Annual Report 2013 Table of contents Table of contents Table of contents Annual Review 3 Financial Statements 86 CEO's review 4 Consolidated financial statements 86 Fortum in 2013 7 Operations and market areas 7 Group business structure 9 Highlights of the year 12 Parent company financial statements 198 Proposal for the distribution of earnings 212 Auditor's report 212 Quarterly financial information 213 Year 2013 in figures 14 Investor information 215 Strategy 21 Governance 217 Strategy overview 21 Corporate Governance Statement 218 Future energy system 22 Governing bodies of Fortum 218 Core areas of the strategy 23 Internal control and risk management systems in relation to Strategy realisation 24 financial reporting 225 Research and development supporting business 24 Remuneration 228 Market Development 25 Short-term incentives 228 European market development 26 Long-term incentives 228 Market development in Russia 30 Compensation for the President and CEO and the Fortum Carbon market development 31 Financials 33 Operating and financial review 34 Management Team 229 Pensions 230 Remuneration of Board of Directors 231 Board of Directors 232 Financial performance and position 34 Risk management 58 The Fortum share and shareholders 65 Group Management 236 Contact information 241 Key figures 72 Legal notice 241 Financial key figures 72 Share key figures 75 Operational key figures, volumes 77 Operational key figures, segments 79 Definitions of key figures 83 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 2 Annual Report 2013 Annual Review Fortum's Annual Report 2013 Fortum's Annual Report 2013 Fortum is an energy company highly committed to sustainability. Catering to the versatile needs of our customers, we generate, distribute and sell electricity and heat and offer related expert services. Annual Review Annual Review In 2013, we implemented our strategy by creating energy that improves life for present and future generations. Five new production facilities were inaugurated in Northern Europe and two in Russia. Our efficiency programme increasing flexibility and securing competitiveness progressed as planned. The assessment of our electricity distribution business was completed, and we announced that the Finnish networks will be sold. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 3 Annual Report 2013 CEO's review CEO’s review CEO’s review In 2013, the economic recession in Europe and uncertainty over how long it would persist influenced energy prices and demand. The downturn also slowed economic growth in Russia. In the recent years, the inflow of heavily subsidised renewable energy with grid priority has changed the operating environment in Europe significantly. Market-driven energy production is struggling with weakened profitability, reducing the ability of companies to invest. Furthermore, the rapid growth in distributed production poses big challenges for market functionality and security of supply. Wholesale prices decreased as Wholesale prices decreased as consumer prices rose consumer prices rose The rapid entry of shale gas into the US market has increased the use of gas, improved the country’s energy self- sufficiency and reduced the consumption of coal. In the meanwhile, Europe has received a steady stream of more economically priced coal and its use has increased. This trend, coupled with the rock-bottom prices of emission allowances and more expensive gas has eroded the profitability of energy produced with natural gas in Europe. Brand- new gas-fired power plants have been shut down due to unprofitability. Despite the lower wholesale prices, subsidies to renewable energy have significantly hiked the consumers' electricity bills. Compared to coal-fired power generation, natural gas-based power has a much lower environmental impact. Power from natural gas is also necessary for balancing the fluctuation of renewable energy production in areas where hydropower is unavailable. In fact, discussions on the introduction of capacity payments to support traditional energy production have taken place in several European countries during the year. All the while, governments are already spending considerable sums on subsidising energy production. Making carbon dioxide Making carbon dioxide emission reductions the emission reductions the energy policy’s main goal energy policy’s main goal Debate on the direction of Europe’s energy and climate policy remained lively throughout 2013. An increasingly topical issue was how to maintain Europe’s competitiveness amidst rising consumer prices. An increasingly topical issue in the debate on the direction of Europe's energy and climate policy was how to maintain competitiveness amidst rising consumer prices. At the beginning of 2014, the European Commission published its proposal on Europe’s climate and energy policy for 2020 to 2030. The proposal placed a sharper focus on reducing greenhouse gas emissions, recommending a target of a 40 per cent reduction in line with the commonly agreed targets set by the EU for 2050. The Commission also proposed getting rid of the binding, national renewable energy targets and setting a binding, EU-level target to increase the share of renewable energy to 27 per cent. While this is a step in the right direction, it still overlaps with the carbon This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 4 Annual Report 2013 CEO's review dioxide emissions reduction target. Overlapping targets and steering mechanisms increase the energy and climate policy price tag and, ultimately, the consumers’ electricity bill. A positive development in the Commission’s proposal was a market stability reserve mechanism for emissions trading. The mechanism may be useful in addressing the central weakness of the emissions trading scheme, which is its inability to cope with strong fluctuations in demand or oversupply. Advance agreement on the arrangements controlling the scheme will reduce political risk and improve the predictability required for energy sector investments. For Europe to remain competitive, it is essential that efforts to create an integrated electricity market continue. Shifting the energy policy’s focus from national interests to common energy production solutions that leverage the region’s strengths will eventually provide the most sustainable and cost- effective results for consumers, industry and the climate. In an integrated European electricity market the use of production capacity will be optimised and investment signals market-driven. Increased Increased flexiblility in 2013 speed andand flexiblility in 2013 speed Despite a challenging operating environment, 2013 was a satisfactory year for Fortum. Although our comparable operating profit decreased, the operative cash flow was very strong, and we continued to implement our investment projects in Europe and Russia with determination. In 2012, we set a goal for Fortum’s efficiency programme, which was to improve the company’s speed and flexibility by strengthening cash flow by at least one billion euros in total by the end of 2014. The programme has progressed as planned, lightening our cost structure throughout our operating areas. Furthermore, we have divested non-core assets and improved our working capital efficiency. Towards emissions-free energy Towards emissions-free energy production in line with the production in line with the strategy strategy Regardless of the economic recession, steps must be taken to mitigate climate change. The latest report by the Intergovernmental Panel on Climate Change (IPCC) sent a strong scientific message to decision-makers: Emissions must be clearly reduced before 2020 and must be cut in half by 2050. The transition to a Solar Economy where energy production is based on renewable energy sources may be gradual, but it is inevitable. The cornerstones of Fortum's strategy are our strong expertise in CO2-free hydro and nuclear power production, our efficient combined heat and power (CHP) production, and know-how in operating in the energy markets. Alongside electricity production based on renewable energy sources, our strength, the energy-efficient CHP production, flexibly responds to fluxuating demand. In 2013, we inaugurated five new production facilities in Europe. New waste-fired CHP plants were inaugurated in Klaipeda, Lithuania, and Brista, Sweden, and new biomass-fuelled CHP plants in Jelgava, Latvia, and Järvenpää, Finland. Additionally, bio-oil production using pyrolysis technology commenced at Fortum’s Joensuu CHP plant. This unique technology may offer significant future business potential, for example, in the area of traffic fuels. In fact, the Joensuu project is the first of its kind in the world and was recognised for innovation at the Global District Energy Climate Awards in autumn 2013. The transition to a Solar Economy where energy production is based on renewable energy sources may be gradual, but it is inevitable. In addition to increasing CHP capacity, we also continued our annual hydropower refurbishments and strengthened the prerequisites for nuclear power production particularly at our co-owned power plants in Sweden. Fortum's fully-owned Loviisa nuclear power plant in Finland had once again a good production year. The plant’s load factor of 92.5% was excellent by international standards. We have also established our position in growth markets through our expert services business during the year. Fortum's Russian investment Fortum's Russian investment programme progressed to the programme progressed to the final large units final large units In Russia, our investment programme is progressing, and in 2013 two new power plant units were commissioned in Nyagan, in Western Siberia. Out of the programme's eight production units, the three last, large ones are under construction. Our new gas- fired power plants in Russia are very energy- efficient. The weakened industrial and economic growth indicators reported in Russia at the end of the year indicate that not even this market area is immune to the uncertainty in the global economy. The Russian government decided to postpone and reduce the previously planned annual gas price increases in its domestic markets. As a result, the new and efficient plants will not have as significant a competitive advantage as previously estimated. Due to this development and the weakened exchange rate for the rouble, it will be more challenging to achieve an operating profit level (EBIT) of EUR 500 million run rate in 2015. However, we will not abandon this target. Instead, we will strive to actively develop our operations and find ways to reach it. Russia will be an important growth area for Fortum in the upcoming years. The reform of the Russian wholesale market has proceeded completely according to plan, and we expect the same consistent progress in the reform of the heating sector as it gets underway. Russia has the potential to significantly increase the efficiency of its heat production, a fact that offers interesting prospects for Fortum’s heat business and CHP expertise. Next generation solutions Next generation solutions Along with emissions-free hydro and nuclear power and resource-efficient CHP production, we are developing the use of waste and biomass-based fuels as well as researching opportunities in solar and wave power. These are all building blocks of the future energy system based on the sun's energy. In India, we invested in a 5-megawatt solar power plant in order to gain experience in solar energy technologies and to enhance our understanding of the country’s electricity market. If the operating requisites develop positively, I believe that in regions that are favourable for production, unsubsidised solar This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 5 Annual Report 2013 Fortum in 2013 energy will be able to compete with other energy sources even within this decade. We are also continuously developing new tools and services to help our business and private customers monitor and lower their energy consumption. A smart grid and products that complement it, such as Fortum Fiksu, play an increasingly important role in the interaction between the energy producer and the consumer. We are also developing open, two-way solutions that enable customers to sell the surplus electricity or heat they produce to Fortum. In 2013, we inaugurated five new production facilities in Europe. Our concerted efforts to cater to the evolving needs of our customer are also reflected in our annual stakeholder satisfaction survey results. For several consecutives years, customers have indicated their increasing satisfaction with Fortum and in 2013, the survey results improved again. At the same time, the number of customers we serve has increased. At the end of 2013, Fortum had more retail customers in the Nordic countries than ever before. Electricity distribution Electricity distribution business in Finland to be business in Finland to be divested divested In December 2013, we completed the assessment of future alternatives for our electricity distribution business. After a thorough analysis, we concluded that divesting the electricity distribution business is the best alternative for Fortum’s shareholders and for the business itself. The decision gives Fortum the opportunity to focus on efficient and low-carbon electricity and heat production as well as on its activities in the integrating energy markets. It also provides the company with strategic freedom and increases shareholder value. I firmly believe that it is also a good solution from the perspective of our distribution customers and society at large because it will enable the development of the network business purely from its own standpoint. Accordingly, we signed an agreement to sell the electricity distribution business in Finland to Suomi Power Networks Oy in December. Its shareholders are a consortium of the Finnish pension funds Keva and LocalTapiola Pension and the international infrastructure investors First State Investments and Borealis Infrastructure. We expect to finalise the sale during the first quarter of 2014. The decision has no effect on our electricity retail customers to whom will continue to offer smart products and services that improve the efficiency of their energy consumption and decrease their costs. Our new products, like solar panels and heating solutions that take advantage of the power market's lowest hourly prices, have been well received by customers. I am very pleased with the continuous improvement in customer satisfaction in all our divisions. Fortum’s reputation among other key groups also continued to strengthen. Sustainability as an integral Sustainability as an integral part of strategy part of strategy Sustainability is a key success factor for Fortum, and we are committed to the principles of the UN Global Compact. We adopted new sustainability indicators at the beginning of 2013 and have met the customer satisfaction and reputation targets we set for them. However, because of the heavy storms at the end of the year, we did not reach our target with regard to the security of supply for electricity. The average outage time per customer was 220 minutes during the entire year. We will persist in our efforts to achieve our environmental targets. Fortum gained significant recognition for its work towards emissions-free energy production and climate change mitigation in autumn 2013 when the Carbon Disclosure Project (CDP), which represents institutional investors, ranked us as the best company in the Nordic Climate Leadership Index with a maximum score of one hundred points. The occupational safety of Fortum’s own personnel further improved in 2013 and the number of injuries resulting in absences reached an all-time low. On the other hand, there is room for improvement in the development of the occupational safety culture of our contractors. In 2013, an accident resulted in the death of a contractor employee at our construction site in Russia and in February 2014, an accident took the life of a contractor employee working on our distribution network in Sweden. I would like to express my sincere condolences to the families and colleagues of the victims. Our goal is to avoid all serious accidents. For this reason, improving occupational safety must become integral to the daily routines of every Fortum employee. Ready to seize opportunities in Ready to seize opportunities in the changing energy markets the changing energy markets In difficult times it is good to be at the helm of a company that can boldly shape its own future. We will continue our efficiency programme as planned, enhance our flexibility, and decisively and systematically build new business opportunities. Only a company on stable financial footing such as Fortum can leverage the opportunities presented by the rapidly changing sector. We will carefully manage our current business and build the future in line with our strategy. In difficult times it is good to be at the helm of a company that can boldly shape its own future. To conclude, I extend my sincerest gratitude to Fortum’s personnel in all our operating countries for the work they have done towards achieving our shared goals in the past year. I also wish to acknowledge Sari Baldauf, our Chairman of the Board, who for a period of months assumed a greater responsibility in advancing Fortum’s interests while I was on sick leave. I also thank our CFO Markus Rauramo, who successfully served as my deputy. And, finally, I would like to thank our customers and our broadening shareholder roster for your trust. We will continue to work to increase the company’s value also in 2014. Tapio Kuula This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 6 Annual Report 2013 Fortum in 2013 Operations and market areas Operations and market areas Finland Finland Sweden Sweden Russia Russia 4,528 MW Power generation, capacity 5,856 MW Power generation, capacity 4,250 MW Power generation, capacity 1,915 MW Heat production, capacity 3,626 MW Heat production, capacity 13,466 MW Heat production, capacity 642,000 Distribution, customers 903,000 Distribution, customers 16% 2,477 100% 70% 43% Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 12% 1,939 100% 64% 36% Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) - - 4,162 100% 100% 2% Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 3.5 Mt CO2 emissions 0.9 Mt CO2 emissions 15.3 Mt CO2 emissions This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 7 Annual Report 2013 Fortum in 2013 Poland Poland Lithuania Lithuania Latvia Latvia 258 MW Power generation, capacity 1,310 MW Heat production, capacity - - 636 100% 100% 100% Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 18 MW 95 MW - - 103 100% 100% 100% Power generation, capacity 26 MW Power generation, capacity Heat production, capacity 236 MW Heat production, capacity Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) - - 86 95% 95% 95% Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 0.9 Mt CO2 emissions 0.05 Mt CO2 emissions 0.05 Mt CO2 emissions Norway Norway Great Britain Great Britain Estonia Estonia - 210 MW 103,000 4% 141 100% 0% 100% Power generation, capacity Heat production, capacity Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 140 MW 250 MW - - 50 100% 100% 100% Power generation, capacity 48 MW Power generation, capacity Heat production, capacity 551 MW Heat production, capacity Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) - - 210 100% 100% 100% Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 0.005 Mt CO2 emissions 0.6 Mt CO2 emissions 0.1 Mt CO2 emissions 1) ISO 14001 is a standard for environmental management systems 2) OHSAS 18001 is a standard for occupational health and safety management systems 3) ISO 9001 is a standard for quality management systems India India 5 MW Power generation, capacity - - - 22 0% 0% 0% Heat production, capacity Distribution, customers Share of retail customers Employees 31 Dec 2013 ISO 14001 certified 1) OHSAS 18001 certified 2) ISO 9001 certified 3) 0 Mt CO2 emissions This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 8 Annual Report 2013 Fortum in 2013 Group business structure Group business structure (on 31 Decmber 2013) Division Power Heat Russia Electricity Solutions and Distribution (ESD) Business The Division consists of Fortum's power generation, power trading and power capacity development as well as expert services for power and heat producers. The 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 Division consists of power and heat generation and sales in Russia. It includes OAO Fortum and Fortum's over 25% holding in TGC-1. The Division is responsible for Fortum's electricity sales and distribution activities. The division consists of two business areas: Distribution and Electricity Sales. Finland, Sweden, Norway, Poland, Lithuania, Latvia, Estonia, India 18 CHP plants and hundreds of heat boilers. A solar power plant in India. Heat supply to one million homes in the Nordic and Baltic countries and Poland. Distribution Electricity Sales Finland, Sweden and Norway Finland, Sweden and Norway 1.2 million customers. 160,000 km of distribution lines, 53,500 substations, three operation centres, and 1.6 million customers and meters. Russia Russia Eight CHP plants, one condensing power plant and several heat boilers. ~500 km trunk networks as well as heat supply to two million residents. Includes >25% share (giving blocking minority) in TGC-1 in north-western Russia. Reporting segment Power Heat Geographic presence, production and distribution assets and/or customer base Production in Finland, Sweden and Great Britain. Expert services worldwide. In Finland and Sweden full or co- ownership in 159 hydropower plants, one co- owned and two fully-owned condensing power plants and ownership in three wind power companies. Two fully-owned nuclear reactors and eight co-owned nuclear power plant units. One CHP plant in Great Britain. Third largest power producer in the Nordic countries, among the 15 Market position Leading heat supplier in the Nordic and Baltic countries and Poland. Sizable power and heat utility in Western Siberia and the Urals in Russia. Largest electricity distribution operator in the Nordic countries. Second largest electricity sales operator and a leading seller of eco-labelled and This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 9 Annual Report 2013 Fortum in 2013 Reporting segment Power Heat Russia Distribution Electricity Sales largest in Europe and Russia. Production capacity Volumes Power 9,475 MW Heat 250 MW Power 1,398 MW Heat 7,943 MW Power 4,250 MW Heat 13,466 MW - Total power generation 44.7 TWh/a Nordic power generation 43.7 TWh/a Power sales 4.8 TWh/a Heat sales 19.0 TWh/a Power sales 25.6 TWh/a Heat sales 24.1 TWh/a Distribution network 26.1 TWh/a Regional network 16.3 TWh/a CO2-free electricity in the Nordic countries. - Electricity sales 13.6 TWh/a Sales EUR 2,248 million EUR 1,565 million EUR 1,119 million EUR 1,075 million EUR 744 million Share of Fortum's sales 33% 23% 16% 16% 11% Comparable operating profit Comparable EBITDA EUR 858 million EUR 273 million EUR 156 million EUR 331 million EUR 48 million EUR 1,003 million EUR 489 million EUR 258 million EUR 550 million EUR 50 million Net assets EUR 6,329 million EUR 4,283 million EUR 3,846 million EUR 3,770 million EUR 39 million Comparable return on net assets 13.8% 6.8% 5.2% 8.8% 137.9% Capital expenditures EUR 178 million EUR 397 million EUR 435 million EUR 260 million EUR 1 million Employees 1,709 2,102 4,162 852 496 Business and result drivers - Nordic power supply-demand balance, volatility and price; stability through hedging - About 90% of production is hydro and nuclear power: hydrological situation, nuclear power availability, and prices of fuels and emission allowances important - Maintenance and asset lifetime management practices and costs - Steady growth through investments; newly commissioned CHP plants bring earnings - Fuel and CO2 emissions allowance prices and fuel availability, flexibility and efficiency play a key role - Production primarily in CHP plants with power as an important earnings source: power supply/demand balance, volatility and price affect profitability; stability through hedging - Investments into - Heat and auxiliary - Investment programme: earnings growth through new capacity and new volume - Power generation capacity prices, power supply- demand balance, price and volatility - Production mainly CHP with power as the primary earnings source: Power supply-demand balance as well as price level and volatility in the Urals/Western Siberia - Growth through investments - Long-term optimised levels of investment and maintenance - Distribution volumes: weather conditions as well as macro and local economy have an impact - Stable earnings with regulated tariffs - Cost-efficiency and quality of service - Growth in customer base through new offerings and innovative solutions - Margin between Nord Pool wholesale purchase and retail sales price levels; stability through efficient hedging This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 10 Annual Report 2013 Fortum in 2013 Reporting segment Power Heat Russia Distribution Electricity Sales new or existing generation product prices - Heat demand: weather conditions as well as macro and local economy have an impact - Maintenance and asset lifetime management practices and costs Strategy drivers - Existing CO2-free, flexible and market- driven production portfolio - Need for increased resource-efficiency will increase CHP's competitiveness - Potential for increased usage of local biofuels and waste - Solid position and competence in flexible multi-fuel CHP production - Solid position and competence in hydro and nuclear production in the Nordic power market - Liberalisation and integration of European power market - Plant availability, production optimisation and efficiency upgrades - Fuel prices and availability as well as gas and electricity price ratio - Development of heat market in the long term as well as heat demand and tariffs in the short term - Maintenance and asset lifetime management practices and costs - Liberalised and privatised power and heat market - Economic and power demand growth - Boosting efficiency of existing operations and bringing the ongoing investment programme to completion - Development of heat market - Potential for improved operations on the basis of current assets modernisation - Grid availability and service level; liability to compensate for distribution interruptions - Maintenance and asset lifetime management practices and costs - Cost efficiency through economies of scale and lean processes - Cost efficiency through economies of scale and lean processes - Technical development utilised for a more efficient, reliable and smarter network enabling sustainable and energy-efficient solutions for customers - Unbundling and harmonisation of Nordic/European electricity distribution sector - Potential for new businesses related to smart grid/ system development -Solid position and competence in the downstream part of the Nordic power value chain - Liberalisation, integration and harmonisation of Nordic/European retail electricity markets This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 11 Annual Report 2013 Fortum in 2013 Highlights of the year Highlights of the year Most significant events of 2013: This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 12 Annual Report 2013 Fortum in 2013 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 13 Annual Report 2013 Fortum in 2013 2013 in figures 2013 in figures Sales and production Sales and production The operating year was characterised by low hydro production volumes and good nuclear availability. Power generation by source1), % 1 2 7 26 29 Hydropower (26) Nuclear power (35) 35 100 50 0 Total electricity sales by area, TWh 1) 26.1 26.9 19.5 3.2 2009 30.7 28.3 18.7 3.2 2010 24.6 29.4 20.2 3.6 2011 21.6 30.1 23.3 3.8 2012 23.4 24.6 25.6 4.3 2013 Natural gas (29) Coal (7) Biomass (2) Finland Sweden Russia Other countries Other (1) 1) Power, Heat and Electricity Sales sell electricity to the Nordic power exchange or external customers and purchase electricity from the power exchange or other external sources. Fortum's power exchange transactions are calculated as a net amount of hourly sales at the Group-level. The Russia Division sells 1) Total power generation in 2013 was 68.7 TWh. electricity to the Russian wholesale market. Heat production by source1), % 1 1 Total electricity procurement by type, TWh Total heat sales by area, TWh 5 7 12 13 100 50 0 8.4 3.8 16.0 16.6 32.7 8.3 3.8 16.1 18.1 5.7 0.6 17.4 20.3 35.6 35.0 7.2 0.1 19.2 19.5 34.4 9.4 0.1 20.0 18.7 31.1 2009 2010 2011 2012 2013 61 Natural gas (61) Coal (13) Biomass (12) Heat pumps and electricity (7) Waste (5) Peat (1) Oil (1) 1) Total heat production in 2013 was 42.8 TWh. Purchases Import to the Nordic market Own power plants in Russia Co-owned power plants in Europe Own power plants in Europe Fortum's power production by energy source in 2011-2013 75 50 25 0 25.6 9.8 8.0 26.8 10.9 9.6 26.7 8.5 8.5 26.4 8.5 5.8 7.2 2009 7.6 2010 7.7 2011 7.2 2012 24.1 8.2 5.5 3.1 2013 Russia Sweden Finland Other countries TWh Hydro power Nuclear power Natural gas Coal Biomass Peat Other Total 2013 18.0 23.7 20.0 4.5 1.6 0.1 0.8 68.7 2012 25.2 23.4 19.4 3.3 1.3 0.1 0.3 73.1 2011 21.0 24.9 18.5 5.8 1.7 0.2 0.6 72.7 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 14 Annual Report 2013 Fortum in 2013 Fortum’s power generation capacity, 31 Dec 2013 MW Hydropower Nuclear power Combined heat and power Condensing power Other Total Finland Sweden Russia Poland Other 1,500 1,460 438 1,127 3 4,528 3,090 1,816 610 309 30 4,250 258 5,855 4,250 258 232 5 237 Total 4,590 3,276 5,788 1,436 38 15,128 Fortum's heat production capacity, 31 Dec 2013 MW Heat Finland 1,915 Sweden 3,626 Russia 13,466 Poland 1,310 Other 1,342 Total 21,659 Financial summary Financial summary The following table presents key figures of our operations. More data on Fortum's financial performance is available in the Financials section of the Annual Report. Key financial figures EUR million or as indicated Sales EBITDA Comparable EBITDA Operating profit Comparable operating profit Profit for the period, owners of the parent Capital employed Interest-bearing net debt Net debt/EBITDA Comparable net debt/EBITDA Return on capital employed, % Return on shareholders' equity, % Capital expenditure Gross investments in shares Net cash from operating activities Emissions subject to EU's ETS, million tonnes CO2 Free emission allocation, million tonnes CO2 * Pending approval of the European Commission 2013 6,056 2,452 2,299 1,712 1,607 1,204 19,780 7,849 3.2 3.4 9.2 12.0 1,284 15 1,836 6.0 3.0* 2012 6,159 2,538 2,416 1,874 1,752 1,416 19,420 7,814 3.1 3.2 10.2 14.6 1,558 16 1,382 4.8 5.4 2011 6,161 3,008 2,374 2,402 1,802 1,769 17,931 7,023 2.3 3.0 14.8 19.7 1,408 74 1,613 8.0 6.8 2010 6,296 2,271 2,396 1,708 1,833 1,300 16,124 6,826 3.0 2.8 11.6 15.7 1,222 27 1,437 9.7 5.6 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 15 Annual Report 2013 Fortum in 2013 Share key figures EUR or as indicated Earnings per share Cash flow per share Equity per share Dividend per share 1) Payout ratio, % Dividend yield, % 2013 1.36 2.07 11.28 1.10 80.9 6.6 2012 1.59 1.56 11.30 1.00 62.9 7.1 2011 1.99 1.82 10.84 1.00 50.3 6.1 2010 1.46 1.62 9.24 1.00 68.5 4.4 1) Board of Directors' proposal for the Annual General Meeting on 8 April 2014. Sales, EUR million 7,500 5,435 5,000 6,296 6,161 6,159 6,056 2,500 0 Operating profit and comparable operating profit, EUR million 2,402 1,888 1,782 1,833 1,708 1,802 1,874 1,752 1,712 1,607 09 10 11 12 13 2,500 2,000 1,500 1,000 500 0 09 10 11 12 13 Operating profit Comparable operating profit Environmental summary Environmental summary All indicators measuring Fortum's environmental responsibility will be available in the GRI section of Fortum's Sustainability Report 2013. It will be published the end of March 2014. Carbon dioxide emissions, million tonnes Sulphur dioxide emissions, tonnes Nitrogen oxide emissions, tonnes Particle emissions, tonnes ISO 14001 certified operations (% of sales) Specific CO2 emissions of power generation, g/kWh 5-year average in the EU, g/kWh Specific CO2 emissions of total energy production, g/kWh 5-year average, g/kWh Overall efficiency of fuel use, % 5-year average, % Share of CO2-free energy in power generation, % Share of renewable energy in power generation, % Share of renewable energy in heat production, % Primary energy consumption, TWh Utilisation rate of gypsum, % 2013* 21.4 22,200 32,200 20,800 100 202 70 196 186 61 66 63 29 21 146 99 2012 20.7 19,800 29,400 16,000 95 171 60 177 179 64 67 68 36 20 149 42 2011 23.5 24,900 36,000 16,600 95 192 67 192 169 67 68 65 31 16 157 89 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 16 Annual Report 2013 Fortum in 2013 Utilisation rate of ash, % Environmental non-compliances Water withdrawal, million m3 of which cooling water, million m3 Thermal load on waterways, TWh * Figures pending assurance 48 14 2,541 2,241 19 51 12 3,679 3,582 17 52 20 3,853 3,746 21 Specific CO2 emissions of electricity production in the EU in 2011-2013, gCO2/kWh Specific CO2 emissions of total energy production in 2011-2013, gCO2/kWh Overall efficiency of fuel use in 2011-2013, % 100 50 0 2011 2012 2013 300 200 100 0 2011 2012 2013 100 50 0 2011 2012 2013 Specific emissions Specific emissions Efficiency Target (5-year average) Target (5-year average) 5-year average Target( 5-year average) 5-year average 5-year average Social summary Social summary All indicators measuring Fortum's social responsibility will be available in the GRI section of Fortum's Sustainability Report 2013. It will be published at the end of March 2014. Average number of employees Number of employees, 31 December of whom permanently employed Departure turnover, % Female employees, % Females in management, % Health care expenditure, EUR/person 1) Number of sickdays Sickness absence rate, % Lost workday injury frequency (LWIF), Fortum personnel 3) Lost workday injury frequency (LWIF), contractors 3) Fatalities OHSAS 18001 certified operations (% of sales) * Figures pending assurance 1) In Finland 2) Includes Finland, Sweden, Poland and Russia 3) Injuries resulting in an absence of at least one day per million working hours 2013* 10,246 9,886 9,515 9.7 28 31 580 2012 10,600 10,371 9,899 12.0 28 35 580 2011 11,010 10,780 10,379 13.7 29 34 560 56,316 74,188 69,654 2) 2.5 1.1 4.8 1 73 3.1 1.5 3.8 1 70 - 1.6 3.2 1 60 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 17 Annual Report 2013 Fortum in 2013 Fortum's personnel statistics from 2013, by country of operation Personnel at year-end male female Personnel, average Personnel expenses, 1,000 euros Personnel expenses per person, 1,000 euros Finland Sweden 2,477 1,796 681 2,616 1,939 1,357 582 1,993 Russia 4,162 3,030 1,132 4,245 Poland Other countries 636 497 139 660 672 465 207 732 207,427 177,085 87,905 14,881 41,702 79.3 88.9 20.7 22.5 57.0 Personnel by country, 31 Dec. 2013 Number of employees, 31 Dec. 2013 Other countries (321) Finland (2,477) Sweden (1,939) 15,000 10,000 5,000 0 11,613 10,585 10,780 10,371 9,886 09 10 11 12 13 Russia (4,162) 9,886 Norway (141) Finland (2,477) Estonia (210) Poland (636) Sweden (1,939) Poland (636) Estonia (210) Norway (141) Russia (4,162) Other countries (321) Market position Market position Fortum is the 3rd largest power generator in the Nordic countries, and among the leading heat producers globally. Fortum's carbon exposure is among the lowest in Europe. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 18 Annual Report 2013 Fortum in 2013 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 19 Annual Report 2013 Fortum in 2013 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 20 Annual Report 2013 Strategy Strategy overview Strategy overview 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. The core of our strategy is our strong expertise in CO2-free hydro and nuclear power and in efficient combined heat and power (CHP) production. Our strengths also include our solid experience in operating in the energy markets. responsibility are tightly linked, underlining the role of sustainable solutions as a competitive advantage. In its operations, Fortum gives balanced consideration to economic, social and environmental responsibility. Sustainability is an integral part of Fortum's strategy. Business operations and Fortum's values – accountability, creativity, respect and honesty – form the foundation for all our activities. Fortum wants to be a forerunner in developing the future energy system - the Solar Economy. Fortum's mission, strategy and values Fortum's mission, strategy and values This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 21 Annual Report 2013 Strategy Future energy system - Solar Economy Future energy system - Solar Economy Fortum believes that the future energy system will be based on emissions-free and inexhaustible energy sources and on overall efficiency of the energy system. The transition towards Solar Economy brings changes to the way energy is produced and consumed. In conventional energy production, the combustion of fuels, like coal and gas, provides the main source of energy. Coal, in particular, burdens the environment and has poor total efficiency. With the rapid growth in the global demand for energy and in the consumption of electricity, mitigating climate change is becoming an increasingly important issue. Energy systems and the use of limited natural resources must be made more efficient. Solar Economy provides solutions to the challenges of climate change and resource scarcity. In Solar Economy, energy from the sun is used either directly as solar electricity and heat or indirectly as hydro, ocean, wind and bioenergy. On the journey towards Solar Economy, traditional production forms will be further developed and used alongside solar- based production. In Solar Economy, the energy system is more dynamic and smarter, enabling both centralised and distributed electricity production. Active participation by electricity users brings elasticity to demand, which improves the efficiency of the system. Towards a Solar Economy Towards a Solar Economy A gradual transition to Solar A gradual transition to Solar Economy Economy Changes in the energy system are slow to implement. Transitioning from the current energy system to a Solar Economy requires technology advancements as well as changes in the energy markets, the political environment, and society's infrastructure and consumption habits - changes that happen over the course of several decades. Development of the operating environment is necessary for the investments required for a change in the energy system, while the length of the transition period and the cost are dependent on political decisions, society's priorities and technology advancements in production forms. Fortum wants to promote both short- and long-term development of the energy system simultaneously. However, the current emission-free energy sources are not yet able to fulfil the energy demand of today's rapidly developing society. That is why in the short term we are continuing to widely utilise also traditional energy forms, albeit with the goal to do so even more efficiently. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 22 Annual Report 2013 Strategy Core areas of the strategy Core areas of the strategy The core of our strategy is our strong expertise in CO2-free hydro and nuclear power and in efficient combined heat and power production. Our strengths also include solid experience operating in the energy markets. Our business focus areas will continue to be developed through these competencies. Build on the strong Nordic core Build on the strong Nordic core Hydro and nuclear power have a significant role in Fortum's production portfolio. Both are CO2-free production forms and competitive with regard to variable costs. In 2013, about 85% of Fortum's European electricity production was based on hydro and nuclear power located in the Nordic countries. Hydro power is particularly valuable in the integrating European energy market, where it can be used to balance out consumption peaks and the production fluctuations of growing wind and solar power. Combined heat and power (CHP) production has a central role in our business throughout the Baltic region. Electricity produced in conjunction with district heat enables the use of bio- and waste fuels, and it is a more energy-efficient way to use traditional fossil fuels. In 2013, Fortum assessed the future alternatives of its electricity distribution business. After thorough consideration, the company has concluded that divesting the electricity distribution business is the best solution for the business and its customers, Fortum's shareholders and the company's other businesses. Focusing on electricity and heat production and sales, is estimated to improve Fortum's long-term value creation. Fortum has electricity distribution business in Finland, Sweden and Norway. The assessment has no impact on Fortum's electricity retail customers. Fortum will continue to develop its electricity sales business as an integral part of the company's strategy and will continue offering innovative products and services to its approximately 1.2 million electricity retail customers in the Nordic countries also in the future. Create solid earnings growth Create solid earnings growth in Russia in Russia Russia is the fourth biggest consumer of electricity globally and the growth of its electricity demand is outpacing that of the EU's. Fortum's investment programme is bringing new energy-efficient production units on stream; these are expected to significantly increase the share of sales and profits that Fortum earns from its Russian operations and will diversify Fortum's production portfolio geographically. Completing the investment programme is a key priority for us. Fortum's production in Russia consists mainly of combined heat and power production. For the time being, the heating market in Russia is completely regulated and does not work effectively nor encourage the necessary investments in the sector. However, heating reform is being drafted in Russia. If realised, it would offer significant possibilities of value creation for Fortum. Build a platform for future Build a platform for future growth growth Alongside our current business operations, we are pursuing precisely targeted new growth and developing future energy solutions. We are developing the solar power business through centralised large-scale production, commercial applications and distributed household applications. Additionally, our research and development activities support the advancement towards a carbon dioxide-free future by promoting the adoption of new technologies, which could offer significant business opportunities in the future. Examples include wave power, new CHP concepts, and new solutions for customers. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 23 Annual Report 2013 Strategy Strategy realisation in 2013 Strategy realisation in 2013 Build on the strong Nordic core • Assessing the future alternatives of the electricity distribution business and decision to sell the distribution business in Finland • Securing profitability and cash flow through optimised electricity trading and production with high availability • Continuing ongoing hydropower refurbishments in Finland and Sweden • Outsourcing hydro power operation and maintenance in Finland • Renewing the co-ownership agreement on Fortum Värme with the City of Stockholm • Starting construction of a new bio-CHP plant in Stockholm, Sweden • Inaugurating new waste-to-energy CHP plants in Brista, Sweden, and Klaipeda, Lithuania • Inaugurating new bio-CHP plants in Jelgava, Latvia, and Järvenpää, Finland • Extending the district heating network in Tartu, Estonia, through an acquisition • Enhancing the safety of Fortum's Loviisa nuclear power plant with new air-cooling towers • Deciding to discontinue electricity production at the Inkoo coal-fired power plant in Finland in 2014 • Continuing good progress with the efficiency programme and divesting several minority shareholdings and small units throughout the Nordic countries Create solid earnings growth in Russia • Focus on completing the investment programme • Commissioning the Nyagan 1 and Nyagan 2 power plant units in Russia Build a platform for future growth • Launching solar power production in India through an acquisition of a solar power plant • Taking into use an integrated bio-oil plant at Joensuu CHP, Finland, and signing a supply contract for bio-oil with a local energy company • Signing a collaboration agreement to provide nuclear expertise in the UK • Preparing for the hydro power concessions tender process in France • Participating in an industry-wide 1.5 MW wave power development initiative in Bretagne, France R&D supporting business R&D supporting business The purpose of our Research and Development (R&D) is to improve Fortum’s competitiveness and to create a basis for new profitable business. R&D activities help Fortum to enable a sustainable, carbon dioxide-free future. The main areas of R&D activities are: • The advanced technologies included in Fortum's existing energy system. In this field, nuclear power is our most important research area. In addition, we are developing integrated combined heat and power systems, i.e. CHP+ plants. • New technologies and solutions supporting development of the energy system towards the future Solar Economy. Targets of development in this area include solar and wave power as well as innovative customer solutions. Fortum's total R&D expenditure in 2013 was EUR 49 million (2012: 41), which corresponded to 0.8% of sales (2012: 0.7%). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 24 Annual Report 2013 Market Development Market development in recent years has pushed Europe’s electricity sector into turmoil. Since 2010, the players in the sector have lost an average of about one fifth of their market value, and the companies focusing solely on power generation have lost even more. Driving the change has been the weakened industrial demand for electricity caused by the economic downturn, the strong increase in subsidised renewable energy that has replaced market-driven production, and the increased uncertainty and inconsistency in energy policy regulation both at the national and EU level. The market price of electricity has decreased, and energy companies are struggling to manage the debt burdens stemming from capital-intensive investments. And the influx of shale gas into the market has weakened the competitive position of European industry, particularly compared to that of the United States. The turmoil continued in the energy sector in 2013, and the state of the European economy did not ease the situation for companies in the sector. Economic growth estimates were further lowered, which in turn has reflected on electricity demand estimates in Europe and in Russia. The growth outlook in the sector is generally flat and, for example, Fortum’s estimate on annual growth of electricity consumption in the Nordic countries has hovered around the 0.5% level for a long time. The turmoil continued in the energy sector in 2013, and the state of the European economy didn’t ease the situation for companies in the sector. At the same time, the increase of electricity production from subsidised renewable energy sources was strong in Europe in 2013, in line with policy targets set for renewable energy. Overall, energy market development moved towards national and more regulated solutions rather than European and market- driven solutions. Against this background, it was not a surprise that the structural reform of the emissions trading scheme and renewable energy support schemes were actively debated. The Commission gave its proposal on reforming the emissions trading scheme in January 2014, but the related decisions will be deferred to the term of the new Commission and Parliament. At the same time, the Commission is in a process to revise the State aid guidelines for energy and the environment advocating more market- oriented and harmonised subsidies for renewable energy sources in order to improve their efficiency and save cost. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 25 Annual Report 2013 Market Development European market development European market development Electricity production from renewable energy sources increased strongly in 2013. The development is in line with EU climate and energy policy targets. Most of these production forms, however, rely on subsidies and require regulating power capacity to balance production fluctuations and to secure energy supply in situations when e.g. wind or solar energy is not available. Subsidy mechanisms that were designed on a national basis and, in some cases, are oversized, have proved to be counterproductive to the functioning of European electricity market and emissions trading. In addition to a growing tax burden, they have led to an increase in the end-users’ energy bill – even though the wholesale market price of electricity has decreased. Meanwhile, the competitiveness of market- driven, unsubsidised production has weakened, and very few, if any, investments decisions based on the wholesale market price are being made. The situation has sparked a discussion on the need to reassess renewable energy support schemes and to develop the EU electricity market model so that it better rewards flexible power and reserve power through capacity mechanisms. Renewable generation energy costs for member states are expected to rise to a total of 330 billion euros by 2020; this is an economic burden for member states and the entire EU, and it weakens competitiveness. In November 2013, the European Commission published the first extensive guidance that aims to help member states to choose support mechanisms that are least detrimental to the functioning and development of the EU energy market. The guidelines focus on renewable energy support schemes and capacity mechanisms and on the possibilities to utilise elasticity of demand. Building on these non-binding guidelines, the European Commission will adopt legally binding EU’s guidelines for State aid for the energy sector in 2014. production would also be better rewarded than it is today. Balanced development of the EU energy market requires renewable energy support schemes and capacity mechanisms to be megawatt-neutral. The situation has sparked a discussion on the need to reassess renewable energy support schemes and to develop the EU electricity market model. Balanced development of the EU energy market requires renewable energy support schemes and capacity mechanisms to be megawatt-neutral, i.e. they must give equal treatment to the different production forms and to production capacities of varying ages. As the need for flexible energy production grows, it is essential to change the current market model so that flexibility of energy Price development of Price development of electricity and emission electricity and emission allowances allowances While market development has not been totally satisfactory at the EU level, the situation in the Nordic countries is better. The Nordic wholesale market has developed further, and in June 2013 Latvia became the last Baltic country to join the Nord Pool power exchange. Because of the exceptionally good hydrological situation in 2012, area price differences between Finland and Sweden were big. In 2013 the prices became more aligned. The average system spot price of electricity in 2013 was 38.1 (31.2) euros per megawatt- hour. The average area price in Finland was 41.2 (36.6) euros per megawatt-hour and in This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 26 Annual Report 2013 Market Development Sweden (SE3) 39.4 (32.3) euros per megawatt-hour. In Germany, the average spot price was 37.8 (42.6) euros per megawatt- hour. In January-December 2013, CO2 emission allowances traded at a price of 2.8-6.7 euros per tonne. Heat market development Heat market development The implementation of the Energy Efficiency Directive (EED) continued in 2013. According to the directive, district heating and combined heat and power production can offer solutions to reach the energy-efficiency targets set for EU member states. District heating has been included in the national energy strategies in the Nordic and Baltic countries and in Poland. Heat-related legislation is currently (end of January 2014) under governmental consideration in Poland (proposal on renewable energy act) and in Estonia (amendments to heat legislation). In Latvia and Lithuania, similar legislative amendments are expected to be introduced in the near future. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 27 Annual Report 2013 Market Development energy production. The permit processes required to build transnational power lines have become the most significant bottleneck. In 2013, the EU adopted a new energy infrastructure regulation that was linked to a special financing instrument. This is expected to advance the construction of priority transmission networks by accelerating permit processes and offering additional funding. Europe needs major Europe needs major investments in production investments in production plants and transmission plants and transmission infrastructure infrastructure European energy production plants are aging. Despite regional overproduction of renewable energy, significant investments must be made in low-carbon production over the next decade in Europe in order to achieve the tightened legislative requirements and the EU emissions targets for 2050. It is estimated that investments of about 5-7 trillion, i.e. 5,000-7,000 billion euros, in electricity generation capacity are needed in Europe by 2050. Implementing the investments requires a supporting market model and reasonable return potential from wholesale markets. Europe’s energy infrastructure development has not kept pace with increasing renewable This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 28 Annual Report 2013 Market Development Nordic electricity market structure Nordic electricity market structure This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 29 Annual Report 2013 Market Development Market reform approaching in Russia Market reform approaching in Russia Enforcement of heat production legislation, which took effect at the beginning of 2011, is continuing in Russia. Meanwhile, the elimination of cross-subsidies has been advanced between electricity and heat production as well as between residential and big industrial customers. The country has also taken into use long-term heat tariffs, but, as with the legislation on heat production, their implementation is still unfinished. Modernisation of the heat sector in Russia is vitally important, as it would be very difficult to achieve the national targets for energy efficiency without it. As the first step, a change from cost plus-pricing of heat to pricing based on alternative forms of heating is under consideration. This would encourage investments in improved efficiency and especially in combined heat and power (CHP) production. Modernisation of the heat sector in Russia is vitally important. In 2013, the Ministry of Energy stated that a heat reform should be developed before changing the current electricity and capacity market model. Therefore, at the end of the year, the Ministry of Energy proposed a new heat market model (for public discussion), which is supposed to ensure the transition to economically justified heat tariffs by 2020 and to attract investments into the heat sector. The new regulation concept is at an early stage and is expected to be further developed during 2014. Quarterly reviews for gas Quarterly reviews for gas prices prices Since the beginning of 2013, wholesale gas prices (except for private household and industrial consumers) have been reviewed quarterly. In February 2013, the Board of Russia's Federal Tariff Service (FTS) adopted a decision according to which the wholesale gas price for industrial consumers decreased by 3% as of the second quarter 2013, compared to first quarter. As of 1 July 2013, the Russian Government increased gas prices by 15% compared to June 2013. Further increases were done in August and October in order to reach the planned total increase of approximately 15% in 2013 compared to 2012. According to a forecast made by the Russian Ministry of Economic Development, Russian gas price indexation will not take place as of July 2014. However, year-on-year gas price growth is estimated to be 7.6% in 2014. In 2013, 1,026 (1,037) terawatt-hours of electricity was used in Russia. The corresponding figure in Fortum’s operating area, in the First price zone, was 767 (769) terawatt-hours. In January-December 2013, the average electricity spot price, excluding capacity price, increased by 10% to 1,104 roubles (2012: 1,001) per megawatt-hour in the First price zone. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 30 Annual Report 2013 Market Development Carbon market development Carbon market development Substantial oversupply and low price levels characterised the EU market for emission allowances in 2013. The scheme is in urgent need of reform in order to give the market the right price signal that encourages investments in low-carbon production. New knowledge about climate New knowledge about climate change change The Intergovernmental Panel on Climate Change (IPCC) published its latest assessment report on climate change in September 2013. The report takes a more serious tone than before in describing the advancement of climate change – limiting the increase in the global average temperature to two degrees is extremely challenging and, at worst, the increase can be as high as five degrees. As a new issue, the IPCC addresses the significance of oceans on climate change; the bulk of the heat increase is stored specifically in oceans. In 2013, the carbon dioxide concentration in the atmosphere surpassed 400 parts per million (ppm) for the first time in human history. The IPCC also determined the carbon emissions limit that, if exceeded, would lead to atmospheric warming of more than two degrees. The IPCC noted that at the current pace the global carbon emissions quota will be reached in 30 years, and called for quick actions to curb emissions. To improve the functionality of the emissions trading scheme, the EU must set an ambitious reduction target for greenhouse gas emissions only. The UN’s international climate negotiations advanced with weak results in 2013. The goal is for a universal climate agreement by 2015. Development of an international carbon market advanced only in some respects. Several emissions trading pilot projects were launched in China, and regional schemes were expanded in North America. Australia decided to repeal the previously agreed emissions trading legislation, and thus its earlier agreed link with the EU’s emissions trading scheme remains unrealised for now. Japan also announced that it will significantly lower its own emissions reduction target. Climate targets must be Climate targets must be clarified quickly clarified quickly The EU has committed to an 80-95% reduction in carbon dioxide emissions by 2050. The European energy industry has committed to the challenging emissions target, but the regulatory uncertainty significantly hampers the investments and emissions reduction measures required to achieve the target. Climate policy must be long-term and predictable for energy sector investments. By committing to one target – the ambitious reduction of greenhouse gas emissions by 2030 – overlapping regulations and controls could be dismantled and uncertainty could be significantly reduced. Market-driven solutions, like emissions trading, must be prioritised to minimise the costs incurred by reducing emissions. Emissions trading improves the competitiveness of low-carbon production methods and enables climate targets to be achieved at the lowest possible cost. The EU is currently defining the energy and climate policy framework and targets for 2030. The Commission’s proposal for 2030 target-setting was received in January 2014, and the aim is to decide on the targets during spring 2014. The Commission proposes a 40% reduction in greenhouse gas emissions by 2030 compared to 1990 levels. The proposal also includes a binding EU-level target to increase the share of renewable energy sources to 27% by 2030. Emissions trading scheme Emissions trading scheme must be reformed must be reformed The economic recession and overlapping climate policy steering mechanisms in the EU have led to reduced demand for emission allowances and lower prices, which hovered around 4-5 euros for most of 2013, although the price did fluctuate considerably from 2.5 euros to nearly 7 euros. A very low emission allowance price does not encourage low- carbon investments, and thus creates a risk that new production capacity to be built will generate emissions far into the future. After long negotiations in the EU and the resulting decision to postpone the auctioning of 900 million allowances (backloading), the end of the year saw a slight recovery in the carbon market from the low in spring 2013. The backloading to be implemented during 2014 is the first measure to reform the emissions trading scheme. The goal is to restore confidence in the emissions trading scheme and to give the market a price signal that encourages investments in low-carbon production methods. Structural reform of the emissions trading scheme was actively debated. The Commission gave its proposal on reforming the scheme in January 2014, but the related decisions will be deferred to the term of the new Commission and Parliament. The Commission is proposing the adoption of a market stability reserve starting in 2021; the mechanism sparked wide interest already in 2013. Fortum proposed an allowance supply adjustment mechanism in July 2013 and actively lobbied for the method with various stakeholders. During the year, real concern emerged about the impact of climate change mitigation on the competitiveness of Europe and energy- intensive industries in particular. Emissions must be reduced cost-efficiently, e.g. with a functioning carbon market; consequently, climate change mitigation costs and the impact on energy prices will remain lower than with other climate policy control mechanisms. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 31 Annual Report 2013 Financials This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 32 Annual Report 2013 Operating and financial review Financials 2013 Financials 2013 In a challenging market environment, our result remained at a satisfactory level. The cash flow from operating activities was very strong with all divisions contributing. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 33 Annual Report 2013 Operating and financial review Financial performance and position Financial performance and position The strategic assessment of the electricity distribution business and inaugurations of power plants were in focus. Key financial figures EUR million Sales Operating profit Operating profit, % of sales Comparable operating profit Profit before taxes Profit for the period attributable to owners of the parent Earnings per share, EUR Net cash from operating activities Shareholders' equity per share, EUR Capital employed Interest-bearing net debt Equity-to-assets ratio, % 2013 6,056 1,712 28.3 1,607 1,499 1,204 1.36 1,836 11.28 19,780 7,849 44 2012 6,159 1,874 30.4 1,752 1,586 1,416 1.59 1,382 11.30 19,420 7,814 43 2011 6,161 2,402 39.0 1,802 2,228 1,769 1.99 1,613 10.84 17,931 7,023 44 Average number of shares, 1,000s 888,367 888,367 888,367 Group financial targets ROCE, % ROE, % Capital structure: Target 12 14 Comparable net debt/EBITDA Around 3 Net debt/EBITDA 2013 9.2 12.0 3.4 3.2 2012 10.2 14.6 3.2 3.1 2011 14.8 19.7 3.0 2.3 Change 13/12 -2% -9% -7% -8% -5% -15% -14% 33% 0% 2% 0% 2% 0% Change 13/12 -10% -18% 6% 3% In 2013, electricity consumption in the Nordic countries was slightly lower than last year at 386 terawatt-hours (TWh), even though non-industrial consumption partly offset the decrease in industrial demand especially during the first half of the year. In Russia, in the areas where Fortum operates, consumption was flat at 767 TWh. The Nordic hydro reservoirs were below the long-term average and although the levels normalised towards the end of the year, they were still clearly lower than last year’s record- high levels. Precipitation was weak in Fortum’s operating areas during the first three quarters of the year; this put pressure on hydro volumes and thus impacted Fortum's results negatively. The comparable profit declined compared to the previous year and totalled approximately EUR 1.6 billion, and earnings per share were EUR 1.36. The cash flow from operating activities, however, was strong with all divisions contributing. We made good progress in sustainability and safety in 2013. Fortum received a special award for innovation from the Global District Energy Climate Awards organisation and was ranked as the best company in the Nordic climate index. We had our lowest-ever total recordable incidents (TRIF) among our own personnel. In December 2013, Fortum completed the strategic assessment of its electricity distribution business. The conclusion was that divesting the electricity distribution business is the best solution in order to further develop our company according to its strategy. We also consider it to be the best solution for the distribution business itself and for its customers. Focusing on electricity and heat production and sales, is estimated to give Fortum more strategic flexibility and to improve the company's long-term value creation. In line with the conclusions of the completed assessment, Fortum agreed to sell its electricity distribution business in Finland to This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 34 Annual Report 2013 Operating and financial review Sales, EUR million 7,500 5,435 5,000 6,296 6,161 6,159 6,056 2,500 0 3,000 2,000 1,000 0 20 15 10 5 0 09 10 11 12 13 Operating profit, EUR million 2,402 1,782 1,708 1,874 1,712 09 10 11 12 13 Return on capital employed, % 14.8 12.1 11.6 10.2 9.2 09 10 11 12 13 Return on capital employed, % Target % Suomi Power Networks Oy. The business is in very good shape and deserves to be developed further as a core business from its own standpoint. The buyer has a deep understanding of the social importance of infrastructure assets and is committed to developing reliable networks and services for the customers. We expect to close the deal during the first quarter of 2014; until then, work continues as usual in all business areas. Fortum is also evaluating the possible future divestment opportunities within the electricity distribution business country by country. In 2014, we will continue our everyday work in serving our customers in all areas of our business. The year-end storms in Finland, Sweden and Norway tested once again our ability to serve customers in challenging conditions. We have continuously improved the reliability of our networks. The same trend can be seen also in the results of the recent customer satisfaction survey: Fortum improved its ranking in electricity sales, distribution and as a supplier of district heat. 2013 was a year of inaugurations at Fortum. In Jelgava, Latvia, and in Järvenpää, Finland, we commissioned new biomass-fired CHP plants. In Klaipeda, Lithuania, we took into production a waste-to-energy CHP plant, while in Brista, Sweden, test-runs were started. Fortum also commissioned the world's first bio-oil production facility that is integrated with a combined heat and power (CHP) plant in Joensuu, Finland. In Russia, the gas-fired thermal power plant Nyagan GRES was inaugurated by President of Russia Vladimir Putin and President of Finland Sauli Niinistö. Units 1 and 2 are now commissioned, and both are receiving capacity payments. We will continue the determined implementation of our investment programme with three large units still under construction. Both with existing and with new power plants, we continue to build Fortum's future growth. The on-going company-wide efficiency programme continued to proceed according to plan, and we are approximately half way through. The work will continue; we are continuously working on reducing fixed costs and capital expenditures, divesting non-core business and focusing on working capital efficiency. Looking at the operating environment for Fortum overall, it’s clear that the markets will remain challenging also in 2014. Only through our own actions can we ensure that the premises for success are in place. Changes to the EU energy and climate policy are likely to be seen in 2014. It is crucial that determined measures to mitigate climate change are continued. However, in order to safeguard the competiveness of European industries and get the much needed investments into low-carbon energy production and infrastructure, the EU climate policy should be steered by a single CO2 reduction target post-2020, and the existing overlapping steering mechanisms should be removed. In January, the European Commission published a new proposal for the EU's climate policy and energy policy - the proposal is a step in the right direction, but overlapping targets remain. Regarding the tax climate, the governments in Finland and Sweden have made positive and material decisions on lowering the corporate tax rates to stimulate businesses; beyond that, the overall tax climate has tightened considerably. Fortum has appealed several cases raised by the tax authorities that have been addressed retroactively and also some cases that have already been scrutinised. In Finland, the power plant tax (previously called the windfall tax) has been adopted as of 2014. It will be applied provided that the European Commission finds that it is in line with the general tax principles and regime in Finland and that it does not include forbidden state aid. The Swedish hydro real-estate tax is also being challenged. We are pursuing growth, carefully considering and prioritising alternatives in line with our strategy. We consider Fortum to be well positioned among its peers and ready to grab emerging opportunities that are a good fit with our strategy focus on low-carbon power generation, energy-efficient combined heat and power (CHP) production and sales, and innovative customer offerings. Concentrating on electricity and heat production and sales is estimated to improve Fortum's long-term value creation. To summarise, 2013 was a year full of activity as well as challenges; nevertheless, the result was satisfactory. The dividend proposal reflects Fortum's dividend policy to pay a stable, sustainable and over time increasing dividend that supports shareholder value and the company's strategy. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 35 Annual Report 2013 Operating and financial review Return on shareholders' equity, % 19.7 16.0 15.7 14.6 12.0 09 10 11 12 13 20 15 10 5 0 Return on shareholders' equity, % Target % Efficiency programme 2013-2014 Efficiency programme 2013-2014 Fortum started an efficiency programme in 2012 in order to maintain and strengthen its strategic flexibility and competitiveness and to enable the company to reach its financial targets in the future. The aim is to improve the company’s cash flow by more than approximately EUR 1 billion during 2013–2014 by reducing capital expenditures (capex) by EUR 250–350 million, divesting approximately EUR 500 million of non-core assets, reducing fixed costs and focusing on working capital efficiency. possible. The assessments will therefore be done at a unit level. Capex in 2014 is expected to be EUR 0.9–1.1 billion excluding Värme. At the end of 2014, the cost run-rate is targeted to be approximately EUR 150 million lower compared to 2012, including growth projects. If headcount reductions are needed, Fortum seeks to limit redundancies whenever At the end of December 2013, Fortum had divested approximately EUR 300 million in non-core assets since the start of the efficiency programme. The company has been able to decrease its cost run-rate by approximately half of the targeted EUR 150 million and working capital efficiency has been improved. Assessment of the electricity distribution Assessment of the electricity distribution business business In December, Fortum completed the assessment of the future alternatives of its electricity distribution business; the assessment was launched in January 2013. After thorough consideration, the company concluded that divesting the electricity distribution business is the best solution for the business and its customers, Fortum's shareholders and the company's other businesses. During the assessment process all alternatives were carefully studied in order to find the best solution. Fortum is evaluating the remaining possible future divestment opportunities country by country. The outcome is dependent on market development and on development of national regulation in the countries of operation. Also in December, as the first phase, Fortum agreed to sell its electricity distribution business in Finland to Suomi Power Networks Oy, which is owned by a consortium of Finnish pension funds Keva (12.5%) and LocalTapiola Pension (7.5%) together with international infrastructure investors First State Investments (40%) and Borealis Infrastructure (40%). The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum expects to complete the divestment process during the first quarter of 2014, subject to the necessary regulatory approvals as well as customary closing conditions. Fortum expects to book a one- time sales gain of EUR 1.8-1.9 billion, corresponding to approximately EUR 2.0 per share, in its Electricity Solutions and Distribution Division's first-quarter 2014 results. A total of 340 employees will transfer with the business at closing with existing terms of employment. The sale has no effect as such on Fortum's approximately 640,000 distribution customers. Upon closing, those customers will transfer with the business with existing terms. For further information, see Note 9 Assets held for sale. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 36 Annual Report 2013 Operating and financial review Market conditions Market conditions Nordic countries Nordic countries In 2013, according to preliminary statistics, electricity consumption in the Nordic countries was 386 TWh (2012: 391). At the beginning of the year, the Nordic water reservoirs were at 85 TWh, i.e. 2 TWh above the long-term average. At the end of the year, the reservoirs were at 82 TWh, which is 1 TWh below the long-term average and 3 TWh below the corresponding level in 2012. Heavy precipitation, mild weather and moderate consumption led to rapid normalisation of reservoirs. In 2013, the average system spot price was EUR 38.1 per MWh (2012: 31.2). In Finland, the average area price was EUR 41.2 per MWh (2012: 36.6) and in Sweden (SE3) EUR 39.4 per MWh (2012: 32.3). In Germany, the average spot price during 2013 was EUR 37.8 per MWh (2012: 42.6). The market price of CO2 emission allowances (EUA) dropped from approximately EUR 6.6 per tonne at the beginning of the year to approximately EUR 5.0 per tonne at the beginning of the fourth quarter, to which it also returned by the year-end. During 2013, EUA traded between EUR 2.8 and EUR 6.7 per tonne. Russia Russia Fortum operates in the Urals and Western Siberia. Both 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, electricity demand declined somewhat for the full year 2013 compared to previous year. In 2013, Russia consumed 1,026 TWh (2012: 1,037) of electricity. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 767 TWh (2012: 769). In 2013, the average electricity spot price, excluding capacity price, increased by 10% to RUB 1,104 per MWh (2012: 1,001) in the First price zone. Power consumption TWh Nordic countries Russia Tyumen Chelyabinsk Russia Urals area Average prices Spot price for power in Nord Pool power exchange, EUR/MWh Spot price for power in Finland, EUR/MWh Spot price for power in Sweden, SE3, Stockholm, EUR/MWh 1) Spot price for power in Sweden, SE2, Sundsvall, EUR/MWh 1) Spot price for power in European and Urals part of Russia, RUB/MWh 2) Average capacity price, tRUB/MW/month Spot price for power in Germany, EUR/MWh Average regulated gas price in Urals region, RUB/1,000 m3 Average capacity price for old capacity, tRUB/MW/month 3) Average capacity price for new capacity, tRUB/MW/month 3) Spot price for power (market price), Urals hub, RUB/MWh 2) CO2, (ETS EUA), EUR/tonne CO2 Coal (ICE Rotterdam), USD/tonne Oil (Brent Crude), USD/bbl 1) Until 1st November 2011 there was only one price area in Sweden. 2) Excluding capacity tariff. 2013 386 1,026 87 36 253 2013 38.1 41.2 39.4 39.2 1,104 276 37.8 3,131 163 576 1,021 5 82 109 2012 391 1,037 83 36 252 2012 31.2 36.6 32.3 31.8 1,001 227 42.6 2,736 152 539 956 7 93 112 2011 384 1,020 83 36 250 2011 47.1 49.3 47.9 N/A 990 209 51.1 2,548 160 560 925 13 122 111 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 37 Annual Report 2013 Operating and financial review 3) Capacity prices paid only for the capacity available at the time. Water reservoirs TWh Nordic water reservoirs level Nordic water reservoirs level, long-term average Export/import between Nordic Area and Continental Europe+Baltics TWh (+ = import to, - = export from Nordic area) Export/import between Nordic area and Continental Europe+Baltics Export/import between Nordic area and Russia Export/import Nordic area, total 31 Dec 2013 31 Dec 2012 31 Dec 2011 82 83 2013 -3 5 -2 85 83 2012 -19 5 -14 95 83 2011 -6 11 5 innovations and demonstration, not on production. It is also important to integrate renewable electricity fully into the electricity market, as its amount and share will grow in the future. Increasing the share of renewable energy in the EU energy mix is a positive and desired development. The EU carbon market was characterised by a significant surplus of allowances and therefore a low market price in 2013. The revision of the European emissions trading scheme (EU ETS) was actively debated throughout the year. After a lengthy process, in late 2013 and early 2014, the amendment of the emissions trading directive and changes to the auctioning regulation enabling the backloading of allowances from 2014-2016 to 2019-2020 were approved. The backloading concerns a total of 900 million allowances and is not expected to substantially increase the price. Backloading is expected to be implemented during the first half of 2014 and is the first step in the revision of the ETS. This revision aims at restoring confidence in the system and giving a price signal that encourages investments in low-carbon production methods. The Commission released a proposal on the structural reform of the European Trading system (ETS) in January 2014. The proposal includes a market stability reserve, where the supply-demand balance is automatically managed by pre-defined rules from 2021 onwards. The proposal will be processed further by the new Commission and the Parliament. European business European business environment and carbon environment and carbon market market In January, the European Commission published its proposal for the EU’s climate and energy policy for 2020-2030. As a part of the proposal the Commission put forward an emissions reduction target of 40% by 2030, which is in line with the political target to reduce emissions by 80.95% by 2050. It is positive that in the 2030 framework the main focus is now more clearly on reducing greenhouse gases. In addition, a new stability mechanism for emissions trading was proposed. Contrary to the current policy, only an EU- level target is proposed for renewable energy. This is a step in the right direction, although this EU-level target is binding and therefore creates some overlapping with the greenhouse gas emissions reduction target. Fortum's view is that an energy and climate framework based on one single binding target for CO2 and a non-binding target for renewables in 2030 would be a more cost- efficient solution to tackle climate change without compromising Europe's industrial competitiveness. Fortum supports a technology-neutral approach both regarding climate policy and renewable energy, and the target for renewable energy (RES) should concentrate on promotion of research & development, This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 38 Annual Report 2013 Operating and financial review Restatements related to IFRS changes in Restatements related to IFRS changes in accounting accounting Fortum is applying an amended IFRS standard for pensions as of 1 January 2013. Adoption of the new standard is done retrospectively and comparative information for 2012 is therefore restated to reflect the change. The change had only a minor impact on Fortum’s financial results and financial position; however, it reduced the equity by EUR 124 million as of 1 January 2012. The restated comparative figures for the year 2012 are presented in the attachment to the first-quarter 2013 interim report. As of 1 January 2014, Fortum will apply the new IFRS 10 Consolidated Financial Statements and 11 Joint Arrangements standards. The major effect of this reassessment relates to Fortum Värme, operating in the capital area in Sweden, which will be treated as a joint venture and thus consolidated with the equity method. The company is currently consolidated as a subsidiary with a 50% minority interest. For further information see Note 1 Accounting principles. Financial results Financial results Sales by division EUR million Power Heat Russia Distribution 1) Electricity sales 1) Other Netting of Nord Pool transactions 2) Eliminations Total Comparable operating profit by division EUR million Power Heat Russia Distribution 1) Electricity sales 1) Other Total 2013 2,248 1,565 1,119 1,075 744 69 -510 -254 6,056 2013 858 273 156 331 48 -59 2012 2,415 1,628 1,030 1,070 722 137 -503 -340 6,159 2012 1,146 271 68 320 39 -92 2011 2,481 1,737 920 973 900 108 -749 -209 6,161 2011 1,201 278 74 295 27 -73 1,607 1,752 1,802 Change 13/12 -7% -4% 9% 0% 3% -50% -1% 25% -2% Change 13/12 -25% 1% 129% 3% 23% 36% -8% This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 39 Annual Report 2013 Operating and financial review Operating profit by division EUR million Power Heat Russia Distribution 1) Electricity sales 1) Other Total 2013 921 288 156 348 56 -57 2012 1,175 344 79 331 39 -94 2011 1,476 380 74 478 3 -9 1,712 1,874 2,402 Change 13/12 -22% -16% 97% 5% 44% 39% -9% 1) Part of the Electricity Solutions and Distribution division. 2) 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. For further information, see Note 5 Segment reporting. In 2013, Group sales were EUR 6,056 million (2012: 6,159). Comparable operating profit totalled EUR 1,607 million (2012: 1,752) and the reported operating profit totalled EUR 1,712 million (2012: 1,874). Fortum's operating profit for the period was affected by non-recurring items, an IFRS accounting treatment (IAS 39) of derivatives mainly used for hedging Fortum's power production, and nuclear fund adjustments amounting to EUR 105 million (2012: 122). The share of profits of associates and joint ventures was EUR 105 million (2012: 23). The increase comes mainly from Hafslund and TGC-1. The share of profits from Hafslund and TGC-1 are based on the companies' published fourth-quarter 2012 as well as first-, second- and third-quarter 2013 interim reports. The Group’s net financial expenses were EUR 318 million (2012: 311). Net financial expenses included changes in the fair value of financial instruments of EUR 16 million (2012: 23). Profit before taxes was EUR 1,499 million (2012: 1,586). Taxes for the period totalled EUR 220 million (2012: 74). The tax rate according to the income statement was 14.7% (2012: 4.7%). In Finland, the corporate tax rate was decreased to 20.0% from 24.5% starting 1 January 2014. The tax rate change caused a one-time effect in 2013 of approximately EUR 0.09 per share. In Sweden, the corporate tax rate was decreased to 22.0% from 26.3% starting 1 January 2013. In 2012, the one- time positive effect from the tax rate change was approximately EUR 230 million, of which EUR 34 million is attributable to non- controlling interests. The tax rate, excluding the changes in the tax rates, the impact of the share of profits of associated companies and joint ventures as well as non-taxable capital gains was 22.3% (2012: 21.2%). The profit for the period was EUR 1,279 million (2012: 1,512). Fortum's earnings per share were EUR 1.36 (2012: 1.59), of which EUR 0.10 per share (2012: 0.14) relates to items affecting comparability and EUR 0.09 per share to the change in Finnish corporate tax rate. In 2012, the impact of the lowered Swedish corporate tax rate was approximately EUR 0.22 per share. Non-controlling (minority) interests amounted to EUR 75 million (2012: 96). These are mainly attributable to AB Fortum Värme Holding, in which the city of Stockholm has a 50% economic interest. Operating profit and comparable operating profit, EUR million 2,402 1,888 1,782 1,833 1,708 1,802 1,874 1,752 1,712 1,607 09 10 11 12 13 2,500 2,000 1,500 1,000 500 0 Operating profit Comparable operating profit Profit before taxes, EUR million 2,228 1,636 1,615 1,586 1,499 09 10 11 12 13 2,500 2,000 1,500 1,000 500 0 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 40 Annual Report 2013 Operating and financial review Financial position and cash flow Financial position and cash flow EUR million Interest expense Interest income Fair value gains and losses Other financial expenses Finance costs - net Interest-bearing liabilities 1) Less: Cash and cash equivalents 2) Interest-bearing net debt 2013 -295 42 -16 -49 -318 9,118 1,269 7,849 2012 -300 54 -23 -42 -311 8,777 963 7,814 2011 -284 56 5 -42 -265 7,770 747 7,023 Change 13/12 -2% -22% -30% 17% 2% 4% 32% 0% 1) 2013 includes EUR 20 million presented as asset held for sale. 2) 2013 includes EUR 15 million and 2011 EUR 16 million presented as asset held for sale. Interest-bearing net debt, EUR million Cash flow Cash flow 8,000 6,000 5,969 6,826 7,023 7,814 7,849 4,000 2,000 0 3.5 3 2.5 2 1.5 1 0.5 0 09 10 11 12 13 Net debt/EBITDA 3.3 3.1 3.4 3.2 2.6 2.5 3.0 2.8 3.0 2.3 09 10 11 12 13 Net debt/EBITDA Comparable net debt/EBITDA In 2013, total net cash from operating activities increased by EUR 454 million to EUR 1,836 million (2012: 1,382), mainly due to a decrease in working capital of EUR 296 million and realised foreign exchange differences turning to positive EUR 320 million which were offset with a lower EBITDA. Capital expenditures decreased by EUR 151 million to EUR 1,271 million (2012: 1,422). Proceeds from divestments totalled EUR 210 million (2012: 433). Total net cash used in investing activities was EUR -1,210 million (2012: -1,128). Cash flow before financing activities, i.e. dividend distributions and financing, increased by EUR 372 million to EUR 626 million (2012: 254). Realised foreign exchange gains and losses of EUR 52 million (2012: -268) were related to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries. Dividends totalling EUR 888 million were paid on 19 April 2013 using cash and cash equivalents. Assets and capital employed Assets and capital employed Total assets decreased by EUR 141 million to EUR 24,420 million (24,561 at year-end 2012). The net change in total assets was negative, even though capital expenditures and gross investments in shares (EUR 1,299 million) were higher than depreciation during the year (EUR 740 million). The total impact of translation differences on intangible assets, property plant and equipment as well as participations in associates and joint ventures was negative EUR 861 million. Cash and cash equivalents increased by EUR 291 million. Presenting the Finnish distribution business as assets held for sale impacted the structure of the balance sheet, because all assets and liabilities belonging to those operations were presented separately on one line both in assets and liabilities. For further information, see Note 9 Assets held for sale. Capital employed was EUR 19,780 (19,420 at year-end 2012) million, an increase of EUR 360 million. The increase was due to the lower amount of total assets, EUR 141 million, and a EUR 501 million decrease in interest-free liabilities. Equity Equity Total equity was EUR 10,662 (10,643 at year- end 2012) million, of which equity attributable to owners of the parent company totalled EUR 10,024 million (2012: 10,040) and non-controlling interests EUR 638 million (2012: 603). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 41 Annual Report 2013 Operating and financial review The decrease in equity attributable to owners of the parent company totalled EUR 16 million and is mainly arising from the payment of dividends totalling EUR -888 million, net profit of EUR 1,204 million for the period and translation differences of EUR -471 million. Financing Financing Net debt increased during 2013 by EUR 35 million to EUR 7,849 (7,814 at year-end 2012) million. During 2013 Fortum Corporation issued new long term debt in SEK and EUR amounting to approximately EUR 760 million. At the end of December 2013, the Group’s liquid funds totalled EUR 1,269 million (963 at year-end 2012). Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 113 million (128 at year- end 2012). In addition to the liquid funds, Fortum had access to approximately EUR 2.2 billion of undrawn committed credit facilities. The Group's net financial expenses during 2013 were EUR 318 million (2012: 311). Net financial expenses include changes in the fair value of financial instruments of EUR -16 million (2012: -23). Fortum Corporation's long-term credit rating with S&P was reaffirmed at A- (negative outlook) in December 2013. As of April 2013, Fitch Ratings provides a rating of Fortum Corporation and any subsequently issued securities issued under Fortum's EMTN programme. Fitch's current long-term issuer default rating of Fortum Corporation is A- (negative outlook), which was also reaffirmed in December 2013. Fortum decided to terminate the rating relationship with Moody’s Investors Service in February. At that time, Moody’s had assigned an A2 rating with a negative outlook. Key figures Key figures At year-end 2013, net debt to EBITDA was 3.2 (3.1 at year-end 2012) and comparable net debt to EBITDA 3.4 (2012: 3.2), impacted by EUR 888 million in dividend payments. Gearing was 74% (2012: 73%) and the equity- to-assets ratio 44% (2012: 43%). Equity per share was EUR 11.28 (2012: 11.30). Return on capital employed totalled 9.2% (2012: 10.2%) and return on shareholders’ equity 12.0% (2012: 14.6%). Division reviews Division reviews Power Power The Power Division consists of Fortum’s power generation, power trading and power capacity development as well as expert services for power producers. EUR million Sales - power sales - other sales Operating profit Comparable operating profit Comparable EBITDA Net assets (at period-end) Return on net assets, % Comparable return on net assets, % Capital expenditure and gross investments in shares Number of employees 2013 2,248 2,117 131 921 858 1,003 6,329 14.6 13.8 180 1,709 2012 2,415 2,282 133 1,175 1,146 1,260 6,389 18.7 18.5 190 1,846 2011 2,481 2,353 128 1,476 1,201 1,310 6,247 24.6 19.9 148 1,847 Change 13/12 -7% -7% -2% -22% -25% -20% -1% -22% -25% -5% -7% In 2013, the Power Division’s comparable operating profit was EUR 858 million (2012: 1,146), i.e. EUR 288 million lower than in 2012. Significantly lower hydro volumes, the increased real-estate tax for hydropower in Sweden and the write-down of the Inkoo power plant were the main reasons for the decreased profit. The Nordic annual inflow was approximately 10% lower in 2013 compared to 2012. The annual inflow in Fortum’s hydropower production areas was approximately 30% lower than in 2012. hedging Fortum's power production and nuclear fund adjustments amounting to EUR 38 million (2012: -28). Operating profit was EUR 921 million (2012: 1,175). The operating profit was affected by sales gains totalling EUR 25 million (2012: 57) and by the IFRS accounting treatment (IAS 39) of derivatives used mainly for This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 42 Annual Report 2013 Operating and financial review Power generation by source TWh Hydropower Nuclear power Thermal power Total in the Nordic countries Thermal in other countries Total Nordic sales volume TWh Nordic sales volume of which Nordic Power sales volume 1) 2013 18.1 23.7 1.9 43.7 1.0 44.7 2013 45.3 40.2 2012 25.2 23.4 0.6 49.2 1.1 50.3 2012 50.7 46.8 2011 21.0 24.9 2.2 48.1 1.2 49.3 2011 50.0 44.3 Change 13/12 -28% 1% 217% -11% -9% -11% Change 13/12 -11% -14% 1) The Nordic power sales income and volume does not include thermal generation, market price-related purchases or minorities (i.e. Meri- Pori, Inkoo and imports from Russia). Sales price EUR/MWh Power's Nordic power price 2) 2013 46.4 2012 44.6 2011 46.1 Change 13/12 4% 2) Power’s Nordic power price does not include sales income from thermal generation, market price-related purchases or minorities (i.e. Meri- Pori, Inkoo and imports from Russia). The achieved Nordic power price was EUR 46.4 per MWh, or EUR 1.8 per MWh higher than in 2012. The average system spot price was EUR 38.1 per MWh (2012: 31.2), and the average area price in Finland EUR 41.2 per MWh (2012: 36.6) and in Stockholm, Sweden, (SE3) 39.4 per MWh (2012: 32.3). Significantly lower water reservoir levels and lower inflow decreased hydro generation significantly compared to 2012. Olkiluoto and Forsmark had record-high production in 2013, nuclear outages were also shorter in 2013 resulting in higher volumes than during the corresponding period in 2012. Nuclear availability was at a good level in all reactors except Oskarshamn 1 and 2. The total nuclear volume was thus lower than during the corresponding period in 2012. In 2013, the Power Division had 1.9 TWh (2012: 0.6) of thermal production in the Nordic countries. Hence, the CO2-free production amounted to 94% (2012: 97%). The combined effect of volumes and the achieved Nordic power price had a negative impact of approximately EUR 235 million during January-December 2013 compared to the corresponding period in 2012. Operating costs decreased as a result of savings achieved through the efficiency programme, even with higher depreciation (EUR 9 million). In addition, the Swedish hydro power property taxes increased by EUR 45 million due to higher taxation values. The discontinuation of the Inkoo power plant caused an impairment loss of approximately EUR 20 million. In 2013, the division's total power generation in the Nordic countries was 43.7 TWh (2012: 49.2), which corresponds to an approximately 11% decrease compared to 2012. Fortum has two fully-owned reactors in Loviisa, Finland, and the company is also a co-owner in eight reactors at the Olkiluoto, Oskarshamn and Forsmark nuclear power plants in Finland and Sweden. Nuclear availability was at a good level in all of the reactors except Oskarshamn 1 and 2, and all the annual outages were executed with good results. 2013 was a good production year for Fortum’s Loviisa nuclear power plant. The plant produced a total of 8.04 terawatt hours, which is approximately 9% of Finland’s total electricity production. The load factor, which depicts the power plant’s availability, was 92.5%; Loviisa 1’s load factor was 92.1% and Loviisa 2’s 93%. On an international scale this was good compared to the worldwide load factor for pressurised water power plants of approximately 83% last year. The process to update the real estate taxation values in Sweden for 2013 was finalised in the third quarter of 2013. The update is done on a six-year cycle and Fortum's costs increased by approximately EUR 45 million in 2013 compared to 2012. At the end of April 2013, Fortum filed a complaint with the EU Commission on the Swedish hydro tax to find out whether the structure of the tax is in line with the EU tax and State Aid regulations. The EU Commission informed Fortum in June that it will investigate the case in more detail, and the investigation was still on-going at the end of 2013. In autumn 2013, Fortum announced that it had decided to discontinue electricity production at its Inkoo coal-fired power plant in Finland. Production operations will end in February 2014, after which the company will mothball three units. As a consequence of the decision to cease production, Fortum booked an impairment loss of approximately EUR 20 million in the Power Division’s This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 43 Annual Report 2013 Operating and financial review results. The decision is based on the weak profitability of the Inkoo power plant. In October, Fortum announced that it will supply nitrogen oxides reduction systems to coal-fired power plants owned by EDF Group in Krakow and Wroclaw, Poland. The deliveries are part of a project to be implemented in 2014-2015. The systems delivered by Fortum will bring the nitrogen emissions of the power plants to clearly below the European Union’s new, strict emissions norms that take effect in 2016. The value of the delivery is EUR 90 million, and the project is being implemented in co- operation with Instal Kraków S.A. At year-end, the Power Division's total power generating capacity was 9,475 megawatts (MW) (2012: 9,702), of which 9,335 MW (2012: 9,562) was in the Nordic countries. Hydropower capacity in the Nordic countries totalled 4,624 MW (2012: 4,627), nuclear power capacity 3,276 MW (2012: 3,247) and condensing capacity 1,435 MW (2012: 1,688). Power Division's power generation in the Nordic area by source, TWh Power Division's power generation by area, TWh 75 50 25 0 0.2 21.4 2.3 22.0 22.1 22.0 09 10 2.2 24.9 21.0 11 0.6 23.4 25.2 12 1.9 23.7 18.1 13 75 50 25 0 1.2 25.0 18.7 09 1.1 26.0 1.2 28.3 1.1 29.1 1.0 23.6 20.3 19.8 20.1 20.1 10 11 12 13 Thermal Nuclear Hydro UK Sweden Finland HeatHeat 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. EUR million Sales - heat sales - power sales - other sales Operating profit Comparable operating profit Comparable EBITDA Net assets (at period-end) Return on net assets, % Comparable return on net assets, % Capital expenditure and gross investments in shares Number of employees 2013 1,565 1,164 234 167 288 273 489 4,283 7.2 6.8 397 2,102 2012 1,628 1,158 232 238 344 271 481 4,286 8.8 7.0 474 2,212 2011 1,737 1,238 342 157 380 278 471 4,191 9.9 7.4 329 2,504 Change 13/12 -4% 1% 1% -30% -16% 1% 2% 0% -18% -3% -16% -5% This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 44 Annual Report 2013 Operating and financial review Heat sales volumes during 2013 amounted to 19.0 TWh (2012: 19.7) and power sales volumes from CHP production totalled 4.8 TWh (2012: 4.2). The warm weather in the last quarter reduced heat volumes. The Heat Division’s comparable operating profit in 2013 was EUR 273 million (2012: 271). The profit increase was mainly due to lower fuel costs. New CHP capacity and better availability, especially in Finland, increased power volumes. In 2013, fixed costs were lower due to the efficiency programme. Income from sales of CO2 allowances decreased. when the existing ownership agreement expires. Operating profit in 2013 totalled EUR 288 million (2012: 344). Sales gains related to divestments totalled EUR 18 million (2012: 80). In September, Fortum disclosed that Fortum and the City of Stockholm have renewed their co-ownership agreement of Fortum Värme, the jointly-owned power and heat company operating in the capital area in Sweden. The agreement will come into force as of 2016, At year-end, the Heat Division's power generating capacity totalled 1,398 MW (2012: 1,569), of which 1,048 MW (2012: 1,315) was in the Nordic countries. The Heat Division's total heat production capacity was 7,943 MW (2012: 8,785), of which 5,751 MW (2012: 6,785) was in the Nordic countries. Heat sales by area TWh Finland Sweden Poland Other countries Total Power sales TWh Total 2013 5.4 8.3 4.1 1.2 19.0 2013 4.8 2012 5.8 8.5 4.3 1.1 19.7 2012 4.2 2011 8.5 8.5 4.3 1.3 22.6 2011 6.2 Change 13/12 -7% -2% -5% 9% -4% Change 13/12 14% Heat Division's district heating and industrial steam sales, TWh Heat Division's district heating and industrial steam sales by area, TWh 30 20 2.8 4.0 10 20.1 22.1 3.7 18.9 2.3 2.3 17.4 16.7 0 09 10 11 12 13 30 20 10 0 5.1 9.8 8.0 09 5.6 10.9 9.6 10 5.6 8.5 8.5 11 5.4 8.5 5.8 12 5.3 8.3 5.4 13 Steam Heat Other countries Sweden Finland This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 45 Annual Report 2013 Operating and financial review Russia Russia The Russia Division consists of power and heat generation and sales in Russia. It also includes Fortum’s over 25% holding in TGC-1, which is an associated company and is accounted for using the equity method. EUR million Sales - power sales - heat sales - other sales Operating profit Comparable operating profit Comparable EBITDA Net assets (at period-end) Return on net assets, % Comparable return on net assets, % Capital expenditure and gross investments in shares Number of employees 2013 1,119 822 290 7 156 156 258 3,846 5.2 5.2 435 4,162 2012 1,030 713 300 17 79 68 189 3,848 3.0 2.7 568 4,253 2011 920 590 324 6 74 74 148 3,273 3.5 3.5 694 4,379 Change 13/12 9% 15% -3% -59% 97% 129% 37% 0% 73% 93% -23% -2% Fortum operates in the well-developed industrial regions of the Urals and in the oil- producing Western Siberia. The liberalisation of the Russian wholesale power market has been completed since the beginning of 2011. However, all generating companies continue to sell a part of their electricity and capacity – an amount equalling the consumption of households and a few special groups of consumers – under regulated prices. During the fourth quarter of 2013, Fortum sold approximately 83% of its power production in Russia at a liberalised electricity price. The capacity selection for generation built prior to 2008 (CCS -“old capacity”) for 2013 was held at the end of 2012. In the selection auction, the majority of Fortum’s power plants were selected, with a price level close to the level received in 2012. Approximately 10% (265 megawatts, MW) of the old capacity was not allowed to participate in the selection for 2013, due to tightened technical requirements. It did, however, receive capacity payments at the capacity market price during 2013. The generation capacity built after 2007 under the government capacity supply agreements (CSA – “new capacity”) receives guaranteed payments for a period of 10 years. The period and the prices for capacity under CSA are defined to ensure a sufficient return on investments. At the time of the acquisition in 2008, Fortum made a provision, as penalty clauses are included in the CSA agreement in case of possible delays. If the new capacity is delayed or if the agreed major terms of the capacity supply agreement are not otherwise fulfilled, possible penalties can be claimed. The effect of changes in the timing of commissioning of new units is assessed at each balance sheet date and the provision is changed accordingly. The company’s extensive investment programme is a key driver of growth in Russia. The last units have been slightly delayed by some months and the programme is now due to be completed during the first half of 2015. After the completion of the investment programme, the power generation capacity of the Russia Division will have nearly doubled and will exceed 5,100 MW. Fortum’s goal is to achieve an operating profit level (EBIT) of about EUR 500 million run-rate in its Russia Division during 2015 and to create positive economic value added in Russia. The new capacity will bring income from new volumes sold and will receive considerably higher capacity payments than the old capacity. However, received capacity payments will differ depending on the age, location, type and size of the plant as well as seasonality and availability. The regulator will review the guaranteed CSA payments by re- examining earnings from the electricity-only market three years and six years after the commissioning of a unit and could revise the CSA payments accordingly. In addition, CSA payments can vary somewhat annually because they are linked to the Russian Government long-term bonds with 8 to 10 years maturity. The Russia Division's power sales volumes amounted to 25.6 TWh (2012: 23.3) during 2013. Heat sales totalled 24.1 TWh (2012: 26.4) during the same period. The Russia Division’s comparable operating profit was EUR 156 million (2012: 68) in January-December 2013. The positive effect from the commissioning of the new units amounted to approximately EUR 163 million (2012: 87), including a reversal of the CSA provision totalling EUR 48 million. In addition, the EUR 40 million in compensation for CSA penalties received from E4 (the general contractor of the Nyagan power plant) was booked and recognised in the fourth quarter. The result was burdened by EUR 16 million in bad debt losses for Energostream group and This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 46 Annual Report 2013 Operating and financial review EUR 23 million due to unplanned outages. In addition, volumes were impacted negatively by the lower heat volumes due to exceptionally warm weather at both the beginning and end of 2013 as well as by the divestment of the heating network assets in Surgut in 2012. Operating profit was EUR 156 million (2012: 79) in 2013. In 2012, the operating profit included a gain of EUR 11 million relating to the divestment of heating network assets in Surgut. end of 2014. The capacity payments for the Nyagan unit 3 will start as of 1 January 2015. In late March, Fortum finished the final stages in the construction of its Nyagan power plant unit 1. Accordingly, the company started receiving capacity payments for the unit from 1 April 2013 onwards. As of 1 December also Nyagan power plant unit 2 was commissioned and started receiving capacity payments. Nyagan 3 will be finalised at the At year-end, the Russia Division's total power generating capacity was 4,250 MW (2012: 3,404) and the division's total heat production capacity was 13,466 MW (2012: 13,396). Key electricity, capacity and gas prices for OAO Fortum Electricity spot price (market price), Urals hub, RUB/MWh Average regulated gas price, Urals region, RUB/1,000 m3 Average capacity price for CCS “old capacity”, tRUB/MW/month 1) Average capacity price for CSA “new capacity”, tRUB/MW/month 1) Average capacity price, tRUB/MW/month Achieved power price for OAO Fortum, EUR/MWh 2013 1,021 3,131 163 576 276 32.1 2012 956 2,736 152 539 227 30.6 2011 925 2,548 160 560 209 29.2 Change 13/12 7% 14% 7% 7% 22% 5% 1) Capacity prices paid for the capacity volumes excluding unplanned outages, repairs and own consumption. Electricity Solutions and Distribution Electricity Solutions and Distribution The division is responsible for Fortum's electricity sales and distribution activities and consists of two business areas: Distribution and Electricity Sales. Distribution Distribution Fortum owns and operates distribution and regional networks and distributes electricity to a total of 1.6 million customers in Sweden, Finland and Norway. EUR million Sales - distribution network transmission - regional network transmission - other sales Operating profit Comparable operating profit Comparable EBITDA Net assets (at period-end) Return on net assets, % Comparable return on net assets, % Capital expenditure and gross investments in shares Number of employees 2013 1,075 896 129 50 348 331 550 2012 1,070 877 125 68 331 320 529 3,770 3,889 9.2 8.8 260 852 9.1 8.8 324 870 2011 973 809 96 68 478 295 482 3,589 13.7 8.6 289 898 Change 13/12 0% 2% 3% -26% 5% 3% 4% -3% 1% 0% -20% -2% This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 47 Annual Report 2013 Operating and financial review In 2013, the volume of distribution and regional network transmissions totalled 26.1 TWh (2012: 26.6) and 16.3 TWh (2012: 17.3), respectively. The Distribution business area's comparable operating profit was EUR 331 million (2012: 320). The increased profits are mainly attributable to an increased amount of relocation of cables and parts of the network. Operating profit in 2013 totalled EUR 348 million (2012: 331) and was affected by sales gains totalling EUR 17 million (2012: 5). In January 2013, Fortum announced that it had decided to assess the strategic position of its electricity distribution business; the assessment was concluded in December. The assessment has no impact on Fortum's electricity distribution customers and excludes the company's electricity retail business. The Finnish government submitted a Government Bill for the renewal of electricity market legislation in the spring of 2013, and the new Electricity Market act came into force on 1 September 2013. The new legislation includes implementation of the 3rd electricity market directive and functional demands on electricity grids. This includes that the maximum length of outages should be limited to six hours for urban areas and 36 hours for rural areas after a 15-year transition period. Also, gradual increases in customer compensation for long outages have been included; 150% of the annual grid fee after 8 days of outage and 200% of the annual grid fee for outages longer than 12 days. The maximum amount would be increased from 700 euros to 2,000 euros by 2015. Both in Finland and Sweden, legal processes are under way concerning the appeals filed regarding the network income regulatory period 2012-2015, which came into force as of 1 January 2012. In Finland, the appeal of Volume of distributed electricity in distribution network the national grid company Fingrid is being processed in the Supreme Administrative Court; in Sweden the Administrative Court ruled in favour of the network companies, in December. The Energy Market Inspectorate decided, however, to appeal the decision, and the process continues. At the end of 2013, a total of almost 620,000 smart meters with hourly measurement capabilities had been installed for network customers in Finland over the course of three years in Fortum’s electricity distribution areas (434,000 at year-end 2012). The new meters are part of the smart electricity network of the future, enabling more efficient energy use through, for example, hourly measurement of electricity consumption and real-time billing, and supporting the transition towards a more sustainable energy system. The new legislation on hourly meter reading in Finland became effective as of 1 January 2014. TWh Sweden Finland Norway Estonia Total Number of electricity distribution customers by area Thousands Sweden Finland Norway Estonia Total 2013 14.1 9.5 2.5 - 26.1 2012 14.4 9.8 2.4 - 26.6 2011 14.2 9.5 2.3 0.1 26.1 2013 2012 2011 903 642 103 - 898 633 102 - 893 627 101 24 1,648 1,633 1,645 Change 13/12 -2% -3% 4% N/A -2% Change 13/12 1% 1% 1% N/A 1% This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 48 Annual Report 2013 Operating and financial review Electricity sales Electricity sales The Electricity Sales business area is responsible for retail sales of electricity as well as smart electricity solutions and services to a total of 1.2 million private customers. In addition, standardised products are offered for large corporate customers (Sales Trading). Electricity Sales buys its electricity from the Nordic power exchange. EUR million Sales - power sales - other sales Operating profit Comparable operating profit Comparable EBITDA Net assets (at period-end) Return on net assets, % Comparable return on net assets, % Capital expenditure and gross investments in shares Number of employees 2013 744 723 21 56 48 50 39 148.9 137.9 1 496 2012 722 697 25 39 39 40 51 152.3 203.1 1 509 2011 900 879 21 3 27 29 11 4.2 33.5 5 519 Change 13/12 3% 4% -16% 44% 23% 25% -24% -2% -32% 0% -3% In 2013, the business area's electricity sales volume to retail customers totalled 12.1 TWh (2012: 12.1) and Sales Trading 1.5 TWh (2012: 2.1) (reported until 2012 in the Other segment). Electricity Sales' comparable operating profit in 2013 totalled EUR 48 million (2012: 39). The increase was mainly due to favourable wholesale market conditions, an increased customer base and Sales Trading. The operating profit totalled EUR 56 million (2012: 39) and was affected by an IFRS accounting treatment (IAS 39) of derivatives. Number of electricity distribution customers by area, thousands 2,000 1,000 0 Estonia Sweden 24 99 611 882 09 24 100 620 24 101 627 0 102 633 0 103 642 893 893 898 903 10 11 12 13 Norway Finland Volume of distributed electricity by area, TWh ESD Division's power sales, TWh 30 20 10 0 2.5 14.0 9.4 09 2.7 15.2 10.0 10 2.4 2.4 2.5 14.2 14.4 14.1 9.5 11 9.8 12 9.5 13 Norway and Estonia Sweden Finland 40 30 20 10 0 30.0 29.8 14.4 13.0 13.6 09 10 11 12 13 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 49 Annual Report 2013 Operating and financial review Capital expenditure, investments & Capital expenditure, investments & divestments of shares divestments of shares EUR million Capital expenditure Intangible assets Property, plant and equipment Total Gross investments in shares Subsidiaries Associated companies Available for sale financial assets Total In 2013, capital expenditures and investments in shares totalled EUR 1,299 million (2012: 1,574). Investments, excluding acquisitions, were EUR 1,284 million (2012: 1,558). Capital expenditure by area, 13 EUR million 16 266 10 47 See also Note 19.2 Capital expenditure. 435 1,284 2013 2012 2011 49 1,235 1,284 11 0 4 15 2,000 1,500 1,000 500 0 35 1,523 1,558 5 10 1 16 27 1,381 1,408 47 25 2 74 Capital expenditure and gross investments in shares, EUR million 16 74 1,408 1,558 15 1,284 27 1,222 67 862 09 10 11 12 13 Finland (266) Sweden (497) Russia (435) Other countries (47) 497 Investments in shares Capital expenditures Poland (10) Estonia (16) Norway (13) Fortum expects to start the supply of power and heat from new power plants and to upgrade existing plants as follows: Power Hydro refurbishment Heat Värtan, Sweden Russia 1) Nyagan 3 Chelyabinsk 1 Chelyabinsk 2 Type Hydropower Biofuel (CHP) Gas (CCGT) Gas (CCGT) Gas (CCGT) Electricity capacity MW Heat capacity MW Supply starts 1) 10 130 418 248 248 2014 280 Q2 2016 175 175 2H 2014 1H 2015 1H 2015 1) Start of commercial operation, preceded by test runs, licensing, etc. Power Power Through its interest in Teollisuuden Voima Oyj (TVO), Fortum is participating in the building of Olkiluoto 3 (OL3), a 1,600-MW nuclear power plant unit in Finland. Based on the progress reports received from the plant supplier, AREVA-Siemens Consortium, TVO is preparing for the possibility that the start of regular electricity production at OL3 may be postponed until 2016. The Board of Directors of TVO proposed in February a new EUR 300 million shareholder loan commitment to the company's B-series shareholders. By means of the shareholder loan, TVO will prepare to maintain a sufficient level of equity in the OL3 project and cope with possible additional delays and costs in This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 50 Annual Report 2013 Operating and financial review finalising the project. In June, all the B-series shareholders signed the loan agreement in accordance with the proposal made by the Board of Directors. Fortum's share of the new shareholder loan is 25% (EUR 75 million). In addition, Fortum has earlier committed to another EUR 300 million shareholder loan in the OL3 project; Fortum’s share of that shareholder loan is 25% as well. In June, TVO withdrew EUR 100 million from the first EUR 300 million shareholder loan commitment for the OL3 project; Fortum’s share was EUR 25 million. Wind power production was started at the Blaiken wind power park (75 MW) in the first quarter of the year. The first 30 windmills underwent test runs in February and commercial production was started in the second quarter. The Blaiken wind power park is co-owned by Skellefteå Kraft (60%) and Fortum (40%). In July, Fortum completed the divestment of its 33% holding in Infratek ASA to a fund managed by Triton, following the approval of the Swedish and Norwegian competition authorities. The sales price was approximately EUR 38 million. A sales gain of EUR 11 million was booked in the Power Division's third-quarter 2013 results. In September, Fortum and Metsähallitus agreed to sell their Kuolavaara-Keulakkopää (50 MW) and Joukhaisselkä (25 MW) pre- construction stage wind power projects in Lapland to the Impax New Energy Investors II Fund (“NEF ll”) managed by Impax Asset Management. Fortum's share of the projects is 51% and Metsähallitus’ 49%. The transaction will be implemented in phases and the sale is expected to be completed during the first quarter of 2014. The transaction will have a minor impact on Fortum's Power Division’s financial results and it will be booked over several quarters. The sale price and other terms are not disclosed. HeatHeat In January, the cornerstone for the new, EUR 500 million biofuel-fired CHP plant was laid in Stockholm (Värtan), Sweden; the plant is scheduled to be ready in 2016. This project is the largest ongoing investment in the Heat Division. In May, Fortum's new waste-fuelled CHP plant was inaugurated in Klaipeda, Lithuania. Commercial operation started at the end of the first quarter. The Klaipeda CHP plant has a capacity of 60 MW heat and 20 MW electricity. With an efficiency of almost 90%, it is able to incinerate 230,000 tonnes of waste and biomass annually, and by replacing gas-fired capacity it reduces CO2 emissions by approximately 100,000 tonnes annually. In June, a new bio-fuelled CHP plant was inaugurated in Järvenpää, Finland. Commercial operation started in April. The plant has a capacity of 63 MW heat and 23 MW electricity. Also in June, Fortum announced that it is acquiring district heating operations from the Estonian company Eraküte in the city of Tartu. Eventually, Fortum plans to connect the acquired network area to Fortum's current network supplied by the company's biomass and peat- fired Tartu CHP plant. This will enable a larger use of biomass, reduce CO2 emissions and increase efficiency of heat production. After the acquisition, Fortum owns the whole district heating network of Tartu. In September, Fortum inaugurated the first large-scale biomass CHP plant in Latvian city of Jelgava. The new plant covers approximately 85% of the city’s district heating demand. Fortum’s new power plant uses wood chips as fuel and replaces old natural gas-fired heat production in Jelgava. The production capacity of the Jelgava power plant is 23 MW electricity and 45 MW heat. The plant will produce approximately 110 GWh of electricity and 230 GWh of heat per year. In October, Fortum disclosed that it had sold its Kuusamo combined heat and power plant to the Finnish energy company Adven Oy. The sale had a minor impact on Fortum’s financial result. In November, Fortum sold its 50% stake in the Finnish district heating company Riihimäen Kaukolämpö Oy to the City of Riihimäki and to Riihimäen Kaukolämpö Oy. The divestment had a minor impact on Fortum’s financial result. The total sales price was EUR 11 million. In November, Fortum inaugurated the second unit at the Brista CHP plant in Sigtuna, Stockholm. Brista 2 produces heat and power from 240,000 tonnes of sorted municipal and industrial waste annually and has a capacity of 57 MW heat and 20 MW electricity. The annual heat production is about 500 GWh, and the estimated annual electricity production is 140 GWh. Fortum co-owns the plant (85%) together with the municipal energy company Sollentuna Energi (15%). Final testing was started late 2013. In 2013, Heat launched a new commercial concept for bio-oil. In the future, besides heat and electricity, CHP+ plants will produce bio- oil; in these plants, pyrolysis is integrated into the production process. The commercial scale CHP+ plant is the first of its kind in the world and is being integrated with Fortum’s Joensuu CHP plant in Finland. The Joensuu bio-oil plant’s annual production of 50,000 tonnes corresponds to the heating needs of more than 10,000 households. Fortum Otso® bio-oil can be used at heat plants or in industrial steam production as a replacement for heavy and light fuel oil, and in the future, bio-oil can be used as a raw material for various biochemicals or traffic fuels. In December, Fortum announced that it sold its combined heat and power (CHP) plant as well as its natural gas and district heating network in the town of Nokia to the Finnish energy company Leppäkosken Sähkö. Fortum also announced the sale of the Kauttua combined heat and power plant in Eura, in south-western Finland, to the Finnish energy company Adven Oy. The sales had a minor impact on Fortum’s financial performance and the parties have agreed not to disclose the sales price. In addition, in December, Fortum’s Uimaharju combined heat and power plant ownership was transferred to Stora Enso as part of an arrangement signed in 1990. According to the agreement, the transfer price paid by Stora Enso is approximately EUR 15 million. The impact on Fortum’s financial result was marginal. Russia Russia In late March, Fortum finished the final stages in the construction of its Nyagan power plant unit 1. Accordingly, the company started receiving capacity payments for the unit as of 1 July 2013. The unit's capacity was certified to exceed 420 MW. As of 1 December, Nyagan unit 2 was commissioned and started receiving capacity payments. The second unit's certified capacity is 424 MW. Distribution Distribution In June, Fortum agreed to sell its 47.9% ownership in the Swedish energy company Härjeåns Kraft AB to the Finnish energy company Oy Herrfors Ab, a subsidiary of Katternö Group. The sales price was SEK 445 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 51 Annual Report 2013 Operating and financial review million (approximately EUR 51 million). The transaction was completed in July and Fortum booked a sales gain of EUR 17 million to Distribution’s third-quarter 2013 financial result. In December, Fortum disclosed that it had completed the assessment of the future alternatives of its electricity distribution business; the assessment was launched in January 2013. After thorough consideration, the company concluded that divesting the electricity distribution business is the best solution for the business and its customers, Fortum's shareholders and the company's other businesses. Fortum is evaluating the possible further divestment opportunities country by country. In December 2013, Fortum disclosed that it has agreed to sell its electricity distribution business in Finland to Suomi Power Networks Oy. The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum expects to complete the divestment process during the first quarter of 2014, subject to the necessary regulatory approvals as well as customary closing conditions. Fortum expects to book a one-time sales gain of EUR 1.8-1.9 billion corresponding to approximately EUR 2.00 per share. Other Other In June, Fortum acquired a solar power plant in the state of Rajasthan, in north-western India. The company's short-term ambition is to build a small photo-voltaic (PV) solar portfolio in order to gain experience in different solar technologies and in operating in the Indian power market. The power plant's nominal peak capacity is 5.4 MW and its annual production is approximately 9 gigawatt-hours. The plant will receive a higher, guaranteed electricity price for 25 years. The period and the prices for power generation under the government's power purchase agreement are defined to ensure a sufficient return on investment. In the short term, Fortum is looking to invest some tens of millions of euros − including this acquisition − in developing its PV solar competence and operations in India. Employees Employees Number of employees, 31 Dec Average number of employees Total amount of employee costs, EUR million Fortum’s operations are mainly based in the Nordic countries, Russia and Baltic Rim area. The total number of employees at the end of December was 9,886 (10,371 at the end of 2012). The Power Division had 1,709 employees (2012: 1,846), the Heat Division 2,102 (2012: 2,212), the Russia Division 4,162 (2012: 4,253), the Distribution business area 852 (2012: 870), the Electricity Sales business area 496 (2012: 509) and Other 565 (2012: 681) at the end of December 2013. Possible headcount reductions due to Fortum’s efficiency program have been implemented on a unit level by using natural rotation, rearranging of vacant jobs and by retirement. During 2013, the efficiency programme proceeded according to plan and vacant jobs have primarily been filled internally. The possibilities for internal rotation were improved during the year. By 2013 9,886 10,246 529 2012 10,371 10,600 543 2011 10,780 11,010 529 Number of employees, 31 Dec. 2013 11,613 10,585 10,780 10,371 9,886 09 10 11 12 13 rotating staff between different countries and divisions, we improve know-how and develop the exchange of competencies throughout the organisation. For further details of Group personnel see Note 12 Employee benefits. Personnel by country, 31 Dec. 2013 Other countries (321) 15,000 10,000 5,000 0 Finland (2,477) Sweden (1,939) Russia (4,162) 9,886 Norway (141) Finland (2,477) Estonia (210) Sweden (1,939) Poland (636) Poland (636) Estonia (210) Norway (141) Russia (4,162) Other countries (321) Changes in Fortum’s Management Changes in Fortum’s Management In March, Fortum Corporation's President and CEO Tapio Kuula was diagnosed with a condition requiring medical treatment. He started his sick leave immediately. During Tapio Kuula's leave of absence, Fortum's CFO Markus Rauramo assumed responsibility for the duties of President and CEO. President and CEO Kuula returned to work during the second half of November 2013. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 52 Annual Report 2013 Operating and financial review Kaarina Ståhlberg, LL.M. (Helsinki University), LL.M. (Columbia University, New York), 46, was appointed General Counsel and member of Fortum Corporation's Management Team as of 1 September 2013. She reports to the President and CEO. Events after the balance sheet date Events after the balance sheet date In February, Fortum announced that it will renew its business structure as of 1 March 2014. The target of the reorganisation is to strengthen Fortum's capability to execute the company's strategy in the fast developing operating environment. Fortum will report its 2014 first quarter financial results according to the new structure. The new structure will consist of four reporting segments and staff functions. The four segments are Heat, Electricity Sales and Solutions, Power and Technology, Russia and Distribution. The staff functions are Finance, Strategy, Mergers and Acquisitions, Legal, Human Resources and IT, Communications and Corporate Relations. Matti Ruotsala is appointed Chief Operating Officer (COO) and will act as deputy to the CEO. Fortum's new CFO will be Timo Karttinen, who also will head the Distribution Division. Markus Rauramo will continue in a new role as Executive Vice President, Heat, Electricity Sales and Solutions, Per Langer as Executive Vice President, Hydro Power and Technology and Alexander Chuvaev as Executive Vice President, Russia. New Executive Management members are Tiina Tuomela, Executive Vice President, Nuclear and Thermal Power; Kari Kautinen, Senior Vice President, Strategy, Mergers and Acquisitions and Esa Hyvärinen, Senior Vice President, Corporate Relations. Outlook Outlook Key drivers and risks Key drivers and risks Fortum's financial results are exposed to a number of strategic, political, financial and operational risks. The key factor influencing Fortum's business performance is the wholesale price of electricity in the Nordic region. The key drivers behind the wholesale price development in the Nordic region are the supply-demand balance, fuel and CO2 emissions allowance prices as well as the hydrological situation. The completion of Fortum’s investment programme in Russia is also one key driver to the company’s result growth, due to the increase in production volumes. The continued global economic uncertainty and Europe's sovereign-debt crisis has kept the outlook for economic growth unpredictable. The overall economic uncertainty impacts commodity and CO2 emissions allowance prices, and this could maintain downward pressure on the Nordic wholesale price for electricity in the short term. In the Russian business, the key factors are the regulation around the heat business and further development of electricity and capacity markets. Operational risks related to the investment projects in the current investment programme are still valid. In all regions, fuel prices and power plant availability also impact profitability. In addition, increased volatility in exchange rates due to financial turbulence could have both translation and transaction effects on Fortum's financials, especially through the SEK and RUB. In the Nordic countries, also the regulatory and fiscal environment for the energy sector has added risks for utility companies. For further details on Fortum's risks and risk management, see the Risk management section of the Operating and financial review and Note 3 Financial risk management. Nordic market Nordic market Despite macroeconomic uncertainty, electricity will continue to gain a higher share of the total energy consumption. Fortum currently expects the average annual growth rate in electricity consumption to be 0.5%, while the growth rate for the nearest years will largely be determined by macroeconomic development in Europe and especially in the Nordic countries. The new 650-MW Estlink-2 interconnector between Finland and Estonia increases market coupling between the Nordic and Baltic countries. During the fourth quarter of 2013, the price of oil improved, whereas coal and EUA ended close to their opening levels. The price of electricity for the upcoming twelve months clearly decreased in the Nordic area, whereas in Germany it was largely unchanged. In late January 2014, the future quotation for coal (ICE Rotterdam) for the rest of 2014 was around USD 81 per tonne, and the price for CO2 for 2014 was about EUR 6 per tonne. In late January 2014, the electricity forward price in Nord Pool for the rest of 2014 was around EUR 32 per MWh. For 2015 the price was around EUR 33 per MWh, and for 2016 around EUR 33 per MWh. In Germany, the electricity forward price for the rest of 2014 was around EUR 36 per MWh and for 2015 EUR 37 per MWh. In late January 2014, Nordic water reservoirs were about 1 TWh above the long-term average and 1 TWh above the corresponding level of 2013. Power Power The Power Division's Nordic power price typically depends on such factors as hedge ratios, hedge prices, spot prices, availability and utilisation of Fortum's flexible production portfolio, and currency fluctuations. Excluding the potential effects from the changes in the power generation mix, a 1 EUR/MWh change in the Power Division’s Nordic power sales (achieved) price will result in an approximately EUR 45 million change in Fortum's annual comparable operating profit. In addition, the comparable operating profit of the Power Division will be affected by the possible thermal power generation volumes and its profits. The on-going multi-year Swedish nuclear investment programmes are expected to enhance safety, improve availability and increase the capacity of the current nuclear fleet. The implementation of the investment This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 53 Annual Report 2013 Operating and financial review programmes could, however, affect availability. Fortum’s power procurement costs from co-owned nuclear companies are affected by these investment programmes through increased depreciation and finance costs of associated companies. Russia Russia The generation capacity built after 2007 under the Russian Government's Capacity Supply Agreements (CSA – “new capacity”) receives guaranteed capacity payments for a period of 10 years. Prices for capacity under CSA are defined in order to ensure a sufficient return on investments. Capacity not under CSA competes in the competitive capacity selection (CCS – “old capacity”). The capacity selection for 2014 was held in September 2013. In the selection auction, the majority of Fortum’s power plants were selected. The volume of Fortum’s installed capacity not selected in the auction totalled 132 MW, which is approximately 4.6% of Fortum’s total installed capacity. All of Fortum’s capacity was allowed to participate in the selection for 2014. The Russia Division's new capacity will be a key driver for earnings growth in Russia as it will bring income from new volumes sold and also receive considerably higher capacity payments than the old capacity. However, the received capacity payment will differ depending on the age, location, size and type of the plants as well as seasonality and availability. The return on the new capacity is guaranteed, as regulated in the CSA. The regulator will review the earnings from the electricity-only market three years and six years after the commissioning of a unit and could revise the CSA payments accordingly. CSA payments can vary somewhat annually because they are linked to Russian Government long-term bonds with 8 to 10 years maturity. Fortum estimates that the commissioning of the Nyagan unit 3 will be finalised by the end of 2014. The capacity payments for Nyagan unit 3 will start as of 1 January 2015, one year earlier than originally planned in 2008. In accordance with the CSA terms, no penalties for unit 3 can start to run before 1 January 2016. The last two units of Fortum's Russian investment programme are being built in Chelyabinsk instead of Tyumen, as originally planned. The units constructed at the Chelyabinsk GRES power plant, originally planned to be commissioned by the end of 2014, have been slightly delayed and are scheduled to be finalised during the first half of 2015 mainly due to extensive groundwork at the brownfield site. The delay will not cause any penalties. In addition, Fortum plans to modernise and upgrade the existing equipment of the power plant. 1.9% in order to reach the planned total increase of approximately 15% in 2013 compared to 2012. According to a forecast made by the Russian Ministry of Economic Development, Russian gas price indexation will not take place as of July 2014. However, year-on-year gas price growth is estimated to be 7.6% in 2014. The value of the remaining part of the investment programme, calculated at the exchange rates prevailing at the end of December 2013, is estimated to be approximately EUR 0.5 billion, as of January 2014. After completing the on-going investment programme by mid-2015, Fortum’s goal is to achieve an operating profit level (EBIT) of about EUR 500 million run-rate in its Russia Division during 2015 and to create positive economic added value in Russia. The Russian Government’s earlier target to increase gas prices by 15% annually to reach netback price parity with European prices by 2018 has recently been changed. The forecast by the Russian Ministry of Economic Development now suggests much lower annual increases. The Russia Division’s profits are impacted by possible changes in gas prices, currency exchange rates and other regulations. The suggested gas price development and the weaker Russian rouble make the approximately EUR 500 million operating profit level (EBIT) goal more challenging for the Division, but the company is making every effort to mitigate the negative impacts. In 2013, the Ministry of Energy stated that a Heat reform should be developed before changing the current Electricity and Capacity Market model. Therefore, at the end of the year, the Ministry of Energy proposed a new heat market model (for public discussion), which is supposed to ensure transition to economically justified heat tariffs by 2020 and to attract investments into the heat sector. The new regulation concept is at an early stage and expected to be further developed during 2014. Since the beginning of 2013, wholesale gas prices (except for private household and industrial consumers) have been reviewed quarterly. In February 2013, the Board of Russia's Federal Tariff Service (FTS) adopted a decision according to which the wholesale gas price for industrial consumers decreased by 3% as of the second quarter 2013, compared to first quarter. As of 1 July 2013, the Russian Government increased gas prices by 15% compared to June 2013, and in October 2013 they were further increased by Distribution Distribution Fortum has disclosed that it has completed the assessment of the future alternatives of its electricity distribution business; the assessment was launched in January 2013. As a result, Fortum is evaluating the possible divestment opportunities country by country. Fortum's electricity distribution business in Finland is to be sold to Suomi Power Networks Oy. The divestment process is expected to be finalised during the first quarter of 2014 subject to the necessary regulatory approvals as well as customary closing conditions. The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum expects to book a one-time sales gain of EUR 1.8-1.9 billion, corresponding to approximately EUR 2.00 per share in its Electricity Distribution and Sales Division's first quarter 2014 results. A total of 340 employees will transfer with the business at closing. The work to define the Swedish network income regulation model for the next regulatory period 2016-2019 has been ongoing and a first proposal from the Energy Market Inspectorate is expected to come during the first quarter of 2014. Capital expenditure and Capital expenditure and divestments divestments Fortum currently expects its capital expenditure, excluding Värme in 2014, to be approximately EUR 0.9-1.1 billion, excluding potential acquisitions (including the Finnish distribution business until the end of first quarter 2014). The annual maintenance capital expenditure is estimated to be about EUR 400-500 million in 2014, below the level of depreciation. Capex for electricity distribution in Finland has been approximately EUR 150 million annually. Fortum will gradually decrease its financing to Värme during 2014-2015. At the end of 2013, Värme's share of debt totalled approximately EUR 1 billion. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 54 Annual Report 2013 Operating and financial review Taxation Taxation The effective corporate tax rate for Fortum in 2014 is estimated to be 19–21%, excluding the impact of the share of profits of associated companies and joint ventures, non-taxable capital gains and non-recurring items. In Finland, the corporate tax rate was reduced from 24.5% to 20% as of 1 January 2014. In Sweden, the corporate tax rate was decreased from 26.3% to 22% as of 1 January 2013. The Finnish Parliament approved the power plant tax (previously called windfall tax) in December 2013. It will be enacted later and will be applied from the beginning of 2014, provided that the EU Commission approves it. Fortum has filed a complaint on the tax to the Commission, arguing that it is not in line with general tax principles in Finland and that it constitutes illegal state aid for those plants that are not subject to the tax. If implemented, the estimated impact on Fortum would be approximately EUR 25 million annually. Hedging Hedging At the end of December 2013, approximately 60% of the Power Division's estimated Nordic power sales volume was hedged at approximately EUR 43 per MWh for the calendar year 2014. The corresponding figures for the calendar year 2015 were about 20% at approximately EUR 41 per MWh. Research and development Research and development Sustainability is at the core of Fortum’s strategy, and Fortum's research and development activities promote environmentally-benign energy solutions. Investments in the development of renewable energy production, like wave and solar power, are an important part of Fortum’s strategy implementation. In 2013, Fortum decided to participate in the Sustainable Bioenergy Solutions for Tomorrow (BEST) research programme established by two Strategic Centres for Science, Technology and Innovation (SHOK), CLEEN Oy and FIBIC Oy, in Finland and India. The programme's goal is to encompass a completely new kind of collaboration between forestry and energy know-how. Fortum is also a co-signer along with DCNS and AW-Energy of a development agreement in wave power research and development with the support of La Région Bretagne. As part of the agreement, the companies will develop a joint 1.5-MW wave power demonstration project. Fortum will be responsible for project development and will be the owner of the demonstration park. The agreement is an extension to the wave power research and development collaboration initiated in 2011 by DCNS and Fortum. In addition, Fortum received a special award for innovation from the Global District Energy Climate Awards organisation. The prize was awarded to Fortum for its investment project using fast pyrolysis technology to produce bio-oil in connection with existing district heating production and a combined heat and power plant. Commissioned at the end of the year, the commercial plant is the first of its kind in the world and integrated with R&D expenditure, EUR million R&D expenditure, % of sales Sustainability Sustainability The hedge price for the Power Division's Nordic generation excludes hedging of the condensing power margin. In addition, the hedge ratio excludes the financial hedges and physical volume of Fortum's coal-condensing generation as well as the division’s imports from Russia. The reported hedge ratios may vary significantly, depending on Fortum's actions on the electricity derivatives markets. Hedges are mainly financial contracts, most of them Nord Pool forwards. Fortum’s Joensuu CHP plant. The use of bio- oil has significant positive environmental impacts because energy produced with bio- oil reduces greenhouse gas emissions by as much as 90% or more compared to fossil fuels. Fortum acquired a solar power plant in the state of Rajasthan, in north-western India. The company's short-term ambition is to build a small photo-voltaic (PV) solar portfolio in order to gain further experience in different solar technologies. The Group reports its R&D expenditure on a yearly basis. In 2013, Fortum’s R&D expenditure was EUR 49 million (2012: 41) or 0.8% (2012: 0.7%) of sales. 2013 49 0.8 2012 41 0.7 2011 38 0.6 Fortum strives for balanced management of economic, social and environmental responsibility in the company’s operations. Fortum's sustainability targets consist of Group-level key indicators and division-level indicators. The Group-level sustainability targets emphasise Fortum's role in society and measure not only environmental and safety targets, but also Fortum's reputation, customer satisfaction, and the security of supply of power and heat. The achievement of the sustainability targets is monitored through monthly, quarterly and annual reporting. As of the beginning of 2013, results of the sustainability indicators have been regularly reported to Fortum's Board of Directors. In June 2013, the Board of Directors decided on This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 55 Annual Report 2013 Operating and financial review a more systematic handling of sustainability issues and supplemented their working order with the approval of Fortum Corporation's Sustainability Policy, sustainability target setting as well as follow-up and the review of Fortum's Sustainability Report. The company is listed on the STOXX Global ESG Leaders, the NASDAQ OMX and OMX GES Sustainability Finland indices. In October 2013, Fortum was awarded as the best Nordic company in the Nordic Climate Disclosure Leadership Index focusing on management and reporting of climate issues. Sustainability indicators at the Group level Fortum received its all-time high score – a full 100/100. In December Fortum was listed in ECPI® Indices. Specific CO2 emission from power generation in the EU (g/kWh), 5-year average Specific CO2 emission from total energy production (g/kWh), 5-year average Overall efficiency of fuel use as a five-year average, % Environmental incidents Energy availability of CHP plants in the EU, % SAIDI*, minutes in 2013 Lost workday injury frequency (LWIF) for own personnel * System Average Interruption Duration Index corporate income taxes EUR 220 million (2012: 74) but also several other taxes. In 2013, Fortum’s taxes borne were EUR 644 million (2012: 565). Taxes borne include corporate income taxes, production taxes, employment taxes, taxes on property and cost of indirect taxes. Production taxes include also production taxes and taxes on property paid through electricity purchased from associated companies. Fortum's effective tax rate (ETR) was 14.7% (4.7% in 2012) and total tax rate (TTR) 33.8% (2012: 29.0%). See also note 14 Income tax expense. In addition, Fortum administers and collects different taxes on behalf of governments and authorities. Such taxes include e.g. VAT, excise taxes on power consumed by customers, payroll taxes and withholding taxes. The amount of taxes collected by Fortum was EUR 834 million (2012: 749). In 2012 Fortum reported VAT as a gross amount for input and output VAT. The gross amount of taxes collected was EUR 3,918 million in 2012. Targets for reputation and customer satisfaction are monitored annually. In the One Fortum Survey for 2013 the result was 69.8 (target for 2013 was 69.6) and the company’s reputation among the key stakeholders was good. Customer satisfaction improved in all divisions. Economic responsibility Economic responsibility In the area of economic responsibility, the focus is on competitiveness, performance excellence and market-driven production. The aim is to create long-term economic value and enable profitable growth and added value for shareholders, customers, employees, suppliers, and other key stakeholders in the company's operating areas. Fortum's 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 Fortum measures its 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). In addition, Fortum also uses the applicable Global Reporting Initiative (GRI) G3.1 indicators for reporting economic responsibility. Fortum as a tax payer Fortum as a tax payer Fortum supports social development and well-being of the areas of operations by e.g. paying taxes. The tax benefits Fortum produces to society include not only Five-year average 66 186 66 Target < 80 < 200 > 70 < 40 > 92 < 110 < 1.0 2013 70 196 61 51 94 220 1.1 Effective tax rate and Total tax rate, % 29.0 33.8 14.7 4.7 2012 2013 40 35 30 25 20 15 10 5 0 Effective tax rate Total tax rate Taxes borne 2013 by country, EUR million 31 32 25 174 644 382 Finland (174) Sweden (382) Russia (25) Netherlands (32) Other countries (31) Environmental responsibility Environmental responsibility Fortum's environmental responsibility emphasises mitigation of climate change, efficient use of resources as well as This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 56 Annual Report 2013 Operating and financial review Fortum's total CO2 emissions in 2013 amounted to 21.3 million tonnes (Mt) (2012: 20.7), of which 6.0 Mt (2012: 4.8) were within the EU's emissions trading scheme (EU ETS). Since 2013, electricity production does not receive free allowances in the EU ETS. The amount of free allowances for heat will gradually decrease during 2013-2020 as well. Plant-specific free allowances have not yet been confirmed for 2013. The preliminary estimate for Fortum is about 3.0 Mt, which is clearly less than the 5.4 Mt in 2012. Fortum's energy efficiency target is to raise the overall efficiency of fuel use to 70% as a five-year average. In 2013, the overall efficiency of fuel use was 61% (2012: 64%) and the five-year average after September was 66% (2012: 67%), meaning the target level was not met. Fortum's target is for fewer than 40 environmental incidents annually. In 2013, a total of 51 (2012: 36) environmental incidents took place in Fortum's operations. This includes 19 leaks or spills of oil into the environment, 12 fires, 14 environmental non- compliances, four explosions and two International Nuclear Event Scale 1 incidents (INES). None of these incidents had significant environmental or financial impacts. management of the impacts of our energy production, distribution and supply chain. Our know-how in CO2-free hydro and nuclear power production and in energy-efficient CHP production is highlighted in environmental responsibility. Fortum’s Group-level environmental targets are related to CO2 emissions, energy efficiency as well as environmental incidents and non- compliances. At the end of September 2013, ISO 14001 certification covered 96% of Fortum's power and heat production and distribution operations worldwide. Fortum’s climate targets over the next five years are: specific CO2 emissions from power generation in the EU below 80 grams per kilowatt-hour (g/kWh) and total specific CO2 emissions from both electricity and heat production in all countries below 200 g/kWh. Both targets are calculated as a five-year average. At the end of December 2013, the five-year average for specific CO2 emissions from power generation in the EU was at 66 g/kWh (2012: 60) and the total specific CO2 emissions from energy production were at 186 g/kWh (2012: 179), both better than the target level. Fortum’s total CO2 emissions (million tonnes, Mt) Total emissions Emissions subject to ETS Free emission allocation Emissions in Russia 1) Pending approval of the European Commission 2013 21.3 6.0 3.0 1) 15.3 2012 20.7 4.8 5.4 15.6 2011 23.5 8.0 6.8 14.7 Change 13/12 3% 25% -44% -2% Social responsibility Social responsibility In the area of social responsibility, Fortum's innovations and the secure supply of low- carbon power and heat support the development of society and increase well- being. Good corporate citizenship, reliable energy supply and ensuring a safe working environment for all employees and contractors at Fortum sites are emphasised. At the end of 2013, OHSAS 18001 certification covered 75% of Fortum's power and heat production and distribution operations worldwide. In 2013, the average energy availability of Fortum's European CHP plants was 93.9 (2012: 90.9), which is above the annual target level of 92%. In electricity distribution, the cumulative SAIDI (System Average Interruption Duration Index) was 220 minutes (2012: 103) in 2013, while the annual target is less than 110 minutes. The high SAIDI was caused by severe storms in Finland and Sweden in December 2013. In 2013, the Group-level lost workday injury frequency (LWIF) was 1.1 (2012: 1.5), which is close to the target level of less than one per million working hours for Fortum's own personnel. In contrast to the LWIF for Fortum's own employees, contractor safety has not developed as desired. The injury frequency is higher than in 2012. Safety improvements were implemented in 2013 and include more precise instructions and requirements and increased supervision of high-risk jobs. Fortum's categorical target is to avoid serious injuries. Fortum wants to conduct business with viable companies that act responsibly and comply with the Fortum Code of Conduct and the Fortum Supplier Code of Conduct. In 2013, Fortum audited 13 suppliers, focusing on biomass suppliers and contractors. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 57 Annual Report 2013 Operating and financial review Risk management Risk management Risk management is an integrated part of business planning and performance management. The objective of risk management within Fortum is to support the creation of the corporate strategy, enable the strategy execution, support the achievement of agreed financial targets, and avoid unwanted operational events. Risk management framework and objectives Risk management framework and objectives Involvement in the power and heat business exposes Fortum to several types of risks. The main sources of risk in the Nordic business are electricity prices and volumes, which in turn are affected by the weather in the Nordic region, the development of the global commodity markets and availability of power production. The Russian business is exposed to risks related to fuel, electricity and capacity prices and volumes, which are to a large extent subject to regulation, although the market is developing. Fortum is continuously developing its risk management capabilities to cope with prevailing market conditions, developing operations and an ever changing business environment. In the operational risk management area, the focus has been on further enhancing the framework for internal controls, compliance risk management and business continuity management. At the same time, market and credit risk modelling has been developed in order to cope with an increasingly global and volatile market. Also the new market entries like India add complexity and risk in operations. Risk management objective Risk management objective The objective of risk management within Fortum is to support the creation of the corporate strategy, enable the execution of the corporate strategy, support the achievement of agreed financial targets and avoid unwanted operational events. Corporate risk policy structure Corporate risk policy structure Group risk policy Group risk policy Fortum's Board of Directors annually approves the Group Risk Policy, which sets the objective, principles and division of responsibilities for risk management activities within the Group as well as defines the overall risk management process. The CEO approves Group Risk Policy appendices, which include instructions for managing commodity market risks, counterparty risks, operational risks, financial risks and insurances. Corporate Treasury is responsible for managing the Group's currency, interest rate, liquidity and refinancing risks as well as for insurance management. Credit Control in Corporate Risk Management is responsible for assessing and consolidating the Group's exposure to counterparty risks, monitoring the creditworthiness of counterparties and approving counterparty credit limits. Corporate IT is responsible for managing IT information and security risks. There are also corporate units dealing with risks related to human resources, laws and regulation, and sustainability. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 58 Annual Report 2013 Operating and financial review Risk management organisation Risk management organisation Fortum's risk reporting structure Fortum's risk reporting structure The Audit and Risk Committee is responsible for risk oversight within the Group. Corporate Risk Management is an independent function headed by the Chief Risk Officer (CRO), who reports to the CFO, and is responsible for assessing and reporting the Group's consolidated risk exposure to the Board of Directors and Group Management. Corporate Risk Management also monitors and reports risk in relation to mandates approved by the CEO. The main principle is that risks are managed at the source, unless otherwise agreed. In order to maintain a strict segregation of duties, risk control functions in the divisions and corporate units, like Treasury, are responsible for reporting risks to Corporate Risk Management. Risk management process Risk management process The risk management process consists of identification of risks, risk assessment, risk response and risk control. Risks are primarily identified and assessed by divisions and corporate units in accordance with Group instructions and models that are approved by Corporate Risk Management. Every function is also responsible for responding to risks by taking appropriate actions. Risk responses can be one of, or a combination of, mitigating, transferring or absorbing the risk. Fortum's risk management process Fortum's risk management process This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 59 Annual Report 2013 Operating and financial review Risk factors Risk factors Risk control, monitoring and reporting is carried out by the divisional and corporate unit risk control functions. The frequency of reporting is dependent upon the scope of the business. For example, trading activities and limit breaches are reported daily whereas strategic and operational risks are reported as part of the annual business planning process and followed up at least quarterly in management reviews. Corporate Risk Management assesses and reports the Group's consolidated exposure to financial and market risks to Group Management and the Board of Directors on a monthly basis. Fortum's risk map Fortum's risk map Strategic risks Strategic risks Fortum's strategy is based on three areas of focus: • Leverage the strong Nordic core • Create solid earnings growth in Russia • Build a platform for future growth Investment, integration and Investment, integration and project risks project risks Fortum's growth strategy includes expansion of operations. As a result of ongoing integrations or any future acquisitions, there is a risk to existing operations, including: • additional demands placed on senior management, who are also responsible for managing existing operations; • increased overall operating complexity and requirements for personnel and other resources in other cultures; • the need to attract and retain sufficient numbers of qualified management and other personnel. Within the projects that are part of the Russian investment programme, as with all large projects, there is a risk of delays, for example in establishing new capacity and grid connections. The project risks are closely monitored by the management and risks are followed up in monthly management reporting. Political and regulatory risks Political and regulatory risks The political and regulatory environment has a clear impact on energy businesses. This applies both to existing and potential new businesses and market areas. Fortum is thus exposed to regulatory risks in various countries. Nordic/EU Nordic/EU Nordic/EU Policy harmonisation, infrastructure development and integration of the Nordic electricity market towards continental Europe depend to large extent on the actions of authorities. The current trend of national policies could even endanger market-driven development of the energy sector and the uncertainty with regard to future policy targets and framework is currently considerable. Fortum favours market-driven development, which would mean e.g. more interconnections and competition in addition to policy harmonisation, by maintaining an active dialogue with all stakeholders. Currently the biggest potential risks within the policy framework relate to the electricity market model, targets with regard to future climate change mitigation and renewable energy and taxation. In particular, the interlinkages of these issues create uncertainty, as they are overlapping and undermine the effects of each other. The EU is currently discussing capacity remuneration mechanisms that would change the market model. The specific details of targets for CO2 emissions and renewables for 2030 are also under discussion. At the end of 2013 in Finland, a Government Bill for a windfall tax on some non-emitting and old power plants was approved. Furthermore, the nuclear safety directive is under revision, and This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 60 Annual Report 2013 Operating and financial review a discussion on broadening nuclear liability in the EU is starting. All these would pose risks, but also opportunities, for energy companies. To manage these risks and proactively participate in the development of the political and regulatory framework, Fortum maintains an active dialogue with the bodies involved in the development of laws and regulations at national and EU-levels. Russia Russia Russia is exposed to political, economic and social uncertainties and risks resulting from changes in policies, legislation, economic and social upheaval and other similar factors, as other similar countries. Fortum owns and operates heat and power generation assets in Russia under the operations of OAO Fortum. The wholesale power market deregulation in Russia has proceeded well and to a large extent according to original plans. The main policy- related risks in Russia are linked to the development of the whole energy sector, part of which, namely wholesale electricity, is liberated while other parts, like gas, heat, and retail electricity, are not. Currently, there is the risk that the Government will freeze tariffs of certain regulated products including gas, which creates a risk for Fortum's efficient operations. Cross-subsidies, which are supposed to be eliminated but still exist, compromise the competitiveness of energy- efficient combined heat and power (CHP) production. Artificially low energy prices do not benefit anyone in the long run, as they promote inefficiency by limiting investments in efficiency. Political risk concerning taxes Political risk concerning taxes The current economic situation in Fortum's key operating territories has created an unstable tax environment leading to new or increased taxes and new interpretations of existing tax laws. This in turn has led to unexpected challenges for Fortum in the way the Group is organised and how its operations are taxed. The certainty and visibility around taxes has decreased. Where there is uncertainty, Fortum seeks to maintain its position in line with its tax policy. Legal and compliance risks Legal and compliance risks Fortum's operations are subject to rules and regulations set forth by the relevant authorities, exchanges, and other regulatory bodies in all markets in which it operates. Inadequacies in the legal systems and law enforcement mechanisms in Russia and Commodity market risks Commodity market risks certain other emerging markets expose Fortum to a risk of loss resulting from criminal or abusive practices by competitors, suppliers, or contracting parties. Fortum's ability to operate in Russia may also be adversely affected by difficulties in protecting and enforcing its rights in disputes with its contractual partners or other parties concerning, for example, regulatory influence on business and unfair market conditions, and also by future changes to local laws and regulations. Fortum maintains strict internal market conduct rules and has procedures in place to prevent, for example, the use of confidential information before it is published. Segregation of duties and internal controls are enforced to minimise the possibilities of unauthorised activities. Compliance with competition legislation is an important area for Fortum. Fortum has also enhanced its compliance risk management by establishing a process to systematically and separately identify and mitigate compliance risks linked to the operational risk framework. This process aims to capture also potential bribery risks. Fortum has also rolled-out the Code of Conduct, including the bribery risk assessment process, to enhance the compliance to business ethics. Commodity market risk refers to the potential negative effects of market price movements or volume changes in electricity, fuels and environmental values. A number of different methods, such as Profit-at-Risk and Value-at- Risk, are used throughout the Group to quantify these risks and to take into account their interdependencies. Stress-testing is carried out in order to assess the effects of extreme price movements on Fortum's earnings. monitored in quarterly meetings and in monthly reporting. All products and marketplaces used for hedging and trading are approved by the CRO. For further information on hedge ratios, exposures, sensitivities and outstanding derivatives contracts, see Note 3 Financial risk management. Fortum hedges its exposure to commodity market risks in accordance with the Hedging Guidelines. Risk taking is limited by risk mandates, including volumetric limits, Profit- at-Risk limits and stop-loss limits. The Profit- at-Risk measure in the form of Group minimum EBITDA is monitored by management to ensure that Fortum can deliver on its financial commitments without weakening its financial position. The development of minimum EBITDA is Electricity price and volume Electricity price and volume risks risks Fortum is exposed to electricity market price movements and volume changes mainly through its power generation and customer sales businesses. In competitive markets, such as in the Nordic region, the price is determined as the balance between supply and demand. The short-term factors affecting electricity prices on the Nordic market include hydrological conditions, temperature, CO2 allowance prices, fuel prices, and the import/export situation. In the Nordic business, power and heat generation, customer sales and electricity distribution volumes are subject to changes in, for example, hydrological conditions and temperature. Uncertainty in nuclear production due to prolonged maintenance or delays in upgrades, especially in co-owned plants in Sweden, has also increased in recent years. Electricity price and volume risks are hedged by entering into electricity derivatives contracts, primarily on the Nordic power exchange, Nasdaq OMX (Nord Pool). The objective of hedging is to reduce the effect of electricity price volatility on earnings and cash flows, and to secure a minimum level of earnings and cash flow, which ensures that financial commitments can be met. Hedging strategies cover several years in the short to This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 61 Annual Report 2013 Operating and financial review Risk Management in Fortum's Performance Management Risk Management in Fortum's Performance Management Fuel price and volume risks Fuel price and volume risks Heat and power generation requires the use of fuels that are purchased on global or local markets. The main fuels used by Fortum are uranium, coal, natural gas, peat, oil, and various biomass-based fuels such as wood pellets. For fuels that are traded on global markets such as coal and oil, the uncertainty in price is the main factor. Prices are largely affected by demand and supply imbalances that can be caused by, for example, increased demand growth in developing countries, natural disasters or supply constraints in countries experiencing political or social unrest. The main fuel source for heat and power generation in Russia is natural gas. Natural gas prices are partially regulated, so the exposure is limited. For fuels traded on local markets, such as bio-fuels, the volume risk in terms of access to the raw material of appropriate quality is more significant as there may be a limited number of suppliers. Exposure to fuel prices is limited to some extent because of Fortum's flexible generation possibilities that allow for switching between different fuels according to prevailing market conditions and, in some cases, the fuel price risk can be transferred to the customer. The remaining exposure to fuel price risk is mitigated through fixed-price purchases that cover forecasted consumption levels. Fixed-price purchases can be either for physical deliveries or in the form of financial hedges. amount of CO2 emissions. The CO2 emissions trading scheme enhances the integration of the Nordic market with the rest of Europe. In addition to the emissions trading scheme, there are other trading schemes in environmental values in place in Sweden, Norway and Poland. There is currently no trading scheme in Russia for emissions or other environmental values. The main factor influencing the prices of CO2 allowances and other environmental values is the supply and demand balance. Part of Fortum's power and heat generation is subject to requirements of these schemes. Fortum manages its exposure to these prices and volumes through the use of derivatives, such as CO2 forwards, and by ensuring that the costs of allowances are taken into account during production planning. medium term and are executed by the trading unit within set mandates. These hedging strategies are continuously evaluated as electricity and other commodity market prices, the hydrological balance and other relevant parameters change. In Russia, electricity prices and capacity sales are the main sources of market risk. Market deregulation has developed as planned and the electricity price is highly correlated with the gas price. Hedges are mainly done through regulated bilateral agreements, but the financial market is developing and Fortum is utilising the possibilities in these markets to further mitigate electricity price risks. Emission and environmental Emission and environmental value risks value risks The European Union has established an emissions trading scheme to reduce the Financial Risks Financial Risks Liquidity and refinancing risks Liquidity and refinancing risks The power and heat business is capital intensive. Consequently, Fortum has a regular need to raise financing. In order to manage these risks, Fortum maintains a diversified financing structure in terms of debt maturity profile, debt instruments and geographical markets. Fortum manages liquidity and refinancing risks through a combination of cash positions and committed credit facility agreements with its core banks. Fortum shall at all times have access to cash, bank deposits and unused committed credit facilities, including overdrafts, to cover all loans maturing within the next twelve-month period. Interest rate risks Interest rate risks Fortum's debt portfolio consists of interest- bearing assets and liabilities on a fixed- and This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 62 Annual Report 2013 Operating and financial review floating-rate basis with differing maturity profiles. Fortum manages the duration of the debt portfolio by entering into different types of financing contracts and interest rate derivative contracts, such as interest rate swaps and forward rate agreements (FRAs). exchange rates can therefore have an effect on Fortum's earnings and balance sheet. The main currency exposures are EUR/SEK, arising from Fortum's extensive operations in Sweden and EUR/RUB from translation exposure of OAO Fortum in Russia. Currency risks Currency risks Fortum has cash flows, assets and liabilities in currencies other than the euro. Changes in Fortum's currency exposures are divided into transaction exposures (foreign exchange exposures relating to contracted cash flows and balance sheet items where changes in exchange rates will have an impact on Counterparty risks Counterparty risks earnings and cash flows) and translation exposure (foreign exchange exposure that arises when profits and balance sheets in foreign entities are consolidated at the Group level). For transaction risks, the main principle is that all material exposures are hedged while translation exposures are not hedged or are hedged selectively. Fortum is exposed to counterparty risk whenever there is a contractual arrangement with a customer, supplier, financing partner or trading counterparty. During 2013 Fortum enhanced the country entry and partner risk assessment processes when entering new markets and/or partnerships. Credit risk exposures relating to financial derivative instruments are often volatile. Although the majority of commodity derivatives are cleared through exchanges, derivatives contracts are also entered into directly with external counterparties. Such contracts are limited to high-credit-quality counterparties active on the financial or commodity markets. with financial institutions as well as to banks that provide guarantees for suppliers and contracting parties. Limits with banks and financial institutions are followed closely so that exposures can be adjusted as ratings or the financial situation changes. obligations are entered into without proper, reasonable and viable credit checks, and creditworthiness is continuously monitored through the use of internal and external sources to ensure that actions can be taken immediately if changes occur. Credit risk exposures relating to customers and suppliers are spread across a wide range of industrial counterparties, small businesses and private individuals over a range of geographic regions. The majority of exposure is to the Nordic market, but there is also significant exposure in Russia and Poland as a result of increased operations. The risk of non-payment in the electricity and heat sales business in Russia is higher than in the Nordic market. Corporate Credit Control is responsible for assuring stringent controls for all larger individual counterparty exposures. Annual credit reviews are performed manually for all larger approved limits. Each division or corporate unit is responsible for ensuring that exposures remain within approved limits. Mitigation of counterparty risk includes the use of collateral, such as guarantees, managing payment terms and contract length, and netting agreements. Corporate Credit Control continuously monitors and reports counterparty exposures against the approved limits. Due to the financing needs and management of liquidity, Fortum has counterparty exposure to a number of banks and financial institutions. This includes exposure to the Russian financial sector in terms of deposits In order to minimise counterparty risk, Fortum has well established routines and processes to identify, assess and control counterparty exposure. No contractual Operational risks Operational risks Operational risks are defined as the negative effects resulting from inadequate or failed internal processes, people and systems or equipment, or from external events. The main objective of operational risk management is to reduce the risk of unwanted operational events by clearly documenting and automating processes and by ensuring a strict segregation of duties between decision- making and controlling functions. Quality and environmental management systems are a tool for achieving this objective, and Fortum has several certifications including ISO 9001 and ISO 14001. Equipment and system risks are primarily managed within maintenance investment planning, and there are contingency plans in place to ensure business continuity. Operational risks in production facilities (nuclear, hydro and heat plants) are mitigated by continuous maintenance, condition monitoring, and other operational improvements. The Corporate Insurance Steering Document defines the management of insurable operational risks. The objective of insurance management is to optimise loss prevention activities, self retentions and insurance coverage in a long-term cost-efficient manner. Fortum has established Group-wide insurance programmes for risks related to property damages, business interruption and liability exposures. Hydro power Hydro power Operational events at hydro power generation facilities can lead to physical damages, business interruptions, and third- party liabilities. A long-term programme is in place for improving the surveillance of the condition of dams and for securing the discharge capacity in extreme flood situations. In Sweden, third-party liabilities from dam failures are strictly the plant owner's responsibility. Together with other hydro power producers, Fortum has a shared dam liability insurance programme in place that covers Swedish dam failure liabilities up to SEK 9,000 million. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 63 Annual Report 2013 Operating and financial review Nuclear power Nuclear power Fortum owns the Loviisa nuclear power plant, and has minority interests in one Finnish and two Swedish nuclear power companies. At the Loviisa power plant, the assessment and improvement of nuclear safety is a continuous process is performed under the supervision of the Radiation and Nuclear Safety Authority of Finland (STUK). In Finland and Sweden, third-party liability relating to nuclear accidents is strictly the plant operator's responsibility and must be covered by insurance. As the operator of the Loviisa power plant, Fortum has a statutory liability insurance policy of 600M SDR (Special Drawing Right). The same type of insurance policies are in place for the operators where Fortum has a minority interest. In Sweden, the limits are compliant with the national legislation. Decisions have been made in both Finland and Sweden to renew the current nuclear liability legislation to align more with the Paris and Brussels convention. The new legislation is not likely to come into force during 2014 in Finland and Sweden. The changes in the new national legislation consist of a liability on plant operators covering damages up to EUR 700 million in Finland and up to EUR 1,200 million per nuclear incident in Sweden. The liability should be covered by insurance or other form of financial guarantee, as well as a strict and unlimited liability for the plant operators in each respective country. Under Finnish law, Fortum bears full legal and financial responsibility for the management and disposal of nuclear waste produced by the Loviisa power plant. In both Finland and Sweden, Fortum bears partial responsibility, proportionate to the output share, for the costs of the management and disposal of nuclear waste produced by co- owned nuclear power plants. In both Finland and Sweden, the future costs of the final disposal of spent fuel, the management of low and intermediate-level radioactive waste and nuclear power plant decommissioning are provided for by a state- established fund to which nuclear power plant operators make annual contributions. Multi-layered containment systems and sophisticated safety protocols effectively isolate radioactive materials from the surrounding environment during the process of interim storage, packaging, transport, relocation and encasement of nuclear waste in the final storage repositories. Distribution facilities Distribution facilities external audits and risk assessments, and corrective and preventive actions are launched when necessary. EHS related risks arising in investments are systematically evaluated in accordance with Fortum's Investment Evaluation and Approval Procedure. Environmental risks and liabilities in relation to past actions have been assessed and necessary provisions made for future remedial costs. Operational events at distribution facilities can lead to physical damages, business interruptions, and third-party liabilities. Storms and other unexpected events can result in electricity outages that create costs in the form of repairs and customer compensations. Although outages are typically short, it is not possible to completely prevent long outages. There are extensive procedures in place to minimise the length and consequences of outages. Sustainability risks Sustainability risks The assessment of sustainability risks is also included in the assessment of business risks. The Corporate Sustainability function assesses the risks related to Group operations as part of the annual planning. The divisions assess the risks identified by the Corporate Sustainability function in their own annual planning and prepare for their control. Business divisions with ISO 14001 certification manage their environmental risks and their preparedness to operate in exceptional and emergency situations in compliance with the requirements of the standard. Operating power and heat generation and distribution facilities involves the use, storage and transportation of fuels and materials that can have adverse effects on the environment. Operation and maintenance of the facilities expose the personnel to potential safety risks. The risks involved with these activities and their supply chain are receiving increased attention. There is also a growing public awareness of sustainable development and the expectations on companies' responsible conduct. Environmental, health and safety (EHS) risks are regularly evaluated through internal and Technology risks Technology risks Fortum actively explores opportunities in new technologies in a solar economy. Fortum is participating in technologies and projects in solar and wave energy, and in 2013 invested in the first solar plant in India. New technologies, like bio-oil and solar, expose Fortum to new types of risks, such as IPR risks and viability of technologies. These, in combination with operating in new markets, add complexity. IT and information security IT and information security risks risks Information security risks are managed centrally by the Corporate Security and IT functions. Business-specific IT risks are managed within the divisions and corporate units. Group IT instructions set procedures for reducing risks and managing IT and other information security incidents. The main objective is to ensure high availability and fast recovery of IT systems. Fortum's IT community identifies the IT- related operational risks that might threaten business continuity, and the mitigating actions are planned accordingly. Fortum IT is exposed to hardware and software risks including cyber attacks, as is any other corporate function, however, taking into account the size and complexity of the business. The management of these risks is coordinated by Corporate IT, headed by the CIO, who also manages the IT architecture and strategy. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 64 Annual Report 2013 Operating and financial review The Fortum share and shareholders The Fortum share and shareholders Fortum Corporation's shares have been listed on NASDAQ OMX Helsinki since 18 December 1998. The trading code is FUM1V. Fortum Corporation’s shares are in the Finnish book-entry system maintained by Euroclear Finland Ltd, which also maintains the official share register of Fortum Corporation. Share key figures EUR Earnings per share Cash flow per share Equity per share Dividend per share Payout ratio, % Dividend yield, % 2013 1.36 2.07 11.28 1.10 1) 80.9 1) 6.6 1) 2012 1.59 1.56 11.30 1.00 62.9 7.1 2011 1.99 1.82 10.84 1.00 50.3 6.1 1) Board of Directors' proposal for the Annual General Meeting 8 April 2014. For the full set of share key figures, 1998-2013, see the Key figures section in the Financial Statements. Shareholders value, share price performance Shareholders value, share price performance and volumes and volumes Fortum's mission is to deliver excellent value to its shareholders. Fortum’s share price has appreciated approximately 9% during the last five years, while the Dow Jones Europe Utility Index has decreased 18%. During the same period NASDAQ Helsinki Cap index has increased 69%. During 2013 Fortum’s share price appreciated approximately 18%, while the Dow Jones Europe Utility Index increased 7% and the NASDAQ Helsinki Cap index increased 26%. During 2013, a total of 465.0 million (2012: 494.8) Fortum Corporation shares, totalling EUR 7,027 million, were traded on the NASDAQ OMX Helsinki Ltd. The highest quotation of Fortum Corporation shares during 2013 was EUR 18.18, the lowest EUR 13.10, and the volume-weighted average EUR 15.11. The closing quotation on the last trading day of the year 2013 was EUR 16.63 (2012: 14.15). Fortum's market capitalisation, calculated using the closing quotation of the last trading day of the year, was EUR 14,774 million (2012: 12,570). In addition to the NASDAQ OMX Helsinki Ltd., Fortum shares were traded on several alternative market places, for example at Boat, BATS Chi-X and Turquoise, and on the OTC market as well. The total volume of these all trades in 2013, including also all other trades than the primary market place, was approximately 1,101 million shares (2012: 1,097) and the turnover was approximately EUR 16,508 million (2012: 17,292). In 2013, approximately 58% (2012: 55%) of Fortum's traded shares were traded on markets other than NASDAQ OMX Helsinki Ltd. Fortum has continuously carried out structural and operational development according to its strategy. Since the year 2000, Fortum has made acquisitions totalling EUR 11 billion and divestments totalling EUR 8 billion. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 65 Annual Report 2013 Operating and financial review 1. Acquisition of Stora Enso power generation assets 1.9 bn EUR 15. Acquisition of TGC-10 (Changed name to OAO Fortum) EUR 2.5 bn 16. Divestment of district heat operations outside Stockholm area in Sweden, total sales price appr. 220 MEUR 17. Final agreement over sale of Fingrid shares appr. 325 MEUR 18. Fortum agreed to sell Fortum Energiaratkaisut Oy and Fortum Termest AS total sales price appr. 200 MEUR 2. Birka acquisition remaining 50% 3.6 bn EUR 3. Sale of Fortum Energie GmbH 545 MEUR 4. Ministry of Trade and Industry sells down to 61% 5. Sale of Norwegian E&P for $1.1 bn 6. Asset swap worth 800 MEUR gaining shareholdings in Hafslund and Lenenergo 7. Increase in Hafslund stake to 31% 8. Increase in Lenenergo stake 9. Dividending out and sale of Neste Oil shares market value 3.8 bn EUR 10. Ministry of Trade and Industry sells down to 51.7% 11. Acquisition of Wroclaw 120 MEUR 12. E.ON Finland acquisition 713 MEUR 13. Sale of Russian Lenenergo stake for 295 MEUR 14. Participation in 243 MEUR share issue in TGC-1 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 66 Annual Report 2013 Operating and financial review This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 67 Annual Report 2013 Operating and financial review Share capital Share capital Fortum has one class of shares. By the end of 2013, a total of 888,367,045 shares had been issued. The nominal value of the share is EUR 3.40 and each share entitles the holder to one vote at the Annual General Meeting. All shares entitle holders to an equal dividend. At the end of 2013 Fortum Corporation’s share capital, paid in its entirety and entered in the trade register, was EUR 3,046,185,953.00. The registered share capital exceeds the aggregate nominal value of the issued shares due to the cancellations of the company’s own shares in 2006 and 2007 (in total 7,570,000) without decreasing the share capital. Share Capital 1999–2013 3,500 3,000 2,500 2,000 1,500 1,000 500 0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Share capital, EUR million Number of shares (million) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 68 Annual Report 2013 Operating and financial review Corporation to no less than 50.1% of the share capital and voting rights. The proportion of nominee registrations and direct foreign shareholders increased to 26.2% (2012: 25.4%). Shareholders Shareholders At the end of 2013, the Finnish State owned 50.8% of the company's shares. The Finnish Parliament has authorised the Government to reduce the Finnish State's holding in Fortum Shareholders, 31 December 2013 Shareholders Prime Minister's Office Ilmarinen Mutual Pension Insurance Company The Finnish Social Insurance Institution The State Pension Fund The city of Kurikka Varma Mutual Pension Insurance Company Mandatum Life Insurance Company Ltd. Mutual Insurance Company Pension Fennia The Local Government Pensions Institution Schweizerische Nationalbank Tapiola Mutual Pension Insurance Company Society of Swedish Literature in Finland Etera Mutual Pension Insurance Company OP-Delta Mutual Fund Nominee registrations and direct foreign ownership* Other shareholders in total Total number of shares *Excluding Schweizerische Nationalbank By shareholder category Finnish shareholders Corporations Financial and insurance institutions General government Non-profit organisations Households Non-Finnish shareholders Total No. of shares Holding % 450,932,988 50.76 7,351,961 7,195,896 6,560,000 6,203,500 4,964,300 4,954,834 3,476,000 2,951,403 2,787,984 2,300,000 2,202,700 1,710,006 1,625,000 0.83 0.81 0.74 0.70 0.56 0.56 0.39 0.33 0.31 0.26 0.25 0.19 0.18 229,790,979 153,359,494 888,367,045 25.87 17.26 100.00 % of total amount of shares 2.13 2.74 56.10 2.02 10.83 26.18 100.00 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 69 Annual Report 2013 Operating and financial review % of total amount of shares 0.22 1.63 1.85 6.21 3.28 3.39 7.23 50.76 74.57 0.01 25.42 100 Breakdown of share ownership, 31 December 2013 Number of shares owned No. of shareholders % of shareholders No. of shares 1-100 101-500 501-1,000 1,001-10,000 10,001-100,000 100,001-1,000,000 1,000,001-10,000,000 over 10,000,000 33,180 53,752 22,363 21,390 1,262 103 21 1 25.12 40.70 16.93 16.20 0.96 0.08 0.01 0.00 1,980,533 14,426,381 16,413,674 55,195,035 29,132,710 30,136,102 64,257,134 450,932,988 Unregistered/uncleared transactions on 31 December Nominee registrations Total 132,072 100.00 662,474,557 75,696 225,816,792 888,367,045 Management interests, 31 December 2013 Management interests, 31 December 2013 At the end of 2013, the President and CEO and other members of the Fortum Management Team owned 346,106 shares (2012: 268,992) representing approximately 0.04% of the total shares in the company. A full description of the shareholdings and interests in long-term incentive schemes of the President and CEO and of other members of the Fortum Management Team is shown in Note 12 Employee benefits. Authorisations from the Annual General Authorisations from the Annual General Meeting 2013 Meeting 2013 Currently the Board of Directors has no unused authorisations from the Annual General Meeting of Shareholders to issue convertible loans or bonds with warrants or to issue new shares or to buy Fortum Corporation’s own shares. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 70 Annual Report 2013 Operating and financial review Dividend Dividend Updated dividend policy Updated dividend policy In April 2013, Fortum's Board of Directors updated the company's dividend policy. The new 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, in the range of 50-80% of earnings per share, excluding one-off items. Dividend distribution proposal Dividend distribution proposal The distributable funds of Fortum Corporation as at 31 December 2013 amounted to EUR 4,151,029,137.59, including the profit for the period of EUR 477,747,032.48. After the end of the financial period, there have been no material changes in the financial position of the company. The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 1.10 per share be paid for 2013 totaling approximately EUR 977 million, when calculated based on the number of registered shares as of 3 February 2014. The Board of Directors proposes that the remaining part of the profit be retained in the shareholders’ equity. The Annual General Meeting will be held on 8 April 2014 at 14:00 EET at Finlandia Hall in Helsinki. 1.5 1 0.5 0 Dividend per share, EUR 1.00 1.00 1.00 1.00 1.10 09 10 11 12 13 Earnings per share, EUR 1) Board of Directors' proposal for the Annual General Meeting in April 2014 2 1.99 1.5 1.48 1.46 1.59 1.36 1 0.5 0 09 10 11 12 13 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 71 Annual Report 2013 Key figures Financial key figures Financial key figures Fortum Corporation and its subsidiaries (together the Fortum Group) is a leading energy company focusing on the Nordic countries, Russia and the Baltic Rim area. Fortum's activities cover the generation, distribution and sale of electricity and heat, the operation and maintenance of power plants as well as energy-related services. Neste Oil was included in Fortum Group until 31 March 2005, when the Annual General Meeting made the final decision to separate the oil operations by distributing approximately 85% of Neste Oil Corporation shares as a dividend. The remaining approximately 15% of the shares were sold to investors in April 2005. Oil operations were presented as discontinued operations in years 2004 and 2005. From 2005, Fortum applies International Financial Reporting Standards (IFRS) for the annual and interim reports. The 2005 annual report included one comparison year 2004, which was restated to IFRS. The years 1998-2003 have not been restated to comply with IFRS. They are prepared under Finnish Accounting Standards (FAS). IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS Change 13/12 EUR million or as indicated 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sales total Fortum 11,659 5,918 4,491 4,479 5,636 5,435 6,296 6,161 6,159 6,056 Sales continuing operations 3,835 3,877 4,491 4,479 5,636 5,435 6,296 6,161 6,159 6,056 EBITDA total Fortum 1) 2,443 2,307 1,884 2,298 2,478 2,292 2,271 3,008 2,538 2,452 EBITDA continuing operations 1,583 1,754 1,884 2,298 2,478 2,292 2,271 3,008 2,538 2,452 Comparable EBITDA continuing operations 1,741 1,866 2,015 2,360 2,398 2,396 2,374 2,416 2,299 Operating profit total Fortum 1,916 1,864 1,455 1,847 1,963 1,782 1,708 2,402 1,874 1,712 - of sales % 16.4 31.5 32.4 41.2 34.8 32.8 27.1 39.0 30.4 28.3 Operating profit continuing operations 1,195 1,347 1,455 1,847 1,963 1,782 1,708 2,402 1,874 1,712 - of sales % 31.2 34.7 32.4 41.2 34.8 32.8 27.1 39.0 30.4 28.3 Comparable operating profit continuing operations 1,148 1,334 1,437 1,564 1,845 1,888 1,833 1,802 1,752 1,607 Profit before income tax total Fortum 1,700 1,776 1,421 1,934 1,850 1,636 1,615 2,228 1,586 1,499 - of sales % 14.6 30.0 31.6 43.2 32.8 30.1 25.7 36.2 25.8 24.8 Profit before income tax continuing operations 962 1,267 1,421 1,934 1,850 1,636 1,615 2,228 1,586 1,499 - of sales % 25.1 32.7 31.6 43.2 32.8 30.1 25.7 36.2 25.8 24.8 % -2 -2 -3 -3 -5 -9 -9 -8 -5 -5 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 72 Annual Report 2013 Key figures Profit for the period continuing operations - of which attributable to owners of the parent 703 936 1,120 1,608 1,596 1,351 1,354 1,862 1,512 1,279 670 884 1,071 1,552 1,542 1,312 1,300 1,769 1,416 1,204 Capital employed total Fortum 12,890 11,357 12,663 13,544 15,911 15,350 16,124 17,931 19,420 19,780 Capital employed continuing operations 10,739 11,357 12,663 13,544 15,911 15,350 16,124 17,931 19,420 19,780 Interest-bearing net debt 5,095 3,158 4,345 4,466 6,179 5,969 6,826 7,023 7,814 7,849 -15 -15 2 2 0 Capital expenditure and gross investments in shares total Fortum - of sales % Capital expenditure and gross investments in shares continuing operations Capital expenditure continuing operations Net cash from operating activities total Fortum Net cash from operating activities continuing operations Return on capital employed total Fortum, % Return on capital employed continuing operations, % Return on shareholders' equity total Fortum, % Return on shareholders' equity continuing operations, % 2) 830 7.1 578 1,395 972 2,624 929 1,249 1,482 1,574 1,299 -17 9.8 31.1 21.7 46.6 17.1 19.8 24.1 25.6 21.4 514 479 1,395 972 2,624 929 1,249 1,482 1,574 1,299 335 346 485 655 1,108 862 1,222 1,408 1,558 1,284 1,758 1,404 1,151 1,670 2,002 2,264 1,437 1,613 1,382 1,836 1,232 1,271 1,151 1,670 2,002 2,264 1,437 1,613 1,382 1,836 -17 -18 33 33 15.8 16.6 13.4 16.5 15.0 12.1 11.6 14.8 10.2 11.4 13.5 13.4 16.5 15.0 12.1 11.6 14.8 10.2 9.2 9.2 18.2 18.7 14.4 19.1 18.7 16.0 15.7 19.7 14.6 12.0 13.5 14.4 19.1 18.7 16.0 15.7 19.7 14.6 12.0 Interest coverage 8.0 11.6 11.5 12.8 9.4 12.4 13.7 10.5 7.6 6.8 Interest coverage including capitalised borrowing costs Funds from operations/interest- bearing net debt, % 8.6 10.3 10.0 8.5 5.7 5.3 36.4 43.2 30.6 36.3 34.1 37.6 20.5 21.5 19.9 21.8 Gearing, % 3) 67 43 53 52 73 70 78 69 73 74 Net debt/EBITDA 2.1 1.4 2.3 1.9 2.5 2.6 3.0 2.3 3.1 3.2 Net debt/EBITDA continuing operations Comparable net debt/EBITDA continuing operations - - 1.8 2.3 1.9 2.5 2.6 3.0 2.3 3.1 3.2 1.8 2.3 2.2 2.6 2.5 2.8 3.0 3.2 3.4 Equity-to-assets ratio, % 44 49 48 49 41 43 40 44 43 44 Dividends 4) Dividends continuing operations 506 987 511 1,122 1,198 888 888 888 888 888 977 5) 10 650 683 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 73 Annual Report 2013 Key figures Dividends additional in 2006 and 2007/discontinued operations in 2005 Research and development expenditure - of sales % Average number of employees total Fortum Average number of employees continuing operations 476 472 515 26 0.2 14 0.2 17 0.4 21 0.5 27 0.5 30 0.5 30 0.5 38 0.6 41 0.7 49 0.8 20 12,859 10,026 8,910 8,304 14,077 13,278 11,156 11,010 10,600 10,246 8,592 8,939 8,910 8,304 14,077 13,278 11,156 11,010 10,600 10,246 1) EBITDA is defined as Operating profit continuing operations + Depreciation, amortisation and impairment charges. According to Finnish Accounting Standards (FAS) share of profit of associated companies was included in operating profit. In calculating EBITDA presented under FAS share of profit of associated companies have been excluded in 1998-2003. 2) Return on equity for continuing operations for 2005 is calculated based on profit for the period from continuing operations divided by total equity at the end of the period. Profit for the period from discontinued operations has been subtracted from total equity on 31 December 2005. 3) Gearing is defined as interest-bearing net debt over shareholders' equity plus non-controlling interests. In 2000-2002 non-controlling interests included the preference shares amounting to EUR 1.2 billion, carrying fixed income dividend of 6.7 %, issued by Fortum Capital Ltd. 4) In addition to cash dividend Fortum distributed approximately 85% of Neste Oil Corporation shares as dividend in 2005. 5) Board of Directors' proposal for the Annual General Meeting on 8 April 2014. See Definitions of key figures. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 74 Annual Report 2013 Key figures Share key figures Share key figures EUR or as indicated Earnings per share total Fortum Earnings per share continuing operations Earnings per share discontinued operations Diluted earnings per share total Fortum Diluted earnings per share continuing operations Diluted earnings per share discontinued operations Cash flow per share total Fortum Cash flow per share continuing operations Dividend per share total Fortum 1) Dividend per share continuing operations Dividend per share additional in 2006 and 2007/discontinued operations in 2005 Payout ratio total Fortum, % Payout ratio continuing operations, % Payout ratio additional dividend in 2006 and 2007/discontinued operations in 2005, % IFRS 2004 IFRS 2005 IFRS 2006 IFRS 2007 IFRS 2008 IFRS 2009 IFRS 2010 IFRS 2011 IFRS 2012 IFRS 2013 1.48 1.55 1.22 1.74 1.74 1.48 1.46 1.99 1.59 1.36 0.79 1.01 1.22 1.74 1.74 1.48 1.46 1.99 1.59 1.36 0.69 0.54 - - - - - - - - Change 13/12 % -14 -14 1.46 1.53 1.21 1.74 1.74 1.48 1.46 1.99 1.59 1.36 -14 0.78 1.00 1.21 1.74 1.74 1.48 1.46 1.99 1.59 1.36 -14 0.68 0.53 - - - - - - - - 2.06 1.61 1.31 1.88 2.26 2.55 1.62 1.82 1.56 2.07 1.44 1.46 1.31 1.88 2.26 2.55 1.62 1.82 1.56 2.07 33 33 0 10 0.58 1.12 1.26 1.35 1.00 1.00 1.00 1.00 1.00 1.10 2) - - 0.58 0.73 0.77 0.54 0.53 0.58 - - - - - - - - - - - - 39.2 72.3 103,3 4) 77,6 4) 57.5 67.6 68.5 50.3 62.9 80.9 2) - 57,4 3) 59,8 4) 44,3 4) - 100.0 3) 43,4 4) 33,3 4) - - - - - - - - - - - - 6.6 2) Equity per share 8.65 8.17 8.91 9.43 8.96 9.04 9.24 10.84 11.30 11.28 Dividend yield, % 4.3 7.1 5.8 4.4 6.6 5.3 4.4 6.1 7.1 Price/earnings ratio (P/E) Share prices 9.2 10.2 17.7 17.7 8.8 12.8 15.4 8.3 8.9 12.2 At the end of the period 13.62 15.84 21.56 30.81 15.23 18.97 22.53 16.49 14.15 16.63 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 75 Annual Report 2013 Key figures Average Lowest Highest 10.29 7.45 13.99 13.87 10.45 16.90 20.39 15.71 23.48 23.57 20.01 31.44 24.79 12.77 33.00 15.91 12.60 19.20 19.05 17.18 22.69 19.77 15.53 24.09 15.66 12.81 19.36 15.11 13.10 18.18 Market capitalisation at the end of the period, EUR million Trading volumes 5) Number of shares, 1 000 shares In relation to the weighted average number of shares, % Number of shares, 1 000 shares Number of shares excluding own shares, 1 000 shares Average number of shares, 1 000 shares Diluted adjusted average number of shares, 1 000 shares 11,810 13,865 19,132 27,319 13,519 16,852 20,015 14,649 12,570 14,774 478,832 900,347 830,764 787,380 628,155 580,899 493,375 524,858 494,765 465,004 59.2 103.2 94.3 88.5 70.8 65.4 55.5 59.1 55.7 52.3 867,084 875,294 887,394 886,683 887,638 888,367 888,367 888,367 888,367 888,367 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 852,625 872,613 881,194 889,997 887,256 888,230 888,367 888,367 888,367 888,367 861,772 887,653 886,929 891,395 887,839 888,230 888,367 888,367 888,367 888,367 1) In addition to cash dividend Fortum distributed approximately 85% of Neste Oil Corporation shares as dividend in 2005. 2) Board of Directors' proposal for the Annual General Meeting on 8 April 2014. 3) Payout 2005 ratio is calculated for continuing and discontinued operations are based on the respective earnings per share from continuing and discontinued operations. 4) Payout ratios for dividends in 2006 and 2007 are based on the total earnings per share. 5) Trading volumes in the table represent volumes traded on NASDAQ OMX Helsinki. In addition to the NASDAQ OMX Helsinki Ltd., Fortum shares were traded on several alternative market places, for example at Boat, BATS Chi-X and Turquoise, and on the OTC market as well. The total volume of these all trades, including also all other trades than the primary market place, was approximately 1,101 million shares (2012: 1,097) and the turnover was approximately EUR 16,508 million (2012: 17,292) in 2013. In 2013, approximately 58% (2012: 55%) of Fortum's traded shares were traded on other markets than NASDAQ OMX Helsinki Ltd. Years 1998-2003 have not been restated to comply with IFRS. They are prepared under Finnish Accounting Standards (FAS). See Definitions of key figures. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 76 Annual Report 2013 Key figures Operational key figures, volumes Operational key figures, volumes 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Fortum's total power and heat generation in EU and Norway Power generation Heat generation TWh TWh 55.5 25.4 52.3 25.1 54.4 25.8 52.2 26.1 52.6 25.0 49.3 23.2 53.7 26.1 55.3 22.0 53.9 18.5 48.7 18.6 Fortum's total power and heat generation in Russia Power generation Heat generation TWh TWh - - - - - - - - 11.6 15.3 16.0 25.6 16.1 26.0 17.4 25.4 19.2 24.8 20.0 24.2 Fortum's own power generation by source, total in the Nordic area Hydropower Nuclear power Thermal power Total TWh TWh TWh TWh 19.1 25.8 9.5 54.4 21.2 25.8 4.2 51.2 19.8 24.4 9.0 53.2 Fortum's own power generation by source, total in the Nordic area 35 47 18 42 50 8 37 46 17 20.0 24.9 6.2 51.1 39 49 12 22.9 23.7 5.0 51.6 44 46 10 22.1 21.4 4.6 48.1 46 44 10 22.0 22.0 8.3 52.3 42 42 16 21.0 24.9 7.2 53.1 40 47 13 25.2 23.4 3.0 51.6 49 45 6 18.1 23.7 4.7 46.5 39 51 10 100 100 100 100 100 100 100 100 100 100 10,003 1,278 9,540 1,373 9,560 1,360 - - - - - - 9,575 1,213 2,785 9,709 1,446 2,785 9,728 1,600 2,785 9,752 1,670 3,404 9,702 1,569 3,404 9,475 1,398 4,250 - - - - - 5 11,281 10,913 10,920 13,573 13,940 14,113 14,826 14,675 15,128 Hydropower Nuclear power Thermal power Total % % % % Power generation capacity by segment Power Heat Russia Other (solar in India) Total MW MW MW MW MW Heat production capacity by segment Power Heat Russia Total MW MW MW MW 250 250 250 250 250 250 250 250 250 9,757 10,633 10,973 10,218 10,284 10,448 10,375 8,785 7,943 - - - 13,796 13,796 13,796 14,107 13,396 13,466 10,007 10,883 11,223 24,264 24,330 24,494 24,732 22,431 21,659 Fortum's total power and heat sales in EU and Norway Electricity sales Heat sales EUR million EUR million 2,017 2,002 809 867 2,437 1,014 2,370 1,096 2,959 1,157 2,802 1,095 3,110 1,309 2,868 1,278 2,700 1,201 2,519 1,210 Fortum's total power and heat sales in Russia Electricity sales Heat sales EUR million EUR million - - - - - - - - 332 141 390 219 505 287 590 324 713 300 822 290 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 77 Annual Report 2013 Key figures Fortum's total power sales by area Finland Sweden Russia Other countries Total TWh TWh TWh TWh TWh Fortum's total heat sales by area Finland Russia Sweden Poland Other countries Total TWh TWh TWh TWh TWh TWh 31.1 27.6 - 3.6 26.0 30.4 - 3.3 29.6 28.5 - 3.5 29.0 27.6 - 3.1 62.3 59.7 61.6 59.7 10.5 - 9.6 0.4 3.3 9.8 - 9.5 1.1 3.4 10.7 11.1 - 9.3 3.6 3.2 - 9.2 3.5 3.3 28.7 28.5 14.8 3.0 75.0 10.8 15.3 9.1 3.6 3.4 26.1 26.9 19.5 3.2 75.7 8.0 25.6 9.8 3.7 3.5 30.7 28.3 18.7 3.2 80.9 9.6 26.8 10.9 4.0 3.6 24.6 29.4 20.2 3.6 77.8 8.5 26.7 8.5 4.3 3.4 21.6 30.1 23.3 3.8 78.8 5.8 26.4 8.5 4.3 2.9 23.4 24.6 25.6 4.3 77.9 5.5 24.1 8.2 4.1 3.1 23.8 23.8 26.8 27.1 42.2 50.6 54.9 51.4 47.9 45.0 Volume of distributed electricity in distribution networks Finland Sweden Norway Estonia Total TWh TWh TWh TWh TWh 6.2 14.2 2.1 0.2 6.3 14.4 2.2 0.2 7.7 14.4 2.3 0.2 9.2 14.3 2.3 0.2 9.3 14.0 2.3 0.2 9.4 14.0 2.3 0.2 10.0 15.2 2.5 0.2 9.5 14.2 2.3 0.1 9.8 14.4 2.4 0.0 9.5 14.1 2.5 - 22.7 23.1 24.6 26.0 25.8 25.9 27.9 26.1 26.6 26.1 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 78 Annual Report 2013 Key figures Operational key figures, segments Operational key figures, segments From 2005, Fortum applies International Financial Reporting Standards (IFRS) for the annual and interim reports. The 2005 annual report included one comparison year 2004, which was restated to IFRS. Segment numbers are presented based only on IFRS for comparison purposes, because in the transition to IFRS reportable segments were redefined and segment reporting as such was reassessed. Following the acquisition of the Russian company, OAO Fortum, Fortum changed its segment reporting during 2008. Comparison numbers for 2004-2007 were restated in 2008. For further information see Note 5 Segment reporting. Sales by segment, EUR million Power - of which internal Heat - of which internal Russia - of which internal Distribution - of which internal Electricity Sales - of which internal Other - of which internal Eliminations Total 2004 2,084 128 2005 2,058 -97 2006 2,439 -133 2007 2,350 323 2008 2,892 0 2009 2,531 254 2010 2,702 -281 2011 2,481 -24 2012 2,415 296 2013 2,248 70 1,025 1,063 1,268 1,356 1,466 1,399 1,770 1,737 1,628 1,565 49 - - 707 10 -12 -32 - - 707 -8 - - 753 8 38 - - 769 9 0 489 - 789 10 23 632 - 800 13 -8 804 - 963 18 1,387 1,365 1,912 1,683 1,922 1,449 1,798 92 90 93 -101 91 -63 149 78 62 155 81 72 177 83 82 67 71 -5 158 51 169 8 18 8 920 1,030 1,119 - 973 15 900 95 108 115 - - 1,070 1,075 37 722 55 137 -66 36 744 73 69 67 -1,458 -1,407 -1,959 -1,760 -2,005 -1,447 -1,792 -958 -843 -764 3,835 3,877 4,491 4,479 5,636 5,435 6,296 6,161 6,159 6,056 Comparable operating profit by segment, EUR million 2004 2005 2006 Power Heat Russia Distribution Electricity Sales Other 730 207 - 240 23 -52 854 253 - 244 30 -47 985 253 - 250 -4 -47 2007 1,095 290 - 231 -1 -51 2008 1,528 2009 1,454 2010 1,298 2011 1,201 2012 1,146 250 -92 248 -33 -56 231 -20 262 22 -61 275 8 307 11 -66 278 74 295 27 -73 271 68 320 39 -92 2013 858 273 156 331 48 -59 Comparable operating profit 1,148 1,334 1,437 1,564 1,845 1,888 1,833 1,802 1,752 1,607 Non-recurring items Other items affecting comparability 18 29 30 -17 61 -43 250 33 85 33 29 -135 93 -218 284 316 155 -33 61 44 Operating profit 1,195 1,347 1,455 1,847 1,963 1,782 1,708 2,402 1,874 1,712 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 79 Annual Report 2013 Key figures Comparable EBITDA by segment, EUR million 2004 2005 Power Heat Russia Distribution Electricity Sales Other Total Depreciation, amortisation and impairment charges by segment, EUR million Power Heat Russia Distribution Electricity Sales Other Total Share of profit of associates and joint ventures by segment, EUR million Power Heat Russia Distribution Electricity Sales Other Total Capital expenditure by segment, EUR million Power Heat Russia Distribution Electricity Sales Other Total 834 331 - 373 39 -41 966 376 - 389 45 -35 2006 1,093 397 - 397 15 -36 2007 1,198 453 - 393 10 -39 2008 1,625 2009 1,547 2010 1,398 2011 1,310 2012 1,260 2013 1,003 419 -25 413 -26 -46 393 55 426 28 -51 462 94 485 13 -56 471 148 482 29 -66 481 189 529 40 -83 489 258 550 50 -51 1,536 1,741 1,866 2,015 2,360 2,398 2,396 2,374 2,416 2,299 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 104 124 - 133 16 11 112 123 - 145 15 12 108 144 - 147 19 11 103 163 - 162 11 12 97 169 67 165 7 10 93 162 75 164 6 10 100 187 86 178 2 10 109 193 108 187 2 7 114 210 121 209 1 9 145 216 150 219 2 8 388 407 429 451 515 510 563 606 664 740 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -21 15 - 16 0 2 12 -21 11 - 20 1 44 55 -9 23 - 15 1 39 69 -23 24 - 18 0 222 241 26 12 19 16 5 48 126 -35 30 20 10 0 -4 21 -25 31 8 19 1 28 62 3 19 30 14 2 23 91 -12 20 27 8 0 -20 23 4 19 46 5 0 31 105 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 84 123 - 106 10 12 83 124 - 115 10 14 95 184 - 183 8 15 93 309 - 236 3 14 134 408 256 296 3 11 96 358 215 188 1 4 97 304 599 213 0 9 131 297 670 289 5 16 190 464 568 324 1 11 178 397 435 260 1 13 335 346 485 655 1,108 862 1,222 1,408 1,558 1,284 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 80 Annual Report 2013 Key figures Gross investments in shares by segment, EUR million Power Heat Russia Distribution Electricity Sales Other Total Gross divestments of shares by segment, EUR million Power Heat Russia Distribution Electricity Sales Other Total Net assets by segment, EUR million Power Heat Russia Distribution Electricity Sales Other Total 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 23 53 103 0 0 0 45 87 2 - - - 5 589 140 130 6 40 52 18 0 23 245 1,492 1 0 1 0 0 1 57 25 1 3 5 - 1 1 - 0 - 1 179 134 910 317 1,516 67 27 17 32 24 - - 1 74 - 10 - - - 6 16 2 0 0 0 - 13 15 2009 2010 2011 2012 2013 10 1 - 1 - 2 0 52 43 46 - 6 3 203 23 323 16 0 102 269 - 37 2 0 79 11 - 52 - - 14 147 568 410 142 2004 5,804 2,440 151 2005 5,493 2,551 153 2006 5,690 3,407 294 2007 5,599 3,507 456 3,091 3,021 3,412 3,239 194 220 228 447 176 835 247 1,237 2008 5,331 3,468 2,205 3,032 188 796 2009 5,494 3,787 2,260 3,299 125 382 2010 5,806 4,182 2,817 3,683 210 29 2011 6,247 4,191 3,273 3,589 11 208 2012 6,389 4,286 3,848 3,889 51 158 2013 6,329 4,283 3,846 3,770 39 315 11,900 11,893 13,814 14,285 15,020 15,347 16,727 17,519 18,621 18,582 Return on net assets by segment, % 2004 2005 2006 2007 Power Heat Russia Distribution Electricity Sales 12.6 9.8 - 8.1 25.2 14.3 11.6 - 8.8 17.4 17.5 9.6 - 8.4 -1.6 19.2 9.3 66.3 7.7 6.9 2008 29.6 2009 24.5 2010 19.5 8.9 3.7 8.1 7.9 0.0 8.7 8.4 2.4 9.7 2011 24.6 9.9 3.5 13.7 2012 18.7 2013 14.6 8.8 3.0 9.1 7.2 5.2 9.2 -14.0 28.9 38.4 4.2 152.3 148.9 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 81 Annual Report 2013 Key figures Comparable return on net assets by segment, % 2004 2005 2006 Power Heat Russia Distribution Electricity Sales Average number of personnel Power Heat Russia Distribution Electricity Sales Other Total 2009 26.4 2010 22.3 2011 19.9 2012 18.5 2013 13.8 12.0 9.3 - 8.3 17.1 2004 4,588 1,605 - 995 682 722 14.9 11.0 - 8.6 16.4 2005 4,374 2,186 - 1,008 745 626 17.4 9.2 - 8.3 -0.8 2006 4,147 2,345 - 983 825 610 2007 18.9 9.2 0.0 7.6 2008 28.0 7.3 -3.8 8.2 7.6 0.0 8.6 -0.6 -15.3 18.6 2007 3,475 2,302 - 1,060 936 531 2008 3,591 2,422 5,566 1,222 766 510 2009 2,068 2,652 6,170 1,166 629 593 7.7 0.7 9.3 9.3 2010 1,891 2,482 4,555 1,098 538 592 7.4 3.5 8.6 7.0 2.7 8.8 6.8 5.2 8.8 33.5 203.1 137.9 2011 1,873 2,682 4,436 902 510 607 2012 1,896 2,354 4,301 873 515 661 2013 1,887 2,164 4,245 866 506 578 8,592 8,939 8,910 8,304 14,077 13,278 11,156 11,010 10,600 10,246 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 82 Annual Report 2013 Key figures Definitions of key figures Definitions of key figures EBITDA (Earnings before interest, taxes, depreciation and amortisation) Comparable EBITDA Items affecting comparability Comparable operating profit Non-recurring items Other items affecting comparability Funds from operations (FFO) Capital expenditure Gross investments in shares Return on shareholders' equity, % Return on capital employed, % Return on capital employed continuing operations, % Return on net assets, % = = = = = = = = = = = = Operating profit + Depreciation, amortisation and impairment charges EBITDA - items affecting comparability - Net release of CSA provision Non-recurring items + other items affecting comparability Operating profit - non-recurring items - other items affecting comparability Mainly capital gains and losses Includes effects from financial derivatives hedging future cash-flows where hedge accounting is not applied according to IAS 39 and effects from the accounting of Fortum´s part of the Finnish Nuclear Waste Fund where the asset in the balance sheet cannot exceed the related liabilities according to IFRIC interpretation 5. Net cash from operating activities before change in working capital Capitalised investments in property, plant and equipment and intangible assets including maintenance, productivity, growth and investments required by legislation including borrowing costs capitalised during the construction period. Maintenance investments expand the lifetime of an existing asset, maintain usage/availability and/or maintains reliability. Productivity improves productivity in an existing asset. Growth investments' purpose is to build new assets and/or to increase customer base within existing businesses. Legislation investments are done at a certain point of time due to legal requirements. Investments in subsidiary shares, shares in associated companies and other shares in available for sale financial assets. Investments in subsidiary shares are net of cash and grossed with interest-bearing liabilities in the acquired company. Profit for the year Total equity average Profit before taxes + interest and other financial expenses Capital employed average Profit before taxes continuing operations + interest and other financial expenses continuing operations Capital employed continuing operations average x 100 x 100 x 100 Operating profit + Share of profit (loss) in associated companies and joint ventures x 100 Net assets average This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 83 Annual Report 2013 Key figures Comparable return on net assets, % = Comparable operating profit + Share of profit (loss) in associated companies and joint ventures (adjusted for IAS 39 effects and major sales gains or losses) x 100 Comparable net assets average Capital employed = Total assets - non-interest bearing liabilities - deferred tax liabilities - provisions Net assets Comparable net assets Interest-bearing net debt Gearing, % Equity-to-assets ratio, % Net debt/EBITDA Comparable net debt/EBITDA Net debt/EBITDA continuing operations Comparable net debt/EBITDA continuing operations Interest coverage Interest coverage including capitalised borrowing costs Average number of employees Earnings per share (EPS) Cash flow per share Equity per share = = = = = = = = = = = = = = Non-interest bearing assets + interest-bearing assets related to the Nuclear Waste Fund - non- interest bearing liabilities - provisions (non-interest bearing assets and liabilities do not include finance related items, tax and deferred tax and assets and liabilities from fair valuations of derivatives where hedge accounting is applied) Net assets adjusted for non-interest-bearing assets and liabilities arising from financial derivatives hedging future cash flows where hedge accounting is not applied according to IAS 39 Interest-bearing liabilities - cash and cash equivalents Interest-bearing net debt Total equity Total equity including non-controlling interests Total assets Interest-bearing net debt Operating profit + Depreciation, amortisation and impairment charges x 100 x 100 Interest-bearing net debt Comparable EBITDA Interest-bearing net debt Operating profit continuing operations + Depreciation, amortisation and impairment charges continuing operations Interest-bearing net debt Comparable EBITDA continuing operations Operating profit Net interest expenses Operating profit Net interest expenses-capitalised borrowing costs Based on monthly average for the whole period Profit for the period - non-controlling interests Average number of shares during the period Net cash from operating activities Average number of shares during the period Shareholders' equity Number of shares at the end of the period This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 84 Annual Report 2013 Key figures Payout ratio, % = Dividend per share Earnings per share Payout ratio continuing operations, % = Dividend per share continuing operations Earnings per share continuing operations Dividend per share Share price at the end of the period Share price at the end of the period Earnings per share Amount traded in euros during the period Number of shares traded during the period Dividend yield, % Price/earnings (P/E) ratio Average share price Market capitalisation Trading volumes = = = = = Number of shares at the end of the period x share price at the end of the period Number of shares traded during the period in relation to the weighted average number of shares during the period x 100 x 100 x 100 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 85 Annual Report 2013 Financial Statements Consolidated financial statements Consolidated financial statements income statement Consolidated income statement Consolidated EUR million Sales Other income Materials and services Employee benefits Depreciation, amortisation and impairment charges 5, 18, 6, 5, Other expenses Comparable operating profit Items affecting comparability Operating profit Share of profit of associates and joint ventures Interest expense Interest income Fair value gains and losses on financial instruments Other financial expenses - net Finance costs - net Profit before income tax Income tax expense Profit for the period Attributable to: Owners of the parent Non-controlling interests Earnings per share (in EUR per share) Basic Note 5 10 11 12 19 10 5 7 5 20 13 13 13 13 13 14 15 2013 6,056 94 -2,533 -529 -740 -741 1,607 105 1,712 105 -295 42 -16 -49 -318 1,499 -220 1,279 1,204 75 1,279 2012* 6,159 109 -2,548 -543 -664 -761 1,752 122 1,874 23 1 -300 54 -23 -42 -311 1,586 -74 2 1,512 1,416 96 1,512 1.36 1.59 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 86 Annual Report 2013 Financial Statements Diluted EUR million Comparable operating profit Non-recurring items (sales gains) Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment Operating profit 1.36 1.59 2013 1,607 61 21 23 1,712 2012 1,752 155 -2 -31 1,874 * Comparative period information for 2012 presented in these financial statements has been restated due to the accounting change for pensions, see Note 1.6.1. 11 Higher share of profits mainly from Hafslund ASA and TGC-1. 22 In 2012 a positive one-time effect from change in Swedish tax rate from 26.3% to 22%. Sales by segment, % 1 11 Sales by country, % 3 1 3 19 33 16 16 74 Power (33) Heat (23) 23 Russia (16) Nordic countries (74) Russia (19) Distribution (16) Electricity Sales (11) Poland (3) Estonia (1) Others (1) Other countries (3) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 87 Annual Report 2013 Financial Statements Consolidated statement of comprehensive Consolidated statement of comprehensive income income The components of the Consolidated statement of comprehensive income (OCI) are items of income and expense that are recognised in equity and not recognised in the Consolidated income statement. They include unrealised items, such as fair value gains and losses on financial instruments hedging future cash flows. These items will be realised in the Consolidated income statement when the underlying hedged item is recognised. OCI also includes gains and losses on fair valuation on available for sale financial assets, items in comprehensive income in associated companies and translation differences. EUR million Profit for the period Other comprehensive income Items that may be reclassified to profit or loss in subsequent periods Cash flow hedges Fair value gains/losses in the period Transfers to income statement Transfers to inventory/fixed assets Tax effect Net investment hedges Fair value gains/losses in the period Tax effect Available for sale financial assets Fair value changes in the period Exchange differences on translating foreign operations Share of other comprehensive income of associates Other changes Items that will not be reclassified to profit or loss in subsequent periods Actuarial gains/losses on defined benefit plans Actuarial gains/losses on defined benefit plans in associates Other comprehensive income for the period, net of tax Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests 2013 1,279 2012 1,512 105 -51 -8 -8 28 -7 0 -496 39 0 -398 58 2 60 -338 941 881 60 941 15 1 -152 -5 33 0 0 0 204 2 -23 0 72 -24 -36 -60 12 1,524 1,412 112 1,524 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 88 Annual Report 2013 Financial Statements 11 Fair valuation of cash flow hedges mainly relates to hedging electricity price in future cash flows. When electricity price is higher than the hedging price, the impact on equity is negative and vice versa. 22 Translation differences from translation of foreign entities, mainly in RUB, NOK and SEK. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 89 Annual Report 2013 Financial Statements Consolidated balance sheet Consolidated balance sheet EUR million ASSETS Non-current assets Intangible assets Property, plant and equipment Participations in associates and joint ventures Share in State Nuclear Waste Management Fund Other non-current assets Deferred tax assets Derivative financial instruments Long-term interest-bearing receivables Total non-current assets Current assets Inventories Derivative financial instruments Trade and other receivables Cash and cash equivalents Assets held for sale Total current assets Total assets EQUITY Equity attributable to owners of the parent Share capital Share premium Retained earnings Other equity components Total Non-controlling interests Total equity Note 31 Dec 2013 31 Dec 2012 18 19 20 30 21 29 3 22 23 3 24 25 9 26 27 392 15,201 1,905 744 75 130 363 1,463 20,273 375 297 1,048 1,254 1,173 4,147 442 16,497 1,979 678 69 177 451 1,384 21,677 428 223 1,270 963 - 2,884 24,420 24,561 3,046 73 6,851 54 10,024 638 10,662 3,046 73 7,020 -99 10,040 603 10,643 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 90 Annual Report 2013 Financial Statements LIABILITIES Non-current liabilities Interest-bearing liabilities Derivative financial instruments Deferred tax liabilities Nuclear provisions Other provisions Pension obligations Other non-current liabilities Total non-current liabilities Current liabilities Interest-bearing liabilities Derivative financial instruments Trade and other payables Liabilities related to assets held for sale Total current liabilities Total liabilities Total equity and liabilities 28 3 29 30 31 32 33 28 3 34 9 6,960 177 1,648 744 103 65 151 9,848 2,138 85 1,147 540 3,910 7,699 182 1,879 678 207 152 472 11,269 1,078 264 1,307 - 2,649 13,758 13,918 24,420 24,561 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 91 Annual Report 2013 Financial Statements Consolidated statement of changes in total Consolidated statement of changes in total equity equity Share capital Share premium Retained earnings Other equity components Owners of the parent Non- controlling interests Total equity Retained earnings and other funds Translation of foreign operations Cash flow hedges Other OCI items OCI items associated companies 3,046 73 7,193 -173 34 -133 0 10,040 603 10,643 1,204 1,204 75 1,279 -476 -1 2 4 -471 -25 -496 35 72 41 148 10 158 1,204 -888 1 -10 -476 34 74 45 881 -888 60 941 -888 0 1 -26 -26 -10 1 1 -9 3,046 73 7,500 -649 68 -59 45 10,024 638 10,662 EUR million Note Total equity 31 December 2012 Net profit for the period Translation differences Other comprehensive income Total comprehensive income for the period Cash dividend 15 Dividends to non-controlling interests Changes due to business combinations Other changes Total equity 31 December 2013 8 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 92 Annual Report 2013 Financial Statements Total equity 31 December 2011 Change in accounting policy Total equity 1 January 2012 Net profit for the period Translation differences Other comprehensive income Total comprehensive income for the period Cash dividend 15 Dividends to non-controlling interests Changes due to business combinations Other changes Total equity 31 December 2012 8 Translation differences 3,046 73 6,670 -352 136 -2 61 9,632 529 10,161 3,046 73 6,670 -352 136 -108 56 9,521 516 10,037 -106 -5 -111 -13 -124 1,416 1,416 179 4 -3 3 183 96 21 1,512 204 -106 -22 -59 -187 -5 -192 1,416 -888 -5 179 -102 -25 -56 1,412 112 1,524 -888 -888 0 0 -5 -26 -26 2 -1 2 -6 3,046 73 7,193 -173 34 -133 0 10,040 603 10,643 Translation of financial information from subsidiaries in foreign currency is done using average rate for the income statement and end rate for the balance sheet. The exchange rate differences occurring from translation to EUR are booked to equity. Translation differences impacted equity attributable to owners of the parent company by EUR -471 million during 2013 (2012: 183) including the net effect from RUB, NOK and SEK amounting to EUR -465 million in 2013 (2012: 173). For information regarding exchange rates used, see Note 1 Accounting policies. For information about translation exposure, see Note 3.6 Interest rate risk and currency risk. Cash flow hedges The impact on equity attributable to owners of the parent from fair valuation of cash flow hedges, EUR 34 million (2012: -102), mainly relates to cash flow hedges hedging electricity price for future transactions. When electricity price is lower/higher than the hedging price, the impact on equity is positive/negative. Non-controlling interests The main changes in non-controlling interests in equity are dividend distributions to non-controlling interests EUR -26 million (2012: -26). Change in accounting policy Comparative period information has been restated due to the accounting change for pensions, see Note 1.6.1. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 93 Annual Report 2013 Financial Statements Consolidated cash flow statement Consolidated cash flow statement EUR million Cash flow from operating activities Net profit for the period Adjustments: Income tax expenses Finance costs - net Share of profit of associates and joint ventures Depreciation, amortisation and impairment charges Operating profit before depreciations (EBITDA) Non-cash flow items and divesting activities Interest received Interest paid Dividends received Realised foreign exchange gains and losses and other financial items Taxes Funds from operations Change in working capital Total net cash from operating activities Cash flow from investing activities Capital expenditures Acquisitions of shares Proceeds from sales of fixed assets Divestments of shares Proceeds from interest-bearing receivables relating to divestments Shareholder loans to associated companies Change in other interest-bearing receivables Total net cash used in investing activities Cash flow before financing activities Cash flow from financing activities Proceeds from long-term liabilities Payments of long-term liabilities Change in short-term liabilities Dividends paid to the owners of the parent Other financing items Total net cash used in financing activities Note 2013 1,279 220 318 -105 740 2,452 -260 28 -374 50 46 -229 1,713 123 1,836 2012 1,512 74 311 -23 664 2,538 -192 1 59 -352 45 -274 2 -269 1,555 -173 1,382 5, 18, 19 -1,271 -1,422 3 -15 66 122 22 -136 2 -14 13 239 181 -138 13 -1,210 -1,128 626 254 790 -642 438 -888 -2 -304 1,375 -669 168 -888 -33 -47 15 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 94 Annual Report 2013 Financial Statements Total net increase(+)/decrease(-) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Foreign exchange differences in cash and cash equivalents Cash and cash equivalents at the end of the year 1) 322 963 -16 25 1,269 207 747 9 963 1) Including cash balances of EUR 15 million relating to assets held for sale as of 31 December 2013. 11 Non-cash flow items and divesting activities consist mainly of changes in provisions (including nuclear) EUR -178 million (2012: -40), adjustments for unrealised fair value changes of derivatives EUR -21 million (2012: 3) and capital gains EUR -61 million (2012: -155). The actual proceeds for divestments are shown under cash flow from investing activities. 22 Realised foreign exchange gains and losses and other financial items include realised foreign exchange gains and losses of EUR 52 million for 2013 (2012: -268) related mainly to financing of Fortum's Swedish and Russian subsidiaries and the fact that the Group's main external financing currency is EUR. The foreign exchange gains and losses arise for rollover of foreign exchange contracts hedging the internal loans as major part of these forwards is entered into with short maturities i.e. less than twelve months. 33 Capital expenditures in cash flow do not include not yet paid investments. Capitalised borrowing costs are included in interest costs paid. Change in net debt EUR million Net debt 1 January Foreign exchange rate differences EBITDA Paid net financial costs, taxes and adjustments for non-cash and divestment items Change in working capital Capital expenditures Acquisitions Divestments Proceeds from interest-bearing receivables relating to divestments Shareholder loans to associated companies Change in other interest-bearing receivables Dividends Other financing activities Net cash flow (- increase in net debt) Fair value change of bonds and amortised cost valuation Net debt 31 December 2013 7,814 -110 2,452 -739 123 -1,271 -15 188 22 -136 2 -888 -2 -264 -119 7,849 2012 7,023 89 2,538 -983 -173 -1,422 -14 252 181 -138 13 -888 -45 -679 23 7,814 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 95 Annual Report 2013 Financial Statements Additional cash flow information Change in working capital EUR million Change in interest-free receivables, decrease(+)/increase(-) Change in inventories, decrease(+)/increase(-) Change in interest-free liabilities, decrease(-)/increase(+) Total 2013 123 39 -39 123 Positive effect from change in working capital during 2013, EUR 123 million (2012: -173) is mainly due to decrease in receivables. Capital expenditure EUR million Capital expenditure Change in not yet paid investments, decrease(+)/increase(-) Capitalised borrowing costs Capital expenditure in cash flow Note 19 5, 18, 2013 1,284 56 -69 1,271 2012 -226 109 -56 -173 2012 1,558 -56 -80 1,422 Capital expenditure in intangible assets and property, plant and equipment in the balance sheet was EUR 1,284 million (2012: 1,558). Capital expenditure in cash flow EUR 1,271 million (2012: 1,422) is presented without not yet paid investments i.e. change in trade payables related to investments EUR -56 million (2012: 56) and capitalised borrowing costs EUR 69 million (2012: 80), which are presented in interest paid. See also information about the investments by segments and countries in Note 5 Segment reporting and the investment projects by segment in Note 19.2 Capital expenditure. Acquisition of shares in cash flow Acquisition of shares, net of cash acquired, amounted to EUR 15 million during 2013 (2012: 14). Divestments of shares in cash flow EUR million Proceeds from sales of subsidiaries, net of cash disposed Proceeds from sales of associates Proceeds from available for sale financial assets Total Note 8 20 2013 22 100 0 122 2012 223 13 3 239 Gross divestment of shares totalled EUR 142 million in 2013 (2012: 410) including interest-bearing debt in sold subsidiaries of EUR 22 million (2012: 181). Proceeds from divestments of shares totalled EUR 122 million in 2013 (2012: 239). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 96 Annual Report 2013 Financial Statements Notes to the consolidated financial statements Notes to the consolidated financial statements 1 Accounting policies 1 Accounting policies 1.1 Basic information 1.1 Basic information • effects from fair valuations of derivatives Fortum Corporation (the Company) is a Finnish public limited liability company with its domicile in Espoo, Finland. The Company is listed on NASDAQ OMX Helsinki. Fortum Corporation and its subsidiaries (together the Fortum Group) is a leading energy company focusing on the Nordic countries, Russia and the Baltic Rim area. Fortum's activities cover generation, distribution and sale of electricity and heat, operation and maintenance of power plants as well as energy-related services. These financial statements were approved by the Board of Directors on 3 February 2014. 1.2 Basis of preparation 1.2 Basis of preparation The consolidated financial statements of the Fortum Group have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRIC Interpretations as adopted by the European Union. The financial statements also comply with Finnish accounting principles and corporate legislation. The consolidated financial statements have been prepared under the historical cost convention, except for available for sale financial assets, financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss and items hedged at fair value. 1.2.1 Income statement presentation 1.2.1 Income statement presentation In the Consolidated income statement Comparable operating profit is presented to better reflect the Group’s business performance when comparing results for the current period with previous periods. Items affecting comparability are disclosed as a separate line item. The following items are included in “Items affecting comparability”: • non-recurring items, which mainly consist of capital gains and losses; hedging future cash flows which do not obtain hedge accounting status according to IAS 39. The major part of Fortum’s cash flow hedges obtain hedge accounting where fair value changes are recorded in equity; • effects from accounting of Fortum’s part of the State Nuclear Waste Management Fund where the assets can not exceed the related liabilities according to IFRIC 5. Comparable operating profit is used for financial target setting, follow up and allocation of resources in the group’s performance management. 1.2.2 Classification of current and non- 1.2.2 Classification of current and non- current assets and liabilities current assets and liabilities An asset or a liability is classified as current when it is expected to be realised in the normal operating cycle or within twelve months after the balance sheet date or it is classified as financial assets or liabilities held at fair value through profit or loss. Liquid funds are classified as current assets. All other assets and liabilities are classified as non-current assets and liabilities. 1.3 Principles for consolidation 1.3 Principles for consolidation The consolidated financial statements have been prepared in accordance with the principles set forth in IAS 27, Consolidated and Separate Financial Statements. The consolidated financial statements comprise of the parent company, subsidiaries, joint ventures and associated companies. The Fortum Group was formed in 1998 by using the pooling-of-interests method for consolidating Fortum Power and Heat Oy and Fortum Oil and Gas Oy (the latter demerged to Fortum Oil Oy and Fortum Heat and Gas Oy 1 May 2004). In 2005 Fortum Oil Oy was separated from Fortum by distributing 85% of its shares to Fortum's shareholders and by selling the remaining 15%. This means that the acquisition cost of Fortum Power and Heat Oy and Fortum Heat and Gas Oy has been eliminated against the share capital of the companies. The difference has been entered as a decrease in shareholders’ equity. 1.3.1 Subsidiaries 1.3.1 Subsidiaries Subsidiaries are defined as companies in which Fortum Corporation has the power to govern the financial and operating policies and generally holds, directly or indirectly, more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls another entity. The acquisition method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the aggregate of fair value of the assets given and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, subsidiaries’ accounting policies have been changed to ensure consistency with the policies the Group has adopted. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 97 Annual Report 2013 Financial Statements The Fortum Group subsidiaries are disclosed in Note 42 Subsidiaries by segment on 31 December 2013. 1.4 Foreign currency transactions 1.4 Foreign currency transactions and translation and translation 1.4.3 Group companies 1.4.3 Group companies 1.3.2 Associates and joint ventures 1.3.2 Associates and joint ventures 1.4.1 Functional and presentation 1.4.1 Functional and presentation currency currency Associated companies are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Joint ventures are entities over which the Group has contractually agreed to share the power to govern the financial and operating policies of that entity with another venturer or venturers. The Group’s interests in associated companies and jointly controlled entities are accounted for using the equity method of accounting. 1.3.3. Non-controlling interests 1.3.3. Non-controlling interests Non-controlling interests in subsidiaries are identified separately from the equity of the owners of the parent company. The non- controlling interests are initially measured at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets. Subsequent to acquisition, the carrying amount of non- controlling interests is the amount of those interests at initial recognition plus the non- controlling interests’ share of subsequent changes in equity. Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in euros, which is the Company’s functional and presentation currency. 1.4.2 Transactions and balances 1.4.2 Transactions and balances Transactions denominated in foreign currencies are translated using the exchange rate at the date of the transaction. Receivables and liabilities denominated in foreign currencies outstanding on the closing date are translated using the exchange rate quoted on the closing date. Exchange rate differences have been entered in the income statement. Net conversion differences relating to financing are entered under financial income or expenses, except when deferred in equity as qualifying cash flow hedges. Translation differences on available for sale financial assets are included in Other equity components section of the equity. The income statements of subsidiaries, whose measurement and reporting currencies are not euros, are translated into the Group reporting currency using the average exchange rates for the year based on the month-end exchange rates, whereas the balance sheets of such subsidiaries are translated using the exchange rates on the balance sheet date. On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign operation is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. The Group deems all cumulative translation differences for all foreign operations to be zero at the date of transition to IFRS, i.e. 1 January 2004. The balance sheet date rate is based on the exchange rate published by the European Central Bank for the closing date. The average exchange rate is calculated as an average of each month's ending rate from the European Central Bank during the year and the ending rate of the previous year. Key exchange rates for Fortum Group applied in the accounts Sweden Russia Poland Norway Average rate Balance sheet date rate Currency SEK RUB PLN NOK 2013 8.6624 42.4441 4.2027 7.8266 2012 8.7015 40.2354 4.1900 7.4840 31 Dec 2013 31 Dec 2012 8.8591 45.3246 4.1543 8.3630 8.5820 40.3295 4.0740 7.3483 1.4.4 Associates and joint ventures 1.4.4 Associates and joint ventures as for subsidiaries, see 1.4.3 Group companies. where they are presented as well as the relevant IFRS standard. The Group’s interests in associated companies and jointly controlled entities are accounted for by the equity method. Associates and joint ventures, whose measurement and reporting currencies are not euro, are translated into the Group reporting currency using the same principles 1.5 Accounting policies 1.5 Accounting policies Fortum describes the accounting principles in conjunction with the relevant note information. The table below lists the significant accounting policies and the note This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 98 Annual Report 2013 Financial Statements Accounting principle Segment reporting Revenue recognition Government grants Share-based payments Income taxes Non-current assets held for sale and discontinued operations Joint ventures Investments in associates Shares and participations Intangible assets Tangible assets Leasing Inventories Earnings per share Provisions Contingent liabilities Financial instruments Cash equivalents Borrowings Note 5. Segment reporting 5. Segment reporting and 24. Trade and other receivables 19. Property, plant and equipment 12. Employee benefits 29. Deferred income taxes 9. Assets held for sale 20. Participations in associated companies and joint ventures 20. Participations in associated companies and joint ventures IFRS-standard IFRS 8 IAS 18 IAS 20 IFRS 2 IAS 12 IFRS 5 IAS 31 IAS 28 16. Financial assets and liabilities by categories IAS 32, IAS 36, IAS 39 18. Intangible assets IAS 38 19. Property, plant and equipment IAS 16, IAS 36, IAS 40 36. Leasing 23. Inventories 15. Earnings and dividend per share 31. Other provisions 38. Contingent liabilities IAS 17 IAS 2 IAS 33 IAS 19 IFRIC 5 IAS 37 IAS 37 16. Financial assets and liabilities by categories and 17. Financial assets and liabilities by fair value hierarchy IAS 32, IAS 39, IFRS 7 25. Cash and cash equivalents 28. Interest-bearing liabilities IAS 7 IAS 39 Pensions and similar obligations 32. Pension obligations Decommissioning obligation 30. Nuclear related assets and liabilities 1.6 New accounting principles 1.6 New accounting principles 1.6.1 New IFRS standards adopted from 1 1.6.1 New IFRS standards adopted from 1 Jan 2013 Jan 2013 Fortum has adopted the following new or amended standards on 1 January 2013: IAS 19 Employee benefits IAS 19 Employee benefits The amendment to IAS 19 Employee benefits changed the accounting for defined benefit plans by eliminating the corridor approach. Accordingly actuarial gains and losses are immediately recognised in the period they occur in equity. The amendment did not have a material effect on Fortum's financial results or financial position, however it had an impact to equity through other comprehensive income. Transition requirements in IAS19 require that the financial information for 2012 is restated. Restated quarterly information for 2012 (including effects for segments) is presented in the attachment to the Q1/2013 interim report. The following table summarises the adjustments made to the statement of financial position. Impact on balance sheet as of 31 December 2012 EUR million Participation in associates and joint ventures Deferred tax assets Pension assets Other non-current assets Impact to assets Equity Deferred tax liability Balances at 1 Jan 2012, previously reported Impact of change in accounting policy Restated balances at 1 Jan 2012 Balances at 31 Dec 2012, previously reported Impact of change in accounting policy Restated balances at 31 Dec 2012 2,019 150 60 69 10,161 2,013 -5 25 -60 -4 -44 -124 -16 2,014 175 0 65 10,037 1,997 2,019 148 54 71 10,821 1,893 -40 29 -54 -2 -67 -178 -14 1,979 177 0 69 10,643 1,879 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 99 Annual Report 2013 Financial Statements Pension obligations Other non-current liabilities Impact to equity and liabilities 26 465 95 1 -44 121 466 27 472 125 0 -67 152 472 The effect on the consolidated income statement and consolidated statement of comprehensive income for 2012 is presented below. When starting to apply the amended IAS19 standard, Fortum has decided to present the net interest in financial items. Impact on income statement for 2012 EUR million Effect to income statement Employee benefits Comparable operating profit Share of profit in associates and joint ventures Other financial expenses - net Income tax expense Profit for the year Effect to other comprehensive income Actuarial gains/losses on defined benefit plans Actuarial gains/losses on defined benefit plans in associates Previously reported 2012 Impact of change in accounting policy Restated 2012 -556 1,739 21 -38 -72 1,503 - - 13 13 2 -4 -2 9 -24 -36 -543 1,752 23 -42 -74 1,512 -24 -36 Other new or amended standards adopted Other new or amended standards adopted from 1 January 2013 from 1 January 2013 standard did not have impact on Fortum's reported result or financial position. New IFRS 13 Fair value measurement - standard establishes guidance under IFRS for all fair value measurements. IFRS 13 does not change the requirement when to use fair value, but rather provides guidance on how to measure fair value under IFRS when fair value is required or permitted. The application of IFRS 13 has not materially impacted the fair value measurements carried out by Fortum. IFRS 13 also requires specific disclosures on fair value hierarchy. These disclosures are given in Note 17. IFRS 7 Financial Instruments: Disclosures Offsetting Financial Assets and Financial Liabilities -standard as amended requires disclosures about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement. This information is disclosed in Notes 16 and 17. The amendment to IAS 1 Presentation of Financial statements: Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after 1 July 2012) relates to presentation of Comprehensive Income. The adoption of the Annual improvements to IFRSs issued in May 2012 (effective for annual periods beginning on or after 1 January 2013). The improvements primarily remove inconsistencies and clarify wording of standards. There are separate transitional provisions for each standard. Amendments did not have an impact on Fortum’s financial statements. 1.6.2 Adoption of new IFRS standards 1.6.2 Adoption of new IFRS standards from 1 Jan 2014 or later from 1 Jan 2014 or later Fortum will apply the following new IFRS standards starting from 1 January 2014: IFRS 10 Consolidated financial IFRS 10 Consolidated financial statements, IFRS 11 Joint arrangements statements, IFRS 11 Joint arrangements and IFRS 12 Disclosures of interests in and IFRS 12 Disclosures of interests in other entities other entities IFRS 10 Consolidated financial statements (mandatory application in EU for annual periods beginning on or after 1 January 2014). The standard builds on existing principles by identifying the concept of control as the determining factor whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 11 Joint arrangements (mandatory application in EU for annual periods beginning on or after 1 January 2014). The standard replaces IAS 31 Interests in joint ventures. Joint control under IFRS 11 is defined as the contractual sharing of control of an arrangement, which exists only when the decisions about the relevant activities require unanimous consent of the parties sharing control. IFRS 12 Disclosures of interests in other entities (mandatory application in EU for annual periods beginning on or after 1 January 2014). The standard includes disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles. These disclosures will be given in the consolidated financial statements for 2014. When adopting the new standards Fortum has reassessed its control conclusions for its investees and re-evaluated its involvement in its partially owned investments. The reassessment has lead reclassification of some entities from an associated company to This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 100 Annual Report 2013 Financial Statements a joint venture. Notwithstanding the reclassification, the investments will continue to be recognised by applying the equity method and there will be no impact on the recognised assets, liabilities and comprehensive income of Fortum. The accounting effects of applying the new standards to Fortum Group financial information relate to AB Fortum Värme samägt med Stockholms Stad (Fortum Värme), that will be treated as a joint venture and thus consolidated with equity method from 1 January 2014. Fortum Värme is a district heating company producing heat and power with CHP plants in Stockholm area. Currently the company is being consolidated as a subsidiary with 50% minority interest. Impact on income statement for 2013 In the following tables Fortum's income statement, balances sheet and certain key figures are presented before and after restatement. In the restated balance sheet shares of Fortum Värme are included in the Shares in associated companies and joint ventures. At the year end Fortum Oyj and its subsidiaries had given loans to Fortum Värme which are presented as shareholders loans in the restated balance sheet. There is a plan to refinance those shareholder loans with external financing e.g. bank financing by the end of 2015. Restatement does not have any or only limited effect on Fortum's key ratios such as earnings per share, return on capital employed and return on shareholders' equity. The current financing arrangement effects the restated comparable net debt to EBITDA ratio negatively, increase from 3.4 to 3.9 in 2013, due to Fortum's definition of net debt where interest-bearing receivables are not deducted from net debt. The effect will decrease as Fortum's shareholder loans are replaced with external financing. Comparable net debt to EBITDA ratio would be 3.4, if the interest-bearing receivables from Fortum Värme are deducted from net debt. When applying IFRS 10 and 11 in 2014, the standards require the comparative information to be restated i.e. 2013 financial information will be restated. Full set of restated quarterly information for 2013 will be given in the Q1/2014 interim report. EUR million Sales Other income Materials and services Employee benefit costs Other expenses Depreciation, amortisation and impairment charges Comparable operating profit Items affecting comparability Operating profit Share of profits in associates and joint ventures Finance costs - net Profit before income taxes Income taxes Profit for the period Non-controlling interests Net profit for the period, owners of the parent Earnings per share, EUR Fortum Group with Värme as subsidiary 6,056 94 -2,533 -529 -740 -741 1,607 105 1,712 105 -318 1,499 -220 1,279 -75 1,204 1.36 Fortum group restated Värme as joint venture 5,309 93 -2,270 -460 -621 -648 1,403 105 1,508 178 -289 1,397 -185 1,212 -8 1,204 1.36 Change -747 -1 263 69 119 93 -204 0 -204 73 29 -102 35 -67 67 0 0 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 101 Annual Report 2013 Financial Statements Impact on balance sheet as of 31 December 2013 Fortum Group with Värme as subsidiary 392 15,201 1,905 1,463 1,312 20,273 375 2,518 1,254 4,147 24,420 3,046 6,978 10,024 638 10,662 9,098 1,648 3,012 13,758 24,420 Fortum group restated Värme as joint venture 384 12,849 2,341 2,597 1,314 19,485 263 2,350 1,250 3,863 23,348 3,046 6,978 10,024 100 10,124 9,039 1,338 2,847 13,224 23,348 Change -8 -2,352 436 1,134 2 -788 -112 -168 -4 -284 -1,072 0 0 0 -538 -538 -59 -310 -165 -534 -1,072 EUR million ASSETS Intangible assets Property, plant and equipement Shares in associated companies and joint ventures Long-term interest-bearing receivables Other non-current assets Total non-current assets Inventories, total Trade and other receivables 1) Liquid funds Total current assets Total assets EQUITY AND LIABILITIES Share capital Other equity Total Non-controlling interests Total equity Interest-bearing liabilities Deferred tax liabilities Other interest-free liabilities 2) Total liabilities Total liabilities and equity 1) Include assets held for sale EUR 1,173 million. 2) Include liabilities related to assets held for sale EUR 540 million. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 102 Annual Report 2013 Financial Statements Impact on key ratios for 2013 EUR million Comparable EBITDA, EUR million Earnings per share (basic), EUR Capital expenditure, EUR million Capital employed, EUR million Interest-bearing net debt, EUR million Interest-bearing net debt without Värme financing, EUR million Return on capital employed, % Return on shareholders' equity, % Comparable net debt/EBITDA Comparable net debt/EBITDA without Värme financing Impact on Heat segment information for 2013 EUR million Comparable EBITDA Comparable operating profit Operating profit Share of profits in associates and joint ventures Depreciation and amortisation Capital expenditure Assets (at period end) Liabilities (at period end) Net assets (at period end) Comparable RONA, % RONA, % Number of employees (at period end) Power generation, TWh Heat production, TWh Power generation capacity, MW Heat production capacity, MW Fortum Group with Värme as subsidiary 2,299 1.36 1,284 19,780 7,849 7,849 9.2 12.0 3.4 3.4 Heat segment with Värme as subsidiary 489 273 288 19 216 397 4,709 426 4,283 6.8 7.2 2,102 4.0 16.5 1,398 7,943 Fortum group restated Värme as joint venture 1,976 1.36 1,004 19,183 7,794 6,660 9.0 12.0 3.9 3.4 Heat segment restated Värme as joint venture 166 69 84 92 97 117 2,478 239 2,239 7.1 7.8 1,402 2.8 8.3 788 4,326 Change -323 0 -280 -597 -55 -1,189 -0.2 0.0 0.5 0.0 Change -323 -204 -204 73 -119 -280 -2,231 -187 -2,044 0.3 0.6 -700 -1.2 -8.2 -610 -3,617 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 103 Annual Report 2013 Financial Statements Fortum will apply the following new or Fortum will apply the following new or amended standards and interpretations amended standards and interpretations starting from 1 January 2015 or later starting from 1 January 2015 or later will apply the new standard in due course. The Standard is still subject to endorsement by EU. IFRS 9 Financial instruments (effective for annual periods beginning on or after 1 January 2015). The standard has new requirements for the classification and measurement of financial assets and liabilities. New requirements are expected to be added to the standard and it will eventually replace IAS 39 and IFRS 7. Fortum IFRIC 21 Levies (effective for annual periods beginning on or after 1 January 2014). The interpretation has guidance on when to recognise a liability to pay a levy. Fortum will apply the new standard in due course. The Standard is still subject to endorsement by EU. Annual improvements to IFRSs issued in December 2013 (effective for annual periods beginning on or after 1 July 2014). The improvements primarily remove inconsistencies and clarify wording of standards. There are separate transitional provisions for each standard. Amendments are not expected to have an impact on Fortum’s financial statements. The Standard is still subject to endorsement by EU. 2 Critical accounting estimates 2 Critical accounting estimates The preparation of IFRS consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results and timing may differ from these estimates. The table below is listing the areas where management's accounting estimates and Critical accounting estimates Note judgements are most critical to reported results and financial position. The table is also showing where to find more information about those estimates. Assigned values and useful lifes determined for intangible assets and property, plant and equipment acquired in a business combination 18. Intangible assets 19. Property, plant and equipment Assumptions related to impairment testing of property, plant and equipment and intangible assets 18. Intangible assets Assumptions and estimates regarding future tax consequences 29. Deferred income taxes Assumptions made to determine long-term cash flow forecasts of estimated costs for provision related to nuclear production 30. Nuclear related assets and liabilities Assumptions used to determine future pension obligations 32. Pension obligations 19. Property, plant and equipment This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 104 Annual Report 2013 Financial Statements 3 Financial risk management 3 Financial risk management Risk management objectives, principles and framework including governance, organisation and processes as well as description of risks i.e. strategic, financial and operational risks are described in the Operating and financial review (OFR). See also Risk management. 3.1 Commodity market risks Commodity market risk refers to the potential negative effects of market price movements or volume changes in electricity, fuels and environmental values. A number of different methods, such as Profit-at-Risk and Value-at-Risk, are used throughout Fortum to quantify these risks taking into account their interdependencies. Stress-testing is carried out in order to assess the effects of extreme price movements on Fortum’s earnings. Commodity market risk management aims to capture potential upside by optimising hedging or by trading in the markets. Risk taking is limited by risk mandates. Risk mandates include the Group minimum EBITDA mandate approved by the CEO and volumetric limits, Profit-at-Risk limits and Stop-Loss limits. 3.2 Electricity price and volume risk Strategies for hedging the electricity price are developed and executed by the Power division in co-operation with the divisions within set mandates approved by the CEO. In the Nordic markets, the hedging strategies are executed by entering into commodity derivatives contracts such as forward or futures, mainly on Nasdaq OMX Commodities Europe. The majority of electricity price risk in Russia is hedged with physical fixed priced delivery contracts. Hedging strategies for Russia are developed in line with the development of the financial electricity market. Risk in the hedging strategies and their execution are continuously evaluated in accordance with models approved by the Chief Risk Officer and mandates approved by CEO. Fortum's sensitivity to electricity market price is dependent on the hedge level for a given time period. As per 31 December 2013, approximately 60% of the Power Division's estimated Nordic power sales volume was hedged for the calendar year 2014 and approximately 20% for the calendar year 2015. Assuming no changes in generation volumes, hedge ratios or cost structure a 1 EUR/MWh change in the market price of electricity would affect Fortum's 2014 comparable operating profit by approximately EUR 18 million and for 2015 by approximately EUR 36 million. The volume used in this sensitivity analysis is 45 TWh which includes the electricity generation sold to the spot market in Sweden and Finland in the Power Division without minority owner's shares of electricity or other pass-through sales, and excluding the volume of Fortum's coal-condensing generation. This volume is heavily dependent on price level, the hydrological situation, the length of annual maintenance periods and availability of power plants. Sensitivity is calculated only for electricity market price movements. Hydrological conditions, temperature, CO2 allowance prices, fuel prices and the import/export situation all affect the electricity price on short-term basis and effects of individual factors cannot be separated. 3.2.1 Sensitivity arising from financial instruments according to IFRS 7 Sensitivity analysis shows the sensitivity arising from financial electricity derivatives as defined in IFRS 7. These derivatives are used for hedging purposes within Fortum. Sensitivities are calculated based on 31 December 2013 (31 December 2012) position. Positions are actively managed in the day-to-day business operations and therefore the sensitivities vary from time to time. Sensitivity analysis includes only the market risks arising from derivatives i.e. the underlying physical electricity sales and purchase are not included. Sensitivity is calculated with the assumption that electricity forward quotations in NASDAQ OMX Commodities Europe and in EEX would change 1 EUR/MWh for the period Fortum has derivatives. Sensitivity according to IFRS 7 +/- 1 EUR/MWh change in electricity forward quotations, EUR million Effect on Profit before income tax Effect on Equity Effect -/+ -/+ 2013 2012 7 22 26 20 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 105 Annual Report 2013 Financial Statements 3.2.2 Electricity derivatives The tables below disclose the Group's electricity derivatives used mainly for hedging electricity price risk. The fair values represent the values disclosed in the balance sheet. See also Note 16 Financial assets and liabilities by categories for accounting principles and basis for fair value estimations and Note 7 Fair value changes of derivatives and underlying items in income statement for the effects in the income statement regarding electricity derivatives not getting hedge accounting status. Electricity derivatives by instrument 2013 Sales swaps Purchase swaps Purchased options Written options Total Netting against electricity exchanges 1) Total Electricity derivatives by accounting status 2013 Derivatives with hedge accounting status Derivatives with non-hedge accounting status 2) Total Netting against electricity exchanges 1) Derivatives with hedge accounting status Derivatives with non-hedge accounting status 2) Total Total Of which long-term Short-term Volume, TWh Fair value, EUR million Under 1 year 1-5 years Over 5 years Total Positive Negative 50 29 0 0 79 22 13 0 1 36 0 0 0 0 0 72 42 0 1 115 484 11 0 0 495 -227 268 33 253 0 0 286 -227 59 Volume, TWh Fair value, EUR million Under 1 year 1-5 years Over 5 years Total Positive Negative 19 60 79 12 24 36 0 0 0 31 84 115 181 314 495 -35 -192 -227 268 82 186 42 244 286 -35 -192 -227 59 35 24 Net 451 -242 0 0 209 0 209 Net 139 70 209 0 0 0 209 47 162 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 106 Annual Report 2013 Financial Statements Electricity derivatives by instrument 2012 Sales swaps Purchase swaps Purchased options Written options Total Netting against electricity exchanges 1) Total Electricity derivatives by accounting status 2012 Derivatives with hedge accounting status Derivatives with non-hedge accounting status 2) Total Netting against electricity exchanges 1) Derivatives with hedge accounting status Derivatives with non-hedge accounting status 2) Total Total Of which long-term Short-term Volume, TWh Fair value, EUR million Under 1 year 1-5 years Over 5 years Total Positive Negative 63 35 0 0 98 27 10 0 2 39 0 0 0 0 0 90 45 0 2 137 376 26 0 1 403 -193 210 62 164 0 0 226 -193 33 Volume, TWh Fair value, EUR million Under 1 year 1-5 years Over 5 years Total Positive Negative 26 72 98 14 25 39 0 0 0 40 97 137 152 251 403 -55 -138 -193 210 76 134 60 166 226 -55 -138 -193 33 14 19 Net 314 -138 0 1 177 0 177 Net 92 85 177 0 0 0 177 62 115 1) Receivables and liabilities against electricity exchanges arising from standard derivative contracts with same delivery period are netted. 2) Derivatives with non-hedge accounting status consist of trading derivatives and cash flow hedges without hedge accounting status. Maturity analysis of commodity derivatives EUR million Electricity derivatives assets Electricity derivatives liabilities Other commodity derivatives, assets Other commodity derivatives, liabilities Under 1 year 2013 1-5 years Over 5 years 186 25 28 10 80 33 3 2 2 2 0 0 2012 Under 1 year 1-5 years 288 174 50 44 21 51 17 3 Over 5 years 80 1 0 0 Total 268 60 31 12 Total 389 226 67 47 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 107 Annual Report 2013 Financial Statements 3.3 Fuel price and volume risks Exposure to fuel prices is to some extent limited because of Fortum's flexible generation possibilities, which allow for switching between different fuels according to prevailing market conditions, and in some cases, the fuel price risk can be transferred to the customer. The remaining exposure to fuel price risk is mitigated through fixed price purchases that cover forecasted consumption levels. Fixed price purchases can be either for physical deliveries or in the form of financial hedges, such as oil and coal derivatives. In addition to this, Fortum has a proprietary trading book which includes oil and coal derivatives. 3.4 Emission allowance price and volume risk Part of Fortum's power and heat generation is subject to requirements of emission trading schemes. Fortum manages its exposure to these prices and volumes through the use of CO2 forwards and by ensuring that the costs of allowances are taken into account during production planning. Most of these CO2 forwards are own use contracts valued at cost and some are treated as derivatives in the accounts. 3.5 Liquidity and refinancing risk Fortum's business is capital intensive and the Group has a regular need to raise financing. Fortum has a diversified loan portfolio mainly consisting of long-term financing denominated in EUR and SEK. Long-term financing is primarily raised by issuing bonds under Fortum’s Euro Medium Term Note programme as well as through bilateral and syndicated loan facilities from a variety of different financial institutions. Seasonal variations in working capital are generally financed by issuing short-term commercial papers under the Group’s Swedish (SEK) and Finnish (EUR) Commercial Paper programmes. Financing is primarily raised on parent company level and distributed internally through various internal financing arrangements. On 31 December 2013, 95% (2012: 93%) of the Group’s total external financing was raised by the parent company Fortum Oyj. On 31 December 2013, the total interest-bearing debt was EUR 9,118 million (2012: 8,777) and the interest-bearing net debt was EUR 7,849 million (2012: 7,814). Fortum manages liquidity and refinancing risks through a combination of cash positions and committed credit facility agreements with its core banks. The Group shall at all times have access to cash, marketable securities and unused committed credit facilities including overdrafts, to cover all loans maturing within the next twelve-month period. However, cash/marketable securities and unused committed credit facilities shall always amount to at least EUR 500 million. On 31 December 2013, loan maturities for the coming twelve-month period amounted to EUR 2,142 million (2012: 1,078). Cash and cash equivalents amounted to EUR 1,269 million (2012: 963) and the total amount of committed credit facilities amounted to EUR 2,218 million (2012: 2,722) of which EUR 2,218 million (2012: 2,722) was undrawn. Maturity of interest-bearing liabilities EUR million 2014 2015 2016 2017 2018 2019 and later Total 1) 1) Including interest-bearing debt of EUR 20 million (2012: 0) classified as assets held for sale in the balance sheet. 2013 2,142 1,088 884 580 668 3,756 9,118 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 108 Annual Report 2013 Financial Statements Loan maturities per loan type, EUR million 3,000 2,000 1,000 0 154 718 61 106 1,103 0 0 240 149 699 0 0 31 106 748 2014 2015 2016 0 30 0 180 370 2017 0 0 30 171 468 0 15 0 72 745 2018 2019 3 0 0 0 968 0 0 0 21 530 0 0 1,107 0 0 35 42 0 2020 2021 2022 3 0 0 0 113 2023 5 96 2024+ Other short-term debt CPs Other long-term debt Financial institutions Bonds Cash and cash equivalents, major credit lines and debt programmes 2013 EUR million Cash and cash equivalents 1) of which in Russia (OAO Fortum) Committed credit lines EUR 2,000 million syndicated credit facility Bilateral overdraft facilities Total Debt programmes (uncommitted) Fortum Corporation, CP programme EUR 500 million Fortum Corporation, CP programme SEK 5,000 million Fortum Corporation, EMTN programme EUR 8,000 million Total 1) Including cash balances of EUR 15 million (2012: 0) classified as assets held for sale in the balance sheet. Cash and cash equivalents, major credit lines and debt programmes 2012 EUR million Cash and cash equivalents of which in Russia (OAO Fortum) Committed credit lines EUR 2,500 million syndicated credit facility Bilateral overdraft facilities Total Debt programmes (uncommitted) Fortum Corporation, CP programme EUR 500 million Fortum Corporation, CP programme SEK 5,000 million Fortum Corporation, EMTN programme EUR 6,000 million Total Total facility Drawn amount Available amount 1,269 113 2,000 218 2,218 119 227 2,161 2,507 2,000 218 2,218 500 564 8,000 9,064 - - - 381 337 5,839 6,557 Total facility Drawn amount Available amount 963 128 2,500 222 2,722 400 455 159 1,014 2,500 222 2,722 500 583 6,000 7,083 - - - 100 128 5,841 6,069 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 109 Annual Report 2013 Financial Statements Cash and cash equivalents amounted to EUR 1,269 million (2012: 963), including OAO Fortum's bank deposits amounting to EUR 101 million (2012: 105) earmarked for capacity increase investments in Russia. Of these deposits at year-end 2013 EUR 58 million (2012: 100) were in euros and EUR 43 million (2012: 5) in Russian roubles. See also Note 25 Cash and cash equivalents. Maturity analysis of interest-bearing liabilities and derivatives Amounts disclosed below are non-discounted expected cash flows (future interest payments and amortisations) of interest-bearing liabilities and interest rate and currency derivatives. 2013 2012 EUR million Interest-bearing liabilities Under 1 year 1-5 years Over 5 years Total 2,411 3,920 4,250 10,581 Interest rate and currency derivatives liabilities 7,116 1,942 294 9,352 Under 1 year 1,377 8,695 1-5 years 4,626 1,365 Interest rate and currency derivatives receivables -7,142 -2,023 -271 -9,436 -8,560 -1,473 Over 5 years Total 4,274 10,277 304 -330 10,364 -10,363 Total 2,385 3,839 4,273 10,497 1,512 4,518 4,248 10,278 Interest-bearing liabilities include loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj of EUR 995 million (2012: 940). These loans are renewed yearly and the related interest payments are calculated for ten years in the table above. For further information regarding loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj, see Note 30 Nuclear related assets and liabilities. 3.6 Interest rate risk and currency risk 3.6.1 Interest rate risk The Treasury risk policy stipulates that the average duration of the debt portfolio shall always be kept within a range of 24 and 48 months and that the flow risk i.e. changes in interest rates shall not affect the net interest payments of the Group by more than EUR 50 million for the next rolling 12-month period. Within these mandates, strategies are evaluated and developed in order to find an optimal balance between risk and financing cost. On 31 December 2013, the average duration of the debt portfolio (including derivatives) was 2.4 years (2012: 2.1). Approximately 51% (2012: 45%) of the debt portfolio was on a floating rate basis or fixed rate loans maturing within the next 12 month period. The effect of one percentage point change in interest rates on the present value of the debt portfolio was EUR 179 million on 31 December 2013 (2012: 175). The flow risk, measured as the difference between the base case net interest cost estimate and the worst case scenario estimate for Fortum's debt portfolio for the coming 12 months, was EUR 14 million (2012: 24). The average interest rate on loans and derivatives on 31 December 2013 was 3.6% (2012: 4.5%). Average cumulative interest rate on loans and derivatives for 2013 was 4.1% (2012: 4.7%). 3.6.2 Currency risk Fortum's policy is to hedge major transaction exposures to avoid exchange differences in the profit and loss statement. These exposures are mainly hedged with forward contracts. Translation exposures in the Fortum Group are generally not hedged as the majority of these assets are considered to be long-term strategic holdings. In Fortum this means largely entities operating in Sweden, Russia, Norway and Poland, whose base currency is not euro. The currency risk relating to transaction exposures is measured using Value-at-Risk (VaR) for a one-day period at 95% confidence level. Translation exposures relating to net investments in foreign entities are measured using a five day period at 95% confidence level. The limit for transaction exposure is VaR EUR 5 million. On 31 December 2013 the open transaction and translation exposures were EUR 1 million (2012: 1) and EUR 4,837 million (2012: 4,993) respectively. The VaR for the transaction exposure was EUR 0 million (2012: 0) and VaR for the translation exposure was EUR 55 million (2012: 45). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 110 Annual Report 2013 Financial Statements Group Treasury's transaction exposure EUR million SEK USD NOK RUB PLN Other Total 2013 2012 Net position Hedge Open 5,769 -5,769 -33 39 523 110 59 33 -39 -523 -110 -58 6,467 -6,466 0 0 0 0 0 1 1 Net position 6,789 -61 94 571 114 96 Hedge -6,789 61 -94 -571 -114 -95 7,603 -7,602 Open 0 0 0 0 0 1 1 In addition OAO Fortum is hedging its euro investments with euro deposits EUR 58 million (2012: 100), which qualifies as a cash flow hedge in Fortum group accounts. Transaction exposure is defined as already contracted or forecasted foreign exchange dependent items and cash flows. Transaction exposure is divided into balance sheet exposure and cash flow exposure. Balance sheet exposure reflects currency denominated assets and liabilities for example loans, deposits and accounts receivable/payable in currencies other than the company’s base currency. Cash flow exposure reflects future forecasted or contracted currency flows in foreign currency deriving from business activities such as sales, purchases or investments. Net conversion differences from transaction exposure are entered under financial income or expense when related to financial items or when related to accounts receivable/payable entered under items included in operating profit. Conversion differences related to qualifying cash flow hedges are deferred to equity. Fortum’s policy is to hedge balance sheet exposures in order to avoid exchange rate differences in the income statement. The Group’s balance sheet exposure mainly relates to financing of Swedish subsidiaries and the fact that the Group’s main external financing currency is EUR. For derivatives hedging this balance exposure Fortum does not apply hedge accounting, because they have a natural hedge in the income statement. Contracted cash flow exposures shall be hedged to reduce volatility in future cash flows. These hedges normally consist of currency derivative contracts, which are matched against the underlying future cash flow according to maturity. Fortum has currency cash flow hedges both with and without hedge accounting treatment under IFRS. Those currency cash flow hedges, which do not qualify for hedge accounting are mainly hedging electricity derivatives. Unrealised hedges create volatility in the operating profit. Group Treasury's translation exposure EUR million RUB SEK NOK PLN Other Total 2013 Hedge -317 - - - - Invest- ment 3,187 1,303 440 138 86 Open 2,870 1,303 440 138 86 Invest- ment 3,086 1,217 451 135 130 2012 Hedge -26 - - - - Open 3,060 1,217 451 135 130 5,154 -317 4,837 5,019 -26 4,993 Translation exposure position includes net investments in foreign subsidiaries and associated companies. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to equity. The net effect of exchange differences on equity attributable to equity holders from RUB, NOK and SEK was EUR -465 million in 2013 (2012: 173). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 111 Annual Report 2013 Financial Statements Interest rate and currency derivatives by instrument 2013 Notional amount Remaining lifetimes Fair value EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Forward rate agreements Total Of which long-term Short-term Under 1 year 6,796 1-5 years 396 Over 5 years - 944 2,215 3,499 - 56 928 - - - 7,192 6,658 928 56 7,796 3,539 3,499 14,834 Total Positive Negative Net 29 105 36 0 170 138 32 73 252 36 0 361 278 83 44 147 0 0 191 140 51 Fair value Total Positive Negative Net 55 461 6,676 7,192 1,700 1,429 3,585 6,714 344 584 928 - 7 66 73 70 0 182 252 19 17 36 0 7 37 44 22 43 82 147 0 - 0 0 0 29 29 48 -43 100 105 19 17 36 Interest rate and currency derivatives by use 2013 EUR million Net investment hedging foreign exchange derivatives 1) Cash flow hedging foreign exchange derivatives Non-hedging foreign exchange derivatives 2) Total forward foreign exchange contracts Fair value hedging interest rate derivatives Cash flow hedging interest rate derivatives Non-hedging interest rate derivatives 2) Total interest rate derivatives Net investment hedging, interest rate and currency swaps Non-hedging interest rate and currency swaps 2) Total interest rate and currency swaps Notional amount Remaining lifetimes 1-5 years Over 5 years - 203 193 396 - - - - - 1,700 1,086 299 Under 1 year 55 258 6,483 6,796 - 44 956 1,129 1,500 1,000 2,215 3,499 - - - 344 584 928 - - - Total 7,796 3,539 3,499 14,834 361 191 170 1) Contracts hedging dividends. 2) Consists of deals without hedge accounting status. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 112 Annual Report 2013 Financial Statements Interest rate and currency derivatives by instrument 2012 Notional amount Remaining lifetimes Fair value EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Forward rate agreements Total Of which long-term Short-term Under 1 year 8,148 477 227 87 1-5 years 523 Over 5 years - 2,856 2,935 317 29 - - 8,671 6,268 544 116 8,939 3,725 2,935 15,599 Total Positive Negative 38 362 - 0 400 358 42 197 161 8 0 366 165 201 Fair value 61 439 8,171 8,671 1,975 1,108 3,301 6,384 26 518 544 - 5 33 38 181 1 180 362 - - - 0 5 192 197 0 56 105 161 0 8 8 Net -159 201 -8 0 34 193 -159 0 0 -159 -159 181 -55 75 201 0 -8 -8 34 Total Positive Negative Net Interest rate and currency derivatives by use 2012 EUR million Net investment hedging foreign exchange derivatives 1) Cash flow hedging foreign exchange derivatives Non-hedging foreign exchange derivatives 2) Total forward foreign exchange contracts Fair value hedging interest rate derivatives Cash flow hedging interest rate derivatives Non-hedging interest rate derivatives 2) Total interest rate derivatives Net investment hedging, interest rate and currency swaps 2) Non-hedging interest rate and currency swaps 2) Total interest rate and currency swaps Notional amount Remaining lifetimes 1-5 years Over 5 years - 177 346 523 - - - - - 1,975 824 2,061 210 750 2,885 2,935 26 291 317 - - - Under 1 year 61 262 7,825 8,148 - 74 490 564 - 227 227 Total 8,939 3,725 2,935 15,599 400 366 1) Contracts hedging dividends. 2) Consists of deals without hedge accounting status. 3.7 Share derivatives Cash-settled share forwards are used as a hedging instrument for the Fortum share price risk regarding the Fortum Group's long-term incentive schemes. The amounts disclosed are non-discounted cash flows for the share derivatives. In December 2013 there were no outstanding share derivatives. See Note 12 Employee benefits for more information about the Group's long-term incentive schemes. EUR million Share forwards 2013 2012 Notional value Net fair value Notional value Net fair value - - 8 7 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 113 Annual Report 2013 Financial Statements 3.8 Credit risk Fortum is exposed to credit risk whenever there is a contractual obligation with an external counterpart. Fortum has procedures in place to ensure that credit risks are kept at an acceptable level. All larger exposures are monitored centrally against limits which are approved according to authority levels defined in the Group Credit Instructions. Counterpart creditworthiness is continuously monitored and reported. Collaterals are used if dealing with counterparts without approved limits or when exposures arising from engagements are considered too high in relation to the counterpart creditworthiness. Parent company guarantees are requested when dealing with subsidiaries not considered creditworthy on a stand- alone basis. Credit risk exposures relating to derivative instruments are often volatile due to rapidly changing market prices and are therefore monitored closely. Currency and interest rate derivative counterparts are limited to investment grade banks and financial institutions. ISDA Master agreements, which include netting clauses and in some cases collateral support agreements, are in place with most of these counterparts. The majority of the Group's commodity derivatives are cleared through an exchange such as NASDAQ OMX Commodities Europe. Some derivative transactions are also executed on the OTC market. These OTC counterparts are limited to those considered of high creditworthiness. Master agreements, such as ISDA, FEMA and EFET, which include netting clauses, are in place with the majority of the counterparts. Fortum, like any capital intensive business, is exposed to credit risks in the financial sector. Credit risk relating to banks is monitored closely as the creditworthiness of financial institutions can deteriorate quickly. Where possible, exposures have been concentrated to key relationship banks considered to be of high credit quality and importance to the financial stability of their respective countries. In Russia, bank guarantees are used to cover exposures to suppliers related to the investment programme of OAO Fortum. In case a contractor defaults or does not fulfil its obligations, there are guarantees covering prepayments as well as performance guarantees in place. Issuers of these guarantees are banks with a strong local presence and understanding of the contractor. The creditworthiness of these banks as well as exposures arising from issued guarantees is monitored closely. Credit risk relating to customers is well diversified over a large number of private individuals and businesses across several geographic regions and industry sectors. Russia, Finland and Sweden account for most of the exposure, of which exposure to Russia represents the highest risk of non-payment. 3.8.1 Credit quality of major financial assets Amounts disclosed below are presented by counterparties for interest-bearing receivables including finance lease receivables, bank deposits and derivative financial instruments recognised as assets. EUR million Investment grade receivables Electricity exchanges Associated companies Other Total 2013 2012 Carrying amount of which past due Carrying amount of which past due 1,553 185 1,416 135 3,289 - - - - - 1,284 160 1,332 109 2,885 - - - - - Investment grade receivables consist of deposits and Treasury bank accounts EUR 1,163 million (2012: 818), fair values of interest rate and currency derivatives EUR 361 million (2012: 400) and fair values of electricity, coal, oil and CO2 emission allowance derivatives EUR 29 million (2012: 66). Electricity exchange receivable is the fair value of derivatives on NASDAQ OMX Commodities Europe. Associated companies receivables consist of loan receivables EUR 1,415 million (2012: 1,332) and fair values of electricity derivatives EUR 1 million (2012: 0). Other receivables consist of loan and other interest bearing receivables EUR 52 million (2012: 58), finance lease receivables EUR 2 million (2012: 3) and fair values of electricity, coal, oil, and CO2 emission allowance derivatives EUR 81 million (2012: 48). The following tables indicate how bank deposits and fair values of derivatives are distributed by rating class. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 114 Annual Report 2013 Financial Statements Deposits and Treasury Bank Accounts EUR million Counterparties with external credit rating from Standard & Poor's and/or Moody's Investment grade ratings AAA AA+/AA/AA- A+/A/A- BBB+/BBB/BBB- Total investment grade ratings Non-investment grade ratings Counterparties without external credit rating from Standard & Poor's and/or Moody's Total In addition, cash in other bank accounts totalled EUR 106 million on 31 December 2013 (2012: 145). 2013 2012 - 410 658 95 1,163 - - - 144 586 88 818 - - 1,163 818 Interest rate and currency derivatives EUR million Counterparties with external credit rating from Standard & Poor's and/or Moody's Investment grade ratings AAA AA+/AA/AA- A+/A/A- BBB+/BBB/BBB- Total investment grade ratings Counterparties without external credit rating from Standard & Poor's and/or Moody's Total Electricity, coal and oil derivatives and CO2 emission allowances treated as derivatives EUR million Counterparties with external credit rating from Standard & Poor's and/or Moody's Investment grade ratings AAA AA+/AA/AA- A+/A/A- BBB+/BBB/BBB- Total investment grade ratings Non-investment grade ratings BB+/BB/BB- B+/B/B- Below B- Total non-investment grade ratings 2013 2012 Receivables Netted amount Receivables Netted amount - 36 308 17 361 - 361 - 0 220 0 220 - 220 - 12 374 14 400 - 400 - 0 272 8 280 - 280 2013 2012 Receivables Netted amount Receivables Netted amount - 0 30 - 30 8 - - 8 - 0 21 - 21 7 - - 7 - 0 66 - 66 1 - - 1 - 0 32 - 32 1 - - 1 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 115 Annual Report 2013 Financial Statements Total associated companies 1 1 Counterparties without external credit rating from Standard & Poor's or Moody's Government or municipality Fortum Rating 5 - Lowest risk Fortum Rating 4 - Low risk Fortum Rating 3 - Normal risk Fortum Rating 2 - High risk Fortum Rating 1 - Highest risk No rating Total non-rated counterparties 1 1 23 47 - 2 1 75 1 1 23 46 - 1 1 73 0 2 10 10 16 9 0 0 47 Total 114 102 114 For derivatives, the receivable is the sum of the positive fair values, i.e the gross amount. Netted amount includes negative fair values where a valid netting agreement is in place with the counterparty. When the netted amount is less than zero, it is not included. In cases where a parent company guarantee is in place, the exposure is shown on the issuer of the guarantee. 0 2 9 9 15 9 0 0 44 77 All counterparties for currency and interest rate derivatives and the majority of counterparties for bank deposits have an external rating from Standard & Poor's and Moody's credit agencies. The above rating scale is for Standard & Poor's rating categories. For those counterparties only rated by Moody's, the rating has been translated to the equivalent Standard and Poor's rating category. For counterparties rated by both Standard & Poor's and Moody's, a conservative approach is taken by choosing the lower of the two ratings. In the electricity, coal and oil derivatives market, there are a number of counterparties not rated by Standard & Poor's or Moody's. For these counterparties, Fortum assigns an internal rating. The internal rating is based on external credit ratings from other credit agencies. The rating from Soliditet is used for Finnish, Norwegian and Swedish counterparties and for other counterparties the rating from Dun & Bradstreet is used. Governments and municipal companies are typically not rated, and are shown separately. This rating category does not include companies owned by governments or municipalities. Counterparties that have not been assigned a rating by the above listed credit agencies are in the "No rating" category. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 116 Annual Report 2013 Financial Statements 4 Capital risk management 4 Capital risk management Fortum wants to have a prudent and efficient capital structure which at the same time allows the implementation of its strategy. Maintaining a strong balance sheet and the flexibility of the capital structure is a priority. The Group monitors the capital structure based on Comparable net debt to EBITDA ratio. Net debt is calculated as interest-bearing liabilities less cash and cash equivalents. EBITDA is calculated by adding back depreciation, amortisation and impairment charges to operating profit, whereas Comparable EBITDA is calculated by deducting items affecting comparability and net release of CSA provision from EBITDA. Fortum's net debt to EBITDA target is around 3. In April 2013, Fortum's Board of Directors updated the company's dividend policy. The new 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, in the range of 50-80% of earnings per share, excluding one-off items. Fortum Corporation's long-term credit rating with S&P was reaffirmed at A- (negative outlook) in December. As of April 2013, Fitch Ratings provides a rating of Fortum Corporation and any subsequently issued securities under Fortum's EMTN programme. Fitch's current long-term issuer default rating of Fortum Corporation is A- (negative outlook) was also reaffirmed in December. Fortum decided to terminate the rating relationship with Moody’s Investors Service in February. Moody’s had at the time being an A2 rating with a negative outlook. Net debt/EBITDA ratios EUR million Interest-bearing liabilities 1) Less: Cash and cash equivalents 1) Net debt Operating profit Add: Depreciation, amortisation and impairment charges EBITDA Less: Items affecting comparability Less: Net release of CSA provision Comparable EBITDA Net debt/EBITDA Comparable net debt/EBITDA Note 28 25 2013 9,118 1,269 7,849 1,712 740 2,452 105 48 2,299 3.2 3.4 2012 8,777 963 7,814 1,874 664 2,538 122 - 2,416 3.1 3.2 1) Including interest-bearing debt of EUR 20 million and cash balances of EUR 15 million (2012: 0) classified as assets held for sale in balance sheet. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 117 Annual Report 2013 Financial Statements 5 Segment reporting 5 Segment reporting Accounting policies Fortum discloses segment information in a manner consistent with internal reporting to Fortum's Board of Directors and to Fortum Management Team led by the President and CEO. Fortum mainly has segments based on type of business operations, combined with one segment based on geographical area. The Group's businesses are divided into the following reporting segments: Power, Heat, Russia, Distribution and Electricity Sales. Revenue recognition Revenue comprises the fair value consideration received or receivable at the time of delivery of products and/or upon fulfilment of services. Revenue is shown, net of rebates, discounts, value-added tax and selective taxes such as electricity tax. Revenue is recognised as follows: Sale of electricity, heat, cooling and distribution of electricity Sale of electricity, heat, cooling and distribution of electricity is recognised at the time of delivery. The sale to industrial and commercial customers and to end-customers is recognised based on the value of the volume supplied, including an estimated value of the volume supplied to customers between the date of their last meter reading and year-end. Physical energy sales and purchase contracts are accounted for on accrual basis as they are contracted with the Group's expected purchase, sale or usage requirements. Electricity tax is levied on electricity delivered to retail customers by domestic utilities in Sweden. The tax is calculated on the basis of a fixed tax rate per kWh. The rate varies between different classes of customers. Sale of electricity in the income statement is shown net of electricity tax. Physical electricity sales and purchases are done through Nord Pool Spot. The sales and purchases are netted on Group level on an hourly basis and posted either as revenue or cost, according to whether Fortum is a net seller or a net buyer during any particular hour. The prices charged of customers for the sale of distribution of electricity are regulated. The regulatory mechanism differs from country to country. Any over or under income decided by the regulatory body is regarded as regulatory assets or liabilities that do not qualify for balance sheet recognition due to the fact that no contract defining the regulatory aspect has been entered into with a specific customer and thus the receivable is contingent on future delivery. The over or under income is normally credited or charged over a number of years in the future to the customer using the electricity connection at that time. No retroactive credit or charge can be made. Connection fees Fees paid by the customer when connected to the electricity, gas, heat or cooling network are recognised as income to the extent that the fee does not cover future commitments. If the connection fee is linked to the contractual agreement with the customer, the income is recognised over the period of the agreement with the customer. Connection fees paid by customers when connected to the electricity network before 2003 are refundable in Finland if the customer would ever disconnect the initial connection. Also fees paid by the customer when connected to district heating network in Finland are refundable. These connection fees have not been recognised in the income statement and are included in other liabilities in the balance sheet. Contract revenue Contract revenue is recognised under the percentage of completion method to determine the appropriate amount to recognise as revenue and expenses in a given period. The stage of completion is measured by reference to the contract costs incurred up to the closing date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature. The Group presents as an asset the amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceed progress billings. Progress billings not yet paid by customers and retention are included within 'trade and other receivables'. The Group presents as a liability the amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 118 Annual Report 2013 Financial Statements 5.1 Fortum’s business structure Fortum's business operations are organised in four divisions and five corporate staff functions. The business divisions are Power, Heat, Russia and Electricity Solutions and Distribution. The Electricity Solutions and Distribution (ESD) Division consists of business areas Distribution and Electricity Sales. The staff functions are Corporate Finance, Corporate Communications, Corporate Human Resources, Corporate Relations and Corporate R&D and Innovation. The shared service centers, as parts of the staff functions, charge the companies according to service level agreements. 5.2 Segment structure in Fortum The business divisions (Power, Heat and Russia) and the business areas of ESD Division (Distribution and Electricity Sales) are Fortum's reportable segments under IFRS. Below is the description of the reportable segments: Power consists of Fortum’s power generation, power trading and power capacity development as well as expert services for power producers. Power sells its power mainly to the Nordic power exchange Nord Pool Spot. Heat segment's main business is 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 power from CHP-production is sold to Nord Pool Spot and to end customers mainly by long-term contracts. Russia consists of power and heat generation and sales in Russia. It includes OAO Fortum and Fortum's over 25% interest in TGC-1, which is an associated company and consolidated according to the equity method. Distribution owns and operates distribution and regional networks and distributes electricity to a total of 1.6 million customers in Sweden, Finland and Norway. Electricity distribution is a regulated business, and is therefore supervised by national energy authorities. Models and principles for supervision and considerations of reasonable tariffs differ from country to country. Electricity Sales is responsible for retail sales of electricity as well as smart electricity solutions and services to a total of 1.2 million private customers. In addition, standardised products are offered for large corporate customers (Sales Trading). Electricity Sales buys its electricity from Nord Pool Spot. Other segment includes mainly the shareholding in the associated company Hafslund ASA and Fortum Group staff functions. 5.3 Definitions for segment information Financial target setting, follow up and allocation of resources in the group's performance management process is mainly based on the business units' comparable operating profit including share of profit from associated companies and comparable return on net assets. Fortum discloses in the segment information operating profit, comparable operating profit, comparable EBITDA and share of profit from associated companies as well as return on net assets and comparable return on net assets. Consolidation by segment is based on the same principles as for the Group as a whole. Comparable operating profit is reported to give a better view of each segment's performance. The difference between Comparable operating profit and Operating profit is that Comparable operating profit does not include “Items affecting comparability”, which are: • non-recurring items, which mainly consist of capital gains and losses; • effects from fair valuations of derivatives hedging future cash flows which do not obtain hedge accounting status according to IAS 39. The major part of Fortum's cash flow hedges obtain hedge accounting where the fair value changes are recorded in equity; See Note 7 Fair value changes of derivatives and underlying items in income statement. • effects from the accounting of Fortum's part of the State Nuclear Waste Management Fund where the assets in the balance sheet cannot exceed the related liabilities according to IFRIC 5. See Note 30 Nuclear related assets and liabilities. The segments’ net assets consist primarily of non-interest-bearing assets and liabilities such as property, plant and equipment, intangible assets, participations in associated companies, inventories, operative related accruals and trade and other receivables and liabilities. Net assets also include Fortum's share of the State Nuclear Waste Management Fund, nuclear related provisions, pension and other provisions as well as assets and liabilities from fair valuations of derivatives hedging future cash flows which do not obtain hedge accounting status according to IAS 39. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 119 Annual Report 2013 Financial Statements Interest-bearing receivables and liabilities and related accruals, current and deferred tax items, as well as assets and liabilities from fair valuations of derivatives hedging future cash flows which obtain hedge accounting status according to IAS 39 are not allocated to the segments' net assets. In comparable net assets, segment’s net assets are adjusted for assets and liabilities from fair valuations of derivatives hedging future cash flows which do not obtain hedge accounting status according to IAS 39 to be in line with comparable operating profit. Gross investments in shares include investments in subsidiary shares, shares in associated companies and other shares in available for sale financial assets. Investments in subsidiary shares are net of cash and grossed with interest-bearing liabilities in the acquired company. Gross divestments in shares include divestments in subsidiary shares, shares in associated companies and other shares in available for sale financial assets. Divestments in subsidiary shares are net of cash and grossed with interest-bearing liabilities in the sold company. See also Financial key figures, Definitions of key figures and Quarterly financial information. Quarterly segment information from 2005 to 2013 is available on Fortum's website www.fortum.com/investors/financial information. 5.4 Inter-segment transactions and eliminations Power segment sells its production to Nord Pool Spot and Electricity Sales buys its electricity from Nord Pool Spot. Eliminations of sales include eliminations of sales and purchases with Nord Pool Spot that are netted on group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour. Inter-segment sales, expenses and results for the different business segments are affected by intra-group deliveries, which are eliminated on consolidation. Inter-segment transactions are based on commercial terms. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 120 Annual Report 2013 Financial Statements 5.5 Segment information 2013 Income statement Note Power Heat Russia Distribution Electricity Sales Other 2,248 1,565 1,119 70 8 - 2,178 1,557 1,119 -145 1,003 858 25 6 -216 489 273 18 6, 7 6, 30 15 23 -3 - -150 258 156 0 0 - 1,075 36 1,039 -219 550 331 17 0 - 921 288 156 348 20, 30 4 19 46 5 744 73 671 -2 50 48 0 8 - 56 0 69 67 2 -8 -51 -59 1 1 - -57 31 Netting and eliminations 1) -764 -254 -510 - - - - - - - - EUR million Sales of which internal External sales Depreciation, amortisation and impairment Comparable EBITDA Comparable operating profit Non-recurring items Changes in fair values of derivatives hedging future cash-flow Nuclear fund adjustment Operating profit Share of profit of associated companies and joint ventures Finance costs - net Income taxes Profit for the period Total 6,056 0 6,056 -740 2,299 1,607 61 21 23 1,712 105 -318 -220 1,279 1) Netting and eliminations include eliminations of Group internal sales and netting of Nord Pool Spot transactions. Sales and purchases with Nord Pool Spot, EUR 510 million, are netted on Group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour. Impairment losses and restructuring costs EUR million Power Heat Russia Distribution Electricity Sales Other Total Recognised impairment losses for trade receivables Recognised impairment losses for intangible assets and property, plant and equipment Restructuring costs 0 -24 0 -3 0 -2 -18 - 0 -2 - 0 -1 - 0 0 - -2 -24 -24 -4 Impairment losses and restructuring costs are included in comparable operating profit. Recognised impairment losses for property, plan and equipmenet in Power segment includes EUR 20 million impairment loss relating to the decision to discontinue electricity production at Inkoo power plan. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 121 Assets and liabilities EUR million Non-interest-bearing assets Participations in associated companies and joint ventures Assets included in Net assets Interest-bearing receivables Deferred taxes Other assets 1) Cash and cash equivalents Total assets Annual Report 2013 Financial Statements Power Heat Russia Distribution Electricity Sales Other Eliminations Total 6,441 4,553 3,687 4,233 896 156 463 68 7,337 4,709 4,150 4,301 310 0 310 138 322 460 -268 19,094 - 1,905 -268 20,999 1,467 130 570 1,254 24,420 2,417 1,648 575 4,640 9,118 10,662 24,420 Liabilities included in Net assets 1,008 426 304 531 271 145 -268 Deferred tax liabilities Other liabilities Total liabilities included in Capital employed Interest-bearing liabilities 2) Total equity Total equity and liabilities 1) Other assets at 31 December 2013 includes cash, EUR 15 million, included in Assets related to Assets held for sale. 2) Interest-bearing liabilitiesat 31 December 2013 includes interest-bearing liabilities, EUR 20 million, included in Liabilities related to Assets held for sale. Investments/Divestments EUR million Note Power Heat Russia Distribution Gross investments in shares Capital expenditure 8, 18, 20 19 2 0 178 397 of which capitalised borrowing costs Gross divestments of shares Comparable return on net assets 3) 2 79 11 11 0 435 56 - 0 260 - 52 Power Heat Russia Distribution Electricity Sales Other 3) Including assets and liabilities relating to Assets held for sale. Electricity Sales - 1 - - Other 13 13 - - Total 15 1,284 69 142 Net assets by segments EUR millon Return on net assets, % Comparable return on net assets, % 6,329 4,283 3,846 3,770 39 315 14.6 7.2 5.2 9.2 148.9 -9.6 13.8 6.8 5.2 8.8 137.9 -8.3 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 122 Annual Report 2013 Financial Statements Employees Number of employees 31 Dec Average number of employees 5.6 Segment information 2012 Income statement Power Heat Russia Distribution 1,709 2,102 1,887 2,164 4,162 4,245 852 866 Electricity Sales 496 506 Other 565 578 Total 9,886 10,246 Note Power Heat Russia Distribution Electricity Sales 2,415 1,628 1,030 296 18 - 2,119 1,610 1,030 -114 1,260 1,146 6 57 -210 481 271 80 6, 7 6, 30 3 -31 -7 - 1,175 344 -121 189 68 11 0 - 79 1,070 37 1,033 -209 529 320 5 6 - 331 20, 30 -12 20 27 8 722 55 667 -1 40 39 1 -1 - 39 0 Netting and eliminations 1) -843 -340 -503 Other 137 -66 203 -9 -83 -92 1 -3 - -94 -20 - - - - - - - - EUR million Sales of which internal External sales Depreciation, amortisation and impairment Comparable EBITDA Comparable operating profit Non-recurring items Changes in fair values of derivatives hedging future cash-flow Nuclear fund adjustment Operating profit Share of profit of associated companies and joint ventures Finance costs - net Income taxes Profit for the period Total 6,159 0 6,159 -664 2,416 1,752 155 -2 -31 1,874 23 -311 -74 1,512 1) Netting and eliminations include eliminations of Group internal sales and netting of Nord Pool Spot transactions. Sales and purchases with Nord Pool Spot, EUR 503 million, are netted on Group level on an hourly basis and posted either as revenue or cost depending on if Fortum is a net seller or net buyer during any particular hour. Impairment losses and restructuring costs EUR million Power Heat Russia Distribution Electricity Sales Other Total Recognised impairment losses for trade receivables Recognised impairment losses for intangible assets and property, plant and equipment Restructuring costs 0 0 0 -3 0 -2 -8 - - -2 - 0 -1 - 0 0 - 0 -14 0 -2 Impairment losses and restructuring costs are included in comparable operating profit. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 123 Annual Report 2013 Financial Statements Assets and liabilities EUR million Power Heat Russia Distribution Non-interest-bearing assets 6,477 4,628 3,833 4,319 Participations in associated companies and joint ventures 903 157 476 Assets included in Net assets 7,380 4,785 4,309 109 4,428 Electricity Sales 292 0 292 Other Eliminations 326 334 660 -403 -403 Interest-bearing receivables Deferred taxes Other assets Cash and cash equivalents Total assets Liabilities included in Net assets 991 499 461 539 241 502 -403 Deferred tax liabilities Other liabilities Total liabilities included in Capital employed Interest-bearing liabilities Total equity Total equity and liabilities Investments/Divestments EUR million Note Power Heat Russia Distribution Gross investments in shares Capital expenditure 8 18 20 19 of which capitalised borrowing costs Gross divestments of shares - 190 1 102 10 464 10 269 - 568 68 - - 324 1 37 Comparable return on net assets Power Heat Russia Distribution Electricity Sales Other Employees Number of employees 31 Dec Average number of employees Power Heat Russia Distribution 1,846 2,212 1,896 2,354 4,253 4,301 870 873 Electricity Sales - 1 - 2 Net assets by segments EUR million 6,389 4,286 3,848 3,889 51 158 Electricity Sales 509 515 Total 19,472 1,979 21,451 1,393 177 577 963 24,561 2,830 1,879 432 5,141 8,777 10,643 24,561 Total 16 1,558 80 410 Other 6 11 - 0 Return on net assets, % Comparable return on net assets, % 18.7 8.8 3.0 9.1 152.3 -68.8 18.5 7.0 2.7 8.8 203.1 -34.1 Other 681 661 Total 10,371 10,600 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 124 Annual Report 2013 Financial Statements 5.7 Group-wide disclosures The Group's operating segments operate mainly in the Nordic countries, Russia, Poland and other parts of the Baltic Rim area. Power, Distribution and Electricity Sales operate mainly in Finland and Sweden, whereas Heat operates in all of these geographical areas except Russia. Other countries are mainly Latvia, Lithuania and the U.K. The home country is Finland. The information below is disclosing sales by product area as well as sales by the country in which the customer is located. Assets, capital expenditure and personnel are reported where the assets and personnel are located. Participations in associates and joint ventures are not divided by location since the companies concerned can have business in several geographical areas. External sales by product area EUR million Power sales excluding indirect taxes Heat sales Network transmissions Other sales Total 2013 3,341 1,500 1,024 191 6,056 Heating sales include sale of delivered heat and transmission of heat. Due to the large number of customers and the variety of its business activities, there is no individual customer whose business volume is material compared with Fortum's total business volume. Sales by market area based on customer location 2012 3,413 1,501 1,002 243 6,159 2012 4,641 1,029 220 69 200 2013 4,464 1,121 205 69 197 6,056 6,159 EUR million Nordic Russia Poland Estonia Other countries Total The Nordic power production is not split by countries since Nordic power production is mainly sold through Nord Pool Spot. Capital expenditure by location EUR million Finland Sweden Russia Poland Estonia Norway Other countries Total 2013 2012 266 497 435 10 16 13 47 338 492 568 19 10 35 96 1,284 1,558 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 125 Annual Report 2013 Financial Statements Segment assets by location 1) EUR million Finland Sweden Russia Poland Estonia Norway Other countries Eliminations Non-interest bearing assets Participations in associates and joint ventures Total 1) Including assets relating to Assets held for sale. See also Note 9 Assets held for sale. Number of employees on 31 December by location Finland Sweden Russia Poland Estonia Norway Other countries Total 2013 4,371 10,046 3,687 352 200 245 461 -268 19,094 1,905 20,999 2013 2,477 1,939 4,162 636 210 141 321 2012 4,401 10,396 3,833 386 203 285 263 -295 19,472 1,979 21,451 2012 2,647 2,050 4,252 687 204 145 386 9,886 10,371 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 126 Annual Report 2013 Financial Statements 6 Items affecting comparability 6 Items affecting comparability EUR million Capital gains on disposals Fair value changes on derivatives that do not qualify for hedge accounting Nuclear fund adjustments Total 2013 61 21 23 105 2012 155 -2 -31 122 Items affecting comparability are exceptional items or unrealised items which fluctuate between the years. Items affecting comparability are disclosed separately in Fortum's income statement as they are necessary for understanding the financial performance when comparing results for the current period with previous periods. Items affecting comparability are not included in Comparable operating profit. Capital gains in 2013 mainly include sales gains from finalising the sale of small hydropower plants in Sweden and sale of Fortums's 33% shareholding in Infratek ASA in Norway, both in Power segment. Sale of Fortum's 47.9% shareholding in Härjeåns Kraft AB in Sweden, in Distribution segment. Capital gains includes also gains related to divestment of the combined heat and power plants in Kuusamo and Kauttua, in Finland, and divestments of Fortum's 50% shares in Riihimäen Kaukolämpö Oy, in Finland, which are included in Heat segment. Capital gains in 2012 mainly include sales gains from sales of Fortum Energiaratkaisut Oy, Fortum Termest AS and Fortum Heat Naantali Oy, which are included in Heat segment, and Estonian subsidiary Fortum Elekter AS and ownership in Imatran Seudun Sähkö Oy, which are included in Distribution segment. Capital gains also include sales gains from sale of small hydropower plants in Finland and Sweden, which are included in Power segment. Changes in the fair values of financial derivative instruments hedging future cash flows that do not qualify for hedge accounting are recognised in items affecting comparability. This is done to improve the understanding of the financial performance when comparing results from one period to another. Nuclear fund adjustment includes effects from the accounting principle of Fortum´s part of the State Nuclear Waste Management Fund where the assets in the balance sheet cannot exceed the nuclear related provisions according to IFRIC 5. As long as the Fund is overfunded from an IFRS perspective, the effects to the operating profit from this adjustment will be positive if the provisions increase more than the Fund and negative if actual value of the fund increases more than the provisions. For more information regarding fair value changes of derivatives, see Note 7 Fair value changes of derivatives and underlying items in income statement. For more information regarding disposals of shares, see Note 8 Acquisitions and disposals and Note 20 Participations in associated companies and joint ventures. For more information regarding nuclear waste management, see Note 30 Nuclear related assets and liabilities. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 127 Annual Report 2013 Financial Statements 7 Fair value changes of derivatives and underlying items in 7 Fair value changes of derivatives and underlying items in income statement income statement Fair value changes in operating profit presented below are arising from financial derivatives hedging future cash flows where hedge accounting is not applied according to IAS 39 and the ineffectiveness from cash flow hedges. Fair value changes of currency derivatives in net financial expenses are arising mainly from balance sheet hedges without hedge accounting status according to IAS 39, because they are natural hedges of loans and receivables. Fair value change of interest rate hedges without hedge accounting is EUR -16 million (2012: -12). The net effect of fair value changes of hedging derivative and hedged bonds are EUR 1 million (2012: 0). EUR million In operating profit Fair value changes from derivatives not getting hedge accounting status 2013 2012 Electricity derivatives Currency derivatives Oil derivatives Coal and CO2 derivatives Ineffectiveness from cash flow hedges Total effect in operating profit Fair value changes of derivatives not getting hedge accounting included in share of profit of associated companies In finance costs Exchange gains and losses on loans and receivables Fair value changes of derivatives not getting hedge accounting status Cross currency interest rate derivatives Foreign currency derivatives Rate difference on forward contracts Currency derivatives Interest rate derivatives Fair value change of hedging derivatives in fair value hedge relationship Fair value change of hedged items in fair value hedge relationship Total 1) Total effect in finance costs Total effect on profit before income tax 1) Including fair value gains and losses on financial instruments and exchange gains and losses on derivatives. -2 15 0 -8 16 21 3 -214 19 195 -1 213 -16 25 -24 198 -16 8 46 1 0 -22 -27 -2 1 246 -12 -231 -11 -254 -12 39 -39 -266 -20 -21 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 128 Annual Report 2013 Financial Statements 8 Acquisitions and disposals 8 Acquisitions and disposals Gross investments in subsidiary shares by segment EUR million Power Heat Russia Distribution Electricity Sales Other Total Gross investments in subsidiary shares by country EUR million Finland Sweden Russia Other countries Total 2013 2012 - - - - - 11 11 1 - - - - 4 5 2013 2012 - - - 11 11 5 - - - 5 Gross investments in subsidiary shares consist of interest-bearing debt as well as paid cash according to purchase agreement added with direct costs relating to the acquisition less cash and cash equivalents in acquired subsidiary. 8.1 Acquisitions in 2013 and 2012 Total investment in subsidiary shares in 2013 amounted to EUR 11 million (2012: 5). 8.2 Disposals in 2013 and 2012 During 2013 Fortum divested small hydropower plants in Sweden and a minor gain was recognised in the Power segment. In June 2013, Fortum agreed to sell its 47.9% ownership in the Swedish energy company Härjeåns Kraft AB to the Finnish energy company Oy Herrfors Ab, a subsidiary of Katternö Group. The sales price was SEK 445 million (approximately EUR 51 million). The transaction was completed in July and a capital gain of EUR 17 million was booked to Distribution segment's third quarter results. In July 2013 Fortum completed the divestment of its 33% holding in Infratek ASA to a fund managed by Triton. The sales price was NOK 295 million (approximately EUR 38 million). A capital gain of EUR 11 million was booked in the Power segment's third quarter results. During fourth quarter there were several divestments that had a minor effect to Fortum’s Heat segment's results. In November 2013 Fortum sold its 50% ownership in the Finnish district heating company Riihimäen Kaukolämpö Oy to the City of Riihimäki (40%) and to Riihimäen Kaukolämpö Oy (10%). In December 2013 Fortum sold its Kauttua combined heat and power (CHP) plant in Eura, Finland to the Finnish energy company Adven Oy. Also in December 2013 Fortum sold its CHP plant as well as its natural gas and district heating network in the town of Nokia to Leppäkosken Sähkö Oy. Furthermore Fortum’s Uimaharju CHP plant ownership was transferred to Stora Enso on 31 December 2013 according to an earlier agreement signed in 1990. During Q4 2012 Fortum divested small hydropower plants in Sweden, a minor gain was recognised in the Power segment. Fortum sold its shares in Fortum Heat Naantali Oy to Turun Seudun Energiantuotanto Oy (TSE) in which Fortum has 49.5% interest at 31 December 2012. The total sales price (less liquid funds in sold company) was approximately EUR 74 million, of which EUR 2 million was unpaid as of 31 December 2012. Fortum's capital gain EUR 21 million was recognised in Heat segment. In connection with the sale Fortum participated in the share issue in TSE with EUR 10 million and gave a shareholder loan to the company amounting to EUR 13 million. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 129 Annual Report 2013 Financial Statements Fortum closed its divestment of Fortum Energiaratkaisut Oy and Fortum Termest AS to EQT Infrastructure Fund on January 31, 2012. The total sales price, including net debt, was approximately EUR 200 million. Fortum's capital gain was EUR 58 million. The assets and liabilities related to the divested operations were presented as assets and liabilities held for sale in December 2011. In the beginning of January 2012 Fortum sold Distribution's Estonian subsidiary Fortum Elekter AS to Imatran Seudun Sähkö. In connection with the sale Fortum also sold its ownership in Imatran Seudun Sähkö Oy. The assets and liabilities related to the divested operations were presented as assets and liabilities held for sale in December 2011. During Q1 2012 Fortum divested small hydropower plants in Finland with the sale of a 60% share in Killin Voima Oy to Koillis-Satakunnan Sähkö Oy and sale of 14 small hydropower plants in Finland to Koskienergia Oy. Capital gain from these transactions was EUR 47 million booked in the Power segment's first-quarter results. Divestments EUR million Divestment of subsidiaries Intangible assets and Property, plant and equipment Other non-current and current assets Liquid funds Interest-bearing loans Other liabilities and provisions Non-controlling interests Gain on sale Sales price received Less proceeds not yet settled in cash Less liquid funds Sales price for the shares (net of cash) Proceeds from interest-bearing receivables Proceeds not yet settled in cash Total Other divestments Gross divestment of shares For more information see Note 20 Participations in associated companies and joint ventures. 2013 2012 30 3 1 -22 -3 - 12 21 -2 1 22 22 -2 42 100 142 247 73 14 -181 -53 0 139 239 2 14 223 181 2 406 4 410 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 130 Annual Report 2013 Financial Statements 9 Assets held for sale 9 Assets held for sale Accounting policies Non-current assets (or disposal groups) classified as held for sale are valued at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. These classification criteria do not include non-current assets to be abandoned or those that have been temporarily taken out of use. An impairment loss (or subsequent gain) reduces (or increases) the carrying amount of the non-current assets or disposal groups. The assets are not depreciated or amortised. Interest or other expenses related to these assets are recognised as before the classification as held for sale. Discontinued operations represent a separate major line of business that either has been disposed of or is classified as held for sale. Assets and liabilities attributable to the discontinued operations must be clearly distinguishable from the other consolidated entities in terms of their operations and cash flows. In addition, the reporting entity must not have any significant continuing involvement in the operations classified as a discontinued operation. The assets and liabilities relating to Finnish distribution business have been classified as assets held for sale in the balance sheet as of 31 December 2013. Fortum signed in December 2013 an agreement to sell its electricity distribution business in Finland to Suomi Power Networks Oy, which is owned by a consortium of Finnish pension funds Keva (12.5%) and Local Tapiola Pension (7.5%) together with international infrastructure investors First State Investments (40%) and Borealis Infrastructure (40%). The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum expects to complete the divestment process during the first quarter of 2014 subject to the necessary regulatory approvals as well as customary closing conditions. Fortum expects to book a one-time sales gain of EUR 1.8-1.9 billion (depending on the timing of the closing) corresponding to approximately EUR 2.0 per share in its Distribution segment’s first quarter 2014 results. As of 31 December 2012 there were no Assets held for sale. Assets held for sale 1) EUR million Intangible assets and property, plant and equipment Other assets Cash and cash equivalents Total Liabilities related to assets held for sale 1) EUR million Interest-bearing liabilities Deferred tax liabilities Connection fees Other liabilities Total 2013 1,116 42 15 1,173 2012 - - - - 2013 2012 20 141 306 73 540 - - - - - 1) Amounts are presented net of internal balances with other Fortum subsidiaries, such as internal financing amounting to EUR 61 million (2012: 0). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 131 Annual Report 2013 Financial Statements Impact on Distribution segment information The Finnish distribution operations are included in the segment information presented in Note 5. The impact of Finnish distribution business to Distribution segment's comparable operating profit for 2013 was EUR 73 million. Additional information of the impact to segment information is presented in the table below: EUR million Comparable EBITDA Comparable operating profit Operating profit Share of profits in associates and joint ventures Depreciation and amortisation Capital expenditure Assets (at period end) Liabilities (at period end) Net assets (at period end) Comparable return on net assets, % Return on net assets, % Number of employees (at period end) Volume of distributed electricity, TWh Number of electricity distribution customers, thousands 1) Impact as consolidated to Fortum Group figures for 2013. Distribution segment 2013 without Finnish operations Distribution segment 2013 Impact 1) 550 331 348 5 219 260 4,301 531 3,770 8.8 9.2 852 26.1 1,648 410 258 271 7 152 134 3,145 195 2,950 8.7 9.1 515 16.6 1,006 -140 -73 -77 2 -67 -126 -1,156 -336 -820 -0.1 -0.1 -337 -9.5 -642 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 132 Annual Report 2013 Financial Statements 10 Other income and other expenses 10 Other income and other expenses Accounting policies Other income Revenue from activities outside normal operations is reported in other income. This includes recurring items such as rental income. Emission allowances The Group accounts for emission allowances based on currently valid IFRS standards where purchased emission allowances are accounted for as intangible assets at cost, whereas emission allowances received free of charge are accounted for at nominal value. A provision is recognised to cover the obligation to return emission allowances. To the extent that Group already holds allowances to meet the obligation the provision is measured at the carrying amount of those allowances. Any shortfall of allowances held over the obligation is valued at the current market value of allowances. The cost of the provision is recognised in the income statement within materials and services. Gains/losses from sales of emission rights are reported in other income. Research and development costs Research and development costs are recognised as expense as incurred and included in other expenses in the income statement. If development costs will generate future income, they are capitalised as intangible assets and depreciated over the period of the income streams. 10.1 Other income EUR million Gain on sale of emission rights Rental income Insurance compensation Other items Total 2013 - 14 3 77 94 2012 43 16 6 44 109 Revenue from activities outside normal operations is reported in other income. This includes recurring items such as rental income and non- recurring items such as insurance compensation. In 2013 Fortum received EUR 40 million in compensation for CSA penalties from E4, the general contractor of the Nyagan power plant, which is included in other items in the table above. No gain booked for sale of emission rights in 2013 (2012: 43). Costs for made emissions which are not covered by emission rights received for free were EUR 9 million (2012: 17). The costs are included in Materials and services. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 133 Annual Report 2013 Financial Statements 10.2 Other expenses EUR million Operation and maintenance costs Property taxes IT and telecommunication costs Other items Total 2013 219 171 69 282 741 2012 280 125 72 284 761 The major components recorded in other expenses are the external operation and maintenance costs of power and heat plants and of transmission lines. Property taxes include property taxes relating to directly owned hydropower production EUR 138 million (2012: 72). Principal auditors fees EUR million Audit fees Audit related assignments Tax assignments Other assignments Total 2013 2012 1.4 0.2 0.0 0.0 1.6 1.6 0.1 0.1 0.0 1.8 Deloitte is the appointed auditor until the next Annual General Meeting, to be held in 2014. Audit fees include fees for the audit of the consolidated financial statements, review of the interim reports as well as the fees for the audit of Fortum Oyj and its subsidiaries. Audit related assignments include fees for assurance and associated services related the audit. Tax assignments include fees for tax advice services. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 134 Annual Report 2013 Financial Statements 11 Materials and services 11 Materials and services EUR million Materials Materials purchased from associated companies and joint ventures Transmission costs External services Total 2013 1,667 654 194 18 2,533 2012 1,651 679 192 26 2,548 Materials contain mainly coal, gas and nuclear fuels used for producing power and heat. Materials purchased from associated companies consist of nuclear and hydropower purchased at production cost (including interest costs and production taxes), purchased fuels used in CHP production and purchased steam. Total materials and services include production taxes and duties EUR 188 million (2012: 193), of which nuclear related capacity and property taxes EUR 92 million (2012: 88) and hydro power related property taxes EUR 14 million (2012: 13). Taxes related to nuclear and hydro production include taxes paid through purchases from associated companies as mentioned above. See Note 20 Participations in associated companies and joint ventures. 12 Employee benefits 12 Employee benefits EUR million Wages and salaries Pensions Defined contribution plans Defined benefit plans Reduction due to insured defined benefit obligation Social security costs Share-based remunerations Other employee costs Total 2013 380 36 15 -5 75 7 21 529 2012 377 33 15 - 73 8 37 543 The compensation package for Fortum employees consists of a combination of salaries, fringe benefits, short-term incentives, profit sharing paid to the Personnel Fund and share-based long-term incentives. The majority of Fortum employees are included in a performance bonus system. The long-term incentive schemes are intended for senior executives and other management of the Fortum Group. The remuneration policy is determined by the Board of Directors. The Nomination and Remuneration Committee discusses, assesses and makes recommendations and proposals to the Board of Directors on the remuneration policy, pay structures, bonus and incentive systems for the Group and its management, and contributes to the Group's nomination issues. For further information on pensions see Note 32 Pension obligations. 12.1 Short term incentives Fortum’s short-term incentive scheme, i.e. bonus system, supports the realisation of the Group’s financial performance targets, sustainability targets, values and structural changes. The system ensures that the performance targets of individual employees align with the targets of the division and the Group. All Fortum employees, with the exception of certain personnel groups in Poland and Russia, are covered by the bonus system. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 135 Annual Report 2013 Financial Statements The criteria used in determining the size of the bonus for senior management (the President and CEO and other members of the Fortum Management Team) are decided annually by the Board of Directors on the recommendation of the Board's Nomination and Remuneration Committee. The size of each senior executive's bonus is dependent on the Group's financial performance, as well as on their own success in reaching personal goals. The performance bonus criteria may also include indicators related to sustainability targets. The maximum bonus level for the senior management is 40% of the executive's annual salary including fringe benefits. For executives with division responsibilities, the bonus system reflects the performance of their division together with the Group’s financial performance. The criteria for evaluating an executive's personal performance are mutually agreed between the executive and his/her superior in an annual performance discussion at the beginning of each year. The performance of the President and CEO is evaluated annually by the Board of Directors. 12.2 Long-term incentives Accounting policies Fortum's share bonus system is a performance-based, long-term incentive (LTI) arrangement. The share bonus system is divided into six-year share plans, within which participants have the possibility to earn rights to company shares. A new plan commences annually if the Board of Directors so decides. The arrangement was launched in 2003 and was further developed in 2008. The potential reward is based on the performance of the Group and its divisions. In the LTI arrangement each share plan begins with a three-year earning period during which participants may earn share rights if the earnings criteria set by the Board of Directors are fulfilled. The value of the share participation is defined after the three-year earning period when the participants are paid the earned rights in the form of shares. After the earning period, income tax and statutory employment related expenses are deducted from the reward and the net reward is used to acquire Fortum shares in the name of the participant. The maximum value of shares, before taxation, to be delivered to a participant after the earning period cannot exceed the participant’s annual salary. The earning period is followed by a three-year lock-up period. During the lock-up period the shares may not be sold, transferred, pledged or disposed in any other way. Dividends and other financial returns paid on the shares during the lock-up period are, however, not subject to restrictions. The shares are released from the lock-up after publishing of the Company’s financial results for the sixth calendar year of an individual plan, provided that the participant remains employed by the Group. The share plans under the new LTI arrangement are accounted for as partly cash- and partly equity-settled arrangements. The portion of the earned reward that the participants receive in shares is accounted for as an equity settled transaction, and the portion of the earned reward settled in cash covering the tax and other charges, is accounted for as cash settled transaction. For participants receiving cash only, the total arrangement is accounted for as cash-settled transaction. The reward is recognised as an expense during the vesting period with a corresponding increase in the liabilities and for the transactions settled in shares in the equity. The social charges related to the arrangement payable by the employer are accrued as a liability. Under the previous LTI arrangement (before 2008) the reward as share rights was determined after the three year earning period, however the settlement of the plan occurred only after the lock-up period. The fair value changes arising from the changes in Fortum share price were accrued over the remaining vesting period. The Group had entered into share forward transactions to hedge this exposure. The forward transactions did not qualify for hedge accounting and therefore the periodic changes in their fair values were recorded in the income statement. Last plan under the previous LTI arrangement was settled in spring 2013. At present, approximately 140 managers, all of whom have been elected by the Board of Directors, are participants in at least one of the five on-going annual LTI plans (plans 2009–2013, 2010-2015, 2011-2016, 2012-2017 and 2013-2018). The expense recorded as employee costs for the period was EUR 7 million (2012: 8). Estimated departures 5% have been taken into account when determining the expense. The LTI liability including social charges at the end of the year 2013 was EUR 8 million (2012: 15), including EUR 1 million (2012: 2) recorded in equity. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 136 Annual Report 2013 Financial Statements Share bonus system Share bonus system Shares granted Grant date Grant price, EUR Number of shares granted Number of shares subsequently forfeited Number of shares released from lock-up Plan 2010-2015 Plan 2009-2013 Plan 2008-2012 13.2.2013 13.90 187,493 -3,671 8.2.2012 18.16 165,132 -18,988 9.2.2011 21.85 150,436 -22,735 -127,701 0 Number of shares under lock-up at the end of the year 2013 183,822 146,144 Fortum share price at the end of the grant year, EUR 16.63 14.15 16.49 In addition to the shares granted above, share rights have been granted to participants that will receive cash payments instead of shares after the lock-up period. The gross amount of share rights outstanding at the end of the year 2013 for plan 2010-2015 was 97,842 share rights and for plan 2009-2013 49,289 share rights. In spring 2013 the plan 2007-2012 was settled and 299,766 share rights were paid to the participants. 12.3 Fortum Personnel Fund The Fortum Personnel Fund (for employees in Finland only) has been in operation since year 2000. The Board of Directors determines the criteria for the fund's annual profit-sharing bonus. Persons included in Fortum's long-term incentive schemes are not eligible to be members of this fund. Members of the personnel fund are the permanent and fixed-term employees of the Group. The membership of employees joining the company starts at the beginning of the next month after the employment relationship has been ongoing for five months. The membership in the fund terminates when the member has received his/her share of the fund in full. New rules for the Fund were registered by the Ministry of Employment and the Economy, and approved by the Annual General Meeting of the Fortum Personnel Fund in 2013. The rules were amended in order to be aligned with the law for the personnel funds effective from the beginning of 2011. The main change concerns the members' right to withdraw funds. An employee is entitled to make withdrawals right from the beginning of the membership. The membership in the fund starts at the beginning of the next month after the employment relationship has been ongoing for five months. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 137 Annual Report 2013 Financial Statements The profit-sharing received by the fund is distributed equally between the members. Each employee's share is divided into a tied amount and an amount available for withdrawal. It is possible to transfer a maximum of 15% of capital from the tied amount to the amount available for withdrawal each year. The amount available for withdrawal (maximum 15% of the tied amount) is decided each year by the council of the fund and it is paid to members who want to exercise their withdrawal rights. The fund's latest financial year ended at 30 April 2013 and the fund then had a total of 2,722 members (2012: 2,727). At the end of April 2013 Fortum contributed EUR 2.8 million (2012: 2.5) to the personnel fund as an annual profit-sharing bonus based on the financial results of 2012. The combined amount of members' shares in the fund was EUR 23 million (2012: 22). The contribution to the personnel fund is expensed as it is earned. 12.4 The President and CEO and the management team remuneration The Fortum Management Team (FMT) consists of nine members, including the President and CEO. The following table presents the total remuneration of the President and CEO and the Fortum Management Team and takes into account the changes in FMT during the year. The expenses are shown on accrual basis. Additional information about cash based remuneration is available in section Remuneration. Management remuneration EUR thousands Salaries and fringe benefits Performance bonuses Share-based remuneration Pensions (statutory) Pensions (voluntary) Social security expenses Total 2013 2012 The President and CEO Other FMT members 1) The President and CEO Other FMT members 795 22 448 137 204 48 1,654 2,860 197 1,122 494 695 337 5,705 980 27 637 172 252 60 2,128 2,803 170 1,455 479 613 333 5,853 1) Including compensation of EUR 80,000 paid to CFO Rauramo for assuming the duties of the President and CEO during March-November 2013. A pension liability of EUR 1,566 thousand (2012: 1,078) related to the defined benefit plans for management team members has been recognised in the balance sheet.The additional pension arrangement for the President and CEO is a defined contribution pension plan and thus no liability has been recognised in the balance sheet. The annual contribution for the President and CEO's pension arrangement is 25% of the annual salary. The annual salary consists of a base salary, fringe benefits and bonus. The President and CEO's retirement age is 63. In case his assignment is terminated before the retirement age, the President and CEO is entitled to retain the benefits accrued in the arrangement for his benefit. For other management team members the retirement age is 60 or 65 depending on the arrangement. The pension paid is maximum 66% or 60% of the remuneration upon retirement. In the first case they are defined benefit pension plans and are insured and paid by Fortum's pension fund. In the latter, pensions are either defined benefit or defined contribution schemes insured by an insurance company. In the event that Fortum decides to give notice of termination to the President and CEO, he is entitled to salary of the notice period (6 months) and to severance pay equal to 18 months’ salary. Other FMT members’ termination compensation is equal to 12 to 24 months’ salary. Additional information about the terms and conditions of the remuneration of the President and CEO Tapio Kuula is available online at www.fortum.com/en/corporation/corporate-governance/remuneration-board/employment-terms-conditions-president-ceo/pages/def and in section Remuneration. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 138 Annual Report 2013 Financial Statements Number of shares delivered to the management The table below shows the number of shares delivered in 2013 and 2012 to the President and CEO and other FMT members under the LTI arrangements. In spring 2013 there were deliveries of LTI plans 2007-2012 and 2010-2015. Shares delivered under the plan 2010-2015 are subject to a lock-up period under which they cannot be sold or transferred to a third party. FMT members at 31 December 2013 Tapio Kuula Helena Aatinen (from 1 November 2012) Alexander Chuvaev 1) Mikael Frisk Timo Karttinen Per Langer Markus Rauramo (from 1 September 2012) Matti Ruotsala Kaarina Ståhlberg (from 1 September 2013) Former FMT members Anne Brunila (until 31 October 2012) Juha Laaksonen (until 31 August 2012) Maria Paatero-Kaarnakari (until 31 January 2012) Total 2013 35,152 519 35,783 10,079 9,563 8,550 756 12,395 - - - - 112,797 2012 17,171 - 18,749 4,576 5,213 3,966 - 7,283 - 3,983 6,840 3,367 71,148 1) Share rights will be paid in cash instead of shares after the lock-up period due to local legislation. 12.5 Board of Directors and management shareholding On 31 December 2013, the members of the Board of Directors owned a total of 10,950 shares (2012: 11,950), which corresponds to 0.00% (2012: 0.00%) of the company’s shares and voting rights. Number of shares held by members of the Board of Directors Board members at 31 December 2013 Chairman, Sari Baldauf Deputy Chairman, Christian Ramm-Schmidt Ilona Ervasti-Vaintola Joshua Larson Minoo Akhtarzand Heinz-Werner Binzel Kim Ignatius Total 2013 2,300 2,250 4,000 - - - 2,400 10,950 2012 2,300 2,250 4,000 - - 1,000 2,400 11,950 The President and CEO and other members of the Fortum Management Team owned a total of 346,106 shares (2012: 268,992) which corresponds to approximately 0.04% (2012: 0.03%) of the company's shares and voting rights. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 139 Annual Report 2013 Financial Statements Number of shares held by members of the Fortum Management Team FMT members at 31 December 2013 Tapio Kuula Helena Aatinen Alexander Chuvaev Mikael Frisk Timo Karttinen Per Langer Markus Rauramo Matti Ruotsala Kaarina Ståhlberg Total 2013 2012 153,555 118,403 519 12,093 42,128 69,791 25,267 13,756 28,897 - - 12,093 32,049 60,228 16,717 13,000 16,502 - 346,006 268,992 12.6 Board remuneration The Board of Directors comprises five to eight members who are elected at the Annual General Meeting for a one-year term of office, which expires at the end of the first Annual General Meeting following the election. At the 2013 Annual General Meeting seven members were elected. The Annual General meeting confirms the yearly compensation for the Board of Directors. In addition, a EUR 600 meeting fee is paid. The meeting fee is also paid for committee meetings and is paid in double to a member who lives outside Finland in Europe and triple to a member who lives outside Europe. The members are entitled to travel expense compensation in accordance with the company's travel policy. Board members are not offered any long-term incentive benefits or participation in other incentive schemes. There are no pension arrangements for the Board members. Social security costs EUR 13 thousand (2012: 12) have been recorded for the fees in accordance with local legislation in respective countries. Compensation for Board service EUR/year/meeting Chairman Deputy Chairman Chairman of the Audit and Risk Committee 1) Members Meeting fee 2) 2013 75,000 57,000 57,000 40,000 600 1) If not acting as Chairman or Deputy Chairman of the Board of Directors simultaneously. 2) Is paid in double to a member who lives outside Finland in Europe and triple to a member who lives outside Europe. 2012 75,000 57,000 57,000 40,000 600 2012 80,353 64,479 54,349 53,149 46,549 48,100 67,549 2013 84,000 66,000 58,000 60,400 49,000 67,200 70,600 - 455,200 13,000 427,528 Total compensation for Board of Directors EUR Board members at 31 December 2013 Chairman, Sari Baldauf Deputy Chairman, Christian Ramm-Schmidt Minoo Akhtarzand Heinz-Werner Binzel Ilona Ervasti-Vaintola Kim Ignatius (from 11 April 2012) Joshua Larson Former Board members Esko Aho (until 11 April 2012) Total This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 140 Annual Report 2013 Financial Statements 13 Finance costs - net 13 Finance costs - net EUR million Interest expense Borrowings Other interest expense Capitalised borrowing costs Total Interest income Loan receivables Other interest income Total Fair value gains and losses on financial instruments Fair value change of interest rate derivatives not getting hedge accounting status Fair value change of hedging derivatives in fair value hedge relationship Fair value change of hedged items in fair value hedge relationship Rate difference on forward contracts Total Exchange gains and losses Loans and receivables Cross currency interest rate derivatives Foreign currency derivatives Interest income on share of State Nuclear Waste Management Fund Unwinding of discount on nuclear provisions Unwinding of discount on other provisions 31, Other financial income Other financial expenses Total Finance costs - net Note 2013 2012 19 7 7 7 7 30 30 32 -363 -1 69 -295 38 4 42 -16 25 -24 -1 -16 -214 19 195 9 -35 -16 1 -8 -49 -318 -379 -1 80 -300 51 3 54 -12 39 -39 -11 -23 246 -12 -231 16 -36 -15 1 -11 -42 -311 Interest expenses include interest expenses on interest-bearing loans, interest on interest rate and currency swaps and forward points on forward foreign exchange contracts hedging loans and receivables. Further information can be found in the Notes mentioned in the table. Interest income includes EUR 29 million (2012: 40) from shareholders' loans in Finnish and Swedish nuclear companies and EUR 6 million (2012: 7) from deposits. Fair value gains and losses on financial instruments include change in clean price of interest rate and cross currency swaps not getting hedge accounting and fair value changes of interest rate derivatives in hedge relationship and hedged items. Accrued interest on these derivatives is entered in interest expenses of borrowings. Fair value gains and losses include also rate difference from forward contracts hedging loans and receivables without hedge accounting. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 141 Annual Report 2013 Financial Statements Exchange gains and losses includes exchange rate differences arising from valuation of foreign currency loans and receivables and exchange rate differences from forward foreign exchange contracts and interest rate and currency swaps. Fair value changes on interest rate and currency derivatives EUR million Interest rate and cross currency swaps Interest expenses on borrowings Exchange rate difference from derivatives Rate difference in fair value gains and losses on financial instruments 1) Total fair value change of interest rate derivatives in finance costs - net Forward foreign exchange contracts Interest expenses on borrowings Exchange rate difference from derivatives Rate difference in fair value gains and losses on financial instruments Total fair value change of currency derivatives in finance costs - net Total fair value change of interest and currency derivatives in finance costs - net 2013 2012 18 19 9 46 -89 195 -1 105 151 29 -12 27 44 -108 -231 -11 -350 -306 1) Fair value gains and losses on financial instruments include fair value changes from interest rate swaps not getting hedge accounting amounting to EUR -16 million (2012: -12) and fair value change of hedging derivatives in fair value hedge relationship EUR 25 million (2012: 39), totalling EUR 9 million (2012: 27). 14 Income tax expense 14 Income tax expense 14.1 Profit before tax EUR million Finnish companies Swedish companies Other companies Total 2013 440 476 583 1,499 2012 495 625 466 1,586 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 142 Annual Report 2013 Financial Statements 14.2 Major components of income tax expense by major countries EUR million 2013 2012 Current taxes Finnish companies Swedish companies Other companies Total Deferred taxes Finnish companies Swedish companies Other companies Total Adjustments recognised for current tax of prior periods Finnish companies Swedish companies Other companies Total Total income taxes -104 -93 -46 -243 81 -7 -56 18 -1 5 1 5 -220 -97 -91 -13 -201 -13 172 -30 129 0 -2 0 -2 -74 14.3 Income tax rate The table below explains the difference between the theoretical enacted tax rate in Finland compared to the tax rate in the income statement. EUR million Profit before tax Tax calculated at nominal Finnish tax rate Tax rate changes Differences in tax rates and regulations Income not subject to tax Tax exempt capital gains Expenses not deductible for tax purposes Share of profit of associated companies and joint ventures Taxes related to dividend distributions Tax losses for which no deferred tax was recognised Utilisation of previously unrecognised tax losses Other items Adjustments recognised for taxes of prior periods Tax charge in the income statement Key tax indicators: 2013 1,499 -367 80 55 2 12 -7 25 0 -22 3 -5 4 -220 % 24.5 -5.3 -3.7 -0.2 -0.8 0.5 -1.7 0.0 1.5 -0.2 0.3 -0.2 14.7 2012 1,586 -389 230 42 16 32 -7 4 -4 -6 9 0 -1 -74 % 24.5 -14.5 -2.6 -1.0 -2.0 0.4 -0.3 0.3 0.4 -0.6 0.0 0.1 4.7 - The weighted average applicable tax rate for 2013 is 22.5% (2012: 25.6%) - The effective tax rate in the income statement for 2013 is 14.7% (2012: 4.7%) - The effective tax rate excluding the share of profits from associates, tax exempt capital gains and tax rate changes for 2013 is 22.3% (2012: 21.2%) - The total tax rate for 2013 is 33.8% (2012 29.0%). Fortum has a material deferred tax liability owing to its investments in non current assets. These assets are depreciated more rapidly for tax than for accounting purposes resulting in lower current tax payments at the start of an assets’ lifetime and higher tax payments at the end of its lifetime. This difference results in a deferred tax liability, which is valued using the tax rate expected to be in force when the liability unwinds. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 143 Annual Report 2013 Financial Statements In December 2013 the Finnish Parliament passed legislation lowering the income tax rate from 24.5% to 20%. The one-time positive effect in the income tax cost from the tax rate change was approximately EUR 79 million. Respectively, in 2012 tax rate was positively effected with EUR 230 million from lowering of Swedish tax rate from 26.3% to 22%. These tax rate changes have created the effective tax rate to fluctuate. One time tax exempt capital gains reduced the effective tax rate in 2013 through mainly the sale of small hydro plants in Sweden, Swedish energy company Härjeåns Kraft AB and Infratek ASA in Norway. Similar reductions in effective tax rate occurred in 2012 through divestments of some heat operations in Finland and Estonia. Capital gains are booked in Finnish, Swedish, Norwegian and Dutch companies. 14.4 Total taxes Fortum has current income taxes in 2013 totalling EUR 243 million (2012: 201). The effective tax rate indicates tax burden taking into account the differences between accounting and tax rules, including tax exempt capital gains, tax rate changes and other differences. The effective tax rate may therefore fluctuate. Taxes borne indicate different taxes that Fortum pays for the period. In 2013 Fortum’s taxes borne were EUR 644 million (2012: 565). Taxes borne include corporate income taxes, production taxes, employment taxes, taxes on property and cost of indirect taxes. Production taxes include also production taxes and taxes on property paid through electricity purchased from associated companies. The total tax rate (TTR) indicates the burden on taxes borne by Fortum from its profit before these taxes. On the contrary to the effective tax rate the total tax rate is steadily increasing as different production taxes and real estate taxes are increasing. In addition, Fortum administers and collects different taxes on behalf of governments and authorities. Such taxes include VAT, and excise taxes on power consumed by customers, payroll taxes and withholding taxes. The amount of taxes collected by Fortum was EUR 834 million (2012: 749). In 2012 Fortum reported VAT as gross amount for input and output VAT. The gross amount of taxes collected was EUR 3,918 million in 2012. Fortum has had several tax audits ongoing during 2013. Fortum has received income tax assessments in Sweden for the years 2009-2011, in Belgium for the years 2008 and 2009 as well as in Finland regarding the year 2007. Fortum has appealed all assessments received. Based on legal analysis, no provision has been accounted for in the financial statements related to tax audits. See also Note 29 Deferred income taxes, Note 11 Materials and services and Operating and financial review; Sustainability. For further information regarding the on-going tax appeals see Note 39 Legal actions and official proceedings. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 144 Annual Report 2013 Financial Statements 15 Earnings and dividend per share 15 Earnings and dividend per share Accounting policies Earnings per share Basic earnings per share is calculated by dividing the net profit attributable to the owners of the parent company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held as treasury shares. Diluted earnings per share is calculated adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. For the warrants and stock options a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Fortum share) based on the monetary value of the subscription rights attached to outstanding stock options. The number of shares calculated as above is deducted from the number of shares that would have been issued assuming the exercise of the stock options. The incremental shares obtained through the assumed exercise of the options and warrants are added to the weighted average number of shares outstanding. Options and warrants have a dilutive effect only when the average market price of ordinary shares during the period exceeds the exercise price of the options or warrants. Previously reported earnings per share are not retroactively adjusted to reflect changes in price of ordinary shares. Dividends Dividends proposed by the Board of Directors are not recognised in the financial statements until they have been approved by the Company's shareholders at the Annual General Meeting. 15.1 Earnings per share Earnings per share, basic Profit attributable to owners of the parent (EUR million) Weighted average number of shares (thousands) Basic earnings per share (EUR ) At the end of 2013 Fortum had no diluting stock option schemes. 2013 1,204 2012 1,416 888,367 888,367 1.36 1.59 15.2 Dividend per share Dividends proposed by the Board of Directors are not recognised in the financial statements until they have been approved by the Company’s shareholders at the Annual General Meeting. A dividend in respect of 2013 of EUR 1.10 per share, amounting to a total dividend of EUR 977 million based on the amount of shares registered as of 3 February 2014, is to be proposed at the Annual General Meeting on 8 April 2014. These Financial statements do not reflect this dividend. A dividend in respect of 2012 of EUR 1.00 per share, amounting to a total dividend of EUR 888 million, was decided at the Annual General Meeting on 9 April 2013. The dividend was paid on 19 April 2013. A dividend in respect of 2011 of EUR 1.00 per share, amounting to a total dividend of EUR 888 million, was decided at the Annual General Meeting on 11 April 2012. The dividend was paid on 23 April 2012. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 145 Annual Report 2013 Financial Statements 16 Financial assets and liabilities by categories 16 Financial assets and liabilities by categories Accounting policies Financial assets The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables and available for sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation at every reporting date. Financial assets at fair value through profit or loss A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the closing date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor. They are included in non-current assets, except for maturities under 12 months after the closing date. These are classified as current assets. Available for sale financial assets Available for sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless there is an intention to dispose of the investment within 12 months of the closing date. Purchases and sales of investments are recognised on the trade-date – the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available for sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans are carried at amortised cost using the effective interest method. Gains and losses arising from changes in the fair value of the ’financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of securities classified as available for sale are recognised in equity. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments are included in the income statement. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models refined to reflect the issuer’s specific circumstances. The Group assesses at each closing date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Accounting for derivative financial instruments and hedging activities Within the ordinary course of business the Group routinely enters into sale and purchase transactions for commodities. The majority of these transactions take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the commodity in accordance with the Group's expected sale, purchase or usage requirements. Such contracts are not within the scope of IAS 39. All other net-settled commodity contracts are measured at fair value with gains and losses taken to the income statement. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: (1) hedges of highly probable forecast transactions (cash flow hedges); (2) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); or (3) hedges of net investments in foreign operations. The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Derivatives are divided into non-current and current based on This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 146 Annual Report 2013 Financial Statements maturity. Only for those electricity derivatives, which have cash flows in different years, the fair values are split between non-current and current assets or liabilities. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised in equity. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. When a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity is recognised in the income statement when the forecast transaction is ultimately also recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately recognised in the income statement. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss for the period to maturity. Net investment hedging in foreign operations Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed off. Derivatives that do not qualify for hedge accounting Certain derivative instruments hedging future cash flows do not qualify for hedge accounting. Fair value changes of these financial derivative instruments are recognised in items affecting comparability in the income statement. Financial assets and liabilities in the tables below are split into categories in accordance with IAS 39. The categories are further split into classes which are the basis for valuing a respective asset or liability. Further information can be found in the Notes mentioned in the table. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 147 Annual Report 2013 Financial Statements Financial assets by categories 2013 Loans and receivables Financial assets at fair value through profit and loss Hedge accounting, fair value hedges Non-hedge accounting Fair value recognised in equity, cash flow hedges Available- for-sale financial assets Finance leases Total financial assets Amortised cost 44 EUR million Note Financial instruments in non-current assets Other non-current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts 21 3 Long-term interest-bearing receivables 22 1,461 Financial instruments in current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Trade receivables Other short-term interest- bearing receivables Cash and cash equivalents 1) Total 3 24 24 25 771 6 1,269 3,551 70 40 185 3 82 80 28 42 23 104 3 0 31 75 82 278 3 2 1,463 186 83 28 771 6 1,269 4,244 70 418 172 31 2 1) Cash and cash equivalents includes EUR 15 million related to assets held for sale. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 148 Annual Report 2013 Financial Statements Financial assets by categories 2012 Loans and receivables Financial assets at fair value through profit and loss Amortised cost 37 EUR million Note Financial instruments in non-current assets Other non-current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts 21 3 Long-term interest-bearing receivables 22 1,381 Financial instruments in current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Trade receivables Other short-term interest- bearing receivables Cash and cash equivalents Total 3 24 24 25 914 9 963 Hedge accounting, fair value hedges Non-hedge accounting Fair value recognised in equity, cash flow hedges Available- for-sale financial assets Finance leases Total financial assets 181 34 175 17 79 38 45 42 2 55 4 2 32 69 76 358 17 3 1,384 134 42 47 914 9 963 3,304 181 388 105 32 3 4,013 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 149 Annual Report 2013 Financial Statements Financial liabilities by categories 2013 Financial liabilities at fair value through profit and loss Other financial liabilities Hedge accounting, fair value hedges Fair value recognised in equity, cash flow hedges Non-hedge accounting Amortised costs Fair value Finance leases Total financial liabilities 22 28 71 2 24 48 9 7 47 0 3 1 5,656 1,299 2) 21 6,976 35 140 2 2,140 2 2,142 24 51 10 452 140 452 140 22 182 58 8,388 1,299 23 9,972 EUR million Note Financial instruments in non-current liabilities Interest-bearing liabilities 1) Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Financial instruments in current liabilities Interest-bearing liabilities 1) Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Trade payables Other liabilities Total 28 3 28 3 34 34 1) Including interest-bearing liabilities, EUR 20 million, in Liabilities related to assets held for sale at 31 December 2013 (2012: 0) of which EUR 4 million in current liabilities. 2) Fair valued part of bond in fair value hedge relationship. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 150 Annual Report 2013 Financial Statements Financial liabilities by categories 2012 Financial liabilities at fair value through profit and loss Other financial liabilities Hedge accounting, fair value hedges Fair value recognised in equity, cash flow hedges Non-hedge accounting Amortised costs Fair value Finance leases Total financial liabilities 10 108 3 18 197 40 4 57 1 4 4 5,781 1,895 1) 23 7,699 14 165 3 1,076 2 1,078 19 201 44 558 228 558 228 - 376 70 7,643 1,895 25 10,009 EUR million Note Financial instruments in non-current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Financial instruments in current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Trade payables Other liabilities Total 28 3 28 3 34 34 1) Fair valued part of bond in fair value hedge relationship. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 151 Annual Report 2013 Financial Statements 17 Financial assets and liabilities by fair value hierarchy 17 Financial assets and liabilities by fair value hierarchy Accounting policies Fair value measurements are classified using a fair value hierarchy i.e. Level 1, Level 2 and Level 3 that reflects the significance of the inputs used in making the measurements. Fair values under Level 1 measurement hierarchy The fair value of some commodity derivatives traded in active markets (such as publicly traded electricity options, coal and oil forwards) are market quotes at the closing date. Fair values under Level 2 measurement hierarchy The fair value of financial instruments including electricity derivatives traded in active markets (such as publicly traded derivatives, and trading and available for sale securities) is based on quoted market prices at the closing date. Known calculation techniques, such as estimated discounted cash flows, are used to determine fair value of interest rate and currency financial instruments. The fair value of interest-rate swaps is calculated as the present value of the estimated future cash flows. The fair value of forward foreign exchange contracts is determined using forward exchange market rates at the closing date. Fair values of options are determined by using option valuation models. The fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. In fair valuation, credit spread has not been adjusted, as quoted market prices of the instruments used are believed to be consistent with the objective of a fair value measurement. The Group bases the calculation on existing market conditions at each closing date. Financial instruments used in Fortum are standardised products that are either cleared via exchanges or widely traded in the market. Commodity derivatives are generally cleared through exchanges such as for example NASDAQ OMX Commodities Europe and financial derivatives done with creditworthy financial institutions with investment grade ratings. Fair values under Level 3 measurement hierarchy Fair valuation of electricity derivatives maturing over ten years which are not standard NASDAQ OMX Commodities Europe products are based on prices collected from reliable market participants. Other financial assets and liabilities that are not based on observable market data. Other measurements The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 152 Annual Report 2013 Financial Statements Financial assets EUR million In non-current assets Level 1 Level 2 Level 3 Netting 3) Total Note 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Available for sale financial assets 1) Derivative financial instruments 21 3 1 1 30 31 31 32 Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Oil and other futures and forward contracts 1 Non-hedge accounting 3 10 In current assets Derivative financial instruments 3 Electricity derivatives Hedge accounting Non-hedge accounting 2 18 Interest rate and currency derivatives Hedge accounting Non-hedge accounting Oil and other futures and forward contracts Hedge accounting Non-hedge accounting Total 1 60 67 125 155 54 68 93 185 127 244 3 80 56 55 183 175 17 96 175 4 38 2 60 -12 -28 -14 -24 2 2) 42 40 93 185 42 34 183 175 -10 3 17 -23 -164 -41 -114 104 82 55 79 4 38 2 45 3 80 0 28 854 861 30 33 -260 691 706 -1 -32 -140 -343 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 153 Annual Report 2013 Financial Statements Level 1 Level 2 Level 3 Netting 3) Total Note 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Financial liabilities EUR million In non-current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Oil and other futures and forward contracts 28 3 12 Non-hedge accounting 2 3 In current liabilities Derivative financial instruments 3 Electricity derivatives Hedge accounting Non-hedge accounting 3 23 Interest rate and currency derivatives Hedge accounting Non-hedge accounting Oil and other futures and forward contracts Hedge accounting Non-hedge accounting Total 2 41 48 116 1,299 1,895 4) 1,299 1,895 19 56 69 71 23 185 3 48 17 22 57 108 10 42 109 4 197 4 64 1 2) -12 -28 -14 -24 7 28 69 71 4 10 57 108 -10 2 3 -23 -164 -41 -114 -1 -32 -140 0 24 3 48 1 9 1 18 4 197 4 40 154 1,773 2,529 0 1 -260 -343 1,561 2,341 1) Available for sale financial assets, i.e. shares which are not classified as associated companies or joint ventures, consists mainly of shares in unlisted companies of EUR 30 million (2012: 31), for which the fair value cannot be reliably determined. These assets are measured at cost less possible impairment. Available for sale financial assets include listed shares at fair value of EUR 1 million (2012: 1). The cumulative fair value change booked in Fortum's equity was EUR -3 million (2012: -3). 2) In 2013 NASDAQ OMX Commodities Europe quoted the closest 10 years and in 2012 for the closest 5 years, for years beyond a systematic price estimate made by Fortum is used. Reason for transferring electricity derivatives from level 3 to level 2 is the maturity of contracts. 3) Receivables and liabilities against electricity, oil and other commodity exchanges arising from standard derivative contracts with same delivery period are netted. 4) Fair valued part of bond in fair value hedge relationship. Net fair value amount of interest rate and currency derivatives is EUR 170 million, assets EUR 361 million and liabilities EUR 191 million. Fortum has cash collaterals based on Credit Support Annex agreements with some counterparties. At the end of December 2013 Fortum had received EUR 134 million from Credit Support Annex agreements. The received cash has been booked as short term liability. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 154 Annual Report 2013 Financial Statements 18 Intangible assets 18 Intangible assets Accounting policies Intangible assets, except goodwill, are stated at the historical cost less accumulated amortisation and impairment losses. They are amortised on a straight-line method over their expected useful lives. Computer software Acquired computer software licences are capitalised on the basis of the costs incurred when bringing the software into use. Costs associated with developing or maintaining computer software are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software costs recognised as assets are amortised over their estimated useful lives (three to five years). Trademarks and licenses Trademarks and licences are shown at historical cost less accumulated amortisation and impairment losses, as applicable. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and licences over their estimated useful lives (15-20 years). Contractual customer relationships Contractual customer relationships acquired in a business combination are recognised at fair value on acquisition date. The contractual customer relations have a finite useful life and are carried at costs less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected duration of the customer relationship. Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisition of associates is included in investments in associates and is tested for impairment as part of the overall balance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on disposal of an entity include the carrying amount of goodwill relating to the entity sold. Critical accounting estimates: Assigned values and useful lives in acquisitions In an acquisition acquired intangible and tangible assets are fair valued and their remaining useful lives are determined. Management believes that the assigned values and useful lives, as well as the underlying assumptions, are reasonable. Different assumptions and assigned lives could have a significant impact on the reported amounts. The Group has significant carrying values in property, plant and equipment as well as goodwill which are tested for impairment according to the accounting policies. See note 19 Property, plant and equipment for more information. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 155 Annual Report 2013 Financial Statements EUR million Cost 1 January Translation differences and other adjustments Increases through business combinations Capital expenditure Change in emission rights Disposals Sale of subsidiary companies Reclassifications Moved to Assets held for sale Cost 31 December Accumulated depreciation 1 January Translation differences and other adjustments Increases through business combinations Disposals Sale of subsidiary companies Reclassifications Impairment charges Depreciation for the period Moved to Assets held for sale Accumulated depreciation 31 December Goodwill 2013 309 -34 2012 294 15 - - - - - - - - - - - - - - 275 309 - - - - - - - - - - - - - - - - - - - - Other intangible assets 2013 457 2012 447 -1 - 49 0 -20 -3 5 -89 398 324 -2 - -20 0 3 - 30 -54 281 5 4 35 -25 -17 - 8 - 457 308 7 2 -17 - 2 0 22 - 324 Total 2013 766 -35 - 49 0 -20 -3 5 -89 673 324 -2 - -20 0 3 - 30 -54 281 2012 741 20 4 35 -25 -17 - 8 - 766 308 7 2 -17 - 2 0 22 - 324 Carrying amount 31 December 275 309 117 133 392 442 The goodwill is included in Russia segment and relates to the acquisition of OAO Fortum. The goodwill has been tested for impairment by comparing recoverable amounts of the net operating assets of OAO Fortum, including goodwill, with their carrying amounts. The recoverable amounts were determined on the basis of value in use, applying discounted cash flow calculations. See also note 19.2.4. Russia Key assumptions made by management and used in calculating value in use were: expected development of Russian power market, utilization of power plants and other assets, forecasted maintenance and refurbishment investments as well as timing of the finalization of the investment programme and discount rate used for discounting. The assumptions used for impairment testing are determined as part of the business planning process for the Fortum Group and are based on expectations of future events that are believed to be reasonable under the circumstances. The discount rate used is taking into account the risk profile of the country in which the cash flows are generated. Pre-tax discount rate used for Russia was 10.5% (2012: 10.8%). There have not been any major changes in the discount rate components or in the methods used to determine them. As of 31 December 2013, the recoverable values were greater than their carrying values and therefore the related goodwill is not impaired. According to management a reasonably possible change in the discount rate used or in the level of future earnings would not cause Russian cash generating unit's carrying amount to exceed its recoverable amount. The main items in other intangible assets are costs for software products and software licenses, bought emission rights and emission rights received free of charge, which are recognised to the lower of fair value and historical cost. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 156 Annual Report 2013 Financial Statements 19 Property, plant and equipment 19 Property, plant and equipment Accounting policies Property, plant and equipment comprise mainly power and heat producing buildings and machinery, transmission lines, tunnels, waterfall rights and district heating network. Property, plant and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses as applicable in the consolidated balance sheet. Historical cost includes expenditure that is directly attributable to the acquisition of an item and borrowing costs capitalised in accordance with the Group’s accounting policy. Cost may also include transfers from equity of any gains or losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Acquired assets on the acquisition of a new subsidiary are stated at their fair values at the date of acquisition. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Additionally the cost of an item of property, plant and equipment includes the estimated cost of its dismantlement, removal or restoration. See Note 31 Other provisions for information about asset retirement obligations. Land, water areas, waterfall rights and tunnels are not depreciated since they have indefinite useful lives. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Hydro power plant buildings, structures and machinery Thermal power plant buildings, structures and machinery Nuclear power plant buildings, structures and machinery CHP power plant buildings, structures and machinery Substation buildings, structures and machinery Distribution network District heating network Other buildings and structures Other tangible assets Other machinery and equipment Other non-current investments 40–50 years 25 years 25 years 15–25 years 30–40 years 15–40 years 30–40 years 20–40 years 20–40 years 3–20 years 5-10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each closing date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Impairment of non-financial assets The individual assets’ carrying values are reviewed at each closing date to determine whether there is any indication of impairment. An asset's carrying amount is written down immediately to its recoverable amount if it is greater than the estimated recoverable amount. When considering the need for impairment the Group assesses if events or changes in circumstances indicate that the carrying amount may not be recoverable. This assessment is documented once a year in connection with the Business Plan process. Indications for impairment are analysed separately by each division as they are different for each business and include risks such as changes in electricity and fuel prices, regulatory/political changes relating to energy taxes and price regulations etc. Impairment testing needs to be performed if any of the impairment indications exists. Assets that have an indefinite useful life, such as goodwill, are not subject to amortisation and are tested annually for impairment. An impairment loss is recognised in the income statement for the amount by which the assets' carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Value in use is determined by discounting the future cash flows expected to be derived from an asset or cash-generating unit. Cash flow projections are based on the most recent Business Plan that has been approved by management. Cash flows arising from future investments such as new plants are excluded unless projects have been started. The cash outflow needed to complete the assets is included. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 157 Annual Report 2013 Financial Statements The period covered by cash flows is related to the useful lives of the assets reviewed for impairment. Normally projections should cover a maximum period of five years but as the useful lives of power plants and other major assets are over 20 years, the projection period is longer. Cash flow projections beyond the period covered by the most recent business plan are estimated by extrapolating the projections using a steady or declining growth rate for subsequent years. Non-financial assets other than goodwill that suffered an impairment charge are reviewed for possible reversal of the impairment at each reporting date. Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and are recognised as income by reducing the depreciation charge of the asset they relate to. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Jointly controlled assets Fortum owns, through its subsidiary Fortum Power and Heat Oy, the coal condensing power plant Meri-Pori in Finland. Teollisuuden Voima Oyj (TVO) has the contractual right to participate in the plant with 45.45%. The capacity and production is divided between Fortum and TVO. Each owner can decide when and how much capacity to produce. Both Fortum and TVO purchase fuel and emission rights independently. Since Fortum and TVO are sharing control of the power plant, Meri-Pori is accounted for as a jointly controlled asset. Fortum is accounting for its part of the investment, i.e. 54.55%. Fortum is also entitled to part of the electricity TVO produces in Meri-Pori through its shareholding of 26.58% of TVO C-series shares. For further information regarding Fortum’s shareholding in TVO, see Note 20 Participations in associated companies and joint ventures. Critical accounting estimates: Assumptions related to impairment testing The Group has significant carrying values in property, plant and equipment as well as goodwill which are tested for impairment according to the accounting policy described in this note.The recoverable amounts of cash-generating units have been determined based on value in use calculations. These calculations are based on estimated future cash flows. Preparation of these estimates requires management to make assumptions relating to future expectations. Assumptions vary depending on the business the tested assets are in. For power and heat generation business the main assumptions relate to the estimated future operating cash flows and the discount rates used to present value them. The distribution business is regulated and supervised by national authorities. Estimated future cash flows include assumptions relating to the development of the future regulatory framework. The Group has not recognised any impairment losses in 2013 based on impairment testing done in late 2013. The Group has considered the sensitivity of key assumptions as part of the impairment testing. When doing this any consequential effect of the change on the other variables has also been considered. The calculations are most sensitive to changes in estimated future operating profit levels and discount rate. If the revised estimated operating profit before depreciation on 31 December 2013 was 10% lower than management's estimates or pre-tax discount rate applied to the discounted cash flows was 10% higher than management's estimates, the Group would not have recognised impairment losses for property plant and equipment or goodwill. Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets, see note 18 Intangible assets. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 158 Annual Report 2013 Financial Statements Machinery and equipment 15,398 Other tangible assets 199 EUR million Cost 1 January 2013 Translation differences and other adjustments Increases through business combinations Capital expenditure Nuclear asset retirement cost Disposals Sale of subsidiary companies Reclassifications Moved to Assets held for sale Cost 31 December 2013 Land, waterfall, rights and tunnels 3,401 -103 0 1 - 0 -1 1 -3 Buildings, plants and structures 3,436 -158 1 74 - -114 -19 580 -30 3,296 3,770 Accumulated depreciation 1 January 2013 Translation differences and other adjustments Increases through business combinations Disposals Sale of subsidiary companies Depreciation for the period Reclassifications Moved to Assets held for sale Accumulated depreciation 31 December 2013 - - - - - - - - - 1,549 -47 0 -96 -4 122 28 -22 -558 9 269 45 -119 -17 1,051 -1,977 14,101 6,784 -201 0 -90 -7 582 -31 -957 Advances paid and construction in progress Total 2,550 24,984 -152 -967 0 10 889 1,235 - 0 -1 -1,638 45 -234 -38 -5 -50 -2,061 1,598 22,969 - - - - - - - - - 8,487 -248 0 -187 -11 710 -3 -980 7,768 1,598 15,201 4 0 2 - -1 0 1 -1 204 154 0 0 -1 0 6 0 -1 158 46 1,530 6,080 Carrying amount 31 December 2013 3,296 2,240 8,021 The change in property, plant and equipment was negative, even though capital expenditures were higher than depreciation during the year. The decreases were mainly due to the transfer to assets held for sale and translation differences. The main increases were due to the ongoing investment programme in OAO Fortum and construction of CHP plants in Heat segment. See Note 9 Assets held for sale For more information on credit risks regarding ongoing investments, see Note 3.8 Credit risk. Property, plant and equipment that are subject to restrictions in the form of real estate mortgages amount to EUR 240 million (2012: 261). See Note 35 Pledged assets. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 159 Annual Report 2013 Financial Statements EUR million Cost 1 January 2012 Translation differences and other adjustments Increases through business combinations Capital expenditure Nuclear asset retirement cost Disposals Reclassifications Land, waterfall, rights and tunnels 3,277 124 - 1 - -4 3 Buildings, plants and structures 3,305 105 - 33 - -79 72 Machinery and equipment 14,830 Other tangible assets 200 418 0 272 -1 -625 504 Cost 31 December 2012 3,401 3,436 15,398 Accumulated depreciation 1 January 2012 Translation differences and other adjustments Increases through business combinations Disposals Depreciation for the period Reclassifications Accumulated depreciation 31 December 2012 - - - - - - - 1,460 6,629 32 - -47 107 -3 192 0 -568 530 1 1,549 6,784 Carrying amount 31 December 2012 3,401 1,887 8,614 Advances paid and construction in progress Total 1,864 23,476 64 - 715 0 1217 1523 - -3 -592 -1 -721 -8 2,550 24,984 - - - - - - - 8,242 227 0 -622 642 -2 8,487 2,550 16,497 4 - 0 - -10 5 199 153 3 - -7 5 0 154 45 19.1 Capitalised borrowing costs EUR million 1 January Translation differences and other adjustments Increases Reclassification Depreciation Moved to Assets held for sale 31 December Buildings, plants and structures Machinery and equipment Advances paid and construction in progress Total 2013 2012 2013 2012 2013 2012 2013 2012 17 -3 - 27 -1 - 40 16 1 - 0 0 - 73 -12 - 108 -6 -1 17 162 74 149 -12 69 -135 - - 3 - 0 -4 - 73 67 2 80 0 - - 239 -27 69 0 -7 -1 157 6 80 0 -4 - 71 149 273 239 New borrowing costs of EUR 69 million were capitalised in 2013 (2012: 80) for the OAO Fortum investment program, and for CHP plant projects in Finland, Sweden, Latvia and Lithuania. The interest rate used for capitalisation varied between 2.8 - 8.7% (2012: 3.4 - 8.1%) depending on country and loan currency. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 160 Annual Report 2013 Financial Statements 19.2 Capital expenditure 1) Finland Sweden Estonia Poland Norway Other countries, total Total EUR million 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 Power Hydropower Nuclear power Fossil-based electricity Renewable- based electricity Other 17 60 2 4 1 12 53 4 1 1 91 86 - - 3 - - - 27 - Total Power 84 71 94 113 - - - - - - - - - - - - - - - - - - - - - - - - 16 - 16 - - - 10 0 10 0 - - - - - - - - 2 2 - - - - 6 0 10 - - 0 - - - - - - 3 1 - - - - 15 - 19 - - - - - - - - - - - - - - - 4 - 4 9 - - - - - - - - - - - - - - 21 - 21 15 - - - - - - 0 0 1 - 39 14 25 - 4 0 - - - - 6 6 - - 87 47 40 - 0 1 44 88 - - 3 - 1 - 108 60 2 7 1 98 53 4 28 7 178 190 16 24 2 274 119 153 2 86 19 397 260 1 13 1 303 153 147 3 91 45 464 324 1 11 7 - 17 0 17 - 14 5 43 9 - 66 0 66 - 12 12 99 128 158 1 10 - 10 6 - 218 105 111 2 42 14 280 123 - 0 12 - 150 106 41 3 33 32 227 151 0 1 266 338 497 492 16 10 10 19 13 36 47 95 849 990 387 535 48 0 32 1 435 568 1,284 1,558 1) Includes capital expenditure to both intangible assets and property, plant and equipment. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 161 Heat Fossil-based heat Fossil-based electricity Renewable, of which waste biofuels other District heat network Other Total Heat Distribution Electricity Sales Other Total excluding Russia-segment Russia Fossil-based electricity Fossil-based heat Other Total Russia Total including Russia-segment Annual Report 2013 Financial Statements Maintenance investments during 2013 in property, plant and equipment were EUR 239 million (2012: 247). Investments due to requirements of legislation were EUR 187 million (2012: 223). Investments increasing productivity were EUR 385 million (2012: 422) and growth investments were EUR 473 million (2012: 666). 19.2.1 Power In Finland, Fortum invested EUR 60 million (2012: 53) into the Loviisa nuclear power plant. Fortum invested additionally EUR 108 million (2012: 98) into hydro production, mainly refurbishment and productivity investments. The biggest of these were Höljes, Skedvi and Gammelänge refurbishment in Sweden, EUR 35 million (2012: 21). Investments for CO2 free production were EUR 175 million (2012: 178). 19.2.2 Heat In year 2013 Heat segment commissioned new bio-mass fired CHP plants in Jelgava, Latvia and Järvenpää, Finland. In Klaipeda, Lithuania new waste-to-energy CHP-plant was taken into production, while in Brista 2, in Sweden test-runs were started. Growth investments in Heat segment totalled EUR 105 million (2012: 142). Refurbishment and legislation investments totalled EUR 90 million (2012: 102). This amount consists mainly of investments in district heat networks and plants as well as the maintenance of existing CHP plants and measures defined by legal requirements. Larger ongoing projects in 2013 comprised of a new fuel handling systems in Stockholm aiming to increase biomass share of fuels in the coal fired CHP-plant KVV6 and new CHP plant KVV8 in Värtan. New pyrolysis based bio-oil plant was inaugrated in November 2013 in Joensuu, Finland. Investments for CO2 free production were EUR 272 million (2012: 301). 19.2.3 Distribution Distribution invested EUR 260 million (2012: 324) in reliability of electricity distribution, maintenance and new investments in Finland, Sweden, and Norway. This includes EUR 31 million (2012: 59) investment in the Finnish smart metering with hourly measurement capabilities to network customers, project was finalized in the end of 2013 with almost 620,000 installed meters. 19.2.4 Russia OAO Fortum has an extensive investment programme aiming to almost double its power capacity with 2,300 MW. During 2013 EUR 249 million (2012: 371) was invested in this programme. The value for the remaining part of the programme is estimated to be approximately EUR 0.5 billion from January 2014 onwards. The last three units are to be completed by mid of 2015. Nyagan power plant unit 1 started operations in March 2013 and Nyagan power plant unit 2 was commisioned in December 2013. Altogether, Fortum’s extensive investment programme in Russia consists of eight new units. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 162 Annual Report 2013 Financial Statements 20 Participations in associated companies and joint ventures 20 Participations in associated companies and joint ventures Accounting policies The Group’s interests in associated companies and jointly controlled entities are accounted for using the equity method of accounting. Assets acquired and liabilities assumed in the investment in associates or joint ventures are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the associate or joint venture acquired, the difference is recognised directly in the income statement. The Group’s share of its associates or joint ventures post-acquisition profits or losses after tax and the expenses related to the adjustments to the fair values of the assets and liabilities assumed are recognised in the income statement. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. The Group's share of post-acquisition adjustments to associates or joint ventures equity that has not been recognised in the associates or joint ventures income statement, is recognised directly in Group's shareholder's equity and against the carrying amount of the investment. When the Group’s share of losses in an associate or a joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group’s interest in the associate or joint venture. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates or joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. Fortum owns shareholdings in associated electricity production companies (mainly nuclear and hydro), from which the owners purchase electricity at production cost, including interest costs and production taxes. The share of profit of these companies is mainly IFRS adjustments and depreciations on fair value adjustments from historical acquisitions since the companies are not profit making under local accounting principles. If more recent information is not available, the share of the profit of certain associated or joint venture companies is included in the consolidated accounts based on the latest available information. Fortum owns shareholdings in listed associated companies such as Hafslund ASA and TGC-1. The share of profit of these companies is accounted for based on previous quarter information since updated interim information is not normally available. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 163 Annual Report 2013 Financial Statements EUR million Historical cost 1 January Translation differences and other adjustments Acquisitions Reclassifications Divestments Historical cost 31 December Equity adjustments to participations in associates and joint ventures 1 January Translation differences and other adjustments Share of profits of associates Reclassifications Divestments Dividends received OCI items associated companies Equity adjustments 31 December Total 2013 2012 1,683 1,637 -97 - -6 -49 41 10 -5 - 1,531 1,683 296 -12 105 6 -16 -50 45 374 377 -8 23 5 - -45 -56 296 1,905 1,979 The carrying amount of investments in associated companies at the end of 2013 was EUR 1,905 million (2012: 1,979). Fortum owns shares in three (2012: three) companies classified as joint ventures. The total carrying value of these joint ventures was EUR 59 million (2012: 54). 20.1 Investments There were no material investments in associated companies or joint ventures during 2013. In December 2012 Turun Seudun Energiantuotanto Oy increased the company’s share capital by EUR 20 million of which Fortum’s share is EUR 10 million. The additional participation was recognised and paid in December 2012. 20.2 Divestments In June 2013, Fortum agreed to sell its 47.9% ownership in the Swedish energy company Härjeåns Kraft AB to the Finnish energy company Oy Herrfors Ab, a subsidiary of the Katternö Group. The sales price was SEK 445 million (approximately EUR 51 million). The transaction was completed in July and a capital gain of EUR 17 million was booked to Distribution segment's third quarter results. In July 2013 Fortum completed the divestment of its 33% holding in Infratek ASA to a fund managed by Triton. The sales price was NOK 295 million (approximately EUR 38 million). A capital gain of EUR 11 million was booked in the Power segment's third quarter results. There were no material divestments of shares in associated companies during 2012. 20.3 Share of profits from associates Fortum's share of profit for the full year 2013 amounted to 105 million (2012: 23), of which Hafslund represented EUR 31 million (2012: -20), TGC-1 EUR 46 million (2012: 27) and Gasum EUR 8 million (2012: 15). Share of profits from associates also includes Fortum's share of its nuclear associates Teollisuuden Voima Oyj, Forsmark Kraftgrupp AB and OKG AB EUR 21 million (2012: -6), of which EUR 17 million (2012: 1) is due to accounting of nuclear related assets and liabilities. See Note 30 Nuclear related assets and liabilities. In 2012 the share of profit from Hafslund included EUR -25 million related to extraordinary write-downs and provisions on BioWood Norway AS, Bio-El Fredrikstad and an ongoing tax dispute and EUR 7 million loss in relation to Hafslund's divestment of REC shares. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 164 Annual Report 2013 Financial Statements 20.4 Dividends received During 2013 Fortum has received EUR 50 million (2012: 45) in dividends from associates of which EUR 21 million (2012: 22) was received from Hafslund, EUR 12 million (2012: 10) from Gasum and EUR 4 million (2012: 4) from Infratek ASA. 20.5 Principal associated companies EUR million Company Kemijoki Oy Teollisuuden Voima Oyj (TVO) OKG AB Forsmark Kraftgrupp AB Gasum Oy Territorial Generating Company 1 (TGC-1) Hafslund ASA Others Total Segment Domicile 2013 2012 2013 2012 Participation % Carrying amount in Group Power Power Power Power Heat Russia Other Finland Finland Sweden Sweden Finland Russia Norway 18 26 46 26 31 26 34 18 26 46 26 31 26 34 215 284 184 78 116 463 323 242 223 270 142 112 121 476 334 301 1,905 1,979 Fortum owns 63.8% of the hydro shares and 15.4% of the monetary shares in Kemijoki Oy. Each owner of hydro shares is entitled to the hydropower production in proportion to its hydro shareholding. Fortum's total ownership is 17.5% of the share capital. Since Fortum has significant influence due to its representation on the Board of Directors and participation in policy-making processes, Kemijoki Oy is accounted for as an associated company. TVO has three series of shares which entitle the shareholders to electricity produced in the different power plants owned by TVO. Series A entitles to electricity produced in nuclear power plants Olkiluoto 1 and 2, series B entitles to electricity in the nuclear power plant presently being built, Olkiluoto 3, and series C entitles to electricity produced in TVO’s share of the thermal power plant Meri-Pori. The Meri-Pori power plant is a jointly controlled asset between Fortum and TVO. Fortum accounts for its 54.55% of the assets and TVO for 45.45%. Fortum owns, through its Swedish subsidiaries, 45.5% of the shares in OKG AB and 25.5% of the shares in Forsmark Kraftgrupp AB. Each owner is entitled to electricity produced in proportion to its shareholding. Excluding non-controlling interests in the subsidiaries, Fortum’s participation in the associated companies are 43.4% and 22.2% respectively, which reflects the share of electricity produced that Fortum can sell further to the market. The minority part of the electricity purchased is invoiced further to each minority owner according to their respective shareholding and treated as pass-through. See also Jointly controlled assets in Note 19 Property, plant and equipment. Market value, based on market quotations of Fortum's shareholding in the listed principal associated companies on 31 December 2013 (Hafslund ASA and TGC-1) was EUR 514 million (2012: 581), of which Hafslund was EUR 369 million (2012: 412) and TGC-1 was EUR 145 million (2012: 169). The market quotation for the TGC-1 share is affected by the low liquidity of the TGC-1 shares in the Russian stock exchanges. During 2013 trading volumes of TGC-1 shares in relation to the number of shares of the company were approximately 10% in Russian stock exchanges. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 165 Annual Report 2013 Financial Statements Assets, liabilities, sales and profit and loss as presented by the Group's principal associates EUR million Company Kemijoki Oy 1) 3) Teollisuuden Voima Oyj 1) 2) OKG AB 1) 3) Forsmark Kraftgrupp AB 1) 3) Gasum Oy 2) Territorial Generating Company 1 (TGC-1) 2) Hafslund ASA 2) Domicile Assets Liabilities Sales Profit/ Loss Ownership, % Votes, % Finland Finland Sweden Sweden Finland Russia Norway 462 6,725 2,620 2,573 731 3,245 2,869 366 5,257 2,088 2,005 341 1,159 1,992 41 285 606 752 855 1,153 1,175 -8 37 6 0 22 99 69 18 26 46 26 31 26 34 18 26 46 26 31 26 33 1) Power plants are often built jointly with other power producers. Under the consortium agreements, each owner is entitled to electricity in proportion to its share of ownership or other agreements and each owner is liable for an equivalent portion of costs. The associated companies are not profit making, since the owners purchase electricity at production cost including interest cost and production taxes. See also Note 11 Materials and services. 2) Based on September 2013 figures. 3) Based on December 2012 figures. 20.6 Transactions and balances Associated company transactions EUR million Sales to associated companies Interest on associated company loan receivables Purchases from associated companies 2013 2012 3 27 626 5 41 652 Purchases from associated companies include mainly purchases of nuclear and hydro power at production cost including interest costs and production taxes. See Note 11 Materials and services. Associated company balances EUR million Receivables from associated companies Long-term interest-bearing loan receivables Trade receivables Other receivables Liabilities to associated companies Long-term loan payables Trade payables Other payables 2013 2012 1,415 1,332 14 19 248 12 2 10 9 234 21 6 Long-term interest-bearing receivables are mainly receivables from Swedish nuclear companies, OKG AB and Forsmark Kraftgrupp AB, EUR 1,312 million (2012: 1,249). Investments in Swedish nuclear companies are financed through loans from owners of the nuclear companies, pro rata ownership. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 166 Annual Report 2013 Financial Statements Transactions and balances with joint ventures EUR million Sales to joint ventures Interest on joint venture loan receivables Purchases from joint ventures Receivables from joint ventures Other payables to joint ventures 2013 63 2 20 51 0 2012 118 - 27 49 2 There is a decrease in sales in 2013 since the comparative 2012 figures include a sales of inventory to Turun Seudun Energiantuotanto Oy (TSE). Receivables from joint ventures included long-term interest-bearing loan receivables of EUR 37 million (2012: 38). See Note 8 Acquisitions and disposals for information regarding the sale of Fortum Heat Naantali Oy shares to TSE. 21 Other non-current assets 21 Other non-current assets EUR million Available for sale financial assets Other Total 2013 2012 31 44 75 32 37 69 Available for sale financial assets, i.e. shares which are not classified as associated companies or joint ventures, consist mainly of shares in unlisted companies of EUR 30 million (2012: 31), for which the fair value can not be reliably determined. These assets are measured at cost less possible impairment. Available for sale financial assets include listed shares at fair value of EUR 1 million (2012: 1). The cumulative fair value change booked in Fortum's equity was EUR -3 million (2012: -3). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 167 Annual Report 2013 Financial Statements 22 Long-term and short-term interest-bearing receivables 22 Long-term and short-term interest-bearing receivables EUR million Long-term loan receivables Finance lease receivables Total long-term interest-bearing receivables Other short-term interest-bearing receivables Total short-term interest-bearing receivables 1) Total 2013 1,461 2 1,463 6 6 2012 1,381 3 1,384 9 9 1,469 1,393 1) Included in trade and other receivables in the balance sheet, see Note 24. Long-term loan receivables include receivables from associated companies EUR 1,415 million (2012: 1,332), mainly from Swedish nuclear companies, OKG AB and Forsmark Kraftgrupp AB, EUR 1,312 million (2012: 1,249). These companies are mainly funded with shareholder loans, pro rata each shareholder’s ownership. The increase is related to investments made according to plan in OKG AB and Forsmark Kraftgrupp AB. Long-term loan receivables from associated companies also include receivables from the Finnish nuclear company Teollisuuden Voima Oyj (TVO) amounting to EUR 85 million (2012: 58). Olkiluoto 3, the nuclear power plant being built by TVO, is funded through external loans, share issues and shareholder loans according to shareholders' agreement between the owners of TVO. In March 2009, TVO’s shareholders committed to provide a EUR 300 million subordinated shareholders' loan to TVO. The facility will be available until the end of 2015. Fortum’s share of this commitment is at maximum EUR 75 million of which EUR 25 was outstanding at end of December 2013. In March 2012 a new subordinated shareholder loan was given to fund planning of Olkiluoto 4, where Fortum´s share of the commitment is EUR 72 million of which EUR 15 million was outstanding at end of December 2013. In June 2013, TVO’s shareholders committed to provide additional EUR 300 million subordinated shareholders' loan related to Olkiluoto 3. The facility will be available until the end of 2018. Fortum’s share of this commitment is at maximum EUR 75 million. At the end of December 2013 no drawdowns were done on this facility. For further information regarding credit risk management, see Note 3.8 Credit risk. Interest-bearing receivables Repricing 1-5 years Over 5 years EUR million Long-term loan receivables Finance lease receivables Total long-term interest-bearing receivables 1) Other short- term interest-bearing receivables Total interest-bearing receivables Effective interest rate, % Carrying amount 2013 2.5 8.5 1,466 2 Under 1 year 1,444 - 2.5 1,468 1,444 0.8 2.5 1 1 1,469 1,445 11 - 11 - 11 Fair value 2013 1,505 4 Carrying amount 2012 1,389 3 Fair value 2012 1,440 5 11 2 13 1,509 1,392 1,445 - 13 1 1 1 1,510 1,393 1,446 1) Including current portion of long-term receivables EUR 5 million (2012: 8). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 168 Annual Report 2013 Financial Statements 23 Inventories 23 Inventories Accounting policies Inventories mainly consist of fuels consumed in the production process or in the rendering of services. Inventories are stated at the lower of cost and net realisable value being the estimated selling price for the end product, less applicable variable selling expenses and other production costs. Cost is determined using the first-in, first-out (FIFO) method. Inventories which are acquired primarily for the purpose of trading are stated at fair value less selling expenses. EUR million Nuclear fuel Coal Oil Biofuels Other inventories Total No write downs have been booked related to inventories during 2013 or 2012. 24 Trade and other receivables 24 Trade and other receivables 2013 109 74 44 55 93 375 2012 91 140 46 74 77 428 Accounting policies Trade receivables are recorded at their fair value. A provision for impairment of trade receivables is established when there is evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy or financial reorganisation, and default or delinquency in payments are considered as indicators that the receivable is impaired. The amount of the impairment charge is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows. Trade receivables include revenue based on an estimate of electricity, heat, cooling and distribution of electricity already delivered but not yet measured and not yet invoiced. EUR million Trade receivables Income tax receivables Accrued interest income Accrued income and prepaid expenses Other receivables Short-term finance lease receivables Other short-term interest-bearing receivables Moved to assets held for sale Total 2013 771 98 14 40 161 0 6 -42 1,048 2012 914 110 1 44 192 0 9 - 1,270 The management considers that the carrying amount of trade and other receivables approximates their fair value. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 169 Annual Report 2013 Financial Statements 24.1 Trade receivables Ageing analysis of trade receivables EUR million Not past due Past due 1-90 days Past due 91-180 days Past due more than 181 days Total 2013 2012 Gross 725 39 10 83 857 Impaired 2 2 2 80 86 Gross 865 45 9 68 987 Impaired 2 6 1 64 73 Impairment losses recognised in the income statement were EUR 24 million (2012: 14), of which EUR 18 million (2012: 8) are impairment losses recognised in the OAO Fortum Group. On 31 December 2013, trade receivables of EUR 86 million (2012: 73) are impaired and provided for, of which EUR 73 million (2012: 63) refers to the OAO Fortum Group. For information regarding impairment losses by segment, see Note 5 Segment reporting. Trade receivables by currency EUR million EUR SEK RUB NOK PLN Other Total 2013 2012 219 381 173 30 31 23 857 242 463 180 37 36 29 987 Trade receivables are arising from a large number of customers mainly in EUR, SEK and RUB mitigating the concentration of risk. On 31 December 2013 bank guarantees held as collaterals for trade receivables amounted to EUR 0.3 million (2012: 0.1). For further information regarding credit risk management and credit risks, see Counterparty risks in the Operating and financial review and Note 3.8 Credit risk. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 170 Annual Report 2013 Financial Statements 25 Cash and cash equivalents 25 Cash and cash equivalents Accounting policies Liquid funds include cash and cash equivalents such as cash in hand, deposits held at call with banks and other short-term, highly liquid investments with maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. EUR million Cash at bank and in hand Bank deposits with maturity under 3 months Cash and cash equivalents Cash and cash equivalents moved to assets held for sale Total 2013 1,240 29 1,269 -15 1,254 2012 858 105 963 - 963 Bank deposits include bank deposits held by OAO Fortum amounting to EUR 101 million (2012: 105). At the year end 2013 OAO Fortum’s deposits included EUR 58 million in euros and EUR 43 million in Russian roubles. The funds in OAO Fortum are committed to the ongoing investment program. The bank deposits in euros held by OAO Fortum are hedging future payments in euros. For further information regarding credit risk management and credit risks, see Counterparty risks in the Operating and financial review and Note 3.8 Credit risk. 26 Share capital 26 Share capital Accounting policies Where any group company purchases the Company's shares (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company's equity holders until cancelled or reissued. When such shares are subsequently sold or reissued, any consideration received is included in equity. EUR million Registered shares at 1 January Registered shares at 31 December 2013 2012 Number of shares 888,367,045 888,367,045 Share capital 3,046 3,046 Number of shares 888,367,045 888,367,045 Share capital 3,046 3,046 Fortum Oyj has one class of shares. By the end of 2013, a total of 888,367,045 shares had been issued. The nominal value of one share is EUR 3.40 and each share entitles the holder to one vote at the Annual General Meeting. All shares entitle holders to an equal dividend. At the end of 2013 Fortum Corporation’s share capital, paid in its entirety and entered in the trade register, was EUR 3,046,185,953.00. The registered share capital exceeds the aggregate nominal value of the issued shares due to the cancellations of the company’s own shares in 2006 and 2007 (in total 7,570,000 shares) without decreasing the share capital. Fortum Corporation's shares are listed on NASDAQ OMX Helsinki. The trading code is FUM1V. Fortum Corporation's shares are in the Finnish book entry system maintained by Euroclear Finland Ltd. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 171 Annual Report 2013 Financial Statements Details on the President and CEO and other members of the Fortum Management Team's shareholdings and interest in the equity incentive schemes is presented in Note 12 Employee benefits. A description of shares, share capital and shareholders in Fortum is shown in the Operating and financial review. 26.1 Treasury shares At the end of 2013, Fortum Corporation did not own its own shares and the Board of Directors of Fortum Corporation has no unused authorisations from the General Meeting of shareholders to repurchase the company’s own shares. 26.2 Convertible bond loans, bonds with warrants and unused authorisations Fortum Corporation has not issued any convertible bonds or bonds with attached warrants, which would entitle the bearer to subscribe for Fortum shares. The Board of Directors of Fortum Corporation has no unused authorisations from the General Meeting of shareholders to issue convertible bond loans or bonds with warrants or increase the company's share capital. 27 Non-controlling interests 27 Non-controlling interests Principal non-controlling interests EUR million AB Fortum Värme Holding samägt med Stockholms stad Group OAO Fortum Group Tartu Energi Group Other Total Sweden Russia Estonia 2013 538 59 21 20 638 2012 494 64 20 25 603 Fortum owns, via Fortum Power and Heat AB, 90.1% of the shares which represents 50.1% of the votes in AB Fortum Värme Holding samägt med Stockholms stad. 9.9% of the shares are owned by the City of Stockholm. The City of Stockholm holds preference shares in AB Fortum Värme Holding samägt med Stockholms stad, which entitles them 50% of the economical output. The ownership and administration of AB Fortum Värme Holding samägt med Stockholms stad is settled by a consortium agreement. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 172 Annual Report 2013 Financial Statements 28 Interest-bearing liabilities 28 Interest-bearing liabilities Accounting policies Borrowings are recognised initially at fair value less transaction costs incurred. In subsequent periods, they are stated at amortised cost; any difference between proceeds (net of transaction costs) and the redemption value is recognised as interest cost over the period of the borrowing using the effective interest method. Borrowings or portion of borrowings being hedged with a fair value hedge are recognised at fair value. 2012 5,342 869 23 1,465 7,699 499 114 31 2 228 204 1,078 8,777 - 8,777 Fair value 2012 6,239 1,062 EUR million Bonds Loans from financial institutions Finance lease liabilities Other long-term interest-bearing debt Total long-term interest-bearing debt Current portion of long-term bonds Current portion of loans from financial institutions Current portion of other long-term interest-bearing debt Current portion of financial lease liabilities Commercial papers Other short-term interest-bearing debt Total short-term interest bearing debt Total interest-bearing debt Interest-bearing liabilities moved to assets held for sale Total Interest-bearing debt 1) 2013 4,736 752 21 1,467 6,976 1,103 106 59 2 718 154 2,142 9,118 -20 9,098 EUR million Bonds Loans from financial institutions Other long-term interest- bearing debt 2) Total long-term interest- bearing debt 3) Commercial papers Other short-term interest- bearing debt Total short-term interest- bearing debt Total interest-bearing debt 4) Effective interest rate, % 3.7 3.3 1.2 3.2 0.8 0.4 0.7 3.0 Carrying amount 2013 5,839 858 Repricing Under 1 year 2,017 584 1-5 years 1,483 72 Over 5 years 2,339 202 Fair value 2013 6,232 916 Carrying amount 2012 5,841 983 1,549 1,545 - 4 1,572 1,521 1,566 8,246 718 154 872 4,146 718 154 872 1,555 2,545 - - 0 - - 0 8,720 719 154 873 8,345 228 204 432 8,867 228 204 432 9,118 5,018 1,555 2,545 9,593 8,777 9,299 1) Including interest-bearing liabilities, EUR 20 million, in Liabilities related to assets held for sale at 31 December 2013 (2012: 0). 2) Includes loans from State Nuclear Waste Management Fund and Teollisuuden Voima Oyj EUR 995 million (2012: 940), financial leases EUR 23 million (2012: 25), loans from Finnish pension institutions EUR 198 million (2012: 228) and other loans EUR 333 million (2012: 328). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 173 Annual Report 2013 Financial Statements 3) Including current portion of long-term debt. 4) The average interest rate on loans and derivatives on 31 December 2013 was 3.6% (2012: 4.5%). The interest-bearing debt increased in 2013 by EUR 341 million to EUR 9,118 million (2012: 8,777). The amount of short-term financing increased with EUR 440 million, and at the end of the year the amount of short term financing was EUR 872 million (2012: 432). On 13 March 2013, Fortum issued two 5 year bonds under its existing Euro Medium Term Note programme. The total nominal value of the bonds is SEK 3,150 million (about EUR 376 million) consisting of SEK 2,000 million at floating rate and SEK 1,150 million at 2.75% fixed interest rate. In April Fortum increased the amount of re-borrowing from the Finnish nuclear waste fund and Teollisuuden Voima by EUR 55 million to EUR 995 million. In the second quarter Fortum issued three new bonds: one 30 year EUR 100 million bond at fixed interest rate 3.5% and two SEK denominated bonds of 1 billion each (in total about EUR 231 million) at floating rate maturing 2018 and 2023. In June the amount of Fortum's Revolving Credit Facility (RCF) was lowered from EUR 2.5 billion to EUR 2.0 billion. The amount of the facility is EUR 2 billion until July 2016 and EUR 1.9 billion until July 2017. During the third quarter OAO Fortum repaid bilateral loans of RUB 3,057 million (approximately EUR 72 million). During the last quarter Fortum repaid a maturing EUR 500 million bond. For more information please see Note 3 Financial risk management, Note 35 Pledged assets and Note 38 Contingent liabilities. 28.1 Bond issues Issued/Maturity Fortum Oyj EUR 8,000 million EMTN Programme 1) Interest basis Interest rate, % Effective interest, % Currency Nominal million 2006/2016 2007/2014 2009/2014 2009/2014 2009/2017 2009/2019 2010/2015 2010/2015 2011/2021 2012/2017 2012/2017 2012/2022 2013/2018 2013/2018 2013/2023 2013/2043 Total outstanding carrying amount 31 December 2013 1) EMTN = Euro Medium Term Note Fixed Fixed Fixed Fixed Fixed Fixed Floating Fixed Fixed Floating Fixed Fixed Fixed Floating Floating Fixed 4.615 4.764 4.714 5.400 6.240 6.095 3.235 4.123 3.260 2.344 2.855 4.500 4.700 4.625 5.250 6.125 6.000 Stibor 3M+0.95 3.125 4.000 Stibor 3M+1.2 3.250 2.250 2.750 Stibor 3M+1.0 Stibor 3M+1.13 3.500 3.719 EUR SEK EUR NOK NOK EUR SEK SEK EUR SEK SEK EUR SEK 750 2,600 750 500 500 750 3,100 3,100 500 1,000 1,750 1,000 1,150 SEK 3,000 SEK EUR 1,000 100 Carrying amount EUR million 748 293 750 60 60 745 350 350 530 113 197 967 129 338 113 96 5,839 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 174 Annual Report 2013 Financial Statements 28.2 Finance lease liabilities On 31 December 2013 Fortum had a small number of finance lease agreements for machinery and equipment. Present value of finance lease liabilities EUR million Minimum lease payments Less future finance charges Total Maturity of minimum lease payments EUR million Less than 1 year 1-5 years Over 5 years Total Maturity of finance lease liabilities EUR million Less than 1 year 1-5 years Over 5 years Total 2013 2012 24 1 23 28 3 25 2013 2012 2 22 - 24 3 25 - 28 2013 2012 2 21 - 23 2 23 - 25 29 Deferred income taxes 29 Deferred income taxes Accounting policies The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the closing date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax assets are set off against deferred tax liabilities if they relate to income taxes levied by the same taxation authority. Deferred tax is provided on temporary differences arising from investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group, and it is probable that the temporary difference will not reverse in the foreseeable future. Critical accounting estimates: Assumptions and estimates regarding future tax consequences Fortum has deferred tax assets and liabilities which are expected to be realised through the income statement over the extended periods of time in the future. In calculating the deferred tax items, Fortum is required to make certain assumptions and estimates regarding the future tax consequences attributable to differences between the carrying amounts of assets and liabilities as recorded in the financial statements and their tax basis. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 175 Annual Report 2013 Financial Statements Assumptions made include the expectation that future operating performance for subsidiaries will be consistent with historical levels of operating results, recoverability periods for tax loss carry-forwards will not change, and that existing tax laws and rates will remain unchanged into foreseeable future. Fortum believes that it has prudent assumptions in developing its deferred tax balances. The Group recognises liabilities for anticipated tax dispute issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. If the actual final outcome (regarding tax disputes) would differ negatively from management's estimates with 10%, the Group would need to increase the income tax liability by EUR 36 million. The movement in deferred tax assets and liabilities during 2013 EUR million Deferred tax assets Property, plant and equipment Provisions Tax losses and tax credits carry-forward Pension obligations Other Total deferred tax assets Offset against deferred tax liabilities Net deferred tax assets Deferred tax liabilities Property, plant and equipment Derivative financial instruments Other Total deferred tax liabilities Offset against deferred tax assets Net deferred tax liabilities 1 Jan 2013 17 42 80 29 43 211 -34 177 1,840 29 44 1,913 -34 1,879 Charged to income state- ment Charged to other compre- hensive income Exchange rate differ- ences reclassi- fications and other changes Acqui- sitions, disposals and assets held for sale 2 -18 - 2 -14 -28 2 -26 -53 9 -2 -46 2 -44 - - - -19 - -19 -19 - 9 - 9 - 9 - - - - -2 -2 -2 -55 - - -55 - -55 31 Dec 2013 19 24 80 12 27 162 -32 130 - - - - - 0 0 -141 1,591 - - -141 - -141 47 42 1,680 -32 1,648 Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. Deferred income tax liabilities of EUR 7 million (2012: 8) have been recognised for the withholding tax and other taxes that would be payable on the all unremitted earnings of Estonian subsidiaries. Unremitted earnings from these companies totalled EUR 32 million on 31 December 2013 (2012: 26). Deferred tax assets and liabilities from acquisitions, disposals and assets held for sale in 2013 relate to the sale of Fortum Sähkönsiirto Oy and Fortum Espoo Distribution Oy shares in 2014. See Note 9 Assets held for sale. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 176 Annual Report 2013 Financial Statements The movement in deferred tax assets and liabilities during 2012 Charged to income state- ment Charged to other compre- hensive income Exchange rate differ- ences reclassi- fications and other changes Acqui- sitions, disposals and assets held for sale -4 -1 -4 0 1 -8 6 -2 -179 2 40 -137 6 -131 - - - 4 - 4 - 4 - -39 - -39 - -39 - - - - - - - 0 58 - - 58 - 58 - - - - - 0 - 0 -6 - - -6 - -6 1 Jan 2012 21 43 84 25 42 215 -40 175 1,967 66 4 2,037 -40 1,997 31 Dec 2012 17 42 80 29 43 211 -34 177 1,840 29 44 1,913 -34 1,879 EUR million Deferred tax assets Property, plant and equipment Provisions Tax losses and tax credits carry-forward Pension obligations Other Total deferred tax assets Offset against deferred tax liabilities Net deferred tax assets Deferred tax liabilities Property, plant and equipment Derivative financial instruments Other Total deferred tax liabilities Offset against deferred tax assets Net deferred tax liabilities Deferred income tax assets are recognised for tax loss carry-forward to the extent that realisation of the related tax benefit through future profits is probable. The recognised tax assets relate to losses carry-forward with no expiration date and partly with expiry date as described below. Deferred income tax assets recognised for tax loss carry-forwards EUR million Losses without expiration date Losses with expiration date Total 2013 2012 Tax losses 6 320 327 Deferred tax asset 2 78 80 Tax losses 10 262 272 Deferred tax asset 3 78 81 Deferred tax assets of EUR 47 million (2012: 31) have not been recognised in the consolidated financial statements, because the realisation is not probable. The major part of the unrecognised tax asset relates to loss carry-forwards that are unlikely to be used in the foreseeable future. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 177 Annual Report 2013 Financial Statements 30 Nuclear related assets and liabilities 30 Nuclear related assets and liabilities Accounting policies Fortum owns Loviisa nuclear power plant in Finland. Fortum's nuclear related provisions and the related part of the State Nuclear Waste Management Fund are both presented separately in the balance sheet. Fortum's share in the State Nuclear Waste Management Fund is accounted for according to IFRIC 5, Rights to interests arising from decommissioning, restoration and environmental rehabilitation funds which states that the fund assets are measured at the lower of fair value or the value of the related liabilities since Fortum does not have control or joint control over the State Nuclear Waste Management Fund. The Nuclear Waste Management Fund is managed by governmental authorities. The related provisions are the provision for decommissioning and the provision for disposal of spent fuel. The fair values of the provisions are calculated according to IAS 37 by discounting the separate future cash flows, which are based on estimated future costs and actions already taken. The initial net present value of the provision for decommissioning (at the time of commissioning the nuclear power plant) has been included in the investment cost and is depreciated over the estimated operating time of the nuclear power plant. Changes in the technical plans etc., which have an impact on the future cash flow of the estimated costs for decommissioning, are accounted for by discounting the additional costs to the current point in time. The increased asset retirement cost due to the increased provision is added to property, plant and equipment and depreciated over the remaining estimated operating time of the nuclear power plant. The provision for spent fuel covers the future disposal costs for fuel used until the end of the accounting period. Costs for disposal of spent fuel are expensed during the operating time based on fuel usage. The impact of the possible changes in the estimated future cash flow for related costs is recognised immediately in the income statement based on the accumulated amount of fuel used until the end of the accounting period. The related interest costs due to unwinding of the provision, for the period during which the spent fuel provision has been accumulated and present point in time, are also recognised immediately in the income statement. The timing factor is taken into account by recognising the interest expense related to discounting the nuclear provisions. The interest on the State Nuclear Waste Management Fund assets is presented as financial income. Fortum's actual share of the State Nuclear Waste Management Fund, related to Loviisa nuclear power plant, is higher than the carrying value of the Fund in the balance sheet. The legal nuclear liability should, according to the Finnish Nuclear Energy Act, be fully covered by payments and guarantees to the State Nuclear Waste Management Fund. The legal liability is not discounted while the provisions are, and since the future cash flow is spread over 100 years, the difference between the legal liability and the provisions are material. The annual fee to the Fund is based on changes in the legal liability, the interest income generated in the State Nuclear Waste Management Fund and incurred costs of taken actions. Fortum also has minority shareholdings in the associated nuclear power production companies Teollisuuden Voima Oyj (TVO) in Finland and directly and indirectly in OKG AB and Forsmarks Kraftgrupp AB in Sweden. The Group’s interests in associated companies are accounted for by the equity method. Accounting policies of the associates regarding nuclear assets and liabilities have been changed where necessary to ensure consistency with the policies adopted by the Group. Critical accounting estimates: Assumptions made when estimating provisions related to nuclear production The provision for future obligations for nuclear waste management including decommissioning of Fortum's nuclear power plant and related spent fuel is based on long-term cash flow forecasts of estimated future costs. The main assumptions are technical plans, timing, cost estimates and discount rate. The technical plans, timing and cost estimates are approved by governmental authorities. Any changes in the assumed discount rate would affect the provision. If the discount rate used would be lowered, the provision would increase. Fortum has contributed cash to the State Nuclear Waste Management Fund based on a non-discounted legal liability, which leads to that the increase in provision would be offset by an increase in the recorded share of Fortum's part of the State Nuclear Waste Management Fund in the balance sheet. The total effect on the income statement would be positive since the decommissioning part of the provision is treated as an asset retirement obligation. This situation will prevail as long as the legal obligation to contribute cash to the State Nuclear Waste Management Fund is based on a non-discounted liability and IFRS is limiting the carrying value of the assets to the amount of the provision since Fortum does not have control or joint control over the fund. Based on the Nuclear Energy Act in Finland, Fortum has a legal obligation to fully fund the legal liability decided by the governmental authorities, for decommissioning of the power plant and disposal of spent fuel through the State Nuclear Waste Management Fund. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 178 Annual Report 2013 Financial Statements EUR million Amounts recognised in the balance sheet Nuclear provisions Share in the State Nuclear Waste Management Fund Legal liability and actual share of the State Nuclear Waste Management Fund Liability for nuclear waste management according to the Nuclear Energy Act Funding obligation target Fortum's share of the State Nuclear Waste Management Fund 2013 2012 744 744 1,059 1,039 1,005 678 678 996 996 956 30.1 Nuclear related provisions According to the renewed Nuclear Energy Act Fortum submitted the proposal for the nuclear waste management liability regarding the Loviisa nuclear power plant to the Ministry of Employment and the Economy at the end of June 2013. The legal liability is calculated according to the Nuclear Energy Act in Finland and is decided by the Ministry of Employment and the Economy in December every year. The liability is based on a technical plan, which is made every third year. Following the update of technical plan in 2013, the discounted liability increased due to updated cost estimates related to interim and final storage of spent fuel. The legal liability by the end of 2013, decided by the Ministry of Employment and the Economy and calculated according to the Nuclear Energy Act, is EUR 1,059 million (2012: 996). The carrying value of the nuclear provisions in the balance sheet, calculated according to IAS 37, have increased by EUR 66 million compared to 31 December 2012, totaling EUR 744 million on 31 December 2013. The main reason for the difference between the carrying value of the provision and the legal liability is the fact that the legal liability is not discounted to net present value. See also Note 19 Property, plant and equipment. Nuclear provisions EUR million 1 January Additional provisions Used during the year Unwinding of discount 31 December Fortum's share in the State Nuclear Waste Management Fund 2013 678 51 -20 35 744 744 2012 653 10 -21 36 678 678 30.2 Fortum's share in the State Nuclear Waste Management Fund According to the Nuclear Energy Act, Fortum is obligated to contribute the funds in full to the State Nuclear Waste Management Fund to cover the legal liability. Based on the law, Fortum applied for periodising of the payments to the fund over three years, due to proposed increase in the legal liability. The application was approved by the Ministry ot the Employment and the Economy in December 2013. The Fund is from an IFRS perspective overfunded with EUR 261 million (2012: 278), since Fortum's share of the Fund on 31 December 2013 is EUR 1,005 million (2012: 956) and the carrying value in the balance sheet is EUR 744 million (2012: 678). Operating profit for 2013 includes a positive total adjustment of EUR 23 million (2012: -31), since the carrying value of the provisions has increased more than the fund. These adjustments are recognised in "Items affecting comparability" and are not included in comparable operating profit in the Power segment, see Note 5 Segment reporting and Note 6 Items affecting comparability. As long as the Fund stays overfunded from an IFRS perspective, positive accounting effects to operating profit will always occur when the nuclear provision is increasing more than the net payments to the Fund. Negative accounting effects will occur when the net payments to the Fund are higher than the increase of the provision. 30.2.1 Funding obligation target The funding obligation target for each year is decided by the Ministry of Employment and the Economy in December each year after the legal liability has been decided. The difference between the funding obligation target for Fortum and Fortum's actual share of the State Nuclear Waste Management Fund is paid in Q1 each year. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 179 Annual Report 2013 Financial Statements The funding obligation target, corresponding to the new legal liability and the approved periodisation amounts to EUR 1,039 million (2012: 996). Real estate mortgages and other securities given also cover unexpected events according to the Nuclear Energy Act. See also Note 35 Pledged assets and Note 38 Contingent liabilities. 30.3 Borrowing from the Finnish State Nuclear Waste Management Fund Finnish participants in the State Nuclear Waste Management Fund are allowed to borrow from the Fund according to certain rules. Fortum uses the right to borrow back and has pledged Kemijoki Oy shares as security for the loans. The loans are renewed yearly. See also Note 28 Interest-bearing liabilities and Note 35 Pledged assets. 30.4 Associated companies Fortum has at year-end received updated cash flow information for its nuclear associated companies Teollisuuden Voima Oyj, OKG AB and Forsmarks Kraftgrupp AB. Based on the updated cost estimates, the effect in share of profits was EUR +17 million in 2013, which included EUR -5 million due to decrease of the carrying value of the State Nuclear Waste Management Fund in Finland. In 2012, the effect in share of profits was EUR +1 million, which included EUR -9 million due to decrease of the carrying value of the State Nuclear Waste Management Fund in Finland. The State Nuclear Waste Management Fund in Finland is overfunded whereas the value of the Swedish Nuclear Waste Fund is estimated to be slightly below the value of provisions at year-end 2013. Fortum has according to law given guarantees to the Finnish and Swedish nuclear Funds on behalf of the associated companies, to guarantee that sufficient funds exist to cover future expenses of decommissioning of the power plants and disposal of spent fuel. Through the shareholding in TVO, Fortum uses the right to borrow from the Fund. See also Note 38 Contingent liabilities. 31 Other provisions 31 Other provisions Accounting policies Provisions for environmental restorations, asset retirement obligations, restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events to a third party, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense. Environmental provisions Environmental provisions are recognised, based on current interpretation of environmental laws and regulations, when it is probable that a present obligation has arisen and the amount of such liability can be reliably estimated. Environmental expenditures resulting from the remediation of an existing condition caused by past operations, and which do contribute to current or future revenues, are expensed as incurred. Asset retirement obligations Asset retirement obligation is recognised either when there is a contractual obligation towards a third party or a legal obligation and the obligation amount can be estimated reliably. Obligating event is e.g. when a plant is built on a leased land with an obligation to dismantle and remove the asset in the future or when a legal obligation towards Fortum changes. The asset retirement obligation is recognised as part of the cost of an item of property and plant when the asset is put in service or when contamination occurs. The costs will be depreciated over the remainder of the asset's useful life. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 180 Annual Report 2013 Financial Statements Restructuring provisions A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing activities of the entity. Restructuring provisions comprise mainly of employee termination payments and lease termination costs. EUR million 1 January Provisions for the period Provisions used Provisions reversed Unwinding of discount Exchange rate differences 31 December Of which current provisions 1) Of which non-current provisions 2013 Environ- mental Other 12 1 -2 0 0 0 11 0 11 24 10 -12 -9 0 -1 12 3 9 CSA pro- vision 178 - -24 -48 12 -15 103 20 83 CSA pro- vision 180 - -23 - 15 6 178 - 178 Total 214 11 -38 -57 12 -16 126 23 103 2012 Environ- mental 12 0 0 0 0 0 12 6 6 Other 17 15 -7 -2 0 1 24 1 23 Total 209 15 -30 -2 15 7 214 7 207 1) Included in trade and other payables in the balance sheet, see note 34. Fortum's extensive investment programme in Russia is subject to possible penalties that can be claimed if the new capacity is substantially delayed or agreed major terms of the capacity supply agreement (CSA) are not otherwise fulfilled. The remaining provision is assessed at each balance sheet date and the assessment is based on changes in estimated risks and timing related to commissioning of the remaining power plants in the investment programme. During 2013 EUR 48 million of the provision was reversed to the income statement after the finalisation of the two greenfield power plant investments, i.e. Nyagan 1 and Nyagan 2. The remaining provision for possible penalties amounts to EUR 103 million (Dec 31 2012: 178) including EUR 20 million covering the remaining penalties to be paid in 2014 regarding the delay of Nyagan 2. Paid penalties during 2013 amounted to EUR 24 million (2012: 23). The provision increases due to unwinding of the discounting of potential future penalty payments, which during 2013 resulted in an increase of the provision with EUR 12 million (2012: 15). The unwinding effect is recognised in other financial expenses. Environmental provision relates to dismantling of buildings and structures on contaminated land. Main part of the provision is estimated to be used within ten years. Restructuring provisions, included in other provisions, amounts to EUR 2 million (2012: 1). Other provisions include also provisions for insurance payments, tax claims and provisions for onerous contracts. The other provisions are estimated to be used within two to five years. Regarding provisions for decommissioning and provision for disposal of spent fuel for nuclear production, see note 30. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 181 Annual Report 2013 Financial Statements 32 Pension obligations 32 Pension obligations Accounting policies The Group companies have various pension schemes in accordance with the local conditions and practises in the countries in which they operate. The schemes are generally funded through payments to insurance companies or Group’s pension fund as determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. The Group's contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate. For defined benefit plans, pension costs are assessed using the projected unit credit method. The cost of providing pensions is charged to the income statement as to spread the service cost over the service lives of employees. The net interest is presented in financial items and the rest of the income statement effect as pension cost. The defined benefit obligation is calculated annually on the balance sheet date and is measured as the present value of the estimated future cash flows using interest rates of high-quality corporate bonds that have terms to maturity approximating to the terms of the related pension liability. In countries where there is no deep market in such bonds, market yields on government bonds are used instead. The plan assets for pensions are valued at market value. The liability recognised in the balance sheet is the defined benefit obligation at the closing date less the fair value of plan assets. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss related to a curtailment is recognised immediately in profit or loss. Gains or losses on settlements of defined benefits plans are recognised when the settlement occurs. Critical accounting estimates: Assumptions used to determine future pension obligations The present value of the pension obligations is based on actuarial calculations that use several assumptions. Any changes in these assumptions will impact the carrying amount of pension obligations. Fortum's pension arrangements Finland In Finland the most significant pension plan is the Finnish Statutory Employment Pension Scheme (TyEL) in which benefits are directly linked to employees' earnings. These pensions are funded in insurance companies and treated as defined contribution plans. The benefits provided under TyEL are old age pensions, disability pensions, unemployment pensions and survivors' pensions. Certain Fortum employees in Finland have an additional pension coverage, certain level of benefit promised after retirement, through the company's own pension fund (Fortum Pension Fund) or through insurance companies. The additional pensions through insurance companies provide old age pension and funeral grant and Fortum Pension Fund is providing old age pension, early old age benefit, disability pension, survivor’s pension and funeral grant. The Fortum Pension Fund is a closed fund managed by a Board, consisting of both employer's and employees' representatives. The Fund is operating under regulation from Financial Supervisory Authority (FSA). The liability has to be fully covered according to the regulations. The national benefit obligation related to the defined benefit plans is calculated so that the promised benefit is fully funded until retirement. After retirement the benefits payables are indexed yearly with TyEL-index. The promised benefit is defined in the rules of the Fund, mostly 66% at a maximum of the salary basis.The salary basis is an average of ten last year's salaries, which are indexed with common salary index to accounting year. Sweden In Sweden the Group operates several defined benefit and defined contribution plans like the general ITP-pension plan and the PA-KL and PA- KFS plans that are eligible for employees within companies formerly owned by municipalities. The defined benefit plans are fully funded and have partly been financed through Fortum’s own pension fund and partly through insurance premiums. The pension arrangements comprise normal retirement pension, complementary retirement pensions, survivors' pension and disability pension. The most significant pension plan is the ITP-plan for white-collar employees in permanent employment (or temporary employees after a certain waiting period), who fulfill the age conditions. To qualify for a full pension the employee must have a projected period of pensionable service, from the date of entry until retirement age, of at least 30 years. The Swedish pension fund is managed by a Board, consisting of both employers' and employees' representatives. The fund is operating under regulation from Swedish Financial Supervisory Authority and the County Administrative Board and governed by Swedish law (no. 1967:531). The fund constitutes a security for the employer’s defined benefit pension plan liability and the fund has no obligations in relation to pension This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 182 Annual Report 2013 Financial Statements payments. The employer must have a credit insurance from PRI Pensionsgaranti Mutual Insurance Company for the liability. The liability must not be fully covered by the fund according to the regulations. The part of the ITP multiemployer pension plan that is secured by paying pension premiums to Alecta, in Fortum’s case the collective family pension, is accounted for as a defined contribution plan due to that there is no consistent and reliable basis to allocate assets or liabilities to the participating entities within the ITP insurance. The reason for this is that it is not possible to determine from the terms of the plan to which extent a surplus or a deficit will affect future contributions. Pension arrangements in other countries Pension arrangements in Russia and Poland include payments made to the state pension fund. These arrangements are treated as defined contribution plans. In addition the Russian and Polish companies participate in certain defined benefit plans, defined by collective agreements, which are unfunded and where the company meets the benefit payment obligation as it falls due. The benefits provided under these arrangements include, in addition to pension payments, one-time benefits paid in case of employee mortality or disability as well as lump sum payments for anniversary and financial support to honored workers and pensioners. The Norwegian companies are part of schemes that are common for municipalities in Norway. These are defined benefit pension plans and provide old age pensions, disability pension and survivor’s pension, including pension benefits from the National Insurance Scheme (Folketrygden). The schemes are fully funded within the rules set out in the Norwegian insurance legislation. In other countries the pension arrangements are done in accordance with the local legislation and practice, mostly being defined contribution plans. Main risks relating to defined benefit plans - Sweden and Finland Overall risks Sweden - As the pension fund is separated from the funding companies Fortum is not obliged to make additional contributions to the pension fund in any case of deficit. However if the assets decrease to a level lower than the liability according to Swedish GAAP, Fortum's credit insurance cost from PRI will increase. Finland - If the return of fund’s assets is not enough to cover the raise in liability and benefit payments over the financial year then the employer funds the deficit with contributions unless the fund has sufficient equity. Change in discount rate Sweden - The discount rate which is used to calculate the defined benefit obligation is derived from market rates on Swedish covered bonds with an equivalent duration to the pension obligation, and the company therefore has a risk in the development on the bond market. Should the market rates decrease then the liability increases. Finland - The discount rate which is used to calculate the defined benefit obligation (according to IFRS) depends on the value of corporate bond yields as at reporting date. A decrease in yields increases the benefit obligation that is offset by increase in the value of fixed income holdings. Investment and volatility risk Finland - The pension fund's board accepts yearly an Investment Plan, which is based on the external asset-liability analysis. The assets are allocated to stocks and stock funds, fixed income instruments and real estate. The investments are diversified into different asset classes and to different asset managers taking into account the regulation of the Financial Supervisory Authority. The real estate investments consist mainly of the Fortum headquarters, rented by Fortum Oyj. Risks relating to assumptions used Actuarial calculations use assumptions for future inflation and salary levels and longevity. Should the actual outcome differ from these assumptions, this might lead to higher liability. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 183 Annual Report 2013 Financial Statements Defined benefit obligation 2013 652 2012 581 Fair value of plan assets Net defined benefit asset(-)/liability(+) 2013 -500 2012 -460 2013 152 2012 121 Movement in the net defined benefit liability EUR million Balance at 1 January Included in profit or loss Current service cost Past service cost Settlements Curtailments Net interest 1) Included in OCI Remeasurement gains(+)/losses(-) Actuarial gains/losses arising from changes in demographic assumptions Actuarial gains/losses arising from changes in financial assumptions Actuarial gains/losses arising from experience adjustments Return on plan assets (excluding amounts included in net interest expense) Exchange rate differences Other Contributions paid by the employer Benefits paid Transfer of assets in to insurance company in Sweden 15 -42 18 -9 -55 -69 14 -15 -70 15 0 1 -1 20 35 47 59 -12 12 59 -22 -23 4 -14 -10 -22 -22 10 -12 -6 13 29 -16 -16 -21 -21 -9 -30 -6 12 Balance at 31 December 551 652 -486 -500 Present value of funded defined obligation Fair value of plan assets Funded status Present value of unfunded obligation 2) Net liability arising from defined benefit obligation Defined benefit obligations included in the non-current liabilities Defined benefit assets included in the non-current assets Net defined benefit asset(-)/liability(+) presented in balance sheet 1) Net interest is presented among financial items in income statement, the rest of costs related to defined benefit plans are included in staff costs (row defined benefits plans and part of the amount reduction due to insured defined benefit obligation in staff cost specification in Note 12 Employee benefits). 2) The unfunded obligation relates to arrangements in Russia and Poland. At the end of 2013 a total of 2,085 (2012: 2,542) Fortum employees are included in defined benefit plans providing pension benefits. During 2013 pensions or related benefits were paid to a total of 4,300 (2012: 4,303) persons. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 184 15 -38 4 -19 -77 0 -69 14 -22 -5 -82 -6 -9 29 65 540 -485 55 10 65 65 0 65 15 0 1 -1 4 19 26 59 -12 -21 3 29 -6 -11 - 152 638 -496 142 10 152 152 0 152 Annual Report 2013 Financial Statements Contributions expected to be paid during the year 2014 are EUR 11 million. Fair value of plan assets EUR million Equity instruments Debt instruments Cash and cash equivalents Real estate, of which the total EUR 74 million (2012: 74) occupied by the Group Company's own ordinary shares Other assets Total 2013 196 155 24 83 5 23 486 2012 161 168 41 80 4 46 500 When the pension plan has been financed through an insurance company, a specification of the plan assets has not been available. In these cases the fair value of plan assets has been included in other assets. The actual return on plan assets in Finland and Sweden totalled EUR 25 million (2012: 35). Amounts recognised in the balance sheet by country 2013 EUR million Present value of funded obligations Fair value of plan assets Deficit(+)/surplus(-) Present value of unfunded obligations Net asset(-)/liability(+) in the balance sheet Defined benefit asset included in the assets Pension obligations in the balance sheet Amounts recognised in the balance sheet by country 2012 EUR million Present value of funded obligations Fair value of plan assets Deficit(+)/surplus(-) Present value of unfunded obligations Net asset(-)/liability(+) in the balance sheet Defined benefit asset included in the assets Pension obligations in the balance sheet The principal actuarial assumptions used Finland Sweden Other countries 281 -262 19 - 19 0 19 221 -197 24 - 24 0 24 38 -26 12 10 22 0 22 Finland Sweden Other countries 289 -251 38 - 38 0 38 313 -221 92 - 92 0 92 40 -27 13 9 22 0 22 Total 540 -485 55 10 65 0 65 Total 642 -499 143 9 152 0 152 Discount rate, % Future salary increases, % Future pension increases, % Rate of inflation, % 2013 2012 Finland Sweden Russia 3.02 2.20 2.10 2.00 3.90 3.00 2.00 2.00 7.50 7.50 6.00 6.00 Other countries 4.11 3.72 2.80 1.89 Finland Sweden Russia 2.72 2.20 2.10 2.00 2.90 3.50 2.00 2.00 7.50 7.50 6.00 6.00 Other countries 3.96 3.54 3.85 1.80 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 185 Annual Report 2013 Financial Statements The discount rate in Finland is based on high quality European corporate bonds with maturity that best reflects the estimated term of the defined benefit pension plans. The discount rate in Sweden and Norway is based on yields on Swedish respectively Norwegian covered bonds with maturity that best reflects the estimated term of the defined benefit pension plans. The covered bonds in Sweden and Norway are considered high quality bonds as they are secured with assets. The discount rate in Russia is based on the yield of long-term government bonds which are consistent with the currency and the estimated term of the post-employment benefit obligations. The life expectancy is the expected number of years of life remaining at a give age: Longevity at age 65 aged 45 - male 45 - female 65 - male 65 - female Finland Sweden 20.6 26.4 19.0 24.7 21.6 24.1 19.6 22.8 The discount, inflation and salary growth rates used are the key assumptions used when calculating defined benefit obligations. Effects of 0.5 percentage point change in the rates to the defined benefit obligation on 31 December 2013, holding all other assumptions stable, are presented in the table below. Sensitivity of defined benefit obligation to changes in assumptions Change in the assumption 0.5 % increase in discount rate 0.5 % decrease in discount rate 0.5 % increase in benefit 0.5 % decrease in benefit 0.5 % increase in salary growth rate 0.5 % decrease in salary growth rate Impact to the pension obligation increase+/decrease- Finland Sweden -7% 8% 6% -6% 1% -1% -8% 9% 8% -6% 3% -3% The methods used in preparing the sensitivity analysis did not change compared to the previous period. Change in mortality basis so that life expectancy will increase by one year increases net liability in Finland and Sweden with EUR 17 thousand (3.4%). Maturity profile of the undiscounted defined benefit obligation for Finland and Sweden EUR million Maturity under 1 year Maturity between 1 and 5 years Maturity between 5 and 10 years Maturity between 10 and 20 years Maturity between 20 and 30 years Maturity over 30 years Future benefit payments 20 96 109 213 177 153 The weighted average duration of defined benefit obligation in Finland and Sweden at the end of the 2013 is 15.9 years. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 186 Annual Report 2013 Financial Statements 33 Other non-current liabilities 33 Other non-current liabilities EUR million Connection fees Other liabilities Moved to assets held for sale Total 2013 417 40 -306 151 2012 418 54 - 472 Connection fees to the electricity network in Finland that are paid before 2003 are refundable, if the customer would ever disconnect the initial connection. The connection fees to the electricity network amounted to EUR 306 million (2012: 306). These connection fees are included in the amount moved to assets held for sale in 2013. Refundable connection fees to the district heating network in Finland amounted to EUR 111 million (2012: 112). 34 Trade and other payables 34 Trade and other payables EUR million Trade payables Accrued expenses and deferred income Accrued personnel expenses Accrued interest expenses Other accrued expenses and deferred income Other liabilities VAT-liability Current tax liability Energy taxes Advances received Current provisions 1) Other liabilities Moved to assets held for sale Total 1) See also Note 31 Other provisions. The management considers that the amount of trade and other payables approximates fair value. 2013 452 86 255 128 29 16 37 57 23 137 -73 1,147 2012 558 57 228 105 47 18 25 41 7 221 - 1,307 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 187 Annual Report 2013 Financial Statements 35 Pledged assets 35 Pledged assets EUR million On own behalf For debt Pledges Real estate mortages For other commitments Real estate mortages On behalf of associated companies and joint ventures Pledges and real estate mortgages 2013 2012 301 137 103 3 293 137 124 3 35.1 Pledged assets for debt Finnish participants in the State Nuclear Waste Management Fund are allowed to borrow from the fund. Fortum has pledged shares in Kemijoki Oy as a security. The value of the pledged shares is unchanged, EUR 269 million on 31 December 2013 (2012: 269). Pledges also include bank deposits as trading collateral of EUR 12 million (2012: 4) for trading of electricity and CO2 emission allowances in Nasdaq OMX Commodities Europe, in Intercontinental Exchange (ICE) and European Energy Exchange (EEX). Fortum Tartu in Estonia (60% owned by Fortum) has given real estate mortgages for a value of EUR 96 million (2012: 96) as a security for an external loan. Real estate mortgages have also been given for loans from Fortum's pension fund for EUR 41 million (2012: 41). Regarding the relevant interest-bearing liabilities, see Note 28 Interest-bearing liabilities. 35.2 Pledged assets for other commitments Fortum has given real estate mortgages in power plants in Finland for a value of EUR 103 million (2012: 124) as a security to the Ministry of Employment and Economy for the uncovered part of the legal liability and unexpected events relating to costs for future decommissioning and disposal of spent fuel in the wholly owned Loviisa nuclear power plant. The size of the securities given is updated every year in June, based on the decisions regarding the legal liabilities and the funding target which takes place around year-end every year. Due to the yearly update, the amount of real estate mortgages given as a security decreased by EUR 21 million. Pledges given related to Inkoo and Naantali power plants. See also Note 30 Nuclear related assets and liabilities and note 38 Contingent liabilities. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 188 Annual Report 2013 Financial Statements 36 Leasing 36 Leasing Accounting policies Finance leases Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the commencement of the lease term at the lower of the fair value of the leased property and the present value of the minimum lease payments determined at the inception of the lease. Each lease payment is allocated between the reduction of the outstanding liability and the finance charges. The corresponding rental obligations, net of finance charges, are included in the long-term or short-term interest-bearing liabilities according to their maturities. The interest element of the finance cost is charged to the income statement over the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the useful life of the asset or the lease term. Sale and leaseback transactions resulting in a finance lease agreement are recognised according to the principles described above. The difference between the selling price and the carrying amount of the asset sold is deferred and amortised over the lease period. The property, plant and equipment leased out under a finance lease are presented as interest-bearing receivables at an amount equal to the net investment in the lease. Each lease payment receivable is allocated between the repayment of the principal and the finance income. Finance income is recognised in the income statement over the lease term so as to produce a constant periodic rate of return on the remaining balance of the receivable for each period. Operating leases Leases of property, plant and equipment, where the Group does not have substantially all of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases are recognised in the income statement as costs on a straight-line basis over the lease term. Payments received under operating leases where the Group leases out fixed assets are recognised as other income in the income statement. 36.1 Leases as a lessor Operating leases The operating rental income recognised in income statement was EUR 1 million (2012: 8). Future minimum lease payments receivable on operating leases EUR million Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total 2013 2012 6 1 2 9 6 6 4 16 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 189 Annual Report 2013 Financial Statements Assets leased out by operating lease agreements EUR million Acquisition cost Accumulated depreciation at 1 January Depreciation charge for the year Total Finance leases 2013 2012 4 -1 0 3 8 -2 0 6 Fortum does not have material finance lease arrangements where where the Group is leasing out assets. 36.2 Leases as lessee Operating leases Fortum leases office equipment and cars under various non-cancellable operating leases, some of which contain renewal options. The future costs for non-cancellable operating lease contracts are stated below. Lease rental expenses amounting to EUR 28 million (2012: 31) are included in the income statement in other expenses. Future minimum lease payments include land leases with long lease periods. Future minimum lease payments on operating leases EUR million Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total Finance leases Assets leased in by finance lease agreements EUR million Acquisition cost Accumulated depreciation at 1 January Depreciation charge for the year Total The assets leased by financial lease agreements are classified as machinery and equipment. For more information regarding Fortum's finance lease liabilities, see Note 28 Interest-bearing liabilities. 2013 30 60 154 244 2013 40 -18 -2 20 2012 32 73 176 281 2012 41 -17 -2 22 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 190 Annual Report 2013 Financial Statements 37 Capital commitments 37 Capital commitments EUR million Property, plant and equipment Intangible assets Total 2013 759 6 765 2012 1,168 4 1,172 Capital commitments are capital expenditure contracted for at the balance sheet date but not recognised in the financial statements. Capital commitments have decreased compared to year-end 2012. The decrease comes mainly from progressing of OAO Fortum's investment programme, finalisation of CHP investments in Klaipeda in Lithuania and Jelgava in Latvia, as well as the implementation of automatic meters in Finland. The decrease is offset by increases CHP investments in Stockholm, Sweden. For more information regarding capital expenditure, see Note 19 Property, plant and equipment. 38 Contingent liabilities 38 Contingent liabilities Accounting policies A contingent liability is disclosed when there is a possible obligation that arises from events and whose existence is only confirmed by one or more doubtful future events or when there is an obligation that is not recognised as a liability or provision because it is not probable that an outflow of resources will be required or the amount of the obligation cannot be reliably estimated. EUR million On own behalf Other contingent liabilities On behalf of associated companies and joint ventures Guarantees Other contingent liabilities On behalf of others Guarantees 2013 2012 78 472 125 3 67 487 125 0 38.1 Guarantees on own behalf Other contingent liabilities on own behalf contain various contingent liabilities for group companies, EUR 78 million in 2013 (2012: 67). 38.2 Guarantees on behalf of associated companies Guarantees and other contingent liabilities on behalf of associated companies and joint ventures mainly consist of guarantees relating to Fortum's associated nuclear companies Teollisuuden Voima Oyj (TVO), Forsmarks Kraftgrupp AB (FKA) and OKG AB (OKG). The guarantees are given in proportion to Fortum's respective ownership in each of these companies. According to law, nuclear companies operating in Finland and Sweden shall give securities to the Finnish State Nuclear Waste Management Fund and the Swedish Nuclear Waste Fund respectively, to guarantee that sufficient funds exist to cover future expenses of decommissioning of the power plant and disposal of spent fuel. In Finland, Fortum has given a guarantee on behalf of TVO to the Finnish State Nuclear Waste Management Fund to cover Fortum's part of TVO's uncovered part of the legal liability and for unexpected events. The amount of guarantees is updated every year in June based on the legal liability decided in December the previous year. Due to the yearly update, the amount of guarantees given were EUR 40 million (2012: 39). In Sweden, Fortum has given guarantees on behalf of FKA and OKG to the Swedish Nuclear Waste Fund to cover Fortum's part of FKA's and OKG's liability. The guarantees for 2012-2014 were decided in December 2011 by the Swedish government and they became effective from September 2012. The total amount of guarantees for FKA and OKG amount to SEK 3,696 million (EUR 417 million) at year-end 2013 (2012: EUR 431 million). This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 191 Annual Report 2013 Financial Statements Meri-Pori power plant in Finland is owned by Fortum 54.55% and TVO 45.45%. Based on the participation agreement Fortum has to give a guarantee to TVO against possible loss of asset or breach in contract of TVO's share of the asset, EUR 125 million (2012: 125). Fortum's 100% owned subsidiary Fortum Heat and Gas Oy has a collective contingent liability with Neste Oil Oyj of the in 2004 demerged Fortum Oil and Gas Oy's liabilities based on the Finnish Companies Act's (734/1978) Chapter 14a Paragraph 6. 39 Legal actions and official proceedings 39 Legal actions and official proceedings 39.1 Group companies The Swedish Energy Authority (EI), which regulates and supervises the distribution network tariffs in Sweden, has issued a decision concerning the allowed income frame for the years 2012-2015. EI has based its decision on a model with a transition rule stating that it takes 18 years to reach the allowed level of income. The EI decision has been appealed to the County Administrative Court by more than 80 distribution companies, including Fortum Distribution AB. The basis for Fortum Distribution AB’s appeal is that the model is not compatible with the existing legislation and that EI has applied an incorrect method for the calculation of Weighted Average Cost of Capital (WACC). In December 2013, the court decided in favor of the industry on all major topics. However, the decision has been appealed by EI to the next level, the Administrative Court of Appeal. EI is expected to file its detailed appeal by the end of February 2014. Timetable for consideration of the matter by the Administrative Court of Appeal is not yet set. In Finland, the Supreme Administrative Court gave its ruling on December 23, 2013 on the appeal by Fortum Sähkönsiirto Oy and Fortum Espoo Distribution Oy concerning the level of cost of equity and debt used in the regulatory model for 2009-2011. According to the appeal, the cost of equity and debt used in the model was too low for 2009-2011 due to the impact of the financial crisis. The Supreme Administrative court stated that according to the main rule the regulatory model confirmed in advance will be applied and amendments to the model should only be made based on significantly changed circumstances. The Court ruled that the change in circumstances was not significant enough and the appeal by Fortum Sähkönsiirto Oy and Fortum Espoo Distribution Oy was rejected. Additionally, Fortum Sähkönsiirto Oy has a case open in the Supreme Administrative Court in Finland concerning consideration of the extraordinary storm repair costs in 2011 in the regulation. Fortum Sähkönsiirto Oy has appealed for EUR 19 million to be treated as pass through items. Time schedule for the court ruling is still open and Fortum Sähkönsiirto Oy's regulatory decision for 2008-2011 will be further delayed. Fortum received income tax assessments in Sweden for the years 2009, 2010 and 2011 in December 2011, December 2012 and December 2013, respectively. According to the tax authorities, Fortum would have to pay additional income taxes for the years 2009, 2010 and 2011 for the reallocation of loans between the Swedish subsidiaries in 2004-2005, as well as additional income taxes for the years 2010 and 2011 for financing of the acquisition of TGC 10 (current OAO Fortum) in 2008. The claims are based on a change in tax regulation as of 2009. Fortum considers the claims unjustifiable and has appealed the decisions. Based on legal analysis, no provision has been recognised in the financial statements. If the decisions by the tax authority remain final despite the appeal processes, the impact on net profit would be approximately SEK 425 million (EUR 48 million) for the year 2009, approximately SEK 444 million (EUR 50 million) for the year 2010 and approximately SEK 532 million (EUR 60 million) for the year 2011. The Administrative Court has now investigated Fortum's appeal for the year 2009 and, on 9 October 2013, ruled against the tax authority. The Administrative Court approved the appeal on formal legal grounds. Both the tax authority and Fortum have appealed the court's decision. Fortum is dissatisfied with the amount of legal costs that the Court ordered the tax authority to pay and appealed this part of the decision. Fortum has received income tax assessments in Belgium for the years 2008 and 2009. Tax authorities disagree with the tax treatment of Fortum EIF NV. Fortum finds the tax authorities interpretation not to be based on the local regulation. No provision has been accounted for in the financial statements. If the decision by the tax authorities remains final despite the appeal process, the impact on the net profit would be approximately EUR 36 million for the year 2008 and approximately EUR 27 million for the year 2009. The tax has already been paid. If the appeal is approved, Fortum will receive a 7% interest on the amount. Fortum received an income tax assessment in Finland for 2007 in December 2013. Tax authorities claim in the transfer pricing audit, that detailed business decisions are done by Fortum Oyj and therefore re-characterize the equity Fortum has injected to its Belgium subsidiary Fortum Project Finance NV not to be equity, but funds to be available for the subsidiary. Tax authorities' view is that the interest income that Fortum Project Finance NV received from its loans should be taxed in Finland, not Belgium. The Belgium tax authorities have an opposite view on the issue. Fortum considers the claims unjustifiable both for legal grounds and interpretation. Fortum has appealed the decision. The This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 192 Annual Report 2013 Financial Statements appeal is based on national legislation in Finland and the EU arbitration between Finland and Belgium. Based on legal analysis, no provision has been recognized in the financial statements. If the decisions by the tax authority remain final despite the appeals processes, the impact on net profit would be approximately EUR 136 million for the year 2007. Fortum has on-going tax audits in Finland, Belgium, Russia and some other countries. See Note 14 Income tax expense and 29 Deffered income taxes In addition to the litigations described above, some Group companies are involved in other routine tax and other disputes incidental to their normal conduct of business. Based on the information currently available, management does not consider the liabilities arising out of such litigations likely to be material to the Group's financial position. 39.2 Associated companies In Finland Fortum is participating in the country's fifth nuclear power plant unit, Olkiluoto 3 (OL3), through the shareholding in Teollisuuden Voima Oyj (TVO) with an approximately 25% share representing some 400 MW in capacity. The civil construction works of the Olkiluoto 3 plant unit have been mainly completed, and the reactor main components are installed. Installation of the other components and engineering of the plant automation system continued. Based on the progress reports of AREVA-Siemens Consortium, TVO estimates that the start of the regular electricity production of the plant unit may be postponed until year 2016. The supplier is responsible for the time schedule. In December 2008 the OL3 supplier, AREVA-Siemens, initiated the International Chamber of Commerce (ICC) arbitration proceedings and submitted a claim concerning the delay and the ensuing costs incurred at the Olkiluoto 3 project. In 2012, TVO submitted a counter-claim and defense in the matter. The quantification estimate of TVO's costs and losses was approximately EUR 1.8 billion, which included TVO's actual claim and estimated part. The arbitration proceedings may continue for several years and TVO's claimed amounts will be updated. The supplier updated its original claim in October 2013. The updated claim including quantification until the end of June 2011 and together with the original claim, is in total approximately EUR 2.7 billion. TVO has considered and found the claim by the supplier to be without merit, and is in the process of scrutinizing the new material and responding to it. 40 Related party transactions 40 Related party transactions 40.1 The Finnish State and companies owned by the Finnish State At the end of 2013, the Finnish State owned 50.76% of the Company's shares. The Finnish Parliament has authorised the Government to reduce the Finnish State's holding in Fortum Corporation to no less than 50.1% of the share capital and voting rights. See The Fortum share and shareholders section of the Operating and financial review for further information on Fortum shareholders. All transactions between Fortum and other companies owned by the Finnish State are on arms length basis. In the ordinary course of business Fortum engages in transactions on commercial terms with associated companies and other related parties, which are on same terms as they would be for third parties, except for some associates as discussed later in this note. 40.2 Board of Directors and Fortum Management Team The key management personnel of the Fortum Group are the members of Fortum Management Team and the Board of Directors. Fortum has not been involved in any material transactions with members of the Board of Directors or Fortum Management Team. No loans exist to any member of the Board of Directors or Fortum Management Team at 31 December 2013. See Note 12 Employee benefits for further information on the Board of Directors and Fortum Management Team remuneration and shareholdings. 40.3 Associated companies and joint ventures Fortum owns shareholdings in associated companies and joint ventures which in turn own hydro and nuclear power plants. Under the consortium agreements, each owner is entitled to electricity in proportion to its share of ownership or other agreements. Each owner is liable for an equivalent portion of costs regardless of output. The associated companies are not profit making, since the owners purchase electricity at production cost including interest costs and production taxes, which generally is lower than market price. For further information on transactions and balances with associated companies and joint ventures, see Note 20 Participations in associated companies and joint ventures. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 193 Annual Report 2013 Financial Statements 40.4 Pension fund The Fortum pension funds in Finland and Sweden are stand-alone legal entities which manage pension assets related to the part of the pension coverage in Sweden and Finland. The assets in Fortum Pension Fund in Finland include Fortum shares representing 0.03% (2012: 0.03%) of the company's outstanding shares. Real estate and premises owned by the Fortum Pension Fund in Finland have been leased to Fortum. In 2013 the total amount paid by Fortum in contributions to the pension funds was EUR 0 million (2012: 0). Real estate mortgages have also been given for loans from Fortum's pension fund for EUR 41 million (2012: 41). 41 Events after the balance sheet date 41 Events after the balance sheet date There are no material events after balance sheet date. 42 Subsidiaries by segment on 31 December 2013 42 Subsidiaries by segment on 31 December 2013 ● = Power ■ = Heat ▲ = Distribution ○ = Electricity Sales □ = Russia ▼ = Other Company name AW-Energy Oy Findis Oy Fortum Asiakaspalvelu Oy Fortum Assets Oy Fortum BCS Oy Fortum C&H Oy Fortum Espoo Distribution Oy Fortum Heat and Gas Oy Fortum Hyötytuotanto Oy Fortum Markets Oy Fortum Norm Oy Fortum Nuclear Services Oy Fortum Power and Heat Oy Fortum Sähkönsiirto Oy Kiinteistö Oy Espoon Energiatalo Koillis-Pohjan Energiantuotanto Oy KPPV-Sijoitus Oy Lounais-Suomen Lämpö Oy Oy Pauken Ab Oy Tersil Ab 1) Founded during the year 2) Shares held by the parent company 3) Control through contractual arrangements Domicile 2), 3) Finland 2) Finland 2) Finland Finland Finland Finland 2) Finland 2) Finland Finland 2) Finland 2) Finland Finland 2) Finland 2) Finland Finland Finland Finland Finland Finland Finland Segment Group holding, % ▼ ▼ ▲ ▼ □ ▼ ▲ ■, ▼ ● ○ ▼ ● ●, ■, ▼ ▲ ▼ ● ▲ ▲ ▼ ▲ 13.6 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 194 Annual Report 2013 Financial Statements Oy Tertrade Ab Tohkojan Tuulipuisto Oy Varsinais-Suomen Sähkö Oy Fortum Project Finance N.V. Fortum Energi A/S AS Anne Soojus AS Fortum Tartu AS Tartu Joujaam AS Tartu Keskkatlamaja Fortum CFS Eesti OU Fortum Eesti AS Fortum France S.A.S Fortum Service Deutschland GmbH Fortum Energy Ltd Fortum O&M(UK) Limited Grangemouth CHP Limited IVO Energy Limited Fortum Insurance Ltd Amrit Energy Private Ltd Finnshakti Energy Private Limited FinnSurya Energy Private Limited Fortum India Private Limited Fortum C&P Fortum Finance Ireland Limited Fortum Jelgava, SIA Fortum Latvija, SIA UAB Fortum Ekosiluma UAB Fortum Heat Lietuva UAB Fortum Klaipeda UAB Joniskio energija UAB Svencioniu energija Fortum Baltic Investments SNC Fortum Investment SARL Fortum L.A.M SNC. Fortum Luxembourg SARL Fortum Meter Lease Norway SNC Fortum Meter Lease SNC Fortum Sendi Prima Sdn Bhd Fortum Distribution AS Fortum ESD Norway AS Fortum Fjernvarme AS Fortum Förvaltning AS Fortum Holding Norway AS Finland 1) Finland Finland 2) Belgium Denmark Estonia Estonia Estonia Estonia Estonia Estonia France Germany Great Britain Great Britain Great Britain Great Britain Guernsey 1) 1) 1) 2) 2) India India India India Ireland Ireland Latvia Latvia Lithuania Lithuania Lithuania Lithuania Lithuania Luxemburg Luxemburg Luxemburg Luxemburg Luxemburg Luxemburg Malaysia Norway 1) Norway Norway Norway Norway ▲ ● ▲ ▼ ○ ■ ■ ■ ■ ▼ ■ ● ● ▼ ● ● ● ▼ ▼ ▼ ▼ ▼ ▼ ▼ ■ ■ ■ ■ ■ ■ ■ ■ ▼ ■ ▼ ▲ ▲ ● ▲ ▲ ■ ▼ ■ 100.0 100.0 100.0 100.0 100.0 60.0 60.0 60.0 60.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 95.0 66.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 195 Annual Report 2013 Financial Statements Fortum Leasing KS Fortum Markets AS Fortum Power and Heat AS Fortum Bytom SA Fortum Power and Heat Polska Sp.z.o.o Fortum Zabrze SA Rejonowa Spółka Ciepłownicza Sp. z o.o. Chelyabinsk Energoremont LLC Fortum Energy OOO Fortum Energija OAO Fortum Norway Norway 1) Norway Poland Poland Poland Poland Russia Russia Russia Tobolsk CHP Limited Liability Company 1) Russia Urals Heat Network AB Fortum Värme Holding samägt med Stockholms stad AB Fortum Värme samägt med Stockholms stad Akallaverket Aktiebolag Blybergs Kraftaktiebolag Brännälven Kraft AB Brista 2 Aktiebolag Brista 2 Kommanditbolag Brista Spårterminal AB Bullerforsens Kraft Aktiebolag Fortum 1 AB Fortum Älvkraft i Värmland AB Fortum AMCO AB Fortum Dalälvens Kraft AB Fortum Ditribution AB Fortum Fastigheter AB Fortum Generation AB Fortum Indalskraft AB Fortum Ljunga Kraft AB Fortum Ljusnans Kraft AB Fortum Markets AB Fortum Nordic AB Fortum Power and Heat AB Fortum Produktionsnät AB Fortum Sweden AB Fortum Värme Invest AB Fortum Vind Norr AB Fortum Vindvärme AB Fortum Zeta AB Laforsen Produktionsnät Aktiebolag Mellansvensk Kraftgrupp Aktiebolag Oreälvens Kraftaktiebolag Russia Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden 2) Sweden Sweden Sweden 2) Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden ■ ○ ▲ ■ ■, ●, ▼ ■ ■ □ □ □ □ □ ■ ■ ■ ● ● ■ ■ ■ ● □ ● ▼ ● ▲ ▼ ● ● ● ● ○ ▼ ▼ ● ▼ ■ ● ■ ▼ ▲ ● ● 100.0 100.0 100.0 98.2 100.0 97.7 98.2 97.6 100.0 97.6 97.6 97.6 50.1 50.1 37.6 66.7 67.0 42.6 42.6 50.1 88.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 50.1 100.0 50.1 100.0 80.0 86.9 65.0 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 196 Annual Report 2013 Financial Statements Sigtuna-Väsby Fastighets AB Stockholm Gas AB Uddeholm Kraft Aktiebolag Värmlandskraft-OKG-delägarna Aktiebolag FB Generation Services B.V. Fortum Finance II B.V. Fortum Holding B.V. Fortum India B.V. Fortum India Industry B.V. Fortum Power Holding B.V. Fortum Russia B.V. Fortum Russia Holding B.V. Fortum SAR B.V. Fortum Sun B.V. Fortum Wave Power B.V. Sweden Sweden Sweden Sweden The Netherlands The Netherlands 2) The Netherlands The Netherlands 1) The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands ■ ■ ● ● ● ▼ ▼ ▼ ▼ ● □ □ ▼ ▼ ● 50.1 50.1 100.0 73.3 75.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 197 Annual Report 2013 Financial Statements Parent company financial statements Parent company financial statements Income statement Income statement EUR million Sales Other income Employee costs Depreciation, amortisation and write-downs Other expenses Operating profit Financial income and expenses Profit after financial items Group contributions 1) Profit before income tax Income tax expense Profit for the period 1) Taxable profits transferred from Finnish subsidiaries. Note 2013 2012 2 3 4 7 5 6 84 7 -33 -9 -60 -11 -16 -27 608 581 -104 477 34 8 -38 -7 -67 -70 409 339 574 913 -84 829 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 198 Annual Report 2013 Financial Statements Balance sheet Balance sheet EUR million ASSETS Non-current assets Intangible assets Property, plant and equipment Investments in group companies Interest-bearing receivables from group companies Interest-bearing receivables from associated companies Other non-current assets Deferred tax assets Total non-current assets Current assets Other current receivables from group companies Other current receivables from associated companies Other current receivables Cash and cash equivalents Total current assets Total assets EQUITY Shareholders' equity Share capital Share premium Retained earnings Profit for the period Note 31 Dec 2013 31 Dec 2012 7 7 7 7 7 7 8 8 8 9 10 15 13 16,215 2,382 1 5 4 16 10 16,450 1,561 1 1 5 18,635 18,044 630 0 11 1,059 1,700 582 0 39 714 1,335 20,335 19,379 3,046 2,822 3,674 477 3,046 2,822 3,733 829 Total shareholders' equity 10,019 10,430 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 199 Annual Report 2013 Financial Statements LIABILITIES Non-current liabilities External interest-bearing liabilities Interest-bearing liabilities to group companies Interest-bearing liabilities to associated companies Other non-current liabilities Total non-current liabilities Current liabilities External interest-bearing liabilities Trade and other payables to group companies Trade and other payables to associated companies Trade and other payables Total current liabilities Total liabilities Total equity and liabilities 11 11 11 11 12 12 12 6,351 1,470 247 2 8,070 2,025 25 2 194 2,246 10,316 6,863 552 234 5 7,654 958 95 4 238 1,295 8,949 20,335 19,379 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 200 Annual Report 2013 Financial Statements Cash flow statement Cash flow statement EUR million Cash flow from operating activities Profit for the period Adjustments: Income tax expense Group contributions Finance costs - net Depreciations, amortisation and write-downs Operating profit before depreciations Non-cash flow items and divesting activities Interest and other financial income Interest and other financial expenses paid Dividend income Group contribution received Realised foreign exchange gains and losses Taxes Funds from operations Other short-term receivables increase(-)/decrease(+) Other short-term payables increase(+)/decrease(-) Change in working capital Net cash from operating activities Cash flow from investing activities Capital expenditures Acquisition of shares and capital contributions in subsidiaries Capital returns from subsidiaries Acquisition of other shares Proceeds from sales of fixed assets Proceeds from sales of shares in associates Change in interest-bearing receivables and other non-current assets Net cash used in investing activities Cash flow before financing activities 2013 2012 477 104 -608 16 9 -2 1 60 -229 210 574 -149 -87 378 -5 -40 -45 333 -9 -19 210 -2 0 0 -836 -656 -323 829 84 -574 -409 7 -63 0 64 -191 683 542 52 -61 1,026 2 35 37 1,063 -8 -912 - 0 0 0 230 -690 373 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 201 Annual Report 2013 Financial Statements Cash flow from financing activities Proceeds from long-term liabilities Payment of long-term liabilities Change in cashpool liabilities Change in short-term liabilities Dividends paid Net cash used in financing activities Net increase(+)/decrease(-) in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 759 -526 917 406 -888 668 345 714 1,059 1,351 -508 -253 179 -888 -119 254 460 714 Notes to the parent company financial Notes to the parent company financial statement statement 1 Accounting policies and principles 1 Accounting policies and principles The financial statements of Fortum Oyj are prepared in accordance with Finnish Accounting Standards (FAS). 1.1 Sales Sales include sales revenue from actual operations and exchange rate differences on trade receivables, less discounts and indirect taxes such as value added tax. 1.2 Other income Other income includes gains on the sales of property, plant and equipment and shareholdings, as well as all other operating income not related to the sales of products or services, such as rents. 1.3 Foreign currency items and derivative instruments Transactions denominated in foreign currencies have been valued using the exchange rate at the date of the transaction. Receivables and liabilities denominated in foreign currencies outstanding on the balance sheet date have been valued using the exchange rate quoted on the balance sheet date. Exchange rate differences have been entered in the financial net in the income statement. Fortum Oyj enters into derivative contracts mainly for hedging foreign exchange and interest rate exposures. Derivatives used to hedge balance sheet items e.g. bank accounts, loans or receivables are valued employing the exchange rate quoted on the balance sheet date, and gains or losses are recognised in the income statement. The interest element on forward contracts is accrued for the period. Option premiums are treated as advances paid or received until the option matures, and any losses on options entered into other than for hedging purposes are entered as an expense in the income statement. Interest income or expense for derivatives used to hedge the interest rate risk exposure is accrued over the period to maturity and is recognised as an adjustment to the interest expense of the liabilities. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 202 Annual Report 2013 Financial Statements 1.4 Income taxes Income taxes presented in the income statement consist of accrued taxes for the financial year and tax adjustments for prior years. 1.5 Property, plant and equipment and depreciation The balance sheet value of property, plant and equipment consists of historical costs less depreciation and other deductions. Property, plant and equipment are depreciated using straight-line depreciation based on the expected useful life of the asset. The depreciation is based on the following expected useful lives: Buildings and structures Machinery and equipment Other intangible assets 1.6 Pension expenses 15 – 40 years 3 - 15 years 5 - 10 years Statutory pension obligations are covered through a compulsory pension insurance policy or Group's own pension fund. Payments to Group's pension fund are recorded in the income statement in amounts determined by the pension fund according to the actuarial assumptions pursuant to the Finnish Employees' Pension Act. 1.7 Long-term incentive schemes Costs related to the Fortum long-term incentive plans are accrued over the plan period and the related liability is booked to the balance sheet. 1.8 Provisions Foreseeable future expenses and losses that have no corresponding revenue to which Fortum is committed or obliged to settle, and whose monetary value can be reasonably assessed, are entered as expenses in the income statement and included as provisions in the balance sheet. 1.9 Presentation of the notes Information presented in the notes is given seperately for Fortum Group companies and for associated companies of the Group. 2 Sales by market area 2 Sales by market area EUR million Finland Other countries Total 2013 65 19 84 2012 20 14 34 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 203 Annual Report 2013 Financial Statements 3 Other income 3 Other income EUR million Gain on sales of shareholdings Rental and other income Total 4 Employee costs 4 Employee costs EUR million Personnel expenses Wages, salaries and remunerations Indirect employee costs Pension costs Other indirect employee costs Other personnel expenses Total Salaries and remunerations President and CEO Board of Directors Total 2013 2012 - 7 7 0 8 8 2013 2012 26 5 1 1 33 2 0 2 29 6 2 1 38 2 0 2 For the President and CEO the retirement age is 63. The pension obligations are covered either through insurance companies or through the Fortum Pension Fund. See also Note 12 Employee benefits and Note 32 Pension obligations in the Consolidated financial statements. Average number of employees 2013 326 2012 334 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 204 Annual Report 2013 Financial Statements 5 Financial income and expenses 5 Financial income and expenses EUR million Dividend income from group companies Dividend income from associated companies and other companies Interest and other financial income from group companies Write-downs of participations in group companies Interest and other financial income Exchange rate differences Interest and other financial expenses to group companies Interest and other financial expenses Total Total interest income and expenses Interest income Interest expenses Interest net Write-downs of participations in group companies are related to shares in Fortum Heat and Gas Oy. 6 Income tax expense 6 Income tax expense EUR million Taxes on regular business operations Taxes on group contributions Total Current taxes for the period Current taxes for prior periods Changes in deferred tax Total For more information, see note 13 Contingent liabilities. 2013 210 0 27 -44 13 1 -8 -215 -16 40 -219 -179 2013 -45 149 104 103 0 1 104 2012 683 - 60 -110 2 -4 -6 -216 409 62 -217 -155 2012 -57 141 84 84 0 0 84 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 205 Annual Report 2013 Financial Statements 7 Non-current assets 7 Non-current assets Intangible assets EUR million Cost 1 January 2013 Additions Disposals Cost 31 December 2013 Accumulated depreciation 1 January 2013 Disposals Depreciation for the period Accumulated depreciation 31 December 2013 Carrying amount 31 December 2013 Carrying amount 31 December 2012 Property, plant and equipment EUR million Cost 1 January 2013 Additions and transfers between categories Disposals Cost 31 December 2013 Accumulated depreciation 1 January 2013 Disposals Depreciation for the period Accumulated depreciation 31 December 2013 Carrying amount 31 December 2013 Carrying amount 31 December 2012 Intangible assets total 47 4 -2 49 31 -1 4 34 15 16 Total 38 6 -1 43 28 -1 3 30 13 10 Buildings and structures Machinery and equipment Advances paid and construction in progress 1 - 0 1 0 0 1 1 0 1 33 0 -1 32 28 -1 2 29 3 5 4 6 - 10 - - - - 10 4 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 206 Annual Report 2013 Financial Statements Receivables from Group companies Receivables from associated companies Other non-current assets Investments EUR million 1 January 2013 Additions 1) Disposals 2) 31 December 2013 Accumulated depreciation 1 January 2013 Impairment charges 3) Accumulated depreciation 31 December 2013 Shares in Group companies 17,330 - -191 17,139 -880 -44 -924 1,561 1,089 -268 2,382 - - - 1 - 0 1 - - - 1 2 5 - 7 - -2 -2 5 Total 18,894 1,094 -459 19,529 -880 -46 -926 18,603 Carrying amount 31 December 2013 16,215 2,382 1) Additions regarding shares comprise acquisitions of shares and capital contributions and reclassification between other non-current assets and shares in Group companies. 2) Disposals regarding shares comprise divestments and repayments of capital. 3) Write-downs of participations in group companies are related to shares in Fortum Heat and Gas Oy. 8 Other current receivables 8 Other current receivables EUR million Other current receivables from group companies Trade receivables Other receivables Accrued income and prepaid expenses Total Other current receivables from associated companies Trade receivables Other current receivables Trade receivables Other receivables Accrued income and prepaid expenses Total 2013 2012 10 609 11 630 0 0 1 10 11 5 574 3 582 0 0 1 38 39 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 207 Annual Report 2013 Financial Statements 9 Cash and cash equivalents 9 Cash and cash equivalents EUR million Cash at bank and in hand Bank deposits Cash and cash equivalents 10 Changes in shareholders' equity 10 Changes in shareholders' equity EUR million Total equity 31 December 2012 Cash dividend Profit for the period Total equity 31 December 2013 Total equity 31 December 2011 Cash dividend Profit for the period Share capital 3,046 - - 3,046 3,046 - - Share premium 2,822 - - 2,822 2,822 - - Total equity 31 December 2012 3,046 2,822 EUR million Distributable funds 31 December 2013 984 75 1,059 Retained earnings 4,562 -888 477 4,151 4,621 -888 829 4,562 2013 4,151 2012 714 - 714 Total 10,430 -888 477 10,019 10,489 -888 829 10,430 2012 4,562 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 208 Annual Report 2013 Financial Statements 11 Interest-bearing liabilities 11 Interest-bearing liabilities External interest-bearing liabilities EUR million Bonds Loans from financial institutions Other long-term interest-bearing debt Total long-term interest-bearing debt Current portion of long-term bonds Current portion of loans from financial institutions Commercial papers Other short-term interest-bearing debt Total short-term interest-bearing debt Total external interest-bearing debt Maturity of external interest-bearing liabilities EUR million 2014 2015 2016 2017 2018 2019 and later Total External interest-bearing liabilities due after five years EUR million Bonds Loans from financial institutions Other long-term liabilities Total Other interest-bearing liabilities due after five years EUR million Interest-bearing liabilities to group companies Interest-bearing liabilities to associated companies Total 2013 4,725 681 945 6,351 1,103 49 718 155 2,025 8,376 2013 2,440 118 750 3,308 2013 9 248 257 2012 5,205 747 911 6,863 499 25 228 206 958 7,821 2013 2,025 1,029 841 542 631 3,308 8,376 2012 2,228 287 710 3,225 2012 9 234 243 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 209 Annual Report 2013 Financial Statements 12 Trade and other payables 12 Trade and other payables EUR million Trade and other payables to group companies Trade payables Other liabilities Accruals and deferred income Total Trade and other payables to associated companies Accruals and deferred income Total Trade and other payables Trade payables Other liabilities Accruals and deferred income Total 13 Contingent liabilities 13 Contingent liabilities EUR million On own behalf Other contingent liabilities On behalf of group companies Guarantees On behalf of associated companies Guarantees Contingent liabilities total 2013 2012 1 24 0 25 2 2 9 8 177 194 39 56 0 95 4 4 9 6 223 238 2013 2012 3 348 417 768 5 527 431 963 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 210 Annual Report 2013 Financial Statements Operating leases EUR million Lease payments Not later than 1 year Later than 1 year and not later than 5 years Total Derivatives EUR million Forward rate agreements Interest rate swaps Forward foreign exchange contracts 1) Interest rate and currency swaps 1) Includes also future positions. 2013 2012 4 6 10 3 7 10 2013 Fair value Contract or notional value 56 0 6,658 105 18,614 928 -39 36 Not recog- nised as income Contract or notional value 2012 Fair value 0 100 5 -2 116 0 6,268 201 19,909 544 -54 -8 Not recog- nised as income 0 169 1 0 Fortum Oyj received in December 2013 an income tax assessment regarding transfer pricing for the year 2007. Fortum has appealed the decision. Based on legal analyses, no provision has been recognised in the financial statements. If the decisions by the tax authority remain final despite the appeals processes, the impact on net profit would be approximately EUR 136 million for the year 2007. For more information, see note 39 Legal actions and official proceedings to the consolidated financial statements. 14 Related party transactions 14 Related party transactions See Note 40 Related party transactions in the Consolidated financial statements. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 211 Annual Report 2013 Financial Statements Proposal for the distribution of Proposal for the distribution of earnings earnings The distributable funds of Fortum Corporation as at 31 December 2013 amounted to EUR 4,151,029,137.59 including the profit of the period of EUR 477,747,032.48. After the end of the financial period, there have been no material changes in the financial position of the Company. The Board of Directors proposes to the Annual General Meeting that Fortum Corporation pay a dividend of EUR 1.10 per share for 2013 totalling EUR 977,203,749.50, when calculated based on the number of registered shares as of 3 February 2014. The Board of Directors proposes that the remaining part of the profit be retained in the shareholders' equity. Espoo, 3 February 2014 Auditor's report Auditor's report To the Annual General Meeting of To the Annual General Meeting of Fortum Oyj Fortum Oyj We have audited the accounting records, the financial statements, the Operating and Financial Review, and the administration of Fortum Oyj for the financial period 1.1.-31.12.2013. The financial statements comprise of the consolidated income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and notes to the consolidated financial statements, as well as the parent company's income statement, balance sheet, cash flow statement and notes to the financial statements. the preparation of financial statements and the Operating and Financial Review that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the Operating and Financial Review in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company’s accounts and finances, and the President and CEO shall see to it that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner. Auditor’s Responsibility Auditor’s Responsibility Responsibility of the Board of Responsibility of the Board of Directors and the President and CEO Directors and the President and CEO The Board of Directors and the President and CEO are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for Our responsibility is to express an opinion on the financial statements, on the consolidated financial statements and on the Operating and Financial Review based on our audit. The Auditing Act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good auditing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the Operating and Financial Review are free from material misstatement, and whether the members of the Board of Directors of the parent company and the President and CEO are guilty of an act or negligence which may result in liability in damages towards the company or have violated the Limited Liability Companies Act or the articles of association of the company. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the Operating and Financial Review. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements and Operating and Financial Review that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 212 Annual Report 2013 Quarterly financial information and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements and Operating and Financial Review. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion on the consolidated financial Opinion on the consolidated financial statements statements In our opinion, the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. Opinion on the company’s financial Opinion on the company’s financial statements and the Operating and statements and the Operating and Financial Review Financial Review In our opinion, the financial statements and the Operating and Financial Review give a true and fair view of both the consolidated and the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the Operating and Financial Review in Finland. The information in the Operating and Financial Review is consistent with the information in the financial statements. Other opinions Other opinions We support that the financial statements should be adopted. The proposal by the Board of Directors regarding the treatment of distributable funds is in compliance with the Limited Liability Companies Act. We support that the Board of Directors of the parent company and the President and CEO should be discharged from liability for the financial period audited by us. Espoo, 3 February 2014 Deloitte & Touche Oy Authorized Public Audit Firm Jukka Vattulainen Authorized Public Accountant NOTE: Quarterly financial information is unaudited. Selected data based on quarterly consolidated income statement EUR million Sales Comparable EBITDA Comparable operating profit Operating profit Share of profit/loss of associates and joint ventures Finance costs - net Profit before income tax Income tax expense Profit for the period Q1/ 2012 Q2/ 2012 Q3/ 2012 Q4/ 2012 2012 Q1/ 2013 Q2/ 2013 Q3/ 2013 Q4/ 2013 2013 1,901 1,284 1,140 1,834 6,159 1,991 1,327 1,148 1,590 6,056 812 654 739 -7 -77 655 -119 536 447 284 286 26 -74 238 -47 191 391 223 226 7 -83 150 -30 120 766 2,416 591 1,752 623 1,874 -3 -77 23 -311 543 1,586 122 -74 665 1,512 819 650 603 29 -73 559 -107 452 467 298 438 33 -83 388 -74 314 364 166 649 2,299 493 1,607 97 574 1,712 4 -78 23 4 27 39 -84 105 -318 529 1,499 -43 -220 486 1,279 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 213 Annual Report 2013 Quarterly financial information Profit for the period, non-controlling interests Profit for the period, owners of the parent -39 497 -4 6 -59 -96 187 126 606 1,416 -51 401 0 314 4 31 -28 -75 458 1,204 Earnings per share, basic, EUR Earnings per share, diluted, EUR 0.56 0.56 0.21 0.21 0.14 0.14 0.68 0.68 1.59 1.59 0.45 0.45 0.35 0.35 0.04 0.04 0.52 0.52 1.36 1.36 Sales by quarter, EUR million Comparable operating profit by quarter, EUR million 3,000 2,000 1,991 1,901 1,834 1,590 1,284 1,327 1,140 1,148 1,000 0 Q1 Q2 Q3 Q4 750 500 250 0 Q1 Q2 Q3 Q4 2012 2013 2012 2013 Quarterly sales by segment EUR million Power Heat Russia Distribution Electricity Sales Other Netting of Nord Pool Spot transactions 1) Eliminations Total Q1/ 2012 Q2/ 2012 Q3/ 2012 Q4/ 2012 655 625 310 308 247 44 -188 -100 535 321 198 223 135 29 -88 -69 506 205 203 225 119 23 -66 -75 719 477 319 314 221 41 -161 -96 2012 2,415 1,628 1,030 1,070 722 137 -503 -340 Q1/ 2013 Q2/ 2013 Q3/ 2013 Q4/ 2013 664 629 344 342 262 16 -188 -78 547 283 251 230 153 15 -98 -54 495 214 210 219 133 16 -92 -47 542 439 314 284 196 22 -132 -75 2013 2,248 1,565 1,119 1,075 744 69 -510 -254 1,901 1,284 1,140 1,834 6,159 1,991 1,327 1,148 1,590 6,056 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 if Fortum is a net seller or net buyer during any particular hour. Quarterly comparable operating profit by segments EUR million Power Heat Russia Distribution Electricity Sales Other Comparable operating profit Non-recurring items Other items affecting comparability Operating profit Q1/ 2012 342 162 48 110 9 -17 654 110 -25 739 Q2/ 2012 222 Q3/ 2012 201 24 4 51 11 -28 284 11 -9 -9 -12 57 9 -23 223 1 2 Q4/ 2012 2012 Q1/ 2013 381 1,146 94 28 102 10 -24 271 68 320 39 -92 591 1,752 33 -1 155 -33 Q2/ 2013 210 Q3/ 2013 138 11 20 60 13 -16 298 0 140 438 -14 -15 57 13 -13 166 40 -109 97 Q4/ 2013 207 106 110 77 7 -14 493 17 64 2013 858 273 156 331 48 -59 1,607 61 44 574 1,712 303 170 41 137 15 -16 650 4 -51 603 286 226 623 1,874 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 214 Annual Report 2013 Investor information The first and last quarters of the year are usually the strongest quarters for power and heat businesses. Quarterly information from 2005 to 2013 is available in Excel format on Fortum's website www.fortum.com/investors/financial information. Financial information in 2014 Financial information in 2014 Fortum will publish three interim reports in 2014: Q1 on 29 April, Q2 on 18 July, and Q3 on 23 October. The reports are published at approximately 9:00 EET in Finnish and English, and are available on Fortum's website at www.fortum.com/investors Fortum's management hosts regular press conferences, targeted at analysts and the media. A webcast of these conferences is available online at www.fortum.com. Management also gives interviews on a one- on-one and group basis. Fortum observes a silent period of 30 days prior to publishing its results. Fortum share basics Fortum share basics Listed on NASDAQ OMX Helsinki Trading ticker: FUM1V Number of shares, 4 February 2014: 888,367,045. Sector: Utilities Fortum's Financials 2013 includes the audited consolidated financial statement of the Fortum Group and review of the operations during the year. The company's Corporate Governance Statement and Annual Review are published on the annual report 2013 internet site at the same time as Fortum's Financials. In addition to the Annual Review, Financials and Corporate Governance, Fortum publishes its Sustainability Report 2013 on the same internet site at the end of March 2014. The report follows the Global Reporting Initiative's (GRI) G3.1 Guidelines. Annual General Meeting Annual General Meeting The Annual General Meeting of Fortum Corporation will be held on Tuesday, 8 April 2014, starting at 14:00 EET at Finlandia Hall, address: Mannerheimintie 13 e, Helsinki, Finland. The reception of shareholders who have registered for the meeting will commence at 13 EET. Payment of dividends Payment of dividends The Board of Directors proposes to the Annual General Meeting that Fortum Corporation pay a dividend of EUR 1.10 per share for 2013, totalling approximately EUR 977 million based on the number of registered shares as of 3 February 2014. The possible dividend-related dates planned for 2014 are: • the ex-dividend date 9 April 2014, • the record date for dividend payment 11 April 2014 and • the dividend payment date 22 April 2014. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 215 Annual Report 2013 Governance This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 216 Annual Report 2013 Governance Corporate Governance Corporate Governance The General Meeting of Shareholders is the highest decision-making body of Fortum. The Board of Directors is responsible for the company's strategic development. The President and CEO is in charge of the operative, day- to-day management. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 217 Annual Report 2013 Corporate Governance Statement Corporate governance at Fortum is based Finnish laws, the company's Articles of Association and the Finnish Corporate Governance Code 2010. The Corporate Governance Statement is issued separately from the Operating and financial review, and it has been reviewed by the Audit and Risk Committee of Fortum's Board of Directors. Fortum prepares consolidated financial statements and interim reports in accordance with the International Financial Reporting Standards (IFRS), as adopted by the EU, the Finnish Securities Markets Act as well as the appropriate Financial Supervision Authority's regulations and guidelines and NASDAQ OMX Helsinki Ltd's rules. The company's Operating and financial review and the parent company financial statements are prepared in accordance with the Finnish Companies Act, Accounting Act, Securities Market Act and the opinions and guidelines of the Finnish Accounting Board. The auditor's report covers the Operating and financial review, consolidated financial statements and the Governing bodies of Fortum Governing bodies of Fortum parent company financial statements. The Finnish Corporate Governance Code 2010 is available on the website of the Securities Markets Association (www.cgfinland.fi). The decision-making bodies managing and overseeing the Group's administration and operations are the General Meeting of Shareholders, the Board of Directors with its two Committees, the Audit and Risk Committee and the Nomination and Remuneration Committee, and the President and CEO, supported by the Fortum Management Team. The General Meeting of Shareholders is the highest decision-making body of Fortum making resolutions in matters designated in the Companies Act. The Board of Directors is responsible for the company's strategic development and for supervising and steering the company's business and management. The President and CEO, supported by the Fortum Management Team, has the operational responsibility at the Group level and is in charge of the day-to-day management of the Group, and at the division level, the operational responsibility is held by the division head, supported by the division's management team. In addition, Fortum has an informal Advisory Council consisting of representatives of Governing bodies of Fortum Governing bodies of Fortum Fortum's stakeholder groups as invited by the Board of Directors. The Advisory Council aims to advance Fortum's businesses by facilitating dialogue and exchange of views This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 218 Annual Report 2013 Corporate Governance Statement between Fortum and its stakeholders. During 2013, the Advisory Council consisted of 13 representatives of Fortum's stakeholder groups and three employee representatives. General Meeting of Shareholders General Meeting of Shareholders The General Meeting of Shareholders is the highest decision-making body of Fortum. Every shareholder has the right to attend the General Meeting and exercise his/her power of decision in matters belonging to the General Meeting by law. Each share entitles to one vote. A shareholder who is present at the General Meeting of Shareholders also has the right to request information with respect to the matters to be considered at the meeting. Decisions at the General Meetings of Shareholders are primarily made by a simple majority of votes. Examples of such decisions are the following: resolutions on the adoption of the financial statements, payment of dividends, discharging from liability of the members of the Board of Directors and the President and CEO, appointment of the Board of Directors and the external auditors and decision on their remuneration. In accordance with the Articles of Association and the Companies Act, a notice to convene the General Meeting of Shareholders is issued by the Board of Directors. The notice is delivered no more than three months and no less than three weeks before the General Meeting of Shareholders by publishing the notice in two newspapers chosen by the Board of Directors. However, the notice shall be delivered at least nine days before the record date of the General Meeting of Shareholders. The Annual General Meeting of Shareholders is to be held once a year, at the latest in June. An Extraordinary General Meeting of Shareholders shall be held whenever the Board of Directors finds it necessary or when it is required by law to convene such a meeting. The Board of Directors The Board of Directors The Board of Directors is responsible for the company’s strategic development and for supervising and steering the company’s business and management. Further, under the Articles of Association and in line with the Companies Act, the Board of Directors represents the company and is responsible for the proper arrangement of the control of the company's accounts and finances. The Board of Directors comprises five to eight members who are elected at the Annual General Meeting for a one-year term of office, which expires at the end of the first Annual General Meeting following the election. The Annual General Meeting also elects the Chairman and the Deputy Chairman of the Board of Directors. Under the Articles of Association, a person who has reached the age of 68 cannot be elected to the Board of Directors. The Board of Directors convenes according to a previously agreed schedule to discuss specified themes and other issues whenever considered necessary. The Chairman of the Board of Directors prepares the agenda for the Board of Directors meeting based on the proposal by the President and CEO. The members of the Board of Directors have a right to suggest specific matters and have them included on the agenda. More than half of the members must be present at the meeting to constitute a quorum. The decision of the Board of Directors shall be made by a simple majority. The Board of Directors has approved a written charter for its work, the main content of which is disclosed herein, including the duties of the Board of Directors. The President and CEO, the Chief Financial Officer and the General Counsel, as secretary to the Board of Directors, attend the Board meetings on a regular basis. Other Fortum Management Team members and senior executives attend as required. As part of its duties, the Board of Directors conducts an annual self-assessment in order to further develop its work. In addition, the Board of Directors annually evaluates which of the directors are independent of the company and its significant shareholders. Board of Directors in 2013 Board of Directors in 2013 Until the Annual General Meeting held on 9 April 2013, the Board of Directors comprised the following seven members: Chairman Sari Baldauf, Deputy Chairman Christian Ramm- Schmidt, Minoo Akhtarzand, Heinz-Werner Binzel, Ilona Ervasti-Vaintola, Kim Ignatius and Joshua Larson. The Annual General Meeting on 9 April 2013 re-elected them to the Board of Directors until the end of the Annual General Meeting in 2014. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 219 Annual Report 2013 Corporate Governance Statement In 2013, the Chairman, the Deputy Chairman and the members of the Board of Directors were all independent non-executive directors and also independent from the company's significant shareholders. Three members, including the Chairman, are female. During 2013, the Board of Directors met 11 times and the attendance rate of its members was 100%. The main focus areas of the Board of Directors during 2013 consisted of in-depth reviews of the economic environment and the energy sector, further development of the company's strategy, including assessment of the future alternatives of the electricity distribution business, update of the dividend policy, setting and implementing interim arrangements during the sick leave of the President and CEO, a leadership audit and review of succession plans as well as of further audit and review of various operations like IT and sustainability, among others. Fortum's Board of Directors on 31 December 2013 Fortum's Board of Directors on 31 December 2013 Based on the self-assessment conducted during the previous year, the processes related to the sharing of the meeting material were improved during 2013. In addition, the Board of Directors set certain focus areas and amended certain processes in an effort to further enhance the efficiency of the board work. Name Born Education Occupation Attendance in the Board meetings Attendance in the Board Committee meetings Chairman Ms. Sari Baldauf 1955 MSc (Econ.) Non-executive chairman 11/11 Deputy Chairman Mr. Christian Ramm-Schmidt 1946 BSc (Econ.) Ms. Minoo Akhtarzand 1956 Civil Engineer, Electrical engineering Mr. Heinz- Werner Binzel 1954 Economics and electrical engineering degree Senior Partner of Merasco Capital Ltd. Non-executive director 11/11 Governor in the County of Jönköping Non-executive director Independent consultant Non-executive director 11/11 11/11 Ms. Ilona Ervasti-Vaintola 1951 LL.M, Trained on the bench Non-executive director 11/11 Mr. Kim Ignatius 1956 BSc (Econ) Mr. Joshua Larson 1966 Master of International Affairs, Bachelor in Russian language CFO of Sanoma Corporation Non-executive director Private investor and consultant Non-executive director 11/11 11/11 Nomination and Remuneration Committee, 4/4 Nomination and Remuneration Committee, 3/3 Audit and Risk Committee, 1/1 Nomination and Remuneration Committee, 4/4 Audit and Risk Committee, 6/6 Nomination and Remuneration Committee, 4/4 Audit and Risk Committee, 6/6 Audit and Risk Committee, 6/6 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 220 Annual Report 2013 Corporate Governance Statement The Board Committees The Board Committees The committees of the Board of Directors are the Audit and Risk Committee and the Nomination and Remuneration Committee. The committees assist the Board of Directors by preparing and reviewing in more detail matters falling within the competence of the Board of Directors. The Board of Directors appoints members of the Audit and Risk Committee and the Nomination and Remuneration Committee from among its members. Each committee shall have at least three members. The members shall have the expertise and experience required by the duties of the respective committee. Members are appointed for a one-year term of office, which expires at the end of the first Annual General Meeting following the election. All the members of the Board of Directors have the right to attend the committee meetings. The Chairman of the committee reports on the committee work to the Board of Directors regularly after each meeting and, in addition, the committee meeting materials and minutes are available to all members of the Board of Directors. The Board of Directors has approved written charters for the committees which are updated on a regular basis upon need. The Audit and Risk Committee The Audit and Risk Committee The Audit and Risk Committee assists the Board of Directors in matters relating to financial reporting, risks and control, in accordance with the tasks specified for audit committees in the Finnish Corporate Governance Code 2010. The Audit and Risk Committee oversees the financial reporting process and monitors the efficiency of the internal controls and risk management within the Group. The committee has a written charter in which its duties have been defined. Pursuant to the Finnish Corporate Governance Code 2010, the members of the Audit and Risk Committee shall have the qualifications necessary to perform the responsibilities of the committee and at least one of the members shall have expertise specifically in accounting, bookkeeping or auditing. The members shall be independent of the company and at least one member shall be independent of the company's significant shareholders. The external auditors, Chief Financial Officer, Head of Internal Audit, Corporate Controller and General Counsel, as secretary to the committee, attend the committee meetings on a regular basis. Other senior executives attend to the meetings as invited by the committee. The Audit and Risk Committee reports on its work to the Board of Directors regularly after each meeting. The Audit and Risk Committee annually reviews its charter, approves the internal audit charter and the internal audit plan and carries out an annual self- assessment of its work. As regards the external auditor, the committee reviews the audit plan and meets the external auditor regularly to discuss the audit plan, audit reports and findings. In addition, the committee evaluates the independence as well as monitors the performance of the external auditors. Audit and Risk Committee in 2013 Audit and Risk Committee in 2013 After the Annual General Meeting on 9 April 2013, the Board of Directors elected from amongst its members itself Kim Ignatius as the Chairman and Joshua Larson and Heinz- Werner Binzel as members to the Audit and Risk Committee. Until the Annual General Meeting on 9 April 2013, the committee comprised of Kim Ignatius as the Chairman and Joshua Larson, Heinz-Werner Binzel and Christian Ramm-Schmidt as members. In 2013, the members were all independent of the company and its significant shareholders. The Audit and Risk Committee met six times in 2013 and the attendance rate was 100%. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 221 Annual Report 2013 Corporate Governance Statement The Nomination and The Nomination and Remuneration Committee Remuneration Committee The Nomination and Remuneration Committee assists the Board of Directors in issues related to nomination and remuneration of the company's management. The committee has a written charter in which its duties have been defined. Pursuant to the Finnish Corporate Governance Code 2010, the members of a remuneration committee shall be independent of the company. The President and CEO or other executives of the company may not be appointed as members of the committee. The regular participants at the committee meetings are the President and CEO, Senior Vice President, Corporate Human Resources, and General Counsel as Secretary to the Committee. The Nomination and Remuneration Committee reports on its work to the Board of Directors regularly after each meeting. The Nomination and Remuneration Committee annually conducts a self-evaluation of its work. The Nomination and Remuneration The Nomination and Remuneration Committee in 2013 Committee in 2013 After the Annual General Meeting on 9 April 2013, the Board of Directors elected from amongst its members Sari Baldauf as the Chairman and Minoo Akhtarzand, Ilona Ervasti-Vaintola and Christian Ramm-Schmidt as members of the Nomination and Remuneration Committee. Until the Annual General Meeting on 9 April 2013, the committee comprised Sari Baldauf as the Chairman and Minoo Akhtarzand and Ilona Ervasti-Vaintola as members. In 2013, the members were all independent of the company and its significant shareholders. The committee met four times during 2013 and the attendance rate was 100%. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 222 Annual Report 2013 Corporate Governance Statement Shareholders' Nomination Board Shareholders' Nomination Board The Annual General Meeting on 9 April 2013 established a permanent Shareholders' Nomination Board, in accordance with the proposal of the Board of Directors. During the 9 years prior to the Annual General Meeting on 9 April 2013, the Shareholders' Nomination Board had been appointed annually in accordance with the proposal of the majority shareholder, the State of Finland. Fortum’s three largest shareholders, that are entitled to appoint members to the Shareholders' Nomination Board, shall be determined on the basis of the registered holdings as of the first working day in September in the year concerned. The Shareholders' Nomination Board shall forward its proposals for the Annual General Meeting to the Board of Directors by 31 January each year. members of the Board of Directors remain unchanged compared to 2013 and are for 2014 as follows: for the Chairman, EUR 75,000 per year; for the Deputy Chairman, EUR 57,000 per year; and for each member, EUR 40,000 per year, as well as for the Chairman of the Audit and Risk Committee EUR 57,000 per year if he or she is not at the same time acting as Chairman or Deputy Chairman. In addition, for each Board and Board Committee meeting a fee of EUR 600 is proposed. For Board members living outside Finland in Europe, the fee for each meeting is proposed to be doubled and for Board members living outside Europe, the fee for each meeting is proposed to be tripled. In addition, the Shareholders' Nomination Board has decided to propose to the Annual General Meeting 2014 that the Board of Directors comprises eight (8) members and that the following persons be elected to the Board of Directors for a term ending at the end of the Annual General Meeting 2015: Ms Sari Baldauf (as Chairman), Mr Kim Ignatius (as Deputy Chairman), Ms Minoo Akhtarzand, Mr Heinz-Werner Binzel, Ms Ilona Ervasti- Vaintola and Mr Christian Ramm-Schmidt as well as new members Mr Petteri Taalas and Mr Jyrki Talvitie. Nomination Board ahead of Nomination Board ahead of Annual General Meeting 2014 Annual General Meeting 2014 In September 2013, the following persons were appointed to the Shareholders' Nomination Board: Eero Heliövaara, Director General of the Government Ownership Steering Department, Prime Minister's Office; Harri Sailas, President and CEO, Ilmarinen Mutual Pension Insurance Company; and Liisa Hyssälä, Director General, Social Insurance Institution of Finland, KELA. In addition, the Chairman of the Board of Directors Sari Baldauf was a member of the Shareholders' Nomination Board. The Shareholders' Nomination Board has decided to propose to the Annual General Meeting 2014, which will be held on 8 April 2014, that the fees to be paid to the The purpose and task of the Shareholders' Nomination Board is to prepare and present to the Annual General Meeting, and, if necessary, to an Extraordinary General Meeting, a proposal on the following matters: proposal on the remuneration, number and members of the Board of Directors. In addition, the task of the Shareholders' Nomination Board is to seek candidates as potential board members. The Shareholders' Nomination Board consists of four members, three of which shall be appointed by the company’s three largest shareholders, who shall appoint one member each. The Chairman of the Board of Directors serves as the fourth member. The members shall be nominated annually and their term of office shall end when new members are nominated to replace them. President and CEO President and CEO The President and CEO holds the position of Managing Director under the Companies Act and is the Chairman of the Fortum Management Team. The President and CEO is in charge of the day-to-day management of the Group in accordance with the Companies Act and with instructions and orders issued by the Board of Directors. Under the Companies Act, the President and CEO is responsible for that the accounts of the company comply with the applicable laws and that its financial affairs have been arranged in a reliable manner. the duties of the President and CEO during the sick leave. President and CEO Mr. Kuula returned to work in November 2013. Tapio Kuula has served as the President and CEO since May 2009. In March 2013, Mr. Kuula was diagnosed with a condition requiring medical treatment after which he started a sick leave. Chief Financial Officer Markus Rauramo assumed responsibility for The performance of the President and CEO is evaluated by the Board of Directors. The evaluation is based on objective criteria that include the performance of the company and the achievement of targets set by the Board of Directors in advance. Fortum Management Team and operational organisation Fortum Management Team and operational organisation The President and CEO is supported by the Fortum Management Team. The Fortum Management Team assists the President and CEO in setting the strategic and sustainability targets within the framework approved by the Board of Directors, preparing the Group's business plans, and deciding on investments, mergers, acquisitions and divestments within its authorisation. Financial results are monitored in the monthly reporting and reviewed monthly by the Fortum Management Team. Quarterly Performance Review meetings with the Fortum Management Team and the divisions' management are embedded in the Fortum Performance Management process. Each member of the Fortum Management Team is responsible for the day-to-day operations and the implementation of operational decisions in their respective organisations. The Fortum Management Team meets on a monthly basis. On 31 December 2013, the Fortum Management Team consisted of nine members, including the President and CEO to whom the members This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 223 Annual Report 2013 Corporate Governance Statement of the Management Team report. Two of the members were female. Fortum's four divisions are: • Power Division, focusing on power generation, power trading and power capacity development as well as on expert services for power producers. • Heat Division focusing on combined heat and power generation, district heating and cooling activities as well as on business-to-business heating solutions. • Russia Division focusing on power and heat generation and sales in Russia. It includes OAO Fortum and Fortum’s 25% holding in TGC-1. • Electricity Solutions and Distribution Division focusing on Fortum’s electricity sales and distribution activities; it consists of two business areas: Distribution and Electricity Sales. Fortum's Staff functions are Finance, Human Resources, IT and Business Process Management, R&D and Innovation, Communications, Corporate Relations, Strategy and M&A and Sustainability. The Fortum Management Team The Fortum Management Team on 31 December 2013 on 31 December 2013 • Tapio Kuula, President and CEO, Chairman of the Fortum Management Team Born 1957, MSc (Eng), MSc (Econ) • Helena Aatinen, Senior Vice President, Corporate Communications Born 1959, MSc (Econ) • Alexander Chuvaev, Executive Vice President, Russia Division Born 1960, MSc (Eng) • Mikael Frisk, Senior Vice President, Corporate Human Resources Born 1961, MSc (Econ) • Timo Karttinen, Executive Vice President, Electricity Solutions and Distribution Division Born 1965, MSc (Eng) • Per Langer, Executive Vice President, Heat Division Born 1969, MSc (Econ) • Markus Rauramo, Chief Financial Officer Born 1968, MSc (Econ and Pol. Hist.) • Matti Ruotsala, Executive Vice President, Power Division Born 1956, MSc (Eng) • Kaarina Ståhlberg, General Counsel Born 1966, LL.M. (Helsinki), LL.M. (Columbia University, New York) Fortum's financial reporting structure 31 December 2013 Fortum's financial reporting structure 31 December 2013 Changes in the business Changes in the business structure as of structure 1 March 2014 as of 1 March 2014 In February, Fortum announced that it will renew its business structure as of 1 March 2014. The target of the reorganisation is to strengthen Fortum's capability to execute the company's strategy in the fast developing operating environment. Fortum will report its 2014 first quarter financial results according to the new structure. The new structure will consist of four reporting segments and staff functions. The four segments are Heat, Electricity Sales and Solutions, Power and Technology , Russia and Distribution. The staff functions are Finance, Strategy, Mergers and Acquisitions, Legal, Human Resources and IT, Communications and Corporate Relations. Matti Ruotsala is appointed Chief Operating Officer (COO) and will act as deputy to the CEO. Fortum's new CFO will be Timo Karttinen, who will also head the Distribution Division. Markus Rauramo will continue in a new role as Executive Vice President, Heat, Electricity Sales and Solutions, Per Langer as Executive Vice President, Hydro Power and Technology and Alexander Chuvaev as Executive Vice President, Russia. New Executive Management members are Tiina Tuomela, Executive Vice President, Nuclear and Thermal Power; Kari Kautinen, Senior Vice President, Strategy, Mergers and Acquisitions and Esa Hyvärinen, Senior Vice President, Corporate Relations. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 224 Annual Report 2013 Corporate Governance Statement Internal control and risk management systems Internal control and risk management systems in relation to financial reporting in relation to financial reporting The internal control and risk management systems relating to financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and to ensure compliance with applicable laws and regulations. Overview of risk management Overview of risk management Fortum's Board of Directors approves the Group Risk Policy that sets the Group's objective, principles and division of responsibilities for risk management activities and also for the financial reporting process. The financial reporting process is embedded in the internal control framework, and the process-level internal control structure has been created using a risk-based approach. Fortum's internal control framework includes the main elements from the framework introduced by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). Financial reporting framework in Fortum Financial reporting framework in Fortum This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 225 Annual Report 2013 Corporate Governance Statement Internal control framework Internal control framework Control environment Control environment Fortum's internal control framework supports the execution of the strategy and ensures regulatory compliance and reliability of the financial reporting. The internal control framework consists of Group-level policies and processes as well as business and support process-level controls. Corporate Risk Management is responsible for reporting risk exposures and maintaining the company's risk management framework. Corporate Accounting and Control is responsible for the overall control structure of the financial performance management process. The control process is based on Group policies, instructions and guidelines relating to financial reporting. The Controllers Manual contains financial reporting instructions. This manual is regularly reviewed and updated. The Core Finance Process Owner supports the finance organisation in ensuring a uniform way of working and monitoring the performance of the processes within the Finance function. Fortum's organisation is decentralised, and a substantial degree of authority and responsibility is delegated to the divisions in form of control responsibilities. This applies also to the financial reporting. Some areas, such as commodity market risk control are centralised. Risk assessment Risk assessment Risks related to financial reporting are identified and analysed annually as part of the risk management process. Risks are reported regularly in connection with the planning process and the follow-up of actions and improvements is integrated in operational management. The control risk assessment has been the basis for creating the process- level internal control framework and the same applies to the control points to prevent errors in the financial reporting process. Cross- divisional teams by process area update this framework regularly. This assessment includes risks related to potential fraud and other irregularities, as well as to risks of loss or misappropriation of assets. Control activities Control activities Control activities are applied in the business processes and, from a financial reporting perspective, they ensure that potential errors or deviations are prevented, discovered and corrected. In financial reporting, the Controllers Manual sets the standards. The Corporate Accounting and Control unit defines the design of the control points and the internal controls covering the end-to-end financial reporting process. Responsibilities are assigned for the controls and also for ensuring their operating effectiveness. Fortum's processes include controls regarding the initiation, approval, recording and accounting of financial transactions. A standardised way of working is also ensured by Fortum's financial shared service center, which performs controls for the recognition, measurement and disclosure of financial information. The financial shared service centre has been ISO 9001:2008 certified since 2011. All divisions have their own finance function ensuring that relevant analyses of the business performance are done, such as volumes, revenues, costs, working capital, asset base, risks and investments. These analyses are reviewed at different levels of the Group and ultimately by the Board of Directors. Information and communication of policies, instructions and processes Information and communication of policies, instructions and processes The Controllers Manual includes the Fortum Accounting manual, Investment manual and reporting instructions and other policies relating to financial reporting. The monthly Core Controllers' meetings, headed by the Corporate Controller, steer the development projects within Finance and receive updates from different expert forums within Finance. The Regular Accounting Network Forum meetings are used to inform the finance community about upcoming changes in IFRS, new accounting policies and other changes. Monitoring and follow-up Monitoring and follow-up Financial results are followed up in the monthly reporting and reviewed monthly by the Fortum Management Team. Quarterly Performance Review meetings with the Fortum Management Team and the divisions' management are embedded in the Fortum Performance Management process. As part of the Fortum internal control framework, all divisions assess the effectiveness of the controls they are responsible for. Division- and corporate-level controller teams are responsible for assessing the financial reporting process, and Corporate Risk Management reviews these control assessments regularly and reports to the management and to the Audit and Risk Committee on an annual basis. Internal control design and operating effectiveness are also assessed by Corporate Internal Audit. Audit results, including corrective actions and status, are regularly reported to the management and to the Audit and Risk Committee. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 226 Annual Report 2013 Corporate Governance Statement Fortum performance management process Fortum performance management process Auditing Auditing Internal Audit Internal Audit Fortum’s Corporate Internal Audit is responsible for assessing and assuring the adequacy and effectiveness of internal controls in the company. Furthermore, it evaluates the effectiveness and adequacy of the business processes and risk management, compliance with laws, regulations and internal rules and instructions. The Standards for the Professional Practice of Internal Audit form the basis for the work of Internal Audit. External Audit External Audit The company has one external auditor, which shall be an audit firm certified by the Central Chamber of Commerce. The external auditor is elected by the Annual General Meeting for a term of office that expires at the end of the first Annual General Meeting following the election. Fortum's Annual General Meeting on 9 April 2013 elected Authorised Public Accountant Deloitte & Touche Oy as the company's external auditor, with Authorised Public Accountant Jukka Vattulainen having the principal responsibility. Compliance Management and Code of Conduct Compliance Management and Code of Conduct Fortum's Code of Conduct is rooted in the shared corporate values: Accountability, Creativity, Respect and Honesty, which form the ethical basis for all work at Fortum. Fortum's updated Code of Conduct was implemented in the spring of 2012 (originally launched in 2007) and is published in ten languages. The Code of Conduct has been approved by the Board of Directors. Prevention of corruption is one of the Code of Conduct's focus areas. Compliance risks such as corruption, are managed as part of Fortum's operational risk management framework and control procedures in all Fortum's operating countries. Fortum has procedures to ensure the prevention, oversight, reporting and enforcement based on the requirements prescribed in international legislation. The review of compliance risks assessment is periodic and documented, with the Fortum Management Team having oversight of the process. A systematic compliance risk assessment is included in the business plans, and follow-up is a part of the business performance review. Line management regularly reports on the compliance activities to the Fortum Management Team and further to the Audit and Risk Committee. Fortum employees are encouraged to report suspected misconduct to their own supervisors, to other management or, if necessary, directly to internal audit. Additionally, Fortum employees and partners can report suspicions of misconduct confidentially via an electronic-channel. The report can be submitted in several languages and anonymously if necessary. The Code of Conduct and compliance topics and instructions are communicated through internal and external communication channels. The communication is made applying the tone of the top management principle. For instance, separate anti- corruption training events for division management teams and other specific groups have been arranged by Legal department and, in addition, Fortum has provided training to its employees and directors through a specific Code of Conduct eLearning tool. Conducting the eLearning is also a part of the induction programme of new Fortum employees. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 227 Annual Report 2013 Remuneration The Finnish Corporate Governance Code 2010 requires that Fortum issues a remuneration statement regarding the salaries and other remuneration paid by the company. Furthermore, the Cabinet Committee on Economic Policy, representing the state owner, issued in August 2012 a statement on the remuneration of executive management and key individuals in companies with state ownership. Fortum complies both with the Finnish Corporate Governance Code 2010 and the statement in its remuneration. Remuneration at Fortum is directed by the Group’s remuneration principles and Fortum’s general remuneration and benefits practices. When determining remuneration, the company’s financial performance and external market data, particularly the remuneration for similar positions among peer companies, are taken into consideration. The Board of Directors approves, at the proposal of the Nomination and Remuneration Committee, the remuneration principles at the Group level and decides on the bonus targets and the remuneration of senior management (President and CEO and other members of the Fortum Management Team). Remuneration of the Board of Directors is decided by the Annual General Meeting of Fortum. Fortum offers a competitive compensation package for senior executives and other Short-term incentives Short-term incentives management. The aim is to attract, commit and retain key resources in all countries where Fortum operates. The package offers employees a competitive base salary. In addition to a salary, other relevant benefits, challenging short-term incentives and long-term incentive schemes are also offered. Fortum’s short-term incentive scheme, i.e. bonus system, supports the realisation of the Group’s financial performance targets, sustainability targets, values and structural changes. The system ensures that the performance targets of individual employees align with the targets of the division and the Group. All Fortum employees, with the exception of certain personnel groups in Poland and Russia, are covered by the system. The Board of Directors decides on the bonus criteria - based on predetermined and measurable performance and result targets - for senior management (the President and CEO and other members of the Fortum Management Team). The bonuses paid to the members of senior management are dependent on the Group’s financial performance and on their own success in reaching personal targets. The performance bonus criteria also include indicators related to sustainability targets. The maximum bonus for senior management is 40% of the executive’s annual salary including fringe benefits (annual salary = 12 times the salary paid in December of the year in question). The bonuses of the division heads, who are all members of the Fortum Management Team, are determined on the basis of the division’s performance and the Group’s financial performance. During the annual performance discussion held at the beginning of the year, the division head and his/her superior, the President and CEO, agree on the criteria used to assess the personal performance of the executive. The Board of Directors assesses the performance of the President and CEO on an annual basis. Long-term incentives Long-term incentives The purpose of Fortum’s long-term incentive system, i.e. share bonus system, is to support the achievement of the Group’s long-term targets by committing key individuals. The Board of Directors approves the Fortum management members and key individuals entitled to participate in the share bonus system. The Board of Directors can also exclude individual participants from the system. Participation in the system precludes the individual from being a member in the Fortum Personnel Fund. Fortum’s share bonus system is divided into six-year share plans, within which participants This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 228 Annual Report 2013 Remuneration have the opportunity to earn company shares. A new plan commences yearly, if the Board of Directors so decides. Each share plan begins with a three-calendar- year period, during which participants may earn share rights if the earnings criteria set by the Board of Directors are fulfilled. After the earning period has ended and the relevant taxes and other employment-related expenses have been deducted from the gross value of the earned share rights, participants are paid the net balance of the earned rights in the form of shares. The earning period is followed by a subsequent lock-up period, during which participants cannot transfer or dispose of the shares. If the value of the shares decrease or increase during the lock- up period, the potential loss or gain is carried by the participants. The maximum value of shares, before taxation, to be delivered to a participant after the earning period cannot exceed the participant’s annual salary. Fortum’s current long-term incentive system is in line with the statement on the remuneration of executive management and key individuals in companies with state ownership and the Finnish Corporate Governance Code 2010 for listed companies. Share bonus systems Share bonus systems PCA Corporate Finance, an independent Finnish financial advisor, has been consulted in matters related to remuneration. Compensation for the President and CEO and Compensation for the President and CEO and the Fortum Management Team the Fortum Management Team The remuneration of the President and CEO amounted to EUR 812,936 (2012: 1,260,483) and the remuneration of other Fortum Management Team members amounted to a total of EUR 2,997,744 (2012: 3,515,796). The table below includes the short-term compensation paid to the President and CEO and the Fortum Management Team during 2013 and 2012. The bonuses paid to the Management Team, including the President and CEO, amounted to a total of EUR 155,182 (2012: 993,131), which corresponds to 0.04% (2012: 0.26%) of the total remuneration in the Fortum Group. EUR President and CEO Other Management Team members 2) 3) Total Salaries and fringe benefits 2013 Salaries and fringe benefits 2012 795,000 979,824 Short-term bonuses 2013 1) 17,935 Short-term bonuses 2012 1) 280,659 Total 2013 Total 2012 812,936 1,260,483 2,860,497 2,803,324 137,246 712,472 2,997,744 3,515,796 3,655,498 3,783,148 155,182 993,131 3,810,680 4,776,279 1) 2) 3) Short-term bonus payments are based on the previous year's targets and achieved results. Including compensation of EUR 80,000 paid to CFO Rauramo for assuming the duties of the President and CEO during March-November 2013. CFO Rauramo was granted a recruitment bonus in 2012, to be paid over three years. As Fortum disclosed in 2012, the first 33,334 euro payment was made in 2012. The second payment of the same amount was disbursed in 2013 and Rauramo is entitled to a third payment of the same amount in 2014. This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 229 Annual Report 2013 Remuneration Additionally, the President and CEO had a gross income of EUR 971,341 from the share delivery of share plans 2007-2012 and 2010-2015 during spring 2013. The corresponding aggregated figure for the other members of the Fortum Management Team was EUR 1,508,203. The shares from share plan 2010-2015 cannot be transferred or sold before the end of the lock-up period. Shares delivered to the Shares delivered to the management management The table shows the number of Fortum shares delivered to the President and CEO and other Fortum Management Team members under the long-term incentive plans. Fortum Management Team members 31st December 2013 Fortum Management Team members 31st December 2013 According to the Cabinet Committee's Economic Policy, the total taxable gross value of the benefit arising from the shares delivered to a participant cannot exceed the participant's one year salary. Tapio Kuula Helena Aatinen Alexander Chuvaev 1) Mikael Frisk Timo Karttinen Per Langer Markus Rauramo Matti Ruotsala Kaarina Ståhlberg (member of the Fortum Management Team from 1 September 2013) 1) Share rights will be paid in cash instead of shares after the three-year lock-up period due to local legislation Remuneration and terms of employment of President and CEO Tapio Kuula Remuneration and terms of employment of President and CEO Tapio Kuula 2013 2012 35,152 17,171 519 35,783 10,079 9,563 8,550 756 - 18,749 4,576 5,213 3,966 - 12,395 7,283 - - Salary and fringe benefits Base salary EUR 77,845 /month, including free car allowance and phone allowances as fringe benefits. Short-term incentive system (bonus) * Long-term incentive system (share bonus) * Pension The bonus can be earned annually based on the criteria approved by the Board of Directors. The maximum level is 40% of the annual salary including fringe benefits. According to Fortum management’s current share bonus system the maximum value of shares (before taxation) cannot exceed the annual salary of the President and CEO. Retirement age is 63. The President and CEO’s supplementary pension is a defined contribution pension plan, and the annual contribution is 25% of the annual salary. The annual salary consists of the base salary, fringe benefits and bonuses. If the President and CEO’s contract is terminated before retirement age, he is entitled to retain the funds that have accrued in the pension fund. Termination of contract The notice period for both parties is six months. If the company terminates the contract, the President and CEO is entitled to the salary of the notice period and to severance pay equal to 18 months’ salary. *) Annual bonus payments (short- and long-term ) cannot exceed 120% of annual salary (annual salary = 12 times the salary paid in December of the year in question). Pensions Pensions Fortum’s Finnish executives participate in the Finnish TyEL pension system, which provides for a retirement benefit based on years of service and earnings in accordance with the prescribed statutory system. Under the Finnish pension system, earnings are defined as base pay, annual bonuses and taxable fringe benefits, but gains realised from the share bonus system are not included in that definition. Finnish pension legislation offers a flexible retirement from age 63 to age 68 without full-pension restrictions. Fortum’s executives outside Finland participate in pension systems based on collective agreements and market practises in their local countries. In addition to the statutory pensions, the members of Fortum Management Team have supplementary pension arrangements. The Group policy is that all new supplementary pension arrangements are defined contribution plans. Retirement age for Fortum’s President and CEO is 63 and for other members of the This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 230 Annual Report 2013 Remuneration Fortum Management Team 60-65. For the President and CEO and the other members of the Fortum Management Team, the maximum pension can be 60% of the salary, with the pension insured by an insurance company, and for some executives the maximum is 66% of the salary, with the pension insured and paid by Fortum's Pension Fund. Remuneration of Board of Directors Remuneration of Board of Directors Every member of the Board of Directors receives a fixed yearly fee and a meeting fee. The meeting fee is also paid for committee meetings and is paid in double to a member who lives outside Finland in Europe and in triple to a member who lives outside Europe. The members are entitled to travel expense compensation in accordance with the company’s travel policy. Board members are not in employment relationship or service contract with Fortum and they are not given the opportunity to participate in Fortum’s bonus or share bonus systems, nor does Fortum have a pension plan that they can opt to take part in. The compensation of the Board members is not tied to the sustainability performance of the Group. The Annual General Meeting on 9 April 2013 confirmed the following compensation for the members of the Board of Directors: Compensation for Board of Directors EUR/year/meeting Chairman Deputy Chairman Chairman of the Audit and Risk Committee 1) Members Meeting fee 2) 2013 75,000 57,000 57,000 40,000 600 2012 75,000 57,000 57,000 40,000 600 1) if not acting as Chairman or Deputy Chairman of the Board of Directors simultaneously. 2) is paid in double to a member who lives outside Finland in Europe and triple to a member who lives outside Europe. Total compensation for Board of Directors Total compensation for Board of Directors EUR Board service in 2013 Total compensation in 2013 * Board service in 2012 Total compensation in 2012 * Board Members at 31 December 2013 Sari Baldauf, Chairman Christian Ramm-Schmidt,Deputy Chairman Minoo Akhtarzand Heinz-Werner Binzel Ilona Ervasti-Vaintola Kim Ignatius Joshua Larson Former Board Members 1 Jan-31 Dec 1 Jan-31 Dec 1 Jan-31 Dec 1 Jan-31 Dec 1 Jan-31 Dec 1 Jan-31 Dec 1 Jan-31 Dec 84,000 1 Jan-31 Dec 66,000 1 Jan-31 Dec 58,000 1 Jan-31 Dec 60,400 1 Jan-31 Dec 49,000 1 Jan-31 Dec 67,200 11 Apr-31 Dec 70,600 1 Jan-31 Dec 80,353 64,479 53,349 53,149 46,549 48,100 67,549 Esko Aho N/A N/A 1 Jan-11 Apr 13,000 *) includes fixed yearly fee and meeting fees This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 231 Annual Report 2013 Board of Directors Fortum's Board of Directors 31 December 2013 Sari Baldauf Sari Baldauf • Chairman, born 1955, MSc, Business Administration • Independent member of Fortum's Board of Directors since 2009 • Chairman of the Nomination and Remuneration Committee Main occupation: Main occupation: Finnish Business and Policy Forum EVA: Member of the Board • Finland’s Children and Youth Foundation, Tukikummit Foundation, John Nurminen Foundation and Technology Industries of Finland Centennial Foundation: Member of the Board • Savonlinna Opera Festival, Chairman • Sanoma Corporation, Deputy Chairman 2003–2009 • Non-executive Director • Capman Corporation, Member of the Primary work experience: Primary work experience: Board 2008–2011 • YIT Corporation, Member of the Board 2006–2008 • Hewlett-Packard Company, Member of • Nokia Corporation, several senior the Board 2006–2012 executive positions, Member of the Group Executive Board Key positions of trust: Key positions of trust: • F-Secure Corporation, Daimler AG, Akzo Nobel N.V., Deutsche Telekom AG and Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 2,300 (31 December 2012: 2,300) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 232 Annual Report 2013 Board of Directors Christian Ramm-Schmidt Christian Ramm-Schmidt • Deputy Chairman, born 1946, BSc (Econ) • Independent member of Fortum's Board • ISS ServiSystems Oy, Director • Rank Xerox Oy, Director Key positions of trust: Key positions of trust: • Reima Oy and Atoy Oy, Member of the Board Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 2,250 (31 December 2012: 2,250) of Directors since 2006 • Member of the Nomination and Remuneration Committee Main occupation: Main occupation: • Merasco Capital Ltd., Senior Adviser Primary work experience: Primary work experience: • Baltic Beverages Holding Ab (BBH), President • Baltika Breweries, Russia, Chairman of the Board • Fazer Biscuits Ltd., Fazer Chocolates Ltd., Fazer Confectionery Group Ltd., President Minoo Akhtarzand Minoo Akhtarzand • Born 1956, MSc, Electrical engineering • Independent member of Fortum's Board of Directors since 2011 • Member of the Nomination and Remuneration Committee Main occupation: Main occupation: • Governor in the County of Jönköping Primary work experience: Primary work experience: • Swedish National Rail Administration, Director-General • Regional Labour Agency, Director • Vattenfall AB, several senior executive positions • Stockholm Energi, various positions Key positions of trust: Key positions of trust: • The National Society for Road Safety in the County of Jönköping, Chairman • The Swedish Export Credit Agency, Member of the Board • Sveriges Radio 2007-2010, Vattenfall Bränsle AB 2004-2006, Vattenfall Vattenkraft AB 2003-2006, Vattenfall Business service AB 2003-2006 and Teracom AB (Telecommunication and IT) 2001-2007, Member of the Board • EIM (European Infrastructure Managers) 2009-2010 and Södertörn university 1997-2003, Deputy Chairman • Västerbergslagens Energi AB, Chairman of the Board 2000-2004 Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: - (31 December 2012: -) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 233 Annual Report 2013 Board of Directors Heinz-Werner Binzel Heinz-Werner Binzel Key positions of trust: Key positions of trust: • TÜV Rheinland Holding AG, Member of the Supervisory Board, Chairman of the Audit Committee • RWE Solutions AG, Chairman of the Supervisory Board 2003-2006 Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: - (Dec 31, 2012: 1,000) • Born 1954, Economics and electrical engineering degree • Independent member of Fortum's Board of Directors since 2011 • Member of the Audit and Risk Committee Main occupation: Main occupation: • Independent consultant Primary work experience: Primary work experience: • RWE Energy AG, Board member for procurement and sale of electricity, gas, and water • RWE Solutions AG, Board member as CFO, CEO • NUKEM GmbH, several senior executive positions in Germany and the USA Ilona Ervasti-Vaintola Ilona Ervasti-Vaintola • Born 1951, LL.M., Trained on the bench • Member of Fortum's Board of Directors since 2008, independent since 1 November 2011 • Member of the Nomination and Remuneration Committee Main occupation: Main occupation: • Non-executive Director Primary work experience: Primary work experience: • Sampo plc, Group Chief Counsel, Member of the Group Executive Committee • Mandatum Bank plc, Chief Counsel and member of the Board • Mandatum & Co Ltd, Director, Partner • Union Bank of Finland Ltd, Head of Financial Law Department, Legal counsel Key positions of trust: Key positions of trust: • Securities Market Association, Deputy Chairman of the Board • Finnish Literature Society 2005-2011, Fiskars Corporation 2004-2010, OMX Nordic Exchanges Group Ltd 2003-2008 and Stockholmsbörsen AB 2003-2007, Member of the Board • Legal Committee of the Central Chamber of Commerce of Finland, Member 2002-2005 and Chairman 2005-2010 Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 4,000 (31 December 2012: 4,000) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 234 Annual Report 2013 Board of Directors Kim Ignatius Kim Ignatius Joshua Larson Joshua Larson Key positions of trust: Key positions of trust: • Millicom International Cellular S.A., Member of the Board, Chairman of the Audit Committee Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 2,400 (31 December 2012: 2,400) • Born 1956, BSc (Econ), Helsinki School of Economics and Business Administration • Independent member of Fortum's Board of Directors since 2012 • Chairman of the Audit and Risk Committee Main occupation: Main occupation: • Sanoma Corporation, CFO Primary work experience: Primary work experience: • TeliaSonera AB, Executive Vice President and CFO • Sonera Oyj, Executive Vice President and CFO • Tamro Oyj, Group CFO • Born 1966, Master of International Affairs, Bachelor in Russian language • Independent member of Fortum's Board • Goldman Sachs International, London and Moscow, Executive Director, Co- Head of Russian Business of Directors since 2010 • Member of the Audit and Risk Committee Key positions of trust: Key positions of trust: Main occupation: Main occupation: • Private investor and consultant Primary work experience: Primary work experience: • IFC Alemar, CEO and Senior Managing Director • The Carlyle Group, Moscow, Managing Director • Morgan Stanley, Moscow, Executive Director, Head of Russian Operations • Kora Group 2006-2007, Bank Alemar, IFC Alemar and Alemar Asset Management 2006-2008, OAO Apteka Holdings 2004-2006 and OAO Cherkizovo Agro- Industrial Complex 2002-2004: Member of the Board of Directors Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: - (31 December 2012: - ) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 235 Annual Report 2013 Group Management Fortum Management Team 31 December 2013 In February 2014, Fortum announced that it will renew its business structure as of 1 March 2014. For more information, see Financials, Events after the balance sheet date. Tapio Kuula Tapio Kuula President and CEO President and CEO Key positions of trust: Key positions of trust: • Born 1957, MSc (Eng), MSc (Econ) • President and CEO since 2009 • Member of the Management Team since 1997 • Varma Mutual Pension Insurance Company, Chairman of the Supervisory Board • Lappeenranta University of Technology, • Employed by Fortum since 1996 Member of the Board Primary work experience: Primary work experience: • Fortum Corporation, Senior Vice President 2005 • East Office of Finnish Industries Oy, Deputy Chairman of the Board • Finnish-Russian Chamber of Commerce - FRCC, Member of the Board • EURELECTRIC, Member of the Board • Northern Dimension Business Council, • Fortum Power and Heat Oy, President Co-chairman 2000 • Power and Heat Sector, Fortum Oyj, President 2000 • Fortum Power and Heat Oy, Executive Vice President 1999 • Imatran Voima Oy, Executive Vice President, Member of the Board, Member of the Management Team 1997 Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 153,555 (31 December 2012: 118,403) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 236 Annual Report 2013 Group Management Helena Aatinen Helena Aatinen • Metso Corporation, several positions in Communications function 1997 Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 519 (31 December 2012: - ) Senior Vice President, Senior Vice President, Corporate Communications Corporate Communications • Born 1959, MSc (Econ) • Senior Vice President, Corporate Communications since 2012 • Member of the Management Team since 2012 • Employed by Fortum since 2011 Primary work experience: Primary work experience: • Fortum Corporation, Vice President, Corporate Communications 2011 • Finnish Forest Industries Federation, Communications Director 2005 • Metso Corporation, Senior Vice President, Corporate Communications 2002 Aleksander Chuvaev Aleksander Chuvaev Executive Vice President, Executive Vice President, Russia Division Russia Division • Born 1960, MSc (Eng) • Executive Vice President, Russia Division, General Director of OAO Fortum and country responsible for Russia since 2009 • Member of the Management Team since • JSC OMZ, Chief Operations Officer, Russia 2005 • GE, various positions in the USA and Canada 1999 • Solar Turbines Europe S.A., various positions in Europe and the USA 1991 Key positions of trust: Key positions of trust: 2009 • Energy Producers Council, Member of the • Employed by Fortum since 2009 Supervisory Board Primary work experience: Primary work experience: • GE Oil & Gas, Regional Executive Director, Russia and CIS 2009 • SUEK, Investment Development Director, Russia 2008 • Russian Union of Industrialists and Entrepreneurs, Member of the Board • Territorial Generating Company No. 1 (TGC-1), Member of the Board • Government Commission on the Development of the Electric Power Industry, Member • JSC Power Machines, Managing Director, Russia 2006 • GE Oil & Gas, Regional General Manager, Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 12,093 (31 December 2012: 12,093) Russia 2006 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 237 Annual Report 2013 Group Management Mikael Frisk Mikael Frisk Timo Karttinen Timo Karttinen Senior Vice President, Senior Vice President, Corporate Human Resources Corporate Human Resources • Nokia NCM Division, HR Development Manager 1992 • Oy Huber Ab, HR Development Manager 1990 Key positions of trust: Key positions of trust: • HENRY - The Finnish Association for Human Resources Management, Member of the Board Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 42,128 (31 December 2012: 32,049) • Born 1961, MSc (Econ) • Senior Vice President, Corporate Human Resources, since 2001. Responsible for Corporate HR, IT and Business Process Management. • Member of the Management Team since 2001 • Employed by Fortum since 2001 Primary work experience: Primary work experience: • Nokia Mobile Phones, Vice President, HR Global Functions 1998 • Nokia-Maillefer, Vice President, HR, Lausanne, Switzerland 1993 Executive Vice President, Executive Vice President, Electricity Solutions and Electricity Solutions and Distribution Division Distribution Division • Born 1965, MSc (Eng) • Executive Vice President, Electricity Solutions and Distribution Division, and country responsible for Finland and Norway since 2009 • Member of the Management Team since 2004 • Employed by Fortum since 1991 Primary work experience: Primary work experience: • Fortum Corporation, Senior Vice President, Corporate Development 2004 • Fortum Power and Heat Oy, Business Unit Head, Portfolio Management and Trading 2000 • Fortum Power and Heat Oy, Vice President, Electricity Procurement and Trading 1999 • Imatran Voima Oy, Vice President, Electricity Procurement 1997 Key positions of trust: Key positions of trust: • Gasum Oy, Member of the Supervisory Board • Finnish Energy Industries, Vice- Chairperson of the Executive Board Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 69,791 (31 December 2012: 60,228) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 238 Annual Report 2013 Group Management Per Langer Per Langer Executive Vice President, Heat Executive Vice President, Heat Division Division Key positions of trust: Key positions of trust: • Fortum Sweden AB, Chairman of the Board • AS Fortum Tartu, Supervisory Board Chairman • AB Fortum Värme Holding samägt med Stockholm Stad, Member of the Board • Fortum Heat Polska, Member of the Board • EFA AB, Deputy Chairman • Svensk Energi, Member of the Board • Hafslund ASA, Member of the Board • AS Võrguteenus Valdus, Deputy Chairman of the Supervisory Board Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 25,267 (31 December 2012: 16,717) • Born 1969, MSc (Econ) • Member of the Management Team since 2009 • Employed by Fortum since 1999 • Executive Vice President, Heat Division, and country responsible for Sweden, Poland and the Baltic countries since 2009. Responsible for Corporate Research & Development since 2011. Primary work experience: Primary work experience: • Fortum Power and Heat Oy, President of Heat 2007 • Fortum Power and Heat Oy, President of Portfolio Management and Trading 2004 • Fortum Oyj, managerial positions 1999 • Gullspång Kraft, managerial positions 1997 Markus Rauramo Markus Rauramo Chief Financial Officer Chief Financial Officer • Enso Oyj, Helsinki, several financial tasks 1993 • Born 1968, MSc (Econ and Pol. Hist.) • Chief Financial Officer since 2012 • Member of the Management Team since 2012 • Employed by Fortum since 2012 Primary work experience: Primary work experience: • Stora Enso Oyj, Helsinki, CFO and Member of the GET 2008 • Stora Enso International, London, SVP Group Treasurer 2004 • Stora Enso Oyj, Helsinki, VP Strategy and Investments 2001 • Stora Enso Financial Services, Brussels, VP Head of Funding 1999 Key positions of trust: Key positions of trust: • Wärtsilä Oyj Abp, Member of the Board • Teollisuuden Voima Oyj, Member of the Board • Kemijoki Oy, Member of the Supervisory Board • Oy Proselectum AB, Member of the Board • Chairman of the Board of several Fortum Corporation companies Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 13,756 (31 December 2012: 13,000) This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 239 Annual Report 2013 Contact information Matti Ruotsala Matti Ruotsala Executive Vice President, Executive Vice President, Power Division Power Division • Konecranes Plc and Kone Corporation, several senior and managerial positions 1982 • Born 1956, MSc (Eng) • Executive Vice President, Power Division Key positions of trust: Key positions of trust: since 2009 • Member of the Management Team since 2009 • Employed by Fortum since 2007 • Kemijoki Oy, Chairman of the Board • PKC Group Oyj, Chairman of the Board • Teollisuuden Voima Oyj, Vice-Chairman of Primary work experience: Primary work experience: • Fortum Power and Heat Oy, President of Generation 2007 • Valtra Ltd, Managing Director 2005 • AGCO Corporation, Vice President 2005 • Konecranes Plc, Chief Operating Officer (COO) and Deputy CEO 2001 the Board • Componenta Oyj, Member of the Board • Halton Group Ltd, Member of the Board Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: 28,897 (31 December 2012: 16,502) Kaarina Ståhlberg Kaarina Ståhlberg General Counsel General Counsel • Born 1966, LL.M. (Helsinki), LL.M. (Columbia University, New York) • General Counsel since 2013 • Member of the Management Team since 2013 • Employed by Fortum since 2013 • Nokia Corporation, Senior Legal Counsel at Head Office, Legal Department 1999 • Law Offices Dittmar & Indrenius, Attorney at Law 1993 • Law Offices Heikki Haapaniemi, Attorney at Law 1992 Key positions of trust: Key positions of trust: Primary work experience: Primary work experience: • Helsinki Chamber of Commerce, Member of the Board of Directors Fortum shares as of 31 December 2013: Fortum shares as of 31 December 2013: - (31 December 2012: - ) • White & Case, Counsel, 2012 • Nokia Corporation, Vice President, Assistant General Counsel 2005 • Nokia Corporation, Vice President, Head of the Mobile Phones legal department 2004 • Nokia Corporation, Director, Legal at Head Office, Legal Department 2001 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 240 Annual Report 2013 Legal notice Contact information Contact information Investor relations Investor relations Financial communications Financial communications Sustainability Sustainability Sophie Jolly Sophie Jolly Vice President, Investor Relations tel. +358 10 45 32552, sophie.jolly@fortum.com Rauno Tiihonen Rauno Tiihonen Manager, Investor Relations tel. +358 10 45 36150, rauno.tiihonen@fortum.com Pauliina Vuosio Pauliina Vuosio Vice President, Financial Communications tel. +358 50 453 2383, pauliina.vuosio@fortum.com Ulla Rehell Ulla Rehell Vice President, Sustainability tel. +358 10 45 29251, ulla.rehell@fortum.com Karoliina Lehmusvirta Karoliina Lehmusvirta Manager, Financial Communications tel. +358 40 581 3710, karoliina.lehmusvirta@fortum.com Kari Kankaanpää Kari Kankaanpää Sustainability Manager tel. +358 10 45 32330, kari.t.kankaanpaa@fortum.com Legal notice Legal notice Terms of Use Terms of Use The use of the website of Fortum Corporation and its subsidiaries (together “FORTUM”) requires following the terms of use set forth below. 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You This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 241 Annual Report 2013 Legal notice may request to have your personal information collected by FORTUM removed or corrected at any time. Applicable Law Applicable Law Enquiries and Remarks Enquiries and Remarks These terms of use shall be governed by the laws of Finland. Please address all enquiries and remarks regarding these terms of use to FORTUM’S Legal Affairs, P.O. BOX 1, 00048 FORTUM, FINLAND, Tel. +358 10 4511 This is an automatically generated PDF document of Fortum's online Annual Report and may not be as comprehensive as the complete Annual Report, which is available at http://annualreport2013.fortum.com/ 242