Annual Report 2014 | Suomeksi |

Core areas of the strategy

At the core of Fortum’s strategy is our strong expertise in CO2-free hydro and nuclear power and in efficient combined heat and power production (CHP). Our strengths also include solid experience operating in the energy markets. We will continue developing our business through these competencies.

Changing markets

In the coming years, far-reaching decisions must be made in our main markets to mitigate climate change, to develop the energy markets, and to find a sustainable operating model for the pan-European market. Fortum’s strong position enables us to actively participate in restructuring the markets and developing new operating models.

We are very competitive, whether measured by CO2-free production volume, competences in our strategic focus areas, production mix, capacity flexibility, financial position, cost structure, sustainability or occupational safety.

We have a clear vision of how Fortum must be developed in order to create added value for our stakeholders, particularly for our shareholders, both in the short term and the long term.

We want to actively participate in energy sector development and restructuring.

Business focus areas

In 2013, we assessed the future alternatives of our electricity distribution business. After thorough consideration, we concluded that divesting the electricity distribution business is the best solution for the distribution business' development and its customers, Fortum’s shareholders and our other businesses. In 2014, we divested our electricity distribution businesses in Finland and Norway. We are currently assessing and preparing the possibilities to divest the Swedish electricity distribution business. The process is advancing as planned.

We believe that focusing on electricity and heat production and sales will improve our long-term value creation. With the proceeds from the divestment of the electricity distribution businesses in Finland and Norway, we are pursuing growth

opportunities and developing our company in line with our strategy: build on the strong Nordic core and create solid earning growth in Russia. We are developing new businesses around these core areas and, in this way, we are building a strong platform for future growth.

Developing the electricity sales business is also an integral part of our strategy. We sell electricity and develop and offer innovative products and services to more than 1.3 million electricity retail customers in the Nordic countries.

Build on the strong Nordic core

We are building our future growth on the strong position we have in the Nordic countries, the Baltic countries and Poland. The foundation for our operations in these markets is our hydro and nuclear power production, which is CO2-free and very competitive in terms of cost structure and flexibility. In 2014, more than 90% of our European electricity production was generated with Nordic hydro or nuclear power.

As a natural continuation of our Nordic business we seek new opportunities in hydro and nuclear power as well as in combined heat and power (CHP) production in the integrating European energy market. We estimate that the market integration will continue and the significance of hydropower will grow: hydropower can be used flexibly to level consumption peaks and to balance fluctuations in other renewable production. We will also continue developing combined heat and power (CHP) production which is a more efficient way of production than condensing power. In CHP production we can also utilise bio- and waste-based fuels. We estimate that the need for efficient CHP plants and heat networks will grow, especially in urban areas.

Solid earnings growth in Russia

Russia is the world’s fifth biggest electricity market where, in recent years, electricity consumption has grown faster than the EU’s. We have operated in Russia for more than 50 years, and we consider it to be one of our home markets. We

currently operate in the Urals and Western Siberia in the Tyumen and Khanty-Mansiysk area, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area, which is dominated by the metal industry. Additionally, we have a 29.5% stake in the hydropower and thermal power company TGC-1, operating in north-western Russia.

We launched an extensive investment programme in Russia in 2008; the programme consists of 8 new power plant units and the modernisation of existing units. Six of the new units are already in commercial operation, and the remaining two units are estimated to be commissioned in the first half of 2015. Our new units are very energy efficient. The investment programme will have nearly doubled our power generation capacity in Russia once finalised in 2015. Our sales revenue will grow along with the increased production.

These eight new units will receive capacity payments under the Russian Government’s Capacity Supply Agreement (CSA);

the capacity payments are considerably higher than the payments for energy produced with the old capacity. The income from the new capacity is guaranteed by capacity market regulations for a period of 10 years, although the payments can fluctuate slightly every year.

In 2014, the Russian Government approved the heat market reform roadmap, which aims to reform the heat market and liberalise prices by 2020 in big cities and by 2023 elsewhere. Heat reform creates incentives for efficiency improvements. It also increases profitability of Fortum's production capacity and other efficient capacity.

Restructuring according to strategy in Russia

In December 2014 we signed a protocol with Gazprom Energoholding to start a restructuring process of our ownerships in TGC-1, a Territorial Generating Company. TGC-1 owns and operates hydro and thermal power plants in

north-western Russia as well as heat distribution networks in St. Petersburg. Currently, Gazprom Energoholding owns 51.8% of the TGC-1 shares and Fortum 29.5%. The company is listed on the Moscow Exchange (MOEX).

In the restructuring, a company owned by Fortum and Rosatom would be responsible for hydropower production. Gazprom Energoholding would continue with the heat and thermal power businesses of TGC-1. Through its present stake in TGC-1, Fortum’s share of the hydropower-focused company would rise to more than 75%, and the company would become a Fortum subsidiary. Rosatom would be a minority holder in the company, with a less than 25% ownership.

We see the restructuring as an excellent opportunity to increase our CO2-free hydropower capacity, optimise our production portfolio in Russia and increase the flexibility that hydropower offers. If realised, the arrangement will increase Fortum’s hydro portfolio by 60%, some 12-13 TWh.

Provided that Fortum obtains a more than 75% ownership in TGC-1 hydropower production, we are ready to participate with a minority stake (max.15%) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies participating in the project.

A platform for future growth

Alongside our current businesses, we are exploring and developing new sources of growth that support our strategic core areas. We are exploring growth opportunities in these new businesses with prudence.

We are particularly interested in solutions we can use to advance CO2-free energy production. We believe that new CHP concepts, such as pyrolysis, and wave energy, can offer business opportunities in the future. We are developing solar power applications.

For consumers, we offer solutions that improve energy

efficiency. These include, among others, turnkey solar kits for households in Finland and Sweden as well as our rapidly expanding Charge & Drive concept for charging electric vehicle batteries.

Financial targets

Our goal is to achieve excellent financial performance in strategically selected core areas through strong competence and responsible ways of operating. The key figures by which we measure our financial success include return on capital employed (target: 12%), return on shareholders' equity (target: 14%) and capital structure (target: comparable net debt/EBITDA around 3.0).

Dividend policy

Fortum’s dividend policy is based on the following preconditions:

  • The dividend policy ensures that shareholders receive a fair remuneration for their entrusted capital, supported by the company’s long-term strategy that aims at increasing earnings per share and thereby the dividend.
  • When proposing the dividend, the Board of Directors looks at a range of factors, including the macro environment, balance sheet strength as well as future investment plans.

Fortum Corporation's target is to pay a stable, sustainable and over time increasing dividend of 50-80% of earnings per share excluding one-off items.

​Group financial targets
Target 2014 2013 2012 2011 2011
​ROCE, % 12 19.5 ​9,0 ​10,0 14,8​ 11.6
​ROE, % 14 30.0 ​12,0 14,3​ 19,7​ 15,7​
​Capital structure, Comparable net debt/EBITDA ~3,0 2.3 ​3,4 3,3​ 3 2.8

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