Fortum Oyj (OTC:FOJCF) Q4 2015 Earnings Conference Call February 3, 2016 9:00 AM ET
Sophie Jolie - Head, IR
Pekka Lundmark - President & CEO
Timo Karttinen - CFO
Lueder Schumacher - Societe Generale
Peter Testa - One Investments
James Brand - Deutsche Bank
Andreas Thielen - MainFirst
Peter Bisztyga - Bank of America
Peter Crampton - Macquarie
Good day, and welcome to the Quarter Four 2015 Fortum Corporation Earnings Conference Call. Today's conference is being recorded.
At this time, I would like to turn the conference over to Ms. Sophie Jolie. Please go ahead ma'am.
Thank you. Ladies and gentlemen, welcome to Fortum's fourth quarter and full-year 2015 results conference call. It's also a conference call for our new strategy. I'm Sophie Jolie, Head of Fortum's Investor Relations. I'm here in Espoo. With me are Pekka Lundmark, President and CEO, as well as Timo Karttinen, our Group CFO.
We have released quite a lot of new info today. So we have a very exciting and interesting one hour ahead of us, and this is also for you to note that this is one hour conference call. If you have additional questions after the conference call, please mail the IR department.
Pekka will start by presenting the results, and going through the new vision and strategy, after which Timo, will take us through some financial targets and how we're going to improve our cost base.
With that Pekka, please.
Thank you, Sophie. Good afternoon dear investors wherever you are. What we will do, we'll go first to the main points and the results, and then after that we will talk about the future. And then of course we are available for your questions.
Starting with the main points in the result, our sales dropped from slightly over EUR 4 billion to EUR 3.459 billion. About three quarters of this drop is coming directly from electric price. And clearly in this whole report and in our business in general we are greatly suffering from the low market prices of electricity. So that's about three quarters. One quarter is mostly related to the exchange rate translation between the Russian ruble and euro.
Now this result is strongly affected by lot of one-time measures both positive and negative. So it's important to focus on the -- in addition to the one-timers to focus on the true operational performance. And a good indicator of that is always the comparable operating profit which was EUR 808 million compared to 1,085 the year before. And this comes also very directly from the power price decline. I'll show you an EBIT reach later in the presentation.
But then of course we have a lot of one-timers altogether EUR 958 million that were affecting comparability. Of course by far the largest one being the OKG 1 and 2 related write-downs and provisions in Sweden. But in addition to that, we also have, in the fourth quarter, provisions and write-downs relating to our old thermal capacity in Finland. And then, of course, we have the pretty big gain, capital gain on the divestment of the Swedish grid which then affects the results positively.
Now, one way to look at the earnings per share for the year is to take all this out, and see that what would earnings per share have been with our current fleet with the prices that we were able to achieve and with our current cost structure. And that number is EUR 0.71 per share. Of course now the reported earnings per share for continuing operations was EUR 0.26 negative, and then, for total reported earnings per share EUR 4.66. So this just shows how massive the scale in EPS is depending on which one you take. But I mean when look at operatively I kind of myself like the EUR 0.71 because that gives the picture of where we currently are going.
Cash flow was actually quite strong. Of course the results are affected by the prices but EUR 1.228 compared to EUR 1.4 million the year before was not the bad result from cash flow point of view at all.
Then, if we move forward, to the next page, just repeating that the EPS effect from the distribution divestment was EUR 4.82. The key reasons not big surprises for the low electricity prices are high inflow and high hydro power and I'll show the graph for that in a second. Then, of course, very mild weather. About seven terawatt hours more wind in the Nordic in 2015 compared to 2014, and the very low commodity prices which of course have continued, and as you very well know there is a strong correlation between the general commodities and the electricity price.
On top of this, then of course, and a result of all this on the prices is of course an achieved price of EUR 33 per MWh versus EUR 41.4 per MWh the year before. This is our achieved price. But when we look at the Nordic average spot prices in 2015 they were one-third lower than in 2014, and compared to 2013 they are almost 50% lower. So that's of course the source for all these challenges and the result the price of our product on the spot market has dropped almost 50% in two years.
On top of the prices, we are facing significant cost challenges, especially in Sweden because of the increased tax for -- capacity tax for nuclear. Tax was increased by 17% in August 2017, and also the waste fees have increased in Swedish nuclear which also benefits the results. So with this prices that we have and the Swedish area prices in particular in combination with this growing costs, that's also the other nuclear operators in Sweden have indicated that whole business is under heavy challenges, and we are certainly doing whole week and to take away some of that cost burden. We've for example said that our opinion is that the capacity that should be removed, but let's see this is a heavy political discussions in Sweden at the moment. But this combination is very challenging at the moment.
I already mentioned the write-downs. I will not repeat them anymore. But I also want to emphasize that we are also investing in newer things Fennovoima 6.6% share was of course announced earlier this year. But then, earlier last year, but then, some of the later news we are going to participate or we have been selected a 70 megawatt solar plant operator in India which then increases our capacity in India in solar from 15 megawatts to 85 megawatts. We decided last year to build a new multifuel CHP plant in Poland and we are also expanding in Poland through a tender, public tender offer for a listed electricity and gas sales company.
And then, as part of not a new major investment program in Russia because that we do not have, but I would say as part of the portfolio development in Russia we started a 35 megawatt wind farm development that's the first wind program actually in the whole country.
We still target to reach the RUB 18.2 billion operating profit level in Russia in 2017 and 2018. And when we do mean to the segment's results actually you'll note that given the challenging economic circumstances in Russia, the operating profit development that we had there last year was not all that bad.
Next page, market conditions recap. Power consumption in the Nordics followed our estimates three megawatt hours more. We have been saying 0.5% growth. This was slightly above that 381 was the final figure for last year. Priority talks about the lower prices, spot price EUR 9 down and area prices in Finland EUR 6 down, and Sweden area prices down even more EUR 10 per megawatt hour.
On the more positive note there was a decision by the -- or the Council adopted the European Commission's proposal to start the so-called Market Stability Reserve which will start buying back non-used emission certificates from the market that should been then start typing up the ETS scheme and boosting hopefully up the carbon price from 2019.
Market conditions in Russia, slightly lower prices, of course significant part of our income comes from capacity payments but market prices for electricity declined also there because of the weak economy 4% but significantly lower than in the Nordic region.
Then if we move to the next page one of the key reason why prices have been so low is the very unusually high levels of water reservoirs. When you look at the Q4 development the dark blue curve you can see that it was at the end of the year pretty much on the record level. The situation has moved towards more normal now in January. But as you can see when you look at the left-hand side on the orange dotted line or curve there you can see that we are still very high in historical comparison and there is no question of the fact that this will put pressure on the power prices in the coming months.
Next page wholesale price for electricity. There you can see how low we actually were at the end of the second half especially of last year and actually throughout the whole year but especially towards the second half of the year. Now, in January, we had two or three weeks of quite cold weather in both Finland and Sweden and that supported prices and we actually had a couple of peaks also there. But of course their overall effect for the cold situation then on longer-term basis is limited at best.
Because of the lower commodities in the beginning of the year unfortunately the forwards in the Nordics for '17 to '19 have continued to drop and we announced slightly below EUR 20 per share, of course still remembering that the area price forwards for Finland are on quite much higher level than that.
Then on the next page brief comments on the segments and I would focus now on the full-year comparable operating profit. You can see there the 2015 to 2014 comparison Power and Technology declined from EUR 877 million to EUR 561 million because of the reasons that we just described comes directly from the electricity price. Heat, Electricity Sales and Solutions improved slightly. This comparable operating profit does not include the share of profit that we have in associated bond companies like in Stockholm, Fortum Värme. This is the ones that we report directly in our P&L on the operational level. So that improved from EUR 104 million to EUR 108 million. But the bigger improvement that I already earlier mentioned we had in Russia EUR 161 million to EUR 201 million.
Now, just to highlight a couple of things affecting comparability. We released EUR 52 millions of CSA payments from the completed investments that we had on as of reservation in our balance sheet, which was then released during this year. But on top of that we suffered from the weaker translation ruble euro translation so that the effect was very high EUR 71 million. And putting these two together and then adding to this 40% reported improvement, in a way the underlying local improvement in euros was EUR 59 million, which is a reasonable progress in a market which has been suffering from a very weak economy.
May be common thing just quickly, before moving on Russia, from a more general point of view, I mentioned the wind investment. There was also a release where we confirmed that we are negotiating about the potential sale of our power plant in Tobolsk. These are all what I would call minor moves. Our strategy in Russia is unchanged. We now want to complete the investment program that we have had ongoing. It will be completed quite quickly actually during the first quarter of this year. Then after that our priority is to achieve the RUB 18.2 billion that we've be talking about. We are not planning to change our general investment strategy there. We may be doing small reallocations or shuffling within the existing capacity and I would put both the wind farm investment and the potential divestment of Tobolsk, if we reach an agreement into that category. On top of that, we of course keep our eyes open in general what's happening in the economy, but we keep our strategy unchanged.
Then moving on to the EBIT which Q4, which first, we have a comparison from the year before EUR 370 million and now we have EUR 243 million, the biggest difference by far comes Power and Technology because of prices. But we also had 1 terawatt hours of lower production volume in Q4 in the year-over-year comparison. And this was mainly Swedish nuclear production, which then affected both the obviously top-line and bottom-line negatively.
Heat, Electricity Sales and Solution division improved by EUR 4 million, Russia EUR 10 million, and others minus EUR 7 million.
The pay chart for that is the full-year comparison; starting point EUR 1,085 million in 2014. Then when we take the achieved power prices a slightly higher volume on the full-year level we get this net change of EUR 316 million, which is a big change because of the lower prices. And then we have then the Heat, Electricity Sales and Solutions and the EUR 40 million from Russia that I talked about and we get to EUR 808 million as comparable operated profit from continuing operations in 2015.
Next page, no dramatic news on the power consumption outlook of course, this is pretty stable development. We continued to believe that this modest growth of 0.5% per year will continue in the coming years in the Nordic power consumption. And in general, electricity is expected to continue to gain share of the total energy consumption in the Nordics.
Russia, I already mentioned, we have now for this year guidance for CapEx without acquisitions at EUR 350 million and out of that EUR 300 million to EUR 350 million -- EUR 650 million -- sorry, EUR 650 million -- and out of that maintenance CapEx is expected to be EUR 300 million to EUR 350 million, which is close to our depreciation. The rest has been known acquisitions but growth CapEx from the already announced growth projects that we have.
Hedging 2016 about half has been hedged at EUR 33 per megawatt hour which incidentally is exactly the same level where our achieved price was for the last year. And then looking at 2017, we are currently at 20% at EUR 30 per megawatt hour.
And the final piece of the guidance is taxation. The Group tax rate to be 19% to 21% for the full-year 2016.
Before I talk about the future, just to recap, that the dividend proposal EUR 1.1 per share. There are several ways to look at this of course. We had a large one-time gain from the sale of the distribution that's on one hand. The other way to look at this is the EUR 0.71 in a way operating earnings per share. And as our policy says the Board took a very thorough and careful look at the situation, looked at our operational capabilities, market situation, our balance sheet, our investment potential, and arrived at this proposal.
This will of course then be reviewed in the same way also going forward, and next year, we will then based on the information that we have had at hand at that time then we will then again make the proposal for that year. But that's too early to say at this stage, let's speculate where that would be; this is what we're now focusing on.
Of course our main goal and now I started to move towards the strategy going forward is to put our balance sheet into work so that we would be a good dividend payer going forward and in the long-term. That is really our key goal in the host strategy which are now moving, moving towards, if you move please two pages forward to Page 15 in the deck just a very short recap on the global megatrends that are really shaping the energy sector, I mean this sector will not look similar in the future as it was in the past.
We are being shaped by the climate change, strong pressure on decarbonisation, greater share of renewables that will take larger and larger share of new investments in the world but also add volatility to the system.
Resource efficiency, resource cost is affecting the world. There will be more and more solutions available for so-called circular economy, which have a quiet important connection points to the energy system as well.
This is very much connected to the urbanization and the massive challenges that the growing megacities of the world are facing with pollution with ways with the development of their energy system just to name a few examples.
Digitalization will change a lot of things in the energy business as well, not only in the consumer interface where it is very clear that the way how consumer services and energy products will be sold and delivered and packaged to consumers will be totally different in the future affected by digitalization. But digitalization is also starting to add new possibilities to how to handle the volatility in the system, how to handle local or create scale storage systems, how to finance that delivery on the long promises, old promises of demand response and being able to manage decentralized production. Of course in addition to this being able to empower more conscious consumers in the future. So digitalization will, I mean it has already changed a lot in many industrial sectors and energy sector will definitely not be an exception.
Now if we move to the next page, this is actually an old slide that we have been using before and there are not that much new messages on that, that's why I move quickly to the next one. But just quickly on the left and right, left-hand bottom corner you have the high emissions and low efficiency systems first our systems. In the middle you have the CHPs and nuclear today. Then moving to the upper right-hand corner which is more the future than you will have the new fuels, biofuels waste, advanced new generation waste treatment, and then of course combination of hydro, sun, and wind in connection with the all new intelligence that this has been enabled by the new digital solutions.
This is how the future energy system will look like. But then if we, then think what will all this mean for us. I would say that probably the most important message in the whole strategy is that we do not know and nobody else knows either where the power prices will go in the future. We do not publish any power price forecasts of our own. But it is very clear that when you look at the different dynamics and the different views there on the market as to where the prices might go, there are people who are saying that yes, okay, now after a period of weak market then there will be a major recovery, and then, there will be a very strong market again that's one extreme. And then the other extreme is saying that okay this may continue for quite a long time. And then there is a lot of people in between.
Now, the key message in this strategy is that we do not want to bet the future of this company alone on the assumption that there will be a big recovery in power prices. Hopefully there will and that is then good news to us all. But a key element in this strategy is that we want to develop and put our balance sheet to work in such a way that we would also get other revenue streams where the earnings potential is not dependent on the Nordic wholesale power price as it today.
So this is kind of the thinking. We want to build couple of additional legs that will be able to generate good earnings for us in the future, also in the situation where the prices would not recover. Then, if they do recover, and hopefully that will be the case, then we would get this best or above both legs, we would have several legs generating good results.
When we talk about the existing fleet, and with the current prices and preparing for the scenario where the prices would not recover, it is of utmost importance that we do everything we can to increase productivity and lower our cost. And that's why we today announced a continuation to the previous cost reduction program; we are now looking at an additional EUR 100 million cost reduction during the years '16 and '17. We target implement the actions by the end of the year, so that then this full EUR 100 million will be visible in 2017.
In addition to that as part of the development of the existing fleet, we of course keep our eyes open and intent to use our strong balance sheet; if and hopefully when we find attractive consolidation on other industry transformation opportunities restructuring opportunities. And we are prepared to use a significant part of our balance sheet for this purpose.
At the same time, it's not possible to speculate in advance what exactly those moves would be. If they come they come and they will be announced when they come but of course they need to be good deals and it's very important from our point of view not to overpay in large deals.
That's one thing and that's about the existing fleet. Then about the new legs that we want to build. We have a good starting point in today's Heat and Electricity Sales division in terms of the solutions for different types of cities. We want to increase the importance of this strategy. We want to be solving the growing problems in these cities where they are traveling with emissions in the energy system where they want to bring new fuels, waste, biomass, new types of biofuels, other things enabled by new technologies on the fuel side into the system. We want to be able to take advantage of the ambitions that these cities have in the development of their own circular economies to the maximum possibility.
We want to make the heat and cooling systems and networks in the cities as intelligent and as two-directional as possible so that we would then be able to open new types of services for consumers and business customers that would be two-directional services being able to offer them markets for excess heat, excess electricity that this customers would not need.
This is a very large potential market in the world and it is expected to grow fast. We will not be a market size limited at all. The key is for us to find our own niche in this segment. And the goal here once again is to develop revenue streams that would be able to deliver cash flow also in low power price scenarios.
Then to the second new leg that we will develop, and that is of course solar and wind. When we look at the expected investments in the world into electricity, all power generation, the current estimate is that the about 80% of new investments in the world in the coming five years will be in solar and wind, 80%. That's a massive share.
When we look at the forecasts towards 2030, there are expectations that that share will grow to 90%. So we are talking about a massive transformation here. And at the same time, we believe that and there is actually more and more evidence of this now that the taxpayers in several countries are getting nervous about the different types of subsidy schemes that there are. At the same time the cost of these technologies has already come down and will continue to come down. Solar has dropped 80%, in five years will continue to go down. Wind is also improving in cost.
And when the subsidy schemes will be gradually phased out, and when the new digitally enabled possibilities in handling the volatility, and demand aggregation in the system will come into play, we believe that utility type of competences will grow in importance. And we believe that the relative comparative advantage that utilities will have also in this gain will increase in comparison with financial only investors which have so far been dominating this segment because of the various subsidy schemes that there has been.
So that's why we believe that this is now right time to make a serious move in this segment. Of course, we would be very carefully evaluating the return potentials that the different moves in this segment would be offering.
In terms of the geographical scope, it is likely that the wind geographical strategy will be close to or at least nearby our current whole market and often in such a way that we would then be able to take advantage of being both in wind and in other generation forms.
When it comes to solar, we need to take a slightly wider geographical ambition level, because our current whole markets are not exactly the leaders in solar development in the world. India is of course one of these countries, but we definitely do not plan to put all our X in one basket. We do plan to add also a carefully selective number of other initiatives into this portfolio to broaden the scope. So India will continue to be there, but it is definitively not the only one.
And then last but not least, but this is then the lower spending but strategically important for the future. Because of the reasons on the technology development side that I described, a growing share of innovation in the energy business in the same way as in many other businesses is actually moving to startups. And that's why it's very important for us to be strongly anchored in that startup innovation that's taking place in the different parts of the world. And that's what we mean with building new energy ventures. It could also mean acquisitions of promising startups, it could mean investments into own development or it could also mean indirect investment into startups through a venture capital funds that are specializing on energy innovations.
What I want to emphasize really is that when we talk about our capital allocation, the first three cornerstones in the strategy are the ones that will get the big capital, or guess the first one could potentially get the really big capital allocation, if and hopefully when we find good deals. But also number two, and number three, will from ambition point of level be in the billion euro scale. More specific on this, we do not plan to be.
Of course, you all understand that you do not build a gigawatt portfolio in solar and wind without being able to be in the billion euro investment ballpark. But the same ambition level, at least is true to the self solutions for sustainable cities as well. And this is really needed. I mean we will need to put a significant amount of money to both sustainable cities in solar and wind if and when we want to build other revenue streams than wholesale price revenue streams.
So these are now the most important points about the strategy. There is some more internal stuff lower on the slide in terms about the most important internal development projects that we will be focusing. I will not be spending time on those now.
But I would ask Timo now to take over and comment our financial targets and our financial position.
Thank you, Pekka, and good afternoon everybody. Timo Karttinen here. Let's turn to Page 21 in the presentation. I will update the long-term financial targets that give guidance on our view of the Company's long-term value creation potential, strategy, and its business activities in the portfolio.
So I'll update it long-term and emphasize also over the business cycle, financial targets, return on capital employed, ROCE, at least on level of 10% and comparable net debt to EBITDA ratio around 2.5 times in normal condition of course that's been fluctuating around the 2.5 level asset.
Moving on to Page 22. We have a very strong financial position, which of course gives us a good starting point now to deliver on our strategy. Our comparable EBITDA on continuing operations EUR 1.1 billion during 2015. Interest bearing net debt at the end of 2015 minus EUR 2.2 billion i.e. EUR 2.2 billion net cash in our balance sheet, and the improvement all-in-all roughly EUR 6.4 billion during the year of course coming from the operative cash flow, and then coming from the sales proceeds of the Swedish distribution grid business.
That leaves us, sorry, with a comparable net debt to EBITDA ratio currently minus 1.7 as we have negative net debt, target being there around 2.5, as I said previously, and then also with a return on capital employed for total over 22% for the calendar year 2015. There obviously heavily reflected the sales gains from the Swedish distribution grid business, long-term target being to be at least on the level of 10%.
We have all-in-all more than EUR 8 billion liquid funds in our balance sheet at the end of the period. And then on top of that we have committed credit lines totally more than EUR 2 billion.
Moving to cash flow statement, turning Page 23. Our cash flow operating activities in the continuing operations EUR 332 million during the last quarter last year and EUR 1.228 billion during the whole of the year. So the cash from operating activity is continuing on a relatively good level despite the lowering prices as explained by Pekka.
Looking at cash used in investing activities paid capital expenditure in our cash flow EUR 180 million in the fourth quarter, and roughly EUR 530 million during the whole of the year. Based on this line, other investment activities, which is net positive that includes among other things, the cash we have received as the Varme has been paying back the shareholder loans to us, so EUR 143 million net positive during the last quarter and EUR 437 million net positive during the whole of the year. At the end of 2015 Varme has no shareholder loans left towards us.
And that then all leaves us with the cash flow before financing activities totaled Fortum almost EUR 300 million during the last quarter, and EUR 7.65 billion during the whole year, obviously bulk of that coming from the sales proceeds of the Swedish distribution grid.
Moving to Page 24, on our debt portfolio and average interest rate, we have gross debt of EUR 6 billion in our balance sheet at the end of the period, the average interest rate being 3.7%. At the balance sheet date the external portfolio is mainly in euros and in Swedish kroner, and then the average interest cost is 2.6%. Then we have roughly EUR 640 million worth of that external debt converted to rubles with which we financed our Russian operations. And the average interest cost of that portion, including the cost of hedging the ruble to euro exchange rate was 12.8% at the balance sheet date. And these 12.8% and the 2.6% weighted by the average sizes gives them the average interest cost of 3.7%.
As you can see from the maturity profile, we have roughly EUR 800 million of our debt maturating during 2016 and most of that will be maturing during the first half.
Page 25, we continue to focus and to lower our fixed cost base. Our target is to reduce fixed cost base by EUR 100 million euros in our current operations by the end of 2017. And this is of course a natural continuation of the cost control and savings we have completed earlier.
We continue to face pressure, as explained by Pekka, low commodity prices, so it is an absolute must that we have a cost improvement and continuous control there. We will further look at our organization and streamline that. We improve our operational efficiency and we certainly will also put more focus on our procurement activities on top of the fixed cost.
And with that, I will hand over to Pekka for conclusions and Q&A.
Thank you, Timo. I think we can go directly enter Q&A. Page 25, just recaps the cornerstones in our strategy, but I already spent so much time on that, I would not like repeating them again.
So operator, we are ready for Q&A.
Thank you. [Operator Instructions].
We have our first question from Lueder Schumacher from Societe Generale. Please go ahead.
Good afternoon. I'm a little confused about your dividend policy; I mean the official policy as regard to the payout has been ignored for the last few years, which kind of backs the question, why that still there? And going out what shall we assume -- leave the EUR 1.1 or you also mentioned that the low recurring earnings, you have from this year also took part in your decision not to pay special dividend as you've done on the bookings received on the finished distribution assets. So I'm just a bit puzzled what we should be expecting for the dividend going forward. And second, also related to that, what is the idea behind having a payout ratio that is anywhere between 170% and 220% going forward if you saw market-to-market current prices. I'm not quite sure what to make of that. And lastly I'm more curious to see what do you think will happen to your output from Swedish nuclear in 2017 when you basically are un-hedged, you've got a level that even before the Swedish nuclear tax is not making any money, will you just not run them or what's going to happen there? If you could enlighten us that will be great.
Okay. If I comment on dividend and then Timo will comment on outlook and hedging for Swedish nuclear. As I said the dividend policy, also said if that every year when the Board decides on the dividend proposal it will take a broad view on our result, on our balance sheet, on the market development, on prices, and on the investment potential that there is. And this is now even more important than usual because we have EUR 8 billion on the balance sheet. And that's why we will not say anything more about the dividend in the future than what we have now said because we will know much more in one year's time as to how much and in to what type of assets we will have invested, but at least of that EUR 8 billion. So that will then be again a new decision and a new review when we get there one-year from now.
What I want to emphasize and I said it several times is that our goal is to be a good dividend payer in the long-term and that is not possible unless we really put this balance sheet into work.
Okay. And then about the nuclear volumes going forward as to referred to 2017 of course that's still one-year ahead. It's good to look back also and think the sort of the market conditions related to of course commodities globally, but then also Nordic market we have had two very warm winters, and last autumn also for the fourth quarter, was very warm and wet quarter and that's always visible in the day-to-day prices on the forward is what is the global commodity situation.
So obviously we don't know how that will develop and what is impact of that into the price is. We look at that of course, we then decide as we go that's one thing. Then on the other thing, on the other hand of course what we say and what also we hear other Swedish nuclear owners saying is that the post-situation in Swedish nuclear is getting more and more severe and more and more untenable especially because of the nuclear taxes and increases of those nuclear taxes and that is what we continue to discuss and that is what we continue to try to get through our message in Sweden. But and of course all these things then ultimately will come into play when we go forward and then going forward to decide on what we do, produce, and where. But it’s not possible to say more than that at this point of time.
Sorry, just one follow-up question but on the more short-term decision making basis, do you just run the plans and the hope to eventually be compensated or after-tax dropped. I mean you already must be making decisions on whether to run them or not based on the current price?
I mean of course we have first of all we are minority owners in this plant. So the operational decision making is elsewhere. But the plants are being run with the exception of end decisions about OKG 1 and 2 which will mean that number two will not be taken into use again at all. What will then happen to the others exactly as our co-owners have said and we repeat the same thing is that we will have to make decisions about the future quite soon because at the same time when the cost can increase because of the capacity tax and other obligations, there is a need to make decisions about investments into safety and into prolonging the lifetime of the reactors we want to continue to use them.
So these are critical important decisions that will have to be made not sometime in 2017 or 2018 but hopefully much sooner than that and that’s why -- that’s one of the messages that we’re trying to get through in Sweden that the capacity tax must be taken away completely not reduced but taking away is one of the key items that we are working on.
We will now take our next question from Peter Testa from One Investments.
So just a couple of questions. One is just a follow-up on the dividend question. Can you just give us an understanding of distributable reserves going forward and how that the balance sheet structure of the new investments in wind and solar may allocate those reserves in a different way your balance sheet towards supporting those investments?
All-in-all of course as you can see from the notes from our release, so we have quite a lot of equity in our balance sheet and that is of course due to the historical good results and also for the sales gains that we have made both in the Finnish and a lot here in the Swedish distribution activity. So that's on a group level. Then you can also see from the last page, Page 26 of our interim release that current distributable funds at the end of 2015 were a bit more than EUR 5.4 billion. So that's the situation in the parent company which obviously is been dividend paying entity in the group.
And then when it comes to the return potential on the solar and wind projects one guiding principle for us there is that of course that we would target them to be something that sorry that they would support our growth, the internal capital employed targets.
Okay. And can you give some of these program take some time to develop. You talked about some markets being attractive. But could you give us some understanding of where you stand on understanding and analyzing projects, how quickly you think on organic basis you can deploy capital in developing the new project speed.
I think the speed will very much depend on what kind of combinations of organic and or non-organic growth we will be able to find. We are working hard on this at the moment and we have several things on our table that we are looking at. But unfortunately I cannot be more specific than that but this is a high priority matter for us.
Okay. And then on the inorganic side, given your criteria of a 10% return on capital employed, I mean that's not that easy to get straightaway the acquisition date. Can you give some view as to why you would believe that's a year one target or by year three you've just some understanding of how the timeframe from going from acquisition to those targets?
Yes, the return on capital employed target that we have, I think that we announced earlier that's a group-wise target on our total capital employed and that's over the cycle. So of course every time when we look at a specific project be it organic or be it acquisition, so then we will cut the profile of the returns and what would that mean as part of our balance sheet and as part of our portfolio but the external target is for the whole group as a whole.
All right. Okay. Last question please. Just on Russia, you talk about getting to the RUB 18.2 billion profit goal in '17-'18, but there is also quite a bit of sensitive to inflation in gas prices. Can you give some sort of understanding as to what different scenario you're expecting for those items between today's situation and that's expected to make that RUB 18.2 billion target?
I mean that RUB 18.2 billion is driven by several items where obviously the capacity payment is one important thing and there are components, they are connected to the bond, state bond drags in Russia where they're actually I think favorable development recently. We have also been successful in getting through some of our views on how the combined heat and power pricing structure should be integrated and implemented that will support our results. So we're actually quite happy with what we've been able to achieve in terms of developing our position vis-à-vis the different schemes that are available in Russia. What we have not achieved in that RUB 18.2 million target or billion target is that there will be a wide scale implementation of the so-called heat reforms in Russia which would be a liberalization of the heat market. The electricity market has been liberalized on the wholesale market but the heat market is regulated and that's why the implementation of this so-called heat scheme is very important thing for us. But we have not achieved a heat market liberalization which then would be an obvious upside to this target.
Now the gas price increases in Russia have been quite political discussion and they have been fairly modest now recently in 2016 if I'm not mistaken it's only 4% or 5%, 4.9% this year which does put a lid on the price development then on the consumer market as well. So that does affect negative price development but at the same time a relative share of the importance of this study I believe now is totaled in power generation potential with our size is rather limited.
We will now take our next question from James Brand from Deutsche Bank. Please go ahead.
Just firstly a follow-on from Lueder's and have questions on the trust on the Swedish nuclear. And certainly you said that [indiscernible] you've minority holdings a number. Given the Oskarshamn 1 and 2, you already decided, you're going to close those units. I just wondering you restrained by kind of process in terms of how quickly you can do that, so see they're not both expected to close until 2020? Is it not worth, it was possible to just kind of shut -- close them down straight away was not technically feasible. Second question is on the timeframe for the investments. Is there was certain amount of time; you're giving yourself to find a transfer communities. Would you get a point where you haven't found then that you would return any excess capital that you have to shareholders. And thirdly, just in terms of your financing position, you're incurring of EUR100 million by the looks of net interest costs, as you obviously got over EUR 2 billion of net cash. Are you looking at sort of buying back bonds? Thank you.
Okay. I'll let Timo to take the last question. The shutting down – the shutdown schedule of OKG 1 and OKG 2 is of course something that this is discussed between the license holder and the authorities in Swedish. And my understanding is that they are now in the process of applying the permit needed for those projects. So we are typically talking about fairly long time schedules in this type of methods. Of course for OKG 2 it's easier, because it will back into production at all. So for all practical purposes we're talking about OKG 1 time schedule.
But of course I mean as you know these are market sensitive messages and should there be a change in that schedule then it would have to be published in the correct way in the market.
And then about our bonds and portfolio as a whole, we have of course going through that many times and the loans we have had that we have been able to premature a payback without any penalty to others, those we have of course taken care and done. Then of course looking at the bonds, so if, hypothetically, if we were to buyback bonds of course we would need to pay the difference and most likely we would need to pay a bit additional so that we could buy them back and still that would be a question how much of that how big percentage we could be buying.
So, yes, of course we could do that or we could try to do that and through that we would reduce our future interest cost, but of course we would take an NPV through paying the penalties and others when we do that. So that is something that we continue to evaluate and of course if we decide to do something then we thought. But for the time being we have not decided to do that.
And your third question was about the time horizon for the investments. The ballpark answer is two years during 2016 and 2017. But of course it all depends, I mean what type of opportunities we will find and once again, if I have learned anything in my life it is not to overpay in excitement of large deals. You have to be very careful on that. But at the same time as you also actually hinted in your question that in case we do not find wise use for the money, it is our duty to return it to shareholders.
We will now take our next question from Andreas Thielen from MainFirst. Please go ahead.
I would like to get a bit better understanding of the new savings target you say it's a natural continuation from '13, '14 plan. Is any indication on implementation cost, anything on the timing? I mean if it is natural continuation have you already achieved something in 2015 or should we just think that it's more or less equal splits of our -- the next year?
That there isn't anything related to this number already achieved in 2015. So this method would be implemented during this year, the target being that they will be readily implemented so that we would achieve this run rate, annualized run rate of EUR 100 million by the end of the year, so that that full effect will be visible next year. More details on that we will not get into because there are methods also that needs to be just cut in the right way with the personal representatives in seven countries before things can be published.
Okay, thank you. And then if I may just one thought. If I look on the share price development today, I think that the markets the equity market is concerned about the lack of visibility on the dividend. I clearly got all your messages on that one, just in terms of potential consideration as it will take another two-year before it becomes clear what’s going to happen to your investment program targets, there are other companies in the market to reach that period we've given some kind of guarantee or minimum level of dividends. I fully understand that is not on the table for this year but may be would be helpful in the future. Thank you.
I mean, we of course understand very well the importance of dividends there is no question about that. At the same time, I also hope that the investors appreciate that we also want to be a good dividend payer in the long-term and this weak market can also be a very good opportunity to do structural things on the market that will be good things for shareholders and our dividend capability in the long-term. And it is the kind of play with these two factors that we need to weigh against each other all the time. And this is the reason why it is not possible at this stage to be more specific about where the dividend will go from here.
That's why we are keeping this fairly general level dividend policy as it is. And of course if I repeat couple of numbers that I said in the beginning that if we have an operational EPS of EUR 0.71 and then we have a one-time EPS of close to EUR 5, I mean that’s a huge scale and that of course makes this communication of the future plans more challenging which is fully understandable. I mean, I understand very well your question but unfortunately I cannot be more specific than this.
This will end today's question-and-answer session.
Excuse me, we will still allow a couple of questions, please.
A couple of more questions, perfect. Thank you. We will now take a next question from Peter Bisztyga from Bank of America. Please go ahead.
I'll just ask about your ROCE target, why you reduced from 12% to 10%. And at what timeframe do you envisage achieving that ROCE on any particular M&A deal that you end up doing. So it's my first question. My second question is, do you think that your decision to exit electricity distribution now at least you will say competitive disadvantage in your sort of new strategy to provide urban solutions to mega cities and that kind of stuff?
Okay. I'll ask Timo to take the first one and I'll take the second one. Timo, first.
Okay. First, upon the ROCE target 10% versus the earlier 12%. So all-in-all, the target is over the cycle and if you look at our history, so we were many years above our pervious target, we were below that some years in the beginning of previous decade and now have been excluding the best case we have been a bit below. So it is a long-term target and the cycles are long, that's one thing.
The other thing is that it's for the whole balance sheet. And once again, I repeat what I said earlier, so that whether it's organic growth or a power plant investment or something else or whether it's an acquisition, then we need to look through the specifics of the deal, the cash flows and the balance sheet was varies et cetera the investment. And that gives of course we look at the IRR, we look at the total returns and then we look at what is -- how does it develop over time and over years. But that's specific to every deal, so I can't answer, we'll not give any ballpark of how we would generally go. That's one thing.
And then about the growth from 12% to 10%. We are, as said in our new strategy formulation, which is a development from the earlier one. So we are emphasizing more solar and wind and we are also emphasizing more these city solutions, which may for instance be tied to the heat business that we already have et cetera, which have less volatility but also at least in current markets they would typically be of a bit low returns than the wholesale power business. And that is the mix that we are looking at, that is the mix that that we are communicating about and that is also the reasons behind lowering the average ROCE target from 12% to 10%.
And then the question about the city networks on the bundling or unbundling of the services. When you look at whether regulators in most markets want to drive this business, there is a strong push towards developing the distribution network, the grid as a regulated service that is available to all commercial players both on the generation side and then on the -- in the consumer interface be it private consumers or business customers. So this is the general direction that the regulator wants to take. And in most markets they are specifically working against bundling or cross subsidizing of services between the grid and the consumer, that's one thing.
Then the -- on the technology side, we have now in our home market smart meters being part of the grid operator's responsibility from where the information is available to all service providers. They can be used in all kinds of consumer services. And on top of that the new communications technologies and the possibilities to make devices in homes integrate and communicate through the home networks, still taking advantage and interfacing with the information from the smart meter, gives all the possibilities that are needed to develop a new generation of services for homes and business customer.
So long answer to your question, we have really talked a lot about this. And as long as the regulators keep this direction that they now are taking i.e. regulated grid unbundled from commercial generation and commercial customer services then we should be fine.
We will now take our next question from Peter Crampton from Macquarie. Please go ahead.
Just one quick question. Are you still pursing on the restructuring of TGC-1? Would you kind of communicate a little over a year ago, if that's still ongoing the discussions?
We have discussions ongoing about various structuring alternatives of our Russian portfolio. But on that particular one you should not expect any quick news. We have good discussion ongoing with several partners, including our co-owners in TGC-1. If there is a way to make deals that are from economic point of view good for both parties, there may be something, but this is not something that would be an immediate priority.
Having said that, when we now get to the completion of the investment program in Russia within that portfolio and within the general investment that we have made, we do have an interest to find ways to further restructure the portfolio may be with some partners, if there are ways to do that in a value creating way.
Okay. Thank you very much from Espoo. And if you have further questions please shoot an email to the IR Department, we will be answering your questions and have a good evening.
That will conclude today's conference call. Thank you ladies and gentlemen. You may now disconnect.
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