Fortum's (FOJCF) CEO Tapio Kuula on Q2 2014 Results - Earnings Call Transcript

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Fortum Corporation (OTC:FOJCF) Q2 2014 Earnings Conference Call July 18, 2014 10:00 AM ET


Tapio Kuula – President and CEO

Timo Karttinen – CFO


Zoltan Fekete – Credit Suisse

Benjamin Leyre – Exane BNP Paribas

Anne Azola

Lueder Schumacher – Société Générale

Andreas Thielen – MainFirst

Ingo Becker – Kepler

Tapio Kuula

Okay. Thank you and welcome everyone to this conference call. I am here together with me our CFO, Timo Karttinen. And we will give short presentations. And after that we are ready for questions. And I hope that all of you have material, I will start from page 3.

And just to remind you that there are some structural changes in this report if you have read our previous report especially from last year. Finnish distribution business is not anymore included in figures for our second quarter. They are included for the first quarter.

And then also, we use the latest IFRS standard for our environment, heat and the district heating operations in Sweden so that they are not consolidated to the figures but they are taken into account by equity method. So, Timo will come a bit closer to these issues.

But if we then go to the page 3 and some highlights of those numbers. You see that the sales is a bit down, one reason those structural changes. Comparable EBITDA is slightly down as well as operating profit for second quarter.

Reporting operating profit is obviously very significantly up and the main reason is of course the divestment of Finnish distribution business. That is for the six month about €2.7 billion, which then obviously leads also good earnings per share for six months €2.8 per share and that for the second quarter the earnings per share was €0.28. That being last year €0.35 but if you take into account items affecting comparability you see that they are very much on the same level.

What I’m very delighted about is net cash flow also from purely operating activities there are some one-time items that Timo will come back to those especially fair valuation and derivatives but even taking that into account we can be very satisfied with the net cash from operations both from the first six months as well as from the second quarter.

If we then go to the next page and summarize about the second quarter, we can say that despite low stock prices and weak ruble exchange rate then we can be satisfied with the results and especially our power production and Russian division I think, they were able to deliver a very satisfactory results in these circumstances.

I already mentioned strong cash flow and we also completed the divestment of Norwegian electricity distribution business as well as Norwegian sales business.

Then statement about our Russian operations, operationally we have done well in line with our plans. And as you know that our income and costs are in rubles, we really operate in Russia, in Russian electricity and heat market that is the reason why we have decided that we will put our financial markets in rubles.

So that the number will stay exactly as it was during the time of acquisition, RUB18.2 billion. And that is the run rate which we are confident to achieve in 2015 and onwards. And the reason why we go to rubles currency is that we feel that it’s very difficult to predict the exact ruble exchange rate. And as we have seen that that has been very volatile during the past months and especially when we talk about the year 2015, it’s difficult to predict that.

What we are also satisfied is that Finnish government decided not to implement so called Power plant tax, windfall tax and I think that that is even in turnaround good decision for Finland certainly improved the predictability and certainly it’s very important message to power and heat business.

On page 5, we have some messages about market conditions during the second quarter, power consumption in Nordic area declined, marginally it was pretty much on the same level. Industry was very much on the same level but the private consumption was a bit down because of warm weather.

High progress water, are now in practice really on long term a very statistical average level. But what was significant change was of course that – as asset Nord Pool stock prices went down by 34%, €13 per megawatt hour, Finnish and Swedish area prices not quite as much but still even those, €5, €7 per megawatt hour.

European business environment in general is of course for this industry challenging, one thing which is important during this year is really those decisions which will be done in the Brussels during the autumn and one of those is certainly the energy and environmental targets, especially CO2 reduction target for 2030, which we believe and hope that we’ll be that 40% decrease compared to the 1990.

Energy security and efficiency has been very much in focus in European Union and really triggered obviously by these crises in Ukraine.

In Russia, power consumption was on the same level as last year. And what is positive is of course the price development in rubles that increased in our operating area by 15%. In Euros you can see that the price increase was much less than that.

On page 7, on page 6, you see as I already mentioned that the water levels are now very much on the statistical average level. And on page 7, you can see the forward prices where you can see modest increase during the coming years. Most likely of course the actual development would not be as stable as this picture indicates, especially if you believe that the outcome will be anything like in the history. But this is the forward as market sees those today.

Then, page 8, there are fuel and CO2 prices, I would only underline that there is some seamless gas price increase at least in forward prices for the rest of this year and for next year, nothing special otherwise.

On page 9, which is obviously very important states substance wise we see what I already told that Nord Pool stock price went down by 34% which is of course significant decrease. But we also can see that Fortum, our achieved power plants price went down by 10% but we managed with our hedges proposals with flexible production portfolio and with our activities reduce or mitigate the price decrease to 10%, so that we achieved still a bit more than €40 per megawatt hour.

On the right hand side of page 9, you can see our power price development in Russia and the energy prices I already told went up in rubles by 17%. And the achieved power price which then includes also the capacity prices in Euros that went up 2% to €31.7 per megawatt hour, which, as you can see actually exceeds the Nord Pool stock price during the same period.

Then, on next page, page number 10, we see different reporting segments. And they are compared to last year, we see that our power and technology segment was down by €27 million, which I think is quite good achievement in these circumstances where power price Nord Pool stock price went down by 34%.

And main reasons to mitigate that is as I already told, the achieved power price and also hydro volumes developed positively. Nuclear volumes were a bit down because of the plant outages which are time wise a bit earlier than last year.

Then Russia, even if ruble exchange rate was weak, we could improve from last year by €8 million obviously in Russia because of seasonality in the second quarter and the third quarter are optional than it was quite small figures.

But then on page 11, you can see pretty much the same message of course in distribution there is warm weather but also structural changes affecting the situation. In power and technology we see, bigger, bigger decrease but in Russia, this is clearly better six months than last year even the weak ruble exchange rate burden about €17 million. This result compared to last year, and it’s important to remember that there is still close to 1,000 megawatt under construction from our capacity supply agreement construction program.

Now, I will hand over to Timo, Timo Karttinen. Timo will go a bit more in detail to financial figures as well as a bit more detailed information about different businesses. Please.

Timo Karttinen

Thank you, Tapio, and good afternoon everybody. As we move over to the financials, let’s remind ourselves, Tapio already mentioned that from the start of this year we have started to apply two new IFRS standards.

And the main implication of that being that we no longer consolidate for environment which is the distributing and company power production operation in the area of Greater Stockholm in Sweden, owned the 50-50 together with the City of Stockholm. We used to consolidate that contender was 50%, minority interest going to 50% but now we rather take our 50% on the share of profit from our associates.

And now then, we have changed the 2013 numbers we stated those numbers earlier in the previous report to correspond that effect.

Then also, regarding the distributions, so obviously 2013 numbers do include all Finnish, Swedish and Norwegian distribution businesses whereas now this year, Finland is included in the first quarter as we closed the deal during the last week of the first quarter. And Norway included five months as we closed it at the end of May, and obviously then of course Sweden is included in the numbers over time.

But then, let’s move over to page 13, looking at the comparable and reported operating profit. From the reported operating profit we clean away the effects, the items affecting comparability. Those being non-recurring items mainly the sales gains and obviously this year there are significant sales gains mainly from the Finnish distribution operations but also then from the divested Norwegian operations.

Then the IFRS accounting treatment, the IAS 39 effects from the hedges in our cash flow, hedges portfolio that do not get hedge accounting and then also nuclear fund adjustments if there might be any during, any given quarter.

Now, these together for the second quarter this year, they affected €41 million so that reported operating profit was €41 million higher at €295 million compared to the comparable €255 million. Where, at last year during the second quarter we had €140 million positive impact in the reported operating profit from these, mainly coming from the IAS 39 but also nuclear fund adjustments.

During the second quarter this year, the biggest impact was coming from the sales gains from the Norwegian operations and then also some net negative effects from the IAS 39 derivative hedges.

Moving on to page 14, power and technology segment, the comparable operating profit during the second quarter this year was €27 million below last year’s number at €183 million. The stock price is – the system stock price is in the Nordic market area where significantly lower being €13 per megawatt hour, lower this year second quarter. But then fees in Swedish area price is somewhat higher so that the difference on the area price level compared to last year was between €5 and €7 per megawatt hour.

We were able to compensate the stock in the market prices by higher hydro products and we had all-in-all 1.4 terawatt hours more hydro produced during the second quarter this year compared to the last year’s second quarter.

Nuclear volumes were on the other hand lower due to the timing and the length of the annual maintenance outages this year compared to last year, and the effect there is altogether minus 0.9 terawatt hours. All-in-all, six out of the 10 annual maintenances in the nuclear units where we are participating have already been completed.

The thermal volumes this year second quarter were 0.5 terawatt hours lower than last year, then we practically produced – didn’t produce any thermal in this segment during the second quarter this year. And this leads the total volumes quite stable on the same level than last year same time.

It’s good to note here that nuclear availability during the first half of this year has been on good levels in all the reactors where we participate in excess for the – from two unit which is currently under a long maintenance than automation renewal shutdown.

And here it’s also good to remind you about the new two sites where you can always find the most up-to-date and correct information about the ongoing and also about the plant maintenances and altitudes in the Nordic wholesale electricity market area.

Then turning to page 15, and heat electricity sales and solutions segment we have completed the divestment of the Norwegian heat businesses, at the end of reporting quarter. As you may remember, we divested also during 2013 and actually also at the end of 2013 some of our assets and operations in the heat area especially in Finland. And those divestments continue to burden our net volumes still even if we on the other hand have also new capacities on line.

The comparable operating profit is down €2 million during the quarter compared to last year at level of €11 million. Here it’s good to note that second and third quarter are typically always seasonally the low in heat business, low heat demand, annual maintenances and that means that this €11 million of comparable operating profit in the segment is practically during this quarter coming from the electricity sales side.

The availability has been good in our CHP companies and power plants, and it’s also pleasure to note that we have been able to continue the positive trend to end customer numbers both in our district heating operations and also in our end customer electricity sales operations.

Back to environment, which is also heating business, CHP business but I said, it’s not reported in these numbers. But it’s reported through the associated company line. Environment contributed all-in-all €48 million on that line during the first half of the year and €4 million during the second quarter.

Turning the page to Russia, Russia is also seasonal business, so first quarter and last quarter of the year typically are best for volumes and also for margins and then second and third quarters are typically on a lower level.

During the second quarter this year, we were able to continue the same positive trend already from the first quarter so we improved the comparable operating profit by all-in-all €8 million compared to last year. And the improvement came from pretty much the same line and such during the first quarter as well from the CSA capacity payments, from better electricity and heat spreads and also from the increased internal efficiencies.

This €28 million of comparable operating profit this year second quarter contains €4 million positive effects from the reversal of provisions related to the CSA capacities whereas the last year’s €20 million number contains a similar €10 million positive effects.

Overall, as the ruble has weakened during the second quarter, the net negative effect was roughly €3 million in terms of our Euro results whereas during the whole of the first half of the year, the negative effect has been roughly €17 million.

The last 12 months level of comparable EBITDA in our Russian operations is currently at the level of €315 million.

Turning the page to distribution, now, I said we have completed the divestment of the Norwegian electricity grids at the end of May month. And that means that this quarter two numbers this year, they do include Sweden, of course for the whole of the quarter, they do include Norway for two months. But they do no longer include Finnish operations whereas the comparable numbers for 2013 to include also Finland, so that’s one reason for the drop in the numbers.

Volumes and also the comparable profit levels in the Swedish operations separately were pretty much in line with last year’s numbers during the second quarter of this year.

And now, like we have divested the Finnish and Norwegian grids, we obviously and certainly continue to evaluate the possibility of divesting the Swedish grids as well, now this is done about the divestment or about the time schedule as such. But definitely we are focused on that and the work continues.

Then moving on to the income statement starting at the operating profit level, operating profit at €295 million, €134 million below last year same quarter. But we had the €100 million difference in the items affecting comparability. So the comparable operating profit was then only if you will, €34 million below last year’s numbers even if and when we had the last drop in the market prices in the Nordic area.

The share of profits from associates and joint ventures during the second quarter was €37 million, and on last 12 months level it’s €175 million which is a significant contribution in our operations all-in-all.

The financial net expenses were down by €27 million compared to the same quarter last year on the level of €48 million and there of course the main impact is coming from the lower level of debt as we had good cash flow and especially divested activities and we have been able to mature the debt but not date on more as we go.

Looking at our income tax expense, €37 million during the quarter and the tax rate when we clean from the profit away, the share of profit of associates and joint ventures and also the non-taxable sales gains, the tax rate is on the level of €20.6 million which is well within the 19% to 21% bracket that we have indicated.

And this all then leaves the EPS €0.28 for the quarter including €0.05 positive effect from the items affecting comparability and then during the first half year €2.81 per share including €2.14 all-in-all items affecting comparability.

Turning the page to cash flow statements, and starting from the total net cash from operating activities at €455 million, €173 million is better during the quarter than last year. Changes in working capital were plus €83 million during the quarter compared to last year but that is good to note that if we look at the first half year numbers, the improvement this year compared to last year first half year level is €18 million so clearly there has been timing differences between the quarters, between the years ‘13 and ‘14.

Financial expense, financial items and foreign exchange gains and losses has also improved the €29 million better than last year being positive €29 million this quarter and that of course these foreign exchange gains and losses that includes the effect from the roll-over of the foreign exchange contracts that we used to hedge loans to our Swedish and Russian subsidiaries.

And they are also if the Swedish krona or the Russian ruble depreciates against the Europe, we get a positive effect on this line as we roll-over these contracts. And likewise then if those other currencies appreciate against the Euro, we get the negative effect.

Looking at the down the table, base capital expenditures on the whole year level, last 12 months have been over €900 million last year €1 billion all-in-all. And then this leaves us on a very good level of cash flow before financing activities €770 million during the quarter, and €3.7 billion during the first half of the year, obviously containing big impacts from the divestments mainly from the Finnish but then also divest Finnish distribution grid but also from the divestments of the Norwegian activities.

Turning the page to key ratios, looking at the last 12-month numbers, EBITDA €3.84 billion, once again, a large impact on the divestments. Comparable EBITDA also on a good level €1.9 billion, interest bearing net debt down by almost €2.8 billion during the year to the level of €5 billion and then this leaves us with a comparable net debt to EBITDA ratio of €2.6 billion.

Now we have these shareholder loans outstanding to Fortum environment. And as we have an agreement with the City of Stockholm that by the end of next year environment should be paying back those shareholder loans slide and take their own external financing approaches which is already ongoing. And if we take away those shareholder loans from our net debt, so then this comparable net debt to EBITDA ratio will be at 2.2.

And it’s then good to remind that our target for this net debt to EBITDA ratio is to be around 3, which shows that also by this measure, we are well off and we have a strong situation.

Our return on capital employed and also return on shareholder’s equity are on very high levels, obviously reflecting the impact on the sales gains of mainly from the divestment of the Finnish distribution grid.

We have liquidity situation committed credit lines totaling over €2 billion and also liquid funds in the balance sheet at the end of the reporting quarter a bit over €2 billion. And then it’s good to note also that during the quarter we paid almost €1 billion of dividends to our shareholders.

Our debt maturity profile on the next page, we have a bit less than €300 million of debt maturing during the rest of this year and roughly €1 billion of debt maturing during 2015. Average interest rate currently is roughly at 4% and the portion of floating to fixed debt at 39% to 61%.

Our efficiency program page 22, we started the efficiency program during the last quarter of 2012 and it is to be ended and concluded by the end of this year. Overall, the target for the efficiency program was and is into increased split, speed and flexibility. And this in complete terms and target numbers is to be done by improving cash flow over the period by €1 billion compared to the original situation.

The efficiency program is proceeding according to plan but the cost savings are visible throughout the organization we have been able to include working capital efficiency. And by the end of the reporting quarter now, we have been divesting non-core assets totaling roughly €400 million and this obviously does not include anything from the divestment of Finnish or Norwegian distribution businesses.

And now then let’s go over to outlook and back to Tapio, please.

Tapio Kuula

Okay. Thank you, Timo. And I will continue on page 24, and starting outlook with the Nordics markets. As we have said before, we expect that there is modest growth in electricity demand and one and probably the main reason is that the electricity is expected to continue to gain share in total energy consumption like datacenters, like electrical vehicles etcetera.

Then, as said, we have stated our official market setting for Russia, now in rubles RUB18.2 billion run rate 2015 and onwards. But obviously of course we do everything to mitigate the potential impact ruble exchange rate. So, every accord to do and achieve that is obviously on our agenda. Internally it’s much more fair and easier to understand to have the target setting in rubles.

Key drives and risks are very much the same as they have been. Of course the wholesale price and electricity volumes are the key drivers demand and supply. In that sense, it is the key driver hydrological situation, CO2 prices, fuel prices and power plant availability specially the nuclear power plant availability, where we seem to have been now quite successful except Oskarshamn 2 overall with our nuclear power fleet.

If we then turn to next page, page 25, it seems to be that our CapEx guidance is very accurate, the average CapEx which we assume to use with those restrictions which are in currency is, as we see that today very exactly above €1 billion.

Hedging, you see that we have hedged 55% volume with the price €45 for the rest of the year. And if you compare that to figures which we presented in April, the price is €1 per megawatt hour or higher the volume is percentage wise the same. And then if we look at next year, now the hedged ratio is 30% and the price is €41 per megawatt hour, there we have been able to increase the volume by 5% units but the price has gone down €1 per megawatt hour.

And Timo already told about our efficiency program where we are confident to achieve that increase or cash flow at least by €1 billion 2013-2014.

Taxation, the windfall tax as I said is positive news for us. And we state and restate the effective tax rate for the quarter as we see that most likely will be between 19%, 20%, 21%.

So, overall, I think that we can say that power and heat sectors will most likely leave while challenging times also in near future. But I would say that as a company Fortum is certainly operationally and financially in very strong position. And strategically because of restructuring of our businesses, I think that we are also in that sense very interesting company.

So, now I think that we are ready together with Timo to answer your questions. Please go ahead.

Question-and-Answer Session


(Operator Instructions). We will now take our first question from Zoltan Fekete. Please go ahead, sir.

Zoltan Fekete – Credit Suisse

Hi, good afternoon. Two questions from me please. Firstly on hedging and achieved prices for 2014 and ‘15, compared to the levels you reported in February and then in April, hedging ratios and prices you mentioned today seemed to have changed very little. Does this mean that you have scaled back the pace of forward selling of power or is there some other reason behind this?

And then, secondly, on CapEx, the year-to-date run rate seems to be around €0.3 billion versus your full-year target of €1 billion. This suggests that your annual CapEx spend will be heavily backend loaded. I was wondering which divisions, in which divisions and on what projects will you be spending on in H2? And also could you please give some clarity on your CapEx plans for 2015? Thank you.

Tapio Kuula

Okay. If Timo takes the CapEx, and I will take the hedging, I think that to be able to increase the price level for the rest of the year by €1 and reaching €45 with the current market price, is I regard that as quite good achievement.

Then with the hedging volume increase by 5% from 25% to 30% that for next year that is also I would say a reasonable increase and also there we have been able to take care of reasonable price level, even if we have been giving up €1 megawatt hour. So, in that sense I don’t see that there has been any fundamental changes we have been active. And in addition to volume, we always try to take care of the price level as well.

Timo Karttinen

Yes, and regarding the CapEx. So it is true that the, if you think of roughly €1 million or €0.9 million to €1.1 billion guidance for this year. So, we are not at the linear rate, we are a bit below that. But it’s more a timing difference inside the year than anything else, so it is true that we see the capital expenditures and being a bit higher during the second half of the year.

So, but we are not changing the CapEx guidance for the whole year. At this point of time, we don’t have, we have guided only for this year, so we don’t have any specific guidance for the year CapEx for next year.

Zoltan Fekete – Credit Suisse

Okay, thank you.


And we’ll now take our next question from Benjamin Leyre. Please go ahead sir.

Benjamin Leyre – Exane BNP Paribas

Yes, thank you and good afternoon. I guess two questions from me please as well. First on Russia and the new guidance in rubles, the RUB18.2 billion target should we understand this is a minimum target or as a central case that you are targeting?

And the second point, a question on Sweden. You indicate in your report that there is a new report reappraising the hydro permits in Sweden. I wonder if you could quantify how much volume Fortum might lose in terms of hydro production in Sweden in light of this report. Thank you.

Tapio Kuula

Okay. If I first start with the Russia, of course we can’t say that that is the absolute floor. But as I said that we are confident that we will reach that. And when we say that we are confident I think that as you have heard before, we mean that. And when I say that we try to mitigate roughly this also means that if the ruble exchange is weak, hopefully we can improve operations that will partly – at least partly mitigate ruble exchange consequences.

It’s very difficult to predict any exact figure about hydro permits and potential change in speed. And there might be, might be something but then also it’s good to remember that it’s in very early phase and that is very much the process and discussions ongoing, so that I wouldn’t over traumatize that situation.

Benjamin Leyre – Exane BNP Paribas

Thank you very much.


We will now take our next question from Anne Azola. Please go ahead.

Anne Azola

Good afternoon. Thank you for taking my question. I have two questions. First, looking at your €2 billion cash at hand you are balance sheet, could you please elaborate on what is the cost of carry associated for 2H to that level? And whether you are considering using this cash to put into the buyback some debt even if that would entail a one-time cost?

And my second question would be concerning the overall nuclear production for 2014 with the outage of Oskarshamn 2 expected to last longer. Would you consider a level of approximately 20 terawatt hours for the year a good level for the nuclear production?

Tapio Kuula

If Timo will start with the advanced issue?

Timo Karttinen

Yes, regarding the €2 billion of cash flow as I indicated in the presentation. So of course we have based back quite a lot of data and it has matured. And certainly we will continue to do that as we go. Then, it’s a separate question whether we would prematurely pay anything back and obviously those are questions that we look at and analyze but we have nothing further to say about that at this point.

Of course, right now, as the interest rates are low, so it is obvious that the interest that we get from that cash is fairly low.

Tapio Kuula

Okay. And then about production volumes, I think that if you read the report page 11, you can see that what has been the last 12 months hydro production and there you can also see that last year was exceptionally low, I think at the 12, last month is much closer to the average.

And then also you see the same about nuclear power last 12 months is 22.7 and last year it was 23.7. We don’t give exact or more guidance to those volumes. But I think that with these figures you get quite good understanding and picture about the situation.


(Operator Instructions). We will now take our next question from Lueder Schumacher from Société Générale. Please go ahead.

Lueder Schumacher – Société Générale

Yes, good afternoon, just two questions. The first one is on your dividend policy. Depending on of course what happens to Nord Pool prices but you could find yourself in a situation where you would have to choose between the stable and over time increasing part of the policy or the 50% to 80% payout ratio.

Would it be fair to say that the first part, the stable and over time increasing carries more weight? That is the first question. The second one is on Nord Pool prices, they have been quite strong since or rather recovered I should say €2.5 since April yet coal prices are down, CO2 is only marginally up. What would you, how would you explain that? Have you seen any drivers that would explain that?

Tapio Kuula

Okay, if I start with the dividend situation. As you said yourself, there are in addition to those figures at least as important guidance with the verge stable, sustainable and over time increasing. And of course when our board decides the proposal to shareholders meeting, I think that we will look at macro environment, we will look at our balance sheet, how strong that is as well as future investment plans.

So that is really the overall picture taken all those issues into account. And that we have tried to underline that it’s not only those figures.

Nord Pool prices I think that it’s difficult to give any exact comment because that is really the market you and it seems to be that the market is expecting some gradual increase in prices.


We will now take our next question from Andreas Thielen from MainFirst. Please go ahead.

Andreas Thielen – MainFirst

Yes, good afternoon. Two questions from my side as well. Firstly, on the efficiency target of the €1 billion which you now feel confident to achieve in the full year, can you give any indication on the working capital side? I mean, you have €125 million improvement in the first half. Should it be a similar level for the full year?

And then the second question relates to the nuclear tax in Finland. Could you remind us what the potential impact on your numbers would have been if the tax would have been implemented? Thank you.

Tapio Kuula

Yes, the nuclear tax or that’s so called windfall tax, the power plant tax. So, if it would have been applied originally decided, so it would have been €25 million on whole year basis, for us roughly €50 million in Finland all-in-all. And quite close to half but then payable to us either directly or indirectly through our own achievements in other production companies. So, that is what it would have been is, it would have been done as proposed last autumn.

Then regarding the efficiency targets, so and specifically our working capital, our working capital also moves that we cyclically. So, typically as we sell more during the winter months, so we have been also higher customer receivables at the end of the reporting. And then also we have higher inventories in the places where we burn fuels, etcetera.

So, if you look at the last year and this year, so we have been able to both years improve the working capital during the spring time. So the point is that you cannot directly read from the improvement of the first six months into what it would be on a yearly level. So, we haven’t yet drawn a line where it would be but obviously we are looking at the longer term trend as well.

Andreas Thielen – MainFirst

Okay, great. Thanks.


(Operator Instructions). We will now take our next question from Ingo Becker from Kepler.

Ingo Becker – Kepler

Yes, thank you. Good afternoon. I have I think three questions. The first, on your RUB18.2 billion target for Russia that is I understand the same target that you had at the time of the acquisition. I think you communicated later on in euros. But if that’s unchanged from ‘08 and given that prices for your existing power plants in Russia prove rather weak over the years.

I was wondering what actually had improved to offset that? Was it strong cost-cutting or I think at the same time you always reiterated that Russia kept its promise on the new plant so things appear not to have changed? Are you expecting that weakness in your plants or have other areas offset that?

The second question would be just technically on Sweden, can you give us the H1 comparable operating profit and maybe EBITDA for Sweden only?

And the last question, I was cut off the line briefly so maybe it was asked already, sorry for that in that case, the networks sale once you have sold Sweden apparently your balance sheet will be super strong. And can you help us what the next steps to take if you so could be?

It doesn’t sound like you are considering a bonus dividend. It is a bit hard to imagine bigger M&A for the group but maybe that is an option or would you be happy also with a view to keep paying a rather high dividend to keep funds on the balance sheet and basically just set them aside? Thank you.

Tapio Kuula

Okay. If I take the first and third question and Timo will take the second one. As said, this RUB18.2 billion that is exactly the same figure as I said that during the time of acquisition, which is in line with the ruble exchange rate at that time.

And as I mentioned, we feel that we are confident achieving that ruble figure and if and hopefully when we can also mitigate the consequences weak rubles, we certainly do everything we can to do that. And cost cutting is one way to do that, which I think that we have implied quite well. And of course the biggest contribution comes from the new power capacity, which has also materialized very exactly according to the plant.

After potential divestment of Swedish distribution business and that is certainly one reason why I said that we feel that Fortum is very interesting company that we feel that we will utilize the money mainly in order to develop the company to be better company to increase our earnings per share. And in that way also, time wise be able to increase our dividends.

And we do those investments in line with our strategy as we have communicated before. And certainly we are after good transactions whether those are restructuring or whether those are acquisitions or investments. And in that sense it’s more important for us that they are successful good transactions than the timing. We feel and we are confident that we can do those quickly enough.

But really the main target is the developed company, certainly this keeps also strong financial position which I think that is in the interest of shareholders in that sense that it gives also good position for dividend payments.

Timo Karttinen

Yes, then regarding the second question I think it was about the Swedish and especially the Swedish grid numbers separately. I don’t have the numbers here right now in front of me but before I could ask you to look at our website, and we should have there a supplementary excel sheet which one of the pages there contains quarterly information which is broken down a bit more regarding the distribution segment and the countries.

So, I hope that you could find the information there and I think it’s good if you go and look at what all numbers are there, if it’s not there then please come back to our IR.

Ingo Becker – Kepler

Okay. Thank you, Tapio. Can I just inquire one more, you’re certain in developing the company? Does that include M&A or is that rather organically by developing, constructing new assets. And can you maybe give an indication what areas or regions you’re looking at?

Tapio Kuula

Yes, both of those can be included as I said that it can include restructuring, it can include acquisitions and it can include also Greenfield investments.

Ingo Becker – Kepler

Okay. Thank you.


We will take our next question from Lueder Schumacher of Société Générale.

Lueder Schumacher – Société Générale

Yes, just one follow-up question. Once you’ve sold the Swedish distribution business, what proportion of your earnings would you regard as regulated?

Tapio Kuula

Yes, it’s difficult to specify exactly what is regulated. If we say that district heat business is semi-regulated of course that is quite significant part of our business. As well as very stable business is also capacity supply agreement income from Russia. And then of course we don’t have that much solar business but solar business is also in that sense stable business. So that, actually those business areas from which the Russia and heat business, are more significant that they can be called probably semi-regulated businesses.

Lueder Schumacher – Société Générale

If you take 50% of the heat business and the Russian capacity payments then would the revenue streams you would regard as regulated?

Tapio Kuula

That would be right figure. You could probably analyze that a bit further.

Lueder Schumacher – Société Générale

Okay, thank you.


There are currently no more questions at this time. So, at this point, I would like to pass back to Mr. Tapio.

Tapio Kuula

Okay. Thank you for all of your, about your interest and attention. And I really wish you all very enjoyable summer time. Thank you.

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