Business review, Annual General Meeting, 9 April 2013

Transcription

1 1 (9) 9 April 2013 Business review, Annual General Meeting, 9 April 2013 Madam Chairman, Valued shareholders, Ladies and gentlemen, Ärade ordförande, bästa aktieägare, mina damer och herrar, I will start my review of Fortum s operations in 2012 with the company s strategy. Then I will look at last year's developments and the on-going investments in Europe and Russia. After that, we will review the key figures of last year and look at Fortum s performance from the customers point of view. Finally, I will say a few words about personnel development and occupational safety. I will end the business review with the assessment of the future alternatives for the electricity distribution business from a financial perspective. Fortum s purpose is to create energy that improves life for present and future generations. We provide sustainable solutions for society and deliver excellent value to our shareholders. Sustainability is an integral part of our strategy. Our strategy is based on three core areas: 1. Build on the strong Nordic core 2. Create solid earnings growth in Russia 3. Build a platform for further growth Fortum s strengths are: - Expertise in carbon dioxide-free hydro and nuclear power - Efficient combined heat and power production, and - Operating in the energy markets - in the wholesale and retail markets, alike. Fortum s operations are based on electricity and heat production, and operations will continue to be developed based on them. In 2012, two-thirds of the electricity produced by Fortum was carbon dioxide-free. Hydropower accounted for one third of our electricity production; in the Nordic electricity market, hydropower is the most important production form for balancing the supply and demand. Hydropower is particularly suitable as the fastest regulating power, because hydropower plants can be started up or shut down quickly. Nuclear power also accounted for close to one third of our electricity production. The availability and safety of Fortum s Loviisa nuclear power plant are among the best in the world. With last year s extended maintenance outage, which is performed every 8 years, and with the three production outages, availability fell slightly short of levels in previous years. Investments into continuous improvement of availability and safety will continue this year. In Finland, Fortum has a 25-per cent stake in Teollisuuden Voima s third nuclear power unit under construction at Olkiluoto. The project has proved to be challenging and

2 2 (9) Teollisuuden Voima announced in February that the launch of commercial power production with the unit may be postponed to Fortum s nuclear power expertise is respected around the world. In 2012, we supplied the Fortum-developed Nures ion exchange material to Fukushima, Japan. The material makes it possible to decrease the amount of radioactive liquid to a fraction of its former volume. This is a good demonstration of our special expertise, for which there is an increasing worldwide demand. Along with hydro and nuclear power, our third strength is efficient combined heat and power (CHP) production, which can achieve as high as 90 per cent energy efficiency. The method is especially suitable in areas where, in addition to electricity, there is a need for district heat for customers or steam for industrial use. Local fuels, like biomass and waste, can be used in CHP production. And CHP production is a suitable solution particularly for the urbanising world because, in addition to electricity, it can produce district heating and cooling. We use the CHP solution to produce district heating in seven countries and dozens of cities. In fact, Fortum is the world s fifth largest heat producer. As an electricity producer, we are a medium-sized European company. At Fortum, we have strong confidence in our expertise and our future. We are continuing to invest in modern energy production, and we have 11 new power plants or plant units under construction in different countries of operation. This year, we will commission the Järvenpää biopower plant in Finland, the Jelgava biopower plant in Latvia, and new, waste-fired power plants in Brista, Sweden, and Klaipeda, Lithuania. In late 2012, we made an investment decision to build a biofuelled CHP plant in Värtan, Stockholm. Biofuel will replace the use of coal, and the direct and multiplier effects will result in carbon dioxide emissions reductions of about 650,000 tonnes annually. The plant will be commissioned in The world s first industrial scale bio-oil plant will be commissioned next autumn in Joensuu, Finland. The integrated CHP/bio-oil plant will use domestic forest biomass to produce electricity and district heat as well as 50,000 tonnes of bio-oil annually; bio-oil can be used for heat production. The use of bio-oil has significant positive environmental impacts: energy produced with bio-oil reduces greenhouse gases by more than 70% compared to fossil fuels. We are continuing to implement our extensive investment programme in Russia. In 2011, three of the total of eight power plant units in the programme were commissioned. Thus the power plant units in Tyumen, Chelyabinsk and Tobolsk are in commercial use. Just recently, at the end of March, the first of Nyagan s three large power plant units started commercial operation. In addition to Nyagan s three units, there are still two units to be completed in Chelyabinsk. These five new units will account to a total of 1,800 megawatts - that is three quarters - of the Russian investment programme, which will increase our capacity by a total of 2,400 megawatts.

3 3 (9) One quarter of our Russian investment programme is completed, and three quarters will be completed by the end of 2014, in line with our original timetable. After completion, the investment programme will almost double the power production capacity of the Russian subsidiary OAO Fortum. This also means that Russia s share of Fortum s sales will clearly grow in the upcoming years. As we have noted before, Fortum s goal is to achieve an annual operating profit level of about 500 million euros in the Russia Division after completion of the programme. The majority of the operating profit will come from the guaranteed price capacity payments paid for new capacity for a period of 10 years. The three new Nyagan units alone account for about half of our operating profit target. Since the reform of the electricity wholesale market in Russia, the Russian President has appointed a reform committee to study investment prerequisites for the heat business. Fortum is also participating in the work of this group. The heat business may offer interesting development opportunities in Russia in the future. Next we will take a look at our operations from a customer perspective. The core areas of Fortum s customer service include customer-oriented approach in all encounters, offering of products and services that meet customers needs, ensuring the reliable delivery of electricity and heat, developing future energy solutions and conducting regular customer satisfaction surveys. In 2012, we continued to improve the weather-proofing of our electricity network and accelerated our investments in the form of the VahvaVerkko project. At the start of the project, we set a goal of adding 90,000 more customers to the 200,000 customers already within the sphere of the weather-proof network. In addition to network investments, we improved - our preparedness for power and heat distribution outage situations, - deployed a text message-based power outage notification system for customers as well as an online power outage map application, - the procedures related to solving outage situations and - we trained personnel. As a result of these and other measures, the reliability of Fortum s electricity distribution increased to per cent last year. Our customers were more satisfied with our operations than before. In a customer satisfaction survey, we achieved the all-time best result in Sweden and Norway. In Finland, customer satisfaction decreased slightly as a result of the very memorable winter storms in late The long-term customer satisfaction trend has developed favourably in all three of these countries of operation. Consistent with our strategy, we are building a platform for future growth in many ways: - In France, we are continuing preparations for the upcoming hydropower concessions tender process. - In India, we are exploring opportunities for CHP production for industry as well as solar power production.

4 4 (9) Our research and development activities also improve the company s competitiveness and create a platform for new, profitable business: - we are developing the safety of nuclear power, - researching areas like solar power and heat, - and wave and wind power as future energy production forms. Additionally, we are investing in smart grids - innovative heating and cooling solutions, - solutions for sustainable urban living, and - the electrification of transportation. The economic situation in Europe and globally and the uncertainty regarding its duration dominated the news last year, and the operating environment can be described as very challenging. Electricity prices in the Nordic countries were clearly lower than in the previous year. The past year will also be remembered for its high precipitation, and the historically high water reservoir levels put added pressure on electricity prices. Despite this, Fortum performed reasonably well in As the image shows, our sales remained at the previous year s level and totalled in excess of 6.1 billion euros. Through successful hedging, the price level we achieved for electricity was clearly better that on the markets. Comparable operating profit decreased by about 60 million euros, and was over 1.7 billion euros. Operating profit was close to 1.9 billion euros, which was clearly less than the previous year. In 2011, the sale of the company s stake in Fingrid and the changes in the fair value of electricity price hedges impacted operating profit. In 2012, Fortum s total tax rate was 29.0 per cent, and the payable taxes in all operating countries totalled 562 million euros. Income taxes accounted for 203 million euros of this. In Sweden, the corporate tax rate was lowered last year by more than 4 percentage points to 22 per cent, which extraordinarily lowered also Fortum s taxes. Fortum is one of the biggest payers of corporate taxes both in Finland and Sweden. The profit for the year was EUR 1,503 million. The decrease in the profits compared to the previous year is explained by the already mentioned one-off items related to the sale of Fortum's Fingrid shares and changes in the fair value of electricity price hedges. Fortum's earnings per share were EUR The earnings per share were impacted by the reduction in Sweden s corporate tax rate to 22 per cent. The corporate tax rate in Sweden was previously 26.3%. The change had a favourable impact of 22 cents on Fortum s earnings per share. Fortum has traditionally had a strong cash flow, and the operating profit before depreciations was 2.5 billion euros in Deducting from that the items that do not entail expenses as well as financial items and taxes, we get the cash flow from operating activities before the change in working capital. Last year it was at the 2011 level. However, the cash flow from operating activities after the change in working capital was 231 million euros less than in the previous year. This is explained by the growth in the

5 5 (9) change in working capital, attributable to the increase in accounts receivable from customers as a result of cold weather and increased electricity sales in late As we have already stated, we are investing strongly in future growth; the table shows that in 2012 our investments billion euros - were slightly more than the cash flow from operating activities. We strongly believe that these big investments will bear fruit. This also demonstrates our firm confidence our competence and future opportunities. We are ready to invest in good business prospects also in the future. The comparable operating profit of the Power Division, which operates in the wholesale markets and is responsible for electricity production and sales, was 1,144 million euros, which is 57 million euros less than in Electricity prices were lower than in the previous year, but hydropower production was at a record high level because of the high amount of precipitation during the year. A third factor affecting performance was the maintenance outages of the co-owned Oskarshamn nuclear power plant in Sweden. The long maintenance outage of the plant s number-one unit caused about 50 million euros in lost production for Fortum. Power Division's investments last year amounted to approximately 200 million euros. The Heat Division consists of combined heat and power (CHP) generation, district heating activities and business-to-business heating solutions in the Nordic countries and other parts of the Baltic Rim. The Heat Division s comparable operating profit of 266 million euros was impacted particularly by the decrease in volumes. In Finland and Estonia, heat business operations were divested in early In addition, the Turku region energy production was restructured in Finland into a regional company. Our numerous new power plant investments, which we reviewed earlier, will grow the Heat Division s capacity in the future. In the table, the bar for investments - over 400 million euros - is higher than comparable operating profit. The Russia Division s comparable operating profit was 68 million euros. As I noted earlier, only one fourth of our Russian investment programme s new capacity is ready; accordingly, the division s share of Fortum s business will grow significantly in the future. Accordingly, investments remained at a high, 500 million plus, level. The Electricity Solutions and Distribution Division is responsible for Fortum s electricity sales and distribution activities. The Distribution business area s comparable operating profit was 317 million euros. The result was weakened by the warm weather early in the year, as well as by additional costs caused by the exceptionally strong winter storms at the end of Electricity distribution investments were 324 million euros. The Electricity Sales business area s comparable operating profit was 38 million euros. Growth in the number of customers and the colder weather late in the year increased sales. When examining performance in 2012 from the perspective of the balance sheet, we can see that Fortum s interest-bearing net debt grew to 7.8 billion euros due to our extensive investment programme. With the Russian and European investment programmes, we are taking a strong forward-looking approach and creating future growth.

6 6 (9) In 2012, the comparable equity-to-assets ratio rose to 3.3, which was slightly over our target level of 3. We aim to keep the equity-to-assets ratio stable also in a changing operating environment. Fortum s return on capital employed was 10%, which is fell below our set target. Return on shareholders equity was 14.3%, which is good and exceeds our target level. Although, this was impacted by the lower Swedish corporate tax rate. Fortum has a strong balance sheet and good financial structure. The 10-year and 5-year euro- and Swedish krona-denominated bond issue coupon rates were 2.25% and 2.75%, which reflects the markets confidence in Fortum. We have already described the overall result in 2012 as satisfactory. Earnings per share were 1.59 euros. Based on these key indicators, Fortum s Board of Directors has proposed to the General Annual Meeting that the company pay a dividend of one euro per share for The European and global economic situation has created instability in our operating environment. Under these circumstances, we did not achieve our financial targets. Because of this, and because we want our operations to become more agile and flexible; we launched the Fortum-wide operational efficiency programme last autumn. The efficiency programme will run from and it aims to improve cash flow by more than 1 billion euros. This will be achieved by - reducing capital expenditures by million euros, - divesting approximately 500 million euros of non-core assets, - reducing fixed costs, and - focusing on working capital efficiency. The efficiency programme is included in Fortum s business planning during this year and next, and it is progressing as expected. The programme has gotten to a good start and the personnel is very much engaged on all levels. Together, we have already identified hundreds of efficiency improvement opportunities. Unfortunately, the efficiency programme could affect our personnel as well. Should headcount reductions be needed, they will be implemented on a unit level through natural rotation, restructuring vacant jobs and through attrition, whenever possible. Sustainability is an integral part of Fortum's strategy. The good hydrological year enabled us to achieve our climate targets in 2012, and the share of carbon dioxide-free electricity production grew from the previous year. In terms of energy efficiency, we fell slightly short of our target. We will continue our efforts to improve plant availability, energy efficiency and fuel quality. In Russia, where we have focused our operations in oil and natural gas production areas in particular, our emissions have increased with the growth in the volume of operations. With the new generation capacity, also the energy efficiency of our production will improve.

7 7 (9) The renewed sustainability targets came into force at the beginning of We emphasise Fortum s role in society and measure not only environmental targets, but also the company s reputation, customer satisfaction, and the delivery reliability of power and heat. Sustainability performance is a regular item in each management team and Board meeting. Not only has customer satisfaction increased, so too has the number of Fortum electricity customers. We now have more customers in Finland than ever before, and the number of customers in Sweden has also increased. In the Nordic countries, a total of 1.2 million customers buy electricity from Fortum, which is a leading seller of carbon dioxide-free electricity with a guarantee of origin in the Nordic countries. During the year we introduced new products to the markets, like solar panels and services related to energy use. We also buy back electricity and heat from customers, whose small-scale production contributes to the efficient use of energy. The home applications we have developed are based on real-time, hourly-based electricity consumption metering and give consumers new opportunities to influence their electricity consumption. Behind Fortum s good customer service and good financial performance are competent and engaged employees. The results of the Fortum Sound survey conducted in 2012 indicate a clearly stronger level of employee engagement compared to the previous survey three years ago. The strengths of Fortum employees are teamwork, the possibility to influence the content of one s own work and fair treatment of personnel. Retirement statistics also reflect the overall well-being of the personnel: the average age of retirement from Fortum is 63.9 years. Also in the event in which a person has to go on disability pension, the average starting time in Fortum is 6 years later than the Finnish national average, according to pension insurance companies long-term statistics. It is important to us that Fortum is a safe place to work. To reduce work injuries, we are continuously training our personnel; we review the situation resulting in an injury causing lost workdays at Board and Management Team meetings. We also investigate every serious work injury to eliminate similar situations. The safety of our own personnel improved further last year, and the accident frequency decreased to an all-time low. Contractor safety development, meanwhile, didn t progress in the desired direction, and we must continue our efforts to improve it. The attitude of continuous improvement must be part of the daily routines of every Fortum employee and contractor. Over the past six months, I have visited 20 some production sites and met about a thousand Fortum employees in different countries. We have talked a lot about different topics: - the company s strategy, - changes in the operating environment, - improving occupational safety - and the efficiency of operations, but more than anything, every-day work.

8 8 (9) Based on this experience, I can say that there is a very active and open dialogue underway at Fortum. We have regular country- and company-level discussion forums that really function, including personnel infos after the publication each interim report, as well as a number of other opportunities to engage in a dialogue. Fortum has a very engaged, professional and firmly forward-looking personnel; I am proud to be part of it. Fortum initiated a project at the end of January to assess the future alternatives of the electricity distribution business. Divestment is also among the alternatives being assessed. The assessment has no impact on Fortum s electricity distribution customers and excludes the company s electricity retail business. We estimate that the assessment will be finished during 2013, but the timing of the solutions naturally depends also on the interest in the markets. The decision is based on Fortum s strategy. The company s strongest area of expertise is the cost-efficient production and sales of low-carbon electricity and heat. It is in these areas that we have the best possibility to produce a profit reaching the target level of 12 per cent. We can t achieve that in electricity distribution. Distribution has yielded a stable, somewhat over 8% comparable return on net assets. Even though the stable return is of value, it nevertheless remains clearly below Fortum s target. The business also ties up a lot of new capital, the returns of which in Fortum would fall well below the above-mentioned 8 per cent. We believe that this capital could create shareholder value if used in another way. When looking at the issue from the perspective of electricity distribution, it is clear that this business has untapped potential. Fortum s structure supports energy production; and Distribution does not provide synergy benefits in this business entity. The total 1.6 million electricity distribution customers in Finland, Sweden and Norway would benefit if the business were to be developed as a core business. Specialising in electricity distribution would provide better opportunities to develop this business both from the customers and the owner s perspective. Electricity distribution is an important business, but Fortum s strengths are in energy production and sales. Our strengths allow us to leverage our Finnish energy expertise in the development of the entire energy sector and to produce the highest added value not only for shareholders and customers, but also for Finnish society. Valued shareholders, During the past five years, Fortum has gained many new investors. Five years ago, the company had 50,000 shareholders; today, there are over 135,000 of you. To you, valued shareholders, I extend my utmost gratitude for the past year. We will continue implementing our strategy by creating energy that improves life for present and future generations. In 2013, we will continue our determined efforts to develop the company so that we can offer sustainable solutions that benefit society, our customers and our shareholders.

9 9 (9) Ladies and gentlemen, the operating environment in Europe has not been easy, but Fortum has strong expertise and confidence in the future. We have growth opportunities in Europe and beyond. Leveraging these opportunities requires determined efforts and if required, also the ability to react to changing situations fast. We have all the prerequisites for success. Fortum s future is bright.