Financial statements and operating and financial review 2020

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Financial performance and position

Good performance in a challenging year – Strategy updated to drive the clean energy transition

Key figures

1)Comparable EBITDA is defined as an alternative performance measure and used as a component in the capital structure target 'Financial net debt-to-Comparable EBITDA'. In 2020 Comparable EBITDA includes contribution from Uniper for the period of 1 April to 31 December 2020 since Uniper was consolidated as a subsidiary from 31 March 2020. Until 31 of March 2020 Uniper's contribution to the income statement was recognised in the Share of profit/loss of associates and joint ventures.

2)Change in net margin liabilities has been reclassified from operating cash flows to investing cash flows and to financing cash flows.

3)Following the consolidation of Uniper, Fortum has updated its definition of net debt and uses financial net debt and adjusted net debt.

See } Definitions of key figures

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The year 2020 will be remembered first and foremost for the Covid-19 pandemic that shook the world and impacted the lives and livelihoods of people all around the globe. While the utilities sector, and Fortum more specifically, was also affected by the pandemic, we suffered clearly less than many other sectors and companies. Our focus through the challenging times was – and continues to be – on securing the well-being of our employees and thereby ensuring uninterrupted supply of power and heat to our customers and the societies around us.

Over the course of the year, we stood up to the challenge very well and successfully operated our power plants, carried out the annual overhauls, and secured the construction and commissioning of new power plants without major disturbances. In the Nordics we commissioned both the 90-MW Kalax and 99-MW Sørfjord wind parks, and in Russia we brought a total of 550 MWs of wind capacity to the market. At the same time, our subsidiary Uniper’s construction projects at Irsching and Scholven in Germany and the modernisation of the Surgutskaya power plant in Russia are proceeding according to plan.

We have also continued our strategy execution tenaciously. During the year, we increased our ownership in Uniper from 49.99% to approximately 76%, and consolidated Uniper as a subsidiary into our financials as a separate reporting segment. One of the key focus areas in 2020 was intensifying the cooperation between Fortum and Uniper. As a result, we presented an updated strategy covering the whole Fortum Group at the beginning of December. Building on our strong position in CO₂-free power generation and gas as well as our expertise in sustainable industrial and infrastructure solutions, the strategy focuses on driving the clean energy transition. With determined execution of our strategy, we intend to deliver sustainable financial performance and target a growing dividend over the years to come. Our strategy is aligned with the goals of the Paris Agreement, targeting carbon neutrality for the Group by 2050 and in our European generation already in 2035.

As part of our strategy execution in 2020, we continued to optimise our portfolio and decided to divest our district heating businesses in Joensuu and Järvenpää in Finland after a strategic review. The sales gains recorded for these assets totalled EUR 722 million. The strategic reviews of our district heating assets in the Baltics, Poland, and Sweden as well as of our Consumer Solutions business are ongoing.

In 2020, Europe took determined strides on climate policy. The EU’s Green Deal package with a clear commitment to climate neutrality by 2050 and tighter emissions reduction targets for 2030 was a truly welcome development as it bundles up all EU policy areas and all sectors of society. Until now, the focus of decarbonisation has largely been on the power sector, but the Green Deal has a society-wide approach. The tighter targets will be translated into a substantially tighter EU emission trading system in the upcoming years and the expansion of it is also on the table. This is something we for several years have been advocating for and we are very pleased with the development. This decision has also supported the price of CO₂ emission allowances, which are trading around twice the price compared to a year ago. The hydrogen economy also took several steps forward, with the EU Commission and several member states presenting their hydrogen strategies. This is a very welcome development, as the role of hydrogen made from CO₂-free power will play a key role in decarbonising the European economy, including many sectors that are hard to decarbonise, such as heavy transport and some industrial processes.

The market conditions in 2020 were characterised, not only by the pandemic and market volatility, but for us even more so by the wet hydrology in the Nordics that pushed power prices heavily down. Towards the end of the year, CO₂ emission allowance and commodity prices started to recover, which was also reflected in increasing power prices. While 2020 was a rough year for many energy commodities, European gas and power demand suffered only mildly – both in the region of a 3-4% decrease year-on-year.

The 2020 financial results for our Generation segment were burdened by the low power prices and low nuclear volumes especially in the fourth quarter. Our successful hedging significantly alleviated the effect of the low power prices. In the City Solutions segment, the result declined on warm weather and low power prices, while Consumer Solutions’ results continued to improve. Despite the impact of the pandemic in the first half of 2020 and the lower power margins, our Russia segment fared well operationally, and the result decline was to a large extent due to the change in the Russian rouble exchange rate. Uniper’s results generally follow a seasonal pattern with the first and fourth quarters being the strongest. As a result of the strong hedging and optimisation in the power and gas business, the fourth-quarter 2020 results of the Uniper segment significantly contributed to Fortum’s comparable operating profit.

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In line with our updated dividend policy and what we communicated in early December, the Board of Directors proposes a dividend of EUR 1.12 per share for the financial year 2020, an increase from the stable dividend we have been paying for several years.

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Changes in reporting

Uniper consolidation

As the majority owner of Uniper, Fortum consolidated Uniper as a subsidiary as of 31 March 2020. Uniper is a separate reportable segment of Fortum. Fortum consolidated Uniper into its balance sheet as of 31 March 2020 and, from 1 April 2020, consolidated Uniper’s results into its income statement. In 2019 and in the first quarter of 2020, Uniper was consolidated as an associated company into Fortum’s income statement.

When consolidating Uniper’s results into Fortum’s income statement, the income statement line items have been classified in accordance with Fortum’s income statement categorisation and, as such, may not be fully comparable to Uniper’s standalone income statement. In the consolidation of Uniper’s results, Fortum has utilised the ‘Components of adjusted EBIT’ reported by Uniper (see Uniper’s Annual Report 2020, page 38). Furthermore, reporting of both the Uniper segment and the Generation segment are impacted by adjustments for the joint ownership in the Swedish nuclear company, OKG AB.

Purchase price allocation

The preparation of the purchase price allocation for the Uniper acquisition is being finalised and will be completed within the one-year window from the acquisition date, i.e. by 31 March 2021.

At 31 December 2020, Fortum presents the preliminary purchase price allocation for the Uniper acquisition, which has resulted in adjustments to Uniper’s opening balance sheet on 31 March 2020. These adjustments led to restatement of the first, second, and third quarters of 2020 (Restated quarterly financials separately published on 12 March 2021).

The financial effect of the purchase price allocation of the Uniper acquisition on the comparable operating profit of the Uniper segment in 2020 totals EUR 57 million resulting from one-time adjustments of EUR +68 million and recurring adjustments of EUR -11 million. See below.

Recurring adjustments:

One-time adjustments:

Excess of the acquisition value over the fair value of Uniper’s net assets, resulted in a preliminary goodwill amount of EUR 515 million.

Other changes

The following changes have been made in comparison to Fortum’s 2019 Annual Financial Statements in order to align with Uniper:

Uniper’s energy trading and optimisation business accounts for more than 90% of the Uniper Group’s sales. A substantial portion of Uniper’s sales arises from the physical assets and contract portfolio optimisation, which is accounted for on a gross basis.

For further details on the consolidation of Uniper, see } Note 1.

Strategy update

In December 2020, Fortum updated the strategy for the whole Fortum Group to drive the clean energy transition and deliver sustainable financial performance. Aligned with the goals of the Paris Agreement, Fortum targets carbon neutrality by 2050 with ambitious mid-term targets.

The updated strategy builds on four priorities: ‘Transform own operations to carbon neutral’, ‘Strengthen and grow in CO₂-free power generation’, ‘Leverage strong position in gas to enable the energy transition’, and ‘Partner with industrial and infrastructure customers’.

Fortum has committed to the following ambitious climate and environmental targets:

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During 2021, Fortum will develop a target for the reduction of Scope 3 emissions addressing the indirect emissions from our fuel sales business (category 11).

Fortum’s coal-fired generation capacity will be reduced by more than 50% by the end of 2025, to approximately 5 GW. Measures for the reduction include the coal-fired plant closures in Germany announced by Uniper earlier in 2020 (and updated in December): 0.9 GW at the end of 2020, 1.5 GW by the end of 2022, and a further 0.5 GW by the end of 2025. The reduction also includes the closure of Uniper’s 2 GW in the UK by the end of 2025 and Fortum’s previously announced commitment to discontinue the use of coal in Espoo by 2025.

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In addition to the above-mentioned planned power plant closures, Uniper will close its 1-GW coal-fired plant in the Netherlands by the end of 2029. As defined in the German coal-exit law, Uniper’s 1.1-GW coal-fired power plant in Germany, Datteln 4, will be decommissioned by 2038.

Fortum will also focus on growing a sizeable portfolio of onshore wind and solar based power generation primarily in Europe to make it a meaningful EBITDA contributor. The target is to build 1.5-2 GW of new capacity by 2025. This capacity will be built partly on our own balance sheet and partly using the ‘build-operate-transfer’ business model.

Fortum will gradually transform its Russian asset portfolio towards renewables, while over time reducing our fossil exposure.

In parallel with the strategy alignment, Fortum and Uniper have together identified cooperation benefits with a positive cash impact on a consolidated Group basis of approximately EUR 100 million annually. More than EUR 50 million of these annual benefits are estimated to be achieved by the end of 2023, with full effect of approximately EUR 100 million annually in 2025. Through this cooperation we will be able to create value for both companies and their shareholders.

Financial targets and dividend policy

Following the consolidation of Uniper, Fortum’s business profile has changed. Consequently on 15 May 2020, Fortum’s Board of Directors decided to remove the financial targets (return on capital employed of at least 10% and comparable net debt-to-EBITDA of around 2.5x) as of the first quarter of 2020.

In December 2020, Fortum updated its financial targets and dividend policy. Fortum continues to be committed to maintaining a rating of at least BBB. The long-term financial targets are:

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Fortum's dividend policy was revised and is ‘to pay a stable, sustainable, and over time increasing dividend’.

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Comparability of information presented in tables

As the majority owner of Uniper, Fortum consolidated Uniper as a subsidiary as of 31 March 2020. Uniper is a separate reportable segment of Fortum. This entailed changes in Fortum’s reporting structure, accounting policies, as well as definitions of certain key figures and reclassification of nuclear fund adjustment, among others. For additional information, see } Note 1 Significant accounting policies.

Fortum consolidated Uniper’s income statement from 1.4.2020, which is the main reason for the change in the figures compared to the previous year. Financial results discussed in the operating and financial review are for Fortum, including Uniper unless otherwise stated.

Financial results

Sales by segment

1)Sales and purchases with Nord Pool Spot are netted at the Group level on an hourly basis and posted either as revenue or cost depending on whether Fortum is a net seller or net buyer during any particular hour.

Comparable EBITDA by segment

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Comparable operating profit by segment

Operating profit by segment

Share of profits of associated companies and joint ventures

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For further information see } Note 6 Segment reporting.

Sales were EUR 49,015 (5,447) million.

Comparable operating profit increased by 13% and was EUR 1,344 (1,191) million, mainly due to the consolidation of Uniper, partly offset by the weaker results in the heating and cooling business, and the negative effect of the change in the Russian rouble exchange rate. In the Generation segment the negative impact of the lower achieved power price and lower nuclear volumes was partly offset by the higher hydro volumes.

Operating profit for the period was impacted by EUR 255 (-72) million of items affecting comparability, mainly due to the sales gains of EUR 722 million from the divestments of the Joensuu and Järvenpää district heating operations, changes in fair values of non-hedge-accounted derivatives of EUR -675 (-72) million, and a one-time, non-cash tax-exempt income statement impact of EUR -222 million from Uniper becoming Fortum’s subsidiary on 31 March 2020. This one-time item did not affect Fortum’s total equity, as it is merely a reclassification within equity (} Note 1 and } Note 7).

The share of profits of associates and joint ventures was EUR 656 (744) million. Since Fortum has accounted for Uniper’s share of profits with a time-lag of one quarter, Fortum's first-quarter 2020 results include the share of Uniper’s fourth-quarter 2019 profits of EUR 162 million and first-quarter 2020 profits of EUR 307 million. Fortum’s share of Uniper’s profits, EUR 469 (632) million, includes a reversal of the adjustment that Fortum recorded in the fourth quarter of 2019 related to the positive impact from the reinstatement of the UK capacity market. Further, Fortum also made a reversal of EUR 449 million after tax, related to the impairments Uniper recorded in the fourth quarter of 2019 and first quarter of 2020. In this reversal, Fortum utilised the fair value adjustments recorded in the purchase price allocation in 2018 (} Note 18).

Net finance costs amounted to EUR 56 (134) million.

Profit before income taxes was EUR 2,199 (1,728) million.

Taxes for the period totalled EUR 344 (221) million. The effective income tax rate according to the income statement was 15.7% (2019: 12.8%). The comparable effective income tax rate (excluding the impact of the share of profit of associated companies and joint ventures as well as items affecting comparability, tax rate changes, and other major one-time income tax effects) was 23.8% (22.0%) (} Note 12).

The profit for the period was EUR 1,855 (1,507) million. Earnings per share were EUR 2.05 (1.67), of which EUR 0.38 (-0.07) per share were related to items affecting comparability.

Financial position and cash flow

Cash flow

In 2020, net cash from operating activities increased by EUR 980 million to EUR 2,555 (1,575) million.

Net cash used in investing activities was EUR 2,140 (-118) million. Capital expenditure increased by EUR 406 million to EUR 1,101 (695) million. Acquisition of shares, net of liquid funds, amounted to EUR 1,801 million, mainly from acquiring shares in Uniper. Divestment of shares, mainly from the divestments of the Joensuu and Järvenpää district heating operations, amounted to EUR 1,244 million. Change in margin receivables was EUR -522 (403) million. The non-cash collateral arrangement to release pledged cash from the Nordic power exchange in the first quarter of 2019 had a one-time positive impact of EUR 310 million presented in ‘Change in other interest-bearing receivables’. Operational cash flow and divestments more than covered the investments resulting in cash flow before financing activities of EUR 415 (1,693) million.

Proceeds from long-term liabilities were EUR 2,569 (2,805) million. On 24 March 2020, Fortum drew a term loan of EUR 2,000 million and on 6 May 2020 a bridge loan of EUR 300 million to finance the acquisition of Uniper shares. In 2019, Fortum issued new bonds totalling EUR 2.5 billion under the Euro Medium Term Note (EMTN) programme. The total payments of long-term liabilities were EUR 507 (2,567) million including repayment of bridge loan. Change in margin liabilities was EUR -623 (-47) million. The net increase in liquid funds was EUR 920 (806) million.

Assets

At the end of 2020, total assets amounted to EUR 57,810 (23,364) million. The increase mainly relates to the consolidation of Uniper. Liquid funds at the end of the period were EUR 2,308 (1,433) million.

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Equity

Equity attributable to owners of the parent company totalled EUR 12,953 (12,982) million. The change was mainly related to the net profit for the period of EUR 1,823 million, the dividend payment of EUR 977 million and the negative translation differences of EUR 492 million.

Financing

In 2020, Fortum updated the definition of net debt and started to use financial net debt and adjusted net debt when following indebtedness of the Group. At the end of 2020, financial net debt was EUR 7,023 (4,833) million and adjusted net debt EUR 9,784 (4,978) million. Net debt according to the old definition was EUR 5,260 million at the end of 2019 (} Note 26).

At the end of 2020, the Group’s liquid funds totalled EUR 2,308 (1,433) million. Liquid funds include EUR 289 million held by Uniper.

At the end of 2020, Fortum had undrawn committed credit facilities amounting to EUR 5,000 million. The undrawn facilities include a EUR 1,450 million revolving credit facility, maturing in November 2021 (with an option to extend the maturity by one year), a EUR 1,750 million revolving credit facility maturing in June 2023, and Uniper’s revolving credit facility of EUR 1,800 million, which matures in September 2025. In addition to the revolving credit facilities, Fortum has EUR 100 million of committed overdraft limits that are valid until further notice.

In January 2020 Fortum cancelled EUR 3,000 million, in June 2020 EUR 1,200 million and in August 350 million of facilities and the revolving credit facility maturing in November 2021. The facilities were for purchase of Uniper shares and liquidity purposes.

In March 2020, Fortum drew a term loan of EUR 2,000 million, maturing on 31 October 2022, under these facilities for the acquisition of Uniper shares. In April 2020, Fortum signed a ten-year EUR 70 million bilateral loan agreement. In May 2020, under the facilities, Fortum drew a bridge loan of EUR 300 million, which was prepaid in June 2020. On 21 December 2020, Fortum drew a ten-year SEK 814 million (EUR 80 million) bilateral loan.

In March 2020, Standard & Poor’s resolved its CreditWatch Negative placement by affirming Fortum’s BBB long-term rating, with a Negative Outlook. The short-term rating is at level A 2. In April 2020, Fitch removed Fortum’s Rating Watch Negative placement by affirming Fortum’s BBB long-term rating, with a Negative Outlook.

In March 2020, Standard & Poor’s also resolved the CreditWatch Negative on Uniper’s rating by affirming Uniper’s BBB rating, with a Negative Outlook.

Operating and regulatory environment

European power markets

According to preliminary statistics, electricity consumption in the Nordic countries was 383 (394) TWh during 2020. The lower power demand in the Nordics was mainly related to mild weather. Lower industrial demand in Finland and Sweden also contributed to the decline in power demand.

Measures taken to prevent the spread of Covid-19 impacted power demand in various European countries, especially during the second quarter of 2020. However, the European power demand recovered significantly in the third quarter according to preliminary statistics, demand in the fourth quarter in central western Europe (Germany, France, Austria, Switzerland, Belgium, and the Netherlands) was just 1% below the 2019 level. As a whole, consumption in 2020 in central western Europe saw a 4% decline year-on-year.

In the long term, electricity is expected to continue to gain a higher share of total energy consumption. The growth rate, however, will largely be determined by the macroeconomic development in Europe and the Nordic countries. In the longer term, the rate of electrification of the industrial, transportation, and heating sectors is a key element determining the growth in electricity consumption.

At the beginning of 2020, the Nordic water reservoirs were at 79 TWh, which is 5 TWh lower than the long-term average and 5 TWh higher than one year earlier. The rainy and mild winter led to a rapid increase of the Nordic water reservoirs during the first quarter. Spring was fairly cold and the spring inflows were significantly delayed, but once melting started, the very large snow pack resulted in the spring inflows bringing water levels close to the historical maximum levels in most Nordic water reservoirs. At the end of 2020, the reservoirs were at 105 TWh, which is 21 TWh above the long-term average and 26 TWh higher than one year earlier.

During 2020, the average system spot price in Nord Pool was EUR 10.9 (38.9) per MWh. The average area price in Finland was EUR 28.0 (44.0) per MWh, in the SE3-area in Sweden (Stockholm) EUR 21.2 (38.4) per MWh, and in the SE2-area in Sweden (Sundsvall) EUR 14.4 (37.9) per MWh. The very large hydrological surplus in many hydro reservoirs was the main reason for the low Nordic spot prices during 2020.

In Germany, the average spot price in 2020 was EUR 30.5 (37.7) per MWh.

At the end of February 2021, the Nordic system electricity forward price on Nasdaq Commodities for the remainder of 2021 was around EUR 26 per MWh and for 2022 equally around EUR 26 per MWh. The Nordic water reservoirs were about 9 TWh above the long-term average and 1 TWh lower than one year earlier. The German electricity forward price for the remainder of 2021 was around EUR 48 per MWh and for 2022 around EUR 52 per MWh.

Commodity markets

Gas demand in central western Europe was 2,119 (2,184) TWh during 2020. The central western European gas storage levels decreased from 539 TWh at the beginning of the year to 439 TWh at the end of the year, which is 8 TWh higher than the five-year average (2015–2019).

The average gas spot price (TTF) during 2020 was EUR 9.5 (13.5) per MWh. The 2021 forward price increased from EUR 16.4 per MWh at the beginning of the year to EUR 17.1 per MWh at the end of the year.

During 2020, European Emission Allowances (EUA) traded in the range of EUR 14-33 per tonne. The price increased from EUR 24.6 per tonne at the beginning of the year to EUR 32.7 per tonne at the end of the year.

The forward quotation for coal (ICE Rotterdam) for 2021 increased from USD 62.0 per tonne at the beginning of the year to USD 68.9 per tonne at the end of the year.

At the end of February 2021, the TTF forward price for gas for the remainder of 2021 was EUR 16.4 per MWh and for 2022 EUR 16.6 per MWh. The forward quotation for EUAs for 2021 was at the level of EUR 37 per tonne. The forward price for coal (ICE Rotterdam) for the remainder of 2021 was USD 67 per tonne.

Russian market

Fortum’s Russia division operates thermal power plants mainly in the Tyumen and Khanty-Mansiysk area of western Siberia, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area of the Urals, which is dominated by the metal industry. Uniper’s Russian subsidiary Unipro PJSC operates in the Smolensk, Moscow, Sverdlovsk, and Krasnoyarsk regions, as well as in the Khanty-Mansiysk Autonomous District.

The Russian market is divided into two price zones; Fortum’s Russia division operates in the first price zone (European and Urals part of Russia), while Uniper operates in both the first and second price zones.

In 2020, the average electricity spot price, excluding capacity prices, was RUB 1,220 (1,289) per MWh in the first price zone and by RUB 873 (892) in the second price zone. The spot price in the Urals hub was RUB 1,068 (1,117) per MWh.

The Russian Government increased the gas price by 1.4% in July 2019 and by 3% in August 2020.

In Russia, capacity payments based on CSA contracts are a key driver for earnings growth, as CSA payments are considerably higher than for capacities selected in Competitive Capacity Selection (CCS) auctions. Currently, Fortum’s Russia segment’s CSA capacity amounts to 2,368 MW, including 70 MW of solar and wind capacity. In addition to this, Fortum’s joint ventures for renewable power generation have 600 MW of operational wind capacity, as well as 495 MW under construction and 728 MW under development. Correspondingly, Uniper’s CSA capacity amounts to 2,455 MW.

In addition, thermal power plants are entitled to clearly higher CSA payments starting approximately six years after commissioning (see tables below). In 2021, an increase in CSA payments is expected for three units of Fortum’s Russia segment’s generation fleet and one unit of Fortum’s Uniper segment’s generation fleet. After the CSA period ends, units can receive CCS payments from CCS auctions. See the corresponding changes in the table below:

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1)Wind CSA.

2)Solar CSA.

Fortum’s Russia division’s generation capacity not receiving CSA payments, totalling 2,560 MW, is allowed to participate in the annual CCS auctions. Uniper’s generation capacities allowed to participate in the CCS auction totalled 8,790 MW. The next CCS auction, for the year 2027, is expected to be held in November 2021.

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In June 2019, Fortum won the right to build 5.6 MW of solar capacity in a CSA auction, in addition to the 110 MW won in June 2018. The power plants will receive a guaranteed CSA price for a period of 15 years, corresponding to approximately RUB 14,000 per MWh and RUB 15,000 per MWh, respectively. These plants are to be commissioned during 2021-2022.

In June 2018, the Fortum-Rusnano wind investment fund won the right to build 823 MW of wind capacity in a CSA auction. The wind parks were to be commissioned during 2019-2023 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000-8,000 per MWh for a period of 15 years.

In June 2017, the Fortum-Rusnano wind investment fund won the right to build 1,000 MW of wind capacity in a CSA auction. The wind parks were to be commissioned during 2018-2022 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000-9,000 per MWh for a period of 15 years.

Power consumption

1)Reported from 2019 onwards.

Average prices

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Water reservoirs

Export/import

Regulatory environment

EU legislation under preparation to implement the revised 2030 climate target

On 11 December, the European Council adopted conclusions on the new 2030 climate target. The Council’s decision is in line with the Commission’s original proposal to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 level, increasing the ambition level from the current reduction target of 40%.

The new target is expected to be officially approved as part of the adoption of the European Climate Law during the first quarter of 2021 in the negotiations between the Council, the Parliament, and the Commission. The Parliament has called for a 60% emission reduction target.

Legislative proposals to implement the new target are under preparation and expected to be published in mid-2021. Revisions will be made e.g. to the directives on Emissions Trading, Renewable Energy, and Energy Efficiency. In early 2021, public consultations on the various legislative files were carried out, and Fortum has responded to all of them. The Commission is also working on extensive impact assessments for each legislative file.

The key issue that will potentially have a large effect on the ETS and carbon price is the allocation of the new target between the ETS and non-ETS sectors. In Fortum’s view, the ETS sector should take the main responsibility for the more ambitious target.

EU Commission’s delegated act on EU taxonomy regulation delayed

The consultation on the Commission’s draft delegated act on climate adaptation and mitigation ended in December, with an unprecedented bulk of 46,000 responses. The act has turned even more technology-oriented than expected, raising challenges for essential power technologies such as hydro, nuclear, natural gas, and also hydrogen. The proposed criteria are of significant concern for the largely CO₂-free Nordic power generation, as hydro and nuclear might not be taxonomy-aligned.

Based on a coalition of like-minded companies and associations, Fortum has placed significant pressure on the Commission to review the delegated act to comply with the principle of technology neutrality and EU sectorial legislation.

According to the EU taxonomy regulation, the final climate change delegated acts should have been adopted by the end of 2020, but the adoption is now due during the second half of April 2021. The separate environmental assessment of nuclear should be finalised mid of this year and supporting member states stressed the need to include nuclear in the second wave of delegated acts due for adoption by year end.

Fortum firmly supports the objective of transitioning the European economy towards carbon neutrality by mid-century. However, we caution against arbitrarily ruling out 40% of European net electricity generation and two thirds of European CO₂-free electricity generation by excluding hydro and nuclear from taxonomy-aligned operations.

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Last minute Brexit deal secured

On 24 December, the EU and the UK agreed on a broad trade and cooperation agreement only one week before the end of the Brexit transition period. The agreement provisionally entered into force on 1 January, and the ratification process is to be concluded during the first quarter of 2021.

The scope of the agreement is more limited compared to the EU internal market, but it goes beyond several other EU trade agreements. Provisions in the Energy Chapter aim to enable energy trading and investments between the parties as well as to support security of supply and ecological sustainability. The terminology and definitions are aligned with the EU legislation. The UK will maintain its earlier commitment to the energy and climate targets.

From the beginning of 2021, the UK needs to establish its own carbon pricing system covering emissions from energy production, industry, and air traffic. The aim is to assess the possibilities to link the UK trading system to the EU ETS while maintaining the integrity of both systems.

Most importantly a hard Brexit was avoided and there is a deal, but Fortum regrets losing a firm supporter of the strong climate policy and the free market. No major changes in the energy market are envisaged but the linkage of the UK to the EU ETS is still open.

Segment reviews

Business model

Fortum is a European energy company with activities in more than 40 countries. We provide our customers with electricity, gas, heating and cooling as well as smart solutions to improve resource efficiency. Together with our subsidiary Uniper, we are the third largest producer of CO₂-free electricity in Europe. Fortum is the largest electricity retailer in the Nordic countries and one of the leading heat producers globally.

Fortum’s organisation consists of four business divisions: Generation, Russia, City Solutions, and Consumer Solutions, and additionally Uniper as a segment. Fortum employs a diverse team of almost 20,000 energy-sector professionals.

Generation

Generation is responsible for Nordic power generation. The division comprises nuclear, hydro, wind, and thermal power generation, as well as power portfolio optimisation, trading, industrial intelligence, and global nuclear services. The segment does not include the Nordic hydro and nuclear power generation or the trading activities of Uniper. As of 31 March 2020, the segment includes Generation’s proportionate share of OKG (} Note 1).

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1)The Nordic power sales income and volume includes hydro and nuclear generation, excluding minorities. It does not include thermal generation, minorities, customer business or other purchases.

2)Power plants are often built jointly with other power producers, and owners purchase electricity at cost including interest cost and production taxes. The share of profit/loss is mainly IFRS adjustments (e.g. accounting for nuclear-related assets and liabilities) and depreciations on fair-value adjustments from historical acquisitions (} Note 18).

The Generation segment’s total power generation in the Nordic countries decreased, mainly due to longer planned and some unplanned nuclear outages, the effect of which was almost offset by clearly higher hydro volumes. The CO₂ free generation accounted for 100% (99%) of the total power generation.

The achieved power price in the Generation segment decreased by EUR 2.0 per MWh, down 5%. Supported by the fairly high hedge price and hedge level, the decline was minor compared to the 44% drop in spot power prices in Fortum’s power generation areas.

Comparable operating profit decreased by 9%. The negative impact of the lower achieved power price and lower nuclear volumes was partly offset by the higher hydro volumes. Hydro volumes were somewhat above the long term average annual level. Comparable operating profit was also positively affected by EUR 15 million, due to the consolidation of the Generation segment’s proportionate share of OKG (} Note 1).

Operating profit was affected by EUR -11 (14) million of items affecting comparability (see ‘Changes in reporting’ and } Note 6).

The share of profits of associates and joint ventures totalled EUR 29 (10) million (} Note 18).

The Swedish hydropower real-estate tax decreased from 1.0% to 0.5% in January 2020. In 2019, the tax amounted to EUR 40 million and in 2020 it was EUR 25 million.

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Power generation by source

Nordic sales volume

1)The Nordic power sales income and volume includes hydro and nuclear generation, excluding minorities. It does not include thermal generation, minorities, customer business or other purchases.

Sales price

1)Generation’s Nordic power price includes hydro and nuclear generation, excluding minorities. It does not include thermal generation, minorities, customer business or other purchases.

Russia

The Russia segment comprises power and heat generation and sales in Russia. The segment also includes Fortum’s joint ventures for building and operating approximately 2 GW of renewable power generation and for power and heat sales, as well as Fortum’s more than 29% holding in TGC 1. These joint ventures and associated company are accounted for using the equity method. The segment does not include Uniper’s Russian subsidiary Unipro.

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Power generation volumes declined by 8% and heat production volumes declined by 5%. The load factor was among the highest in the Russian Federation according to market data published by the Wholesale Market Trading Administrator. Reduced oil production and lower overall economic activity following the OPEC+ decisions and Covid-19 restrictions had an adverse effect on power demand especially in the first nine months of the year. Heat production volumes were negatively affected especially by the warmer weather in the Chelyabinsk and Tyumen areas during the first three quarters.

Sales decreased by 13%, EUR 142 million, due to the weaker Russian rouble and lower power prices and volumes. The effect of the change in the Russian rouble exchange rate was EUR -127 million.

Comparable operating profit decreased by 21%, EUR 65 million, mainly due to the weaker Russian rouble, lower power margins and volumes, as well as lower CSA payments, partly offset by higher heat tariffs. To counter the effects of Covid-19 focus was put on cost efficiency and securing good availability. The effect of the change in the Russian rouble exchange rate was EUR -34 million. The decline in CSA payments is a consequence of the lower Government bond yields.

The share of profits of associates and joint ventures totalled EUR 47 (59) million, including the lower share of profits of EUR 24 (54) million from TGC-1 and the share of profits EUR 18 (2) million from the joint ventures for renewables power generation (} Note 18).

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Key electricity, capacity and gas prices for Fortum Russia

1)Including capacity receiving payments under "forced mode status", regulated tariffs, and bilateral agreements.

2)Capacity prices paid for the capacity volumes, excluding unplanned outages, repairs, and own consumption.

3)Translated using the average exchange rate.

Russian power generation and heat production

City Solutions

City Solutions is responsible for sustainable solutions for urban areas. The segment comprises heating, cooling, waste-to-energy, and other circular economy solutions, as well as solar power generation, services, and development of new biomass-based businesses. The business operations are located in the Nordics, the Baltic countries, Poland, and India. The segment also includes Fortum’s 50% holding in Stockholm Exergi, which is a joint venture and is accounted for using the equity method. The segment does not include the operations of Fortum’s subsidiary Uniper.

1)Waste treatment sales comprise gate fees at waste treatment plants and environmental construction services.

2)Other sales comprise mainly operation and maintenance services and fuel sales.

Heat sales volumes decreased by 11% as temperatures were clearly higher than normal throughout the year, especially in the first quarter of 2020. The decline in the power sales volumes and part of the lower heat sales volumes were related to the divestments of the Joensuu and Järvenpää district heating businesses.

Comparable operating profit decreased by 61%. The main reasons for the clearly weaker profitability were lower heat sales volumes, lower power prices, and lower Norwegian heat prices, as well as weaker performance in the recycling and waste business. In Norway, the district heat pricing is linked to the power price development, which in this market environment had in a clear negative impact on the heat prices. Furthermore, the results declined due to positive one-time items of EUR 16 million in the Finnish district heating business in the fourth quarter of 2019. In addition, the results were negatively impacted by structural changes, the most significant of these being the divestments of the Joensuu and Järvenpää district heating businesses with a EUR 14 million impact. The Pavagada 2 solar park, commissioned in August 2019, contributed positively to the result. The Covid-19 pandemic had adverse effects mainly on the recycling and waste business, negatively affecting the results of City Solutions.

Operating profit was affected by EUR 728 (7) million of items affecting comparability, mainly the tax-exempt capital gains of EUR 431 million and EUR 291 million, respectively, from the divestments of the Joensuu and Järvenpää district heating businesses (} Note 6).

The share of profits of associates and joint ventures totalled EUR 57 (37) million (} Note 18), EUR 46 (24) million of which is related to the share of profit of Stockholm Exergi.

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The cost synergies from integrating Fortum Oslo Varme’s business operations materialised gradually starting in 2019, and annual synergies in line with the target level of EUR 5-10 million were achieved by the end of 2020.

On 20 December 2019, Fortum signed an agreement to sell its district heating business in Joensuu, Finland, to Savon Voima Oyj. The total consideration on a debt- and cash-free basis was approximately EUR 530 million, and the cash was received at the completion of the divestment on 10 January 2020. Fortum recorded a tax-exempt capital gain of EUR 431 million in the City Solutions segment’s first-quarter 2020 results.

On 3 July 2020, Fortum announced it had agreed to sell the district heating business in Järvenpää, Finland for approximately EUR 375 million. In August, Fortum closed the transaction and recorded a tax-exempt capital gain of EUR 291 million in the City Solutions segment’s third-quarter 2020 results.

Heat sales by country

Power sales by country

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Consumer Solutions

Consumer Solutions is responsible for the electricity and gas retail businesses in the Nordics, Poland, and Spain, including the customer service and invoicing businesses. Fortum is the largest electricity retail business in the Nordics, with approximately 2.4 million customers across different brands in Finland, Sweden, Norway, Poland, and Spain. The business provides electricity as well as related value-added and digital services.

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The electricity sales volumes decreased by 5%, mainly due to warmer weather in the Nordics in the first quarter. Total sales revenue decreased by 31%. The gas volume increased by 20%, mainly due to an increase of enterprise customers in Poland. The Covid-19 pandemic has increased market uncertainty especially in the small and medium-sized enterprises’ sector; so far, however, no major negative implications on the business, such as credit losses, have materialised. Despite these uncertainties, Consumer Solutions’ competitiveness continued to strengthen, and the customer recommendation and employee engagement indices remained at all-time high levels.

Comparable operating profit continued to improve and increased by 14%, mainly driven by higher margins from value-added services and higher sales margins. The higher margins are a result of active development of the service offering following the Hafslund integration and subsequent development of the business.

Operating profit was affected by EUR 39 (-59) million of items affecting comparability, due to the fair value change of non-hedge-accounted derivatives (} Note 6).

Consumer Solutions offers various services enabling our customers to reduce their carbon footprint. Positive progress has been achieved among all measured sustainability categories during 2020, with increased CO₂-free electricity volumes as the main contributor.