Annual Report • Mar 6, 2009
Annual Report
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| 02 04 06 |
Fortum in brief Financial summary Decisions '08 |
|
|---|---|---|
| Chapter 1: | 15 16 19 |
Fortum in 2008 CEO's review Strategy |
| Chapter 2: | 23 24 |
The world around us Market development |
| Chapter 3: | 29 30 34 36 |
Investing in the future Investments Trends Research & development activities |
| Chapter 4: | 39 40 44 47 50 |
Sustainability Environmental responsibility Social responsibility Personnel Economic responsibility |
| Chapter 5: | 53 54 58 60 62 64 |
Segment reviews Power Generation Heat Distribution Markets Russia |
| Chapter 6: | 67 68 74 78 80 |
Corporate governance Corporate Governance Statement Remuneration Board of Directors Group management |
| Chapter 7: | 108 | 85 Fortum group financials 2008 86 Operating & financial review Financial statements |
Concept, graphic design and production: Miltton Oy Photographs: Finnish Press Agency (cover, page 6), Fortum (inner front cover), Jaakko Alatalo/Leuku (8), Tomi Parkkonen (10, 15, 19, 80, 81, 82, 83), Fennopress (12), Fortum (15), Lauri Henttonen (15), Reijo Juurinen/Kuvaliiteri (15), Shutterstock (15). Paper: Invercote Creato 300 g, Galerie Art Matt 130/100 g. Printing: Lönnberg Painot Oy 2009
Fortum publishes three interim reports in 2009:
Reports are published at approximately 9.00 EET in Finnish and English, and are available on Fortum's website at www.fortum.com.
Fortum management serves analysts and the media with regular press con ferences, which are webcasted to the company's internet pages. Management also gives interviews on a one-on-one and group basis. Fortum observes a silent period of 30 days prior to publish ing its results.
Fortum is a leading energy company focusing on the Nordic countries, Russia and the Baltic Rim area. Activities cover the generation, distribution and sale of electricity and heat and the operation and maintenance of power plants. Our vision is to be the benchmark power and heat company excelling in sustainability.
In 2008, Fortum's sales totalled EUR 5.6 billion and operating profi t was EUR 2.0 billion. The company employs approximately 15,500 people. Fortum's shares are quoted on NASDAQ OMX Helsinki. Read more: www.fortum.com.
| Reporting segments |
Power Generation | Heat | Distribution | Markets | Russia | |||
|---|---|---|---|---|---|---|---|---|
| Sales Comparable operating profi t |
EUR 2,892 million EUR 1,528 million |
EUR 1,466 million EUR 250 million |
EUR 789 million EUR 248 million |
EUR 1,922 million EUR –33 million |
EUR 489 million EUR –92 million |
|||
| Business units |
Generation | Portfolio Management and Trading |
Service | Heat | Värme | Distribution | Markets | Russia |
| Generation is responsible for Fortum's Nordic nuclear, hydro, thermal and wind power generation and development in chosen market areas. |
PMT is responsible for planning the use of Fortum's Nordic generation portfolio and for trading in the physical and fi nancial markets of electricity, fuels and environmen tal values. PMT is also responsible for related market analysis. |
Service offers operation and main tenance, produc tivity and energy effi ciency services to power and heat asset owners and commercial energy users. |
Heat focuses on combined heat and power production (CHP), on district heating and on energy outsourc ing services to industries. |
Värme delivers district heating and cooling, power and gas to industries and private custom ers in Sweden. |
Distribution is responsible for Fortum's network asset management and for the distribu tion and regional transmission of electricity to 1.6 mil lion customers. |
Markets is respon sible for retail sales of electricity to 1.3 million private and business customers as well as to other electricity retailers. Markets buys its electricity through Nord Pool. |
The business unit is responsible for power and heat generation and sales in Russia. It includes TGC-10 operations, Fortum's TGC-1 share and some other minority shares. |
|
| Market position |
# 2 in power generation in the Nordic market |
# 1 heat provider in the Nordic market |
# 1 in electricity distribution in the Nordic market |
# 1 in electricity sales in the Nordic market |
A leading power company in western Siberia and Urals |
Operating profi t excluding non-recurring items, fair value changes of derivatives not getting hedge accounting and nuclear fund adjustment. Comparable operating profi t plus profi t from associated companies divided by comparable net assets.
| EUR million or as indicated | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sales | 5,636 | 4,479 | 4,491 |
| EBITDA | 2,478 | 2,298 | 1,884 |
| Operating profi t | 1,963 | 1,847 | 1,455 |
| Comparable operating profi t | 1,845 | 1,564 | 1,437 |
| Profi t for the period, equity holders | 1,542 | 1,552 | 1,071 |
| Capital employed | 15,911 | 13,544 | 12,663 |
| Interest-bearing net debt | 6,179 | 4,466 | 4,345 |
| Net debt / EBITDA 1) | 2.5 | 2.2 | 2.3 |
| Return on capital employed, % 1) | 15.0 | 14.0 | 13.4 |
| Return on shareholders' equity, % 1) | 18.7 | 15.8 | 14.4 |
| Capital expenditure | 1,108 | 655 | 485 |
| Gross investments in shares | 1,516 | 317 | 910 |
| Net cash from operating activities | 2,002 | 1,670 | 1,151 |
| Sales | Comparable operating profi t | Comparable RONA% | |||||||
|---|---|---|---|---|---|---|---|---|---|
| EUR million or as indicated | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 |
| Power Generation | 2,892 | 2,350 | 2,439 | 1,528 | 1,095 | 985 | 28.0 | 18.9 | 17.4 |
| Heat | 1,466 | 1,356 | 1,268 | 250 | 290 | 253 | 7.3 | 9.2 | 9.2 |
| Distribution | 789 | 769 | 753 | 248 | 231 | 250 | 8.2 | 7.6 | 8.3 |
| Markets | 1,922 | 1,683 | 1,912 | –33 | –1 | –4 | –15.3 | –0.6 | –0.8 |
| Russia | 489 | - | - | –92 | - | - | –3.8 | 0.0 | 0.0 |
| Other | 83 | 81 | 78 | –56 | –51 | –47 | |||
| Eliminations | –2,005 | –1,760 | –1,959 | - | - | - | |||
| Total | 5,636 | 4,479 | 4,491 | 1,845 | 1,564 | 1,437 |
1)Adjusted for REC and Lenenergo gains in 2007.
| EUR or as indicated | 2008 | 2007 | 2006 |
|---|---|---|---|
| Earnings per share | 1.74 | 1.74 | 1.22 |
| Cash fl ow per share |
2.26 | 1.88 | 1.31 |
| Equity per share | 8.96 | 9.43 | 8.91 |
| Dividend per share | 1.00 1) | 1.35 | 1.26 |
| Payout ratio, % | 57.5 1) | 77.6 | 103.3 |
| Dividend yield, % | 6.6 1) | 4.4 | 5.8 |
1)Board of Directors' proposal for the Annual General Meeting in April 2009.
%
Incl. REC and Lenenergo gains
Discontinued oil operations
Discontinued oil operations
Net debt / EBITDA
Continuing operations Adjusted with Lenenergo gains Total, incl. discontinued oil operations
Discontinued oil operations
0 04 05 06 07 08
Fortum (Neste Oil spin-off adjusted)
DJ European Utilities
OMX Helsinki Cap
FORTUM ACQUIRED the Russian Territorial Generating Company 10 (TGC-10) through a share auction orga nised as part of the Russian power sector reform. The acquisition made Fortum a signifi cant player in one of the world's largest energy markets. TGC-10 operates in the heart of the oil- and gasproducing region in western Siberia. The acquisition signifi cantly increased Fortum's power generation capacity and doubled its heat production capacity. Liberalisation of the Russian wholesale power market will be fully implemented 92% OF FORTUM'S power generation in the EU was CO2-free in 2008. Targets for improving the environmental performance of the newly-acquired Russian operations were set. Over the year, Fortum continued efforts to increase its climate-benign generation capacity, for example, by initiating wind power projects and by continuing several biomass-fuelled CHP-projects and hydro power refurbishments. CO2-free nuclear power plays an increasingly important part in addressing the climate change challenge. In February 2009, Fortum applied for a decision-in-principle to construct a new nuclear power plant unit in Loviisa, Finland.
IN 2008, Fortum stepped up its research and development activities in order to further contribute to the creation of a low-carbon society. Large-scale initiatives during the year included developing a recharging network for electric cars in Espoo, Finland, and Stockholm, Sweden, and testing carbon capture and storage. Fortum also continued research in tomorrow's climate-benign energy technologies such as wave power. In 2008, a new dimension to Fortum's R&D activities was introduced by the decision to invest in cleantech venture capital funds. Fortum also closely collaborated with universities and research
THE FOCUS on performance excellence was further accented in 2008 as the global economic situation deteriorated. Fortum believes that a company must succeed and stay in good shape at all times so that it can invest in future opportunities once the time for new investments re-emerges. Fortum's strategy remains unchanged; however, the global fi nancial situation can affect the pace at which the strategy is executed.
In 2008, Fortum took a big step into the Russian market with the acquisition of TGC-10. Fortum consistently implements its strategy also as the global economy declines, President and CEO Mikael Lilius describes the past year.
BACKBONE OF OPERATIONS: SUSTAINABILITY In 2008, four key decisions underscored Fortum's activities: expand operations in Russia, advance sustainability in the production portfolio, pursue a lowcarbon society through research and development, and focus on strong performance and earnings. Why specifi cally these decisions?
"The common denominator in all these decisions is that they support our goal of profi table growth."
"Acquiring TGC-10 was defi nitely our most signifi cant decision. Russia is a very interesting market area for us and one in which we have also decades of experience. The Russian electricity market is in the midst of sweeping reforms that will unlock the world's fourthlargest electricity market to new players. We felt that there are good growth opportunities and demand for Fortum's expertise and know-how in Russia. At the same time, TGC-10 has shifted our focus: It is now at the centre of our attention. We are demonstrating that TGC-10 can be integrated successfully, and that it will be an essential part of our success story in the years to come."
"Our decision to emphasise sustainability in our production portfolio and our work towards a low-carbon society refl ect our acknowledgement that climate change is one of the biggest challenges in the decades ahead. As a responsible energy company, Fortum wants to be part of the solution,
and, in fact, already 92% of our power generation in the EU is CO2-free. At the same time, this challenge contains huge opportunities for a company that is investing in the use, research and development of renewable and emissions-free energy sources and in energy effi ciency."
"Strong focus on performance wasn't exactly a new idea for 2008, but in these times of global economic crisis it is even more topical. A company must succeed and stay in good shape at all times so that it can invest in future opportunities once the time for new investments re-emerges."
"Our overall results were good and, operationally, it was the best year ever, even though the operating environment was very challenging. It must be noted, however, that there is also room for further development under the good overall results. Many units have areas of improvement that must be addressed specifi cally with internal measures."
"Towards the end of the year, the recession affected also Fortum as commodities prices and electricity consumption decreased. However, the hedging of Power Generation's electricity sales smooths the fl uctuations, and we have also increased the hedge ratios for 2009–2010. Fortum is in good fi nancial shape to face diffi cult times – our success in previous years helps us a lot."
"The fi nancial crisis doesn't affect Fortum's strategy. Our view of where we want to go and what kind of company we want to be has not changed. However, the situation can affect the pace at which the strategy is executed. Instead of pursuing growth, we are now ensuring that Fortum will remain in a fi nancially sound shape through the crisis."
"The development continued towards a pan-European electricity market. The advancement of the EU's internal market package and the EU member countries' approval of the climate package in December were milestones on this path. Fortum has supported the development of the Nordic electricity market for years, and we believe that ultimately there will be a single, open European market. Fortum advocates and supports this development, and we are also preparing to operate in such an environment. The shared climate targets – reduce carbon dioxide emissions by 20%, improve energy effi ciency by 20% and increase the share of renewables in fi nal energy consumption to 20% by
2020 – are something that the EU, the Finnish government and Fortum are committed to realising."
How will the energy markets develop in upcoming years? Are there any signifi cant changes or challenges ahead? "We believe that the Russian electricity market and power market reform will continue to develop, and wholesale power prices consequently will be deregulated in 2011. So far, everything has progressed according to plans."
"We also trust that development of a common European electricity market will continue. Construction of transmission connections within the Nordic countries and between the Nordic countries and Central European countries seems to have gained new momentum. The EU Commission elevated the integration of the Baltic countries to the rest of the European electricity markets as one of the most important goals. At the same time, the Commission has encouraged investments in transmission grids as a way to stimulate the economy and proposes that EUR 100 million from the EU stimulus package is allocated to Estlink 2, the planned second undersea power cable between Finland and Estonia."
"As the markets integrate, also national regulations should be in line with each other. This is the only way to avoid distortions in competition. In integrated markets, national support mechanisms for renewable energy, for example, lead to a downright support scheme competition. In this kind of situation, investments are made where the most support is given, not where it would be most feasible to make the investments in terms of, say, wind conditions. Particularly in the Nordic countries, it would be natural to adopt a common support system, thanks to the common electricity market. It doesn't matter in which country new capacity is generated, the electricity is available to all Nordic consumers."
"We want to be a forerunner in sustainability, but we also see it as a business opportunity. Sustainability is the backbone of Fortum's strategy, and it must be refl ected in all our activities. Operating in Russia creates a new challenge to
this, because fossil fuels are an integral part of Russia's energy system. However, Fortum has only one operating model under which it operates everywhere, including in Russia. We are going to be a forerunner in sustainability also there."
"For us, research and development, too, is an essential part of sustainability. In practice, this means for example, developing a recharging network for electric cars, testing carbon capture at our power plants and investing in tomorrow's climate-benign energy technologies such as wave power. We did all this in 2008."
"Sustainability also means offering our customers the kinds of products and services that take climate issues into consideration. It is also important that all Fortum work sites are safe environments for our employees. For example, TGC-10's employees were included in Fortum's safety management programme already last year."
"It is important to complete the projects that have already been started and to focus on doing a good job with the current operations. At this moment, we aren't really pursuing anything new because there is already plenty of work on the agenda. We want the Russian acquisition to be a successful part of Fortum."
"One of our goals over the next couple of years is to get a permit for the construction of a third nuclear power unit in Loviisa, Finland. We submitted our application for a decision-inprinciple regarding this with the Government on 5 February 2009. The new power plant unit would strongly support our own and Finland's emissions reduction targets. We have everything in place – from the zoning to the fi nal disposal for spent fuel. We own the area where the new unit would be located, and our project has strong local support. Fortum is an experienced and strong player in nuclear power. We can implement the Loviisa 3 project without public fi nancial support – only the permit is missing!"
"The fi rst eight years of this decade have been favourable for us. Fortum has a good organisation and, consequently, we are in a good position to weather also the downturn in the economy. I want to thank our employees for the excellent work they do, our partners, whose co-operation we can count on, and our customers, who give us the opportunity to do this work – thank you all."
| Target | 2008 | 2007 Adjusted 1) |
|
|---|---|---|---|
| ROCE, % | 12 | 15.0 | 14.0 |
| ROE, % | 14 | 18.7 | 15.8 |
| Capital structure: Net debt / EBITDA | 3.0–3.5 | 2.5 | 2.2 |
Source: PWC & Enerpresse, 2008, Changement climatique et Electricité, Fortum. 1)Adjusted for REC and Lenenergo gains.
Mitigating climate change is one of the energy sector's biggest challenges globally. As a responsible power and heat company, we take the challenge seriously, but we also believe that strong commitment to sustainability is a success factor for forerunners.
Fortum's vision is to be the benchmark power and heat company excelling in sustainability. The vision acts as a shared, long-term goal guiding our strategic choices and business development. The vision is also directly linked to Fortum's core purpose: "Our energy improves life for present and future generations." Our core purpose and our shared values form the foundation of our daily activities.
Fortum focuses on the Nordic, Russian and Baltic Rim markets. Fortum is currently the leading company in the Nordic market in electricity sales and distribution and in district heat, and also the second-largest power generator. In the Baltic Rim countries, we have developed a good platform for future growth, especially in the heat business, and in Russia, our ownership in TGC-10 and the liberalisation of the Russian power market represent a unique opportunity in the coming years. At Fortum, we believe that our profi table growth will continue to be based on a leading position in the power and heat markets, on excellent customer service and on benchmark results.
Fortum operates responsibly and is mindful of the global and local chal-
18 TWh increase in CO2-free generation 70% increase in CO2-free capacity
Read more on page 104.
lenges in energy production and consumption. Fortum offers its customers comprehensive services, is a good corporate citizen and works actively to mitigate climate change.
Sustainability is factored into all our operations. We believe that mitigating climate change is a success factor for forerunners and have worked systematically for years to increase Fortum's CO2-free share of production. In Europe, Fortum is one of the leading companies in terms of specifi c emissions of power production already today, and we have set strict targets for the future – both for power and heat production. In Russia, we are committed to increasing the effi ciency of our production assets and thus reducing the environmental impacts from our power and heat generation in the coming years.
In line with our vision, we want to participate in the development of a carbon dioxide-free energy system for tomorrow. We are developing carbon capture and storage, researching ways to increase the use of renewable energy sources, and focusing on new nuclear technologies. We are helping our customers improve their energy effi ciency, but also developing means to increase energy effi ciency through the smart utilisation of electricity, for example in electric cars. Decisions to limit carbon dioxide emissions from company cars and to reduce work-related air travel
Our vision refl ects our strong commitment to performance excellence in all areas of operation. It conveys our belief that mitigating climate change is a success factor for forerunners.
defi nes our market area and the elements that will enable Fortum to continue on a profi table growth track also in the future.
Shared values guide the way we work at Fortum as well as how we interact with each other and with our partners and stakeholders.
The Core Purpose summarises the ultimate reason for Fortum's existence.
are examples of internal measures and evidence of Fortum's desire to shoulder responsibility for the climate.
Fortum's competitiveness is based on effi cient operations and a wide customer base. We strive for benchmark performance in all our key activities. Our goal is to become the leading power and heat company and the energy supplier of choice in selected markets.
Customer satisfaction is of utmost importance to us, and we strive to enhance our products and services to better meet the needs of our customers. A prerequisite for success is also the continuous development of personnel; we strive to achieve this by improving the quality of leadership and by encouraging Fortum employees to take individual initiative.
Fortum believes that market-based development of the energy markets will lead to increased competition and improved effi ciency, thus benefi ting societies and individual consumers. Fortum actively promotes this development.
Fortum's strategic agenda supplements the Fortum Compass and defi nes the focus areas for the organisation to ensure development throughout the company in line with the strategy and vision. All units' plans, decisions and actions shall refl ect the strategic agenda as relevant for each unit.
Actions related to assessing organic growth opportunities, renewables-based growth, acquisitions in home markets and growth from R&D.
Actions related to making sustainability a success factor and developing the energy effi ciency business.
Actions related to successful integration of TGC-10 and carrying out the investment programme.
Actions related to driving Nordic harmonisation and infrastructure development, promoting integration towards continental Europe and ensuring viability of regulated businesses.
& cash dividends EUR 4.8 billion
Fortum's share has outperformed its European utility peers during last fi ve years. During 2008, Fortum's share price depreciated approximately 51%, while Dow Jones European Utility index decreased 38% and OMX Helsinki Cap index decreased 50%.
– target world class
Actions related to strengthening the performance culture and delivering on stretched targets, gaining leadership in operational excellence and driving customer focus and sales culture.
Actions related to improving the quality of leadership on all levels of the organisation and encouraging individual initiative.
Largest European and Russian power producers
Source: Fortum, company data 2007 fi gures. Effects of later structural changes taken into account.
~350 active companies, 14 million customers
European major utilities became even bigger in 2008. The merger of French Suez and GDF created the second largest utility in Europe in terms of market capitalisation. The largest utility, French EDF, acquired the nuclear producer British Energy. In January 2009, German RWE reached agreement with Dutch Essent to acquire the company. Swedish Vattenfall acquired two wind power companies from the UK and a minority stake in the Polish utility Enea. In addition, plenty of other acquisitions took place. Consolidation is expected to continue also in the future as market liberalisation proceeds.
CONSOLIDATION CONTINUES
During 2008, the energy discussion intensifi ed around global climate change mitigation and the rocketing and plummeting fuel prices. The latter part of the year was shadowed by the global financial downturn. Its impacts could also be seen in Fortum's market area.
ENERGY STRATEGY IN FOCUS
The short-term effects of the global downturn were seen already in the 2008 fi gures for fuel prices and electricity consumption. The long-term effects are hard to estimate, but the general understanding seems to be that glob al fuel prices will increase over the long run and that electricity consumption in western Europe, for example, will remain fl at or fall for 1–2 years but then return to the moderate growth path seen during the past few years. In the Nordic countries, consumption decreased 5 terawatt-hours (TWh) during the last quarter of 2008 compared to 2007. The long-term electricity consumption growth is estimated
to be fairly moderate, below 1%. In Russia, consumption decreased during the last months of 2008. In the long term, consumption is estimated to grow 3–4% annually during the next 10–15 years.
The International Energy Agency (IEA) confi rmed in its World Energy Outlook 2008 its view of future energy consumption. According to the IEA's reference scenario – a scenario without major changes in policies – the world's energy demand would increase by 45% between 2006 and 2030. This is a slightly lower increase compared to the estimate done a year ago. The decrease is mainly due
to the economic slowdown, increased fuel prices and some policy initiatives. According to the IEA, fossil fuels will continue to dominate the fuel mix globally. These trends will lead to continued growth in energy-related emissions of carbon dioxide (CO2).
During 2008, preparations for the United Nations climate change conference, taking place in Copenhagen in December 2009, proceeded. It is expected that the post-2012 global climate change policy will be set at this meeting. In late 2008, WWF published a study concluding that the impact of increased CO2 emissions is even more severe than the IPCC reported in 2007
Source: IEA World Energy Outlook 2008 reference scenario for generation.
Source: Eurelectric, Eurprog 2007 EU27, Fortum.
Existing generation
and that CO2 emissions would need to be cut by 80% by 2050 to keep the temperature increase below 2°C.
Several actors in the energy fi eld, including the IEA, are calling for concrete action to tackle global climate change, as the consequences for inaction are devastating. The IEA sees that the energy sector has to play a central role in curbing emissions through improvements in effi ciency, switching to renewables and other low-carbon technologies, essentially nuclear power and CCS (carbon capture and storage) for fossil fuel-based production. It is often seen that in order to realise needed investments and the desired
TWh/a
General scheme, base case, 2007 APBE, base case, post-crisis, January 2009 General scheme = power sector development target adopted by the government in 2007. APBE = forecasting agency in charge of updating General scheme.
development there needs to be a global price for greenhouse gas emission.
As a result of the growth in energy consumption and need for CO2 reductions, massive infrastructure investments will be needed. According to the IEA, the projected investment need is even higherthan estimated a year ago and the power sector accounts for over half of these investments. The global fi nancial crisis is not expected to affect long-term investments, but could lead to delays in the short term.
Despite the global fi nancial and economic crisis, the will to take action in combating the rising emissions of greenhouse gases remains both within the industry and with European politicians. Energy strategy and policy, security of supply and market development were heavily on the political agenda during 2008 in the European Union (EU).
In January 2008, the European Commission introduced a comprehensive "Green Package" including the directive proposals for meeting the year 2020 targets to achieve its core energy objectives of sustainability, competitiveness and security of supply. In December, the package was approved by the member states and the European parliament. The target is to by 2020 cut greenhouse gas emissions by 20%, establish a 20%
share for renewable energy and improve energy effi ciency by 20%. The revised European Emission Trading System (ETS) will apply from 2013 to 2020. The revised directive establishes auctioning of the emissions allowances from 2013 in principle, but includes several exceptions especially for energy-intensive industry. Contrary to emissions trading, where the main aim of the revision was to establish a harmonised EU-level scheme, targets for renewable energy are national. Trading between the member states – as well as common support schemes for renewable energy together with several member states – has been made possible, however.
The EU member states have agreed to establish an EU-wide internal market for electricity. To fi nalise this development, the Commission put forward the third legislative package in September 2007. In October 2008, the Council reached a political agreement on the legislative package concerning the internal energy market and the fi nal adoption is expected to take place during the fi rst half of 2009. As a proactive action related to this package, Transmission System Operators (TSOs) for electricity from 34 European countries founded a new association in December 2008: European Network of Transmission System Operators for Electricity (ENTSO-E). The association aims to promote reliable and effi cient pan-European and
regional markets. ENTSO-E will work with a clear mandate based on full consultation with the European Commission, regulators and stakeholders.
In October, the European Commission adopted its second Strategic Energy Review focusing on the security of energy supply. This review is particularly important, as it will guide the energy policy of the new Commission starting in summer 2009. The report underscores the importance of a functioning internal electricity market as the number-one measure in improving the security of electricity supply. From the Nordic perspective, the strong push to better integrate the Baltic countries and to form one common electricity market around the Baltic Sea as an intermediate step towards an EU-wide market is of great importance. The Baltic countries are facing electricity supply challenges in the coming years with the gradual replacement of a production fl eet that, for example, uses coal slate as fuel and the closing of Ignalina nuclear power plant combined with the estimated demand development.
Nordic energy policy development
In March 2008, the IEA published a country review on the Finnish energy policy. The report commended Finland for a balanced and realistic energy policy, but also raised concerns around security of supply. For example, the IEA points out that the current policies on regulated peak reserve power and peat subsidies do not enhance long-term energy security. In the future, more attention should be paid to strengthening the long-term policy measures related to energy effi ciency.
In September 2008, the Nordic energy ministers approved a plan for accelerating Nordic power market development. The roadmap includes, for example, enhancement of interconnections and harmonisation of permitting procedures. There was also a suggestion for the Nordic TSOs to study the dividing of the Nordic market into a larger number of bidding areas, which can lead to price areas. This suggestion has raised some concerns in Finland and Sweden, in particular from the retail market point of view. More price areas would discourage retailers acting outside their own local areas, hence decreasing competition.
In November 2008, the Finnish government published its new climate and energy strategy aiming at reducing energy demand growth and at increasing the share of renewable-based energy in fi nal energy consumption to 38% (up by some 9 percentage-points), in line with the EU burden sharing. The strategy aims to ensure the competitiveness of energy-intensive industries also in the future and targets that Finland's own production capacity should cover the peak consumption. The strategy is also preparing for the building of additional nuclear generation.
Discussion on the future energy policy intensifi ed in Sweden towards the year-end 2008. It culminated in the coalition government's agreement early February 2009. The government commits to continue the green certifi cate scheme to support the investments in renewable electricity production with an increased target, it is ready to accept the replacement of the existing nuclear plants one-to-one and it sets a target to get rid of fossil fuels in road transportation, with the help of biofuels and electric vehicles, by 2030. The government also reiterated its commitment to development of an EU internal energy market, the use of market-based steering mechanisms and harmonisation.
The common Nordic wholesale electricity market has been in place for almost a decade. The focus in further development of the wholesale market is to increase the integration towards a continental European market. In March 2008, Nordel published a Nordic Grid Master plan recommending some internal grid reinforcements within the Nordic market. The new recommendations focused on strengthening the connections in Norway and between Norway and Sweden. The report also included suggestions on studies for multiregional interconnections from the Nordic region to the Netherlands, Germany, Poland and the Baltic countries.
A concrete step in further integration of the Nordic and the continental European markets was taken in May, when the 700-MW NorNed cable connecting Norway and the Netherlands started its commercial operation with daily capacity auctions. With the help of this new connection, the net export volume from the Nordic market to continental Europe (Germany, Poland and the Netherlands) reached 15 TWh in 2008, 67% higher than the 9 TWh in 2007.
Market coupling is seen as an effi cient means to integrate and harmonise different regional electricity markets. Various preparations are ongoing in Northern and Continental Europe for harmonising the cross-border trading. Market coupling between Nord Pool and EEX was tested in September but, due to errors and problems in the calculation system, the market coupling was stopped. A solution to the problems is expected during the fi rst part of 2009.
Development of the retail market in the Nordic countries has focused on giving customers a choice in their electricity pricing in the form of different contract types. Sweden is already implementing an automatic metering solution to the retail market; the solution will enable consumers to follow their electricity consumption more closely and also more actively participate in the market. Similar solutions are under preparation also in Finland and Norway. Despite some common development, the retail markets in the Nordic countries still have many national characteristics.
The Russian power market is the fourth largest in the world, with annual production above 1,000 TWh. During the past few years, Russian consumption has grown by as much as 4% annually. The global economic slowdown has also impacted the Russian power market. According to preliminary statistics, the electricity consumption in Russia in 2008 increased by about 2% compared to 2007.
During the fi rst nine months of 2008, electricity consumption had increased by over 5% compared to the fi rst nine months of 2007, but the consumption turned to a rapid decrease during the last three months.
The Russian power sector reform, which was started in 2003, has pro-
1)Excluding capacity tariff. Source: ATS.
gressed according to plans. The reform targets to secure the vast future investments needed in the power sector and to increase sector effi ciency. All territorial generating companies (TGC) and all but one of the wholesale generation companies (WGC) have been privatised, establishing the basic structure for competition. RAO UES, the former monopoly in the power and heat sector, ceased to exist as of 1 July 2008. Its regulatory functions were divided between different governmental bodies. A Market Council, where all wholesale electricity market participants are members, was set up. The Market Council represents a non-commercial partnership, the primary task of which is to develop an effi cient system of electricity wholesale and the capacity market.
The day-ahead market for electricity is in operation and all electrical energy supply and demand is matched through the spot market. The share of power sold at a competitive price is increasing gradually. At the beginning of 2008, 15% of the power was sold at competitive prices, on 1 July, the share increased to 25% and further to 30% at the beginning of 2009. The fi rst phase of the capacity market was launched at the beginning of July. At that time, 25% of the capacity was sold in competitive selection. The capacity market continues to be liberalised at the same pace as the electricity energy market. The rules for the long-term capacity market, taking place from 2011 onwards, are under preparation. The capacity market is established to provide system security over the long term. The launch of the fi nancial derivatives market is planned for 2009. The wholesale power market is to be fully liberalised by 2011. Sales to households will remain regulated even after 2011.
The prices for liberalised electricity on the Russian power exchange ATS fl uctuated during the year. In 2008, the average price for electrical energy in the European and Urals part of Russia was RUB 700 per MWh (2007: 570).
The need for energy and the importance of energy affairs are constantly increasing in our society. Climate change, security of supply and the cost of energy are already every-day conversation topics.
Read more on www.fortum.com/public_affairs.
| TWh | 2008 | 2007 |
|---|---|---|
| NORDIC | 395 | 401 |
| Finland | 87 | 91 |
| Sweden | 144 | 147 |
| Norway | 128 | 127 |
| Denmark | 36 | 36 |
| RUSSIA | 1,019 | 1,001 |
| TWh | 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|---|
| Hydro | 225 | 215 | 192 | 222 | |
| Nuclear | 83 | 87 | 87 | 92 | |
| Other thermal | 77 | 85 | 97 | 73 | |
| Wind | 10 | 10 | 8 | 8 | |
| Total | 395 | 397 | 384 | 395 | |
| Net import 1) | –1 | 3 | 11 | –1 | |
| 1) import-export |
| TWh | 2008 | 2007 | 2006 | 2005 |
|---|---|---|---|---|
| Hydro | 166 | 179 | 173 | 173 |
| Nuclear | 164 | 160 | 156 | 149 |
| Other thermal | 706 | 676 | 665 | 629 |
| Total | 1,036 | 1,015 | 994 | 951 |
Fortum's long-term vision of the world's energy system 2020–2100
Energy companies shoulder great responsibility. They must secure adequate power and heat generation capacity, reliable transmission and high quality services for industrial clients and households alike. At the same time, they play a key role in mitigating climate change, as the majority of greenhouse gases are generated in the production and consumption of energy. Decisions made today affect generations to come, as the average lifetime of a power plant is 40–60 years.
For Fortum's investments, the starting point is always an economically viable balance between increasing capacity demand and emissions reduction targets. Fortum wants to develop and apply new technologies to support the development towards a carbon dioxide-free energy system. All means are needed – it is not just a matter of technology. The most effective way to reduce environmental impacts is to use energy effi ciently.
INVESTMENTS FOR THE NEXT GENERATION
In the midst of the global fi nancial turmoil, Fortum retained its fi nancial fl exibility and continued committed, ongoing investments in new generation capacity as planned. The acquisition of the Russian TGC-10 increased Fortum's power generation capacity by 3,000 MW and doubled its heat generation capacity.
SECURING PROFITABLE GROWTH AND FINANCIAL INDEPENDENCE The global economic climate deteriorated dramatically and at an unforeseen pace during the latter part of 2008. In Fortum's main markets, the economy slump ed from a steady growth track to recession in just months. At year-end, the consensus in the market was that the fi nancial crisis will dampen overall economic growth at least for 2009– 2010. Under these circumstances, maintaining fi nancial fl exibility is a priority for Fortum.
Despite the downturn, global consumption of electricity is expected to grow by some 80% by 2030. New power generation capacity is needed to fulfi l growing demand and to replace old capacity.
In the Nordic countries, demand is expected to grow by less than 1% annually. In addition to meeting the growing demand, new investments are needed to cover retiring generation. Committed plans for new generation capacity in the order of 40 TWh by the year 2020 are in place in the Nordic market. Despite current plans and ongoing projects to increase capacity, new decisions on additional generation are still needed to fi ll the supply gap estimated for 2020.
In Russia, electricity consumption is expected to grow by 3–4% annually dur-
New capacity, except nuclear, will require over 60 EUR/MWh power price
Estimated lifetime average cost in nominal 2014 terms. Large variations in cost of new Source: Nord Pool hydro and wind due to location and conditions.
ing the next 10–15 years. In the heavily industrialised and other high growth areas, electricity consumption has grown as much as 5–7% annually in the past few years. Extensive investments in new power generation are needed to match the demand growth and to replace retiring capacity. However, in the short term, electricity demand will be affected by the global economic slowdown.
Read more on pages 26–27.
At year-end, there was wide uncertainty about the impact of the global fi nancial crisis on investment costs. As a responsible market player in an increasingly
challenging investment climate, Fortum carefully analyses opportunities to invest in new generating capacity and assesses new production technologies within its R&D.
In 2008, Fortum took a major strategic step by acquiring the Russian Territorial Generating Company 10 (TGC-10) that operates in the developed oil- and gas-producing Urals and western Siberia regions. At year-end 2008, Fortum's ownership in TGC-10 was approximately 93%, including shares owned by TGC-10's fully-owned subsidiary. The total consideration for Fortum's ownership in TGC-10 at year-end amounted to approximately EUR 2.5 billion, including the EUR 1.3 billion new share issue Fortum subscribed to in March 2008.
Read more on pages 64–65.
TGC-10 has a committed 2,300 megawatt (MW) investment programme. Once completed, the programme will have increased TGC-10's power generation capacity by approximately 70% from the current 3,000 MW to 5,300 MW. The investment programme covers
seven units; capacity will be increased by upgrading two existing units, building a new unit at two existing plants and by constructing a new power plant with three units.
Execution of the investment programme progressed well during 2008. Building of the new Nyagan power plant in the northern Urals area started with groundbreaking. Once completed, the power plant will have three 400- MW natural gas-fi red power generation units. At Tyumen CHP-2, preparation for the construction of the fi fth unit started. Once completed, the natural gas-fi red unit will have a power generation capacity of 420 MW. Construction of the second unit at Tyumen CHP-1, with 190-MW power generation capacity and the third unit at Chelyabinsk CHP-3, with 220-MW power generation capacity, also began during the year. At Tobolsk CHP, work on the installation of the bottom turbine operating in condensation mode are ongoing. The new turbine will increase the plant's power generation capacity by 210 MW.
The total estimated value of the programme at year-end 2008 for year 2009 and onwards was EUR 2.0 billion. However, the economic slowdown is likely to further affect the Russian power demand-supply balance. Fortum and other power companies in Russia are currently in the process of analysing the impacts of the changed eco-
| Fortum's European investment plan as of December 2008 | ||
|---|---|---|
| • Olkiluoto 3, Finland (nuclear) • Nuclear upgrades, Sweden • Suomenoja, Finland (gas-CHP) • Järvenpää, Finland (biomass-CHP) • Brista, Sweden (waste-CHP) |
• Refurbishing of existing hydro assets • Wind power, Sweden • Częstochowa, Poland (biomass/coal CHP) • Tartu, Estonia (biomass/peat CHP) • Pärnu, Estonia (biomass/peat CHP) |
Total ~1,200 MW |
| 80% CO 2-free | ||
| In addition • Automated meter management |
• Security of supply in distribution
nomic conditions and their potential impact on the timing of investment programmes.
At year-end 2008, Fortum had a 1,200- MW planned investment programme in the Nordic countries and Baltic Rim area. The fl exibility of the programme is retained and consequently the level of annual investments can be adjusted depending on the overall economic conditions and availability of funding at a reasonable cost. The importance of fl exibility is further heightened due to the fact that building new generation, except for nuclear power, was estimated to require a long-term power price of over EUR 60 per megawatt-hour (MWh) at year-end, while the average Nordic power price in 2008 was EUR 44.7 per MWh. At year-end, forward prices for both 2009 and 2010 were EUR 38 per MWh.
During the year, Fortum's biggest own ongoing capacity investment in the Nordic area was the construction of the natural gas-fi red Suomenoja CHP plant in Finland. The project has proceeded as planned and the new unit will be taken into use during 2009. In addition, a number of new biomass-fi red heating plant projects were started in Finland during the year.
In Sweden, Fortum continued its hydro refurbishment and grid reliability investments as well as the roll-out of new smart meters (Automated Meter Management, AMM). At year-end 2008, about 800,000 meters out of 835,000 were installed. Fortum also completed the connection between the southern and central district heating grids in Stockholm and started the investment in fl ue-gas condensing in its Värtan power plant. This will increase the production of district heating without any increase in fuel usage.
In 2007, Fortum commenced an environmental impact assessment (EIA) process for a new 1,000–1,800 MW nuclear power unit possibly to be built adjacent to the existing two units at the Loviisa nuclear power plant. The EIA was completed in 2008 and indicates that a new unit can be built on Hästholmen island in Loviisa. Consequently, on 5 February 2009, Fortum submitted to the Finnish Government an application for a decision-in-principle concerning the construction of the new nuclear power plant unit. According to plan, the new unit will be operational in 2020. Its designed service life is at least 60 years. The application presents fi ve different plant unit alternatives, all of which will fulfi l stringent Finnish safety standards.
In addition, Fortum is participating in the project to build the fi fth
nuclear power unit (Olkiluoto 3) in Finland with a share of approximately 25%. The AREVA-Siemens Consortium, the turn-key supplier of Olkiluoto 3, has announced that the start-up of the unit will be postponed until 2012, while it was earlier anticipated to take place during 2011.
In Sweden, capacity increases at the Forsmark and Oskarshamn power plants in Sweden are planned to be carried out during 2009–2014. As a minority owner, Fortum is participating in these upgrades. Fortum's share of the planned capacity additions is estimated at 290 MW. Some of these projects still require licenses. The planned upgrad-
ing of Oskarshamn 3 in 2008 was postponed to 2009 due to component delays. Read more on page 56.
In addition to investing in new capacity in the Nordic market and Russia, Fortum carries out investments in Poland and the Baltic countries. Over the year, Fortum had two major ongoing projects; the construction of the Tartu CHP plant in Estonia and the construction of the Częstochowa CHP plant in Poland. The Tartu plant is biomass- and peat-fi red and will be taken into use in 2009. The Częstochowa plant uses
coal and biomass for fuel and will begin production in 2010.
In June 2008, Fortum announced its decision to build a new CHP plant in Pärnu, Estonia. The power plant is planned to be operational by the end of 2010. As much biomas fuels will be used as are available in the local market and the remaining fuel-need will be covered with peat.
In February 2008, Fortum signed an agreement to acquire 100% of the shares in Jelgavas Kogeneracija in Latvia. The company provides district heating to the city of Jelgava. Heat is produced in natural gas-fuelled heating plants and the annual heat sales total 200 GWh.
Fortum's capital expenditures and investments in shares in 2008 totalled EUR 2,624 (2007: 972) million. Investments, excluding acquisitions, were EUR 1,108 (2007: 655) million.
The annual level of Fortum's capital expenditures, including investments in Russia, is estimated to be within a range of EUR 1.0–1.5 billion during 2009–2013.
During 2009, two new CHP plants will be commissioned, bringing volume and earnings growth. New, future capacity investments will be considered carefully with profi tability as the fi rst priority.
Generation capacity (MW)
| Plant | Fuel type | Existing | Planned | Total |
|---|---|---|---|---|
| Tyumen CHP-2 | Gas | 755 | 450 | 1,205 |
| Tyumen CHP-1 | Gas | 472 | 190 | 662 |
| Tobolsk CHP | Gas | 452 | 210 | 662 |
| Chelyabinsk CHP-3 | Gas | 360 | 220 | 580 |
| Chelyabinsk CHP-2 | Coal, gas | 320 | 320 | |
| Argayash CHP | Coal, gas | 195 | 195 | |
| Chelyabinsk CHP-1 | Coal, gas | 149 | 149 | |
| Chelyabinsk GRES | Gas | 82 | 82 | |
| Nyagan GRES | Gas | 1,200 | 1,200 | |
| Kurgan Generation (49%) | Gas | 235 | 235 | |
| TGC-10 | 3,020 | 2,270 | 5,290 |
In order to solve the climate and capacity equation in an economically viable and effi cient manner, all current technologies must be utilised and new technologies and solutions developed. From this setting, Fortum sees a number of new trends arising.
DISTRIBUTED PRODUCTION AND ENERGY CONSERVATION Bioenergy will contribute signifi cantly to the achievement of the EU's climate targets by 2020. This is the case particularly in Finland, where the expansion of hydropower has been strictly regulated and the areas suitable for largescale wind power are limited. The most important biomass fuels for power and heat production are industrial by-products and forest-residuals, like woodchips that can be used either as the main fuel or co-fi red with other fuels.
The challenges commonly associated with the use of forest-based biomass are availability and the economic feasibility of transporting the fuel for long distances. To be able to fi nd new ways to utilise forest biomass a number of advanced (second generation) bioenergy technologies are under development.
While the sun, wind and waves provide an inexhaustible source of energy, their large-scale utilisation is still relatively demanding. For example, just one percentage-point increase in the share of renewables from fi nal energy consumption in Finland would require 1,500 MW of new wind power that equals to 500 new 3 MW-windmills. Therefore, it may be unrealistic to propose that the climate and capacity equation be solved
only with renewables-based power production within the foreseeable future.1)
CO2-free nuclear power is a good alternative for base-load production, yet it could be more energy effi cient. Constructing nuclear plants as combined heat and power plants (CHP) and utilising the cooling water for district heating would help reduce the local environmental impacts and increase energy effi ciency signifi cantly. Fortum's planned third nuclear power plant unit in Loviisa will be designed to allow for CHP-production. Also new types of nuclear power plants that utilise the energy content of the nuclear fuel more effi ciently than today's reactors are being developed.
World-wide, however, fossil fuels will continue to be the primary source of energy in the coming decades. Consequently, technology is needed to reduce the harmful impacts caused by such plants. Carbon capture and storage (CCS) is a process in which CO2 created in energy production is captured, liquefi ed or converted into crystals and permanently sequestered from the atmosphere. Possible storage sites include e.g. depleted oil and gas deposits and saline aquifers in the bedrock. According to a number of energy system scenario studies, CCS will be the single most important technology to reduce CO2 emissions in electricity production in the upcoming decades.
Distributed energy systems are characterised by energy production close to the point of consumption, and by smaller scale production units, compared to large-scale centralised power stations typically of the order of several hundred megawatts. The strong drivers to increase the share of renewables, will also most likely drive towards a more distributed production pattern. For example, in an extremely energy-effi cient building (a "zero-energy house"), heating could be accomplished with rather small-scale local solutions or even a small amount of electricity.
Thus, households and other units much smaller than conventional power plants could participate in energy production. Households could, for example, generate electricity for their own consumption with solar panels or small wind power plants. An important feature of this kind of system is that households could feed the surplus electricity to the grid or store it locally for peak-load use. Therefore, this trend would also call for new, smarter ways to manage the grid and for better electricity storage technologies. In a somewhat larger scale, residential areas could, for example, utilise their waste waters for biogas production.
Thermal energy always exists in the
1) Climate and capacity equation: According to the EU climate targets, Finland needs to increase the share of renewables from fi nal energy consumption to 38% (2005: 28.5%) by 2020. At the same time, new power generation capacity in the Nordic market is required to replace retiring capacity and to cover demand.
environment and can be utilised as well. Heat in the bedrock can be utilised with heat pumps. There is also usable thermal energy in seas and lakes. Ground source energy from the bedrock can be a good solution for energy production outside areas of district heating networks, especially in cases where cooling energy is needed as well.
Effi cient use of energy plays a central role in tomorrow's more distributed energy system. In the Nordic countries, development of low-energy building solutions is an important trend. In low-energy buildings, the energy used for heating is a maximum of one-half of the average consumption of a singlefamily home. Buildings may also be equipped with smart equipment that optimise energy consumption as well as with real-time metering that enables the residents to see the results of more effi cient energy use in their next bill.
Fortum also recognises that many measures to improve energy effi ciency increase electricity consumption, which may be a good thing in terms of the total energy consumption and climate impacts. Electricity can replace other, more ineffi cient or polluting forms of energy: for example, electric engines can bring a three-fold improvement to the energy effi ciency of passenger cars.
Fortum's research and development activities focus on economically viable solutions for a carbon-free future.
ELECTRIC CARS, CO2 CAPTURE AND BIOENERGY
Technology know-how is essential in the development of effi cient, reliable and emissions-free energy production. Longterm development of the entire energy system – including the development of effi cient smart grids and energy storage solutions – is also important from the perspective of sustainable development and climate change mitigation.
Fortum's long-term goal is to be a completely carbon dioxide-free energy company and, consequently, Fortum's R&D activities are also geared towards this goal. The R&D approach is based on building networks and partnerships with leading research organisations, engineering companies, and equipment and plant suppliers. Fortum also conducts signifi cant in-house research and development in strategic key areas, such as nuclear safety and plant life-cycle management.
In 2008, Fortum added a new dimension to its research and development activities and decided to invest in cleantech venture capital funds in order to contribute to the research and development of environmentally-benign energy technologies. The primary objective is to gain strategic insight into the development of new energy technologies, while at the same time expecting sound fi nancial returns.
Cleantech funds invest in companies that focus on the development of renewable energy production and solutions enhancing energy effi ciency, performance and productivity. A central objective is that these technologies reduce energy consumption, waste or emissions.
Fortum's fi rst investment was made in the Canadian Chrysalix Clean Energy Fund. Chrysalix's portfolio includes companies developing fuel cell and LED technologies, fusion and solar energy technologies and lithium batteries for use in applications such as electric cars.
development that promote emissionsfree energy solutions over the longterm.
• Performance excellence in current operations: Fortum ensures that it has access to all the know-how it needs to be the benchmark company in power and heat production and distribution.
Technologies that have the most potential in terms of climate change mitigation are prominently represented in Fortum's R&D. Group-wide R&D programmes in 2008 focused on carbon capture and storage, new bioenergy technologies and development of the longer-term, sustainable energy system. Nuclear R&D also continues to be strongly represented in the overall R&D portfolio.
Carbon capture and storage (CCS) is a process in which carbon dioxide in fossil fuel-based energy production is captured, compressed or liquefi ed, transported for storage, and permanently isolated from the atmosphere. According to several analyses, CCS will be the single most important way to reduce carbon dioxide emissions in electricity production in the upcoming decades. Fortum is participating in numerous development projects involving all phases of
the CCS process. In Sweden, carbon capture was successfully tested in 2008 at the Värtan power plant in Stockholm in collaboration with the Norwegian company Sargas.
Fortum is also planning for a CCS solution for the Meri-Pori plant together with Teollisuuden Voima. The goal is to have Meri-Pori approved as one of the large-scale demonstration projects of the EU fl agship programme that will be launched in 2015. The Meri-Pori project was launched in 2008 and during the year, an analysis of applicable technologies took place. More detailed planning on how the chosen technology can be retrofi tted into the plant processes will be launched in early 2009. The objective is to make an investment decision in 2011 and thus have the system operational in Meri-Pori in 2015.
Replacing fossil traffi c fuels with electricity is up to three times more energy effi cient and signifi cantly helps to reduce CO2 emissions if the electricity is produced with low- or zero-emissions technologies. Fortum wants to accelerate the penetration of plug-in hybrid and electric vehicles when car manufacturers introduce them in the upcoming years. Accordingly, in 2008, an assessment of the technology status of plug-in hybrid and electric cars as well as of the changes that the introduction of electric cars would require in the electricity distribution infrastructure was launched. For practical testing of the cars and different charging solutions, Fortum also
started extensive co-operation projects with the cities of Stockholm in Sweden and Espoo in Finland.
Fortum and Uppsala University signed a collaboration agreement in 2008 whereby Fortum will invest in wave power research and development in Sweden and will acquire a share of the university's Islandsberg wave power park. Located off the coast of western Sweden, the Islandsberg test site has 10 wave power units, two of which Fortum acquired. The test site is based on technology developed at Uppsala University. It produces electricity from the movement of surface waves using a buoy coupled with a linear generator; the solution is specifi cally developed for Nordic wave conditions. The installation of the test site started in 2008, and upon completion the total output of the 10 units will be 100 kW.
Already in 2007, Fortum invested in AW-Energy, a Finnish company developing technology that harnesses the energy in near-shore bottom waves. Trials with this technology continued over the year in Peniche, Portugal.
Achieving an emissions-free energy system will require new technological breakthroughs, which may arise from basic research. In this respect, close collaboration with universities and research facilities is important for Fortum.
Cleen Oy (Cluster for Energy and Environment) is one of the strategic centres for science, technology and innovation established in 2008 in Finland based on the initiative from the Finnish Science and Technology Policy Council. Developing the business sectors in which these centres operate has been deemed vital for Finland in the upcoming years. Cleen's mission is to create competitive clusters and collaboration within Finnish energy and environmental expertise. Fortum was very actively engaged in the work to set up Cleen, and joined as a large corporate shareholder, it also participates actively in board work.
The Group's total R&D expenditure in 2008 was EUR 27 million (2007: 21). The increase in expenses is mainly attributable to new programmes and activities initiated in 2008. Fortum's R&D expenditure in 2008 was 0.5% of net sales (2007: 0.5%) and 0.8% of total expenses (2007: 0.8%). The ratio of R&D expenditure to net sales is above average compared to European power and heat companies.
Read more on www.fortum.com/ research.
Performance indicators
In 2008, 93% of Fortum employees participated in activities designed to familiarise all personnel with the Fortum Code of Conduct. As part of the roll-out, employees received a personal copy of the Code and had a chance to discuss its principles in a workshop.
The Fortum Code of Conduct was
approved by the Board of Directors in 2007 and is based on Fortum's shared values. It establishes principles for business conduct applicable throughout the company. All Fortum employees are expected to conduct themselves, and their business, in compliance with the Code – without exception.
Fortum's vision statement "to be the benchmark power and heat company excelling in sustainability" expresses our fi rm belief that sustainability is a success factor for our business.
In accordance with the vision statement, Fortum revisited and updated its Sustainability Agenda in 2008. The new agenda has three important elements: the desired future position for Fortum, our goals for 2020 and the actions to reach them.
In order to move towards the desired position, the agenda states intermediate goals for 2020. These goals refl ect the most important aspects of sustain ability for Fortum and serve as input for the business planning. The new agenda was used for the fi rst time in the business planning process for 2009.
In addition to the desired position and sustainability goals, the business units completed the agenda with their own sustainability targets and action plans for the years 2009–2014 as part of their business planning.
Fortum's goal is to be among the lowest emitting energy companies.
SUSTAINABLE ENERGY SOLUTIONS
Mitigating climate change is one of Fortum's most important strategic goals. The company strives to keep the climate impact from its own activities at a minimum. In the long term, Fortum's aim is to be a CO2-free power and heat company. To this aim, Fortum has set tough targets for CO2 emissions from its electricity and heat production. The acquisition of TGC-10 increases the challenge, and therefore an Environmental, Health and Safety (EHS) action plan has been worked out for the company. It contains short – and longer – term actions in order to bring TGC-10 closer to the level of Fortum's European operations. Read more on pages 64–65.
Fortum's climate goals within the EU:
• Energy effi ciency of power plants increased and specifi c emissions reduced.
In 2008, Fortum's total CO2 emissions were 17.6 million tonnes, a sharp increase due to the acquisition of TGC-10 in Russia. TGC-10's power generation is mainly based on natural gas. The specifi c CO2 emissions of Fortum's total power generation, including TGC-10's power generation, was 134 g/kWh. The share of CO2-free electricity in Fortum's total production was 75%.
Within the EU countries, 92% of the power generated by Fortum was CO2-free. The specifi c CO2 emissions for power production in the EU countries was 41 g/kWh, which is among the lowest of the major European power companies. Fortum's total CO2 emissions subject to the EU's emissions trading scheme (ETS) amounted to 7.2 mil-
| 2008 | 2007 | |
|---|---|---|
| emissions, 1,000 t CO2 |
17,600 | 10,400 |
| SO2 emissions, 1,000 t |
16.8 | 14.0 |
| emissions, 1,000 t NOx |
29.5 | 14.6 |
| emissions of power generation, g/kWh CO2 (own plants and partly-owned plants) |
134 | 64 |
| Share of renewable energy sources in power generation, % | 38 | 40 |
| Share of CO2-free energy sources in power generation, % | 75 | 89 |
| Share of renewable energy sources in heat production, % | 19 | 34 |
Fortum Fortum incl. TGC-10
Additional environmental key fi gures are available at www.fortum.com/sustainability.
lion tonnes of CO2, while Fortum's average CO2 emissions subject to the ETS were approximately 8.7 million tonnes per year during 2005–2007. CO2 emissions from Fortum's own power plants outside the EU were 9.8 million tonnes.
Fortum has been a pioneer in utilising the Kyoto mechanisms and continued efforts in this area in 2008 by signing contracts with the Russian TGC-1 and TGC-10 on Joint Implementation projects. According to the agreements, Fortum will invest in energy-effi cient production in these companies and in turn receive approximately 6.5 million tonnes of emission reduction units (ERU) from Russia during the Kyoto
Fortum SO2 Fortum NOx Fortum incl. TGC-10 SO2 Fortum incl. TGC-10 NOx period 2008–2012. Part of the emission reduction units can be utilised in the EU emissions trading scheme.
When Fortum acquired TGC-10, the company had already agreed on and fi xed an investment programme including both CHP and condensing plants, which will increase TGC-10's production capacity by 70%. TGC-10's total CO2 emissions will increase due to the higher production volumes and larger share of gas condensing power production. However, the increase of specifi c CO2 emissions will be limited to approximately 5% from the present level as the current 5% share of coal in the fuel mix will not be raised. Reductions in specifi c emissions will be achieved later, when existing old power plants are replaced with new ones with better energy effi ciency. Planning and preparation for a CCS testing facility in TGC-10 will be started as TGC-10's geographical location close to major Russian oil and gas fi elds makes carbon capture and storage a very attractive future option.
In 2008, Fortum made an additional investment of USD 4.6 million to the Prototype Carbon Fund (PCF) of the World Bank. The fi rst certifi ed emission reductions were delivered from the Fund in January 2009.
Fortum believes that renewable energy sources are an integral part of future
energy solutions, and their use will create new business opportunities. The company constantly develops its hydropower generation and strives to increase the use of biomass and waste-derived fuels. Fortum also aims at a profi table growth in wind power generation.
In 2008, renewable energy sources accounted for 46% of Fortum's electricity generation and 32% of heat generation within the EU countries. The total use of biomass was 8.1 terawatthours (TWh), representing an increase of 4% from the previous year. The use of waste-derived fuels rose by 2% to 1.7 TWh.
Fortum is making several new investments in renewable energy. In Finland, Fortum is building new biomass-fuelled heat plants in Seinäjoki, Riihimäki, Levi and Hanko. In Sweden, Fortum started building an underground fuel storage at the planned bio-fuelled power plant unit in Värtan, Stockholm, and continued the planning of a waste-fuelled boiler in Brista. In Pärnu and Tartu in Estonia, and in Częstochowa in Poland, Fortum is building new CHP plants fuelled with biomass and local fuels, e.g. coal and peat. As part of the EHS action plan, Fortum will study the feasibility of replacing some coal use with biomass or waste derived fuels in TGC-10.
During 2008, Fortum completed refurbishment projects at three hydropower plants, resulting in 12 gigawatthours (GWh) of additional renewable energy annually. Fortum also participated in a refurbishment project at Kemijoki hydro power plants, resulting in 20 GWh of additional power production for the company.
Out of Fortum's total power production capacity of 13,573 megawatts (MW), wind power currently contributes slightly over 6 MW. Fortum's aim is to increase its wind power production substantially by 2025. In order to facilitate that, Fortum is carrying out numerous wind power studies.
In addition to renewables, nuclear energy is an important source of CO2 free electricity for Fortum. Read more on pages 55–56.
Fortum promotes responsible use of natural resources by systematically improving the energy effi ciency of operations. Energy-effi cient CHP production accounts for a signifi cant share of Fortum's energy production. Fortum is also developing solutions to utilise industry's waste energy and to improve the operating economy of power plants.
At the end of 2007, Fortum decided to establish a unit focusing on Energy Effi ciency Solutions. The unit offers customised energy-effi ciency services for industrial and medium-sized customers.
Furthermore, Fortum is involved in several national and international joint energy-effi ciency projects within the energy industry. As part of the Finnish energy-effi ciency agreements, Fortum has its own energy conservation plan, which is reviewed annually. The plan contains training in energy conservation for plant operators, optimisation of plant operations, energy-saving studies and investments based on them. Energy effi ciency programmes are carried out also in plants in other countries as well as in offi ces.
In Russia, Fortum is improving the effi ciency of TGC-10's district heating networks by 20% through an energy and water loss reduction programme to be completed by 2015.
Fortum constantly strives to reduce the environmental impacts of its energy production.
The company's major thermal power plants in the EU are equipped with state-of-the-art technologies reducing sulphur dioxide, nitrogen oxide and particulate emissions.
Also the new gas-fi red power plants to be built in TGC-10 will be on par with the strict EU emissions norms. In the coming years, Fortum will invest in particle and sulphur removal at the company's existing coal-fi red power plants in Russia as part of the EHS action plan. The particle emissions from the Argayash plant will be reduced by 80% by the end of 2012. A signifi cant reduction of also sulphur emissions will take place when modernising the plant around 2015. A study on replacement of the coal-fi red units in Chelyabinsk will take place during 2009–2010. These studies will form the basis for further emissions-reduction target setting.
g/kWh
Fortum's impact on biological diversity originates mainly from hydropower generation. In order to minimise the impacts, restoration projects are implemented in river systems to improve habitats for endangered species and to support the recreational use of waterways.
During 2008, Fortum participated in several waterway restoration projects. In Finland, Fortum was involved in conservation projects at the Oulujoki river. Fortum also co-operates with the Finnish Nature Conservation Association and Joensuu University in protecting the Saimaa ringed seal, the most endangered species in Finland. In Sweden, the company was involved in projects to improve the hab-
Fortum Fortum incl. TGC-10
Fortum Fortum incl. TGC-10
itat of threatened species in the Klarälven, Dalvälven and Västerdal rivers as well as in the Dellen lakes. Fortum also started a four-year research project with the University of Karlstad using the fi sh farming plant at Fortum's hydropower plant at Brattfors.
Fortum Distribution prefers underground cables in building new power lines across water bodies that have rich bird life. In Finland, Fortum participated in a joint project with WWF Finland and Finnish Energy Industries to install protective roosts to prevent sea eagles from receiving electric shocks while resting on pylons.
In order to participate in the protec-
tion of the Baltic Sea and to safeguard its biodiversity, Fortum also contributed EUR 400,000 to the John Nurminen Foundation's Clean Baltic Sea project in 2008. The project aims at reducing phosphorous discharges from municipal sources in Poland.
The majority of Fortum's business units and subsidiaries have certifi ed their management systems in accordance with the ISO 14001 standard and some units in accordance with ISO 9001/9002 and OHSAS 18001, as well. In 2008, new ISO 9001, ISO 14001 and OHSAS 18001 certifi cates were
Share of carbon-free energy sources in power generation Share of carbon-free energy sources in power generation, Europe
Graphs on pages 40–43: Environmental indicators are unverifi ed and minor changes are possible during a later assurance process. Total emission fi gures include Meri-Pori and Kirkniemi power plants, although they were leased to another company in 2007–2008. The fi gures also include TGC-10 in Russia from 1 April 2008.
granted to Fortum Service Deutschland GmbH.
Today, environmental certifi cates cover approximately 97% of Fortum's business volume in Europe. According to the EHS action plan, TGC-10 will be ISO-14001 certifi ed by the end of 2012.
In 2008, Fortum invested a total of EUR 60 million (2007: 60) in improving environmental and safety performance. Environment, health and safety (EHS) related operating costs amounted to EUR 40 million (2007: 29), covering e.g. air-pollution control, soil protection, effl uent treatment, waste management and occupational safety measures.
Fortum strives to systematically identify the sustainability-related risks of its operations. An internal sustainability assessment procedure is applied to all signifi cant acquisition and other projects. Fortum has evaluated the liabilities relating to past operations and has made the necessary provisions for any future remedial costs concerning environmental damage.
Fortum's management is not aware of any cases that might have a material impact on the company's fi nancial position. Of the provisions for liabilities and charges included in the fi nancial statements in 2008, EUR 7.9 million is for environmental liabilities. Such liabilities primarily relate to contaminated soil clean-up projects.
In accordance with the Finnish Nuclear Energy Act, Fortum has made provisions for future costs relating to nuclear waste management. Read more on page 162.
In 2008, Fortum recorded 16 cases of non-compliance with environmental regulations. Most of the cases were related to small, temporary exceedances of water level limits in regulated rivers and reservoirs. These cases did not incur any consequences to Fortum.
We want to be known as the responsible energy company.
THE RESPONSIBLE ENERGY COMPANY
Fortum's goal is to be a respected corporate citizen. The company strives to be the benchmark for equal opportunities and to have the best safety performance in its sector. Also Fortum's service and goods providers and contractors play an important role in the efforts towards sustainability. The company's commitment also extends into the community, where Fortum's businesses and employees support charitable events and sponsor community programmes and projects. Acting as a responsible and respected corporate citizen is an integral part of Fortum's holistic approach to business.
Fortum is committed to sustainability in all its operations. According to its sustainability policy and internal Code of Conduct, Fortum wants to actively engage stakeholders to continuously improve its environmental, social and economic performance. Fortum takes responsibility for the impact its activities have on customers, employees, shareholders, communities and other stakeholders, as well as the environment.
In order to achieve Fortum's sustainability targets, it is important to recognise possible risks in the supply chain, evaluate them and actively work to mitigate those risks. That is why a "Fortum way" of managing its suppliers in a responsible way is being developed. The project will produce a systematic way of assessing and managing suppliers, including the tools needed. During 2008, a new supplier code of conduct was attached to all large contracts prepared by Fortum's purchasers in Finland, Sweden and Norway. In the next phase, the purchasers in the Baltic countries and Russia will start to use the supplier code of conduct in their purchasing.
In Finland, Fortum and the city of Espoo agreed in 2006 on long-term cooperation to enhance the living environment of Espoo citizens. The cooperation includes improved illumination and thus improved safety in public areas, cultural events for families and the elderly as well as support for a local football club, Honka, which trains thousands of children and youngsters. In 2008, when Fortum and Espoo launched co-operation aiming to enable the widescale adoption of electric cars in the city and thus to signifi cantly reduce traffi c emissions.
In Sweden, Fortum and the city of Stockholm have engaged in active cooperation in several areas for several years. In 2008, Fortum and Stockholm started strategic co-operation to prepare for the large-scale introduction of plugin electric cars.
Read more on page 61.
Another area of co-operation with Stockholm is removal of graffi ti, which was expanded in 2008 to cover the whole city area in 24 hours. The purpose of the project is to improve the open-air environment and coordinate the cleaning of Fortum's substations and other equipment's exposed areas.
Co-operation in two new sustainable environment areas in Stockholm was extended. The sustainable urban areas are a continuation of the Hammarby Sjöstad project, in which Fortum has participated for several years. The purpose is to bring energy-saving illumination to several dark walkways and parks and thereby make them safer and more pleasant. During the year, the illumination at Humlegården was renewed.
Furthermore, Fortum participated in several co-operation projects with schools during the year. Energisnackis project, which was started in Sweden in 2007, was now launched also in Finland as Energiakompassi (energy compass).
In 2008, the Fortum Foundation distributed over EUR 630,000 to support energy sector research and development. Fortum also continued its cooperation with a number of schools and universities by donating several energyrelated professorships to Finnish universities. Fortum also contributed
• Different types and levels of cooperation bodies and programmes
• Regular performance discussions with
• Evaluation meetings with potential
with business partners
key suppliers
new suppliers
• Employee satisfaction surveys
Regulators
authorities
• Different types and levels of cooperation bodies and programmes with local, national and international
EUR 3 million for an energy research programme at the Helsinki University of Technology. In Sweden, Fortum participates in several research projects via Swedish Elforsk together with several universities.
Read more on page 37.
In Finland, Fortum made donations totalling approximately EUR 360,000 to various charitable causes. These included projects aiding children and youngsters, protecting the environment and support for culture. Fortum also supported the John Nurminen Foundation's Clean Baltic Sea project with a EUR 400,000 contribution.
In line with Fortum's core purpose, our energy improves life for present and future generations also in Fortum's sponsoring programme, which combines support for the next generation, society and the environment.
The main social support in 2008 included the Finnish Children and Youth Foundation project in Russian Carelia and co-operation with the Ung Företagsamhet organisation in Sweden.
In the area of environmental sponsorships, Fortum started co-operation with Skansen, the world's oldest openair museum and zoological park. The co-operation includes several areas, such as illumination, energy-effi ciency and sponsoring youth activities. Also
concrete measures to save the endangered Saimaa ringed seal were started with the Finnish Nature Conservation Association.
Fortum's main sports sponsorship projects in 2008 were the Swedish Athletic Association and the Finnish Paralympic Committee. The co-operation with the Swedish Athletic Association is part of Fortum's commitment to climate change mitigation and includes, for instance, energy surveys for sports centres. In Finland, the focus of Fortum's sports sponsorship programmes is on the next generation. Team Forte and Fortum Tutor programmes were started in the end of 2008.
Furthermore, the main cultural support was donations of instruments made to the Finnish Sibelius Academy. Fortum's Art Foundation owns some 300 valuable pieces of art, including paintings from the Golden Age of Finnish art, modern art, sculptures and unique ceramics and glass artefacts, as well as textile art. During the year, several of them were loaned out to art exhibitions. The Foundation also promotes Finnish art and art history research.
Fortum is committed to providing a safe working environment for its employees and contractors. The company aims to be the industry benchmark in safety with the ultimate goal of zero accidents. To attain this goal, signifi cant efforts to develop safety management have continued for several years and now also include TGC-10.
As part of the Environment, Health and Safety plan at TGC-10, an ambitious safety programme covering all its plants and all personnel is being launched. The programme consists of several focus areas in occupational health and safety with their own milestones, e.g. management procedures, the use of safety tools,
| 2008 | 2007 | |
|---|---|---|
| Injury frequency (number of injuries/million hours worked) | 4.3 | 2.9 |
| Number of safety observation tours | 8,731 | 6,450 |
| Number of improvement proposals and near-miss reports | 4,317 | 2,670 |
| 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|
| Injuries | 63 | 40 | 55 | 68 |
| Fatalities | 1 | 2 | 2 | 2 |
training, asbestos management and establishing reliable incident reporting and investigation procedures. The injury frequency rate (LWIF) at TGC-10 will be included in Fortum reporting as soon as fully verifi ed data is available. The target of the programme is to achieve the Fortum way of working regarding safety by 2012. Read more on pages 64–65.
During 2008, special emphasis was put on contractor safety and accident investigation. The injury frequency rate among contractors improved from 12.5 to 8.4, but the excellent trend over previous years regarding Fortum's own personnel reversed. A total of 63 occupational accidents leading to an absence of one working day or more happened (2007: 40). The resulting LWIF was 4.3 (2007: 2.9), despite over 8,730 safety walks carried out by the company's management and supervisors, which raised the general awareness of and commitment to occupational safety.
During 2008, Fortum encountered one fatal accident in its operations. In January, a contractor's employee fell from the scaffolding he was dismantling at one of the district heating plants in Stockholm. This accident, as all accidents at Fortum, has been thoroughly investigated to help to prevent similar accidents in the future.
The year saw also many positive developments, however. The fi rst Fortum Safety Award acknowledged and recognised exemplary occupational safety behaviour. A total of 32 nominations from 10 different countries were competing for the award. This year the Champion Award went to the Lovii sa
nuclear power plant and the Team Award to the Högdalen waste incineration plant.
Although Fortum's safety performance is clearly better than average within our sector, the reversed LWIF trend was a clear disappointment leading to reinforced actions to get safety development back on track. Occupational safety efforts will be stepped up further on several fronts: visible management commitment, reinforced training, improved risk assessment practices and better adherence to given instructions are key to attaining our very ambitious target of less than one injury per million working hours in 2010. This requires safety to be a mindset issue, embraced by everyone in the company.
Integrating TGC-10's personnel to Fortum started in 2008 and will be one of the biggest efforts also throughout 2009.
OUR GOAL IS TO BE THE BENCHMARK FOR EQUAL OPPORTUNITIES
In spring 2008, Fortum's personnel almost doubled as a result of the acquisition of the Russian TGC-10, which employs 7,200 people. Fortum's management model, organisational structure and way of working were in place already in 2008, and a new HR organisation was created with the intention to harmonise key leadership and HR policies and processes.
The TGC-10 acquisition sets a big challenge to the organisation, but at the same time offers a wide range of opportunities for individual development. At year-end 2008, about 50 Fortum employees have moved from other parts of the organisation to work permanently in the TGC-10 organisation.
In 2008, Fortum employed an average of 14,077 people (2007: 8,304). At the end of the year, the number of personnel was 15,579 (2007: 8,303), of which 15,064 were permanent employees (2007: 7,954). Of the permanent employees, 2.2% were employed parttime (2007: 3.8%).
The increase in the number of personnel was due to the TGC-10 acquisition. At the same time, there was also a decrease of 318 people due to redundancies and outsourcings. A big part of these took place in Poland.
Fortum promotes equality and diversity in all its operations. Women represented 29% of the total workforce (2007: 23%), but accounted for 33% of corporate and business unit management (2007: 33%).
Continuous people development has been on Fortum's strategic agenda since the beginning of the 2000s. It is carried out in personnel development discussions and development plans, and has been implemented through the career and development planning process, various management development programmes, job rotation and both in-house and external training.
In 2008, Fortum's career and development planning process was evaluated and was within the best quartile in a benchmark study covering 25 European companies. For managers, a special 360-degree feedback process is used to identify the most important individual development needs and in this way to support their growth as leaders.
Active job rotation is a key tool for individual and organisational development. In 2008, Fortum had 573 internal vacancies in Finland and in Sweden (2007: 244) and there were about 400 transfers between units (2007: 358). Job rotation in business unit and sub-unit management teams increased substantially.
| 2008 | 2007 | Change % | |
|---|---|---|---|
| Average number of employees | 14,077 | 8,304 | 69.5 |
| Number of employees at 31 Dec. | 15,579 | 8,303 | 87.6 |
| of whom permanently employed | 15,064 | 7,954 | 91.9 |
| Female, % | 29 | 23 | 26.1 |
| Women in management positions, % | 33 | 33 | 0.0 |
| Training days per person | 4 | 4 | 0.0 |
| Training expenditure, EUR mill. | 8.3 | 7.6 | 9.2 |
| Health care expenditure 1), EUR per person | 428 | 412 | 3.9 |
| Expenditure on recreation and leisure activities 1), % of salaries paid on working time |
0.4 | 0.4 | 0.0 |
1) Finland
Four different development programmes for managers were running during 2008 and they will continue in 2009. Altogether, 497 managers participated in these. Investments in people development amounted to EUR 8.3 million (2007: 7.6). Fortum employees spent an average of 4.0 days in training (2007: 4.0).
The annual job satisfaction survey was replaced by a new employee survey, focusing on employee engagement. The new survey is linked to Fortum's values, strategy and business targets, and the
fi ndings of the survey are utilised in the annual planning process. The fi rst survey round had a response rate of 72% and it was implemented in 13 countries. According to the results, the key strengths of Fortum are team excellence, leadership and personal growth, to mention a few. The most important areas of development include change management, the link between Fortum strategy and employee's own targets as well as cross-unit collaboration. Based on the fi ndings, each unit created respective development plans, the implementation of which will be regularly followed.
Various actions have been taken in order to enhance Fortum's employer image. In 2008, an employer value proposition was created to manifest Fortum's offering to new employees and also the employer's expectations of them. A Fortum Trainee programme for recent university graduates started in January 2009 with a total of 13 participants from Finland, Latvia, Poland, Sweden and Russia. In Finland and in Sweden, a special Summer Energy campaign was organised for recruiting the best possible summer trainees. In order to attract the best people, Fortum has
2008 2007 Change %
also developed its recruitment process and the tools used in recruitment.
Fortum's remuneration strategy aims at strengthening the performance culture and attracting and retaining the best people. Traditionally, all employees are covered by an annual bonus system, with the exception of Poland and Russia in 2008. Individual or team-based targets are set in the annual performance discussions between the individual or team and the superior.
The fi nal bonus is based on the fi nancial results of the Group or the business
| 2008 | 2007 | Change % | |
|---|---|---|---|
| Power Generation | 3,520 | 3,511 | 0.3 |
| Heat | 2,318 | 2,279 | 1.7 |
| Distribution | 1,336 | 1,063 | 25.7 |
| Markets | 635 | 935 | –32.1 |
| Russia | 7,262 | - | N/A |
| Other operations | 508 | 515 | –1.4 |
| Total | 15,579 | 8,303 | 87.6 |
Russia 7,262 - N/A Sweden 3,436 3,465 –0.8 Finland 3,045 2,981 2.2 Poland 767 925 –17.1 Estonia 333 336 –0.9 Norway 292 277 5.4 Other countries 444 319 39.2 Total 15,579 8,303 87.6
unit and on the individual or team performance. Consequently, the average bonus payments vary between units and individuals. In spring 2008, the average bonus paid (from 2007 results) ranged from 0.5 to slightly over 10% of the annual salary of a Fortum employee.
In addition to the annual bonus, Group and business unit management participate in Fortum's share-based Long Term Incentive (LTI) system. The fi rst shares under the scheme were distributed in February 2008. The LTI system was modifi ed from January 2008 onwards.
The Fortum Personnel Fund covered 3,187 employees in Finland in spring
Read more on pages 74–77.
Integration of the new Fortum employees in Russia will continue actively in the coming years and is a major personnel challenge for the Fortum organisation in 2009. Fortum's evolving business continues to create increasing opportunities for individual development within the company.
The coming years will also bring a
ments and thus new recruitments. Fortum believes that the mixture of experience and knowledge combined with new skills and fresh ideas will form a solid platform also for future business development.
Level of education, 31 December 2008
31 December 2008
%
substantial change in the workforce due to the growing number of retire-
%
Fortum's goal is to be the market leader in low-carbon products and energy effi ciency solutions. Successful deployment of climate-benign R&D is essential in building a low-carbon society.
Since 2000, Fortum has invested a total of EUR 7 billion in climate-benign energy production. These investments make Fortum one of the lowest-emitting energy companies in Europe. In a carbon constrained society with CO2 having value, CO2-free energy production is a clear economic benefi t for Fortum. This is living evidence that sustainability and business success can go hand in hand.
low-carbon products There is a developing market for climate-smart energy solutions as more and more companies and households want to decrease their carbon footprint. Thus by providing customers with lowcarbon energy products and expertise in efficient use of energy, Fortum can create growth.
Fortum is the largest provider of ecolabelled electricity in the Nordic countries. The company sells eco-labelled electricity to over 700,000 customers in Sweden, Finland and Norway. In Finland, customers receive environmentally-labelled "Norppa" electricity, which meets the criteria of the Finnish Association for Nature Conservation. In a similar way, Fortum's Swedish customers receive "Bra Miljöval"-labelled (good environmental choice) electricity according to the criteria set by the Swedish Society for Nature Conservation. In Norway, Fortum sells CO2-FRI certifi cate of origin, based on RECS certifi cates. The RECS, Renewable Energy Certifi cates System, is a European system where a certifi cate shows that the electricity is produced with renewables. A part of Fortum's Finnish heat generation also carries the Norppa eco-label.
At the beginning of 2008, Fortum introduced two eco-labels for business customers in the Finnish and Swedish markets. Electricity that is produced without carbon dioxide emissions carries the Fortum Carbon Free eco-label, and electricity produced from entirely
renewable energy sources carries the Fortum Renewable eco-label. Today, nearly all Fortum's business customers receive nuclear energy-based Fortum Carbon Free-labelled energy. Also the fi rst Fortum Renewable agreements were made in 2008.
Improving energy effi ciency is one of the essential means to mitigate climate change. Hence, the role of an energyeffi ciency expert and services provider is becoming an increasingly integral part of Fortum's business.
At the the end of 2007, Fortum
started a new Energy Effi ciency Solutions unit, which serves as a competence centre for the company's energyeffi ciency services. The new unit is a part of the implementation of Fortum's renewed sustainability agenda. In 2008, the new unit started its operations in Sweden and the operations will begin in Finland in 2009.
In order to create market growth for energy-efficient transport solutions, Fortum has started co-operation with the cities of Stockholm and Espoo aiming at enabling the wide-scale adoption of electric cars and thus signifi cantly reducing traffi c emissions. A key component of these projects is to develop the infrastructure needed to recharge the electric cars in order to make the adoption of them as smooth as possible when car manufacturers introduce electric cars to the markets in a few years. In Stockholm, the project developed the fi rst functional infrastructure for recharging hybrids already in 2008. In the fi rst phase of the Espoo project, Fortum and Espoo acquired several rechargeable hybrid and battery electric vehicles and recharging stations for test use.
In Sweden, Fortum's Energihjälpen (Energy help) programme continued in customer communications and interaction. Energihjälpen encourages and advises customers to save energy and cut costs.
In Finland, Forum carried out exten-
sive campaigns providing information on renewable energy and advice on energy saving. Fortum also provided some 50 local libraries in its network areas with energy consumption meters that people can use to measure the energy consumption of their household appliances.
Fortum's R&D vision is to enable a carbon dioxide-free sustainable future. Hence, technologies curbing climate change are prominently represented in Fortum's R&D activities. Fortum's R&D programmes focus on carbon capture and storage, new bioenergy technologies and sustainable energy systems. Nuclear R&D is also strongly represented in the overall R&D portfolio.
Read more on pages 36–37.
Fortum received several signifi cant recognitions for its sustainability performance in 2008. For the sixth year in a row, the company secured its place on the global Dow Jones Sustainability World Index. This year, Fortum was also included in the Dow Jones STOXX Sustainability Index.
Furthermore, Fortum was included for the second consecutive time in the Climate Disclosure Leadership Index,
a prestigious honour for global corporations addressing the challenges of climate change. Globally, Fortum was ranked as one of the top-six utility companies and as the best in the Nordic countries by the Carbon Disclosure Project. Fortum is also included on Storebrand's global "Best in Class" list as the most responsible energy company.
Fortum's power generation capacity, 31 December 2008
| MW | Finland | Sweden | Russia | Other | Total |
|---|---|---|---|---|---|
| Hydropower | 1,493 | 3,161 | 4,654 | ||
| Nuclear power | 1,433 | 1,656 | 3,089 | ||
| Combined heat and power | 574 | 535 | 2,785 | 145 | 4,039 |
| Condensing power | 1,376 | 297 | 1,673 | ||
| Other | 6 | 112 | 118 | ||
| Total | 4,882 | 5,761 | 2,785 | 145 | 13,573 |
MW Finland Sweden Russia Other Total Heat 3,634 4,644 13,796 2,190 24,264
| Purchases |
|---|
| Import to the Nordic market |
| Own power plants in Russia |
| Partly-owned power plants in Europe |
| Own power plants in Europe |
TWh
| TWh | 2008 | 2007 |
|---|---|---|
| Hydro | 22.9 | 20.0 |
| Nuclear | 23.7 | 24.9 |
| Thermal | 6.0 | 7.3 |
| Total in EU and Norway | 52.6 | 52.2 |
| Thermal in Russia | 11.6 | 0.0 |
| Total | 64.2 | 52.2 |
Fortum's business is divided into fi ve reporting segments. Power is generated in plants owned or partly owned by Fortum in the Power Generation segment and in combined heat and power (CHP) plants in the Heat segment.
Power Generation sells the electricity it generates through the Nordic power exchange Nord Pool. The Markets segment buys its electricity through Nord Pool and sells it to private and business customers as well as to other electricity retailers. The Heat segment sells steam, district heating and cooling mainly to industrial and municipal customers as well as to real estate companies. It also sells the electricity it generates at CHP plants. Fortum's distribution and regional network transmissions are reported in the Distribution segment. Power and heat generation and sales in Russia are reported in the Russia segment.
1)The segments, Power Generation, Heat and Markets, sell electricity to Nord Pool or external customers, and purchase electricity from Nord Pool or other external sources. Fortum's Nord Pool transactions are calculated as a net amount of hourly sales and purchases at the Group level. Segment Russia sells electricity to the Russian wholesale market.
A GOOD YEAR
The key success areas for Power Generation are a high level of power plant availability, investments in continuous modernisation of the existing fl eet and in sustainable electricity production as well as operational excellence in physical and fi nancial trading.
BUILDING ON A STRONG PRODUCTION PORTFOLIO
The Power Generation segment generates and sells power, manages and develops Fortum's power generation assets and is responsible for risk management and commodity trading operations related to power generation. The segment sells power to the Nordic power exchange Nord Pool and the over-the-counter (OTC) market. Power Generation also provides operation and maintenance services for power and heat companies in the Nordic area and selected international markets. The segment has three business units: Generation, Portfolio Management and Trading (PMT) and Service.
Power Generation contributes to Fortum's vision of becoming the benchmark power and heat company excelling in sustainability with its fl exible and sustainable production portfolio. Commitment to sustainability shows in all of Fortum's actions and investments. All of the company's Nordic power generation operations have ISO 14001 environmental certifi cation. About 4 terawatt-hours (TWh), 20%, of Fortum's annual hydro production has been certifi ed by Finnish and Swedish societies for nature conservation.
The main fi nancial performance drivers in the power generation business are power plant availability and the wholesale price for electricity. The main factors affecting the wholesale price are the prices for CO2 emissions allowances and fuels in the international markets, infl ow to the Nordic water reservoirs, as well as the overall supply and demand balance.
2008 saw heavy price fl uctuations on the Nordic electricity market. The average spot price for electricity in 2008 in Nord Pool was EUR 44.7 per megawatt-hour (MWh) (2007: 27.9), which is 62% higher than in 2007. During the year, there was high volatility in prices. Forward price quotations for 2009 increased during the fi rst half of 2008 from around EUR 50 per MWh to above EUR 65 per MWh, but decreased during the second half of 2008, closing at EUR 38 per MWh at the end of 2008.
Area price differences in the Nordic wholesale market were more common than in previous years. These differences were mainly caused by a longlasting, extraordinary failure in transmission connections between southern Norway and Sweden. However, the prices in Finland and Sweden were exactly the same 97% of the time during the year, with the average spot price in Finland being EUR 51.0 per MWh (2007:
| EUR million | 2008 | 2007 | Change % |
|---|---|---|---|
| Sales | 2,892 | 2,350 | 23.1 |
| power sales | 2,566 | 2,019 | 27.1 |
| other sales | 326 | 331 | –1.5 |
| Operating profi t | 1,599 | 1,115 | 43.4 |
| Comparable operating profi t | 1,528 | 1,095 | 39.5 |
| Net assets (at end of period) | 5,331 | 5,599 | –4.8 |
| Return on net assets, % | 29.6 | 19.2 | 54.2 |
| Comparable return on net assets, % | 28.0 | 18.9 | 48.1 |
| Gross investments | 134 | 145 | –7.6 |
| Number of employees | 3,520 | 3,511 | 0.3 |
ENERGY ADVICE
30.0) and in Sweden EUR 51.1 per MWh (2007: 30.3).
The average spot price in Germany was EUR 65.8 per MWh (2007: 38.0). With the initiation of a new connection between Norway and the Netherlands in May 2008, the Nordic market became more closely connected to the continental market. Net exports from the Nordic market to continental Europe grew from 9 TWh in 2007 to 15 TWh in 2008.
The new emissions trading period, the Kyoto period, started at the beginning of 2008 and meant a signifi cant increase in emissions allowance prices compared to 2007. During the year, the prices for emissions allowances fl uctuated between EUR 15–28 per tonne CO2. Oil and coal price development has an increasing infl uence on the Nordic electricity price. After a steady increase since early 2007, the fuel prices decreased dramatically during the second half of 2008.
The year started with a signifi cant surplus of 9 TWh in the Nordic water reservoirs, and, compared to historical average, the reservoirs maintained a surplus until late August. The year ended with the reservoirs 5 TWh below average.
The segment's power generation in 2008 was 47.9 TWh (2007: 47.2), of which 46.9 TWh (2007: 46.1) originated in the
Nordic countries. Compared to the previous year, hydropower generation increased due to the stronger hydrological situation and thermal production decreased due to low spot-price levels as well as high fuel and CO2 prices.
Reduced nuclear power production was caused by technical problems with lower availabilities in the partly-owned Swedish Forsmark and Oskars hamn nuclear power plants. At the Loviisa nuclear power plant in Finland, a planned, extended annual outage affecting the production volume was carried out at the Unit 1, although Loviisa's availability remained at a high level.
In 2008, 97% of the segment's power generation in Europe was CO2-free (2007: 95%). At year-end, the segment's power generating capacity totalled 9,575 megawatts (2007: 9,560), of which 9,435 MW (2007: 9,420) was in the Nordic countries and 140 MW (2007: 140) in other countries.
Power Generation's achieved Nordic power price (excluding pass-through sales) was EUR 49.3 per MWh (2007: 39.7), 24% higher than the year before, due to improved hedging prices and physical optimisation margin. The related sales volume was 48.4 TWh (2007: 46.6). Power Generation continues to steer value creation by timing decisions in fi nancial hedging and physical production optimisation.
Power Generation investments are related to additional safety, growth by adding capacity focusing on renew able and other CO2-free production, and the upgrading of the existing plant fl eet. The investment programme includes refurbishment investments in several hydropower plants to increase capacity, improve safety and maintain good plant availability. During 2008, Fortum completed three refurbishment projects. One of the new projects started is the old Frykforsen hydropower plant in Värmland, Sweden. The plant will be replaced with a new plant with 15% higher effi ciency. The construction work of the new plant started at the end of 2008 and is planned be in commercial use during spring 2010.
Fortum is proceeding with several wind power projects in the Nordic countries. Plans include both onand off-shore wind farm developments in the region. In Finland, Fortum and Metsähallitus, the national forest enterprise, made a reservation agreement on the state-owned Pitkämatala and Maa krunni sea areas in the municipalities of Kemi, Simo and Ii for largescale wind power generation. Both areas have been marked as wind power areas in the land use plans for Lapland and Northern Ostrobothnia provinces.
Bringing up energy consumption with your employees is defi nitely worthwhile because their working habits have a big impact on the energy bill. All devices that use electricity (lights, pumps, fans, motors etc.) should be turned off after use. You should also make sure they are turned off at night and on weekends. However, any devices that should remain on 24/7 should be clearly marked.
Motion sensors save energy in big warehouse areas, and it makes sense to do any offi ce printing and photocopying work without interruption.
In Finland, Fortum is participating in the country's fi fth nuclear power plant unit, Olkiluoto 3, with an approximately 25% share representing some 400 MW in capacity. The construction of the unit in Eurajoki has proceeded, but the commissioning has been delayed until summer 2012. In December 2008, the constructor, Teollisuuden Voima (TVO), announced that the plant supplier, the AREVA-Siemens consortium, has fi led a request for arbitration concerning the Olkiluoto 3 delay and related costs in the International Chamber of Commerce (ICC).
In 2007, Fortum commenced an environmental impact assessment (EIA) process for a new 1,000–1,800 MW nuclear power unit possibly to be built adjacent to Fortum's existing two units on Hästholmen Island in Loviisa. The EIA includes the assessment of the impacts of an electricity-producing unit and, optionally, a unit producing electricity and heat. Fortum submitted the EIA report on Loviisa 3 to the Finnish Ministry of Employment and the Economy at the beginning of April 2008. In August 2008, the ministry gave its statement on the report, stating that it meets the content requirements for legislation and has been handled in the manner required under the regulations in force.
In February 2009, Fortum submitted to the Finnish Government an application for a decision-in-principle concerning Loviisa 3. The application presents five different plant alternatives, all of which will fulfi l stringent Finnish safety standards once completed. The total cost of the new, 1,000–1,800 MW nuclear power plant unit is EUR 4–6 billion, depending on the size and type of plant selected. According to plan, the new unit will be operational in 2020. Its designed service life is at least 60 years.
Fortum is a minority shareholder in
TVO, which already in April 2008 submitted its decision-in-principle application for a fourth nuclear power unit to be built in Olkiluoto, Eurajoki.
Posiva Oy, the company responsible for the fi nal disposal of Fortum's and TVO's spent nuclear fuel in Finland, conducted an EIA on the expansion of the planned fi nal repository for spent nuclear fuel in Olkiluoto. The expansion is needed if Fortum builds a new nuclear power plant unit. Posiva submitted its EIA report to the Ministry of Employment and the Economy at the end of October. After a statement from the contact authority, Posiva can submit to the Finnish Government an application for a decision-in-principle for the expansion of the repository in Olkiluoto.
Capacity increases at the Forsmark and Oskarshamn power plants in Sweden are planned to be carried out during 2009–2014. As a minority owner, Fortum is participating in these
upgrades. Fortum's share of the planned capacity additions is estimated at 290 MW. Some of these projects still require Swedish nuclear safety authority licenses. One of the capacity increases, the planned upgrading of Oskarshamn 3 in 2008, was postponed to 2009 due to component delays.
Fortum's nuclear waste management liability is based on the Finnish Nuclear Energy Act. The Ministry of Employment and the Economy annually decides on a nuclear waste management fee in relation to the amount of spent nuclear fuel and other nuclear waste management actions. Fortum is obligated to contribute the funds to the State Nuclear Waste Management Fund to cover the legal liability. Future costs will increase mainly due to updated decommissioning plans of the Loviisa nuclear power plant units. In 2008, the legal liability was increased by approximately EUR 80 million.
Fortum Service offers operation and maintenance (O&M), productivity and energy-effi ciency services to power and heat companies, industrial companies with own power production as well as commercial energy users. At Fortum, Service is the competence centre for the company's own power plant O&M, ensuring high availability and cost-effi cient utilisation of the company's generation assets.
Service is growing both in Fortum's home market and selected international markets, for example Russia, Middle East, Asia and Germany, where Service is the leading independent O&M service supplier with responsibility for the O&M of 2,400 MW of power plant capacity. Service's operations in the highly competitive international markets also support Fortum's competence development.
The availability and effi ciency of Fortum's own power plants as well as those operated globally by Fortum is very good by international standards. In 2008, the operation time energy availability (tgdE) of power plants in Fortum's O&M fl eet, excluding hydropower and Russia was 96.6% (2007: 96.7%).
During the year, Service had a major role in the integration of TGC-10 to Fortum. Service was responsible for driving improvements in the operation and maintenance activities in TGC-10 power plants as well as for the take-over of TGC-10 maintenance companies. The aim was to implement a uniform Fortum way of working and thus improve the profi tability and effi ciency of the power plants and maintenance companies. Also in Russia, Service supported the implementation of hydropower plant modernisation projects at the Vuoksi and Syväri rivers as part of Fortum associate company TGC-1's Joint Implementation projects.
At the end of 2007, Fortum decided to establish a unit concentrating on
Nordic wholesale electricity price
on Nord Pool EUR/MWh
Energy Effi ciency Solutions within Service. In June, Fortum acquired the Swedish energy-effi ciency consulting company Processio AB to complement the competence of the unit.
Infrastructure services are an important part of Service's business. New growth opportunities in the area opened when Hafslund Infratek ASA and Fortum decided to combine their businesses of construction and operation of infrastructure from the beginning of 2009. Fortum's ownership in the combined company, Infratek ASA, is 33%. Hafslund ASA holds 43.3% and the remaining shares are owned by institutional and private shareholders. The transaction concerned some 1,000 Service employees, approximately 700 in Sweden, 150 in Finland and 150 in Norway.
The majority of Fortum's research and development is conducted in Power
| TWh | 2008 | 2007 |
|---|---|---|
| Hydro | 22.9 | 20.0 |
| Nuclear | 23.7 | 24.9 |
| Thermal | 0.3 | 1.2 |
| Total in the Nordic | 46.9 | 46.1 |
| Thermal in other countries | 1.0 | 1.1 |
| Total | 47.9 | 47.2 |
Generation. The work is aimed at securing the continuous and very effi cient operation of Fortum's power plants and developing sustainable solutions for new power generation.
The main focus of this work has been to develop and enhance the availability of Fortum's existing power plants and follow-up of new production technologies. Within nuclear power, R&D work has focused on nuclear safety and waste management. New R&D areas include developing a nuclear power plant producing electricity and heat, preparations for a full-scale demo plant using carbon capture and storage techno logy and participation in wave power opportunities.
Read more on pages 36–37.
Fortum will continue to invest in power generation capacity during the coming years. The focus in these investments is in wind, nuclear and hydro power production.
| TWh | 2008 | 2007 |
|---|---|---|
| Sales | 52.1 | 51.8 |
| of which pass-through sales | 3.7 | 5.2 |
| EUR/MWh | 2008 | 2007 |
|---|---|---|
| Segment's power price 1) | 49.3 | 39.7 |
1)For the Power Generation segment in the Nordic area, excluding pass-through sales.
Availability of power plants 1)
Operation-time energy availability, tgdE % Generation, TWh
1)Fortum's O&M fl eet, excluding hydropower and Russia.
75 90
Source: Nord Pool, futures as of 31 December 2008.
Heat continued with the measures to ensure future competitiveness. The extensive investment programme for new combined heat and power capacity proceeded.
Heat concentrates on combined heat and power (CHP), district heating and cooling, waste-to-energy production, and energy outsourcing services to industry. It owns and operates 20 CHP plants (2007: 21) and several hundred heat plants in the Nordic and Baltic countries as well as in Poland. The segment consists of two business units: Heat, operating in Finland, Norway, the Baltic countries and Poland, and Värme, operating in Sweden.
The segment's goal is to become the benchmark of the heating industry. Today, Heat is the leading provider of heat in the Nordic countries and in the Baltic Rim area.
Heat is striving for earnings growth and effi ciency improvements with an environmentally-benign investment programme concentrating on new CHP to replace old, heat-only pro duction and to increase electricity generation. The CHP projects in Tartu, Estonia, in Suomenoja, Finland, and in Częstochowa, Poland, proceeded well. The commercial use of these plants will start during 2009–2010. Once completed, these plants will increase Heat's annual electricity generation by about 1.5 terawatt-hours (TWh).
In June, Fortum also decided to invest in a biomass fuel- and peat-fi red CHP
plant in Pärnu, Estonia, and in a gasengine CHP plant in Jelgava, Latvia. The Pärnu plant is scheduled to be in commercial use in 2011 and the Jelgava plant in 2009. Once completed, these plants will increase Heat's annual electricity generation by about 0.1 TWh.
Planning of the biomass fuel-fi red CHP plant in Värtan, Stockholm, and in Järvenpää, Finland, and the wasteto-energy plant in Brista, Stockholm, continued. The connection between the southern and central district heating grids in Stockholm was completed and the grid was taken into operation in spring 2008. Investment in fl ue-gas condensing in Värtan was started. Once
| EUR million | 2008 | 2007 | Change % |
|---|---|---|---|
| Sales | 1,466 | 1,356 | 8.1 |
| heat sales | 1,120 | 1,053 | 6.4 |
| power sales | 228 | 202 | 12.9 |
| other sales | 118 | 101 | 16.8 |
| Operating profi t | 307 | 294 | 4.4 |
| Comparable operating profi t | 250 | 290 | –13.8 |
| Net assets (at end of period) | 3,468 | 3,507 | –1.1 |
| Return on net assets, % | 8.9 | 9.3 | –4.3 |
| Comparable return on net assets, % | 7.3 | 9.2 | –20.7 |
| Gross investments | 431 | 327 | 31.8 |
| Number of employees | 2,318 | 2,279 | 1.7 |
Finland
1)Excluding heat production in Russia.
HEAT
ENERGY ADVICE
completed, it will increase the production of district heating without any increase in fuel usage. Construction of the rock storage system that will be used for handling the biomass fuel for the new Värtan plant continued and it will be ready by early 2009. A number of new biomass-fi red heating plant projects were started during the year in Finland.
Heat continued leveraging its growth platforms by acquiring a heating company in Latvia in February. The company provides district heating to the city of Jelgava. Its annual heat sales total 200 gigawatt-hours (GWh) and the net sales around EUR 10 million. The district heating is produced in seven natural gas-fi red heat ing plants. Fortum entered the Latvian heat market by acquiring the Riga Airport heat deliveries in January 2007.
In June, Fortum and the Norwegian Sargas announced the results of the CO2 capture technology pilot project in the Värtan power plant in Sweden. The results were very good and clearly demonstrated that the technology for CO2 capture is adaptable, although further development of storing and logistics are still needed.
In Finland, Fortum together with the YIT and Uponor corporations created a working concept for using rockheating in a residential area. The solution will be fi rst implemented in Espoo, Finland. The warming of the houses and of the household water will be CO2-free. In addition, the system offers free cooling for the houses in summer.
The segment makes continuous efforts to ensure long-term profi table growth
Steam Heat
and satisfi ed customers in its key areas. Customer satisfaction is followed on a yearly basis. The segment's overall customer satisfaction in 2008 was good and the trend has been continuously positive. Safe and environmentally-benign operations with the target to reduce specifi c CO2 emissions by 10% by 2020 are also in focus.
In order to reach the demanding targets, Heat has taken steps to create and maintain the optimal heat operations and asset base. As part of the development programme, Heat decided to divest its 60% ownership in Jyväskylän Energiantuotanto Oy as well as the related business operations in Finland. The transaction took effect at the end of 2008.
Also some other non-core assets in Finland were divested. In July, the gas turbine in Hyvinkää was sold, and in October, Heat sold its heat operations in Tornio. In addition, the optical fi bre canalisation capacity in Sweden was sold to the city of Stockholm.
A new programme for the development of maintenance, Main-X, was started in Sweden. The target is to reach world-class operation and maintenance practices in heat production and distribution.
In upcoming years, Heat will focus on ensuring profi table growth and successful completion of its on-going investment projects. Increasing the utilisation of biomass fuels is continuously on the agenda. Possibilities for new CHP plants are being evaluated.
Use a thermometer to monitor room temperature. The recommended temperature is 20–22°C. At higher temperatures, the air dries out and energy consumption increases. A one-degree increase in room temperature can add fi ve percent to the heating bill.
A draught can make a room feel chilly, so it makes sense to seal doors and windows. Remember to close the curtains on cold nights; curtains function as a third layer of window glass. Avoid placing furniture in front of radiators; make it easy for the heat to warm up the room. It's a good idea to make sure radiators are functioning properly before the start of the heating season. son.
In 2008, Distribution launched initiatives on delivering the infrastructure of the future.
SECURING IMPLEMENTATION OF FUTURE INFRA - STRUCTURE
Distribution is responsible for the reliable and secure supply of electricity to 1.6 million customers in Finland, Sweden, Norway and Estonia. Fortum owns and operates distribution and regional networks that have a combined length of 157,300 km, corresponding to 3.5 times around the earth.
In 2008, the volume of local and regional network transmissions totalled 25.8 terawatt-hours (TWh) (2007: 26.0) and 17.7 TWh (2007: 18.1), respectively. Electricity transmissions via the regional distribution network totalled 14.8 TWh in Sweden (2007: 14.9) and 2.9 TWh in Finland (2007: 3.2). The market share of electricity distribution, based upon volume transmitted in the <20 kV local network, was 19% in Finland (2007: 20%), 14% in Sweden (2007: 15%), 3% in Norway (2007: 3%) and 3% in Estonia (2007: 3%). A special feature of the Finnish electricity market is that one single player is allowed a maximum share of 25% of the electricity distributed in the 0.4 kV network across the country. At the end of 2008, Fortum's share stood at 20%.
The need of reliable electricity has become more and more crucial in our daily lives. Fortum's network reliabil-
In total, about 1,100 km of middle voltage lines were secured by cables in ground or by other measures during 2008. A positive trend of fewer and shorter outages can already be seen as a result of the Reliability Investment Programme. For example, in those Swedish areas where the network has been
| EUR million | 2008 | 2007 | Change % |
|---|---|---|---|
| Sales | 789 | 769 | 2.6 |
| distribution network transmission | 669 | 648 | 3.2 |
| regional network transmission | 77 | 81 | –4.9 |
| other sales | 43 | 40 | 7.5 |
| Operating profi t | 248 | 233 | 6.4 |
| Comparable operating profi t | 248 | 231 | 7.4 |
| Net assets (at end of period) | 3,032 | 3,239 | –6.4 |
| Return on net assets, % | 8.1 | 7.7 | 5.2 |
| Comparable return on net assets, % | 8.2 | 7.6 | 7.9 |
| Gross investments | 296 | 237 | 24.9 |
| Number of employees | 1,336 | 1,063 | 25.7 |
| thousands | 2008 | 2007 |
|---|---|---|
| Sweden | 877 | 871 |
| Finland | 606 | 591 |
| Norway | 99 | 98 |
| Estonia | 24 | 24 |
| Total | 1,606 | 1,584 |
| TWh | 2008 | 2007 |
|---|---|---|
| Sweden | 14.0 | 14.3 |
| Finland | 9.3 | 9.2 |
| Norway | 2.3 | 2.3 |
| Estonia | 0.2 | 0.2 |
| Total | 25.8 | 26.0 |
ENERGY ADVICE
secured, the average outage time has decreased from 11.7% in 2005 to 4.4% in 2008. The areas secured are chosen based on the number of customers and where the network is most affected by weather.
The roll-out of automatic meter management (AMM) in Sweden peaked during 2008 when 500,000 automatic meters were installed. At year-end 800,000 (96%) out of the 835,000 were installed. The remaining meters will be installed by July 2009.
The major benefi t of AMM is that invoicing is based on actual consumption. At the end of 2008, 690,000 customers received invoices based on monthly meter readings. In the future, customers can also monitor their consumption on an hourly basis in Fortum's online service. For the customer, this means better control, understanding and awareness of energy consumption.
Over the year, Distribution started the planning for an AMM roll-out also in Finland and Norway. Tender evaluation is ongoing in Finland, but no investment decisions have been made.
As part of Fortum's continuous efforts to promote sustainable development, a corporate-wide initiative, lead by Distribution, to study the large-scale introduction of plug-in electric vehicles in Sweden and Finland was launched. A key component of the project is to develop the infrastructure needed to recharge the electric cars in order to
facilitate adoption when car manufacturers introduce them to the markets in a few years. Fortum believes that there is potential for signifi cant usage of electric cars in the Nordic countries, and that adoption of them can help to achieve the EU's climate targets especially regarding traffi c.
An extensive internal effi ciency programme was carried out in 2008 with actions to follow also in the coming years. The focus of the programme is on improving customer service and enhancing the effi ciency of internal processes, and thus securing the longterm competitiveness of the business. For Distribution, this also means a centralisation of offi ce work to the headquarters in Finland and to Stockholm and Karlstad in Sweden.
Another major change during the year was the outsourcing of fi eld construction services to Hafslund Infratek, which affected ca. 140 employees by an annual volume of EUR 20 million.
In 2009, Distribution will focus on fi nalising the ongoing effi ciency programme in order to secure faster throughput time and higher quality for customers.
The distribution business is strictly regulated and supervised by national authorities. However, Fortum sees its responsibility as wider than just following regulations. The goal is to secure long-term customer satisfaction and consistent development of the future regulatory framework.
In December, the Swedish Energy
Market Inspectorate (Energimarknadsinspektionen) and Swedish network companies agreed to fi nalise their ongoing court cases regarding net prices. For Fortum, this means that supervision for the years 2003–2008, regarding Stockholm and West Coast is closed. Fortum is now concentrating on the new regulation model in which net pricing is determined in advance. This model is proposed to be applied from 2012 onward. Fortum will actively work to get a clear model for the future.
The Finnish regulation period 2005– 2007 has ended. The fi nal supervisory decision confi rmed that Fortum's income for the period was below the allowed limit. Fortum has appealed the parameters on which the fi nal decision for the regulation period 2008–2011 will be based. The Market Court decided on 31 December to accept some of the complaints given by the industry.
The same reasoning is behind the complaints about the parameters in the Norwegian regulator's decision. During 2008, Fortum received a favourable ruling on one of its appeals and compensation of EUR 2.7 million.
Little changes made in household energy use can add up to big savings. In the kitchen, the average household can save about 10–15% on the electricity bill by not preheating the oven. Use a microwave to warm up small portions. Using a lid and stirring food during microwave cooking, as well as defrosting frozen foods using the microwave's defrost setting, can also bring savings.
Repair leaking toilets or faucets right away, and wash full loads when doing laundry. Running the light wash cycle or washing less than a full load typically uses almost as much water as a full load.
Customers' wishes and values are clearly visible in the development of products and services by Markets.
COMBATING CLIMATE CHANGE TOGETHER WITH CUSTOMERS
Markets is the leading electricity retail company in the Nordic countries with a total of 1.3 million private and business customers. Approximately 75% of electricity volumes are sold to business customers and 25% to consumers. In addition to direct electricity sales, Markets sells electricity to other electricity retailers in Sweden and Finland. Markets buys all its electricity through Nord Pool and is the largest seller of ecolabelled Norppa electricity in Finland and Bra Miljöval electricity in Sweden.
For electricity retail companies, 2008 was a period of intense competition in the Nordic market. The wholesale price of electricity increased sharply during the three fi rst quarters. At the same time, tough competition kept consumer prices down and the high procurement costs put pressure on the sales margins.
Over the year, Markets was not able to fully offset the increased wholesale prices and procurement costs in the sales prices. This was especially the case with the consumer market segment in Finland and with the business market segment in all the Nordic countries. Similar challenges existed also in the other segments in all the Nordic countries.
In order to enhance its fi nances, Markets launched a performance improvement programme. To achieve signifi cant improvements in sales margin performance, Markets renewed its procurement model. Revisions to electricity offering portfolio were initiated both in the consumer market segment and in the business market segment in order for end-customer pricing to follow Nord Pool prices more closely. Consequently, sales margin performance will be less affected by the wholesale price volatility. In the consumer market segment, new electricity products were being developed at spot-based prices.
Also an extensive internal effi ciency programme was carried out in 2008 with actions to follow also in the coming years. The focus is on improving customer service, enhancing the effi ciency of processes and securing the long-term competitiveness of the business. For Markets, this means a centralisation of operations to Espoo and Stockholm.
Fortum's own monthly customer satisfaction surveys show that the customers give high grades to customer service employees for their willingness to be of service and their positive attitude. Fortum Customer Services has put a lot
| EUR million | 2008 | 2007 | Change % |
|---|---|---|---|
| Sales | 1,922 | 1,683 | 14.2 |
| power sales | 1,865 | 1,582 | 17.9 |
| other sales | 57 | 101 | –43.6 |
| Operating profi t | –35 | 12 | N/A |
| Comparable operating profi t | –33 | –1 | N/A |
| Net assets (at end of period) | 188 | 247 | –23.9 |
| Return on net assets, % | –14.0 | 6.9 | N/A |
| Comparable return on net assets, % | –15.3 | –0.6 | N/A |
| Gross investments | 3 | 3 | 0.0 |
| Number of employees | 635 | 935 | –32.1 |
%
Electricity sales customers
of effort into developing the processes so that customer requests are handled quickly, effi ciently and in one contact with Fortum Customer Services.
According to the SKI Rating 2008 in Sweden, Fortum's customer satisfaction among consumers has improved and in 2008 the image of the company reached its highest level ever. In Finland, the EPSI rating 2008 shows that even though all customer segments are satisfi ed with the level and technical quality of customer service, customer loyalty declined in 2008.
Markets' vision is to transform from an electricity retailer into a leading supplier of attractive energy offerings and solutions. As a customer's partner, Markets aims to be a catalyst in environmental impact mitigation and effective energy usage as well as a benchmark company in convenient and cost-effective customer services.
To engage with the customers' world, Markets has established customer councils together with local homeowners' associations. The councils discuss Fortum's services openly and test development ideas from Markets employees and council members alike. The dialogue has proven very fruitful and useful for the development of Markets' product and service offering. The positive experience from the consumer councils also encourages Markets to engage in a similar dialogue with business customers.
Energy partnership activities in Sweden and in Finland have also proven to be a very successful way to establish a natural co-operation relationship and
achieve direct interaction with current and potential customers. In Sweden, Energihjälpen (Energy help) programme continued in customer communications and interaction. The programme helps customers to improve their energy effi ciency and thus reduce energy costs by offering and carbon dioxide emissions through activities such as energy effi ciency guidance, consumption reports and by lending of fl ow meters. A similar energy advice programme was also started in Finland during 2008.
More and more consumers deal with their energy transactions via the internet. Markets is developing its online services in order to facilitate this global trend and to gradually make the internet the main transaction channel for customers. Starting in 2009, Fortum's Finnish customers can, for example, fi nd information on their energy consumption, energy-effi ciency improvement measures and even the profi tability of energy-conservation investments on the Fortum website.
Markets shares the global concern for the environment and wants to make it easy for its customers to make choices that help to combat climate change. For several years, Markets has maintained its place as the largest seller of eco-labelled Norppa and Bra Miljöval electricity in the Nordic countries. Almost 70% of Markets' customers purchase Norppa or Bra Miljöval electricity, both of which meet the strict environmental requirements of the Finnish and Swedish Associations for Nature Conservation.
To complement these eco-labels, Markets started to sell CO2FRI guarantees of origin to all customers in Norway at the beginning of the year. The idea is that customers purchase guarantees of origin from Markets corresponding to the amount of their own consumption and thus contribute to the introduction of new electricity generation that is free of CO2 emissions. These guarantees of origin may also be purchased by customers who buy their actual physical electricity supply from another electricity retailer.
In Finland and Sweden, Markets introduced two new environmental labels for business customers. Under the Fortum Carbon Free environmental label, electricity is produced without CO2 emissions using nuclear power. The production of electricity under the Fortum Renewable label, in turn, is based entirely on renewable energy sources, mainly hydro, bio and wind power. Fortum Renewable is sold to companies that want to acquire a corresponding amount of environmental value to offset their electricity consumption under their current electricity contract.
Markets' number-one target for 2009 is balancing its own economy and getting through the worldwide economic recession as a winner. This means not only tight cost control, but also improved performance and signifi cantly enhanced sales margin performance. At the same time, Markets must keep in mind its vision to be the benchmark company in offering environmental products and services on the Nordic market and thus move towards environmental leadership.
A laptop computer uses only a fraction of the energy used by a desktop computer. Be sure to activate your computer's power saving mode – it can reduce the computer's electricity consumption by as much as half, especially if the computer is on for long periods of time. A fl at LCD screen uses half the energy of a CRT monitor, and screen savers are not energy savers. Operating habits matter: A continuously running desktop computer with all the peripherals can use as much as 1,000 kWh/a of electricity, i.e. as much as an electric sauna heater!
ADVICE
Russia is a new reporting segment in Fortum as of 1 April 2008, comprising power and heat generation and sales in Russia. The segment includes TGC-10 and Fortum's approximately 25% holding in TGC-1.
CAPTURING A UNIQUE GROWTH OPPORTUNITY Fortum acquired 76.49% of TGC-10 shares in March 2008 through an auction held by RAO UES of Russia and in an additional share issue of the company. Subsequently, in accordance with Russian legislation, Fortum fi led a mandatory public tender offer to the company's minorities. At year-end 2008, Fortum's ownership in TGC-10 had reached 93.4%, including shares owned by TGC-10's fully-owned subsidiary. The total consideration for Fortum's ownership in TGC-10, at year-end, amounted to approximately EUR 2.5 billion, including the EUR 1.3 billion new share issue Fortum subscribed to in March.
The acquisition of Territerial Gen-
erating Company 10 (TGC-10) was in line with Fortum's growth strategy and has positioned Fortum as a signifi cant player in one of the world's largest energy markets.
Read more on pages 26–27.
TGC-10 operates in well-developed industrial regions of the Urals and western Siberia. Out of all territorial generating companies, TGC-10 has the best capacity utilisation rates and it is the leading district heating supplier in its area. The total installed capacity of TGC-10 and its affi liates is over 3,000
megawatt (MW) electricity and 15,800 MW heat with an annual production of 18 terawatt-hours (TWh) electricity and 27 TWh heat.
TGC-10 is the main heat supplier in the area where it operates. Heat is produced mainly in combined heat and power (CHP) plants and additionally with heat boilers. The company operates district heating networks, 1/3 of which are owned and 2/3 of which are operated. Heat pricing is regulated, set by local authorities within the limits set at the federal level.
TGC-10 has a committed, extensive investment programme, which will increase its electricity generation capacity by approximately 70% to 5,300 MW by 2013.
Read more on page 31.
The Environmental, Health and Safety (EHS)-performance of the TGC-10 power plants and district heating networks has been evaluated to identify and prioritise actions needed to raise their EHS performance closer to the level of Fortum's European operations. The plan consists of actions to be initiated immediately and issues that need further studies before specifi ed targets can be set. One of the fi rst actions is to
| EUR million | 2008 | 2007 | Change % |
|---|---|---|---|
| Sales | 489 | - | - |
| power sales | 332 | - | - |
| heat sales | 141 | - | - |
| other sales | 16 | - | - |
| Operating profi t | –91 | 244 | N/A |
| Comparable operating profi t | –92 | - | - |
| Net assets (at end of period) | 2,205 | 456 | N/A |
| Return on net assets, % | –3.7 | 66.3 | N/A |
| Comparable return on net assets, % | –3.8 | 0.0 | - |
| Gross investments | 1,748 | 245 | N/A |
| Number of employees | 7,262 | - | - |
The segment includes TGC-10 and Fortum's approximately 25% holding in TGC-1. TGC-10 is accounted for as a subsidiary and fully consolidated from 1 April 2008. TGC-1 is an associated company and accounted for using the equity method.
ENERGY
ADVICE
establish an adequate EHS organisation. The target is to become ISO 14001 certifi ed by 2012.
Another short term target is reducing particle and sulphur emissions from TGC-10's Argayash power plant. Particle emissions will be reduced by 80% before the end of 2012 and a signifi cant reduction of sulphur emissions will take place when modernising the plant around 2015.
Starting 2009, an ambitious occupational health and safety programme is being launched at TGC-10 and will cover all plants and all personnel. The programme consists of several focus areas with their own milestones. The target of the programme is to achieve the Fortum way of working regarding safety by 2012.
As a result of the committed investment programme, TGC-10's total CO2 emissions will increase due to higher production volumes and a larger share of gas condensing power production. However, the increase of specifi c CO2 emissions will be limited to approximately 5% from the present level as the current 5% share of coal in the fuel mix will not be raised. Reductions in specifi c emissions will be achieved later when existing old power plants are replaced with new ones with better energy effi ciency. Fortum will also study the feasibility of replacing some coal use with biomass or waste-derived fuel and will start planning for a carbon capture and storage testing facility in TGC-10.
Another short-term measure to
reduce CO2 emissions is to upgrade the district heating network. A programme was launched early in 2009 aiming at reducing energy and water losses by 20% in the networks owned and operated by TGC-10. This corresponds to an approximate energy saving of 1.5 TWh and a CO2 emissions reduction of 300,000 tonnes by 2015. Optimising CHP and heat-only production offers another signifi cant savings potential.
Over the year, Fortum agreed on joint implementation projects with TGC-1 and TGC-10. According to the agreements, Fortum will invest for example, in hydro power plant refurbishments, effi ciency improvements in district heating networks and construction of new energy-effi cient production capacity. In return, Fortum will receive approximately 6.5 million tonnes of emission reduction units (ERU) from TGC-1 and TGC-10 between 2008 and 2012. Fortum can use the ERUs to cover part of its own emissions in the EU once the projects are approved by the authorities and the emissions reduction of the completed projects has been verifi ed.
Fortum has put considerable efforts into integrating TGC-10. The integration team has worked in TGC-10 since the beginning of April and the Fortum management model, organi sational structure and the way of working were in place at the beginning of September 2008. The company is now organised to function in a competitive market.
The main integration priorities have been to optimise purchasing processes, to do technical audits of sites and defi ne value creation opportunities, to launch a portfolio management and trading function and to streamline other internal processes. The integration has proceeded as planned and several targets for effi ciency improvements have been identifi ed. Consequently, annual effi ciency improvements are expected to increase to approximately EUR 100 million by 2011.
Fortum's associated company, TGC-1, operates in the northwest region of Russia. It has 6,250 MW of electricity production capacity, approximately 50% of which is hydropower. TGC-1 has an investment programme that will increase the company's power generation capacity by 3,900 MW. The estimated value of the programme is about EUR 5 billion. Fortum's goal is to maintain its ownership in TGC-1 at over 25%.
The acquisition of TGC-10 was the beginning of a long-term commitment and unique opportunity for Fortum. It is a platform for growth in the fourthlargest energy market in the world. Fortum is committed to transferring and applying its expertise to Russian production plants in order to increase their energy and environmental effi ciency with latest technologies. TGC-10 will continue to be a key focus area for Fortum also in the coming years.
A power plant produces energy most costeffi ciently and with lower emissions when planned preventive maintenance is used to keep equipment and systems in operating condition.
In preventive maintenance, the condition of important production equipment is constantly monitored. Planned maintenance is done at regular intervals and worn parts are replaced. This prevents down time in production and a lower performance level caused by malfunctions and equipment failures.
The Board of Directors and President and CEO's responsibility for the administration and management of the company is regulated in the Finnish Companies Act, which is supplemented by the Finnish Corporate Governance Code.
In the following, you will fi nd Fortum's Corporate Governance Statement, as recommended in the Corporate Governance Code, as well as information on management remuneration, followed by their biographical presentations. Insider administration at Fortum is presented on the web at www.fortum. com/insider_administration.
Corporate governance at Fortum is based on the laws of Finland, the company's Articles of Association and the new Finnish Corporate Governance Code 2008. The new Code replaced the Corporate Governance Recommendation for Listed Companies 2003, which the company earlier complied with.
This Corporate Governance Statement has been prepared pursuant to Recommendation 51 of the new Code and Chapter 2, Section 6 of the Securities Markets Act. The Corporate Governance Statement is issued separately from the company's operating and fi nancial review.
Furthermore, Fortum complies with the rules of NASDAQ OMX Helsinki Ltd, where it is listed, and the rules and regulations of the Finnish Financial Supervisory Authority. Fortum's headquarters is located in Espoo, Finland.
The company complies with the Finnish Corporate Governance Code with the exception that Fortum's Board of Directors' Nomination and Compensation Committee is not involved in the nomination process of members to the Board of Directors. For this, the Annual General Meeting has established a Shareholders' Nomination Committee. The Corporate Governance Code is available on the website of the Securities Markets Association (www.cgfi nland.fi ).
Fortum prepares consolidated fi nancial statements and interim reports in accordance with the International Financial Reporting Standards (IFRS), as adopted by EU, the Securities Markets Act as well as the appropriate Financial Supervision Authority's standards and NASDAQ OMX Helsinki Ltd's rules. The company's operating and fi nancial review report and parent company fi nancial statements are prepared in accordance with Finnish Accounting Act and the opinions and guidelines of the Finnish Accounting Board. The auditor's report covers the operating and fi nancial review report, consolidated fi nancial statements and the parent company fi nancial statements.
The decision-making bodies managing and overseeing the Group's administration and operations are the Annual General Meeting of Shareholders, the
Supervisory Board, the Board of Directors with its two Committees, and the President and Chief Executive Offi cer (CEO) assisted by the Fortum Management Team. The Board of Directors supervises the performance of the company, its management and organisation. The Supervisory Board, the Board of Directors and the Fortum Management Team are separate bodies, and no person serves as a member of more than one of them.
Day-to-day operational responsibility at the Group level rests with the President and CEO assisted by the Fortum Management Team and at business unit level with each unit's head assisted by a management team.
Fortum's organisation is characterised by a decentralised organisation that is managed based on target-oriented leadership with clear targets and rewards based on performance. Each business unit has its own staff and other resources. However, there are service units supporting the business units. Fortum also has corporate centre functions to ensure that Group synergies can be captured.
The right of shareholders to make decisions over company matters is exercised at an appropriately convened General Meeting of Shareholders by those shareholders present, or by their authorised representatives. In accordance with the Articles of Association and Finnish Corporate Governance Code, a notice to convene the General Meeting of Shareholders is issued by the Board of Directors. The notice is delivered no more than two months and no less than 21 days before the General Meeting of
Shareholders by publishing the notice in two newspapers chosen by the Board of Directors.
The Annual General Meeting is held once a year, at the latest in June. An Extraordinary General Meeting of Shareholders shall be held whenever the Board of Directors fi nds cause for such a meeting or when provisions of the law rule that such a meeting must be held.
• Adoption of the fi nancial state-
The shareholders who are registered as shareholders in the company's shareholder register maintained by Euroclear Finland Ltd ten days prior to the meeting are entitled to attend the General Meeting of Shareholders. Shareholders who hold their shares under the name of a nominee can be temporarily registered in the company's shareholder register to allow attendance at the General Meeting of Shareholders.
To take part in the General Meeting of Shareholders, shareholders shall register with the company at the latest by the date mentioned in the notice convening the meeting, which may be no more than ten days before the meeting. Shareholders wishing to bring up a matter for consideration by the General Meeting of Shareholders shall present the matter in writing to the Board of Directors early enough for the matter to be included in the notice convening the meeting.
A dividend as decided by the General Meeting is paid to shareholders who, on the record date for dividend payment, are registered as shareholders in the company's shareholder register.
By decision of Fortum's Annual General Meeting 2008, a Shareholders' Nomination Committee was appointed to prepare proposals concerning Board members and their remuneration for the following Annual General Meeting. The Committee consists of the representatives of the three largest shareholders and the Chairman of the Board of Directors as an expert member. Those three shareholders, whose share of the total votes of all shares in the company were the largest as of 3 November 2008 preceding and whose ownership is registered in the book-entry system, were entitled to appoint the members representing the shareholders on the Committee. Should a shareholder not have wished to use its right to nominate, this right would have been be passed on to the next biggest shareholder.
In November 2008, the following persons were appointed to Fortum's Shareholders' Nomination Committee by the three largest shareholders: Pekka Timonen, Director General, Prime Minister's Offi ce, Ownership Steering Department, Harri Sailas, CEO, Ilmarinen Mutual Pension Insurance Company, and Jorma Huuhtanen, Director General, Social Insurance Institution. The Chairman of Fortum's Board of Directors, Peter Fagernäs, served as the Committee's expert member.
In its meeting on 2 February 2009, the Shareholders' Nomination Committee decided to propose to the Annual General Meeting, which is to be held 7 April 2009, that the following persons be elected to the Board of Directors: Peter Fagernäs as chairman, Matti Lehti as deputy chairman, and as members Esko Aho, Sari Baldauf (new member), Ilona Ervasti-Vaintola, Birgitta Johansson-Hedberg and Christian Ramm-Schmidt.
The Supervisory Board is responsible for overseeing that the shareholders' interests are safeguarded.
The members of the Supervisory Board, its Chairman and Deputy Chairman are elected at the Annual General Meeting for a one-year term of offi ce. A person who has reached the age of 68 years may not be elected as a member of the
Supervisory Board. The Supervisory Board comprises a minimum of six and a maximum of 12 members; in February 2009 there were 10 members. The Supervisory Board meetings are also attended by employee representatives who are not members of the Supervisory Board. More than half of the Supervisory Board's members must be present to constitute a quorum. In 2008, the Supervisory Board met 6 times. Average attendance at these meetings was 85%.
At the 2008 Annual General Meeting, the following persons were elected to the Supervisory Board for a one-year term of offi ce:
The employee representatives on Fortum's Supervisory Board were Jouni Koskinen, Tapio Lamminen and Satu Viranko. The current employee representatives were elected in the spring
2007 and their term continues until the spring 2009.
The Board of Directors is responsible for the administration of the Group and for ensuring that the business complies with the relevant laws and regulations, including the Finnish Companies Act, Fortum's Articles of Association, the instructions given by the General Meeting of Shareholders and the guidelines issued by the Supervisory Board. The responsibilities of the Board of Directors are outlined in the Board of Director's working order.
The Board of Directors comprises fi ve to eight members who are elected at the Annual General Meeting for a one-year term of offi ce, which expires at the end of the fi rst Annual General Meeting following the election. More than half of the members must be present to constitute a quorum. A person who has reached the age of 68 cannot be elected to the Board of Directors.
In 2008, the Board of Directors met 10 times, of which one was a teleconference. Average Director attendance at all Board meetings was 98.6%. In addition to steering and supervising the company's operational and fi nancial development, the main items during the year were Fortum's strategy, fi nancial position as well as risks and fi nancial reporting. Main items also included the TGC-10 acquisition in Russia, electricity sales business, nuclear power projects and investments in new power and heat production. Over the year, the Board closely followed the development of the electricity market in Europe and in Russia. The Board also continued to address issues relating to sustainable business development and management performance, implementation of the Code of Conduct, and, at the end of the year, made a decision to comply with the new Finnish Corporate Governance Code.
The members of the Board of Directors are all independent from the company and its signifi cant shareholders.
The President and CEO, the Chief Financial Offi cer and the General Counsel (being the secretary to the Board) attend Board meetings. Other Fortum Management Team members attend as required to provide information to the Board or upon invitation by the Board.
The Chairman of the Board, together with the President and CEO, prepares the items for discussion and to be decided upon at the Board of Directors' meetings.
The Board of Directors has approved a working order to govern its work. The main contents of the working order have been summarised as follows:
• Annual self-assessment
Chairman decides on the agenda based on proposals by the other members of the Board, the President and CEO, and the secretary to the Board
The Chairman shall convene a meeting to deal with a specifi c item, if requested by a member of the Board or the President and CEO
The Board of Directors appoints an Audit Committee, which has three members, as well as a Nomination and Compensation Committee, which has four members. The members of these committees are all members of the Board of Directors. Members are appointed for a one-year term of offi ce, which expires at the end of the fi rst Annual General Meeting following the election. All the members of the Board of Directors have the right to participate in the committee meetings. The secretary to the Board of Directors acts as the secretary to the committees.
The Board has approved written charters for the committees. The main contents of these rules are outlined below.
The Audit Committee assists the Board of Directors in fulfi lling its supervisory responsibilities in accordance with the tasks specifi ed for audit committees in the Finnish Corporate Governance Code. The Audit Committee follows the fi nancial position of Fortum and oversees the fi nancial reporting process, the management of fi nancial risks and overviews the effectiveness of the internal control framework and the related systems of accounting and fi nancial controls, as well as reviewing of the company's Corporate Governance Statement. The committee also prepares the recommendation for the election of external auditors to the Board of Directors and monitors the independence and performance of the external auditors. The Audit Committee reports on its work to the Board of Directors regularly after each meeting.
The Audit Committee annually reviews its charter, approves the internal audit charter and the internal audit plan and carries out a self-assessment of its work. Furthermore, the Audit Committee meets the external auditors regularly to discuss the audit plan, audit reports and audit fi ndings.
In 2008, the Audit Committee was chaired by Birgitta Johansson-Hedberg and its members were Ilona Ervasti-Vaintola and Christian Ramm-Schmidt. The Committee met fi ve (5) times in 2008. Average Director attendance at all meetings was 93.4%. Also regularly participating in the Committee's meetings were external auditors, Head of Internal Audit, Chief Financial Offi cer, Corporate Controller and General Counsel as the Secretary to the Committee as well as other parties invited by the Committee.
The main items during the year included reviewing the interim reports, the fi nancial statements, internal audit and risk management reports, monitoring of certain important projects, such as the acquisition of TGC-10 in Russia, preparing a recommendation for the election of the external auditor, as well as regulatory compliance and development of internal controls and monitoring the implementation of the Code of Conduct.
The Nomination and Compensation Committee discusses, assesses and makes proposals on the salary structure, bonus and incentive systems for the Group and its management, and contributes to the Group's nomination issues. The Committee reports on its work to the Board of Directors after each meeting.
In 2008, the Nomination and Compensation Committee was chaired by Peter Fagernäs and its members were Esko Aho, Marianne Lie and Matti Lehti. The Committee met four (4) times during 2008. Director attendance at all meetings was 100%. Other regular participants at the Committee meetings were the President and CEO, Senior Vice President, Human Resources, and General Counsel as the secretary to the Committee.
The main items included top management performance evaluations and compensation issues, including performance target-setting for the Fortum Management Team as well as succession planning.
The Board of Directors conducts an annual self-assessment in order to further develop the work of the Board. The assessment process analyses the effi ciency of the work, the size and composition of the Board, the preparation of the agenda, and the level and openness of discussions, as well as the members' ability to contribute to an independent judgement.
The role of the President and CEO is to manage the Group's business and
administration in accordance with the Finnish Companies Act and related legislation and the instructions from the Board of Directors. The President and CEO is supported by the Fortum Management Team. The performance of the President and CEO is evaluated annually by the Board of Directors. The evaluation is based on objective criteria that include the performance of the company and the achievement of goals previously set for the President and CEO by the Board's Nomination and Compensation Committee.
The Fortum Management Team currently consists of eight members, including the President and CEO to whom the members of the Management Team report. The General Counsel acts as the Secretary to the Management Team. The Management Team meets regularly on a monthly basis. In addition, there are meetings dealing with strategy and business planning, as well as performance reviews and people issues such as management reviews.
The Fortum Management Team, among other things, sets the strategic targets, prepares the Group's annual business plans, follows up on the results, plans and decides on investments, mergers, acquisitions and divestments within authorisation, reviews the key day-today operations and the implementation of operational decisions.
Fortum's Corporate Internal Audit is responsible for assessing and assuring the adequacy and effectiveness of internal controls in the company. Furthermore, it evaluates the effective-
ness and effi ciency of various business processes, the adequacy of risk management, and e.g. compliance with laws, regulations and internal instructions. The Standards for the Professional Practice of Internal Audit form the basis for its work.
Corporate Internal Audit is independent of the business and other units in Fortum. It reports to the Audit Committee of the Board of Directors and administratively to the CFO. The purpose, authority and responsibility of Corporate Internal Audit is formally defi ned in its charter. The charter and the annual audit plan are approved by the Audit Committee.
The company has one auditor, which shall be an audit fi rm certifi ed by the Central Chamber of Commerce. The auditor is elected by the Annual General Meeting for a term of offi ce that expires at the end of the fi rst Annual General Meeting following the election.
Fortum Corporation's Annual General Meeting on 1 April 2008 elected Authorised Public Accountant Deloitte & Touche Oy as auditor, with Authorised Public Accountant Mikael Paul having the principal responsibility.
Fortum's Board of Directors approves the Corporate Risk Policy, which sets the objective, principles and division of responsibilities for risk manage ment activities within the Group as well as
defi nes the Fortum risk management process.
The Fortum risk management process is also embedded in the internal control framework, and the processlevel internal control structure has been created by using a risk-based approach. The same approach is also used for the fi nancial reporting process.
Fortum's internal control framework includes main elements from the framework introduced by the Committee of Sponsoring Organisations of the Treadway Commission (COSO).
Read more about Fortum's risk management process and largest risks on pages 98–102.
Fortum has an internal control framework supporting the execution of the strategy and ensuring regulatory compliance. Values and Code of Conduct set the foundation for the internal control framework. The framework consists of Group-level structures, corporate-level processes as well as business and support process-level controls. The Audit Committee, appointed by the Board of Directors, has oversight over risk management within the Group. Corporate Risk Management, an independent function headed by the Chief Risk Offi cer, reports to the CFO and is responsible for reporting risk exposures and maintaining the company's risk management framework. In the fi nancial reporting process, the ownership of the overall control structure is in the Corporate Control and Accounting unit as part of the CFO's offi ce.
As part of the Fortum risk management process, also risks related to fi nancial reporting are identifi ed and analysed annually. Additionally, all new risks are analysed and escalated as they have been identifi ed. The control risk assessment has been the basis for creating the process-level internal control framework and the same applies to the control points to prevent errors in the fi nancial reporting process. The results of the control risk assessment and the process-level controls have been reported to the Audit Committee.
Fortum's organisation is decentralised and a substantial degree of authority and responsibility has been delegated to the business units. Each business unit has its own staff and other resources. Control activities are applied in the business processes and, from a fi nancial reporting perspective, they ensure that potential errors or deviations are prevented, discovered and corrected. The Fortum policy structure ensures that governance around all activities exists.
In fi nancial reporting, the Controller's manual sets the standards. The Corporate Control and Accounting -unit defi nes the design of the control points, and internal controls cover the end-to-end fi nancial reporting process. However, the part of the organisation responsible for performing the controls is also responsible for the effectiveness of the controls. There are transaction process-level controls and periodic controls. These periodic controls are linked to the monthly and annual reporting process and include reconciliations and analytical reviews to ensure the correctness of fi nancial reporting.
Accounting manuals and policies are stored on intranet sites accessible by all people involved in the fi nancial reporting process. Additionally, Corporate Control and Risk Management functions regularly arrange meetings in which information around the processes and practices is shared to ensure uniform application of the processes. Investor Relations and Corporate Communications together with Corporate Control maintain the instructions for releasing fi nancial information.
Financial results are followed in the monthly reporting. In addition to that, the quarterly Performance Review meetings with Group and business unit management are embedded in the Fortum Performance Management process to review the fi nancial performance and ultimately reviewed by the Audit Committee and Board of Directors.
The Performance Reviews have a monitoring role also in ensuring that the internal controls are functioning. As part of the Fortum internal control framework, all units are account able for assessing the effectiveness of the controls they are responsible for. For the fi nancial reporting process, business unit- and corporate-level controller teams are responsible for this assessment. In addition, Internal Audit performs audits of the fi nancial reporting process.
Corporate strategy
Business unit roles and expectations on business units
Business unit strategy
Business unit target setting and incentives Continuous follow-up
Fortum offers a competitive compensation package for senior executives and other management, in order to attract and retain key resources. This package offers competitive, but not excessive, base salaries, purposeful benefi ts, challenging short-term incentives and deferred, share-based, long-term incentives. The compensation package is determined according to the Group's remuneration policy.
Fortum's remuneration takes into account the company's fi nancial performance and external market data, in particular, remuneration levels for similar positions among peer companies. The remuneration policy is determined by the Board of Directors.
Compensation for the members of the Supervisory Board and the Board of Directors is decided by the Annual General Meeting of Fortum Corporation.
Short-Term Incentives (STI)
Fortum's short-term incentive system (called annual bonus below) exists to support the Group's values, the achievement of fi nancial targets and structural changes, and to secure an alignment between the performance targets of the individual employee and the targets of the Group or his/her business unit. Traditionally, all Fortum employees are covered by the annual bonus system. In 2008, Poland and Russia were still exceptions.
The criteria used in determining the size of the bonus for senior management (President and CEO and other members of Fortum's Management Team) are decided annually by the Board of Directors on the recommendation of the Board's Nomination and
Compensation Committee. The size of each senior executive's annual bonus is dependent on the Group's fi nancial performance, as well as on their own success in reaching his/her personal goals. If the fi nancial targets and personal goals are met, each senior executive receives a 25% bonus. The maximum bonus level, when all targets and goals are exceeded, is 40% of the person's annual salary including fringe benefi ts.
For executives with business unit responsibilities, the scheme refl ects the performance of their business unit. The criteria for evaluating an executive's
| Salaries and fringe benefi ts | Performance bonuses | Total | ||||
|---|---|---|---|---|---|---|
| EUR | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 |
| President and CEO | 866,824 | 833,304 | 156,359 | 297,018 | 1,023,182 | 1,130,322 |
| Other Management Team members | 1,718,584 | 1,562,073 | 102,104 | 539,550 | 1,820,688 | 2,101,623 |
Additionally, the President and CEO had a calculatory gross income of EUR 2,149,442 based on February 2008 share delivery from the LTI plan 2002–2007. The corresponding aggregated fi gure for the other members of the Fortum Management Team was EUR 3,468,162. These shares were granted in spring 2005 after the earning period with the value not exceeding participants' one year salary and were delivered after the three-year lock-up period.
personal performance are mutually agreed between the executive and his/ her superior in an annual performance discussion at the beginning of each year. The performance of the President and CEO is evaluated annually by the Board of Directors.
The annual performance bonuses paid to the Fortum Management Team, including the President and CEO, in 2008 amounted to EUR 258,463, which is 0.06% of the total salaries and remuneration paid in the Group.
In the event that Fortum decides to give of termination to the President and CEO, he is entitled to compensation equalling 24 months' salary.
Fortum's Management Performance Share Arrangement (LTI) is a performance-based, long-term incentive arrangement. It was launched in 2003 to support the achievement of the Group's long-term goals by attracting and retaining key personnel. The last plan in this arrangement started in 2007 and will end 2012. In January 2008, the arrangement was further developed.
At present, approximately 160 managers, all of whom have been elected by the Board of Directors, are participants in at least one of the six ongoing annual LTI plans. The 2006–2011 LTI plan is for non-stock option holders only.
| Shares | Year 2008 1) | Year 2009 1) | Year 2010 2) | Year 2011 2) |
|---|---|---|---|---|
| Mikael Frisk | 10,450 | 6,292 | 5,661 | 3,502 |
| Timo Karttinen | 8,622 | 5,174 | 4,792 | 2,988 |
| Tapio Kuula | 14,415 | 8,682 | 7,813 | 5,168 |
| Juha Laaksonen | 12,010 | 7,227 | 6,504 | 4,718 |
| Mikael Lilius | 36,765 | 22,423 | 20,446 | 14,871 |
| Christian Lundberg | 10,762 | 6,667 | 6,232 | 3,861 |
| Maria Paatero-Kaarnakari | 3,721 | 2,643 | 2,353 | 1,592 |
| Maria Romantschuk | - | - | - | - |
1) Actual numbers of shares delivered after taxation.
2) Calculative number of share rights based on 56% tax deduction.
A new performance share plan under the new arrangement starts annually if approved by the Board of Directors and runs for a fi ve-year period. Each share plan begins with a three-year earning period, followed by a two-year lock-up period. The individual number of share rights delivered after the three-year earning period is based on the achievement of the earnings criteria set by the Board of Directors. The earnings criteria are set annually, and may vary from year to year.
Before delivering the shares to the participant, the company deducts all taxes and other charges payable by the participant, and the participant receives the remaining portion (in Finland currently approximately 40–50%) of the value in Fortum shares. Taxation details may vary from country to country.
The maximum value of shares (before taxation) to be delivered to a participant after the earning period cannot exceed the participant's one-year salary.
During the lock-up period, the shares may not be sold, transferred, pledged or disposed in any other way. The shares will be released from lock-up after publication of the company's fi nancial results for the fi fth calendar year of an individual plan.
Based on the previous LTI system, the fi rst annual share plan began in 2003 and was based on the 2002
fi nancial results. After the three-year earning period, in spring 2005, share rights belonging to the fi rst plan were granted to the participants. The shares, based on these share rights, were delivered to the participants in February 2008. In 2006, the earning period of the consecutive plan (2003–2008) ended and share rights belong ing to this plan were granted to the participants and were delivered in February 2009. In 2007, the share rights from plan 2004–2009, and, in 2008, the share rights from plan 2005–2010, were granted to the participants.
The fi rst shares under the new arrangement will be delivered to participants in 2011 and will be re leased from lock-up in 2013. The President and CEO is not participating in the new plans started in 2008 and 2009.
Fortum does not have any stock option programmes, where the subscription periods have not yet started. The subscription periods for the last stock option scheme (2002B) began in 2006 and will end in April 2009. The members of the current Fortum Management Team do not have any remaining stock options.
For more information about the incentive schemes and stock option schemes, please refer to pages 153–155.
Fortum's Finnish executives participate in the Finnish TyEL pension system, which provides for a retirement benefi t based on years of service and earnings according to the prescribed statutory system. Under the Finnish pension system, base pay, incentives and taxable fringe benefi ts are included in the defi nition of earnings, although gains realised from stock options and from the Management Performance Share Arrangement are not. Finnish pension legislation now offers a fl exible retirement from age 63 to age 68 without full pension limits.
For the President and CEO and the members of the Fortum Management Team, the retirement age is between 60 and 62 and the pension paid can be a maximum of 66% or 60% of the remuneration. In the fi rst case, the pensions are insured and paid by Fortum's pension fund, and in the latter, pensions are insured by an insurance company. The pension of the President and CEO is 60% of the remuneration at the age of 60.
Fortum has one pension fund, the Fortum Pension Fund for employees in Finland only, which was closed in 1991. The fund offers certain supplementary pension benefi ts to people within
the sphere of its operations. The most important of these are the overall guaranteed pension of 66% and the reduced retirement age of 60 for women and some men. At the end of 2008, the number of employees covered by the fund was 1,020.
In addition to the persons covered by the pension fund, there are some three hundred other Fortum employees who have various additional pension benefi ts based on the systems of their previous employers. These benefi ts are insured by insurance companies. The clear majority of these persons are employees of the former E.ON Finland.
In Sweden, the majority of Fortum's employees are covered by statutory retirement pension benefi ts and an additional collective agreement-based supplementary pension scheme, ITP for white-collar workers and SAF/LO for blue-collar workers.
In addition, approximately 240 key persons have opted out a portion of the ITP plan and are members of Birkaplanen, an alternative ITP-based pension scheme. Birkaplanen guarantees a defi ned pension of the fi nal pensionable salary at the time of retirement and was closed to new entrants in 2003.
In 2006, Fortum therefore launched a new, alternative ITP-based pension scheme, ÖVER 10, for key persons earning more than 10 income base amounts. The scheme is contribution-based and offered both to existing and new employees. A limited number of employees in Sweden are also covered by separate pension schemes, due to earlier agreements with former employers.
The Fortum Personnel Fund (for employees in Finland only) has been in operation since 2000. The Board of Directors determines the criteria for the fund's annual profi t-sharing bonus. Persons included in the Management Performance Share Arrangement are not eligible to be members of this fund. Members of the personnel fund are the permanent and fi xed-term employees of the Group. The membership of employees joining the company starts at the beginning of the next month after the employment relationship has been ongoing for six months. Fund membership terminates when the member has received his/her share of the fund in full.
The profi t-sharing received by the fund is distributed equally between the members. Each employee's share is divided into a tied amount and an amount available for withdrawal. It is possible to transfer a maximum of 15% of capital from the tied amount to the amount available for withdrawal each year, once the employee has been a member for fi ve years. The fund's latest fi nancial year ended at 30 April 2008 and the fund then had a total of 3,187 members. At the end of April 2008, Fortum contributed EUR 4.3 million to the personnel fund as an annual profi tsharing bonus based on the fi nancial results of 2007. The combined amount of members' shares in the fund was EUR 22.7 million.
The amount available for withdrawal is decided each year and it is paid to members who want to exercise their withdrawal rights.
Each Supervisory Board member receives a fi xed monthly fee and a meeting fee. The employee representatives receive only a meeting fee. All members are entitled to travel expense compensation in accordance with the company's travel policy. Members of the Supervisory Board are not offered stock options, warrants or participation in other incentive schemes, nor do they have a pension plan at Fortum. On 1 April 2008, the Annual General
Meeting confi rmed the following remuneration for Supervisory Board service:
The Annual General Meeting of 2008 confi rmed the following compensation for Board service:
EUR 2008 2007 Chairman 66,000 55,000 Deputy Chairman 49,200 42,000 Other members 35,400 30,000 Meeting fee 600 500
| 2008 | 2007 |
|---|---|
| 1,000 | 1,000 |
| 600 | 600 |
| 500 | 500 |
| 200 | 200 |
| EUR | 2008 | 2007 |
|---|---|---|
| Chairman | 14,000 | 13,000 |
| Deputy Chairman | 8,000 | 8,000 |
| Other members | 54,423 | 57,700 |
Each Board member receives a fi xed monthly fee and a meeting fee. The meeting fee is also paid for committee meetings and is paid in double to a member who lives outside Finland in Europe. The members are entitled to travel expense compensation in accordance with the company's travel policy. Board members are not offered stock options, warrants or participation in other incentive schemes. There is no pension plan for non-executive directors.
| EUR | 2008 | 2007 |
|---|---|---|
| Chairman | 70,250 | 61,500 |
| Deputy Chairman | 54,259 | 50,000 |
| Other members of the Board |
220,850 | 186,500 |
Peter Fagernäs Chairman, Born 1952, Master of Laws Chairman of the Nomination and Compensation Committee
Chairman of the Board of Oy Hermitage Ab and Managing Partner of Hermitage Co Ltd. Primary working experience: Chairman of the Board, Pohjola Group Plc Chairman of the Board, Conventum Plc CEO, Conventum Plc Member of the Board, Merita Bank CEO, Prospectus Oy Various positions at Kansallis-Osake-Pankki Key positions of trust: Member of the Board of Winpak Ltd., Canada and Amanda Capital plc
Independent member of Fortum's Board of Directors since 2004.
Fortum shareholding on 31 Dec. 2008: 30,591 (31 Dec. 2007: 30,591)
Esko Aho Born 1954, Master of Political Sciences Member of the Nomination and Compensation Committee
Executive Vice President, Corporate Relations and Responsibility, Nokia Corporation. Member of the Group Executive Board. Primary working experience: President of Sitra, the Finnish Innovation Fund Prime Minister of Finland Member of Parliament Leader of the Centre Party Lecturer at Harvard Key positions of trust: Member of the Board of Directors of Russian Venture Company
Ilona Ervasti-Vaintola Born 1951, LL.M., Trained on the bench Member of the Audit Committee
Group Chief Counsel, Principal Attorney, Secretary of the Board of Directors, Sampo plc. Member of the Group Executive Committee. Primary working experience:
Chief Counsel and member of the Board, Mandatum Bank plc Director, Partner, Mandatum & Co Ltd Head of Financial Law Department, Legal counsel, Union Bank of Finland Ltd Key positions of trust:
Member of the Board of Fiskars Corporation and Finnish Literature Society, Chairman of Legal Committee and Member of the Panel on Takeovers and Mergers at the Central Chamber of Commerce of Finland
Independent member of Fortum's Board of Directors since 2008.
Fortum shareholding on 31 Dec. 2008: 4,000
Birgitta Johansson-Hedberg Born 1947, Bachelor of Arts, Master of Psychology Chairman of the Audit Committee
Director
Primary working experience: President and CEO of Lantmännen President and CEO of Föreningssparbanken Resident Director for Scandinavia, Wolters Kluwer
Chairman of the Board of Umeå Universitet and Vinnova, Deputy Chairman of A-banan, Member of the Board of Sveaskog, Finansinspektionen, NAXS, Rieber & Son ASA and The Forest Company Limited
Independent member of Fortum's Board of Directors since 2004.
Fortum shareholding on 31 Dec. 2008: 900 (31 Dec. 2007: 0)
Independent member of Fortum's Board of Directors since 2006
Fortum shareholding on 31 Dec. 2008: 0 (31 Dec. 2007: 0)
Deputy Chairman, born 1947, PhD (Econ) Member of the Nomination and Compensation Committee
Chancellor of the Helsinki School of Economics Primary working experience: Chairman of the Board, President and CEO,
TietoEnator Corporation and Tietotehdas Oy Deputy Managing Director, Rautakirja Oy Key positions of trust:
Chairman of the Foundation for Economic Education, Vice Chairman of the Helsinki School of Economics Foundation
Independent member of Fortum's Board of Directors since 2005
Fortum shareholding on 31 Dec. 2008: 0 (31 Dec. 2007: 0)
Born 1962, Law and Political Science studies at the University of Oslo (UiO) Member of the Nomination and Compensation Committee
Primary working experience: Director General, Norwegian Shipowners Association (NSA) Managing Director, Helsevakten Telemed AS, an Umoe Group company Managing Director, Vattenfall Norge AS Director, Department of Information and Industrial Policy, NSA Key positions of trust:
Chairman of the Board of Punkt Ø, Member of the Board of Kverneland and Arendals Fossekompani ASA
Christian Ramm-Schmidt Born 1946, BSc (Econ) Member of the Audit Committee
Senior Partner of Merasco Capital Ltd. Primary working experience: President of Baltic Beverages Holding Ab (BBH) President of Fazer Biscuits Ltd., Fazer Chocolates Ltd., Fazer Confectionery Group Ltd. Director, ISS ServiSystems Oy Key positions of trust: Member of the Board of Rocla Oyj, Suomen
Lähikauppa Oy, Bang & Bonsomer Oy, OOO Moron (Moscow) and OOO Vitim (Moscow)
Independent member of Fortum's Board of Directors since 2005.
Fortum shareholding on 31 Dec. 2008: 0 (31 Dec. 2007: 0)
Independent member of Fortum's Board of Directors since 2006.
Fortum shareholding on 31 Dec. 2008: 3,500 (31 Dec. 2007: 1,000)
Mikael Lilius President and CEO since 2000 Born 1949. BSc (Econ) Employed by Fortum since 2000
President and CEO of Gambro AB, Stockholm, 1998 President and CEO of Incentive AB, Stockholm, 1991 President and CEO of KF Industri AB (Nordico), Stockholm, 1989 President of the Packing Division of Huhtamäki Oy, Helsinki, 1986 Key positions of trust: Chairman of the Board, Huhtamäki Oyj
Vice Chairman of the Board, Sanitec Oy Member of the Board, Hafslund ASA
Fortum shareholding on 31 Dec. 2008: 170,050 (31 Dec. 2007: 170,050)
Mikael Frisk Senior Vice President, Corporate Human Resources, since 2001 Born 1961. MSc (Econ) Member of the Management Team since 2001 Employed by Fortum since 2001
Vice President, HR Global Functions, Nokia Mobile Phones, 1998 Vice President, HR, Nokia-Maillefer, Lausanne, Switzerland, 1993 HR Development Manager, Nokia NCM Division, 1992 HR Development Manager, Oy Huber Ab, 1990 Key positions of trust: Member of the Board, Talentor Group Oy Member of the Board, Staffpoint Oy
Fortum shareholding on 31 Dec. 2008: 25,350 (31 Dec. 2007: 14,900)
Timo Karttinen Senior Vice President, Corporate Development, since 2004 Born 1965. MSc (Eng) Member of the Management Team since 2004 Employed by Fortum since 1991
Business Unit Head, Portfolio Management and Trading, Fortum Power and Heat Oy, 2000 Vice President, Electricity Procurement and Trading, Fortum Power and Heat Oy, 1999 Vice President, Electricity Procurement, Imatran Voima Oy, 1997
Member of the Board, Fingrid Oyj Vice Chairman of the Executive Board, Association of Finnish Energy Industries Member of the Supervisory Board, Gasum Oy Member of the Supervisory Board, AS Eesti Gaas Member of the Trade Policy Committee and Energy Committee, Confederation of Finnish Industries
Fortum shareholding on 31 Dec. 2008: 38,622 (31 Dec. 2007: 30,000)
Tapio Kuula
Senior Vice President since 2005 Born 1957. MSc (Eng), MSc (Econ) Member of the Management Team since 1997 Employed by Fortum since 1996
President, Fortum Power and Heat Oy, 2000– President, Power and Heat Sector, Fortum Oyj, 2000
Executive Vice President, Fortum Power and Heat Oy, 1999
Executive Vice President, Member of the Board, Member of the Management Team, Imatran Voima Oy, 1997
Member of the Board, TGC-1 Chairman of the Board, Teollisuuden Voima Oyj Member of the Supervisory Board, Varma Mutual Pension Insurance Company
Fortum shareholding on 31 Dec. 2008: 64,465 (31 Dec. 2007: 50,050)
Juha Laaksonen Chief Financial Offi cer since 2000 Born 1952. BSc (Econ) Member of the Management Team since 2000 Employed by Fortum since 1979
Corporate Vice President, M&A, Fortum Corporation, 2000 Executive Vice President, Finance & Planning, Fortum Oil & Gas Oy, 1999 CFO, Neste Oyj, 1998 Key positions of trust:
Fortum shareholding on 31 Dec. 2008: 20,000 (31 Dec. 2007: 20,000)
Christian Lundberg Senior Vice President since 2005 Born 1956 Member of the Management Team since 2003 Employed by Fortum since 2003
President, Fortum Markets AB, 2003–2005 Regional Director Nordic/Baltic Services Microsoft, 2001 Regional Director MS Nordic/Baltic Microsoft, 2000 General Manager MS Sweden Microsoft, 1997 Key positions of trust: Member of the Board, Svensk Energi Vice Chairman, EnergiFöretagens Arbetsgivareförening
Fortum shareholding on 31 Dec. 2008: 30,000 (31 Dec. 2007: 30,000)
Maria Paatero-Kaarnakari Senior Vice President, Corporate Strategy, since 2007 Born 1955. MSc (Eng) Member of the Management Team since 2007 Employed by Fortum since 1985
Vice President, Corporate Development, Fortum Corporation, 2000 Manager, Strategic Planning, Neste Oyj, 1998 Business Development Manager, Neste Polyester Inc, USA, 1997 Various managerial positions, Neste Group, 1985
Fortum shareholding on 31 Dec. 2008: 5,751 (31 Dec. 2007: 2,030)
Maria Romantschuk
Senior Vice President, Corporate Communications, since 2007 Born 1956 Member of the Management Team since 2007 Employed by Fortum since 2007
Head of Press Relations and Member of Cabinet, Offi ce of The President of the Republic of Finland, 2000 Press Counselor, Embassy of Finland, Stockholm, Ministry of Foreign Affairs, 1997 Press Secretary to the Minister for Foreign Affairs, Ministry of Foreign Affairs, 1995 Political reporter, Hufvudstadsbladet, 1989 Key positions of trust:
Member of the Board, UNICEF Finland Member of the Board, Svenska Teatern
Fortum shareholding on 31 Dec. 2008: 0 (31 Dec. 2007: 0)
The Annual General Meeting of Fortum Corporation will be held on Tuesday, 7 April 2009 at 14:00 pm at Cable Factory's Merikaapelihalli, address: Tammasaarenlaituri, Entrance J, 00180 Helsinki. The reception of shareholders who have registered for the meeting will commence at 13:00 pm.
The Board of Directors proposes to the Annual General Meeting that Fortum Corporation pay a cash dividend of EUR 1.00 per share for 2008, totalling EUR 888 million based on the number of registered shares as of 4 February 2009.
Listed on NASDAQ OMX Helsinki Trading ticker: FUM1V Number of shares, 4 February 2009: 887,789,330 Sector: Utilities
Mika Paloranta, Vice President, Investor Relations, tel. +358 (0)10 452 4138, fax +358 (0) 10 452 4176, e-mail: [email protected]
Rauno Tiihonen, Manager, Investor Relations, tel. +358 (0)10 453 6150, fax +358 (0) 10 452 4176, e-mail: [email protected]
Financial documents can be obtained from Fortum Corporation, Mail Room, POB 1, FI-00048, FORTUM, Finland, tel. +358 (0)10 452 9151, e-mail: [email protected]
Investor information is available online at www.fortum.com/investors
| Operating & fi nancial review | 86 |
|---|---|
| Financial performance | 86 |
| Risk management | 98 |
| The Fortum share and shareholders | 103 |
| Consolidated fi nancial statements | 108 |
|---|---|
| Consolidated income statement | 108 |
| Consolidated balance sheet | 109 |
| Consolidated statement of changes in total equity | 110 |
| Consolidated cash fl ow statement | 111 |
| Notes to the consolidated fi nancial statements | 112 |
| 1 Accounting policies | 112 |
| 2 Critical accounting estimates and judgments | 122 |
| 3 Financial risk management | 123 |
| 4 Capital risk management | 130 |
| 5 Segment reporting | 130 |
| 6 Fair value changes of derivatives and underlying items in income statement | 134 |
| 7 Acquisitions and disposals | 135 |
| 8 Exchange rates | 137 |
| 9 Other income | 137 |
| 10 Materials and services | 138 |
| 11 Other expenses | 138 |
| 12 Management remuneration and employee costs | 138 |
| 13 Depreciation, amortisation and impairment charges | 140 |
| 14 Finance costs – net | 140 |
| 15 Income tax expense | 141 |
| 16 Earnings per share | 142 |
| 17 Dividend per share | 142 |
| 18 Financial assets and liabilities by categories | 143 |
| 19 Intangible assets | 144 |
| 20 Property, plant and equipment | 144 |
| 21 Participations in associated companies and joint ventures | 147 |
| 22 Other non-current assets | 149 |
| 23 Long-term and short-term interest-bearing receivables | 150 |
| 24 Inventories | 150 |
| 25 Trade and other receivables | 151 |
| 26 Liquid funds | 151 |
| 27 Share capital | 151 |
|---|---|
| 28 Fair value and other reserves | 152 |
| 29 Employee bonus system, personnel fund and incentive schemes | 153 |
| 30 Minority interests | 156 |
| 31 Interest-bearing liabilities | 156 |
| 32 Deferred income taxes | 158 |
| 33 Pension and other provisions | 159 |
| 34 Pension obligations | 159 |
| 35 Nuclear related assets and liabilities | 162 |
| 36 Other non-current liabilities | 163 |
| 37 Trade payables and other current liabilities | 163 |
| 38 Pledged assets | 164 |
| 39 Operating leases | 164 |
| 40 Capital commitments | 164 |
| 41 Contingent liabilities | 165 |
| 42 Legal actions and offi cial proceedings | 165 |
| 43 Related party transactions | 166 |
| 44 Events after the balance sheet date | 166 |
| 45 Subsidiaries by segment on 31 December 2008 | 167 |
| Key fi gures | 169 |
| Financial key fi gures | 169 |
| Share key fi gures | 171 |
| Operational key fi gures, volumes | 172 |
| Operational key fi gures, segments | 173 |
| Definitions of key fi gures | 174 |
| Parent company fi nancial statements, Finnish GAAP (FAS) | 176 |
| Income statement | 176 |
| Balance sheet | 176 |
| Cash fl ow statement | 177 |
| Parent company notes to the fi nancial statements | 177 |
| Proposal for the distribution of earnings | 182 |
| Auditor's report | 183 |
| Statement by the Supervisory Board | 184 |
The year 2008 was a year of big swings in power and commodity prices. In the fi rst half of the year, commodity prices and wholesale power prices increased rapidly. During the second half of the year, all commodity prices and also power prices in the Nordic region declined signifi cantly from the peaks in autumn.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sales | 5,636 | 4,479 | 4,491 |
| Operating profi t | 1,963 | 1,847 | 1,455 |
| Operating profi t, % of sales | 34.8 | 41.2 | 32.4 |
| Comparable operating profi t | 1,845 | 1,564 | 1,437 |
| Profi t before taxes | 1,850 | 1,934 | 1,421 |
| Profi t for the period attributable to equity holders | 1,542 | 1,552 | 1,071 |
| Earnings per share, EUR | 1.74 | 1.74 | 1.22 |
| Net cash from operating activities | 2,002 | 1,670 | 1,151 |
| Shareholders' equity per share, EUR | 8.96 | 9.43 | 8.91 |
| Capital employed | 15,911 | 13,544 | 12,663 |
| Interest-bearing net debt | 6,179 | 4,466 | 4,345 |
| Equity to assets ratio, % | 41 | 49 | 48 |
| Average number of shares, 1,000s | 887,256 | 889,997 | 881,194 |
| Target | 2008 | 2007 Adjusted1) |
2007 | 2006 | |
|---|---|---|---|---|---|
| ROCE, % | 12 | 15.0 | 14.0 | 16.5 | 13.4 |
| ROE, % | 14 | 18.7 | 15.8 | 19.1 | 14.4 |
| Capital structure: Net debt / EBITDA | 3.0–3.5 | 2.5 | 2.2 | 1.9 | 2.3 |
1) Adjusted for REC and Lenenergo gains.
In 2008, Fortum took a major strategic step in Russia through the acquisition of Territorial Generating Company 10 (TGC-10). The acquisition gave Fortum a signifi cant presence in Russia's fast-evolving power markets. The acquisition doubled Fortum's heat production capacity, increased power generation capacity by over 25% and added over 7,000 employees to Fortum.
Fortum's 2008 comparable operating profi t improved signifi cantly from a year ago, driven by better results in the Power Generation segment. Fortum's consistent hedging strategy, higher average Nord Pool spot prices and higher hydropower volumes contributed to the improvement.
Fortum's earnings per share in 2008 were at the same level as a year ago, despite the higher amount of positive one-time items in 2007 earnings. In 2007, non-recurring sales gains amounted to EUR 412 million (Hafslund's REC shares, Lenenergo), corresponding to EUR 0.46 per share. In 2008, sales gains and a positive one-time tax effect amounted to EUR 184 million in net earnings, corresponding to EUR 0.21 per share. The tax effect is due to the lowering of corporate tax rates in Sweden and Russia, leading to a reduction in deferred tax liabilities.
The decline in the Swedish currency especially during the last two months of the year affected Fortum's operating profi t negatively. The average SEK rate in 2008 declined by approximately 5% from 2007. The negative effect from the decline on the average SEK rate was approximately EUR 50 million in Fortum's 2008 comparable operating profi t. The effect mainly impacted fourth quarter earnings.
In 2008, the average system spot price in Nord Pool was EUR 44.7 per megawatthour (MWh), with the Finnish area price being EUR 51.0 per MWh and the Swedish area price EUR 51.1 per MWh. Power Generation's achieved Nordic power price was EUR 49.3 per MWh, up by 24% from a year ago.
Return on capital employed
Discontinued oil operations Incl. REC and Lenenergo gains Operating profit
Return on shareholders' equity
%
Discontinued oil operations Incl. REC and Lenenergo gains
According to preliminary statistics, the Nordic countries consumed 395 terawatt-hours (TWh) (2007: 401) of electricity in 2008, about 1% less than in the previous year. During the last quarter, consumption was about 5% less than the year before.
Year 2008 started with the Nordic water reservoirs being 9 TWh above the long-term average and remained above the average until late August. At the end of December, the Nordic water reservoirs were 5 TWh below the long-term average and 13 TWh below the corresponding level last year.
During 2008, the average spot price for power in Nord Pool was EUR 44.7 per MWh (2007: 27.9), or 60% higher than in 2007. The Nord Pool spot price was higher mainly due to higher fuel and CO2 prices.
In Germany, the average spot price for the fourth quarter was EUR 68.0 per MWh (2007: 57.7), being higher than in the Nordic area. This resulted in a net export from the Nordic area to Germany.
During 2008, the average market price of CO2 emission allowances (EUA) for 2008 was EUR 23 per tonne CO2. In 2007, the corresponding price for CO2 emission allowances for 2007 was EUR 0.7 per tonne CO2. Coal and oil prices decreased during the second half of 2008.
During the year, the average spot price for power for the European and Urals part of Russia in the Russian electricity exchange ATS was RUR 700 (2007: 570), approximately EUR 19.1 per MWh (2007: 16.3). The increase in the spot price was mainly due to higher gas prices. In addition, there is a capacity tariff for power generation, which varies by production unit but is, on average, approximately EUR 10 per MWh.
Fortum's total power generation was 64.2 TWh (2007: 52.2), of which 51.6 TWh (2007: 51.1) was in the Nordic countries, representing 13% (2007: 13%) of the total Nordic electricity consumption. Fortum's total heat generation was 40.3 TWh (2007: 26.1), of which 20.8 TWh (2007: 22.1) was in the Nordic countries.
At year end, Fortum's total power generating capacity was 13,573 megawatt (MW) (2007: 10,920), of which 10,643 MW (2007: 10,775) was in the Nordic countries. At year end, Fortum's total heat production capacity was 24,263 MW (2007: 11,223), of which 8,448 MW (2007: 9,381) was in the Nordic countries. The increase in the total power and heat generation volumes and capacities are mainly due to the inclusion of TGC-10, consolidated from the beginning of April.
Fortum's total power and heat generation fi gures are presented below. In addition, the segment reviews include the respective fi gures by segment.
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Power generation | 52.6 | 52.2 | 54.4 |
| Heat generation | 25.0 | 26.1 | 25.8 |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Power generation | 11.6 | - | - |
| Heat generation | 15.3 | - | - |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Hydropower | 22.9 | 20.0 | 19.8 |
| Nuclear power | 23.7 | 24.9 | 24.4 |
| Thermal power | 5.0 | 6.2 | 9.0 |
| Total | 51.6 | 51.1 | 53.2 |
| % | 2008 | 2007 | 2006 |
|---|---|---|---|
| Hydropower | 44 | 39 | 37 |
| Nuclear power | 46 | 49 | 46 |
| Thermal power | 10 | 12 | 17 |
| Total | 100 | 100 | 100 |
Fortum's total power sales were 75.0 TWh (2007: 59.7), of which 59.1 TWh (2007: 58.5) were in the Nordic countries. This represents approximately 15% (2007: 15%) of estimated Nordic electricity consumption during 2008. Fortum's total heat sales were 42.2 TWh (2007: 27.1), of which 20.0 TWh (2007: 20.4) were in the Nordic countries.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Electricity sales | 2,959 | 2,370 | 2,437 |
| Heat sales | 1,157 | 1,096 | 1,014 |
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Electricity sales | 332 | - | - |
| Heat sales | 141 | - | - |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Finland | 28.7 | 29.0 | 29.6 |
| Sweden | 28.5 | 27.6 | 28.5 |
| Russia | 14.8 | - | - |
| Other countries | 3.0 | 3.1 | 3.5 |
| Total | 75.0 | 59.7 | 61.6 |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Russia | 15.3 | - | - |
| Finland | 10.8 | 11.1 | 10.7 |
| Sweden | 9.1 | 9.2 | 9.3 |
| Poland | 3.6 | 3.5 | 3.6 |
| Other countries 2) | 3.4 | 3.3 | 3.2 |
| Total | 42.2 | 27.1 | 26.8 |
1) Nord Pool transactions are calculated as a net amount of hourly sales and purchases at the Group level. 2) Including the UK, which is reported in the Power Generation segment, other sales.
In 2008, approximately 92% (2007: 89%) of the power generated by Fortum within the EU countries was CO2-free.
Fortum's total CO2 emissions subject to the EU's emissions trading scheme (ETS) amounted to 7.2 million tonnes of CO2.
Fortum's total annual CO2 allowance allocation for its power and heat plants is approximately 5.9 million tonnes per year during 2008–2012. In Finland, Fortum's CO2 allocation is approximately 4.1 million tonnes of CO2 per annum, representing 11% of the Finnish national allocation. In Sweden, Fortum's CO2 allocation is approximately 0.2 million tonnes of CO2 per annum, representing 0.7% of the Swedish national allocation.
Fortum's target in the EU countries is to decrease its emissions in power generation to less than 80 g/kWh by 2020 as a fi ve-year average. In heat production, Fortum aims at reducing the specifi c emissions in each country by at least 10% from 2006 until 2020. Outside the EU, Fortum is committed to increasing the energy effi ciency, thus reducing specifi c emissions.
| Million tonnes | 2008 | 2007 | 2006 | 2005 |
|---|---|---|---|---|
| Total emissions | 17.6 | 10.4 | 11.0 | 6.3 |
| Emissions subject to ETS | 7.2 | 9.8 | 10.5 | 5.9 |
| Free emission allocation | 5.9 | 8.1 | 8.1 | 8.1 |
| Emissions in Russia | 9.8 | - | - | - |
| g/kWh | 2008 | 2007 | 2006 | 2005 |
|---|---|---|---|---|
| Specifi c emissions within ETS | 41 | 64 | 107 | 38 |
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Power Generation | 2,892 | 2,350 | 2,439 |
| Heat | 1,466 | 1,356 | 1,268 |
| Distribution | 789 | 769 | 753 |
| Markets | 1,922 | 1,683 | 1,912 |
| Russia | 489 | - | - |
| Other | 83 | 81 | 78 |
| Netting of Nord Pool transactions 1) | –1,736 | –1,163 | 1,905 |
| Eliminations | –269 | –597 | –54 |
| Total | 5,636 | 4,479 | 4,491 |
1) Sales and purchases with Nord Pool are netted on Group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Power Generation | 1,528 | 1,095 | 985 |
| Heat | 250 | 290 | 253 |
| Distribution | 248 | 231 | 250 |
| Markets | –33 | –1 | –4 |
| Russia | –92 | - | - |
| Other | –56 | –51 | –47 |
| Total | 1,845 | 1,564 | 1,437 |
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Power Generation | 1,599 | 1,115 | 980 |
| Heat | 307 | 294 | 264 |
| Distribution | 248 | 233 | 252 |
| Markets | –35 | 12 | –6 |
| Russia | –91 | 244 | - |
| Other | –65 | –51 | –35 |
| Total | 1,963 | 1,847 | 1,455 |
Group sales were EUR 5,636 million (2007: 4,479). Group operating profi t totalled EUR 1,963 million (2007: 1,847). Comparable operating profi t increased to EUR 1,845 million (2007: 1,564).
The Group's net fi nancial expenses increased to EUR 239 million (2007: 154). The increase is attributable to a higher average level of debt and higher short-term interest rates. The change in fair value of derivatives was EUR –11 million (2007: 7).
Profi t before taxes was EUR 1,850 million (2007: 1,934).
Taxes for the period totalled EUR 254 million (2007: 326). The tax rate according to the income statement was 13.7% (2007: 16.9%). The tax rate in 2008 was lowered by the one-time booking due to a reduction in deferred tax liabilities, stemming from the lowering of corporate tax rates in Sweden and Russia. The tax rate in 2007 was lowered by the non-taxable gains from Hafslund's sale of REC shares and from the sale of Lenenergo shares.
Minority interests accounted for EUR 54 million (2007: 56). The minority interests are mainly attributable to Fortum Värme Holding AB, in which the City of Stockholm has a 50% economic interest.
The profi t for the period was EUR 1,542 million (2007: 1,552). Fortum's earnings per share were EUR 1.74 (2007: 1.74).
Fortum's total equity stood at EUR 7,954 million (2007: 8,359). The equity was lowered by translation effects due to lower SEK, NOK and RUB exchange rates at year end, while cash fl ow hedges (mainly power derivatives) contributed positively.
Hafslund ASA is showing the fair value change in the REC shareholding through the income statement, while Fortum is showing the fair value change in equity. The fair value booked in Fortum's equity and based on the number of shares reported by Hafslund ASA was EUR 126 million at the end of December 2008 (EUR 793 million at the end of 2007).
Return on capital employed was 15.0% (2007: 16.5%), and return on shareholders' equity was 18.7% (2007: 19.1%).
Profit before tax
The business area comprises power generation and sales in the Nordic countries and the provision of operation and maintenance services in the Nordic area and selected international markets. The Power Generation segment sells its production to Nord Pool. The segment includes the business units Generation, Portfolio Management and Trading (PMT), and Service.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sales | 2,892 | 2,350 | 2,439 |
| power sales | 2,566 | 2,019 | 2,059 |
| other sales | 326 | 331 | 380 |
| Operating profi t | 1,599 | 1,115 | 980 |
| Comparable operating profi t | 1,528 | 1,095 | 985 |
| Net assets (at period-end) | 5,331 | 5,599 | 5,690 |
| Return on net assets, % | 29.6 | 19.2 | 17.5 |
| Comparable return on net assets, % | 28.0 | 18.9 | 17.4 |
| Gross investments | 134 | 145 | 100 |
| Number of employees | 3,520 | 3,511 | 4,147 |
In 2008, the segment's power generation in the Nordic countries was 46.9 TWh (2007: 46.1). Approximately 97% (2007: 95%) of the segment's power generation was CO2-free.
Comparable operating profi t of the Power Generation segment was clearly higher than last year. The segment's higher achieved Nordic power price and all-time high hydropower generation were the main drivers for the achievement. The positive effects were partly offset by unplanned nuclear outages in Sweden, lower thermal
Segment's power generation
power generation volumes and higher nuclear capacity tax and hydro property taxes in Sweden. The additional cost from these tax increases was approximately EUR 25 million in 2008.
The translation effect from weaker SEK was approximately EUR –35 million mainly in last quarter. The segment's comparable operating profi t in 2008 does not include material gains from the sale of CO2 allowances as it did in 2007.
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Hydropower | 22.9 | 20.0 | 19.8 |
| Nuclear power | 23.7 | 24.9 | 24.4 |
| Thermal power | 0.3 | 1.2 | 4.1 |
| Total | 46.9 | 46.1 | 48.3 |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sweden | 26.8 | 26.0 | 27.1 |
| Finland | 20.1 | 20.1 | 21.1 |
| Other countries | 1.0 | 1.1 | 1.2 |
| Total | 47.9 | 47.2 | 49.4 |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total | 52.1 | 51.8 | 53.9 |
| of which pass-through sales | 3.7 | 5.2 | 4.5 |
| EUR/MWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Generation's Nordic power price 1) | 49.3 | 39.7 | 37.1 |
1) For the Power Generation segment in the Nordic area, excluding pass-through sales.
TWh
In 2008, the average system spot price in Nord Pool was EUR 44.7 per MWh, with the Finnish area price being EUR 51.0 per MWh and the Swedish area price EUR 51.1 per MWh. Generation's achieved Nordic power price was EUR 49.3 per MWh, up by 24% from a year ago.
In Finland, Fortum is participating in the country's fi fth nuclear power plant unit, Olkiluoto 3, with an approximately 25% share, representing some 400 MW in capacity. In January 2009, TVO disclosed information, confi rmed by Areva-Siemens, that the construction of the unit is delayed and the unit is estimated to start up in summer 2012. In December 2008, the constructor TVO informed that the plant supplier, consortium AREVA-Siemens, had filed a request for arbitration in the International Chamber of Commerce (ICC) concerning the Olkiluoto 3 delay and related costs.
The business area comprises heat generation and sales in the Nordic countries and other parts of the Baltic Rim. Fortum is a leading heat producer in the Nordic region. The segment also generates power in combined heat and power plants (CHP) and sells it to end-customers mainly through long-term contracts, as well as to Nord Pool. The segment includes the business units Värme, operating in Sweden, and Heat, operating mainly in other markets.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sales | 1,466 | 1,356 | 1,268 |
| heat sales | 1,120 | 1,053 | 976 |
| power sales | 228 | 202 | 198 |
| other sales | 118 | 101 | 94 |
| Operating profi t | 307 | 294 | 264 |
| Comparable operating profi t | 250 | 290 | 253 |
| Net assets (at period-end) | 3,468 | 3,507 | 3,407 |
| Return on net assets, % | 8.9 | 9.3 | 9.6 |
| Comparable return on net assets, % | 7.3 | 9.2 | 9.2 |
| Gross investments | 431 | 327 | 773 |
| Number of employees | 2,318 | 2,279 | 2,345 |
The segment's heat sales during the year totalled 24.9 TWh (2007: 25.1). Power sales at combined heat and power plants (CHP) totalled 4.7 TWh (2007: 5.0).
The Heat segment's comparable operating profi t during 2008 was EUR 40 million lower than the previous year, mainly due to the warm weather, higher fuel prices, CO2 emission costs, maintenance costs due to unavailability of some CHP plants and SEK depreciation.
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Finland | 10.8 | 11.1 | 10.7 |
| Sweden | 9.1 | 9.2 | 9.3 |
| Poland | 3.6 | 3.5 | 3.6 |
| Other countries | 1.4 | 1.3 | 1.1 |
| Total | 24.9 | 25.1 | 24.7 |
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Total | 4.7 | 5.0 | 5.0 |
Fortum owns and operates distribution and regional networks and distributes electricity to a total of 1.6 million customers in Sweden, Finland, Norway and Estonia.
| 2008 | 2007 | 2006 |
|---|---|---|
| 753 | ||
| 636 | ||
| 77 | 81 | 80 |
| 37 | ||
| 252 | ||
| 248 | 231 | 250 |
| 3,032 | 3,239 | 3,412 |
| 8.1 | 7.7 | 8.4 |
| 8.2 | 7.6 | 8.3 |
| 296 | 237 | 313 |
| 1,336 | 1,063 | 983 |
| 789 669 43 248 |
769 648 40 233 |
In 2008 the volume of distribution and regional network transmissions totalled 25.8 TWh (2007: 26.0) and 17.7 TWh (2007: 18.1), respectively. Electricity transmissions via the regional distribution network totalled 14.8 TWh (2007: 14.9) in Sweden and 2.9 TWh (2007: 3.2) in Finland.
The comparable operating profi t of the Distribution segment was EUR 248 million, EUR 17 million higher than the previous year. Depreciations on meters for automatic meter reading started in the second half of 2008. In 2007, the segment's result was negatively affected by winter storms in Sweden and price adjustments to customers in Finland.
The Swedish Energy Market Inspectorate (Energimarknadsinspektionen) and Swedish energy companies reached an agreement on 2003–2008 network tariffs. As a part of the agreement, Fortum has accepted to withdraw a planned price increase for the West Coast area and to make a one-time payback of EUR 2 million to Fortum's Stockholm area distribution customers.
The main roll-out of new smart meters (Automated Meter Management, AMM) in Sweden was fi nalised during December 2008. By the end of the year, about 800,000 meters out of the 835,000 were installed, of which 690,000 have been activated for monthly meter reading. The remaining meters will be installed during the coming months. The legislation for monthly meter reading takes effect as of 1 July 2009.
| TWh | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sweden | 14.0 | 14.3 | 14.4 |
| Finland | 9.3 | 9.2 | 7.7 |
| Norway | 2.3 | 2.3 | 2.3 |
| Estonia | 0.2 | 0.2 | 0.2 |
| Total | 25.8 | 26.0 | 24.6 |
| Thousands | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sweden | 877 | 871 | 865 |
| Finland | 606 | 591 | 580 |
| Norway | 99 | 98 | 97 |
| Estonia | 24 | 24 | 23 |
| Total | 1,606 | 1,584 | 1,565 |
Markets is responsible for retail sales of electricity to a total of 1.3 million private and business customers as well as to other electricity retailers in Sweden, Finland and Norway. Markets buys its electricity through Nord Pool. Markets sells approximately 75% of its volumes to business customers and 25% to retail consumers.
| Sales 1,922 1,683 1,912 power sales 1,865 1,582 1,831 other sales 57 101 81 Operating profi t –35 12 –6 Comparable operating profi t –33 –1 –4 Net assets (at period-end) 188 247 176 Return on net assets, % –14.0 6.9 –1.6 Comparable return on net assets, % –15.3 –0.6 –0.8 Gross investments 3 3 14 Number of employees 635 935 825 |
EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|---|
In 2008, Markets was unable to fully pass on the increased wholesale prices and procurement costs in its retail sales prices.
Due to continuing unsatisfactory business performance, a restructuring programme was launched in 2008. Several cost-saving actions were initiated. The employee negotiations in Finland and Sweden to centralise Markets' service activities were fi nalised by the end of 2008. Markets' new organisation was published at the beginning of 2009.
The segment comprises power and heat generation and sales in Russia. The segment includes TGC-10 and Fortum's holding in TGC-1. TGC-10 is accounted for as a subsidiary and fully consolidated from 1 April 2008. TGC-1 is an associated company and accounted for using the equity method.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Sales | 489 | - | - |
| power sales | 332 | - | - |
| heat sales | 141 | - | - |
| other sales | 16 | - | - |
| Operating profi t | –91 | 244 | - |
| Comparable operating profi t | –92 | - | - |
| Net assets (at period-end) | 2,205 | 456 | 294 |
| Return on net assets, % | –3.7 | 66.3 | 0.0 |
| Comparable return on net assets,% | –3.8 | 0.0 | 0.0 |
| Gross investments | 1,748 | 245 | 140 |
| Number of employees | 7,262 | - | - |
TGC-10 operates in well-developed industrial regions of the Urals and Western Siberia. The growing activities of oil and gas companies and the increase in housing construction are the main drivers behind the increasing power and heat demand in the region.
In 2008 segment's power sales amounted to 14.8 TWh and heat sales of the segment totalled 15.3 TWh.
TGC-10 fi gures have been consolidated starting from the beginning of April 2008. In 2008 the segment booked a comparable operating loss amounting to EUR 92 million.
The loss for the three consolidated quarters is explained by TGC-10's stand-alone loss of EUR 33 million, the surplus value depreciation of EUR 38 million (depreciation on the EUR 1,022 million that has been allocated to the fair value of TGC-10's property, plant and equipment), and integration costs of EUR 21 million.
Russian power sector reform is proceeding. Starting from 1 January 2009, 30% of all produced power is sold on the competitive market. The wholesale power market is expected to be fully liberalised by 2011. The capacity market was launched at the beginning of July 2008, as planned.
In August 2008, the contract was signed for the biggest project in the investment programme, the construction of the power island of Nyagan power plant (capacity 1,200 MW).
Construction work commenced at the Tyumen, Tobolsk and Chelyabinsk CHP sites.
In September, Fortum announced that it will gain approximately 1.5 million tonnes of emission reduction units (ERU) from joint implementation projects conducted at TGC-10 between 2009 and 2012.
Fortum is putting considerable focus on the integration of TGC-10 as a part of Fortum. The integration process started in April 2008. The new organisational structure and Fortum's management model have been in place since the beginning of September 2008. The integration has proceeded well and several targets for effi ciency improvements have been identifi ed. Consequently, the annual effi ciency improvements are expected to be approximately EUR 100 million by 2011.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Capital expenditure | |||
| Intangible assets | 24 | 11 | 21 |
| Property, plant and equipment | 1,084 | 644 | 464 |
| Total | 1,108 | 655 | 485 |
| Gross investments in shares | |||
| Subsidiaries | 1,506 | 18 | 765 |
| Associated companies | 8 | 295 | 124 |
| Available for sale fi nancial assets | 2 | 4 | 21 |
| Total | 1,516 | 317 | 910 |
Capital expenditures and investments in shares in 2008 totalled EUR 2,624 million (2007: 972). Investments, excluding acquisitions, were EUR 1,108 million (2007: 655).
gross investments in shares
EUR million
0 500 1,000 1,500 2,000 2,500 3,000
Investments in shares Capital expenditure
04 05 06 07 08
In June, Fortum and Hafslund Infratek ASA signed a letter of intent with the aim to combine Fortum Service's Infrastructure Solutions operations with Hafslund Infratek.
The deal concerns all Infrastructure Solutions operations in Sweden, Norway and Finland and altogether 1,060 Fortum employees. In January 2009, the Norwegian competition authorities accepted the establishment of Infratek ASA and the deal was closed. Fortum's ownership of the new combined company Infratek ASA is 33%. Hafslund ASA holds 43.3% of the shares in the combined company. Infratek ASA is listed on the Oslo Stock Exchange.
The construction work of new CHP-plants in Częstochowa in Poland, in Tartu in Estonia and in Suomenoja, Finland, continued and investments were EUR 134 million (2007: 58).
In October, Heat sold its 60% share of a company operating a CHP plant in Jyväskylä, Finland. The transaction took effect at the end of 2008.
Investments, excluding acquisitions, were EUR 296 million (2007: 236). The AMM investment programme represented EUR 104 million (2007: 64) of this.
In the fi rst quarter of 2008, Fortum acquired a controlling stake (76.5%) in the Russian Territorial Generating Company No. 10 (TGC-10), consisting of a 29.1 percentage-point share acquisition from United Energy Systems of Russia (RAO UES), for approximately EUR 0.8 billion, and a 47.4 percentage-point share issue for approximately EUR 1.3 billion.
In the second quarter, Fortum fi led the mandatory public tender offer to TGC-10's minorities. The period of offer was from 30 April until 18 October 2008. The tender offer covered 23.51% of the share capital of TGC-10 and was launched at a price of 111.8 roubles (approximately EUR 3) per share to be fully paid in cash. The tender price was the same price Fortum paid for its shares acquired through the auction and share issue, and it represented a signifi cant premium to the market price. At the end of December, Fortum's ownership in TGC-10 was 93.4%, and by that time Fortum had paid EUR 465 million for the additional share purchases.
TGC-10 has an extensive investment programme aiming to increase its power capacity to 5,300 MW. In October, Fortum estimated the value of the investment programme in new capacity to be approximately EUR 2.5 billion. The value for the remaining part of the programme, calculated at year-end exchange rates, is estimated to be EUR 2.0 billion from January 2009 onwards.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Interest expense | –351 | –220 | –176 |
| Interest income | 143 | 76 | 50 |
| Fair value gains and losses | –11 | 7 | 30 |
| Other fi nancial expenses | –20 | –17 | –7 |
| Finance costs - net | –239 | –154 | –103 |
| Interest-bearing liabilities | 7,500 | 4,893 | 4,502 |
| Liquid funds | 1,321 | 427 | 157 |
| Interest-bearing net debt | 6,179 | 4,466 | 4,345 |
At year end, the interest-bearing net debt stood at EUR 6,179 million (2007: 4,466), resulting in a total increase in net debt during the year of EUR 1,713 million.
Cash fl ow during the year was strong with funds from operations amounting to EUR 2,104 million (2007: 1,619). Net cash used in investing activities was EUR 2,282 million (2007: 609). Capital expenditures EUR 1,018 million (2007: 592) and acquisitions EUR 1,243 million (2007: 285) were higher than during last years, and together with the dividend payment to shareholders of EUR 1,198 million are the main explanations for the increase in interest-bearing net debt.
Net debt to EBITDA for 2008 was 2.5 (2007: 1.9).
The Group's net fi nancial expenses in 2008 were EUR 239 million (2007: 154). The increase in fi nancial expenses is attributable to higher average net debt and higher average interest rates in 2008 compared to 2007. Net fi nancial expenses include fair value losses on fi nancial instruments of EUR 11 million (2007: fair value gain 7).
The average interest rate of Fortum's interest-bearing debt (including derivatives) for 2008 was 5.3% (2007: 4.3%).
Group liquidity remained strong. Year-end liquid funds totalled EUR 1,321 million (2007: 427), of which EUR 1,020 million was in TGC-10. In addition, the Group had a total of approximately EUR 2.3 billion (2007: 1.4) available for drawings under committed credit facilities.
During the year, Fortum raised a syndicated loan facility of EUR 3,500 million. The loan facility is structured as a 3-year term-loan of EUR 2,000 million to be used for acquisition fi nancing of TGC-10, and as a 5-year revolving credit facility of EUR 1,500 million. At year end the term-loan was fully drawn and EUR 600 million of the new revolving credit facility was drawn. Short-term fi nancing (mainly issuance of Commercial paper) increased to EUR 520 million at year end (year-end 2007: 26). Fortum Corporation's long-term credit rating from Moody's and Standard & Poor's was "A2" (outlook stable) and "A–" (outlook stable) respectively.
Interest-bearing net debt
Total, incl. discontinued oil operations
The average number of employees in the Group during the period from January to December was 14,077 (2007: 8,304). The number of employees at the end of the period was 15,579 (2007: 8,303), of which 15,264 (2007: 7,954) were permanent employees.
The increase in the number of employees is due to the acquisition of TGC-10.
The number of employees in the parent company, Fortum Corporation, at year end totalled 434 (2007: 583).
| 2008 | 2007 | 2006 | |
|---|---|---|---|
| Number of employees | 15,579 | 8,303 | 8,134 |
| Average number of employees | 14,077 | 8,304 | 8,910 |
| Total amount of employee costs, EUR million | 587 | 495 | 508 |
For further details of group personnel see Note 12 Management remuneration and employee cost on page 138 of the Consolidated Financial Statements. See also pages 47–49 of the Annual report.
Fortum and the Norwegian Hafslund Infratek ASA combined their businesses of construction and operating of infrastructure in Sweden, Finland and Norway as of 15 January 2009.
On February 4, the Fortum Board decided in their meeting that Fortum will on February 5 submit its application to the Finnish government for a decision-in-principle on the construction of a nuclear power plant unit to its Loviisa site, where Fortum already owns and operates two nuclear reactors. According to preliminary plans, the plant could be in operation in 2020. The plant's planned lifetime would be at least 60 years. Depending on the size and type of the reactor, the total investment is estimated to be EUR 4–6 billion.
The key market driver infl uencing Fortum's business performance is the wholesale price of electricity. Key drivers behind wholesale price development are the supplydemand balance, CO2 emissions allowance and fuel prices as well as the hydrological situation.
The exchange rates of the Swedish krona and Russian rouble also affect Fortum's fi nancials. The balance sheet translation effects from potential changes in currency exchange rates are booked in Fortum's equity.
The on-going economic and fi nancial slowdown may continue to depress power demand in the markets where Fortum operates. Lower power demand and commodity prices, which may be further affected by the recession, have a negative impact on power prices. The on-going economic crisis may also increase Fortum's counterparty risk.
Fortum's fi nancial results are exposed to a number of strategic, fi nancial and operational risks.
For further details on Fortum's risks and risk management, see Risk management section of the Operating and Financial Review on page 98 and Note 3 Financial risk management on page 123 in the Consolidated Financial Statements.
Economic slowdown is expected to further affect electricity consumption growth in the Nordic countries. In the longer term, electricity consumption in the Nordic countries is predicted to increase by less than 1% a year.
In Russia, one of the key assumptions in the TGC-10 acquisition is the continuation of the Russian power sector reform. As planned, the share of power sold at a competitive price was increased from 15% to 25% on 1 July 2008 and further to 30% in the beginning of 2009. The share is planned to be increased to 50% at the beginning of July 2009. The fi rst phase of the capacity market was launched at the beginning of July. The rules for the long-term capacity market, taking place from 2011 onwards, are under preparation. The wholesale power market is expected to be fully liberalised in 2011.
TGC-10 is committed and contractually obligated to a signifi cant investment programme, still amounting to approximately EUR 2.0 billion for 2009 and onwards. However, the economic slowdown is likely to further affect the Russian power demandsupply balance. Fortum as well as other power companies in Russia are currently in the process of analysing the effects from changed economic conditions and their potential impact on the timing of investment programmes.
The acquisition of TGC-10 is expected to marginally dilute Fortum's EPS during 2009. Annual effi ciency improvements are expected to be approximately EUR 100 million in 2011.
In late January 2009, the Nordic water reservoirs were about 4 TWh below the longterm average and 14 TWh below the corresponding level of 2008. In late January, the market price for emissions allowances (EUA) for 2009 was about EUR 12 per tonne CO2. At the same time, the electricity forward price for the rest of 2009 was around EUR 38–39 per MWh and for 2010 around EUR 34–36 per MWh.
The fi rst and last quarters of the year are usually the strongest quarters for the power and heat businesses.
Fortum Power Generation's achieved Nordic power price typically depends on e.g. the hedge ratio, hedge price, spot prices, availability and utilisation of Fortum's fl exible production portfolio and currency fl uctuations. Excluding the potential effects from the changes in the power generation mix, a 1 EUR/MWh change in Generation's achieved Nordic sales price results in an approximately EUR 50 million change in Fortum's annual operating profi t.
At the end of January 2009, Fortum had hedged approximately 65% of the Power Generation segment's estimated Nordic electricity sales volume for the rest of 2009 at approximately EUR 53 per MWh. For the calendar year 2010, approximately 50% of the Power Generation segment's estimated Nordic electricity sales volume was hedged at approximately EUR 46 per MWh.
The reported hedge ratios may vary signifi cantly depending on Fortum's actions on the electricity derivatives markets. Hedges are mainly fi nancial contracts, most of them Nord Pool forwards or standardised futures, consisting of several types of products and maturities. Hedge prices are also infl uenced by changes in the SEK/EUR exchange rates, as some of the hedges are conducted in SEK.
Fortum's results in 2008 were good. A fl exible and climate-benign production portfolio accompanied by a strong fi nancial position and liquidity enable Fortum to meet the challenges caused by the fi nancial crisis. Fortum is in a stable position to weather the turbulence, despite the lower visibility beyond 2009.
R&D activities are geared towards Fortum's long-term goal to be a carbon dioxide-free company. Activities are based on building networks and partnerships with leading research organisations, engineering companies, and equipment and plant suppliers. Fortum also conducts in-house research and development in strategically signifi cant key areas.
In 2008, key achievements in R&D were:
The group's total R&D expenditure in 2008 was EUR 27 million (2007: 21). The increase in expenses is mainly attributable to new activities and the technology investments initiated in 2008.
Fortum's R&D expenditure amounts to 0.5% of sales (2007: 0.5%) and 0.8% (2007: 0.8%) of total expenses. Fortum's R&D expenditure is above average level compared to European power and heat companies.
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| R&D expenditure, EUR million | 27 | 21 | 17 |
| R&D expenditure, % of sales | 0.5 | 0.5 | 0.4 |
| R&D expenditure, % of total expenses | 0.8 | 0.8 | 0.6 |
For further details on research and development, see pages 36–37 of the Annual Report.
Fortum's vision statement "to be the benchmark power and heat company excelling in sustainability" expresses the company's fi rm belief that sustainability is a success factor for its business.
In accordance with the vision statement, Fortum revisited and updated its Sustainability Agenda in 2008. The new agenda has three important elements: the desired future position for Fortum, our goals for 2020 and the actions to reach those goals.
The desired position defi nes our strategic ambitions. We want to:
Mitigating climate change is one of Fortum's most important strategic goals. The company strives to keep the climate impact from own activities at a minimum. In the long-term, Fortum's vision is to be a CO2-free power and heat company.
In 2008, 92% of the power generated by Fortum within the EU countries was CO2-free. The specifi c CO2 emissions in the EU countries were 41 g/kWh, which continues to be among the lowest of the major European power companies. Fortum's target is to decrease its emissions in power generation to less than 80 g/kWh by 2020 as a fi ve-year average. In heat production, Fortum aims at reducing the specifi c emissions in each country by at least 10% from 2006 until 2020. Outside the EU, Fortum is committed to increasing the energy effi ciency of power plants and thus reducing specifi c emissions.
In 2008 Fortum's total CO2 emissions subject to the EU's emissions trading scheme (ETS) amounted to 7.2 million tonnes of CO2.
Total CO2 emissions from Fortum's own power plants increased sharply in 2008 due to the acquisition of TGC-10 in Russia, as its power generation is largely based on natural gas. In 2008, CO2 emissions from Fortum's own power plants in Russia were 9.8 million tonnes. In 2008 Fortum's total emissions were 17.6 million tonnes of CO2.
An Environment, Health and Safety (EHS) action plan was defi ned to raise TGC- 10's EHS performance closer to the level of Fortum's other plants. The resulting plan consists of actions to be initiated immediately and issues that need to be investigated further before specifi ed targets can be set. Issues to be addressed include increased energy effi ciency, emission reductions and improved occupational health and safety, The EHS action plan will be revised on an annual basis when more precise information is available on how improvements can be achieved in the most feasible way. One of the fi rst actions is to establish an adequate EHS organisation with skilled professionals to ensure a consistent development of EHS affairs in the company. The target is to become ISO 14001 certifi ed by 2012.
In 2008, there were a total of 63 occupational accidents (2007: 40) leading to an absence of more than one working day. This means 4.3 injuries (2007: 2.9) per one million working hours, which was above Fortum's target value of 2 for 2008. In order to meet the new very ambitious target of less than 1 injury per million working hours in 2010, Fortum will step up its safety efforts further.
In 2008, the Fortum Code of Conduct, which establishes principles for business conduct applicable throughout the company were introduced to all personnel. All Fortum employees are expected to conduct themselves, and their business, in compliance with the Code – without exception. During the year 93% of Fortum employees participated in a roll-out process, the purpose of which was to familiarise themselves with the principles of the Code. The Board of Directors approved the Fortum Code of Conduct in 2007.
For further details on Sustainability see pages 39–51 in the Annual report.
Risk management is an integrated part of business planning and performance management. Its purpose is to enable the execution of the company's strategy and to support the business in achieving fi nancial targets.
Involvement in the power and heat business exposes Fortum to several types of fi nancial, operational and strategic risks. Electricity prices, which in turn are affected by the weather in the Nordic region and the development of the global commodity markets, are the main source of fi nancial risk.
Fortum is continuously developing its risk management capabilities to cope with prevailing market conditions, developing operations and an ever changing business environment. During 2008 the global fi nancial crisis has set pressure on all areas of risk management. The impacts can been seen in funding and refi nancing risks as well as other counterparty risks and long-term price development. In the Risk Management development work the focus has been on further enhancing the framework for operational risk management especially within the concept of internal controls.
Fortum's Board of Directors approves the Corporate Risk Policy which sets the objective, principles and division of responsibilities for risk management activities within the Group as well as defi ning the overall risk management process.
Corporate guidelines are issued for those risks which are managed on Group level. Corporate Treasury is responsible for managing the Group's currency, interest rate, and liquidity and refi nancing risks as well as for insurance management. Corporate Credit Control is responsible for assessing and consolidating the Group's exposure to counterpart risk, monitoring the creditworthiness of counterparts and for approving counterpart credit limits. Corporate IT is responsible for managing IT information and security risks. There are also corporate functions dealing with risks related to human resources, laws and regulation, and sustainability.
The Audit Committee is responsible for risk oversight within the Group. Corporate Risk Management, an independent function headed by the Chief Risk Offi cer (CRO), reports to the CFO, and is responsible for assessing and reporting the Group's consolidated risk exposure to the Board of Directors and Group Management. Corporate Risk Management also monitors and reports risk in relation to mandates approved by the CEO. The main principle is that risks are managed at source. In order to maintain a strict segregation of duties, risk control functions at the business and service unit level are responsible for reporting risks to Corporate Risk Management.
The risk management process consists of event identifi cation, risk assessment, risk response and risk control. Risks are primarily identifi ed and assessed by business and service units in accordance with corporate guidelines and models that are approved by Corporate Risk Management. Business and service units are also responsible for responding to risks by taking appropriate actions. Risk responses can be one of, or a combination of, mitigating, transferring or absorbing the risk.
Risk control, monitoring and reporting is carried out by the business and service units' risk control functions. The frequency of reporting is dependent upon the scope of the business. For example, trading activities are reported daily whereas strategic and operational risks are reported as part of the annual business planning process. Corporate Risk Management assesses and reports the Group's consolidated exposure to fi nancial risks to Group Management and the Board of Directors on a monthly basis.
Fortum seeks growth both by leveraging organic growth opportunities and actively participating in further Nordic consolidation. Fortum's aim is to grow profi tably in chosen market areas: the Nordic countries, Russia, Poland and the Baltic countries. The growth possibilities are in part subject to regulatory supervision and political decisions.
Nordic/EU Policy harmonisation, infrastructure development and integration of the Nordic electricity market towards continental Europe depend partly on the actions of authorities. Changes in the market environment and regulation could endanger the implementation of the market-driven development of the electricity market. Fortum promotes market-driven development by maintaining an active dialogue with all stakeholders.
Fortum's growth strategy includes expanding operations in emerging markets, particularly Poland and Russia. In the fi rst quarter 2008, Fortum acquired a controlling stake in the Russian territorial generating company TGC-10. The integration of TGC-10 or any other such business may be diffi cult for a variety of reasons, including differing culture or management styles. As a result, the need to integrate TGC-10 or any potential future acquisitions poses risks to existing operations, including:
Development of the political and regulatory environment has a major impact on the energy industry and on the conditions of its business operations. To manage these risks and proactively participate in the development of the political and regulatory framework, including energy taxation, Fortum maintains an active and on-going dialogue with the bodies involved in the development of laws and regulations.
As a result of the TGC-10 acquisition Fortum now owns and operates heat and power generation assets in Russia. These businesses are currently subject to regulation, but the power market in particular is undergoing a process of deregulation and, as a result, the prices for electricity in Russia are expected to increase. The main fuel source for heat and power generation in Russia is gas. Gas prices are partially regulated, and there is a dependency on a limited number of suppliers. Changes in the regulation regarding gas prices and suppliers can affect the supply and price of gas. Furthermore, if deregulation of the gas and electricity markets is not aligned, the impact of price changes in either electricity or gas could be signifi cant.
Emerging markets countries are subject to greater political, economic and social uncertainties than countries with more developed institutional structures, and the risk of loss resulting from changes in law, economic and social upheaval and other factors may be substantial. Among the more signifi cant risks of operating and investing in emerging market countries are those arising from the establishment or enforcement of foreign exchange restrictions, which could effectively prevent Fortum from repatriating profi ts or liquidating assets and withdrawing from one or more of these countries, and changes in tax regulations or enforcement mechanisms, which could substantially reduce or eliminate any revenues derived from operations in these countries and reduce signifi cantly the value of assets related to such operations.
Fortum's operations are subject to rules and regulations set forth by the relevant authorities, exchanges, and other regulatory bodies in all markets it is operating on. 25% of the controls in the Fortum internal control framework mitigate compliance risks.
Inadequacies in the legal systems and law enforcement mechanisms in Russia and certain other of the emerging markets exposes Fortum to risk of loss as a result of criminal or abusive practices by competitors, suppliers, or contracting parties. Fortum's ability to operate in Russia may also be adversely affected by diffi culties in protecting and enforcing its rights in disputes with its contractual partners or other parties, and also by future changes to local laws and regulations.
Fortum maintains strict internal market conduct rules and has procedures in place to prevent, for example, the use of proprietary information before it is published. Segregation of duties and internal controls are enforced to minimise the possibilities of unauthorised activities. Fortum has also MiFID Licence relating to its Customer Portfolio Services.
Compliance with the competition legislation is an important area for Fortum and it is managed through Fortum's Competition Compliance Programme.
Financial risk refers to the potential negative effects of market price movements, volume changes, liquidity events or counterpart events. A number of different methods, such as Value-at-Risk and Profi t-at-Risk, are used throughout the Group to quantify fi nancial risks. In particular, the potential impact of price and volume risks of electricity, weather, CO2 and the main fuels are assessed taking into account their interdependencies. Stress-testing is carried out in order to assess the effects of extreme price movements on Fortum's earnings.
Financial risk taking in business units aims to capture potential upside by optimising hedging or by trading in the markets. Risk taking is limited by risk mandates. Risk mandates include minimum EBIT levels for the business units that are set by the CEO. Volumetric limits, Value-at-Risk limits, Stop Loss limits and counterpart exposure limits are also in place.
For further information on hedge ratios, exposures, sensitivities and outstanding derivatives contracts, see Note 3 Financial risk management on page 123.
Fortum is exposed to electricity market price movements mainly through its power generation and customer sales businesses. The short-term factors affecting electricity prices on the Nordic market include hydrological conditions, temperature, CO2 allowance prices, fuel prices, and the import/export situation. Fortum manages exposure to electricity price risk through the use of hedging strategies that are executed by the business units within set mandates. Hedges for electricity price risks consist of electricity derivatives contracts.
Power and heat generation, customer sales, and electricity distribution volumes are subject to changes in, for example, hydrological conditions and temperature. Although volume risks in power and heat generation are partly mitigated through generation fl exibility, changes in volumes are closely monitored so that hedges can be adjusted accordingly.
The European Union has established an emissions trading scheme to limit the amount of CO2 emissions. Part of Fortum's power and heat generation is subject to requirements of the trading scheme. Fortum manages its exposure to CO2 allowance prices through the use of CO2 forwards and by ensuring that the costs of allowances are taken into account during production planning.
Heat and power generation requires the use of fuels that are purchased from global or local markets. The main fuels used by the Group are uranium, coal, natural gas, peat, oil, and various bio-fuels such as wood pellets. Exposure to fuel prices is to some extent limited because of Fortum's fl exible generation possibilities, which allow for switching between different fuels according to prevailing market conditions, and in some cases, the fuel price risk can be transferred to the customer. The remaining exposure to fuel price risk is mitigated through fi xed price purchases that cover forecasted consumption levels. Fixed price purchases can be either for physical deliveries or in the form of fi nancial hedges.
Fortum engages in a certain level of trading for profi t based on a high level of market knowledge. Fortum's proprietary trading activities are limited to standardised electricity, coal and CO2 allowance contracts mainly traded through established markets such as Nord Pool, EEX and ICE.
Risks associated with trading activities are limited through strict management controls. Stop Loss mandates are set to limit the cumulative maximum loss during the year, and Value-at-Risk mandates limit the maximum risk taking during one day. All trading risks are monitored and reported on a daily basis.
Fortum's business is capital intensive and the Group has a regular need to raise fi nancing. Financing needs may also arise as a result of Fortums growth strategy, such as the acquisition of TGC-10. This acquisition includes a committed investment program which is partially prefunded with approximately EUR 1 billion of bank deposits earmarked for investments. Fortum has a diversifi ed loan portfolio mainly consisting of long-term bond fi nancing but also a variety of other long- and shortterm fi nancing facilities.
The global fi nancial crisis during 2008 has emphasised the need for prudent management of liquidity and refi nancing risk. Fortum manages these risks through a combination of cash positions and committed credit facility agreements with its core banks. The Group shall at all times have access to cash/marketable securities and unused committed credit facilities including overdrafts, to cover all loans maturing within the next twelve-month period. As of 31 December 2008, Fortum had approximately EUR 1.3 billion of cash and bank deposits as well as access to EUR 2.3 billion million of undrawn committed credit facilities Debt maturities for 2009 amounted to EUR 980 million.
Fortum's debt portfolio consists of interest-bearing assets and liabilities on fi xed and fl oating rate bases with differing maturity profi les. Fortum manages the duration of the debt portfolio by entering into different types of fi nancing contracts and interest-rate derivative contracts such as interest rate swaps and forward rate agreements (FRAs).
Fortum has cash fl ows, assets and liabilities in currencies other than in euro. Changes in exchange rates can therefore have an effect on Fortum's earnings and balance sheet. The main currency exposures for Fortum are EUR/SEK, arising from the Group's extensive operations in Sweden and EUR/RUB from translation exposure of TGC-10 investment in Russia.
The Group's currency exposures are divided into transaction exposures (foreign exchange exposures relating to contracted cash fl ows, and balance sheet items where changes in exchange rates will have an impact on earnings and cash fl ows) and translation exposure (foreign exchange exposure that arises when profi ts and balance sheets in foreign entities are consolidated in on Group level). Fortum Treasury policy states the principles and limits for managing currency exposures. For transaction risk the main principle is that all material exposures are hedged while translation exposures are not hedged or hedged selectively.
Fortum is exposed to counterpart risk whenever there is a contractual obligation with an external counterpart. In order to minimize counterpart risk, Fortum has well-established routines and processes to identify, assess and control counterpart exposure. The Group Credit Guidelines regulates that no contractual obligation should be entered into without a proper, reasonable and viable credit check.
Corporate Credit Control is responsible for assuring stringent controls for all larger individual counterpart exposures. Creditworthiness is continuously monitored through the use of external sources to ensure that actions can be taken immediately when changes occur, and annual credit reviews are performed manually for all larger approved limits. Each Business Unit is responsible for ensuring that exposures remain within approved limits. Mitigation of counterpart risk includes, for example, the use of collateral, managing payment terms and contract length, as well as pursuing netting agreements. Corporate Credit Control continuously monitors and reports counterpart exposures against the approved limits.
Fortum's counterpart portfolio is well-diversifi ed over a wide range of industries, private customers, small businesses and geographical regions. Although the Nordic countries account for most of the counterpart exposure, the exposure to Russia has increased as a result of the acquisition of TGC-10. Most of the exposures in Russia are related to deposits and guarantees from Russian banks which are earmarked for the on-going investment program.
Operational risks are defi ned as the negative effects resulting from inadequate or failed internal processes, people and systems or equipment, or from external events. The main objective of operational risk management is to reduce the risk of unwanted operational events by clearly documenting and automating processes and by ensuring a strict segregation of duties between decision-making and controlling functions. Quality and environmental management systems are a tool for achieving this objective, and Fortum has several certifi cations including ISO 9001 and ISO 14001. Equipment and system risks are primarily managed within maintenance investment planning, and there are contingency plans in place to ensure business continuity.
The Group Insurance Policy governs the management of insurable operational risks. The objective of insurance management is to optimise loss prevention activities, self retentions and insurance coverage in a long-term cost-effi cient manner. Fortum has established Group-wide insurance programmes for risks related to property damages, business interruption and liability exposures.
Operational events at power and heat generation or electricity distribution facilities can lead to physical damages, business interruptions, and third-party liabilities. In Sweden, third-party liabilities from dam failures are strictly the plant owner's responsibility. Together with other hydropower producers, Fortum has a shared dam liability insurance program in place that covers Swedish dam failure liabilities up to SEK 7,000 million. Operational risks in production facilities are mitigated by continuous maintenance, condition monitoring, and other operational improvements.
Storms and other unexpected events can result in electricity outages that create costs in the form of repairs and compensations. Although outages are typically short, it is not possible to completely prevent long outages in exceptional circumstances. There is an extensive procedure in place to minimise the length and consequences of outages.
Fortum owns the Loviisa nuclear power plant, and has minority interests in one Finnish and two Swedish companies with nuclear plants. In the Loviisa power plant, assessment and improvement of nuclear safety is a continuous process which is performed under the supervision of the Radiation and Nuclear Safety Authority of Finland (STUK). In Finland and Sweden, third-party liability relating to nuclear accidents is strictly the plant operator's responsibility and must be covered by insurance. As the operator of the Loviisa power plant, Fortum has a statutory insurance policy of SDR 175 million, +20% (approximately EUR 240 million) per nuclear incident. Similar insurance policies are in place for the operators where Fortum has a minority interest.
Operating power and heat generation and electricity distribution facilities involves the use, storage and transportation of fuels and materials that can have adverse effects on the environment. The risks involved with these activities and their supply chain are receiving increased attention due to the growing public awareness of sustainable development and the expectations on companies' responsible conduct. Operation and maintenance of the facilities exposes the personnel to potential safety risks. Environmental, health and safety risks are regularly evaluated through internal and external audits and risk assessments, and corrective and preventive actions are launched when necessary. EHS related risks arising in investments are systematically evaluated in accordance with Fortum's Investment Evaluation and Approval Procedure.
Information security risks are managed centrally by the corporate security and IT functions. Business-specifi c risks are managed within the business and service units. Corporate policies defi ne guidelines and set procedures for reducing risks and managing IT and other information security incidents. The main objective is to ensure high availability and fast recovery of IT systems.
Fortum Corporation's shares have been listed on NASDAQ OMX Helsinki since 18 December 1998. The trading code is FUM1V. Fortum Corporation's shares are in the Finnish book entry system maintained by the Finnish Central Securities Depository Ltd (name changed from 2 February 2009 to Euroclear Finland LTD), which also maintains the offi cial share register of Fortum Oyj.
| EUR | 2008 | 2007 | 2006 |
|---|---|---|---|
| Earnings per share | 1.74 | 1.74 | 1.22 |
| Cash fl ow per share | 2.26 | 1.88 | 1.31 |
| Equity per share | 8.96 | 9.43 | 8.91 |
| Dividend per share | 1.00 1) | 1.35 | 1.26 |
| Payout ratio, % | 57.5 1) | 77.6 | 103.3 |
| Dividend yield, % | 6.6 1) | 4.4 | 5.8 |
1) Board of Directors' proposal for the Annual General Meeting 7 April 2009.
For full set of share key fi gures 1998–2008, see page 171.
Fortum's share has outperformed its European utility peers during last fi ve years. Fortum's share price has appreciated approximately 135% during last fi ve years, while Dow Jones European Utility Index has increased 18% and OMX Helsinki cap index has decreased 48%.
During 2008 Fortum's share price depreciated approximately 51%, while Dow Jones European Utility index decreased 38% and OMX Helsinki cap index decreased 50%.
During 2008, a total of 628.2 million (2007: 787.4) Fortum Corporation shares, totalling EUR 15,571 million were traded. Fortum's market capitalisation, calculated using the closing quotation of the last trading day of the year, was EUR 13,519 million. The highest quotation of Fortum Corporation shares on NASDAQ OMX Helsinki in 2008 was EUR 33.00, the lowest EUR 12.77, and the volume weighted average quotation EUR 24.76. The closing quotation on the last trading day of the year was EUR 15.23 (2007: 30.81).
EUR billion
Share price, EUR (monthly average) Number of traded shares/day (monthly average)
Fortum has continuously carried out structural and operational development according to its strategy. Since the year 2000 Fortum has made acquisitions totalling EUR 11 billion and divestments EUR 7 billion. Since the year 2000 the share price has increased by approximately 320%.
Fortum (Neste Oil spin-off adjusted) OMX Helsinki Cap
DJ European Utilities
Fortum has one class of shares. By the end of 2008, a total of 887,638,080 shares had been issued. The nominal value of the share is EUR 3.40 and each share entitles the holder to one vote at the Annual General Meeting. All shares entitle holders to an equal dividend. At the end of 2008 Fortum Corporation's share capital, paid in its entirety and entered in the trade register, was EUR 3,043,707,472.00.
Share capital of Fortum Corporation increased by a total of EUR 3,247,074.80 (2007: 17,678,000.80). A total of 955,022 shares (2007: 5,199,412) subscribed on the basis of share option schemes were entered into the trade register in 2008. At year end the amount of shares that can still be registered for under the share option schemes is a maximumof 0.1% (728,965 shares) of Fortum's 2008 year-end share capital and voting rights.
The registered share capital exceeds the aggregate nominal value of the issued shares due to the cancellations of the company's own shares in 2006 and 2007 (in total 7,570,000) without decreasing the share capital.
| Number of shares | Share capital, EUR | |
|---|---|---|
| Fortum established on 7 February 1998 | 500,000 | 1,681,879 |
| Rights issue in 1998 | 782,282,635 | 2,631,409,886 |
| Employee issue in 1998 | 2,000,000 | 6,727,517 |
| 31 December 1998 | 784,782,635 | 2,639,819,282 |
| 31 December 1999 | 784,782,635 | 2,639,819,282 |
| Script issue in 2000 | - | 28,441,677 |
| Rights issue in 2000 | 60,825,940 | 206,808,196 |
| 31 December 2000 | 845,608,575 | 2,875,069,155 |
| 31 December 2001 | 845,608,575 | 2,875,069,155 |
| Subscriptions with options in 2002 | ||
| - 1999 bond loan with warrants | 148,380 | 504,492 |
| - 1999 management share option scheme | 3,000 | 10,200 |
| 31 December 2002 | 845,759,955 | 2,875,583,847 |
| Subscriptions with options in 2003 | ||
| - 1999 bond loan with warrants | 159,520 | 542,368 |
| - 1999 management share option scheme | 2,913,000 | 9,904,200 |
| 31 December 2003 | 848,832,475 | 2,886,030,415 |
| Subscriptions with options in 2004 | ||
| - 1999 bond loan with warrants | 4,560,730 | 15,506,482 |
| - 1999 management share option scheme | 7,154,000 | 24,323,600 |
| - 2002 A share options scheme for key employees | 6,536,700 | 22,224,780 |
| 31 December 2004 | 867,083,905 | 2,948,085,277 |
| Number of shares | Share capital, EUR | |
|---|---|---|
| Subscriptions with options in 2005 | ||
| - 1999 bond loan with warrants | 1,284,370 | 4,366,858 |
| - 1999 management share option scheme | 1,698,000 | 5,773,200 |
| - 2001 A share options scheme | 1,636,350 | 5,563,590 |
| - 2002 A share options scheme | 3,591,400 | 12,210,760 |
| 31 December 2005 | 875,294,025 | 2,975,999,685 |
| Subscriptions with options in 2006 | ||
| - 2001 A share options scheme | 3,026,200 | 10,289,080 |
| - 2001 B share options scheme | 5,360,133 | 18,224,452 |
| - 2002 A share options scheme | 516,800 | 1,757,120 |
| - 2002 B share options scheme | 4,856,488 | 16,512,059 |
| Cancellation of own shares | –1,660,000 | - |
| 31 December 2006 | 887,393,646 | 3,022,782,396 |
| Subscriptions with options in 2007 | ||
| - 2001 A share options scheme | 274,920 | 934,728 |
| - 2001 B share options scheme | 1,339,867 | 4,555,548 |
| - 2002 A share options scheme | 122,100 | 415,140 |
| - 2002 B share options scheme | 3,462,525 | 11,772,585 |
| Cancellation of own shares | –5,910,000 | - |
| 31 December 2007 | 886,683,058 | 3,040,460,397 |
| Subscriptions with options in 2008 | ||
| - 2002 B share options scheme | 955,022 | 3,247,075 |
| 31 December 2008 | 887,638,080 | 3,043,707,472 |
At the beginning of 2008, the Finnish State owned 50.86% of the company's shares. After the changes in amount of shares during 2008, increase in amount of shares due to the share subscriptions under the share option schemes for employees, the Finnish State owned 50.80% of the Company's shares at the end of the year. The Finnish Parliament has authorised the Government to reduce the Finnish State's holding in Fortum Corporation to no less than 50.1% of the share capital and voting rights.
The proportion of nominee registrations and direct foreign shareholders increased to 35.2% (2007: 35.8%).
| Shareholders | No. of shares | Holding % |
|---|---|---|
| Finnish State | 450,932,988 | 50.80 |
| Ilmarinen Mutual Pension Insurance Company | 15,426,693 | 1.74 |
| The Social Insurance Institution of Finland, KELA | 7,195,896 | 0.81 |
| The City of Kurikka | 6,203,500 | 0.70 |
| Varma Mutual Pension Insurance Company | 6,150,000 | 0.69 |
| The State Pension Fund | 4,950,000 | 0.56 |
| OP-Delta Fund | 2,679,649 | 0.30 |
| Etera Mutual Pension Insurance Company | 2,038,911 | 0.23 |
| Svenska Handelsbanken, Finland | 1,635,780 | 0.19 |
| Tapiola Mutual Pension Insurance Company | 1,361,176 | 0.15 |
| Nominee registrations | 309,067,701 | 34.82 |
| Other shareholders in total | 79,995,786 | 9.01 |
| Total number of shares | 887,638,080 | 100.00 |
By shareholder category % of total amount of shares Finnish shareholders Corporations 0.7 Financial and insurance institutions 1.6 General government 56.4 Non-profi t organisations 1.1 Households 5.0 Non-Finnish shareholders 35.2 Total 100.0
| By number of shares owned | No. of share holders |
% of share holders |
No. of shares |
% of total amount of shares |
|---|---|---|---|---|
| 1–100 | 10,510 | 17.70 | 632,594 | 0.07 |
| 101–500 | 24,917 | 41.96 | 6,639,946 | 0.75 |
| 501–1,000 | 12,996 | 21.88 | 8,929,116 | 1.01 |
| 1,001–10,000 | 10,341 | 17.41 | 25,826,634 | 2.91 |
| 10,001–100,000 | 539 | 0.91 | 13,252,231 | 1.49 |
| 100,001–1,000,000 | 72 | 0.12 | 21,351,942 | 2.40 |
| 1,000,001–10,000,000 | 11 | 0.02 | 35,500,499 | 4.00 |
| over 10,000,000 | 2 | 0.00 | 466,359,681 | 52.54 |
| 59,388 | 100.00 | 578,492,643 | 65.17 | |
| Unregistered/uncleared transactions on 31 December |
77,736 | 0.01 | ||
| Nominee registrations | 309,067,701 | 34.82 | ||
| Total | 887,638,080 | 100.00 | ||
At the end of 2008, the President and CEO and other members of the Fortum Management Team owned 354,238 shares (2007: 317,030), representing less than 0.04% of the total shares in the Company.
A full description of Fortum's equity incentive schemes is shown in Note 29 Employee bonus system, personnel fund and incentive schemes together with details on the President and CEO and other members of the Fortum Management Team's shareholdings and interests in equity incentive schemes on page 153.
Currently, the Board of Directors has no unused authorisations from the Annual General Meeting of Shareholders to issue convertible loans or bonds with warrants or to issue new shares. The Board of Directors has the authorisation from the Annual General Meeting of Shareholders on 1 April 2008 to buy Fortum Corporation's own shares. The authorisation, amounting to EUR 300 million or 15 million shares, is valid one year from the last year AGM. The shares repurchased by Fortum shall be cancelled through a separate decision made by the Board of Directors of Fortum.
For more information regarding share repurchases, see Note 27.1 Treasury shares on page 152.
Fortum Corporation's dividend policy states that the company aims to pay a dividend which corresponds to an average payout ratio of 50% to 60%.
Parent company's distributable equity as of 31 December 2008 amounted to EUR 3,742 million. After the end of the fi nancial period there have been no material changes in the fi nancial position of the Company.
The Board of Directors proposes to the Annual General Meeting that Fortum Corporation pay a cash dividend of EUR 1.00 per share for 2008, totalling EUR 888 million based on the number of registered shares as of 4 February 2009. The Annual General Meeting will be held on 7 April 2009 at 2:00 pm at the Cable Factory in Helsinki.
EUR
Additional dividend, 2006 and 2007 Discontinued oil operations
1) Board of Directors' proposal for the Annual General Meeting in April 2009.
Fortum's Investor Relations (IR) activities cover equity and fi xed-income markets to ensure full and fair valuation of the Company's shares, access to funding sources and stable bond pricing. Investors and analysts primarily in Europe and North America are met on a regular basis.
In 2008 the Fortum conducted close to 200 individual and group meetings with professional equity investors, whilst maintaining regular contact with equity research analysts at investment banks and brokerage fi rms. In addition, site visits were arranged for members of the investment community. During the year, IR and senior management gave approximately 15 presentations at investor conferences in Scandinavia, the United Kingdom and North America.
One of the main IR events of the year is the Capital Markets Day. In 2008 the event was held in October. The event was attended by approximately 100 representatives of equity and fi xed-income markets, including fund managers, analysts and institutional shareholders.
Sweden 46
Heat 19
Distribution 10
| EUR million | Note | 2008 | 2007 | EUR million | 2008 | 2007 |
|---|---|---|---|---|---|---|
| Sales | 5 | 5,636 | 4,479 | Comparable operating profi t | 1,845 | 1,564 |
| Other income | 9 | 230 | 393 | Non-recurring items | 85 | 250 1) |
| Materials and services | 10 | –2,117 | –1,572 | Changes in fair values of derivatives hedging future cash fl ow | 52 | 16 |
| Employee costs | 12 | –587 | –495 | Nuclear fund adjustment | –19 | 17 |
| Depreciation, amortisation and impairment charges | 5,13 | –515 | –451 | Other items effecting comparability | 33 | 33 |
| Other expenses | 11 | –684 | –507 | Operating profi t | 1,963 | 1,847 |
| Operating profi t | 5 | 1,963 | 1,847 | 1) In 2007 non-recurring items include gain on Lenenergo shares EUR 232 million. | ||
| Share of profi t of associates and joint ventures | 5,21 | 126 | 241 | In 2007 gain on Hafslund's REC shares EUR 180 million. | ||
| Interest expense | 14 | –351 | –220 | |||
| Interest income | 14 | 143 | 76 | |||
| Fair value gains and losses on fi nancial instruments | 6,14 | –11 | 7 | |||
| Other fi nancial expenses - net | 14 | –20 | –17 | |||
| Finance costs - net | 14 | –239 | –154 | Higher average debt and interest rates 5.3% (4.3%) for debt including derivatives. | ||
| Profi t before income tax | 1,850 | 1,934 | ||||
| Income tax expense | 15 | –254 | –326 | In 2008 one-time positive effect on lowering tax rates in Sweden and Russia | ||
| Profi t for the period | 1,596 | 1,608 | amounting to EUR 113 million. | |||
| Attributable to: | ||||||
| Equity holders of the Company | 1,542 | 1,552 | ||||
| Minority interest | 54 | 56 | Sales by segment | Sales by country | ||
| 1,596 | 1,608 | % % |
||||
| Earnings per share for profi t attributable to the equity holders of the Company during the year (in EUR per share) |
16 | Other 1 Russia 7 |
Other countries 4 Norway 10 |
|||
| Basic | 1.74 | 1.74 | Poland 3 | Finland 28 | ||
| Diluted | 1.74 | 1.74 | Power Russia 9 Markets 25 Generation 38 |
| EUR million | Note | 31 Dec 2008 | 31 Dec 2007 |
|---|---|---|---|
| ASSETS | |||
| Non-current assets | |||
| Intangible assets | 19 | 395 | 85 |
| Property, plant and equipment | 20 | 12,138 | 11,343 |
| Participations in associates and joint ventures | 21 | 2,112 | 2,853 |
| Share in State Nuclear Waste Management Fund | 35 | 566 | 516 |
| Other non-current assets | 22 | 117 | 99 |
| Deferred tax assets | 32 | 2 | 3 |
| Derivative fi nancial instruments | 3 | 445 | 153 |
| Long-term interest-bearing receivables | 23 | 742 | 736 |
| Total non-current assets | 16,517 | 15,788 | |
| Current assets | |||
| Inventories | 24 | 444 | 285 |
| Derivative fi nancial instruments | 3 | 761 | 140 |
| Trade and other receivables | 25 | 1,235 | 1,034 |
| Bank deposits | 588 | - | |
| Cash and cash equivalents | 733 | 427 | |
| Liquid funds | 26 | 1,321 | 427 |
| Total current assets | 3,761 | 1,886 | |
| Total assets | 20,278 | 17,674 |
| EUR million | Note | 31 Dec 2008 | 31 Dec 2007 |
|---|---|---|---|
| EQUITY | |||
| Capital and reserves attributable to the Company's equity holders |
|||
| Share capital | 27 | 3,044 | 3,040 |
| Other restricted funds | 90 | 78 | |
| Fair value and other reserves | 28 | 525 | 715 |
| Retained earnings | 4,295 | 4,526 | |
| Total | 7,954 | 8,359 | |
| Minority interests | 30 | 457 | 292 |
| Total equity | 8,411 | 8,651 | |
| LIABILITIES | |||
| Non-current liabilities | |||
| Interest-bearing liabilities | 31 | 6,520 | 4,288 |
| Derivative fi nancial instruments | 3 | 120 | 139 |
| Deferred tax liabilities | 32 | 1,851 | 1,687 |
| Nuclear provisions | 35 | 566 | 516 |
| Pension and other provisions | 33,34 | 250 | 144 |
| Other non-current liabilities | 36 | 470 | 486 |
| Total non-current liabilities | 9,777 | 7,260 | |
| Current liabilities | |||
| Interest-bearing liabilities | 31 | 980 | 605 |
| Derivative fi nancial instruments | 3 | 126 | 260 |
| Current tax liability | 22 | 29 | |
| Trade payables and other liabilities | 37 | 962 | 869 |
| Total current liabilities | 2,090 | 1,763 | |
| Total liabilities | 11,867 | 9,023 | |
| Total equity and liabilities | 20,278 | 17,674 |
| EUR million | Note | Share capital | Other restricted funds |
Fair value and other reserves |
Treasury shares | Retained earnings | Attributable to the equity holders |
Minority | Total |
|---|---|---|---|---|---|---|---|---|---|
| Total equity at 31.12.2007 | 3,040 | 78 | 715 | - | 4,526 | 8,359 | 292 | 8,651 | |
| Translation and other differences | - | 6 | –148 | - | –561 | –703 | –86 | –789 | |
| Cash fl ow hedges | - | - | 440 | - | - | 440 | - | 440 | |
| Other fair value adjustments | - | - | –484 | - | - | –484 | 2 | –482 | |
| Total gains and losses not recognised in income statement | - | 6 | –192 | - | –561 | –747 | –84 | –831 | |
| Profi t for the period | - | - | - | - | 1,542 | 1,542 | 54 | 1,596 | |
| Total recognised income for the period | - | 6 | –192 | - | 981 | 795 | –30 | 765 | |
| Stock options exercised | 27 | 4 | - | - | - | - | 4 | - | 4 |
| Cash dividend | 17 | - | - | - | - | –1,198 | –1,198 | - | –1,198 |
| Changes between restricted and unrestricted equity | - | 6 | - | - | –6 | 0 | - | 0 | |
| Changes due to business combinations | 7 | - | - | 2 | - | –8 | –6 | 195 | 189 |
| Total equity at 31.12.2008 | 3,044 | 90 | 525 | - | 4,295 | 7,954 | 457 | 8,411 | |
| Total equity at 31.12.2006 | 3,023 | 74 | 511 | - | 4,300 | 7,908 | 253 | 8,161 | |
| Translation and other differences | - | - | 10 | - | –25 | –15 | –11 | –26 | |
| Cash fl ow hedges | - | - | –168 | - | - | –168 | –2 | –170 | |
| Other fair value adjustments | - | - | 362 | - | - | 362 | - | 362 | |
| Total gains and losses not recognised in income statement | - | - | 204 | - | –25 | 179 | –13 | 166 | |
| Profit for the period | - | - | - | - | 1,552 | 1,552 | 56 | 1,608 | |
| Total recognised income for the period | - | - | 204 | - | 1,527 | 1,731 | 43 | 1,774 | |
| Stock options exercised | 27 | 17 | - | - | - | - | 17 | - | 17 |
| Repurchase of own shares | 27 | - | - | - | –175 | - | –175 | - | –175 |
| Cancellation of own shares | 27 | - | - | - | 175 | –175 | 0 | - | 0 |
| Cash dividend | 17 | - | - | - | - | –1,122 | –1,122 | - | –1,122 |
| Changes between restricted and unrestricted equity | - | 4 | - | - | –4 | 0 | - | 0 | |
| Changes due to business combinations | 7 | - | - | - | - | - | 0 | –4 | –4 |
| Total equity at 31.12.2007 | 3,040 | 78 | 715 | - | 4,526 | 8,359 | 292 | 8,651 | |
The weakening of mainly RUB, SEK and NOK has impacted equity attributable to equity holders through translation differences with EUR –703 million. Part of the translation differences are arising from the NOK effect in fair valuation of Hafslund's REC shares EUR –148 million which is shown in fair value and other reserves.
The impact on equity attributable to equity holders from fair valuation of cash fl ow hedges, EUR 440 million, mainly relates to cash fl ow hedges hedging electricity price. When electricity price is lower than the hedging price, the impact on equity is positive.
See also Note 28 Fair value and other reserves on page 152.
Other fair value adjustments EUR –484 million, mainly relates to the change in share price of Hafslund's REC shares during 2008 excluding exchange rate differences. See also Note 21 Participations in associates and joint ventures on page 147.
The main changes to minority interest in equity are translation differences EUR –86 million, arising from RUB and SEK and also changes through business combinations which relates to the minority interest in TGC-10.
1) Translation of fi nancial information from subsidiaries in foreign currency is done using average rate for the income statement and end rate for the balance sheet. The exchange rate differences occurring from translation to EUR are booked to equity. For further information regarding exchange rates used, see Note 8 Exchange rates on page 137.
| EUR million | Note | 2008 | 2007 |
|---|---|---|---|
| Cash fl ow from operating activities | |||
| Net profi t for the period | 1,596 | 1,608 | |
| Adjustments: | |||
| Income tax expenses | 254 | 326 | |
| Finance costs-net | 239 | 154 | |
| Share of profit of associates and joint ventures | –126 | –241 | |
| Depreciation, amortisation and impairment charges | 515 | 451 | |
| Operating profit before depreciations (EBITDA) | 2,478 | 2,298 | |
| Non-cash flow items and divesting activities | –275 | –286 | |
| Interest received | 135 | 75 | |
| Interest paid | –352 | –271 | |
| Dividends received | 51 | 179 | |
| Other financial items and realised foreign exchange gains and | |||
| losses | 399 | 7 | |
| Taxes | –332 | –383 | |
| Funds from operations | 2,104 | 1,619 | |
| Increase in interest-free receivables | –48 | –11 | |
| Increase/decrease in inventories | –132 | 40 | |
| Increase in interest-free liabilities | 78 | 22 | |
| Change in working capital | –102 | 51 | |
| Total net cash from operating activities | 2,002 | 1,670 | |
| Cash flow from investing activities | |||
| Capital expenditures 1) | 5,19,20 | –1,018 | –592 |
| Acquisition of subsidiaries, net of cash acquired | 7 | –1,210 | –10 |
| Acquisition of associates 2) | 21 | –32 | –271 |
| Acquisition of other long-term investments | –1 | –4 | |
| Proceeds from sales of fi xed assets | 37 | 14 | |
| Proceeds from sales of subsidiaries, net of cash disposed | 7 | 44 | - |
| Proceeds from sales of associates | 21 | 34 | 304 |
| Proceeds from sales of other non-current assets | 0 | 29 | |
| Change in interest-bearing receivables | –136 | –79 | |
| Total net cash used in investing activities | –2,282 | –609 | |
| Cash fl ow before fi nancing activities | –280 | 1,061 | |
| EUR million | Note | 2008 | 2007 |
|---|---|---|---|
| Cash fl ow from fi nancing activities | |||
| Proceeds from long-term liabilities | 5,550 | 942 | |
| Payments of long-term liabilities | –3,479 | –417 | |
| Change in short-term liabilities | 551 | –37 | |
| Proceeds from stock options exercised | 27 | 4 | 17 |
| Dividends paid to the Company's equity holders | 17 | –1,198 | –1,122 |
| Repurchase of own shares | 27 | - | –175 |
| Other fi nancing items | –108 | 1 | |
| Total net cash used in fi nancing activities | 1,320 | –791 | |
| Total net increase (+) / decrease (–) in liquid funds | 1,040 | 270 | |
| Liquid funds at the beginning of the year | 427 | 157 | |
| Foreign exchange differences in liquid funds | –146 | - | |
| Liquid funds at the end of the year | 26 | 1,321 | 427 |
1) Capital expenditures in cash flow do not include not yet paid investments. Capitalised borrowing costs are included in interest costs paid.
| EUR million | 2008 | 2007 |
|---|---|---|
| Net debt 1 January | 4,466 | 4,345 |
| Foreign exchange rate differences | –203 | –73 |
| EBITDA | 2,478 | 2,298 |
| Paid net financial costs, taxes and adjustments for non-cash and divestment items |
–374 | –679 |
| Change in working capital | –102 | 51 |
| Capital expenditures | –1,018 | –592 |
| Acquisitions | –1,243 | –285 |
| Divestments | 115 | 347 |
| Change in interest-bearing receivables | –136 | –79 |
| Dividends and repurchase of own shares | –1,198 | –1,297 |
| Other fi nancing activities | –103 | 18 |
| Net cash flow (- increase in net debt) | –1,581 | –218 |
| Loans in acquired companies | 272 | 7 |
| Fair value change of bonds and amortised cost valuation | 63 | –31 |
| Net debt 31 December | 6,179 | 4 ,466 |
Fortum Corporation (the Company) is a Finnish public limited liability company with domicile in Espoo, Finland. The Company is listed on NASDAQ OMX Helsinki.
Fortum Corporation and its subsidiaries (together the Fortum Group) is a leading energy company focusing on the Nordic countries, Russia and the Baltic Rim area. Fortum's activities cover the generation, distribution and the sale of electricity and heat, the operation and maintenance of power plants as well as energy-related services.
Fortum's competitiveness in the power and heat business is based on a pan-Nordic concept which is characterised by a high level of operational effi ciency and a broad customer base.
These Financial Statements were approved by the Board on 4 February 2009.
The consolidated fi nancial statements of Fortum Group are prepared in accordance with International Financial Reporting Standards (IFRS)/International Accounting Standards (IAS) as adopted by the European Union.
The consolidated fi nancial statements have been prepared under the historical cost convention except for the revaluation of certain fi nancial instruments.
The preparation of fi nancial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Group's accounting principles. The areas involving higher degree of judgment or complexity, or areas where assumptions and estimates are signifi cant to the consolidated fi nancial statements are disclosed in Note 2 Critical accounting estimates and judgments.
In the year ended at 31 December 2008 Fortum has adopted the following amended standard and interpretations to existing standards:
Amendments to IAS 39 · Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures (effective from 1 July 2008). Amendment to IAS 39 allows an entity to reclassify certain non-derivative fi nancial assets out of the heldfor-trading category in rare circumstances as well as certain loans and receivables out of the held-for-trading or available-for-sale categories if the entity has the intention and ability to hold the asset for the foreseeable future or until maturity. The amendment to IFRS 7 requires extensive disclosures for any fi nancial asset reclassifi ed in the situations described. The amendments have no impact on the fi nancial position or performance of Fortum Group as no assets have been re-classifi ed.
IFRS 8 · Operating segments was early adopted in 2008. The standard requires a "management approach" under which segment information is presented on the same basis as used for internal reporting purposes. A new Russia segment has been introduced in Fortum, following the acquisition of the Russian company, TGC-10. This means that the new segment structure has one segment based on geographical area, combined with segments based on types of business operations. IFRS 8 deals with disclosures and therefore has no impact on Group's reported results or fi nancial position.
on Fortum's reported results or fi nancial position. The revised standard has been endorsed in the EU.
The following amendments and interpretations are not relevant to the Fortum's operations:
IFRIC 13 · Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). Fortum does not have any such programmes in the scope of the interpretation. The interpretation has been endorsed by the EU.
An asset or a liability is classifi ed as a current asset or liability when it is held primarily for commercial purposes or is expected to be realised within twelve months after the balance sheet date. Cash and cash equivalents are classifi ed as current assets.
All other assets and liabilities are classifi ed as non-current assets and liabilities.
The consolidated fi nancial statements include the parent company Fortum Corporation and all those companies in which Fortum Corporation has the power to govern the fi nancial and operating policies and generally holds, directly or indirectly, more than 50% of the voting rights.
The Fortum Group subsidiaries are disclosed in Note 45 Subsidiaries by segment on 31 December 2008.
Fortum Group was formed in 1998 by using the pooling-of-interests method for consolidating Fortum Power and Heat Oy and Fortum Oil and Gas Oy (the latter demerged to Fortum Oil Oy and Fortum Heat and Gas Oy 1 May 2004). In 2005 Fortum Oil Oy was separated from Fortum by distributing 85% of its shares to Fortum's shareholders and by selling the remaining 15%. This means that the acquisition cost of Fortum Power and Heat Oy and Fortum Heat and Gas Oy has been eliminated against the share capital of the companies. The difference has been entered as a decrease in shareholders' equity.
The fi nancial statements of Fortum Group have been consolidated according to the acquisition method. The cost of an acquisition is measured as the aggregate of fair value of the assets given and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifi able assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifi able net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Income Statement.
Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, subsidiaries' accounting policies have been changed to ensure consistency with the policies the Group has adopted.
Associated companies are entities over which the Group has signifi cant infl uence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint ventures are entities over which the Group has contractually agreed to share the power to govern the fi nancial and operating policies of that entity with another venturer or venturers. The Group's interests in associated companies and jointly controlled entities are accounted for by the equity method of accounting. Assets acquired and liabilities assumed in the investment in associates or joint ventures are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group's share of the identifi able net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the associate or joint venture acquired, the difference is recognised directly in the income statement.
The Group's share of its associates or joint ventures post-acquisition profi ts or losses after tax and the expenses related to the adjustments to the fair values of the assets and liabilities assumed is recognised in the income statement. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. The Group's share of post-acquisition adjustments to associates or joint ventures equity that have not been recognised in the associates or joint ventures income statement, is recognised directly in Group's shareholder's equity and against the carrying amount of the investment.
When the Group's share of losses in an associate or a joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture.
Unrealised gains on transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group's interest in the associate or joint venture. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates or joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. If the information is not available the share of the profi t of certain associated or joint venture companies is included in the consolidated accounts based on the previous quarterly information.
Regarding accounting for Fortum's shareholding in Hafslund ASA and the Russian shareholdings, see Note 21 Participations in associated companies and joint ventures on page 147.
Fortum discloses segment information in a manner consistent with internal reporting to Fortum's Board of Directors and to Fortum Management Team led by the President and CEO. Fortum mainly has segments based on type of business operations, combined with one segment based on geographical area. The Group's businesses are divided into the following reporting segments:
Power Generation – comprises power generation and sales in the Nordic countries · as well as operation and maintenance services in the Nordic area and selected international markets.
Discontinued operations represent a separate major line of business that either have been disposed of or are classifi ed as held for sale. Assets and liabilities attributable to the discontinued operations must be clearly distinguishable from the other consolidated entities in terms of their operations and cash fl ows. In addition, the reporting entity must not have any signifi cant continuing involvement in the operations classifi ed as a discontinued operation. The post-tax profi t for the period attributable to discontinued operations including the gain or loss on the disposal is shown as a separate item in the income statement. The discontinued operations effect on cash fl ow is either separated in the cash fl ow statement or disclosed in the notes.
Non-current assets (or disposal groups) classifi ed as held for sale are valued at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. These classifi cation criteria do not include non-current assets to be abandoned or those that have been temporarily taken out of use. An impairment loss (or subsequent gain) reduces (or increases) the carrying amount of the non-current assets or disposal groups. The assets are not depreciated or amortised. Interest or other expenses related to these assets are recognised as before the classifi cation as held for sale.
Neste Oil was included in Fortum Group up until 31 March 2005, when the Annual General Meeting took the fi nal decision to separate the oil operations by distributing approximately 85% of Neste Oil Corporation shares as dividend. The remaining approximately 15% of shares were sold to investors in April 2005.
Oil operations have been presented as discontinued operations for 2004 and 2005, see Financial key fi gures on pages 169–170.
Items included in the fi nancial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated fi nancial statements are presented in euros, which is the Company's functional and presentation currency.
Transactions denominated in foreign currencies are translated using the exchange rate at the date of the transaction. Receivables and liabilities denominated in foreign currencies outstanding on the closing date are translated using the exchange rate quoted on the closing date. Exchange rate differences have been entered in the income statement. Net conversion differences relating to fi nancing are entered under fi nancial income or expenses, except when deferred in equity as qualifying cash fl ow hedges. Translation differences on available-for-sale fi nancial assets are included in the fair value reserve in equity.
The income statements of subsidiaries, whose measurement and reporting currencies are not euros, are translated into the Group reporting currency using the average exchange rates for the year based on the month-end exchange rates, whereas the balance sheets of such subsidiaries are translated using the exchange rates on the balance sheet date. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group deems all cumulative translation differences for all foreign operations to be zero at the date of transition to IFRS, i.e. 1 January 2004.
Exchange rates used to translate reporting currencies into euros in the Consolidated Financial Statements are disclosed in Note 8 Exchange rates on page 137.
The Group's interests in associated companies and jointly controlled entities are accounted for by the equity method. Associates and joint ventures, whose measurement and reporting currencies are not euro, are translated into the Group reporting currency using the same principles as for subsidiaries, see 1.6.3 Group companies.
Revenue comprises the fair value consideration received or receivable at the time of delivery of products and/or upon fulfi llment of services. Revenue is shown, net of rebates, discounts, value-added tax and selective taxes such as electricity tax. Revenue is recognised as follows:
Sale of electricity, heat, cooling and distribution of electricity are recognised at the time of delivery. The sale to industrial and commercial customers and to end-customers is recognised based on the value of the volume supplied, including an estimated value of the volume supplied to customers between the date of their last meter reading and year end.
Physical energy sales and purchase contracts are accounted for on accrual basis as they are contracted with the Group's expected purchase, sale or usage requirements.
Electricity tax is levied on electricity delivered to retail customers by domestic utilities in Sweden. The tax is calculated on the basis of a fi xed tax rate per kWh. The rate varies between different classes of customers. Sale of electricity in the income statement is shown net of electricity tax.
As from 1 January 2004 Fortum has replaced its physical electricity transactions between the segments with transactions against Nord Pool. The hourly sales and purchases with Nord Pool are netted on the Group level and posted either as revenue or cost, according to whether Fortum is a net seller or a net buyer during any particular hour.
The prices charged to customers for the sale of distribution of electricity are regulated. The regulatory mechanism differs from country to country. Any over or under income decided by the regulatory body is regarded as regulatory assets or liabilities that do not qualify for balance sheet recognition due to the fact that no contract defi ning the regulatory aspect has been entered into with a specifi c customer and thus the receivable is contingent on future delivery. The over or under income is normally credited or charged over a number of years in the future to the customer using the electricity connection at that time. No retroactive credit or charge can be made.
Fees paid by the customer when connected to the electricity, gas, heat or cooling network are recognised as income to the extent that the fee does not cover future commitments. If the connection fee is linked to the contractual agreement with the customer, the income is recognised over the period of the agreement with the customer. Fees paid by customers when connected to the electricity network before 2003 are refundable in Finland if the customer would ever disconnect the initial connection. Also fees paid by the customer when connected to district heating network in Finland are refundable. These connection fees have not been recognised in the income statement and are included in other liabilities in the balance sheet.
Contract revenue is recognised under the percentage of completion method to determine the appropriate amount to recognise as revenue and expenses in a given period. The stage of completion is measured by reference to the contract costs incurred up to the closing date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature.
The Group presents as an asset the amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profi ts (less recognised losses) exceeds progress billings. Progress billings not yet paid by customers and retention are included within "trade and other receivables". The Group presents as a liability the amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profi ts (less recognised losses).
Revenue from activities outside normal operations is reported in Other income. This includes recurring items such as rental income and non-recurring items such as gains from sales of shares, property, plant and equipment, emission rights etc. Other income also includes the changes in the fair value of any derivative instruments that do not qualify for hedge accounting which are recognised immediately in the income statement.
Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and are recognised as income by reducing the depreciation charge of the asset they relate to.
The Group accounts for emission allowances based on currently valid IFRS standards where purchased emission allowances are accounted for as intangible assets at cost, whereas emission allowances received free of charge are accounted for at nominal value. A provision is recognised to cover the obligation to return emission allowances. To the extent that Group already holds allowances to meet the obligation the provision is measured at the carrying amount of those allowances. Any shortfall of allowances held over the obligation is valued at the current market value of allowances. The cost of the provision is recognised in the income statement within materials and services. Gains from sales of emission rights are reported in Other income.
Borrowing costs are recognised as an expense in the period in which they are incurred, except if they are directly attributable to the construction of an asset that meets the determined criteria. The determined criteria is as follows (a) the costs incurred for the construction of an investment exceed EUR 100 million (b) it will take more than 18 months to get the related assets operational (c) it is an initial Greenfi eld investment.
Research and development costs are recognised as expense as incurred and included in other expenses in the income statement. If development costs will generate future income, they are capitalised as intangible assets and depreciated over the period of the income streams.
Property, plant and equipment comprise mainly power and heat producing buildings and machinery, transmission lines, tunnels, waterfall rights and district heating network. Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses as applicable in the consolidated balance sheet. Historical cost includes expenditure that is directly attributable to the acquisition of an item. Cost may also include transfers from equity of any gains or losses on qualifying cash fl ow hedges of foreign currency purchases of property, plant and equipment. Acquired assets on the acquisition of a new subsidiary are stated at their fair values at the date of acquisition.
Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefi ts associated with the item will fl ow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the fi nancial period in which they are incurred.
Additionally the cost of an item of property, plant and equipment includes the estimated cost of its dismantlement, removal or restoration.
Land, water areas, waterfall rights and tunnels are not depreciated since they have indefi nite useful lives. Depreciation on other assets is calculated using the straightline method to allocate their cost to their residual values over their estimated useful lives, as follows:
| Hydropower plant buildings, structures and machinery | 40–50 years |
|---|---|
| Thermal power plant buildings, structures and machinery | 25 years |
| Nuclear power plant buildings, structures and machinery | 25 years |
| CHP power plant buildings, structures and machinery | 15–25 years |
| (each CHP plant has an individual depreciation period) | |
| Substation buildings, structures and machinery | 30–40 years |
| Distribution network | 15–40 years |
| District heating network | 30–40 years |
| Other buildings and structures | 20–40 years |
| Other tangible assets | 20–40 years |
| Other machinery and equipment | 3–20 years |
| Other non-current investments | 5–10 years |
The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each closing date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
Fortum owns, through its subsidiary Fortum Power and Heat Oy, the coal condensing power plant Meri-Pori in Finland, but Teollisuuden Voima Oyj (TVO) has the contractual right to participate in the plant with 45.55%. The capacity and production can be divided between Fortum and TVO. Each owner can decide when and how much capacity to produce. Both Fortum and TVO purchase fuel and CO2 rights independently. Since both Fortum and TVO have control, including related risks and rewards, of their share of the power plant, Meri-Pori is accounted for as a jointly controlled asset.
Fortum is accounting for the part of the investment that corresponds to the investment Fortum has made, i.e. 55.55%. At present Fortum leases out its part of the Meri-Pori power plant. The lease agreement has been classifi ed as an operating lease.
Fortum is also entitled to part of the electricity TVO produces in Meri-Pori through the shareholding of 26.58% of TVO C-series shares, see Note 21 Participations in associated companies and joint ventures.
Intangible assets, except goodwill, are stated at the historical cost less accumulated amortisation and impairment losses if applicable and amortised on a straight-line method over their expected useful lives.
Acquired computer software licences are capitalised on the basis of the costs incurred to the acquirer and bring to use the specifi c software. These costs are amortised over their estimated useful lives (three to fi ve years). Costs associated with developing or maintaining computer software are recognised as an expense as incurred. Costs that are directly associated with the production of identifi able and unique software products controlled by the Group, and that will generate economic benefi ts exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognised as assets are amortised over their estimated useful lives (not exceeding three years).
Trademarks and licences are shown at historical cost less accumulated amortisation and impairment losses, as applicable. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and licences over their estimated useful lives (15–20 years).
Costs in connection with acquisition of customer base are stated at its fair values at the date of the acquisition. Customer base means a portfolio of customers or a market share. Costs for customer base is amortised over their useful life, usually in fi ve years. The customer base is also reviewed for impairment by assessing at each closing date whether there is any indication that the carrying amount may be impaired.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of net identifi able assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefi t from the business combination in which the goodwill arose.
Assets that have an indefi nite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the assets' carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifi able cash fl ows (cash-generating units). Non-fi nancial assets other than goodwill that suffered an impairment charge are reviewed for possible reversal of the impairment at each reporting date.
The Group classifi es its investments in the following categories: fi nancial assets at fair value through profi t or loss, loans and receivables and available-for-sale fi nancial assets. The classifi cation depends on the purpose for which the investments were acquired. Management determines the classifi cation of its fi nancial assets at initial recognition and re-evaluates this designation at every reporting date.
A fi nancial asset is classifi ed in this category if acquired principally for the purpose of selling in the short-term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classifi ed as current assets if they are either held for trading or are expected to be realised within 12 months of the closing date.
Loans and receivables are non-derivative fi nancial assets with fi xed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor. They are included in non-current assets, except for maturities under 12 months after the closing date. These are classifi ed as current assets.
Available-for-sale fi nancial assets are non-derivatives that are either designated in this category or not classifi ed in any of the other categories. They are included in non-current assets unless there is an intention to dispose of the investment within 12 months of the closing date.
Purchases and sales of investments are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all fi nancial assets not carried at fair value through profi t or loss. Investments are derecognised when the rights to receive cash fl ows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale fi nancial assets and fi nancial assets at fair value through profi t or loss are subsequently carried at fair value. Loans are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the "fi nancial assets at fair value through profi t or loss" category are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of securities classifi ed as available-for-sale are recognised in equity. When securities classifi ed as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement.
The fair values of quoted investments are based on current bid prices. If the market for a fi nancial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash fl ow analysis, and option pricing models refi ned to refl ect the issuer's specifi c circumstances.
The Group assesses at each closing date whether there is objective evidence that a fi nancial asset or a group of fi nancial assets is impaired. If any such evidence exists for available-for-sale fi nancial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that fi nancial asset previously recognised in profi t or loss – is removed from equity and recognised in the income statement.
Trade receivables are recorded at their fair value. A provision for impairment of trade receivables is established when there is evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. Signifi cant fi nancial diffi culties of the debtor, probability that the debtor will enter into bankruptcy or fi nancial reorganisation, and default or delinquency in payments are considered as indicators that the receivable is impaired. The amount of the impairment charge is measured as the difference between the asset's carrying amount and the present value of estimated future cash fl ows.
Trade receivables include revenue based on an estimate of electricity, heat, cooling and distribution of electricity already delivered but not yet measured and not yet invoiced.
Cash and cash equivalents include cash in hand, deposits held at call with banks and other short-term, highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet.
Where any group company purchases the Company's shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company's equity holders. When such shares are subsequently sold or reissued, any consideration received is included in equity.
Borrowings are recognised initially at fair value less transaction costs incurred. In subsequent periods, they are stated at amortised cost; any difference between proceeds (net of transaction costs) and the redemption value is recognised as interest cost over the period of the borrowing using the effective interest method. Borrowings or portion of borrowings being hedged item of a fair value hedge is recognised at fair value.
Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership, are classifi ed as fi nance leases. Finance leases are capitalised at the commencement of the lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments each determined at the inception of the lease. Each lease payment is allocated between the reduction of the outstanding liability and the fi nance charges. The corresponding rental obligations, net of fi nance charges, are included in the long-term or short-term interest-bearing liabilities according to their maturities. The interest element of the fi nance cost is charged to the income statement over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under fi nance leases are depreciated over the shorter of the useful life of the asset or the lease term.
Sale and leaseback transactions resulting in a fi nance lease agreement are recognised according to the principles described above. The difference between the selling price and the carrying amount of the asset sold is deferred and amortised over the lease period.
The property, plant and equipment leased out under a fi nance lease are presented as interest-bearing receivables at an amount equal to the net investment in the lease. Each lease payment receivable is allocated between the repayment of the principal and the fi nance income. Finance income is recognised in the income statement over the lease term so as to produce a constant periodic rate of return on the remaining balance of the receivable for each period.
Leases of property, plant and equipment, where the Group does not have substantially all of the risks and rewards of ownership are classifi ed as operating leases. Payments made under operating leases are recognised in the income statement as costs on a straight-line basis over the lease term.
Payments received under operating leases where the Group leases out fi xed assets are recognised as other income in the income statement. Fortum has leased out its share of the coal condensing power plant Meri-Pori in Finland until June 2010. (See also Jointly controlled assets above.) The lease agreement has been classifi ed as an operating lease.
Inventories are stated at the lower of cost and net realisable value. Cost is determined using the fi rst-in, fi rst-out (FIFO) method. The cost of fi nished goods and work in progress comprises raw materials, direct labour, other direct costs and related fi xed production overheads (based on normal operating capacity). Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated fi nancial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profi t or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the closing date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profi t will be available against which the temporary differences can be utilised. Deferred tax assets are set off against deferred tax liabilities if they relate to income taxes levied by the same taxation authority.
Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future.
The Group companies have various pension schemes in accordance with the local conditions and practises in the countries in which they operate. The schemes are generally funded through payments to insurance companies or Groups pension fund as determined by periodic actuarial calculations. The Group has both defi ned benefi t and defi ned contribution plans.
The Group's contributions to defi ned contribution plans are charged to the income statement in the period to which the contributions relate.
For defi ned benefi t plans, pension costs are assessed using the projected unit credit method. The cost of providing pensions is charged to the income statement as to spread the service cost over the service lives of employees. The defi ned benefi t obligation is measured as the present value of the estimated future cash fl ows using interest rates of high-quality corporate bonds that have terms to maturity approximating to the terms of the related pension liability. The liability recognised in the balance sheet is the defi ned benefi t obligation at the closing date less the fair value of plan assets with adjustments for unrecognized actuarial gains or losses. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
Actuarial gains and losses exceeding 10% of total of the present value of defi ned benefi t obligations or the fair value of plan assets (whichever is higher) are recorded in the income statement over the employees' expected average remaining working lives. These limits are calculated and applied separately for each defi ned benefi t plan. Past-service costs are recognised immediately in income statement amortised on a straight-line basis over the vesting period. The related interest cost is included in the employee benefi t expense.
The Group operates long-term management performance share arrangements. The potential reward of the performance share arrangement is based on the performance of the Group, its business units and the individual participant as well as appreciation of the Fortum share. The potential reward of the performance share arrangement is treated as cash settled arrangement which is recognised as an expense during the vesting period with a corresponding increase in the liabilities. The fair value of the potential reward is measured based on the market value of Fortum share at each closing date and at the grant date. Estimated departures are taken into account when determining the fair value of the potential reward. The changes of the fair value of the potential reward are accrued over the remaining vesting period. A provision is recorded on the social charges related to the arrangement payable by the employer.
In order to hedge the Group against the changes in the fair values of the potential rewards the Group has entered into share forward transactions which are settled in cash. The forward transactions do not qualify for hedge accounting and therefore the periodic changes to their fair values are recorded in the income statement.
Stock options are measured at fair value at the time they were granted, and, they are expensed on a straight-line basis in the income statement over the period from the date they were granted to commencement of the right to exercise them. The expense determined at the moment of granting the options is based on an estimate of the number of options that will vest at the time of commencement of the right to exercise them. The fair value of the options is determined on the basis of the Black-Scholes or Binomial pricing model. Estimates of the fi nal amount of options are updated on each closing date if applicable and the effects of changes in estimates are recorded in the income statement. Social charges related to the options payable by the employer are entered as an expense to the income statement and as a provision in the balance sheet in the accounting period during which the options are granted. This provision is measured based on the fair value of the options, and the amount of the provision is adjusted to refl ect the changes in the Fortum share price. When stock options are exercised, the cash payments received on the basis of the share subscriptions (adjusted for any transaction expenses) are recognised in equity.
Provisions for environmental restorations, asset retirement obligations, restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events to a third party, it is probable that an outfl ow of resources will be required to settle the obligation and the amount can be reliably estimated.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that refl ects current market assessments of the time value of money and the risks specifi c to the obligation. The increase in the provision due to the passage of time is recognised as interest expense.
Environmental provisions are recognised, based on current interpretation of environmental laws and regulations, when it is probable that a present obligation has arisen and the amount of such liability can be reliably estimated. Environmental expenditures resulting from the remediation of an existing condition caused by past operations, and which do contribute to current or future revenues, are expensed as incurred.
Asset retirement obligation is recognised either, when there is a contractual obligation towards a third party or a legal obligation and the obligation amount and the defi nite lifetime can be estimated reliably. Obligating event is e.g. when a plant is built on a leased land with an obligation to dismantle and remove the asset in the future or when a legal obligation towards Fortum changes. The asset retirement obligation is recognised as part of the cost of an item of property and plant when the asset is put in service or when contamination occurs. The costs will be depreciated over the remainder of the assets' useful life.
Restructuring provisions comprise mainly of employee termination payments.
Fortum owns Loviisa nuclear power plant in Finland. Fortum's part of the State Nuclear Waste Management Fund and the related nuclear provisions are both presented separately in the balance sheet. Fortum's share in the State Nuclear Waste Management Fund is accounted for according to IFRIC 5, Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds, which states that the fund assets are measured at the lower of fair value or the value of the related liabilities since Fortum does not have control or joint control over the State Nuclear Waste Management Fund. The related provisions are the provision for decommissioning and the provision for disposal of spent fuel.
The fair values of the provisions are calculated by discounting the separate future cash fl ows, which are based on estimated future costs and actions already taken. The initial net present value of the provision for decommissioning (at the time of commissioning the nuclear power plant) has been included in the investment cost and is depreciated over the estimated operating time of the nuclear power plant. Changes in the technical plans etc, which have an impact on the future cash fl ow of the estimated costs for decommissioning, are accounted for by discounting the additional costs to the current point in time. The increased asset retirement cost due to the increased provision is added to property, plant and equipment and depreciated over the remaining estimated operating time of the nuclear power plant.
The provision for spent fuel covers the future disposal costs for fuel used until the end of the accounting period. Costs for disposal of spent fuel are expensed during the operating time based on fuel usage. The impact of the possible changes in the estimated future cash fl ow for related costs is recognised immediately in the income statement based on the accumulated amount of fuel used until the end of the accounting period. The related interest costs due to unwinding of the provision, for the period during which the spent fuel provision has been accumulated and present point in time, are also recognised immediately in the income statement.
The timing factor is taken into account by recognising the interest expense related to discounting the nuclear provisions. The interest on the State Nuclear Waste Management Fund assets is presented as fi nancial income.
Fortum's actual share of the State Nuclear Waste Management Fund, related to Loviisa nuclear power plant, is higher than the carrying value of the Fund in the balance sheet. The legal nuclear liability should, according to the Finnish Nuclear Energy Act, be fully covered by payments and guarantees to the State Nuclear Waste Management Fund. The legal liability is not discounted while the provisions are, and since the future cash fl ow is spread over 100 years, the difference between the legal liability and the provisions are material.
The annual fee to the Fund is based on changes in the legal liability, the interest income generated in the State Nuclear Waste Management Fund and incurred costs of taken actions.
Fortum also has minority shareholdings in the associated nuclear power production companies Teollisuuden Voima Oyj (TVO) in Finland and directly and indirectly OKG AB and Forsmarks Kraftgrupp AB in Sweden. The Group's interests in associated companies are accounted for by the equity method. Accounting policies of the associates regarding nuclear assets and liabilities have been changed where necessary to ensure consistency with the policies adopted by the Group.
For more information regarding nuclear related assets and liabilities, see Note 35 Nuclear related assets and liabilities on page 162.
A contingent liability is disclosed when there is a possible obligation that arises from events and whose existence is only confi rmed by one or more doubtful future events or when there is an obligation that is not recognised as a liability or provision because it is not likely that on outfl ow of resources will be required.
Basic earnings per share is calculated by dividing the net profi t attributable to shareholders by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held as treasury shares.
Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. For the warrants and stock options a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Fortum share) based on the monetary value of the subscription rights attached to outstanding stock options.
The number of shares calculated as above is deducted from the number of shares that would have been issued assuming the exercise of the stock options. The incremental shares obtained through the assumed exercise of the options and warrants are added to the weighted average number of shares outstanding.
Options and warrants have a dilutive effect only when the average market price of ordinary shares during the period exceeds the exercise price of the options or warrants. Previously reported earnings per share are not retroactively adjusted to refl ect changes in price of ordinary shares.
Dividends proposed by the Board of Directors are not recognised in the fi nancial statements until they have been approved by the Company's shareholders at the Annual General Meeting.
Within the ordinary course of business the Group routinely enters into sale and purchase transactions for commodities. The majority of these transactions take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the commodity in accordance with the Group's expected sale, purchase or usage requirements. Such contracts are not within the scope of IAS 39. All other net-settled commodity contracts are measured at fair value with gains and losses taken to the income statement.
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of highly probable forecast transactions (cash fl ow hedges); (2) hedges of the fair value of recognised assets or liabilities or a fi rm commitment (fair value hedge); or (3) hedges of net investments in foreign operations. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an on-going basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash fl ows of hedged items. Derivatives are divided into non-current and current based on maturity. Only for those electricity derivatives, which have cash fl ows in different years, the fair values are split between non-current and current assets or liabilities.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash fl ow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profi t or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-fi nancial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity is recognised in the income statement when the forecast transaction is ultimately also recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately recognised in the income statement.
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.
If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profi t or loss for the period to maturity.
Hedges of net investments in foreign operations are accounted for similarly to cash fl ow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of.
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in other income in the income statement.
The fair value of fi nancial instruments including electricity derivatives traded in active markets (such as publicly traded derivatives, and trading and available-forsale securities) is based on quoted market prices at the closing date. The fair value of fi nancial instruments that are not traded in an active market is determined by using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at each closing date.
Fair valuation of electricity derivatives maturing over six years and which are not standard Nord Pool products are based on prices collected from reliable market participants. Other techniques, such as estimated discounted cash fl ows, are used to determine fair value for the remaining fi nancial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash fl ows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the closing date. Fair values of options are determined by using option valuation models. The fair value of fi nancial liabilities is estimated by discounting the future contractual cash fl ows at the current market interest rate that is available to the Group for similar fi nancial instruments. Changes in assumptions about these factors will affect the reported fair value of fi nancial instruments.
In fair valuation, credit spread has not been adjusted, as quoted market prices of instrument used are believed to be consistent with the objective of a fair value measurement. Financial instruments used in Fortum are standardized products that are either cleared via exchanges or widely traded in the market. Commodity derivatives are generally cleared through exchanges such as for example Nord Pool and fi nancial derivatives done with creditworthy fi nancial institutions with investment grade ratings.
The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values.
The preparation of consolidated fi nancial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the consolidated fi nancial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The company's critical accounting estimates and judgments are described below.
The Group has signifi cant carrying values in property, plant and equipment which are tested for impairment according to the accounting policy stated in Note 1 Accounting policies. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates of future cash fl ows.
The Group has not recognised any impairment losses during 2008 based on these calculations. If the revised estimated operating profi t before depreciation at 31 December 2008 was 10% lower than management's estimates at 31 December 2008 or pre-tax discount rate applied to the discounted cash fl ows was 10% higher than management's estimates, the Group would not have recognised impairment against property plant and equipment.
Fortum has deferred tax assets and liabilities which are expected to be realised through the income statement over the extended periods of time in the future. In calculating the deferred tax items, Fortum is required to make certain assumptions and estimates regarding the future tax consequences attributable to differences between the carrying amounts of assets and liabilities as recorded in the fi nancial statements and their tax basis.
Assumptions made include the expectation that future operating performance for subsidiaries will be consistent with historical levels of operating results, recoverability periods for tax loss carry-forwards will not change, undistributed earnings of foreign investments have been permanently invested and that existing tax laws and rates will remain unchanged into foreseeable future. Fortum believes that it has prudent assumptions in developing its deferred tax balances.
The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the fi nal outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Were the actual fi nal outcome (regarding tax audits) to differ negatively from management's estimates with 10%, the Group would need to increase the income tax liability by EUR 1 million.
The provision for future obligations for nuclear waste management including decommissioning of Fortum's nuclear power plant and related spent fuel is based on long-term cash fl ow forecasts of estimated future costs. The main assumptions are technical plans, timing, costs estimates and discount rate. The technical plans, timing and cost estimates are approved by governmental authorities.
Any changes in the assumed discount rate would affect the provision. If the discount rate used would be lowered, the provision would increase. Fortum has contributed cash to the State Nuclear Waste Management Fund based on a non-discounted legal liability, which leads to that the increase in provision would be offset by an increase in the recorded share of Fortum's part of the State Nuclear Waste Management Fund in the balance sheet. The total effect on the income statement would be positive since the decommissioning part of the provision is treated as an asset retirement obligation. This situation will prevail as long as the legal obligation to contribute cash to the State Nuclear Waste Management Fund is based on a non-discounted liability and IFRS is limiting the carrying value of the assets to the amount of the provision since Fortum does not have control or joint control over the fund. (See Note 35 Nuclear related assets and liabilities).
The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Any changes in these assumptions will impact the carrying amount of pension obligations. Assumptions used and sensitivity analysis of change in discount factor is presented in Note 34 Pension obligations.
Risk management objectives, principles, and framework including governance, organisation and processes as well as description of risks i.e. strategic, fi nancial and operational risks are described in Operating and Financial Review (OFR).
Fortum defi nes fi nancial risk as the negative effects of market price movements, volume changes, liquidity events or counterpart events. A number of different methods, such as Value-at-Risk and Profi t-at-Risk, are used throughout Fortum to quantify fi nancial risks. In particular, the potential impact of price and volume risks of electricity, weather, CO2 and main fuels are assessed taking into account their interdependencies. Stress-testing is carried out in order to assess the effects of extreme electricity price movements on Fortum's earnings.
Financial risk taking in business units aims to capture potential upside by optimising hedging or by trading in the markets. Risk taking is limited by risk mandates. Risk mandates include minimum EBIT levels for the business units that are set by the President and CEO. Volumetric limits, Value-at-Risk limits, Stop-Loss limits and counterpart exposure limits are also in place.
Strategies for hedging the electricity price are developed and executed by the business units within set mandates approved by the Fortum Management Team. In the Nordic markets, the hedging strategies are executed by entering into electricity derivatives contracts. In Russia, there is currently no existing fi nancial market for electricity as the majority of electricity sales are regulated. Hedging strategies for Russia will be developed in line with the deregulation of the electricity market. Risk in the hedging strategies and their execution are continuously evaluated in accordance with models approved by the CFO.
Fortum's sensitivity to electricity market price is dependent on the hedge level for a given time period. The hedge ratio on 31 December 2008 was approximately 65% for the year 2009 and 40% for 2010. Assuming no changes in generation volumes, hedge ratios or cost structure a 1 EUR/ MWh change in the market price of electricity would affect Fortum's 2009 profi t before income tax by approximately EUR 18 million and 2010 EUR 30 million. Volume used in this sensitivity analysis is 50 TWh which includes the electricity generation sold to the spot market in Sweden and Finland in Power Generation and Heat segments without minority owner's shares of electricity or other pass-through sales. This volume is heavily dependent on price level, hydrological situation, the length of annual maintenance periods and availability of power plants. Sensitivity is calculated only for market price movement as hydrological conditions, temperature, CO2 allowance prices, fuel prices and the import/export situation all affect electricity price on short-term basis and effects of these factors cannot be separated as individual sensitivity analysis. The sensitivity to electricity prices in Russia is not calculated as this price is to a large extent regulated, and the effects of any changes of the price will be off-set by changes to the price of gas, which is the main fuel cost component.
Sensitivity analysis shows the sensitivity arising from fi nancial electricity derivatives as defi ned in IFRS 7. These derivatives are used in hedging and proprietary trading purposes in various Business Units within Fortum. Sensitivities are calculated based on 31 December 2008 (31 December 2007) position. Positions are actively managed in the day-to-day business operations and therefore the sensitivities vary from time to time. Sensitivity analysis includes only the market risks arising from derivatives i.e. the underlying physical electricity sales and purchase is not included. Sensitivity is calculated with the assumption that electricity forward quotations in Nord Pool and in EEX would change 1 EUR/MWh for the period Fortum has derivatives.
| +/– 1 EUR/MWh change in electricity forward quotations, EUR million | Effect | 2008 | 2007 |
|---|---|---|---|
| Effect on Profi t before income tax | –/+ | 1 | 2 |
| Effect on Equity | –/+ | 40 | 29 |
The tables below disclose the Group's electricity derivatives used mainly for hedging electricity price risk. The fair values represent the values disclosed in the balance sheet.
See also Note 1 Accounting policies for accounting principles and bases for fair value estimations on page 112 and Note 6 Fair value changes of derivatives and underlying items in income statement on page 134 for the effects in the income statement regarding electricity derivatives not getting hedge accounting status.
| Gross | Volume, TWh | Fair value, EUR million | ||||||
|---|---|---|---|---|---|---|---|---|
| Under 1 year |
1–5 years |
Over 5 years |
Total | Positive | Negative | Net | ||
| Sales swaps | 108 | 56 | 1 | 165 | 2,168 | 66 | 2,102 | |
| Purchase swaps | 89 | 34 | - | 123 | 54 | 1,746 | –1,692 | |
| Purchased options | 2 | - | - | 2 | 0 | 0 | 0 | |
| Written options | 4 | - | - | 4 | 2 | 16 | –14 | |
| Total | 203 | 90 | 1 | 294 | 2,224 | 1,828 | 396 | |
| Netting against electricity exchanges 1) |
–1,717 | –1,717 | 0 | |||||
| Balance | 507 | 111 | 396 |
1) Receivables and liabilities against electricity exchanges arising from standard derivative contracts with same delivery period are netted.
| Gross | Volume, TWh | Fair value, EUR million | |||||
|---|---|---|---|---|---|---|---|
| Under 1 year |
1–5 years |
Over 5 years |
Total Positive Negative | Net | |||
| Derivatives with hedge accounting status |
95 | 66 | 0 | 161 | 1,349 | 942 | 407 |
| Derivatives with non-hedge accounting status 1) |
107 | 25 | 1 | 133 | 875 | 886 | –11 |
| Total | 202 | 91 | 1 | 294 | 2,224 | 1,828 | 396 |
| Netting against electricity exchanges 2) |
|||||||
| Derivatives with hedge accounting status | –931 | –931 | 0 | ||||
| Derivatives with non-hedge accounting status 1) |
–786 | –786 | 0 | ||||
| Total | –1,717 | –1,717 | 0 | ||||
| Balance | 507 | 111 | 396 | ||||
| Of which long-term | 219 | 45 | 174 | ||||
| Short-term | 288 | 66 | 222 |
| Gross | Volume, TWh | Fair value, EUR million | |||||
|---|---|---|---|---|---|---|---|
| Under 1 year |
1–5 years |
Over 5 years |
Total Positive Negative | Net | |||
| Sales swaps | 92 | 26 | 1 | 119 | 65 | 716 | –651 |
| Purchase swaps | 71 | 17 | 0 | 88 | 526 | 64 | 462 |
| Purchased options | - | - | - | - | - | - | - |
| Written options | 2 | - | - | 2 | 1 | 2 | –1 |
| Total | 165 | 43 | 1 | 209 | 592 | 782 | –190 |
| Netting against electricity exchanges 2) |
–473 | –473 | 0 | ||||
| Balance | 119 | 309 | –190 |
| Gross | Volume, TWh | Fair value, EUR million | |||||
|---|---|---|---|---|---|---|---|
| Under 1 year |
1–5 years |
Over 5 years |
Total Positive Negative | Net | |||
| Derivatives with hedge accounting status |
65 | 25 | 0 | 90 | 211 | 383 | –172 |
| Derivatives with non-hedge accounting status 1) |
100 | 18 | 1 | 119 | 381 | 399 | –18 |
| Total | 165 | 43 | 1 | 209 | 592 | 782 | –190 |
| Netting against electricity exchanges 2) |
|||||||
| Derivatives with hedge accounting status | –198 | –198 | 0 | ||||
| Derivatives with non-hedge accounting status 1) |
–275 | –275 | 0 | ||||
| Total | –473 | –473 | 0 | ||||
| Balance | 119 | 309 | –190 | ||||
| Of which long-term | 56 | 88 | –32 | ||||
| Short-term | 63 | 221 | –158 |
1) Derivatives with non-hedge accounting status consist of trading derivatives and cash flow hedges without hedge accounting status.
2) Receivables and liabilities against electricity exchanges arising from standard derivative contracts with same delivery period are netted.
Power and heat generation, customer sales, and electricity distribution volumes have signifi cant variations that depend on the nature of the business. These volumes are subject to changes in, for example, hydrological conditions and temperature.
Changes in volumes are closely monitored so that hedges can be adjusted accordingly. In addition, volume risks in power and heat generation are partly mitigated through generation fl exibility.
Fortum uses fi nancial derivatives such as oil and coal derivatives to mitigate its fuel price risk. At 31 December 2008 Fortum had oil sales swaps and futures amounting to 1,047 thousand bbl (2007: 460) and oil purchase swaps and futures amounting to 1,230 thousand bbl (2007: 795). The respective net fair values were EUR –14 million (2007: –4) and EUR 11 million (2007: 9). Volumes of sold and bought coal derivatives were 276 kt (2007: 150) and 641 kt (2007: 375) respectively and the net fair values were EUR 7 million (2007: –1) and EUR –16 million (2007: 1).
Fortum manages its exposure to CO2 allowance prices related to own production through the use of CO2 forwards and by ensuring that the costs of allowances are taken into account during production planning. These CO2 allowances are own use contracts valued at cost.
In addition to own production Fortum has proprietary trading book. These allowances are treated as derivatives in the accounts. At 31 December 2008 the trading volumes of sold and bought CO2 emission allowances were 592 ktCO2 (2007: 3,101) and 592 ktCO2 (2007: 3,121). The respective net fair values were EUR 4 million (2007: –13) and EUR –4 million (2007: 13).
On 20 February 2008, Fortum, the Russian Territorial Generating Company No. 1 (TGC-1) and ECF Project Ltd signed an agreement according to which Fortum will purchase approximately 5 million tonnes of emission reduction units (ERU) from TGC-1. The ERUs will come from Joint Implementation projects conducted at TGC-1's production facilities during the Kyoto Period (2008–2012) of the European Emissions Trading Scheme. The agreement has been classifi ed as an own use contract and valued at cost.
Amounts disclosed below are non-discounted cash fl ows for electricity derivatives.
| EUR million | 31 December 2008 | 31 December 2007 | ||||||
|---|---|---|---|---|---|---|---|---|
| Under 1 year |
1–5 years |
Over 5 years |
Total | Under 1 year |
1–5 years |
Over 5 years |
Total | |
| Electricity derivatives liabilities |
–1,461 | –657 | –4 | –2,122 | 642 | 166 | 9 | 817 |
| Electricity derivatives assets | 1,565 | 713 | 3 | 2,281 | 466 | 133 | 6 | 605 |
Fortum is trading electricity forwards, futures and options mainly on the Nord Pool and EEX market, CO2 allowances on the European market and fi nancial coal derivatives on the ICE and OTC market.
Proprietary trading risks are monitored and reported daily, and have stringent controls in place. Overall trading mandates for Fortum are set by the Fortum Management Team, and these mandates are further cascaded down to individual portfolios. Stop-loss mandates are set to limit the cumulative maximum loss during the year, and "red-fl ag" thresholds for losses are established at predefi ned levels to signal the need for management involvement before reaching the stop-loss limit. Value-at-Risk mandates are set to limit the maximum level of risk at any given time.
Fortum's business is capital intensive and the Group has a regular need to raise fi nancing. Fortum has a diversifi ed loan portfolio mainly consisting of long-term bond fi nancing but also a variety of other long- and short-term fi nancing facilities. On 31 December 2008, the total interest-bearing debt was EUR 7,500 million (2007: 4,893) and the interest-bearing net debt was EUR 6,179 million (2007: 4,466).
Fortum manages liquidity and refi nancing risks through a combination of cash positions and committed credit facility agreements with its core banks. The Group shall at all times have access to cash/marketable securities and unused committed credit facilities including overdrafts, to cover all loans maturing within the next twelve-month period. However, cash/marketable securities and unused committed credit facilities shall always amount to at least EUR 500 million.
On 31 December 2008, loan maturities for the coming twelve-month period amounted to EUR 980 million (2007: 605), liquid funds amounted to EUR 1,321 million (2007: 427) including TGC-10 bank deposits amounting to EUR 1,014 million earmarked to be used in Russian investment programme. The total amount of committed credit facilities amounted to EUR 2,906 million (2007: 1,416) of which EUR 2,306 million was undrawn (2007: 1,416).
Debt maturities in 2009 and 2010 are limited. In 2009, EUR 395 million is maturing in Q1 and EUR 585 million during the rest of the year. EUR 457 million of the debt maturing in 2009 is CP fi nancing. Debt maturing in 2010 amounts to EUR 543 million. In 2011, the Term Loan Facility of EUR 2,000 million will mature, and the total for maturing debt in 2011 is EUR 2,242 million.
| EUR million | 2008 |
|---|---|
| 2009 | 980 |
| 2010 | 543 |
| 2011 | 2,242 |
| 2012 | 445 |
| 2013 | 1,104 |
| 2014 and later | 2,186 |
| Total | 7,500 |
| EUR million | Total facility |
Drawn amount |
Available amount |
|---|---|---|---|
| Liquid funds | |||
| Cash and cash equivalents | 733 | ||
| Bank deposits over 3 months | 588 | ||
| Total | 1,321 | ||
| of which Russia (TGC-10) | 1,020 | ||
| Committed credit lines | |||
| EUR 1,200 million syndicated credit facility | 1,200 | - | 1,200 |
| EUR 1,500 million syndicated credit facility | 1,500 | 600 | 900 |
| Bilateral overdraft facilities | 206 | - | 206 |
| Total | 2,906 | 600 | 2,306 |
| Debt programmes (uncommitted) | |||
| Fortum Corporation, CP programmes EUR 500 million | 500 | 172 | 328 |
| Fortum Corporation, CP programmes SEK 5,000 million | 460 | 285 | 175 |
| Fortum Corporation, EMTN programmes EUR 5,000 million | 5,000 | 2,918 | 2,082 |
| Total | 5,960 | 3,375 | 2,585 |
TGC-10 bank deposits amounting to EUR 1,014 million are earmarked to be used in Russian investment programme. Of these deposits at the year end 2008, EUR 504 million were euros and EUR 510 million Russian roubles. Bank deposits maturing over three months are all in TGC-10.
| EUR million | Total facility |
Drawn amount |
Available amount |
|---|---|---|---|
| Cash and Marketable securities | 427 | ||
| Committed credit lines | |||
| EUR 1,200 million syndicated credit facility | 1,200 | - | 1,200 |
| Bilateral overdraft facilities | 216 | - | 216 |
| Total | 1,416 | - | 1,416 |
| Debt programmes (uncommitted) | |||
| Fortum Corporation, CP programmes EUR 500 million | 500 | - | 500 |
| Fortum Corporation, CP programmes SEK 5,000 million | 530 | - | 530 |
| Fortum Corporation, EMTN programmes EUR 5,000 million | 5,000 | 3,361 | 1,639 |
| Total | 6,030 | 3,361 | 2,669 |
Amounts disclosed below are non-discounted cash fl ows of interest-bearing liabilities and interest rate and currency derivatives, and the expected cash fl ows arising (future interest payments and amortisations) from these items.
| EUR million | 31 December 2008 | 31 December 2007 | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Under 1 year |
1–5 years |
Over 5 years |
Total | Under 1 year |
1–5 years |
Over 5 years |
Total | ||
| Interest-bearing liabilities | 1,271 | 5,016 | 2,524 | 8,811 | 838 | 2,344 | 3,149 | 6,331 | |
| Interest rate and currency derivatives liabilities |
5,046 | 1,858 | 60 | 6,964 | 4,895 | 3,570 | 136 | 8,601 | |
| Interest rate and currency derivatives receivables |
–5,490 | –2,027 | –59 | –7,576 | –4,924 | –3,608 | –133 | –8,665 | |
| Total | 827 | 4,847 | 2,525 | 8,199 | 809 | 2,306 | 3,152 | 6,267 |
Interest-bearing liabilities include loans from the State Nuclear Waste Fund and Teollisuuden Voima Oyj EUR 708 million (2007: 658). These loans are renewed yearly and connected interest payments are calculated for ten years in the table above.
For further information regarding loans from the State Nuclear Waste Fund and Teollisuuden Voima Oyj, see Note 35 Nuclear related assets and liabilities on page 162.
The Treasury risk policy stipulates that the average duration of the debt portfolio shall always be kept within a range of 12 and 24 months, and that the fl ow risk i.e. changes in interest rates shall not affect the net interest payments of the Group by more than EUR 60 million for the next rolling 12-month period. Within these mandates, strategies are evaluated and developed in order to fi nd an optimal balance between risk and fi nancing cost.
On 31 December 2008 the average duration of the debt portfolio (including derivatives) was 1.6 years (2007: 1.3). Approximately 64% (2007: 67%) of the debt portfolio was on a fl oating rate basis or are fi xed rate loans maturing with the next 12 months period. The effect of one percentage point change in interest rates on the present value of the debt portfolio was EUR 88 million on 31 December 2008 (2007: 71). The fl ow risk, measured as the difference between the base case net interest cost estimate and the worst case scenario estimate for Fortum's debt portfolio for the coming 12 months, was EUR 19 million (2007: 14).
The average interest rate on loans and derivatives on December 31, 2008 was 4.7% (2007: 4.6%). Average cumulative interest rate on loans and derivatives for 2008 was 5.3% (2007: 4.3%).
Fortum's policy is to hedge major transaction exposures to avoid exchange differences in the profi t and loss statement. These exposures are mainly hedged by forward contracts. Translation exposures arising when consolidating income statements and balance sheet statements of entities in Fortum Group whose base currency is not euros, (in Fortum this means mainly entities operating in: Sweden, Russia, Norway and Poland) are generally not hedged as the majority of these assets are considered to be long-term strategic holdings of the Fortum Group.
The currency risk relating to transaction exposures are measured using Value-at-Risk (VaR) for one-day period at 95% confi dence level. Translation exposures relating to net investments in foreign entities are measured using a fi ve day period at 95% confi dence level. The limit for transaction exposure is VaR EUR 5 million. On 31 December 2008 the open transaction and translation exposures were EUR 38 million (2007: 23) and EUR 4,060 million (2007: 1,797). The VaR for the transaction exposure was EUR 0 million (2007: 0) and VaR for the translation exposure calculated without the fair value change of Renewable Energy Corporation (REC) in Hafslund was EUR 75 million (2007: 8).
For further information about the accounting of Fortum's shareholding in Hafslund, see Note 21 Participations in associated companies and joint ventures on page 147.
| EUR million | 31 December 2008 | 31 December 2007 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net position |
Hedge | Open | Net position |
Hedge | Open | |||
| SEK | 5,402 | –5,402 | 0 | 6,266 | –6,300 | –34 | ||
| USD | –115 | 115 | 0 | –118 | 118 | 0 | ||
| NOK | 312 | –312 | 0 | 391 | –383 | 8 | ||
| Other | 216 | –254 | –38 | 194 | –191 | 3 | ||
| Total | 5,815 | –5,853 | –38 | 6,733 | –6,756 | –23 |
Transaction exposure is defi ned already contracted or forecasted foreign exchange dependent items and cash fl ows. Transaction exposure is divided into balance sheet exposure and cash fl ow exposure. Balance sheet exposure refl ects currency denominated assets and liabilities for example loans, deposits and accounts payable/receivable in currencies other than the company's home currency. Cash fl ow exposure refl ects future forecasted or contracted currency fl ows in foreign currency deriving from business activities for example sales, purchases or investments. Net conversion differences relating to transaction exposures are entered under fi nancial income or expenses except when deferred in equity as qualifying cash fl ow hedges, or when related to accounts receivable/payable entered under items included in operating profi t.
| EUR million | 31 December 2008 31 December 2007 |
|||||
|---|---|---|---|---|---|---|
| Investment | Hedge | Open Investment | Hedge | Open | ||
| RUB | 2,634 | - | 2,634 | - | - | - |
| SEK | 803 | - | 803 | 490 | - | 490 |
| NOK | 435 | - | 435 | 1,109 | - | 1,109 |
| PLN | 114 | - | 114 | 122 | - | 122 |
| Other | 140 | –66 | 74 | 128 | –52 | 76 |
| Total | 4,126 | –66 | 4,060 | 1,849 | –52 | 1,797 |
Translation exposure position includes net investments in foreign subsidiaries and associated companies. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. The depreciation of SEK, NOK and RUB against EUR in 2008 is negatively affecting the consolidated equity with EUR 680 million.
NOK amount includes the fair value change of Renewable Energy Corporation (REC) shareholding in Hafslund EUR 126 million (2007: 793).
| Notional amount | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| EUR million | Remaining lifetimes | Fair value | |||||||
| Under 1 year |
1–5 years |
Over 5 years |
Total | Positive | Negative | Net | |||
| Forward foreign exchange contracts |
4,200 | 321 | - | 4,521 | 400 | 30 | 370 | ||
| Interest rate swaps | 1,130 | 1,171 | 692 | 2,993 | 43 | 55 | –12 | ||
| Interest rate and currency swaps |
769 | 1,471 | - | 2,240 | 233 | 15 | 218 | ||
| Forward rate agreement | 184 | 46 | - | 230 | 1 | 1 | 0 | ||
| Total | 6,283 | 3,009 | 692 | 9,984 | 677 | 101 | 576 | ||
| Of which long-term | 223 | 69 | 154 | ||||||
| Short-term | 454 | 32 | 422 |
| Notional amount | |||||||
|---|---|---|---|---|---|---|---|
| EUR million | Remaining lifetimes | Fair value | |||||
| Under 1 year |
1–5 years |
Over 5 years |
Total | Positive | Negative | Net | |
| Net investment hedging fo reign exchange derivatives |
73 | - | - | 73 | 0 | 0 | 0 |
| Cash fl ow hedging foreign exchange derivatives |
287 | 70 | - | 357 | 16 | 4 | 12 |
| Non-hedging foreign exchange derivatives 1) |
3,840 | 251 | - | 4,091 | 384 | 26 | 358 |
| Total forward foreign exchange contracts |
4,200 | 321 | - | 4,521 | 400 | 30 | 370 |
| Fair value hedging interest rate derivatives |
- | - | 300 | 300 | 16 | - | 16 |
| Cash fl ow hedging interest rate derivatives |
1,043 | 62 | 92 | 1,197 | 0 | 16 | –16 |
| Non-hedging interest rate derivatives 1) |
271 | 1,155 | 300 | 1,726 | 28 | 40 | –12 |
| Total interest rate derivatives |
1,314 | 1,217 | 692 | 3,223 | 44 | 56 | –12 |
| Non-hedging interest rate and currency swaps 1) |
769 | 1,471 | - | 2,240 | 233 | 15 | 218 |
| Total interest rate and currency swaps |
769 | 1,471 | - | 2,240 | 233 | 15 | 218 |
| Total | 6,283 | 3,009 | 692 | 9,984 | 677 | 101 | 576 |
1) Consists of deals without hedge-accounting status.
| Notional amount | ||||||||
|---|---|---|---|---|---|---|---|---|
| EUR million | Remaining lifetimes | Fair value | ||||||
| Under 1 year |
1–5 years |
Over 5 years |
Total | Positive | Negative | Net | ||
| Forward foreign exchange contracts |
3,889 | 563 | - | 4,452 | 59 | 30 | 29 | |
| Interest rate swaps | 1,481 | 772 | 1,247 | 3,500 | 25 | 41 | –16 | |
| Interest rate and currency swaps |
695 | 2,598 | - | 3,293 | 82 | 16 | 66 | |
| Forward rate agreement | 503 | 238 | - | 741 | 0 | 0 | 0 | |
| Total | 6,568 | 4,171 | 1,247 | 11,986 | 166 | 87 | 79 | |
| Of which long-term | 93 | 49 | 44 | |||||
| Short-term | 73 | 38 | 35 |
| Notional amount | |||||||
|---|---|---|---|---|---|---|---|
| EUR million | Remaining lifetimes | Fair value | |||||
| Under 1 year |
1–5 years |
Over 5 years |
Total | Positive | Negative | Net | |
| Net investment hedging fo reign exchange derivatives |
52 | - | - | 52 | 0 | 0 | 0 |
| Cash flow hedging foreign exchange derivatives |
341 | 110 | - | 451 | 1 | 10 | –9 |
| Non-hedging foreign exchange derivatives 1) |
3,496 | 453 | - | 3,949 | 58 | 20 | 38 |
| Total forward foreign exchange contracts |
3,889 | 563 | - | 4,452 | 59 | 30 | 29 |
| Fair value hedging interest rate derivatives |
- | 300 | 1,141 | 1,441 | 0 | 23 | –23 |
| Cash flow hedging interest rate derivatives |
- | 293 | 106 | 399 | 6 | 1 | 5 |
| Non-hedging interest rate derivatives 1) |
1,984 | 417 | - | 2,401 | 19 | 17 | 2 |
| Total interest rate derivatives |
1,984 | 1,010 | 1,247 | 4,241 | 25 | 41 | –16 |
| Non-hedging interest rate and currency swaps 1) |
695 | 2,598 | - | 3,293 | 82 | 16 | 66 |
| Total interest rate and currency swaps |
695 | 2,598 | - | 3,293 | 82 | 16 | 66 |
| Total | 6,568 | 4,171 | 1,247 | 11,986 | 166 | 87 | 79 |
1) Consists of deals without hedge-accounting status.
Cash-settled share forwards are used as a hedging instrument for the Fortum share price risk regarding the Fortum Group's long-term incentive schemes.
The amounts disclosed are non-discounted cash fl ows for the share derivatives. The maturity of the share forwards is 1–5 years.
See Note 29 Employee bonus, personnel fund and incentive schemes for more information about the Group's long-term incentive schemes on page 153.
| 31 December 2008 | ||||||
|---|---|---|---|---|---|---|
| EUR million | Notional value |
Net fair value |
Notional value |
Net fair value |
||
| Share forwards | 37 | 24 | 36 | 66 |
Fortum is exposed to credit risk whenever there is a contractual obligation with an external counterpart. Fortum has procedures in place to ensure that credit risks are kept at an acceptable level. All larger exposures are monitored centrally against limits which are approved according to authority levels defi ned in the Corporate Credit Guidelines. Counterpart creditworthiness is continuously monitored and reported.
Counterparty risk exposures relating to derivative instruments are often volatile due to rapidly changing market prices and are therefore monitored closely. Currency and interest rate derivative counterparts are limited to investment grade banks and fi nancial institutions. Master agreements, such as ISDA, which include netting clauses, are in place with all of these counterparts. The majority of the Group's commodity derivatives are cleared through an exchange such as Nord Pool, but derivative transactions are also executed on the OTC market directly with external counterparties. These counterparts are limited to those considered of high creditworthiness. Master agreements, such as ISDA, FEMA and EFET, which include netting clauses, are in place with the majority of the counterparts. Furthermore, collaterals are requested if dealing with counterparts without approved limits or when exposures arising from engagements are considered too high in relation to the counterpart creditworthiness. Parent company guarantees are requested when dealing with subsidiaries not considered creditworthy on a stand-alone basis.
Credit risk relating to banks is monitored closely as the creditworthiness of fi nancial institutions can deteriorate quickly. This has become apparent in the fi nancial crisis during 2008. This can also be said for all Russian fi nancial institutions as liquidity and fi nancing can quickly dry up as foreign investors pull out of emerging markets. Fortum, like any capital intensive business, is exposed to the fi nancial sector, and as a result of the acquisition of TGC-10 also to Russia. Where possible, exposures have been concentrated to key relationship banks considered to be of high credit quality and importance to the fi nancial stability of their respective countries. In Russia, bank guarantees are used to cover exposures related to the investment programme of TGC-10. In case a contractor defaults or does not fulfi ll its obligations, there are guarantees covering any prepayments as well as performance guarantees in place. Issuers of these guarantees are banks with a strong local presence and understanding of the contractor. The creditworthiness of these banks as well as exposures arising from issued guarantees is monitored closely.
Credit risk in the retail and wholesale business is well diversifi ed over a large number of private individuals and businesses and across several geographic regions and industry sectors.
Amounts disclosed below are presented by counterparties for interest-bearing receivables including fi nance lease receivables, bank deposits and derivative fi nancial instruments recognised as assets.
| 2008 | 2007 | |||
|---|---|---|---|---|
| EUR million | Carrying amount |
of which past due |
Carrying amount |
of which past due |
| Investment grade receivables | 1,873 | - | 499 | - |
| Electricity exchanges | 273 | - | 9 | - |
| Associated companies | 704 | - | 639 | - |
| Other | 395 | - | 219 | - |
| Total | 3,245 | - | 1,366 | - |
Investment grade receivables consist of bank deposits (1,183), fair values of interest rate and currency derivatives (677) and fair values of electricity, coal and oil derivatives (13). Electricity exchange receivable is the fair value of derivatives on Nord Pool. Associated companies receivables consist of loan receivables (659) and fair values of electricity derivatives (45). Other receivables consist of loan and other interest-bearing receivables (59), bank deposits (61), fi nance lease receivables (81) and fair values of electricity, coal and oil derivatives (194).
The following tables indicate how bank deposits and fair values of derivatives are distributed by rating class.
| EUR million | Receivables |
|---|---|
| Counterparties with external credit rating from Standard & Poor's and / or Moody's |
|
| Investment grade ratings | |
| AAA | 0 |
| AA+/AA/AA– | 354 |
| A+/A/A– | 100 |
| BBB+/BBB/BBB– | 729 |
| Total investment grade ratings | 1,183 |
| Non-investment grade ratings | 0 |
| Counterparties without external credit rating from Standard & Poor's and / or Moody's | 61 |
| Total | 1,244 |
In addition to the above bank deposits, cash in bank accounts totalled EUR 77 million as per 31.12.2008.
| EUR million | Receivables | Netted amount |
|---|---|---|
| Counterparties with external credit rating from Standard & Poor's and / or Moody's |
||
| Investment grade ratings | ||
| AAA | 0 | 0 |
| AA+/AA/AA– | 329 | 266 |
| A+/A/A– | 348 | 326 |
| BBB+/BBB/BBB– | 0 | 0 |
| Total investment grade ratings | 677 | 592 |
| Non-investment grade ratings | 0 | 0 |
| Total | 677 | 592 |
| EUR million | Receivables | Netted amount |
|---|---|---|
| Counterparties with external credit rating from Standard & Poor's and / or Moody's |
||
| Investment grade ratings | ||
| AAA | 0 | 0 |
| AA+/AA/AA– | 1 | 1 |
| A+/A/A– | 6 | 0 |
| BBB+/BBB/BBB– | 6 | 5 |
| Total investment grade ratings | 13 | 6 |
| Non-investment grade ratings | ||
| BB+/BB/BB– | 4 | 4 |
| B+/B/B– | 0 | 0 |
| Below B– | 0 | 0 |
| Total non-investment grade ratings | 4 | 4 |
| Total associated companies | 45 | 36 |
| Counterparties without external credit rating from Standard & Poor's or Moody's |
||
| Government or municipality | 6 | 3 |
| Fortum Rating 5 - Lowest risk | 131 | 93 |
| Fortum Rating 4 - Low risk | 40 | 35 |
| Fortum Rating 3 - Normal risk | 0 | 0 |
| Fortum Rating 2 - High risk | 0 | 0 |
| Fortum Rating 1 - Highest risk | 0 | 0 |
| No rating | 13 | 13 |
| Total non-rated counterparts | 190 | 144 |
| Total electricity, coal and oil derivatives | 252 | 190 |
For derivatives, the receivable is the sum of the positive fair values. Netted amount include negative fair values where a valid netting agreement is in place with the counterpart or netting is otherwise allowed in accordance with local laws. When the netted amount is less than zero, it is not included. In cases where a parent company guarantee is in place, the exposure is shown on the issuer of the guarantee.
All counterparties for currency and interest rate derivatives and the majority of counterparts for bank deposits have an external rating from Standard & Poor's and Moody's credit agencies. The above rating scale is for Standard & Poor's rating categories. For those counterparts only rated by Moody's, the rating has been translated to the equivalent Standard and Poor's rating category.
In the electricity, coal and oil derivatives market, there are a number of counterparts not rated by Standard & Poor's or Moody's. For these counterparts, Fortum assigns an internal rating. The internal rating is based on external credit ratings from other credit agencies. The risk class from Asiakastieto is used for Finnish counterparties, the rating from Creditinform is used for Norwegian counterparties, the risk indicator from UC (Upplysningscentralen) is used for Swedish counterparties and for other counterparties the rating from Dun & Bradstreet is used. Governments and municipal companies are typically not rated, and are shown separately. This rating category does not include companies owned by governments or municipalities. Counterparts that have not been assigned a rating by the above listed credit agencies are in the "No rating" category.
Fortum wants to have a prudent and effi cient capital structure which at the same time allows the implementation of its strategy. The Group monitors the capital structure based on Net debt / EBITDA ratio. Net debt is calculated as interest-bearing liabilities less liquid funds. EBITDA is calculated by adding back depreciation, amortisation and impairment charges to operating profi t. During 2008 and 2007 target capital structure has been defi ned as Net debt / EBITDA between 3.0–3.5.
Capital expenditure, acquisitions, dividend distributions, repurchases of own shares and capital returns to shareholders are ways to move towards the target capital structure. Fortum's dividend policy states that the company aims to pay a dividend which corresponds to an average payout ratio of 50 to 60%.
Fortum Corporation's long-term credit rating from Moody's and Standard and Poor's was A2 (stable) and A– (stable), respectively.
| EUR million | Note | 2008 | 2007 |
|---|---|---|---|
| Interest-bearing liabilities | 31 | 7,500 | 4,893 |
| Less: Liquid funds | 26 | 1,321 | 427 |
| Net debt | 6,179 | 4,466 | |
| Operating profi t | 1,963 | 1,847 | |
| Add: Depreciation, amortisation and impairment charges |
515 | 451 | |
| EBITDA | 2,478 | 2,298 | |
| Net debt / EBITDA 1) | 2.5 | 1.9 |
1) Net debt / EBITDA for 2007 is 2.2 based on EBITDA excluding capital gain from the sale of Fortum's holding in Lenenergo amounting to EUR 232 million.
Following the acquisition of the Russian company, TGC-10, Fortum has changed its segment reporting during 2008 and a new Russia segment was introduced. Segment information for 2007 have been restated, see below 5.2.
Fortum's business operations are organised in eight business units. Fortum's business units are grouped into operating segments in the external reporting. Fortum's shared service centers consist of Corporate Financial Services, Corporate IT Services and Corporate Support Services. The service units have service level agreements with the business units for services provided.
The Group is reported in the following segments:
Power Generation segment generates and sells power mainly to the Nordic electricity market and is also responsible for the risk management operations within power generation. Power Generation segment consists of the business units Generation, Portfolio Management and Trading and Service. The business units Generation and PMT have from a fi nancial perspective one common set of fi nancial measures. No separate pricing mechanism is in use between the business units. The Portfolio Management and Trading business unit within the segment is responsible for optimising the operating of power plants and for selling power mainly to the Nordic power exchange Nord Pool. Generation is responsible for ownership, operation and maintenance of Fortum's power plants. Service business unit provides operation and maintenance services for the Nordic market and selected international markets, but its core activities refer to Generation business.
Heat provides district heating and cooling, industrial steam and energy produced in waste-to-energy production to industrial companies, municipalities and end-users in the Nordic countries, the Baltic countries and Poland. The Heat segment also sells electricity from its combined heat and power production (CHP) to the Nordic power exchange Nord Pool. Heat consists of two business units, Heat and Värme. Heat and Värme have similar businesses, but are separated into two business units since the City of Stockholm has a 50% economic interest in Värme. Värme's business operations are mainly concentrated to the larger Stockholm area in Sweden, while Heat has operations in Finland, Norway, Poland and other countries in the Baltic rim area.
Distribution is responsible for a reliable and secure electricity supply to its customers in the Nordic countries and Estonia. Fortum owns and operates distribution and regional networks and distributes electricity to a total of 1.6 million customers in Sweden, Finland, Norway and Estonia. Electricity distribution is considered and accepted as a regulated business, and is therefore supervised by national energy authorities. Models and principles for supervision and considerations of reasonable tariffs differ from country to country.
Markets is responsible for offering energy solutions to its 1.3 million customers in Finland, Sweden and Norway. The segment buys its electricity from Nord Pool and sells it further to household and business customers as well as other retailers in the Nordic countries. In addition to the actual sale of electricity, Markets provides comprehensive risk and portfolio management solutions to its business customers. Electricity supply in the Nordic countries is a deregulated business since 1995 which means that customers can freely change electricity supplier.
Russia segment is based on the geographical area, Russia, and includes power and heat generation and sales in Russia. It includes mainly the Russian subsidiary TGC- 10, which is consolidated from 31 March 2008 and the shareholding in the associated company TGC-1.
Other includes mainly the shareholding in the associated company Hafslund ASA and corporate center including the Fortum Group shared service centers. The shared service centers charge the companies according to service level agreements.
Following the acquisition of the Russian company TGC-10, Fortum has changed its segment reporting during Q1 2008. A new Russia segment was introduced, which means that the new segment structure has one segment based on geographical area, combined with segments based on type of business operations. Due to the change in segment structure, Fortum has early adopted IFRS 8 Operating segments.
The new Russia segment includes:
In addition to introducing a new segment, assets and profi ts from the associated company Hafslund have been transferred from Power Generation segment to Other segment.
Comparison numbers for 2007 have been restated according to the new segment structure, resulting mainly in the following effects in operating profi t and non-recurring items:
Financial target setting, follow up and allocation of resources in the group's performance management process is mainly based on the business units' comparable operating profi t including share of profi t from associated companies and return on comparable net assets. Fortum discloses in the segment information operating profi t and comparable operating profi t as well as return on net assets and comparable return on net assets.
Consolidation by segment is based on the same principles as for the Group as a whole. Comparable operating profi t is reported to give a better view of each segment's performance. The following items in operating profi t have been adjusted for in comparable operating profi t:
Segment's net assets consist primarily of non-interest-bearing assets and liabilities such as property, plant and equipment, intangible assets, participations in associated companies, inventories, operative related accruals and trade and other receivables and liabilities. Net assets also include Fortum's share of the State Nuclear Waste Management Fund, nuclear related provisions, pension and other provisions as well as assets and liabilities from fair valuations of derivatives hedging future cash fl ows which do not obtain hedge accounting status according to IAS 39.
Interest-bearing receivables and liabilities and related accruals, current and deferred tax items, as well as assets and liabilities from fair valuations of derivatives hedging future cash fl ows which obtain hedge accounting status according to IAS 39 are not allocated to the segments' net assets.
In comparable net assets, segment's net assets are adjusted for assets and liabilities from fair valuations of derivatives hedging future cash fl ows which do not obtain hedge accounting status according to IAS 39 to be in line with comparable operating profi t.
Gross investments in shares include investments in subsidiary shares, shares in associated companies and other shares in available for sale fi nancial assets. Investments in subsidiary shares are net of cash and grossed with interest-bearing liabilities in the acquired company.
See also Defi nitions of key fi gures, Key fi nancial ratios and Operational key fi gures, on pages 169-175. Quarterly segment information for 2008 and 2007 is available on Fortum's website www.fortum.com/investors/fi nancial information.
Power Generation segment sells its production to Nord Pool and Markets buys its electricity from Nord Pool. Eliminations of sales include eliminations of sales and purchases with Nord Pool that are netted on group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour. Inter-segment sales, expenses and results for the different business segments are affected by intra-group deliveries, which are eliminated on consolidation. Inter-segment transactions are based on commercial terms.
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Netting of Nord Pool transac tions 1) |
Elimina tions |
Total |
|---|---|---|---|---|---|---|---|---|---|
| Sales | 2,892 | 1,466 | 789 | 1,922 | 489 | 83 | –1,736 | –269 | 5,636 |
| Of which internal sales | 0 | 0 | 10 | 177 | 0 | 82 | –269 | 0 | |
| External sales | 2,892 | 1,466 | 779 | 1,745 | 489 | 1 | –1,736 | 0 | 5,636 |
| Depreciation, amortisa tion and impairment |
97 | 169 | 165 | 7 | 67 | 10 | 515 | ||
| Operating profi t | 1,599 | 307 | 248 | –35 | –91 | –65 | 1,963 | ||
| Share of profi t of asso ciated companies and joint ventures |
26 2) | 12 | 16 | 5 | 19 | 48 | 126 | ||
| Finance costs - net | –239 | ||||||||
| Income taxes | –254 | ||||||||
| Profi t for the period | 1,596 |
1) Sales and purchases with Nord Pool are netted on Group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour. 2) Share of profi t of associated companies in the Power Generation segment includes effects from the accounting of Fortum's part of the associated companies share of the Finnish and Swedish nuclear funds amounting to EUR +9 million, see also Note 35 Nuclear related assets and liabilities.
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Comparable operating profi t | 1,528 | 250 | 248 | –33 | –92 | –56 | 1,845 |
| Non-recurring items | 18 | 64 | 2 | - | 1 | 0 | 85 |
| Changes in fair values of derivatives hedging future cash fl ow |
72 | –7 | –2 | –2 | - | –9 | 52 |
| Nuclear fund adjustment | –19 | - | - | - | - | - | –19 |
| Other items effecting comparability | 53 | –7 | –2 | –2 | - | –9 | 33 |
| Operating profi t | 1,599 | 307 | 248 | –35 | –91 | –65 | 1,963 |
For further information on items not included in comparable operating pro fi t please see:
– Note 9 Other income regarding non-recurring items;
– Note 6 Fair value changes of derivatives and underlying items regarding changes in fair values of derivatives hedging future cash fl ow;
– Note 35 Nuclear related assets and liabilities regarding nuclear fund adjustment.
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Recognised impairment losses for trade receivables |
0 | 1 | 1 | 1 | 8 | 0 | 11 |
| Recognised impairment losses for pro perty, plant and equipment |
0 | 0 | 0 | - | 0 | 0 | 0 |
| Restructuring costs | - | - | 5 | 4 | - | 1 | 10 |
Impairment losses, EUR –11 million, and restructuring costs, EUR –10 million, are included in comparable operating profi t.
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Non-interest-bearing assets | 4,914 | 3,763 | 3,336 | 651 | 2,047 | 514 15,225 | |
| Participations in associated companies and joint ventures |
818 | 160 | 210 | 12 | 429 | 483 | 2,112 |
| Assets included in Net assets | 5,732 | 3,923 | 3,546 | 663 | 2,476 | 997 17,337 | |
| Interest-bearing receivables | 799 | ||||||
| Deferred taxes | 2 | ||||||
| Other assets | 819 | ||||||
| Liquid funds | 1,321 | ||||||
| Total assets | 20,278 | ||||||
| Liabilities included in Net assets | 401 | 455 | 514 | 475 | 271 | 201 | 2,317 |
| Deferred tax liabilities | 1,851 | ||||||
| Other liabilities | 199 | ||||||
| Total liabilities included in Capital employed | 4,367 | ||||||
| Interest-bearing liabilities | 7,500 | ||||||
| Total equity | 8,411 | ||||||
| Total equity and liabilities | 20,278 |
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Gross investments in shares | 0 | 23 | 0 | 0 | 1,492 | 1 | 1,516 |
| Capital expenditure | 134 | 408 | 296 | 3 | 256 | 11 | 1,108 |
| of which capitalised borrowing costs | - | 4 | - | - | 19 | - | 23 |
See also Note 7 Acquisitions and disposals regarding gross investments in shares and Note 20.2 Capital expenditure for more information regarding capital expenditure by segment.
| EUR million | Net assets by segments | Return on net assets (%) | Comparable return on net assets (%) |
|---|---|---|---|
| Power Generation | 5,331 | 29.6 | 28.0 |
| Heat | 3,468 | 8.9 | 7.3 |
| Distribution | 3,032 | 8.1 | 8.2 |
| Markets | 188 | –14.0 | –15.3 |
| Russia | 2,205 | –3.7 | –3.8 |
| Other | 796 | –1.8 | –1.7 |
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Number of employees 31 Dec | 3,520 | 2,318 | 1,336 | 635 | 7,262 | 508 15,579 | |
| Average number of employees | 3,591 | 2,422 | 1,222 | 766 | 5,566 | 510 14,077 |
5.6 Segment information 2007
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Netting of Nord Pool transac tions 1) |
Elimina tions |
Total |
|---|---|---|---|---|---|---|---|---|---|
| Sales | 2,350 | 1,356 | 769 | 1,683 | - | 81 | –1,163 | –597 | 4,479 |
| Of which internal sales | 323 | 38 | 9 | 155 | - | 72 | –597 | 0 | |
| External sales | 2,027 | 1,318 | 760 | 1,528 | - | 9 | –1,163 | 0 | 4,479 |
| Depreciation, amortisation and impairment |
–103 | –163 | –162 | –11 | - | –12 | - | - | –451 |
| Operating profi t | 1,115 | 294 | 233 | 12 | 244 | –51 | - | - | 1,847 |
| Share of profi t of associated companies and joint ventures |
–23 2) | 24 | 18 | 0 | - | 222 | - | - | 241 |
| Finance costs - net | –154 | ||||||||
| Income taxes | –326 | ||||||||
| Profit for the period | 1,608 |
1) Sales and purchases with Nord Pool are netted on Group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour. 2) Share of profi t of associated companies in the Power Generation segment includes effects from the accounting of Fortum's part of the associated companies share of the Finnish and Swedish nuclear funds amounting to EUR –7 million.
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Comparable operating profi t | 1,095 | 290 | 231 | –1 | - | –51 | 1,564 |
| Non-recurring items | 2 | 2 | 0 | 0 | 244 | 2 | 250 |
| Changes in fair values of derivatives hedging future cash fl ow |
1 | 2 | 2 | 13 | - | –2 | 16 |
| Nuclear fund adjustment | 17 | - | - | - | - | - | 17 |
| Other items effecting comparability | 18 | 2 | 2 | 13 | 0 | –2 | 33 |
| Operating profi t | 1,115 | 294 | 233 | 12 | 244 | –51 | 1,847 |
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Recognised impairment losses for trade receivables |
–1 | 6 | –2 | –5 | - | - | –2 |
| Recognised impairment losses for pro perty, plant and equipment |
0 | 0 | 0 | - | - | 0 | 0 |
| Restructuring costs | - | - | 1 | - | - | - | 1 |
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Non-interest-bearing assets | 5,348 | 3,770 | 3,549 | 622 | 1 | 195 13,485 | |
| Participations in associated companies and joint ventures |
806 | 158 | 229 | 8 | 455 | 1,197 | 2,853 |
| Assets included in Net assets | 6,154 | 3,928 | 3,778 | 630 | 456 | 1,392 16,338 | |
| Interest-bearing receivables | 747 | ||||||
| Deferred taxes | 3 | ||||||
| Other assets | 159 | ||||||
| Liquid funds | 427 | ||||||
| Total assets | 17,674 | ||||||
| Liabilities included in Net assets | 555 | 421 | 539 | 383 | - | 155 | 2,053 |
| Deferred tax liabilities | 1,687 | ||||||
| Other liabilities | 390 | ||||||
| Total liabilities included in Capital employed | 4,130 | ||||||
| Interest-bearing liabilities | 4,893 | ||||||
| Total equity | 8,651 | ||||||
| Total equity and liabilities | 17,674 |
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Gross investments in shares | 52 | 18 | 1 | 0 | 245 | 1 | 317 |
| Capital expenditure | 93 | 309 | 236 | 3 | - | 14 | 655 |
| of which capitalised borrowing costs | 1 | - | - | - | - | 1 |
| EUR million | Net assets by segments | Return on net assets (%) | Comparable return on net assets (%) |
|---|---|---|---|
| Power Generation | 5,599 | 19.2 | 18.9 |
| Heat | 3,507 | 9.3 | 9.2 |
| Distribution | 3,239 | 7.7 | 7.6 |
| Markets | 247 | 6.9 | –0.6 |
| Russia | 456 | 66.3 | 0.0 |
| Other | 1,237 | 17.1 | –2.1 1) |
1) When calculating comparable return on net assets in Other segment, the gain 2007 in relation to Hafslund's divestment of REC-shares, approximately EUR 180 million, is excluded from the share of profi ts of associates and joint ventures.
| EUR million | Power Generation |
Heat | Distri | bution Markets | Russia | Other | Total |
|---|---|---|---|---|---|---|---|
| Number of employees 31 Dec | 3,511 | 2,279 | 1,063 | 935 | - | 515 | 8,303 |
| Average number of employees | 3,475 | 2,302 | 1,060 | 936 | - | 531 | 8,304 |
The Group's operating segments operate mainly in the Nordic countries, Russia, Poland and other parts of the Baltic Rim area. Power Generation, Distribution and Markets operate mainly in Finland and Sweden, whereas Heat operates in all geographical areas except Russia. Other countries are mainly the Baltic countries and the UK. The home country is Finland.
The information below is disclosing sales by product area as well as sales by the country in which the customer is located. Assets, capital expenditure and personnel are reported where the assets and personnel are located. Investments in associated companies and joint ventures are not divided by location since the companies concerned can have business in several geographical areas.
| EUR million | 2008 | 2007 |
|---|---|---|
| Power sales excluding indirect taxes | 3,291 | 2,370 |
| Heat sales | 1,298 | 1,096 |
| Network transmissions | 746 | 729 |
| Other sales | 301 | 284 |
| Total | 5,636 | 4,479 |
Heating sales include sale of delivered heat and transmission of heat. Other sales include operations and maintenance sales of EUR 189 million (2007: 168), cooling sales of EUR 24 million (2007: 22), connection fees of electricity and district heating distribution of EUR 28 (2007: 42) million and sale of gas and other fuels of EUR 55 million (2007: 52).
Due to the large number of customers and the variety of its business activities, there are no individual customer whose business volume is material compared with Fortum's total business volume.
| EUR million | 2008 | 2007 |
|---|---|---|
| Finland 1) | 1,974 | 1,823 |
| Sweden | 2,615 | 2,161 |
| Russia | 494 | - |
| Poland | 156 | 133 |
| Norway 1) | 178 | 153 |
| Other countries | 219 | 209 |
| Total | 5,636 | 4,479 |
1) The Finnish power production is sold to Nord Pool in Norway, but included in the sales for Finland (2007 comparison numbers are changed accordingly). The Swedish power production is sold through Nord Pool in Stockholm and included in the sales for Sweden.
| EUR million | 2008 | 2007 |
|---|---|---|
| Finland | 296 | 203 |
| Sweden | 401 | 370 |
| Russia | 256 | - |
| Poland | 56 | 19 |
| Norway | 19 | 22 |
| Other countries | 80 | 41 |
| Total | 1,108 | 655 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Finland | 4,623 | 3,828 |
| Sweden | 8,478 | 9,238 |
| Russia | 2,047 | 1 |
| Poland | 249 | 239 |
| Norway | 205 | 233 |
| Other countries | 313 | 232 |
| Eliminations | –690 | –286 |
| Non-interest-bearing assets | 15,225 | 13,485 |
| Investments in associated companies and joint ventures | 2,112 | 2,853 |
| Total segment assets | 17,337 | 16,338 |
| 2008 | 2007 | |
|---|---|---|
| Finland | 3,045 | 2,981 |
| Sweden | 3,436 | 3,465 |
| Russia | 7,262 | - |
| Poland | 767 | 925 |
| Norway | 292 | 277 |
| Other countries | 777 | 655 |
| Total | 15,579 | 8,303 |
Fair value changes in operating profi t presented below are arising from fi nancial derivatives hedging future cash fl ows where hedge accounting is not applied according to IAS 39 and the ineffectiveness from cash fl ow hedges.
Fair value changes of currency derivatives in net fi nancial expenses are arising mainly from balance sheet hedges without hedge accounting status according to IAS 39, because they are natural hedges of loans and receivables. Fair value change of interest rate hedges without hedge accounting is EUR 2 million (2007: 5). The net effect of fair value changes of hedging derivative and hedged bonds are EUR 0 million (2007: –1).
| EUR million | 2008 | 2007 |
|---|---|---|
| In operating profi t | ||
| Fair value changes from derivatives not getting hedge accounting status | ||
| Electricity derivatives | –8 | –7 |
| Currency derivatives | 57 | 18 |
| Oil derivatives | –8 | 4 |
| Coal derivatives | –10 | - |
| Share derivatives 1) | –9 | –1 |
| Ineffectiveness from cash fl ow hedges | 30 | 2 |
| Total effect in operating profi t | 52 | 16 |
| Fair value changes of derivatives not getting hedge accounting included in | ||
|---|---|---|
| share of profi t of associated companies | –2 | 2 |
| In fi nance costs | ||
| Exchange gains and losses on loans and receivables | –757 | –233 |
| Fair value changes of derivatives not getting hedge accounting status | ||
| Currency derivatives | 744 | 236 |
| Interest rate derivatives | 2 | 5 |
| Fair value change of hedging derivatives in fair value hedge relationship | 11 | –37 |
| Fair value change of hedged item in fair value hedge relationship | –11 | 36 |
| Total effect in fi nance costs | –11 | 7 |
| Total effect of derivatives on profit before income tax | 39 | 25 |
1) Related to cash-settled share forwards used as a hedging instrument for Fortum Group's performance share arrangement.
Fortum discloses in segment reporting comparable operating profi t to give a better view of each segment's performance. The following items in operating profi t have been adjusted for in comparable operating profi t:
In 2008 Fortum acquired shares in TGC-10 in Russia, in Jelgava Kogeneracija SIA (renamed Fortum Jelgava SIA) in Latvia and in Hofors Energi AB in Sweden. Fortum also acquired the remaining shares in Fortum Wroclaw SA, Poland. The company was merged at year-end. Total investments amounted to EUR 1,506 million.
Acquisitions in 2007 were shares in Pärnu Energia OÜ (renamed Fortum Pärnu OÜ) in Estonia, in Vattenfall Latvija SIA (renamed Fortum Latvija SIA) in Latvia and in EC Wojkowice in Poland. The total investments amounted to EUR 18 million.
The effect of the acquisitions on the 2008 sales is EUR 503 million, being:
| 2007 | |
|---|---|
| 0 | |
| 18 | |
| 0 | |
| - | |
| - | |
| 0 | |
| 1,506 | 18 |
| 2008 0 14 0 0 1,492 - |
| EUR million | 2008 | 2007 |
|---|---|---|
| Finland | 0 | 0 |
| Sweden | 3 | 0 |
| Russia | 1,492 | - |
| Other countries | 11 | 18 |
| Total | 1,506 | 18 |
Gross investments in subsidiary shares consist of interest-bearing debt as well as paid cash according to purchase agreement added with direct costs relating to the acquistion less cash and cash equivalents in acquired subsidiary.
In March Fortum acquired 76.49% of TGC-10 which is a Russian territorial generating company founded in 2006 and operating in the Urals and West Siberia region. The total installed capacity is 3,000 MW electricity and 15,800 MW heat with an annual production of 18 TWh electricity and 27 TWh heat. The company is committed and contractually obligated to an extensive investment plan to further increase its electricity capacity with 2,300 MW by 2013. The contractual obligations of TGC-10's investment programme include penalty clauses tied to the availability of the new generating capacity. Total sales during 2007 in TGC-10 were EUR 723 million and operating profi t was EUR 26 million based on 2007 published IFRS Financial statements.
The acquisition was made through an acquisition of shares and through participation in a share issue. On 20 March 2008 Fortum paid for 47.42% of the shares in TGC- 10 through a share issue for approximately EUR 1.3 billion. The capital received by TGC- 10 will remain in the company and will be used to fi nance its committed capacity investment programme planned at EUR 2.2 billion. In October 2008, Fortum estimated the value of the investment programme in new capacity to be approximately EUR 2.5 billion. The value for the remaining part of the programme, calculated at year-end exchange rates, is estimated to be EUR 2.0 billion from January 2009 onwards.
On 26 March Fortum paid for an additional 29.07% of the shares in TGC-10 from United Energy Systems of Russia (RAO UES) for approximately EUR 0.8 billion. On 29 April Fortum fi led the mandatory public tender offer (MTO) to TGC-10 minority shareholders. The offer was valid from 30 April until 18 October 2008. The tender offer covered 23.51% of the share capital of TGC-10 and has been launched at a price of 111.8 roubles per share to be fully paid in cash. At the end of December, Fortum's registered ownership in TGC-10 was 93.4% including the shares held by TGC-10's 100% owned subsidiary. Additional shares, approximately 0.9%, have been redeemed by TGC-10 in a redemption process ending in December 2008, but with payment and registration in 2009. These shares are included in the acquisition cost as of 31 December 2008 and by that time Fortum had invested EUR 465 million for share purchases under the MTO including the additionally redeemed shares.
The gross investment for the total transaction was EUR 1,492 million, excluding cash in TGC-10 (mainly coming from the share issue) and including interest-bearing liabilities in the company. The purchase price allocation is based on a balance sheet as of 31 March 2008 of TGC-10. The initial accounting of the acquisition is still provisional since all valuation effects have not been fi nalised, in particular regarding potential obligations. Fortum fi nancial statements include the income statement effect of TGC-10 from 1 April 2008 onwards.
In Latvia, Fortum acquired 100% of the shares in Jelgavas Kogeneracija SIA at the end of March. The acquired company provides district heating to the city of Jelgava. The annual heat sales are 200 GWh, the sales EUR 10 million, and the number of employees 170. The gross investment was EUR 10 million.
In Sweden, Fortum acquired additional 11.22% shares in Hofors Energi AB. After this acquisition Fortum's total ownership of the shares in Hofors Energi AB is 60%. The acquired company provides district heating to the Hofors area. The annual heat sales are 130 GWh, the sales EUR 7 million, and Fortum has already earlier taken care of operations in the company. The gross investment was EUR 3 million.
During 2008 Fortum continued to acquire shares in its Polish subsidiaries. Fortum reached 100% ownership in Fortum Wroclaw S.A and the company has been merged to Fortum Power and Heat Polska Sp z.o.o. at year-end.
| EUR million | TGC-10 Group | Total Group Acquisitions |
|---|---|---|
| Purchase consideration: | ||
| Cash paid | 2,533 | 2,545 |
| Direct costs relating to the acquisition | 8 | 8 |
| Total purchase consideration | 2,541 | 2,553 |
| Fair value of the acquired net assets | 2,211 | 2,223 |
| Translation difference | –9 | –9 |
| Goodwill | 339 | 339 |
| EUR million | TGC-10 Group | Total Group Acquisitions | ||||
|---|---|---|---|---|---|---|
| Total Value |
Allocated Fair Values |
Acquired Book Value |
Total Value |
Allocated Fair Values |
Acquired Book Value |
|
| Cash and cash equivalents | 1,321 | 1,321 | 1,323 | 1,323 | ||
| Intangible assets | 9 | 9 | 10 | 10 | ||
| Property, plant and equip ment |
1,602 | 1,022 | 580 | 1,634 | 1,043 | 591 |
| Participations in associates and joint ventures |
36 | 36 | 37 | 37 | ||
| Inventories | 60 | 60 | 60 | 60 | ||
| Receivables | 122 | 122 | 126 | 126 | ||
| Non-interest-bearing liabilities |
–306 | –192 | –114 | –311 | –192 | –119 |
| Interest-bearing liabilities | –272 | –272 | –276 | –276 | ||
| Deferred tax liabilities | –192 | –199 | 7 | –199 | –204 | 5 |
| Net identifi able assets | 2,380 | 631 | 1,749 | 2,404 | 647 | 1,757 |
| Minority interests | –169 | –53 | –116 | –174 | –56 | –118 |
| Step-by-step acquisition 1) | –7 | –4 | –3 | |||
| Fair value of the acquired net identifi able assets |
2,211 | 578 | 1,633 | 2,223 | 587 | 1,636 |
1) Refers to book values for the part of Hofors Energi previously owned by the Group and the related changes in asset revaluation surplus.
| EUR million | TGC-10 Group |
Total Group Acquisitions |
|---|---|---|
| Purchase consideration settled in cash | 2,541 | 2,553 |
| Cash and cash equivalents in subsidiaries acquired | 1,321 | 1,323 |
| Cash outfl ow on acquisition | 1,220 | 1,230 |
| Interest-bearing debt in subsidiaries acquired | 272 | 276 |
| Gross investment in subsidiaries acquired | 1,492 | 1,506 |
No acquisitions or disposals of shares in subsidiaries which had a material effect on Fortum's income statement and balance sheet were made during 2007. Gross investment in subsidiary shares (see defi nition of key fi gures) amounted to EUR 18 million.
Fortum acquired in the beginning of July 100% of the shares in EC Wojkowice. The acquired company in Poland concentrates on district heating production and sales in three cities. The company also sells electricity. The annual heat sales are around 64 GWh and electricity sales 320 MWh. The number of employees was 34.
Fortum acquired in January 2007 100% of the shares in Vattenfall Estonia AS and Vattenfall Latvia SIA from Vattenfall. The acquired company in Estonia provides district heat and natural gas in the city of Pärnu. Its district heat network is the fourth biggest in Estonia. The annual heat sales are 190 GWh, sales EUR 5.4 million and number of employees 58. The district heat business in Pärnu will be integrated to the current countrywide heat operations of Fortum Termest AS.
The acquired company in Latvia provides heat to Riga airport. The annual heat sales are around 12 GWh and sales around EUR 0.5 million. The acquisition provides a platform for Fortum to Latvian heat market.
Fortum has also acquired additional shares in its subsidiaries in Poland, Fortum Częstochowa SA 11.11% (total ownership 98.71% at year-end 2007), Fortum Wroclaw 0.92% (total ownership of 99.17%), Fortum Plock SA 0.91% (total ownership of 98.66%) and Fortum DZT SA 0.63 % (total ownership 99.92%).
| EUR million | Total Group Acquisitions |
|---|---|
| Purchase consideration: | |
| Cash paid | 11 |
| Direct costs relating to the acquisition | - |
| Total purchase consideration | 11 |
| Fair value of the acquired net assets | 11 |
| Translation difference | - |
| Goodwill | - |
| EUR million | Total Group Acquisitions | |||
|---|---|---|---|---|
| Total Value | Allocated Fair Values |
Acquired Book Value |
||
| Cash and cash equivalents | 1 | 0 | 1 | |
| Property, plant and equipment | 16 | 6 | 10 | |
| Inventories | 0 | 0 | 0 | |
| Receivables | 1 | 0 | 1 | |
| Non-interest-bearing liabilities | –1 | 0 | –1 | |
| Interest-bearing liabilities | –8 | 0 | –8 | |
| Deferred tax liabilities | 0 | 0 | 0 | |
| Net identifi able assets | 9 | 6 | 3 | |
| Minority interests | 2 | 2 | - | |
| Fair value of the acquired net identifi able assets | 11 | 8 | 3 |
| EUR million | Total Group Acquisitions |
|---|---|
| Purchase consideration settled in cash | 11 |
| Cash and cash equivalents in subsidiaries acquired | 1 |
| Cash outflow on acquisition | 10 |
| Interest-bearing debt in subsidiaries acquired | 8 |
| Gross investment in subsidiaries acquired | 18 |
In the end of December 2008 Fortum sold its 60% ownership in Jyväskylän Energiantuotanto Oy to Jyväskylän Energia. The transaction included both subsidiary shares, land on which the power plant is located on and assets related to business operations. In July Fortum sold its Swedish subsidiary, Recotech AB.
There were no disposals in 2007.
The income statement of subsidiaries, whose measurement and reporting currencies are not euros, are translated into the Group reporting currency using the average exchange rates, whereas the balance sheet of such subsidiaries are translated using the exchange rates on the balance sheet date.
The balance sheet date rate is based on exchange rate published by the European Central Bank for the closing date. The average exchange rate is calculated as an average of each month's ending rate from the European Central Bank during the year and ending rate previous year.
| Currency | Average rate | Balance sheet date rate | |||
|---|---|---|---|---|---|
| 2008 | 2007 | 31 Dec 2008 | 31 Dec 2007 | ||
| Sweden | SEK | 9.6647 | 9.2475 | 10.8700 | 9.4415 |
| Norway | NOK | 8.2605 | 8.0253 | 9.7500 | 7.9580 |
| Poland | PLN | 3.5328 | 3.7792 | 4.1535 | 3.5935 |
| Russia | RUB | 36.6905 | 35.0759 | 41.2830 | 35.9860 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Capital gains on disposal of non-current assets | 86 | 251 |
| Gain on sale of emission rights | 8 | 39 |
| Rental income | 39 | 39 |
| Fair value changes on derivatives that do not qualify for hedge accounting status | 52 | 16 |
| Other items | 45 | 48 |
| Total | 230 | 393 |
Revenue from activities outside normal operations is reported in other income. This includes recurring items such as rental income and non-recurring items such as gains from sale of shares, etc. Gains on sale of shares, property, plant and equipment and emission rights are included in capital gains on disposal of non-current assets.
Capital gains 2008 mainly include the sales gains from the divestments of Fortum's 50% shareholding in Panjin Liaohe Thermal Power Company Co in China and the 30% shareholding in Polartest Oy, both in Power Generation segment, and Fortum's 60% ownership in Jyväskylän Energiantuotanto Oy to Jyväskylän Energia and fi xed assets in Stockholm, both in Heat segment. In 2007 Fortum sold its shares in JSC Lenenergo which resulted in an after tax gain of EUR 232 million and also the shareholding in WGC-5, both in Russia segment.
Gain on sale of emission rights amounted to EUR 8 million (2007: 39). Costs for made emissions which are not covered by emission rights received for free were EUR 14 million (2007: 0). The costs are included in Materials and services.
Fortum has leased out its 308-MW share of the Meri-Pori power plant from January 2007 to the end of June 2010. The lease agreement is classifi ed as an operating lease and the rental income is included in other income.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in other income.
For more information regarding fair value changes of derivatives, see Note 6 Fair value changes of derivatives and underlying items in income statement on page 134.
| EUR million | 2008 | 2007 |
|---|---|---|
| Materials | 1,345 | 843 |
| Materials purchased from associated companies | 556 | 519 |
| Transmission costs | 127 | 131 |
| External services | 89 | 79 |
| Total | 2,117 | 1,572 |
Materials contain mainly nuclear, coal and gas used as fuels for producing power and heat. Materials purchased from associated companies consist of purchases of nuclear power and hydropower at production costs including interest costs and income taxes. See Note 21 Participations in associated companies and joint ventures. Total materials and services include production taxes and duties EUR 170 million (2007: 84) of which nuclear related capacity taxes EUR 80 million (2007: 68) and hydropower related property taxes EUR 11 million (2007: 11). Taxes related to nuclear and hydro production are included in materials purchased from associated companies.
| EUR million | 2008 | 2007 |
|---|---|---|
| Operation and maintenance costs | 234 | 116 |
| Property taxes | 79 | 66 |
| IT and telecommunication costs | 67 | 76 |
| Research and development costs | 27 | 21 |
| Other items | 277 | 228 |
| Total | 684 | 507 |
The major components recorded in other expenses are the external operation and maintenance costs of power and heat plants and of transmission lines. Property taxes include property taxes relating to hydropower production EUR 67 million (2007: 55).
| EUR million | 2008 | 2007 |
|---|---|---|
| Audit fees | 1.2 | 1.0 |
| Audit related assignments | 0.2 | 0.1 |
| Tax assignments | 0.3 | 0.4 |
| Other assignments | 0.2 | 0.3 |
| Total | 1.9 | 1.8 |
Deloitte is the appointed auditor for the period until 2009 Annual General Meeting. In TGC-10, KPMG is the appointed auditor for the period until 2009 Annual General Meeting. Audit fees include fees for the audit of the consolidated fi nancial statements, review of the interim reports as well as the fees for the audit of Fortum Oyj and its subsidiaries. Audit related assignments include fees for assurance and associated services related the audit. Tax fees include fees for tax advice and tax planning services.
| EUR million | 2008 | 2007 |
|---|---|---|
| Wages and salaries | 420 | 348 |
| Pensions | ||
| Defi ned contribution plans | 36 | 35 |
| Defi ned benefi t plans | 11 | 11 |
| Social security costs | 83 | 77 |
| Share-based remunerations | 5 | 8 |
| Other employee costs | 32 | 16 |
| Total | 587 | 495 |
The Nomination and Compensation Committee discusses, assesses and makes recommendations and proposals on the remuneration policy, pay structures, bonus and incentive systems for the Group and its management, and contributes to the Group's nomination issues. The remuneration policy is determined by the Board of Directors.
The compensation package for Fortum employees consists of a combination of salaries, benefi ts, short-term incentives, profi t sharing paid to Personnel Fund and deferred share-based long-term incentives. The majority of Fortum employees are covered by an annual performance bonus system. The long-term incentive schemes are intended for senior executives and other management of the Fortum Group.
For further information on Fortum's employee bonus and equity incentive schemes as well as Personnel Fund, see Note 29 on page 153 and for pension obligations see Note 34 on page 159.
The Supervisory Board comprises a minimum of six and a maximum of 12 members. The Supervisory Board meetings are also attended by employee representatives who are not members of the Supervisory Board. The Annual General Meeting confi rms the remuneration for the Supervisory Board members.
Each Supervisory Board member receives a fi xed monthly fee and a meeting fee. The employee representatives receive only a meeting fee. All members are entitled to travel expense compensation against receipts in accordance with the company's travel policy. Members of the Supervisory Board are not offered stock options, warrants or participation in other incentive schemes, nor do they have a pension plan in Fortum.
Total remuneration for the Supervisory Board service in 2008 has been EUR 76 thousand (2007: 79).
| EUR thousand | 2008 | 2007 |
|---|---|---|
| Chairman, Peter Fagernäs | 70 | 62 |
| Deputy chairman, Matti Lehti (2007: Birgitta Kantola) | 54 | 50 |
| Other members of the Board | 221 | 186 |
| Total | 345 | 298 |
The Board of Directors comprises fi ve to seven members who are elected at the Annual General Meeting for a one-year term of offi ce, which expires at the end of the fi rst Annual General Meeting following the election. During 2008 and 2007 the Board consisted of seven members.
The annual general meeting confi rms a yearly compensation for Board service. In addition, a EUR 600 meeting fee is paid. The meeting fee is also paid for committee meetings and is paid in double to a member who lives outside Finland in Europe. The members are entitled to travel expense compensation in accordance with the company's travel policy. Board members are not offered stock options, warrants or participation in other incentive schemes. There is no pension plan for non-executive members.
The table above shows total compensation for the Board of Directors paid by Fortum.
| 12.3 The President and CEO and the management team remuneration | ||||
|---|---|---|---|---|
| -- | -- | -- | -- | ----------------------------------------------------------------- |
| 2008 | The President and CEO | Other management team members | ||||
|---|---|---|---|---|---|---|
| EUR thousands | Renumeration booked as expense |
Remuneration paid during the year |
Renumeration booked as expense |
Remuneration paid during the year |
||
| Salaries and fringe benefi ts | 867 | 867 | 1,719 | 1,719 | ||
| Performance bonuses | 388 | 156 | 586 | 102 | ||
| Pensions and other post employment benefi ts 1) |
1,013 | 1,075 | 757 | 595 | ||
| Total | 2,268 | 2,098 | 3,062 | 2,416 |
| 2007 | The President and CEO | Other management team members | |||
|---|---|---|---|---|---|
| EUR thousands | Renumeration booked as expense |
Remuneration paid during the year |
Renumeration booked as expense |
Remuneration paid during the year |
|
| Salaries and fringe benefi ts | 833 | 833 | 1,562 | 1,562 | |
| Performance bonuses | 84 | 297 | 102 | 540 | |
| Pensions and other post employment benefi ts 1) |
808 | 1,169 | 600 | 508 | |
| Total | 1,725 | 2,299 | 2,264 | 2,610 |
1) Payments relating to pensions and other post-employement benefits are paid to the insurance companies and to Fortum's pension funds.
The Fortum Management Team consists of eight members from 1 September 2007 (previously seven members), including the President and CEO to whom the members of the Management Team report.
The compensation package for Management Team consists of base salaries, purposeful benefi ts, annual individual short-term incentives (annual bonus) and deferred share-based long-term incentives.
The President and CEO as well as the Fortum Management Team are paid annual performance bonuses in addition to their salary and fringe benefi ts. The criteria used in determining the size of the annual bonus for senior management are decided annually by the Board of Directors on the recommendation of the Board's Nomination and Compensation Committee. The performance of each senior executive is evaluated annually. The size of each senior executive's annual bonus is dependent on the Group's fi nancial performance, as well as on their own success in reaching their individual goals, which for the President and CEO are set by the Board's Nomination and Compensation Committee. The Committee recommends the level of the President and CEO's compensation to the Board of Directors for approval. Performance bonuses are paid next spring after publication of Fortum's yearly results and after the annual performance discussions have been held.
For the President and CEO and for part of the members of the Fortum Management Team, the retirement age between 60 and 62 and the pension paid is maximum 66% or 60% of the remuneration. In the fi rst case the pensions are insured and paid by Fortum's pension fund, and in the latter, pensions are insured by an insurance company. The pension of the President and CEO is 60% of the remuneration at the age of 60.
In the event that Fortum decides to give notice of termination to the President and CEO, he is entitled to compensation equaling 24 months' salary, other Management Team members for 12 to 18 months.
The President and CEO as well as the Fortum Management Team participate in long-term incentive plans. The President and CEO is not participating in new plans started in 2008 and 2009. The expense in the income statement for these plans is calculated in accordance with IFRS 2 Share-based payments. The charge is calculated at the vesting value of shares granted in the year, plus any fair value movement in the year on previous awards. The cost in accounting does not agree with the actual cash costs on yearly basis, but on total level they do.
See Note 29 Employee bonus system, personnel fund and incentive schemes on page 153.
| 2008 | 2007 | |||
|---|---|---|---|---|
| Other mana | Other mana | |||
| EUR thousand | The President and CEO |
gement team members |
The President and CEO |
gement team members |
| Share-based remuneration | 475 | 1,024 | 629 | 1,081 |
Shares for long-term incentive plan 2002–2007 were delivered to the participants in February 2008. The number of shares was granted in spring 2005 after the three-year earning period. The value of the shares at the grant date could not exceed participants' one year salary including fringe benefi ts. The shares were delivered to the participant after the three-year lock-up period. The President and CEO had a calculated gross income of EUR 2,149 thousand from the delivery. The corresponding fi gure for the other members of Fortum Management Team was EUR 3,468 thousand. These amounts will be included in the taxable income for 2008 of the individuals in question. Taxable income includes the value of actual Fortum shares received, income taxes, transfer taxes and certain statutory employment related expenses paid on the reward depending on the practice in the participant's country. The value of the shares is calculated based on the Fortum share price at the purchase date.
| EUR thousand (except number of shares) | The President and CEO |
Other management team members |
|---|---|---|
| Salaries and fringe benefi ts paid | 867 | 1,719 |
| Performance bonuses paid | 156 | 102 |
| Calculative value of shares received | 1,013 | 1,654 |
| Income tax and other charges | 1,136 | 1,814 |
| Taxable income from the long-term incentive plan | 2,149 | 3,468 |
| Taxable income received | 3,172 | 5,289 |
| Actual number of shares received | 36,756 | 59,980 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Depreciation of property, plant and equipment | ||
| Buildings and structures | 79 | 62 |
| Machinery and equipment | 410 | 360 |
| Other tangible assets | 5 | 6 |
| Amortisation of intangible assets | 21 | 23 |
| Total | 515 | 451 |
| Impairment charges | ||
| Other intangible assets | 0 | 0 |
| Buildings and structures | 0 | 0 |
| Total | 0 | 0 |
| Depreciation, amortisation and impairment charges total | 515 | 451 |
The increase of depreciation in 2008 is mainly due to the acquisition of TGC-10, which took place in the end of March 2008.
See also Note 5 Segment reporting on page 130.
| EUR million | 2008 | 2007 |
|---|---|---|
| Interest expense | ||
| Borrowings | –363 | –218 |
| Other interest expense | –9 | –3 |
| Capitalised borrowing costs | 21 | 1 |
| Total | –351 | –220 |
| Interest income | ||
| Loan receivables | 130 | 62 |
| Other interest income | 13 | 14 |
| Total | 143 | 76 |
| Fair value gains and losses on fi nancial instruments 1) | –11 | 7 |
| Exchange gains and losses | ||
| Loans and receivables | –757 | –233 |
| Derivatives | 759 | 233 |
| Dividend income | 1 | 1 |
| Interest income on share of State Nuclear Waste Management Fund 2) | 30 | 26 |
| Unwinding of discount on nuclear provisions 2) | –32 | –35 |
| Unwinding of discount on other provisions 3) | –12 | 0 |
| Other fi nancial income | 4 | 1 |
| Other fi nancial expenses | –13 | –10 |
| Total | –20 | –17 |
| Finance costs - net | –239 | –154 |
1) Please see Note 6 Fair value changes of derivatives and underlying items in
the income statement on page 134.
2) Please see Note 35 Nuclear related assets and liabilities on page 162.
3) Please see Note 33 Pensions and other provisions on page 159.
Interest expenses include interest expenses on interest-bearing loans, interest on interest rate and currency swaps, forward points on forward foreign exchange contracts hedging loans and receivables. Other interest expenses includes interest on fi nancial leases EUR 3 million and other interest cost EUR 6 million.
About capitalised borrowing costs see Note 20.1. Capitalised borrowing costs on page 145.
Interest income includes EUR 33 million (2007: 26) from shareholders' loans in Finnish and Swedish nuclear companies, EUR 65 million (2007: 21) from deposits as well as income coming from hedging of SEK denominated interest income of EUR 27 million (2007: 11). Other interest income includes mainly income from fi nancial leases as a lessor.
Fair value gains and losses on fi nancial instruments include change in clean price of interest rate and cross currency swaps not getting hedge accounting and fair value changes of interest rate derivatives in hedge relationship and hedged items. Accrued interest on these derivatives is entered in interest expenses of borrowings. Fair value gains and losses include also rate difference from forward contracts hedging loans and receivables without hedge accounting.
Exchange gains and losses includes exchange rate differences arising from valuation of foreign currency loans and receivables and exchange rate differences from forward foreign exchange contracts and interest rate and currency swaps.
| EUR million | 2008 | 2007 |
|---|---|---|
| Interest rate and cross currency swaps | ||
| Interest expenses on borrowings | 4 | 9 |
| Exchange rate difference from derivatives | 322 | 140 |
| Rate difference in fair value gains and losses on fi nancial instruments 1) | 13 | –32 |
| Total fair value change of interest rate derivatives in finance costs - net | 339 | 117 |
| Forward foreign exchange contracts | ||
| Interest expenses on borrowings | –11 | 10 |
| Exchange rate difference from derivatives | 437 | 93 |
| Rate difference in fair value gains and losses on fi nancial instruments | –13 | 3 |
| Total fair value change of currency derivatives in finance costs - net | 413 | 106 |
| Total fair value change of interest and currency derivatives in finance costs - net | 752 | 223 |
1) Fair value gains and losses on financial instruments include fair value changes from interest rate swaps not getting hedge accounting amounting to EUR 2 million (2007: 5).
Aggregated exchange differences included in operating profi t were EUR –1 million (2007: –1) and in fi nance costs EUR 2 million (2007: –5).
| EUR million | 2008 | 2007 |
|---|---|---|
| Finnish companies | 584 | 819 |
| Swedish companies | 723 | 577 |
| Other companies | 543 | 538 |
| Total | 1,850 | 1,934 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Current taxes | ||
| Finnish companies | –47 | –146 |
| Swedish companies | –147 | –131 |
| Other companies | –66 | –32 |
| Total | –260 | –309 |
| Deferred taxes | ||
| Finnish companies | –86 | 6 |
| Swedish companies | 36 | –18 |
| Other companies | 51 | 5 |
| Total | 1 | –7 |
| Adjustments recognised for current tax of prior periods | ||
| Finnish companies | 2 | –5 |
| Swedish companies | 1 | –4 |
| Other companies | 2 | –1 |
| Total | 5 | –10 |
| Total income taxes | –254 | –326 |
In December 2008 the Swedish Government passed legislation lowering the income tax rate from 28% to 26.3%. The one-time positive effect in the income tax cost from the legislation approximates EUR 81 million. Also December 2008 the Russian Government passed legislation lowering the income tax rate from 24% to 20%. The one-time positive effect in the income tax cost from the legislation approximates EUR 32 million. See also Note 32 Deferred income tax on page 158.
| EUR million | 2008 | % | 2007 | % |
|---|---|---|---|---|
| Profi t before tax | 1,850 | 1,934 | ||
| Tax calculated at nominal Finnish tax rate | –481 | 26.0 | –503 | 26.0 |
| Differences in tax rates and regulations in other countries | 76 | –4.1 | 50 | –2.6 |
| Tax rate changes | 113 | –6.1 | - | - |
| Income not subject to tax | 9 | –0.5 | 6 | –0.3 |
| Tax exempt capital gains | 14 | –0.8 | 61 | –3.2 |
| Expenses not deductible for tax purposes | –13 | 0.7 | –1 | 0.1 |
| Share of profit of associated companies and joint ventures | 34 | –1.8 | 67 | –3.5 |
| Taxes related to dividend distributions | –3 | 0.2 | –1 | 0.1 |
| Tax losses for which no deferred tax was recognised | –4 | 0.2 | –3 | 0.2 |
| Utilisation of previously unrecognised tax losses | 1 | –0.1 | 1 | –0.1 |
| Adjustments recognised for change in deferred tax of prior | ||||
| periods | –5 | 0.3 | 2 | –0.1 |
| Adjustments recognised for current tax of prior period | 5 | –0.3 | –5 | 0.3 |
| Tax charge in the income statement | –254 | 13.7 | –326 | 16.9 |
The weighted average applicable tax rate was 29.1% (2007: 27.9%). The tax rate according to the income statement was 13.7% (2007: 16.9%). The tax rate used in the income statement is always impacted by the fact that share of profi ts of associates and joint ventures are recorded based on Fortum's share of profi ts after tax. Excluding the share of profi ts from associates, capital gains and tax rate changes, the tax rate was 22.1% (2007: 22.3%).
During 2008 Swedish and Russian Governments decided to decrease the income tax rate, which is one of the major reasons for decreased tax rate. Decreased tax rates in Sweden and Russia will be in force from the beginning of 2009, but major positive effect comes already during 2008 from revaluing the deferred taxes. The major part of the tax exempt capital gains is the sale of shares in Jyväskylän Energiantuotanto Oy.
Fortum received substantial non taxable capital gains during 2007, which is one of the major reasons for decreased tax rate. These effects are mainly one-time effects. The capital gain from sale of shares in JSC Lenenergo in August 2007 amounted to EUR 232 million. The share of profi t of associated companies and joint ventures also decreased the effective tax rate mainly due to impact of Hafslund's sale of REC shares in March 2007 which impacted the share of profi ts from associates for the period with approximately EUR 180 million. Fortum completed various tax audits during the year. No major risks or failures were identifi ed.
Basic earnings per share is calculated by dividing the profi t attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.
| 2008 | 2007 | |
|---|---|---|
| Profi t attributable to equity holders of the Company, (EUR million) | 1,542 | 1,552 |
| Weighted average number of shares (thousands) | 887,256 | 889,997 |
| Basic earnings per share (EUR per share) | 1.74 | 1.74 |
Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. At the end of 2008 the Group has one diluting stock option scheme 2002 for key employees. For the warrants and stock options a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Fortum's shares) based on the monetary value of the subscription rights attached to outstanding options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the stock options.
The number of shares calculated as above is deducted from the number of shares that would have been issued assuming the exercise of the stock options. The incremental shares obtained through the assumed exercise of the options and warrants are added to the weighted average number of shares outstanding.
Options and warrants have a dilutive effect only when the average market price of ordinary shares during the period exceeds the exercise price of the options or warrants. Previously reported earnings per share are not retroactively adjusted to refl ect changes in price of ordinary shares.
| 2008 | 2007 | |
|---|---|---|
| Profi t attributable to equity holders of the Company, (EUR million) | 1,542 | 1,552 |
| Weighted average number of shares (thousands) | 887,256 | 889,997 |
| Effect of the 2002 key employees stock options (thousands) | 583 | 1,398 |
| Diluted average number of shares (thousands) | 887,839 | 891,395 |
| Diluted earnings per share (EUR per share) | 1.74 | 1.74 |
A dividend in respect of 2008 of EUR 1.00 per share, amounting to a total dividend of EUR 888 million based on the number of shares registered as of 4 February 2009, is to be proposed at the Annual General Meeting on 7 April 2009. These fi nancial statements do not refl ect this dividend.
The Annual General Meeting on 1 April 2008 decided to distribute a dividend of EUR 1.35 per share in respect of 2007 to the shareholders, of which EUR 0.77 per share was paid from Fortum's recurring earnings. An additional dividend of EUR 0.58 per share was decided to steer Fortum's capital structure towards agreed target. The total dividend amounted to EUR 1,198 million based on the amount of shares registered as of 4 April 2008. The dividend was paid on 11 April 2008.
The dividend for the year 2006 was EUR 1.26 per share, of which EUR 0.73 per share is in accordance with the Group's dividend policy. An additional dividend of EUR 0.53 per share was decided to steer Fortum's capital structure towards agreed target. The total dividend amounting to EUR 1,122 million was paid on 11 April 2007.
Financial assets and liabilities in the tables below are split into categories in accordance with IAS 39. The categories are further split into classes which are basis for valuing respective asset or liability. Further information can be found in the Notes mentioned in the table.
| Financial assets by categories | Loans and receivables | Financial assets at fair-value through profi t and loss | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EUR million | Note | Hedge accounting, Amortised cost fair value hedges Non-hedge accounting |
Fair-value recognised in equity, cash fl ow hedges |
Available-for-sale fi nancial assets |
Total fi nancial assets | ||||||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||
| Financial instruments in non-current assets | |||||||||||||
| Other long-term investments | 22 | 79 | 57 | 40 | 42 | 119 | 99 | ||||||
| Derivative fi nancial instruments | 3 | ||||||||||||
| Electricity derivatives | 52 | 51 | 167 | 5 | 219 | 56 | |||||||
| Interest rate and currency derivatives | 16 | 6 | 202 | 87 | 5 | 223 | 93 | ||||||
| Oil and other futures and forward contracts | 3 | 4 | 3 | 4 | |||||||||
| Long-term interest-bearing receivables | 23 | 672 | 648 | 672 | 648 | ||||||||
| Financial instruments in current assets | |||||||||||||
| Derivative fi nancial instruments | 3 | ||||||||||||
| Electricity derivatives | 36 | 57 | 252 | 6 | 288 | 63 | |||||||
| Interest rate and currency derivatives | 1 | 443 | 72 | 11 | 454 | 73 | |||||||
| Oil and other futures and forward contracts | 19 | 4 | 19 | 4 | |||||||||
| Trade receivables | 25 | 849 | 840 | 849 | 840 | ||||||||
| Other interest-bearing receivables | 46 | 10 | 46 | 10 | |||||||||
| Bank deposits | 26 | 588 | 588 | ||||||||||
| Cash and cash equivalents | 26 | 733 | 427 | 733 | 427 | ||||||||
| Total | 2,967 | 1,982 | 16 | 7 | 755 | 275 | 435 | 11 | 40 | 42 | 4,213 | 2,317 |
| Financial liabilities by categories | Financial liabilities at fair-value through profi t and loss | Other fi nancial liabilities | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EUR million | Note | Hedge accounting, fair value hedges Non-hedge accounting |
Fair-value recognised in equity, cash fl ow hedges |
Amortised cost | Fair value | Total fi nancial liabilities | |||||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | ||
| Financial instruments in non-current liabilities | |||||||||||||
| Interest-bearing liabilities | 31 | 6,671 | 2,896 | 309 | 1,392 | 6,980 | 4,288 | ||||||
| Derivative fi nancial instruments | 3 | ||||||||||||
| Electricity derivatives | 42 | 49 | 3 | 39 | 45 | 88 | |||||||
| Interest rate and currency derivatives | 29 | 58 | 20 | 11 | 69 | 49 | |||||||
| Oil and other futures and forward contracts | 6 | 2 | 6 | 2 | |||||||||
| Financial instruments in current liabilities | |||||||||||||
| Interest-bearing liabilities | 31 | 520 | 605 | 520 | 605 | ||||||||
| Derivative fi nancial instruments | 3 | ||||||||||||
| Electricity derivatives | 59 | 76 | 7 | 145 | 66 | 221 | |||||||
| Interest rate and currency derivatives | 6 | 24 | 32 | 8 | 32 | 38 | |||||||
| Oil and other futures and forward contracts | 28 | 1 | 28 | 1 | |||||||||
| Trade payables | 37 | 343 | 272 | 343 | 272 | ||||||||
| Other liabilities | 37 | 116 | 68 | 116 | 68 | ||||||||
| Total | 35 | 217 | 180 | 29 | 184 | 7,650 | 3,841 | 309 | 1,392 | 8,205 | 5,632 |
| Goodwill | Other intangible assets | Total | |||||
|---|---|---|---|---|---|---|---|
| EUR million | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |
| Cost 1 January | - | - | 344 | 317 | 344 | 317 | |
| Exchange rate differences and other adjustments |
–41 | - | –3 | –4 | –44 | –4 | |
| Increases through business combinations |
339 | - | 13 | 25 | 352 | 25 | |
| Capital expenditure | - | - | 9 | 11 | 9 | 11 | |
| Change in emission rights | - | - | 14 | –9 | 14 | –9 | |
| Disposals | - | - | –3 | –9 | –3 | –9 | |
| Reclassifi cations | - | - | 5 | 13 | 5 | 13 | |
| Cost 31 December | 298 | - | 379 | 344 | 677 | 344 | |
| Accumulated depreciation 1 January |
- | - | 259 | 221 | 259 | 221 | |
| Exchange rate differences and other adjustments |
- | - | 2 | –2 | 2 | –2 | |
| Increases through business combinations |
- | - | 2 | 25 | 2 | 25 | |
| Disposals | - | - | –2 | –8 | –2 | –8 | |
| Depreciation for the period | - | - | 21 | 23 | 21 | 23 | |
| Accumulated depreciation 31 December |
- | - | 282 | 259 | 282 | 259 | |
| Carrying amount 31 December |
298 | - | 97 | 85 | 395 | 85 |
Goodwill is included in Russia segment and relates to the acquisition of TGC-10. The initial accounting of the acquisition is still provisional, see Note 7 Acquisitions and disposals. The goodwill has been tested for impairment by comparison of recoverable amounts of the net operating assets for TGC-10, including goodwill, with their carrying amounts. The recoverable amounts were determined on the basis of value in use, applying discounted cash-fl ow calculations. Key assumptions made by management and used in the cash-fl ow forecast were; expected development of Russia power market, utilization of power plants and other assets, forecasted maintenance and refurbishment investments and weighted average cost of capital. The cash-fl ows are based on business plan approved by the Board. As of 31 December 2008, the recoverable values were found to be in excess of their carrying values and therefore the related goodwill is not impaired. The pre-tax WACC rate used was 11.7%.
The main items in other intangible assets are costs for software products and software licenses, which are amortised over their useful lives. Other intangible assets also include bought emission rights, which are recognised to the lower of fair value and historical cost. Emission rights received free of charge are accounted to nominal value. The amount of emission rights in intangible assets is EUR 14 million (2007: 0).
| EUR million | Land, waterfall rights and tunnels |
Buildings, plants and structures |
Machinery and equipment |
Other tangible assets |
Advances paid and construction in progress |
Total |
|---|---|---|---|---|---|---|
| Cost 1 January 2008 | 3,059 | 2,373 | 11,385 | 217 | 578 | 17,612 |
| Exchange rate differences and other adjustments |
–395 | –264 | –1,340 | –16 | –154 | –2,169 |
| Increases through business combinations |
- | 341 | 1,196 | - | 183 | 1,720 |
| Capital expenditure | 18 | 54 | 183 | 3 | 841 | 1,099 |
| Nuclear asset retirement cost |
- | - | 22 | - | - | 22 |
| Disposals | –1 | –32 | –103 | –1 | –9 | –146 |
| Reclassifi cations | 3 | 48 | 377 | –5 | –428 | –5 |
| Cost 31 December 2008 | 2,684 | 2,520 | 11,720 | 198 | 1,011 | 18,133 |
| Accumulated depreciation 1 January 2008 |
- | 1,073 | 5,059 | 137 | - | 6,269 |
| Exchange rate differences and other adjustments |
- | –109 | –634 | –13 | - | –756 |
| Increases through business combinations |
- | 62 | 28 | - | - | 90 |
| Disposals | - | –23 | –78 | –1 | - | –102 |
| Depreciation for the period | - | 79 | 410 | 5 | - | 494 |
| Impairment charges | - | - | - | - | - | 0 |
| Accumulated depreciation 31 December 2008 |
- | 1,082 | 4,785 | 128 | - | 5,995 |
| Carrying amount 31 December 2008 |
2,684 | 1,438 | 6,935 | 70 | 1,011 | 12,138 |
| Carrying amount 31 December 2007 |
3,059 | 1,300 | 6,326 | 80 | 578 | 11,343 |
The increase in the carrying amount of property, plant and equipment in 2008 due to the acquisition of TGC-10, EUR 1,630 million, is partly offset by the effects from the depreciation of SEK and RUB, EUR 1,413 million. Advances paid and construction in progress has increased with EUR 433 million during 2008, due to the on-going investments in new power plants and the Automatic Meter Management project, see Note 20.2 Capital expenditure. Advances paid amounts to EUR 306 million, of which EUR 229 million refers to TGC-10.
For more information on credit risks regarding on-going investments, see Note 3.10 Credit risk on page 128.
Property, plant and equipment that are subject to restrictions in the form of real estate mortgages amounts to EUR 343 million (2007: 241).
See Note 38 Pledged assets on page 164.
| EUR million | Land, waterfall rights and tunnels |
Buildings, plants and structures |
Machinery and equipment |
Other tangible assets |
Advances paid and construction in progress |
Total |
|---|---|---|---|---|---|---|
| Cost 1 January 2007 | 3,189 | 2,237 | 11,363 | 221 | 401 | 17,411 |
| Exchange rate differences and other adjustments |
–129 | –104 | –197 | –7 | –13 | –450 |
| Increases through business combinations |
- | 22 | 28 | - | - | 50 |
| Capital expenditure | - | 44 | 97 | 4 | 499 | 644 |
| Nuclear asset retirement cost |
- | - | 25 | - | - | 25 |
| Disposals | –1 | –14 | –36 | –2 | –2 | –55 |
| Reclassifi cations | - | 188 | 105 | 1 | –307 | –13 |
| Cost 31 December 2007 | 3,059 | 2,373 | 11,385 | 217 | 578 | 17,612 |
| Accumulated depreciation 1 January 2007 |
- | 1,006 | 4,798 | 136 | - | 5,940 |
| Exchange rate differences and other adjustments |
- | 2 | –87 | –3 | - | –88 |
| Increases through business combinations |
- | 11 | 23 | - | - | 34 |
| Disposals | - | –8 | –35 | –2 | - | –45 |
| Depreciation for the period | - | 62 | 360 | 6 | - | 428 |
| Impairment charges | - | 0 | - | - | - | 0 |
| Accumulated depreciation 31 December 2007 |
- | 1,073 | 5,059 | 137 | - | 6,269 |
| Carrying amount 31 December 2007 |
3,059 | 1,300 | 6,326 | 80 | 578 | 11,343 |
| Carrying amount 31 December 2006 |
3,189 | 1,231 | 6,565 | 85 | 401 | 11,471 |
| EUR million | Machinery and equipment |
Advances paid and construction in progress |
Total |
|---|---|---|---|
| 1 January 2008 | 16 | 1 | 17 |
| Increases | - | 22 | 22 |
| Decreases | –3 | - | –3 |
| 31 December 2008 | 13 | 23 | 36 |
| EUR million | Machinery and equipment |
Advances paid and construction in progress |
Total |
|---|---|---|---|
| 1 January 2007 | 19 | 0 | 19 |
| Increases | - | 1 | 1 |
| Decreases | –3 | - | –3 |
| 31 December 2007 | 16 | 1 | 17 |
New borrowing costs of EUR 22 million were capitalised in 2008 (2007: 1) for TGC-10 investment program, Polish Częstochowa and Finnish Suomenoja CHP-plant projects. The interest rate used for capitalisation was 8.9% in Russia and 5.0% in other European countries (2007: 4.2%).
| Finland | Sweden | Other countries | Total | ||||||
|---|---|---|---|---|---|---|---|---|---|
| EUR million | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |
| Power Generation | |||||||||
| Hydropower | 11 | 3 | 52 | 50 | - | - | 63 | 53 | |
| Nuclear power | 57 | 32 | - | - | - | - | 57 | 32 | |
| Fossil-based power | 6 | 1 | - | - | 4 | 1 | 10 | 2 | |
| Other | 3 | 1 | 1 | 4 | - | 1 | 4 | 6 | |
| Total Power Generation | 77 | 37 | 53 | 54 | 4 | 2 | 134 | 93 | |
| Heat | |||||||||
| Fossil-based heat | 54 | 55 | 16 | 4 | 82 | 31 | 152 | 90 | |
| Fossil-based power | 25 | - | - | - | 2 | - | 27 | - | |
| Renewable | 11 | 18 | 29 | 53 | 23 | 7 | 63 | 78 | |
| District heating network | 34 | 19 | 82 | 79 | 20 | 28 | 136 | 126 | |
| Other | - | 19 | 12 | 11 | 3 | 30 | 15 | ||
| Total Heat | 124 | 92 | 146 | 148 | 138 | 69 | 408 | 309 | |
| Distribution | 83 | 62 | 200 | 163 | 13 | 11 | 296 | 236 | |
| Markets | 1 | 1 | 2 | 2 | - | - | 3 | 3 | |
| Other | 11 | 11 | - | 3 | - | - | 11 | 14 | |
| Total excluding Russia | 296 | 203 | 401 | 370 | 155 | 82 | 852 | 655 | |
| Russia | |||||||||
| Fossil-based power | 240 | - | |||||||
| Fossil-based heat | 16 | - | |||||||
| Total Russia | 256 | - | |||||||
| Total including Russia | 1,108 | 655 |
1) Includes capital expenditure to both intangible assets and property, plant and equipment.
Maintenance investments during 2008 in property, plant and equipment were EUR 170 million (2007: 144). Investments due to requirements of legislation were EUR 147 million (2007: 106). Investments increasing productivity were EUR 220 million (2007: 195) and growth investments were EUR 572 million (2007: 210).
In 2008 Fortum continued to invest into several hydro growth projects, the biggest of these was Eldforsen amounting to some EUR 8 million (2007: 0), the total hydro projects focusing on growth and productivity in 2008 amounted to some 28 million (2007: 21). In Finland, Fortum invested EUR 57 million into the Loviisa nuclear power plant. Additionally this segment has invested some EUR 50 million into refurbishment type investments; this investment level is the same as in 2007.
There are currently four on-going CHP plant building projects. These are the natural gas-fi red Suomenoja plant in Espoo, Finland, the Częstochowa plant in Poland and the Tartu and Pärnu plants in Estonia, of the Tartu plant Fortum has a 60% stake. In total growth investments in this segment amount to some 308 million euros, which is about 140 million euros more than in 2007. Refurbishment and other investments are over EUR 100 million in this segment, which is some 30 million less than in 2007. This amount consists mainly of investments in district heat networks, new connections as well as the maintenance of existing CHP plants.
In 2006 Fortum started the large-scale Automatic Meter Management (AMM) project in Sweden. This project is planned to go on into 2009, and is the largest capital expenditure project in the Distribution Segment. During 2008 some 500 thousand automatic meters were installed, the total number of installed meters being at around 800 thousand. In 2008 Fortum invested some EUR 104 million into this project (2007: 64). Another major project in Fortum's Distribution segment is the Reliability Investment Program, which was also started in 2006. This investment aims to improve the reliability of power delivery in e.g. storms. In 2008 Fortum invested some EUR 30 million (2007: 30) into this program. In addition to these two main projects, Fortum has invested some EUR 160 million of maintenance type investments into the Distribution businesses in Finland, Sweden, Norway and Estonia. This is some EUR 20 million more than in 2007.
TGC-10 has an extensive investment programme aiming to increase its power capacity to 5,300 MW. In October 2008, Fortum estimated the value of the investment programme in new capacity to be approximately EUR 2.5 billion. The value for the remaining part of the programme, calculated at year-end exchange rates, is estimated to be EUR 2.0 billion from January 2009 onwards. During the 2008 some EUR 250 million was already invested of the total amount.
| EUR million | 2008 | 2007 |
|---|---|---|
| Acquisition cost | 53 | 39 |
| Accumulated depreciation at 1 January | –10 | –7 |
| Depreciation charge for the year | –4 | –2 |
| Carrying amount | 39 | 30 |
The assets leased by fi nancial lease agreements are classifi ed as machinery and equipment.
Fortum acts also as a lessor and has leased out property, plant and equipment for EUR 70 million (2007: 88), which are not included in property, plant and equipment in the consolidated fi nancial statements.
| EUR million | 2008 | 2007 |
|---|---|---|
| Acquisition cost | 174 | 174 |
| Accumulated depreciation at 1 January | –99 | –92 |
| Depreciation charge for the year | –7 | –7 |
| Carrying amount | 68 | 75 |
Fortum has leased out its 308 MW share of the Meri-Pori power plant from January 2007 to the end of June 2010.
| EUR million | 2008 | 2007 |
|---|---|---|
| Historical cost | ||
| On 1 January | 1,721 | 1,498 |
| Exchange rate differences and other adjustments | –94 | –4 |
| Acquisitions | 7 | 1 |
| New share issues and shareholders' contributions | 1 | 294 |
| Increase through acquisition of subsidiaries | 36 | - |
| Reclassifi cations | –3 | - |
| Divestments | –13 | –68 |
| Historical cost on 31 December | 1,655 | 1,721 |
| Equity adjustments to participations in associates and joint ventures | ||
|---|---|---|
| On 1 January | 1,132 | 699 |
| Exchange rate differences and other adjustments | –122 | –2 |
| Share of profits of associates | 126 | 241 |
| Dividends received | –51 | –178 |
| Fair-value and other adjustments in equity | –628 | 372 |
| Equity adjustments on 31 December | 457 | 1,132 |
| Carrying amount on 31 December | 2,112 | 2,853 |
The carrying amount of investments in associated companies at the end of 2008 was EUR 2,112 million (2007: 2,853). Fortum owns shares in one (2007: three) company classifi ed as joint venture. The total carrying value of this joint venture was EUR 40 million (2007: 61).
In 2008 Fortum acquired a 14.73% share in UAB Klaipedos Energija from Stadtwerke Leipzig GmbH. Fortum now owns a 19.63% share of the company. UAB Klaipedos Energija generates and distributes district heat to the residents and industries in the cities of Klaipeda and Gargzdai. The net sales of the company are around EUR 27 million, annual heat sales 1 TWh and power sales 20 gigawatthours (GWh). The investment was EUR 7 million.
Through the acquisition of TGC-10 in March 2008, Fortum acquired a shareholding in Kurgan Generating Company.
No major acquisitions of new associated companies were made in 2007. In September 2007 Fortum participated in the share issue of Russian Territorial Generating Company 1 (TGC-1). The total value of Fortum's subscription was approximately 8.5 billion rubles or EUR 243 million. With this subscription, Fortum maintained its 25.7% stake in TGC-1 and its position as the second largest shareholder of the company.
In 2007, Fortum also participated in the share issue of Teollisuuden Voima Oyj (TVO) with a total amount of EUR 49 million. Olkiluoto 3, the nuclear power plant being built by TVO, is funded through external loans, share issues and shareholder loans according shareholder agreement between the owners of TVO.
During 2008 Fortum sold its 50% shareholding in Panjin Liaohe Thermal Power Company Co in China and its 30% shareholding in Polartest Oy and its 33% shareholding in the Herbrechtingen GmbH.
In August 2007 Fortum sold its 35% shareholding in JSC Lenenergo, an electricity distribution company in the City of St. Petersburg and the Leningrad Region. A capital gain of EUR 232 million was recorded.
Some of the principal associates present their fi nancial statements according to local accounting principles. Fortum makes adjustments to the reported numbers to ensure consistency with policies adopted by the Group. If information is not available, the share of profi t of associated companies is based on the previous quarterly information.
Fortum's share of profi ts from associates for 2008 amounts to EUR 126 million (2007: 241), of which Hafslund represents EUR 48 million (2007: 219) and TGC-1 EUR 17 million. Share of profi ts from associates also includes Fortum share of the Swedish nuclear associates Forsmarks Kraftgrupp AB and OKG AB with EUR 47 million (2007: 2), of which EUR 42 million is due to accounting of nuclear related assets and liabilities.
See Note 35 Nuclear related assets and liabilities.
In 2007 Hafslund sold approximately one third of its holdings in Renewable Energy Corporation (REC). As a consequence Fortum booked a gain of EUR 180 million as share of profi ts of associates due to the accounting policies following. According to Fortum group accounting policies, the share of profi ts from Hafslund has been included in Fortum Group fi gures based on the previous quarter information.
Dividends received include dividend from Hafslund amounting to EUR 24 million (2007: 145).
When calculating the share of profi ts in Fortum's associated company Hafslund ASA, Fortum has in accordance with Fortum's accounting policies, reclassifi ed Hafslund's accounting treatment for the shareholdings in REC and Fesil Holding AS. Hafslund has classifi ed the shareholdings in REC and Fesil Holding AS as fi nancial assets at fair value through profi t and loss, while Fortum has classifi ed the shareholdings as available for sale fi nancial assets with fair value changes directly through equity. Only if Hafslund would divest shares in REC and Fesil Holding AS would the cumulative fair value change effect Fortum's income statement. Since REC is listed in the Oslo stock exchange, Fortum is accounting for the fair value change in price in Oslo stock exchange at each closing date. The amount of shares is based on the amount published by Hafslund in the previous quarter if other information is not available.
The cumulative fair value change booked in Fortum's equity and based on the remaining number of shares reported by Hafslund was EUR 126 million at the end of the year 2008 (2007: 793).
Hafslund accounted for a value growth after establishing a new ownership structure in Fesil Holding AS. Fortum's share of this value growth EUR 10 million has been recorded directly to equity in Fortum.
| Participation in % | Book value in Group | |||||
|---|---|---|---|---|---|---|
| Company | Segment | Domicile | 2008 | 2007 | 2008 | 2007 |
| Kemijoki Oy | Power Generation |
Finland | 18 | 18 | 250 | 256 |
| Teollisuuden Voima Oyj (TVO) |
Power Generation |
Finland | 26 | 26 | 220 | 238 |
| OKG AB | Power Generation |
Sweden | 46 | 46 | 131 | 85 |
| Forsmarks Kraftgrupp AB | Power Generation |
Sweden | 26 | 26 | 110 | 86 |
| Gasum Oy | Heat | Finland | 31 | 31 | 105 | 111 |
| Fingrid Oyj | Distribution | Finland | 25 | 25 | 99 | 102 |
| Territorial Generating Company 1 (TGC-1) |
Russia | Russia | 26 | 26 | 394 | 452 |
| Hafslund ASA | Other | Norway | 34 | 34 | 488 | 1,202 |
| Total | 1,797 | 2,532 | ||||
| Others | 315 | 321 | ||||
| Carrying amount of associated companies at 31 December |
2,112 | 2,853 |
Fortum owns 63.8% of the hydro shares and 15.4% of the monetary shares in Kemijoki Oy. Each owner of hydro shares is entitled to the hydropower production in proportion to its hydro shareholding. Fortum's total ownership is 17.5% of the share capital. Since Fortum has signifi cant infl uence due to its representation on the board of directors and participation in policy-making processes, Kemijoki Oy is accounted for as an associated company.
TVO has three series of shares which entitles the shareholders to electricity produced in the different power plants owned by TVO. Series A entitles to electricity produced in nuclear power plants Olkiluoto 1 and 2, series B entitles to electricity in the nuclear power plant presently being built, Olkiluoto 3, and series C to electricity produced in TVO's share of the thermal power plant Meri-Pori. The Meri-Pori power plant is a jointly controlled asset between Fortum and TVO. Fortum accounts for its 54.55% of the assets and TVO for 45.45%.
See also jointly controlled assets in Note 1.12.1 in Accounting principles.
Fortum owns 25.7% of the shares in Territorial Generating Company 1, TGC-1. TGC-1 was formed in late 2006 by mergers of several Russian companies. TGC-1 has published IFRS 2007 Financial statements in June 2008. Fortum has in Q2 2008 reporting started to account TGC-1 according to the equity method as TGC-1 prepares IFRS fi nancial statements annually. The share of profi ts will be accounted for once a year in Q2 based on published IFRS Financial Statements for the previous year.
Market value, based on market quotations of listed principal associated companies 31 December (Hafslund ASA and TGC-1) was EUR 572 million (Hafslund 465 and TGC-1 107) (2007: 2,151). Market value for TGC-1 was EUR 107 million (2007: 847), based on market quotation. The low market quotation for the TGC-1 share is effected by the low liquidity of the TGC-1 shares in the Russian stock exchange during 2008. Less than 0.03% of the company's shares were publicly traded since August 2008.
| EUR million | Domicile | Assets Liabilities | Sales | Profi t/ loss |
owner ship, % |
votes, % |
|
|---|---|---|---|---|---|---|---|
| Kemijoki Oy 1) 4) | Finland | 421 | 285 | 42 | –7 | 18 | 18 |
| Teollisuuden Voima Oyj 3) | Finland | 3,787 | 2,873 | 116 | –11 | 26 | 26 |
| OKG AB 1) 4) | Sweden | 1,483 | 1,470 | 395 | 1 | 46 | 46 |
| Forsmarks Kraftgrupp AB 1) 4) | Sweden | 1,253 | 1,218 | 481 | 0 | 26 | 26 |
| Gasum Oy 2) | Finland | 618 | 260 | 843 | 17 | 31 | 31 |
| Fingrid Oyj 2) | Finland | 1,572 | 1,111 | 280 | 28 | 25 | 33 |
| Territorial Generating Company 1 (TGC-1) 4) Russia | 2,085 | 441 | 805 | 68 | 26 | 26 | |
| Hafslund ASA 2) | Norway | 4,020 | 1,981 | 977 –1,381 | 34 | 33 |
1) Power plants are often built jointly with other power producers. Under the consortium agreements, each owner is entitled to electricity in proportion to its share of ownership or other agreements and each owner is liable for an equivalent portion of costs. The associated companies are not profi t making, since the owners purchase electricity at production cost including interest cost and income taxes. (Note 43 Related party transactions).
2) Based on September 2008 fi gures. Gasum Oy reports profi t before taxes. The fi gure has been decreased with nominal tax 26% in this table.
3) Based on June 2008 fi gures.
4) Based on December 2007 fi gures.
Some of the principal asscociates present their fi nancial statements according to local accounting principles. Fortum makes adjustments to the reported numbers to ensure consistency with policies adopted by the Group. If information is not available, the share of profi t of associated companies is based on the previous quarterly information.
| EUR million | 2008 | 2007 |
|---|---|---|
| Sales to associated companies | 113 | 129 |
| Interest on associated company loan receivables | 34 | 26 |
| Purchases from associated companies | 563 | 519 |
Purchases from associated companies are purchases of nuclear- and hydropower at production costs.
See Note 43 Related party transactions.
| 2008 659 |
2007 |
|---|---|
| 636 | |
| 24 | 17 |
| 5 | 7 |
| 171 | |
| 25 | |
| 53 | |
| 184 26 18 |
Long-term interest-bearing receivables are mainly from Swedish nuclear companies, OKG AB and Forsmarks Kraftgrupp AB EUR 594 million (2007: 567). Investments in Swedish nuclear companies are fi nanced through loans from owners of the nuclear companies, pro rata ownership.
| EUR million | 2008 | 2007 |
|---|---|---|
| Purchases | 1 | 1 |
| Receivables from joint ventures | 3 | 3 |
There were no outstanding loans receivable from joint ventures on 31 December 2008 or 2007.
| EUR million | 2008 | 2007 |
|---|---|---|
| Available for sale fi nancial assets | 40 | 42 |
| Defi ned benefi t pension asset | 59 | 14 |
| Other | 18 | 43 |
| Total | 117 | 99 |
Available for sale fi nancial assets, i.e. shares which are not classifi ed as associated companies or joint ventures, consists mainly of shares in unlisted companies of EUR 39 million (2007: 42), for which the fair value can not be reliably determined. These assets are measured at cost less possible impairment.
Available for sale fi nancial assets include listed shares at fair value of EUR 1 million (2007: 0). The cumulative fair value change booked in Fortum's equity was EUR –1 million (2007: 0).
For information regarding defi ned benefi t pension assets, please see Note 34 Pension obligations on page 159.
| EUR million | 2008 | 2007 |
|---|---|---|
| Long-term loan receivables | 672 | 648 |
| Finance lease receivables | 70 | 88 |
| Total long-term interest-bearing receivables | 742 | 736 |
| Other short-term interest-bearing receivables | 46 | 10 |
| Short-term finance lease receivables | 11 | 1 |
| Total short-term interest-bearing receivables 1) | 57 | 11 |
| Total | 799 | 747 |
1) Included in trade and other receivables in balance sheet.
Long-term loan receivables include receivables from associated companies EUR 659 million (2007: 636), mainly from Swedish nuclear companies, OKG AB and Forsmarks Kraftgrupp AB EUR 594 million (2007: 567). These companies are mainly funded with shareholder loans, pro rata each shareholders ownership.
Long-term loan receivables also include receivables from Teollisuuden Voima Oyj (TVO) amounting to EUR 45 million (2007: 45). Olkiluoto 3, the nuclear power plant being built by the associated company TVO, is funded through external loans, share issues and shareholder loans according shareholder' agreement between the owners of TVO.
For information regarding credit risks, see Note 3 Financial risk management on page 123.
| EUR million | Effective interest rate |
Carrying amount 2008 |
Repricing under 1 year |
Repricing 1–5 years |
Repricing over 5 years |
Fair value 2008 |
Carrying amount 2007 |
Fair value 2007 |
|---|---|---|---|---|---|---|---|---|
| Long-term loan receivables |
4.3 | 672 | 663 | 9 | - | 686 | 648 | 657 |
| Finance lease receivables |
6.9 | 81 | 37 | 5 | 39 | 100 | 88 | 103 |
| Total long-term interest-bearing receivables 1) |
4.6 | 753 | 700 | 14 | 39 | 786 | 736 | 760 |
| Other current receivables |
5.4 | 46 | 46 | - | - | 46 | 11 | 11 |
| Total interest-bearing receivables |
4.6 | 799 | 746 | 14 | 39 | 832 | 747 | 771 |
1) Including current portion of long-term receivables.
Fortum held 31 December 2008 mortgage as collateral for other interest-bearing receivables amounting to EUR 11 million (2007: 11).
Fortum owns assets (mainly CHP- and heating plants) that it leases to customers under fi nancial leasing agreements in Finland, Sweden and Estonia. These assets are recorded at the gross investment cost in the lease, less unearned fi nancial income. The average lease term is approximately 10 years. Of all contracts, 4.9 percent carry a fl oating interest rate and 95.1 percent a fi xed rate.
| EUR million | 2008 | 2007 |
|---|---|---|
| Gross investment in fi nance lease contracts | 110 | 118 |
| Less unearned fi nance income | 29 | 29 |
| Present value of future minimum lease payment receivables | 81 | 89 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Gross investment | ||
| Less than 1 year | 16 | 16 |
| 1–5 years | 65 | 73 |
| Over 5 years | 28 | 29 |
| Total | 109 | 118 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Less than 1 year | 11 | 11 |
| 1–5 years | 48 | 55 |
| Over 5 years | 22 | 23 |
| Total | 81 | 89 |
No contingent rents were recognised in income statement neither in 2008 nor in 2007.
| EUR million | 2008 | 2007 |
|---|---|---|
| Nuclear fuel | 78 | 61 |
| Coal | 189 | 76 |
| Oil | 35 | 36 |
| Biofuels | 59 | 60 |
| Other inventories | 83 | 52 |
| Total | 444 | 285 |
No impairment costs have been booked related to inventories neither in 2008 nor in 2007.
| EUR million | 2008 | 2007 |
|---|---|---|
| Trade receivables | 849 | 840 |
| Income tax receivables | 94 | 37 |
| Accrued interest income | 9 | 2 |
| Accrued income and prepaid expenses | 94 | 52 |
| Other receivables | 132 | 92 |
| Finance lease receivables | 11 | 1 |
| Other interest-bearing receivables | 46 | 10 |
| Total | 1,235 | 1,034 |
The management consider that the carrying amount of trade and other receivables approximates their fair value.
| EUR million | 2008 | 2007 | ||
|---|---|---|---|---|
| Gross | Impaired | Gross | Impaired | |
| Not past due | 811 | - | 805 | - |
| Past due 1–90 days | 37 | 2 | 31 | - |
| Past due 91–180 days | 5 | 2 | 4 | - |
| Past due more than 181 days | 34 | 34 | 23 | 23 |
| Total | 887 | 38 | 863 | 23 |
Impairment losses recognised in the income statement were EUR 11 million (2007: 2). The increase is mainly due to impairment losses in TGC-10 (consolidated from 31 March 2008), which amounts to EUR 8 million. As of 31 December 2008, trade receivables of EUR 38 million (2007: 23) were impaired and provided for, of which EUR 23 million refers to TGC-10.
For information regarding impairment losses by segment, see Note 5 Segment reporting on page 130.
| EUR million | 2008 | 2007 |
|---|---|---|
| EUR | 318 | 268 |
| SEK | 399 | 500 |
| NOK | 37 | 35 |
| USD | 1 | 1 |
| PLN | 29 | 30 |
| RUB | 74 | - |
| Other | 29 | 29 |
| Total | 887 | 863 |
Trade receivables are arising from large number of customers mainly in EUR and SEK mitigating the concentration of risk. Fortum held 31 December 2008 bank guarantee as collateral for trade receivables amounting to EUR 8 million (2007: 10).
| EUR million | 2008 | 2007 |
|---|---|---|
| Cash at bank and in hand | 77 | 100 |
| Bank deposits with maturity under 3 months | 656 | 327 |
| Cash and cash equivalents | 733 | 427 |
| Bank deposits with maturity more than 3 months | 588 | - |
| Liquid funds | 1,321 | 427 |
Short-term and long-term bank deposits include bank deposits held by TGC-10 amounting to EUR 426 million and EUR 588 million respectively. Of TGC-10 shortterm deposits at the year end 2008, EUR 70 million were euros and EUR 356 million Russian roubles. The corresponding numbers for long-term were EUR 434 million and EUR 154 million. The funds in TGC-10 are committed to the investment programme to further increase TGC-10 electricity capacity. The bank deposits in euros held by TGC-10 are hedging future payments in euros.
Maturity of cash and cash equivalents is under 3 months.
For information regarding credit risks, see Note 3 Financial risk management on page 123 and for more information regarding the TGC-10 acquisition, see Note 7 Acquisitions and disposals on page 135.
| 2008 | 2007 | |||
|---|---|---|---|---|
| EUR million | Number of shares |
Share capital |
Number of shares |
Share capital |
| Registered shares at 1 January | 886,683,058 | 3,040 | 887,393,646 | 3,023 |
| Shares subscribed with options and registered by year-end |
955,022 | 4 | 5,199,412 | 17 |
| Cancellation of own shares | - | - | –5,910,000 | - |
| Registered shares at 31 December | 887,638,080 | 3,044 | 886,683,058 | 3,040 |
| Unregistered shares | 56,000 | 50,000 |
Fortum has one class of shares. By the end of 2008, a total 887,638,080 shares had been issued. The nominal value of the shares is EUR 3.40 and each share entitles the holder to one vote at the Annual General Meeting. All shares entitle holders to an equal dividend. At the end of 2008 Fortum Corporation's share capital, paid in its entirety and entered in the trade register, was EUR 3,043,707,472.00.
The registered share capital exceeds the aggregate nominal value of the issued shares due to the cancellations of the company's own shares in 2006 and 2007 (in total 7,570,000 shares) without decreasing the share capital.
Fortum Corporation's shares are listed on NASDAQ OMX Helsinki. The trading code is FUM1V. Fortum Corporation's shares are in the Finnish book entry system maintained by the Finnish Central Securities Depository Ltd (name changed from 2 February 2009 to Euroclear Finland Ltd).
At the beginning of 2008, the Finnish State owned 50.86% of the Company's shares. After the changes in amount of shares during 2008, increase in amount of shares due to the share subscriptions under share option schemes for key employees the Finnish State owned 50.80% of the company's shares at the end of the year. The Finnish Parliament has authorised the Government to reduce the Finnish State's holding in Fortum Corporation to no less than 50.1% of the share capital and voting rights.
At the end of 2008, the President and CEO and other members of the Fortum management team owned 354,238 shares (2007: 317,030), representing less than 0.04% of the shares in the Company.
A full description of Fortum's equity incentive schemes is shown in Note 29 together with details on the President and CEO and other members of the Fortum management team's shareholdings and interest in the equity incentive schemes. A description of shares, share capital and shareholders in Fortum is shown in the Operating and fi nancial review.
Fortum Corporation's Annual General Meeting held on 1 April 2008 authorised the Board of Directors to decide on repurchasing the company's own shares by using funds available for distribution of profi t. The authorisation is valid until next Annual General Meeting. The maximum amount of shares to be repurchased is 15 million. In addition, the amount of funds used for the repurchases may not exceed EUR 300 million. The maximum amount of shares to be repurchased corresponds to approximately two percent of the share capital of the company and the total voting rights.
The shares will be repurchased through public trading of securities NASDAQ OMX Helsinki at the market price of the shares at the time of the repurchase. The repurchases shall be carried out and settled according to the Rules of NASDAQ OMX Helsinki and the Rules of the Finnish Central Securities Depository (name changed from 2 February 2009 to Euroclear Finland Ltd).
Shares repurchased by the company shall be cancelled by a decision of the Board of Directors. The repurchase will reduce the company's distributable retained earnings but will not have a material impact on the division of the ownership of the shares and the voting rights.
There were no share repurchases during the year 2008. The amount of shares repurchased in 2007 was 5,910,000 and the cost was EUR 175 million. In December 2007 the Board of Directors decided to cancel the total amount of repurchased shares without decreasing the share capital. The cancellation was entered in the Trade Register on 20 December 2007.
Fortum Corporation has issued no other convertible bonds or bonds with attached warrants, which would entitle the bearer to subscribe for Fortum shares. The Board of Directors of Fortum Corporation has today no unused authorisations from the General Meeting of shareholders to issue convertible bond loans or bonds with warrants or increase the company's share capital.
| EUR million | Net investment |
Hedging reserve |
Share-based payments |
AFS | Other fair value changes |
Total |
|---|---|---|---|---|---|---|
| Balance on 31 December 2007 |
19 | –120 | 16 | 793 | 7 | 715 |
| Cash fl ow hedges | ||||||
| Fair value gains/ losses in period |
- | 453 | - | - | - | 453 |
| Tax on fair value gains/ losses |
- | –128 | - | - | - | –128 |
| Transfers to income statement |
- | 160 | - | - | - | 160 |
| Tax on transfers to income statement |
- | –42 | - | - | - | –42 |
| Transfers to inventory/ fi xed assets |
- | –4 | - | - | - | –4 |
| Tax on transfers to inventory/ fi xed assets |
- | 1 | - | - | - | 1 |
| Net investment hedge | - | - | - | - | - | - |
| Tax on net investment hedge |
- | - | - | - | - | - |
| Changes due to business combinations |
- | - | - | - | 2 | 2 |
| Other equity changes in associates and available for sale fi nancial assets |
- | - | - | –667 | 35 | –632 |
| Balance on 31 December 2008 |
19 | 320 | 16 | 126 | 44 | 525 |
| Net | Hedging | Share-based | Other fair value |
|||
| EUR million | investment | reserve | payments | AFS | changes | Total |
| Balance on 31 December 2006 |
17 | 50 | 10 | 446 | –12 | 511 |
| Cash fl ow hedges | ||||||
| Fair value gains/losses in period |
- | –165 | - | - | - | –165 |
| Tax on fair value gains/ losses |
- | 46 | - | - | - | 46 |
| Transfers to income statement |
- | –69 | - | - | - | –69 |
| Tax on transfers to income statement |
- | 18 | - | - | - | 18 |
| Net investment hedge | 2 | - | - | - | - | 2 |
| Tax on net investment hedge |
- | - | - | - | - | - |
| Share-based payments | - | - | 6 | - | - | 6 |
| Other equity changes in associates and available for sale fi nancial assets |
- | - | - | 347 | 19 | 366 |
| Balance on 31 December 2007 |
19 | –120 | 16 | 793 | 7 | 715 |
Hedging reserve includes fair value changes of those derivatives getting hedge accounting under IAS 39. Major part of these fair value changes (numbers presented before deferred taxes) relates to cash fl ow hedges hedging electricity price risk amounting to EUR 382 million (2007: –167), EUR 58 million (2007: –9) relates to cash fl ow hedges hedging foreign currency risk in future payments of certain investments and purchases, and EUR –9 million (2007: 11) relates to interest rate hedges, see Note 3 Financial risk management.
Fair value changes for available for sale fi nancial assets include the fair value change of the Renewable Energy Corporation shareholding in Hafslund, (see Note 21 Participations in associated companies and joint ventures) and the fair value change on Fortum's own shareholdings in available for sale fi nancial assets (see Note 22 Other non-current assets).
| EUR million | 2008 | 2007 |
|---|---|---|
| Included in operating profi t | 160 | –81 |
| Included in fi nancial costs | 0 | 12 |
| Total cash flow hedges - amounts moved from equity to income statement | 160 | –69 |
Fortum's short-term incentive system (called annual bonus below) exists to support the Group's values, the achievement of fi nancial targets and structural changes, as well as to secure an alignment between the performance targets of the individual employee and the targets of the Group or his/her business unit. Traditionally all Fortum employees are covered by the annual bonus system. In 2008, Poland and Russia were still exceptions.
The criteria used in determining the size of the bonus for senior management (President and CEO and other members of Fortum's Management Team) are decided annually by the Board of Directors on the recommendation of the Board's Nomination and Compensation Committee. The size of each senior executive's annual bonus is dependent on the Group's fi nancial performance, as well as on their own success in reaching their individual goals. If the fi nancial targets and personal goals are met, each senior executive receives a 25% bonus. The maximum bonus level, in the case when all targets and goals are exceeded, is 40% of the person's annual salary including fringe benefi ts.
For executives with business unit responsibilities, the scheme refl ects the performance of their business unit. The criteria for evaluating an executive's personal performance are mutually agreed between the executive and his/her superior in an annual performance discussion at the beginning of each year. The performance of the President and CEO is evaluated annually by the Board of Directors.
For further information on bonus costs for senior management, see Note 12 Management Remuneration and Employee Costs on page 138.
The Fortum Personnel Fund (for employees in Finland only) has been in operation since 2000. The Board of Directors determines the criteria for the fund's annual profi tsharing bonus. Persons included in the Management Performance Share Arrangement are not eligible to be members of this fund. Members of the personnel fund are the permanent and fi xed-term employees of the Group. The membership of employees joining the company starts at the beginning of the next month after the employment relationship has been on-going for six months. Fund membership terminates when the member has received his/her share of the fund in full.
The profi t-sharing received by the fund is distributed equally between the members. Each employee's share is divided into a tied amount and an amount available for withdrawal. It is possible to transfer a maximum of 15% of capital from the tied amount to the amount available for withdrawal each year, once the employee has been a member for fi ve years.
The amount available for withdrawal is decided each year and it is paid to members who want to exercise their withdrawal rights. Since 2005, employees have had the choice of having the amount paid in Fortum shares acquired by the personnel fund.
The fund's latest fi nancial year ended at 30 April 2008 and the fund then had a total of 3,187 members (2007: 3,491). At the end of April 2008 Fortum contributed EUR 4.3 million (2007: 4.6) to the personnel fund as an annual profi t-sharing bonus based on the fi nancial results of 2007. The combined amount of members' shares in the fund was EUR 22.7 million (2007: 27.8).
The contribution to the personnel fund is expensed as it is earned.
Fortum's Management Performance Share Arrangement (LTI) is a performance-based, long-term incentive arrangement. It was launched in 2003 to support the achievement of the Group's long-term goals by attracting and retaining key personnel. The last plan under this arrangement (called previous arrangement below) started in 2007 and will end in 2012. In January 2008, the arrangement was further developed (called new arrangement below).
At present, approximately 160 managers, all of whom have been elected by the Board of Directors, are participants in at least one of the six on-going annual LTI plans. The 2006–2011 LTI plan is for non-stock option holders only. The President and CEO is not participating in new plans started in 2008 and 2009.
Each LTI plan in the previous arrangement comprises of two three-year periods following each other. The plan starts with a three-year earning period, during which the person earns annual bonus based on the performance of the Group, the relevant business unit and the achievements of the individual participant. The grant date when the amount of the potential reward as a calculative amount of share rights is decided is determined by the Board of Directors following the announcement of the Group's annual results for the last calendar year after the earning period has ended. The maximum value in share rights a participant can be granted after the three years earning period cannot at the grant date exceed the participant's one-year salary including fringe benefi ts.
The earning period of the previous arrangement is followed by an approximately three year restriction period which ends at the cash-settlement of the earned reward provided that the participant remains employed by the Group. The potential reward under each annual LTI plan is adjusted during the restriction period by potential dividends paid up until the settlement date, which takes place at the end of the restriction period. The participant has approved that the earned reward will be used to acquire Fortum shares in the name of the participant deducted by the income tax and the statutory employment related expenses and insurance contributions payable by the participant on the reward.
Based on the previous LTI arrangement, the fi rst annual share plan began in 2003 and was based on the 2002 fi nancial results. After the three-year earning period, in spring 2005, share rights belonging to the fi rst plan were granted to the participants. The shares, based on these share rights, were delivered to the participants in February 2008. In 2006, the earning period of the consecutive plan (2003–2008) ended and share rights belonging to this plan were granted to the participants and were delivered in February 2009. In 2007, the share rights from plan 2004–2009 and in 2008, the share rights from plan 2005–2010 were granted to the participants.
Under the new arrangement a new performance share plan starts annually if approved by the Board of Directors and runs for a fi ve-year period. Each share plan begins with a three-year earning period, followed by a two-year lock-up period. The individual number of share rights delivered after the three-year earning period is based on the achievement of the earnings criteria set by the Board of Directors. The earnings criteria are set annually, and may vary from year to year. The maximum value in share rights a participant can be granted after the three years earning period cannot at the grant date exceed the participant's one-year salary including fringe benefi ts. The participant has approved that the earned reward will be used to acquire Fortum shares in the name of the participant deducted by the income tax and the statutory employment related expenses and insurance contributions payable by the participant on the reward.
During the lock-up period the shares may not be sold, transferred, pledged or disposed in any other way. Dividends and other fi nancial returns paid on the shares during the lock-up period are, however, not subject to restrictions. The shares will be released from the lock-up after publishing of the Company's fi nancial results for the fi fth calendar year of an individual plan.
The fi rst share rights under the new arrangement will be delivered to the participants in 2011 and will be released from the lock-up in 2013.
The LTI arrangement is treated as a cash-settled arrangement. The total LTI liability including provisions for social charges at the end of the year 2008 was EUR 22 million (2007: 37). The expense recorded in the personnel costs for the period was EUR 19 million (2007: 7) netted with the change in the fair values of the hedge arrangements.
Under the previous LTI arrangement in order to hedge the Group against the changes in the fair values of the potential rewards the Group has entered into share forward transactions which are settled in cash. The change during the year 2008 in the fair values of the hedge arrangements for the 2003–2008, 2004–2009 and 2005–2010 plans amounted to EUR –24 million (2007: 18). The change is netting personnel expenses with a corresponding entry in other non-current liabilities (long-term receivables in 2007). Under the new LTI arrangement Fortum has no obligation to hedge or otherwise protect the value of the shares for the participants during the lock-up period.
| Plan 2005–2010 |
Plan 2004–2009 |
Plan 2003–2008 |
Plan 2002–2007 |
|
|---|---|---|---|---|
| Grant date | 8.2.2008 | 8.2.2007 | 13.2.2006 | 11.2.2005 |
| Grant price, EUR | 27.54 | 20.99 | 19.07 | 14.51 |
| Number of share rights granted | 303,153 | 496,362 | 514,903 | 573,885 |
| Outstanding at the beginning of the period | 0 | 508,844 | 534,775 | 814,209 |
| Granted during the period | 303,153 | 0 | 0 | 0 |
| Dividend adjustments during the period | 16,519 | 26,602 | 27,935 | 0 |
| Payments during the period | –9,343 | –32,843 | –36,239 | –806,166 |
| Cancelled during the period | –409 | –6,426 | –7,975 | –8,043 |
| Outstanding at the end of the period | 309,920 | 496,177 | 518,496 | 0 |
| Estimated departures, % | 4.52 | 4.52 | 4.52 | 4.52 |
| Fortum share price at the end of the grant year, EUR | 15.23 | 30.81 | 21.56 | 15.84 |
The fair value of the potential reward is measured based on the market value of Fortum share at each closing date and at the grant date taking into account the estimated departures. The changes of the fair values of the potential rewards are accrued over the remaining vesting period. The income tax and other statutory employment related expenses and insurance contributions payable by the participant will be deducted from the outstanding amounts at the payments.
The calculative share rights with adjustment for dividends and after taxes (assumed average tax deduction of 56%) that the President and CEO and other members of the Fortum Management Team will receive in 2010 and 2011 are at 31 December as follows. For 2009 (2008) the number of shares represents the actual number of shares delivered in February 2009 (February 2008).
| Name | Year 2008 | Year 2009 | Year 2010 | Year 2011 |
|---|---|---|---|---|
| Mikael Frisk | 10,450 | 6,292 | 5,661 | 3,502 |
| Timo Karttinen | 8,622 | 5,174 | 4,792 | 2,988 |
| Tapio Kuula | 14,415 | 8,682 | 7,813 | 5,168 |
| Juha Laaksonen | 12,010 | 7,227 | 6,504 | 4,718 |
| Mikael Lilius | 36,756 | 22,423 | 20,446 | 14,871 |
| Christian Lundberg | 10,762 | 6,667 | 6,232 | 3,861 |
| Maria Paatero-Kaarnakari (from 1 September 2007) | 3,721 | 2,643 | 2,353 | 1,592 |
| Maria Romantschuk (from 1 September 2007) | - | - | - | - |
In March 2002, a resolution was passed to issue a maximum of 25,000,000 stock options to key employees of the Fortum Group and to a wholly owned subsidiary of Fortum Corporation. Of the total number of stock options, 12,500,000 were marked with the letter A and were exercisable from 1 October 2004 through 1 May 2007, and 12,500,000 are marked with the letter B and are exercisable from 1 October 2006 through 1 May 2009. The Board of Directors could distribute stock options to the key personnel, only if the increase in Fortum Group's earnings per share (EPS) was at least fi ve percent compared with the preceding period. The proportion of the annual maximum amount that became available for distribution was infl uenced by the Company's relative share price development compared to the European Utilities Index during a period of twelve calendar months preceding the month that the stock options were distributed.
The total number of stock options marked with a letter A listed on 1 October 2004 was 10,767,000. Each stock warrant entitled the holder to subscribe for one share. The warrants were exercisable during the period from 1 October 2004 through to 30 April 2007. By the end of the option 2002 A scheme in April 2007, a total of 10,767,000 shares were subscribed for and entered into the trade register. This scheme covered some 350 persons.
The total number of stock options marked with a letter B listed on 2 October 2006 was 10,003,000. Each stock warrant entitles the holder to subscribe for one share. The warrants are exercisable during the period from 2 October 2006 to 30 April 2009. By the end of 2008, a total of 9,274,035 shares were subscribed for and entered into the trade register with the stock options marked with a letter B. At the end of 2008 total of 728,965 shares could still have been registered with the stock options 2002B such that the share capital is increased by a maximum of EUR 2,478,481, which corresponds to 0.1% of the share capital at the end of 2008. At the end of 2008, the subscription price of the stock options marked with the letter B was EUR 3.40. This scheme covered some 350 persons.
The entitlement of the shares subscribed for with the 2002A or B options to dividend, and other shareholder rights, will commence once the increase in the share capital has been registered. The stock options are freely transferable, when the relevant share subscription period has commenced.
| 2008 | 2007 | |||
|---|---|---|---|---|
| Weighted average exercise price, EUR |
Number of options (thousand) |
Weighted average exercise price, EUR |
Number of options (thousand) |
|
| Outstanding at the beginning of the period | 3.40 | 1,684 | 3.40 | 6,883 |
| Granted during the period | - | - | - | - |
| Forfeited during the period | - | - | - | - |
| Exercised during the period | 3.40 | 955 | 3.40 | 5,199 |
| Expired or cancelled during the period | - | - | - | - |
| Outstanding at the end of the period | 729 | 1,684 | ||
| Exercisable at the end of the period | 729 | 1,684 |
In compliance with IFRS, the fair value was defi ned for 2002B options that were granted 15 April 2003 and vested 2 October 2006. The fair value of transferable 2002B options was determined at the grant date by using the Binomial valuation model and was expensed over the vesting period, which ended 2 October 2006.
On 31 December 2008, the members of the Supervisory Board of Fortum Corporation owned a total of 690 shares (2007: 200) or 0.0% of the shares and voting rights. The members of the Board of Directors owned a total of 38,991 shares (2007: 31,591), which corresponds to 0.0% of the company's shares and voting rights.
The President and CEO and other members of the Fortum Management Team owned a total of 354,238 shares (2007: 317,030) which corresponds to less than 0.04% (2007: 0.036%) of the company's shares and voting rights. The President and CEO and other members of the Fortum Management Team members did not have any remaining stock options on 31 December 2008.
| 2008 | 2007 | |
|---|---|---|
| Peter Fagernäs | 30,591 | 30,591 |
| Christian Ramm-Schmidt | 3,500 | 1,000 |
| Ilona Ervasti-Vaintola | 4,000 | - |
| Birgitta Johansson-Hedberg | 900 | - |
| Total | 38,991 | 31,591 |
| Mikael Frisk 25,350 |
14,900 |
|---|---|
| Timo Karttinen 38,622 |
30,000 |
| Tapio Kuula 64,465 |
50,050 |
| Juha Laaksonen 20,000 |
20,000 |
| Mikael Lilius 170,050 |
170,050 |
| Christian Lundberg 30,000 |
30,000 |
| Maria Paatero-Kaarnakari (from 1 September 2007) 5,751 |
2,030 |
| Maria Romantschuk (from 1 September 2007) - |
- |
| Total 354,238 |
317,030 |
| EUR million | 2008 | 2007 | |
|---|---|---|---|
| AB Fortum Värme Holding samägt med Stockholms stad | Sweden | 259 | 270 |
| TGC-10 | Russia | 164 | - |
| Tartu Energi Group | Estonia | 5 | 5 |
| Ekerö Energi Group | Sweden | 4 | 4 |
| Hofors Energi AB | Sweden | 4 | - |
| Fortum Wroclaw S.A. | Poland | - | 1 |
| Jyväskylän Energiatuotanto Oy | Finland | - | 4 |
| Other | 21 | 8 | |
| Total minority interests | 457 | 292 |
Acquisitions during 2008 effecting minority interests in the group consists mainly of the acquisition of 93.4% of the shares in TGC-10, leaving 6.6% as a minority. Fortum also acquired 11% of the shares in Hofors Energi AB in Sweden, resulting in a 60% ownership.
During 2008 Fortum continued to acquire shares in its Polish subsidiaries. Fortum reached 100% ownership in Fortum Wroclaw S.A and the company has been merged to Fortum Power and Heat Polska Sp z.o.o. at year-end.
The only divestment in 2008 effecting minority interests consists of the sale of the 60% shareholding in Jyväskylän Energia which took place at year-end.
Fortum owns, via Fortum Power and Heat AB, 90.1% of the shares which represents 50.1% of the votes in AB Fortum Värme Holding samägt med Stockholms stad. 9.9% of the shares are owned by the City of Stockholm. The City of Stockholm holds preference shares in AB Fortum Värme Holding samägt med Stockholms stad, which entitles them 50% of the economical interest. The ownership and administration of AB Fortum Värme Holding samägt med Stockholms stad is settled by a consortium agreement.
| EUR million | 2008 | 2007 |
|---|---|---|
| Bonds | 2,495 | 2,820 |
| Loans from fi nancial institutions | 3,016 | 467 |
| Finance lease liabilities | 26 | 30 |
| Other long-term interest-bearing debt | 983 | 971 |
| Total long-term interest-bearing debt | 6,520 | 4,288 |
| Current portion of long-term bonds | 422 | 541 |
| Current portion of loans from fi nancial institutions | 31 | 36 |
| Current portion of other long-term interest-bearing debt | 1 | 1 |
| Current portion of financial lease liabilities | 6 | 1 |
| Commercial papers | 457 | - |
| Other short-term interest-bearing debt | 63 | 26 |
| Total short-term interest-bearing debt | 980 | 605 |
| Total | 7,500 | 4,893 |
| EUR million | Effective interest rate |
Carrying amount 2008 |
Repricing under 1 year |
Repricing 1–5 years |
Repricing over 5 years |
Fair value 2008 |
Carrying amount 2007 |
Fair value 2007 |
|---|---|---|---|---|---|---|---|---|
| Bonds | 5.0 | 2,918 | 744 | 1,180 | 994 | 2,925 | 3,361 | 3,416 |
| Loans from fi nancial institutions |
4.0 | 3,047 | 3,028 | 1 | 18 | 3,115 | 503 | 515 |
| Other long-term interest-bearing debt 1) |
4.3 | 1,015 | 991 | 17 | 7 | 1,032 | 1,003 | 1,007 |
| Total long-term interest-bearing debt 2) |
4.5 | 6,980 | 4,763 | 1,198 | 1,019 | 7,072 | 4,867 | 4,938 |
| Commercial papers | 5.2 | 457 | 457 | - | - | 467 | - | - |
| Other short-term interest-bearing debt |
11.5 | 63 | 63 | - | - | 64 | 26 | 26 |
| Total short-term interest-bearing debt |
5.9 | 520 | 520 | - | - | 531 | 26 | 26 |
| Total interest-bearing debt |
4.6 3) | 7,500 | 5,283 | 1,198 | 1,019 | 7,603 | 4,893 | 4,964 |
1) Includes loan from State Nuclear Waste Management Fund and Teollisuuden Voima Oyj EUR 708 million (2007: 658), financial leases EUR 32 (2007: 31), loans from from Fortum's Finnish pension fund EUR 33 million (2007: 33) and other loans EUR 242 million (2007: 281).
2) Including current portion of long-term debt.
3) The average interest rate on loans and derivatives on December 31, 2008 was 4.7% (2007: 4.6%).
Fortum raised a syndicated loan facility of EUR 3,500 million in 2008. The loan facility is structured as a 3-year term loan of EUR 2,000 million used for acquisition fi nancing of TGC-10, and as a 5-year revolving credit facility of EUR 1,500 million used for general corporate purposes. As per year end the 3-year term loan was fully drawn while EUR 600 million was drawn under the 5-year revolving credit facility. During the year long-term bonds of EUR 500 million, EUR 20 million and SEK 200 million were repaid. Issuance of Commercial Papers (CPs) in the Finnish and Swedish markets increased in 2008, per year-end the amount of short-term CPs outstanding amounted to EUR 457 million (2007: 0). Debt in TGC-10 amounted to the equivalent of EUR 259 million as per year-end.
The reported interest-bearing debt increased during the year by EUR 2,607 million to EUR 7,500 million (2007: 4,893). Liquid funds increased by EUR 894 million to EUR 1,321 million (2007: 427) including liquid funds held by TGC-10 amounting to EUR 1,020 million.
For more information please see Note 3 Financial risk management on page 123, Note 38 Pledged assets on page 164 and Note 41 Contingent liabilities on page 165.
| Issued Maturity | Loan description 1) | Interest basis | Interest rate | Effective interest | Currency | Nominal million | Carrying amount 31.12.2008 |
|---|---|---|---|---|---|---|---|
| 2003/2010 | Fortum Oyj EUR 5,000 Million EMTN Programme | Fixed | 4.625 | 4.728 | EUR | 500 | 499 |
| 2003/2013 | Fortum Oyj EUR 5,000 Million EMTN Programme | Fixed | 5.000 | 5.164 | EUR | 500 | 497 |
| 2006/2011 | Fortum Oyj EUR 5,000 Million EMTN Programme | Fixed | 3.750 | 3.793 | SEK | 2,000 | 184 |
| 2006/2009 | Fortum Oyj EUR 5,000 Million EMTN Programme | Floating | Stibor 3M+0.10 | SEK | 2,500 | 230 | |
| 2006/2016 | Fortum Oyj EUR 5,000 Million EMTN Programme | Fixed | 4.500 | 4.615 | EUR | 750 | 756 |
| 2007/2012 | Fortum Oyj EUR 5,000 Million EMTN Programme | Floating | Stibor 3M+0.15 | SEK | 3,500 | 322 | |
| 2007/2014 | Fortum Oyj EUR 5,000 Million EMTN Programme | Fixed | 4.700 | 4.764 | SEK | 2,600 | 238 |
| 2007/2010 | TGC-10 | Fixed | 7.600 | 7.745 | RUB | 3,000 | 72 |
| 2008/2013 | TGC-10 | Fixed | 9.750 | 9.988 | RUB | 5,000 | 120 |
| Total outstanding carrying amount 31 December 2008 | 2,918 |
1) EMTN = Euro Medium Term Note
TGC-10 has two bond loans of totally RUB 8,000 million with fi nal maturity 2010 and 2013. The loan documentation includes a put option, giving bond holders the right to request redemption of the bonds in 2009. In the balance sheet these bonds are classifi ed as short-term.
On 31 December 2008 Fortum had a small number of fi nance leasing agreements for machinery and equipment. No new leasing commitments were entered into in 2008 or 2007.
| EUR million | 2008 | 2007 |
|---|---|---|
| Minimum lease payments | 43 | 42 |
| Less future fi nance charges | 11 | 11 |
| Total | 32 | 31 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Less than 1 year | 8 | 3 |
| 1–5 years | 16 | 16 |
| Over 5 years | 19 | 23 |
| Total | 43 | 42 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Less than 1 year | 6 | 1 |
| 1–5 years | 9 | 9 |
| Over 5 years | 17 | 21 |
| Total | 32 | 31 |
| EUR million | 1 Jan 2008 |
Charged to income statement |
Charged in equity |
Exchange rate differences, reclassifi cations and other changes |
Acquisitions and disposals |
31 Dec 2008 |
|---|---|---|---|---|---|---|
| Deferred tax assets | ||||||
| Property, plant and equipment |
10 | 3 | –1 | 12 | ||
| Provisions | 19 | –2 | –1 | 16 | ||
| Tax losses and tax credits carry-forward |
20 | 11 | 31 | |||
| Other | 10 | 6 | –1 | 15 | ||
| Total deferred tax assets | 59 | 18 | –3 | 74 | ||
| Offset against deferred tax liabilities |
–56 | –16 | –72 | |||
| Deferred tax assets after offset |
3 | 2 | –3 | 2 | ||
| Deferred tax liabilities | ||||||
| Property, plant and equipment |
1,769 | –93 | –180 | 198 | 1,694 | |
| Fair value adjustments | 0 | 67 | 67 | |||
| Derivative fi nancial instruments |
–47 | 14 | 153 | –2 | 118 | |
| Current assets | 7 | 5 | 12 | |||
| Other | 14 | 19 | –1 | 32 | ||
| Offset against deferred tax assets |
–56 | –16 | –72 | |||
| Deferred tax liabilities after offset |
1,687 | –4 | 153 | –183 | 198 | 1,851 |
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fi scal authority.
In December 2008 the Swedish Government passed legislation lowering the income tax rate from 28% to 26.3%. The one-time positive effect in the net deferred liabilities approximated EUR 81 million. Also December 2008 the Russian Government passed legislation lowering the income tax rate from 24% to 20%. The one-time positive effect in the net deferred liabilities approximated EUR 32 million.
See also Note 15 Income tax expense on page 141.
Deferred tax assets and liabilities from acquisitions 2008 mainly refer to the Russian acquisition of TGC-10.
Deferred tax assets of EUR 14 million (2007: 16) have not been recognised in the consolidated fi nancial statements, because the realisation is not probable. The major part of the unrecognised tax asset (EUR 9 million) relates to capital loss in UK, which has no expiration date. The rest of the unrecognised tax assets (EUR 5 million) relates to loss carry-forwards that are unlikely to be used under the expiration date.
Deferred income tax liabilities of EUR 5 million (2007: 3) have been recognised for the withholding tax and other taxes that would be payable on the all unremitted earnings of Estonian subsidiaries. Unremitted earnings from these companies totalled EUR 23 million on 31 December 2008 (2007: 25).
| EUR million | 1 Jan 2007 |
Charged to income statement |
Charged in equity |
Exchange rate differences, reclassifi cations and other changes |
Acquisitions and disposals |
31 Dec 2007 |
|---|---|---|---|---|---|---|
| Deferred tax assets | ||||||
| Property, plant and equipment |
17 | –7 | - | - | - | 10 |
| Provisions | 29 | –10 | - | - | - | 19 |
| Tax losses and tax credits carry-forward |
9 | 11 | - | - | - | 20 |
| Other | 15 | –5 | - | - | - | 10 |
| Total deferred tax assets | 70 | –11 | - | - | - | 59 |
| Offset against deferred tax liabilities |
–65 | 9 | - | –56 | ||
| Deferred tax assets after offset |
5 | –2 | - | - | - | 3 |
| Deferred tax liabilities | ||||||
| Property, plant and equipment |
1,829 | –8 | - | –52 | - | 1,769 |
| Derivative fi nancial instruments |
19 | –5 | –61 | - | - | –47 |
| Current assets | 7 | 0 | - | - | - | 7 |
| Other | 5 | 9 | - | - | - | 14 |
| Offset against deferred tax assets |
–65 | 9 | - | - | - | –56 |
| Deferred tax liabilities after offset |
1,795 | 5 | –61 | –52 | - | 1,687 |
Deferred income tax assets are recognised for tax loss carry-forward to the extent that the realisation of the related tax benefi t through future profi ts is probable. The recognised tax assets relate to losses carry-forward with no expiration date and partly with expiry date as described below.
| 2008 | 2007 | |||
|---|---|---|---|---|
| EUR million | Tax losses |
Deferred tax asset |
Tax losses |
Deferred tax asset |
| Losses without expiration date (Sweden, Norway) | 110 | 28 | 73 | 19 |
| Losses with expiration date (Poland) | 18 | 3 | 14 | 1 |
| Total | 128 | 31 | 87 | 20 |
| EUR million | Pension | CSA provision |
Environ mental |
Other | Total |
|---|---|---|---|---|---|
| 1 January 2008 | 119 | - | 9 | 16 | 144 |
| Provisions for the period | - | - | - | 12 | 12 |
| Increases through acquisition of subsi diary companies |
10 | 192 | - | 3 | 205 |
| Provisions used | - | - | - | –7 | –7 |
| Change in pension obligation (see Note 34 Pension obligations) |
–78 | - | - | - | –78 |
| Provisions reversed | - | - | - | –2 | –2 |
| Unwinding of discount | - | 12 | - | - | 12 |
| Exchange rate differencies | - | –24 | –1 | –2 | –27 |
| 31 December 2008 | 51 | 180 | 8 | 20 | 259 |
| Allocation between current and non-current provisions |
|||||
| Current provisions | - | - | - | 9 | 9 |
| Non-current provisions | 51 | 180 | 8 | 11 | 250 |
| EUR million | Pension | CSA provision |
Environ mental |
Other | Total |
| 1 January 2007 | 126 | - | 13 | 47 | 186 |
| Provisions for the period | - | - | - | 2 | 2 |
| Provisions used | - | - | –4 | –22 | –26 |
| Change in pension obligation (see Note 34 Pension obligations) |
–7 | - | - | - | –7 |
| Provisions reversed | - | - | - | –11 | –11 |
| 31 December 2007 | 119 | - | 9 | 16 | 144 |
| Allocation between current and non-current provisions |
|||||
| Current provisions | - | - | - | 2 | 2 |
| Non-current provisions | 119 | - | 9 | 14 | 142 |
Capacity supply agreement provision (CSA) is the possible penalty that the Russian System Operator can claim against Fortum if the extensive investment program of TGC-10 to increase electricity capacity with 2,300 MW by 2013 is substantially delayed or agreed major terms in connection with the acquisition of TGC-10 are not otherwise fulfi lled.
Environmental provision relates to dismantling of buildings and structures on contaminated land. The provision is estimated to be used within fi ve years. Other provisions include provisions for restructuring costs, insurance payments, tax claims and provisions for onerous contracts. The provision is estimated to be used within two to fi ve years. Pension obligations for 2007 include EUR 2 million of unpaid liabilities related to defi ned contribution plans, see Note 34 Pension obligations.
Restructuring provisions, included in other provisions, of EUR 10 million (2007: 3). The restructuring provision relates to re-organisations of service functions in order to develop internal processes and aims to create more effi cient and higher quality workfl ows. The re-organisation affects maximum 55 employees in Finland and 180 employees in Sweden. The main part of the restructuring provision is staff costs and the major part of the provision will be utilized in 2009 and some minor parts in 2010 onwards.
The Group companies have various defi ned benefi t and defi ned contribution pension plans in accordance with the local conditions and practices in the countries in which they operate. The concerned pensions are primarily retirement pensions, disability pensions and family pensions but contain also early retirement arrangements.
In Finland the most signifi cant pension plan is the Finnish Statutory Employment Pension Scheme (TyEL) in which benefi ts are directly linked to employees' earnings. These pensions are funded in insurance company and treated as defi ned contribution plans. The benefi ts provided under TyEL are old age pensions, disability pensions, unemployment pensions and survivors' pensions. In addition, certain employees in Finland have additional pension coverage through companies' own pension funds or through insurance companies.
In Sweden the Group operates several defi ned benefi t and defi ned contribution plans like the general ITP-pension plan and the PA-KL and PA-KFS plans that are eligible for employees within companies formerly owned by municipalities. The pension arrangements comprise normal retirement pension, complementary retirement pensions, survivors' pension and disability pension. The most signifi cant pension plan is the ITP-plan for white-collar employees in permanent employment (or temporary employees after a certain waiting period), who fulfi ll the age conditions. To qualify for a full pension the employee must have a projected period of pensionable service, from the date of entry until retirement age, of at least 30 years. The ITP-plan has been partly fi nanced through insurance premiums and partly through provisions in the balance sheet (book-reserves). In April 2008 Fortum transferred majority of its pension liabilities previously fi nanced through insurance premiums or through provisioning to a newly established own pension fund. Among the transferred pension arrangements were major part of the general ITP-pension plan, all plans eligible for employees of formerly municipality-owned companies as well as certain other smaller arrangements. The total amount of transferred liability was at the time of transfer SEK 742 million (EUR 68 million). At the time of transfer Fortum paid contributions to the fund amounting to the same amount, in order to cover this liability. The part of the ITP multiemployer pension plan that is secured by paying pension premiums to Alecta, in Fortums case the collective family pension, is accounted for as a defi ned contribution plan due to lack of information necessary to account for the plan as a defi ned benefi t plan.
The Norwegian companies are part of schemes that are common for municipalities in Norway. These are defi ned benefi t pension plans and provide old age pensions and disability pension, including pension benefi ts from the National Insurance Scheme (Folketrygden). The schemes also provide survivor's pensions. The schemes are fully funded within the rules set out in the Norwegian insurance legislation.
Pension arrangements in Russia include payments made to the Russian Federation's state pension fund. These arrangements are treated as defi ned contribution plans. In addition the Russian companies participate in a non-state power industry pension fund as well as in certain defi ned benefi t plans, defi ned by collective agreements. The benefi ts provided under these arrangements include one-time benefi ts paid in case of employee mortality or disability as well as lump sum payments for anniversary and fi nancial support to honored workers and pensioners.
In other countries the pension arrangements are done in accordance with the local legislation and practice, mostly being defi ned contribution plans.
The pension obligations are calculated annually, on the balance sheet date, based on actuarial principles. When accounting for defi ned contribution plans the obligation for each period is determined by the amounts to be contributed for that period. When accounting for defi ned benefi t plans, actuarial calculations are required to measure the obligation on discounted basis and the expense. The plan assets for pensions are valued at market value. When the net cumulative unrecognised actuarial gain or loss on pension obligations and plan assets goes outside the corridor with 10% of the greater of either pension obligations or the market value of the plan assets, the surplus amount is amortised over the average remaining employment period.
| EUR million | 2008 | 2007 |
|---|---|---|
| Current service cost | –11 | –11 |
| Interest cost | –20 | –16 |
| Expected return on plan assets | 20 | 15 |
| Settlements | 1 | 1 |
| Past service cost | –1 | - |
| Total included in employee costs (Note 12) | –11 | –11 |
The actual return on plan assets in Finland and Sweden totalled EUR –29 million (2007: 17).
| EUR million | 2008 | 2007 |
|---|---|---|
| Present value of funded obligations | 406 | 390 |
| Fair value of plan assets | –343 | –276 |
| Deficit (+) / Surplus (–) | 63 | 114 |
| Present value of unfunded obligations | 0 | 0 |
| Unrecognised past service cost | –4 | - |
| Unrecognised actuarial gains and losses | –67 | –11 |
| Net asset (–) / liability (+) in the balance sheet | –8 | 103 |
| Defi ned benefi t asset included in the assets (Note 22) | 59 | 14 |
| Pension obligations in the balance sheet | 51 | 117 |
| Experience adjustments arising on funded obligations; gain(–)/loss(+) | 20 | 11 |
| Experience adjustments arising on plan assets; gain(+)/loss(–) | –48 | 21 |
| EUR million | 2008 | 2007 |
|---|---|---|
| 1 January | 103 | 124 |
| Exchange rate differencies | –14 | –4 |
| Increases through acquisition of subsidiary companies | 10 | 0 |
| Formation of the Swedish pension fund | –68 | 0 |
| Total expense charged in the income statement | 11 | 12 |
| Contributions paid | –50 | –29 |
| 31 December Net asset(–)/liability(+) | –8 | 103 |
| Defi ned benefi t obligations | 51 | 117 |
| Defi ned benefi t assets included in assets | –59 | –14 |
| Net asset(–)/ liability(+) | –8 | 103 |
Contributions expected to be paid during the year 2009 are EUR 20 million.
| EUR million | 2008 | 2007 |
|---|---|---|
| 1 January | 390 | 367 |
| Exchange rate differencies | –28 | –7 |
| Increases through acquisition of subsidiary companies | 11 | - |
| Service cost | 11 | 11 |
| Interest cost | 20 | 15 |
| Increase in obligation | 4 | 0 |
| Effect of settlement | –1 | –5 |
| Actuarial gains(–)/ losses(+) on obligations | 17 | 25 |
| Benefi ts paid | –18 | –16 |
| 31 December | 406 | 390 |
| EUR million | 2008 | 2007 |
|---|---|---|
| 1 January | 276 | 250 |
| Exchange rate differencies | –6 | 0 |
| Expected return of plan assets | 20 | 15 |
| Actuarial gains and losses | –44 | 1 |
| Formation of the Swedish pension fund | 68 | - |
| Contributions by employer | 41 | 24 |
| Effect of settlement | - | –5 |
| Benefi ts paid | –12 | –9 |
| 31 December | 343 | 276 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Equity instruments | 101 | 73 |
| Debt instruments | 112 | 53 |
| Property (of which EUR 71 million (2007: 65) occupied by the Group) | 75 | 65 |
| Company's own ordinary shares | 4 | 9 |
| Other assets | 51 | 76 |
| Total | 343 | 276 |
When the pension plan has been fi nanced through incurance company, the specifi cation of plan assets has not been available. In these cases the fair value of plan assets has been included in the Other assets.
| EUR million | Finland | Sweden | Other countries |
Total |
|---|---|---|---|---|
| Present value of funded obligations | 204 | 151 | 51 | 406 |
| Fair value of plan assets | –222 | –98 | –23 | –343 |
| Defi cit(+)/Surplus(–) | –18 | 53 | 28 | 63 |
| Present value of unfunded obligations | 0 | 0 | 0 | 0 |
| Unrecognised past service cost | 0 | 0 | –4 | –4 |
| Unrecognised actuarial gains and losses | –16 | –43 | –8 | –67 |
| Net asset(–)/ liability (+) in the balance sheet | –34 | 10 | 16 | –8 |
| Defi ned benefi t asset included in the assets (Note 22) | 46 | 13 | 0 | 59 |
| Pension obligations in the balance sheet | 12 | 23 | 16 | 51 |
| EUR million | Finland | Sweden | Other countries |
Total |
|---|---|---|---|---|
| Present value of funded obligations | 202 | 153 | 35 | 390 |
| Fair value of plan assets | –230 | –25 | –21 | –276 |
| Defi cit(+)/Surplus(-) | –28 | 128 | 14 | 114 |
| Present value of unfunded obligations | 0 | 0 | 0 | 0 |
| Unrecognised actuarial gains and losses | 28 | –32 | –7 | –11 |
| Net asset(-)/ liability (+) in the balance sheet | 0 | 96 | 7 | 103 |
| Defi ned benefi t asset included in the assets (Note 24) | 14 | 0 | 0 | 14 |
| Pension obligations in the balance sheet | 14 | 96 | 7 | 117 |
| EUR million | 2008 | 2007 | 2006 |
|---|---|---|---|
| Present value of defi ned benefi t obligation | 406 | 390 | 361 |
| Fair value of plan assets | –343 | –276 | –250 |
| Deficit/(surplus) in the plan | 63 | 114 | 111 |
| Experience adjustments on plan liabilities | 20 | 11 | 21 |
| Experience adjustments on plan assets | –48 | 21 | –10 |
| 2008 | 2007 | ||||||
|---|---|---|---|---|---|---|---|
| Finland | Sweden | Russia | Other countries |
Finland | Sweden | Other countries |
|
| Discount rate, % | 5.50 | 4.30 | 9.00 | 4.30 | 5.00 | 4.50 | 4.70 |
| Expected return on plan assets, % |
6.50 | 5.50 | 5.80–6.30 | 6.50 | 4.50 | 5.75 | |
| Future salary increases, % | 4.00 | 3.70 | 8.00 | 4.50 | 4.00 | 3.50 | 3.20 |
| Future pension increases, % |
2.10 | 2.20 | 6.50 | 1.75 | 2.10 | 2.00 | 2.70 |
| Rate of infl ation, % | 2.00 | 2.20 | 6.50 | 2.50 | 2.00 | 2.00 | 2.50 |
The discount rate in Finland is based on the quoted European government bonds with maturity that best refl ects the estimated term of the defi ned benefi t pension plans. The discount rate in Sweden and Norway is based on the yield of long-term government bonds which are consistent with the currency and the estimated term of the postemployment benefi t obligations. The expected return on plan assets is determined by considering the expected returns available on the assets underlying the current investment policy. Expected returns are based on long-term real rates of return experienced in the respective markets and reported by external asset manager.
During 2007, new mortality tables were published by the Swedish Insurance Supervisory Board (Finansinspektionen). The new tables are based on updated data and present mortality rates for different age cohorts. The Group has adopted the new mortality tables as at December 31, 2007. The change of mortality table results in an actuarial loss in aggregate of 7% due to the increase in average life expectancy.
Discount rate used is one of the key assumptions used when calculating defi ned benefi t obligations. A change of 0.5 percentage points in the discount rate holding all other assumptions stable would have the following effects to the defi ned benefi t obligation as of 31 December 2008:
| Impact to the pension liability (increase +/ decrease –) |
||
|---|---|---|
| Change in the assumption | Finland | Sweden |
| 0.5% increase in discount rate | –6.4% | –8.6% |
| 0.5% decrease in discount rate | 5.8% | 9.8% |
Fortum owns the Loviisa nuclear power plant in Finland. Based on the Nuclear Energy Act in Finland, Fortum has a legal obligation to fully fund the legal liability decided by the governmental authorities, for decommissioning of the power plant and disposal of spent fuel through the State Nuclear Waste Management Fund. The text below should be read in conjunction with information in Note 1 Accounting principles.
| EUR million | 2008 | 2007 |
|---|---|---|
| Carrying values in the balance sheet | ||
| Nuclear provisions | 566 | 516 |
| Share in the State Nuclear Waste Management Fund | 566 | 516 |
Legal liability and actual share of the State Nuclear Waste Management Fund
| Liability for nuclear waste management according to the Nuclear Energy Act | 895 | 816 |
|---|---|---|
| Funding obligation target | 767 | 698 |
| Fortum's share of the State Nuclear Waste Management Fund | 728 | 673 |
The nuclear provisions are related to future obligations for nuclear waste management including decommissioning of the power plant and disposal of spent fuel. The fair values of the provisions are calculated according to IAS 37 based on future cash fl ows regarding estimated future costs for each of the provisions separately. The cash fl ows used are based on the cost estimates which are also the basis for the legal liability. Provisions for decommissioning and for disposal of spent fuel are both included in Nuclear provisions in the balance sheet.
In September 2008 Fortum submitted the yearly proposal for the nuclear waste management legal liability regarding the Loviisa nuclear power plant to the Ministry of Employment and the Economy. The legal liability is calculated according to the Nuclear Energy Act in Finland and is decided by the Ministry of Employment and the Economy in January every year. The proposal was based on an updated cost estimate, which is done every year, and on a new technical plan, which is made every third year and was updated last time in 2007. Based on the new plan, the future costs are estimated to increase mainly due to the new limits for free release of materials set by the authorities (STUK) which has caused a larger scope for future decommissioning of the nuclear power plant.
The legal liability by the end of 2008, based on the proposal to the Ministry of Employment and the Economy and calculated according to the Nuclear Energy Act, is EUR 895 million (2007: 816). The carrying value of the nuclear provisions, calculated according to IAS 37, have increased by EUR 50 million compared to 31 December 2007, totalling EUR 566 million as of 31 December 2008. The main reason for the difference between the carrying value of the provision and the legal liability is the fact that the legal liability is not discounted to net present value.
The increase of the provision for spent fuel caused a negative one-time effect of EUR 3 million in comparable operating profi t in Q3 2008 (Q3 2007: 13 million) due to higher nuclear waste management costs related to already spent fuel. The increase of the provision for spent fuel also caused negative one-time effect in interest costs, due to unwinding of the provision for the period during which the spent fuel provision has been accumulated and present point in time, which are recognised immediately in the income statement.
The increase of the provision for decommissioning is added to the nuclear decommissioning cost and depreciated over the remaining estimated operating time of the nuclear power plant. See Note 20 Property, plant and equipment.
| EUR million | 2008 | 2007 |
|---|---|---|
| At 1 January | 516 | 450 |
| Additional provisions | 34 | 46 |
| Used during the year | –16 | –15 |
| Unwinding of discount | 32 | 35 |
| At 31 December | 566 | 516 |
| Carrying value of Fortum's share in the State Nuclear Waste Management Fund | 566 | 516 |
Fortum contributes funds to the State Nuclear Waste Management Fund in Finland to cover future obligations based on the legal liability calculated according to the Finnish Nuclear Energy Act. The fund is managed by governmental authorities. The carrying value of the Fund in Fortum's balance sheet is calculated according to IFRIC 5 Rights to interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds.
According to the Nuclear Energy Act, Fortum is obligated to contribute the funds in full to the State Nuclear Waste Management Fund to cover the legal liability. Based on the law, Fortum applied for periodising of the payments to the Fund over six years, due to the proposed increase in the legal liability. The application was approved by Council of State in December 2007.
The periodisation of the payments to the State Nuclear Waste Management Fund has an impact on cash fl ow, but also on operating profi t since the carrying value of the Fund in the balance sheet cannot exceed the carrying value of the nuclear provisions according to IFRIC Interpretation 5. The Fund is from an IFRS perspective overfunded with EUR 162 million (2007: 157), since Fortum's share of the Fund as of 31 December 2008 is EUR 728 million (2007: 673) and the carrying value in the balance sheet is EUR 566 million (2007: 516).
Operating profi t for 2008 includes a negative total adjustment of EUR –19 million (2007: 17), since the value of the Fund has increased more than the carrying value of the provision. The positive adjustment in 2007 related to the increase of the carrying value of the Fund in the balance sheet as a result of the increased provision due to the updated technical plan. These adjustments are included in "Other items effecting comparability" in the Power Generation segment, see Note 5 Segment information, and are not included in comparable operating profi t. As long as the Fund stays overfunded from an IFRS perspective, positive accounting effects to Operating profi t will always occur when the nuclear provision is increasing more than the net payments to the Fund. Negative accounting effects will occur when the net payments to the Fund are higher than the increase of the provision.
The funding obligation target for the each year is decided by the Ministry of Employment and the Economy retrospectively in January each year after the legal liability has been decided. The difference between the funding obligation target for Fortum and Fortum's actual share of the State Nuclear Waste Fund is paid in Q1 each year.
The funding obligation target, corresponding to both the new legal liability and the new decision for periodisation to the Fund, amounts EUR 767 million (2007: 698). The difference between the legal liability at year end 2008 and the corresponding funding obligation target, EUR 39 million (2007: 25) is covered by a security which has been given in the end of June 2008. The real estate mortgages given also covers unexpected events according to the Nuclear Energy Act, see also Note 38 Pledged assets.
Finnish participants in the State Nuclear Waste Management Fund are allowed to borrow from the Fund according to certain rules. Fortum uses the right to borrow back and has pledged Kemijoki shares as security for the loan. The loans are renewed yearly.
See also Note 31 Interest-bearing liabilities on page 156 and Note 38 Pledged assets on page 164.
Fortum has minority shareholdings in associated Finnish and Swedish nuclear production companies. The shareholdings entitle Fortum to electricity produced according to consortium agreements.
Regarding the Finnish company Teollisuuden Voima Oyj (TVO), similar IFRS nuclear accounting adjustments are made when accounting for the share of profi t from the associate company. Regarding the two Swedish shareholdings, OKG AB and Forsmarks Kraftgrupp AB, Fortum has at year-end received the cash fl ow information for its Swedish nuclear associated companies from Swedish Nuclear Fuel and Waste Management Co (SKB). The cash fl ow information is based on the 2008 technical plan and cost estimates, which are also the basis for the legal fee and guarantee calculations to be decided for 2010 and 2011. Fortum has accounted for its share of the effects from nuclear related assets and provisions according to Fortum accounting principles. The effect in share of profi ts was EUR 43 million in Q4. The positive effect included EUR +16 million due to the increase of the carrying value of the Swedish Nuclear Waste Fund as a result of the increased provision due to the new technical plan in 2008. The Swedish Fund has been overfunded from an IFRS perspective, but is almost equal to the provision at year-end. The total nuclear fund adjustments for 2008 included in share of profi ts from associates (also including TVO) amounted to EUR +9 million (2007: –7).
Fortum has according to law given guarantees to the Finnish and Swedish nuclear Funds on behalf of the associated companies, to guarantee that suffi cient funds exist to cover future expenses of decommissioning of the power plants and disposal of spent fuel, see Note 41 Contingent liabilities.
Through the shareholding in TVO, Fortum uses the right to borrow from the Fund.
| EUR million | 2008 | 2007 |
|---|---|---|
| Connection fees | 410 | 405 |
| Other liabilities | 60 | 81 |
| Total | 470 | 486 |
Connection fees to the electricity network in Finland that are paid before 2003 are refundable, if the customer would ever disconnect the initial connection. The connections fees to the electricity network amounted to EUR 307 million (2007: 307).
Connection fees to the district heating network in Finland amounted to EUR 103 million (2007: 98).
| EUR million | 2008 | 2007 |
|---|---|---|
| Trade payables | 343 | 272 |
| Accrued expenses and deferred income | ||
| Personnel expenses | 78 | 89 |
| Interest expenses | 86 | 107 |
| Other accrued expenses and deferred income | 158 | 201 |
| Other liabilities | ||
| VAT-liability | 61 | 34 |
| Energy taxes | 33 | 36 |
| Advances received | 87 | 62 |
| Other liabilities | 116 | 68 |
| Total | 962 | 869 |
The management considers that the amount of trade and other payables approximates fair value.
| EUR million | 2008 | 2007 |
|---|---|---|
| On own behalf | ||
| For debt | ||
| Pledges | 229 | 170 |
| Real estate mortgages | 137 | 138 |
| For other commitments | ||
| Real estate mortgages | 206 | 103 |
| On behalf of associated companies and joint ventures | ||
| Pledges and real estate mortgages | 2 | 3 |
Finnish participants in the State Nuclear Waste Management Fund are allowed to borrow from the Fund. Fortum has during 2008 increased the loan from the fund and has pledged additional shares in Kemijoki as security. The carrying value of the pledged shares is EUR 208 million as of 31 December 2008 (2007: 145).
Pledges also include bank deposits as trading collateral of EUR 1 million (2007: 5) for trading of electricity and CO2 allowances in Nord Pool and trading of CO2 with Intercontinental Exchange (ICE) and European Energy Exchange (EEX).
Fortum Tartu in Estonia (60% owned by Fortum) has given real estate mortgages for a value of EUR 96 million (2007: 95) as a security for an external loan. Real estate mortgages have also been given for loans from Fortum's pension fund for EUR 41 million (2007: 41).
Regarding the relevant interest-bearing liabilities, see Note 31 Interest-bearing liabilities on page 156.
Fortum has given real estate mortgages in Naantali and Inkoo power plants in Finland for a value of EUR 206 million (2007: 102) as a security to the State Nuclear Waste Management Fund for the uncovered part of the legal liability and unexpected events relating to costs for future decommissioning and disposal of spent fuel in the wholly owned Loviisa nuclear power plant. The legal liability, based on the situation as of 31 December, is decided by the Ministry of Employment and the Economy in January the following year and the amount of the security is adjusted by the end of June.
See also Note 35 Nuclear related assets and liabilities on page 162.
Fortum has leased out its 308 MW share of the Meri-Pori power plant from January 2007 to the end of June 2010. The rental income recognised in income statement was EUR 25 million (2007: 25).
| EUR million | 2008 | 2007 |
|---|---|---|
| Not later than 1 year | 25 | 25 |
| Later than 1 year and not later than 5 years | 12 | 37 |
| Later than 5 years | - | - |
| Total | 37 | 62 |
Fortum leases offi ce equipment and cars under various non-cancellable operating leases, some of which contain renewal options. The future costs for non-cancellable operating leasing contracts are stated below. Lease rental expenses amounting to EUR 15 million (2007: 12) are included in the income statement in other expenses. Future minimum lease payments include land leases with long lease periods.
| EUR million | 2008 | 2007 |
|---|---|---|
| Not later than 1 year | 28 | 21 |
| Later than 1 year and not later than 5 years | 47 | 31 |
| Later than 5 years | 86 | 69 |
| Total | 161 | 121 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Property, plant and equipment | 1,321 | 425 |
| Intangible assets | 7 | 11 |
| Total | 1,328 | 436 |
The increase in capital commitments from 2007 is mainly due to the acquisition of TGC-10 in March 2008, representing approximately EUR 940 million at year-end 2008, of which approximately EUR 390 million refers to investments in 2009.
Other contracted future investments refers mainly to the installation of new meters for automatic meter reading in Distribution business in Sweden and CHP plants being built in the Heat business in Finland, Estonia and Poland.
For more information regarding capital expenditure, see Note 20 Property, plant and equipment on page 144. See also Note 7 Acquisitions and disposals on page 135 for information regarding TGC-10.
| 2007 | |
|---|---|
| 224 | |
| 235 | |
| 125 | |
| 10 | |
| 1 | 1 |
| 2008 362 565 125 10 |
Other contingent liabilities on own behalf include guarantees issued for the fulfi llment of various contractual obligations relating to Fortum's Service business in the UK, amounting to a maximum of EUR 66 million (2007: 85). Fortum has also given guarantees to suppliers, EUR 60 million (2007: 66) regarding the new CHP plant being built by business unit Heat in Częstochowa in Poland and EUR 173 million regarding the investment program in TGC-10.
Guarantees and other contingent liabilities on behalf of associated companies and joint ventures mainly consist of guarantees relating to Fortum's associated nuclear companies Teollisuuden Voima Oyj (TVO), Forsmarks Kraftgrupp AB (FKA) and OKG AB (OKG). The guarantees are given in proportion to Fortum's respective ownership in each of theses companies.
According to law, nuclear companies operating in Finland and Sweden shall give securities to the Finnish State Nuclear Waste Management Fund and the Swedish Nuclear Waste Fund respectively, to guarantee that suffi cient funds exist to cover future expenses of decommissioning of the power plant and disposal of spent fuel. In Finland, Fortum has given a guarantee on behalf of TVO to the Finnish State Nuclear Waste Management Fund amounting to EUR 70 million (2007: 32) to cover Fortum's part of TVO's uncovered part of the legal liability and for unexpected events.
In Sweden, Fortum has given guarantees on behalf of FKA and OKG to the Swedish Nuclear Waste Fund to cover Fortum's part of FKA's and OKG's liability. Starting on 1 January 2008, a new law applies in Sweden for fi nancing of future fees to the fund for spent nuclear fuel and decommissioning of the plant. Following the implementation of the new law, the total amounts of guarantees relating to nuclear waste management in Sweden have increased from SEK 1,841 million (EUR 169 million) in December 2007 to SEK 5,314 million (EUR 489 million) in December 2008. The guarantees are changed the year after new decisions have been made regarding the level of the legal liabilities and the payment schedules to fund the Nuclear Waste Funds.
Meri-Pori power plant in Finland is owned by Fortum 54.55% and Teollisuuden Voima Oyj (TVO) 45.45%. Based on the participation agreement Fortum has to give a guarantee to TVO against possible loss of asset or breach in contract of TVO's share of the asset, EUR 125 million (2007: 125).
Fortum's 100% owned subsidiary Fortum Heat and Gas Oy has a collective contingent liability with Neste Oil Oyj of the demerged Fortum Oil and Gas Oy's liabilities based on the Finnish Companies Act's (734/1978) Chapter 14a Paragraph 6.
Two subsidiaries of Fortum, Grangemouth CHP Limited and Fortum O&M (UK) Limited, are defendants in a court case regarding greenhouse gas emissions allowances in the High Court of Justice in London. Grangemouth CHP Limited is a party to an Electricity Supply Agreement with Ineos Manufacturing Scotland Limited, pursuant to which Grangemouth CHP Limited provides electricity from its CHP plant to the Grangemouth site in Scotland until April 2016. Ineos Manufacturing Scotland Limited claims that it is entitled to all of the emissions allowances allocated under the EU ETS scheme for greenhouse gas emission allowance trading with respect to the CHP plant. Grangemouth CHP Limited denies this claim. The case has currently been postponed until further notice.
The Finnish Competition Authority gave on 2 June 2006 its conditional approval to the transaction by which Fortum acquired control in E.ON Finland Oyj. On 3 July 2006 Fortum appealed against the decision to the Market Court. In March 2008 the Finnish Market Court decision overruled the conditional decision given by the Finnish Competition Authority in June 2006 on the acquisition of E.ON Finland. In their ruling, the Market Court stated that the Finnish Competition Authority had no grounds for setting conditions, because Fortum cannot be considered to have a dominant position in the power generation and wholesale market. According to the Market Court, the relevant geographical market area in power generation and wholesale consist of at least Finland and Sweden. The Finnish Competition authority has appealed the decision to the Supreme Administrative Court.
In addition to the litigations described above, some Group companies are involved in disputes incidental to their business. In management's opinion the outcome of such disputes will not have material effect on the Group's fi nancial position.
In Finland, Fortum is participating in the country's fi fth nuclear power plant unit, Olkiluoto 3, through the shareholding in Teollisuuden Voima Oyj (TVO) with an approximately 25% share representing some 400 MW in capacity. In January 2009 TVO disclosed information, confi rmed by AREVA-Siemens, that the construction of the unit is delayed and the unit is estimated to start up in summer 2012. In December 2008 the constructor TVO informed that the plant supplier, consortium AREVA-Siemens, has fi led a request for arbitration concerning Olkiluoto 3 delay and related costs in the International Chamber of Commerce (ICC).
At the beginning of 2008 the Finnish State owned 50.86% of the company and at the end of 2008 50.80%. See The Fortum share and shareholders section of the Operating and Financial Review for further information on Fortum shareholders. All transactions between Fortum and other companies owned by the Finnish State are on arms length basis. In the ordinary course of business Fortum engages in transactions on commercial terms with associated companies and other related parties, which are on same terms as they would be for third parties, except for some associates as discussed later in this note.
Fortum has not been involved in any material transactions with members of the Board of Directors or Fortum Management Team. No loans exist to any member of the Board of Directors or Fortum Management Team at 31 December 2008. Members of the Board of Directors and Fortum Management Team holdings of options and shares are disclosed in Note 29 Employee bonus, personnel fund and incentive schemes. Compensation to members of the Supervisory Board, the Board of Directors and Fortum Management Team are disclosed in Note 12 Management remuneration and employee costs.
All transactions between Fortum and other companies owned by the Finnish State are on arms length basis. The service agreement with Neste Oil concerning services from Fortum's Shared Financial Service Center was terminated in August 2007. The service agreement was on arms length.
Fortum owns shareholdings in associated companies and joint ventures which in turn own hydro- and nuclear power plants. Under the consortium agreements, each owner is entitled to electricity in proportion to its share of ownership or other agreements. Each owner is liable for an equivalent portion of costs regardless of output. The associated companies are not profi t making, since the owners purchase electricity at production cost including interest costs and income taxes, which generally is lower than market price.
For further information of transactions and balances with associated companies and joint ventures, see Note 21 Participations in associated companies and joint ventures.
In October 2008 Fortum and (Norwegian) Hafslund Infratek ASA signed a contract according to which they will combine their businesses of construction and operating of infrastructure in Sweden, Finland and Norway. The deal became effective as of 15 January 2009. Fortum transfers its construction and operating of infrastructure as well as parts of its distribution network construction activities in Sweden into the new combined company. Fortum receives newly issued shares in Infratek ASA entitling to a 33% ownership in the enlarged company. Hafslund ASA holds 43.3% of the shares. The remaining shares are owned by institutional and private shareholders.
On 4 February, the Fortum Board decided in their meeting that Fortum will on 5 February submit its application to the Finnish government for a decision-in-principle on the construction of a nuclear power plant to its Loviisa site, where Fortum already owns and operates two nuclear reactors. According to preliminary plans, the plant could be in operation in 2020. The plant's planned lifetime would be at least 60 years. Depending on the size and type of the reactor, the total investment is estimated to be EUR 4–6 billion.
= Power Generation
= Heat
1) Acquired 2) Founded 4) Dormant
3) Shares held by the parent company
= Other Operations
| Corp. Name | Domicile | Segment | Group holding % |
|
|---|---|---|---|---|
| Finnish Substation Service Oy | 2) | Finland | 100.0 | |
| Fortum Asiakaspalvelu Oy | 3) | Finland | 100.0 | |
| Fortum Assets Oy | Finland | 100.0 | ||
| Fortum BCS Oy | 2) | Finland | 100.0 | |
| Fortum Espoo Distribution Oy | 3) | Finland | 100.0 | |
| Fortum Heat and Gas Oy | 3) | Finland | 100.0 | |
| Fortum Markets Oy | 3) | Finland | 100.0 | |
| Fortum Nuclear Services Oy | Finland | 100.0 | ||
| Fortum Portfolio Services Oy | Finland | 100.0 | ||
| Fortum Power and Heat Oy | 3) | Finland | 100.0 | |
| Fortum Sähkönsiirto Oy | 3) | Finland | 100.0 | |
| Hexivo Oy | Finland | 52.0 | ||
| Imatran Voima Oy | Finland | 100.0 | ||
| Imatrankosken Voima Oy | Finland | 100.0 | ||
| Kiinteistö Oy Espoon Energiatalo | Finland | 100.0 | ||
| Killin Voima Oy | Finland | 60.0 | ||
| Koillis-Pohjan Energiantuotanto Oy | Finland | 100.0 | ||
| Koskivo Oy | Finland | 100.0 | ||
| KPPV-Sijoitus Oy | Finland | 100.0 | ||
| Linnankosken Voima Oy | Finland | 100.0 | ||
| Lounais-Suomen Lämpö Oy | Finland | 100.0 | ||
| Mansikkalan Voima Oy | Finland | 100.0 | ||
| Mäntynummen Lämpö Oy | Finland | 58.3 | ||
| Oy Pauken Ab | Finland | 100.0 | ||
| Oy Tersil Ab | Finland | 100.0 | ||
| Oy Tertrade Ab | Finland | 100.0 | ||
| Rajapatsaan Voima Oy | Finland | 100.0 | ||
| Saimaanrannan Voima Oy | Finland | 100.0 | ||
| Tunturituuli Oy | Finland | 55.4 | ||
| Varsinais-Suomen Sähkö Oy | Finland | 100.0 | ||
| Viikinki Energia Oy | Finland | 100.0 | ||
| Fortum Liegenschaftsverwaltungs GmbH | Austria | 100.0 | ||
| Fortum EIF NV | 2), 3) | Belgium | 100.0 | |
| Fortum Project Finance N.V. | 3) | Belgium | 100.0 | |
| Fortum Energi A/S | 4) | Denmark | 100.0 | |
| AS Anne Soojus | Estonia | 60.0 | ||
| AS Fortum Tartu | Estonia | 60.0 |
| Corp. Name | Domicile | Segment | Group holding % |
|
|---|---|---|---|---|
| AS Tartu Joujaam | Estonia | 60.0 | ||
| AS Tartu Keskkatlamaja | Estonia | 60.0 | ||
| Fortum CFS Eesti osauhing | Estonia | 100.0 | ||
| Fortum Elekter AS | Estonia | 99.3 | ||
| Fortum Termest AS | Estonia | 99.7 | ||
| Lauka Turvas OU | Estonia | 60.0 | ||
| Fortum Service Deutschland GmbH | Germany | 100.0 | ||
| Fortum Direct Ltd | Great Britain | 100.0 | ||
| Fortum Energy Ltd | Great Britain | 100.0 | ||
| Fortum Gas Ltd | Great Britain | 100.0 | ||
| Fortum Insurance Ltd | Great Britain | 100.0 | ||
| Fortum O&M (UK) Limited | Great Britain | 100.0 | ||
| Grangemouth CHP Limited | Great Britain | 100.0 | ||
| IVO Energy Limited | Great Britain | 100.0 | ||
| Kildare Energy Ltd | Ireland | 55.0 | ||
| Fortum Jelgava SIA | 1) | Latvia | 100.0 | |
| Fortum Latvija SIA | Latvia | 100.0 | ||
| SIA Jelgavas Inzeniersistemu Serviss | 1) | Latvia | 100.0 | |
| SIA Komunikasiju vadiba | 1) | Latvia | 100.0 | |
| UAB Fortum Ekosiluma | Lithuania | 100.0 | ||
| UAB Fortum Heat Lietuva | Lithuania | 100.0 | ||
| UAB Fortum Klaipeda | Lithuania | 51.0 | ||
| UAB Joniskio energija | Lithuania | 66.0 | ||
| UAB Svencioniu energija | Lithuania | 50.0 | ||
| Fortum Sendi Prima Sdn Bhd | Malaysia | 100.0 | ||
| Fortum Distribution AS | Norway | 100.0 | ||
| Fortum Fjernvarme AS | Norway | 100.0 | ||
| Fortum Förvaltning AS | Norway | 100.0 | ||
| Fortum Holding Norway AS | Norway | 100.0 | ||
| Fortum Leasing AS | Norway | 100.0 | ||
| Fortum Markets AS | Norway | 100.0 | ||
| Fortum Service AS | Norway | 100.0 | ||
| Mosjøen Fjernvarme AS | Norway | 100.0 | ||
| Fortum Częstochowa S.A. | Poland | 98.8 | ||
| Fortum Power and Heat Polska Sp z.o.o. | Poland | 100.0 | ||
| Fortum Plock Sp z o.o. | Poland | 98.8 | ||
| Chelyabinsk Energoremont | 1) | Russia | 93.4 |
= Heat
1) Acquired 2) Founded
| Corp. Name | Domicile | Segment | Group holding % |
|
|---|---|---|---|---|
| LLC Fortum Energy OOO Fortum Energija | Russia | 100.0 | ||
| Territorial Generating Company No. 10 | 1) | Russia | 93.4 | |
| TGC-10 Invest | 1) | Russia | 93.4 | |
| Tyumen Energoremont | 1) | Russia | 93.4 | |
| Urals Heat Network | 1) | Russia | 93.4 | |
| AB Fortum Värme Holding samägt med Stockholms stad |
Sweden | 50.1 | ||
| AB Fortum Värme samägt med Stockholms stad | Sweden | 50.1 | ||
| AB Ljusnans Samkörning | Sweden | 80.0 | ||
| Akallaverket AB | Sweden | 37.6 | ||
| Arvika Fjärrvärme AB | Sweden | 30.1 | ||
| Blybergs Kraft AB | Sweden | 66.7 | ||
| Brännälven Kraft AB | Sweden | 67.0 | ||
| Bullerforsens Kraft AB | Sweden | 88.0 | ||
| Ekerö Energi AB | Sweden | 81.7 | ||
| Ekerö Energi Försäljning AB | Sweden | 81.7 | ||
| Elbolaget OEP AB | Sweden | 100.0 | ||
| Fortum 1 AB | Sweden | 100.0 | ||
| Fortum Dalälvens Kraft AB | Sweden | 100.0 | ||
| Fortum Distribution AB | Sweden | 100.0 | ||
| Fortum Fastigheter AB | Sweden | 100.0 | ||
| Fortum Four AB | 2) | Sweden | 100.0 | |
| Fortum Generation AB | Sweden | 100.0 | ||
| Fortum Indalskraft AB | Sweden | 100.0 | ||
| Fortum Ljunga Kraft AB | Sweden | 100.0 | ||
| Fortum Ljusnans Kraft AB | Sweden | 100.0 | ||
| Fortum Markets AB | Sweden | 100.0 | ||
| Fortum Nordic AB | 3) | Sweden | 100.0 | |
| Fortum Portfolio Services AB | Sweden | 100.0 | ||
| Fortum Power and Heat AB | Sweden | 100.0 | ||
| Fortum Produktionsnät AB | Sweden | 100.0 | ||
| Fortum Service AB | Sweden | 100.0 | ||
| Fortum Service Öst AB | Sweden | 100.0 | ||
| Fortum Sweden AB | 3) | Sweden | 100.0 | |
| Fortum Värme Alpha AB | Sweden | 50.1 | ||
| Fortum Värme Fastigheter AB | Sweden | 50.1 |
| Corp. Name | Domicile | Segment | Group holding % |
|
|---|---|---|---|---|
| Fortum Värme Nynäshamn AB | Sweden | 100.0 | ||
| Fortum Zeta AB | Sweden | 100.0 | ||
| Fortum Älvkraft i Värmland AB | Sweden | 100.0 | ||
| Hofors Energi AB | Sweden | 30.1 | ||
| Hällefors Värme AB | Sweden | 47.6 | ||
| Infra Service Väst AB | Sweden | 100.0 | ||
| Infra Service Öst AB | Sweden | 100.0 | ||
| Mellansvensk Kraftgrupp AB | Sweden | 86.9 | ||
| NGI Naturgasinvest AB | Sweden | 100.0 | ||
| Nybroviken Kraft AB | Sweden | 100.0 | ||
| Oreälvens Kraft AB | Sweden | 65.0 | ||
| Parteboda Kraft AB | Sweden | 100.0 | ||
| Processio AB | 1) | Sweden | 100.0 | |
| Ryssa Energi AB | Sweden | 100.0 | ||
| Sigtuna-Väsby Fastighets AB | Sweden | 50.1 | ||
| Stockholm Gas AB | Sweden | 50.1 | ||
| Säffl e 5:35 Fastighets AB | Sweden | 50.1 | ||
| Säffl e Fjärrvärme AB | Sweden | 25.6 | ||
| Uddeholm Kraft AB | Sweden | 100.0 | ||
| Voxnan Kraft AB | Sweden | 100.0 | ||
| Värmlandskraft OKG-delägarna AB | Sweden | 73.3 | ||
| FB Generation Services B.V. | The Netherlands | 75.0 | ||
| Fortum Alpha B.V. | The Netherlands | 100.0 | ||
| Fortum East China Energy Investments B.V. | The Netherlands | 100.0 | ||
| Fortum Finance 2 B.V. | The Netherlands | 100.0 | ||
| Fortum Holding B.V. | 3) | The Netherlands | 100.0 | |
| Fortum Power Holding B.V. | The Netherlands | 100.0 | ||
| Fortum Russia B.V. | The Netherlands | 100.0 | ||
| Fortum Russia Holding B.V. | The Netherlands | 100.0 | ||
Fortum Corporation and its subsidiaries (together the Fortum Group) is a leading energy company focusing on the Nordic countries, Russia and the Baltic Rim area. Fortum's activities cover the generation, distribution and the sale of electricity and heat, the operation and maintenance of power plants as well as energy-related services. Neste Oil was included in Fortum Group up until 31 March 2005, when the Annual General Meeting took the fi nal decision to separate the oil operations by distributing approximately 85% of Neste Oil Corporation shares as dividend. The remaining approximately 15% of shares were sold to investors in April 2005.
Oil operations have been presented as discontinued operations in years 2004 and 2005.
As from 2005, Fortum applies International Financial Reporting Standards (IFRS) for the annual and interim reports. The 2005 annual report included one comparison year 2004, which was restated to IFRS. Years 1998–2003 have not been restated to comply with IFRS. They are presented under Finnish Accounting Standards (FAS).
| Change 08/07 |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EUR million or as indicated | FAS 1998 | FAS 1999 | FAS 2000 | FAS 2001 | FAS 2002 | FAS 2003 | IFRS 2004 | IFRS 2005 | IFRS 2006 | IFRS 2007 | IFRS 2008 | % |
| Sales total Fortum | 8,494 | 8,232 | 10,614 | 10,410 | 11,148 | 11,392 | 11,659 | 5,918 | ||||
| Sales continuing operations | 3,835 | 3,877 | 4,491 | 4,479 | 5,636 | 26 | ||||||
| EBITDA total Fortum 1) | 1,049 | 1,192 | 1,431 | 1,501 | 1,952 | 1,917 | 2,443 | 2,307 | ||||
| EBITDA continuing operations | 1,583 | 1,754 | 1,884 | 2,298 | 2,478 | 8 | ||||||
| Operating profit total Fortum | 586 | 705 | 906 | 914 | 1,289 | 1,420 | 1,916 | 1,864 | ||||
| – of sales % | 6.9 | 8.6 | 8.5 | 8.8 | 11.6 | 12.5 | 16.4 | 31.5 | ||||
| Operating profi t continuing operations | 1,195 | 1,347 | 1,455 | 1,847 | 1,963 | 6 | ||||||
| – of sales % | 31.2 | 34.7 | 32.4 | 41.2 | 34.8 | |||||||
| Comparable operating profi t continuing operations | 1,148 | 1,334 | 1,437 | 1,564 | 1,845 | 18 | ||||||
| Profit before income tax total Fortum | 363 | 954 | 623 | 702 | 1,008 | 1,184 | 1,700 | 1,776 | ||||
| – of sales % | 4.3 | 11.6 | 5.9 | 6.7 | 9.0 | 10.4 | 14.6 | 30.0 | ||||
| Profi t before income tax continuing operations | 962 | 1,267 | 1,421 | 1,934 | 1,850 | –4 | ||||||
| – of sales % | 25.1 | 32.7 | 31.6 | 43.2 | 32.8 | |||||||
| Profi t for the period continuing operations | 703 | 936 | 1,120 | 1,608 | 1,596 | –1 | ||||||
| – of which attributable to equity holders | 670 | 884 | 1,071 | 1,552 | 1,542 | –1 | ||||||
| Capital employed, total Fortum | 8,647 | 9,425 | 11,365 | 11,032 | 13,765 | 12,704 | 12,890 | |||||
| Capital employed continuing operations | 10,739 | 11,357 | 12,663 | 13,544 | 15,911 | 17 | ||||||
| Interest-bearing net debt | 3,898 | 3,818 | 4,626 | 3,674 | 5,848 | 5,626 | 5,095 | 3,158 | 4,345 | 4,466 | 6,179 | 38 |
| Capital expenditure and gross investments in shares, total Fortum | 1,702 | 1,059 | 3,131 | 713 | 4,381 | 1,136 | 830 | 578 | 1,395 | 972 | 2,624 | 170 |
| – of sales % | 20.0 | 12.9 | 29.5 | 6.8 | 39.3 | 10.0 | 7.1 | 9.8 | 31.1 | 21.7 | 46.6 |
| EUR million or as indicated | FAS 1998 | FAS 1999 | FAS 2000 | FAS 2001 | FAS 2002 | FAS 2003 | IFRS 2004 | IFRS 2005 | IFRS 2006 | IFRS 2007 | IFRS 2008 | Change 08/07 % |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Capital expenditure and gross investments in | ||||||||||||
| shares continuing operations | 514 | 479 | 1,395 | 972 | 2,624 | 170 | ||||||
| Capital expenditure continuing operations | 335 | 346 | 485 | 655 | 1,108 | 69 | ||||||
| Net cash from operating activities, total Fortum | 793 | 524 | 424 | 1,145 | 1,351 | 1,577 | 1,758 | 1,404 | ||||
| Net cash from operating activities continuing operations | 1,232 | 1,271 | 1,151 | 1,670 | 2,002 | 20 | ||||||
| Return on capital employed, total Fortum, % | 7.7 | 8.4 | 9.4 | 8.7 | 11.1 | 11.4 | 15.8 | 16.6 | ||||
| Return on capital employed continuing operations, % | 11.4 | 13.5 | 13.4 | 16.5 | 15.0 | |||||||
| Return on shareholders' equity, total Fortum, % | 5.7 | 7.7 | 8.6 | 8.3 | 10.5 | 12.3 | 18.2 | 18.7 | ||||
| Return on shareholders' equity continuing operations, % 2) | 13.5 | 14.4 | 19.1 | 18.7 | ||||||||
| Interest coverage | 2.6 | 3.4 | 3.7 | 4.3 | 4.7 | 5.8 | 8.0 | 11.6 | 11.5 | 12.8 | 9.4 | |
| Funds from operations/interest-bearing net debt, % | 17.9 | 14.3 | 19.9 | 28.8 | 21.6 | 26.1 | 36.4 | 43.2 | 30.6 | 36.3 | 34.1 | |
| Gearing, % 3) | 93 | 79 | 73 | 54 | 80 | 85 | 67 | 43 | 53 | 52 | 73 | |
| Net debt / EBITDA | 3.7 | 3.2 | 3.2 | 2.4 | 3.0 | 2.9 | 2.1 | 1.4 | ||||
| Net debt / EBITDA continuing operations | - | 1.8 | 2.3 | 1.9 | 2.5 | |||||||
| Equity-to-assets ratio, % | 36 | 39 | 43 | 48 | 41 | 40 | 44 | 49 | 48 | 49 | 41 | |
| Dividends 4) | 99 | 141 | 194 | 220 | 262 | 357 | 506 | 987 | 1,122 | 1,198 | 888 5) | –26 |
| Dividends continuing operations | 511 | 650 | 683 | |||||||||
| Dividends additional in 2006 / discontinued operations in 2005 | 476 | 472 | 515 | |||||||||
| Research and development expenditure | 92 | 72 | 58 | 53 | 33 | 35 | 26 | 14 | 17 | 21 | 27 | 29 |
| – of sales % | 1.1 | 0.9 | 0.5 | 0.5 | 0.3 | 0.3 | 0.2 | 0.2 | 0.4 | 0.5 | 0.5 | |
| Average number of employees total Fortum | 19,003 | 17,461 | 16,220 | 14,803 | 14,053 | 13,343 | 12,859 | 10,026 | 8,910 | 8,304 | 14,077 | |
| Average number of employees continuing operations | 8,592 | 8,939 | 8,910 | 8,304 | 14,077 | |||||||
1) EBITDA is defi ned as Operating profi t continuing operations + Depreciation, amortisation and impairment charges. According to Finnish Accounting Standards (FAS) share of profi t of associated companies were included in operating profi t. In calculating EBITDA presented under FAS share of profi t of associated companies have been excluded in 1998–2003.
2) Return on equity for continuing operations for 2005 is calculated based on profi t for the period from continuing operations divided by total equity at the end of the period. Profi t for the period from discontinued operations has been subtracted from total equity on 31 December 2005.
3) Gearing is defi ned as interest-bearing net debt over shareholders' equity plus minority interest. In 2000–2002 minority interest included the preference shares amounting to EUR 1.2 billion, carrying fi xed income dividend of 6.7 percent, issued by Fortum Capital Ltd.
4) In addition to cash dividend Fortum distributed approximately 85% of Neste Oil Corporation shares as dividend in 2005.
5) Board of Directors' proposal for the Annual General Meeting 7 April 2009. The total amount is calculated based on the number of registered shares on 4 February 2009.
Defi nitions of key fi gures on pages 174 and 175.
| Change 08/07 |
||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EUR or as indicated | FAS 1998 | FAS 1999 | FAS 2000 | FAS 2001 | FAS 2002 | FAS 2003 | IFRS 2004 | IFRS 2005 | IFRS 2006 | IFRS 2007 | IFRS 2008 | % |
| Earnings per share total Fortum | 0.27 | 0.41 | 0.55 | 0.57 | 0.79 | 0.91 | 1.48 | 1.55 | 1.22 | 1.74 | 1.74 | 0 |
| Earnings per share continuing operations | - | - | - | - | - | - | 0.79 | 1.01 | 1.22 | 1.74 | 1.74 | 0 |
| Earnings per share discontinued operations | - | - | - | - | - | - | 0.69 | 0.54 | - | - | ||
| Diluted earnings per share total Fortum | - | - | 0.55 | 0.57 | 0.78 | 0.90 | 1.46 | 1.53 | 1.21 | 1.74 | 1.74 | 0 |
| Diluted earnings per share continuing operations | - | - | - | - | - | - | 0.78 | 1.00 | 1.21 | 1.74 | 1.74 | 0 |
| Diluted earnings per share discontinued operations | - | - | - | - | - | - | 0.68 | 0.53 | - | - | ||
| Cash fl ow per share total Fortum | 1.01 | 0.67 | 0.54 | 1.43 | 1.60 | 1.86 | 2.06 | 1.61 | 1.31 | 1.88 | 2.26 | 19 |
| Cash flow per share continuing operations | - | - | 1.44 | 1.46 | 1.31 | 1.88 | 2.26 | 19 | ||||
| Equity per share | 5.06 | 6.00 | 6.32 | 6.49 | 6.97 | 7.55 | 8.65 | 8.17 | 8.91 | 9.43 | 8.96 | –5 |
| Dividend per share total Fortum 1) | 0.13 | 0.18 | 0.23 | 0.26 | 0.31 | 0.42 | 0.58 | 1.12 | 1.26 | 1.35 | 1.00 2) | –26 |
| Dividend per share continuing operations | - | - | - | - | - | - | - | 0.58 | 0.73 | 0.77 | ||
| Dividend per share additional in 2006 and 2007 / discontinued operations in 2005 |
- | - | - | - | - | - | - | 0.54 | 0.53 | 0.58 | ||
| Payout ratio total Fortum, % | 46.3 | 43.4 | 41.9 | 45.6 | 39.2 | 46.2 | 39.2 | 72.3 | 103.3 4) | 77.6 4) | 57.5 2) | |
| Payout ratio continuing operations, % | - | - | - | - | - | - | - | 57.4 3) | 59.8 4) | 44.3 4) | ||
| Payout ratio additional dividend in 2006 and 2007 / discontinued operations in 2005, % |
- | - | - | - | - | - | - | 100.0 3) | 43.4 4) | 33.3 4) | ||
| Dividend yield, % | 2.5 | 4.0 | 5.3 | 5.5 | 5.0 | 5.1 | 4.3 | 7.1 | 5.8 | 4.4 | 6.6 2) | |
| Price/earnings ratio Fortum (P/E) | 18.5 | 10.9 | 7.9 | 8.3 | 7.9 | 9.0 | 9.2 | 10.2 | 17.7 | 17.7 | 8.8 | |
| Share prices | ||||||||||||
| At the end of the period | 5.03 | 4.50 | 4.35 | 4.75 | 6.25 | 8.18 | 13.62 | 15.84 | 21.56 | 30.81 | 15.23 | |
| Average share price | 5.66 | 4.76 | 4.18 | 4.79 | 5.87 | 6.94 | 10.29 | 13.87 | 20.39 | 23.57 | 24.79 | |
| Lowest share price | 4.86 | 4.24 | 3.50 | 4.05 | 4.75 | 5.66 | 7.45 | 10.45 | 15.71 | 20.01 | 12.77 | |
| Highest share price | 6.05 | 5.80 | 4.94 | 5.70 | 6.52 | 8.75 | 13.99 | 16.90 | 23.48 | 31.44 | 33.00 | |
| Market capitalisation at the end of the period, EUR million | 3,949 | 3,532 | 3,456 | 4,017 | 5,286 | 6,943 | 11,810 | 13,865 | 19,132 | 27,319 | 13,519 | |
| Trading volumes | ||||||||||||
| Number of shares, 1 000 shares | 17,643 | 112,398 | 93,900 | 134,499 | 251,216 | 270,278 | 478,832 | 900,347 | 830,764 | 787,380 | 628,155 | |
| In relation to the weighted average number of shares, % | 2.2 | 14.3 | 11.9 | 16.8 | 29.7 | 31.9 | 59.2 | 103.2 | 94.3 | 88.5 | 70.8 | |
| Number of shares, 1 000 shares | 784,783 | 784,783 | 845,609 | 845,609 | 845,776 | 849,813 | 867,084 | 875,294 | 887,394 | 886,683 | 887,638 | |
| Number of shares excluding own shares, 1 000 shares | NA | NA | 794,571 | NA | NA | NA | NA | NA | NA | NA | NA | |
| Average number of shares, 1 000 shares | 784,783 | 784,783 | 787,223 | 798,346 | 845,642 | 846,831 | 852,625 | 872,613 | 881,194 | 889,997 | 887,256 | |
| Diluted adjusted average number of shares, 1 000 shares | - | - | 787,223 | 798,308 | 851,482 | 858,732 | 861,772 | 887,653 | 886,929 | 891,395 | 887,839 |
1) In addition to cash dividend Fortum distributed approximately 85% of Neste Oil Corporation shares as dividend in 2005.
2) Board of Directors' proposal for the Annual General Meeting in April 2009.
3) 2005 payout ratio for continuing and discontinued operations are calculated based on the respective earnings per share from continuing and discontinued operations.
4) Payout ratios for dividends in 2006 and 2007 are based on the total earnings per share.
Years 1998–2003 have not been restated to comply with IFRS. They are presented under Finnish Accounting Standards (FAS). Defi nitions of key fi gures on pages 174 and 175.
| 2004 | 2005 | 2006 | 2007 | 2008 | ||
|---|---|---|---|---|---|---|
| Fortum's total power and heat generation in EU and Norway | ||||||
| Power Generation | TWh | 55.5 | 52.3 | 54.4 | 52.2 | 52.6 |
| Heat Generation | TWh | 25.4 | 25.1 | 25.8 | 26.1 | 25.5 |
| Fortum's total power and heat generation in Russia | ||||||
| Power Generation | TWh | - | - | - | - | 11.6 |
| Heat Generation | TWh | - | - | - | - | 15.3 |
| Fortum's own power generation by source, total in the Nordic countries | ||||||
| Hydropower | TWh | 19.1 | 21.2 | 19.8 | 20.0 | 22.9 |
| Nuclear power | TWh | 25.8 | 25.8 | 24.4 | 24.9 | 23.7 |
| Thermal power | TWh | 9.5 | 4.2 | 9.0 | 6.2 | 5.0 |
| Total | TWh | 54.4 | 51.2 | 53.2 | 51.1 | 51.6 |
| Fortum's own power generation by source, total in the Nordic countries | ||||||
| Hydropower | % | 35 | 42 | 37 | 39 | 44 |
| Nuclear power | % | 47 | 50 | 46 | 49 | 46 |
| Thermal power | % | 18 | 8 | 17 | 12 | 10 |
| Total | % | 100 | 100 | 100 | 100 | 100 |
| Fortum's total electricity and heat sales in EU and Norway | ||||||
| Electricity sales | EUR million | 2,017 | 2,002 | 2,437 | 2,370 | 2,959 |
| Heat sales | EUR million | 809 | 867 | 1,014 | 1,096 | 1,157 |
| Fortum's total electricity and heat sales in Russia | ||||||
| Electricity sales | EUR million | - | - | - | - | 332 |
| Heat sales | EUR million | - | - | - | - | 141 |
| Fortum's total electricity sales by area | ||||||
| Finland | TWh | 31.1 | 26.0 | 29.6 | 29.0 | 28.7 |
| Sweden | TWh | 27.6 | 30.4 | 28.5 | 27.6 | 28.5 |
| Russia | TWh | - | - | - | - | 14.8 |
| Other countries | TWh | 3.6 | 3.3 | 3.5 | 3.1 | 3.0 |
| Total | TWh | 62.3 | 59.7 | 61.6 | 59.7 | 75.0 |
| Fortum's total heat sales by area | ||||||
| Finland | TWh | 10.5 | 9.8 | 10.7 | 11.1 | 10.8 |
| Russia | TWh | - | - | - | - | 15.3 |
| Sweden | TWh | 9.6 | 9.5 | 9.3 | 9.2 | 9.1 |
| Poland | TWh | 0.4 | 1.1 | 3.6 | 3.5 | 3.6 |
| Other countries | TWh | 3.3 | 3.4 | 3.2 | 3.3 | 3.4 |
| Total | TWh | 23.8 | 23.8 | 26.8 | 27.1 | 42.2 |
| Volume of distributed electricity in distribution networks | ||||||
| Finland | TWh | 6.2 | 6.3 | 7.7 | 9.2 | 9.3 |
| Sweden | TWh | 14.2 | 14.4 | 14.4 | 14.3 | 14.0 |
| Norway | TWh | 2.1 | 2.2 | 2.3 | 2.3 | 2.3 |
| Estonia | TWh | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 |
| Total | TWh | 22.7 | 23.1 | 24.6 | 26.0 | 25.8 |
As from 2005, Fortum applies International Financial Reporting Standards (IFRS) for the annual and interim reports. The 2005 annual report included one comparison year 2004, which was restated to IFRS. Segment numbers are presented based only on IFRS for comparison purposes, because in the transition to IFRS reportable segments were redefi ned and segment reporting as such was reassessed.
Following the acquisition of the Russian company, TGC-10, Fortum has changed its segment reporting during 2008. A new Russia segment was introduced which mean that the new segment structure has one segment based on geographical area, combined with segments based on type of business operations. Comparison numbers for 2004–2007 have been restated according to the new segment structure.
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 2,084 | 2,058 | 2,439 | 2,350 | 2,892 |
| - of which internal | 128 | –97 | –133 | 323 | 0 |
| Heat | 1,025 | 1,063 | 1,268 | 1,356 | 1,466 |
| - of which internal | 49 | –12 | –32 | 38 | 0 |
| Distribution | 707 | 707 | 753 | 769 | 789 |
| - of which internal | 10 | –8 | 8 | 9 | 10 |
| Markets | 1,387 | 1,365 | 1,912 | 1,683 | 1,922 |
| - of which internal | 92 | –101 | 149 | 155 | 177 |
| Russia | - | - | - | - | 489 |
| - of which internal | - | - | - | - | 0 |
| Other | 90 | 91 | 78 | 81 | 83 |
| - of which internal | 93 | –63 | 62 | 72 | 82 |
| Eliminations | –1,458 | –1,407 | –1,959 | –1,760 | –2,005 |
| Total | 3,835 | 3,877 | 4,491 | 4,479 | 5,636 |
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 730 | 854 | 985 | 1,095 | 1,528 |
| Heat | 207 | 253 | 253 | 290 | 250 |
| Distribution | 240 | 244 | 250 | 231 | 248 |
| Markets | 23 | 30 | –4 | –1 | –33 |
| Russia | - | - | - | - | –92 |
| Other | –52 | –47 | –47 | –51 | –56 |
| Comparable operating profi t | 1,148 | 1,334 | 1,437 | 1,564 | 1,845 |
| Non-recurring items | 18 | 30 | 61 | 250 | 85 |
| Other items effecting comparability | 29 | –17 | –43 | 33 | 33 |
| Operating profi t | 1,195 | 1,347 | 1,455 | 1,847 | 1,963 |
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 104 | 112 | 108 | 103 | 97 |
| Heat | 124 | 123 | 144 | 163 | 169 |
| Distribution | 133 | 145 | 147 | 162 | 165 |
| Markets | 16 | 15 | 19 | 11 | 7 |
| Russia | - | - | - | - | 67 |
| Other | 11 | 12 | 11 | 12 | 10 |
| Total | 388 | 407 | 429 | 451 | 515 |
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | –21 | –21 | –9 | –23 | 26 |
| Heat | 15 | 11 | 23 | 24 | 12 |
| Distribution | 16 | 20 | 15 | 18 | 16 |
| Markets | 0 | 1 | 1 | 0 | 5 |
| Russia | - | - | - | - | 19 |
| Other | 2 | 44 | 39 | 222 | 48 |
| Total | 12 | 55 | 69 | 241 | 126 |
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 84 | 83 | 95 | 93 | 134 |
| Heat | 123 | 124 | 184 | 309 | 408 |
| Distribution | 106 | 115 | 183 | 236 | 296 |
| Markets | 10 | 10 | 8 | 3 | 3 |
| Russia | - | - | - | - | 256 |
| Other | 12 | 14 | 15 | 14 | 11 |
| Total | 335 | 346 | 485 | 655 | 1,108 |
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 23 | 45 | 5 | 52 | 0 |
| Heat | 53 | 87 | 589 | 18 | 23 |
| Distribution | 0 | - | 130 | 1 | 0 |
| Markets | 0 | - | 6 | 0 | 0 |
| Russia | 103 | 2 | 140 | 245 | 1,492 |
| Other | 0 | - | 40 | 1 | 1 |
| Total | 179 | 134 | 910 | 317 | 1,516 |
| EUR million | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 5,804 | 5,493 | 5,690 | 5,599 | 5,331 |
| Heat | 2,440 | 2,551 | 3,407 | 3,507 | 3,468 |
| Distribution | 3,091 | 3,021 | 3,412 | 3,239 | 3,032 |
| Markets | 194 | 228 | 176 | 247 | 188 |
| Russia | 151 | 153 | 294 | 456 | 2,205 |
| Other | 220 | 447 | 835 | 1,237 | 796 |
| Total | 11,900 | 11,893 | 13,814 | 14,285 | 15,020 |
| % | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 12.6 | 14.3 | 17.5 | 19.2 | 29.6 |
| Heat | 9.8 | 11.6 | 9.6 | 9.3 | 8.9 |
| Distribution | 8.1 | 8.8 | 8.4 | 7.7 | 8.1 |
| Markets | 25.2 | 17.4 | –1.6 | 6.9 | –14.0 |
| Russia | - | - | - | 66.3 | –3.7 |
| % | 2004 | 2005 | 2006 | 2007 | 2008 |
|---|---|---|---|---|---|
| Power Generation | 12.0 | 14.9 | 17.4 | 18.9 | 28.0 |
| Heat | 9.3 | 11.0 | 9.2 | 9.2 | 7.3 |
| Distribution | 8.3 | 8.6 | 8.3 | 7.6 | 8.2 |
| Markets | 17.1 | 16.4 | –0.8 | –0.6 | –15.3 |
| Russia | - | - | - | 0.0 | –3.8 |
| 2004 | 2005 | 2006 | 2007 | 2008 | |
|---|---|---|---|---|---|
| Power Generation | 4,588 | 4,374 | 4,147 | 3,475 | 3,591 |
| Heat | 1,605 | 2,186 | 2,345 | 2,302 | 2,422 |
| Distribution | 995 | 1,008 | 983 | 1,060 | 1,222 |
| Markets | 682 | 745 | 825 | 936 | 766 |
| Russia | - | - | - | - | 5,566 |
| Other | 722 | 626 | 610 | 531 | 510 |
| Total | 8,592 | 8,939 | 8,910 | 8,304 | 14,077 |
| EBITDA (Earnings before interest, taxes, depreciation and amortisation) |
= | Operating profi t + Depreciation, amortisation and impairment charges |
|---|---|---|
| Comparable operating profi t | = | Operating profi t - non-recurring items - other items effecting comparability |
| Non-recurring items | = | Mainly capital gains and losses |
| Other items effecting comparability | = | Includes effects from fi nancial derivatives hedging future cash fl ows where hedge accounting is not applied according to IAS 39 and effects from the accounting of Fortum's part of the Finnish Nuclear Waste Fund where the asset in the balance sheet cannot exceed the related liabilities according to IFRIC interpretation 5. |
| Funds from operations (FFO) | = | Net cash from operating activities before change in working capital |
| Capital expenditure | = | Capitalised investments in property, plant and equipment and intangible assets including maintenance, productivity, growth and investments required by legislation including borrowing costs capitalised during construction period. Maintenance investments expand lifetime of an existing asset, maintain useage/availability and/or maintains reli ability. Productivity improves productivity an existing asset. Growth investments' purpose is to build new assets and/ or to increase customer base within existing businesses. Legislation investments are done at certain point of time due to legal requirements. |
| Gross investments in shares | = | Subsidiary shares, shares in associated companies and other shares in available for sale fi nancial assets. Investments in subsidiary shares are net of cash and grossed with interest bearing liabilities in the acquired company. |
| Return on shareholders' equity, % | = | Profi t for the year x 100 Total equity average |
| Return on capital employed, % | = | Profi t before taxes + interest and other fi nancial expenses x 100 Capital employed average |
| Return on capital employed continuing operations, % |
= | Profi t before taxes continuing operations + interest and other fi nancial expenses continuing operations x 100 |
|
|---|---|---|---|
| Capital employed continuing operations average | |||
| Return on net assets, % | = | Operating profi t + Share of profi t (loss) in associated companies and joint ventures x 100 |
|
| Net assets average | |||
| Comparable return on net assets, % | = | Comparable operating profi t + Share of profi t (loss) in associated companies and joint ventures (adjusted for IAS 39 effects) x 100 |
|
| Comparable net assets average | |||
| Capital employed | = | Total assets - non-interest-bearing liabilities - defer red tax liabilities - provisions |
|
| Net assets | = | Non-interest-bearing assets + interest-bearing assets rela ted to the Nuclear Waste Fund - non-interest-bearing liabi lities - provisions (non-interest-bearing assets and liabilities do not include fi nance related items, tax and deferred tax and assets and liabilities from fair valuations of derivatives where hedge accounting is applied) |
|
| Comparable net assets | = | Net assets adjusted for non-interest-bearing assets and liabilities arising from fi nancial derivatives hedging future cash fl ows where hedge accounting is not applied according to IAS 39 |
Dividend yield, % |
| Interest-bearing net debt | = | Interest-bearing liabilities - liquid funds | Price/earnings (P/E) ratio |
| Gearing, % | = | Interest-bearing net debt x 100 Total equity |
Average share price |
| Equity-to-assets ratio, % | = | Total equity including minority interest x 100 Total assets |
|
| Interest-bearing net debt | |||
| Net debt / EBITDA | = | Operating profi t + Depreciation, amortisation and impairment charges |
|
| Net debt / EBITDA continuing | Interest-bearing net debt | ||
| operations | = | Operating profi t continuing operations + Dep reciation, amortisation and impairment charges continuing operations |
| Interest coverage | = | Operating profi t | |
|---|---|---|---|
| Average number of employees | = | Net interest expenses Based on monthly average for the whole period |
|
| Earnings per share (EPS) | = | Profi t for the period - minority interest Average number of shares during the period |
|
| Cash fl ow per share | = | Net cash from operating activities Average number of shares during the period |
|
| Equity per share | = | Shareholders' equity Number of shares at the end of the period |
|
| Payout ratio, % | = | Dividend per share Earnings per share |
x 100 |
| Payout ratio continuing operations, % | = | Dividend per share continuing operation Earnings per share continuing operation |
x 100 |
| Dividend yield, % | = | Dividend per share Share price at the end of the period |
x 100 |
| Price/earnings (P/E) ratio | = | Share price at the end of the period Earnings per share |
|
| Average share price | = | Amount traded in euros during the period Number of shares traded during the period |
|
| Market capitalisation | = | Number of shares at the end of the period x share price at the end of the period |
|
| Trading volumes | = | Number of shares traded during the period in relation to the weighted average number of shares during the period |
| EUR million | Note | 2008 | 2007 |
|---|---|---|---|
| Sales | 2 | 68 | 84 |
| Other income | 3 | 7 | 15 |
| Employee costs | 4 | –48 | –51 |
| Depreciation, amortisation and write-downs | –10 | –11 | |
| Other expenses | –60 | –62 | |
| Operating profi t | –43 | –25 | |
| Financial income and expenses | 5 | 1,215 | 1,797 |
| Profi t after fi nancial items | 1,172 | 1,772 | |
| Group contributions 1) | 757 | 724 | |
| Profit before income tax | 1,929 | 2,496 | |
| Income tax expense | 6 | –108 | –145 |
| Profit for the period | 1,821 | 2,351 | |
1) Taxable profits transferred from Finnish subsidiaries.
| EUR million | Note | 31 Dec 2008 | 31 Dec 2007 |
|---|---|---|---|
| ASSETS | |||
| Non-current assets | 7 | ||
| Intangible assets | 15 | 17 | |
| Property, plant and equipment | 15 | 13 | |
| Investments in group companies | 16,285 | 12,255 | |
| Interest-bearing receivables from group companies | 970 | 1,978 | |
| Investments in associated companies | 0 | 0 | |
| Interest-bearing receivables from associated companies | 2 | 1 | |
| Other non-current assets | 6 | 3 | |
| Deferred tax assets | 3 | - | |
| Total non-current assets | 17,296 | 14,267 | |
| Current assets | |||
| Trade and other receivables from group companies | 8 | 798 | 768 |
| Trade and other receivables from associated companies | 8 | 0 | 0 |
| Trade and other receivables | 8 | 686 | 126 |
| Cash and cash equivalents | 9 | 249 | 372 |
| Total current assets | 1,733 | 1,266 | |
| Total assets | 19,029 | 15,533 |
| 11 Share capital 3,044 3,040 Share issue 0 0 Share premium 2,822 2,822 Retained earnings 1,921 768 Profit for the period 1,821 2,351 9,608 8,981 - 1 LIABILITIES External interest-bearing liabilities 12 6,016 3,821 Interest-bearing liabilities to group companies 12 1,767 1,831 Interest-bearing liabilities to associated companies 12 184 172 Other non-current liabilities 13 19 Deferred tax liabilities 67 2 8,047 5,845 External interest-bearing liabilities 12 687 542 Trade and other payables to group companies 13 570 32 Trade and other payables to associated companies 13 8 7 Trade and other payables 13 109 125 1,374 706 9,421 6,551 19,029 15,533 |
EUR million | Note | 31 Dec 2008 | 31 Dec 2007 |
|---|---|---|---|---|
| SHAREHOLDERS' EQUITY AND LIABILITIES | ||||
| Shareholders' equity | ||||
| Total shareholders' equity | ||||
| Provisions for liabilities and charges | ||||
| Non-current liabilities | ||||
| Total non-current liabilities | ||||
| Current liabilities | ||||
| Total current liabilities | ||||
| Total liabilities | ||||
| Total equity and liabilities |
| EUR million | 2008 | 2007 |
|---|---|---|
| Cash fl ow from operating activities | ||
| Profi t for the period | 1,821 | 2,351 |
| Adjustments: | ||
| Income tax expense | 108 | 145 |
| Group contributions | –757 | –725 |
| Finance costs - net | –1,215 | –1,797 |
| Depreciations, amortisation and write-downs | 10 | 11 |
| Operating profit before depreciations | –33 | –15 |
| Non-cash flow items and divesting activities | –1 | 2 |
| Interest and other fi nancial income | 152 | 151 |
| Interest and other financial expenses paid, net | –442 | –291 |
| Dividend income | 1,596 | 1,939 |
| Group contribution received | 724 | 638 |
| Realised foreign exchange gains and losses | –695 | –261 |
| Income taxes paid | –147 | –108 |
| Funds from operations | 1,154 | 2,055 |
| Decrease/increase in trade and other short-term receivables | 5 | –7 |
| Increase in trade and other short-term payables | 0 | 5 |
| Change in working capital | 5 | –2 |
| Net cash from operating activities | 1,159 | 2,053 |
| Cash flow from investing activities | ||
| Capital expenditures | –13 | –14 |
| Acquisition of shares and capital contributions in subsidiaries | –4,110 | –650 |
| Acquisition of other shares | 0 | –1 |
| Proceeds from sales of fi xed assets | 1 | 3 |
| Proceeds from sales of shares in associates | - | 1 |
| Change in interest-bearing receivables and other non-current | ||
| assets | 1,005 | 182 |
| Net cash used in investing activities | –3,117 | –479 |
| Cash fl ow before fi nancing activities | –1,958 | 1,574 |
| Cash fl ow from fi nancing activities | ||
| Proceeds from long-term liabilities | 5,382 | 210 |
| Payment of long-term liabilities | –3,346 | –37 |
| Change in short-term liabilities | 993 | –167 |
| Proceeds from stock options exercised | 4 | 17 |
| Repurchase of own shares | - | –175 |
| Dividends paid | –1,198 | –1,122 |
| Net cash used in fi nancing activities | 1,835 | –1,274 |
| Net increase (+)/decrease (–) in cash and cash equivalents | –123 | 300 |
| Cash and cash equivalents at the beginning of the period | 373 | 73 |
| Cash and cash equivalents at the end of the period | 250 | 373 |
| Net increase (+)/ decrease (–) in cash and cash equivalents | –123 | 300 |
The fi nancial statements of Fortum Oyj are prepared in accordance with Finnish Accounting Standards (FAS).
Sales include sales revenues from actual operations and exchange rate differences on trade receivables, less discounts and indirect taxes such as value added tax.
Other income includes gains on the sales of tangible assets and shareholdings, as well as all other operating income not related to the sales of products or services, such as rents.
Transactions denominated in foreign currencies have been valued using the exchange rate at the date of the transaction. Receivables and liabilities denominated in foreign currencies outstanding on the balance sheet date have been valued using the exchange rate quoted on the balance sheet date. Exchange rate differences have been entered in the fi nancial net in the income statement.
Fortum Oyj enters into derivative contracts mainly for hedging foreign exchange and interest rate exposures.
Derivatives used to hedge balance sheet items e.g. bank accounts, loans or receivables are valued employing the exchange rate quoted on the balance sheet date, and gains or losses are recognised in the income statement. The interest element on forward contracts is accrued for the period.
Option premiums are treated as advances paid or received until the option matures, and any losses on options entered into other than for hedging purposes are entered as an expense in the income statement.
Interest income or expense for derivatives used to hedge the interest rate risk exposure is accrued over the period to maturity and is recognised as an adjustment to the interest expense of the liabilities.
Income taxes presented in the income statement consist of accrued taxes for the fi nancial year and tax adjustments for prior years.
The balance sheet value of property, plant and equipment consists of historical costs less depreciation and other deductions. Property, plant and equipment are depreciated using straight-line depreciation based on the expected useful life of the asset.
The depreciation is based on the following expected useful lives:
| Buildings and structures | 15–40 years |
|---|---|
| Machinery and equipment | 3–15 years |
| Other intangible assets | 5–10 years |
Statutory pension obligations are covered through a compulsory pension insurance policy or Group's own pension fund. Payments to Group's pension fund are recorded in the income statement in amounts determined by the pension fund according to the actuarial assumptions pursuant to the Finnish Employees' Pension Act.
Costs related to the Fortum long-term incentive plans are accrued over the plan period and the related liability is booked to the balance sheet.
Foreseeable future expenses and losses that have no corresponding revenue to which Fortum is committed or obliged to settle, and whose monetary value can be reasonably assessed, are entered as expenses in the income statement and included as provisions in the balance sheet.
| EUR million | 2008 | 2007 |
|---|---|---|
| Finland | 63 | 81 |
| Sweden and other countries | 5 | 3 |
| Total | 68 | 84 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Gain on sales of shareholdings | - | 1 |
| Rental income and other | 7 | 14 |
| Total | 7 | 15 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Personnel expenses | ||
| Wages, salaries and remunerations | 30 | 36 |
| Indirect employee costs | ||
| Pension costs | 11 | 12 |
| Other indirect employee costs | 2 | 2 |
| Other personnel expenses | 5 | 1 |
| Total | 48 | 51 |
| Salaries and remunerations | ||
| President and CEO, members of the Board of Directors and the Supervisory Board |
4 | 2 |
| Average number of employees | 504 | 594 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Dividend income from group companies | 1,596 | 1,939 |
| Interest and other financial income from group companies | 125 | 127 |
| Write-downs of participations in group companies | –80 | - |
| Interest and other fi nancial income | 12 | 24 |
| Exchange rate differences | –7 | 6 |
| Interest and other financial expenses to group companies | –112 | –112 |
| Interest and other fi nancial expenses | –319 | –187 |
| Total | 1,215 | 1,797 |
| Total interest income and expenses | ||
| Interest income | 136 | 151 |
| Interest expenses | –427 | –292 |
| Interest net | –291 | –141 |
Write-downs of participations in group companies is a consequence of received dividends.
| EUR million | 2008 | 2007 |
|---|---|---|
| Taxes on regular business operations | –89 | –43 |
| Taxes on group contributions | 197 | 188 |
| Total | 108 | 145 |
| Current taxes for the period | 45 | 140 |
| Current taxes for prior periods | 0 | 0 |
| Changes in deferred tax | 63 | 5 |
| Total | 108 | 145 |
| EUR million | Intangible assets total |
|---|---|
| Cost 1 January 2008 | 34 |
| Additions | 4 |
| Disposals | –2 |
| Cost 31 December 2008 | 36 |
| Accumulated depreciation 1 January 2008 | 17 |
| Disposals | –1 |
| Depreciation for the period | 5 |
| Accumulated depreciation 31 December 2008 | 21 |
| Carrying amount 31 December 2008 | 15 |
| Carrying amount 31 December 2007 | 17 |
| EUR million | Buildings and structures |
Machinery and equipment |
Advances paid and construction in progress |
Total |
|---|---|---|---|---|
| Cost 1 January 2008 | 1 | 27 | 2 | 30 |
| Additions | - | 5 | 3 | 8 |
| Disposals | - | –1 | - | –1 |
| Cost 31 December 2008 | 1 | 31 | 5 | 37 |
| Accumulated depreciation 1 January 2008 | 0 | 17 | - | 17 |
| Disposals | - | –1 | - | –1 |
| Depreciation for the period | - | 6 | - | 6 |
| Accumulated depreciation 31 December 2008 | 0 | 22 | - | 22 |
| Carrying amount 31 December 2008 | 1 | 9 | 5 | 15 |
| Carrying amount 31 December 2007 | 1 | 10 | 2 | 13 |
| EUR million | Shares in Group companies |
Receivables from Group companies |
Shares in associated companies |
Receivables from associated companies |
Other non-current assets |
Total |
|---|---|---|---|---|---|---|
| 1 January 2008 | 12,255 | 1,977 | 0 | 2 | 3 | 14,237 |
| Additions 1) | 4,110 | 5,158 | - | - | 3 | 9,271 |
| Disposals | - | –6,165 | - | - | - | –6,165 |
| 31 December 2008 | 16,365 | 970 | 0 | 2 | 6 | 17,343 |
| Accumulated depreciation 1 January 2008 |
- | - | - | - | - | - |
| Impairment charges | –80 | - | - | - | - | –80 |
| Accumulated depreciation 31 December 2008 |
–80 | 0 | 0 | 0 | 0 | –80 |
| Carrying amount 31 December 2008 |
16,285 | 970 | 0 | 2 | 6 | 17,263 |
1) Additions regarding shares comprise acquisitions of shares and capital contributions.
Investments
| EUR million | 2008 | 2007 |
|---|---|---|
| Trade and other receivables from group companies | ||
| Trade receivables | 28 | 33 |
| Other receivables | 757 | 724 |
| Accrued income and prepaid expenses | 13 | 11 |
| Total | 798 | 768 |
| Trade and other receivables from associated companies | ||
| Accrued income and prepaid expenses | 0 | 0 |
| Trade and other receivables | ||
| Trade receivables | 0 | 1 |
| Other receivables | 1 | 1 |
| Accrued income and prepaid expenses | 685 | 124 |
| Total | 686 | 126 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Cash at bank and in hand | 19 | 62 |
| Bank deposits | 230 | 310 |
| Cash and cash equivalents | 249 | 372 |
For the President and CEO and the members of the Fortum Management Team, the retirement age is 60. The pension obligations are covered either through insurance companies or Fortum Pension Fund. See also Note 34 to the Consolidated fi nancial statements.
| EUR million | Share capital |
Share issue |
Share premium |
Retained earnings |
Total |
|---|---|---|---|---|---|
| Total equity 31 December 2007 | 3,040 | 0 | 2,822 | 3,119 | 8,981 |
| Stock options exercised | 4 | - | - | - | 4 |
| Cash dividend | - | - | - | –1,198 | –1,198 |
| Repurchase of own shares | - | - | - | - | 0 |
| Profi t for the period | - | - | - | 1,821 | 1,821 |
| Total equity 31 December 2008 | 3,044 | 0 | 2,822 | 3,742 | 9,608 |
| Total equity 31 December 2006 | 3,023 | 0 | 2,822 | 2,065 | 7,910 |
| Stock options exercised | 17 | 0 | - | - | 17 |
| Cash dividend | - | - | - | –1,122 | –1,122 |
| Repurchase of own shares | - | - | - | –175 | –175 |
| Profit for the period | - | - | - | 2,351 | 2,351 |
| Total equity 31 December 2007 | 3,040 | 0 | 2,822 | 3,119 | 8,981 |
| EUR million | 2008 | 2007 | |||
| Distributable funds 31 December | 3,742 | 3,119 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Bonds | 2,488 | 2,865 |
| Loans from fi nancial institutions | 2,837 | 280 |
| Other long-term interest-bearing debt | 691 | 676 |
| Total long-term interest-bearing debt | 6,016 | 3,821 |
| Current portion of long-term bonds | 230 | 541 |
| Current portion of loans from fi nancial institutions | 0 | 1 |
| Commercial papers | 457 | 0 |
| Other short-term interest-bearing debt | 0 | 0 |
| Total short-term interest-bearing debt | 687 | 542 |
| Total external interest-bearing debt | 6,703 | 4,363 |
| EUR million | 2008 |
|---|---|
| 2009 | 687 |
| 2010 | 500 |
| 2011 | 2,208 |
| 2012 | 414 |
| 2013 | 1,098 |
| 2014 and later | 1,796 |
| Total | 6,703 |
| 2008 | 2007 |
|---|---|
| 1,519 | |
| 131 | |
| 676 | |
| 1,796 | 2,326 |
| 985 120 691 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Interest-bearing liabilities to group companies | 17 | 17 |
| Interest-bearing liabilities to associated companies | 184 | 172 |
| Total | 201 | 189 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Trade and other payables to group companies | ||
| Trade payables | 8 | 7 |
| Other liabilities | 559 | 19 |
| Accruals and deferred income | 3 | 6 |
| Total | 570 | 32 |
| Trade and other payables to associated companies | ||
| Accruals and deferred income | 8 | 7 |
| Total | 8 | 7 |
| Trade and other payables | ||
| Trade payables | 10 | 10 |
| Other liabilities | 2 | 3 |
| Other short-term accruals and deferred income | 97 | 112 |
| Total | 109 | 125 |
| EUR million 2008 |
2007 | |||||
|---|---|---|---|---|---|---|
| Contract or notional value |
Fair value |
Not recog nised as an income |
Contract or notional value |
Fair value |
Not recog nised as an income |
|
| Forward rate agreements | 230 | 0 | 0 | 741 | 0 | 0 |
| Interest rate swaps | 2,977 | –12 | –13 | 3,476 | –16 | –26 |
| Forward foreign exchange contracts 1) |
12,846 | 366 | –4 | 13,158 | 41 | 8 |
| Interest rate and currency swaps |
2,145 | 217 | 6 | 3,191 | 76 | –2 |
1) Includes also closed forward and future positions.
| EUR million | 2008 | 2008 |
|---|---|---|
| On own behalf | ||
| Other contingent liabilities | 6 | 3 |
| On behalf of group companies | ||
| Guarantees | 463 | 349 |
| On behalf of associated companies | ||
| Guarantees | 489 | 195 |
| On behalf of others | ||
| Guarantees | 4 | 4 |
| Contingent liabilities total | 962 | 551 |
| EUR million | 2008 | 2007 |
|---|---|---|
| Lease payments | ||
| Not later than 1 year | 1 | 1 |
| Later than 1 year and not later than 5 years | 0 | 0 |
| Total | 1 | 1 |
Parent company's distributable equity as of 31 December 2008 amounted to EUR 3,742,202,898.57. After the end of the fi nancial period there have been no material changes in the fi nancial position of the Company.
The Board of Directors proposes to the Annual General Meeting that Fortum Corporation pay a cash dividend of EUR 1.00 per share for 2008, totalling EUR 888 million based on the number of registered shares as of 4 February 2009.
Espoo, 4 February 2009
Peter Fagernäs Esko Aho
Birgitta Johansson-Hedberg Ilona Ervasti-Vaintola
Matti Lehti Marianne Lie
Christian Ramm-Schmidt
We have audited the accounting records, the fi nancial statements, the Operating and Financial Review, and the administration of Fortum Oyj for the fi nancial period 1.1.–31.12.2008. The fi nancial statements comprise the consolidated balance sheet, income statement, cash fl ow statement, statement of changes in equity and notes to the consolidated fi nancial statements, as well as the parent company's balance sheet, income statement, cash fl ow statement and notes to the fi nancial statements.
The responsibility of the Supervisory Board is to supervise the company's administration by the Board of Directors and the President and CEO. The Board of Directors and the President and CEO are responsible for the preparation of the fi nancial statements and the Operating and Financial Review and for the fair presentation of the consolidated fi nancial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the fair presentation of the parent company's fi nancial statements and the Operating and Financial Review in accordance with laws and regulations governing the preparation of the fi nancial statements and the report of the Operating and Financial Review in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company's accounts and fi nances, and the President and CEO shall see to it that the accounts of the company are in compliance with the law and that its fi nancial affairs have been arranged in a reliable manner.
Our responsibility is to perform an audit in accordance with good auditing practice in Finland, and to express an opinion on the parent company's fi nancial statements, on the consolidated fi nancial statements and on the Operating and Financial Review based on our audit. Good auditing practice requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the fi nancial statements and the Operating and Financial Review are free from material misstatement and whether the members of the parent company´s Supervisory Board and Board of Directors and the President and CEO have complied with the Limited Liability Companies Act.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements and the Operating and Financial Review. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company's preparation and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the fi nancial statements and the Operating and Financial Review.
The audit was performed in accordance with good auditing practice in Finland. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated fi nancial statements give a true and fair view of the fi nancial position, fi nancial performance, and cash fl ows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.
In our opinion, the fi nancial statements, together with the consolidated fi nancial statements included therein, and the Operating and Financial Review give a true and fair view of the fi nancial performance and fi nancial position of the company in accordance with the laws and regulations governing the preparation of the fi nancial statements and the Operating and Financial Review in Finland. The information in the Operating and Financial Review is consistent with the information in the fi nancial statements.
The consolidated fi nancial statements and the parent company's fi nancial statements can be adopted and the members of the Supervisory Board and the Board of Directors and the President and CEO of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding the treatment of distributable funds is in compliance with the Limited Liability Companies Act.
Espoo, February 4, 2009
Deloitte & Touche Oy Authorized Public Audit Firm
Mikael Paul Authorized Public Auditor
The Supervisory Board has today in their meeting reviewed Fortum Corporation's income statement, balance sheet and notes to the fi nancial statements for the year 2008 as well as consolidated fi nancial statements and the auditors' report provided by the Company's auditors. The Supervisory Board has no comments to make on these. The Supervisory Board recommends that the income statement, balance sheet and consolidated fi nancial statements can be approved.
The Supervisory Board states that it has received adequate information from the Board of Directors and the company's management.
Espoo, 4 February 2009
Markku Laukkanen
Kimmo Kiljunen
Juha Mieto
Katri Komi
Jukka Mäkelä
Panu Laturi
Sanna Perkiö
Fortum Corporation Keilaniemi, Espoo POB 1 00048 FORTUM, Finland tel. +358 10 4511 fax. +358 10 45 24447
Domicile Espoo, Business ID 1463611-4
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