Fortum Oyj

Timo Karttinen - Interim President and CEO

Patrick Hummel - UBS Peter Bisztyga - Bank of America Anne Azola - Morgan Stanley Lueder Schumacher - Société Générale Deborah Wilkens - Goldman Sachs Alberto Marenco - Osborne Investments

Thank you. And welcome on my behalf to this results conference call as well.

I hope that you have the material with you that we have published in our website. I will be referring to those page numbers as I go through the material.

First, let’s remind everybody on page three, the IFRS related restatement to the discounted operations. As you know and as we published separately, we have during the first quarter this year signed a binding agreement to sell the Swedish distribution grid and that also concludes the divestment process of our distribution activities.

And therefore, all these distribution activities have now been reclassified as discounted operations and we have separated discounting operations and discounted in the reporting material. And we have also separate the 15 of April published a stock exchange release where you can find the interim period 2014 material related to this discounted and continued operations.

But with that, let’s turn to page four, and our first quarter results. Our sales on continuing basis down in euro terms €170 million, part of this decline in sales is, of course, due to the decline of rouble to euro exchange rate.

But then what is directly attributable while our Nordic businesses prices and volumes mainly in our Nordic generation businesses. Our comparable EBITDA down €60 million in the continue operations to the level of €396, comparable operating profit for the whole Fortum €425, continuing operations €343 and then discounted being the difference €82.

And that then correspondingly leaves us with the Fortum total earnings per share for the first quarter €0.40 and for continuing operations €0.33. The corresponding number for first quarter last year for the continuing operations earnings per share was €0.35.

Turning to page five and summary of the first quarter, what did happened, we continued to have strong cash flow from our operations, our hydro production and I will come back to the volumes a bit more later, was slightly lower and that was impacted by a bit latest spring floods this year than launched. One can really say that this year we are closer to normal schedule, last year we had quite early spring flooding areas.

And in also our nuclear volumes have been somewhat negatively impacted by some minor but than still unplanned outages in co-owned nuclear plants where we received volumes. Binding agreement for the Swedish distribution business signed assets and we expect that the agreement to be closed during the second quarter.

We continue on the Russian side to prepare this TGC-1 restructuring and I will say, really our target there is really to achieve a majority of TGC-1. Hydro businesses and then once we have secured that, we have said that, we also ready to participate with a maximum 15% ownership of -- in this Finnish nuclear power plant project, Fennovoima.

Also on Russian side, the Nyagan 3, third power plant in the Nyagan side. We finalized that late last year and it has been receiving capacity payments at normal as of 1 January, so during the first -- the whole of the first quarter this year.

Also the capacity payment CSA, capacity supply agreement payments in Russian side they were revised upwards in rouble terms for this year, due to the linkage in Russian bond rate. The average bond rate last year was higher than the year before and correspondingly the payments were revised up as they should have been.

And then as this happened really after the reporting quarter during the first days of April, Pekka Lundmark was appointed to be the new President and CEO for Fortum and as said he will start his work here at the beginning of September. Then turning to page six, market conditions that -- those really continue to be fairly weak and challenging during the first quarter of 2015.

Power consumption in the Nordic areas all in all for the same level as year before first quarter, the hydro reservoirs was very close to long-term average levels. System spot prices in the Nordic electricity market, they declined approximately €2 per megawatt hours compared to first quarter last year, whereas the Finnish and Swedish area prices were €1 to €3 lower per megawatt hour compared to corresponding quarter.

On the European business environment side, so the European Commission is continuing to develop and discuss a possible preference market model for this capacity market or capacity systems that are being discussed in various countries, implemented already in some form in U.K. I think that this is a good development in the sense that for all mechanisms that there would be it, that there is EU basis and as much harmonization as possible.

What is even more concrete and important for the copper market are the negotiations between EU governing bodies. Now what is happening about the market stability reserve, MSR system.

So the question is really details the MSR system will be started but then the question is when on which year and then also whether the back loaded emissions would be directly put into the system or not. Those questions are the low but and even now I think that there is a discussion about that today and then follow-up discussions will be next week and next month.

So during the second we should also have decisions about how market stability reserve is proceeding. On Russian side, the Power consumption in our operating areas was on stable level compared to first quarter 2014.

The roubles electricity prices were quite close to say levels as well, year-on-year comparison and therefore the rouble exchange rate so -- again, euro especially, it weakened during January but then it strengthened during February and March and strengthened so much, so that it net strengthened like against the year end levels. But then on the other hand, of course it is still significantly weaker than it was one year ago first quarter and I will come back to those numbers a bit later.

Turning to page seven, hydro situation in Nordics. You can see here this orange dotted curve 2015, very closed to the reference level or average level.

And then also you can see that it’s close to the time where it normally bottoms out and then starts to turn up as the melting starts in the -- primarily in Sweden and Norway but also in Northern Finland where there is high altitudes and more snow. So we have most of the reservoir content.

Turning to page eight on the wholesale price electricity. The forward curve what we see here for the Nordic market is slightly lower than one quarter ago and as we looked at it previously but no big changes and one can say also earlier, so that coal and other commodities as well are general economic situation but then also warm winter affecting the load, et cetera.

So they are amongst the factors that are affecting short to medium-term, the power prices and the fluctuation. Turning to page nine, CO2 prices, really no big changes during the quarter other than the oil price, increasing somewhat from the lowest levels as I said also before, so the oil price doesn’t impact that much our cost base for the prices of our products.

So coal prices, CO2 prices are much more important and also CO2 price has been trading on a fairly narrow range around roughly €7 per tonne of CO2 really, I think waiting for the political decisions how the stability reserve is going to be developed. Then to the page 10, price development in the Nordic region and Russia.

Spot prices for the Nord pool, system price declined roughly 7% or €2 year-on-year first quarter. Also our continued power price declined roughly €2 or 5% to the level of 37.7 on the average.

On the Russia side, we see that the spot prices in rubbles were marginally up 3% here but then on the other hand, power achieved -- power price in euros was 15% lower and their of course we can see clearly the effect of the declining exchange rate, both last quarter, last year and now first quarter this year. Tuning the page to 11, in first quarter, the Fortum total comparable operating profit declined by €52 million and the continuing operations’ comparable operating profit declined by €15 million and here we can see that the decline is really at this time in the Power and Technology segment where I said, we had most drop in the average achieved sales price but then also some drops in volumes that I will come back later, whereas in Heat, Electricity Sales and Solutions segment and Russia segment, we are both able to improve the result in euro terms.

Turning the page then to 13, comparable and reported operating profit, this quarter differences were minor. The comparable operating profit on continuing operations was €7 million lower than the reported, so no big differences there this time.

Page 14, on Power and Technology, there I said the comparable operating profit declined quarter-on-quarter by €48 million. We had €2 lower average achieved power sales price.

We had 0.2 terawatt-hours lower hydro volumes and 0.3 terawatt-hours lower nuclear volumes. Hydro volumes, of course always fluctuate between quarters and here I said, we had last year quite early spring floods and this year, they are more closer to normal.

So that is one explanation why the hydro volumes now are a bit lower and then on the other hand I said earlier, so we had several small unplanned outages in the co-owned nuclear power plants where we receive volumes. So that’s the reason for the drop in the nuclear volumes.

Also you have to note that Oskarshamn 2, the second factory in Oskarshamn in Sweden, which was done also last year for long-term outage. It continues to be out of service and if you look at the Nord pool site, which always has the up to date information of the availability and planned outages, all going outages of large power plants in the Nordic market area.

So the information is that the Oskarshamn 2 reactor would be back by December this year. Then for Heat, Electricity Sales and Solutions segment, our comparable operating profit improved by €10 million, improvement really coming both from the heat operations and the retail sales operations.

On the heat side, we had lower fuel costs. So here we can see some benefit also from the lower commodities in terms of lower cost base but then on the other hand, we had in some regions also we are able to achieve higher heat sales prices during the period.

On the electricity, retail sales side, we have been able to continue the trend wise growth in our retail customer numbers and then also we had good margin development during the quarters of those contributed to the improvement of the results there. Heat sales volumes as well as power sales volumes and really here also related to these combined heat power plants, so power sales coming from the heating operations.

They were at approximately same levels as first quarter last year. It’s also good to note that we had once again a very warm start of the year here in the Nordic area.

This was all-in-all roughly as warm as it was one year ago. And as such, the first quarter last year was closed to being record warm in terms of the first quarter of the year.

So now we have, I think, two warm winters in the first quarter in a row. Turning to page 16 on Russia, our comparable operating profit there in euro terms improved by €24 million that includes €29 million of the CSA release relating to the Nyagan Power Plant.

But then also it includes minus 47 difference in euro terms because of the lower rouble exchange rate compared to the exchange rates level one year ago. So just for comparison 2014 first quarter average rouble to euro exchange rate in our reporting was 48.

Now, first quarter this year, the average rouble rate to euro was €71 and then closing rate for this first quarter this year was €62. So that we can also see that on the other hand also rouble strengthened towards the end of the first quarter.

In the key production side, we had also warmer weather where we operate in Russia, also on the Russian side this winter. So warm weather affected somewhat down our heat volumes and then also we had somewhat higher bad debt provisions for our heat trade receivables and those impacted our heat side results.

And then I said already we have the €47 million exchange rates difference comparing euro numbers and then €29 million CSA provision release. All-in-all, here in our Russian operations, we have the investment program still ongoing, the investment program that we started when we made the acquisition in 2008.

We have two power plants remaining there, Chelyabinsk 1 and 2 unit which are CHP, so combined heat and power units. We have at the end of the reporting quarter roughly 200 million in euro terms less in the investment program to finalize these two power plants.

And as we have noted here, these units are somewhat or some months delayed from our earliest schedule and therefore, we now estimate that these units are ready during the second half of this year whereas we earlier communicate this that they would be ready by the end of the first half. Then to the discontinued operations i.e.

our distribution segment, so once again we have signed a binding agreement to divest the Swedish grid. Operatively the volumes in Sweden were in line with distribution volumes.

And then just to note that if you look at the numbers in the table, any specific compare, the numbers between years, it’s good to remember that when did we during 2014 divest the Finnish and the Norwegian distribution grids because then they affected the underlying business base that these in those ‘14 comparison numbers. Moving to the income statement, page 18, sales sit down in €170 million, comparable operating profit slightly down at €343 million.

We had only minor items affecting comparability. Our share of profit of associates and joint ventures was somewhat down.

The biggest thing would decline there was coming from our district heating and CHP operations. Värme covered with the city of Stockholm but then we have also -- we had also some other changes that were underlined by its like during the end of last year, we sold Gasum and Gasum province was still here in the beginning of last year.

Our financial expenses continue to go down as stated. So our net debt is going down.

Our income tax expense, tax rate is roughly 19 during the quarter when we exclude the profit of association and then the non-taxable sales gains. And this is then where it leaves us with a net profit for total Fortum €358 million and continuing operations €295 million.

And therefore we have then arrived at this EPS numbers for the euro cents for the total Fortum and €0.33 for continuing operations. Moving to cash flow statement, our cash flow from operating activities for continuing operations increased more than €100 million, level of 516 and that includes positive impact from change in working capital and also positive impact from these realized foreign exchange gains and losses.

Our cash flow of operating activities for total Fortum was €603 million. Cash used in investing activities all-in-all during the quarter €89 million net and then that leaves us with the cash flow before financing for total Fortum €514 million.

Moving to key ratios, page 20. Our comparable EBITDA for total Fortum declined a bit more than €100 million to the level of €1.75 billion and for continuing operations, the comparable EBITDA declined by €60 million to the level of roughly €1.4 billion.

Interest bearing net debt down by €500 million to €3.7 billion and these leaves with a comparable net debt to EBITDA when then, of course, looking at total Fortum numbers here, 2.1 and then excluding Värme financing that Värme is then to pay us but during the rest of this year, we would be at 1.8 and once again remind that now we have target for this comparable net debt to EBITDA ratio to be around 2.5. Our return of capital employed was 9% for the quarter, 19.5% for the whole of last year but of course, especially the last year number includes a big impact from various sales gains.

Liquid funds at the quarter end of €3.3 billion out of those liquid funds, then of course during this quarter and this month, we have already paid, for instance, €1.15 billion as dividends. And we continue to have otherwise also good liquidity.

We have committed credit lines totaling €2.2 billion. Turning to page 12, debt maturity profile.

We have roughly 1 billion of debt maturing during this year. This is quite close to the say number as it was in the beginning of the year.

So we didn’t have that much maturing debt during the first quarter. This is now by the end of the year, the 1 billion.

And of course, it’s safe to assume that we will continue doing, as we have done we will pay down the debt as we go barring anything else happening so that we would be needing more cash. And then average interest rates, if you look at the snapshot at the end of the quarter, so now our average interest rate has actually increased, and this increase is really due to the ruble financing impact and especially due to the fact that at around year end and in the beginning of this year, the local ruble rates were quite high and of course they have now come down in Russia.

The situation has somewhat stabilized, and also the ruble have strengthened. Then moving on to outlook, we continue to expect that there is a slow trend wise growth in the electricity usage and one of the reasons being that electricity is a good and a decent way of using energy.

So electricity should be gaining share of total energy consumption. Of course, it’s been so that the annual actual, also seasonal changes to the consumption, they depend on the economic cycle and they also depend on temperature as we have quite a lot of temperature related heating demand here in the Nordic area.

In Russia, we have the 18.2 billion ruble target. But as we have said, the euro result will be volatile because of all the volatility of the exchange rate and the translation effect.

Key drivers and risks, when you look at our performance economic, of course the general economic development impacting the demand, impacting both industry and also demand political decisions, like the emissions trading and market stability reserves like country wise taxation decisions, currency, of course Swedish krona and Russian ruble are the most important currencies to us apart from our reporting currency, euro. And then also the drivers that the impact of wholesale price of electricity and volumes, our own power plant availability and then commodities and others that affect the price level of the market.

CapEx estimate for this year approximately 0.8 billion for the continuing operations, including of course the rest of the Russian CapEx for the investment program and likewise including the what we say 300 million to 350 million maintenance CapEx level that we now have in our continuing operations. Our hedging levels, the rest to the year 2015, at the end of the reporting period hedged roughly 50% at average €41 per megawatt hour and then the next year hedged roughly 20% at the average of €37 per megawatt hour.

For taxation we continue to guide this corporate income tax rate between in the 19.1 and then we have to note that the Swedish government has decided to propose again an increase of 17% on the nuclear capacity tax in the spring budget. And if this proposal now goes through, it didn’t go through in the autumn, but if it now goes through, then as we communicated it already then the impact on whole year that will for us is €15 million before tax.

So that concludes the outlook and the presentation. And now, we can move to questions and answers.

Yes. Thanks.

Good afternoon. Patrick Hummel, UBS.

First question relates to Vattenfall’s announcement yesterday to or at least its intent to close the units one and two at the Ringhals nuclear station, already in 2018. I was wondering if you could just share your views on this announcement and whether you think you have to reassess the Swedish nuclear assets where you hold participations in, in light of the current low power price environment or whether you think this is really unique to the Ringhals nuclear plant?

And the second question I have on the M&A front, I guess you will not comment specifically on Slovenske, but it seems like analysts are going to sell part of the stake and the deal as a whole is not going to go head. So I was wondering if you looking at the European landscape if you would expect any larger deals on your radar screen in the coming months and quarters or whether we should be prepared for more smaller bolt-on M&A.

And as a general question, you have a new CEO arriving in September, so I was wondering if any potential M&A project would be on hold until the arrival of the incoming CEO? Thank you.

Yes. Thanks for the questions if I start from the second question.

So yes, it’s correct. And as you say and as we have also said before so we don’t comment on any specific project whether we would be interested or not.

But as we have said more broadly, so of course we look at those areas and countries where we are. And then on top of that, that we look at also the opportunities that this integrating European power and energy market do for us.

And then also we focus -- we start from our competencies what we know either power, nuclear power, combined heat and power customer activity, so those really are and those continue to be our focus areas. We of course monitor what is happening.

And while we monitor, we also develop our own ideas that is work that we have we’re doing and that is work that we continue to do. We are not in any specific waiting mode regarding new CEO, Pekka Lundmark to come here, so that’s not any specific point in the calendar, otherwise than of course it’s good to have him here, but that doesn’t mean that we would specifically do or not do anything because of that date.

Then coming back to the first question about greenhouse and Vattenfall’s announcement. Yesterday, so obviously we are not part owners in greenhouse so we don’t know any details we have, no knowledge of that power plant other than what is public.

So therefore, we don’t have comment specifically to there. And of course, that’s been actions of our competitors, so as such actions of our competitor related to their power plant.

So they don’t mean that we would do any decisions on our side. Of course, we monitor what is happening and we live at the same market.

But I said, we are not part owners in greenhouse, so we don’t have any specific knowledge there.

Okay. Thanks very much.

Yes. Good afternoon.

So two questions for me please. Firstly, I’ve been just -- no actually this is sort of follow-up, whether the change in sort of Chief Executive in the couple months they have to wait for filling [indiscernible] have any impact on your ability to execute on the strategy has attracted management bandwidth at all?

And then the second question regarding the power plant delays in Russia. And can you just provide a little bit of detail as to why those two units delayed?

And also would you expect to have to pay any CSA penalties as a results of those delays please?

Yes. Thanks.

Regarding the first question. So we have a good and competent management team here and actually it was even widen than strengthened about a year ago when [indiscernible] called then announced his new organization.

So I feel that that we are well equipped to both maintain and develop the company, while then also Pekka is to come here a bit later. So I don’t see any problem there.

Then to the second question, the power plant delays in Russia. So they are some months, so somewhat delayed from the earlier estimate.

They are big project, big power plants and there is always critical parts to get ready equipment, distance, and speed, etcetera, etcetera. So it’s really due to those, it’s not anything specific.

And I said, we really estimate that it would be some months and not more than that. So that’s really what is happening there.

Unfortunately, we saw that this kind of launch construction projects every now and then are some months late from the schedule. The penalties for delays, they will be small, there would only be, theoretically there would be bigger penalties if the delays would be much longer.

So any penalties that we would then need to pay as they would be some months delayed, so they would not be weak.

Okay. Thank you.

Good afternoon. Thank you for taking my two questions please.

The first one is regarding the reform of the carbon market and the potentially implementation of the market stability reserve, to address document circulated and it seems that it includes the allocation of allowances to the resrve, but it you would start in 2019 as opposed to 2017? I understand negotiations are still ongoing, but do you believe that this start date could be modified to 2017 again and if so, what are the key meetings we should watch out?

That will be number one and my second question is regarding your CapEx at 21 page which is below your run rate guidance of €800 million for the full year? If you could mention if it purely relating to timing or is there something different?

Thank you.

Thanks. First about the carbon market and market stability reserve.

So my understanding is first that the stability reserve should happen. So there is fairly wide unanimous understanding for that, but then it’s really question of these key points what is the starting year and whether these -- both these back loaded and then unallocated will go to the reserve or would be put into the market in the time between.

Unfortunately, as it is a EU internal decision making now there is European parliament, there is EU Commission and then there is the Council of States. And its these three -- I think these court -- these three decision makers will now then should find a decision of compromise between themselves.

The parliament is supporting for the early start and also supporting for putting all these allowances directly into the mechanism. And then it’ s more a question of, I think, that the commission could be more flexible there in between and then it’s a question whether in the Council of States whether there would be a blocking minority of some countries blocking the early start and then a question of what kind of compromise that would be found.

So this really the roughly the situation and therefore it is really hard and I don’t want to start guessing of what the end result or the exact year for instance might be. But this is how it seem -- it would seem to be right now.

I think the important point also is that for market my understanding is for the copper market is that these back loaded allowances would be put into the market reserve. And then, of course, what is the exact year for the system to start that will also have an impact, but maybe a smaller impact.

That's about the first question then about our capital expenditure. So we have also something now in our CapEx estimate that have not started yet like as we announced that we are building a new CHP plant in Poland and subject and we announced that roughly a year ago -- roughly a month ago.

So there will be some CapEx, of course, now -- in our estimate that is some CapEx for that towards the end of the year, but that's an example of a project that has not started yet, but will mean that there is -- there would be CapEx during the latter half of the year. We have some other projects like that there also inside and then I think also that quite a lot of these Russian investment program CapEx is rather in the forecast than in the realization.

So these are the spots, which affect that we are a bit below the run rate of the CapEx. Still -- if I then also come back to the earlier question, which was about these Chelyabinsk power plants and the possible penalties about the delay.

So it’s also good to remember and good to know that like for Nyagan power plant, we had these CSA reserve there and we release that. So we have also then left those reserves for these Chelyabinsk 1 and 2 and those numbers also visible in our interim report, not somewhere there.

I don’t remember the exact place, but we have roughly €32 million left there for these two Chelyabinsk power plants and of course these should be more than enough to cover for the -- I said small penalties for any delays or couple of months.

Yes. Thank you very much.

Hi. Good afternoon.

It’s Lueder Schumacher from Société Générale. Just quickly coming back to the Swedish nuclear situation.

I mean, you pointed out quite rightly that you don’t have a stake in Ringhals, but you do have a stake at Oskarshamn, which is even older and is also in the target of the politicians. There is also -- I mean, one unit is down already at the normal.

But there is talk of some, one also closing early, potentially 2019. Is this something you are considering, especially with the Swedish nuclear attacks?

Is it still viable to leave the old directors open?

Yeah. I don’t think if -- I am not sure if this has been -- if these have been specifically target of politicians.

Of course, it is fair to say that Green Party now being in the parliament as discussed about nuclear there in Sweden. But I think it’s also fair to say that in Sweden, like in other countries, there is both pro and again.

But there is also quite a lot of growth nuclear thinking. So it’s always a balance and a mix.

Then of course, it is true that we are of course in close discussion together with E.ON and then as I talked also in presentation on the Oskarshamn 2 has been on a long-term of the Chinese is still in there in the outage. Once again, this -- what they are doing something or not doing something in their power plant of course doesn’t impact what we think.

So, we have our long-term strategy of how to develop our capacity and of course in those power plants where we are co-owners we need to agree and negotiate with the other owners. But this once again doesn’t impact our thinking, what they are now doing or what they announced to do.

And what is your current thinking to keep the units out as long as possible, as long as they are making positive contribution?

We have been modernizing the OL2 and of course, now the Oskarshamn 1 also is running that was also under modernization. So of course, we, all the time evaluate every capacity that we have and every power plant that we have.

But for the time being, we’ve been happy with those and they are -- one is up and running and the two is under modernization.

Okay. Thank you.

Yes. Good afternoon.

I was hoping to follow-up. In the release you mentioned that you’ve transferred about 500 employees from Power and Heat into other.

I’m just trying to understand, if that shift of cost is already reflective in the divisional split in terms of EBIT or if that cost shift will only become more evident in the coming quarters?

Yeah. Thanks for the question.

So we have this Fortum business services there. So we have grouped our services, both our internal financial back office services, our IT services and our customer service operations.

But then, of course, the divisions will continue to use those services. So they will pay for those services.

But as we have a pick-up internal unit, so of course, our thinking and our aim and what we are doing is, we continue our drive for efficiency. So we want to do better job with lower cost.

And that is the reason of having that kind of internal service center. But I said, as those costs previously, we have traditional own cost, so now the cost that they are paying for those services, they are still visible in that divisional results.

We just are thinking for a higher efficiency for Fortum all-in-all.

Are you able to give us an estimate of how much that might reduce cost overtime?

I don’t have an estimate right now for that. But of course, we are working on the costs all the time.

And as you can see, it is a fairly big number of personnel involved. So it’s both a question of how effective will we use those people, but then also all the systems that they use, IT systems and others till we’re more able to harmonize those, reduce the number of systems that set up as we have them co-located in one organizational unit.

So that’s the work what we are doing but I don’t have an external growth for any number gain for the efficiency.

Thank you.

Okay. Good afternoon, everybody.

I had a question on the cash and the possible exchange of deregulation with the payments going from 10 to 15 years. I understand that these possible change have a new turning that in the net present value, that’s one that what could be the impact on the P&L, should I expect a lower contribution in the first year and then growing over is going to be a new color effect?

Thank you.

Yes. Thank you.

This is something that we also -- I think that we mentioned in an earlier report so and once again. Yeah.

The reason -- the decision yet about this but the discussion rather and we need to also see what the details would be. But of course as I said then this would be -- we expect it to be neutral for us in the value term and that would mean that the payments are spread a bit for a bit longer period.

But I said we don’t have all the details yet.

Okay. Thank you.

Okay. Thank you everybody for good questions and once again welcome then at the latest next time when we report our second quarter result.

Thank you.