The first is regarding the Russian comparable EBIT. Is the compensation you are receiving included in this figure or not? And at the same time, is there this compensation -- is this compensation already included also in your working capital on the consolidated basis? And the second question is regarding the tax in Finland, you mentioned that there is some cost action and the expectation regarding the EU position versus this Finland tax. Are you going to account this tax starting the first of the year, 2014 or are you expecting the decision before taking into account this new charge? Many thanks.

Tapio Kuula

Yes, that €40 million compensation is included in comparable EBIT. Whether that is included in working capital I must say that I don’t know whether Markus knows I don’t know.

Markus Rauramo

No it’s not in working capital.

Tapio Kuula

Yeah.

Markus Rauramo

And with regard to the -- if you refer to the windfall tax that is now in the process in EU, no we have not been taken that yet into account. It is different compared to the Swedish tax because that was an existing tax and it was a periodic review. So when we had good enough visibility on what the level would be during last year we started to accrue for it in our tax.

Philippe Ourpatian - Natixis

Many thanks.

Operator

We’ll take the next question from Ingo Becker from Kepler Cheuvreux. Please go ahead.

Ingo Becker - Kepler Cheuvreux

Yes, thank you. Good afternoon. Again on the dividend please, can we clarify; this is not a bonus, right? I think the way you phrased it suggests you do not want this to be right as a bonus dividend. And further to that, given that you stick with your 50% to 80% payout ratio and given that your basically payout 81% for last year, we almost pushed into reading this you are expecting 2014 probably also ‘15 net income at least to be upward or at the very lead flat on the ‘13 number. Maybe if you can elaborate somewhat on that.

And third question, if I may on Russia, can you help us with the one-offs? I think when I read your statement, you had a €40 million compensation one-off positive €48 million provision released, then €88 million positive, then it was €16 million for bad debt and €23 million for unplanned outages, which still gets a net one-off number €49 million. Could you just tell us what the underlying excluding any one-offs EBIT and EBITDA figures would have been for Russia?

Tapio Kuula

Okay. If I start with dividend question, I said that when we propose this €1.1 per share, we see that this is in line with our dividend policy and I said also this reflects our future prospect. And we are pragmatic with exact range, so that this went a bit slightly above the 80% debt limit or guidance. But I wouldn't call this as a bonus dividend.

And Markus will continue about the Russian figures.

Markus Rauramo

Yeah. So, I think you did highlight already the one step that can be regarded as that is something that is not permanently. But I think the essence of your question is really that why are there in operating profit and how should we think about them. The reason why we run these numbers through the operating profit is that we have also over the time, we have taken the CSA penalties when we have had delays through our operating profit and thus it makes a lot of sense that for example the compensation from [report] is then booked on the same line where we had to take the penalties when we had been late. So in that way you have the visibility on what has been happening on that line, as well as the provision releases are on the same line because they then correspond also with the timing and the penalties that we have been by plan accruing.

Tapio Kuula

They are part of the big investment approaches.

Ingo Becker - Kepler Cheuvreux

Sorry Markus, so that the [258] EBITDA that does something to the provision right, but does it include any of the other numbers?

Markus Rauramo

Sorry, which number are you referring to?

Ingo Becker - Kepler Cheuvreux

The comparable EBITDA to 258.

Markus Rauramo

So that does not include CSA, the comparable EBITDA. But if you want of course, we can then -- Sophie and her team can walk through details, if there is something still unclear.

Ingo Becker - Kepler Cheuvreux

Okay. Thank you.

Operator

We’ll now take the next question from Sarah Laitung from JPMorgan. Please go ahead.

Sarah Laitung - JP Morgan

Hello. I have two questions remaining. Firstly, on the cost cutting; you said earlier that it has come from…

Tapio Kuula

It’s a bit difficult to hear you. Could you speak a bit louder?

Sarah Laitung - JP Morgan

Sorry about that. Yeah, on the cost cutting, you said earlier that it comes from all divisions. But I was wondering if you could maybe help us understand a bit better how much of the €150 million is for savings and by 2015 is expected to come from distribution? And given that you are likely to be existing that business, and that will be helpful to know what the -- your cost cutting will be post (inaudible).

And my second question was on the hedging. And could you just explain why the level for 2014 has gone down from 65% to 60% please?

Tapio Kuula

If I start with hedging, actually last time when we disclosed the bigger was it so that that was after the third quarter and was that already at that time for 2014, yes. But then what we have done is that we have been able to increase the price by €1 per megawatt hour and that has then included some transactions which have cost that volume is slightly down.

Markus Rauramo

And I would add to that that we round the hedging ratios to the closest 5%, so this is not necessarily a 5% change, 5 percentage point change in the hedging ratio. But these numbers can be closer.

Tapio Kuula

Only slightly down. As I would say that this is more structural positioning of the portfolio but we have said improved price resulting from that. Like I said, cost cutting has happened in all divisions and this is quite evenly spread based on the fixed cost basis of the divisions and functions. So all have been working and also when we have been setting our own internal targets, we have had the view that there is possibility to reduce the fixed cost in all of these. So basically the proportionate amount of fixed cost would go if and when part of the distribution are divested.

Sarah Laitung - JP Morgan

And so just to follow-up, is it fair to assume that their level as fixed versus variable costs as a proportion is higher in distribution than it is elsewhere?

Markus Rauramo

No.

Sarah Laitung - JP Morgan

Okay. Thanks.

Operator

And I’ll take the next question from Emmanuel Turpin from Morgan Stanley. Please go ahead.

Emmanuel Turpin - Morgan Stanley

Good afternoon everybody. First question please on your new corporate structure on page 29 of your slides, I noted that you are essentially speaking the original power division into hydro and technology on one hand, nuclear and thermal on the other. I was wondering what rational puts you in that direction, what do you expect you will be able to do better or different under this new structure and also where would be the power trading business be sitting in this new organization? That would be my first question. My second question is on dividend policy. And I would like to revisit the way you think about setting your dividend in the light of what you decided for this time around. You have very clear 50% to 80% payout ratio.

What’s been less clear to me overtime is on what you apply it. Here your €1.1 per share, is it -- as you suggested on the call I think 80% or 81% times your reported EPS, which included quite a number of positive one-offs or do you clean up your one-offs, which can be positive, but also negative some years and then maybe adjusted for normalized hydro. When I do a quick calculation, we also get to about 80%. The reason I am asking the question is to help us obviously forecast around these one-offs which can be quite volatile? Thank you.

Tapio Kuula

Okay. If I start with the corporate structure, of course one reason to divide the existing power division between these two divisions is that that hopefully gives us even more focus to those, especially [fuels], which are relevant to these two divisions. And still to keep the synergies together they are now under, anyway under Matti Ruotsala.

Where is power trading, that’s very good question because you can’t read that from the picture. That belongs to hydropower and technology which is quite natural, so that is under Per Langer’s responsibility.

The dividend question we can’t of course disclose much more than we have told in our dividend policy. I would say that range is without major one-time items, but in this kind of business there are always minor one-time items, which I think this part normal business. And I think that's probably the best guidance we can give. And when we decide the proposal, it's not any mathematical operating, but we take into account our consideration of future prospects, balance-sheet situation et cetera as well.

Markus Rauramo

And if I may add to that that we have gone to €1.36 to be operational in its entirety. So, that we would regard as one-time in this context would be something like against from sale of our Finnish distribution business. I think that is the key message there. As I’ve said, that’s our strong commitment based on that. We do have strong competencies, we have a good platform for growth that also works in this more difficult economic environment that delivers that's a good business plan that enables us to go and implement the dividend policy of stable and increasing request and they buy dividends overtime.

Tapio Kuula

Yes. And of course one main reason for that is that we strongly believe that we can invest the money coming from distribution network with better return somewhere else probably including also strengthening of balance sheet. If you calculate what was the return on sales price in Finnish distribution business that was 3.7%.

Emmanuel Turpin - Morgan Stanley

Very clear, thank you very much.

Operator

We'll now take a follow-up question from Ingo Becker from Kepler Cheuvreux. Please go ahead.

Ingo Becker - Kepler Cheuvreux

Thank you. Yeah, just three question on numbers. Can you tell us the 20 (inaudible) that you produced in Russian electricity, how that breaks down into old CCS and new CSA plant? Next, the capacity price for the old plants was down in ‘11 and ‘12 and it was marginally up by 7% in ‘13. Can you remind us briefly of the reasons for why it was up? And last year your CapEx guidance of €0.9 billion to €1.1 billion is unchanged, but given that now you have sold the DS also in Finland so this will only be for Q1 I guess and you said that Värme will be out. It looks like that your underlying CapEx number actually is up, if so I’d be interested in and where the additional spending goes. Did you basically just moved from the upper-end of the range to the lower-end and didn’t bother to change the target range? Thank you.

Markus Rauramo

Yeah. I can start with the CapEx, your comment is correct. So Värme itself and Finnish distribution only is part of that, so that implies upon a like-for-like basis. CapEx is higher and I think that affect us from believing that we do have the expected possibilities going forward and based on our existing platform.

Tapio Kuula

Yes, the capacity if we call to -- for us the capacity price for old capacity that is based on bidding process so that that comes from the market that is not regulated. I don’t have the figures, exact figures for CSA and CSS now with me. But I think that’s okay, now Markus for the figures.

Markus Rauramo

So, if we look at just the fourth quarter the average capacity price for CCS is up, average capacity price for CSA, new capacity is up all-in-all average capacity price on this basis is up on a year-on-year basis, same applies also for the full year and [30%] in earlier also the stock prices have developed positively more on the quarter and on the full year.

Tapio Kuula

And this information is on page 16 in our report.

Ingo Becker - Kepler Cheuvreux

And the breakdown for the 23?

Markus Rauramo

That we don’t disclose, but basically what we show here, we actually [stock price] for us in Russia shows the totality of all the markets as we think.

Ingo Becker - Kepler Cheuvreux

Okay, thank you.

Operator

And we’ll our next follow-up from Benjamin Leyre from EXANE. Please go ahead.

Benjamin Leyre - EXANE

Yes, thank you very much. Two quick follow-ups, the first one on Värme; I understand there is a plan to gradually refinance the shorter loans with external financing by the end of 2015. I wonder if Värme is willing to refinance that quickly and basically what reason you expect for the Värme refinancing.

And the second question on Russia. Can you please share with us whether the old capacity should have an increase or a decrease in the capacity integration of payment for 2014 versus 2013? And maybe trend wise, I wonder if there is any prospect for the improvement of the margins for the old capacity in case you are trying to perhaps decrease the gas [booking request] for the old gas plants? Could that be affect of appreciation on the market is under estimating perhaps in your earnings forecast for 2015? Thank you.

Tapio Kuula

I will start with the Värme refinancing, so it is about $1.1 billion of financing from Fortum to Värme and it is very financeable. So, we can see from the banks and from the market that that would be a very attractive company to the financed. So, we think that this will go well ahead as planned. And also we will be reporting then with and without external and internal financing just to give you the bridge so that you can see what the like-for-like numbers could be.

And regarding the gas price, yeah for instance if the gas prices increased less than or within we have previously anticipated that positive for the old capacity. So yes, there is an offsetting factor our new capacities would benefit from higher prices and it would be marginally negative for these old capacities. So there is an offset in our capacities.

Overall of course, we would like that the Russian economy would do better and the development has not been as positive as we expected when we made initial investment in 2008. But nonetheless, we will have the best capacities in Russia when we are done with our investment program. So our competitiveness will be on a very good level.

Benjamin Leyre - EXANE

Thank you.

Operator

We’ll now take our next question from Richard [Elderman] from Macquarie Security Group. Please go ahead.

Unidentified Analyst

Good afternoon. I was wondering if you could just give us a little bit more color on the message that you discussed the need for heat reform with the Deputy Prime Minister in Russia last week. What form did that discussion take? And should we expect any change to the way that business is, the concessions or given tax changes and regulation? Clearly obviously you have a lot more capacity in that business than you do in the new [CCGTs], does it makes you a little money?

Tapio Kuula

Yes, that is true. I think also key political decision makers in Russia see that there is something to be done in heat sector because without doing anything it would be difficult to get that investments needed in heat sector and I think that that is the key driver. And of course for Fortum that is very important.

Business sector, exactly as you said, but not really doing money today volumes being about 25 terawatt hours. It was positive discussion I said -- I think it’s very much useful views. But as I have said before, it will take some time it will not happen during coming months, but it’s more question about coming years. But I believe that the process is going forward. And in fact we said in many respects that has already started. But before we see real financial consequences, I think it is better to be a bit cautious.

Unidentified Analyst

Can I ask what you do to see change for you to put some more significant investment into that area?

Tapio Kuula

I think that main thing is really the regulation here regulation parameters and also to take away for example the cross subsidies between power production and heat.

Unidentified Analyst

Thank you.

Operator

We will take our next follow-up from Anne Azzola from Morgan Stanley. Please go ahead.

Anne Azzola - Morgan Stanley

Thank you. Just a follow-up question regarding the divestments of your non-core assets, you disclosed you have achieved €300 million off of your €500 million target. I appreciate it correspond to a number of different asset. But could you help us a review on the contribution that has been divested in terms of EBITDA, EBIT or net income from that package of asset? Thank you.

Tapio Kuula

Okay, okay. I can take that though. It varies, we have been divesting different type of assets, we have divested shareholdings in (inaudible). We have been divesting small CHP plants like Kauttua, Nokia Fortum and so on. So, I would say in relative terms, the lot of contribution is smaller than the part of our balance sheet in these assets.

Markus Rauramo

Yes. And that would be I think we probably wouldn't be divesting them.

Anne Azzola - Morgan Stanley

Thank you.

Operator

We'll now take our next follow-up question from Patrick Hummel from UBS. Please go ahead.

Patrick Hummel - UBS

Yes thanks; just one follow-up question. I'm just interested in your updated views and your latest thinking about the redeployment of the proceeds that you will receive from the sale of the distribution businesses. In terms of M&A in particular, should we read your dividend statement in a way that you're less focused on redeploying a lot of proceeds there relatively quickly or yeah just any kind of latest thoughts on M&A driven growth versus [divi] payout versus just paying down debt will be very helpful? Thank you.

Tapio Kuula

Yes, I would say that the main guidance is really included in our strategy. If you look at one page strategy summary I think that tells the main story. So that what we are really aiming for is CO2 free production and CSB. And I would say that we are not feeling any time pressure. What we are after is that when we do investment decisions or mergers and acquisitions, we have to be satisfied with the outcome. So that’s the key guidance and metrics. We save the time if there is need to take so there is not in that sense urgency, but if there are good opportunities of course we are ready to act quickly as well.

Patrick Hummel - UBS

Okay. Fair enough. Thank you.

Operator

Gentlemen, there are no further questions in the queue.

Tapio Kuula

Okay. So, we like to thank you all for your interest and you will be hearing from us at the end of April, so we will disclose our results from the first quarter 29th of April and that will happen according to the new structure. Thank you and good bye.

Operator

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

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