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Otter TailContents Contents This is Fortum .......................................................... 4 CEO’s review ................................................................................. 4 Operations and market areas .................................................... 9 Year 2014 in figures .................................................................11 Sales and production...............................................................11 Financial summary .................................................................17 Support for society ....................................................................69 Generating economic value .....................................................70 Distribution of added value 2014 ............................................70 Fortum as a tax payer ...............................................................73 Financials ................................................................ 77 Environmental summary .........................................................18 OpEratinG and FinanCial rEviEw ...................................77 Social summary ......................................................................19 Market position .......................................................................20 Strategy ........................................................................................23 Core areas of the strategy ........................................................23 Strategy realisation in 2014 ....................................................26 Future energy system ...............................................................27 Sustainability embedded in the strategy ...................................28 Research and development ......................................................31 Operating environment and market development .............32 European market development ................................................32 Russian market development ...................................................35 Carbon market development ....................................................36 Business .................................................................. 38 Group Business structure ........................................................38 Our operations............................................................................41 Hydropower .............................................................................41 Financial performance and position ......................................77 risk management .................................................................. 102 Fortum share and shareholders .......................................... 111 KEY FiGurES ..................................................................................118 COnSOlidatEd FinanCial StatEMEntS .........................131 Consolidated income statement .......................................... 131 Consolidated statement of comprehensive income ......... 133 Consolidated balance sheet .................................................. 134 Consolidated statement of changes in total equity ......... 135 Consolidated cash flow statement....................................... 136 notes to the consolidated financial statements ............... 139 1 Accounting policies ............................................................139 2. Critical accounting estimates and judgements ...................152 3. Financial risk management ..............................................154 4. Capital risk management ..................................................163 Nuclear power .........................................................................43 5. Segment reporting .............................................................164 CHP ........................................................................................46 6. Items affecting comparability ............................................174 Other production .....................................................................47 7. Fair value changes of derivatives and underlying items in Power and heat distribution .....................................................48 income statement ..............................................................175 Electricity and heat sales .........................................................50 8. Acquisitions and disposals ................................................176 Expert services ........................................................................51 9. Assets held for sale ...........................................................178 In Society ................................................................. 52 Stakeholders ...............................................................................52 Stakeholder collaboration ........................................................52 Main stakeholder groups .........................................................54 Shareholders ...........................................................................58 Customers ...............................................................................58 Personnel ................................................................................59 Suppliers of goods and services ...............................................62 Authorities and energy industry organisations .........................66 Media .....................................................................................67 Non-governmental organisations .............................................67 Local communities ..................................................................67 10. Other income and other expenses ....................................179 11. Materials and services ...................................................180 12. Employee benefits ............................................................181 13. Finance costs – net ..........................................................187 14. Income tax expense ........................................................189 15. Earnings and dividend per share .....................................191 16. Financial assets and liabilities by categories ....................192 17. Financial assets and liabilities by fair value hierarchy .....196 18. Intangible assets .............................................................198 19. Property, plant and equipment ........................................199 20. Participations in associated companies and joint ventures ..................................................................203 21. Other non-current assets ..................................................210 Contents 22. Long-term and short-term interest-bearing receivables ......210 GRI ......................................................................... 279 Standard disclosures .............................................................. 279 Report content .......................................................................280 Material aspects ....................................................................281 Management approach .........................................................285 Ethics and integrity ...............................................................295 assurance ................................................................................. 296 Assurance statement .............................................................296 Gri index .................................................................................. 298 Economic responsibility ........................................................ 309 Economic performance ..........................................................309 Plant decommissioning .........................................................310 System efficiency ...................................................................311 Environmental responsibility .............................................. 312 Materials ..............................................................................312 Energy...................................................................................313 Water ....................................................................................315 Biodiversity ...........................................................................316 Emissions ..............................................................................317 Effluents and waste ...............................................................320 Compliance ...........................................................................322 Supplier environmental assessment .......................................322 Environmental grievance mechanisms ...................................323 Social responsibility ............................................................... 324 Labour practices and decent work .........................................324 Human rights ........................................................................334 Society ..................................................................................336 Product responsibility ............................................................339 acronyms and units ............................................................... 341 legal notice .............................................................................. 342 Contact information ............................................................... 343 23. Inventories ......................................................................211 24. Trade and other receivables .............................................211 25. Liquid funds....................................................................213 26. Share capital ...................................................................213 27. Non-controlling interests ..................................................214 28. Interest-bearing liabilities ................................................214 29. Deferred income taxes .....................................................216 30. Nuclear related assets and liabilities ...............................218 31. Other provisions ..............................................................220 32. Pension obligations .........................................................221 33. Other non-current liabilities .............................................226 34. Trade and other payables ................................................226 35. Pledged assets .................................................................227 36. Leasing ...........................................................................228 37. Capital commitments .......................................................229 38. Contingent liabilities .......................................................229 39. Legal actions and official proceedings .............................230 40. Related party transactions ...............................................231 41. Events after the balance sheet date ..................................232 42. Subsidiaries by segment on 31 December 2014 ...............232 parEnt COMpanY FinanCial StatEMEntS ...................235 income statement ................................................................... 235 Balance Sheet .......................................................................... 236 Cash flow statement ............................................................... 237 notes to the parent company financial statement ........... 238 prOpOSal FOr thE diStriButiOn OF EarninGS ..........248 auditOr’S rEpOrt ......................................................................248 QuartErlY FinanCial inFOrMatiOn ...............................250 invEStOr inFOrMatiOn ..........................................................252 Governance ........................................................... 253 Corporate Governance Statement ....................................... 253 Governing bodies of Fortum ...................................................253 Internal controls in relation to financial reporting .................260 remuneration .......................................................................... 263 Board of directors ................................................................... 269 Group Management ............................................................... 273 Annual Report 2014 This is Fortum Fortum's Annual Report 2014 Fortum's Annual Report 2014 Fortum is an energy company highly committed to sustainability. We strive to respond to the needs of our customers by generating, selling and distributing low-carbon electricity and heat and by offering energy-sector expert services. THIS IS FORTUM THIS IS FORTUM CEO Tapio Kuula’s review CEO Tapio Kuula’s review President and CEO until 31 January 2015 In 2014, the significant weakening of the global economy and the value of the rouble increased the uncertainty in the operating environment. There was positive development in the EU’s climate policy, and in Europe a decision was reached on energy and climate targets for 2030. Fortum focused on increasing the flexibility of its business operations and prepared to take the next significant steps in implementing the company’s strategy. Alongside energy market development and the energy market model, climate change is an important issue that must be resolved. According to the latest assessment reports by the Intergovernmental Panel on Climate Change (IPCC), the global average temperature is estimated to rise by as much as three-four degrees Celsius by 2100 compared to the level of past decades. The IPCC proposes relinquishing dependence on fossil fuels by the end of the century to keep climate warming below two degrees. Greenhouse gas emissions must be reduced significantly, which requires major changes to energy production. Additionally, smart solutions are needed to make energy distribution and consumption more efficient. Emissions-free production Emissions-free production is Fortum’s strategic is Fortum’s strategic choice choice Fortum’s strategy fits very well within the frame of reference of measures mitigating climate change. Our purpose is to create energy that improves life for present and future generations. We provide sustainable 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://annualreport2014.fortum.com/ 4 Annual Report 2014 CEO's review solutions for society while delivering excellent value to our shareholders. We want to act responsibly, both in the short term and long term. The cornerstones of our strategy are strong expertise in CO2-free hydro and nuclear power production, in efficient combined heat and power (CHP) production, and in operating in the energy markets. Tighter EU emissions Tighter EU emissions reduction targets for 2030 reduction targets for 2030 Leaders of the EU countries decided in 2014 to decrease the member countries’ combined carbon dioxide emissions from the 1990 level by 40 per cent by 2030. In the EU, preparations for a Market Stability Reserve (MSR) to strengthen the steering effects of emissions trading were also initiated. When the price for carbon dioxide emissions is adequately steering power plant operations and future investments, the share of renewable energy can be increased in a market-based manner. For cost and efficiency reasons, electricity supply and generation must be viewed from a Europe-wide perspective. When electricity is generated with a method that is most efficient for each area, a reasonable electricity price for consumers and a competitive supply for industry can be ensured. Instead of massive production subsidies from the public sector, it would be important to ensure market functionality by investing in, e.g., electricity interconnections that would improve the security of electricity supply throughout Europe. The EU’s energy policy and The EU’s energy policy and national solutions national solutions Europe’s energy and climate policy decision making in 2014 was characterised by concerns about competitiveness of the euro zone and the security of energy supply. Europe got into a situation in which the wholesale price of electricity was low in the weak economy, there was a surplus of emission allowances on the market and the share of heavily subsidised renewable production increased. Due to the global market situation, coal was economical and fossil fuels were the most significant energy source for industrial countries. Electricity’s low market prices didn’t encourage market-based investments; instead, the majority of the new energy production capacity was based on public-sector subsidies, thereby growing the end customers’ electricity bill and the burden on taxpayers. Concerns about the security of energy supply led to the reinforcement of national perspectives. Instead of creating a European electricity market, some EU countries advanced towards national solutions. There were discussions in some EU countries about subsidies to maintain traditional capacity and about the so-called capacity mechanisms. However, from the perspective of the EU’s integrated energy market, this is partial optimisation and an expensive solution, and it doesn’t secure the supply of electricity in Europe in the long-term. If and when European countries adopt capacity mechanisms, they must not be tied to a single technology; they must be cross-border mechanisms and they must cover both old and new production capacity as well as all production forms. Predictable European Predictable European energy markets operating energy markets operating on a commercial basis on a commercial basis Even though the wholesale prices for electricity have continued to decrease, various taxes, fees and subsidies have increased the end-customers’ energy costs. Therefore, it is important to create a predictable electricity market built on consumer participation, utilisation of the different value components of energy sources, as well as the inclusion of various energy producers. Rather than advancing individual technologies or narrow-scope regional solutions, it is important to create the biggest possible integrated electricity market model that includes adequate physical transmission capacity and that has transmission system operators, grid companies and power exchanges operating in close cooperation. In addition, when environmental impacts are given the right price through CO2 emissions, it creates energy markets that are competitive, attentive to environmental requirements, and provide security of supply. In the future, both industrial customers and consumers should become involved in balancing production and consumption and in levelling consumption peaks in the electricity system. This is most successful when the premises are genuinely market-based and the levelling of consumption benefits economically both the electricity user and the producer. This will be one of the central challenges of energy market development in the years ahead. We increased our We increased our operational efficiency and operational efficiency and our flexibility our flexibility In a challenging market situation, Fortum’s 2014 results were strong. The wholesale price of electricity, global economic development and the weakened rouble were clearly disappointing. The drop in also commodity prices during the fourth quarter was not foreseeable. On the other hand, the price of CO2 emission allowances in EU emissions trading scheme increased somewhat; as a result, the drop in the price of electricity in the wholesale market was smaller than the decrease in commodity prices. In the Nordic countries, electricity production increased slightly thanks to the growth in exports, and demand in Russia remained at the 2013 level. Fortum’s sales in 2014 were EUR 4,751 million. Comparable operating profit, excluding items affecting comparability, mainly profit from the sale of the electricity distribution businesses in Finland and Norway, totalled EUR 1,351 million and cash from operating activities was a strong EUR 1,762 million. Earnings per share were EUR 3.55, of which EUR 2.36 per share relates to items affecting comparability. During the year, we continued Fortum’s internal transformation to further increase efficiency and flexibility. We finalised succesfully our two-year efficiency programme, within which we decreased investments, divested non-core assets, reduced fixed costs and improved working capital efficiency. 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://annualreport2014.fortum.com/ 5 Annual Report 2014 CEO's review We divested Finnish and We divested Finnish and Norwegian electricity Norwegian electricity distribution businesses distribution businesses Fortum sold its electricity distribution business in Finland in spring 2014 to a new distribution company owned by the Finnish pension insurance companies Keva and LocalTapiola Pension and the international infrastructure investors First State Investments and Borealis Infrastructure. The Norwegian electricity distribution business was sold to the energy company Hafslund ASA. We are continuing to prepare and evaluate opportunities to divest the Swedish electricity distribution business. By divesting the electricity distribution businesses, Fortum is better equipped to focus on the production and sales of efficient and low-carbon electricity and heat. This significantly increases Fortum’s strategic freedom, and gives the company an exceptionally good platform for improving shareholder value. Electricity sales and Electricity sales and services related to services related to electricity use are our electricity use are our core competences core competences Electricity has become a cornerstone of modern society and the driving force of the information society. With the electrification of transportation, and as information technology becomes even more integrated into the daily life of consumers, electricity’s share in total energy consumption will grow. Fortum is continuously developing new tools and services enabling business and private customers to monitor, control and boost the efficiency of their electricity consumption. Customers are also offered open, two-way solutions that enable them to sell the surplus electricity they produce to Fortum. Knowing consumers’ needs and identifying changes is an important part of Fortum’s strategy implementation. From this perspective, the natural next steps are growing the electricity sales-related business and strengthening our expertise related to the services offered to electricity users. For the good of customers For the good of customers and the surrounding and the surrounding society society We are committed to the principles of the UN Global Compact initiative. Our sustainability indicators emphasise Fortum’s role in society and measure environmental and safety performance as well as the company’s reputation, customer satisfaction, and the delivery reliability of electricity and heat. In 2014, we served our customers well. Customer satisfaction improved in all divisions, and customer loyalty and customer willingness to recommend Fortum were reflected in the growing number of customers. Fortum became the biggest electricity seller in the Nordic countries last year. The quality of our products and services were also appreciated. In terms of the delivery reliability of electricity, we reached our target. The average outage per customer was 97 minutes during the year. Customer satisfaction Customer satisfaction Results of the annual customer satisfaction survey indicate that we are moving in the right direction. The survey results published late last year indicate that Fortum’s customer satisfaction had improved more than that of any other major electricity company’s. Customer satisfaction has developed very favourably for several years. Fortum now has about 1.3 million electricity customers in Finland, Sweden and Norway; consequently, Fortum is the biggest seller of electricity in the Nordic countries. We have collaborated with our customers to modify electricity agreements to meet their needs. We offer electricity produced with emissions-free hydropower through easy-to-understand agreements with logical, competitive pricing. This basic work is supported with energy- efficiency services the customers can use to influence the cost of their electricity bill. Measured through the annual One Fortum survey, the company’s reputation remained stable and improved in Finland. However, in Sweden our reputation among the general public is not at the desired level, so we must continue our efforts to improve it. Russian investment Russian investment programme close to programme close to completion completion The investment programme consisting of eight new production units in Russia has advanced to the final phase. In 2014, the last of the three big, new power plant units in Nyagan was commissioned. The final two units of the programme will be commissioned in 2015 in Chelyabinsk. Fortum’s target set at the time of the acquisition of the Russian subsidiary OAO Fortum in 2008 was to reach a run-rate level in operating profit (EBIT) of RUB 18.2 billion in the Russian Segment during 2015. We have kept the rouble-denominated target intact, but, due to the significant fluctuations in the rouble exchange rates, the euro- denominated result level will be volatile. Acquiring TGC-1’s Acquiring TGC-1’s hydropower - Fortum’s hydropower - Fortum’s next step to growth next step to growth In December 2014, we announced our intention to increase Fortum’s hydropower production capacity by 60% through the restructuring of TGC-1, a Russian Territorial Generating Company. TGC-1 owns and operates hydro and thermal power in north- western Russia and heat distribution networks in St. Petersburg. Gazprom Energoholding owns 51.8% of the company’s shares and Fortum 29.5%. In the restructuring, Fortum and the Russian company Rosatom would own the hydropower production of TGC-1. Gazprom Energoholding would continue with the heat and thermal power operations of TGC-1. Through our present stake in TGC-1, Fortum’s share of the new, hydropower- focused company would rise to more than 75%. Rosatom would become a minority holder in the company, with a less than 25% stake. The new company would be a subsidiary of Fortum. We are working to complete detailed structuring, practical arrangements and final commercial terms. Provided that Fortum obtains more than 75% ownership in TGC-1’s hydro assets, we are ready to participate with a minority stake (max. 15%) in Fennovoima’s Finnish nuclear power project on the same terms and conditions as the other domestic companies currently participating in the project. The restructuring of TGC-1 and a minority share in Fennovoima’s nuclear power plant 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://annualreport2014.fortum.com/ 6 Annual Report 2014 CEO's review project are in line with Fortum’s strategy, which is based on strong expertise in CO2- free hydro and nuclear power and in efficient combined heat and power production as well as operating in energy markets. Increasing Fortum’s hydropower capacity by 60% would also balance the company’s production structure and Russian business operations. After the restructuring, 60% of the Russian operations would be combined heat and power production and condensing power production, and the remaining 40% would be hydropower. At the Fortum level, the share of hydropower would increase from the current one-third to over 40% of the total production mix. Hydropower balances the Hydropower balances the variability of wind and variability of wind and solar power solar power Emissions-free hydropower is a climate- neutral production form that can be used to reduce the energy sector’s emissions. From the perspective of the entire energy system, hydropower offers the opportunity to balance the large variability of renewable energy sources, particularly solar and wind power. Hydropower balances Hydropower balances fluctuations in both other fluctuations in both other renewable energy renewable energy production and electricity production and electricity consumption consumption The values associated with electricity are energy content, capacity and the ability of the production forms to respond to consumption peaks. Despite the intermittency of renewable energy, there must be balance between production and consumption at all times in the electricity system. Maintaining the balance – particularly as the share of other renewable energy increases – requires flexibility; in this respect, hydropower meets this need very well. This is precisely why hydropower production is very attractive to Fortum. Fortum’s current hydropower production is centralised in Finland and Sweden. The company has 33 fully-owned or co-owned hydropower plants in Finland and 126 in Sweden. Their production capacity can be increased mostly through plant modernisations and by optimising the use of water systems. In 2014, we continued our annual investments in hydropower capacity upgrades. For example, the refurbishment of the Imatra power plant’s number-three unit, commissioned in 1929, re-established the plant as Finland’s biggest hydropower plant in terms of capacity. When the refurbishment of the number-four unit is completed in 2015, the plant’s capacity will further increase to 192 megawatts. Therefore, it is important that we use this opportunity wisely and in good collaboration with authorities and stakeholder groups. Fortum takes the local environmental impacts of hydropower into consideration and is ready to work with stakeholders to find solutions. Russian heat reform Russian heat reform brings more business brings more business The roadmap for Russia’s heat sector reform was approved by the Russian Government in 2014. With the reform, the district heat pricing would be based only on a heat-only boiler price methodology. The reform would encourage investments in energy-efficient production to reduce fuel consumption and in upgrading district heating networks to reduce heat loss. The plan is to phase in new heat tariffs mostly by 2020, starting in 2015. The reform would start in the big cities with over 100,000 residents and in cities that have existing combined heat and power production. Thanks to Fortum’s production structure, we are able to utilise energy-efficient combined heat and power production in a competitive manner. There have not yet been any final decisions made on the implementation of heat reform, but it could offer Fortum’s existing plants the opportunity to increase business in Russia. Combined heat and power Combined heat and power production boosts production boosts resource efficiency resource efficiency Combined heat and power (CHP) production is the most efficient fuel-based energy production. The fuel efficiency of CHP production can be as high as 90%. CHP plants play a significant role in Fortum’s energy production structure: CHP accounts for about one third of electricity production and about 90% of heat production. In recent years, Fortum has built a lot of new biomass- and waste-based combined heat and power production capacity in Estonia, Lithuania, Latvia, Poland, Sweden and Finland. Fortum’s co-owned TSE Turun Seudun Energiantuotanto Oy is currently building a new multifuel power plant in Naantali. Additionally, a new biopower plant is currently under construction in Stockholm, and upon completion will be one of the biggest in Europe. The plant is being built by Fortum Värme, which is Fortum's and the city of Stockholm’s joint venture. The value of the investment is about EUR 500 million. The amount of heat and electricity produced by the plant will be equivalent to the annual heat consumption of about 190,000 medium-sized apartments. The plant will significantly reduce the district heating-related CO2 emissions in Stockholm. Emissions-free energy Emissions-free energy with nuclear power with nuclear power Nuclear power accounts for about one third of Fortum’s electricity production and plays a significant role in reducing carbon emissions. Fortum also has long experience in the responsible use of nuclear power, and the company’s expertise is globally recognised. Nuclear power is needed to mitigate climate change, and its efficiency can be further improved significantly in combined heat and power production. The Loviisa nuclear power plant in Finland operated by Fortum had a good production year, and the plant’s load factor of 90.9% was excellent by international standards. Safety is a top priority in nuclear power plant operations, and Fortum continuously invests in improvements to safety. In 2014, investments to improve safety included a new air cooling system. The investment will ensure removal of residual heat in the plant units in improbable extreme situations in which seawater for some reason becomes unavailable for its normal cooling function. During 2015-2018 several other significant investment and modernisation projects will be implemented at Loviisa. These projects, such as the modernisation of automation, secure reliable and profitable electricity production at the plants to the end 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://annualreport2014.fortum.com/ 7 Annual Report 2014 Operations and market areas of the operating licenses, i.e. to 2027 and 2030. with this because it was a very bleak year for contractor safety. capacity flexibility, cost structure, sustainable operations or occupational safety. A significant nuclear power sector issue for Fortum in 2015 is the progression of the Russian TGC-1 restructuring and the related possible participation in the Finnish Fennovoima nuclear power project. Five accidents leading to the deaths of contractor employees occurred during the year, four in Sweden and one in Russia. My deepest condolences to the families and co- workers of the victims. Organisational reform to Organisational reform to support strategic change support strategic change As part of Fortum’s strategic change, we broadened the Group’s management team in March 2014. The divestment of the electricity distribution business puts Fortum in a new situation in which the company has significant business divestments and investment programmes under way while simultaneously preparing for growth. In light of this, we strengthened the Executive Management Team with competencies related to strategy, mergers and acquisitions, and corporate relations. The 2013-2014 efficiency programme was successfully completed, but there is still internal development potential within Fortum. With the organisational change, we strengthened the opportunities to leverage synergies between the businesses. The Chief Operating Officer (COO) model offers excellent opportunities to continue this development. The renewal also gave the Management Team members the opportunity to expand their own know-how and experience to the benefit of the company, the Executive Management Team work, and themselves. Occupational safety is Occupational safety is important important As in the previous year, the occupational safety of Fortum’s own employees remained very good. Measured by the Total Recordable Injury Frequency indicator, it was a record- best year. However, we cannot be satisfied Our goal is to prevent all serious injuries; we cannot tolerate non-compliance when it comes to safety practices. Immediate corrective measures involved an inspection of all Fortum’s construction sites and the most significant ongoing maintenance work, especially that involving hoisting work and work performed at heights. Additionally, the work safety guidelines and practices were updated, and the safety practices for construction projects were improved. All key individuals will receive training on these guidelines in 2015 in an effort to reduce serious injuries by half. We improve energy We improve energy efficiency efficiency At the end of 2014, Fortum’s Board of Directors approved a new long-term energy efficiency target. We aim to achieve an annual energy savings of over 1,400 gigawatt-hours by 2020 compared to 2012. The saving would be equivalent to the annual heating energy need of more than 75,000 households, or the annual production of more than two hundred 2.5-megawatt wind power plants. The new target replaces the previous target that measured the combustion efficiencyof fossil fuels. Ready to seize Ready to seize opportunities in the opportunities in the changing energy markets changing energy markets Fortum has a very strong competitive position, whether measured by CO2-free production, know-how, production structure, Fortum’s strategy provides a clear view of the future direction of development – both in the short term and the long term. It enables value creation, stronger earnings per share, and a good premise for producing stable, sustainable and over time increasing dividends. Thank you for the good Thank you for the good collaboration collaboration When the Annual Report is published, I have already retired. It has been a great pleasure to participate in Fortum's step-by-step development from a national energy company to a significant player in the Nordic countries and Europe. Strategically, Fortum is right now in a very interesting and exceptionally competitive position in the sector. For this reason, I would be pleased to continue working on behalf of Fortum as a member of the Board – if the spring 2015 Annual General Meeting so decides. I want to extend my sincere thanks to all Fortum personnel in all our operating countries for the work in 2014 and good collaboration. I would also like to thank our customers and shareholders for your trust. A special thank you to Chairman of the Board Sari Baldauf and to the whole Board of Directors for your support in advancing Fortum’s interests. Thank you also to Chief Financial Officer Timo Karttinen, who has assumed the responsibility for the duties of the interim President and CEO. I wish the best of success to Fortum, its owners, customers, collaboration partners and personnel. 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://annualreport2014.fortum.com/ 8 Annual Report 2014 Operations and market areas Operations and market areas Operations and market areas Finland Finland Sweden Sweden Russia Russia 4,551 MW Power generation, capacity 4,950 MW Power generation, capacity 4,758 MW Power generation, capacity 1,936 MW Heat production, capacity 16% 2,040 100% 82% 2.2 Mt Share of retail customers Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) CO2 emissions Fortum Corporation's headquarters are situated in Espoo, Finland 12% 1,201 100% 54% 0 Mt - Heat production, capacity 907,000 Distribution, customers Share of retail customers 13,466 MW Heat production, capacity 4,213 100% 100% Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) Employees 31 Dec 2014 16.7 Mt CO2 emissions ISO 14001 certified 1) OHSAS 18001 certified 2) CO2 emissions Fortum Värme Fortum Värme 627 MW Power generation, capacity 3,636 MW Heat production, capacity 694 100% 100% Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) 0.8 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://annualreport2014.fortum.com/ 9 Annual Report 2014 Year 2014 in figures Poland Poland Lithuania Lithuania Latvia Latvia 257 MW Power generation, capacity 1,189 MW Heat production, capacity 603 100% 100% Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) 18 MW 89 MW 101 100% 100% Power generation, capacity 26 MW Power generation, capacity Heat production, capacity 225 MW Heat production, capacity Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) 79 99% 99% Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) 0.8 Mt CO2 emissions 0.05 Mt CO2 emissions 0.02 Mt CO2 emissions Norway Norway Great Britain Great Britain Estonia Estonia Fortum announced in October 2014 agreement to sell its UK-based subsidiary Grangemouth CHP Limited to its long term customer INEOS Industries Holdings Ltd. 48 MW Power generation, capacity 497 MW Heat production, capacity 206 100% 100% Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) 0.08 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 Power generation, capacity Heat production, capacity Share of retail customers Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) CO2 emissions - - 4% 34 100% 0% 0 Mt India India 15 MW Power generation, capacity - 35 0% 0% Heat production, capacity Employees 31 Dec 2014 ISO 14001 certified 1) OHSAS 18001 certified 2) 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://annualreport2014.fortum.com/ 10 Annual Report 2014 Year 2014 in figures Sales and production Sales and production 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://annualreport2014.fortum.com/ 11 Annual Report 2014 Year 2014 in 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://annualreport2014.fortum.com/ 12 Annual Report 2014 Year 2014 in figures Fortum's power production by energy source in 2012–2014 TWh Hydro power Nuclear power Natural gas Coal Biomass Peat Other Total 2014 22.3 23.8 22.5 3.6 0.9 0.1 0.2 73.4 2013 18.0 23.7 20.0 4.0 1.1 0.1 0.5 67.4 * Includes joint venture AB Fortum Värme samägt med Stockholms stad Fortum’s power generation capacity, 31 Dec 2014 MW Hydropower Nuclear power Combined heat and power Condensing power Other Total Finland Sweden Russia Poland Other 1,526 1,460 438 1,126 3,088 1,820 0 12 30 4,758 257 4,551 4,950 4,758 257 93 15 108 2012* 25.2 23.4 19.4 3.3 1.3 0.1 0.3 73.1 Total 4,615 3,279 5,546 1,139 45 14,624 Fortum's heat production capacity, 31 Dec 2014 MW Heat Finland 1,936 Sweden 0 Russia 13,466 Poland 1,189 Other 811 Total 17,402 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://annualreport2014.fortum.com/ 13 Annual Report 2014 Year 2014 in figures Sales and production including Fortum Värme Sales and production including Fortum Värme 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://annualreport2014.fortum.com/ 14 Annual Report 2014 Year 2014 in 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://annualreport2014.fortum.com/ 15 Annual Report 2014 Year 2014 in figures Fortum's power production by energy source in 2012-2014 TWh Hydropower Nuclear power Natural gas Coal Biomass Peat Other Total 2014 22.3 23.8 22.5 4.0 1.1 0.1 0.7 74.6 2013 18.0 23.7 20.0 4.5 1.6 0.1 0.8 68.7 Includes joint venture AB Fortum Värme samägt med Stockholms Stad Fortum’s power generation capacity, 31 Dec 2014 MW Hydropower Nuclear power Combined heat and power Condensing power Other Total Finland Sweden Russia Poland Other 1,526 1,460 438 1,126 3,088 1,820 627 12 30 4,758 257 4,551 5,577 4,758 257 93 15 108 2012 25.2 23.4 19.4 3.3 1.3 0.1 0.3 73.1 Total 4,615 3,279 6,173 1,139 45 15,251 Includes joint venture AB Fortum Värme samägt med Stockholms Stad Fortum's heat production capacity, 31 Dec 2014 MW Heat Finland 1,936 Sweden 3,636 Russia 13,466 Poland 1,189 Other 811 Total 21,038 Includes joint venture AB Fortum Värme samägt med Stockholms Stad. 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://annualreport2014.fortum.com/ 16 Annual Report 2014 Year 2014 in figures 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. Comparability of Comparability of information presented in information presented in tables and graphs tables and graphs Information in the tables and graphs presented for year 2012 or earlier is not restated due to the adoption of IFRS 10 and IFRS 11. Adoption of standards influences treatment of Fortum’s holding in AB Fortum Värme samägt med Stockholms stad in the the consolidated financial statements. For further information, see Note 1.6.1. New IFRS standards adopted from 1 Jan 2014. 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 Interest-bearing net debt without Värme financing Net debt/EBITDA Comparable net debt/EBITDA Comparable net debt/EBITDA without Värme financing 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 Share key figures EUR or as indicated Earnings per share Cash flow per share Equity per share Dividend per share Extra dividend per share Payout ratio, % Dividend yield, % 2014 4,751 3,954 1,873 3,428 1,351 3,154 17,918 4,217 3,664 1.1 2.3 2.0 19.5 30.0 774 69 1,762 3.6 1.4 2013 5,309 2,129 1,975 1,508 1,403 1,204 19,183 7,793 6,658 3.7 3.9 3.4 9.0 12.0 1,005 15 1,548 5.1 1.8 2014 3.55 1.98 12.23 1.10 1) 0.20 1) 36.6 1) 7.2 1) 2013 1.36 1.74 11.28 1.10 - 80.9 6.6 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 2012 1.59 1.56 11.30 1.00 - 62.9 7.1 1) Board of Directors' proposal for the Annual General Meeting on 31 March 2015. 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://annualreport2014.fortum.com/ 17 Annual Report 2014 Year 2014 in figures Sales, EUR million 6,296 6,161 6,159 5,309 4,751 10 11 12 13 14 7,500 5,000 2,500 0 Operating profit and comparable operating profit, EUR million 3,428 2,402 1,833 1,708 1,802 1,874 1,752 1,508 1,403 1,351 10 11 12 13 14 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Operating profit Comparable operating profit Environmental summary Environmental summary The following table presents the key figures of our environmental responsibility. All indicators measuring Fortum's environmental responsibility are available in the GRI section. 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, % Utilisation rate of gypsum, % Utilisation rate of ash, % Environmental non-compliances Water withdrawal, million m3 of which cooling water, million m3 Thermal load on waterways, TWh *Figures unassured **Includes joint venture AB Fortum Värme samägt med Stockholms Stad 2014* 20.3 20,400 28,700 21,300 100 177 60 189 198 64 63 64 32 6 100 34 15 2,178 2,094 18 2013 20.5 22,000 30,800 20,800 100 200 60 204 197 59 64 63 28 9 99 38 14 2,312 2,231 19 2012** 20.7 19,800 29,400 16,000 95 171 60 177 179 64 67 68 36 20 89 51 12 2,210 2,017 17 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://annualreport2014.fortum.com/ 18 Annual Report 2014 Year 2014 in figures Specific CO2 emissions of electricity production in the EU in 2012-2014, gCO2/kWh Specific CO2 emissions of total energy production in 2012-2014, gCO2/kWh Overall efficiency of fuel use in 2012-2014, % 100 75 50 25 0 2012 2013 2014 300 200 100 0 2012 2013 2014 75 50 25 0 2012 2013 2014 Specific emissions Target (5-year average) 5-year average Specific emissions Target( 5-year average) 5-year average Efficiency 5-year average Target (5-year average) Social summary Social summary The following table presents the key figures of our social responsibility. All indicators measuring Fortum's social responsibility are available in the GRI section. 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)2), Fortum personnel Lost workday injury frequency (LWIF)2), contractors Fatalities OHSAS 18001 certified operations, % of sales 1) Only in Finland 2) Injuries resulting in an absence of at least one day per million working hours * Includes joint venture AB Fortum Värme samägt med Stockholms Stad Personnel statistics from 2014, by country of operation 2014 8,821 8,592 8,260 8.1 28 33 542 2013 9,532 9,186 9,515* 9.7* 28* 31* 569 47,677 56,316* 2.4 1.0 3.2 3 75 2.5* 1.0 3.9 1 73* Personnel at year-end male female Personnel, average Finland Sweden Russia Poland 2,040 1,470 570 2,182 1,201 777 424 1,221 4,213 3,069 1,117 4,196 603 472 131 631 Other countries 535 346 190 591 2012* 10,600 10,371 9,899 12 28 35 580 74,188 3.1 1.5 3.8 1 70 Total 8,592 6,134 2,432 8,821 Personnel expenses, 1,000 euros 184,045 104,295 82,804 13,884 20,219 413,021 Personnel expenses per person, 1,000 euros 84.3 85.4 19.7 22.0 34.2 46.8 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://annualreport2014.fortum.com/ 19 Annual Report 2014 Year 2014 in figures Number of employees, 31 Dec. Personnel by country, 31 Dec. 2014 Other countries, 329 Personnel by division, 31 Dec. 2014 Other, 543 Hydro Power and Technology, 542 Finland, 2,040 Distribution, 390 Nuclear & Thermal Power, 1,097 15,000 10,000 5,000 0 10,585 10,780 10,371 9,186 8,592 Russia, 4,213 8,592 10 11 12 13 14 Sweden, 1,201 Poland, 603 Finland, 2,040 Poland, 603 Russia, 4,213 Sweden, 1,201 Estonia, 206 Estonia, 206 Other countries, 329 Heat, Electricity Sales and Solutions, 1,807 Russia, 4,213 Hydro Power and Technology, 542 Nuclear & Thermal Power, 1,097 Heat, Electricity Sales and Solutions, 1,807 Russia, 4,213 Other, 543 Distribution, 390 Market position Market position Fortum is the 3rd largest power generator in the Nordic countries, and one of the lowest-emitting power producers in Europe. We are among the leading heat producers globally. 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://annualreport2014.fortum.com/ 20 Annual Report 2014 Year 2014 in 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://annualreport2014.fortum.com/ 21 Annual Report 2014 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://annualreport2014.fortum.com/ 22 Annual Report 2014 Strategy Strategy Strategy Preparations for future growth are starting to take shape; by divesting the electricity distribution business gives Fortum better opportunities to focus on the production and sales of efficient and low-carbon electricity and heat. In addition, it increases Fortum's strategic freedom to develop the company, both in terms of the near future and long-term, in order to improving earnings per share growth and shareholdervalue. 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. At the core of Fortum’s strategy is our strong expertise in CO2-free hydro and nuclear power and in efficient combined heat and power (CHP) production. Our strengths also include our solid experience in operating in the energy markets. We will continue developing our business through these competencies. Sustainability is an integral part of Fortum’s strategy. The tight link between business operations and corporate responsibility underscores the importance of sustainability as a competitive advantage. In its operations, Fortum gives balanced consideration to economic, social and environmental responsibility. Fortum’s values – accountability, creativity, respect and honesty – form the foundation for our activities. We want to be a forerunner in developing the future energy system – the Solar Economy. Core areas of the strategy Core areas of the strategy At the core of Fortum’s strategy is our strong expertise in CO2-free hydro and nuclear power and in efficient combined heat and power production (CHP). Our strengths also include solid experience operating in the energy markets. We will continue developing our business through these competencies. Changing markets Changing markets In the coming years, far-reaching decisions must be made in our main markets to mitigate climate change, to develop the energy markets, and to find a sustainable operating model for the pan-European market. Fortum’s strong position enables us to actively participate in restructuring the markets and developing new operating models. We are very competitive, whether measured by CO2-free production volume, competences in our strategic focus areas, production mix, capacity flexibility, financial position, cost structure, sustainability or occupational safety. We have a clear vision of how Fortum must be developed in order to create added value for our stakeholders, particularly for our shareholders, both in the short term and the long term. We want to actively participate in energy sector development and restructuring. Business focus areas Business focus areas In 2013, we assessed the future alternatives of our electricity distribution business. After thorough consideration, we concluded that divesting the electricity distribution business is the best solution for the distribution business' development and its customers, Fortum’s shareholders and our other businesses. In 2014, we divested our electricity distribution businesses in Finland and Norway. We are currently assessing and preparing the possibilities to divest the Swedish electricity distribution business. The process is advancing as planned. We believe that focusing on electricity and heat production and sales will improve our long-term value creation. With the proceeds 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://annualreport2014.fortum.com/ 23 Annual Report 2014 Strategy from the divestment of the electricity distribution businesses in Finland and Norway, we are pursuing growth opportunities and developing our company in line with our strategy: build on the strong Nordic core and create solid earning growth in Russia. We are developing new businesses around these core areas and, in this way, we are building a strong platform for future growth. Developing the electricity sales business is also an integral part of our strategy. We sell electricity and develop and offer innovative products and services to more than 1.3 million electricity retail customers in the Nordic countries. Build on the strong Build on the strong Nordic core Nordic core We are building our future growth on the strong position we have in the Nordic countries, the Baltic countries and Poland. The foundation for our operations in these markets is our hydro and nuclear power production, which is CO2-free and very competitive in terms of cost structure and flexibility. In 2014, more than 90% of our European electricity production was generated with Nordic hydro or nuclear power. As a natural continuation of our Nordic business we seek new opportunities in hydro and nuclear power as well as in combined heat and power (CHP) production in the integrating European energy market. We estimate that the market integration will continue and the significance of hydropower will grow: hydropower can be used flexibly to level consumption peaks and to balance fluctuations in other renewable production. We will also continue developing combined heat and power (CHP) production which is a more efficient way of production than condensing power. In CHP production we can also utilise bio- and waste-based fuels. We estimate that the need for efficient CHP plants and heat networks will grow, especially in urban areas. Solid earnings growth in Solid earnings growth in Russia Russia Russia is the world’s fifth biggest electricity market where, in recent years, electricity consumption has grown faster than the EU’s. We have operated in Russia for more than 50 years, and we consider it to be one of our home markets. We currently operate in the Urals and Western Siberia in the Tyumen and Khanty-Mansiysk area, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area, which is dominated by the metal industry. Additionally, we have a 29.5% stake in the hydropower and thermal power company TGC-1, operating in north-western Russia. We launched an extensive investment programme in Russia in 2008; the programme consists of 8 new power plant units and the modernisation of existing units. Six of the new units are already in commercial operation, and the remaining two units are estimated to be commissioned in the first half of 2015. Our new units are very energy efficient. The investment programme will have nearly doubled our power generation capacity in Russia once finalised in 2015. Our sales revenue will grow along with the increased production. These eight new units will receive capacity payments under the Russian Government’s Capacity Supply Agreement (CSA); the capacity payments are considerably higher than the payments for energy produced with the old capacity. The income from the new capacity is guaranteed by capacity market regulations for a period of 10 years, although the payments can fluctuate slightly every year. In 2014, the Russian Government approved the heat market reform roadmap, which aims to reform the heat market and liberalise prices by 2020 in big cities and by 2023 elsewhere. Heat reform creates incentives for efficiency improvements. It also increases profitability of Fortum's production capacity and other efficient capacity. Restructuring according Restructuring according to strategy in Russia to strategy in Russia In December 2014 we signed a protocol with Gazprom Energoholding to start a restructuring process of our ownerships in TGC-1, a Territorial Generating Company. TGC-1 owns and operates hydro and thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg. Currently, Gazprom Energoholding owns 51.8% of the TGC-1 shares and Fortum 29.5%. The company is listed on the Moscow Exchange (MOEX). In the restructuring, a company owned by Fortum and Rosatom would be responsible for hydropower production. Gazprom Energoholding would continue with the heat and thermal power businesses of TGC-1. Through its present stake in TGC-1, Fortum’s share of the hydropower-focused company would rise to more than 75%, and the company would become a Fortum subsidiary. Rosatom would be a minority holder in the company, with a less than 25% ownership. We see the restructuring as an excellent opportunity to increase our CO2-free hydropower capacity, optimise our production portfolio in Russia and increase the flexibility that hydropower offers. If realised, the arrangement will increase Fortum’s hydro portfolio by 60%, some 12-13 TWh. Provided that Fortum obtains a more than 75% ownership in TGC-1 hydropower production, we are ready to participate with a minority stake (max.15%) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies participating in the project. A platform for future A platform for future growth growth Alongside our current businesses, we are exploring and developing new sources of growth that support our strategic core areas. We are exploring growth opportunities in these new businesses with prudence. We are particularly interested in solutions we can use to advance CO2-free energy production. We believe that new CHP concepts, such as pyrolysis, and wave energy, can offer business opportunities in the future. We are developing solar power applications. For consumers, we offer solutions that improve energy efficiency. These include, among others, turnkey solar kits for households in Finland and Sweden as well as our rapidly expanding Charge & Drive concept for charging electric vehicle batteries. Financial targets Financial targets Our goal is to achieve excellent financial performance in strategically selected core areas through strong competence and responsible ways of operating. The key figures by which we measure our financial success include return on capital employed (target: 12%), return on shareholders' equity (target: 14%) and capital structure (target: comparable net debt/EBITDA around 3.0). Dividend policy Dividend policy Fortum’s dividend policy is based on the following preconditions: 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://annualreport2014.fortum.com/ 24 Annual Report 2014 Strategy • The dividend policy ensures that shareholders receive a fair remuneration for their entrusted capital, supported by the company’s long-term strategy that aims at increasing earnings per share and thereby the dividend. Group financial targets • When proposing the dividend, the Board of Directors looks at a range of factors, including the macro environment, balance sheet strength as well as future investment plans. Fortum Corporation's target is to pay a stable, sustainable and over time increasing dividend of 50-80% of earnings per share excluding one-off items. ROCE, % ROE, % Target 12 14 Capital structure, Comparable net debt/EBITDA ~3,0 2014 19.5 30.0 2.3 2013 9,0 12,0 3,4 2012 10,0 14,3 3,3 2011 14,8 19,7 3 2011 11.6 15,7 2.8 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://annualreport2014.fortum.com/ 25 Annual Report 2014 Strategy Strategy realisation in 2014 Strategy realisation in 2014 Step by step towards the future Step by step towards the future Build on the strong Nordic core: Finland: • Loviisa Nuclear Power Plant automation renewal renegotiated and continued with a new partner, Rolls- Royce. Automation modernisation project agreement with Areva-Siemens Consortium discontinued. • Investing in Fortum's associated company Turun Seudun Energiantuotanto Oy´s (TSE) new multifuel CHP plant in Naantali. Commissioning of the new power plant planned for autumn 2017. • Refurbishment at Imatra hydropower plant started, covering two of the plant's seven units. The refurbishment will increase the capacity of the power plant from 178 to 192 MW and will improve safety and reliability. • Construction of a heat pump at Suomenoja Power Plant, Espoo, utilising wastewater for heat production Sweden: • Continued investments in dam safety improvement project at Höljes hydro power plant in Värmland Divestments: • Finnish electricity distribution business • Norwegian electricity distribution and heat businesses • Grangemouth power plant, UK • Several divestments of non-core assets as part of the efficiency programme: Tohkoja wind power project in Kalajoki, Finland; ownership in Karlshamns Kraft AB, Sweden; shareholdings in Gasum Oy, Finland and AS Võrguteenus Valdus, Estonia • Continuing to prepare and evaluate possibilities to divest Swedish electricity distribution business Expertise in nuclear power operations and nuclear waste issues: • Extended deliveries of selective ion exchange materials for the purification of radioactive liquids at the damaged Dai-ichi nuclear power plant in Fukushima, Japan Create solid earnings growth in Russia: • Commissioning of the third unit at Nyagan power plant (418 MW) • Full scale commissioning of new gas turbines at Chelyabinsk CHP-1 (2 x 44 MW) • Successful participation in Capacity Auction for 2015 • Protocol signed with Gazprom Energoholding to start a restructuring process of the ownership of TGC-1. The restructuring would increase Fortum’s hydro portfolio by 60%. • Focus on completing the remaining part of the investment programme during 2015 Build a platform for future growth: • Further development of pyrolysis technology in order to produce advanced biomass based fuels in co- operation with Finnish consortium of Fortum, UPM and Valmet • Comissioning of Kapeli 10 MW solar project in India in December • Continued development of Fortum Charge & Drive business: established market leadership in both Norway/Nordic countries with key partnerships and deals won, e.g. Renault and VW. Expanding the Charge & Drive network. Fortum already has some 50 charging stations in Finland, 90 in Sweden and nearly 200 in Norway. More than 100 stations are fast chargers. • A partnership agreement with Cleantech Invest Plc on business development activities, potential future cleantech investments as well as information sharing • Continued involvement in wave power technology development: co-operation with Seabased AB in Sweden and Wave Hub in the UK; acquiring a minority share of 13.6% in the Finnish wave energy developer Wello Oy • Collaboration with St1, aiming at building Finland’s first industrial-scale geothermal pilot heat plant 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://annualreport2014.fortum.com/ 26 Annual Report 2014 Strategy Future energy system – the solar Future energy system – the solar economy economy We believe that the future energy system will be based on emissions-free and inexhaustible energy sources and on overall efficiency of the energy system. Transitioning to a solar economy changes the way electricity and heat is produced and consumed. In conventional energy production, the combustion of non-renewable, fossil fuels, like coal, oil and gas, provides the main source of energy. This conventional energy system, and particularly the use of coal, burdens the environment and its total efficiency is poor. With the growth in the global demand for energy and in the consumption of electricity in particular, mitigating climate change is becoming an increasingly important issue. Energy systems and the use of limited natural resources must be made more efficient. A solar economy provides solutions to the challenges of climate change and resource scarcity. In a solar economy, energy from the sun is used either directly as solar electricity or heat or indirectly as hydro, wind and bioenergy, and in the future also as ocean energy. Demand flexibility and energy storage are also underscored in the energy-efficient system of the future. Transitioning to a solar economy will take decades. During this time traditional production forms will be further developed and used alongside the production forms of a solar economy. Of the renewable energy forms, hydropower and bioenergy have in many respects been mature technologies for decades. Solar and wind power will evolve into mature technologies in the coming years, even though there is still significant development Towards a Solar Economy Towards a Solar Economy potential with both. The use of ocean energy is in the test phase; its advancement into a commercial technology may be more than a decade out. In a solar economy, the energy system is more dynamic and smarter than today. Electricity and heat can be produced both in a centralised and distributed manner. The active participation by consumers brings flexibility to demand, which improves the efficiency of the system. In the coming years, demand flexibility will improve considerably as both the technology and the business models mature. 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://annualreport2014.fortum.com/ 27 Annual Report 2014 Strategy Gradual transition to a Gradual transition to a solar economy solar economy The energy system changes slowly, and the transition from the current energy system towards a solar economy requires technology advancements as well as changes in the operating environment over the course of several decades. The energy markets and infrastructure must be developed to enable the investments required by the change. The length of the transition period and the costs depend on political decisions, society’s priorities and investments in technology advancements of production forms. We want to promote both short- and long- term development of the energy system simultaneously. However, emission-free energy sources that are currently in use or under development are not yet able to fulfil the energy demand of a modern and developing society. That is why we are continuing to widely utilise also traditional energy forms, but our aim is to operate also these as efficiently and sustainably as possible. Sustainability a part of the strategy Sustainability a part of the strategy regularly reported also to Fortum’s Board of Directors. Sustainability targets affect every Fortum employee and are part of Fortum’s short-term incentive (STI) scheme. Fortum’s Board of Directors annually decides on the sustainability targets to be included in the incentive scheme. In 2014 the incentive scheme included an index measuring lost workday injury frequency for Fortum employees and for contractors, the number of major environmental, health and safety non-compliances (EHS non-compliances), and Fortum’s ability to improve its performance in the Dow Jones Sustainability Assessment. One of Fortum’s targets for 2015 is to reduce the number of serious injuries by half. Therefore, Fortum’s Board of Directors has for 2015 approved for inclusion in the short- term incentive scheme an index measuring the number of serious injuries in addition to the issues measured the previous year. In 2015, the weight of the sustainability index in the STI is 20% (2014: 20%). In these we succeeded: Success in customer satisfaction and employee safety Competitiveness, security of supply and market-driven production enable long-term profitable growth. A company that is financially strong is able to shoulder its responsibility for the environment, take care of its personnel, oversee its supply chain, meet the expectations of customers and provide excellent value to its shareholders. At the same time it can develop sustainable energy solutions that benefit all of society. Sustainability targets Sustainability targets The Fortum Executive Management Team decides on Fortum’s sustainability approach and Group-level sustainability targets that guide annual planning. The targets and the desired performance level are reviewed annually and are ultimately approved by Fortum’s Board of Directors. The Fortum Executive Management Team monitors the achievement of the targets in its monthly meetings and in quarterly performance reviews. The achievement of the targets is 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://annualreport2014.fortum.com/ 28 Annual Report 2014 Strategy Group sustainability targets and performance in 2013-2014 Target for the year 2014 Target result 70.8 in One Fortum Survey CSI divisional scores at level “good” (70-74) in One Fortum Survey Status at the end of 2014 Status at the end of 2013 Remarks 70.4 69.8 67-77 61-77 Customer satisfaction improved in 4 out of 5 customer segments. Power Solutions and Heat business areas achieved the target. Reputation index Customer satisfaction index (CSI) Environmental responsibility Specific CO2 emissions Electricity production in the EU < 80 g/kWh, 5-year average 60 g/kWh 60 g/kWh Total production (electricity & heat, all countries) Energy efficiency Total efficiency of combustion (Definition: produced energy divided by the primary energy of fuel) Major EHS incidents < 200 g/kWh, 5-year average 198 g/kWh 197 g/kWh > 70%, 5-year average < 35 Fortum-wide 63% 27 64% 35 (Fires, leaks, explosions, INES1) events exceeding level 0, dam safety incidents, environmental non-compliances) Social responsibility Security of supply SAIDI2) < 100 minutes 97 minutes 103 min CHP plant energy availability > 95% 94.7% 94% Occupational safety Lost workday injury frequency (LWIF)3), Fortum personnel < 1 Lost workday injury frequency (LWIF)3), contractors < 3.5 1) International Nuclear Event Scale 2) System Average Interruption Duration Index 3) LWIF = Lost workday injury frequency per one million working hours 1.0 3.2 1.0 3.9 Emissions in 2014 were 39 (2013: 64) g/kWh. Emissions in 2014 were 189 (2013: 204) g/kWh. 5-year average has been increasing since 2008. Efficiency in 2014 was 64% (2013: 59%). 5-year average has been decreasing since 2008. In 2013, energy efficiency KPI was measured only for sites located in Europe. In 2014, the KPI covers whole Fortum. In addition to Group-level targets approved by Fortum’s Board of Directors, Fortum also has division-level targets. These targets are monitored and are reported in the same way as the Group-level targets. In terms of contractor safety, 2014 was a rough year. There were three fatal accidents involving our contractors’ employees: in Sweden, a subcontractor’s employee perished in the electricity distribution business, and another subcontractor’s employee at a hydropower plant; in Russia, a subcontractor’s employee perished at the Chelyabinsk power plant construction site. Additionally, two contractor employees perished in an accident at a construction site at Fortum Värme in Stockholm. Fortum Värme is no longer included within the sphere of Fortum Group’s target setting for 2014, so this accident is not seen in Fortum’s statistics. Immediate corrective measures were started after the accidents, and the measures will continue during 2015. 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://annualreport2014.fortum.com/ 29 Annual Report 2014 Strategy Other sustainability targets and related performance in 2013-2014 Occupational safety Total recordable injury frequency (TRIF) 1), Fortum personnel Number of fatalities, Fortum personnel Number of fatalities, contractors Number of lost workday injuries, Fortum personnel Number of lost workday injuries, contractors Supply chain management Supplier audits2) 1) TRIF = Total recordable injury frequency per one million working hours 2) Fortum and joint venture Fortum Värme conduct supplier audits with shared resources. Read more Read more • Safety Corporate sustainability Corporate sustainability targets for 2015 targets for 2015 Fortum’s sustainability targets are based on the continuous improvement of operations. Targets for 2015 put even stronger emphasis on safe operations. In addition to lost workday injury frequency (LWIF), the frequency of injuries requiring medical attention, i.e. total recordable injury frequency (TRIF) for own personnel, was also included as a Group target. Our goal is also to reduce the number of serious injuries by half. In their operating plans for 2015, each division is required to include measures to ensure uncompromised compliance with the Group’s EHS guidelines and requirements. In terms of energy efficiency, we decided to replace the old indicator measuring the efficiency of fossil fuel combustion with a new energy-efficiency index that takes into account all production forms. Fortum’s new target is to achieve annual energy savings of >1,400 GWh by 2020 compared to 2012. This energy savings is equivalent to the annual heating demand of more than 75,000 households (18,500 kWh/household) or the annual energy production of more than two hundred 2.5 MW wind power plants. Target 2014 2013 < 3.0 0 0 - - 15 2.0 0 3 15 35 23 2.5 0 1 16 54 13 To be improved: Contractor safety and our reputation in Sweden Read more Read more • Sustainability indexes • Sustainability management and 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://annualreport2014.fortum.com/ 30 Annual Report 2014 Strategy Corporate sustainability targets in 2015 Reputation index Customer satisfaction index (CSI) Environmental responsibility Specific CO2 emissions Electricity production in the EU Total production (electricity & heat, all countries) Energy efficiency Target Target result 70.8 in One Fortum Survey CSI divisional scores at level “good” (70-74) in One Fortum Survey Target < 80 g/kWh, 5-year average < 200 g/kWh, 5-year average Energy efficiency improvement by 2020 as compared to 2012 > 1,400 GWh/a Major EHS incidents (Fires, leaks, explosions, INES1) > 0 events, dam safety incidents, environmental non-compliances) Social responsibility Security of supply CHP plant energy availability Occupational safety Total recordable injury frequency (TRIF)2), Fortum personnel Lost workday injury frequency (LWIF)3), contractors Number of serious accidents4) 1) International Nuclear Event Scale 2) TRIF = Total recordable injury frequency per one million working hours 3) LWIF = Lost workday injury frequency per one million working hours 4) Accidents leading to fatality, permanent injury or absence from work exceeding 30 days ≤ 27 Target > 95% ≤ 2.5 ≤ 3.2 ≤ 8 Research and development supporting Research and development supporting business business The purpose of Fortum’s research and development (R&D) is to improve the company’s competitiveness and to create a basis for new, profitable business. Research and development helps Fortum to build a sustainable, carbon dioxide-free future. The main areas of R&D are: The main areas of R&D are: • The advanced technologies included in Fortum’s existing energy system: our most important research area is nuclear power. Additionally, we are developing integrated combined heat and power systems, i.e. CHP+ plants, as well as ways to increase and utilise the flexibility of the energy system. • New technologies and solutions supporting development of the energy system towards the future solar economy: we are developing e.g. solar and wave energy as well as innovative solutions for our customers. potential future cleantech investments as well as information sharing. The agreement aims to create new business opportunities for Fortum and to accelerate the growth of Cleantech Invest’s portfolio companies. Key R&D projects in 2014 included: Key R&D projects in 2014 included: • Fortum, UPM and Valmet’s decision to join forces to develop new technology to produce advanced high-value lignocellulosic fuels, such as transportation fuels or higher-value bio liquids. The project aims to develop catalytic pyrolysis technology for refining bio-oil and to commercialise the solution. • Fortum and Cleantech Invest Plc’s signing of an agreement on partnership with regard to business development activities, Fortum’s R&D expenditure in 2014 totalled EUR 41 (2013: 49) million, which corresponded to 0.9% (2013: 0.9%) of sales. A significant share of the R&D expenditure in 2013 targeted the development and commissioning of the world’s first bio-oil plant integrated with a combined heat and power plant, in Joensuu, Finland. Now Joensuu plant is part of Heat, Electricity Sales and Solutions division and is no longer included in the R&D 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://annualreport2014.fortum.com/ 31 Annual Report 2014 Operating environment and market development Operating environment and Operating environment and market development market development Fortum’s operating environment and markets were challenging in 2014. Competitiveness and energy security were emphasised in European energy and climate policy discussions. The budding economic growth in Europe halted and the purchasing power of households decreased significantly in several countries. With the Ukranian crisis, the EU paid more attention to energy security, and in May the EU Commission published a proposal for European Energy Security Strategy. During the year EU imposed sanctions against Russia as a result of the Ukrainian crisis. The gas industry and nuclear energy were exempt from the sanctions. The mutual dependency on energy and tight economic relations between the EU and Russia did stabilise relations between the regions. Energy and climate issues received a lot of attention in the EU in 2014. In January the Commission proposed a Market Stability Reserve (MSR) mechanism for the carbon emissions trading scheme; its adoption is advancing in the Parliament and Council. Additionally, the Commission published a communication on energy efficiency. In October the European Council agreed on the energy and climate targets for 2030. The targets set were at least 40% reduction in domestic greenhouse gas emissions compared to 1990 level, an increase in renewable energy’s share to at least 27% (EU- level binding target), and at least 27% improvement in energy efficiency (EU-level indicative target). The EU Commission will prepare legislative proposals in 2015-2016 to implement the 2030 targets. The EU Commission and European Council brought forth the concept of an Energy Union, the goals of which are economical and clean energy production and security of supply. The aim is also to harmonise position statements related to energy policy. The Energy Union concept is expected to become more defined when a communication about it is released in early 2015. In November the International Energy Agency (IEA) published its annual World Energy Outlook, which analyses global energy production and consumption. The IEA estimated 37% growth in the global energy demand by 2040. In Fortum’s regions of operation, consumption is estimated to increase by 11% in Russia, but decrease by 7% in the EU. European market development European market development Development of the Development of the European electricity European electricity market market The weak economic situation, mild weather and better energy efficiency contributed to decreased electricity demand in several European countries. The demand decreased by 2% in the Nordic countries. However, due to growth in electricity exports, Nordic electricity production was 1% higher than in 2013. Economic development in Estonia, Lithuania and Poland was better than in the Nordic countries, and the demand for electricity was up. The share of renewable energy in Europe’s electricity production continued to grow, and subsidy mechanisms in many countries were developed to be more market-driven. With the exception of the joint certificate system of Sweden and Norway, subsidy mechanisms are still based on national, divergent solutions. New renewable electricity production forms are gradually becoming commercially profitable, which will boost their share in electricity production. At the same time it is possible to give up separate subsidies for renewable energy, particularly if the price for carbon emissions rises. According to the Commission’s January 2014 report on energy prices and costs, the difference between wholesale and retail prices will grow even further. In recent years, energy retail prices have increased significantly in the EU. The reasons for this include various taxes, fees and subsidies. At the same time, wholesale prices 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://annualreport2014.fortum.com/ 32 Annual Report 2014 Operating environment and market development electricity have decreased, and wholesale prices for gas have remained unchanged. Prices also vary substantially among EU countries: some consumers pay as much as several times more for energy than other. At the beginning of 2014, Finnish retail markets were the first in the world to start using smart meters to measure and bill hourly electricity consumption. If consumption- measuring smart meters and the related services become more common on a European level, customers can optimise their electricity use. Aiming for an integrated Aiming for an integrated market market Significant progress was made in the integration of the European electricity market in early 2014 when Western Europe’s electricity exchanges adopted a price coupling algorithm in spot trading. The goal is also to approve common network codes that are under review during 2015. Implementation of the REMIT initiative increasing energy market transparency continued (Regulation (EU) No. 1227/2011 of the European Parliament and of the Council on wholesale energy market integrity and transparency). In terms of the EMIR initiative related to electricity price hedging products, market players continued discussions on allowing the use of bank guarantees also after the transition period ending 2016 (Regulation (EU) No. 648/2012 of the European Parliament and of the Council on OTC derivatives, central counterparties and trade repositories). This would enable price hedging with financial products cost-efficiently also in the future. In autumn 2014 the European Commission published a communication on internal energy markets. The communication highlighted the favourable development of market integration and the need to increase grid investments, develop retail markets, continue regional collaboration and limit government regulation. Despite the goals related to the common market principles, preparation of national capacity remuneration mechanisms (CRM) continued in a few EU countries. The first capacity auction was held in Great Britain in December, securing power plant capacity availability for winter 2018-2019. Great Britain’s government also promised a guaranteed price for the electricity produced by the new nuclear power plant project. The government in Germany published a green paper on market development alternatives; it proposes either the development of the current energy-based trade or the adoption of capacity markets. Proposals for the capacity mechanism’s target model are expected from the Commission by mid-2015. enables the use of Nordic hydropower to cover fluctuations in Europe’s wind and solar power production. Respectively, electricity can be imported to the Nordic countries in years with low precipitation and in cold winters. Market price Market price development development There was a clear drop in the global market prices of fuels in 2014. The price of carbon allowances in the EU emissions trading scheme increased somewhat and was 7.3 euros/tonne at the end of the year. The mild winter and low fuel prices contributed to the decrease in the price of electricity in the Nordic market from 2013. The year’s average system price was 29.6 (2013: 38.1) euros/MWh. The average area price was 36.0 (2013: 41.2) euros/MWh in Finland and 31.6 (2013: 39.4) euros/MWh in Sweden in the SE3 area (Stockholm). The average spot price in Germany was 32.8 (2013: 37.8) euros/MWh. The average spot price in Poland increased to 43.1 (2013: 36.7) euros/MWh. The flat electricity price level does not encourage investments in new production capacity. In fact, the majority of new investments in many countries are based on subsidies. Electricity transmission Electricity transmission connections connections In October 2014 the EU Summit emphasised the importance of new electricity transmission connections and set a goal to increase each EU country’s cross-border transmission capacity to at least 15% of power plant capacity by 2030. According to the TYNDP 2014 grid plan published by the European Network of Transmission System Operators for Electricity (ENTSO-E), European cross-border transmission capacity must be doubled by 2030. This requires investments of EUR 150 billion at the EU level to promote the optimisation of electricity production, the reduction of emissions, and an increase in the share of renewable energy. Upon realisation of current projects, the transmission capacity between the Nordic countries and the rest of Europe will double already by 2020. New connections are planned also for the next decade. This The transmission capacity between Finland and Sweden has been almost in full use. The Finnish electricity network also serves transmission from Sweden to the Baltic countries and, starting in 2016, further from the Baltic countries to Poland, so more transmission capacity from Sweden to Finland is needed. Construction of a new interconnection planned between northern Sweden and northern Finland should be started as soon as possible. This would enable power transits through the Finnish network also to southern Sweden when Sweden’s internal network is in full use. Development of Europe’s Development of Europe’s heat markets heat markets Implementation of the Energy Efficiency Directive continued in 2014. The updated national regulations of the EU member states are expected to take effect mostly in 2015. The directive aims, among other things, to increase the share of energy-efficient district heating and cooling and the share of combined heat and power production (CHP) in energy production as part of the energy- efficiency and climate targets. The directive requires member states to submit to the Commission by the end of 2015 an estimate on the development potential of district heat, CHP, and industrial waste heat up to 2030. At the EU level, consideration is also being given to whether the heat markets need stronger EU guidance and target-setting; they do, in fact, account for over half of the EU’s energy consumption. Two-way, open district heat networks are quickly developing and give companies and consumers an opportunity to sell the surplus heat to the network. Utilising waste heat reduces energy costs and the carbon footprint. Mainly due to national legislation, markets and energy company operations can be impacted in a very country-specific manner through legislation. National legislation proposals related to district heat advanced quite slowly in 2014. Ratification of Poland’s legislation regarding renewable energy forms and the draft of Estonia’s district heating act are expected in 2015. 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://annualreport2014.fortum.com/ 33 Annual Report 2014 Operating environment and market development Energy market models Energy market models Current market model Current market model • Wholesale prices are determined in the power exchange, but cross-border transmission links are inadequate • Intra-day and operational hour trading is not functional at all borders • Renewable energy is subsidised with various country-specific mechanisms • Hourly energy consumption metering or alternative products are not available to electricity users in many countries Capacity markets Capacity markets • Electricity producers are paid for power plant capacity and for the produced energy • Strong, country-specific regulation and overall costs may increase • Weakened position of power exchange trading • Electricity trading between countries may become more difficult • Fossil electricity production may benefit, but renewables and demand flexibility may suffer Advanced energy markets Advanced energy markets • Pan-European markets • Renewable energy growth is based on steering from emissions trading • Building interconnectors reduces price differences and increases security of electricity supply • Grid companies are responsible for operational hour’s balancing reserve capacity • Abundant array of flexible products and services available to electricity users 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://annualreport2014.fortum.com/ 34 Annual Report 2014 Operating environment and market development Nordic electricity market structure Nordic electricity market structure Russian market development Russian market development Development of Russia’s Development of Russia’s electricity market electricity market Liberalisation of the Russian wholesale electricity market has been completed, but retail prices are still regulated. During 2014, Fortum sold approximately 80% of its power production at a liberalised electricity price. The Russian electricity market has been geographically divided into two independently operating zones: the First price zone (European and Urals part of Russia) and the Second price zone (Siberia). While western Europe and the Nordic countries use a pricing model based on area pricing, Russia uses the so-called nodal pricing. This means that the electricity price is determined for each nodal point of the power grid. This pricing model is commonly used in countries where transmission distances are long. In January-December 2014, Russia consumed 1,021 (2013: 1,026) TWh of electricity. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 777 (2013: 772) TWh. Capacity Supply Agreements Capacity Supply Agreements (CSA) (CSA) The generation capacity built after 2007 under the capacity supply agreements receives guaranteed capacity payments for a period of 10 years. Prices for capacity and the period are defined in order to ensure a sufficient return on investments. If the new capacity is delayed or if the agreed major terms of the capacity supply agreement are not otherwise fulfilled, a fine may be imposed on the energy company. The issue of prolonging CSA payments from 10 to 15 years has been under discussion in the Russian Government; however, no official decisions have yet been made. The received capacity payments will differ depending on the age, location, size and type of the plants, as well as on seasonality and availability. CSA payments can vary somewhat annually because they are linked to Russian Government long-term bonds with 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://annualreport2014.fortum.com/ 35 Annual Report 2014 Operating environment and market development 8 to 10 years maturity. In addition, three years and six years after the commissioning of a plant, the regulator will review the payments guaranteed by the capacity supply agreement. Earnings from electricity sales will be taken into consideration in the review and could potentially revise the CSA payments. Capacity payments for old capacity built before 2008 are determined in an annual auction. Development of Russia’s Development of Russia’s heat markets heat markets Reforming the Russian district heating system is a complex but necessary step to improving the security of supply and the efficiency. The reform aims to attract investments in the modernisation of the ageing production and transmission system and to support investments in combined heat and power production. Very few residential buildings in Russia have meters for tracking heat consumption. This significantly slows investments in modernising the heat network. Household- specific meters are not even being considered for old buildings, because they would be too expensive and technically difficult to install. Instead, quickly deploying building-specific regulation substations and automated metering throughout the country would help in the development of the district heating infrastructure. This would also enable consumption-based billing and, at the same time, encourage reductions in waste heat and efficiency in heat production. Heat market reform Heat market reform In 2014, the Russian Government approved heat market reform and a roadmap for a new market model. The aim of the new market model is to ensure the transition to economically justified heat tariffs and to attract investments in the heat market. The heat reform roadmap describes the heat market from 2015 onward. The aim is to complete the reform in 2020 in major industrial cities with populations of over 100,000 and in cities that have functioning combined heat and power production. During the transition period, the full liberalisation of prices for the end customers within the heat price-cap defined on the basis of the heat- only boiler principle should be secured. In smaller cities, the reform will be done by 2023 at the latest. Russia’s natural gas market Russia’s natural gas market Electricity price in Russia is largely based on natural gas price development. Because the electricity market is largely dependent on gas-fired power production, a functioning natural gas market is a prerequisite for a functioning electricity market. Russia’s regulated natural gas prices for industrial customers remained unchanged during 2014. Natural gas price indexing was not done in October 2014. Despite this, natural gas prices are estimated to increase by 3.5% in 2015. According to the Ministry of Economic Development of the Russian Federation, the 2014 price level will remain until the beginning of July 2015, when prices will be indexed by 7.5%, which will bring an annual increase of 3.5% compared to 2014. A presidential natural gas directive issued in October 2014 reopened natural gas trading in St. Petersburg’s International Mercantile Exchange. The natural gas trading is limited to month-ahead physical deliveries. Carbon market development Carbon market development The European carbon market scheme is the world’s first and, so far, the most extensive carbon market. The price of the EU emissions allowance is one of the most significant factors impacting the price of electricity on the Nordic electricity market. In 2014, oversupply increased on the European carbon market and prices remained low. However, emissions allowance prices recovered somewhat towards the end of the year, due to decisions and discussions related to the EU emissions trading scheme and EU emissions targets. Reforming the scheme began in 2014. A decision on a market stability mechanism for emissions trading is expected by the middle of 2015. Market mechanisms gain Market mechanisms gain moment moment The carbon market was widely discussed also in global climate policy discussions. More than 1,000 companies and more than 70 countries have joined the World Bank’s Putting a Price on Carbon initiative in 2013-2014. A total of 40 countries have either deployed or are developing carbon pricing schemes that cover about one fifth of the global greenhouse gas emissions. Nearly 400 companies have joined the UN’s Caring for Climate initiative to develop practices related to carbon pricing and carbon markets. Emissions must be reduced cost-efficiently, e.g. through carbon emissions pricing and a functioning carbon market. It is important that the upcoming international climate agreement would enable wide use of the carbon market so that climate change mitigation costs and their impact on energy prices would remain lower than with other climate policy instruments. However, it is impossible to achieve emissions targets without market mechanisms and private sector capital. Climate agreement Climate agreement urgency urgency The Intergovernmental Panel on Climate Change (IPCC) published its Fifth Assessment report on climate change in November 2014. The Synthesis Report describes the advancement of climate change more seriously than before: it is extremely challenging to limit the increase in the global average temperature to two degrees; at worst, the average temperature can rise by as much as 3–4 degrees. The report proposes abandonment of fossil fuels by the end of the century to keep climate warming below the target of two degrees. The expectations in the UN’s international climate negotiations are focused on the COP21 conference to be held in Paris in late 2015. Its goal is to make a climate agreement binding all countries. The elements of the Paris Agreement were compiled at the climate conference held in Lima, Peru, in December 2014. Just prior to the Lima conference, the USA and China announced that they had agreed on national targets and collaboration to mitigate climate change. The USA is engaged in bilateral discussions on climate issues also with India. A decision on 2030 A decision on 2030 climate targets climate targets The European Council agreed in October 2014 on the key energy and climate targets for 2030. The set target is a binding reduction of domestic greenhouse gas emissions by at least 40% from 1990 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://annualreport2014.fortum.com/ 36 Annual Report 2014 Business 2030. Additionally, EU-level targets to increase the share of renewable energy sources and to improve energy efficiency were agreed on. The targets will steer legislation and energy-sector investments and development far into the future. Preparation of the legislation related to the realisation of the 2030 targets will start in 2015. The European Council emphasised that a well-functioning and stronger emissions trading scheme is key in implementing the EU’s energy and climate policy. Emissions trading improves the competitiveness of low- carbon production forms and enables climate targets to be achieved at the lowest possible cost. Reform of emissions Reform of emissions trading scheme advances trading scheme advances The price of emission allowances hovered between 5.5-6.5 euros for most of 2014. However, the price did fluctuate considerably from 4.4 euros to 7.5 euros. A low allowance price does not encourage low-carbon investments, and thus creates the risk that new production capacity built now will generate emissions far into the future. The goal of reforming the emissions trading scheme is to restore confidence in the scheme and to give the market a price signal that encourages investments in low-carbon and carbon-free production methods. After long negotiations in the EU, a decision was reached in January 2014 to temporarily withdraw 900 million auctionable allowances from the market (backloading). This is the first measure reforming the emissions trading scheme. The first allowances were withdrawn from the auctions in March, and a total of 400 million allowances were withdrawn from the market during 2014. In January 2014 the Commission gave its proposal on the market stability mechanism. The issue is currently under review in the European Parliament and Council. Commission proposals on the structural reform of emissions trading, including e.g. tightening the emissions trading sector’s annual emissions reduction factor and industry’s carbon leakage-related issues, can be expected next. 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://annualreport2014.fortum.com/ 37 Annual Report 2014 Group Business structure BUSINESS BUSINESS Group business structure Group business structure (on 31 December 2014) Reporting segment Power and Technology Heat, Electricity, Sales and Solutions Russia Distribution Division Business Geographic presence, production and distribution assets and/or customer base Market position Hydro Power and Technology Nuclear and Thermal Power Heat, Electricity Sales and Solutions Russia Distribution Fortum's distribution activities in Sweden. Sweden * over 70,000 km of distribution lines *22,100 substations Over 900,000 customers Hydro, nuclear and thermal power generation, Power Solutions with expert services, portfolio management and trading as well as technology and R&D functions Production in Finland and Sweden * In Finland and Sweden full or co-ownership in 159 hydropower plants * Two fully-owned nuclear reactors and eight co-owned nuclear power plant units * One co-owned and two fully-owned condensing power plants * Ownership in three wind power companies Expert services worldwide * Third largest power producer in the Nordic countries * Among the 15 largest in Europe and Russia Combined heat and power (CHP) production, district heating and cooling activities and business to business heating solutions, solar business, electricity sales and related customer offering and Corporate Sustainability Finland, Sweden, Norway, Poland, Lithuania, Latvia, Estonia, India * 12 CHP plants * Hundreds of heat boilers * Two solar power plants in India Heat supply to one million homes in the Nordic and Baltic countries and Poland ~1.3 million electricity sales customers Power and heat generation as well as heat distribution in Russia. Fortum’s holding in TGC-1 of 29.5%, which is correspondingly accounted for as associated company using the equity method Russia * Eight CHP plants * One condensing power plant * Several heat boilers * ~500 km networks as well as heat supply to two million residents TGC-1 owns and operates hydro and thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg * Leading heat supplier in the Nordic and Baltic countries and Poland * Sizable power and heat utility in Western Siberia and the Urals in Russia Production capacity Power 9,063 MW Heat 0 MW Power 803 MW Heat 3,936 MW Power 4,758 MW Heat 13,466 MW 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://annualreport2014.fortum.com/ 38 Annual Report 2014 Group Business structure Reporting segment Power and Technology Heat, Electricity, Sales and Solutions Russia Distribution Volumes * Power production in Nordic countries 47.1 TWh * Total power production 47.9 TWh * Heat sales 7.9 TWh * Electricity sales 16.5 TWh * Electricity sales 26.5 TWh * Heat sales 26.0 TWh * Distribution transmission 17.6 TWh * Regional network transmission 13.8 TWh Sales EUR 2,156 million EUR 1,332 million EUR 1,055 million EUR 751 million Share of Fortum's sales 41% 25% 20% 14% Comparable operating profit EUR 877 million EUR 104 million EUR 161 million EUR 266 million Comparable EBITDA EUR 998 million EUR 204 million EUR 304 million EUR 416 million Net assets EUR 6,001 million EUR 2,112 million EUR 2,597 million EUR 2,615 million Comparable return on net assets 14.2% 8.7% 5.6% 9.3% Capital expenditures and gross investments in shares EUR 198 million EUR 124 million EUR 367 million EUR 147 million Employees 1,639 1,807 4,213 390 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 * Maintenance and asset lifetime management practices and costs * Investments into new or existing generation * Long-term optimised levels of investment and maintenance of networks * Distribution volumes: weather conditions and macro and local economy * Stable earnings with regulated tariffs * Cost-efficiency and quality of service * Grid availability and service level; liability to compensate for distribution interruptions * 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 * Production primarily in CHP plants: power supply/ demand balance, volatility and price affect profitability; stability through hedging * Heat and auxiliary product prices * Heat demand: weather conditions as well as macro and local economy * Maintenance and asset lifetime management practices and costs * Investment programme: earnings growth through new capacity and new volume * Guaranteed payments for the generation capacity built after 2007 under the Russian Government's capacity supply agreements * Production mainly CHP: Power supply-demand balance as well as price level and volatility in the Urals/ Western Siberia * 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 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://annualreport2014.fortum.com/ 39 Annual Report 2014 Our operations Reporting segment Power and Technology Heat, Electricity, Sales and Solutions Russia Distribution Strategy drivers * Existing CO2-free, flexible and market-driven production portfolio * Solid position and competence in hydro and nuclear production in the Nordic power market * Liberalisation and integration of European power market * Need for increased resource-efficiency * Potential for increased usage of local biofuels and waste * Solid position and competence in flexible multi- fuel CHP production * Liberalised and privatised power and heat market * Economic development * Boosting efficiency of existing operations and bringing the ongoing investment programme to completion * Potential for improved operations on the basis of current assets modernisation * 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 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://annualreport2014.fortum.com/ 40 Annual Report 2014 Our operations Business value chain Business value chain Fortum’s business activities cover the production, sales and distribution of electricity and heat as well as energy-sector expert services. Investments and fuels make up a big part of our purchases. We produce emission free and low-emission electricity and heat using different energy sources. We distribute the produced energy to our customers while taking into consideration long-term, sustainable community planning. Energy production, distribution and use result in many kinds of environmental impacts. Some of them are global or have an extensive area of impact, and some are regional or local. The biggest environmental concerns are related to climate change, acidification, and diminishing natural resources and biodiversity. We take into consideration the entire life cycle of our energy products and strive to reduce the environmental impacts of our operations by applying best practices and best available technologies, by using natural resources in a responsible manner, and by using efficient operating and maintenance processes. In our investments, we pursue a financially profitable balance that provides the possibility to increase capacity and reduce emissions. In line with our strategy, we invest in carbon dioxide-free hydro and nuclear power production and in energy-efficient combined heat and power (CHP) production. shareholders, paying taxes, employing people and supporting non-profit activities. As part of our daily operations, we strive to minimise the adverse environmental impacts of our operations. We act responsibly, and we strive to ensure that our business partners act responsibly and comply with our Code of Conduct and Supplier Code of Conduct. Our goal is to make sure that it is safe to work in all our offices and plants. Read more Read more We produce economic added value for our stakeholder groups. We support the functioning of society by, e.g., paying compensation to capital investors and • Environmental impacts of our business operations (PDF) • Fortum’s energy production plants in different countries Hydropower Hydropower Hydropower is Fortum’s most significant renewable electricity production form. Hydropower production doesn’t generate any CO2- emissions. Hydropower accounts for about one third of our annual electricity production; the share fluctuates yearly based on the hydrological situation. In 2014 our hydropower production was 22.3 (2013: 18.0) TWh, i.e. 30% (2013: 27%) of our electricity production. Hydropower has a special role in the functionality and reliability of the energy system because of its flexibility: by regulating water systems, hydropower can be used to respond to fluctuations in demand and in the production of other electricity production forms. Water can be stored in reservoirs and used during electricity consumption peaks. The need for hydropower’s flexibility will increase as the share of solar and wind electricity, both with fluctuating production, grows. Fortum’s hydropower production capacity in the Nordic countries is about 4,600 MW. In 2014, we owned or co-owned 159 hydropower plants in Sweden and Finland. The Fortum-owned or co-owned power plants with the largest capacity are located on the Dalälven, Indalsälven and Ljusnan rivers in central Sweden and on the Oulujoki, Kemijoki 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://annualreport2014.fortum.com/ 41 Annual Report 2014 Our operations and Vuoksi rivers in Finland. Hydropower plants are very reliable producers of electricity. During the year, the reliability of the plants was further improved through our investment programme’s refurbishment projects both in Finland and Sweden. Equipment and machinery refurbishments also increased the production capacity of the power plants. Hydropower Hydropower refurbishments refurbishments We increase the efficiency and electricity production of our hydropower plants with systematic plant refurbishments and power upgrades. At the same time we improve safety and operational reliability and reduce the environmental impact caused by the operations. In Finland, the refurbishment of the Imatra power plant’s number three unit was completed in autumn 2014. The capacity of the unit increased by about 6 MW, i.e. 4%. The refurbishment project at the Imatra power plant will continue in 2015 with the refurbishment of the number four unit. In Sweden, we completed refurbishments at the Noppikoski power plant, at the Skedvi power plant’s number one and two units, and at the Gävunda power plant. Environmental impacts Environmental impacts The most significant environmental impacts of hydropower are caused by construction of power plants and dams, and the dredging of riverbeds. Hydropower and the related regulation of water levels can alter river systems and shorelines as well as the routes and natural flow rates of rivers. Regulating the level of water in lakes and discharges of rivers can affect the aquatic habitat, other uses of the water systems and, above all, fish populations. The migration of fish to spawning areas can be hindered, making reproduction difficult. The impacts on fish populations can be reduced and offset by restocking fish and through projects that improve the natural reproduction of fish as well as through catch-and-transport systems. Regulation of water Regulation of water systems systems Because of hydropower production, the flow rate of water in water systems is regulated both on an annual level and in the short term. With annual regulation, flood waters are stored and the bigger releases of water are done in the winter season, when more electricity is consumed. In short-term regulation, the releases are adjusted during the day or week to correspond with electricity demand. The permit conditions for our hydropower plants and lake regulation define the limits for surface water levels and flow-rate variations in the water systems. The permits also define our obligations to prevent and to compensate for environmental impacts. As a result of careful operation, there were no permit non- compliances at our hydropower plants in Finland in 2014. In Sweden, we reported one non-compliance. A production disruption at our Åsen hydropower plant resulted in the rapid rise of the water level downstream from the power plant. After the incident, we decided to start the control system renewal project in 2015, a couple of years earlier than initially planned. In Finland, we worked with environmental authorities to study the possibilities to develop the regulation of the Oulujoki water system to mitigate future flood situations. As a result of the study, we took into use a maximum water level recommendation in the regulating of the Oulujärvi lake; the recommendation will benefit recreational use of the lake and improve flood protection in summers with heavy rainfall. Reducing environmental impacts Reducing environmental impacts We actively work to mitigate the environmental impacts of hydropower and participate in research and projects with various stakeholder groups. Environmental impacts are mitigated and compensated for through obligatory measures set forth by permits as well as through voluntary measures. The most important obligatory measure is the stocking of fish. In Sweden, in compliance with the court’s decision, we removed the Stackmora Dam in 2014 which had previously prevented the migrating of fish in the water system. Fish stocking Fish stocking Hydropower is produced in compliance with permit decisions for hydropower plants and the regulating of water systems. The permits require compensation for potential negative impacts, e.g. with fish stocking. To compensate for the environmental impacts of hydropower production on the fish industry, in 2014 Fortum released about 260,000 salmon and sea trout smolts, and about 360,000 sea whitefish smolts in Finland. Additionally, we stocked lake trout, landlocked salmon, pike perch, European grayling and whitefish in inland water systems. In 2014 we applied for a permit amendment to increase the amount of our fish stocking in the Oulujoki river. In Sweden, we stocked about 300,000 salmon and sea trout smolts into rivers that flow to the Baltic Sea. Additionally, we stocked about 220,000 landlocked salmon and lake trout smolts in the Klarälven river and Vänern lake. We stocked about 300,000 trout, European grayling and char juveniles and about 45,000 eels in other inland water systems. Voluntary environmental Voluntary environmental projects projects The environmental impacts of hydropower production were mitigated and studied also through voluntary projects implemented in collaboration with local stakeholder groups. In 2014, we spent about EUR 600,000 on implementing voluntary projects. Collaboration projects typically include improvements to the recreational use of water systems and to the biodiversity in developed water systems. Some of these projects were funded with proceeds from the sale of eco-labelled electricity. In autumn 2014, we decided to allocate significant additional funding for projects to restore migratory fish in the Oulujoki river in Finland. The practical planning will start in 2015. 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://annualreport2014.fortum.com/ 42 Annual Report 2014 Our operations A recreational fishing area was established in the Oulujoki river’s Montta dam reservoir, and the migrating fish population was strengthened by stocking Atlantic salmon smolt and by transferring spawn-ready salmon over the dams into spawning areas in the Oulujoki river tributaries. Restoration of river fish habitats continued at two points along the Vuoksi river: in the section of the river between the Tainionkoski and the Imatra power plants. We also participated in the city of Imatra’s Urban Brook project. During the year in Sweden, restoration opportunities to protect the Gullspång river’s unique salmon population were studied. In the Bulsjöån river, the success of the integration of the endangered freshwater pearl mussel was monitored through a research project. In Klarälven river studies targeted ways to improve the survival of smolt as they migrate downstream from spawning areas. Improving dam safety Improving dam safety We are systematically improving the safety of our hydropower plant dams. We monitor the condition of the dams in accordance with the safety inspection programmes approved by the dam authority. In 2014, we carried out the biggest refurbishment projects on our hydropower plant dams in Sweden. Our biggest dam safety project (at the Höljes hydropower plant) continued in 2014. The project is scheduled for completion in 2015. Other major dam safety projects that we have completed were the refurbishment of the Spjutmo and Parteboda power plant dams. We launch a new project to refurbish the Lima power plant dam. Stakeholder views Stakeholder views In 2014 various stakeholder groups brought to the public discourse the following topics important for hydropower production: For a long time, recreational fishermen in Finland and Sweden have called for hydropower producers to take actions to restore migratory fish populations in developed water systems. In particular, the construction of fishways and the removal of small hydropower plants and weirs that have low profitability have been a focal point of debate. In November Finland’s Minister of Agriculture and Forestry and the Minister of the Environment invited hydropower producers and representatives of energy sector interest groups to discuss ways to restore naturally spawning migratory fish populations in developed water systems. The discussion concluded that the best outcome would be achieved if the projects are implemented through the collaborative efforts of multiple players. For Fortum, improving the habitats for migrating fish and strengthening the natural Nuclear power Nuclear power Nuclear power is one of Fortum’s central energy production forms. In 2014, Fortum’s nuclear power production was 23.8 (2013: 23.7) TWh, i.e. 32% (2013: 35%) of our electricity production. Fortum also offers nuclear power expert services. fish populations is an important goal. We think that the most effective means to achieving the goal depend on the water system. We have participated in projects that have studied the prerequisites to building fishways for our power plants. We have also allocated significant additional funding to carry out the Oulujoki river migratory fish project in 2015–2017. In Sweden, the hydropower debate is related to implementation of the EU Water Framework Directive and to hydropower’s environmental measures. An administrator’s proposal on amending environmental legislation regarding the use of waters was published in June 2014; the amendment is proposed in order to achieve the environmental targets of Sweden and the EU. The key proposal in the report was that old hydropower plants should have to apply for new environmental permits. A condition of receiving the permits would be the implementation of environmental measures. In a statement we issued about the report, we emphasised that the environment can be improved also on the basis of current legislation. We think the proposal for permit processes causes uncertainty for the future of hydropower and, in the worst case, major expenses with no corresponding environmental benefits. In July 2014 the Swedish Energy Agency and the Swedish Agency for Marine and Water Management published a national Strategy for Workarounds in Hydropower. According to the strategy, environmental measures should not reduce hydropower production by more than 2.3% on a national level. Nor should the measures significantly decrease the regulating capacity, i.e. the possibility to regulate the amount of hydropower production in accordance with electricity demand. Read more Read more • Reducing hydropower’s environmental impacts • Fish-related issues in hydropower production In Finland, we own and operate the Loviisa power plant. We also have a 26.6% share in Olkiluoto’s two reactors and a 25% share in the third reactor under construction. In Sweden, Fortum has a 22% share in Forsmark’s power production and a 43% share in Oskarshamn’s power production. Fortum’s nuclear power production capacity totals 3,280 MW. Fortum announced in December 2014 that it is ready to take a max. 15% minority stake in Fennovoima’s nuclear power project if the restructuring of TGC-1’s hydropower production is realised in Russia. 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://annualreport2014.fortum.com/ 43 Annual Report 2014 Our operations Safety and availability Safety and availability Fortum has long experience in the responsible operation of nuclear power. Our nuclear power plants have a high level of safety, and we develop the safety and availability of the plants based on the principle of continuous improvement. In 2014, our Loviisa nuclear power plant produced 7.88 (2013: 8.04) TWh of electricity, which was about 12% (2013: 9%) of Finland’s electricity production. The load factor describing the availability of the nuclear power plant was 90.9% (2013: 92.5%), which is high by international standards. The availability of pressurised water reactors globally was about 84% (2013: 83%). In 2014, a normal, so-called short maintenance outage was carried out on Loviisa’s number one unit and an extensive maintenance outage, done every four years, was carried out on the number two unit. In conjunction with the outages, about a quarter of the fuel in both units was replaced. During the year, one incident impacting safety (level 1 on the INES scale used by the International Atomic Energy Agency) was recorded at the Loviisa power plant. The incident did not cause any danger to people, the environment or the power plant. According to the IAEA definition, INES 1 incidents do not pose a risk, but do indicate a lack of safety provisions. Availability also in co-owned nuclear plants – with the exception of the Oskarshamn 2 unit – was good. Since the annual outage, the output of Oskarshamn 1 has been somewhat limited and will continue to be limited until the spring 2015 annual outage. It has been decided to perform an extra inspection outage on Forsmark 3 in spring 2015. Oskarshamn 2 was shut down for all of 2014, due to modifications to improve the plant’s safety and to increase its capacity. Continuous development Continuous development of nuclear safety of nuclear safety For the past decade, the European Union has strived to develop its nuclear safety-related legislation. Based on the work done during and after the stress tests on European nuclear power plants, in summer 2013 the European Commission released a proposal for the renewal of the Nuclear Safety Directive. The directive was approved in July 2014, and Member States shall bring into force in their national legislation the regulations necessary to comply with this directive by the middle of August 2017. In 2014, Fortum continued improving the safety of its nuclear power plants. At the Loviisa power plant, we continued the construction of air-cooled cooling towers that are independent of seawater, and improved flood protection in case of the very improbable exceptionally high seawater level. Construction of a new air cooling system independent of seawater cooling started in 2014, and the system will be completed in 2015. The system will improve the plant’s preparedness for extreme situations in which seawater for some reason becomes unavailable for its normal cooling function. At the Loviisa power plant, steam generator safety valves were replaced, safeguards against high sea levels were improved, and the main transformer was replaced. Additionally, a periodic, extensive safety Modernisations and capacity upgrades Modernisations and capacity upgrades assessment will be conducted at the Loviisa power plant, and the results of the assessment will be submitted to Finland’s Radiation and Nuclear Safety Authority STUK during 2014 and 2015. At the end of the year, the Swedish Radiation Safety Authority published requirements for improving safety. Among other things, the authority is requiring plants to have an independent emergency feedwater system. Transitional solutions must be installed at all plants in 2017, and stationary installations by 2020 at plants with an operating life designed for 60 years. Renewed nuclear power Renewed nuclear power research and research and development programme development programme Fortum decided in 2014 to refocus its nuclear power research and development activities. Going forward, research and development will concentrate on three areas: safe and efficient use of nuclear power, growing the nuclear power business, and new technologies in nuclear energy. Our research and development work in 2014 focused particularly on nuclear waste-related research and on the service life management of concrete. In addition to our own research programmes, we participate in Finnish national research programmes and in the development of Swedish nuclear power research. Fortum also participates in international research projects. The efficiency and power capacity of both units at the Loviisa nuclear power plant have been increased over the years through plant modernisations; this work will continue in the coming years. Nuclear power upgrades are being carried out also in our co-owned plants in Sweden. Modernisations and Modernisations and capacity upgrades at capacity upgrades at Loviisa Loviisa The Loviisa power plant’s high-pressure turbines will be modernised in 2014–2017. Additionally, the plant’s eight moisture separators and reheaters will be modernised in 2015–2017. The modernisations will increase the plant’s nominal output by a total of about 29 MW. Work to modernise also the plant automation is under way. The modernisation project will be implemented over several years and is included as part of Fortum’s normal capital expenditure. In 2014, we refocused the project and switched the main collaboration partner. We agreed to continue the project with English Rolls-Royce and ended the agreement with our previous partner Areva- Siemens Consortium. The automation project to be implemented with Rolls-Royce focuses mainly on safety- related systems for both Loviisa power plant units. The project is to be implemented by the end of 2018. The project will be implemented in close collaboration with Fortum. The aim of the automation modernisation project and of other modernisation projects is to secure safe and reliable electricity production at the Loviisa nuclear power plant 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://annualreport2014.fortum.com/ 44 Annual Report 2014 Our operations until the end of the plant’s operating licences. Capacity upgrades in Capacity upgrades in Sweden Sweden Projects related to capacity upgrades continued at both the Oskarshamn and Forsmark nuclear power plants. A decision was made to continue the capacity upgrade project at Forsmark 1; according to the plan, the new upgraded capacity will be taken into use by 2020 at the latest after extensive grid improvement work. The capacity upgrade for Forsmark 3 was rejected as unprofitable because of the significant additional investments required for the electricity distribution network. The Oskarshamn 2 unit was shut down in June 2013 in order to implement preparations for safety improvement modifications and for a capacity upgrade at the plant. The installations have not progressed as planned. Because of the safety improvements, the stoppage will continue until summer 2015, and the capacity upgrade will be postponed to 2017. Environmental impacts Environmental impacts Carbon dioxide-free nuclear power has an important role in mitigating climate change. Under normal conditions, nuclear power production does not have any impacts on human health or the environment. Nuclear power’s most significant environmental impacts are related to nuclear safety, nuclear waste management, and the impacts the cooling waters have on water systems. The most significant environmental impact of a nuclear power plant during operation is the increase in the water temperature in the immediate vicinity of the plant when seawater is used for cooling. In 2014, the Loviisa power plant’s thermal load on the sea was 15.4 TWh. Based on temperature measurements, the cooling water has increased the temperature of the surface water by 1-2 degrees within a 1-2 kilometre radius of the cooling water’s discharge location. The thermal load on the sea could be reduced by making the nuclear power plant a combined heat and power plant. This would increase the power plant’s energy efficiency by several tens of per cents. So far, this type of solution has not been realised in any country on a large scale. Nuclear waste management Nuclear waste management Both conventional and radioactive waste are generated in nuclear power production. The nuclear waste treatment and final disposal solutions at the Loviisa nuclear power plant and at Fortum’s co-owned nuclear power plants are at the forefront of development globally. Conventional waste is generated at the power plant in, e.g., office work and in servicing and repairing systems that are outside the nuclear power plant’s controlled area. Work performed within the nuclear power plant’s controlled area generates radioactive waste. Depending on the level of radioactivity of that waste, it is categorised as waste that can be released from control or as low-, intermediate- or high-level radioactive waste. The Loviisa power plant’s low- and intermediate-level radioactive waste is treated at the power plant and then placed in the bedrock-excavated final repository (VLJ cave) owned and used by Fortum. The space has been in use since the 1990s. The plan is to enlarge the final repository so that all low- and intermediate-level radioactive waste, including decommissioning waste generated at the Loviisa power plant, can be placed there. The enlargement and the licences for it will become topical in the 2020s. The finalising of the Loviisa nuclear power plant’s liquid waste storage and solidification plant continued in 2014. The plan is to commission the solidification plant by 2016. An analyses update for the long-term safety of the final disposal of power plant and decommissioning waste was started in 2014. The aim is for the update to be completed in 2018. After use, the fuel assemblies removed from the reactor are first stored inside the reactor building for a few years and then in deep water basins in an interim storage located in the plant area. The planning for Fortum and Teollisuuden Voima Oyj’s (TVO) encapsulation plant and final repository for spent fuel, to be built at Olkiluoto in Eurajoki, Finland, has advanced to the construction licence phase. Final disposal of spent Final disposal of spent fuel fuel In Finland and Sweden, the producers of nuclear waste are responsible for management and final disposal of the nuclear waste and for the related costs. In Finland, nuclear waste management principles and timetables were decided on already back in the 1980s, and the construction of waste management solutions has advanced according to plans. The licence holders are responsible for the management of power plant waste generated during the operation of the Loviisa and Olkiluoto nuclear power plants and for the management of future decommissioning waste. The practical implementation of the final disposal of spent nuclear fuel from the companies is handled by Posiva Oy, which is co-owned by Fortum and TVO. Posiva Oy’s construction licence application for the spent nuclear fuel encapsulation plant and final disposal facility is currently under assessment by the Government and the Radiation and Nuclear Safety Authority STUK. The Radiation and Nuclear Safety Authority noted in its statement in February 2015 that the plant can be built to be safe. Preparedness to start final repository operations is estimated to be achieved around 2020. Svensk Kärnbränslehantering AB (SKB) handles the final disposal of the nuclear waste generated by Fortum’s co-owned nuclear power plants in Sweden. In March 2011, the company submitted a construction licence application to build an encapsulation and final disposal plant for spent fuel; the application is still being reviewed by the authorities. The final repository for spent fuel is planned to be built at Forsmark. After construction and a test-run period, disposal operations could start in the late 2020s. Read more Read more • Provisions related to nuclear power 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://annualreport2014.fortum.com/ 45 Annual Report 2014 Our operations Stakeholders views Stakeholders views In 2014 various stakeholder groups brought to the public discourse the following topics important for nuclear power production. Greenpeace launched a campaign in March 2014 to close aging nuclear power plants by encroaching on nuclear power plants in six countries. Fortum’s co-owned Oskarshamn nuclear power plant in Sweden was also a target of the campaign, with 20 demonstrators in the plant area demanding the closure of the nuclear power plant. The demonstration did not endanger the plant’s operations, and police removed the demonstrators from the area. The Loviisa nuclear power plant in Finland was also on the Greenpeace list of nuclear power plants to be closed, but there were no demonstrations against the plant. The current operating licences for the Loviisa nuclear power plant units will end in 2027 (Loviisa 1) and 2030 (Loviisa 2). The continuation of nuclear power production in Loviisa after the current operating licences expire was of interest, particularly locally. Fortum is interested in continuing nuclear power production in Loviisa, but at the moment we have nothing specifically underway with regards to this. We have already publically communicated that a combination of nuclear power and combined heat and power production would be a commercially interesting solution for Loviisa. Using nuclear power in combined heat and power production would significantly improve the energy efficiency of nuclear power. However, building additional nuclear power requires broad social acceptance. Combined heat and power production Combined heat and power production Fortum prefers combined heat and power (CHP) production, which utilises as much as 90% of the fuel’s energy; by comparison, the efficiency of electricity-only production is about 60% at its best. We use different fuels in a diverse and flexible manner in CHP production. In 2014, CHP plants accounted for 90% of Fortum’s heat production and 28% of its electricity production. We produce electricity, heat and steam at 20 CHP plants in Finland, Poland, Russia and the Baltic countries. During the past two years, we have commissioned new CHP plants in Finland, Latvia and Lithuania. Additionally, energy- efficient gas turbine units were taken into use at the Chelyabinsk CHP-1 power plant in Russia. Two more natural gas-fired CHP plant Diverse mix of fuels Diverse mix of fuels units were under construction in Russia in 2014. Upon completion in 2015, they will increase Fortum’s electricity production capacity by 496 MW and its heat production capacity by 350 MW. Joint venture Fortum Värme produces electricity and heat at four CHP plants in the Stockholm region. The Brista power plant’s new CHP unit was commissioned in 2014. Fortum Värme is constructing a new biomass- fired CHP plant in Stockholm. The plant is scheduled to be completed in 2016. The plant’s electricity production capacity is 130 MW, and its heat production capacity 280 MW. It will replace Fortum Värme’s old coal- fired capacity. Availability of CHP plants Availability of CHP plants at a good level at a good level Good availability of a power plants enables efficient and safe operation, a reliable supply of energy and reduced environmental impacts. The average availability of Fortum’s CHP plants in 2014 was 94.7%; the annual target was 95%. We are continuously engaged in projects to improve power plant availability and reliability. In 2014, we upgraded fuel-feed systems, water-steam cycles, and electrical and automation systems, among other things. We utilise a flexible and diverse mix of fuels in energy production at our CHP plants, and we aim to increase the use of renewable and waste-derived fuels. In 2014, we used in total 77 TWh of fuels at our CHP plants with the following breakdown: natural gas 80%, coal 14%, biomass and bioliquids 4%, waste- derived fuel 0.8%, and peat 0.5%. The renewable fuels we use include forest residues, other wood-based fuels and agrobiomass. Additionally, over 60% of the municipality and industrial waste we burn is bio-based. We actively participate in developing new energy sources and fuels. An example of this is the pyrolysis technology-based Fortum Otso® bio-oil production plant constructed at the Joensuu power plant. Operating at full capacity, the plant can annually produce about 50,000 tonnes of bio-oil, which is used to replace fossil fuel oils both at Fortum’s own heat plants and at its customers’ heat plants. This reduces CO2-emissions from energy production by as much as 60,000 tonnes per year. Process technology problems have delayed the commissioning of the plant. In Stockholm, Fortum Värme used 2.0 (2013: 3.2) TWh of biomass and various bioliquids and 2.6 (2013: 2.1) TWh of waste derived fuels. Renewable fuels accounted for 61% Fortum Värme’s total fuel use. The new plant unit under construction is one of the world’s largest bio-CHP plants; it will further increase the use of renewable fuels and reduce emissions in Stockholm. 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://annualreport2014.fortum.com/ 46 Annual Report 2014 Our operations Environmental impacts Environmental impacts The most significant environmental impacts from fuel-based energy production are related to flue-gas emissions. Emissions into water, waste or by-products can also have local impacts. The environmental impacts of heat production are reduced with combustion technology, by scrubbing combustion gases and by switching fuels. The biggest reduction in emissions to air, particularly carbon dioxide and sulphur dioxide, are achieved by switching from fossil fuels to renewable fuels. Heat plant emissions to air are regulated by plant-specific environmental permits, which require the monitoring and reporting of emissions. In 2014, we continued preparations for the investments needed to fulfil the emissions requirements set by the Industrial Emissions Directive (IED). The IED tightens the emissions requirements for practically all of our thermal power plants (CHP plants and condensing power plants) from 2016 onwards. In Finland, we applied for new environmental permits in 2014 for all plants within the sphere of the directive. To reduce sulphur emissions, a switch was made from heavy fuel oil to light fuel oil at the Tapiola heat plant in Espoo, and the planning work to convert the heavy oil-fired boilers at the Kivenlahti heat plant in Espoo to pellet-fired boilers was started. Additionally, it was decided to install a flue-gas condenser at the Joensuu power plant in 2015; this will significantly reduce the plant’s particle and sulphur emissions. Despite the measures implemented, the five- year average for specific carbon dioxide emissions from Fortum’s total energy production increased to 198 g/kWh, which is slightly less than the target level of 200 g/ kWh. The five-year average for specific emissions has been on the rise in recent years, as the share of Russia’s production in calculating the average has increased. Utilisation of by-products Utilisation of by-products Our European power plants utilise and recycle by-products as efficiently as possible. Gypsum produced at the Meri-Pori power plant is used as a raw material for the gypsum board industry. Ash is used in the construction industry, in road construction, in earthwork and in mine fills. CE-labelling for the bottom ash of CHP plants in Finland was received in 2014. By-products with no practical use found are piled in landfills. In Russia, ash is stored in ash ponds because there are no practical applications for it. We improve energy We improve energy efficiency efficiency Better energy efficiency reduces the environmental impacts of energy production and use. Because of the high overall efficiency of CHP production, emissions per produced energy unit are lower than in electricity-only production. In fact, in recent years we have replaced several old production plants with more efficient CHP plants or units in Finland, Russia and the Baltic countries. We apply the principle of continuous improvement in developing the energy efficiency of the existing plant base. The goal is to achieve annual energy savings of over 1,400 GWh by 2020 compared to 2012. This energy savings is equivalent to the annual heating demand of more than 75,000 households (18,500 kWh/household) or the annual energy production of more than two hundred 2.5-MW wind power plants. In 2013-2014 we achieved about 680 GWh of this target, i.e. 49%. In Chelyabinsk, Russia, the district heat networks of the CHP-1 and CHP-2 power plants were integrated. This helps to optimise power plant operations and enables the maximal use of CHP-1’s new gas turbine units. The estimated annual energy savings is 469 GWh. We invested in a flue-gas condenser to be built at the Joensuu power plant. The condenser will be commissioned in 2015 and will save about 100 GWh of energy per year. Read more Read more • The share of renewable energy sources used in electricity and heat production • The use of fuels Other production Other production Fortum has also heat-only production, condensing power production and solar power. Heat-only production Heat-only production Fortum has nearly 200 heat-only plants in Finland, Poland, the Baltic countries and Russia. The plants use a versatile mix of fuels as well as heat pumps to produce district heat, particularly during peak loads. The heat plants produced 10% of our total heat production in 2014. The fuels used in heat production include natural gas, biomass, coal and fuel oil. The size of the heat boilers varies greatly: the smallest have a capacity of less than 1 MW and the largest close to 200 MW. Heat boilers have a good efficiency and generally utilise more than 90% of the fuel’s energy. The environmental impacts from heat-only production are similar to those from combined heat and power production. We are continually developing new ways to improve production efficiency to minimise the environmental load. For example, in Espoo we have two heat pump plants that transfer waste heat from the data centres of IT companies into the district heat network. At the beginning of 2015, we commissioned a new heat pump plant near the Suomenoja power plant. It recovers heat from the city of Espoo’s purified wastewater before the water 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://annualreport2014.fortum.com/ 47 Annual Report 2014 Our operations is piped into the sea. Cooling the water before it is released into the sea reduces the environmental impacts of the wastewater treatment plant. The heat pump plant annually produces about 300 GWh of heat for the Espoo district heat network. The production corresponds to the annual consumption of about 15,000 single-family homes. In Stockholm, Fortum Värme has more than 20 heat-only boilers that are fuelled by fuel oil and bioliquids. Värme also has three big heat pump plants that use seawater to produce heat for Stockholm’s district heat network. Stockholm also has an extensive district cooling network that uses heat pumps and heat exchangers to produce cooling. A heat pump is an energy efficient, climate benign and low emissions production form. The only emissions are the possible minor leaks of refrigerants from the pump equipment. Other environmental impacts of heat pumps mainly stem from the production of the electricity they use. Condensing power production Condensing power production Fortum produces condensing power in Russia and Finland. In 2014, the Nyagan power plant in Russia produced base-load power. The Meri-Pori power plant in Finland supplements other electricity production when electricity demand is high. Annual condensing power production therefore fluctuates considerably based on the market situation. Fortum’s condensing power production in 2014 was 7.2 (2013: 4.6) TWh, i.e. 10% of the company’s total electricity production. Condensing power plants generate electricity only, and the thermal energy from condensing is released into the environment as waste heat. For that reason, the generation efficiency of condensing power plants is clearly lower than that of CHP plants. Solar power Solar power We believe that inexhaustible, renewable and carbon-free solar energy is one of the future’s most important energy production forms as climate change and local environmental problems necessitate sustainable, CO2-free and energy-efficient solutions. Solar electricity technologies are advancing quickly. Solar energy costs continue to decrease and, in many countries, solar electricity production is already profitable for consumers without any subsidies. In countries with ideal conditions for solar energy, the production cost of solar The Nyagan power plant in Russia has three modern natural gas-fired combined-cycle units. The Nyagan power plant is located in a scarcely populated industrial area in Western Siberia, where oil and natural gas production require a lot of electricity but there is no need for a corresponding amount of thermal energy. The plant’s efficiency is over 55%, which is very high also on a global scale. The efficiency of traditional condensing power production in Russia is 40% at best. By comparison, the Nyagan power plant saves about 9 TWh of fuel annually, which is more than the city of Helsinki’s annual consumption of district heat. Because of the good efficiency, the Nyagan plant’s emissions are much less than that of traditional condensing power production. In Finland we produce condensing power only at the Meri-Pori power plant. The plant’s main fuel is coal. The Inkoo power plant was decommissioned in February 2014. The environmental impacts from condensing power production are essentially the same as those from combined heat and power production. The difference is the heat that is released into the environment through the cooling waters. The Nyagan power plant in Russia is equipped with cooling towers that allow heat from the cooling water to dissipate into the atmosphere. The Meri-Pori power plant uses sea water for cooling, and the warmed cooling water is pumped back into the sea. In open sea areas, the impacts of the increased temperature are local and minor. electricity is nearing the price of wholesale electricity. We are researching and developing solar operations in the Nordic countries and in India. 2015. The plant is the first that has been built as part of India’s renewable energy investment programme, Jawaharlal Nehru National Solar Mission (JNNSM) Phase II. The investment increased Fortum’s solar power production capacity in India to 15 MW. In 2014, we produced 9 GWh of solar electricity at our Amrit Solar plant in northwest India. At the end of the year, we connected a new 10-MW solar power plant to the grid in Kapeli, in central India. The plant was officially inaugurated for use in January Fortum has ongoing demonstration and research projects to harness the enormous potential of solar energy. Power and heat distribution Power and heat distribution Fortum is an energy producer and also transmits and distributes power and heat to its customers. At the end of 2014, Fortum had electricity distribution networks in Sweden and district heat networks in Finland, Poland, the Baltic countries and Russia. In 2014, we divested the electricity distribution business in Finland and Norway. The decision to sell the electricity distribution business is related to the assessment the company made in 2013 regarding the future strategic alternatives for the distribution business. During the year, we continued the preparation and assessment of divestment opportunities for Sweden’s electricity distribution business. 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://annualreport2014.fortum.com/ 48 Annual Report 2014 Our operations Heat distribution Heat distribution Heat produced in CHP plants and heat-only plants is transmitted to consumers in the district heat network. Smart metering and control systems as well as open, two-way district heat networks are new types of solutions in the development of heat distribution. Fortum owns and operates about 1,240 km of district heat network in Finland, 700 km in Poland, 336 km in the Baltic countries and 540 km in Russia. We also have small local district cooling networks in Espoo. Uninterrupted heat Uninterrupted heat delivery delivery The security of supply of energy is a priority for Fortum and one of our sustainability targets. Delivery reliability of district heat in the EU countries is already at a good level, and in Russia the modernisation of our district heat network is under way. An uninterrupted supply of district heat is important, particularly in the cold weather conditions of the North. We are continuously improving the reliability of our district heat network with systematic network maintenance. Our district heat customers in the Nordic countries have delivery interruptions for only 1-2 hours per year on average. About half of Power distribution Power distribution the interruptions are caused by damage to the network and the work to repair it, and half are for some other reason, like network refurbishment work and connecting new customers to the district heat network. Generally, we can implement new connections and district heat network branching without interrupting heat distribution. We try to schedule any planned repair work that will cause interruptions in distribution to times outside the heating season. We are developing the We are developing the trunk network in Russia trunk network in Russia We produce district heat for close to two million residents in the Russian cities of Tyumen, Chelyabinsk, Tobolsk and Ozersk. In heat transmission we operate mainly trunk networks through which heat is transmitted from production plants to the distribution networks of the cities. In 2014, the trunk networks of the CHP-1 and CHP-2 power plants in Chelyabinsk were integrated; this helps in the optimisation of the power plants’ operations and enables the maximal use of CHP-1’s new gas turbine units. Smart meters Smart meters Smart metering and control systems give heat network customers the opportunity to influence their own heat consumption. With smart meters, consumption data is received almost in real-time and heat consumption monitoring is more efficient. Nearly all of our district heat customers in Finland, Poland and the Baltic countries are within the sphere of smart metering. Open district-heat Open district-heat network network Buildings, industrial processes and production plants generate a lot of waste heat. Individual households also sometimes produce surplus heat energy. Making the district-heat networks two-way enables customers to sell the surplus heat to the network. Utilising heat that otherwise would be lost can reduce energy costs and the carbon footprint. With an open district-heat network, it is, for example, easier to use solar energy in heat production because production peak surpluses can be sold to the network. Making the district heat network two-way is technically simple and does not require major investments. In 2014, we divested the electricity distribution business in Finland and Norway. The decision to sell the electricity distribution business is related to the assessment the company made in 2013 regarding the future strategic alternatives for the distribution business. During the year, we continued the preparation and assessment of divestment opportunities for Sweden’s electricity distribution business. At the end of the year in Sweden, Fortum had 907,000 electricity distribution customers with the following breakdown: • 780,000 private customers • 9,000 industrial/commercial customers • 118,000 institutional customers Fortum had an electricity distribution network of about 71,000 km in Sweden. Taken into account the pre-divestment distribution volumes in Finland and Norway, 17.6 TWh of electricity was transmitted in our distribution network and 13.8 TWh in our regional transmission network. Construction of weather- Construction of weather- proof network continued proof network continued Fortum has continuously invested in electricity network updates and maintenance and in improving security of supply. In 2014, the Distribution division invested a total of EUR 147 million in Finland, Sweden and Norway. We invested in underground cables, overhead lines and substations. We also further increased the network automation for the critical parts of the grid. Through our electricity network investments, we aim to make the network smarter and to decrease and shorten power outages. By the end of 2014, approximately 761,000 of Fortum’s customers (84% of customers) in Sweden were within the sphere of a weather-proof electricity distribution network. The system average interruption duration index (SAIDI) per customer in our distribution network in Sweden was 97 (2013: 103) minutes, while the target was <100 minutes. The customer average interruption duration index (CAIDI) was 81 (2013: 92) minutes. 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://annualreport2014.fortum.com/ 49 Annual Report 2014 Our operations network upgrades can be reused or recycled. Contaminated soil areas from transformer oil leaks are cleaned as quickly as possible. New transformers are equipped with oil trays that prevent oil from getting into the environment in accident situations. Reduction of environmental impacts Reduction of environmental impacts Construction, use and maintenance of the electricity and heat distribution networks impact the surrounding environment. Environmental impacts are reduced through careful operational planning and technology solutions and by adhering to environmentally benign ways of operating. When planning a distribution network, the impacts on land use, the landscape and nature are taken into consideration. Through the planning, zoning and permit processes, the aim is to find the best solution for society for securing energy distribution. Minor impacts from the Minor impacts from the district heat network district heat network The environmental impacts of district heat distribution occur in the network construction phase. As in other construction projects in society, the nature of the impacts are temporary at the construction site. With the exception of occasional water leaks, there are no environmental impacts from the use of district heat networks. Cabling reduces the Cabling reduces the electricity distribution electricity distribution network’s environmental network’s environmental impacts impacts In the construction phase of an electricity distribution network, environmental impacts are caused by things like the removal of trees, and by construction site traffic, noise and dust. Replacing overhead lines with underground cables reduces impacts on the landscape and on birds. The majority of waste materials generated in distribution Electricity and heat sales Electricity and heat sales The Nordic electricity market is freely competitive. Electricity price is determined on the basis of the cheapest possible electricity production and electricity imports sufficient to cover the demand in each hour. Because of the transmission network’s capacity bottlenecks, the market has been divided into price areas, and their prices differ from each other when transmission needs exceed the network’s capacity. The majority of Nordic and Baltic electricity production is sold through the Nordic electricity exchange’s Nord Pool Spot. In 2014, 361 TWh, i.e. about 90% of the electricity consumed in the Nordic and the Baltic countries, was sold in Nord Pool Spot. Electricity sellers and buyers can also hedge their electricity price with derivatives on the Nasdaq Commodities exchange. In 2014, the trading volume of Nordic electricity market products totalled 1,497 TWh, i.e. about fourfold compared to the physical production. Fortum sells electricity and heat to private and business customers. We are one of the leading electricity sales companies in the Nordic countries. At the end of 2014, we had over 1.3 million electricity sales customers in Sweden, Finland and Norway. In 2014, we sold a total of 13.8 (2013: 13.6) TWh of electricity to private and business customers. Fortum is one of the world’s biggest producers and sellers of heat. We sell heat to companies, the public sector and private customers in Finland, Sweden, Poland, all the Baltic countries, and especially in Russia. Fortum’s heat sales in 2014 totalled 35.4 TWh, of which 26.0 TWh was sold in Russia, 3.2 TWh in Finland and 3.4 TWh in Poland. In 2014, we started selling district cooling in Finland, and we decided to invest in district cooling production and distribution in Tarto, Estonia. In Sweden, Fortum Värme sold 7.6 TWh of heat and 0.4 TWh of district cooling. Our electricity and heat products Our electricity and heat products In recent years, Fortum has introduced several new solutions to the markets, solutions that boost the efficiency of customers’ energy use and reduce environmental impacts. Smart solutions give customers better opportunities to control their electricity consumption and costs. Climate-benign electricity Climate-benign electricity products products Fortum is one of the Nordic countries’ leading sellers of carbon dioxide-free and guarantee- of-origin-labelled electricity and can offer more and more customers an electricity agreement that comes with electricity produced with renewable energy. In 2014, all of the electricity we sold to private customers in Finland was renewable, carbon dioxide-free hydropower or wind power. The origin of the hydroelectricity and wind power was guaranteed with European Guarantees of Origin and additionally a part of the electricity with the pan-European EKOenergy label. Towards the end of 2014 in Sweden, we renewed the private customer electricity agreements: going forward, all electricity is primarily produced with hydropower. Customers can also choose which hydropower plant’s electricity they want to buy. If our Swedish customers prefer, they can also opt for electricity produced with wind and solar power or environmental labelled Bra Miljöval (“Good Environmental Choice”) electricity. Likewise in Norway, our customers have the opportunity to purchase 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://annualreport2014.fortum.com/ 50 Annual Report 2014 Our operations carbon dioxide-free electricity produced exclusively with hydropower. Developing district heat Developing district heat We are continuously developing our district heat solutions in all the countries where we produce and sell heat. An open district heat network is a new solution that enables buildings producing heat to sell their surplus heat to Fortum at a market price. In Finland, two IT-sector data centres and the Espoo hospital under construction have made an agreement with Fortum to sell surplus electricity to the open district heat network. In Sweden, joint venture Fortum Värme’s customers include shopping centres, among Energy-efficiency products and services Energy-efficiency products and services others. With open district heat becoming more common, there is less need to produce heat with fossil fuels in heat-only plants, and thus emissions from our district heat operations are reduced. Fortum has introduced new services to the market in recent years to improve customers’ energy efficiency; examples include the consumption report service Fortum Valpas, the Fortum Kotinäyttö (Home Display), the Fortum Fiksu product family and the Fortum Solar Kit. With the new services, Fortum customers can monitor their energy consumption, optimise their home heating, and thus cut costs. For our private and business customers in Finland and Sweden, we offer turnkey solar Expert services Expert services We offer a variety of operation and maintenance expert services to power plant owners and industrial customers. Our services and tools help our customers to boost the operational and maintenance efficiency of their plants and increase profitability. Additionally, we offer products and consulting services related to hydropower, nuclear safety and nuclear waste handling. panel systems, and we buy surplus solar electricity from customers at a market price. number of motorists will find it convenient to drive electric vehicles. Electricity for cars Electricity for cars Fortum actively promotes the adoption of electric vehicles by developing solutions that enable quick and safe charging of electric vehicles. Fortum’s Charge & Drive network operates in Norway, Sweden and Finland. We are collaborating with various partners in the Charge & Drive project so that an increasing Fortum already has some 50 charging stations in Finland, 90 in Sweden and nearly 200 in Norway. More than 100 stations are fast chargers. Increased use of electric vehicles reduces emissions regardless of the source of electricity, because all electricity production is in the framework of the EU emissions trading scheme, unlike petrol and diesel fuels. In 2014, we continued supplying ion exchange materials to the American EnergySolutions LLC in Japan. The ion exchange materials are used to purify the radioactive waters at the damaged Dai-ichi power plant in Fukushima. We also continued combustion technology- related deliveries. For example, we received a follow-up order from Eesti Energia for a boiler modernisation of the Narva power plants. We will supply a nitrogen oxides reduction system for seven boilers during 2014-2015. We also agreed to supply a nitrogen oxides reduction system for one boiler at a heat plant owned by the city of Iasi in Romania. In Poland, burner deliveries and combustion technology conversion projects continued at EDF’s power plants in Krakow and Wroclaw. 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://annualreport2014.fortum.com/ 51 Annual Report 2014 Stakeholders IN SOCIETY IN SOCIETY Stakeholder collaboration Stakeholder collaboration Our way of operating responsibly includes continuously identifying the views of our stakeholders and finding a balance between the different expectations our stakeholders have. Dialogue, feedback and good collaboration are key ways to promoting a mutual understanding with our stakeholders. Management of stakeholder collaboration at Fortum is assigned to a number of functions, particularly to communications, corporate relations, human resources, and sustainability, and to electricity and heat sales, as well as several expert areas. We have increased dialogue with our stakeholders also through social media channels in all countries where we operate. Responsibilities for managing stakeholder collaboration are primarily determined by stakeholder group or interaction theme. Key interaction areas, e.g. corporate relations, and corporate and customer communications, have annual plans that guide the activities. Fortum has an informal Advisory Council consisting of representatives of Fortum’s stakeholder groups as invited by the Board of Directors. The Advisory Council aims to increase the dialogue and the exchange of views between the company and its stakeholders. We report openly about dialogue with our stakeholders and the impacts of our operations. Our main stakeholders include shareholders, investors, analysts, customers, personnel, authorities and decision makers, and the media. Our other important stakeholder groups are suppliers of goods and services, energy sector organisations and non-governmental organisations. We regularly monitor and assess the public discussion in the countries where we operate. Information through Information through surveys surveys In collaboration with third parties, we conduct annually several surveys regarding stakeholder collaboration. The aim of these surveys is to help Fortum assess and respond to the important stakeholder groups’ expectations of the company. The surveys also measure the success of our stakeholder collaboration. Additionally, the surveys provide information about emerging sustainability trends and risks. We use the survey results in business planning and development. The feedback received from customers guides the development of products and services. Additionally, our activities in national and international organisations help to deepen our understanding of, for example, global sustainability issues and their connections to our business. Survey One Fortum Target groups Customers Target countries Frequency Finland, Sweden, Norway, Annually Public administration Poland, the Baltic countries, Capital markets NGO:s Opinion leaders Personnel Electricitysales customers Russia Finland, Sweden, Norway Annually EPSI customer satisfaction surveys PR-barometer Media Finland, Sweden, Poland, Annually Media tracking Student surveys Media Students the Baltic countries, Russia All operating countries Daily Finland, Sweden Employer surveys by T-Media and Universum and Uratie survey by Talentum in Finland in 2014. Employer survey by Universum in Sweden. Social media Social media Fortum's social media presence is primarily country-specific, and there are some differences in the use of the social media services between our operating countries. Facebook and Twitter are our main social media channels. Additionally, we use other services, like LinkedIn, YouTube and blogs. We use Facebook to engage in a dialogue with our customers and the general public about Fortum and about topical issues related to the energy sector. We also use Facebook to communicate with our 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://annualreport2014.fortum.com/ 52 Annual Report 2014 Stakeholders customers in power and district heat outages. We use Twitter to communicate and for engaging in a dialogue with our customers, the general public, the media, organisations and opinion leaders, and other companies. On Twitter, we discuss topics related to Fortum's current activities and topical new issues in the energy sector. We have also used Twitter to communicate with customers about power and heat outages. Stakeholder surveys Stakeholder surveys We use the extensive One Fortum survey and the EPSI customer satisfaction survey to annually measure customer and stakeholder satisfaction as well as changes in the company’s reputation and the factors that impact it. The One Fortum survey covers customers, public adminstration, capital markets, non- governmental organisations and opinion leaders as well as Fortum’s personnel. In 2014, as in the previous year, we conducted the survey in Finland, Sweden, Norway, Poland, the Baltic countries and Russia. For the Power Solutions business area, the survey also covered customers in Germany and Great Britain. In Finland and Sweden, we also surveyed the views of the general public. As part of the One Fortum survey, we conducted a separate sustainability survey targeting the same stakeholder groups; the goal was to find out what our stakeholders consider to be the most important sustainability areas. A total of 3,431 stakeholder representatives responded to the One Fortum survey; 1,074 of them represented the personnel. A total of 1,720 stakeholder representatives responded to the separate sustainability survey; 985 of them represented the personnel. The EPSI customer satisfaction surveys measures customer satisfaction in Finland, Sweden and Norway. The survey results are reviewed by Fortum’s top management and are used for business planning and development. In 2014, Fortum’s reputation and customer satisfaction were also part of the Group’s sustainability target setting, and reputation among the general public, customers and personnel was also part of the long-term incentive (LTI) system. We use the results from the One Fortum survey, the sustainability survey and the EPSI customer survey as well as other stakeholder surveys to assess materiality of sustainability issues, and to define the content of our sustainability reporting. Our reputation is stable Our reputation is stable and customers and customers increasingly more increasingly more satisfied satisfied Our reputation among the most important stakeholders has remained stable, and, despite a small decrease, it is still the strongest among our stakeholders operating in the capital markets. Our reputation among public sector representatives improved for the third consecutive year. Our reputation improved among all stakeholders in Finland, particularly among customers. Customer satisfaction improved most in our heat business. Satisfaction among electricity distribution’s private customers decreased slightly, but increased among business customers in all market areas. The Power Solutions business area’s customers continued to be very satisfied and are now more loyal and more willing to recommend Fortum. Our reputation continues to be weakest among the general public. The score decreased from 2013 as our reputation in Sweden weakened. Opinion leaders and NGOs have a more positive attitude towards Fortum than before. Business operations and social responsibility are factors that have the biggest impact on reputation. Customer orientation and employer image also have a significant impact. As in the previous year, Fortum’s leadership, operations and financial performance were given high scores. The scores for customer orientation and social responsibility remained lower than in the other main factors for reputation, and are important development targets in 2015. Customer loyalty grows Customer loyalty grows the customer base the customer base The international and independent EPSI Rating annually surveys the level of satisfaction of electricity retail company customers in Finland, Sweden and Norway. Based on the 2014 EPSI survey, the general customer satisfaction in the electricity sector remained on the same level in Finland compared to 2013, decreased slightly in Sweden, and improved in Norway. Fortum’s customer satisfaction improved in Finland and Norway, but decreased in Sweden. According to the EPSI survey, Fortum’s customer loyalty in Finland improved more than that of any other electricity company. Customer loyalty and customer willingness to recommend Fortum also contributed to the growth in the customer base. Furthermore, the customer assessment of Fortum's product and service quality improved. Safe operations and risk Safe operations and risk management of interest management of interest to stakeholders to stakeholders In the separate sustainability survey for stakeholders, decision makers, opinion leaders, NGOs and investors raised sustainability-related risk management as the most important area. The general public and Fortum’s own personnel emphasised the safety of operations. Fortum’s personnel also put a high value on occupational safety and a healthy work environment. Climate change mitigation and the related use of renewable fuels were also considered important by decision makers, opinion leaders, NGOs and the general public. The overwhelmingly most important issue for the general public was security of supply of electricity and heat. The issues considered least important by decision makers, opinion leaders, NGOs and the general public were related to equality and job stability. NGOs and investors ranked the tax footprint among the least important issues. Read more about Read more about • Risk management • Operational safety • Occupational safety • Climate change mitigation • Diverse use of fuels • Security of supply of electricity and heat • Support to society • Employer image • Stakeholder views, hydropower • Stakeholder views, nuclear power 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://annualreport2014.fortum.com/ 53 Annual Report 2014 Stakeholders Important stakeholders Important stakeholders We interact with millions of people through our business operations. Engaging in collaboration and a dialogue with different stakeholder groups as well as conducting surveys help us to assess and meet the expectations important stakeholder groups have towards our company. We report openly about stakeholder collaboration and the impacts of our operations. Investors and shareholders Investors’ and shareholders’ expectations • High-yield share • Risk management • Responsible operations • Long-term value creation Customers Fortum’s actions • We are committed to achieving our financial targets • We are committed to growth and to creating solid earnings • Our goal is to pay a stable, sustainable and over time increasing dividend of 50-80% of earnings per share excluding one-off items • We compensate financiers as agreed • We take economic, social and environmental responsibility into consideration in our business • We manage risks and operate in line with the Fortum Code of Conduct and our company’s values Customers’ expectations Fortum’s actions Customer relationship and products • Safe and reliable electricity company • Good service, self-service channels 24/7 • Fair pricing • Convenient handling of energy-related matters • Modern products and services to support efficient and smart energy use Energy production and distribution • Renewable energy production with minimal load on the environment • Responsible operations in society • Security of supply of energy • Effective communication of outages to customers in the most appropriate ways Products and customer relationship management • We develop new innovative products based on our customers’ needs • We develop customer service know-how and customer orientation • We promote customer orientation with the ‘Customer in the centre’ programme • We develop new energy efficiency products for customers • We offer origin-labelled renewable electricity • We offer climate benign heat products • Our customers participate in our product development projects through customer panels • We serve our customers through the Internet, social media and mobile services Energy production and distribution, and our activities in society • We improve electricity and district heat networks • We communicate outage information through multiple channels • We use environmentally sustainable energy forms • We develop future energy production forms 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://annualreport2014.fortum.com/ 54 Annual Report 2014 Stakeholders Personnel Personnel’s expectations Fortum’s actions • Job security • Equal treatment • Incentivizing compensation • Work well-being and safe working conditions • Opportunities for professional development • Recognition of work contribution • Open interaction • We support equality, and we respect the cultures and values of individuals and groups • Our employees have performance-based wages as well as uniform processes, guidelines and tools in remuneration • We promote and improve work well-being and safety • We develop employee competence through job rotation and career advancement • Personnel have the opportunity to influence the content of their own work • We develop the quality of leadership and supervisory skills • We support employees in change situations • We operate in compliance with the Fortum Code of Conduct and values • We conduct a group-wide personnel survey every other year Services and goods suppliers Services and goods suppliers’ expectations Fortum’s actions Fortum’s business operations • Good financial position and the ability to take care of the agreed obligations • Responsible operations • Good reputation (e.g. Fortum as a good customer reference) Fortum’s business and procurement principles • We comply with the Fortum Code of Conduct, agreements, and agreed upon regulations and business practices • We adhere to professional procurement processes that are consistent with good procurement practice (including public procurements) • We conduct supplier pre-selection and audits • We monitor the development of Fortum’s reputation Business relations with suppliers • Fair and equal treatment of suppliers • Long-term business relations • Development of the suppliers’ business Supplier relationship management • We manage supplier relationships in a systematic manner • We use an operating model that is based on category management in the most significant purchasing categories and products/services • We offer joint development projects and new business opportunities for our suppliers 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://annualreport2014.fortum.com/ 55 Annual Report 2014 Stakeholders Authorities and decision makers Authorities’ and decision makers’ expectations Fortum’s actions • We comply with laws, regulations and permits • We develop the management of environmental and safety risks • We pay our taxes and dividends • We publish a tax footprint • We actively engage in a dialogue with authorities and decision makers about key issues in the energy sector • We communicate proactively and openly • Our Sustaianbility reporting is assured by a third party • Compliance with laws, regulations and permits • Management of risks related to sustainability • Promoting renewable energy production • Paying taxes • Maintaining dialogue • Transparency and reliable reporting Media Media’s expectations Fortum’s actions • Relevant, reliable and transparent communication • In line with our Disclosure policy, we communicate proactively and openly • We are easily accessible through the media desk • We continuously improve our crisis communication preparedness Energy sector organisations Energy-sector organisations’ expectations Fortum’s actions • Advocating on behalf of shared interests • Maintaining dialogue • We advocate on behalf of shared interests • We actively participate in organisational activities • We publish position papers and views on energy-sector development • We actively communicate through our blog 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://annualreport2014.fortum.com/ 56 Annual Report 2014 Stakeholders Non-governmental organisations Non-governmental organisations’ expectations Fortum’s actions • Responsibility of operations and risk management • Environmentally friendly investments • Promoting renewable energy production • Collaboration projects, open interaction and dialogue • Reliable reporting • We communicate actively and openly • We collaborate with Finnish and Swedish nature conservation associations regarding our environmentally benign electricity products • We collaborate with organisations in the responsible procurement of fuels and in our sponsorship projects • We develop environmental and safety risk management • We monitor NGO activities and engage in a dialogue • Our Sustainability reporting is assured by a third party Local communities Local communities’ expectations Fortum’s actions • Plant safety • Elimination of noise and emissions • Safeguarding biodiversity and recreational use of nature • Support and donations to local communities • Dialogue and collaboration • We manage our risks and we comply with the Fortum Code of Conduct • We invest in infrastructure and plant safety • We are a good employer and neighbour • We support local community activities • We carry out environmental projects in collaboration with our local stakeholders • We communicate actively and openly • We meet with local residents and customers General public General public’s expectations Fortum’s actions • Security of supply of electricity and heat • Activities for the good of society • Safety of operations • Promoting renewable energy production • Fair pricing • Transparency • Reasonable financial returns and moderation in management remuneration • We improve the security of supply of electricity and heat • We pay taxes, and we develop the energy sector in accordance with society’s needs • We communicate actively and openly • Our remuneration complies with the Finnish State Ownership Steering department guidelines • We support non-profit activities benefiting society 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://annualreport2014.fortum.com/ 57 Annual Report 2014 Stakeholders Shareholders Shareholders Shareholders, investors and analysts are a key stakeholder group for us. As a listed company, Fortum’s obligation is to provide correct, adequate and up-to-date information regularly and equally to all market participants. In practice, Fortum’s Investor Relations function is responsible for investor relations. Fortum Corporation’s shares are listed on the Nasdaq Helsinki exchange. At the end of 2014, Fortum had 109,403 (2013: 132,072) shareholders. The Finnish State owned 50.8% of Fortum’s shares. Of the shares, 32.3% (2013: 26.2%) were in a book-entry register or in foreign ownership. The key values of Fortum’s Investor Relations are openness, transparency and easy approachability. In accordance with the Finnish Securities Markets Act, we use stock exchange releases to disclose all such decisions and factors related to the company and its operations that are within the sphere of the continuous disclosure obligation or that, in the company’s estimation, can have a material impact on its share value. We regularly provide information on our financial performance in interim reports, the financial statements and the operational and financial Customers Customers review. Fortum’s Investor Relations and top management met with investors and analysts regularly in 2014 in conjunction with the publication of the quarterly interim reports, at investor meetings, road shows, and the Annual General Meeting. We were in close communication with analysts, shareholders and potential investors also at seminars and conferences in Finland and abroad. In 2014, we spent a total of about 20 days visiting financial centres in Europe and the United States, and we met with some 250 investment sector professionals in one-on- one meetings or in other events. Our presentations and discussions with stakeholder groups at these events focused on topics related to the company’s strategy, the operating results of the businesses, and the development of and the outlook for the operating environment. We organised discussions on sustainability issues with analysts and investors focusing on sustainability and corporate social responsibility. Additionally, we participated in several events targeting private investors in Finland and Sweden. We held our Capital Markets Day for institutional investors and analysts in November 2014 in Helsinki, Finland. The programme consisted of top management presentations on current topics. In addition to meetings and discussions, we served out target groups through digital channels, the most important of which is the Investors section on our website. Our stakeholder groups can also follow Fortum through many other channels, such as our free IR application. By communicating openly and proactively, we aim to ensure that investors have timely and sufficient information available about decisions and factors that can have a material impact on the value of Fortum’s share. Through active and consistent communications, we also want to increase knowledge about the company’s strategy and business operations. Read more Read more • Fortum's share and shareholders In 2014, we continued developing new products and services that meet the needs of our customers. The solutions are related to, e.g., energy efficiency, electric vehicles, solar power, and open district heating. To strengthen the customer orientation we launched the internal “Customer in the centre” programme. The programme helps us to concretise development needs related to changes in customers' needs, good customer service and comprehensive customer- oriented operations. Electricity sales and new solutions Electricity sales and new solutions We sell electricity directly to customers in Finland, Sweden and Norway. The number of our electricity sales customers in 2014 continued to grow in all these countries. At the end of the year, we had over 1.3 million electricity customers. The currently low electricity price and new technological solutions change the expectations customers have towards their electricity company. We respond to these expectations by offering customers an opportunity to control and manage their electricity consumption better and make it more efficient. In recent years we have introduced several new services that improve energy efficiency. electricity produced completely with hydropower. Towards the end of the year in Sweden, we renewed private customers’ electricity agreements. From now on, the electricity of our private customers' agreements is produced primarily with CO2-free hydropower. Our customers can choose which hydropower plant’s electricity they want to buy. Our Swedish customers can also opt for electricity produced with wind or solar power. Our customers in Norway and Finland have already had the opportunity to purchase We offer private and business customers in Finland and Sweden solar panel systems, and we buy the customers’ surplus solar electricity at a market price. We actively promote the adoption of electric vehicles by developing solutions that make it possible to charge the electric vehicles quickly and safely. In 2014, our Charge & Drive concept continued to spread further. 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://annualreport2014.fortum.com/ 58 Annual Report 2014 Stakeholders Services for heat customers Services for heat customers We supply heat to millions of people in eight countries. Our activities in 2014 focused on improving the security of supply of heat, on having a dialogue with our customers and on developing new products. To improve our customer service we implemented a new text messaging system in Finland to effectively notify customers about planned and unplanned disruptions in the heat supply. An open district heat network offers our customers the opportunity to sell surplus heat back to the district heat network. Data centres, grocery stores, hospitals and our other similar customers that produce surplus heat can significantly improve their energy efficiency with an open district heat network. In Sweden, Fortum Värme was granted membership in ”Price Dialogue”. Price Dialogue aims to improve customers’ position and to make sure that changes in district heat pricing are reasonable, predictable and stable from customers' point of view. Project has increased transparency in district heat pricing. We offer also energy advice for our district heating customers. Towards the end of the year we launched an open district heat network in Sweden, which offers country's first marketplace for surplus heat. In Poland, we continued the work to reduce district heating disruptions and to improve the communication about disruptions and the direct interaction with the end user. We successfully increased dialogue with our customers through social media services. In Russia, we continued modernisation of the heat networks in the Chelyabinsk and Tyumen regions. Expert services Expert services We offer a variety of operation and maintenance expert services to power plants and industrial customers. Our services and tools help our customers to boost the operational and maintenance efficiency of their plants and increase profitability. Additionally, we offer products and consulting services related to hydropower, nuclear safety and nuclear waste handling. In 2014, we continued supplying ion exchange materials to the American EnergySolutions LLC in Japan. The ion exchange materials are used to purify the radioactive waters at the damaged Dai-ichi power plant in Fukushima. We also continued combustion technology- related deliveries. For example, we received a follow-up order from Eesti Energia for a boiler modernisation of the Narva power plants. We will supply a nitrogen oxides reduction system for seven boilers during 2014-2015. We also agreed to supply a nitrogen oxides reduction system for one boiler at a heat plant owned by the city of Iasi in Romania. In Poland, burner deliveries and combustion technology conversion projects continued at EDF’s power plants in Krakow and Wroclaw. Services for electricity distribution customers Services for electricity distribution customers Fortum divested its electricity distribution businesses in Finland and Norway in 2014. In Sweden, we continued to develop our electricity distribution operations for our over 900,000 customers, focusing on services and improving the security of supply. In Sweden, the SäkraNät programme improving electricity distribution reliability continued in 2014. The programme initially aimed to cut power outages by half within five years for customers living outside urban areas. The goal was achieved in 2010, but the programme still continues. During the year, we also continued with measures to improve the satisfaction of our electricity distribution customers. In Finland and Sweden we arranged customer panels and, based on the discussions within them, we developed our products and services to better meet the needs of our Personnel Personnel customers. Customer use of our online customer service channels continued to increase during the year. We also developed customer and outage communications in social media channels in all the countries we operate. In 2014, we focused particularly on strengthening effective people processes that go through the entire organisation. A comprehensive data system is a prerequisite for uniform people processes and functional reporting. We expanded the coverage of our employee data system by adding the personal and work-related data of our employees in all our operating countries. In Russia, the employee data system covers mainly superiors. In addition, Russian operations have their own, local data system. Additionally, we promoted the internal mobility of personnel and developed our ability to change; we also strengthened our business-critical know-how. At the end of 2014, Fortum had 8,592 (2013: 9,186) employees; about a half of them, 4,213, worked in Russia. The goals of the HR functions for 2015 are to further boost the effectiveness of people processes and to measure their effectiveness. Dialogue with the Dialogue with the personnel personnel The Fortum Sound personnel survey conducted every other year is part of the dialogue with the personnel. The response rate to the survey conducted in October 2014 climbed to 84% (2012: 79%). 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://annualreport2014.fortum.com/ 59 Annual Report 2014 Stakeholders results indicate that 70% of the employees feel a commitment to the company (2012: 65%). Based on the survey results, the personnel feel that the customer-oriented way of thinking of Fortum employees as well as sustainability as an integral part of Fortum’s operations are at a good level. Overall well- being and a healthy work-life balance are also considered to be at a good level. Working in compliance with the Fortum Code of Conduct and occupational safety guidelines is part of the Fortum employees’ daily work. The most important development targets emerging from the survey were clarification of the strategy, transparency and more effective communication change. In 2014, we started improving the effectiveness of internal communication processes and channels in order to promote an open dialogue between management and personnel about the strategy and energy market changes. Fortum Dialogue events for management and personnel were held in May and November 2014. The May Dialogue events focused on the current state of the business and the future outlook. The focus in the November events were on the business reviews and occupational safety. There were events in Finland, Sweden, Poland and Russia. In addition, business-level meetings between management and personnel were held in other countries where we operate. We measure employee engagement also as part of the annual One Fortum stakeholder survey. A total of 1,074 employees participating in the 2014 survey rated Fortum a 73 (2013: 73) on a scale of 0-100 in the index measuring Fortum’s reputation. Operational safety, occupational safety and well-being were emphasised by the 985 employees who responded to the sustainability survey conducted in conjunction with the One Fortum survey. Cooperation between personnel and Fortum's management is based on local legislation and Fortum Code of Conduct. The Fortum European Council (FEC) gathers once a year. FEC is an European level co-operational function where personnel and employer Well-being at work Well-being at work ForCARE, our programme for overall well- being at work, offers our employees information and professional services in issues related to well-being at work. The programme aims to promote employee health, safety, work capacity, and the well- representatives meet to discuss matters related to Fortum. Leadership development Leadership development In line with our Leading Performance & Growth initiative launched in 2010, we continued developing leadership and the organisational culture also in 2014. Within the framework of the initiative, we’ve organised coaching training for the personnel and we’ve developed team activities in the work communities. By the end of 2014, around thousand Fortum supervisors had participated in the initiative’s training for supervisors and over hundred people in the coaching training. The Fortum Navigator programme launched in 2014 supports coaching leadership style culture among young superiors, as well as the development of leadership potential and talent. The Navigator programme consists of an internal mentoring programme with management representatives acting as mentors to the programme participants. Efficiency programme Efficiency programme concluded concluded The group-wide efficiency programme launched in 2012 was completed at the end of 2014. The targets set for the programme were achieved – and some even exceeded. The efficiency programme had minimal impact on the personnel, because the primary goal was to streamline the business. The personnel headcount reductions were implemented mainly through attrition, internal mobility, the reassignment of tasks and retirement. In change situations, we negotiated with personnel representatives in compliance with each country’s local legislation and contractual procedures. When the changes resulted in headcount reductions, we supported the re-employment of the personnel. The support package offered to the personnel included, e.g., outplacement coaching. Fortum terminated 262 employment contracts in 2014. About a half of them were in Russia. Aiming to be an Aiming to be an interesting employer interesting employer We aim to be an interesting employer. Factors improving the interest are good reputation, good leadership, interesting career opportunities and a possibility to do meaningful work. We also strive to create attractive career and advancement opportunities that enable continuous professional growth for individuals. We used communication measures throughout the year to strengthen our employer image internally and externally. We published a series of articles and videos on the intranet and in social media channels to highlight the different career opportunities Fortum offers. The series features our employees telling about their work and their experiences with Fortum as an employer. The aim in 2014 was to fill all job openings at Fortum primarily through internal recruiting, because internal mobility strengthens know- how and deploys best practices within the organisation. According to employer image surveys, Fortum is an interesting company; this facilitates the recruiting of new skilled employees. In the Universum annual employer image survey in Finland in 2014, technology sector students ranked Fortum as the seventh (2013: 11th) most desirable employer, and young professionals ranked it 11th. In the Universum survey in Sweden, Fortum was ranked 69th (2013: 30th). In 2014, we offered 245 summer jobs in Finland and Sweden. The recruiting campaign for summer workers, Summer Energy, was of interest to many young job-seekers; we received a total of 12,500 applications for the summer positions. Read more Read more • Fortum's labour practices and decent work being of the work community. The ForCARE programme’s activities are tailored to comply with the local legislative requirements and unique cultural aspects in different countries. In 2014, we tested a Group-level workplace assessment model at two power plants. The model commensurably maps the psychosocial factors in the work community and the work environment and their impact 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://annualreport2014.fortum.com/ 60 Annual Report 2014 Stakeholders on well-being. The model enables the work community to find the key targets to improve work well-being and safety when the risk factors have been identified and assessed. Coaching that is tailored to the work community also brings the work community – and especially the supervisors – added knowledge of the effects of harmful stress on work productivity. When needed, the work well-being programme also offers support to supervisors and employees in situations of change. Monitoring and assessing Monitoring and assessing well-being at work well-being at work Well-being at work is monitored through the well-being at work index that is part of the Fortum Sound employee survey. Among other things, the index measures the openness of the work community, personal accountability and the level of challenge of work tasks. In 2014, the result of the index on a scale of 1.00-5.00 was 3.88. The result was the same as in the previous survey conducted in 2012. Other work well-being indicators include the quarterly reported sick leaves and the ratio between actual retirement age and the statutory start of the retirement pension. At Fortum, the average retirement age in Sweden was 64, in Finland 63, and in Russia Safety Safety ForCARE programme ForCARE programme 58. The average retirement age in Finnish companies in 2014 was 61.2. Read more Read more • Fortum's labour practices and decent work We strive to be a safe workplace for our employees and for the contractors and service providers who work for us. We believe that all work injuries are preventable when the competence and the right attitude prevails, when potential risks are addressed and when measures are taken to safeguard against them. The regrettable fatal accidents involving contractor employees in 2014 demonstrate that more resolute work must be done to achieve the target. Contractor safety a Contractor safety a challenge challenge Even though many indicators showed that safety improved in 2014, there is still work to do in contractor safety. We must work with our contractors to find more effective ways to improve work safety. There were three fatal accidents involving our contractors’ employees: in Sweden, one in electricity distribution and one at a hydropower plant, and, in Russia, one at the Chelyabinsk power plant construction site. Additionally, two employees of Fortum Värme’s contractors died in a construction site accident. In total there were 15 (2013: 13) serious work related accidents. The lost workday injury frequency (LWIF) per million hours worked for our own personnel remained at the previous year’s good level and was 1.0 (2013: 1.0). The total recordable injury frequency (TRIF) for our own personnel improved and reached a historical best of 2.0 (2013: 2.5). The injury frequency for contractors improved compared to the previous year, as the majority of our plants and projects were able to keep contractor safety at a good level. The lost workday injury frequency (LWIF) per million hours worked for contractors was 3.2 (2013: 3.9). Plant safety improved Plant safety improved The situation in plant safety improved compared to 2013. Major environment, health and safety (EHS) incidents continued to be a Group-level key performance indicator; it covers fires, leaks over 100 litres, explosions, nuclear and dam safety incidents, and environmental non-compliances. During 2014, there were 27 (2013: 35) EHS incidents; the target was 35 or less. The majority of the incidents didn’t cause harm to operations, personnel or the environment. The biggest single impact was from the explosion that occurred in the pyrolysis process at the Joensuu CHP plant; as a result, the process has been shut down for modification work. One INES 1 (International Nuclear Event Scale) incident occurred at the Loviisa plant (2013: 2); it did not cause any injuries to people or damage to the plant or the environment. We are improving We are improving contractor work safety contractor work safety During 2014, we further developed the use of the common contractor safety management model. We ensured that common EHS requirements are included in agreements, and we expanded the assessment of contractor performance. We want to emphasise the importance of contractor 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://annualreport2014.fortum.com/ 61 Annual Report 2014 Stakeholders safety, so this was the first year that a contractor lost workday injury frequency (LWIF) was included as a Group-level key performance indicator. Reducing serious work injuries by half compared to 2014 was also made a key performance indicator for 2015. All divisions and their business areas implemented projects to improve contractor safety. For example, a safety awareness programme, awarded with the Group's annual safety award, was carried out in Poland. In Russia, EHS experts and supervisors audited contractors on a regular basis. Because of the fatalities and other serious injuries, we initiated a number of corrective measures. In the electricity distribution business in Sweden, we set tighter requirements for project safety plans and increased project supervision during implementation. We also permanently changed the work guidelines for hydropower plant maintenance. At the Chelyabinsk construction site in Russia, we concluded that our contractors’ operations were not at a sufficient level to ensure work safety. We clarified the responsibilities, and we added resources so that our own organisation can monitor contractor operations more effectively. The majority of serious work injuries happen to contractors at construction sites. In 2015, the Group’s Sustainability unit will head a project that involves external experts boosting the effectiveness of safety practices in construction projects. focused particularly on improving contractor safety. There were no accidents in India in 2014. Improving safety is a Improving safety is a continuous effort continuous effort We updated Fortum’s common EHS guidelines and requirements in 2014 and supplemented them with support materials to make them easier to use. Training on the guidelines and requirements will be arranged for Fortum’s line management in 2015; compliance with guidelines will be verified more systematically in all our units. We also described Fortum’s common EHS processes so that the guidelines and regulations are easier to use. During the year, we paid special attention to safe operations at our new plants in Latvia and Lithuania as well as at the Russian Nyagan power plant. Operations at the plants and the first annual maintenances were performed safely. The only exception was the explosion that occurred at the Klaipeda plant in Lithuania when old ammunition was fed into a burner along with waste. The explosion caused a brief production stoppage. Waste screening was made more effective, and no new explosives have been found. We continued adopting Fortum’s safety practices in the operations in India. In the solar power plant construction project, we Fortum Värme Fortum Värme The safety culture improvement at joint venture Fortum Värme continued. In terms of safety, there were two sides to Fortum Värme’s year. There were no lost workday accidents for its own personnel (2013: 4). Moreover, there was a clear decrease in the number of major EHS incidents. There were seven (2013:16) incidents during the year. Development of the safety culture will continue also in 2015. Injuries to contractors in plant maintenance work decreased clearly, but the serious accidents in the CHP8 construction project were very distressing. In November, two employees of contractors perished in an accident at the CHP8 work site. There were also 4 serious occupational accidents in the CHP8 construction project. Accident investigations specified measures to be implemented both for contractors and for Fortum’s organisation. Primary improvement areas include the control of high-risk work and changes made by the contractors. Read more Read more • Fortum's occupational health and safety Suppliers of goods and services Suppliers of goods and services Purchasing Purchasing We are a significant purchaser of goods and services: Our purchasing volume in 2014 was EUR 2.9 (2013: 3.5) billion. Investment- related purchases and fuels account for the majority of Fortum’s purchases. In 2014, we had about 10,500 (2013: 12,200) suppliers of goods and services. During the year, there were no significant changes in our supply chain. Of our purchases, EUR 0.8 (2013: 1.0) billion targeted various investments. The biggest investments were made in Russia, EUR 340 million. A large share of the investments are contracted out in full with materials, installation and other service as well as contractor work included in the total purchase. Fortum's fuel purchases in 2014 totalled EUR 782 (2013: 944) million. We purchase fuels from international and local suppliers. Our fossil fuel purchases totalled about EUR 689 (2013: 812) million, biofuels about EUR 55 (2013: 66) million, and nuclear fuel about EUR 38 (2013: 66) million. The rest of our purchases, EUR 1.3 (2013: 1.5) billion consist of other operational goods and services. The figure includes electricity purchased by the Electricity Sales business area from the Nordic wholesale electricity market for retail sales. Other purchases of goods and services related to operations and maintenances as well as other functions, such as IT solutions, marketing and travel. About a half of the purchasing volume was purchased from suppliers operating in Europe, mostly in Finland, Sweden and Poland. This does not include electricity purchases from the Nordic wholesale market. About 50% of the purchases came from risk countries. These purchases mainly consisted of fuel and the Russia Division’s local purchases in Russia. Purchases, EUR million 768 782 1,314 Investments, 768 Other purchases, 1,314 Fuels, 782 The purchasing volume of Fortum Värme, the joint venture with the city of Stockholm, was 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://annualreport2014.fortum.com/ 62 Annual Report 2014 Stakeholders EUR 0.6 (2013: 0.6) billion, and the company had about 1,900 (2013: 2,000) goods and services suppliers. Of the purchases, EUR 341 (2013: 267) million targeted investments. The biggest investments were made to a biomass-fuelled CHP plant in Stockholm (in Värtan). Fuel purchases from international and domestic players totalled EUR 101 (2013: 144) million. Fossil fuel purchases totalled about EUR 41 (2013: 55) million and biofuel purchases about EUR 61 (2013: 89) million. About 27% of the fuel purchases were from risk countries, the biggest countries being Brazil, Malaysia and Russia. 94% of Fortum Värme’s purchased volume was bought from Europe, mainly from Sweden, the Netherlands and Germany. Read more Read more • Fortum's investments in 2014 • Use of fuels Purchases1) excluding investments in 2012-2014 EUR million Nordic countries Russia Poland Estonia Other countries Total 2014 1,133 670 141 29 123 2,096 2013 1,361 813 143 29 106 2,452 2012 1,612 769 161 36 99 2,677 1) Includes purchases of fuel, power and other materials and services. The adoption of IFRS 10 and IFRS 11 is not restated in the figures of financial period 2012. Responsible supply chain management Responsible supply chain management We expect our business partners to act responsibly and to comply with the Fortum Code of Conduct and the Supplier Code of Conduct. We actively strive to reduce the environmental impacts caused by our operations and to improve economic and social well-being. We also manage risks related to our supply chain. Our key tools for this include country and counterparty risk assessments, pre-selection of suppliers and supplier audits. Codes of conduct cover Codes of conduct cover basic requirements basic requirements The Fortum Code of Conduct forms the foundation for ethical business conduct and the Supplier Code of Conduct covers the sustainability requirements for suppliers of services and goods. The Supplier Code of Conduct is based on the principles of the United Nations Global Compact initiative and is divided into four sections: business practices, human rights, labour standards, and the environment. The country and counterparty risk assessment follows the same basic structure with regards to sustainability, and addresses issues like the implementation of the guiding principles of human rights. The Supplier Code of Conduct is used in all our countries of operation and is included in all purchase agreements exceeding EUR 50,000. The Supplier Code of Conduct was updated in 2014. The most significant changes were related to supplier responsibility for their own supply chain. The updated Supplier Code of Conduct calls for the respective requirements to be passed on to the subcontractor chain and the requirements to be monitored. Also the link to human rights-related guiding principles was clarified: suppliers must identify the human rights impacts of their operations, mitigate the impacts, and address any rights violations with corrective measures. The requirements related to anti- corruption were made more specific, and a requirement for the protection of young workers was added to it. At the beginning of 2015, we will start internal training on the requirements of the updated Supplier Code of Conduct, and we will take it into use in new agreements. Fortum is a member of the Bettercoal initiative and uses the Bettercoal Code and tools in assessing the sustainability of the coal supply chain. Bettercoal has defined the agreement text to be taken into use in new purchase agreements. In 2014, a total of 14 coal suppliers, one of which supplies coal also to Fortum, conducted a self-assessment in line with the Bettercoal initiative, and one mine was audited. At the end of the year, approval of the self- assessment and audit process of Fortum’s biggest coal supplier was still in the works. Pre-selection and supplier Pre-selection and supplier audits to support audits to support assessments assessments We assess the level of operations of our business partners through pre-selection and supplier audits. Pre-selection includes verification of solvency as well as a supplier questionnaire, which is used to identify both general and sustainability-related practices. The questionnaire helps suppliers to understand our expectations for compliance with the Supplier Code of Conduct. It also helps us to identify potential high-risk suppliers and thus the need for further actions. The Russia Division uses its own supplier pre- selection process. Pre-selection is done in accordance with Russian procurement law, and bidding is open to all companies. In the Russian operations, we set supplier requirements for business principles and ethics, and we pay special attention to anti- corruption and conflicts of interest. In order to participate in bidding, a potential supplier must commit to compliance with Fortum’s Supplier Code of Conduct. In supplier audits, we assess the supplier’s compliance with the requirements in Fortum’s Supplier Code of Conduct. Audits are always done on-site, and they include production inspections, employee interviews, and reviews of documents and records. If 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://annualreport2014.fortum.com/ 63 Annual Report 2014 Stakeholders makes a plan for corrective actions, and we monitor the implementation of it. The suppliers we select to be audited are from risk countries or they have a significant supply contract. Fortum’s classification of risk countries is based on the ILO’s Decent Work Agenda, the UN Human Development Index, and Transparency International’s Corruption Perceptions Index. In 2014, we conducted a total of 14 audits of suppliers who were in a direct contractual relationship with Fortum; the suppliers were in risk and in non-risk countries. In addition, the joint venture Fortum Värme conducted a total of nine audits of its own suppliers of biofuel and its biggest contractors. The most significant non-compliances identified in the audits were related to occupational safety, overtime hours, working hours of young workers and management of the suppliers’ own subcontractors. During the year we held one contractor training event in Sweden focusing on the Supplier Code of Conduct requirements and safe working procedures. A total of 50 contractors participated in the training event. Our goal in 2015 is to audit 15 suppliers or contractors. The joint venture Fortum Värme has set its own goal of ten audits. Our goal is also to update the supplier selection criteria to be based on a systematic comprehensive risk assessment and to take into use a simplified, lighter auditing model. The lighter model will enable also our purchases personnel to verify a supplier’s practices. Own personnel as Own personnel as auditors auditors Our own personnel are responsible for conducting the sustainability-related supplier audits. An exception is the Bettercoal audits of coal suppliers, which are always conducted by a third, accredited party. By conducting the audits on our own, we gain a better idea of the supplier’s practices while increasing the supplier’s understanding of sustainability- related issues. Fortum’s auditors each receive 1.5 days of internal training, during which they review the requirements of the Supplier Code of Conduct, the sub-areas to Supplier audits in 2014 Supplier audits in 2014 be audited, and the tools to be used to verify compliance with the requirements. After the training, supplier audits are started together with an experienced auditor. We will continue training auditors and developing competence in different divisions and countries in 2015. Those who have completed the internal training are recommended to complete auditor training also on the Social Accountability (SA8000) standard. With the exception of one auditor, the SA8000 auditor training has been completed by all of the trained auditors who regularly conduct audits. In 2014, we trained nine auditors from Russia and Sweden. The goal in 2015 is for the Russia Division to start conducting the audits on its own. To develop collaboration among auditors, in 2014 we established an auditor network. Individuals conducting internal audits, EHS audits and supplier audits can share information and develop their know-how about different auditing methods and processes. The network maintains a database of audits conducted, reports, the most significant non-compliances and corrective measures. Responsible fuel purchasing Responsible fuel purchasing Fuels represent a significant purchasing category at Fortum, EUR 782 (2013: 944) million in 2014. The share of fuels is also significant in the joint venture Fortum Värme’s purchases, EUR 101 (2013: 144) million in 2014. In purchasing, special attention is paid to the origin and responsible, production of the fuels. Natural gas Natural gas The natural gas used in our operations in Russia, the Baltic countries and Finland originated from several suppliers in Russia. 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://annualreport2014.fortum.com/ 64 Annual Report 2014 Stakeholders Uranium Uranium The fuel assemblies used at Loviisa’s power plant are completely of Russian origin. The fuel supplier acquires the uranium used in the fuel assemblies from Russian mines in accordance with Fortum’s agreement. The mines in operation in November 2014 were the Krasnokamensk, Khiagda and Dalur mines. Both ARMZ Uranium Holding Co., a uranium producer, and TVEL, which is responsible for refining and manufacturing uranium, have environmental and occupational safety systems in place in all their plants. The Dalur uranium mine has ISO 14001 environmental certification, and the Krasnokamensk mine (JSC PIMCU) is aiming to certify its management systems for quality, environment, and occupational health and safety by the end of 2015. The zirconium material manufacturing plant and the plant responsible for manufacturing uranium oxide pellets and fuel assemblies have ISO 14001 environmental management system certification and OHSAS 18001 occupational health and safety management system certifications. We regularly assess the quality, environmental, and occupational health and safety management systems of our nuclear fuel suppliers and the manufacturing of nuclear fuel assemblies. In summer 2014, Fortum’s experts reviewed the fuel supplier’s conversion and enrichment facility operations in Russia. Read more: Supplier assessment The natural gas used in Poland was purchased mainly from Poland. The gas used by the joint venture Fortum Värme's subsidiary Stockholm Gas in Sweden originated from Norway. CoalCoal The coal used in Finland originated from Russia. The coal used in Poland originated mainly from Poland. The Russian power plants used coal from Russia and Kazakhstan. The coal used by the joint venture Fortum Värme in Sweden was from Russia. In Finland, we have a legal obligation to have an amount of fuels in reserve equivalent to three months of average electricity production. There are no similar legal obligations in other countries, but we do maintain sufficient reserves for uninterrupted energy production in all countries where we operate. The crisis in Ukraine and the sanctions imposed by the EU and the USA have increased the risks related to fossil fuels. Coal of a quality suitable for our combustion plants is produced also outside of Russia. We are monitoring the situation, and we are prepared to change our ways of operating if the situation so requires. Fortum is a member of the Bettercoal initiative, and uses the Bettercoal Code and tools in assessing the sustainability of the coal supply chain. In 2014, a total of 14 coal suppliers, one of which supplies coal also to Fortum, conducted a self-assessment in line with the Bettercoal initiative, and one mine was audited. At the end of the year, approval of the self-assessment and audit process of Fortum’s biggest coal supplier was still in the works. Fortum aims to continue with Bettercoal-based self-assessments in 2015 in Poland and Russia. The goal in both countries is to complete a self-assessment of at least one supplier. Biomass and other Biomass and other biofuels biofuels The majority of the biomass we used consisted of wood pellets, wood chips and industrial wood residues that originated from Finland, Poland and Lithuania. We have recognised the challenges related to the origin of biomass and other biofuels, and we are developing measures to verify the traceability and sustainability of the fuels. In 2013, a verification system was established for the bio-oil production in the bio-oil plant integrated with Fortum’s Joensuu power plant. The system has been in use since the start-up of production. The verification system is used to prove compliance with nationally legislated sustainability criteria for bio-oil. The Finnish Energy Authority approved the verification system in late 2014. We will further develop the verification system after the approval. In Sweden, the joint venture Fortum Värme purchased biomass and bio-oil from Sweden, Finland, Russia, Brazil and Malaysia, among others. Fortum Värme is a participant in the WWF Global Forest & Trade Network (GFTN) through GFTN Sweden and became a member of the Forest Stewardship Council (FSC) in 2012. Additionally, Fortum Värme has been a member of the Roundtable of Sustainable Palm Oil (RSPO) since 2005. Fortum Värme became a member of the Roundtable of Responsible Soy organisation in 2014. Origin of fuels used at Fortum in 20141) Fuel Biomass Coal Natural gas Uranium Oil Peat Country of origin Finland, Poland, Lithuania Russia, Poland, Kazakhstan Russia Russia Russia Finland, Estonia 1) The biggest countries of origin based on the purchasing volumes 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://annualreport2014.fortum.com/ 65 Annual Report 2014 Stakeholders Authorities, decision makers and energy Authorities, decision makers and energy industry organisations industry organisations The significance of energy issues continues to grow in our society: climate change, security of energy supply and energy prices are part of the everyday public discussion. For this reason, collaboration with authorities, decision makers and energy sector organisations is important. At the EU level, and in our countries of operation, we are directly and indirectly involved in the activities of over 62 sector associations and organisations. We engage in an active dialogue to develop the energy sector. We present our views and offer our expertise to decision makers and organisations in the sector. We annually publish position papers on key topics and participate in stakeholder consultations. Our goal is to offer constructive suggestions for policies and legislation. Public affairs themes in Public affairs themes in 20142014 At the EU level, we participated in discussions regarding the EU’s climate and energy policy and the targets for 2030. Other themes important for us were development of the emissions trading scheme and, in particular, the market stability reserve mechanism, as well as the internal energy market. Additionally, we expressed views on how policy targets and steering mechanisms impact energy prices and hence the competitiveness of EU industry. The EU’s energy dependence and security of energy supply became topics of discussion with the crises in Crimea and Ukraine. Also Europe’s energy security strategy and the Commission’s energy safety stress tests sparked broad debate. The European electricity market model was a trending topic. Several countries are preparing capacity mechanisms to ensure the secure supply of electricity at the national level. Fortum believes that a pan-European, competitive internal energy market with robust transmission connections – and a market in which also renewable energy is developed on a market-driven basis – would not only increase competition and reduce environmental impacts, it would also strengthen the EU’s internal energy availability and security of supply. The European Parliament elections and the new composition of the Commission sparked plenty of interest. Additionally, national parliamentary elections were held in 2014 in two of Fortum’s operating countries: Sweden and Latvia. A report on hydropower legislation was completed in Sweden and is anticipated to lead to comprehensive reform. The discussion on hydropower in Finland focused on recreational fishing, fish stocking and the need to build fishways in conjunction with hydropower plants. In the discussion on tightening environmental regulation and potential renewal of plant permits, we highlighted our long experience in sustainable hydropower production, and we emphasised the CO2-free aspect of hydropower. Nuclear power was a topic of discussion in Sweden and Finland during the year. As a result of the nuclear stress tests in the EU, the Swedish nuclear safety authority (SSM) decided to propose new regulations that would improve safety, but would also increase the costs for existing nuclear power plants. It is our view that, along with maintaining a high level of nuclear safety, EU- level harmonisation of nuclear safety requirements is very important. In Finland, the government reassessed the decisions-in- principle given to Teollisuuden Voima (TVO) and Fennovoima in 2010: The government rejected TVO’s request for additional time to implement the decision-in-principle, but approved the amendments to Fennovoima’s ownership and plant suppliers. In general, the tax environment has become tighter in all our operating countries, and tax issues were often a topic on the social agenda. In particular, the Swedish real-estate tax on hydropower plants and the Finnish power plant tax were politically debated. The increase in the hydropower plant real-estate tax was approved in Sweden, and the government also started a comprehensive study of real-estate taxation. The Finnish Government decided that it will not introduce a power plant tax (windfall tax) on nuclear, hydro and wind power built before 2004. The tax would have increased the production costs of emissions-free energy. The consumer price of heat is a significant political topic and is constantly in the media in countries where the price of heat is regulated. Fortum operates in regulated heat markets in the Baltic countries, Poland and Russia. We expressed our view that all heating forms should compete with each other in a market-driven operating environment. The Ukraine crisis – and particularly the sanctions, the counter sanctions and the impacts of the sanctions – were topical themes throughout Europe in 2014. We brought up views impacting the heat reform that is getting under way in Russia. The goal of the market model reform is to encourage energy-efficient heat production and distribution and to improve the efficiency of consumption. At the same time, the aim is to attract investments in modernising the aging production and transmission systems. Fortum offered its experience to the bodies that are advancing the energy reform; we have extensive operative experience with various legislative environmental work in our various countries of operation. In December 2014, Fortum updated the company’s information in the Transparency Register maintained jointly by the European Parliament and European Commission. The register offers information about organisations that aim to influence EU decision making. Fortum’s Corporate Relations function reports to the President and CEO, who is responsible for all public affairs activities. The Group does not use third parties for lobbying purposes. Read more Read more • Fortum’s participation in the activities of energy-sector organisations • Fortum’s positions on topical energy issues 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://annualreport2014.fortum.com/ 66 Annual Report 2014 Stakeholders MediaMedia The media actively follow Fortum’s operations particularly in the Nordic countries, because we are one of the major listed companies in Finland and one of the biggest energy-sector players also in Sweden. In Finland, the State’s majority ownership increases the media’s and the general public’s interest in the company. Laws and regulations governing the communications of publicly listed companies set the framework for our communications. As a company listed on the Nasdaq Helsinki, we follow the rules and recommendations of the Helsinki stock exchange. Furthermore, we follow the regulations set forth in the Finnish Companies Act, the Finnish Securities Markets Act and other relevant laws as well as the regulations and guidelines of the Financial Supervision Authority (FSA) in Finland. Fortum also observes the European Union’s recommendations set forth for publicly listed companies. We communicate openly, equally and proactively to ensure that also through the media our stakeholder groups receive sufficient information about decisions and factors that can, for instance, materially impact Fortum’s share price. By communicating actively and consistently we also want to increase knowledge about the company’s strategy and business. We engage in a continuous dialogue with the media at press conferences, press visits, other visits, and by giving interviews and responding to daily media contacts. In 2014, we continued strengthening our crisis communication preparedness, and in November we participated in the Loviisa nuclear power plant’s annual emergency exercise. We continued developing our social media channels. We organised local media events in all countries where we operate. Non-governmental organisations Non-governmental organisations We follow the activities of non-governmental organisations and engage in a dialogue with them. In addition, we carry out most of our sponsorships in collaboration with organisations. Sea project, which is mitigating eutrophication of the Baltic Sea and offering maritime solutions in an effort to prevent oil spills in the Gulf of Finland. In 2014, Fortum granted EUR 75,000 for the project. We engage in collaboration with environmental organisations regarding the eco-labelling of electricity products in Finland and Sweden. We also participate in projects related to local environmental protection or maintaining biodiversity. Part of the funding for the environmental projects comes from the sales of eco-labelled electricity. Since 2006 Fortum has been a supporter of the John Nurminen Foundation's Clean Baltic We participate in the Bettercoal initiative promoting sustainability in coal mining. In Sweden, the joint venture Fortum Värme is a member in the Forest Stewardship Council (FSC), an organisation promoting sustainable forest management, and a participant in WWF's Global Forest and Trade Network activities. Fortum Värme is also a member of the Roundtable of Sustainable Palm Oil organisation and became a member of the Roundtable of Responsible Soy organisation in 2014. In Estonia, we have taken part in discussions led by the Private Forest Centre (PFC) foundation. The main objective of the PFC is to contribute to sustainable, environmentally friendly and efficient forest management practices among Estonia’s private forest owners. These programmes aim to ensure the responsible sourcing of fuel and are primarily business-oriented interactions. Since 2013, Fortum has been a member of FIBS Corporate Responsibility Network in Finland. We are a strategic partner of the Responsible Business Forum (RBF) in Poland. Both FIBS and RBF promote responsible business that considers the impacts on the economy, society and environment. Local communities Local communities We collaborate closely with local communities in the municipalities where we have power plants. We are an important employer and significant tax payer in our operating areas. In addition, our investments improve the local infrastructure. We take local communities into account in power plant maintenance, improvement and environmental work, and we meet with local residents at, e.g., power plant open-house events. Examples of our activities with local communities in 2014: Fortum arranged customer panels in Finland, a HotSpot campaign in Sweden, and customer events in Poland, in which the business management actively participated. For us, as electricity and heat production experts, interacting with customers is one way to get direct feedback and development ideas. We want to meet customers’ needs even better and understand how they view the energy markets. about 1,300 visitors who were interested in the plant’s operations. The majority of them took part in Fortum-employee guided tours of the power plant. Throughout the year, Fortum was actively involved in local events, including a clean- up event in April and the Republic of Latvia’s independence day ceremonies in November. The CHP power plant Fortum commissioned in Jelgava, Latvia, in autumn 2013 has sparked major interest among industry representatives and students alike. The power plant’s first open-house day, held in May, attracted In Estonia, Fortum held an open-house event at the Pärnu CHP power plant for the first time in June, and hosted student visits throughout the year at the Pärnu and Tartu power plants. We engaged in an active dialogue with our local stakeholders 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://annualreport2014.fortum.com/ 67 Annual Report 2014 Stakeholders about the energy-efficient cooling solution to be built in Tartu. Fortum started collaboration with Estonia’s co-operative housing association. The Loviisa nuclear power plant published a stakeholder magazine called Naapurina voimala (Power plant as a neighbour) and held regular discussions with the local residents and representatives of the city of Loviisa, Finland. In Russia, Fortum supported various projects in the municipalities where it has power plants, i.e. in Chelyabinsk, Tyumen, Tobolsk and Nyagan. On a local level, we supported a children’s sports school and an ice hockey team as well as various cultural and residential events. In Sweden, Fortum organised the second National Clean River Championships. More than 1,500 students raised money for their recreational activities by collecting 34 tonnes of garbage along the banks of three major rivers in Fortum’s hydropower areas in Värmland, Dalarna, Hälsingland and Härjedalen. In Finland and Sweden, we supported projects to reduce the adverse environmental impacts of hydropower production. We implemented projects in collaboration with municipalities, fishermen, universities and environmental organisations. We carried out several projects to improve recreational use of the Oulujoki river water system in Finland, and we expanded the agreement related to this collaboration to cover all the municipalities in the water system area. A significant share of our hydropower- related environmental work focused on the impacts on fish populations. We worked with local communities to improve fish populations. For example, in 2014 the fish stocking plan for the Oulujoki river was updated based on feedback received from local fishing areas and cooperatives. In Sweden, Fortum supported the stocking of salmon and trout in Stockholm’s water systems in order to maintain recreational fishing opportunities in the centre of the city. In Poland, Fortum met with local residents at various events organised in the municipalities where it has power plants. Open-house events were organised at the CHP plants in Zabrze and Czestochowa. In five cities, where Fortum operates (Bytom, Czestochowa, Plock, Zabrze and Wrocław), 3,200 runners, bicyclists and pole-walkers took part in the Fortum Honorary Energy Donor programme between April and September. Fortum made a donation to charity after the programme. For the fourth consecutive year in Poland, Fortum held workshops and granted scholarships to support talented Silesian children from underprivileged conditions. In 2014, 155 children participated in workshops organised by Fortum, and 107 children received scholarships. In Bhilwara, India, Fortum equipped three schools with solar panels to cover the schools’ energy needs in an efficient and sustainable way. The upgrade has significantly improved the studying conditions for 1,200 students at the schools. 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://annualreport2014.fortum.com/ 68 Annual Report 2014 Generating economic value Support for society Support for society Fortum supports organisations and communities working for the common good in the countries where we operate. Our goal is for the collaboration to be mutually beneficial. In 2014, our support for activities promoting the common good totalled about EUR 3.4 (2013: 2.1) million, of which the share of grants awarded by the Fortum Foundation was about EUR 550,000 (2013: 432,000). Fortum Foundation supports research, education and development in the natural, technical and economical sciences within the energy industry. Collaboration with Collaboration with universities and colleges universities and colleges The goal of the collaboration with universities and colleges is to develop Fortum’s business, promote energy-sector research and development, and foster Fortum’s recruiting and training opportunities. A solar economy professorship focusing on the research and teaching of market mechanisms related to a solar economy was established at Lappeenranta University of Technology in Finland in 2013. We are funding the professorship with a 75% share for a five-year period. In 2013, Christian Breyer was nominated to be the first solar economy professor. In Sweden, we are working with various stakeholders, such as the Royal Institute of Technology, to develop solutions for sustainable urban living in the Stockholm Royal Seaport urban development project. The project covers, e.g., development of a smart grid and analysis of the residential carbon footprint. With the University of Karlstad, we are researching ways to improve the river habitat for migrating fish. In February, we started collaboration with The Royal Swedish Academy of Engineering Sciences (IVA) and The Swedish Academy in the Karlstad region. The two-year project will provide training to a total of 600 teachers in issues related to the energy sector and sustainability. Two new municipalities will participate in the project in 2015. In Poland, Fortum is collaborating with the Wroclaw University of Technology on district cooling solutions and with the Czestochowa University of Technology’s Faculty of Environmental Engineering and Biotechnology. Fortum also has a collaboration agreement with the Silesia University of Technology. In Russia, we are collaborating with the Ural Federal University on the further training of Fortum employees and on research collaboration in the energy sector. In the Baltic countries, Fortum is a member of the Baltic Innovative Research and Technology Infrastructure (BIRTI), which coordinates collaboration between universities, scientific institutes and entrepreneurs. In Latvia, we cooperate with Riga Technical University and Latvia University of Agriculture, and in Lithuania, with Klaipeda Technical School. We arrange internships for students, and we support energy sector-related conferences and seminars. Students from the partnering universities in Latvia regularly visit our Jelgeva CHP plant, which offers future engineers an opportunity to learn more about the country’s largest biomass-fired CHP plant. Fortum's support to society in 2014 by target, % Other, 19 Children and youth, 37 Culture, 2 Environment, 18 Children and youth, 37 Environment, 18 Other, 19 Sports, 24 Sports, 24 Culture, 2 Fortum's support to society in 2014 by country, % 4 5 23 38 30 Sweden, 38 Poland, 5 Finland, 30 Other countries, 4 Russia, 23 Sponsorships supporting Sponsorships supporting athletic coaching and athletic coaching and culture for youth culture for youth Fortum sponsored junior football and junior volleyball in Finland in 2014 through the Fortum Tutor programme. The goal of the junior football programme implemented in collaboration with the Football Association of Finland is to ensure that children have inspiring and motivating coaches. About 100 tutors mentor the junior football coaches and provide them with useful tools for coaching. In its six years of operation, the Fortum Tutor programme has already reached 100,000 children, and 40,000 Fortum Tutor Playbook guides for independent training have been distributed. A similar programme was launched with the Finnish Volleyball Association in January 2014 to strengthen the coaching of junior volleyball. A group of music students from Fortum’s different countries of operation was assembled in spring 2014 for a July visit to the Savonlinna Opera Festival. The group learned about Fortum’s operations in Finland and about the background work and performers at the Opera Festival. The goal was to support the internationalisation and networking of the students and to make Finland and Fortum more familiar in our different operating countries. 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://annualreport2014.fortum.com/ 69 Annual Report 2014 Generating economic value Economic added value for stakeholders Economic added value for stakeholders Fortum is a significant economic actor in Finland, Sweden, Russia, Poland, Norway and the Baltic countries. We continuously monitor the impact and well-being generated by our operations. The most significant direct monetary flows of Fortum’s operations come from sales revenue from customers, procurements from suppliers of goods and services, compensation to financiers and dividend to shareholders, growth and maintenance investments, employee wages and salaries, and taxes borne. Our operations also have indirect economic impacts. The Finnish State owns 50.8% of Fortum’s shares, and we contribute to a functioning society by, among other things, paying taxes and dividends. These secure Finnish society’s basic functions and build well-being. Investments and the procurement of goods and services provide employment both locally and outside our operating areas. The wages and taxes paid have a positive impact on local communities. The accompanying graphic presents Fortum’s monetary flows to the different stakeholder groups in 2014 and examples of the added value generated. Taxes borne in our operating countries in 2014 totalled EUR 525 million. The largest share of taxes borne was for the state of Sweden, EUR 279 million. Distribution of added value 2014 Distribution of added value 2014 Personnel • Operations are concentrated to the Nordic countries, Russia and the Baltic rim area • Fortum employed on average 8,821 (2013: 9,532) people • Fortum develops the competence and performance of its employees through skills and leadership training and job rotation • Wages and incentive payments impact private consumption, and taxes paid by personnel have an impact on the generation of social well-being 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://annualreport2014.fortum.com/ 70 Annual Report 2014 Generating economic value Public sector • Fortum supports social development and well-being by paying taxes and social security costs • Fortum’s income, property and production taxes totalled EUR 501 (2013: 530) million • Support for society totalled about EUR 3.4 (2013: 2.1) million • Fortum supports research in the natural, economic and technical sciences within the energy sector: in 2014, Fortum Foundation granted about EUR 550,000 (2013: 432,000) in scholarships Investors and shareholders • At the end of the year, Fortum had 109,403 (2013: 132,072) shareholders, the Finnish State owns 50.8% of Fortum • Dividends paid in 2014 for 2013 totalled EUR 977 (2013: 888 for 2012) million • About 72.9% (2013: 73.8%) of dividends was paid to Finnish shareholders • Fortum’s total shareholder return has outperformed the development of the index of its European peers during the past five-year period • Dividend income on the shares held by the Finnish State has an impact on maintaining both short- and long-term social well-being Investments • The majority of the growth investments were made in the Heat, Electricity Sales and Solutions division and the Russia division • Almost all of the planned investments in Europe target CO2-free production • Maintenance, productivity and legislation-based investments were EUR 473 (2013: 540) million • Growth investments were EUR 364 (2013: 479) million • Research and development expenditure was EUR 41 (2013: 49) million • Fortum’s investments develop, among other things, safety, production capacity, energy efficiency, local infrastructure and electricity distribution reliability • Fortum’s investments create business opportunities as well as jobs for suppliers of goods and services Suppliers • Fortum refines natural energy sources into electricity and heat • Fortum purchases fuels, goods, and services from local and global suppliers • About a half of the goods and services Fortum purchases are from European suppliers • Uranium, gas and the majority of the coal were purchased from Russia in 2014 • Collaboration creates jobs for suppliers and unlocks business opportunities in the Nordic, Baltic, Polish and Russian markets • Collaboration, networking and partnerships increase Fortum’s intellectual capital, enable a wide project base and support the successful implementation of R&D projects 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://annualreport2014.fortum.com/ 71 Annual Report 2014 Fortum as a tax payer Customers • Fortum sells electricity, heating, cooling and town gas as well as related expert services • Fortum has 1.3 million private and business customers in the Nordic countries and about 900,000 electricity distribution customers in Sweden • Fortum has wholesale electricity market customers in Russia • Fortum has district heat customers in dozens of cities in eight countries • Fortum knows the markets it operates in and develops competitive products and services for its customers • The services and environmentally-benign products Fortum offers help to improve energy efficiency and to reduce costs and emissions • Fortum develops smart grids that support sustainable community planning 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://annualreport2014.fortum.com/ 72 Annual Report 2014 Fortum as a tax payer Fortum as a tax payer Fortum as a tax payer Fortum’s policy is to pay taxes on the production, employment, property and earnings of its businesses in the operating country in question and in compliance with local regulations. We have published our tax footprint as part of our annual reporting since 2012. We aim to communicate about our operations and its impacts in an open and consistent manner with our stakeholders. We also continuously develop our tax footprint reporting. The Finnish State is the majority shareholder in Fortum, with a 50.8% stake. In October 2014, the Ownership Steering Department of the Prime Minister’s Office published guidelines on the country-specific tax reporting of State-majority-owned companies. For 2014, we report the country- specific key indicators required by the Ownership Steering Department as part of our financial statements. See also note 14 Income tax expense. This section focuses on Fortum’s role as a tax payer. We operate internationally, but the taxes are always paid locally. As an international company operating in a capital-intensive sector, it is important to us that we can effectively operate and finance our operations and investments, like new power plant construction projects, in different countries. At the same time, we need manage financing risks. Because taxes are a consequence of business activities, we pay taxes in the country where our business operations are located. Taxes are paid in each operating country in accordance with the local regulations. For every EUR 1 of corporate tax, Fortum pays EUR 1.59 other taxes." Tax environment Tax environment Fortum has operations in more than 15 countries. In addition to income taxes, we pay taxes related to production, employment and property. Our investments are long-term, so we hope for long-term predictability in e.g. energy production-related taxes. The total taxes we pay have a significant impact in our operating countries and in local communities. Economic instability has decreased the predictability of taxation, and the tax environment has become tighter in all our operating countries. The focus of taxation is shifting from income taxes to other taxes. Income tax rates have decreased in Finland and Sweden and in some of our other operating countries. Meanwhile, for example, property taxes have increased, particularly in Sweden. There are discussions under way in Sweden to also increase the tax rate on nuclear power capacity. In Finland, the Government revoked in the end of the year its 2013 decision to levy a tax on hydro, nuclear and wind power plants built prior to 2004 (the so-called windfall tax). The decision took effect in January 2015. At an international level, the OECD and EU create new recommendations and regulations, often making tax predictability more difficult. Likewise, the interpretation of national regulations can suddenly change, creating challenges for Fortum in the taxation of operations and the related earnings. Key tax indicators in Key tax indicators in 20142014 In 2014, Fortum’s total tax rate was 14.3% (2013: 31.8%). The total tax rate indicates the share of taxes borne on Fortum’s pre-tax earnings for the financial period. Taxes borne for the financial period totalled EUR 525 (2013: 558) million. One-time tax exempt capital gains on the sale of subsidiaries, mainly in Finland, Norway and Great Britain, reduced the total tax rate in 2014. Capital gains from the divestment of these companies totalled EUR 2.2 billion. The total tax rate, excluding the share of profits from associated companies and joint ventures and tax exempt capital gains, was 38.2% (2013: 36.6%). Changes to the income tax rate and the restructuring of Fortum’s operations can cause big fluctuations in the effective income tax rate on an annual level. Fortum’s effective income tax rate in 2014 was 5.9% (2013: 13.3%). In our biggest production countries, Finland and Sweden, we are among the biggest tax payers. In Finland, taxes borne was EUR 156 (2013: 174) million for the financial period, and in Sweden EUR 279 (2013: 297) million. Management of tax issues Management of tax issues We aim to manage and mitigate tax-related uncertainties. In our operating countries we seek preliminary rulings from tax authorities, we pay special attention to tax declarations and to transfer pricing documentation, and we strive to protect our rights also through legal measures. Our goal is to manage tax issues so that collaboration with authorities is as effective as possible, potential challenges can be responded to in time and surprises avoided. Taxation is always a consequence of business operations, so tax solutions too must be 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://annualreport2014.fortum.com/ 73 Annual Report 2014 Fortum as a tax payer Internal financing in Internal financing in support of business support of business External financing may be needed for the construction of new power plants and for maintenance investments in existing plants. We have centralised our external financing to the Group’s parent company. The Group’s Finance functions and entities are also responsible for arranging internal financing for our different companies in our countries of operations. This typically consists of equity or loan financing. The terms for intra-Group loans are determined on the basis of market terms. Typically, the interest rate on an intra- Group loan in, for example, Nordic countries was 1-5% in 2014, which corresponds to external interest rate levels. Related to our financing activities, we pay the appropriate taxes in all our operating countries in line with OECD guidelines. See also note 14 Income tax expense. Our international financing operations are, as usual, located in EU countries with stable operating environment and predictable taxation. Other payments to and Other payments to and from the public sector from the public sector In addition to taxes borne and taxes collected, we make other compulsory tax-like payments to the public sector, payments that are not compensation for goods or services received. For example, in 2014, we paid EUR 46 (2013: 51) million in employer’s statutory pension contributions. On the other hand, the public-sector subsidies (worth over EUR 0.5 million) we received for production, investments, R&D and other matters totalled EUR 3 (2013: 8) million. These figures exclude the free emission allowances and electricity certificates received. We are also a significant dividend payer. Fortum’s Board of Directors proposes to the 2015 Annual General Meeting that a total amount of dividend of EUR 1,155 (2014: 977) million be paid for 2014. The Finnish State’s share of this would be about EUR 586 (2014: 496) million. Total tax rate, % 37 32 38 14 2013 2014 40 35 30 25 20 15 10 5 0 Total tax rate Total tax rate excluding associates' and joint ventures profit and capital gains based on business needs. We support Fortum’s operations by managing tax issues in a sustainable manner and by identifying simple and cost-efficient solutions. This way, we aim to ensure that we pay the appropriate taxes in all our operating countries on time. Fortum’s Corporate Tax function is responsible also for instructing and guiding the business units in all taxation-related matters in line with the agreed principles that the business units must follow. We regularly assess the compliance with regulations and guidelines. The key findings and actions related to tax issues and tax risks are reported annually to the Audit and Risk Committee of Fortum’s Board of Directors. Tax-related uncertainties are assessed annually in accordance with the Group’s tax principles. The risk analysis done in 2014 indicated that, in particular, business mobility and the related risk of permanent establishment as well as increasing issues related to non- income and indirect taxes create uncertainty in the management of tax issues. To mitigate risks, we aim to integrate tax issues as part of the business processes and to raise management’s awareness of them. Consequently, the handling of tax issues in 2014 was reorganised to provide better business support. Taxes borne, % 0.8 38.7 30.2 5.3 25.0 Corporate income tax, 38.7 Production taxes, 25.0 Employment taxes, 5.3 Taxes on property, 30.2 Cost of indirect taxes, 0.8 Taxes collected, % 10.9 41.9 30.5 16.7 Payroll taxes, 16.7 Net VAT, 30.5 Excise taxes, 41.9 Withholding taxes, 10.9 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://annualreport2014.fortum.com/ 74 Annual Report 2014 Fortum as a tax payer Economic value distribution, % Taxes borne by country and type in 2014, % 26.0 24.4 100 80 60 40 20 0 1.3 8.3 1.9 28.8 59.7 0.1 44.3 5.7 29.5 20.4 Finland Sweden 1.0 1.3 60.6 17.7 8.3 12.3 Russia 66.9 12.5 12.8 6.5 Poland 0.8 0.0 28.6 2.6 67.9 10.5 9.2 15.0 2.4 62.9 1.9 0.0 0.1 1.2 96.8 1.8 8.4 12.8 2.4 74.6 Estonia Norway Netherlands Other countries Cost of indirect taxes Taxes on property Employment taxes Production taxes Corporate income tax concerning, for example, tax audits and appeals. these transactions in line with the existing regulation. The purpose of transfer pricing rules is to ensure the correct allocation of income to each function in different countries for taxation. Our policy is to apply arm’s length transfer pricing principles according to OECD guidelines in all intra-Group (product, service and financing) transactions. We document Read more Read more • Income taxes expense • Deferred income taxes • Subsidiaries by segment • Ongoing tax appeals • Corporate relations 23.7 25.9 Dividend distribution, Finnish State, 24.4 Dividend distribution, Other shareholders, 23.7 Taxes borne, 25.9 Taxes collected, 26.0 Tax reporting Tax reporting transparency transparency We aim for increased transparency in tax reporting and an increased understanding of our tax footprint. We ensure that all tax- related information is reported on time and correctly to tax authorities, shareholders and other stakeholders. We openly communicate all important tax-related decisions Taxes borne in 2013-2014 Finland Sweden Russia Poland Estonia Norway Netherlands Other countries Total EUR million 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Corporate income tax 1) Production taxes 2) Employment taxes Taxes on property Cost of indirect taxes 93 105 57 54 45 51 82 93 3 3 16 19 3 2 4 -1 2 5 13 13 124 131 15 19 2 2 0 0 0 24 0 25 Total 156 174 279 297 Excluding custom duties 1 1 1 5 0 8 1 1 1 5 0 8 2 0 1 0 0 3 1 0 1 0 0 2 4 0 1 1 1 6 2 0 2 1 0 5 32 31 12 11 203 203 0 0 0 1 0 0 0 1 0 2 1 0 1 2 2 0 131 150 28 32 159 170 4 4 33 31 16 16 525 558 1) Corporate income tax includes current taxes booked as cost for the year and adjustments to the previous year's current taxes. 2) Production taxes include also taxes on production and property paid through electricity purchased from associated companies. 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://annualreport2014.fortum.com/ 75 Annual Report 2014 Financials Taxes collected in 2013-2014 Finland Sweden Russia Poland Estonia Norway Netherlands Other countries Total EUR million 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Sales VAT 352 455 553 574 311 370 51 49 20 19 32 56 VAT on Purchases Net VAT 1) Payroll taxes Excise taxes Withholding taxes 323 403 463 481 303 373 29 45 54 52 52 90 23 93 25 158 149 173 57 42 0 0 9 9 0 0 0 11 0 0 40 11 3 0 0 35 14 3 0 1 Total 184 304 261 291 18 11 15 18 1) If net VAT is negative, included as zero. 18 14 2 2 0 0 4 5 0 0 0 5 21 11 2 17 0 30 35 21 3 35 0 59 1 1 0 0 0 0 0 1 0 1 0 0 0 1 33 48 1,353 1,572 24 43 1,192 1,385 8 4 1 0 5 5 2 0 161 190 88 98 221 369 57 43 14 12 527 700 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://annualreport2014.fortum.com/ 76 Annual Report 2014 Operating and financial review FINANCIALS 2014 FINANCIALS 2014 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 Interest-bearing net debt without Värme financing Equity-to-assets ratio, % Average number of shares, 1,000s 2013 1) 2012 2) Change 14/13 2014 4,751 3,428 72.2 1,351 3,360 3,154 3.55 1,762 12.23 17,918 4,217 3,664 51 5,309 1,508 28.4 1,403 1,398 1,204 1.36 1,548 11.28 19,183 7,793 6,658 43 6,159 1,874 30.4 1,752 1,586 1,416 1.59 1,382 11.30 19,420 7,814 N/A 43 -11% 127% 154% -4% 140% 162% 161% 14% 8% -7% -46% -45% 19% 0% 888,367 888,367 888,367 1) Comparative period information for 2013 presented in these financial statements has been restated due to the accounting change for Fortum Värme, see Note 1.6.1. 2) The adoption of IFRS 10 and IFRS 11 is not restated in the figures of financial period 2012. Group financial targets ROCE, % ROE, % Capital structure Comparable net debt/EBITDA Comparable net debt/EBITDA without Värme financing Net debt/EBITDA 12 14 Around 3 Around 3 2014 19.5 30.0 2.3 2.0 1.1 2013 1) 2012 2) 9.0 12.0 3.9 3.4 3.7 10.2 14.6 3.2 N/A 3.1 Change 14/13 117% 150% -41% -41% -70% 1) Comparative period information for 2013 presented in these financial statements has been restated due to the accounting change for Fortum Värme, see Note 1.6.1. 2) The adoption of IFRS 10 and IFRS 11 is not restated in the figures of financial period 2012. 2014 was a challenging year for Fortum. Power prices and global macro economic performance as well as the rouble weakness – were obviously disappointing. In addition, the decline in commodity prices during the fourth quarter was unforeseen. Though commodity prices declined during the year, power prices declined less, one reason being the positive development of CO2 emission allowances market price. 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://annualreport2014.fortum.com/ 77 Annual Report 2014 Operating and financial review Fortum’s internal transformation continued to further increase our efficiency and flexibility. Fortum was able to reach a strong result largely due to its successful execution of both the efficiency programme and divestments according to plan. Fortum’s 2014 results were good in a market dominated by negative drivers: low spot prices, a very weak rouble and warm weather. In the Nordic countries, electricity demand declined only somewhat, and demand in Russia was at the same level as in 2013. Comparable operating profit was EUR 1,351 million and cash flow was strong at EUR 1,762 million in 2014. In Russia, Fortum finalised the third unit of the Nyagan power plant; the most extensive part of the investment programme is now complete. The run-rate operating profit (EBIT) target for the Russia Segment, RUB 18.2 billion, is to be reached during 2015, while the euro-denominated result level will be volatile, mainly due to the translation effect. In March 2014 we broadened the management team as the disvestment of the electricity distribution business strategically put the company in a new positio; major disvestment and investment programmes are still ongoing; and the company is reorganising and preparing for the changing European power markett in order to capture growth. This means that we need a wide range of competences recovering strategy, M&A and corporate relations in the management team. In addition, after succesfully finalizing our 2013-2014 efficiency programme, we see that there is internal potential to be reached. With the restructured management team, we are able to further improve our performance and efficiency, unlock further synergies between various businesses and staff functions, and scrutinise our investment programmes in a way that gives the best returns in line with our strategy. Preparations for future growth are starting to take shape. The Finnish and Norwegian electricity distribution businesses were divested during 2014, and the divestment of the Swedish electricity distribution business is being prepared and evaluated. Furthermore, we announced in December that we aim to increase our hydro portfolio by 60 % through the restructuring of TGC-1, Territorial Generating Company, in Russia. Provided that we obtain more than 75 % ownership in TGC-1 hydro assets, we would also be ready to participate with a minority stake (max. 15 %) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies currently participating in the project. Increasing the share of hydropower is in line with our mission and strategy: We are committed to create energy that improves life for current and future generations. Therefore, we want to take a responsible approach not only short term but also long term. Through sustainable solutions and operations, we aim to deliver excellent value to our shareholders. This approach gives us a unique opportunity to be even more competitive. We believe that sustainable operations lead to good financial results, and give us a solid platform to increase shareholder value. Fortum’s strategy is based on CO2-free production: hydro, nuclear and CHP being our core competencies. In order to grow in these areas, we strive to create added value through restructuring and acquisitions. In addition to CO2-free production, we also consider the retail business important, and are committed to growth also in this area. In order to continue to build on our strong Nordic core, an integrated European-wide market is a key priority – in hydro, in nuclear and in CHP. Creating a solid earnings base and growth in Russia continues to be equally important. We also aim to build a platform for future growth. Solar technology offers a clearly interesting and sustainable, CO2-free production form; we are currently researching and developing our solar technology competencies in India. In addition, we are for example studying and developing pyrolysis in Finland. Even though the wholesale market prices for electricity have continued to decrease, various taxes, fees and subsidies are increasing end-consumers' energy costs. A predictable electricity market built on consumer participation and the utilisation of all the different energy value components as well as different producers is vital. The setup should be market-driven, commercial, predictable and harmonised in as big geographical area as possible, and it should have enough physical transmission capacity, as well as good cooperation between transmission system operators, grid companies, power exchanges etc. Giving environmental consequences the right price through CO2 would create an energy market that provides security of supply, competitiveness and environmental sustainability. The key criteria and parameters for the European power market in the future are complex. Instead of promoting any single technology solution or innovation, it is most important to have a well-functioning, competitive market that gives producers and consumers access to competitive energy solutions. The supply and demand balance is very critical on the power market. It is important to realise that there are different values associated with electricity, values like energy, capacity and how different production types contribute to peak capacity. The supply- demand balance requires the ability to respond; obviously, hydropower is excellent for this. For this reason flexible hydro is very attractive for Fortum. There are many important market developments ongoing in the EU. A market stability reserve (EU MSR) is under discussion and preparation, but it will take some time before it can be implemented. The capacity remuneration mechanism is also under discussion; if and when that mechanism were implemented, it is important that it would be a technology-neutral, cross-border mechanism and that it would include both old and new assets. In addition, the CO2 reduction target for 2030 was accepted as 40 %. This is the framework Fortum is actively working for in Europe, Brussels, and with key decision makers. Another big issue – in addition to the energy market development and the energy market model – is climate change. Unfortunately, it seems that we are clearly headed towards a global warming of more than 2 degrees Celsius. Some indicators show that we are actually heading towards a three to four- degree Celsius increase. The situation is hence extremely serious and will be much more so in ten years. We at Fortum have taken environmental issues and sustainability very seriously for several years. We are committed to climate change mitigation and give it a high priority on the company agenda. Fortum is already in a very strong competitive position – whether measured by CO2-free production, competencies, portfolio, asset flexibility, cost structure, sustainability or safety. We have a solid view on how to develop the company – both in terms of the near future and long-term sustainability – in order to achieve value creation, improving earnings per share growth, and, through that, a continued good platform for stable, sustainable and over time increasing dividends. 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://annualreport2014.fortum.com/ 78 7,500 5,000 2,500 0 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Annual Report 2014 Operating and financial review Sales, EUR million Return on capital employed, % Earnings per share, EUR 6,296 6,161 6,159 5,309 4,751 10 11 12 13 14 20 15 10 5 0 19.5 14.8 11.6 10.2 9.0 10 11 12 13 14 Return on capital employed, % Target % 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3.55 1.99 1.46 1.59 1.36 10 11 12 13 14 Operating profit and comparable operating profit, EUR million 3,428 2,402 1,833 1,708 1,802 1,874 1,752 1,508 1,403 1,351 10 11 12 13 14 Return on shareholders' equity, % 30.0 19.7 15.7 14.6 12.0 10 11 12 13 14 30 25 20 15 10 5 0 Operating profit Comparable operating profit Return on shareholders' equity, % Target % Comparability of Comparability of information presented in information presented in tables and graphs tables and graphs Information in the tables and graphs presented for year 2012 or earlier is not restated due to the adoption of IFRS 10 and IFRS 11. Adoption of standards influences treatment of Fortum’s holding in AB Fortum Värme samägt med Stockholms stad in the the consolidated financial statements. For further information, see Note 1.6.1. New IFRS standards adopted from 1 Jan 2014. Restructuring according to strategy in Russia Restructuring according to strategy in Russia In December, Fortum and Gazprom Energoholding signed a protocol to start a restructuring process of their ownership of TGC-1, a Territorial Generating Company in Russia. TGC-1 owns and operates hydro and thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg. Currently, Gazprom Energoholding owns 51.8 % of the TGC-1 shares and Fortum 29.5 %. As part of the restructuring, Fortum will establish a company together with Rosatom to own the hydro assets of TGC-1, while Gazprom Energoholding will continue with the heat and thermal power businesses of TGC-1. By utilising our present stake in TGC-1, Fortum would obtain a more than 75 % ownership in the hydro power company. Rosatom would have a less than 25 % minority holding in the hydro power company. The company would be consolidated to Fortum Group as a subsidiary. Provided that Fortum obtains a more than 75 % ownership in TGC-1 hydro assets, Fortum would be ready to participate with a minority stake (max. 15 %) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies currently participating in the project. Efficiency programme 2013-2014 Efficiency programme 2013-2014 The efficiency programme was successfully finished during the fourth quarter of 2014. to enable the company to reach its financial targets in the future. Fortum started the efficiency programme in 2012 in order to maintain and strengthen its strategic flexibility and competitiveness and The aim was 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. 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://annualreport2014.fortum.com/ 79 Annual Report 2014 Operating and financial review Assessment of the electricity distribution business Assessment of the electricity distribution business The decision to start a strategic assessment of future alternatives for Fortum’s electricity distribution business was made in 2013. In March 2014, Fortum completed the divestment of its Finnish electricity distribution business. In May, Fortum finalised its sale of the Norwegian electricity distribution business. The sales gains from the both transactions were booked in Fortum's Distribution Segment in the first and second quarter of 2014, respectively. Fortum is continuing to prepare and evaluate possibilities to divest its distribution business in Sweden. For further information, see Note 9 Assets held for sale. Restatement related to IFRS changes and the new reporting Restatement related to IFRS changes and the new reporting structure structure As of 1 January 2014, Fortum has applied the new IFRS 10 Consolidated Financial Statements and 11 Joint Arrangements standards. The major effect of this reassessment relates to Fortum Värme, which is treated as a joint venture and thus consolidated with the equity method. Comparative information for 2013 presented in this financial statements has been restated accordingly. The segment information for 2013 has been restated due to the change in the organisation from 1 March 2014. In addition, as of 2014, presented figures have been rounded and consequently the sum of individual figures may deviate from the sum presented. Market conditions Market conditions Nordic countries Nordic countries In 2014, according to preliminary statistics, electricity consumption in the Nordic countries was 378 TWh (2013: 386). Industrial consumption was nearly unchanged, while non-industrial consumption decreased due to the exceptionally warm weather particularly during the first half of the year. At the beginning of 2014, the Nordic water reservoirs were at 82 TWh, 1 TWh below the long-term average and 3 TWh lower than a year earlier. The year 2014 ended with reservoirs at 80 TWh, 3 TWh below the long- term average and 2 TWh below the level at the end of 2013. The average area price in Finland was EUR 36.4 per MWh (2013: 39.9) and in Sweden SE3 (Stockholm) EUR 31.3 per MWh (2013: 37.5). The difference in area prices compared to the spot price was mainly due to the fact that Finland continued exporting power to Estonia, while high Swedish hydropower volumes and good availability of the Swedish nuclear power plants kept Swedish area prices close to the system level. In 2014, the average system spot price was EUR 29.6 per MWh (2013: 38.1). In Finland, the average area price was EUR 36.0 per MWh (2013: 41.2) and in Sweden SE3 (Stockholm) EUR 31.6 per MWh (2013: 39.4). In Germany, the average spot price during the fourth quarter of 2014 was EUR 34.8 per MWh (2013: 37.5) and in 2014 EUR 32.8 per MWh (2013: 37.8). The market price of CO2 emission allowances (EUA) was at approximately EUR 4.8 per tonne at the beginning of the year and approximately EUR 7.3 per tonne by the end of December 2014. In 2014, the EUA daily close ranged between EUR 4.4 and EUR 7.5 per tonne. Russia Russia Fortum operates in the Urals and Western Siberia in the Tyumen and Khanty-Mansiysk area, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area, which is dominated by the metal industry. In 2014 according to preliminary statistics, Russia consumed 1,021 TWh (2013: 1,026) of electricity. The corresponding figure in Fortum’s operating area in the First price zone (European and Urals part of Russia) was 777 TWh (2013: 772). In 2014, the average electricity spot price, excluding capacity price, increased by 5 % to RUB 1,163 per MWh (2013: 1,104) 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://annualreport2014.fortum.com/ 80 Annual Report 2014 Operating and financial review 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 Spot price for power in Sweden, SE2, Sundsvall, EUR/MWh Spot price for power in European and Urals part of Russia, RUB/MWh 1) 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 2) Average capacity price for new capacity, tRUB/MW/month 2) Spot price for power (market price), Urals hub, RUB/MWh 1) CO2, (ETS EUA), EUR/tonne CO2 Coal (ICE Rotterdam), USD/tonne Oil (Brent Crude), USD/bbl 1) Excluding capacity tariff. 2) 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 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 2014 378 1,021 93 36 260 2014 29.6 36.0 31.6 31.4 1,163 304 32.8 3,362 167 552 1,089 6 75 99 2013 386 1,026 87 36 257 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 31 Dec 2014 31 Dec 2013 31 Dec 2012 80 83 2014 -14 4 -10 82 83 2013 -3 5 -2 85 83 2012 -19 5 -14 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://annualreport2014.fortum.com/ 81 Annual Report 2014 Operating and financial review European business environment and carbon market European business environment and carbon market EU 2030 climate and EU 2030 climate and energy policy framework energy policy framework The European Council agreed in October 2014 on the following energy and climate targets for 2030: at least 40% cut in domestic greenhouse gas emissions, at least 27% share of renewable energy as an EU-level binding target, and at least 27% improvement in energy efficiency as an EU-level indicative target. An additional target for electricity transmission infrastructure investment was included in the framework. The EU Commission will prepare legislative proposals to implement the agreed 2030 framework during 2015-2016. Fortum considers the framework as a good foundation, and it should enforce the role of emissions trading as the main instrument for emissions reduction. EU's emissions trading EU's emissions trading scheme (ETS) reform scheme (ETS) reform The Commission launched a stakeholder consultation on revision of the Emissions Trading Directive in December 2014. A decision on the market stability reserve (MSR) of the EU ETS is expected during the first half of 2015. EU power market EU power market development development The Commission has indicated that it is in the process of developing a reference target model for capacity remuneration mechanisms (CRM). The first preliminary proposals are expected from the Commission during the first half of 2015. Countries choosing to implement CRMs should follow these principles. This would be important in terms of avoiding fragmentation in the internal electricity market. However, a common EU-wide, competitive and strongly networked internal energy market, where also renewable energy is developed on a market basis, would not just improve competitiveness and mitigate environmental impacts, it would also improve the EU’s internal energy availability and security of supply. EU Commission work EU Commission work programme programme In December 2014, the newly nominated EU Commission published its strategic work programme for 2015. The first major initiative will be a Communication on the EU Energy Union in late February 2015. Among other issues, it should explain in more concrete terms how the Commission aims to tackle security of supply challenges. In Sweden an agreement In Sweden an agreement between the government between the government and the opposition and the opposition In order to avoid a new election, the new government alliance reached an agreement with the former government. The “December Agreement” is valid until 2022 and will establish a new praxis enabling minority governments to get state budgets through the Parliament. The agreement also covers cooperation in three areas: energy, pensions and military defence. Finnish nuclear decisions Finnish nuclear decisions In September 2014, the government issued a positive decision-in-principle (DIP) for the Fennovoima nuclear power plant. In the DIP, the government set an important precondition according to which Fennovoima has to have a domestic ownership (i.e. EU/ EEA) of at least 60% at the time of submitting the construction license. Ukraine crisis and EU Ukraine crisis and EU sanctions sanctions As a consequence of the situation in Ukraine, an amended list of EU restrictive measures against Russia entered into force during the autumn; the gas industry and nuclear energy were not 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://annualreport2014.fortum.com/ 82 Annual Report 2014 Operating and financial review Lima climate conference Lima climate conference The United Nation's climate conference (COP20) in Lima, Peru, in December, made modest progress in international climate negotiations. The meeting agreed on the scope and format of the pledges, which countries will present during the first quarter of 2015, and compiled the elements of the Paris Agreement. The outcome, called Lima Call for Climate Action, also includes some references to carbon pricing and markets. In order to speed up the deployment of low-carbon solutions, market mechanisms and carbon pricing should be at the core of the future agreement. Financial results Financial results Sales by segment EUR million Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Netting of Nord Pool transactions 1) Eliminations Total Comparable operating profit by segment EUR million Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Total Operating profit by segment EUR million Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Total 2014 2,156 1,332 1,055 751 58 -422 -179 4,751 2014 877 104 161 266 -57 1,351 2014 855 337 161 2,132 -58 3,428 2013 2,252 1,516 1,119 1,064 63 -478 -228 5,309 2013 859 109 156 332 -54 1,403 2013 922 134 156 349 -53 1,508 Change 14/13 -4% -12% -6% -29% -8% -12% -21% -11% Change 14/13 2% -5% 3% -20% 6% -4% Change 14/13 -7% 151% 3% 511% 9% 127% 1) Sales and purchases with Nord Pool Spot are netted at the Group level on an hourly basis and posted either as revenue or cost depending on whether Fortum is a net seller or net buyer during any particular hour. For further information, see Note 5 Segment reporting. In 2014, Group sales were EUR 4,751 million (2013: 5,309). Comparable operating profit totalled EUR 1,351 million (2013: 1,403), and the reported operating profit totalled EUR 3,428 million (2013: 1,508). Fortum's operating profit for the period was affected by non-recurring items, mainly the divestment of the Finnish electricity distribution business, as well as an IFRS accounting treatment (IAS 39) of derivatives, mainly used for hedging Fortum's power production, and nuclear fund adjustments amounting to EUR 2,077 million (2013: 106). The share of profit from associates in 2014 was EUR 149 million (2013: 178), of which Fortum Värme represents EUR 67 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://annualreport2014.fortum.com/ 83 Annual Report 2014 Operating and financial review Profit before taxes, EUR million 3,360 2,228 1,615 1,586 1,398 10 11 12 13 14 3,500 3,000 2,500 2,000 1,500 1,000 500 0 (2013: 73). The share of profit from Hafslund and TGC-1 are based on the companies' published third-quarter 2014 interim reports. The Group’s net financial expenses were EUR 217 million (2013: 289). Net financial expenses include changes in the fair value of financial instruments of EUR -5 million (2013: -16). Profit before taxes was EUR 3,360 million (2013: 1,398). Taxes for the period totalled EUR 199 million (2013: 186). The tax rate according to the income statement was 5.9% (2013: 13.3%). In Finland, the corporate tax rate was decreased from 24.5% to 20.0% starting 1 January 2014; the decrease impacted approximately EUR 0.09 per share the fourth quarter of 2013. In 2014, the tax rate, excluding the impact of the share of profit from associated companies and joint ventures as well as non-taxable capital gains, was 18.8% (2013: 22.7%). The profit for the period was EUR 3,161 million (2013. 1,212). Fortum's earnings per share were EUR 3.55 (2013: 1.36), of which EUR 2.36 (2013: 0.10) per share relates to items affecting comparability. The earnings per share impact from the divestment of the Finnish electricity distribution business was EUR 2.08 per share. Operating profit and comparable operating profit, EUR million 3,428 2,402 1,833 1,708 1,802 1,874 1,752 1,508 1,403 1,351 10 11 12 13 14 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Operating profit Comparable operating profit 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: Liquid funds 2) Interest-bearing net debt Interest-bearing net debt without Värme financing 1) 2013 includes EUR 20 million presented as asset held for sale. 2) 2013 includes EUR 15 million presented as asset held for sale. 2014 -256 84 -5 -40 -217 6,983 2,766 4,217 3,664 2013 -301 75 -16 -47 -289 9,058 1,265 7,793 6,658 Change 14/13 -15% 12% -69% -15% -25% -23% 119% -46% -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://annualreport2014.fortum.com/ 84 Annual Report 2014 Operating and financial review Assets of the Finnish distribution business, amounting to EUR 1,173 million, were presented as Assets held for sale at the end of 2013. Liquid funds increased by EUR 1,501 million. Capital employed was EUR 17,918 million (2013: 19,183), a decrease of EUR 1,265 million. For further information, see Note 9 Assets held for sale. Equity Equity Total equity was EUR 10,935 million (2013: 10,124), of which equity attributable to owners of the parent company totalled EUR 10,864 million (2013: 10,024). The increase in equity attributable to owners of the parent company totalled EUR 840 million and was mainly from the net profit of EUR 3,154 million for the period, offset by translation differences of EUR -1,320 million and paid dividends of EUR 977 million. Financing Financing Net debt decreased during 2014 by EUR 3,576 million to EUR 4,217 million (2013: 7,793). Net debt without Värme financing was EUR 3,664 million (2013: 6,658). At the end of December 2014, the Group’s liquid funds totalled EUR 2,766 million (2013: 1,265). Liquid funds include cash and bank deposits held by OAO Fortum amounting to EUR 134 million (2013: 113). 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 in 2014 were EUR 217 million (2013: 289). Net financial expenses include changes in the fair value of financial instruments of EUR -5 million (2013: -16). Fortum Corporation's long-term credit rating with both S&P and Fitch remained unchanged during 2014 and is A- (negative outlook). Key figures Key figures At year-end 2014, net debt to EBITDA was 1.1 (3.7 at year-end 2013) and comparable net debt to EBITDA 2.3 (2013: 3.9). Fortum is currently financing Fortum Värme, and these loans, EUR 553 million (2013: 1,135), are presented as interest-bearing loan receivables in Fortum’s balance sheet. However, the aim is to refinance the loans during 2015. If these loans are deducted from the net debt, the last-twelve-months realised foreign exchange differences, which were offset by changes in working capital EUR -125 million. Realised foreign exchange gains and losses of EUR 352 million (2013: 52) were related to the rollover of foreign exchange contract hedging loans to Fortum's Swedish and Russian subsidiaries. Capital expenditures decreased by EUR 236 million to EUR 768 million (2013: 1,004). Proceeds from divestments of shares totalled EUR 3,062 million (2013: 122), mainly from the divestment of the Finnish distribution business and Gasum shares (Note 8). Proceeds from interest-bearing receivables included EUR 534 million paid by Fortum Värme. Total net cash used in investing activities was positive EUR 2,816 million (2013: -944). Cash flow before financing activities, i.e. financing, increased by EUR 3,974 million to EUR 4,578 million (2013: 604). The proceeds were partially used to pay dividends totalling EUR 977 million in April 2014 as well as payments of interest-bearing debt amounting to EUR 2,079 million. Liquid funds at year-end 2014 were EUR 2,766 million (2013: 1,265). Assets and capital Assets and capital employed employed Total assets decreased by EUR 1,973 million to EUR 21,375 million (2013: 23,348), which includes the decrease of non-current assets, EUR 2,412 million. Translation differences decreased intangible assets, property, plant and equipment as well as participation in associates and joint ventures by EUR 2,015 million and divestments by EUR 433 million. Interest-bearing net debt, EUR million 10,000 7,500 5,000 2,500 0 10 11 12 13 14 Interest-bearing net debt, EUR million Interest-bearing net debt without Värme financing, EUR million Net debt/EBITDA 4 3 2 1 14 0 13 12 11 10 Net debt/EBITDA Comparable net debt/EBITDA Comparable net debt/EBITDA without Värme financing Target, comparable net debt/EBITDA Cash flow Cash flow In 2014, total net cash from operating activities increased by EUR 214 million to EUR 1,762 million (2013: 1,548), mainly due to the EUR 300 million positive impact of 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://annualreport2014.fortum.com/ 85 Annual Report 2014 Operating and financial review comparable net debt to EBITDA is 2.0 (2013: 3.4). Gearing was 39% (2013: 77%) and the equity- to-assets ratio 51% (2013: 43%). Equity per share was EUR 12.23 (2013: 11.28). Return on capital employed totalled 19.5% (2013: 9.0%) and return on shareholders’ equity 30.0% (2013: 12.0%). Both return on capital employed and return on equity were positively affected by the capital gain from the divestment of the Finnish electricity distribution business as well as the divestment of the Norwegian electricity distribution and heat businesses. Segment reviews Segment reviews Power and Technology Power and Technology Power and Technology consists of Fortum's hydro, nuclear and thermal power generation, Power Solutions with expert services, portfolio management and trading, as well as technology and R&D functions. The segment incorporates two divisions: the Hydro Power and Technology Division and the Nuclear and Thermal Power Division. 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 In 2014, Power and Technology's comparable operating profit was EUR 877 million (2013: 859), i.e. EUR 18 million higher than in 2013. This was mainly due to the higher hydropower production volumes, lower operating costs and SEK development, which offset the negative impact from the lower achieved price as well as lower thermal volumes and 2014 2,156 2,026 130 855 877 998 6,001 13.6 14.2 198 1,639 2013 2,252 2,117 135 922 859 1,007 6,355 14.5 13.8 181 1,723 Change 14/13 -4% -4% -4% -7% 2% -1% -6% -6% 3% 9% -5% Grangemouth divestment. In addition, an impairment loss totalling EUR 20 million in 2013 was booked due to the decision to discontinue electricity production at Fortum’s Inkoo coal-fired power plant in Finland. EUR 52 million (2013: 25) and by the IFRS accounting treatment (IAS 39) of derivatives, mainly used for hedging Fortum's power production, and by nuclear fund adjustments amounting to EUR -73 million (2013: 38). Operating profit, EUR 855 million (2013: 922), was affected by sales gains totalling 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://annualreport2014.fortum.com/ 86 Annual Report 2014 Operating and financial review Power generation by source TWh Hydro and wind power 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) 2014 22.4 23.8 0.9 47.1 0.7 47.9 2014 48.6 44.6 2013 18.1 23.7 1.9 43.7 1.0 44.7 2013 45.3 40.2 Change 14/13 24% 0% -53% 8% -30% 7% Change 14/13 7% 11% 1) The Nordic power sales income and volume does not include thermal generation, market price-related purchases or sales to minorities (i.e. Meri-Pori, Inkoo and imports from Russia). Sales price EUR/MWh Power and Technology's Nordic power price 2) 2014 41.4 2013 46.4 Change 14/13 -11% 2) Power and Technology’s Nordic power price does not include sales income from thermal generation, market price-related purchases or sales to minorities (i.e. Meri-Pori, Inkoo and imports from Russia). Power and Technology's achieved Nordic power price was EUR 41.4 per MWh (2013: 46.4), or EUR 5.0 per MWh lower than in 2013. The system and all area prices were clearly lower during 2014 compared to 2013. The average system spot price of electricity in Nord Pool was EUR 29.6 per MWh (2013: 38.1). The average area price in Finland was EUR 36.0 per MWh (2013: 41.2) and in Sweden SE3 (Stockholm) EUR 31.6 per MWh (2013: 39.4). The segment's total power generation in the Nordic countries was 47.1 TWh (2013: 43.7). Due to normalised hydro inflow and reservoir levels, hydropower production was 4.3 TWh higher in 2014 compared to 2013. Nuclear volumes were 0.2 TWh higher due to improved availability. Overall nuclear availability was at a high level in Fortum’s fully owned and co-owned reactors, except in Oskarshamn 2. Availability in Forsmark and Olkiluoto nuclear plants were at all time high in 2014. Oskarshamn 2 has been shut down since 1 June 2013 for an extensive safety modernisation. Thermal production was 0.9 TWh (2013: 1.9) in the Nordic countries. The CO2-free production amounted to 97% (2013: 94%). 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://annualreport2014.fortum.com/ 87 Annual Report 2014 Operating and financial review Power and Technology segment's power generation in the Nordic area by source, TWh Power and Technology segment's power generation by area, TWh 60 45 30 15 0 2.3 2.2 22.0 24.9 22.0 10 21.0 11 0.6 23.4 25.2 12 1.9 23.7 18.1 13 0.9 23.8 22.4 14 Thermal Nuclear Hydro and wind power 60 45 30 15 0 1.1 26.0 20.3 10 1.2 1.1 28.3 29.1 1.0 23.6 0.8 27.7 19.8 20.1 20.1 19.4 11 12 13 14 UK Sweden Finland Heat, Electricity Sales and Solutions Heat, Electricity Sales and Solutions Heat, Electricity Sales and Solutions consists of combined heat and power (CHP) production as well as heat and electricity sales and development of customer-oriented solutions. The business operations are located in the Nordics, the Baltic countries, Poland and India. The segment also includes Fortum’s 50% holding in Fortum Värme, which is a joint venture and is accounted for using the equity method. EUR million Sales - heat sales - power sales - other sales Operating profit Comparable operating profit of which Electricity Sales 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 2014 1,332 430 783 119 337 104 48 204 2,112 19.1 8.7 124 1,807 2013 1,516 492 900 124 134 109 47 211 2,295 9.7 8.7 134 1,968 Change 14/13 -12% -13% -13% -4% 151% -5% 2% -3% -8% 97% 0% -7% -8% As of 2014, the former Heat Division and Electricity Sales and Solutions business area are reported as one segment. In addition, Fortum Värme, which earlier was consolidated as a subsidiary under the Heat Division, is treated as a joint venture and thus consolidated with the equity method. The effect of Fortum Värme is hence included in the share of profits in associates and joint ventures. In January-December 2014, this represented EUR 67 (73) million. In 2014, heat sales volumes of Heat, Electricity Sales and Solutions amounted to 7.9 TWh (2013: 10.7). Power sales volumes from CHP production totalled 2.8 TWh (2013: 3.5). Despite the new capacity and lower fuel costs, heat and power sales volumes were lower, mainly due to the warmer weather during the first and third quarter of 2014 and to the divestments made in 2013 and 2014. The warm weather also burdened retail sales, especially during the first quarter of 2014. Comparable operating profit was EUR 104 million (2013: 109). The result decreased, mainly due to the lower volumes and lower power prices, despite new capacity and lower fuel costs. Operating profit totalled EUR 337 million (2013: 134) and was affected by sales gains totalling EUR 254 million (2013: 18). At the end of December 2014, Fortum's customer base in Electricity Sales exceeded 1.3 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://annualreport2014.fortum.com/ 88 Annual Report 2014 Operating and financial review Heat sales by area TWh Finland Poland Other countries Total Power sales TWh CHP Electricity Sales Total 2014 3.2 3.4 1.3 7.9 2014 2.8 13.8 16.5 2013 5.4 4.1 1.2 10.7 2013 3.5 13.6 17.1 Change 14/13 -41% -15% 8% -26% Change 14/13 -20% 1% -4% Heat, Electricity sales and Solutions segment's district heating and industrial steam sales, TWh Heat, Electricity Sales and Solutions segment's district heating and industrial steam sales by area, TWh Electricity Sales in Heat, Electricity Sales and Solutions segment, TWh 30 20 4.0 3.7 2.3 10 22.1 18.9 17.4 0 10 11 12 2.3 8.4 13 0.3 7.6 14 30 20 10 0 5.6 10.9 9.6 10 5.6 8.5 8.5 11 5.4 8.5 5.8 12 5.3 0.0 5.4 13 4.7 0.0 3.2 14 Steam Heat Other countries Sweden Finland 40 30 20 10 0 29.8 14.4 13.0 13.6 13.8 10 11 12 13 14 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://annualreport2014.fortum.com/ 89 Annual Report 2014 Operating and financial review Russia Russia The Russia segment consists of power and heat generation and sales in Russia. The segment also includes Fortum’s over 29% 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 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 2014, Fortum sold approximately 80% of its power production in Russia at a liberalised electricity price. The capacity selection for generation built prior to 2008 (CCS – “old capacity”) for 2014 was held in September 2013. All of Fortum’s capacity was allowed to participate in the selection for 2014, and the majority of Fortum’s power plants were also selected. The volume of Fortum’s installed capacity not selected in the auction totalled 132 MW, which represents 4.6% of Fortum’s total old capacity in Russia. The generation capacity built after 2007 under the Russian Government's capacity supply agreements (CSA – “new capacity”) receives guaranteed payments for a period of 10 years. The period and the prices for capacity under CSA were 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. Received capacity payments differ depending on the age, location, type and size of the plant as well as seasonality and availability. The CSA payments can also vary somewhat annually because they are linked to the Russian Government long-term bonds with 8 to 10 years maturity. In addition, the regulator will review the guaranteed CSA payments by re-examining earnings from the electricity-only market three and six years after the commissioning of a unit and could revise the CSA payments accordingly. In 2014, the Russia Segment's power sales volumes amounted to 26.5 TWh (2013: 25.6). Heat sales totalled 26.0 TWh (2013: 24.1) during the same period. The Russia Segment’s comparable operating profit was EUR 161 million (2013: 156). The positive effect from the new units receiving CSA payments amounted to approximately 2014 1,055 758 285 11 161 161 304 2,597 5.6 5.6 367 4,213 2013 1,119 822 290 7 156 156 258 3,846 5.2 5.2 435 4,162 Change 14/13 -6% -8% -2% 57% 3% 3% 18% -32% 8% 8% -16% 1% EUR 165 million (2013: 163), including EUR -35 million due to the weaker rouble, a reversal of the CSA provisions totalling EUR 4 million (2013: 48). In addition, better electricity and heat spreads, income from heat connections, improved bad-debt collections and increased efficiency positively affected the result. Overall, the weakened Russian rouble affected the result negatively by approximately EUR 34 million. Note for comparison that 2013 figures included a reversal of the CSA provision totalling EUR 48 million and EUR 40 million in compensation for CSA penalties. Operating profit was EUR 161 million (2013: 156). In late September, the third unit at Fortum's Nyagan Power Plant passed the comprehensive and certification tests that precede commissioning. Fortum started the commercial operation of the unit at the end of 2014. Capacity payments under the Russian Government's capacity supply agreement for 418 megawatts (MW) started as of 1 January 2015. 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://annualreport2014.fortum.com/ 90 Annual Report 2014 Operating and financial review Key electricity, capacity and gas prices for Fortum Russia 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 1) Capacity prices paid for the capacity volumes excluding unplanned outages, repairs and own consumption. 2014 1,089 3,362 167 552 304 30.4 2013 1,021 3,131 163 576 276 32.1 Change 14/13 7% 7% 2% -4% 10% -5% Distribution Distribution Fortum owns and operates electricity distribution and regional networks, and distributes electricity to a total of 0.9 million customers in Sweden. 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 2014 751 590 120 41 2,132 266 416 2,615 73.6 9.3 147 390 2013 1,064 896 129 39 349 332 548 3,745 9.3 8.8 255 805 Change 14/13 -29% -34% -7% 5% 511% -20% -24% -30% 691% 6% -42% -52% In 2014, the volume of distribution and regional network transmissions totalled 17.6 TWh (2013: 26.1) and 13.8 TWh (2013: 16.3), respectively. Volumes were lower due to warmer weather, especially during the first quarter of 2014. The lower total volume was mainly due to the divestment of the Finnish and Norwegian distribution businesses. The Distribution Segment's comparable operating profit was EUR 266 million (2013: 332). The decrease was mainly due to the very mild weather during the first quarter and to the divestment of the electricity distribution business in Finland that was finalised at the end of March. Volume of distributed electricity in distribution network Operating profit totalled EUR 2,132 million (2013: 349) and was affected by sales gains totalling approximately EUR 1,865 billion from the Finnish and Norwegian electricity distribution businesses. TWh Sweden Finland Norway Total 2014 13.7 2.8 1.1 17.6 2013 14.1 9.5 2.5 26.1 Change 14/13 -3% -71% -56% -33% 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://annualreport2014.fortum.com/ 91 Annual Report 2014 Operating and financial review Number of electricity distribution customers by area Thousands Sweden Finland Norway Total Dec 31 2014 Dec 31 2013 906 - - 906 903 642 103 1,648 Change 14/13 0% - - -45% Volume of distributed electricity by area, TWh Number of electricity distribution customers by area, thousands 30 20 10 0 2.7 15.2 10.0 10 2.4 2.4 2.5 14.2 14.4 14.1 1.1 9.5 11 9.8 12 9.5 13 13.7 2.8 14 2,000 1,000 0 24 100 620 24 101 627 0 102 633 0 103 642 0 0 0 893 893 898 903 906 10 11 12 13 14 Norway and Estonia Finland Sweden Estonia Sweden Norway Finland in shares Capital expenditure, divestments & investments in shares Capital expenditure, divestments & investments 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 2014, capital expenditures and investments in shares totalled EUR 843 million (2013: 1,020). Investments, excluding acquisitions, were EUR 774 million (2013: 1,005). See also Note 19.2 Capital expenditure. 2014 2013 22 752 774 7 60 2 69 46 959 1,005 11 0 4 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://annualreport2014.fortum.com/ 92 Annual Report 2014 Operating and financial review Fortum expects to start the supply of power and heat from new power plants and to upgrade existing plants as follows: Power and Technology Hydro refurbishment Russia 1) Chelyabinsk 1 Chelyabinsk 2 1) Start of commercial operation. Capital expenditure by area, EUR million 3 8 16 19 340 774 163 225 Finland, 163 Russia, 340 Poland, 16 Sweden, 225 Other countries, 19 Estonia, 8 Norway, 3 Capital expenditure and gross investments in shares, EUR million 2,000 1,500 1,000 16 74 27 500 1,222 1,408 1,558 15 1,005 0 10 11 12 13 Investments in shares Capital expenditures 69 774 14 Power and Technology Power and Technology 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. The start of commercial electricity production of the plant is expected to take place in late 2018, according to the plant supplier AREVA- Siemens Consortium. TVO has withdrawn a EUR 200 million shareholder loan from the total EUR 600 million commitment. Fortum's share of the EUR 200 million withdrawals is Type Hydropower Gas (CCGT) Gas (CCGT) Electricity capacity MW Heat capacity MW Supply starts 14 248 248 2015 1H 2015 1H 2015 175 175 approximately EUR 50 million. Fortum’s remaining commitment for OL3 is EUR 100 million. same terms and conditions as the other Finnish companies currently participating in the project. In March 2014, Fortum started an extensive refurbishment of two of the Imatra hydropower plant’s seven units. The refurbishment will increase the capacity of the power plant by 14 MW to 192 MW and will improve safety and reliability. After the refurbishment, the Imatra plant will be Finland’s largest hydropower plant in terms of capacity and production. In May 2014, Fortum and the Areva-Siemens Consortium agreed on the discontinuation of the current automation modernisation project agreement at the Loviisa nuclear power plant in Finland. The Areva-Siemens Consortium will complete the ongoing agreed and resized work in cooperation with Fortum. Furthermore, Fortum signed an agreement with Rolls-Royce for the continued modernisation of the power plant's automation. The modernisation will be carried out over several years. In September, the Finnish Government rejected TVO’s application to extend the period of validity of the existing decision-in- principle of the Olkiluoto 4 nuclear power plant. The decision-in-principle is still in force, and the deadline for submitting the construction license application is 30 June 2015. In October, Fortum sold its UK-based subsidiary Grangemouth CHP Limited to INEOS Industries Holdings Ltd. Grangemouth CHP Limited owns and operates a natural gas-fired CHP plant located at Grangemouth in Scotland. In December 2014, Fortum announced that provided that the company would obtain a more than 75% ownership in Russian TGC-1 hydro assets, it would be ready to participate with a minority stake (max 15%) in the Finnish Fennovoima nuclear power project on the Heat, Electricity Sales and Heat, Electricity Sales and Solutions Solutions Through Fortum’s interests in Fortum Värme, Fortum's joint venture with the City of Stockholm, the company is investing in a new biofuelled combined heat and power (CHP) plant in Värtan, Stockholm. The new CHP plant will replace some existing heat production and is planned to be commissioned in 2016. The new plant will have a production capacity of 280 MW heat and 130 MW electricity. In addition, Fortum is participating in its joint venture Turun Seudun Energiantuotanto Oy’s (TSE) new CHP plant in Naantali, Finland, which will replace the old existing plant. The plan is to commission the new power plant in 2017. The plant’s production capacity will be 244 MW heat and 142 MW electricity. In June 2014, Fortum completed the divestment of its Norwegian heat business to the iCON Infrastructure Partners II, L.P. fund. In September 2014, Fortum finalized the acquisitions of E.ON Ruhrgas International GmbH's shareholding of 33.66% in the Estonian natural gas import, sales and distribution company AS Eesti Gaas and a similar shareholding in the gas transmission service company AS Võrguteenus Valdus. The acquired shares increased Fortum's holding in both companies to approximately 51%. Fortum continues to account for its holdings in the Estonian natural gas businesses using the equity method. In November, Fortum agreed to sell its 51.4% shareholding in the associated company AS Võrguteenus Valdus. Fortum finalised the transaction in early January of 2015. The sale is expected to have a minor impact on Fortum's result. 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://annualreport2014.fortum.com/ 93 Annual Report 2014 Operating and financial review In addition, in November, Fortum announced the divestment of its shareholding in the Finnish natural gas company Gasum Oy to the Finnish State. The sales price for the total amount of Fortum's shares was approximately EUR 310 million. Fortum booked a gain of roughly EUR 190 million in the fourth quarter 2014 results of Fortum's Heat, Electricity Sales and Solutions segment. Russia Russia In December 2014, Fortum and Gazprom Energoholding signed a protocol to start a restructuring process of their ownership of TGC-1, a Territorial Generating Company in Russia. TGC-1 owns and operates hydro and 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, Poland and the Baltic Rim area. The total number of employees at the end of December was 8,592 (9,186 at the end of 2013). At the end of December 2014, Power and Technology had 1,639 (2013: 1,723) employees; Heat, Electricity Sales and Solutions 1,807 (2013: 1,968); Russia 4,213 (2013: 4,162); Distribution 390 (2013: 805); and Other 543 (2013: 528). Headcount reductions were mainly due to the divestment of the Finnish and Norwegian distribution businesses and Fortum’s efficiency programme. Reductions related to the efficiency programme have been implemented on a unit level by using natural rotation, rearrangement of vacancies and by retirement. Vacant jobs have primarily been filled internally. The possibilities for internal rotation have been improved. thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg. Currently Gazprom Energoholding owns 51.8% of the TGC-1 shares and Fortum 29.5%. As part of the restructuring, Fortum will establish a company together with Rosatom to own the hydro assets of TGC-1, while Gazprom Energoholding continues with the heat and thermal power businesses of TGC-1. By utilising its present stake in TGC-1, Fortum would obtain a more than 75% ownership in the hydro power company. Rosatom would have a less than 25% minority holding in the hydropower company. Distribution Distribution In March 2014, Fortum completed the divestment of its Finnish electricity distribution business to Suomi Power Networks Oy. The total consideration was EUR 2.55 billion on a debt- and cash-free basis. Fortum's one-time sales gain of approximately EUR 1.85 billion corresponds to EUR 2.08 per share. The sales gain is booked in Fortum's Distribution Segment in the first quarter of 2014. In May 2014, Fortum completed the divestment of its Norwegian electricity distribution business to the Hafslund Group. 2014 8,592 8,821 413 2013 9,186 9,532 460 By rotating staff between different countries and divisions, the company improves know- how and develops the exchange of competencies throughout the organisation. For further details of Group personnel see Note 12 Employee benefits. Personnel by country, 31 Dec. 2014 Other countries, 329 Finland, 2,040 Number of employees, 31 Dec. 15,000 10,000 5,000 0 10,585 10,780 10,371 9,186 8,592 10 11 12 13 14 Russia, 4,213 8,592 Sweden, 1,201 Poland, 603 Finland, 2,040 Poland, 603 Russia, 4,213 Sweden, 1,201 Estonia, 206 Estonia, 206 Other countries, 329 Changes in Fortum’s Management Changes in Fortum’s Management Fortum renewed 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. Matti Ruotsala was appointed Chief Operating Officer (COO) and Timo Karttinen Chief Financial Officer (CFO). New Executive Management Team members are Tiina Tuomela, who was appointed Executive Vice President (EVP), Nuclear and Thermal Power; Kari Kautinen, Senior Vice President (SVP), 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://annualreport2014.fortum.com/ 94 Annual Report 2014 Operating and financial review In the new structure, Fortum has four reporting segments: • Finance, Timo Karttinen, CFO • Strategy and Mergers & Acquisitions, Kari • Power and Technology (reporting to COO), including - Hydro Power and Technology, Per Langer, EVP - Nuclear and Thermal Power, Tiina Tuomela, EVP • Heat, Electricity Sales and Solutions (reporting to COO), Markus Rauramo, EVP • Russia, Alexander Chuvaev, EVP • Distribution, Timo Karttinen, CFO Fortum's six staff functions are: Kautinen, SVP • Legal, Sirpa-Helena Sormunen, General Counsel (as of September 2014) • Human Resources and IT, Mikael Frisk, SVP • Communications, Helena Aatinen, SVP • Corporate Relations, Esa Hyvärinen, SVP COO Matti Ruotsala, CFO Timo Karttinen and Alexander Chuvaev, EVP of Russia, as well as the heads of the staff functions report to President and CEO. Events after the balance sheet date Events after the balance sheet date On 22 January 2015, it was announced that Tapio Kuula, President and CEO of Fortum Corporation, will go on a disability pension starting 1 February 2015. Tapio Kuula has been the President and CEO of Fortum Corporation since 2009. Fortum's Board has started the search process for a new CEO covering internal and external candidates. In the meanwhile, Timo Karttinen, CFO of Fortum will also act as interim President and CEO. On 22 January, Fortum's Nomination Board proposed to the Annual General Meeting that the Board consists of 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 2016. To be re-elected: Ms Sari Baldauf as Chairman, The company's General Counsel and Executive Team member Kaarina Ståhlberg left her position as General Counsel and member of Fortum's Executive Management as of 8 April 2014, due to family reasons. In June 2014, Sirpa-Helena Sormunen, LL.M., 54, was appointed General Counsel and member of Fortum Corporation's Executive Management as of 1 September 2014. She reports to the President and CEO. Mr Kim Ignatius as Deputy Chairman, and as members; Ms Minoo Akhtarzand, Mr Heinz- Werner Binzel, Mr Petteri Taalas and Mr Jyrki Talvitie. To be elected as new board members; Ms Eva Hamilton and Mr Tapio Kuula. Outlook Outlook Key drivers and risks Key drivers and risks Fortum's financial results are exposed to a number of economic, strategic, political, financial and operational risks. One of the key factors 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 and CSA payments. 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 Fortum's Russian business, the key factors are economic growth, the rouble exchange rate, 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 and the Russian rouble (RUB) and Swedish krona (SEK). 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 is expected to continue to gain a higher share of the total energy consumption. Fortum continues to expect the annual growth rate in electricity consumption to be on average approximately 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. During 2014, the price of European Union emissions allowances (EUA) appreciated, whereas the oil and coal prices declined. The price of electricity for the upcoming twelve months declined in the Nordic area as well as in Germany. In late January 2015, the future quotation for coal (ICE Rotterdam) for the rest of 2015 was around USD 58 per tonne, and the price for CO2 emission allowances for 2015 was about EUR 7 per tonne. The electricity forward price in Nord Pool for the rest of 2015 was around EUR 28 per MWh and for 2016 around EUR 29 per MWh. In Germany, the electricity forward price for the rest of 2015 was around EUR 32 per MWh and for 2016 around EUR 32 per MWh. Nordic water reservoirs were about 1 TWh below the long-term average and 1 TWh below the corresponding level of 2014. Restructuring according Restructuring according to strategy in Russia to strategy in Russia In December, Fortum and Gazprom Energoholding signed a protocol to start a 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://annualreport2014.fortum.com/ 95 Annual Report 2014 Operating and financial review restructuring process of their ownership of TGC-1, a Territorial Generating Company in Russia. TGC-1 owns and operates hydro and thermal power plants in north-western Russia as well as heat distribution networks in St. Petersburg. Currently, Gazprom Energoholding owns 51.8% of the TGC-1 shares and Fortum 29.5%. As part of the restructuring, Fortum will establish a company together with Rosatom to own the hydro assets of TGC-1, while Gazprom Energoholding continues with the heat and thermal power businesses of TGC-1. By utilising its present stake in TGC-1, Fortum would obtain a more than 75% ownership in the hydro power company. Rosatom would have a less than 25% minority holding in the hydro power company. The company would be consolidated to Fortum Group as a subsidiary. Provided that Fortum obtains a more than 75% ownership in TGC-1 hydro assets, Fortum would be ready to participate with a minority stake (max. 15%) in the Finnish Fennovoima nuclear power project on the same terms and conditions as the other Finnish companies currently participating in the project. Power and Technology Power and Technology The Power and Technology Segments Nordic power price typically depends on factors such as hedge ratios, hedge prices, spot prices, availability and utilisation of Fortum's flexible production portfolio, and currency fluctuations. Excluding the potential effects from changes in the power generation mix, a 1 EUR/MWh change in the Power and Technology Segment’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 and Technology Segment will be affected by the possible thermal power generation volumes and its profits. The ongoing, multi-year Swedish nuclear investment programmes are expected to enhance safety, improve long term availability and increase the capacity of the current nuclear fleet. The implementation of the investment 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. As a result of the nuclear stress tests in the EU, the Swedish nuclear safety authority (SSM) has decided to propose new regulations for Swedish nuclear reactors. The process is ongoing. Fortum emphasises that maintaining a high level of nuclear safety is the highest priority, but considers EU-level harmonisation of nuclear safety requirements to be of utmost importance. In 2014, the Swedish Government decided to increase the nuclear waste fund fee from approximately 0.022 to approximately 0.04 SEK/kWh for the period 2015 to 2017. The estimated impact on Fortum would be approximately EUR 25 million annually. The process to review the Swedish nuclear waste fees is done in a three-year cycle. The previously announced Swedish Government state budget proposal to increase the tax on the installed effect in nuclear power plants by 17 % iscurrently on hold. 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. The issue of prolonged CSA payments from 10 to 15 years has been under discussion in the Russian Government; however, no official decisions have yet been made. The capacity selection for generation built prior to 2008 (CCS – “old capacity”) for 2015 was held in September 2014. All of Fortum’s capacity was allowed to participate in the selection for 2015, and the majority of Fortum’s plants were also selected. The volume of Fortum’s installed capacity not selected in the auction totalled 195 MW (approximately 3.7% of Fortum’s total old capacity in Russia) for which Fortum plans to obtain forced mode status. The Russia Segment's new capacity will be a key driver for earnings growth in Russia, as it is expected to bring income from new volumes sold and to also receive considerably higher capacity payments than the old capacity. The received capacity payment will differ depending on the age, location, size and type of the plants as well as on seasonality and availability. The return on the new capacity is guaranteed, as regulated in the CSA. CSA payments can vary somewhat annually because they are linked to Russian Government long-term bonds with 8 to 10 years maturity. In addition, 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. The value of the remaining part of the investment programme, calculated at the exchange rates prevailing at the end of December 2014, is estimated to be approximately EUR 0.2 billion, as of December 2014. The Russian result is impacted by seasonal volatility caused by the nature of the heat business, with the first and last quarter being clearly the strongest. At the time of the acquisition of the Russian subsidiary OAO Fortum in 2008, the EUR 500 million run-rate level in operating profit (EBIT) target set to be reached during 2015 in the Russia Segment corresponded to approximately RUB 18.2 billion at the then prevailing euro-rouble exchange rates. As earlier communicated, the segment’s profits are mainly impacted by changes in currency exchange rates as well as power demand, gas prices and other regulatory development. Fortum is keeping its rouble-denominated target intact, but, mainly due to the translation effect, the euro-denominated result level will be volatile. The income statements of non-euro subsidiaries are translated into the Group reporting currency using the average exchange rates. Currently, the unfavourable exchange balance converts into a lower profit level in euros. However, every effort to mitigate the negative impacts is continuously being made. In 2014, the Ministry of Energy proposed a new heat market model (for public discussion), which is supposed to ensure a transition to economically justified heat tariffs by 2020 and attract investments into the heat sector. In September 2014, the heat market reform roadmap was approved by the Russian Government; according to the roadmap, the reform shall give heat market liberalisation by 2020 or, in some specific areas, by 2023. As forecasted by the Russian Ministry of Economic Development, Russian gas price indexation did not take place in October 2014. However, year-on-year gas price growth is estimated to be 3.5% in 2015. Distribution Distribution Fortum continues to prepare and evaluate for a possible sale of the Swedish electricity distribution business. 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://annualreport2014.fortum.com/ 96 Annual Report 2014 Operating and financial review In Sweden, legal processes are under way concerning the appeal filed regarding the network income regulatory period 2012-2015. The Administrative Court in Sweden ruled in favour of the network companies in November 2013. The Energy Market Inspectorate decided to appeal the decision to the next final-law court, the Supreme Administrative Court, which still needs to decide on granting a leave to appeal. The work to define the Swedish network income regulation model for the next regulatory period 2016-2019 is ongoing. In September 2014, the Swedish Government made a decision regarding the capital base ordinance; however, the details will be decided by the Energy Market Inspectorate. Decisions are expected to be made during the spring 2015. Capital expenditure and Capital expenditure and divestments divestments Fortum currently expects its capital expenditure in 2015 to be approximately EUR 0.9 billion, excluding potential acquisitions (including Distribution segment). The annual maintenance capital expenditure (excluding Distribution segment) is estimated to be about EUR 300-350 million in 2015, below the level of depreciation. Fortum will gradually decrease its financing to Fortum Värme, the co-owned power and heat company operating in the capital area in Sweden, during 2014-2015. At the end of December 2014, Fortum Värme's remaining interest-bearing liability to Fortum is approximately EUR 0.6 billion. Taxation Taxation The effective corporate income tax rate for Fortum in 2015 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. The Finnish Government decided in June 2014 that it will not, after all, introduce a power plant tax (windfall tax) on nuclear, hydro and wind power built before 2004. The final decision to revoke the tax was made by the Parliament in November 2014, and the revocation entered into force on 1 January 2015. In August, the Finnish Board of Adjustment of the Large Taxpayers’ Office had unanimously approved Fortum Corporation's appeal of the income tax assessment imposed on Fortum for the year 2007 in December 2013. The Tax Recipients’ Legal Services Unit has appealed in the matter (Note 39). In December 2014, Fortum received a non-taxation decision regarding its financing companies for the remaining years 2008-2011, based on the same audit. This is in line with the Supreme Administrative Court’s (SAC) precedent decision. The Tax Recipients’ Legal Services unit within the tax authorities has the right to appeal the decision. The new Swedish Government proposed to increase the tax on installed nuclear capacity Research and development Research and development by 17% as of 2015. This issue is currently on hold. Fortum's position is that the tax issue should be referred to an upcoming parliamentary energy commission in order to get a broadly established view on how the needs of energy and effect can be resolved. If implemented, the estimated impact on Fortum would be approximately EUR 15 million annually, however corporate tax- deductable. Hedging Hedging At the end of December 2014, approximately 50% of Power and Technology's estimated Nordic power sales volume was hedged at approximately EUR 40 per MWh for the calendar year 2015. The corresponding figures for the calendar year 2016 were approximately 10% at approximately EUR 39 per MWh. The hedge price for Power and Technology'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 segment’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. Sustainability is at the core of Fortum’s strategy, and Fortum's research and development (R&D) activities promote environmentally-benign energy solutions. Investments in the development of renewable energy production, like solar power, are an important part of Fortum’s strategy implementation. In 2014, Fortum, UPM and Valmet joined forces to develop a new technology to produce advanced, high-value lignocellulosic fuels, such as transportation fuels, or higher value bio liquids in order to develop catalytic pyrolysis technology for upgrading bio-oil and to commercialise the new technology. Fortum also signed an agreement with Cleantech Invest Plc on partnership with regard to business development activities, potential future cleantech investments as well as information sharing. The company also started a collaboration with St1 to build Finland’s first industrial-scale geothermal pilot heat plant. St1 will begin planning the pilot production plant, which is estimated to be completed in 2016. Furthermore, Fortum’s leasing agreement signed during the period with the UK-based Wave Hub provides Fortum with an opportunity to study advanced, full-scale wave power converters in ocean conditions. Fortum also acquired a minority share in the Finnish wave energy developer Wello Oy. The Group reports its R&D expenditure on a yearly basis. In 2014, Fortum’s R&D expenditure was EUR 41 million (2013: 49) or 0.9% (2013: 0.9%) of sales. R&D expenditure, EUR million 2014 41 2013 49 Change 14/13 -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://annualreport2014.fortum.com/ 97 Annual Report 2014 Operating and financial review R&D expenditure, % of sales 0.9 0.9 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://annualreport2014.fortum.com/ 98 Annual Report 2014 Operating and financial review Sustainability Sustainability 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. Sustainability target-setting and follow-up as well as the approval of Fortum's Sustainability policy and the review of Fortum's Sustainability Report are included in the working order of the Board of Directors. The company is listed on STOXX Global ESG Leaders, the NASDAQ, OMX GES Sustainability Finland and ECPI® indices. Fortum is also included in the Carbon Disclosure Project’s Nordic Climate Index and has received Prime Status (B-) rating by the German oekom research AG. Sustainability indicators at the Group level Specific CO2 emissions from power generation in the EU as a five-year average, g/kWh Specific CO2 emissions from total energy production (electricity and heat) as a five-year average, g/kWh Overall efficiency of fuel use as a five-year average, % Major EHS incidents Energy availability of CHP plants, % SAIDI, (minutes), Sweden Lost workday injury frequency (LWIF) for own personnel Lost workday injury frequency (LWIF) for contractors Target 2014 Five-year average < 80 < 200 > 70 < 35 > 95 < 100 < 1.0 < 3.5 39 189 64 27 94.7 97 1.0 3.2 60 198 63 - - - - - Targets for reputation and customer satisfaction are monitored annually. Company reputation among the key stakeholders in the One Fortum Survey in 2014 improved to 70.4 (2013: 69.8) i.e. slightly below the target of 70.8. Customer satisfaction improved in all Divisions, and the Group target (70-74 points) was achieved in the Heat and Power Solutions business areas. 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: net debt/EBITDA around 3). In addition, as of January 1, 2014, Fortum had used the applicable Global Reporting Initiative (GRI) G4 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 corporate income taxes EUR 199 million (2013: 186) but also several other taxes. In 2014, Fortum’s taxes borne were EUR 525 million (2013: 558). 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 income tax rate was 5.9% (2013: 13.3%) and total tax rate14.3% (2013: 31.8%). See also note 14 Income tax expense. The effective income 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 18.8% (2013: 22.7%). The total tax rate excluding the impact of the share of profits of associated companies and joint ventures as well as non-taxable capital gains was 38.2% (2013: 36.6%). 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 527 million (2013: 700). The total tax rate excluding the impact of the share of profits of associated companies and joint ventures as well as non-taxable capital gains was 38.2% (2013: 36.6%). 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 527 million (2013: 700). 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://annualreport2014.fortum.com/ 99 Annual Report 2014 Operating and financial review Environmental Environmental responsibility responsibility Fortum's environmental responsibility emphasises mitigation of climate change, efficient use of resources as well as 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 major environmental, health and safety (EHS) incidents. At the end of December 2014, ISO 14001 certification covered 100% 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 2014, the five-year average for specific CO2 emissions from power generation in the EU was at 60 g/kWh (2013: 60) and the total specific CO2 emissions from energy production was at 198 g/kWh (2013: 197), both better than the target level. Fortum's total CO2 emissions in 2014 amounted to 20.2 million tonnes (Mt) (2013: 20.5), of which 3.6 Mt (2013: 5.1) were within the EU's emissions trading scheme (ETS). Since 2013, electricity production has not received free allowances in the EU ETS. The amount of free allowances for heat will gradually decrease during 2013-2020 as well. Fortum's free allowances in 2014 totalled 1.4 Mt. 2014 20.2 3.6 1.4 16.6 2013 20.5 5.1 1.8 15.3 Change 14/13 -1% -29% -22% 8% Total tax rate, % 37 32 38 14 2013 2014 40 35 30 25 20 15 10 5 0 Total tax rate Total tax rate excluding associates' and joint ventures profit and capital gains Taxes borne 2014 by country, 33 EUR million 33 24 156 525 279 Finland, 156 Russia, 24 Other countries, 33 Sweden, 279 Netherlands, 33 Fortum’s total CO2 emissions (million tonnes, Mt) Total emissions Emissions subject to ETS Free emission allocation Emissions in Russia Fortum's energy-efficiency target was to raise the overall efficiency of fuel use to 70% as a five-year average. In 2014, the overall efficiency of fuel use was 64% (2013: 59%) and the five-year average after December 2014 was 63% (2013: 64%), meaning the target level was not met. Fortum's target is for fewer than 35 major EHS incidents annually. In 2014, a total of 27 (2013: 35) major EHS incidents took place in Fortum's operations. This includes 15 environmental permit non-compliances, four explosions, four oil leaks into the environment, three fires and one International Nuclear Event Scale1 incident (INES). These EHS incidents did not have significant environmental or financial impacts, but the explosion in the Pyrolysis unit in Joensuu in March 2014 caused a prolonged interruption in the production of pyrolysis oil. The cause 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://annualreport2014.fortum.com/ 100 Annual Report 2014 Operating and financial review of the explosion has been identified, and work to restart production is ongoing. Social responsibility Social responsibility n 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 December 2014, OHSAS 18001 certification covered 75% of Fortum's power and heat production and distribution operations worldwide. In 2014, the average energy availability of Fortum's CHP plants was 94.7%, which is slightly below the annual target level of 95%. In electricity distribution in Sweden, the cumulative SAIDI (System Average Interruption Duration Index) was 97 (2013: 103) minutes, while the annual target is less than 100 minutes. The lost workday injury frequency (LWIF) for Fortum employees was 1.0 (2013: 1.0) in 2014. This complies with the Group-level frequency target of less than one per million working hours for own personnel. The lost- workday injury frequency for contractors has improved and was 3.2 (2013: 3.9). Unfortunately, there were three fatal accidents for contractors in Fortum's operations, two in Sweden and one in Russia. Additionally, in Fortum Värme's CHP8 project, there was a serious accident in November in which two contractors' employees perished. Implementation of agreed actions to improve contractor safety continues with a specific focus on construction projects. 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 2014, Fortum audited altogether 13 suppliers located in Bulgaria, China, Czech Republic, Poland, Russia and Sweden. 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://annualreport2014.fortum.com/ 101 Annual Report 2014 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 Risk management framework and objectives 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. There is continuos improvement in market and credit risk modelling in order to cope with an increasingly global and volatile market. Also the new market entries like India add complexity and risk in operations. Therefore new practices for country and partner assessments have been created and processes implemented. These processes also include sustainability and human rights impact assessment. Risk management Risk management objective objective The objective of risk management within Fortum is to support the creation of the corporate strategy, enable the straregy execution, support the achievement of agreed financial targets and avoid unwanted operational events. 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, compliance 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://annualreport2014.fortum.com/ 102 Annual Report 2014 Operating and financial review Corporate risk policy structure Corporate risk policy structure 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 risks 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. In connection with the organisation change, in March 2014, the Division Risk Control teams in the three COO divisions were centralised; that now the responsibility for risk control services for these divisions is shared and based on the requirements set by 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 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://annualreport2014.fortum.com/ 103 Annual Report 2014 Operating and financial review can be one of, or a combination of, mitigating, transferring or absorbing the risk. Fortum's risk management process Fortum's risk management process Risk factors Risk factors Risk control, monitoring and reporting is carried out by both 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 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://annualreport2014.fortum.com/ 104 Annual Report 2014 Operating and financial review 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 Investment, integration and project risks and 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: • addtional 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; • the need to understand and manage the new markets and different cultural and compliance requirements; • the need to understand and manage subcontractor risks and related safety issues Political and regulatory Political and regulatory risks 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. The planned Government Bill for a windfall tax on some non-emitting and old power plants was removed during 2014. Furthermore, the nuclear safety directive is under revision, and 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 countries. The Ukraine crisis and EU and US sanctions have increased the risks and made the business environment for Russian business more challenging. Fortum is continuously monitoring the development and impliments risk mitigation actions if deemed necessary. 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 liberalised 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 efficient capacity. Political risk concerning Political risk concerning taxes taxes The current economic situation in Fortum's key operating territories has created an unstable tax environment that is 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 Legal and compliance risks 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 expose Fortum to a risk of loss resulting from possible illegal 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 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 also includes risks related 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://annualreport2014.fortum.com/ 105 Annual Report 2014 Operating and financial review sustainability and business ethics and aims to capture also potential bribery risks. Fortum has zero tolerance against corruption. Systematic compliance risk management has also been enhanced by forming a cross- functional network sharing views on changing regulations. Fortum has also established a Code of Conduct, including bribery risk assessment process, to enhance the compliance to business ethics. Corporate Risk Management, together with other functions like the tax department and sustainability unit, has developed a country and partner risk evaluation processes to support understanding of compliance needs at local and business partner level.The review of compliance risks assessment is periodic, documented and discussed with the Compliance Risk Network, with the Fortum Executive 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 ethical compliance activities to the Fortum Executive 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. Commodity market risks 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 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. 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 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. Electricity price and Electricity price and volume risks volume 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, Risk Management in Fortum's Performance Management Risk Management in Fortum's Performance Management 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 Commodities (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 cash flow, which ensures that financial commitments can be met. Hedging strategies cover several years in the short to 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. 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://annualreport2014.fortum.com/ 106 Annual Report 2014 Operating and financial review Emission and Emission and environmental value environmental value risks risks The European Union has established an emissions trading scheme to reduce the 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 Financial Risks Financial Risks Liquidity and refinancing Liquidity and refinancing risks 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. Due to the volatile rouble develpoment and sanctions imposed, special attention has been paid to ensure that Russia Division has sufficient the costs of allowances are taken into account during production planning. Fuel price and volume Fuel price and volume risks 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. Due to the sanctions and economic development in Russia, the risks related to imported fuels from Russia have been increased. 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. liquidity to undertake committed investments. Interest rate risks Interest rate risks Fortum's debt portfolio consists of interest- bearing assets and liabilities on a fixed- and 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). Currency risks Currency risks Fortum has cash flows, assets and liabilities in currencies other than the euro. Changes in exchange rates can therefore have an effect on Fortum's earnings and balance sheet. The main currency exposures are EUR/RUB from translation exposure of OAO Fortum in Russia and EUR/SEK, arising from Fortum's extensive operations in Sweden. Due to the low oil prices and weakened Russian economy, also the rouble has weakened and volatility of the exchange rate versus the euro has increased in 2014. The weaker rouble is effecting Fortum's profit level and equity when translating the Russia Division results and net assets to euros. 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 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. The rouble exposures are monitored continuously. Counterparty risks Counterparty risks Fortum is exposed to counterparty risk whenever there is a contractual arrangement with an external party; 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. These processes have been fully implemented during 2014. 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 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://annualreport2014.fortum.com/ 107 Annual Report 2014 Operating and financial review counterparties active on the financial or commodity markets. 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 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. Fortum is closely following the sanction development in Russia. Special attention is put to the credit risk management. 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. In order to minimise counterparty risk, Fortum has well established routines and processes to identify, assess and control counterparty exposure. No contractual 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. 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. 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://annualreport2014.fortum.com/ 108 Annual Report 2014 Operating and financial review 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, environmental and occupational health and safety management systems are tools for achieving this objective. Fortum's operational activies are 100% ISO 14001 certified. The coverage of OHSAS 18001 certification is 74%. 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 Group Insurance Instructions 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. 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 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 2015 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 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. After the divestments in Finland and Norway, Fortum is exposed to distributions risks only in Sweden. 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 both Group and their own 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. The same approach applies to risks management related to occupational health and safety and actions in emergency situations for operations with OHSAS 18001 certification. 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 as well as social risks related to Fortum's activities are regularly evaluated through internal and external audits and risk assessments, and corrective and preventive actions are launched when necessary. EHS related risks together with social risks arising in investments are systematically evaluated in accordance with Fortum's 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://annualreport2014.fortum.com/ 109 Annual Report 2014 Operating and financial review Evaluation and Approval Procedure. Environmental risks and liabilities in relation to past actions have been assessed and necessary provisions made for future remedial costs. 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 since 2013 Fortum has operated its 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 IT and information security risks security 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://annualreport2014.fortum.com/ 110 Annual Report 2014 Operating and financial review Fortum share and shareholders Fortum share and shareholders Fortum Corporation's shares have been listed on Nasdaq 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 Extra dividend per share Payout ratio, % Dividend yield, % 2014 3.55 1.98 12.23 1.10 1) 0.20 1) 36.6 1) 7.2 1) 2013 1.36 1.74 11.28 1.10 80.9 6.6 2012 1.59 1.56 11.30 1.00 62.9 7.1 1) Board of Directors' proposal for the Annual General Meeting 31 March 2015. For the full set of share key figures, 2004-2014, see the Key figures section in the Financial Statements. Shareholders value, share price performance and Shareholders value, share price performance and volumes volumes Fortum's mission is to deliver excellent value to it's shareholders. Fortum’s share price has depreciated approximately 8% during the last five years, while Dow Jones European Utility Index has decreased 9%. During the same period Nasdaq Helsinki Cap index has increased 28%. During 2014 Fortum’s share price appreciated approximately 8%, while Dow Jones European Utility index increased 13% and Nasdaq Helsinki Cap index increased 6%. During 2014, a total of 454.8 million (2013: 465.0) Fortum Corporation shares, totalling EUR 8,134 million, were traded on the Nasdaq Helsinki. The highest quotation of Fortum Corporation shares during 2014 was EUR 20.32, the lowest EUR 15.13, and the volume-weighted average EUR 17.89. The closing quotation on the last trading day of the year 2014 was EUR 17.97 (2013: 16.63). Fortum's market capitalisation, calculated using the closing quotation of the last trading day of the year, was EUR 15,964 million (2013: 14,774). In addition to the Nasdaq Helsinki, 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. In 2014, approximately 58% (2013: 58%) of Fortum's shares were traded on markets other than the Nasdaq Helsinki 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://annualreport2014.fortum.com/ 111 Annual Report 2014 Operating and financial review Share price performance, EUR Share price performance, EUR 1. Acquisition of Stora Enso power generation assets 1.9 bn EUR 14. Participation in 243 MEUR share issue in TGC-1 2. Birka acquisition remaining 50% 3.6 bn EUR 15. Acquisition of TGC-10 (Changed name to OAO Fortum) EUR 2.5 bn 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 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 19. Fortum agreed to sell its electricity distribution business in Finland for a total consideration of EUR 2.55 billion 20. Fortum agreed to sell its Norwegian electricity distribution and heat businesses for 340 MEUR 21. Divestment of shares in Gasum Oy for 310 MEUR 22. Fortum and Gazprom Energoholding signed a protocol to start a restructuring process of their ownership of 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://annualreport2014.fortum.com/ 112 Annual Report 2014 Operating and financial review Share quotations 2010-2014, INDEX 100 = Quote on 2 Share quotations 2010-2014, INDEX 100 = Quote on 2 January 2010 January 2010 Market capitalisation 2010-2014, EUR billion Market capitalisation 2010-2014, EUR 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://annualreport2014.fortum.com/ 113 Annual Report 2014 Operating and financial review Share trading 2010-2014 Share trading 2010-2014 Total shareholder return Total shareholder return 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://annualreport2014.fortum.com/ 114 Annual Report 2014 Operating and financial review Share capital Share capital Fortum has one class of shares. By the end of 2014, a total of 888,367,045 shares had been issued. 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 2014 Fortum Corporation’s share capital, paid in its entirety and entered in the trade register, was EUR 3,046,185,953.00. 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Share Capital 2000–2014 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Share capital, EUR million Number of shares (million) Shareholders Shareholders At the end of 2014, 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 Shareholders, 31 December 2014 Shareholders Prime Minister's Office The Finnish Social Insurance Institution Kurikan Kaupunki The State Pension Fund Varma Mutual Pension Insurance Company Elo Mutual Pension Insurance Company Ilmarinen Mutual Pension Insurance Company The Local Government Pensions Institution Schweizerische Nationalbank Nordea Fennia Fund OP-Delta Mutual Fund Society of Swedish Literature in Finland Nordea Pro Finland Fund Nominee registrations and direct foreign ownership* Other shareholders in total Total number of shares *Excluding Schweizerische Nationalbank 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 32.3 % (2013: 26.2%). No. of shares Holding % 450,932,988 50.76 7,030,896 6,203,500 5,960,000 5,224,300 4,620,800 4,487,880 3,679,403 2,618,136 2,174,227 1,725,726 1,452,675 1,433,767 0.79 0.70 0.67 0.59 0.52 0.51 0.41 0.30 0.25 0.19 0.16 0.16 284,749,426 106,073,321 888,367,045 32.05 11.94 100.00 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://annualreport2014.fortum.com/ 115 Annual Report 2014 Operating and financial review By shareholder category Finnish shareholders Corporations Financial and insurance institutions General government Non-profit organisations Households Non-Finnish shareholders Total Breakdown of share ownership, 31 December 2014 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 29,472 44,876 17,940 16,212 817 73 12 1 26.94 41.02 16.40 14.82 0.75 0.06 0.01 0.00 1,721,860 11,906,551 13,039,313 41,048,458 18,561,714 21,058,847 46,611,310 450,932,988 Unregistered/uncleared transactions on 31 December Nominee registrations Total 109,403 100.00 604,881,041 73,636 283,412,368 888,367,045 Management interests, 31 December 2014 Management interests, 31 December 2014 % of total amount of shares 1.02 1.61 55.35 1.51 8.16 32.35 100.00 % of total amount of shares 0.19 1.34 1.47 4.62 2.09 2.37 5.25 50.76 68.09 0.01 31.90 100.00 At the end of 2014, the President and CEO and other members of the Fortum Executive Management Team owned 430,457 shares (2013: 346,106) representing approximately 0.05% (2013: 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 Executive Management Team is shown in Note 12 Employee benefits. Authorisations from the Annual General Meeting Authorisations from the Annual General Meeting 20142014 Currently the Board of Directors has no unused authorisations from the Annual General Meeting of Shareholders to issue convertible loans or bonds with warrants 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://annualreport2014.fortum.com/ 116 Annual Report 2014 Operating and financial review Dividend Dividend Dividend policy Dividend policy The dividend policy ensures that shareholders receive a fair remuneration for their entrusted capital, supported by the company’s long- term strategy that aims at increasing earnings per share and thereby the dividend. When proposing the dividend, the Board of Directors looks at a range of factors, including the macro environment, balance sheet strength as well as future investment plans. Fortum Corporation’s target is to pay a stable, sustainable and over time increasing dividend, in the range of 50-80% of earnings per share, excluding one-off items. Dividend distribution Dividend distribution proposal proposal The distributable funds of Fortum Oyj as at 31 December 2014 amounted to EUR 5,438,689,036.90 including the profit of the period of EUR 2,264,863,648.81. 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 2014. In addition the Board of Directors proposes to the Annual General Meeting an extra dividend of EUR 0.20 per share be paid for 2014. Based on the number of registered shares as of 3 February 2015 the total amount of dividend proposed to be paid is EUR 1,154,877,158.50. 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 31 March 2015 at 14:00 EET at Finlandia Hall in Helsinki. Dividend per share, EUR 1.00 1.00 1.00 1.30 1.10 10 11 12 13 14 1.5 1.0 0.5 0.0 Earnings per share, EUR The dividend for 2014 represents the Board of Directors' proposal for the Annual General Meeting in March 2015 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 3.55 1.99 1.46 1.59 1.36 10 11 12 13 14 Financial key figures Financial key figures The operations of Fortum Corporation and its subsidiaries (together the Fortum Group) focus on the Nordic and Baltic countries, Russia and Poland. Fortum's activities cover the generation, distribution and sale of electricity and heat, and energy-related expert services. Neste Oil was included in the 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. Comparability of information presented in tables and graphs Information in the tables and graphs presented for year 2012 or earlier is not restated due to the adoption of IFRS 10 and IFRS 11. Adoption of standards influences treatment of Fortum’s holding in AB Fortum Värme samägt med Stockholms stad in the the consolidated financial statements. For further information, see Note 1.6.1. New IFRS standards adopted from 1 Jan 2014. EUR million or as indicated Sales total Fortum IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 11,659 5,918 4,491 4,479 5,636 5,435 6,296 6,161 6,159 5,309 4,751 Sales continuing operations 3,835 3,877 4,491 4,479 5,636 5,435 6,296 6,161 6,159 5,309 4,751 Change 14/13 % -11 -11 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://annualreport2014.fortum.com/ 117 Annual Report 2014 Key figures EBITDA total Fortum 1) 2,443 2,307 1,884 2,298 2,478 2,292 2,271 3,008 2,538 2,129 3,954 EBITDA continuing operations 1,583 1,754 1,884 2,298 2,478 2,292 2,271 3,008 2,538 2,129 3,954 Comparable EBITDA continuing operations 1,741 1,866 2,015 2,360 2,398 2,396 2,374 2,416 1,975 1,873 86 86 -5 Operating profit total Fortum 1,916 1,864 1,455 1,847 1,963 1,782 1,708 2,402 1,874 1,508 3,428 127 - of sales % 16.4 31.5 32.4 41.2 34.8 32.8 27.1 39.0 30.4 28.4 72.2 Operating profit continuing operations 1,195 1,347 1,455 1,847 1,963 1,782 1,708 2,402 1,874 1,508 3,428 127 - of sales % 31.2 34.7 32.4 41.2 34.8 32.8 27.1 39.0 30.4 28.4 72.2 Comparable operating profit continuing operations 1,148 1,334 1,437 1,564 1,845 1,888 1,833 1,802 1,752 1,403 1,351 Profit before income tax total Fortum 1,700 1,776 1,421 1,934 1,850 1,636 1,615 2,228 1,586 1,398 3,360 - of sales % 14.6 30.0 31.6 43.2 32.8 30.1 25.7 36.2 25.8 26.3 70.7 -4 140 Profit before income tax continuing operations - of sales % Profit for the period continuing operations - of which attributable to owners of the parent 962 1,267 1,421 1,934 1,850 1,636 1,615 2,228 1,586 1,398 3,360 140 25.1 703 32.7 31.6 43.2 32.8 30.1 25.7 36.2 25.8 26.3 70.7 936 1,120 1,608 1,596 1,351 1,354 1,862 1,512 1,212 3,161 161 670 884 1,071 1,552 1,542 1,312 1,300 1,769 1,416 1,204 3,154 162 Capital employed total Fortum 12,890 11,357 12,663 13,544 15,911 15,350 16,124 17,931 19,420 19,183 17,918 Capital employed continuing operations 10,739 11,357 12,663 13,544 15,911 15,350 16,124 17,931 19,420 19,183 17,918 Interest-bearing net debt 5,095 3,158 4,345 4,466 6,179 5,969 6,826 7,023 7,814 7,793 4,217 -7 -7 -46 Interest-bearing net debt without Värme financing 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) Interest coverage Interest coverage including capitalised borrowing costs Funds from operations/interest-bearing net debt, % Funds from operations/interest-bearing net debt without Värme financing, % 6,658 3,664 -45 830 7.1 514 335 578 1,395 972 2,624 929 1,249 1,482 1,574 1,020 9.8 31.1 21.7 46.6 17.1 19.8 24.1 25.6 19.2 479 346 1,395 485 972 655 2,624 1,108 929 862 1,249 1,482 1,574 1,020 1,222 1,408 1,558 1,005 843 15.9 843 774 1,758 1,404 1,151 1,670 2,002 2,264 1,437 1,613 1,382 1,548 1,762 1,232 1,271 1,151 1,670 2,002 2,264 1,437 1,613 1,382 1,548 1,762 15.8 16.6 13.4 16.5 15.0 12.1 11.6 14.8 10.2 9.0 19.5 11.4 13.5 13.4 16.5 15.0 12.1 11.6 14.8 10.2 9.0 19.5 18.2 18.7 14.4 19.1 18.7 16.0 15.7 19.7 14.6 12.0 30.0 -17 -17 -23 14 14 13.5 11.6 14.4 11.5 19.1 12.8 18.7 9.4 16.0 12.4 15.7 13.7 19.7 10.5 14.6 12.0 7.6 6.7 30.0 19.9 8.0 8.6 10.3 10.0 8.5 5.7 5.3 15.7 36.4 43.2 30.6 36.3 34.1 37.6 20.5 21.5 19.9 18.8 42.9 22.1 49.3 Gearing, % Net debt/EBITDA 67 2 43 1 53 2 52 2 73 3 70 3 78 3 69 2 73 3 77 4 39 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://annualreport2014.fortum.com/ 118 Annual Report 2014 Key figures Net debt/EBITDA continuing operations Comparable net debt/EBITDA continuing operations Comparable net debt/EBITDA without Värme financing Equity-to-assets ratio, % Dividends 3) Dividends continuing operations 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 - - 44 506 1.8 2.3 1.9 2.5 2.6 3.0 2.3 3.1 3.7 1.1 1.8 2.3 2.2 2.6 2.5 2.8 3.0 3.2 3.9 2.3 48 49 41 43 40 44 43 3.4 43 2.0 51 1,122 1,198 888 888 888 888 888 977 1,155 4) 18 650 683 49 987 511 476 472 515 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 0.9 41 0.9 -16 12,859 10,026 8,910 8,304 14,077 13,278 11,156 11,010 10,600 9,532 8,821 8,592 8,939 8,910 8,304 14,077 13,278 11,156 11,010 10,600 9,532 8,821 1) EBITDA is defined as Operating profit continuing operations + Depreciation, amortisation and impairment charges. 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) In addition to cash dividend Fortum distributed approximately 85% of Neste Oil Corporation shares as dividend in 2005. 4) Board of Directors' proposal for the Annual General Meeting on 31 March 2015. 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://annualreport2014.fortum.com/ 119 Annual Report 2014 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 Equity per share Dividend per share 1) Extra dividend Dividend per share continuing operations Dividend per share additional in 2006 and 2007/discontinued operations in 2005 IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS IFRS Change 14/13 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % 1.48 1.55 1.22 1.74 1.74 1.48 1.46 1.99 1.59 1.36 3.55 161 0.79 1.01 1.22 1.74 1.74 1.48 1.46 1.99 1.59 1.36 3.55 161 0.69 0.54 - - - - - - - - - 1.46 1.53 1.21 1.74 1.74 1.48 1.46 1.99 1.59 1.36 3.55 161 0.78 1.00 1.21 1.74 1.74 1.48 1.46 1.99 1.59 1.36 3.55 161 0.68 0.53 - - - - - - - - - 2.06 1.61 1.31 1.88 2.26 2.55 1.62 1.82 1.56 1.74 1.98 1.44 8.65 0.58 1.46 8.17 1.12 1.31 8.91 1.26 1.88 9.43 1.35 2.26 8.96 1.00 2.55 9.04 1.00 1.62 9.24 1.00 1.82 1.56 1.74 1.98 10.84 11.30 11.28 12.23 1.00 1.00 1.10 1.10 2) 14 14 8 0 - - 0.58 0.73 0.77 0.54 0.53 0.58 - - - - - - - - - - 0.20 2) - - - - Payout ratio, % 39.2 72.3 103.3 4) 77.6 4) 57.5 67.6 68.5 50.3 62.9 80.9 36.6 2) Payout ratio continuing operations, % Payout ratio additional dividend in 2006 and 2007/ discontinued operations in 2005, % - 57.4 3) 59.8 4) 44.3 4) - 100.0 3) 43.4 4) 33.3 4) - - - - - - - - - - - - - - Dividend yield, % 4.3 7.1 5.8 4.4 6.6 5.3 4.4 6.1 7.1 6.6 7.2 2) 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 5.1 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 17.97 Average Lowest Highest 10.29 13.87 20.39 23.57 24.79 15.91 19.05 19.77 15.66 15.11 17.89 7.45 10.45 15.71 20.01 12.77 12.60 17.18 15.53 12.81 13.1 15.13 13.99 16.90 23.48 31.44 33.00 19.20 22.69 24.09 19.36 18.18 20.32 Market capitalisation at the end of the period, EUR million 11,810 13,865 19,132 27,319 13,519 16,852 20,015 14,649 12,570 14,774 15,964 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://annualreport2014.fortum.com/ 120 Annual Report 2014 Key figures Trading volumes 5) Number of shares, 1 000 shares In relation to 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 478,832 900,347 830,764 787,380 628,155 580,899 493,375 524,858 494,765 465,004 454,796 59.2 103.2 94.3 88.5 70.8 65.4 55.5 59.1 55.7 52.3 51.2 867,084 875,294 887,394 886,683 887,638 888,367 888,367 888,367 888,367 888,367 888,367 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 852,625 872,613 881,194 889,997 887,256 888,230 888,367 888,367 888,367 888367 888,367 861,772 887,653 886,929 891,395 887,839 888,230 888,367 888,367 888,367 888,367 888,367 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 31 March 2015. 3) Payout ratios in 2005 are calculated for continuing and discontinued operations 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 Helsinki. In addition to the Nasdaq Helsinki, 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. In 2014, approximately 58% (2013: 58%) of Fortum's traded shares were traded on other markets than Nasdaq Helsinki. 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://annualreport2014.fortum.com/ 121 Annual Report 2014 Key figures Operational key figures, volumes Operational key figures, volumes Comparability of information presented in tables and graphs Information in the tables and graphs presented for year 2012 or earlier is not restated due to the adoption of IFRS 10 and IFRS 11. Adoption of standards influences treatment of Fortum’s holding in AB Fortum Värme samägt med Stockholms stad in the the consolidated financial statements. For further information, see Note 1.6.1. New IFRS standards adopted from 1 Jan 2014. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 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 Fortum's total power and heat generation in Russia Power generation Heat generation TWh TWh - - - - - - - - Fortum's own power generation by source, total in the Nordic area Hydro and wind power 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 Hydro and wind power Nuclear power Thermal power Total % % % % 35 47 18 42 50 8 37 46 17 20.0 24.9 6.2 51.1 39 49 12 52.6 25.0 11.6 15.3 22.9 23.7 5.0 51.6 44 46 10 49.3 23.2 16.0 25.6 22.1 21.4 4.6 48.1 46 44 10 53.7 26.1 16.1 26.0 22.0 22.0 8.3 52.3 42 42 16 55.3 22.0 17.4 25.4 21.0 24.9 7.2 53.1 40 47 13 53.9 18.5 19.2 24.8 25.2 23.4 3.0 51.6 49 45 6 47.4 10.4 20.0 24.2 18.1 23.7 3.4 45.2 40 52 8 50.1 8.2 23.3 26.4 22.4 23.8 1.8 48.0 46 50 4 100 100 100 100 100 100 100 100 100 100 100 Power generation capacity by segment Power Heat Heat, Electricity Sales and Solutions Russia Total MW MW MW MW MW Heat production capacity by segment Power Heat Heat, Electricity Sales and Solutions Russia Total MW MW MW MW MW 10,003 1,278 9,540 1,373 9,560 1,360 9,575 1,213 9,709 1,446 9,728 1,600 9,752 1,670 9,702 1,569 9,475 9,063 - - - 2,785 2,785 2,785 3,404 3,404 4,250 4,758 11,281 10,913 10,920 13,573 13,940 14,113 14,826 14,675 14,518 14,624 793 803 250 250 250 250 250 250 250 250 250 0 9,757 10,633 10,973 10,218 10,284 10,448 10,375 8,785 - - - 13,796 13,796 13,796 14,107 13,396 13,466 13,466 10,007 10,883 11,223 24,264 24,330 24,494 24,732 22,431 18,033 17,402 4,317 3,936 Fortum's total power and heat sales in EU and Norway Electricity sales EUR million 2,017 2,002 2,437 2,370 2,959 2,802 3,110 2,868 2,700 2,462 2,299 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://annualreport2014.fortum.com/ 122 Annual Report 2014 Key figures Heat sales EUR million 809 867 1,014 1,096 1,157 1,095 1,309 1,278 1,201 538 468 Fortum's total power and heat sales in Russia Electricity sales EUR million Heat sales EUR million 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 3.3 332 141 28.7 28.5 14.8 3.0 75.0 10.8 15.3 9.1 3.6 3.4 390 219 26.1 26.9 19.5 3.2 75.7 8.0 25.6 9.8 3.7 3.5 505 287 30.7 28.3 18.7 3.2 80.9 9.6 26.8 10.9 4.0 3.6 590 324 24.6 29.4 20.2 3.6 77.8 8.5 26.7 8.5 4.3 3.4 713 300 21.6 30.1 23.3 3.8 78.8 5.8 26.4 8.5 4.3 2.9 822 290 23.4 23.3 25.6 4.3 76.6 5.5 24.1 - 4.1 3.1 758 285 21.6 28.2 26.5 3.8 80.1 3.2 26.0 - 3.4 2.8 23.8 23.8 26.8 27.1 42.2 50.6 54.9 51.4 47.9 36.8 35.4 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 - 2.8 13.7 1.1 - 22.7 23.1 24.6 26.0 25.8 25.9 27.9 26.1 26.6 26.1 17.6 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://annualreport2014.fortum.com/ 123 Annual Report 2014 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. Fortum renewed its business structure as of 1 March 2014. The reorganisation lead to a change in Fortum's external financial reporting structure as previously separately reported segments Heat and Electricity Sales are now combined into one segment: Heat, Electricity Sales and Solutions. For further information see Note 5 Segment reporting. Fortum has applied new IFRS 10 Consolidated financial statements and IFRS 11 Joint arrangements from 1 January 2014. The effect of applying the new standards to Fortum Group financial information relates to AB Fortum Värme samägt med Stockholm Stad (Fortum Värme), that is treated as a joint venture and thus consolidated with equity method from 1 January 2014 onwards. Before the change the company was consolidated as a subsidiary with 50% minority interest. For further information see Note 1.6.1 Adoption of new IFRS standards from 1 Jan 2014 or later Information for 2013 has been restated to reflect both the change in business structure and adoption of new IFRS standards. Sales by segment, EUR million Power and Technology - of which internal Heat - of which internal Heat, Electricity Sales and Solutions - 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 2014 2,252 2,156 69 85 1,025 1,063 1,268 1,356 1,466 1,399 1,770 1,737 1,628 49 -12 -32 38 0 23 -8 8 18 707 10 707 -8 753 8 769 9 489 - 789 10 632 - 800 13 804 - 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 1,516 1,332 87 34 920 1,030 1,119 1,055 - 973 15 900 95 108 115 - - 1,070 1,064 37 722 55 137 -66 19 63 54 0 751 17 58 44 -1,458 -1,407 -1,959 -1,760 -2,005 -1,447 -1,792 -958 -843 -706 -601 3,835 3,877 4,491 4,479 5,636 5,435 6,296 6,161 6,159 5,309 4,751 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://annualreport2014.fortum.com/ 124 Annual Report 2014 Key figures Comparable operating profit by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other 2004 2005 2006 730 207 240 23 -52 854 253 244 30 -47 985 253 250 -4 -47 2007 1,095 290 2008 1,528 250 2009 1,454 231 2010 1,298 275 2011 1,201 278 2012 1,146 271 2013 2014 859 877 -92 248 -33 -56 -20 262 22 -61 8 307 11 -66 74 295 27 -73 68 320 39 -92 231 -1 -51 109 156 332 104 161 266 -54 -57 Comparable operating profit 1,148 1,334 1,437 1,564 1,845 1,888 1,833 1,802 1,752 1,403 1,351 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 45 2,171 -94 Operating profit 1,195 1,347 1,455 1,847 1,963 1,782 1,708 2,402 1,874 1,508 3,428 Comparable EBITDA by segment, EUR million 2004 2005 Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total Depreciation, amortisation and impairment charges by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total 834 331 373 39 -41 966 376 389 45 -35 2006 1,093 397 2007 1,198 453 2008 1,625 419 2009 1,547 393 2010 1,398 462 2011 1,310 471 2012 1,260 481 2013 1,007 2014 998 397 15 -36 393 10 -39 -25 413 -26 -46 55 426 28 -51 94 485 13 -56 148 482 29 -66 189 529 40 -83 211 258 548 204 304 416 -49 -49 1,536 1,741 1,866 2,015 2,360 2,398 2,396 2,374 2,416 1,975 1,873 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 104 124 112 123 108 144 103 163 133 145 147 162 16 11 15 12 19 11 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 9 388 407 429 451 515 510 563 606 664 621 148 121 102 150 216 5 100 147 150 8 526 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://annualreport2014.fortum.com/ 125 Annual Report 2014 Key figures Share of profit of associates and joint ventures by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total Capital expenditure by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total Gross investments in shares by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total Gross divestments of shares by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 -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 -14 91 46 4 32 178 88 35 3 37 149 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 84 123 83 124 95 184 93 309 106 115 183 236 10 12 10 14 8 15 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 11 335 346 485 655 1,108 862 1,222 1,408 1,558 1,005 179 197 123 435 255 12 86 340 147 3 774 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 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 1 3 5 - 1 25 1 - 0 - 1 17 32 24 - - 1 - 10 - - - 6 2 11 0 0 2 2 37 27 0 4 179 134 910 317 1,516 67 27 74 16 15 69 2009 2010 2011 2012 2013 2014 10 1 - 1 - 2 0 52 43 46 - 6 3 203 23 323 16 0 102 269 - 37 2 0 79 11 - 52 - 67 446 0 2,681 2 14 147 568 410 142 3,196 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://annualreport2014.fortum.com/ 126 Annual Report 2014 Key figures Net assets by segment, EUR million Power and Technology Heat Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales Other Total 2004 5,804 2,440 2005 5,493 2,551 2006 5,690 3,407 2007 5,599 3,507 151 153 294 456 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 2014 6,355 6,001 2,295 2,112 3,846 2,597 3,745 2,615 295 496 11,900 11,893 13,814 14,285 15,020 15,347 16,727 17,519 18,621 16,537 13,820 Return on net assets by segment, % 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Power and Technology Heat 12.6 9.8 14.3 11.6 17.5 9.6 Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales 8.1 25.2 8.8 17.4 8.4 -1.6 19.2 9.3 66.3 7.7 6.9 29.6 8.9 3.7 8.1 24.5 7.9 0.0 8.7 19.5 8.4 2.4 9.7 24.6 9.9 3.5 13.7 18.7 8.8 3.0 9.1 14.5 13.6 9.7 5.2 9.3 19.1 5.6 73.6 -14.0 28.9 38.4 4.2 152.3 Comparable return on net assets by segment, % 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Power and Technology Heat 12.0 9.3 14.9 11.0 17.4 9.2 Heat, Electricity Sales and Solutions Russia Distribution Electricity Sales 8.3 17.1 8.6 16.4 8.3 -0.8 18.9 9.2 0.0 7.6 -0.6 28.0 7.3 -3.8 8.2 26.4 7.6 0.0 8.6 -15.3 18.6 Average number of personnel Power and Technology Heat Heat, Electricity Sales and Solutions 2004 4,588 1,605 2005 4,374 2,186 2006 4,147 2,345 2007 3,475 2,302 Russia Distribution Electricity Sales Other Total 995 682 722 1,008 745 626 983 825 610 1,060 936 531 22.3 7.7 0.7 9.3 9.3 2010 1,891 2,482 4,555 1,098 538 592 19.9 7.4 3.5 8.6 18.5 7.0 2.7 8.8 13.8 14.2 8.7 5.2 8.8 8.7 5.6 9.3 33.5 203.1 2011 1,873 2,682 2012 1,896 2,354 2013 2014 1,900 1,685 2,051 1,913 4,436 4,301 4,245 4,196 902 510 607 873 515 661 786 492 550 536 2008 3,591 2,422 5,566 1,222 766 510 2009 2,068 2,652 6,170 1,166 629 593 8,592 8,939 8,910 8,304 14,077 13,278 11,156 11,010 10,600 9,532 8,821 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://annualreport2014.fortum.com/ 127 Annual Report 2014 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 Operating profit + Share of profit (loss) in associated companies and joint ventures Net assets average x 100 x 100 x 100 x 100 x 100 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) Comparable net assets average Capital employed = Total assets - non-interest bearing liabilities - deferred tax liabilities - provisions 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://annualreport2014.fortum.com/ 128 Annual Report 2014 Key figures 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 Payout ratio, % = = = = = = = = = = = = = = = 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 - liquid funds 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 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 Dividend per share Earnings per share x 100 x 100 x 100 x 100 Payout ratio continuing operations, % = Dividend per share continuing operations Earnings per share continuing operations 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://annualreport2014.fortum.com/ 129 Annual Report 2014 Financial Statements Dividend yield, % Price/earnings (P/E) ratio Average share price Market capitalisation Trading volumes = = = = = 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 x 100 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 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://annualreport2014.fortum.com/ 130 Annual Report 2014 Financial Statements income statement Consolidated income statement Consolidated EUR million Sales Other income Materials and services Employee benefits Note 5 10 11 12 Depreciation, amortisation and impairment charges 5, 18, 19 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 Diluted 6, 5, 10 5 7 5 20 13 13 13 13 13 14 15 2014 4,751 75 -1,939 -413 -526 -596 1,351 2,077 3,428 149 -256 84 -5 -40 -217 3,360 -199 3,161 3,154 7 3,161 3.55 3.55 2013* 5,309 93 -2,270 -460 -621 -648 1,403 106 1 1,508 178 -301 75 -16 -47 -289 1,398 -186 1,212 1,204 8 1,212 1.36 1.36 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://annualreport2014.fortum.com/ 131 Annual Report 2014 Financial Statements EUR million Comparable operating profit Non-recurring items (sales gains) Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment Items affecting comparability Operating profit 2014 1,351 2,171 -91 -3 2,077 3,428 2013 1,403 1 61 21 23 106 1,508 * Comparative period information for 2013 presented in these financial statements has been restated due to the accounting change for Fortum Värme, see Note 1.6.1. 11 Items affecting comparability includes 1.85 billion sales gains from sale of the Finnish electricity distribution business in 2014. Sales by segment, % 1 14 Sales by country, % 5 1 5 20 40 22 25 Power and Technology, 40 % Heat, Electricity Sales and Solutions, 25 % Russia, 20 % Others, 1 % Distribution, 14 % 67 Russia, 22 % Nordic countries, 67 % Poland, 5 % Other countries, 5 % Estonia, 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://annualreport2014.fortum.com/ 132 Annual Report 2014 Financial Statements Consolidated statement of Consolidated statement of comprehensive income comprehensive 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 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 2014 3,161 2013 1,212 17 -70 -4 12 149 -28 -1,343 -3 -3 -1,273 -77 -13 -90 -1,363 1,799 1,815 -16 1,799 96 1 -51 -8 -6 28 -7 -478 2 42 0 -384 44 9 53 -331 882 881 1 882 11 Fair valuation of cash flow hedges mainly relates to electricity prices in future cash flows. When electricity price is higher (lower) than the hedging price, the impact on equity is negative (positive). 22 Translation differences from translation of foregin entities, mainly RUB. 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://annualreport2014.fortum.com/ 133 Annual Report 2014 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 Bank deposits Cash and cash equivalents Liquid funds 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 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 Note 31 Dec 2014 31 Dec 2013 18 19 20 30 21 29 3 22 23 3 24 25 9 26 27 28 3 29 30 31 32 33 28 3 34 9 276 11,195 2,027 774 68 98 595 2,041 17,074 256 448 830 757 2,009 2,766 0 4,301 21,375 3,046 73 7,708 36 10,864 71 10,935 5,881 247 1,159 774 17 140 154 8,373 1,103 76 888 0 2,067 10,440 21,375 384 12,849 2,341 744 77 126 367 2,598 19,486 264 307 869 0 1,250 1,250 1,173 3,863 23,348 3,046 73 6,851 54 10,024 101 10,124 6,936 181 1,338 744 94 50 148 9,492 2,103 95 994 540 3,732 13,224 23,348 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://annualreport2014.fortum.com/ 134 Annual Report 2014 Financial Statements Consolidated statement of changes in Consolidated statement of changes in total equity total equity Share capital Share premium Retained earnings Other equity components Owners of the parent Non- controlling interests Total equity Translation of foreign operations Cash flow hedges Other OCI items OCI items associated companies 3,046 73 Retained earnings and other funds 7,500 3,154 -3 3,151 -977 6 -4 -649 -1,319 -1,319 3,046 73 9,676 -1,968 3,046 73 7,193 -173 -173 -476 -476 7,193 1,204 1,204 -888 1 -10 EUR million Total equity 31 December 2013 Note 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 8 Total equity 31 December 2014 Total equity 31 December 2012, as previously reported Change in accounting policy 1) 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 8 Total equity 31 December 2013 Total equity 1 January 2013 3,046 73 66 -3 -43 -47 19 34 2 36 -1 31 30 -51 2 44 46 38 0 -17 -16 10,024 3,154 -1,320 -19 1,815 -977 0 6 -4 101 10,124 7 -23 0 -16 -2 -11 -1 3,161 -1,343 -19 1,799 -977 -2 -5 -4 -5 22 10,864 71 10,935 -133 15 -118 2 65 67 0 10,040 603 10,643 -17 -17 4 51 55 -1 10,039 1,204 -471 148 881 -888 0 1 -10 -495 108 8 -7 0 1 -3 -5 -496 10,147 1,212 -478 148 882 -888 -3 1 -15 3,046 73 7,500 -649 66 -51 38 10,024 101 10,124 Translation differences 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 with EUR -1,320 million during 2014 (2013: -471). Translation differences are mainly related to RUB. Part of this translation exposure has been hedged and the hedge result, amounting to EUR 149 million, is included in the other OCI items. 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 -47 million (2013: 30), 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. 1) Comparative period information has been restated due to the accounting change, 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://annualreport2014.fortum.com/ 135 Annual Report 2014 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 Total net increase(+)/decrease(-) in liquid funds Liquid funds at the beginning of the year Foreign exchange differences in liquid funds Note 5, 18, 19 15 Liquid funds at the end of the period 1) 1) Including cash balances of EUR 15 million relating to assets held for sale as of 31 December 2013. 25 2014 3,161 199 217 -149 526 3,954 -2,111 99 -330 58 349 -211 1,808 -46 1,762 -768 -69 26 3,062 131 425 8 2,816 4,578 50 -1,499 -580 -977 -1 -3,007 1,571 1,265 -70 2,766 2013 1,212 186 289 -178 620 2,129 -262 1 62 -371 74 47 2 -210 1,469 79 1,548 -1,004 3 -15 66 122 22 -136 2 -944 604 781 -636 438 -888 22 -284 320 961 -17 1,265 11 Non-cash flow items and divesting activities consist mainly of changes in provisions (including nuclear) EUR -29 million (2013: -168), adjustments for unrealised fair value changes of derivatives EUR 88 million (2013: -22) and capital gains EUR -2.171 million (2013: -61). 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 352 million for 2014 (2013: 52) 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. 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://annualreport2014.fortum.com/ 136 Annual Report 2014 Financial Statements 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 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 Negative effect from change in working capital during 2014, EUR -46 million (2013: +79). Capital expenditure EUR million Capital expenditure Change in not yet paid investments, decrease(+)/increase(-) Capitalised borrowing costs Capital expenditure in cash flow Note 5, 18, 19 2014 7,793 -81 3,954 -2,147 -46 -768 -69 3,089 131 425 8 -977 -1 3,600 105 4,217 2013 7,757 -106 2,129 -660 79 -1,004 -15 188 22 -136 2 -888 22 -261 -119 7,793 2014 2013 -82 -13 49 -46 2014 774 41 -47 768 92 24 -37 79 2013 1,005 60 -60 1,004 Capital expenditure in intangible assets and property, plant and equipment in the balance sheet was EUR 774 million (2013: 1,005). Capital expenditure in cash flow EUR 768 million (2013: 1,004) is presented without not yet paid investments i.e. change in trade payables related to investments EUR 41 million (2013: 60) and capitalised borrowing costs EUR -47 million (2013: -60), 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. 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://annualreport2014.fortum.com/ 137 Annual Report 2014 Financial Statements Acquisition of shares in cash flow Acquisition of shares, net of cash acquired, amounted to EUR 69 million during 2014 (2013: 15). Divestments of shares in cash flow EUR million Proceeds from sales of subsidiaries, net of cash disposed Proceeds from interest-bearing receivables from sold subsidiaries Proceeds from sales of associates Proceeds from available for sale financial assets Total Note 8 8, 20 2014 2,750 131 311 1 3,193 2013 22 22 100 0 144 Gross divestment of shares totalled EUR 3,196 million in 2014 (2013: 142) including interest-bearing debt in sold subsidiaries of EUR 131 million (2013: 22). Proceeds from divestments of shares totalled EUR 3,193 million in 2014 (2013: 144). 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://annualreport2014.fortum.com/ 138 Annual Report 2014 Financial Statements Notes to the consolidated financial Notes to the consolidated financial statements statements 1 Accounting policies 1 Accounting policies 1.1 Basic information 1.1 Basic information Fortum Corporation (the Company) is a Finnish public limited liability company with its domicile in Espoo, Finland. Fortum’s shares are traded on Nasdaq Helsinki. The operations of Fortum Corporation and its subsidiaries (together the Fortum Group) focus on the focus on the Nordic and Baltic countries, Russia and Poland. Fortum's activities cover generation, distribution and sale of electricity and heat, and energy- related expert services. These financial statements were approved by the Board of Directors on 3 February 2015. 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 1.2.1 Income Statement presentation: presentation: In the Consolidated income statement Comparable operating profit-key figure 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; • 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 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 IFRIC5. 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 1.2.2 Classification of current and non-current assets and liabilities non-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 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 has control. Control exists when Fortum is exposed to, or has rigths to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the 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. The Fortum Group subsidiaries are disclosed in Note 42 Subsidiaries by segment on 31 December 2014. 1.3.2 Associates 1.3.2 Associates Associated companies are entities over which the Group has significant influence but not control, generally accompanying a 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://annualreport2014.fortum.com/ 139 Annual Report 2014 Financial Statements shareholding of between 20% and 50% of the voting rights. The Group’s interests in associated companies are accounted for using the equity method of accounting. 1.3.3. Joint ventures 1.3.3. Joint ventures Joint ventures are arrangement in which the Group has joint control. Joint ventures are accounted for using the equity method of accounting. 1.3.4. Non-controlling interests 1.3.4. 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. 1.4 Foreign currency transactions 1.4 Foreign currency transactions and translation and translation 1.4.1 Functional and presentation 1.4.1 Functional and presentation currency currency 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. 1.4.3 Group companies 1.4.3 Group companies 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 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. The key exchange rates applied in the Fortum Group accounts Sweden Norway Poland Russia Average rate Balance sheet date rate Currency SEK NOK PLN RUB 2014 9.1004 8.3940 4.1909 51.4243 2013 8.6624 7.8266 4.2027 42.4441 31 Dec 2014 31 Dec 2013 9.3930 9.0420 4.2732 72.3370 8.8591 8.3630 4.1543 45.3246 1.4.4 Associates and joint 1.4.4 Associates and joint ventures ventures The Group’s interests in associated companies and jointly ventures 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 as for subsidiaries, see 1.4.3 Group companies. significant accounting policies and the note where they are presented as well as the relevant IFRS standard. 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 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://annualreport2014.fortum.com/ 140 Annual Report 2014 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 arrangements Investments in associates 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 Other shares and participations 16. Financial assets and liabilities by categories Intangible assets Tangible assets Leasing Inventories 18. Intangible assets 19. Property, plant and equipment 36. Leasing 23. Inventories Earnings per share 15. Earnings and dividend per share Pensions and similar obligations 32. Pension obligations Decommissioning obligation 30. Nuclear related assets and liabilities Provisions Contingent liabilities Financial instruments Liquid funds Borrowings 31. Other provisions 38. Contingent liabilities 16. Financial assets and liabilities by categories and 17. Financial assets and liabilities by fair value hierarchy 25. Liquid funds 28. Interest-bearing liabilities IFRS-standard IFRS 8 IAS 18 IAS 20 IFRS 2 IAS 12 IFRS 5 IFRS 11, IAS 28, IFRS 12 IAS 28, IFRS 12 IAS 32, IAS 36, IAS 39 IAS 38 IAS 16, IAS 36, IAS 40 IAS 17 IAS 2 IAS 33 IAS 19 IFRIC 5 IAS 37 IAS 37 IAS 32, IAS 39, IFRS 7 IAS 7 IAS 39 1.6 New accounting principles 1.6 New accounting principles 1.6.1 New IFRS standards adopted 1.6.1 New IFRS standards adopted from 1 Jan 2014 from 1 Jan 2014 Fortum has adopted the following new or amended standards on 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 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 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 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. 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 a joint venture. Notwithstanding the reclassification, these investments will continu to be recognised by applying the equity method and there was 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 is 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. Before 2014, the company has been consolidated as a subsidiary with 50% minority interest. In the restated balance sheet shares of Fortum Värme are included in the Shares in associated companies and joint ventures. Fortum Oyj and its subsidiaries have 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 by the end of 2015. Restatement did 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 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://annualreport2014.fortum.com/ 141 Annual Report 2014 Financial Statements 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 have been 3.4 at the end of 2013, if the interest-bearing receivables from Fortum Värme were deducted from net debt. When applying IFRS 10 and 11 in 2014, the standards require the comparative information to be restated. Therefore the comparative period information for 2013 presented in the consolidated financial statement for 2014 has been restated. Full set of restated quarterly information for 2013 was presented in the Q1/2014 interim report. 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. 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://annualreport2014.fortum.com/ 142 Annual Report 2014 Financial Statements Impact on balance sheet as of 31 December 2013 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. 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 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://annualreport2014.fortum.com/ 143 Annual Report 2014 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 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 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 Change -323 0 -280 -597 -55 -1,189 -0.2 0.0 0.5 0.0 Fortum has also applied the annual improvements to IFRSs issued in December 2013 from 1 January 2014 onwards. The improvements primarily remove inconsistencies and clarified wording of standards. Amendments did not have an impact on Fortum’s financial statements. 1.6.2 Adoption of new IFRS 1.6.2 Adoption of new IFRS standards from 1 Jan 2015 or standards from 1 Jan 2015 or later later Fortum will apply the following new or amended standards and interpretations starting from 1 January 2016 or later: 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 from 1 January 2015 onwards. The interpretation will not have a material impact on Fortum’s financial statements. IFRS 9 Financial instruments (effective for annual periods beginning on or after 1 January 2018). The standard has new requirements for the classification and measurement of financial assets and liabilities and hedge accounting and it will replace IAS 39 and IFRS 7. Fortum will apply the new standard from beginning of 2018. The Standard is still subject to endorsement by EU. IFRS 15 Revenue from contracts with Customers (effective for annual periods beginning on or after 1 January 2017). The standard focuses on revenue recognition models and will replace IAS 11 and IAS 18. Fortum will apply the new standard from beginning of 2017. The Standard is still subject to endorsement by EU. Annual Improvements to IFRSs 2012–2014 Cycle issued in September 2014 (effective for annual periods beginning on or after 1 January 2016). 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 improvements are still subject to endorsement by EU. 1.7 Segment reporting 1.7 Segment reporting Fortum discloses segment information in a manner consistent with internal reporting to Fortum's Board of Directors and to Fortum Executive Management Team led by the President and CEO. Fortum 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 and Technology, Heat, Electricity Sales and Solutions, Russia and Distribution. Revenue recognition 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 Sale of electricity, heat, cooling and distribution of electricity 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 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://annualreport2014.fortum.com/ 144 Annual Report 2014 Financial Statements 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 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. 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 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). See Note 5. Segment reporting 1.8 Assets held for sale 1.8 Assets held for sale 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. See Note 9. Assets held for sale 1.9 Other income and other 1.9 Other income and other expenses expenses Other income Other income 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. Emission allowances 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 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. See Note 10. Other income and other expenses 1.10 Long-term incentives 1.10 Long-term incentives Fortum's share bonus system is a performance-based, long-term incentive (LTI) arrangement. A new plan commences annually if the Board of Directors so decides. 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. From plan 2013-2018 onwards the lock-up period may be shortened to one year for the Fortum Executive Management Team members on individual basis if the value of the aggregate ownership of Fortum shares corresponds to a minimum of annual base salary. For other participants the lock-up period is changed into one year from plan 2013-2018 onwards. The shares are released from the lock-up after publishing of the Company’s financial results for the last calendar year of the lock- up period, provided that the participant remains employed by the Group. 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://annualreport2014.fortum.com/ 145 Annual Report 2014 Financial Statements 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. See Note 12. Employee benefits 1.11 Earnings and dividend per 1.11 Earnings and dividend per share share Earnings per share 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 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. 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. See Note 15. Earnings and dividend per share 1.12 Financial assets and 1.12 Financial assets and liabilities by categories liabilities by categories Financial assets 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 Financial assets at fair value through profit or loss 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 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 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 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 Accounting for derivative financial instruments and financial instruments and hedging activities 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. 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://annualreport2014.fortum.com/ 146 Annual Report 2014 Financial Statements 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 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 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 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 Net investment hedging in foreign operations 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 of. Derivatives that do not qualify for Derivatives that do not qualify for hedge accounting 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. See Note 16. Financial assets and liabilities by categories 1.13 Financial assets and 1.13 Financial assets and liabilities by fair value hierarchy liabilities by fair value hierarchy 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 Fair values under Level 1 measurement hierarchy 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 Fair values under Level 2 measurement hierarchy 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 Fair values under Level 3 measurement hierarchy 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 Other measurements The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. See Note 17. Financial assets and liabilities by fair value hierarchy 1.14 Intangible assets 1.14 Intangible assets 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 Computer software Acquired computer software licences are capitalised on the basis of the costs incurred when bringing the software into use. Costs 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://annualreport2014.fortum.com/ 147 Annual Report 2014 Financial Statements 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 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 Contractual customer relationships 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 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. See Note 18. Intangible assets 1.15 Property, plant and 1.15 Property, plant and equipment equipment 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 40-50 years • Thermal power plant buildings, structures and machinery 25 years • Nuclear power plant buildings, structures and machinery 25 years • CHP power plant buildings, structures and machinery 15-25 years • Substation buildings, structures and machinery 30-40 years • Distribution network 15-40 years • District heating network 30-40 years • Other buildings and structures 20-40 years • Other tangible assets 20-40 years • Other machinery and equipment 3-20 years • Other non-current investments 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 Impairment of non-financial assets 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 and 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 and the Board of Directors. Cash flows arising from future investments such as new plants are excluded unless projects have been started. The cash outflow needed to complete the started projects is included. The period covered by cash flows is related to the useful lives of the assets reviewed for impairment. According to IFRS, projections 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://annualreport2014.fortum.com/ 148 Annual Report 2014 Financial Statements used should cover a maximum period of five years, but longer period can be justifiable in certain circumstances. The Group uses a longer projection period than normally allowed by IFRS, which reflects the long useful lives of power plants and other major assets. Cash flow projections beyond the period covered by the most recent business plan are estimated by extrapolating the projections using growth rates estimated by management 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 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 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. Joint operations Joint operations 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 use for production. 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 joint operation. 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. See Note 19. Property, plant and equipment 1.16 Participations in associated 1.16 Participations in associated companies and joint ventures companies and joint ventures 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. 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. See Note 20. Participations in associated companies and joint ventures 1.17 Inventories 1.17 Inventories 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. See Note 23. Inventories 1.18 Trade and other receivables 1.18 Trade and other receivables 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. See Note 24. Trade and other receivables 1.19 Liquid funds 1.19 Liquid funds Cash and cash equivalents in Liquid funds include 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. See Note 25. Liquid funds 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://annualreport2014.fortum.com/ 149 Annual Report 2014 Financial Statements 1.20 Share capital 1.20 Share capital 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. See Note 26. Share capital 1.21 Interest-bearing liabilities 1.21 Interest-bearing liabilities 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. See Note 28. Interest-bearing liabilities 1.22 Deferred income taxes 1.22 Deferred income taxes 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. 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. See Note 29. Deferred income taxes 1.23 Nuclear related assets and 1.23 Nuclear related assets and liabilities liabilities 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 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. See Note 30. Nuclear related assets and liabilities 1.24 Other provisions 1.24 Other provisions 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 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://annualreport2014.fortum.com/ 150 Annual Report 2014 Financial Statements obligation and the amount can be reliably estimated. termination payments and lease termination costs. 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 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 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. Restructuring provisions 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 See Note 31. Other provisions 1.25 Pension obligations 1.25 Pension obligations 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. See Note 32. Pension obligations 1.26 Leasing 1.26 Leasing Finance leases 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. Operating leases 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. See Note 36. Leasing 1.27 Contingent liabilities 1.27 Contingent liabilities A contingent liability is disclosed when there is a possible obligation that arises from past 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. See 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://annualreport2014.fortum.com/ 151 Annual Report 2014 Financial Statements 2 Critical accounting estimates and judgements 2 Critical accounting estimates and judgements 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 existing at the balance sheet date as well as 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 judgements are most critical to reported results and financial position. The table is also showing where to find more information about those estimates. Critical accounting estimates Note Assigned values and useful lifes determined for intangible assets and property, plant and equipment acquired in a business combination 18. Intangible assets Assumptions related to impairment testing of property, plant and equipment and intangible assets 19. Property, plant and equipment Judgement used when assessing the nature of Fortum's interest in its investees and when considering the classification of Fortum's joint arrangements 20. Participations in associated companies and joint ventures 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 39. Legal actions and official proceedings 2 Critical accounting 2 Critical accounting estimates estimates 2.1 Intangible assets 2.1 Intangible assets 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 18 Intangible assets and Note 19 Property, plant and equipment. 2.2 Property, plant and 2.2 Property, plant and equipment equipment 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 the notes. 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 from most recent approved business plan. 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. 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 and Note 19 Property, plant and equipment. 2.3 Participations in associated 2.3 Participations in associated companies and joint ventures companies and joint ventures Management is required to make significant judgements when assessing the nature of Fortum's interest in its investees and when considering the classification of Fortum's joint arrangements. In the classification, emphasis has been put on decision-making, legal structure and financing of the arrangements. See Note 20 Participation in associated companies and joint ventures. 2.4 Deferred income taxes 2.4 Deferred income taxes Assumptions and estimates Assumptions and estimates regarding future tax regarding future tax consequences 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. 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 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://annualreport2014.fortum.com/ 152 Annual Report 2014 Financial Statements 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. 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. 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 39 million as of 31December 2014. See Note 29 Deferred income taxes. 2.5 Nuclear related assets and 2.5 Nuclear related assets and liabilities liabilities Assumptions made when Assumptions made when estimating provisions related to estimating provisions related to nuclear production 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- 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. See Note 30 Nuclear related assets and liabilities. 2.6 Pension obligations 2.6 Pension obligations Assumptions used to determine Assumptions used to determine future pension obligations 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. See Note 32 Pension obligations. 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://annualreport2014.fortum.com/ 153 Annual Report 2014 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 limit downside and capture potential upside by optimising hedging activities. Risk taking is limited through the use of risk mandates approved according to authority levels defined by the CEO. These risk mandates including 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 within the framework and risk 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. Fortum's sensitivity to electricity market price is dependent on the hedge level for a given time period. As per 31 December 2014, approximately 50% of the Power Segment's estimated Nordic power sales volume was hedged for the calendar year 2015 and approximately 10% for the calendar year 2016. 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 2015 comparable operating profit by approximately EUR 23 million and for 2016 by approximately EUR 41 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 Segment 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 2014 (31 December 2013) 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 3.2.2 Electricity derivatives Effect -/+ -/+ 2014 2013 7 13 7 22 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 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://annualreport2014.fortum.com/ 154 Annual Report 2014 Financial Statements and Note 7 Fair value changes of derivatives and underlying items in income statement. Electricity derivatives by instrument 2014 Electricity derivatives Total Netting against electricity exchanges 1) Total Electricity derivatives by instrument 2013 Electricity derivatives Total Netting against electricity exchanges 1) Total Volume, TWh Fair value, EUR million Under 1 year 75 75 1-5 years 33 33 Over 5 years 1 1 Total Positive Negative 109 109 304 304 -139 164 219 219 -139 80 Volume, TWh Fair value, EUR million Under 1 year 79 79 1-5 years 36 36 Over 5 years 0 0 Total Positive Negative 115 115 502 502 -227 277 292 292 -227 68 1) Receivables and liabilities against electricity exchanges arising from standard derivative contracts with same delivery period are netted. Maturity analysis of commodity derivatives Amounts in the table are fair values. EUR million Electricity derivatives assets Electricity derivatives liabilities Other commodity derivatives, assets Other commodity derivatives, liabilities Over 5 years 1 1 Under 1 year 114 28 12 4 2014 1-5 years 49 51 3 3 2013 Under 1 year 1-5 years Over 5 years 192 31 29 11 83 35 3 2 2 2 0 0 Total 164 80 15 7 Net 85 85 0 85 Net 209 209 0 209 Total 277 68 32 13 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. 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. 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://annualreport2014.fortum.com/ 155 Annual Report 2014 Financial Statements 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. For example Fortum’s Russian operations are mainly financed via intra group internal long term RUB denominated loans. The internal RUB loan receivables are hedged via external forward contracts offsetting the currency exposure for the internal lender. On 31 December 2014, 96% (2013: 95%) of the Group’s total external financing was raised by the parent company Fortum Oyj. On 31 December 2014, the total interest-bearing debt was EUR 6,983 million (2013: 9,058) and the interest-bearing net debt was EUR 4,217 million (2013: 7,793). Net debt without Värme financing was EUR 3,664 million (2013: 6,658). 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 2014, loan maturities for the coming twelve-month period amounted to EUR 1,103 million (2013: 2,106). Liquid funds amounted to EUR 2,766 million (2013: 1,265) and the total amount of committed credit facilities amounted to EUR 2,214 million (2013: 2,218) of which EUR 2,214 million (2013: 2,218) was undrawn. Maturity of interest-bearing liabilities EUR million 2015 2016 2017 2018 2019 2020 and later Total Loan maturities per loan type, EUR million 1,500 1,000 500 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025+ Other short-term debt Other long-term debt Financial institutions Bonds 2014 1,103 860 530 614 820 3,056 6,983 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://annualreport2014.fortum.com/ 156 Annual Report 2014 Financial Statements Liquid funds, major credit lines and debt programmes 2014 EUR million Liquid funds Cash and cash equivalents Bank deposits over 3 months Total 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 Liquid funds, major credit lines and debt programmes 2013 EUR million Liquid funds Cash and cash equivalents 1) Bank deposits over 3 months Total 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 8,000 million Total Total facility Drawn amount Available amount 2,009 757 2,766 134 2,000 214 2,214 500 532 3,252 4,284 2,000 214 2,214 500 532 8,000 9,032 - - - - - 4,748 4,748 Total facility Drawn amount Available amount 1,265 - 1,265 113 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 1) Including cash balances of EUR 0 million (2013: 15) classified as assets held for sale in the balance sheet. Liquid funds amounted to EUR 2,766 million (2013: 1,265), including OAO Fortum's bank deposits amounting to EUR 131 million (2013: 101) earmarked for capacity increase investments in Russia. Of these deposits at year-end 2014 EUR 30 million (2013: 58) were in euros and EUR million 101 (2013: 43) in Russian roubles. See also Note 25 Liquid funds. 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://annualreport2014.fortum.com/ 157 Annual Report 2014 Financial Statements 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. 2014 2013 EUR million Under 1 year 1-5 years Over 5 years Total Interest-bearing liabilities 1,295 3,370 3,265 7,930 Interest rate and currency derivatives liabilities 5,955 1,650 100 7,705 Interest rate and currency derivatives receivables -6,228 -1,890 -134 -8,252 Total 1,022 3,130 3,231 7,383 Under 1 year 2,374 7,286 -7,311 2,349 1-5 years 3,896 2,098 -2,179 3,815 Over 5 years Total 4,249 10,519 294 -271 9,678 -9,761 4,272 10,436 Interest-bearing liabilities include loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj of EUR 1,040 million (2013: 995). 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 stipulated in 2014 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 2014, the average duration of the debt portfolio (including derivatives) was 3.7 years (2013: 2.4). Approximately 46% (2013: 51%) 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 151 million on 31 December 2014 (2013: 179). 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 18 million (2013: 14). The average interest rate on loans and derivatives on 31 December 2014 was 3.7% (2013: 3.6%). Average cumulative interest rate on loans and derivatives for 2014 was 4.0% (2013: 4.1%). 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 2014 the open transaction and translation exposures were EUR 0 million (2013: 1) and EUR 4,310 million (2013: 4,837) respectively. The VaR for the transaction exposure was EUR 0 million (2013: 0) and VaR for the translation exposure was EUR 246 million (2013: 55). 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://annualreport2014.fortum.com/ 158 Annual Report 2014 Financial Statements Group Treasury's transaction exposure 2014 2013 EUR million Net position Hedge Open SEK USD NOK RUB PLN Other Total 4,821 -4,821 -12 -75 483 88 -10 12 75 -483 -88 10 5,295 -5,295 0 0 0 0 0 0 0 Net position 5,595 -11 39 523 110 59 Hedge -5,595 11 -39 -523 -110 -58 6,315 -6,314 Open 0 0 0 0 0 1 1 In addition OAO Fortum is hedging its euro investments with euro deposits EUR 30 million (2013: 58), 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 2014 Hedge -198 -364 - - - Invest- ment 2,109 1,964 580 152 67 Open 1,911 1,600 580 152 67 Invest- ment 3,187 1,303 440 138 86 2013 Hedge -317 - - - - Open 2,870 1,303 440 138 86 4,872 -562 4,310 5,154 -317 4,837 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 mainly from RUB was EUR - 1,320 million in 2014 (2013: -471). Part of this translation exposure has been hedged and the hedge result amounted to EUR 149 million in 2014 (2013: 28). 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://annualreport2014.fortum.com/ 159 270 360 233 0 863 541 322 31 206 0 0 237 193 44 Fair value Positive Negative 76 252 36 0 365 280 85 49 147 0 0 196 143 53 Net 239 154 233 0 626 348 278 Net 27 105 36 0 170 137 32 Annual Report 2014 Financial Statements Interest rate and currency derivatives by instrument 2014 Fair value Total Positive Negative Notional amount Remaining lifetimes 1-5 years 163 Over 5 years - 3,282 1,931 1,111 - - - Under 1 year 5,167 508 362 - 5,330 5,721 1,473 0 6,037 4,556 1,931 12,524 EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Forward rate agreements Total Of which long-term Short-term Interest rate and currency derivatives by instrument 2013 Notional amount Remaining lifetimes 1-5 years 420 Over 5 years - 2,215 3,499 928 - - - Under 1 year 7,092 944 - 56 Total 7,513 6,658 928 56 8,092 3,563 3,499 15,155 EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Forward rate agreements Total Of which long-term Short-term 3.7 Credit risk Fortum is exposed to credit risk whenever there is a contractual obligation with an external counterparty. 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. Counterparty creditworthiness is continuously monitored and reported. Collaterals are used if dealing with counterparties without approved limits or when exposures arising from engagements are considered too high in relation to the counterparty 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 counterparties 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 counterparties. 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 counterparties 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 counterparties. 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. 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://annualreport2014.fortum.com/ 160 Annual Report 2014 Financial Statements 3.7.1 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 and joint ventures Other Total 2014 2013 Carrying amount of which past due Carrying amount of which past due 3,505 75 2,061 145 5,786 - - - - - 1,555 185 2,601 99 4,440 - - - - - Investment grade receivables consist of deposits and Treasury bank accounts EUR 2,636 million (2013: 1,163), fair values of interest rate and currency derivatives EUR 859 million (2013: 362) and fair values of electricity, coal, oil and CO2 emission allowance derivatives EUR 10 million (2013: 30). Electricity exchange receivable is the fair value of derivatives on NASDAQ OMX Commodities Europe. Associated company and joint venture receivables consist of loan receivables EUR 2,041 million (2013: 2,587), fair values of interest rate and currency derivatives EUR 4 million (2013: 3) and fair values of electricity, coal, oil and CO2 emission allowance derivatives EUR 16 million (2013: 11). Other receivables consist of Russian deposits with non-investment grade banks EUR 63 million (2013: 0), loan and other interest bearing receivables EUR 4 million (2013: 14), finance lease receivables EUR 0 million (2013: 2) and fair values of electricity, coal, oil, and CO2 emission allowance derivatives EUR 78 million (2013: 83). The following tables indicate how bank deposits and fair values of derivatives are distributed by rating class. 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 BB+/BB/BB- B+/B/B- Below B- 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 67 million on 31 December 2014 (2013: 102). 2014 2013 - 632 1,923 81 - 410 658 95 2,636 1,163 63 - - 63 - - - - - - 2,699 1,163 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://annualreport2014.fortum.com/ 161 Annual Report 2014 Financial Statements 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 Total associated companies and joint ventures Counterparties without external credit rating from Standard & Poor's and/or Moody's 2014 2013 Recei- vables Netted amount Recei- vables Netted amount - 147 712 - 859 4 - - 88 560 - 648 4 - - 36 308 18 362 3 - - 0 220 - 220 3 - Total 863 652 365 223 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 2014 2013 Receivables Netted amount Receivables Netted amount 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 Total associated companies and joint ventures 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 Total - 0 10 0 10 6 - - 6 16 0 15 37 18 1 0 1 72 104 - 0 6 0 6 6 - - 6 5 0 15 34 17 1 0 1 68 85 - 0 30 0 30 8 - - 8 11 1 1 23 47 - 2 1 75 - 0 21 0 21 7 - - 7 2 1 1 23 46 - 1 1 73 124 103 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://annualreport2014.fortum.com/ 162 Annual Report 2014 Financial Statements 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. 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. 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. 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 both S&P and Fitch remained unchanged during year 2014 and is A- (negative outlook). Net debt/EBITDA ratios EUR million Interest-bearing liabilities 1) Less: Liquid funds 1) Net debt Net debt without Värme financing 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 Comparable net debt/EBITDA without Värme financing Note 28 25 2014 6,983 2,766 4,217 3,664 3,428 526 3,954 2,077 4 1,873 1.1 2.3 2.0 2013 9,058 1,265 7,793 6,658 1,508 621 2,129 106 48 1,975 3.7 3.9 3.4 1) Including interest-bearing debt of EUR 0 million (2013: 20) and cash balances of EUR 0 million (2013: 15) 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://annualreport2014.fortum.com/ 163 Annual Report 2014 Financial Statements 5 Segment reporting 5 Segment reporting 5.1 Fortum’s business structure Fortum renewed its business structure as of 1 March 2014. After reorganisation Fortum's business operations are organised in five divisions and six corporate staff functions. The business divisions are Hydro Power and Technology, Nuclear and Thermal Power, Heat, Electricity Sales and Solutions, Russia, and Distribution. The staff functions are Finance, Strategy and Mergers & Acquisitions, Legal, Human Resources and IT, Communications and Corporate Relations. 5.2 Segment structure in Fortum Fortum's reportable segments were also revised in connection with the reorganisation in March 2014. New reportable segments under IFRS include the business divisions Heat, Electricity Sales and Solutions, Russia and Distribution as well as the Power and Technology segment that consists of the Hydro Power and Technology and Nuclear and Thermal Power divisions. Below is the description of the reportable segments: Other segment includes mainly the shareholding in the associated company Hafslund ASA and corporate 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 divisions' 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. 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://annualreport2014.fortum.com/ 164 Annual Report 2014 Financial Statements Segment information Definition 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. 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. Comparable operating profit and operating profit Net assets Comparable net assets Gross investments in shares Gross divestments in shares See also Financial key figures, Definitions of key figures and Quarterly financial information. Quarterly segment information from 2005 to 2014 is available on Fortum's website www.fortum.com/en/investors/financial-information/pages/default.aspx 5.4 Inter-segment transactions and eliminations Power and Technology 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://annualreport2014.fortum.com/ 165 -601 -179 -422 - - - - - - - - Total 4,751 0 4,751 -526 1,873 1,351 2,171 -90 -3 3,428 149 -217 -199 3,161 Annual Report 2014 Financial Statements 5.5 Segment information 2014 Income statement 2014 Note Power and Technology Netting and eliminations 1) Other EUR million Sales of which internal External sales Depreciation, amortisation and impairment Comparable EBITDA Comparable operating profit Non-recurring items 6 Changes in fair values of derivatives hedging future cash-flow 6 7 Nuclear fund adjustment Operating profit Share of profit of associated 6 30 Heat, Electricity Sales and Solutions 1,332 34 Russia 1,055 0 1,298 1,055 2,156 85 2,071 -121 998 877 52 -70 -3 855 -100 204 104 254 -20 - 337 Distri- bution 751 17 735 -150 416 266 -147 304 161 0 1,865 0 - 0 - 161 2,132 58 44 13 -8 -49 -57 0 0 - -58 companies and joint ventures Finance costs - net Income taxes Profit for the year 20 30 -14 88 35 3 37 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 422 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. 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://annualreport2014.fortum.com/ 166 Annual Report 2014 Financial Statements Impairment losses and restructuring costs 2014 EUR million Recognised impairment losses for trade receivables Recognised impairment losses for intangible assets and property, plant and equipment Restructuring costs Heat, Electricity Sales and Solutions Power and Technology Russia Distri- bution 0 -1 -2 -5 -1 0 -4 0 0 -2 0 0 Other 0 0 -1 Impairment losses and restructuring costs are included in comparable operating profit. Assets and liabilities 2014 EUR million Heat, Electricity Sales and Solutions Power and Technology Distri- bution Russia Other Eliminations Non-interest-bearing assets 6,205 2,127 2,444 2,707 859 523 326 0 7,064 2,650 2,769 2,707 324 319 643 -186 0 -186 1,063 538 172 92 147 -186 Participations in associated companies and joint ventures Assets included in Net assets Interest-bearing receivables Deferred taxes Other assets Liquid funds Total assets Liabilities included in Net assets Deferred tax liabilities Other liabilities Total liabilities included in Capital employed Interest-bearing liabilities Total equity Total equity and liabilities Total -11 -2 -3 Total 13,620 2,027 15,647 2,045 98 818 2,766 21,375 1,827 1,159 470 3,456 6,983 10,935 21,375 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://annualreport2014.fortum.com/ 167 Annual Report 2014 Financial Statements Investments/Divestments 2014 Note 20 19 8 18, EUR million Gross investments in shares Capital expenditure of which capitalised borrowing costs Gross divestments of shares Comparable return on net assets 2014 Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Employees 2014 Number of employees 31 Dec Average number of employees Heat, Electricity Sales and Solutions Power and Technology 2 197 3 67 37 86 1 446 Russia 27 340 43 0 Distri- bution 0 147 0 2,681 Other 4 3 0 2 Total 69 774 47 3,196 Net assets by segments EUR millon Return on net assets, % Comparable return on net assets, % 6,001 2,112 2,597 2,615 496 Distri- bution 390 492 13.6 19.1 5.6 73.6 -5.3 Other 543 536 14.2 8.7 5.6 9.3 -5.8 Total 8,592 8,821 Heat, Electricity Sales and Solutions Russia Power and Technology 1,639 1,685 1,807 4,213 1,913 4,196 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://annualreport2014.fortum.com/ 168 Annual Report 2014 Financial Statements 5.6 Segment information 2013 Income statement 2013 Note Power and Technology Heat, Electricity Sales and Solutions Netting and eliminations 1) Other EUR million Sales of which internal External sales Depreciation, amortisation and impairment Comparable EBITDA Comparable operating profit Non-recurring items 6 Changes in fair values of derivatives hedging future cash-flow Nuclear fund adjustment Operating profit Share of profit of associated companies and 6, 6, 7 30 Distri- bution Russia 1,119 1,064 0 19 1,119 1,045 -150 258 156 0 0 - -216 548 332 17 0 - 1,516 87 1,430 -102 211 109 18 7 - 134 156 349 2,252 69 2,184 -148 1,007 859 25 15 23 922 63 54 9 -5 -49 -54 1 - -53 -706 -228 -478 - - - - - - - - Total 5,309 0 5,309 -621 1,975 1,403 61 21 23 1,508 178 -289 -186 1,212 joint ventures 20, 30 4 91 46 4 32 Finance costs - net Income taxes Profit for the year 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 478 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. 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://annualreport2014.fortum.com/ 169 Annual Report 2014 Financial Statements Impairment losses and restructuring costs 2013 EUR million Recognised impairment losses for trade receivables Recognised impairment losses for intangible assets and property, plant and equipment Restructuring costs Heat, Electricity Sales and Solutions Power and Technology 0 -24 0 -4 0 -1 Russia -18 0 0 Distri- bution -2 0 0 Other 0 0 -1 Total -23 -24 -2 Impairment losses and restructuring costs are included in comparable operating profit. Recognised impairment losses for property, plant and equipment in Power and Technology segment includes EUR 20 million impairment loss relating to the decision to discontinue electricity production at Inkoo power plant. Assets and liabilities 2013 EUR million Heat, Electricity Sales and Solutions Power and Technology Distri- bution Russia Non-interest-bearing assets 6,470 2,268 3,687 4,219 Participations in associated companies and joint ventures 896 592 463 52 7,366 2,860 4,150 4,271 Other 99 339 437 Elimina- tions -293 0 -293 1,010 565 304 526 142 -293 Assets included in Net assets Interest-bearing receivables Deferred taxes Other assets 1) Liquid funds Total assets Liabilities included in Net assets Deferred tax liabilities Other liabilities Total liabilities included in Capital employed Interest-bearing liabilities 2) Total equity Total equity and liabilities Total 16,449 2,341 18,791 2,477 126 704 1,250 23,348 2,254 1,338 573 4,166 9,058 10,124 23,348 1) Other assets at 31 December 2013 includes cash, EUR 15 million, included in Assets related to Assets held for sale. 2) Interest-bearing liabilities at 31 December 2013 includes interest-bearing liabilities, EUR 20 million, included in Liabilities 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://annualreport2014.fortum.com/ 170 Annual Report 2014 Financial Statements Investments/Divestments 2013 EUR million Note Gross investments in shares Capital expenditure of which capitalised borrowing costs Gross divestments of shares 8 18 20 19 Comparable return on net assets 2013 3) Heat, Electricity Sales and Solutions Power and Technology 2 179 2 79 11 123 2 11 Russia 0 435 55 0 Distri- bution 0 255 0 52 Other 2 12 0 0 Total 15 1,005 60 142 Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other 3) Including assets and liabilities relating to Assets held for sale in 2013. Employees 2013 Number of employees 31 Dec Average number of employees Heat, Electricity Sales and Solutions Russia Power and Technology 1,723 1,900 1,968 4,162 2,051 4,245 Net assets by segments EUR million Return on net assets, % Comparable return on net assets, % 6,355 2,295 3,846 3,745 295 Distri- bution 805 786 14.5 9.7 5.2 9.3 -8.5 Other 528 550 13.8 8.7 5.2 8.8 -6.9 Total 9,186 9,532 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 and Technology as well as Distribution operate mainly in Finland and Sweden, whereas Heat, Electricity Sales and Solutions 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. 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://annualreport2014.fortum.com/ 171 Annual Report 2014 Financial Statements External sales by product area EUR million Power sales excluding indirect taxes Heat sales Network transmissions Other sales Total 2014 3,057 753 710 230 4,751 2013 3,284 828 1,024 173 5,309 Heat 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 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 2014 3,197 1,056 223 66 210 4,751 2013 3,685 1,121 206 69 228 5,309 2014 2013 163 225 340 16 8 3 19 774 239 217 435 10 16 13 75 1,005 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://annualreport2014.fortum.com/ 172 Annual Report 2014 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 in 2013. 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 2014 3,417 7,005 2,444 342 199 13 387 -186 13,620 2,027 15,647 2014 2,040 1,201 4,213 603 206 34 295 2013 4,371 7,427 3,687 352 200 245 461 -293 16,449 2,341 18,791 2013 2,477 1,239 4,162 636 210 141 321 8,592 9,186 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://annualreport2014.fortum.com/ 173 Annual Report 2014 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 2014 2,171 -91 -3 2,077 2013 61 21 23 106 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 2014 Capital gains in 2014 mainly include sales gains of EUR 1,85 billion from the sale of the Finnish electricity distribution business. The sales gain is recognised in Fortum's Distribution segment. Capital gains also include the sales gains from selling Fortum's Norwegian electricity distribution and its heat businesses in Norway. The sales gains are booked in Fortum's Distribution segment, EUR 16 million, and Heat and Electricity Sales and Solutions segment, EUR 52 million. Fortum recognised a sales gain from the sale of the UK-based subsidiary Grangemouth CHP. The sales gain was booked in Fortum's Power and Technology segment. Capital gains include approximately EUR 190 million gain from sale of Fortum's 31%-shareholding in the Finnish natural gas company Gasum Oy. The sales gain is booked in Fortum's Heat, Electricity Sales and Solutions segment. Capital gains 2013 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. Fair value changes on derivatives 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 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 disposals of shares, see Note 8 Acquisitions and disposals. 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 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://annualreport2014.fortum.com/ 174 Annual Report 2014 Financial Statements 7 Fair value changes of derivatives and 7 Fair value changes of derivatives and underlying items in income statement underlying items in 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 -13 million (2013: -16). The net effect of fair value changes of hedging derivative and hedged bonds are EUR 1 million (2013: 1). EUR million In operating profit Fair value changes from derivatives not getting hedge accounting status Electricity derivatives Currency 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 2014 2013 -56 8 -15 -28 -91 0 -2 15 -8 16 21 3 In finance costs Exchange gains and losses on loans and receivables -574 -214 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. 39 536 8 583 -13 67 -66 571 -3 -94 19 195 -1 213 -16 25 -24 198 -16 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://annualreport2014.fortum.com/ 175 Annual Report 2014 Financial Statements 8 Acquisitions and disposals 8 Acquisitions and disposals Gross investments in subsidiary shares by segment EUR million Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Total Gross investments in subsidiary shares by country EUR million Finland Sweden Russia Other countries Total 2014 2013 0 0 6 0 0 7 0 10 0 0 0 11 2014 2013 0 0 6 0 7 0 0 0 11 11 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 2014 and 2013 Total gross investments in shares amounted to EUR 69 million (2013: 15), of which investment in subsidiary shares EUR 7 million (2013: 11), shares in associated companies and joint ventures EUR 60 million (2013: 0) and available for sale financial assets EUR 2 million (2013: 4). During 2014 Fortum has acquired additional shares in its associated company, Territorial Generating Company 1. After the acquisition Fortum owns 29.45% of the shares in TGC-1. In July 2014, Fortum acquired E.ON Ruhrgas International GmbH's shareholding of 33.66% in the Estonian natural gas import, sales and distribution company AS Eesti Gaas and a similar shareholding in the gas transmission service company AS Võrguteenus Valdus. The acquired shares increased Fortum's holding in both companies to approximately 51%. The transaction was finalised during the third quarter of 2014. Fortum continues to account for its holdings in the Estonian natural gas businesses using the equity method. There were no material investments in associated companies or joint ventures during 2013. 8.2 Disposals in 2014 and 2013 Disposals 2014 In November 2014 Fortum sold its 31 %-shareholding in the Finnish natural gas company Gasum Oy to the Finnish State. The sales price for the total amount of Fortum's shares was approximately EUR 310 million. Fortum booked a gain of roughly EUR 190 million, corresponding to approximately EUR 0.22 per share. The sales gain is booked in 2014 fourth quarter results of Fortum's Heat, Electricity Sales and Solutions segment. In October 2014 Fortum sold its UK-based subsidiary Grangemouth CHP Limited to its long term customer INEOS Industries Holdings Ltd. Grangemouth CHP Limited owns and operates a natural gas-fired combined heat and power (CHP) plant located at Grangemouth in Scotland. The total sales price was approximately GBP 54 million (corresponding to approximately EUR 70 million). Fortum booked a gain in 2014 fourth quarter results of Fortum's Power and Technology segment. In April 2014 Fortum agreed to sell its Norwegian electricity distribution to the Hafslund Group, listed on the Oslo Stock Exchange, and its heat businesses in Norway to iCON Infrastructure Partners II, L.P. fund. In addition, Fortum agreed to sell its shareholding in Fredrikstad Energi AS (49%) and Fredrikstad Energi Nett AS (35%) to the Hafslund Group. The total consideration was approximately EUR 340 million on a debt- and cash-free basis. The sales gains are booked 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://annualreport2014.fortum.com/ 176 Annual Report 2014 Financial Statements Fortum's Distribution segment, EUR 16 million, and Heat and Electricity Sales and Solutions segment, EUR 52 million in the second quarter 2014 results. The one time sales gains correspond to approximately EUR 0.08 per share. In January 2014 Fortum agreed to sell its 30%-stake in the Swedish power company Karlshamns Kraft AB to the company's majority owner E.ON. The sale has a minor impact on Power and Technology segment’s first quarter 2014 results. In December 2013 Fortum announced that it had agreed to sell its Finnish electricity distribution business to Suomi Power Networks Oy, owned by a consortium of Finnish and international investors. The total consideration is EUR 2.55 billion on a debt- and cash-free basis. Fortum booked a one-time sales gain of EUR 1.85 billion corresponding to EUR 2.08 per share. The sales gain was reported in Fortum's Distribution segment in the first quarter of 2014. Disposals 2013 During 2013 Fortum divested small hydropower plants in Sweden and a minor gain was recognised in the Power and Technology 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 and Technology segment's third quarter results. During fourth quarter 2013 there were several divestments that had a minor effect to Heat, Electricity Sales and Solutions 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. Divestments EUR million Divestment of subsidiaries 1) 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 Divestments in associated companies Divestments of available for sale financial assets Gross divestment of shares 2014 1,342 204 10 -131 -622 - 1,958 2,761 2 10 2,750 131 2 2,884 311 1 3,196 2013 30 3 1 -22 -3 - 12 21 -2 1 22 22 -2 42 100 0 142 1) Divestments of subsidiaries include assets and liabilities that were classified as Assets held for sale in the balance sheet as of December 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://annualreport2014.fortum.com/ 177 Annual Report 2014 Financial Statements 9 Assets held for sale 9 Assets held for sale Assets held for sale 2014 As of 31 December 2014 there were no Assets held for sale. Assets held for sale 2013 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%). 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 2014 - - - - 2013 1,116 42 15 1,173 2014 2013 - - - - - 20 141 306 73 540 1) Amounts are presented net of internal balances with other Fortum subsidiaries, such as internal financing amounting to EUR 0 million (2013: 61). 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://annualreport2014.fortum.com/ 178 Annual Report 2014 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. For more information see Note 8 Acquisitions and disposals. Distribution segment 2013 without Finnish operations Distribution segment 2013 Impact 1) 548 332 349 4 216 255 4,271 526 3,745 8.8 9.3 805 26.1 1,648 408 259 272 6 149 129 3,064 141 2,923 8.8 9.3 477 16.6 1,006 -140 -73 -77 2 -67 -126 -1,206 -385 -821 -0.1 -0.1 -328 -9.5 -642 10 Other income and other expenses 10 Other income and other expenses 10.1 Other income EUR million Rental income Insurance compensation Other items Total 2014 2013 10 8 57 75 14 3 76 93 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 gains booked for sale of emission rights in 2014 nor 2013. Costs for made emissions which are not covered by emission rights received for free were EUR 8 million (2013: 9). 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://annualreport2014.fortum.com/ 179 Annual Report 2014 Financial Statements 10.2 Other expenses EUR million Operation and maintenance costs Property taxes IT and telecommunication costs Other items Total 2014 131 159 64 242 596 2013 167 170 68 243 648 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 132 million (2013: 138). Principal auditors fees EUR million Audit fees Audit related assignments Tax assignments Total 2014 2013 1.4 0.1 0.2 1.8 1.4 0.2 0.0 1.6 Deloitte is the appointed auditor until the next Annual General Meeting, to be held in 2015. 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 of sustainability reporting and other assurance and associated services related to the audit. Tax assignments include fees for tax advice services. 11 Materials and services 11 Materials and services EUR million Materials Materials purchased from associated companies and joint ventures Transmission costs External services Total 2014 1,224 568 134 13 1,939 2013 1,405 657 194 14 2,270 Materials consists mainly of 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 129 million (2013: 148), of which nuclear related capacity and property taxes EUR 81 million (2013: 92) and hydro power related property taxes EUR 14 million (2013: 14). Taxes related to nuclear and hydro production include taxes paid through purchases from associated companies. 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://annualreport2014.fortum.com/ 180 Annual Report 2014 Financial Statements 12 Employee benefits 12 Employee benefits EUR million Wages and salaries Pensions Defined contribution plans Defined benefit plans Social security costs Share-based remunerations Other employee costs Total 2014 298 32 7 52 8 15 413 2013 336 33 6 59 7 19 460 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. The criteria used in determining the size of the bonus for senior management (the President and CEO and other members of the Fortum Executive 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 At present, approximately 120 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 2010-2015, 2011-2016, 2012-2017, 2013-2018 and 2014-2019). The expense recorded as employee costs for the period was EUR 8 million (2013: 7). The LTI liability including social charges at the end of the year 2014 was EUR 9 million (2013: 8), including EUR 1 million (2013: 1) 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://annualreport2014.fortum.com/ 181 Annual Report 2014 Financial Statements Share bonus system Share bonus system Shares granted Grant date Grant price, EUR Number of shares granted Number of shares subsequently forfeited or released from lock-up Number of shares under lock-up at the end of the year 2014 Plan 2011-2016 Plan 2010-2015 14.2.2014 13.2.2013 16.62 13.90 Plan 2009-2013 8.2.2012 18.16 101,753 187,493 165,132 -9,667 92,086 -19,107 168,386 -165,132 0 Fortum share price at the end of the grant year, EUR 17.97 16.63 14.15 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 2014 for plan 2011-2016 was 63,402 share rights and for plan 2010-2015 99,228 share rights. In addition 16,423 shares were delivered for plan 2008-2012 in 2014. 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. An employee is entitled to make withdrawals right from the beginning of the membership.The membership in the fund terminates when the member has received his/her share of the fund in full. 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. 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://annualreport2014.fortum.com/ 182 Annual Report 2014 Financial Statements The fund's latest financial year ended at 30 April 2014 and the fund then had a total of 2,635 members (2013: 2,722). At the end of April 2014 Fortum contributed EUR 0.4 million (2013: 2.8) to the personnel fund as an annual profit-sharing bonus based on the financial results of 2013. The combined amount of members' shares in the fund was EUR 22 million (2013: 23). 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 Executive Management Team (FEM) consists of twelve members (previously nine members), including the President and CEO. The following table presents the total remuneration of the President and CEO and the Fortum Executive Management Team and takes into account the changes in FEM 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 3) Share-based remuneration Pensions (statutory) Pensions (voluntary) Social security expenses Total 2014 2013 The President and CEO 1,005 127 235 188 255 57 1,867 Other FEM members The President and CEO 1) Other FEM members 2) 3,321 511 1,018 594 803 219 6,465 795 22 448 137 204 48 1,654 2,860 197 1,122 494 695 337 5,705 1) Amount is impacted by the sick leave during 2013. 2) Including compensation of EUR 80,000 paid to former CFO Rauramo for assuming the duties of the President and CEO during March-November 2013. 3) Performance bonuses are based on estimated amounts. 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 Tapio Kuula'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 - 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 provided by Fortum's pension fund. In the latter, pensions are either defined benefit or defined contribution schemes and insured by an insurance company. A pension liability of EUR 2,514 thousand (2013: 1,566) 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. 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 FEM 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 is available online at www.fortum.com/en/corporation/ corporate-governance/remuneration-board/employment-terms-conditions-president-ceo/pa and in section Remuneration. Number of shares delivered to the management The table below shows the number of shares delivered during 2014 and 2013 to the President and CEO and other FEM members under the LTI arrangements. Shares delivered under the plans are subject to a lock-up period under which they cannot be sold or transferred to a third party. 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://annualreport2014.fortum.com/ 183 Annual Report 2014 Financial Statements FEM members at 31 December 2014 Tapio Kuula Helena Aatinen Alexander Chuvaev 1) Mikael Frisk Esa Hyvärinen (member of the FEM as of 1 March 2014) Timo Karttinen Kari Kautinen (member of the FEM as of 1 March 2014) Per Langer Markus Rauramo Matti Ruotsala Sirpa-Helena Sormunen (member of the FEM as of 1 September 2014) Tiina Tuomela (member of the FEM as of 1 March 2014) Kaarina Ståhlberg (member of the FEM until 31 March 2014) 2014 2) 15,187 909 13,793 6,463 1,382 6,639 1,739 5,517 1,679 3,463 0 1,156 210 2013 35,152 519 35,783 10,079 n/a 9,563 n/a 8,550 756 12,395 n/a n/a n/a Total 58,137 112,797 1) Share rights will be paid in cash instead of shares after the three-year lock-up period due to local legislation. 2) Share delivery based on share plans 2008-2012 and 2011-2016. 12.5 Board of Directors and management shareholding On 31 December 2014, the members of the Board of Directors owned a total of 10,950 shares (2013: 10,950), which corresponds to 0.00% (2013: 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 2014 Sari Baldauf, Chairman Kim Ignatius, Deputy Chairman (from 8 April 2014) Minoo Akhtarzand Heinz-Werner Binzel Ilona Ervasti-Vaintola Christian Ramm-Schmidt (Deputy Chairman until 8 April 2014) Petteri Taalas (member of the Board from 8 April 2014) Jyrki Talvitie (member of the Board from 8 April 2014) Total 2014 2013 2,300 2,400 - - 4,000 2,250 - - 2,300 2,400 - - 4,000 2,250 n/a n/a 10,950 10,950 The President and CEO and other members of the Fortum Executive Management Team owned a total of 430,457 shares (2013: 346,106) which corresponds to approximately 0.05% (2013: 0.04%) 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://annualreport2014.fortum.com/ 184 Annual Report 2014 Financial Statements Number of shares held by members of the Fortum Executive Management Team FEM members at 31 December 2014 Tapio Kuula Helena Aatinen Alexander Chuvaev Mikael Frisk Esa Hyvärinen (member of the FEM from 1 March 2014) Timo Karttinen Kari Kautinen (member of the FEM from 1 March 2014) Per Langer Markus Rauramo Matti Ruotsala Sirpa-Helena Sormunen (member of the FEM from 1 September 2014) Tiina Tuomela (member of the FEM from 1 March 2014) 2014 2013 168,742 153,555 1,528 14,713 46,591 15,156 76,430 22,276 30,784 15,435 32,360 - 6,442 619 12,093 42,128 n/a 69,791 n/a 25,267 13,756 28,897 n/a n/a Total 430,457 346,106 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 2014 Annual General Meeting eight members were elected. The Annual General meeting confirms the yearly compensation for the Board of Directors. 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 12 thousand (2013: 13) have been recorded for the fees in accordance with local legislation in respective countries. Fees for the Board of Directors EUR thousands Chairman Deputy Chairman Chairman of the Audit and Risk Committee 1) Members 1) If not Chairman or Deputy Chairman simultaneously. 2014 2013 75 57 57 40 75 57 57 40 In addition, a fee of EUR 600 is paid for each Board and Board Committee meeting. The fee is doubled for Board members living outside of Finland in Europe, and tripled for Board members living outside of Europe. The members are entitled to travel expense compensation in accordance with the company's travel policy. 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://annualreport2014.fortum.com/ 185 Annual Report 2014 Financial Statements Compensation for the Board of Directors EUR thousands Board members at 31 December 2014 Sari Baldauf, Chairman Kim Ignatius, Deputy Chairman (from 8 April 2014) Minoo Akhtarzand Heinz-Werner Binzel Ilona Ervasti-Vaintola Christian Ramm-Schmidt (Deputy Chairman until 8 April 2014) Petteri Taalas (member of the Board from 8 April 2014) Jyrki Talvitie (member of the Board from 8 April 2014) Former Board member Joshua Larson (member of the Board until 8 April 2014) Total 2014 2013 83 67 57 60 48 53 37 53 19 477 84 67 58 60 49 66 - - 71 455 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://annualreport2014.fortum.com/ 186 Annual Report 2014 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 and deposits 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 2014 2013 19 7 7 7 7 30 30 32 -303 0 47 -256 82 2 84 -13 67 -66 8 -5 -574 39 536 11 -43 -7 2 -5 -40 -217 -361 -1 60 -301 72 3 75 -16 25 -24 -1 -16 -214 19 195 9 -35 -16 2 -7 -47 -289 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 31 million (2013: 29) from shareholders' loans in Finnish and Swedish nuclear companies, EUR 27 million (2013: 33) from Fortum Värme and EUR 19 million (2013: 6) 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. 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. 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://annualreport2014.fortum.com/ 187 Annual Report 2014 Financial Statements 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 2014 2013 6 39 54 99 -80 536 8 464 563 18 19 9 46 -89 195 -1 105 151 1) Fair value gains and losses on financial instruments include fair value changes from interest rate swaps not getting hedge accounting amounting to EUR -13 million (2013: -16) and fair value change of hedging derivatives in fair value hedge relationship EUR 67 million (2013: 25), totalling EUR 54 million (2013: 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://annualreport2014.fortum.com/ 188 Annual Report 2014 Financial Statements 14 Income tax expense 14 Income tax expense 14.1 Profit before tax EUR million Finnish companies Swedish companies Other companies Total 2014 2,421 287 652 3,360 2013 440 375 583 1,398 14.2 Major components of income tax expense by major countries EUR million 2014 2013 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 -87 -57 -48 -192 15 23 -34 5 -6 0 -5 -11 -199 -104 -54 -46 -203 81 -8 -56 17 -1 0 1 0 -186 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://annualreport2014.fortum.com/ 189 Annual Report 2014 Financial Statements 14.3 Income tax rate The table below explains the difference between the theoretical enacted tax rate in Finland compared to the effective income 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 Changes in tax valuation allowance related to not recognised tax losses Other items Adjustments recognised for taxes of prior periods Tax charge in the income statement Key tax indicators: 2014 3,360 -672 0 5 0 438 -2 34 -3 0 7 -6 -199 % 20.0 0.0 -0.2 0.0 -13.0 0.0 -1.0 0.1 0.0 -0.2 0.2 5.9 2013 1,398 -343 79 53 2 12 -7 40 0 -19 -3 -1 -186 % 24.5 -5.7 -3.8 -0.2 -0.9 0.5 -2.9 0.0 1.4 0.2 0.1 13.3 - The weighted average applicable income tax rate for 2014 is 20.5% (2013: 22.5%) - The effective income tax rate in the income statement for 2014 is 5.9% (2013: 13.3%) - The effective income tax rate excluding the share of profits from associates and joint ventures, tax exempt capital gains and tax rate changes for 2014 is 18.8% (2013: 22.7%) - The total tax rate for 2014 is 14.3% (2013 31.8%) - The total tax rate excluding the share of profits from associates and joint ventures and tax exempt capital gains for 2014 is 38.2% (2013: 36.6%) Effective income tax rate and effective total tax rate are effected by gains or losses on sale of shares. Many countries like Finland, Sweden and Netherlands have exempted income on capital gains and losses from income tax purposes. With this countries aim to tax the operative income of the company and avoid taxing the same income twice in case of the sale of the shares. Taxation of capital gains or losses is in line with the taxation of dividend income. One time tax exempt capital gains from divestments during 2014 reduced the effective income tax rate with 13%. In December 2013 the Finnish Parliament passed legislation lowering the income tax rate from 24.5% to 20%. The one-time positive effect in 2013 in the income tax cost from the tax rate change was approximately EUR 79 million. 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. 14.4 Total taxes Fortum has current income taxes in 2014 totalling EUR 203 million (2013: 203). The effective income 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 even though current income taxes are stable. Taxes borne indicate different taxes that Fortum pays for the period. In 2014 Fortum’s taxes borne were EUR 525 million (2013: 558). 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 indicates the burden on taxes borne by Fortum from its profit before these taxes. Other tax contribution indicators Total taxes borne in relation to segment assets by location was in 2014 in Finland 4.6% (2013: 4.0%), in Sweden 4.0% (2013: 4.0%) and Other countries 2.8% (2013: 1.9%). The indicator reflects how much the Total taxes borne are in relation to the segment assets in a country. Total taxes borne in relation to sales volumes was in 2014 in Finland EUR 6.3 million per TWh (2013: 6.0), in Sweden EUR 9.9 million per TWh (2013: 12.7) and Other countries EUR 1.4 million per TWh (2013: 1.4). 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://annualreport2014.fortum.com/ 190 Annual Report 2014 Financial Statements For group internal long term financing Fortum has financing companies in the Netherlands, Belgium, Luxembourg and Ireland. Fortum group financing companies' total taxes borne were in 2014 EUR 40 million (2013: 36) and total tax rate was 13.2% (2013: 12.4%). Total taxes borne in relation to net interest bearing receivables and liabilities was in 2014 0.4% (2013: 0.3%), which reflects the current low interest levels. 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 527 million (2013: 700). Fortum has had several tax audits ongoing during 2014. Fortum has received income tax assessments in Sweden for the years 2009-2012, in Belgium for the years 2008 -2011 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. 15 Earnings and dividend per share 15 Earnings and dividend per share 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 2014 Fortum had no diluting stock option schemes. 2014 3,154 888,367 2013 1,204 888,367 3.55 1.36 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 General Meeting of the shareholders. A dividend in respect of 2014 of EUR 1.10 per share and an extra dividend of EUR 0.20 per share, amounting to a total dividend of EUR 1,155 million based on the amount of shares registered as of 3 February 2015 is to be proposed at the Annual General Meeting on 31 March 2015. These financial statements do not reflect this dividend. A dividend in respect of 2013 of EUR 1.10 per share, amounting to a total dividend of EUR 977 million, was decided at the Annual General Meeting on 8 April 2014. The dividend was paid on 22 April 2014. 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 General Meeting on 9 April 2013. The dividend was paid on 19 April 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://annualreport2014.fortum.com/ 191 Annual Report 2014 Financial Statements 16 Financial assets and liabilities by categories 16 Financial assets and liabilities by categories 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. Financial assets by categories 2014 Loans and receivables Financial assets at fair value through profit and loss Hedge accounting, fair value hedges Amortised cost Non-hedge accounting 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 Long-term interest-bearing receivables 21 3 38 22 2,041 Financial instruments in current assets Derivative financial instruments 3 Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Trade receivables Other short-term interest-bearing receivables Liquid funds Total 24 24 25 549 4 2,766 5,398 Fair value recognised in equity, cash flow hedges Available- for-sale financial assets 30 49 1 191 206 144 3 47 274 12 67 48 0 191 591 260 30 Finance leases Total financial assets 68 50 541 3 0 2,041 114 322 12 549 4 2,766 6,470 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://annualreport2014.fortum.com/ 192 Annual Report 2014 Financial Statements Financial assets by categories 2013 EUR million Note Loans and receivables Financial assets at fair value through profit and loss Hedge accounting, fair value hedges Amortised cost Non-hedge accounting 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 Long-term interest-bearing receivables 21 3 46 22 2,596 70 Financial instruments in current assets Derivative financial instruments 3 Electricity derivatives Interest rate and currency derivatives Oil and other futures and forward contracts Trade receivables Other short-term interest-bearing receivables Liquid funds Total 24 24 25 618 6 1,265 4,531 Fair value recognised in equity, cash flow hedges Available- for-sale financial assets 31 42 23 104 5 43 186 3 88 80 29 Finance leases Total financial assets 77 85 279 3 2 2,598 192 85 29 618 6 1,265 5,237 70 429 174 31 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://annualreport2014.fortum.com/ 193 Annual Report 2014 Financial Statements Financial liabilities by categories 2014 Financial liabilities at fair value through profit and loss Other financial liabilities EUR million Note 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 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. 45 96 3 27 22 4 7 96 1 22 0 4,427 1,454 1) 0 5,881 52 192 3 1,103 0 1,103 28 44 4 298 69 298 69 0 197 126 5,897 1,454 0 7,675 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://annualreport2014.fortum.com/ 194 Annual Report 2014 Financial Statements Financial liabilities by categories 2013 Financial liabilities at fair value through profit and loss Other financial liabilities EUR million Note 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 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 2) 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 22 30 71 2 31 48 10 5,637 1,299 1) 7 49 5 1 2,103 386 132 6,936 37 142 2 2,103 31 53 11 386 132 22 192 62 8,258 1,299 0 9,833 1) Fair valued part of bond in fair value hedge relationship. 2) Including interest-bearing liabilities, EUR 20 million, in Liabilities related to assets held for sale at 31 December 2013 of which EUR 4 million in current 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://annualreport2014.fortum.com/ 195 Annual Report 2014 Financial Statements 17 Financial assets and liabilities by fair value 17 Financial assets and liabilities by fair value hierarchy hierarchy Financial assets EUR million In non-current assets Level 1 Level 2 Level 3 Netting 2) Total Note 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Available for sale financial assets 1) Derivative financial instruments 21 3 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 1 29 30 30 31 6 66 335 206 54 71 94 186 -5 -17 -12 -28 1 49 335 206 42 43 94 186 Non-hedge accounting 1 3 6 -3 3 3 In current assets Derivative financial instruments 3 Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Oil and other futures and forward contracts Hedge accounting Non-hedge accounting Total 2 1 59 66 30 32 127 250 5 80 79 153 48 274 9 -11 -106 -23 -164 -1 -32 -26 67 47 48 274 0 12 104 88 5 80 0 29 1,182 867 29 30 -168 -260 1,073 706 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://annualreport2014.fortum.com/ 196 Annual Report 2014 Financial Statements Financial liabilities EUR million Note 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Level 1 Level 2 Level 3 Netting 2) Total 28 3 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 1,454 1,299 3) 1,454 1,299 11 62 96 96 19 58 72 71 -5 -17 -12 -28 7 45 96 96 7 30 72 71 Non-hedge accounting 5 2 2 -3 3 2 In current liabilities Derivative financial instruments 3 Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Oil and other futures and forward contracts Hedge accounting Non-hedge accounting Total 3 2 41 48 29 34 23 192 5 48 12 134 22 22 2 -11 -106 -23 -164 -1 -32 -26 1 27 22 22 0 4 0 31 5 48 1 10 1,913 1,787 0 0 -168 -260 1,778 1,575 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 (2013: 30), 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 (2013: 1). The cumulative fair value change booked in Fortum's equity was EUR -3 million (2013: -3). 2) Receivables and liabilities against electricity, oil and other commodity exchanges arising from standard derivative contracts with same delivery period are netted. 3) Fair valued part of bond in fair value hedge relationship. Net fair value amount of interest rate and currency derivatives is EUR 626 million, assets EUR 863 million and liabilities EUR 237 million. Fortum has cash collaterals based on Credit Support Annex agreements with some counterparties. At the end of December 2014 Fortum had received EUR 286 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://annualreport2014.fortum.com/ 197 Annual Report 2014 Financial Statements 18 Intangible assets 18 Intangible assets EUR million Cost 1 January Translation differences and other adjustments 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 Disposals Sale of subsidiary companies Reclassifications Depreciation for the period Moved to Assets held for sale Accumulated depreciation 31 December Goodwill 2014 275 -101 2013 309 -34 0 0 0 -4 0 0 0 0 0 0 0 0 170 275 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Other intangible assets 2014 368 -12 22 -1 -1 -24 27 0 379 260 -11 -2 -5 5 25 0 273 2013 424 -1 46 7 -20 -3 5 -89 368 306 -1 -20 0 3 26 -54 260 Total 2014 644 -113 2013 733 -35 22 -1 -1 -28 27 0 549 260 -11 -2 -5 5 25 0 273 46 7 -20 -3 5 -89 644 306 -1 -20 0 3 26 -54 260 Carrying amount 31 December 170 275 106 109 276 384 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 for information on impairment testing. 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://annualreport2014.fortum.com/ 198 Annual Report 2014 Financial Statements 19 Property, plant and equipment 19 Property, plant and equipment Buildings, plants and structures Machinery and equipment Other tangible assets Advances paid and construction in progress Total EUR million Cost 1 January 2014 Translation differences and other adjustments Capital expenditure Nuclear asset retirement cost Disposals Sale of subsidiary companies Reclassifications Cost 31 December 2014 Accumulated depreciation 1 January 2014 Translation differences and other adjustments Disposals Sale of subsidiary companies Depreciation for the period Reclassifications Accumulated depreciation 31 December 2014 Land, waterfall, rights and tunnels 2,974 -164 2 0 -1 -1 0 3,424 -426 22 0 -5 -88 182 11,120 -1,176 28 -3 -259 -443 461 2,810 3,110 9,728 0 0 0 0 0 0 0 1,321 4,542 -67 -1 -31 111 -5 -330 -258 -287 387 -1 1,328 4,054 144 1,161 18,824 -4 0 0 0 -1 -4 136 111 -3 0 -1 3 0 111 25 -274 -2,043 700 0 -1 -16 -666 752 -3 -266 -549 -27 904 16,687 0 0 0 0 0 0 0 5,974 -400 -259 -319 502 -5 5,492 904 11,195 Carrying amount 31 December 2014 2,810 1,782 5,674 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 translation differences and sale of subsidiary companies. The main increase was due to the ongoing investment programme in OAO Fortum. See Note 9 Assets held for sale For more information on credit risks regarding ongoing investments, see Note 3.7 Credit risk. Property, plant and equipment that are subject to restrictions in the form of real estate mortgages amount to EUR 274 million (2013: 240). 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://annualreport2014.fortum.com/ 199 Annual Report 2014 Financial Statements EUR million Cost 1 January 2013 Translation differences and other adjustments Increases through business combinations Capital expenditure Nuclear asset retirement cost Disposals Reclassifications Moved to assets held for sale Cost 31 December 2013 Accumulated depreciation 1 January 2013 Translation differences and other adjustments Increases through business combinations Disposals Depreciation for the period Reclassifications Moved to assets held for sale Accumulated depreciation 31 December 2013 Buildings, plants and structures Machinery and equipment Other tangible assets Advances paid and construction in progress Total Land, waterfall, rights and tunnels 3,069 -93 0 1 0 -1 1 -3 3,080 -146 1 74 0 -133 579 -30 2,974 3,424 0 0 0 0 0 0 0 0 1,343 -40 0 -100 112 28 -22 1,321 12,414 137 2,284 20,985 -466 9 269 45 -136 960 -1,977 11,120 5,300 -151 0 -97 478 -32 -957 4,542 5 0 2 0 -1 1 -1 144 107 1 0 -1 4 1 -1 111 -139 -839 0 613 0 -1 -1,546 10 959 45 -272 -5 -50 -2,061 1,161 18,824 0 0 0 0 0 0 0 - 6,750 -190 0 -198 594 -3 -980 5,974 Carrying amount 31 December 2013 2,974 2,103 6,579 33 1,161 12,849 19.1 Capitalised borrowing costs EUR million 1 January Translation differences and other adjustments Increases / disposals Reclassification Depreciation Moved to Assets held for sale 31 December Buildings, plants and structures Machinery and equipment Advances paid and construction in progress Total 2014 2013 2014 2013 2014 2013 2014 2013 40 -14 -6 9 5 0 35 17 -2 0 27 -1 0 40 162 -56 12 21 -14 0 73 -11 0 108 -6 -1 57 -21 37 -31 0 0 143 259 233 -11 60 -136 0 0 -91 43 -1 -9 0 -24 60 -1 -7 -1 125 162 42 57 202 259 Borrowing costs of EUR 47 million were capitalised in 2014 (2013: 60) for the OAO Fortum investment program. The interest rate used for capitalisation varied between 3,3 - 16,6% (2013: 2.8 - 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://annualreport2014.fortum.com/ 200 Annual Report 2014 Financial Statements 19.2 Capital expenditure 1) Finland Sweden Estonia Poland Norway Other countries, total Total EUR million 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 2014 2013 Power and Technology Hydropower Nuclear power Fossil-based electricity Renewable-based electricity Other Total Power and Technology Heat, Electricity Sales and Solutions 16 80 7 3 17 60 2 4 2 87 91 1 3 106 85 88 94 0 0 Fossil-based heat 3 7 Fossil-based electricity 24 17 6 18 13 4 44 11 2 17 14 8 46 128 10 2 2 0 133 121 0 0 163 269 221 217 8 1 9 0 0 9 16 16 0 0 16 Renewable, of which waste biofuels other District heat network Other Total Heat, Electricity Sales and Solutions Distribution Other Total excluding Russia segment Russia Fossil-based electricity Fossil-based heat Other Total Russia Total including Russia segment 0 2 2 6 0 5 1 8 1 15 10 0 0 0 0 15 10 0 0 4 4 9 0 0 0 3 0 3 103 80 0 11 3 108 60 2 7 2 0 197 179 1 39 14 25 4 8 1 37 3 6 28 31 9 10 2 56 14 42 0 44 10 3 3 13 3 0 10 2 3 18 44 0 1 0 3 86 147 3 123 255 12 13 22 47 433 570 305 387 35 0 48 0 340 435 774 1,005 1) Includes capital expenditure to both intangible assets and property, plant and equipment. Fortum classifies investments in four main categories. Maintence investments during 2014 in property, plant and equipment were EUR 181 million (2013: 200). Investments due to requirements of legislation were EUR 149 million (2013: 174). Investments increasing productivity were EUR 134 million (2013: 176) and growth investments were EUR 309 million (2013: 453). 19.2.1 Power and Technology In Finland, Fortum invested EUR 80 million (2013: 60) into the Loviisa nuclear power plant. Fortum invested additionally EUR 103 million (2013: 108) into hydro production, mainly refurbishment and productivity investments. The biggest of these were Höljes and Skedvi refurbishment in Sweden, EUR 30 million (2013: 24) and Imatra refurbishment in Finland, EUR 8 million (2013: 4). Investments for CO2 free production were EUR 194 million (2013: 175). 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://annualreport2014.fortum.com/ 201 Annual Report 2014 Financial Statements 19.2.2 Heat, Electricity Sales and Solutions Growth investments in Heat, Electricity Sales and Solutions segment totalled EUR 34 million (2013: 89) in year 2014. Refurbishment and legislation investments totalled EUR 53 million (2013: 34). 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 2014 comprised of new heat pump and bio-pellet fuel conversion in heat boiler in Espoo and district heat connection in Poland. Investments for CO2 free production were EUR 37 million (2013: 56). 19.2.3 Distribution Distribution invested EUR 147 million (2013: 255) in reliability of electricity distribution, maintenance and new investments in Finland, Sweden, and Norway. Lower investment level is consequense of Fortum's divestments of its Finnish electricity distribution business to Suomi Power Networks in March 2014 and its Norwegian electricity business to the Hafslund Group in May 2014. 19.2.4 Russia OAO Fortum has an extensive investment programme aiming to almost double its power capacity with 2,300 MW. During 2014 EUR 235 million (2013: 249) was invested in this programme. The value for the remaining part of the programme is estimated to be approximately EUR 0.2 billion from January 2015 onwards. The last two units are to be completed by mid of 2015. The third unit at Nyagan power plant started commercial operation at the end of 2014. Altogether, Fortum’s extensive investment programme in Russia consists of eight new units. 19.3. Impairment testing of non-financial assets in 2014 Key assumptions used in impairment testing are presented below as well as the basis for determining the value of each assumption. Assumptions are based on internal and external data that are consistent with observable market information, when applicable. The assumptions are determined by management as part of the business planning process for the Fortum Group. Key assumptions Power market development Regulation framework Utilisation of power plants Basis for determining the value for key assumptions Historical analysis and prospective forecasting Current market setup and prospective forecasting (e.g. CSA mechanism) Past experience, technical assessment and forecasted market development Forecasted maintenance investments Past experience, technical assessment and planned maintenance work Finalisation of the investment programme Project forecasts Discount rate Mostly market based information The cash flows used in testing are based on the most recent business plans and are determined in local currency. The period covered by cash flows is related to the useful lives of the assets being reviewed for impairment. The growth rate used to extrapolate the cash flow projections until the end of assets' useful lives is in line with the assumed inflation. In Russia the generation capacity built after 2007 under the Russian Government's Capacity Supply Agreements receives guaranteed capacity payments for a period of 10 years. The discount rate takes into account the risk profile of the country in which the cash flows are generated. There have not been any major changes in the discount rate components or in the methods used to determine them. The long-term pre-tax discount rate used for Russia was 10.8% (2013: 10.5%). The net operating assets of OAO Fortum, including fair value adjustments and goodwill arising from the acquisition of the company are tested yearly for possible impairment. As of 31 December 2014, the recoverable values were greater than their carrying values and therefore no impairments were booked. In light with the sharp rise in the Russian interest rates at the end of 2014 an additional assessment has been performed in January 2015 using a pre-tax discount rate of 12.3%. The reassessment confirmed the results from the earlier testing. 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 changes in discount rate. Management estimates that a reasonably possible change in the discount rate used or in future earnings would not cause Russian cash generating unit's carrying amount to exceed its recoverable amount. Based on the sensitivity analysis done, if the estimated future operating profits before depreciation were 10% lower than management's estimates or pre-tax discount rate applied was 10% higher than the one used, the Group would not need to recognise impairment losses for property plant and equipment or goodwill. 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://annualreport2014.fortum.com/ 202 Annual Report 2014 Financial Statements 20 Participations in associated companies and 20 Participations in associated companies and joint ventures joint ventures 20.1 Principal associated companies and joint ventures Kemijoki Oy Hafslund ASA TGC-1 TVO Fortum Värme OKG AB Power production company Associated company Power and Technology Sweden 46 46 Nature of the relationship Classification Segment Domicile Ownership interest, % 1) Votes, % Forsmarks Kraftgrupp AB Power production company Associated company Power production company Associated company Holding in energy company (listed) Associated company Holding in energy company (listed) Associated company Power and Technology Power and Technology Sweden Finland 26 26 59 18 Other Norway 34 33 Russia Russia 29 29 Power production company Holding in power and heat company Joint venture Joint venture Heat, Electricity Sales and Solutions Power and Technology Finland Sweden 26 26 50 50 1) Kemijoki and TVO have different series of shares. The ownership interest varies due to the changes in equity assigned to the different share series. The ownership interests for 2013 for Kemijoki Oy and TVO were 59% and 26% respectively. Shareholdings in power production companies 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 production companies are not profit making, since the owners purchase electricity at production cost including interest cost and production taxes. The share of profit of these companies is mainly IFRS adjustments (e.g. accounting for nuclear related assets and liabilities) and depreciations on fair value adjustments from historical acquisitions since the companies are not profit making under local accounting principles. Fortum has material shareholdings in such power production companies (mainly nuclear and hydro) that are consolidated using equity method either as associated companies (OKG AB, Forsmarks Kraftgrupp AB and Kemijoki Oy) or in some cases as joint ventures (Teollisuuden Voima Oyj (TVO)). In Sweden nuclear production company shareholdings are 45.5% ownership of the shares in OKG AB and 25.5% ownership of the shares in Forsmarks Kraftgrupp AB. Excluding non-controlling interests in the subsidiaries, Fortum’s participation in the 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. OKG AB and Forsmarks Kraftgrupp AB are accounted for as associated companies as Fortum has a representation on the Board of Directors and it participates in policy-making processes of the companies. In Finland Fortum has an ownership in power production company TVO that has three series of shares which entitle the shareholders to electricity produced in the different power plants owned by TVO. Shares in series A entitle to electricity produced in nuclear power plants Olkiluoto 1 and 2 and Fortum owns 26.6% of these shares. Series B entitles to electricity in the nuclear power plant presently being built, Olkiluoto 3, and Fortum's ownership in this share series is 25%. Series C entitles to electricity produced in TVO’s share of the thermal power plant Meri-Pori. The Meri-Pori power plant is accounted for as a joint operation in Fortum. Fortum accounts for its 54.55% of the assets and TVO for 45.45%. See also Joint operation in Note 19 Property, plant and equipment. The most significant hydro production company shareholding is 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. Since Fortum has a representation on the Board of Directors and it participates in the policy-making processes, Kemijoki Oy is accounted for as an associated company. 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://annualreport2014.fortum.com/ 203 Annual Report 2014 Financial Statements Other shareholdings accounted for using the equity method In Sweden Fortum has a 50.1% ownership in AB Fortum Värme Holding samägt med Stockholms stad (Fortum Värme). Fortum Värme is a district heating company, producing heat and power with CHP plants in Stockholm area, that is co-owned with the City of Stockholm. The shareholding is accounted for as a joint venture as according to the shareholders agreement control is shared. Fortum owns shareholdings in listed companies such as Hafslund ASA and Territorial Generating Company 1 (TGC-1). The shareholdings are accounted for as associated companies as Fortum has representatives in the Board of Directors of the companies. The share of profit of these companies is accounted for based on previous quarter information since updated interim information is not normally available. Participations in associated companies and joint ventures in the balance sheet EUR million Principal associates Principal joint ventures Other associates Other joint ventures Carrying amount 31 December Changes in participation during the year 2014 1,074 730 42 182 2013 1,263 721 226 132 2,027 2,341 EUR million Historical cost 1 January Translation differences and other adjustments Acquisitions Reclassifications Divestments Historical cost 31 December Equity adjustments 1 January Translation differences and other adjustments Share of profits of associates and joint ventures Reclassifications Divestments Dividends received OCI items associated companies Equity adjustments 31 December Carrying amount at 31 December Joint ventures 2014 Associated companies 2014 Joint ventures 2013 Associated companies 2013 518 -11 36 5 -3 546 334 -23 76 12 0 -27 -6 366 912 1,130 -166 26 -9 -143 838 359 -71 72 -7 -36 -30 -10 277 1,115 529 1,270 -7 0 0 -4 -88 0 -6 -45 518 1,130 270 -17 92 0 0 -24 13 334 853 305 -15 86 6 -16 -49 42 359 1,489 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://annualreport2014.fortum.com/ 204 Annual Report 2014 Financial Statements Share of profit of associates and joint ventures EUR million 2014 2013 Principal associates OKG AB Forsmarks Kraftgrupp AB Kemijoki Oy Hafslund ASA TGC-1 Principal associates, total Principal joint ventures Fortum Värme TVO Principal joint ventures, total Other associates Other joint ventures Total 5 -9 -5 36 35 61 67 -4 64 11 12 13 -4 -8 31 46 78 73 12 84 8 7 149 178 The unrecognized share of losses of associated companies and joint ventures (for the reporting period and cumulatively) is zero. Share of profits from Teollisuuden Voima Oyj, Forsmarks Kraftgrupp AB and OKG AB includes EUR 2 million (2013: 17) arising from accounting of nuclear related assets and liabilities. 20.2 Investments in associated companies and joint ventures During 2014 Fortum has acquired additional shares in its associated company, Territorial Generating Company 1. After the acquisition Fortum owns 29.45% of the shares in TGC-1. In July 2014 Fortum acquired 33.66% in AS Eesti Gaas and a similar shareholding in AS Võrguteenus Valdus. The acquired shares increased Fortum's holding in both companies to approximately 51%. Fortum continues to account for its holdings in the Estonian natural gas businesses using the equity method. There were no material investments in associated companies or joint ventures during 2013. See also Note 8 Acquisitions and disposals. 20.3 Divestments of associated companies and joint ventures In November Fortum’s Heat, Electricity Sales and Solutions segment sold its 31% shareholding in the Finnish natural gas company Gasum Oy. During the first quarter 2014 Power and Technology segment divested Fortum's 30% shareholding in its associated company Karlshamn Kraft AB. In June 2013, Fortum agreed to sell its 47.9% ownership in the Swedish energy associate Härjeåns Kraft AB. The transaction was completed in July. In July 2013 Fortum completed the divestment of its 33% holding in associated company Infratek ASA. See also Note 8 Acquisitions and disposals. 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://annualreport2014.fortum.com/ 205 Annual Report 2014 Financial Statements Summarised financial information of the principal associated companies in 2014 EUR million Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities Equity Attributable to NCI Attributable to the owners of the parent Statement of comprehensive income Revenue Profit or loss from continuing operations Other comprehensive income Total comprehensive income Attributable to NCI Attributable to the owners of the parent Reconciliation to carrying amount in the Fortum group Group's interest in the equity of the associate at 1 January Change in share of profit and from OCI items Dividends received Acquisitions Translation differences and other adjustments Group's interest in the equity of the associate at 31 December Fair values on acquisitions and different accounting principles Carrying amount at 31 December Market value for listed shares 1) OKG AB Forsmarks Kraftgrupp AB Kemijoki Oy Hafslund ASA TGC-1 31 Dec 2013 31 Dec 2013 31 Dec 2013 30 Sept 2014 30 Sept 2014 2,200 462 2,552 97 13 13 2,094 488 2,348 197 37 37 449 9 279 90 88 88 2,426 406 1,452 532 849 2 847 1,814 259 481 205 1,388 118 1,270 1 Jan 2013 - 31 Dec 2013 1 Jan 2013 - 31 Dec 2013 1 Jan 2013 - 31 Dec 2013 1 Oct 2013 - 30 Sep 2014 1 Oct 2013 - 30 Sep 2014 568 727 1 1 1 8 -2 6 145 151 1 1 1 10 9 79 88 57 -7 -7 -7 57 -5 52 158 210 1,481 120 -23 96 96 298 33 -20 -23 289 11 299 373 1,357 126 126 8 118 489 35 -4 52 -198 374 -48 326 71 1) 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 2014 trading volumes of TGC-1 shares in relation to the number of shares of the company were approximately 9% (2013: 10%). 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://annualreport2014.fortum.com/ 206 Annual Report 2014 Financial Statements Summarised financial information of the principal associated companies in 2013 EUR million Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities Equity Attributable to NCI OKG AB Forsmarks Kraftgrupp AB Kemijoki Oy Hafslund ASA TGC-1 31 Dec 2012 31 Dec 2012 31 Dec 2012 30 Sept 2013 30 Sept 2013 2,191 429 2,480 121 18 2,061 512 2,284 251 38 453 9 237 129 96 96 2,482 388 1,447 545 877 2 875 2,878 366 732 427 2,085 179 1,906 Attributable to the owners of the parent 18 38 Statement of comprehensive income Revenue Profit or loss from continuing operations Other comprehensive income Total comprehensive income Attributable to NCI Attributable to the owners of the parent Reconciliation to carrying amount in the Fortum group Group's interest in the equity of the associate at 1 January Change in share of profit and from OCI items Dividends received Translation differences and other adjustments Group's interest in the equity of the associate at 31 December Fair values on acquisitions and different accounting principles Carrying amount at 31 December Market value for listed shares 1 Jan 2012 - 31 Dec 2012 1 Jan 2012 - 31 Dec 2012 1 Jan 2012 - 31 Dec 2012 1 Oct 2012 - 30 Sep 2013 1 Oct 2012 - 30 Sep 2013 594 753 6 6 6 6 3 -3 2 8 176 184 10 10 68 78 56 -8 -8 -8 63 -6 57 158 215 1,634 1,641 95 -2 92 92 305 52 -21 -38 298 24 323 369 167 0 167 8 159 510 46 -3 -64 489 -26 463 145 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://annualreport2014.fortum.com/ 207 Annual Report 2014 Financial Statements Summarised financial information of the principal joint ventures in 2014 and 2013 EUR million Balance sheet Non-current assets Current assets of which cash and cash equivalents Non-current liabilities of which non-current interest-bearing liabilities Current liabilities of which current financial liabilities Equity 1) Attributable to NCI 2014 TVO Fortum Värme 2013 TVO Fortum Värme 30 Sept 2014 31 Dec 2014 30 Sept 2013 31 Dec 2013 6,567 423 128 4,994 4,078 516 351 1,480 2,552 313 6 1,362 995 432 298 1,071 6,218 507 220 4,870 3,982 387 180 1,468 2,490 322 3 1,266 906 471 301 1,074 1 1,073 Attributable to the shareholders of the company 1,480 1,071 1,468 Statement of comprehensive income Revenue Depreciation and amortisation Interest income Interest expense Income tax expense or income Profit or loss from continuing operations Other comprehensive income Total comprehensive income Attributable to NCI Attributable to the shareholders of the company Reconciliation to carrying amount in the Fortum group Group's interest in the equity of the joint venture at 1 January Change in share of profit and from OCI items Dividends received Translation differences and other adjustments Group's interest in the equity of the joint venture at 31 December Fair values on acquisitions and different accounting principles Carrying amount at 31 December 1 Oct 2013 - 30 Sep 2014 1 Jan 2014 - 31 Dec 2014 1 Oct 2012 - 30 Sep 2013 1 Jan 2013 - 31 Dec 2013 353 -58 23 -67 4 12 16 16 289 3 292 -7 285 716 -128 1 -28 -30 126 -22 104 104 537 53 -22 -32 535 -91 445 386 -57 36 -64 36 12 48 48 277 12 289 -5 284 807 -124 1 -29 -33 136 20 157 1 155 498 78 -23 -16 537 -101 436 1) The equity of TVO includes subordinated loans of EUR 339 million (2013: 339). Fortum has given part of these loans, pro rata to the ownership. See also Associated companies in Note 39 Legal actions and official proceedings. 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://annualreport2014.fortum.com/ 208 Annual Report 2014 Financial Statements 20.4 Transactions and balances Associated company transactions EUR million Sales to associated companies Interest on associated company loan receivables Purchases from associated companies 2014 1 31 483 2013 0 28 539 Purchases from associated companies include mainly purchases of nuclear and hydro power at production cost including interest costs and production taxes. 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 For more info about receivables from associated companies, please see note 22 Long-term and short-term interest-bearing receivables. Joint venture transactions EUR million Sales to joint ventures Interest on joint venture loan receivables Purchases from joint ventures 2014 2013 1,327 1,320 1 0 1 1 0 0 12 0 10 0 2014 2013 82 28 85 94 34 113 Purchases from joint ventures include mainly purchases of nuclear and hydro power at production cost including interest costs and production taxes. Joint venture balances EUR million Receivables from joint ventures Long-term interest-bearing loan receivables Trade receivables Other receivables Liabilities to joint ventures Long-term loan payables Trade payables Other payables 2014 2013 714 17 15 261 5 4 1,267 27 20 248 6 3 For more info about receivables from joint ventures, please see note 22 Long-term and short-term interest-bearing receivables. 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://annualreport2014.fortum.com/ 209 Annual Report 2014 Financial Statements 21 Other non-current assets 21 Other non-current assets EUR million Available for sale financial assets Other Total 2014 30 38 68 2013 31 46 77 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 (2013: 30), 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 (2013: 1). The cumulative fair value change booked in Fortum's equity was EUR -3 million (2013: -3). 22 Long-term and short-term interest-bearing 22 Long-term and short-term interest-bearing receivables 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 2014 2,041 0 2013 2,595 2 2,041 2,598 4 4 6 6 2,045 2,603 1) Included in trade and other receivables in the balance sheet, see Note 24. Long-term loan receivables include receivables from associated companies and joint ventures EUR 2,041 million (2013: 2,587), mainly from Swedish nuclear companies, OKG AB and Forsmark Kraftgrupp AB, EUR 1,310 million (2013: 1,312) and Fortum Värme samägt med Stockholms stad EUR 553 million (2013: 1,135). The nuclear companies are mainly funded with shareholder loans, pro rata each shareholder’s ownership. TVO is building Olkiluoto 3, the nuclear power plant, which is funded through external loans, share issues and shareholder loans according to shareholders' agreement between the owners of TVO. At end of December 2014 Fortum has EUR 95 million outstanding receivables regarding Olkiluoto 3 and is additionally committed to provide at maximum EUR 100 million. A subordinated shareholder loan EUR 15 million has also been given to fund planning of Olkiluoto 4, to which Fortum has additionally committed to provide EUR 57 million. For further information regarding credit risk management, see Note 3.7 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://annualreport2014.fortum.com/ 210 Annual Report 2014 Financial Statements Interest-bearing receivables 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, % 2.4 - 2.4 0.0 2.4 Carrying amount 2014 2,044 - Under 1 year 1,857 - 2,044 1,857 0 0 2,045 1,857 Repricing 1-5 years 3 - 3 - 3 Over 5 years 184 - Fair value 2014 2,216 - Carrying amount 2013 2,600 2 Fair value 2013 2,702 4 184 2,216 2,602 2,706 - 184 0 1 1 2,216 2,603 2,707 1) Including current portion of long-term receivables EUR 3 million (2013: 5). 23 Inventories 23 Inventories EUR million Nuclear fuel Coal Oil Biofuels Other inventories Total No write downs have been booked related to inventories during 2014 or 2013. 24 Trade and other receivables 24 Trade and other receivables EUR million Trade receivables Income tax receivables Accrued interest income Accrued income and prepaid expenses Other receivables Other short-term interest-bearing receivables Moved to assets held for sale Total The management considers that the carrying amount of trade and other receivables approximates their fair value. 2014 105 77 12 1 61 256 2014 549 132 6 23 116 4 0 830 2013 109 66 15 2 71 264 2013 618 98 21 20 147 6 -42 869 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://annualreport2014.fortum.com/ 211 Annual Report 2014 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 2014 2013 Gross 504 44 6 50 604 Impaired 2 4 3 46 55 Gross 577 37 10 75 699 Impaired 2 2 2 75 80 Impairment losses recognised in the income statement were EUR 11 million (2013: 24), of which EUR 4 million (2013: 18) are impairment losses recognised in the OAO Fortum Group. On 31 December 2014, trade receivables of EUR 55 million (2013: 80) are impaired and provided for, of which EUR 46 million (2013: 73) refers to the OAO Fortum Group. For information regarding impairment losses by segment, see Note 5 Segment reporting. Trade receivables by currency (Gross) EUR million EUR SEK RUB NOK PLN Other Total 2014 2013 204 202 132 12 45 9 604 219 223 173 30 31 23 699 Trade receivables are arising from a large number of customers mainly in EUR, SEK and RUB mitigating the concentration of risk. For further information regarding credit risk management and credit risks, see Counterparty risks in the Operating and financial review and Note 3.7 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://annualreport2014.fortum.com/ 212 Annual Report 2014 Financial Statements 25 Liquid funds 25 Liquid funds EUR million Cash at bank and in hand Bank deposits with maturity under 3 months Cash and cash equivalents Bank deposits with maturity more than 3 months Total Cash and cash equivalents moved to assets held for sale Total 2014 1,880 129 2,009 757 2,766 0 2,766 2013 1,089 176 1,265 0 1,265 -15 1,250 Bank deposits include bank deposits held by OAO Fortum amounting to EUR 131 million (2013: 101). At the year end 2014 OAO Fortum’s deposits included EUR 30 million in euros and EUR 101 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 3.7 Credit risk. 26 Share capital 26 Share capital EUR million Registered shares at 1 January Registered shares at 31 December 2014 2013 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 2014, a total of 888,367,045 shares had been issued. 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 2014 Fortum Corporation’s share capital, paid in its entirety and entered in the trade register, was EUR 3,046,185,953.00. Fortum Corporation's shares are listed on Nasdaq Helsinki. The trading code is FUM1V. Fortum Corporation's shares are in the Finnish book entry system maintained by Euroclear Finland Ltd. Details on the President and CEO and other members of the Fortum Executive 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 2014, 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 and bonds with warrants 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. 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://annualreport2014.fortum.com/ 213 Annual Report 2014 Financial Statements 27 Non-controlling interests 27 Non-controlling interests Principal non-controlling interests EUR million OAO Fortum Group AS Fortum Tartu Group Other Total Russia Estonia 2014 29 24 18 71 28 Interest-bearing liabilities 28 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 Current portion of other long-term interest-bearing debt 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) 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, % 3.3 2.8 1.3 2.9 - 0.0 0.0 2.8 2014 4,088 576 1,216 5,881 660 146 10 0 287 1,103 6,983 0 6,983 Carrying amount 2014 4,748 722 Repricing Under 1 year 1,192 462 1-5 years 1,858 70 Over 5 years 1,698 190 Fair value 2014 5,093 777 Carrying amount 2013 5,839 854 1,226 1,226 - - 1,296 1,494 1,515 6,696 2,880 1,928 1,888 7,166 8,187 8,659 - 287 287 - 287 287 - - 0 - - 0 - 287 287 718 154 871 719 154 873 6,983 3,167 1,928 1,888 7,453 9,058 9,532 1) Including interest-bearing liabilities, EUR 0 million, in Liabilities related to assets held for sale at 31 December 2014 (2013: 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://annualreport2014.fortum.com/ 214 2013 59 21 21 101 2013 4,736 752 1,464 6,952 1,103 102 30 718 154 2,106 9,058 -20 9,038 Fair value 2013 6,232 912 Annual Report 2014 Financial Statements 2) Includes loans from State Nuclear Waste Management Fund and Teollisuuden Voima Oyj EUR 1,040 million (2013: 995), loans from Finnish pension institutions EUR 78 million (2013: 198) and other loans EUR 108 million (2013: 301). 3) Including current portion of long-term debt. 4) The average interest rate on loans and derivatives on 31 December 2014 was 3.7% (2013: 3.6%). The interest-bearing debt decreased in 2014 by EUR 2,075 million to EUR 6,983 million (2013: 9,058). The amount of short-term financing decreased with EUR 584 million, and at the end of the year the amount of short-term financing was EUR 287 million (2013: 871). In March Fortum increased the amount of re-borrowing from the Finnish nuclear waste fund and Teollisuuden Voima by EUR 45 million to EUR 1,040 million. During the first quarter Fortum repaid a maturing EUR 750 million bond. In the second quarter Fortum repaid two bonds equivalent to EUR 350 million (SEK 2,600 million and NOK 500 million) and EUR 95 million of pension loans. In the third quarter OAO Fortum repaid bilateral debt RUB 2 billion (EUR 41 million). Fortum Värme Holding prepaid SEK 1,7 billion (EUR 182 million) to Fortum Oyj who prepaid the same amount to the City of Stockholm. Both loans were originally due in December 2015. 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) 2006/2016 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 2014 1) EMTN = Euro Medium Term Note Interest basis Interest rate, % Effective interest, % Currency Nominal million 4.615 6.240 6.095 3.235 4.123 3.260 2.344 2.855 Fixed Fixed Fixed Floating Fixed Fixed Floating Fixed Fixed Fixed Floating Floating 4.500 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 Fixed 3.500 3.719 EUR NOK EUR SEK SEK EUR SEK SEK EUR SEK 750 500 750 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 749 55 746 330 330 528 106 186 1,074 122 319 106 96 4,748 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://annualreport2014.fortum.com/ 215 Annual Report 2014 Financial Statements 29 Deferred income taxes 29 Deferred income taxes The movement in deferred tax assets and liabilities during 2014 Deferred taxes in balance sheet, EUR million Deferred tax assets Deferred tax liabilities Net deferred taxes EUR million Property, plant and equipment Pension obligations Provisions Derivative financial instruments Tax losses and tax credits carry-forward Other Net deferred taxes 1 Jan 2014 -1,264 7 24 -46 80 -13 -1,212 1 Jan 2014 126 -1,338 -1,212 Exchange rate differ- ences reclassi- fications and other changes 118 22 7 -3 29 115 Change -28 179 151 Acqui- sitions, disposals and assets held for sale 5 -2 -1 2 31 Dec 2014 98 -1,159 -1,061 31 Dec 2014 -1,150 28 1 -40 70 30 -1,061 Charged to income state- ment Charged to other compre- hensive income -10 1 -23 -1 -7 44 5 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 8 million (2013: 7) 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 38 million on 31 December 2014 (2013: 32). Change in deferred tax is mainly coming from exchange rate differences in Russia and in Sweden, EUR 115 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://annualreport2014.fortum.com/ 216 Annual Report 2014 Financial Statements The movement in deferred tax assets and liabilities during 2013 Deferred taxes in balance sheet, EUR million Deferred tax assets Deferred tax liabilities Net deferred taxes EUR million Property, plant and equipment Pension obligations Provisions Derivative financial instruments Tax losses and tax credits carry-forward Other Net deferred taxes 1 Jan 2013 -1,505 22 42 -29 80 -2 -1,392 1 Jan 2013 169 -1,561 -1,392 Exchange rate differ- ences reclassi- fications and other changes Change -43 223 180 Acqui- sitions, disposals and assets held for sale 45 141 31 Dec 2013 126 -1,338 -1,212 31 Dec 2013 -1,264 7 24 -46 80 -13 -25 45 141 -1,212 Charged to income state- ment Charged to other compre- hensive income -17 -8 55 2 -18 -9 -12 18 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. 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 2014 2013 Tax losses 29 260 289 Deferred tax asset 4 66 70 Tax losses 6 320 327 Deferred tax asset 2 78 80 Deferred tax assets of EUR 50 million (2013: 47) 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://annualreport2014.fortum.com/ 217 Annual Report 2014 Financial Statements 30 Nuclear related assets and liabilities 30 Nuclear related assets and liabilities 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 2014 2013 774 774 1,084 1,074 1,039 744 744 1,059 1,039 1,005 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 2014, decided by the Ministry of Employment and the Economy and calculated according to the Nuclear Energy Act, is EUR 1,084 million (2013: 1,059). The carrying value of the nuclear provisions in the balance sheet, calculated according to IAS 37, have increased by EUR 30 million compared to 31 December 2013, totaling EUR 774 million on 31 December 2014. 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 2014 744 11 -24 43 774 774 2013 678 51 -20 35 744 744 30.2 Fortum's share in the State Nuclear Waste Management Fund According to the Nuclear Energy Act, Fortum is obligated to contribute 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 265 million (2013: 261), since Fortum's share of the Fund on 31 December 2014 is EUR 1,039 million (2013: 1,005) and the carrying value in the balance sheet is EUR 774 million (2013: 744). Operating profit for 2014 includes a negative total adjustment of EUR -3 million (2013: +23). 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. 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://annualreport2014.fortum.com/ 218 Annual Report 2014 Financial Statements 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. The funding obligation target, corresponding to the new legal liability and the approved periodisation amounts to EUR 1,074 million (2013: 1,039). 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 +2 million in 2014, which included EUR -1 million due to decrease of the carrying value of the State Nuclear Waste Management Fund in Finland. In 2013, the effect in share of profits was EUR +17 million, which included EUR -5 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 from an IFRS perspective whereas the value of the Swedish Nuclear Waste Fund is estimated to be slightly below the value of provisions at year-end 2014. 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. 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://annualreport2014.fortum.com/ 219 Annual Report 2014 Financial Statements 31 Other provisions 31 Other provisions 2014 2013 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 CSA pro- vision Environ- mental Other 103 0 -14 -4 6 -35 56 56 0 2 0 0 0 0 0 2 0 2 12 22 -4 -3 0 -3 24 10 15 1) Included in trade and other payables in the balance sheet, see note 34. Total 117 22 -18 -7 6 -39 82 66 17 CSA pro- vision Environ- mental Other 178 0 -24 -48 12 -16 103 20 83 4 1 -2 0 0 0 2 0 2 24 9 -11 -10 0 0 12 3 10 Total 206 9 -37 -57 12 -16 117 23 94 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 2014 EUR 4 million of the provision was reversed to the income statement relating to the lower penalties for Nyagan 2. The remaining provision for possible penalties amounts to EUR 56 million (Dec 31 2013: 103). Paid penalties during 2014 amounted to EUR 14 million (2013: 24). The provision increases due to unwinding of the discounting of potential future penalty payments, which during 2014 resulted in an increase of the provision with EUR 6 million (2013: 12). The unwinding effect is recognised in other financial expenses. Environmental provision are mainly related to cleaning of contaminated land. Main part of the provision is estimated to be used within ten years. Restructuring provisions, included in other provisions, amounts to EUR 1 million (2013: 2). 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://annualreport2014.fortum.com/ 220 Annual Report 2014 Financial Statements 32 Pension obligations 32 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 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. 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://annualreport2014.fortum.com/ 221 Annual Report 2014 Financial Statements 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://annualreport2014.fortum.com/ 222 Annual Report 2014 Financial Statements Defined benefit obligation Fair value of plan assets Net defined benefit asset(-)/liability(+) 2014 466 2013 550 2014 -415 2013 -430 2014 51 2013 119 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 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 Disposals of subsidiary companies 7 1 -7 14 15 115 0 120 -4 -12 103 -17 -27 11 0 -41 15 -14 -38 0 -52 14 -12 -50 -19 0 0 6 -13 -7 -15 -15 9 -6 -2 13 17 Transfer of assets in to insurance company in Sweden Balance at 31 December 540 466 -400 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 0 0 3 -12 -8 -22 -22 8 -14 -6 14 29 -415 7 1 -1 1 8 101 0 120 -4 -15 -3 97 -2 -4 -10 140 532 -400 133 7 140 140 0 140 11 0 -38 4 -23 -60 0 -52 14 -22 -4 -63 -6 -6 29 51 456 -415 41 10 50 50 0 50 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 2014 a total of 1,230 (2013: 1,498) Fortum employees are included in defined benefit plans providing pension benefits. During 2014 pensions or related benefits were paid to a total of 2,929 (2013: 3,196) persons. Contributions expected to be paid during the year 2015 are EUR 9 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://annualreport2014.fortum.com/ 223 Annual Report 2014 Financial Statements Fair value of plan assets EUR million Equity instruments Debt instruments Cash and cash equivalents Real estate, of which the total EUR 67 million (2013: 74) occupied by the Group Company's own ordinary shares Other assets Total 2014 129 133 38 72 5 23 400 2013 169 115 23 81 5 22 415 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 27 million (2013: 23). Amounts recognised in the balance sheet by country 2014 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 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 The principal actuarial assumptions used Finland Sweden Other countries 354 -264 90 90 0 90 170 -130 39 39 0 39 9 -5 3 7 11 0 11 Finland Sweden Other countries 281 -262 19 19 0 19 136 -127 9 9 0 9 38 -25 13 10 23 0 23 Total 532 -400 133 7 140 0 140 Total 456 -415 41 10 50 0 50 2014 2013 Finland Sweden 1.30 2.20 2.10 2.00 2.50 3.00 2.00 2.00 Russia 9.00 7.50 6.50 6.50 Other countries Finland Sweden 3.00 3.25 2.23 1.75 3.02 2.20 2.10 2.00 3.90 3.00 2.00 2.00 Russia 7.50 7.50 6.00 6.00 Other countries 4.11 3.72 2.80 1.89 Discount rate, % Future salary increases, % Future pension increases, % Rate of inflation, % 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://annualreport2014.fortum.com/ 224 Annual Report 2014 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 given 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 2014, 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 -8% 9% 7% -6% 1% -1% -11% 12% 10% -9% 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 increases by one year would increase net liability in Finland and Sweden with EUR 21 million (16.6%). Maturity profile of the undiscounted defined benefit obligation for Finland and Sweden as of December 2014 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 The weighted average duration of defined benefit obligation in Finland and Sweden at the end of the 2014 is 16.9 years. Future benefit payments 16 71 93 180 145 120 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://annualreport2014.fortum.com/ 225 Annual Report 2014 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 Refundable connection fees to the district heating network in Finland amounted to EUR 110 million (2013: 111). 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. 2014 110 44 0 154 2014 298 71 205 64 35 35 12 33 66 69 0 888 2013 417 38 -306 148 2013 386 73 254 79 26 11 31 52 23 132 -73 994 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://annualreport2014.fortum.com/ 226 Annual Report 2014 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 2014 2013 292 137 137 0 301 137 103 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 2014 (2013: 269). Pledges also include bank deposits as trading collateral of EUR 3 million (2013: 12) for trading of electricity and CO2 emission allowances in Nasdaq Commodities, 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 (2013: 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 (2013: 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 137 million (2013: 103) 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 increased by EUR 34 million. 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://annualreport2014.fortum.com/ 227 Annual Report 2014 Financial Statements 36 Leasing 36 Leasing 36.1 Leases as a lessor Operating leases The operating rental income recognised in income statement was EUR 1 million (2013: 1). 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 Assets leased out by operating lease agreements EUR million Acquisition cost Accumulated depreciation at 1 January Depreciation charge for the year Total Finance leases 2014 2013 2 4 1 8 6 1 2 9 2014 2013 4 -1 0 3 4 -1 0 2 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 16 million (2013: 28) 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 Fortum does not have material finance lease arrangements where the Group is leasing in assets. 2014 24 43 76 142 2013 27 47 108 181 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://annualreport2014.fortum.com/ 228 Annual Report 2014 Financial Statements 37 Capital commitments 37 Capital commitments EUR million Property, plant and equipment Intangible assets Total 2014 458 3 461 2013 524 6 530 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 2013. The decrease comes mainly from progressing of OAO Fortum's investment programme and divestments of the Finnish and Norweigan distribution businesses. For more information regarding capital expenditure, see Note 19 Property, plant and equipment. 38 Contingent liabilities 38 Contingent liabilities 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 2014 2013 64 459 125 0 77 514 125 3 38.1 Guarantees on own behalf Other contingent liabilities on own behalf contain various contingent liabilities for group companies, EUR 64 million in 2014 (2013: 77). 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 41 million (2013: 40). 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 393 million) at year-end 2014 (2013: EUR 417 million). 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 (2013: 125). 38.3 Other contingent liabilities 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. 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://annualreport2014.fortum.com/ 229 Annual Report 2014 Financial Statements 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. In November 2014, the Administrative Court of Appeal, the second law-court, ruled in favour of the Swedish network companies. In December 2014, however, EI decided to appeal this decision to the next and final law-court, the Supreme Administrative Court. For the case to be reconsidered, it is required that the Supreme Administrative Court grants a leave to appeal. A decision whether to grant such a leave will be made during the spring 2015. Fortum received income tax assessments in Sweden for the years 2009, 2010, 2011 and 2012 in December 2011, December 2012, December 2013 and October 2014, respectively. According to the tax authorities, Fortum would have to pay additional income taxes for the years 2009, 2010, 2011 and 2012 for the reallocation of loans between the Swedish subsidiaries in 2004-2005, as well as additional income taxes for the years 2010, 2011 and 2012 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. The cases are pending before the Administrative Court. In January 2015 the Swedish tax authority announced to the Administrative Court that it has abandoned its claim regarding the year 2010 with respect to financing the acquisition of TGC 10. Based on legal analysis and supporting legal opinions, 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 SEK 425 million (EUR 45 million) for the year 2009, approximately SEK 379 million (EUR 40 million) for the year 2010, approximately SEK 511 million (EUR 54 million) for the year 2011 and approximately SEK 173 million (EUR 18 million) for the year 2012. Fortum has received income tax assessments in Belgium for the years 2008, 2009, 2010 and 2011. 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 and has appealed the decisions. The court of First instance in Antwerpen rejected Fortum's appeal for the years 2008 and 2009 in June 2014. Fortum finds the decision unjustifiable and has appealed to the Court of Appeal. Based on legal analysis and a supporting legal opinion, no provision has been accounted for in the financial statements. If the decision of the tax authorities remain final despite the appeal process, the impact on the net profit would be approximately EUR 36 million for the year 2008, approximately EUR 27 million for the year 2009, approximately EUR 15 million for the year 2010 and approximately EUR 21 million for the year 2011.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. Fortum considered the claims unjustifiable both for legal grounds and interpretation. Fortum appealed the decision. The Board of Adjustment of the Large Taxpayers' Office approved Fortum's appeal for the year 2007 on 21 August 2014. The Board of Adjustment's decision is in line with the principle adopted in the Supreme Administrative Court's precedent in June 2014, according to which, under transfer pricing rules, the nature of business cannot be re-characterized for tax purposes, but can only adjust the pricing of goods or services. Despite the new precedent, the Tax Recipients' Legal Services Unit within the tax authorities has appealed this decision to the Administrative Court in Helsinki. If the appeal of the Tax Recipients' Legal Services Unit would be successful in court, the impact on net profit would be approximately EUR 136 million for the year 2007. Based on legal analysis and a supporting legal opinion, no provision has been accounted for in the financial statements. In December 2014 Fortum Oyj received a non-taxation decision from the large Taxpayers’ office for the years 2008-2011 regarding the activities in the Belgian and Dutch financing companies. The decision was given due to the transfer pricing audit carried out in 2013-2014 and was in line with the Board of Adjustment's decision with respect to Fortum for the year 2007. The Tax Recipients' Legal Services Unit has the right to appeal the decisions. 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. 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://annualreport2014.fortum.com/ 230 Annual Report 2014 Financial Statements 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. Reactor containment pressure and leak-tightness tests have been completed. Instrumentation and control system tests in the test bay in Erlangen, Germany continued alongside planning and licensing. In September 2014 TVO received additional data about the schedule for the OL3 project from the Supplier, AREVA-Siemens. According to this data, the start of regular electricity production of the plant unit will take place in late 2018. Detailed evaluation of the received data is ongoing. In December 2008 the OL3 Supplier 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. The updated quantification which the Supplier submitted in October 2014 and corrected in November 2014 brings the total amount claimed by the Supplier for events occurring during the construction period ending June 2011 to approximately EUR 3.4 billion. In 2012, TVO submitted a counter-claim and defense in the matter. The quantification estimate of TVO's costs and losses updated in October 2014 is approximately EUR 2.3 billion until the end of 2018, which according to the schedule submitted by the OL3 Supplier in September 2014, is the estimated start of the regular electricity production of OL3. The companies belonging to the Plant Supplier Consortium (AREVA GmbH, AREVA NP SAS and Siemens) are jointly and severally liable of the Plant Contract obligations. The arbitration proceedings may continue for several years and the claimed amounts may change. 40 Related party transactions 40 Related party transactions 40.1 The Finnish State and companies owned by the Finnish State At the end of 2014, 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. In November 2014 Fortum sold its 31 %-shareholding in the Finnish natural gas company Gasum Oy to the Finnish State. See further information on the disposal in note 8 Acquisitions and disposals 40.2 Board of Directors and Fortum Executive Management Team The key management personnel of the Fortum Group are the members of Fortum Executive 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 Executive Management Team. No loans exist to any member of the Board of Directors or Fortum Executive Management Team at 31 December 2014. The total compensation (including pension benefits and social costs) for the key management personnel for 2014 was EUR 9 million (2013: 8). See Note 12 Employee benefits for further information on the Board of Directors and Fortum Executive 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. These 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. 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 the pension fund in Finland include Fortum shares representing 0.03% (2013: 0.03%) of the company's outstanding shares. Real estate and premises owned by the Finnish pension fund have been leased to Fortum. Fortum has not paid contributions to the pension funds in 2014 nor in 2013. Real estate mortgages have also been given for loans from Fortum's pension fund for EUR 41 million (2013: 41). 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://annualreport2014.fortum.com/ 231 Annual Report 2014 Financial Statements 41 Events after the balance sheet date 41 Events after the balance sheet date On 22 January 2015, it was announced that Tapio Kuula, President and CEO of Fortum Corporation, will go on a disability pension starting 1 February 2015. Tapio Kuula has been the President and CEO of Fortum Corporation since 2009. Fortum's Board has started the search process for a new CEO covering internal and external candidates. In the meanwhile, Timo Karttinen, CFO of Fortum will also act as interim President and CEO. 42 Subsidiaries by segment on 31 December 42 Subsidiaries by segment on 31 December 20142014 ● = Power and Technology 1) Founded during the year ■ = Heat, Electricity Sales and Solutions 2) Shares held by the parent company ▲ = Distribution □ = Russia ▼ = Other Company name Findis Oy Fortum Asiakaspalvelu Oy Fortum Assets Oy Fortum C&H Oy Fortum Growth Oy Fortum Heat and Gas Oy Fortum Hyötytuotanto Oy Fortum Markets Oy Fortum Norm Oy Fortum Nuclear Services Oy Fortum Power and Heat Oy Kiinteistö Oy Espoon Energiatalo Koillis-Pohjan Energiantuotanto Oy KPPV-Sijoitus Oy Lounais-Suomen Lämpö Oy Oy Pauken Ab Oy Tersil Ab Oy Tertrade Ab Varsinais-Suomen Sähkö Oy Fortum Project Finance N.V. Fortum Energi A/S AS Anne Soojus AS Fortum Tartu Domicile 2) Finland 2) Finland Finland Finland Finland 2) Finland Finland 2) Finland 2) Finland Finland 2) Finland Finland Finland Finland Finland Finland Finland Finland Finland 2) Belgium Denmark Estonia Estonia Segment Group holding, % ▼ ■ ▼ ▼ ▼ ● ■▼ ● ■ ▼ ● ● ■▼ ▼ ● ▼ ▼ ▼ ▼ ▼ ▼ ▼ ■ ■ ■ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 60.0 60.0 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://annualreport2014.fortum.com/ 232 Annual Report 2014 Financial Statements AS Tartu Joujaam AS Tartu Keskkatlamaja Fortum CFS Eesti OU Fortum Eesti AS Fortum France S.A.S Fortum Service Deutschland GmbH Fortum Insurance Ltd Fortum Energy Ltd Fortum O&M(UK) Limited IVO Energy Limited Fortum Amrit Energy Private Limited Fortum FinnSurya Energy Private Limited Fortum India Private Limited Fortum Tarapur Heat Private Limited Fortum C&P Unlimited Fortum Finance Ireland Limited Fortum Jelgava, SIA Fortum Latvia SIA UAB Fortum Ekosiluma UAB Fortum Heat Lietuva UAB Fortum Kaunas 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 Sendi Prima Sdn Bhd Fortum Förvaltning AS Fortum Markets 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 Tobolsk CHP Limited Liability Company Urals Heat Network Blybergs Kraftaktiebolag Brännälven Kraft AB Bullerforsens Kraft Aktiebolag Energikundservice Sverige AB Estonia Estonia Estonia Estonia France Germany Guernsey Great Britain Great Britain Great Britain India India India India Ireland 2) Ireland Latvia Latvia Lithuania Lithuania 1) Lithuania Lithuania Lithuania Lithuania Luxemburg Luxemburg Luxemburg Luxemburg Malaysia Norway Norway Poland Poland Poland Poland Russia Russia Russia Russia Russia Sweden Sweden Sweden Sweden ■ ■ ▼ ■ ● ● ▼ ▼ ● ● ■ ■ ■ ■ ▼ ▼ ■ ■ ■ ■ ■ ■ ■ ■ ■ ▼ ■ ▼ ● ▼ ■ ■ ● ■▼ ■ ■ □ □ □ □ □ ● ● ● ▼ 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 99.8 100.0 99.2 99.8 98.2 100.0 98.2 98.2 98.2 66.7 67.0 88.0 100.0 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://annualreport2014.fortum.com/ 233 Annual Report 2014 Financial Statements Fortum 1 AB Fortum AMCO AB Fortum Dalälvens Kraft AB Fortum Distribution 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 Vind Norr AB Fortum Älvkraft i Värmland AB Laforsen Produktionsnät Aktiebolag Mellansvensk Kraftgrupp Aktiebolag Oreälvens Kraftaktiebolag Uddeholm Kraft Aktiebolag Värmlandskraft-OKG-delägarna Aktiebolag FB Generation Services B.V. Fortum 1 B.V. Fortum 2 B.V. Fortum 3 B.V. Fortum 4 B.V. Fortum Finance II B.V. Fortum Holding B.V. Fortum Hydro 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. PolarSolar B.V. RPH Investment B.V. Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden 2) Sweden Sweden Sweden 2) Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands 1) 1) 1) 1) 2) 1) 1) 1) □ ▼ ● ▲ ▼ ● ● ● ● ■ ▼ ● ● ▼ ● ● ▲ ● ● ● ● ● ▼ ▼ ▼ ▼ ▼ ▼ ● ▼ ▼ ● □ □ ▼ ▼ ● ■ □ 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 80.0 86.9 65.0 100.0 73.3 75.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 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://annualreport2014.fortum.com/ 234 Annual Report 2014 Financial Statements Parent company financial Parent company financial statements 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 2 3 4 7 5 6 2014 76 1,959 -35 -9 -72 1,919 -129 1,790 565 2,355 -90 2,265 2013 84 7 -33 -9 -60 -11 -16 -27 608 581 -104 477 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://annualreport2014.fortum.com/ 235 Annual Report 2014 Financial Statements Balance sheet Balance sheet EUR million ASSETS Non-current assets Intangible assets Property, plant and equipment Investments in group companies Investments in associated 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 Bank deposits Cash and cash equivalents Liquid funds Total current assets Total assets EQUITY Shareholders' equity Share capital Share premium Retained earnings Profit for the period Total shareholders' equity Provisions for liabilities and charges 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 Note 31 Dec 2014 31 Dec 2013 7 7 7 7 7 7 7 8 8 8 9 9 10 11 11 11 11 12 12 12 18 4 16,057 6 1,368 211 2 2 17,668 586 1 170 505 1,813 2,318 3,075 15 13 16,215 0 2,382 1 5 4 18,635 630 0 11 0 1,059 1,059 1,700 20,743 20,335 3,046 2,822 3,174 2,265 11,307 0 5,269 2,648 261 3 8,181 1,083 31 3 138 1,255 9,436 20,743 3,046 2,822 3,674 477 10,019 0 6,351 1,470 247 2 8,070 2,025 25 2 194 2,246 10,316 20,335 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://annualreport2014.fortum.com/ 236 Annual Report 2014 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 Acquisition of shares in associated companies Capital returns from subsidiaries Acquisition of other shares Proceeds from sales of fixed assets Proceeds from sales of shares in subsidiaries Change in interest-bearing receivables and other non-current assets Net cash used in investing activities Cash flow before financing activities 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 liquid funds Liquid funds at the beginning of the period Liquid funds at the end of the period 2014 2,265 90 -565 129 9 1,928 -1,940 45 -168 0 609 -283 -127 64 -6 -9 -15 49 -5 0 -3 0 -2 0 2,093 793 2,876 2,925 46 -1,340 1,178 -573 -977 -1,666 1,259 1,059 2,318 2013 477 104 -608 16 9 -2 1 60 -229 210 574 -149 -87 378 -5 -40 -45 333 -9 -19 0 210 -2 0 0 -836 -656 -323 759 -526 917 406 -888 668 345 714 1,059 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://annualreport2014.fortum.com/ 237 Annual Report 2014 Financial Statements 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 and other foreign currency positions are valued employing the exchange rate quoted on the balance sheet date and gains or losses are recognised in the income statement in the financial net. 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. 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 Shares in group companies The balance sheet value of shares in group companies consists of historical costs less write-downs. If the estimated future cash flows generated by a non current asset are expected to be permanently lower than the balance of the carrying amount, an adjustment to the value must be made to write-down the difference as an expense. If the basis for the write-down can no longer be justified at the balance sheet date, it must be reversed. 1.6 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. 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://annualreport2014.fortum.com/ 238 Annual Report 2014 Financial Statements The depreciation is based on the following expected useful lives: Buildings and structures Machinery and equipment Other intangible assets 1.7 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. 1.8 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. 1.9 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. 2.0 Presentation of the primary statements and notes Information presented in the notes is given seperately for Fortum Group companies and for associated companies of the Group. Fortum Group implemented new IFRS standards starting from 1 January 2014. This changed the status of AB Fortum Värme samägt med Stockholm Stad in the consolidated accounts from subsidiary to joint venture. The parent company financial statements reflect the reclassification from 1 January 2014 onwards and the comparative period information has not been restated. 2 Sales by market area 2 Sales by market area EUR million Finland Other countries Total 3 Other income 3 Other income EUR million Gain on sales of shareholdings Rental and other income Total 2014 52 24 76 2014 1,940 19 1,959 2013 65 19 84 2013 0 7 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://annualreport2014.fortum.com/ 239 Annual Report 2014 Financial Statements 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 EUR thousands Compensation for the President and CEO Salaries and fringe benefits 1) Performance bonuses 2) Share-based remuneration Pensions (statutory) Pensions (voluntary) Social security expenses Total Compensation for the Board of Directors 1) Amount is impacted by the sick leave during 2013. 2) Performance bonuses are based on estimated amounts. 2014 2013 28 5 1 1 35 2014 1,005 127 235 188 255 57 1,867 477 26 5 1 1 33 2013 795 22 448 137 204 48 1,654 455 Compensation above is presented on accrual basis. Paid salaries and remunerations for the President and CEO in 2014 were EUR 1,592 thousands (2013: 1,784). Timo Karttinen, who assumed responsibility for the duties of the President and CEO during Tapio Kuula's sick leave in December 2014, did not receive any compensation during 2014 for these additional duties. In 2013 a compensation of EUR 80 thousands was paid to Markus Rauramo for assuming the duties of the President and CEO during March-November 2013. For the President and CEO Tapio Kuula the retirement age of old-age pension is 63. The pension obligations are covered through insurance company. Board members are not in an 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. See also Note 12 Employee benefits and Note 32 Pension obligations in the Consolidated financial statements. Average number of employees 2014 301 2013 326 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://annualreport2014.fortum.com/ 240 Annual Report 2014 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 Interest and other financial income from associated 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 2014 0 0 24 9 0 10 2 -5 -169 -129 43 -170 -127 2013 210 0 27 - -44 13 1 -8 -215 -16 40 -219 -179 Write-downs of participations in group companies are related to shares in Fortum Heat and Gas Oy and received dividend payments. Interest and other financial income fromjoint venture is related to AB Fortum Värme samägt med Stockholm Stad. 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. 2014 -23 113 90 81 7 2 90 2013 -45 149 104 103 0 1 104 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://annualreport2014.fortum.com/ 241 Annual Report 2014 Financial Statements 7 Non-current assets 7 Non-current assets Intangible assets EUR million Cost 1 January 2014 Additions Disposals Cost 31 December 2014 Accumulated depreciation 1 January 2014 Disposals Depreciation for the period Accumulated depreciation 31 December 2014 Carrying amount 31 December 2014 Carrying amount 31 December 2013 Property, plant and equipment EUR million Cost 1 January 2014 Additions and transfers between categories Disposals Cost 31 December 2014 Accumulated depreciation 1 January 2014 Disposals Depreciation for the period Accumulated depreciation 31 December 2014 Carrying amount 31 December 2014 Carrying amount 31 December 2013 Intangible assets total 49 9 0 58 34 0 6 40 18 15 Total 43 -7 -1 35 30 -1 2 31 4 13 Buildings and structures Machinery and equipment Advances paid and construction in progress 1 0 1 1 1 0 0 32 2 -1 33 29 -1 2 30 3 3 10 -9 1 - - 1 10 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://annualreport2014.fortum.com/ 242 Annual Report 2014 Financial Statements Investments EUR million 1 January 2014 Reclassifications Additions 1) Disposals 2) 31 December 2014 Accumulated write-downs 1 January 2014 3) Impairment charges Accumulated write-downs 31 December 2014 Carrying amount 31 December 2014 4) Shares in Group companies 17,139 -6 0 -152 16,981 -924 -924 16,057 Participation in associated companies Receivables from Group companies Receivables from associated companies Other non-current assets 0 6 0 0 6 0 0 6 2,382 -378 220 -856 1,368 0 0 1 381 28 -199 211 0 0 1,368 211 7 -3 1 0 5 -2 -1 -3 2 Total 19,529 0 249 -1,207 18,571 -926 -1 -927 17,644 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 due to received dividend payments. 4) Receivables from associated companies are mainly from AB Fortum Värme samägt med Stockholm Stad, EUR 199 million . 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 Accrued income and prepaid expenses Total Other current receivables Trade receivables Other receivables Accrued income and prepaid expenses Total 2014 2013 13 564 9 586 1 0 1 1 2 167 170 10 609 11 630 0 0 0 0 1 10 11 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://annualreport2014.fortum.com/ 243 Annual Report 2014 Financial Statements 9 Liquid Funds 9 Liquid Funds EUR million Cash at bank and in hand Bank deposits with maturity more than 3 months Liquid funds 10 Changes in shareholders' equity 10 Changes in shareholders' equity EUR million Total equity 31 December 2013 Cash dividend Profit for the period Total equity 31 December 2014 Total equity 31 December 2012 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 2013 3,046 2,822 EUR million Distributable funds 31 December 2014 1,813 505 2,318 Retained earnings 4,151 -977 2,265 5,439 4,562 -888 477 4,151 2014 5,439 2013 1,059 0 1,059 Total 10,019 -977 2,265 11,307 10,430 -888 477 10,019 2013 4,151 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://annualreport2014.fortum.com/ 244 Annual Report 2014 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 2015 2016 2017 2018 2019 2020 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 2014 3,974 514 781 5,269 660 137 0 286 1,083 6,352 2014 1,690 49 781 2,520 2014 9 261 270 2013 4,725 681 945 6,351 1,103 49 718 155 2,025 8,376 2014 1,083 835 511 594 809 2,520 6,352 2013 2,440 118 750 3,308 2013 9 248 257 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://annualreport2014.fortum.com/ 245 Annual Report 2014 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 2014 2013 1 30 0 31 3 3 8 6 124 138 1 24 0 25 2 2 9 8 177 194 2014 2013 2 131 418 551 3 348 417 768 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://annualreport2014.fortum.com/ 246 Annual Report 2014 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. 2014 2013 4 5 9 4 6 10 2014 2013 Contract or notional value 0 5,721 14,866 1,473 Fair value 155 -77 233 Not recog- nised as income 160 -1 28 Contract or notional value Fair value 56 6,658 18,614 928 105 -39 36 Not recog- nised as income 100 5 -2 Fortum Oyj received in December 2013 an income tax assessment regarding transfer pricing for the year 2007. Fortum appealed the decision. In August 2014 The Board of Adjustment of the large Taxpayers' office approved Fortum's appeal. The Tax Recipients' Legal Services Unit within the tax authorities has appealed this decision to the Administrative Court. If the appeal of the Tax Recipients' Legal Services Unit is successful, the impact on net profit would be approximately EUR 136 million for the year 2007. Based on legal analyses, no provision has been recognized in the financial statements. 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://annualreport2014.fortum.com/ 247 Annual Report 2014 Financial Statements Proposal for the distribution of Proposal for the distribution of earnings earnings The distributable funds of Fortum Oyj as at 31 December 2014 amounted to EUR 5,438,689,036.90 including the profit of the period of EUR 2,264,863,648.81. 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 2014. In addition the Board of Directors proposes to the Annual General Meeting an extra dividend of EUR 0.20 per share be paid for 2014. Based on the number of registered shares as of 3 February 2015 the total amount of dividend proposed to be paid is EUR 1,154,877,158.50. The Board of Directors proposes, that the remaining part of the profit be retained in the shareholders’ equity. Espoo, 3 February 2015 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.-31.12.2014. 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. Responsibility of the Board of Responsibility of the Board of Directors and the President and Directors and the President and CEOCEO 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 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 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://annualreport2014.fortum.com/ 248 Annual Report 2014 Financial Statements 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 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 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 Opinion on the consolidated financial statements financial 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 Opinion on the company’s financial statements and the financial statements and the Operating and Financial Review Operating and 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 2015 Deloitte & Touche Oy Authorized Public Audit Firm Jukka Vattulainen Authorized Public Accountant 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://annualreport2014.fortum.com/ 249 Annual Report 2014 Quarterly financial information 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 Profit for the period, non-controlling interests Profit for the period, owners of the parent Q1/ 2013 Q2/ 2013 Q3/ 2013 Q4/ 2013 2013 Q1/ 2014 Q2/ 2014 Q3/ 2014 Q4/ 2014 2014 1,654 1,205 1,060 1,390 5,309 1,473 1,016 664 524 477 78 -65 490 -86 404 -3 401 429 289 429 34 -75 388 -74 314 0 314 336 167 96 3 -72 27 3 30 1 31 547 423 507 63 -77 1,975 1,403 627 477 1,508 2,333 178 -289 72 -64 493 1,398 2,341 -29 -186 -86 465 1,212 2,255 -6 -8 -4 382 255 295 37 -48 284 -37 247 0 458 1,204 2,251 247 976 309 183 149 1 -56 95 -11 84 1 85 1,285 4,751 556 436 650 38 -48 1,873 1,351 3,428 149 -217 639 3,360 -64 -199 575 3,161 -4 -7 571 3,154 Earnings per share, basic, EUR Earnings per share, diluted, EUR 0.45 0.45 0.35 0.35 0.04 0.04 0.52 0.52 1.36 1.36 2.53 2.53 0.28 0.28 0.10 0.10 0.64 0.64 3.55 3.55 Sales by quarter, EUR million Comparable operating profit by quarter, EUR million 2,000 1,000 0 1,654 1,473 1,205 1,016 1,060 976 1,390 1,285 Q1 Q2 Q3 Q4 750 500 250 0 Q1 Q2 Q3 Q4 2013 2014 2013 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://annualreport2014.fortum.com/ 250 Annual Report 2014 Quarterly financial information Quarterly sales by segment EUR million Power and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Netting of Nord Pool transactions 1) Eliminations Total Q1/ 2013 Q2/ 2013 Q3/ 2013 Q4/ 2013 665 531 344 339 15 -171 -70 548 308 251 227 14 -95 -49 496 255 210 217 14 -90 -42 543 422 314 280 20 -122 -67 2013 2,252 1,516 1,119 1,064 63 -478 -228 Q1/ 2014 Q2/ 2014 Q3/ 2014 Q4/ 2014 586 446 333 300 14 487 269 234 148 14 -133 -101 -72 -35 495 224 207 130 14 -67 -26 588 393 281 173 15 -121 -45 2014 2,156 1,332 1,055 751 58 -422 -179 1,654 1,205 1,060 1,390 5,309 1,473 1,016 976 1,285 4,751 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 and Technology Heat, Electricity Sales and Solutions Russia Distribution Other Comparable operating profit Non-recurring items Other items affecting comparability Operating profit Q1/ 2013 303 Q2/ 2013 210 57 41 137 -14 524 4 -51 477 13 20 60 -14 289 0 140 429 Q3/ 2013 139 -3 -15 59 -14 167 39 -110 96 Q4/ 2013 207 42 110 76 -12 2013 859 109 156 332 -54 423 1,403 Q1/ 2014 251 48 73 119 -14 477 17 66 61 45 1,851 5 507 1,508 2,333 Q2/ 2014 183 Q3/ 2014 167 Q4/ 2014 276 2014 877 104 161 266 -57 1,351 2,171 -94 49 59 67 -14 436 238 -24 650 3,428 11 28 45 -13 255 73 -32 295 -4 1 36 -16 183 8 -42 149 The first and last quarters of the year are usually the strongest quarters for power and heat businesses. Quarterly information from 2005 to 2014 is available in Excel format on Fortum's website www.fortum.com/investors/financial 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://annualreport2014.fortum.com/ 251 Annual Report 2014 Investor information Fortum Corporation’s financial statements include the financial statements of the parent company and the consolidated financial statements of the group. The operating and financial review is attached to the financial statements. The Corporate Governance Statement, issued separately from the operating and financial review, and the Remuneration Statement, are published at the same time as the financial statements. The Company’s Annual Report, including sustainability reporting, will be published in the annual report 2014 internet site during week ten. The additional GRI section will be published on the same internet site at the end of March 2015. Annual General Meeting Annual General Meeting The Annual General Meeting of Fortum Corporation will be held on Tuesday, 31 March 2015, 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 13.00 EET. Payment of dividends Payment of dividends The Board of Directors proposes to the Annual General Meeting that Fortum Corporation pays a dividend of EUR 1.10 per share and an extra dividend of EUR 0.20 per share for 2014, totaling approximately EUR 1,155 million based on the registered shares as of 3 February 2015.The possible dividend- related dates planned for 2015 are: • the ex-dividend date 1 April 2015, • the record date for dividend payment 2 April 2015 and • the dividend payment date 14 April 2015. Financial information in Financial information in 20152015 Fortum will publish three interim reports in 2015: Q1 on 29 April, Q2 on 17 July, and Q3 on 22 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 Fortum`s activities in capital markets during 2014 Fortum`s activities in capital markets during 2014 Fortum`s Investor Relations (IR) activities cover equity and fixed-income markets to ensure full and fair valuation of the Company`s shares, access to funding sources and stable bond pricing. Investors and analysts primarily in Europe and North America are met on a regular basis. In 2014 Fortum met approximately 250 professional equity investros individually or in group meetings, whilst maintaining regular contact with equity research analysts at investment banks and brokerage firms. During the year, IR and senior management gave approximately 20 presentations at investor confereces in Scandinavia and the United Kingdom. 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 Helsinki Trading ticker: FUM1V Number of shares, 4 February 2015: 888,367,045. Sector: Utilities 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://annualreport2014.fortum.com/ 252 Annual Report 2014 Corporate Governance Statement GOVERNANCE GOVERNANCE Corporate Governance Statement Corporate Governance Statement Fortum Corporation's shares (FUM1V) have been listed on Nasdaq Helsinki since 18 December 1998. Fortum's industrial sector, according to the Global Industry Classification Standard, is Electric Utilities. The State of Finland is the majority owner in Fortum with 50.76 % of the shares as at 31 December 2014. Corporate governance at Fortum is based on Finnish laws and the company's Articles of Association. Fortum complies also fully with the Finnish Corporate Governance Code 2010. The 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 Helsinki'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 Markets 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 parent company financial statements. The Finnish Corporate Governance Code 2010 is available on the website of the Securities Market Association. (www.cgfinland.fi) Governing bodies of Fortum Governing bodies of Fortum 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 Executive 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 Executive 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 connection with the reorganisation as of 1 March 2014 Fortum Management Team was renamed as Fortum Executive Management Team (FEM) and the number of members was extended from nine to twelve. In addition, Fortum has an informal Advisory Council consisting of representatives of Fortum's stakeholder groups as invited by the Governing bodies of Fortum Governing bodies of Fortum Board of Directors. The Advisory Council aims to advance Fortum's businesses by facilitating a dialogue and exchange of views between Fortum and its stakeholders. During 2014, the Advisory Council consisted of 14 representatives of Fortum's stakeholder groups and three employee representatives. Fortum has not established a specific Sustainability Committee for decision-making on economic, environmental and social issues. As sustainability is an integral part of Fortum’s strategy, the highest decision- making of these issues falls on the duties of the Board of Directors who share joint 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://annualreport2014.fortum.com/ 253 Annual Report 2014 Corporate Governance Statement responsibility on sustainability matters. The Audit and Risk Committee, members of the Fortum Executive Management Team and other senior executives support the Board of Directors in the decision-making in the aforementioned matters, when necessary. 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 is entitled 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. However, for instance, a change in the Articles of Association of the company would require at least 2/3 majority of the votes at the General Meeting of Shareholders. In accordance with the Articles of Association and 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 on the company's website and/or 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, in June at the latest. 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. No Extraordinary General Meeting of Shareholders was held in 2014. The duties of the Annual General The duties of the Annual General Meeting include: Meeting include • Adoption of the parent company financial statements and consolidated financial statements • Resolution on the use of the profit shown on the balance sheet and the payment of dividends • Resolutions on the discharge from liability of the members of the Board of Directors and the President and CEO • Resolution on the remuneration of the members of the Board of Directors • Resolution on the number of members of the Board of Directors • Election of the chairman, deputy chairman and members of the Board of Directors • Resolution on the remuneration of the external auditor • Election of the external auditor Board of Directors 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 is also responsible for defining the company’s mission and values. 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. The Annual General Meeting resolved in April 2014 to remove the age limit of 68 years for board members from the Articles of Association, in accordance with the stand of the Ownership Steering of the Finnish State. 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 the 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. Decisions 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 Executive 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, 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://annualreport2014.fortum.com/ 254 Annual Report 2014 Corporate Governance Statement accordance with the Finnish Corporate Governance Code 2010, the Board of Directors annually evaluates which of the directors are independent of the company and which are independent of its significant shareholders. The Board of Directors does not have powers to issue or buy back shares without authorization from the General Meeting of the Shareholders. Currently, there is no such authorization for the Board of Directors. Board of Directors in Board of Directors in 20142014 Until the Annual General Meeting held on 8 April 2014, 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 8 April 2014 re-elected Chairman Sari Baldauf, Deputy Chairman Kim Ignatius (previously member), Minoo Akhtarzand, Heinz-Werner Binzel, Ilona Ervasti-Vaintola and Christian Ramm-Schmidt (previously Deputy Chairman) and, in addition, Petteri Taalas and Jyrki Talvitie were elected as new members to the Board of Directors until the end of the Annual General Meeting in 2015. In 2014, the Chairman, the Deputy Chairman and the members of the Board of Directors were all independent, non-executive directors and also independent of the company's significant shareholders. Three members, including the Chairman, are female. During 2014, 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 2014 consisted of in-depth reviews of the economic environment and the energy sector especially in-light of the recent geopolitical development and possible impacts, further development of the company's strategy, including assessment of the future strategic alternatives after divestment of the electricity distribution business e.g. the plan to restructure TGC-1 ownership, reorganisation of business structure, review of succession plans as well as further review of various operations. Based on the self-assessment conducted during the previous year, the Board of Directors set certain focus areas and amended certain processes in an effort to further enhance the efficiency of the board work. Fortum's Board of Directors on 31 December 2014 Fortum's Board of Directors on 31 December 2014 Name Born Nationality Education Occupation Attendance in the Board Meetings Attendance in the Board Committee Meetings Chairman Ms. Sari Baldauf Deputy Chairman Mr. Kim Ignatius 1955 Finnish MSc (Econ.) Non-executive chairman 11/11 1956 Finnish BSc (Econ.) CFO of Sanoma Corporation Non-executive director 11/11 Ms. Minoo Akhtarzand 1956 Swedish MSc (Electrical engineering) Governor in the County of Jönköping Non-executive director Mr. Heinz-Werner Binzel 1954 German Economics and electrical engineering degree Independent consultant Non-executive director 11/11 11/11 1951 Finnish LL.M, Trained on the bench Non-executive director 11/11 Ms. Ilona Ervasti- Vaintola Mr. Christian Ramm-Schmidt Mr. Petteri Taalas 1) 1946 Finnish BSc (Econ) 1961 Finnish PhD in Meteorology Mr. Jyrki Talvitie 1) 1966 Finnish Executive MBA, Master of Law Member of Fortum's Board of Directors until 8 April 2014 Mr. Joshua Larson 1966 U.S. citizen Master of International Affairs, Bachelor in Russian language Private investor and consultant Non-executive director 1) New member from 8 April 2014. Senior Partner of Merasco Capital Ltd. Non-executive director Director General of the Finnish Meteorological Institute Non-executive director Russian Direct Investment Fund, Director Non-executive director 11/11 9/9 9/9 2/2 Nomination and Remuneration Committee, 3/3 Audit and Risk Committee, 6/6 Nomination and Remuneration Committee, 3/3 Audit and Risk Committee, 6/6 Nomination and Remuneration Committee, 3/3 Nomiation and Remuneration Committee 3/3 Nomination and Remuneration Committee, 3/3 Audit and Risk Committee, 4/5 Audit and Risk Committee, 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://annualreport2014.fortum.com/ 255 Annual Report 2014 Corporate Governance Statement The duties of the Board of Directors The duties of the Board of Directors • Responsibility for the administration and the proper organisation of the operations of the company • Strategic development and steering of the company's business and fields of activity • Ensuring that the business complies with the relevant rules and regulations and the company's Articles of Association • Ensuring that the accounting and financial administration are arranged appropriately • Appointing and dismissing the President and CEO • Confirming the Group's organisational structure at the top management level, and appointing and dismissing the members of the Fortum Executive Management Team • Reviewing the main risks and providing instructions concerning the risks • Confirming the Group's business plan on an annual basis • Setting and follow-up of company and management performance targets • Discussing and commenting on the interim reports • Approving consolidated financial statements, operating and financial reviews, and parent company financial statements • Defining the dividend policy • Deciding on major investments, divestments and business arrangements • Confirming Group policies and principles, such as the Group Risk Policy • Confirming the Group's ethical values and operating principles, including sustainability, and overseeing their implementation • Reviewing the Group's sustainability performance and report Board committees 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; the charters are updated based on need. Audit and Risk Audit and Risk Committee 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. In addition, the committee regularly reviews the business ethics compliance reporting. The committee has a written charter in which its duties have been defined. The main content of the charter is disclosed herein. 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 a self- assessment of its work. As regards the external auditor, the committee reviews the audit plan and meets with the external auditor regularly to discuss the audit plan, audit reports and findings. In addition, the committee evaluates 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://annualreport2014.fortum.com/ 256 Annual Report 2014 Corporate Governance Statement independence of the external auditors and monitors their performance. Audit and Risk Committee in Audit and Risk Committee in 20142014 After the Annual General Meeting on 8 April 2014, the Board of Directors elected from amongst its members Kim Ignatius as the Chairman and Heinz-Werner Binzel and Jyrki Talvitie as members to the Audit and Risk Committee. Until the Annual General Meeting on 8 April 2014, the committee comprised Kim Ignatius as the Chairman and Joshua Larson and Heinz-Werner Binzel as members. In 2014, the members were all independent of the company and of its significant shareholders. The Audit and Risk Committee met 6 times in 2014 and the attendance rate was 96 %. Nomination and 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. The main content of the charter is disclosed herein. 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 duties of the Audit and Risk Committee include: The duties of the Audit and Risk Committee include • Monitoring the financial position of the company • Supervising the financial reporting process • Monitoring the reporting process of financial statements • Communicating with the external auditor and reviewing the reports that the auditor prepares for the committee • Monitoring the statutory audit of the financial statements and consolidated financial statements • Holding annual private meetings with the external and internal auditors • Preparing through the Board of Directors the proposal on the election of the external auditor for shareholders to consider and for resolution at the Annual General Meeting • Evaluating the independence of the external auditor particularly the provision of related services to the company to be audited • Approving the operating instructions for internal audit • Reviewing the charter, plans and reports of the internal audit function • Monitoring the efficiency of the company's internal control, internal audit, and risk management systems • Reviewing the description of the main features of the internal control and risk management systems in relation to the financial reporting process, which is included in the company's Corporate Governance Statement • Annual reviewing of the Group Risk Policy and risk exposures • Reviewing reports on legal disputes and proceedings • Reviewing the Corporate Governance Statement The Nomination and Remuneration Committee reports on its work to the Board of Directors regularly after each meeting. The Nomination and Remuneration Committee conducts annually a self-evaluation of its work. Nomination and Remuneration Committee. Until the Annual General Meeting on 8 April 2014, the committee comprised Sari Baldauf as the Chairman and Minoo Akhtarzand, Ilona Ervasti-Vaintola and Christian Ramm-Schmidt as members. Nomination and Remuneration Nomination and Remuneration Committee in 2014 Committee in 2014 After the Annual General Meeting on 8 April 2014, the Board of Directors elected from amongst its members Sari Baldauf as the Chairman and Minoo Akhtarzand, Ilona Ervasti-Vaintola, Christian Ramm-Schmidt and Petteri Taalas as members of the In 2014, the members were all independent of the company and of its significant shareholders. The committee met 3 times during 2014 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://annualreport2014.fortum.com/ 257 Annual Report 2014 Corporate Governance Statement The duties of the Nomination and Remuneration Committee include: The duties of the Nomination and Remuneration Committee include • Preparing for the Board of Directors recommendations on the pay structures and the bonus and incentive systems of the Group and its management • Monitoring the functioning of the bonus systems to ensure that the management bonus systems advance the achievement of the company's objectives and are based on personal performance • Evaluating the performance and the remuneration of the President and CEO as well as other members of the Fortum Executive Management Team • Preparing nomination and remuneration issues and proposals to the Board of Directors concerning the President and CEO as well as other members of the Fortum Executive Management Team • Assisting the Board of Directors in reporting on remuneration at the Annual General Meeting, as necessary • Reviewing and preparing succession plans for the President and CEO and other members of the Fortum Executive Management Team • Monitoring, planning and promoting competence development in the Group based on strategic target setting Shareholders' Nomination Board Shareholders' Nomination Board The Annual General Meeting on 9 April 2013 established a permanent Shareholders' Nomination Board. 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 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. 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. Shareholders' Nomination Shareholders' Nomination Board ahead of Annual Board ahead of Annual General Meeting 2015 General Meeting 2015 In September 2014, the representatives of the company’s three largest registered shareholders were invited to the Shareholders' Nomination Board: the Government Ownership Steering Department of the Prime Minister's Office, the Social Insurance Institution of Finland (KELA) and the State Pension Fund (of Finland). The State Pension Fund informed that they will not use their right to nominate. The following persons were appointed to the Shareholders' Nomination Board: Eero Heliövaara, b. 1956, MSc (Econ.) and MSc (Eng.), Director General of the Government Ownership Steering Department, Prime Minister's Office, and Liisa Hyssälä, b. 1948, MSSc, DDS, Director General, Social Insurance Institution of Finland (KELA). The Chairman of the Board of Directors, Sari Baldauf, acts as a member of the Shareholders' Nomination Board. The Nomination Board convened 4 times and the attendance percentage at the meetings was 100 %. The Shareholders' Nomination Board will propose to the Annual General Meeting 2015, which will be held on 31 March 2015, that the fees to be paid to the members of the Board of Directors are for a term ending at the end of the Annual General Meeting 2016 as follows: for the chairman, EUR 90,000 per year; for the deputy chairman, EUR 65,000 per year; and for each member, EUR 45,000 per year, as well as for the chairman of the Audit and Risk Committee EUR 65,000 per year if he or she is not at the same time acting as chairman or deputy chairman of the Board of Directors. In addition, for each Board of Directors and Board Committee meeting a fee of EUR 600 is proposed. For Board of Directors members living outside Finland in Europe, the proposed fee for each meeting will be doubled and for Board of Directors members living outside Europe, the proposed fee for each meeting will be tripled. For Board of Directors members living in Finland, the proposed fee for each Board of Directors and Board Committee meeting will be doubled for meetings held outside Finland and tripled for meetings held outside Europe. For Board of Directors and Committee meetings held as a telephone conference the proposed fee will be paid as single to all members. No fee will be paid for decisions made without a separate meeting. The largest shareholder of the company, the Finnish State, which owns approximately 50,76% of the shares in the company at the date of the Notice to the Annual General Meeting, has notified the Board of Directors of the company that, in deviation from the proposal made by the Shareholders' Nomination Board, it will propose to the Annual General Meeting that the yearly fees to be paid to the members of the Board of 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://annualreport2014.fortum.com/ 258 Annual Report 2014 Corporate Governance Statement Directors remain at the current level for the following term of office. In addition, the Shareholders' Nomination Board has decided to propose to the Annual General Meeting 2015 that the Board of Directors comprises of the eight members and that the following person be elected to the Board of Directors for the upcoming term: Ms Sari Baldauf (as chairman), Mr Kim Ignatius (as deputy chairman), Ms Minoo Akhtarzand, Mr Heinz-Werner Binzel, Mr Petteri Taalas and Mr Jyrki Talvitie as well as new members Ms Eva Hamilton and Mr Tapio Kuula. Shareholders' Nomination Board Shareholders' Nomination Board 20142014 In September 2013, following the establishment of the Shareholders’ Nomination Board, 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, b. 1951, MSc (Econ), 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 convened three times and the attendance percentage at meetings was 92 %. The Shareholders' Nomination Board presented its proposal covering the members of the Board of Directors and the remuneration be paid to them, on 30 January 2014. The Annual General Meeting decided on the Board of Directors members and remuneration in accordance with this proposal on 8 April 2014. The State of Finland, the majority owner in Fortum, complies with the Government Resolution on State Ownership Policy dated 3 November 2011. This resolution defines criteria for Board of Directors candidates. 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 Executive 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 ensuring that the accounts of the company comply with the applicable laws and that its financial affairs have been arranged in a reliable manner. Tapio Kuula has served as the President and CEO since May 2009. On 18 December 2014, Mr. Kuula started sick leave. Mr Timo Karttinen, CFO of Fortum Corporation, assumed responsibility for the duties of the President and CEO during Tapio Kuula's sick leave. On 22 January 2015 Fortum announced that Tapio Kuula will retire on disability starting 1 February 2015. Timo Karttinen continues to assume responsibility for the duties of the President and CEO as an interim President and CEO until the nomination of the new President and CEO. 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 Executive Management Team and Fortum Executive Management Team and operational organisation operational organisation The President and CEO is supported by the Fortum Executive Management Team. The Fortum Executive 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 and sustainability results are monitored in the monthly reporting and reviewed monthly by the Fortum Executive Management Team. Quarterly Performance Review meetings with the management are embedded in the Fortum Performance Management process. Each member of the Fortum Executive Management Team is responsible for the day- to-day operations and the implementation of operational decisions in their respective organisations. The Fortum Executive Management Team meets on a monthly basis. On 31 December 2014, the Fortum Executive Management Team consisted of twelve members, including the President and CEO. Three of the members were female. Fortum renewed its business structure as of 1 March 2014. Fortum's new divisions and responsibility areas are: • The Hydro Power and Technology Division and the Nuclear and Thermal Power Division are both part of Power and Technology reporting segment. The two divisions are responsible for Fortum's hydro, nuclear and thermal power generation, expert services, portfolio management and trading as well as technology and R&D functions. • The Heat, Electricity Sales and Solutions Division consists of Fortum's combined heat and power (CHP) production, district heating and business-to-business heating solutions, solar business, electricity sales and related customer offering as well as Corporate Sustainability. • The Russia Division consists of power and heat generation as well as heat distribution in Russia. It also includes Fortum’s approximately 29 % holding in TGC-1, accounted for as an associated company using the equity method. • The Distribution Division focuses on distribution activities in Sweden. In addition, Fortum has established a role of Chief Operating Officer (COO) to enhance 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://annualreport2014.fortum.com/ 259 Annual Report 2014 Corporate Governance Statement Fortum's financial reporting structure 31 December 2014 Fortum's financial reporting structure 31 December 2014 agile and flexible operations and to focus on performance and synergy. The Hydro Power and Technology Division, the Nuclear and Thermal Power Division and the Heat, Electricity Sales and Solutions Division report to the COO. Fortum's Staff functions are Finance, Strategy and Mergers & Acquisitions, Legal, Human Resources and IT, Communications and Corporate Relations. Fortum Executive Fortum Executive Management Team on 31 Management Team on 31 December 2014 December 2014 • Tapio Kuula, President and CEO, Chairman of the Fortum Executive 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) • Esa Hyvärinen, Senior Vice President, Corporate Relations, born 1967, MSc (Econ.) and MSc (Agr.& For.) 1) • Timo Karttinen, Chief Financial Officer and Executive Vice President, Distribution Division, born 1965, MSc (Eng) • Kari Kautinen, Senior Vice President, Strategy, Mergers and Acquisitions, born 1964, LL.M 1) • Per Langer, Executive Vice President, Hydro Power and Technology Division, born 1969, MSc (Econ) • Markus Rauramo, Executive Vice President, Heat, Electricity Sales and Solutions Division, born 1968, MSc (Econ and Pol. Hist.) • Matti Ruotsala, Chief Operating Officer, Deputy to the President and CEO, born 1956, MSc (Eng) • Sirpa-Helena Sormunen, General Counsel, born 1959, LL.M 2) • Tiina Tuomela, Executive Vice President, Nuclear and Thermal Power Division, born 1966, MSc (Eng), MBA 1) 1) New member as of 1 March 2014 2) New member as of 1 September 2014 Internal controls in relation to financial Internal controls in relation to financial reporting 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. Risk control processes for Risk control processes for financial reporting financial reporting 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 sets the frame for the financial reporting process. The controls of the financial reporting process are 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). 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://annualreport2014.fortum.com/ 260 Annual Report 2014 Corporate Governance Statement Financial reporting framework in Fortum Financial reporting framework in Fortum 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 instructions and guidelines relating to financial reporting. The Controllers Manual contains financial reporting instructions. This manual is regularly reviewed and updated. The finance process management 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 Risk assessment Risk assessment Fortum's Control Governance Fortum's Control Governance form of control responsibilities. Fortum’s control governance follows the so-called “Three lines of defense” –model, see picture “Fortum's Control Governance” . 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- 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://annualreport2014.fortum.com/ 261 Annual Report 2014 Corporate Governance Statement divisional teams by process area update the controls when needed. After the organisational change, a review was conducted to ensure a clear scope and roles and responsibilities in controls. This assessment included risks related to potential fraud and other irregularities, as well as 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 centre, 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 Information and communication Information and communication business performance are done, analyses 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. The Controllers Manual includes the Fortum Accounting manual, Investment manual and reporting instructions and other policies relating to financial reporting. The regular Core Controllers' meetings, headed by the Corporate Controller, steer the development projects within the Finance function 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 in reporting. Monitoring and follow-up Monitoring and follow-up Financial results are followed up in the monthly reporting and reviewed monthly by the Fortum Executive Management Team. Quarterly Performance Review meetings with the Group 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 consolidates regularly these control assessments and reports to the management and to the Audit and Risk Committee on an annual basis. Auditing Auditing Fortum performance management process Fortum performance management process 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. 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 and compliance with laws, regulations and internal instructions and guidelines. 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 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://annualreport2014.fortum.com/ 262 Annual Report 2014 Corporate Governance Statement 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 8 April 2014 elected Authorised Public Accountant Deloitte & Touche Oy as the company's external auditor, with Authorised Public Accountant Jukka Vattulainen having the principal responsibility. Jukka Vattulainen has had the principal responsibility since 2010. Compliance Management and Code of Conduct Compliance Management and Code of Conduct Fortum's Code of Conduct is based on the shared corporate values of 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. A country and partner risk evaluation process to support the understanding and management of compliance needs at local and business partner level has been developed by Corporate risk management together with other functions, such as the tax department and sustainability. The review of compliance risks is periodic, documented and discussed in the network of compliance risk persons and with the Fortum Executive Management Team, which has oversight of the process. A systematic compliance risk assessment is included in the business plans, and follow-up is a part of the quarterly performance review. Line management regularly reports on the business ethical compliance activities to the Fortum Executive Management Team and further to the Audit and Risk Committee. Support and advice on compliance issues is given by the legal department. Fortum employees are responsible for reporting any suspected misconduct to their own supervisors, to other management members or, if necessary, directly to Internal Audit. Additionally, Fortum employees and partners can report suspicions of misconduct confidentially via the “raise-a-concern channel” on Fortum’s web pages to the Fortum Head of Internal Audit. The report can be submitted in several languages and anonymously if necessary. Additionally in Russia, Fortum has a separate compliance organisation with compliance officers in place. Every Fortum employee is expected to complete the Code of Conduct training through the Code of Conduct eLearning tool. The eLearning is part of the induction programme for new Fortum employees. In 2015, a revision of the Code of Conduct eLearning tool will be introduced. In addition, separate anti-corruption training events for division management teams and other specific groups have been arranged by the legal department. The Code of Conduct and compliance topics and instructions are communicated through internal and external communication channels. Alignment is enforced by top management and with their full commitment. Remuneration 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 Executive Management Team). Remuneration of the Board of Directors is decided by the Annual General Meeting of Fortum. Remuneration proposal is prepared by Fortum's Shareholders' Nomination Board, which is appointed in the previous Annual General Meeting. Fortum offers a competitive compensation package for senior executives and other members of the management teams. 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, relevant benefits and short-term and long-term incentive schemes – with eventual payment based on attainment of challenging performance targets decided by the Board of Directors – are also offered. 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 a statement in August 2012 on the remuneration of executive management and key individuals in companies with State ownership. Fortum's remuneration principles comply both with the Finnish Corporate Governance Code 2010 and the statement issued by the Cabinet 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://annualreport2014.fortum.com/ 263 Annual Report 2014 Remuneration Short-term incentives Short-term incentives Fortum’s short-term incentive scheme (STI), 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 – including all performance measures, target values and performance scales – for senior management. The bonuses paid to the members of senior management are dependent on the Group’s financial performance – measured in 2014 by profitability and cash flow, divisional targets and 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, all of whom are members the Fortum Executive Management Team, are determined on the basis of the division’s performance and the Group’s financial performance. The criteria used to assess the personal performance of the executive are agreed in the annual performance discussions held at the beginning of the year. The Board of Directors assesses the performance of the President and CEO on a regular basis. Long-term incentives Long-term incentives The purpose of Fortum’s long-term incentive system (LTI), 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. For the share bonus system 2014–2019 there are currently approximately one hundred participants. 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 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. For the earnings period 2014–2016 the approved key earning criteria are based on earnings per share (EPS), return for shareholders and reputation index. 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. Share bonus systems Share bonus systems For the Fortum Executive Management Team members, the lock-up period may be shortened to one year on an individual basis if the value of the aggregate ownership of Fortum shares corresponds to a minimum of the annual base salary. For other participants, the share bonus systems lock-up period is changed to one year from Plan 2013–2018 onwards. 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. PCA Corporate Finance, an independent Finnish financial advisor, has been consulted in matters related to remuneration. The maximum value of shares, before taxation, to be delivered to a participant after the earning period cannot exceed the participant’s annual salary. 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://annualreport2014.fortum.com/ 264 Annual Report 2014 Remuneration Pensions Pensions Fortum’s Finnish senior 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 include 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. Fortum’s senior executives outside Finland participate in pension systems based on statutory pension arrangements and market practices in their local countries. In addition to the statutory pensions, the members of the Fortum Executive Management Team have supplementary pension arrangements. The Group policy is that all new supplementary pension arrangements are defined contribution plans. The retirement age for Fortum’s President and CEO is 63 and for the other members of the Fortum Executive Management Team 60-65. For the President and CEO and some members of the Fortum Executive Management Team, the maximum pension can be 60 % of the pensionable salary, with the pension insured by an insurance company and for some members, the maximum is 66 % of the pensionable salary, with the pension provided by Fortum's Pension Fund. Remuneration for Management Remuneration for Management The table below includes the salaries and fringe benefits, short-term bonus- and long- term share bonus payments to the President and CEO and the Fortum Executive Management Team during the year. Short- term bonus (STI) payments are based on the previous year’s targets and achieved results. Long-term share bonus (LTI) includes the shares delivered during the year. The table also includes payments made to supplementary pension arrangements for the President and CEO and the Fortum Executive Management Team. 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://annualreport2014.fortum.com/ 265 Annual Report 2014 Remuneration Salaries and fringe benefits 2014 Salaries and fringe benefits 2013 Long-term Short-term bonus 2014 Short-term bonus 2013 Long-term bonus 2013 Voluntary pensions 2014 Voluntary pensions 2013 bonus 2014 Total 2014 Total 2013 1,005 795 1) 38 18 549 971 255 249 1,847 2,033 3,321 2,860 4,326 3,655 453 491 137 155 1,509 2,058 1,508 2,479 578 833 453 702 5,861 4,958 7,708 6,991 Thousands of euros President and CEO Other Executive Management team members 2) Total 1) Amount is impacted by the sick leave during 2013. 2) Former CFO Markus Rauramo was granted a recruitment bonus in 2012 that was paid in three installments of EUR 33,334 in 2012, 2013 and 2014. In addition former CFO Rauramo was paid EUR 80,000 compensation in 2013 for assuming duties of the President and CEO during March-November 2013. The STI and LTI bonus payments to the Executive Management Team, including the President and CEO, amounted to a total of EUR 2,549 thousand (2013: 2,634), which corresponds to 0.83 % (2013: 0.77 %) of the total compensation in the Fortum Group. Timo Karttinen, who assumed the responsibility for the duties of the President and CEO during Tapio Kuula’s sick leave in December 2014, did not receive any compensation for these additional duties in 2014. Number of shares delivered to the Number of shares delivered to the management management The following table shows the number of Fortum shares delivered to the President and CEO and other Fortum Executive Management Team members under the long- term incentive plans. Number of shares Tapio Kuula Helena Aatinen Alexander Chuvaev 1) Mikael Frisk Esa Hyvärinen (member of the FEM from 1 March 2014) Timo Karttinen Kari Kautinen (member of the FEM from 1 March 2014) Per Langer Markus Rauramo Matti Ruotsala Sirpa-Helena Sormunen (member of the FEM from 1 September 2014) Tiina Tuomela (member of the FEM from 1 March 2014) Kaarina Ståhlberg (member of the FEM until 31 March 2014) 2014 2) 15,187 909 13,793 6,463 1,382 6,639 1,739 5,517 1,679 3,463 0 1,156 210 2013 35,152 519 35,783 10,079 n/a 9,563 n/a 8,550 756 12,395 n/a n/a n/a 1) Share rights will be paid in cash instead of shares after the three-year lock-up period due to local legislation 2) Share delivery based on share plans 2008-2012 and 2011-2016. Remuneration and terms of employment of President and CEO Tapio Kuula Remuneration and terms of employment of President and CEO Tapio Kuula Salary and fringe benefits Short-term incentive system (bonus) * EUR 81,530 /month, including free car allowance and phone allowances as fringe benefits. 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. 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://annualreport2014.fortum.com/ 266 Annual Report 2014 Remuneration Long-term incentive system (share bonus) * Pension 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 bonus. 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. of Board of Directors Compensation of Board of Directors Compensation The following table includes the compensation paid for the Board of Directors during 2014 and 2013. The amounts include fixed yearly fees and meeting fees. Thousands of euros Board Members at 31 December 2014 Sari Baldauf, Chairman Kim Ignatius, Deputy Chairman 1) Minoo Akhtarzand Heinz-Werner Binzel Ilona Ervasti-Vaintola Christian Ramm-Schmidt 2) Petteri Taalas Jyrki Talvitie Former Board Members Joshua Larson 1) Deputy Chairman from 8 April 2014 2) Deputy Chairman until 8 April 2014 Board members are not in an 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 Thousands of euros/year Chairman Deputy Chairman Chairman of the Audit and Risk Committee 1) Members 1) if not Chairman or Deputy Chairman simultaneously 2014 Board service 2014 2013 Board service 2013 83 67 57 60 48 53 37 53 19 1 Jan - 31 Dec 1 Jan - 31 Dec 1 Jan - 31 Dec 1 Jan - 31 Dec 1 Jan - 31 Dec 1 Jan - 31 Dec 8 Apr - 31 Dec 8 Apr - 31 Dec 84 67 58 60 49 66 - - 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 - 8 Apr 71 1 Jan - 31 Dec compensation of the Board members is not tied to the sustainability performance of the Group. Fees for the Board of Directors Fees for the Board of Directors The Annual General Meeting on 8 April 2014 confirmed the following annual fees for the members of the Board of Directors: 2014 75 57 57 40 2013 75 57 57 40 Every member of the Board of Directors receives a fixed yearly fee and a meeting fee. The meeting fee of 600 euro 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. 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://annualreport2014.fortum.com/ 267 Annual Report 2014 Board of Directors Read more about Read more about • Meeting attendances in the Corporate Governance statement • Fortum shares held by the members of the Board of Directors section in the Annual Report 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://annualreport2014.fortum.com/ 268 Annual Report 2014 Board of Directors Board of Directors Board of Directors Fortum's Board of Directors 31 December 2014 Sari Baldauf Sari Baldauf Chairman Chairman • Born 1955, nationality: Finnish • MSc, Business Administration • Independent member of Fortum’s Board of Directors since 2009 • Chairman of the Nomination and Remuneration Committee Main occupation: Main occupation: • Non-executive Director Primary work experience: Primary work experience: • Nokia Corporation, several senior executive positions. Member of the Group Executive Board until February 2005. Key positions of trust: Key positions of trust: • Akzo Nobel N.V., Daimler AG, and Deutsche Telekom AG: Member of the Supervisory Board • DevCo Partners Oy, Senior Advisor • Finland’s Children and Youth Foundation, Tukikummit Foundation, and Technology Industries of Finland Centennial Foundation: Member of the Board • Savonlinna Opera Festival, Chairman of the Board • F-Secure Corporation, Member of the Board 2005–2014 • Sanoma Corporation, Deputy Chairman 2003–2009 • Capman Corporation, Member of the Board 2008–2011 • YIT Corporation, Member of the Board 2006–2008 • Hewlett-Packard Company, Member of the Board 2006–2012 • Finnish Business and Policy Forum EVA, Member of the Board and vice chair 2007–2013 • John Nurminen Foundation, Member of the Board 2009–2013 Fortum shares as of 31 December 2014: Fortum shares as of 31 December 2014 2,300 (31 December 2013: 2,300) Key positions of trust: - Key positions of trust: - Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 2,400 (31 December 2013: 2,400) Deputy Chairman Deputy Chairman • Born 1956, nationality: Finnish • BSc (Econ) • 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 2003–2008 • Sonera Oyj, Executive Vice President and CFO 2000–2002 • Tamro Oyj, Group CFO 1997–2000 Kim Ignatius Kim Ignatius 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://annualreport2014.fortum.com/ 269 Annual Report 2014 Board of Directors Minoo Akhtarzand Minoo Akhtarzand • Born 1956, nationality: Swedish • 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, various senior executive positions • Stockholm Energi, various positions Key positions of trust: Key positions of trust: • Södertörn University, Chairman of the Board • The National Society for Road Safety in the County of Jönköping, Chairman of the Board • The Swedish Export Credit Agency, Vice Chairman 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: Vice Chairman of the Board • Västerbergslagens Energi AB, Chairman of the Board 2000–2004 • Chairman of several different Councils Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: - (31 December 2013: -) Heinz-Werner Binzel Heinz-Werner Binzel • Born 1954, nationality: German • Economics and electrical engineering degree • Independent member of Fortum’s Board of Directors since 2011 • Member of the Audit and Risk Committee 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 Main occupation: Main occupation: • Independent consultant Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: - (31 December 2013: -) 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 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://annualreport2014.fortum.com/ 270 Annual Report 2014 Board of Directors Ilona Ervasti-Vaintola Ilona Ervasti-Vaintola • Born 1951, nationality: Finnish • 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 2001–2011 • Mandatum Bank plc, Chief Counsel and member of the Board 1998–2001 • Mandatum & Co Ltd, Director, Partner 1992–1998 • Union Bank of Finland Ltd, Head of Financial Law Department, Legal counsel 1982–1992 Key positions of trust: Key positions of trust: • Securities Market Association, Deputy Chairman of the Board 2012 • 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 2014 Fortum shares as of 31 December 2014: 4,000 (31 December 2013: 4,000) Christian Ramm-Schmidt Christian Ramm-Schmidt Key positions of trust: Key positions of trust: • Atoy Oy, Merivaara Oy, Reima Oy: Member of the Board Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 2,250 (31 December 2013: 2,250) • Born 1946, nationality: Finnish • BSc (Econ) • Independent member of Fortum’s Board of Directors since 2006 • Member of the Audit and Risk 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 • ISS ServiSystems Oy, Director • Rank Xerox Oy, Director 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://annualreport2014.fortum.com/ 271 Annual Report 2014 Group Management Petteri Taalas Petteri Taalas • Born 1961, nationality: Finnish • PhD in Meteorology • Independent Member of Fortum’s Board of Directors since 2014 • Member of the Nomination and Remuneration Committee Main occupation: Main occupation: • Director General of the Finnish Meteorological Institute Primary work experience: Primary work experience: • World Meteorological Organization, Director • Finnish Meteorological Institute, remote sensing (satellites), Research professor • Finnish Meteorological Institute, Head of research/senior scientist Key positions of trust: Key positions of trust: • World Meteorological Organisation, Member of Executive Council • EUMETSAT (European Organisation for the Exploitation of Meteorological Satellites), Chairman of Council • Intergovernmental Panel on Climate Change (IPCC), Delegate for Finland • University of Eastern Finland, Chairman of the Board • ECMWF (European Centre for Medium- Range Weather Forecasts), Member of Council • Fortum Corporation, Stakeholders’ Advisory Council, Member 2011–2014 Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: - (31 December 2013: n/a) Jyrki Talvitie Jyrki Talvitie Key positions of trust: - Key positions of trust: - Fortum shares as of 31 December 2014: - Fortum shares as of 31 December 2014 (31 December 2013: n/a) • Born 1966, nationality: Finnish • Executive MBA, Master of Law • Independent Member of Fortum’s Board of Directors since 2014 • Member of the Audit and Risk Committee Main occupation: Main occupation: • Russian Direct Investment Fund, Director Primary work experience: Primary work experience: • VTB Bank, Moscow, Senior Vice President • East Capital, Moscow, Chief Representative, Senior Advisor • URALSIB Financial Corporation, Moscow, Head of International Business, Chief Managing Director • BNP-Paribas, Securities Services, Paris, Senior Vice President • The Bank of New York, London, Vice President 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://annualreport2014.fortum.com/ 272 Annual Report 2014 Group Management Group Management Group Management Fortum Executive Management team 31 December 2014 Tapio Kuula Tapio Kuula • Born 1957, nationality: Finnish • MSc (Eng), MSc (Econ) • President and CEO since 2009 • Member of the Management Team since 1997 • Employed by Fortum since 1996 Previous positions: Previous positions: • Fortum Corporation, Senior Vice President 2005 • Fortum Power and Heat Oy, President 2000 • Fortum Corporation, Power and Heat Sector, President 2000 • Fortum Power and Heat Oy, Executive Vice President 1999 • Imatran Voima Oy, Executive Vice Key positions of trust: Key positions of trust: • Fortum Foundation, Chairman of the Board • Varma Mutual Pension Insurance Company, Chairman of the Supervisory Board • OAO Fortum, Chairman of the Board • East Office of Finnish Industries Oy, Deputy Chairman of the Board • Northern Dimension Business Council, Co-Chairman • Finnish Fair Corporation, Member of the Supervisory Board • Finnish-Russian Chamber of Commerce, Member of the Board • Eurelectric, Member of the Board President, Member of the Board, Member of the Management Team 1997 Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 168,742 (31 December 2013: 153,555) Helena Aatinen Helena Aatinen • Born 1959, nationality: Finnish • MSc (Econ) • Senior Vice President, Corporate Communications since 2012 • Member of the Management Team since 2012 • Employed by Fortum since 2011 Previous positions: Previous positions: • Fortum Corporation, Vice President, Corporate Communications 2011 • Finnish Forest Industries Federation, Communications Director 2005 • Metso Corporation, Senior Vice President, Corporate Communications 2002 • Metso Corporation, several positions in Communications function 1997 Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 1,528 (31 December 2013: 619) 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://annualreport2014.fortum.com/ 273 Annual Report 2014 Group Management Alexander Chuvaev Alexander Chuvaev Mikael Frisk Mikael Frisk • Born 1960, nationality: Russian • MSc (Eng) • Executive Vice President, Russia Division and General Director of OAO Fortum since 2009 • Member of the Management Team since 2009 • Employed by Fortum since 2009 Previous positions: Previous positions: • GE Oil & Gas, Regional Executive Director, Russia and CIS 2009 • SUEK, Investment Development Director, Russia 2008 • JSC Power Machines, Managing Director, Russia 2006 • Solar Turbines Europe S.A., various positions in Europe and the USA 1991 Key positions of trust: Key positions of trust: • Energy Producers Council, Deputy Head of the Supervisory Board • Russian Union of Industrialists and Entrepreneurs, Member of the Board, Chairman of Commission on Public Utility • Territorial Generating Company No. 1 (TGC-1), Member of the Board • Government Commission on the Development of the Electric Power Industry, Member • Aggreko Aurasia LLC, Member of the • GE Oil & Gas, Regional General Manager, Board Russia 2006 • JSC OMZ, Chief Operations Officer, Russia 2005 • GE, various positions in the USA and Canada 1999 Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 14,713 (31 December 2013: 12,093) 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 2014: Fortum shares as of 31 December 2014 46,591 (31 December 2013: 42,128) • Born 1961, nationality: Finnish • 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 Previous positions: Previous positions: • Nokia Mobile Phones, Vice President, HR Global Functions 1998 • Nokia-Maillefer, Vice President, HR, Lausanne, Switzerland 1993 • Nokia NCM Division, HR Development Manager 1992 • Oy Huber Ab, HR Development Manager 1990 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://annualreport2014.fortum.com/ 274 Annual Report 2014 Group Management Esa Hyvärinen Esa Hyvärinen Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 15,156 (31 December 2013: n/a) • Born 1967, nationality: Finnish • MSSc (Econ) and M.Sc. (Agr. & For.) • Senior Vice President, Corporate Relations as of 1 March 2014 • Member of the Management Team as of 1 March 2014 • Employed by Fortum since 2006 Previous positions: Previous positions: • Fortum Corporation, Vice President, Corporate Relations 2006 • Confederation of European paper industries CEPI, Brussels, Head of Recycling and Environmental units 2000–2006 • Finnish Ministry of Trade and Industry, Senior Advisor 1997–2000 Key positions of trust: Key positions of trust: • Finnish Energy Industries, Member of the Board Timo Karttinen Timo Karttinen • Imatran Voima Oy, Vice President, Electricity Procurement 1997 Key positions of trust: Key positions of trust: • OAO Fortum, Member of the Board • Confederation of Finnish Industries, Member of the Economy and tax committee Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 76,430 (31 December 2013: 69,791) • Born 1965, nationality: Finnish • MSc (Eng) • Chief Financial Officer since 1 March 2014 • Member of the Management Team since 2004 • Employed by Fortum since 1991 Previous positions: Previous positions: • Fortum Power and Heat Oy, Executive Vice President, Electricity Solutions and Distribution Division 2009 • 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 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://annualreport2014.fortum.com/ 275 Annual Report 2014 Group Management Kari Kautinen Kari Kautinen Per Langer Per Langer • Member of the Board in several Fortum- owned holdings in Russia Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 22,276 (31 December 2013: n/a) Key positions of trust: Key positions of trust: • Fortum Sweden AB, Chairman of the Board • EFA AB, Deputy Chairman • Svensk Energi, Member of the Board • Hafslund ASA, Member of the Board Fortum shares as of 31 December 2014: Fortum shares as of 31 December 2014 30,784 (31 December 2013: 25,267) • Born 1964, nationality: Finnish • LL.M • Senior Vice President, Strategy, Mergers and Acquisitions as of 1 March 2014 • Member of the Management Team as of 1 March 2014 • Employed by Fortum since 1998 Previous positions: Previous positions: • Fortum Corporation, Vice President, Strategy, Mergers and Acquisitions 2012 • Fortum Corporation, Vice President, Mergers and Acquisitions 2007 • Fortum, several managerial positions 1998 Key positions of trust: Key positions of trust: • OAO Fortum, Member of the Board of Directors • TGC-1, Member of the Board of Directors • Born 1969, nationality: Swedish • MSc (Econ) • Executive Vice President, Hydro Power and Technology Division as of 1 March 2014 • Member of the Management Team since 2009 • Employed by Fortum since 1999 Previous positions: Previous positions: • Fortum Power and Heat Oy, Executive Vice President, Heat Division 2009 • Fortum Power and Heat Oy, President of Heat 2007 • Fortum Power and Heat Oy, President of Portfolio Management and Trading 2004 • Fortum Corporation, managerial positions 1999 • Gullspång Kraft, managerial positions 1997 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://annualreport2014.fortum.com/ 276 Annual Report 2014 Group Management Markus Rauramo Markus Rauramo • Born 1968, nationality: Finnish • MSc (Econ and Pol. Hist.) • Executive Vice President, Heat, Electricity Sales and Solutions Division as of 1 March 2014 • Member of the Management Team since 2012 • Enso Oyj, Helsinki, several financial tasks 1993 Key positions of trust: Key positions of trust: • Ahlstrom Oyj, Member of the Board • Wärtsilä Oyj Abp, Member of the Board • Teollisuuden Voima Oyj, Member of the • Employed by Fortum since 2012 Board Previous positions: Previous positions: • Fortum Corporation, Chief Financial Officer 2012 • AS Eesti Gaas, Member of the Supervisory Board • As Vörguteenus Valdus, Member of the Supervisory Board • Stora Enso Oyj, Helsinki, CFO and • AB Fortum Värme samägt med Member of the GET 2008 • Stora Enso International, London, SVP Group Treasurer 2004 Stockholms stad, Chairman of the Board of Directors • Chairman or member of the Board of • Stora Enso Oyj, Helsinki, VP Strategy and several Fortum Corporation companies Investments 2001 • Stora Enso Financial Services, Brussels, VP Head of Funding 1999 Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 15,435 (31 December 2013: 13,756) Matti Ruotsala Matti Ruotsala Key positions of trust: Key positions of trust: • Kemijoki Oy, Chairman of the Board • PKC Group Oyj, Chairman of the Board • Teollisuuden Voima Oyj, Chairman of the Board • Componenta Oyj, Member of the Board • Halton Group Ltd, Member of the Board Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 32,360 (31 December 2013: 28,897) • Born 1956, nationality: Finnish • MSc (Eng) • Chief Operating Officer as of 1 March 2014 • Member of the Management Team since 2007 • Employed by Fortum since 2007 Previous positions: Previous positions: • Fortum Power and Heat Oy, Power Division, Executive Vice President 2009 • 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 • Konecranes Plc and Kone Corporation, several senior and managerial positions 1982 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://annualreport2014.fortum.com/ 277 Annual Report 2014 GRI Sirpa-Helena Sormunen Sirpa-Helena Sormunen Fortum shares as of 31 December 2014: - Fortum shares as of 31 December 2014 (31 December 2013: n/a) • Born 1959, nationality: Finnish • LL.M • General Counsel as of 1 September 2014 • Member of the Management Team since 1 September 2014 • Employed by Fortum since 2014 Previous positions: Previous positions: • Patria Oyj, General Counsel 2012 • Nokia and Nokia Siemens Networks (NSN), several legal and managerial positions 2004 • TeliaSonera Finland Oyj, Vice President, Head of Legal, Mergers and Acquisitions and Finance 2003 • Sonera Oyj, Senior Legal Counsel, Head of Legal, Merger and Acquisitions 2000 Key positions of trust: Key positions of trust: • Nammo AS, Member of the Board of Directors Tiina Tuomela Tiina Tuomela • Born 1966, nationality: Finnish • MSc (Eng), MBA • Executive Vice President, Nuclear and Thermal Power Division as of 1 March 2014 • Kemijoki Oy, Member of the Supervisory Board • Raskone Oy, Member of the Board of Directors • Teollisuuden Voima Oyj, Member of the • Member of the Management Team as of 1 Board of Directors March 2014 • Member of the Board of several • Employed by Fortum since 1990 companies of the Fortum Corporation Fortum shares as of 31 December 2014 Fortum shares as of 31 December 2014: 6,442 (31 December 2013: n/a) Previous positions: Previous positions: • Fortum Power and Heat Oy, Vice President, Finance in Power Division 2009 • Fortum Power and Heat Oy, Vice President, Business Control and Support, Generation 2005 • Fortum, several managerial positions 1990 Key positions of trust: Key positions of trust: • Ekokem Oy, Member of the Board of Directors 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://annualreport2014.fortum.com/ 278 Annual Report 2014 Standard disclosures GRIGRI We report annually on sustainability in accordance with the Global Reporting Initiative Reporting Guidelines. Our reporting for 2014 follows the core option of the GRI G4 Guidelines. Deloitte & Touche Oy has provided limited assurance for the sustainability information presented on our Finnish language web report with the boundaries presented in the assurance statement. Standard disclosures Standard disclosures Sustainability is an integral part of our strategy. We report on sustainability in accordance with the GRI G4 Guidelines and the Electric Utilities Sector Disclosures. Of the general standard disclosures, the strategy, analysis and our Group-level sustainability targets and their realisation have been described mainly in the Strategy section of our report. We describe the key stakeholder groups and stakeholder engagement in the Society section of our report. We describe sustainability governance practices in the Governance section of our report. We have reported other general and specific standard disclosures required by the GRI G4 Guidelines and the sector disclosures in this GRI section. In particular, we focus on describing the material aspects we have identified for the economic, environmental and social responsibility and the related indicators. 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://annualreport2014.fortum.com/ 279 Annual Report 2014 Standard disclosures Report content Report content This year we are not publishing a separate sustainability report; we are reporting about sustainability as part of our Annual Report. We have reported the information required by the Global Reporting Initiative (GRI) G4 reporting guidelines and the Electric Utilities Sector Disclosures in different sections of the Annual Report (see the GRI index). We have reported the specific standard disclosures with indicators in the GRI section of the Annual Report. We will publish the Annual Report in its entirety online, in Finnish and in English, on our website at annualreport2014.fortum.com. The Annual Report describes our operations and the material sustainability aspects for us and for our stakeholders in 2014, and includes some information from January- February 2015 as well. The Sustainability Report for 2013 was published in March 2014. Fortum reports sustainability information annually; we will publish the next report in March 2016. The individuals who can provide more information related to the Annual Report are listed on our Contacts page. Report scope and Report scope and boundaries boundaries Reporting related to operations and management covers all functions under Fortum's control, including subsidiaries in all countries of operation. The consolidation includes the parent company Fortum Corporation and all the companies in which Fortum Corporation has the power to govern the financial and operating policies and in which it generally holds, directly or indirectly, more than 50% of the voting rights. Possible deviations to this principle are reported in conjunction with information applying different boundaries. A list of the Fortum's subsidiaries is in Note 42 Subsidiaries by segment to the Financial Statements. The most significant change in the report boundary compared to the 2013 report is related to the AB Fortum Värme samägt med Stockholms stad company (Fortum Värme). Application of the new IFRS standards has resulted in Fortum Värme being classified in the Financial Statements as a joint venture and it is consolidated with the equity method as of 1.1.2014. Until 2013, Fortum Värme was treated as a Group subsidiary in which non-controlling owners had a 50% share. As of 2014, joint venture Fortum Värme is not included in Fortum's sustainability targets or key indicators or in the descriptions of management practices. In this report, we present joint venture Fortum Värme separately in terms of material sustainability aspects and indicators. Information from previous years is mainly presented as pro forma information, i.e. presented on the basis of the organisation and the functions of each year; the impacts of ownership changes in production facilities, for example, have not been updated afterwards in the previous indicators. An exception to this is joint venture Fortum Värme, whose share has been removed from 2013 information whenever possible. The corresponding removal has not been made in the information for 2012. Possible deviations from this rule are presented with the indicator. Material aspects and defining the Material aspects and defining the report content report content Material sustainability aspects included in the report and the reporting boundaries are presented in table Standard disclosures / Material aspects. The selection of material aspects is based on GRI G4 reporting guidelines and on Fortum's own and our stakeholders' views regarding the significance of the impacts. As the premise for the process, we used the aspects material to the sector as presented in the Implementation Manual and Electric Utilities Sector Disclosures document. Our understanding of stakeholder views is based on the result of the One Fortum survey, the stakeholder sustainability survey, and the EPSI customer satisfaction survey, as well as information gained through other stakeholder collaboration. Our own assessment of the significance of the impacts is based on the systematic monitoring and reporting of indicators for over 20 years. Capacity changes Capacity changes New and acquired capacity New and acquired capacity In 2014, the Nyagan gas-fired power plant's third unit was commissioned in Russia. At the end of the year, we also commissioned the Kapeli solar power plant in India. The plants and the capacities acquired during the year are included in the reporting starting from the moment of possession. The same applies to built new capacity and new plants commissioned during the year. Divested capacity Divested capacity Fortum divested its electricity distribution business in Finland on 24 March 2014, and both its electricity distribution business and heat business in Norway on 30 June 2014. These businesses are not included in the 2014 reporting. Fortum divested its Grangemouth power plant in Great Britain on 1 October 2014. The plant data are included in the reporting until the end of September 2014. Measurement and Measurement and calculation principles calculation principles Data for economic performance indicators is collected from the audited financial statements and from financial accounting and consolidation systems. The environmental information of the report covers the plants for which Fortum is the legal holder of the environmental permit. In such cases, the plant information is reported in its entirety. The only exception is the calculation of specific CO2 emissions from Meri-Pori power plant, where the calculation covers only Fortum's share of production and emissions as specified in the operation agreement between Fortum and Teollisuuden Voima Oy. In the specific emissions calculation, the production shares of minority holdings are also included in the total production. Fortum utilises a Group-wide database with instructions for collecting site-level environmental data. Sites are responsible for data input, emissions calculations and assurance. The Corporate Sustainability unit compiles all data and is responsible for disclosed sustainability information. Fortum's CO2 emissions subject to the EU Emissions Trading Scheme are annually verified at the site-level by external verifiers. Direct and indirect greenhouse gas emissions have been reported in accordance with the Greenhouse Gas Protocol and based on the Greenhouse Gas Analysis performed by an external consultant. Fortum's human resources (HR) management system is currently used in all Fortum’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://annualreport2014.fortum.com/ 280 Annual Report 2014 Standard disclosures operating countries and is the main system for employee-related personal and job data. In Russia, the employee data system covers mainly superiors. In addition, Russian operations have their own, local data system. Other social responsibility data, such as occupational health-related data, originates from various data systems and is collected by designated individuals and delivered to the Corporate Sustainability unit in the format recommended by GRI. Global Compact reporting Global Compact reporting Fortum has been a member of the United Nations Global Compact initiative since June 2010. This report describes the realisation of the Global Compact's ten principles in Fortum's operations. Global Compact approves the use of the indicators in the GRI Guidelines in Communication on Progress (COP) reporting. The GRI index presents the indicators used to measure Fortum's performance in fulfilling the principles of human rights, labour standards, the environment and anti-corruption. Fortum joined the Caring for Climate initiative in November 2013. Fortum meets the reporting requirements of the Caring for Climate initiative by participating annually in the assessment in the CDP's climate change programme and by publishing its response on the CDP website. Material aspects Material aspects The chosen material aspects of sustainability are based on the GRI G4 Guidelines and on Fortum’s own view and its stakeholders’ views on the significance of the impacts. Identified material aspect Why the aspect is material Economic responsibility Economic performance Plant decommissioning2) System efficiency2) Competitiveness, security of supply and market-driven production enable long-term profitable growth. A financially strong company can shoulder responsibility for the environment, take care of its employees, monitor its supply chain, meet customer expectations, and produce excellent value to its shareholders. Producers of nuclear waste in Finland and Sweden are responsible for nuclear waste management and final disposal as well as the related costs. The legal obligation also applies to decommissioning nuclear power plants. Better energy efficiency reduces the use of primary energy and the environmental impacts of energy production and use. We offer energy-efficiency services also to customers. Until the end of 2014, Fortum had a Group-level five-year average target (>70%) for efficiency of fossil fuel-based production. Environmental responsibility Materials We use large volumes of fuels in electricity and heat production. Boundary within organisation on a divisional basis1) Whole organisation NTP Whole organisation Boundary outside organisation. Stakeholders impacted by aspect. Upstream (suppliers, investors) Downstream (customers, investors, public sector) Downstream (communities) Upstream (suppliers) Downstream (communities, customers) Upstream (suppliers) Own production NTP HESS Russia We use large volumes of fuel and other energy sources, like hydropower, in electricity and heat production. Own production Whole organisation Upstream (suppliers) Energy Water Geographical boundary of impact Reported indicators All reporting countries. Especially Finland, Sweden and Russia G4-EC1 G4-EC2 G4-EC3 G4-EC4 Finland and Sweden Aspect does not have indicators EU11 EU12 All operating countries, except India where production is solar power All operating countries, except India where production is solar power All operating countries, except India where production is solar power G4-EN1 G4-EN2 G4-EN3 G4-EN5 G4-EN6 G4-EN8 Water is an important global sustainability issue for stakeholders. Downstream (communities) All operating countries Own production NTP HESS Russia 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://annualreport2014.fortum.com/ 281 Annual Report 2014 Standard disclosures Biodiversity Emissions Hydropower production, electricity distribution and fuel procurement can have an impact on local biodiversity. Also fossil fuel-based energy production may weaken local biodiversity particularly in Russia. Fuel combustion in electricity and heat production generates emissions into the air. Statutory limitations target emissions in our operating countries. Effluents and waste Power plants use huge volumes of water for cooling or as process water. The combustion of solid fuels generates significant amounts of ash and gypsum. Nuclear power production generates low-, medium- and high-level radioactive nuclear waste. Own production NTP HESS Russia Distribution Own production NTP HESS Russia Own production NTP HESS Russia Upstream (suppliers) Finland, Sweden, Baltics, Russia G4-EN13 EU13 Downstream (communities) All operating countries, except India where production is solar power Downstream (communities) All operating countries G4-EN15 G4-EN16 G4-EN17 G4-EN18 G4-EN21 G4-EN22 G4-EN23 G4-EN24 Compliance Compliance with legislation in all our operating countries forms the foundation of our social operating license. Own production Whole organisation Downstream (communities) All operating countries G4-EN29 Supplier environmental assessment Environmental impacts from our supply chain are related mainly to fuels, particularly coal, uranium, and bioenergy. The possible environmental impacts related to the procurement of raw materials are included in the pre-selection and audits of Fortum’s suppliers. NTP HESS Russia Upstream (suppliers) International G4-EN32 G4-EN33 Environmental grievance mechanisms Our operations are guided by Fortum’s values, the Code of Conduct and the Supplier Code of Conduct. A grievance mechanism offers stakeholders a channel for reporting misconduct. Whole organisation Whole supply chain G4-EN34 All operating countries, international Social responsibility Sub-category: Labour practices and decent work Employment Labour/Management relations We are a significant employer in our operating countries. We aspire to be a desired employer that attracts and engages employees at all levels. Collaboration between the employees and the employer is based on local legislation, agreements and Fortum’s Code of Conduct. Occupational health and safety We strive to be a safe workplace for our employees as well as for contractors working for us and for service providers. Training and education We aim to create interesting career and development Diversity and equal opportunity opportunities to continuously advance personal professional skills and know-how. It is important to us to secure the expertise required to implement the strategy. We value diversity and we promote equal treatment and opportunities in recruiting, remuneration, personnel development and advancement, regardless of race, religion, political views, gender, age, nationality, language, sexual orientation, marital status, or disability. Equal remuneration for women and men We want to offer our personnel a fair, transparent and competitive remuneration system. Supplier assessment for labour practices About 50% of the goods and services we acquire originate from risk countries. Violations related to social issues are more likely to occur in these countries than in non-risk countries. Personnel Whole organisation Personnel Whole organisation Personnel Whole organisation Personnel HTP NTP HESS Russia Personnel Whole organisation Personnel Whole organisation NTP HESS Russia Downstream (communities) All operating countries Downstream (society, trade unions) Upstream (suppliers, contractors) G4-LA1 G4-LA2 EU18 G4-LA4 All operating countries All operating countries G4-LA5 G4-LA6 All operating countries G4-LA9 G4-LA10 G4-LA11 All operating countries G4-LA12 All operating countries International G4-LA13 G4-LA14 G4-LA15 Upstream (suppliers) 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://annualreport2014.fortum.com/ 282 Annual Report 2014 Standard disclosures Labour practices grievance mechanisms Our operations are guided by Fortum’s values, the Code of Conduct and the Supplier Code of Conduct. A grievance mechanism offers stakeholders a channel for reporting possible misconduct. Sub-category: Human rights Whole organisation Whole supply chain International G4-LA16 Investment Non-discrimination Freedom of association and collective bargaining Child labour Forced or compulsory labour Assessment Fortum has operations in countries where the legislation and practices are not necessarily consistent with all internationally recognised human rights standards. NTP HESS Russia Upstream (suppliers, contractors) Fortum has operations in countries where the legislation and practices are not necessarily consistent with all internationally recognised human rights standards. Fortum has procurements from suppliers that operate in risk countries. With the exception of India, freedom of association and collective bargaining are protected by legislation in Fortum’s operating countries. Fortum has procurements from suppliers that operate in risk countries. Of our operating countries, India has not ratified the International Labour Organisation’s (ILO) Convention on the minimum age and the worst forms of child labour. Fortum has procurements from suppliers that operate in risk countries. Fortum has not identified risks related to the use of forced labour in Fortum’s own operations. Personnel Whole organisation Personnel Whole organisation HPT NTP HESS Russia HPT NTP HESS Russia Upstream (suppliers) Upstream (suppliers) Upstream (suppliers) Alongside the current businesses, we are pursuing a platform for future growth by exploring and developing new sources of growth that support our strategic core areas. Human rights assessments are part of the assessment process for projects. Own production HPT NTP HESS Russia Downstream (communities) Business partners Russia, India All operating countries G4-HR1 G4-HR2 G4-HR3 International G4-HR4 International G4-HR5 International G4-HR6 International G4-HR9 Supplier human rights assessment About 50% of the goods and services we acquire originate from risk countries. Violations related to social issues are more likely to occur in these countries than in non-risk countries. NTP HESS Russia Upstream (suppliers) International G4-HR10 G4-HR11 Human rights grievance mechanisms Our operations are guided by Fortum’s values, the Code of Conduct and the Supplier Code of Conduct. A grievance mechanism offers stakeholders a channel for reporting possible misconduct. Whole organisation Whole supply chain International G4-HR12 Sub-category: Society Local communities Anti-corruption Public policy Anti-competitive behaviour Compliance Fortum’s future operations in India may require the acquiring of significant land areas and thus will impact local communities. Hydropower production has impacts on local communities. We have identified corruption and bribery as a significant business risk, and we absolutely reject corruption and bribery. The significance of energy issues will grow continuously in society, and we want to engage in an active dialogue to develop the sector. Own production HPT HESS Downstream (communities) India, Finland, Sweden G4-SO2 Whole organisation Whole supply chain International Whole organisation Downstream (communities) All operating countries G4-SO3 G4-SO4 G4-SO5 G4-SO6 G4-SO7 Strict adherence to competition legislation is part of compliance in operations. Whole organisation Compliance with legislation in all our operating countries forms the foundation of our social operating license. Whole organisation Whole supply chain Whole supply chain All operating countries International G4-SO8 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://annualreport2014.fortum.com/ 283 Annual Report 2014 Standard disclosures Grievance mechanisms for impacts on society Disaster/Emergency planning and response2) Our operations are guided by Fortum’s values, the Code of Conduct and the Supplier Code of Conduct. A grievance mechanism offers stakeholders a channel for reporting possible misconduct. We produce energy at hydro, nuclear and CHP plants and we distribute electricity and heat. Exceptional situations may have significant impacts on society. The operational security of our operations is of utmost importance to us. Sub-category: Product responsibility Whole organisation Whole supply chain International G4-SO11 Whole organisation Downstream (society, customers) All operating countries, except India This sector-specific aspect doesn't have indicators Product and service labelling Marketing communications Access2) Fortum complies with national legislation that is based on EU legislation regarding the origin of electricity. It requires that electricity producers report the origin of the produced electricity, the CO2 emissions, and the amount of radioactive waste. Customer satisfaction is a prerequisite for our business and we monitor it regularly. HESS Russia Distribution Fortum is a significant retailer of electricity and heat. Advertising and marketing communications is a key part of the electricity and heat retail business. HESS Russia Distribution Electricity and heat security of supply is a prerequisite for a functioning society. Security of supply requires power plant operations to be as uninterrupted as possible. Whole organisation Downstream (customers) All operating countries G4-PR3 G4-PR5 Downstream (customers) Downstream (communities, customers) All operating countries, except India All operating countries G4-PR7 EU28 EU29 EU30 1) Divisions: HPT: Hydro Power and Technology NTP: Nuclear and Thermal Power HESS: Heat, Electricity Sales and Solutions Russia Distribution 2) Sector-specific aspect 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://annualreport2014.fortum.com/ 284 Annual Report 2014 Standard disclosures Management approach Management approach Sustainability is an integrated part of the strategy, and the Group-level sustainability targets and results for 2014 are presented in the section discussing Fortum’s strategy. Fortum’s financial results are reported in the Financial Statements section under Financial performance and position. Fortum’s values and Code of Conduct form the foundation of our sustainability management. Fortum’s Group-level policies are approved by the Board of Directors, and our public policies can be found on our website. The policies are supplemented with Group-level instructions and manuals, and they are approved by either the President and CEO or by the head of the function responsible for the instruction. International International commitments and commitments and initiatives initiatives Fortum respects and supports the United Nations Universal Declaration of Human Rights, the United Nations Convention on the Rights of the Child, and the core conventions of the International Labour Organisation (ILO). Additionally, Fortum recognises in its operations the UN Guiding Principles on Business and Human Rights, the statutes of the OECD Guidelines for Multinational Enterprises, the International Chamber of Commerce’s anti-bribery and anti-corruption guidelines, and the Bettercoal initiative’s Code on responsible coal mining. Fortum has been a member of the UN Global Compact initiative since June 2010 and joined the UN Caring for Climate initiative in November 2013. The steering effect of Group-level policies, instructions, and international commitments and initiatives on the management of economic responsibility, environmental responsibility and social responsibility is presented in the table below. The management approach related to material aspects we have identified are presented in more detail for economic, environmental, labour practices and decent work, human rights, society and product responsibility. Additionally, more detailed information on the management of the impacts related to material aspects is provided in connection of the indicator descriptions. Fortum’s corporate governance is described in the 2014 Corporate Governance Statement. The steering effect of international commitments and initiatives and Group-level policies and instructions Social Social responsibility: Social Social responsibility: Economic Environmental Labour practices responsibility: responsibility: Product responsibility responsibility and decent work Human Rights Society responsibility x x x x x x x x x Fortum's values Fortum Code of Conduct Fortum Supplier Code of Conduct The United Nations Universal Declaration of Human Rights The United Nations Convention on the Rights of the Child The core conventions of the International Labour Organisation The UN Global Compact initiative The UN Caring for Climate initiative The statutes of the OECD Guidelines for Multinational Enterprises The International Chamber of Commerce’s anti-bribery and anti-corruption guidelines The Bettercoal initiative’s Code on responsible coal mining Group risk policy Sustainability policy (including environmental, and occupational health and safety policies) Fortum guidelines and minimum requirements for EHS management Biodiversity guidelines Guidelines on sustainability assessment Human resources policy x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x 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://annualreport2014.fortum.com/ 285 Annual Report 2014 Standard disclosures x x x x x x Fortum Accounting manual Group manual on investment evaluation and approval procedure Fortum Group instructions for anti-bribery Fortum Group instructions for safeguarding assets Group instructions for conflicts of interest Group instructions on Competition Law Fortum security guidelines Sponsorship steering document Responsible advertising and marketing guidelines Environmental marketing guidelines x x x x x x x x x x x x x Economic Economic Economic performance indicators Material aspects Targets Description Economic performance Plant decommissioning (sector-specific aspect) System efficiency (sector-specific aspect) Our goal is to achieve excellent financial results in strategically selected core areas through strong expertise and responsible ways of operating. We believe that competitiveness, security of supply and market-driven production enable long-term profitable growth. A financially strong company can shoulder responsibility for the environment, take care of its employees, monitor its supply chain, meet customer expectations, and produce excellent value to its shareholders. Each new research and development target is assessed against the criteria of carbon dioxide emissions reduction and resource efficiency. Likewise, each new investment proposal is assessed against sustainability criteria as part of Fortum’s investment assessment and approval process. In our investments we seek the kinds of economically profitable alternatives that provide the opportunity to increase capacity and reduce emissions. We measure financial performance with the return on capital employed (target: 12%), return on shareholders’ equity (target: 14%), and capital structure (target: comparable net debt/EBITDA about 3). The realisation of financial targets in 2014 is reported in the Financial performance and position section of the Financial Statements. Read more: Financial performance and position section of the Financial Statements Policies The financial management system is based on Group-level policies and their specifying instructions, and on good governance, effective risk management, sufficient controls and the internal audit principles supporting them. Other key elements steering financial management are presented in the table Steering effect of international commitments, initiatives, Fortum policies and instructions. Read more: The steering effect of Group-level policies, instructions, and international commitments and initiatives -table Responsibilities The CFO and the Group’s Financial unit, division management, and ultimately the CEO and the Board of Directors, are responsible for issues related to finances and financial statements and for broader financial responsibility issues. The Group’s short-term incentive (STI) system contains financial key indicators. The STI covers all Fortum employees. Read more: Group’s short-term incentive (STI) system Specific actions We arranged special training about taxation-related risks, such as changes in the tax landscape and new markets, and about risks related to fixed sites. 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://annualreport2014.fortum.com/ 286 Annual Report 2014 Standard disclosures Read more: Fortum as a tax payer Monitoring and follow-up Results The Board decides on the company’s financial targets as a part of the annual business planning process. Realisation of the targets is monitored on monthly basis both at the division level and by Fortum’s Executive Management Team. Fortum’s management monitors the realisation of financial targets quarterly as part of the business performance assessment, and key indicators are regularly reported to Fortum’s Board of Directors. Financial key indicators related to investments are monitored in investment forums. Fortum’s net sales for 2014 were EUR 4,751 million and the net cash from operating activities was a strong EUR 1,762 million. After distributing added value to stakeholders, EUR 4,005 million was left to develop our own operations. Taxes borne for the financial period were EUR 156 million in Finland and EUR 279 million in Sweden. Our tax footprint provides a more detailed picture of us as a tax payer. Our biggest investments, EUR 340 million, were in Russia. Our performance in material aspects of economic responsibility is reported in more detail in the following sections: Economic performance: EC1, EC2, EC3, EC4 Pensions: Financial Statements, Note 32 Pension obligations Plant decommissioning: Financial Statements, Note 30 System efficiency: EU11, EU12 Environment Environment Environmental performance indicators Description Material aspects Materials Energy Water Biodiversity Emissions Effluents and waste Compliance Supplier environmental assessment Environmental grievance mechanisms Targets In environmental responsibility, we emphasise the efficient use of natural resources and the need to mitigate climate change. Our expertise in carbon dioxide-free hydro and nuclear power production and in energy-efficient CHP production helps us in realising environmental responsibility. Through research and development work we are creating prerequisites for environmentally benign energy solutions. We measure the realisation of the environmental responsibility with the following indicators, for which we have set Group-level targets: - Specific CO2 emissions - Energy efficiency - Significant environmental non-compliances - Number of supplier audits (aspect: supplier environmental assessment) The realisation of our environmental targets in 2014 is reported in the Strategy section in the table Sustainability targets and performance in 2013-2014. Supply chain management is reported in the Strategy section table Other sustainability targets and related performance in 2013-2014 as well as in the indicator EN32. Read more: Sustainability targets and performance in 2013-2014 Supply chain management in the indicator EN32 Policies Environmental management is based on Fortum's sustainability policy and on the Group's goal to certify all operative functions in accordance with the ISO 14001 standard. The other key steering elements of environmental management are presented in the table Steering effect of international commitments, initiatives, Fortum policies and instructions. 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://annualreport2014.fortum.com/ 287 Annual Report 2014 Standard disclosures We assess environmental risks as part of the Group's risk assessment process. Read more: International commitments, initiatives, Fortum policies and instructions Risk management Responsibilities The management of the divisions and the Group functions, and ultimately the CEO and the Board of Directors, are responsible for issues related to sustainability. The Board has not appointed any member to be specifically responsible for sustainability issues; instead, its decisions rely on the knowledge of Fortum's Executive Management Team and the Group's sustainability experts, and on expert statements. The Group’s short-term incentive (STI) system contains environmental key indicators. The STI covers all Fortum employees. Read more: Short-term incentive system Specific actions We have described our actions to reduce environmental impacts in the following sections: Environmental impacts of CHP production Biomass and other biofuels, and waste-derived fuels Improving energy efficiency Compliance with the Industrial Emissions Directive (IED) Hydropower production/reducing environmental impacts Investigating EHS non-compliances and implementation of corrective measures Monitoring and follow-up EHS non-compliances are reported monthly and key indicators for CO2 emissions and energy efficiency are reported quarterly to the Fortum's Executive Management Team as part of the business performance assessments. The Group's key indicators are reported regularly to Fortum's Board of Directors and are published in Fortum's Interim Reports. Internal and external auditors regularly audit our ISO 14001 standard-compliant management system. Deloitte & Touche Oy has provided limited assurance for Fortum’s Finnish-language sustainability reporting with the boundaries presented in the assurance statement. We use the Dow Jones Sustainability Assessment as an external benchmark when assessing our sustainability performance. We map our stakeholders' views annually with the One Fortum survey and with separate sustainability surveys. Results At year-end, 100% of our operative functions were ISO 14001 certified. The five-year average of our specific CO2 emissions from our electricity production in EU was 60 g/kWh at the end of December 2014 and the five-year average of our specific CO2 emissions from our total energy production was 198 g/kWh. Both results are better than targeted. The efficiency of fuel-based production was 64%, and the five-year average after December 2014 was 63%, which means that the target level was not achieved. There were 27 significant EHS non-compliances in Fortum's operations. In 2014, Fortum conducted 14 supplier audits and the co-owned Fortum Värme conducted 9. Additionally, one of Fortum's coal suppliers completed a self-audit process in line with the Bettercoal Initiative. The self-assessment and auditing process of Fortum's biggest coal supplier was pending at the end of the year. Our performance in material aspects of environmental responsibility is reported in more detail in the following sections: Group sustainability targets and performance in 2013-2014 Materials: EN1, EN2 Energy: EN3, EN5, EN6 Water: EN8 Biodiversity: EN13, EU13 Emissions: EN15, EN16, EN17, EN18, EN19, EN21 Effluents and waste EN22, EN23, EN24 Compliance: EN29 Supplier environmental assessments: EN32, EN33 Grievance mechanisms related to the environment: Ethics and integrity and EN 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://annualreport2014.fortum.com/ 288 Annual Report 2014 Standard disclosures Labour practices and decent work Labour practices and decent work Social performance indicators: Labour practices and decent work Material aspects Description Employment Labour/Management relations Occupational health and safety Process safety Training and education Diversity and equal opportunity Equal remuneration Supplier assessment for labour practices Labour practices grievance mechanisms Targets We aspire to be a desired and safe workplace for our employees and for contractors and service providers working for us. We believe that all injuries can be avoided. Our social responsibility targets are related to employee well-being and competence development, work and process safety, responsible business practices and responsible operations in our supply chain, and good corporate citizenship. We measure the realisation of social responsibility with the following indicators for which we have set Group-level targets: - Lost Workday Injury Frequency (LWIF), Fortum personnel - Lost Workday Injury Frequency (LWIF), contractors - Number of supplier audits (aspect: supplier labour practices) We have set a target for Total Recordable Injury Frequency (TRIF) for Fortum personnel. From the beginning of 2015, the TRIF has been classified as a Group-level target. Our goal is to avoid serious work injuries, which we classify as fatalities and accidents resulting in a permanent disability or a long absence. The realisation of our social responsibility targets in 2014 is reported in the Strategy section in the table Sustainability targets and performance in 2013-2014. TRIF and supply chain management are reported in the Strategy section table Other sustainability targets and related performance in 2013-2014. Read more: Sustainability targets and achievements in 2013-2014 Policies Safety management is based on Fortum’s sustainability policy and on the Group’s target to certify all operative functions in accordance with the OHSAS 18001 standard. The other key elements steering safety management are presented in the table Steering effect of international commitments, initiatives, Fortum policies and instructions. We assess safety risks as part of the Group’s risk assessment process. Everyday safety management is guided with about 20 Group-level Environment, Health and Safety (EHS) instructions and EHS training events. The Group-level instructions are supported by local-level instructions, which address in more detail the material safety issues and local special requirements. They include, e.g., nuclear power plant safety and dam safety. The instructions cover Fortum employees and contractor employees. Personnel management is based on Fortum’s human resources policy and the supporting Group-level HR processes: strategic planning, recruiting, personnel development, performance management, remuneration, and employment and workforce administration. Read more: International commitments, initiatives, Fortum policies and instructions Risk assessment process Responsibilities The management of the divisions and the Group functions, and ultimately the CEO and the Board of Directors, are responsible for issues related to sustainability. The Board has not appointed any member to be specifically responsible for sustainability issues; instead, its decisions rely on the knowledge of Fortum’s Executive Management Team and the Group’s sustainability experts, and on expert statements. The Group’s short-term incentive (STI) system contains occupational safety key indicators. The STI covers all 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://annualreport2014.fortum.com/ 289 Annual Report 2014 Standard disclosures Read more: Short-term incentive system Specific actions Our safety development work is based on continuous improvement. In 2014 we developed the assessment of contractor performance and the Group-level environment, health and safety instructions. We have described these actions in Our stakeholders section. We assess the level of operations of our business partners through pre-selection and supplier audits. During the year we arranged one training event for contractors in Sweden focusing on the Supplier Code of Conduct’s requirements and work safety practices. A total of 50 service and goods suppliers took part in the training. Read more: Safety actions Monitoring and follow-up Fortum employee and contractor Lost Workday Injury Frequency (LWIF) is reported monthly to Fortum’s Executive Management Team. The key indicators for safety are reported to the Executive Management Team every quarter as part of the business performance assessment. The Group’s key indicators are reported regularly to Fortum’s Board of Directors and are published in Fortum’s Interim Reports. Monitoring work well-being is part of the Fortum Sound employee survey. The survey’s well-being index measures employee views on, e.g., the openness of the dialogue in the work community, personal accountability, and how challenging work tasks are. In addition to the work well-being index, work well-being is monitored also with other Group-level indicators, like illness-related absences, reported quarterly to the Executive Management Team, and the ratio between actual retirement age and the statutory start of the retirement pension. The results of the supplier surveys and audits assessing the realisation of labour rights and practices are recorded along with corrective measures into the supplier database, which is accessible to all Fortum employees. Fortum has set a Group target for the number of audits, and the audits that are conducted are reported quarterly to operative management. Internal and external auditors regularly audit our OHSAS 18001 standard-compliant management system. Deloitte & Touche Oy has provided limited assurance for Fortum’s Finnish-language sustainability reporting with the boundaries presented in the assurance statement. We use the Dow Jones Sustainability Assessment as an external benchmark when assessing our sustainability performance. We map our stakeholders’ views annually with the One Fortum survey and with separate sustainability surveys. Results At year-end, 74% of our operative functions were OHSAS 18001 certified. Fortum’s Lost Workday Injury Frequency (LWIF) was 1.0 in 2014. It meets the Group-level injury frequency target, which is less than one injury per million working hours for own employees. The Lost Workday Injury Frequency for contractors was 3.2, which is also better than the target of 3.5. Unfortunately, in 2014 there were three fatal accidents involving contractor employees in Fortum’s operations. Because of these fatalities, all construction sites and important maintenance work were inspected in terms of high-risk work and work performed at heights. Our performance in the material aspect of labour practices and decent work are reported in more detail in the following sections: Employment: G4-10, G4-11, LA1, LA2 and EU18 Labour/Management relations: LA4 Occupational health and safety: LA5, LA6 Process safety Training: LA9, LA10, LA11 Diversity and equal opportunity: LA12 Equal remuneration: LA13 Supplier assessment: environment, labour practices and human rights: LA14, LA15 Labour practices grievance mechanisms: LA16 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://annualreport2014.fortum.com/ 290 Annual Report 2014 Standard disclosures Human rights Human rights Social performance indicators: Human rights Material aspects Description Investment Non-discrimination Freedom of association and collective bargaining Child labour Forced or compulsory labour Assessment Supplier human rights assessment Human rights grievance mechanisms Targets Our goal is to operate in accordance with the UN Guiding Principles on Business and Human Rights, and to apply these principles in our own operations as well as in country and partner risk assessments and supplier audits. Our social responsibility includes operating as a good corporate citizen and taking care of our own employees and the surrounding communities. We advance the well-being and safety of the work community, respect for individuals, and mutual trust and responsible operations in our supply chain and more broadly in society. We have set a Group-level target for the number of supplier audits. Supply chain management is reported in the Strategy section in the table Other sustainability targets and related performance in 2013-2014 and in the HR indicators we have reported. Read more: Sustainability targets and achievements in 2013-2014 Policies The elements of our human rights management are described in the table Steering effect of international commitments, initiatives, Fortum policies and instructions. Read more: International commitments, initiatives, Fortum policies and instructions Responsibilities The management of the divisions and the Group functions, and ultimately the CEO and the Board of Directors, are responsible for issues related to sustainability. The Board has not appointed any member to be specifically responsible for sustainability issues; instead, its decisions rely on the knowledge of Fortum’s Executive Management Team and the Group’s sustainability experts, and on expert statements. Specific actions Fortum has included the UN Guiding Principles on Business and Human Rights (protect-respect-remedy) as a part of a systematic country and counterparty risk assessment. A sustainability assessment is carried out for all of our investment projects and takes into consideration the environmental, occupational health and safety, and social impacts of the project. Projects requiring approval by the Fortum Executive Management Team are additionally subject to an assessment and approval by Group-level sustainability experts. The sustainability assessment includes a human rights evaluation, especially in new operating areas. We assess the level of operations of our business partners through pre-selection and supplier audits. Monitoring and follow-up The results of the supplier surveys and audits assessing the realisation of labour rights and practices are recorded along with corrective measures into the supplier database, which is accessible to all Fortum employees. Fortum has set a Group target for the number of audits, and the audits that are conducted are reported quarterly to operative management. Country-specific reports that address also human rights are presented to Fortum’s Board of Directors when needed. Deloitte & Touche Oy has provided limited assurance for Fortum’s Finnish-language sustainability reporting with the boundaries presented in the assurance statement. We use the Dow Jones Sustainability Assessment as an external benchmark when assessing our sustainability performance. We map our stakeholders’ views annually with the One Fortum survey and with separate sustainability surveys. Results In 2014 a human rights impact assessment was conducted for 30 countries. A more detailed country assessment was conducted for two countries. Our performance in the material aspect of human rights is reported in more detail in the following sections: Investment: HR1, HR2 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://annualreport2014.fortum.com/ 291 Annual Report 2014 Standard disclosures Non-discrimination: HR3 Freedom of association and collective bargaining, Child labour, and Forced or compulsory labour: HR4, HR5, HR6 Assessment: HR9 Supplier human rights assessments: HR10, HR11 Human rights grievance mechanisms: HR12 Society Society Social performance indicators: Society Material aspects Description Local communities Anti-corruption Public policy Anti-competitive behaviour Compliance Grievance mechanisms for impacts on society Disaster/Emergency planning and response (sector-specific aspect) Targets We believe that an excellent financial result and ethical business are intertwined. We follow good business practices and ethical principles in all our operations. We compete fairly and ethically and work within the framework of applicable competition laws and Group competition instructions. We avoid all situations where our own personal interests may conflict with the interests of the Fortum Group. Notably, we never accept or give a bribe or other improper payment for any reason. Our customer relations are based on honesty and trust. We treat our suppliers and subcontractors fairly and equally. We select them based on their merit and we expect them to consistently comply with our requirements and with Fortum’s Supplier Code of Conduct. We report on our compliance with regulations and on the ethicalness of our business in the Governance section, and in the GRI section under Ethics and integrity. Read more: Compliance Ethics and integrity Policies The elements of our social and compliancy management practices are described in the table Steering effect of international commitments, initiatives, Fortum policies and instructions. Read more: International commitments, initiatives, Fortum policies and instructions Responsibilities The management of the divisions and the Group functions, and ultimately the CEO and the Board of Directors, are responsible for issues related to sustainability. The Board has not appointed any member to be specifically responsible for sustainability issues; instead, its decisions rely on the knowledge of Fortum’s Executive Management Team and the Group’s sustainability experts, and on expert statements. Specific actions Code of Conduct training is provided as part of the induction programme of all new employees. During the year, special training was continued on anti-corruption and anti-competitive behaviour. A renewal of the online training course on the Code of Conduct is planned to be implemented in 2015. Read more: Compliance Management and Code of Conduct Monitoring and follow-up The risk assessment on compliance is part of the Group’s risk assessment process, and the results are reported twice per year as part of the business performance assessment process. Significant risks and violations are reported regularly to the Audit and Risk Committee. Fortum has a channel available to all stakeholder groups for the reporting of misconduct. Read more: 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://annualreport2014.fortum.com/ 292 Annual Report 2014 Standard disclosures Results The suspected misconduct reported in 2014 and their classifications are reported under Ethics and integrity. Risks and violations Our performance in material social aspects is reported in more detail in the following sections: Local communities: SO2 Anti-corruption: SO3, SO4, SO5 Anti-competitive behaviour: SO7 Compliance: SO8 Disaster/Emergency planning and response Product responsibility Product responsibility Social performance indicators: Product responsibility Material aspects Targets Description Product and service labelling Marketing communications Access (sector-specific aspect) Our goal is to present products and services truthfully in all our marketing and communication materials. We do not present misleading statements and we strictly follow responsible marketing communication guidelines. In statements regarding environmental issues, we follow the regulations for environmental marketing. We offer our customers environmentally friendly electricity and heat products and services, and we are one of the leading suppliers of CO2-free electricity in the Nordic markets. We have set Group-level targets: - SAIDI (system average interruption duration index) - Energy availability of CHP plants - Customer satisfaction The realisation of our availability and customer satisfaction targets in 2014 is reported in the Strategy section in the table Sustainability targets and performance in 2013-2014. Compliance is reported in the indicator PR7. Read more: Electricity and heat products and services Sustainability targets and performance in 2013-2014 Policies The elements of our management practices related to product responsibility are described in the table Steering effect of international commitments, initiatives, Fortum policies and instructions. Additionally, our operations are guided by responsible marketing and environmental marketing guidelines. Read more: International commitments, initiatives, Fortum policies and instructions Responsibilities The management of the divisions and the Group functions, and ultimately the CEO and the Board of Directors, are responsible for issues related to sustainability. The Board has not appointed any member to be specifically responsible for sustainability issues; instead, its decisions rely on the knowledge of Fortum’s Executive Management Team and the Group’s sustainability experts, and on expert statements. Specific actions In 2014, we started the Customer in the Centre campaign. We constantly have several projects under way to improve the availability and reliability of CHP plants. In 2014, we made improvements in, e.g., fuel feed systems, steam circuits, and electricity and automation systems. The average energy availability of Fortum’s CHP plants in 2014 was 94.7%; the annual target was 95%. We improved the availability of our hydropower plants with refurbishments. The load factor describing the availability of the Loviisa nuclear power plant was high by international standards: 90.9% (2013: 92.5%). 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://annualreport2014.fortum.com/ 293 Annual Report 2014 Standard disclosures Read more: Customer in the Centre campaign Monitoring and follow-up The SAIDI and energy availability results are reported monthly to Fortum’s Executive Management Team. Additionally, the key indicators are reported quarterly to the Executive Management Team as a part of the business performance assessments. The Group’s key indicators are reported regularly also to Fortum’s Board of Directors and are published in Fortum’s interim reports. Customer satisfaction is monitored annually with the One Fortum survey and the EPSI customer satisfaction survey. The results of the surveys are presented to Fortum’s management and they are used to develop the business. Customer satisfaction and Fortum’s reputation are part of the Group-level sustainability target setting, and they are reported annually to the Board of Directors. Compliance is reported on twice per year as part of the business performance assessments. Read more: One Fortum survey and the EPSI customer satisfaction survey Results In 2014, there were no marketing communication or product labelling violations. We served our customers well and our customer satisfaction improved in all divisions. In 2014, the average duration of power outage per customer (SAIDI) was 97 minutes in Sweden, which is better than the target of 100 minutes. The average energy availability of Fortum’s CHP plants was 94.7%, which is slightly lower than the target of 95%. Read more: Customer satisfaction Power outages and plant availability 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://annualreport2014.fortum.com/ 294 Annual Report 2014 Standard disclosures Ethics and integrity Ethics and integrity We believe there is a clear connection between high standards of ethical business practices and excellent financial results. As an industry leader, we go beyond simply obeying the law: we embrace the spirit of integrity and uphold the highest standards of ethical business conduct wherever we operate. The Fortum Code of Conduct and Fortum Supplier Code of Conduct articulate that spirit by defining how we treat others, engage in business, and safeguard our corporate assets, and what we expect from our suppliers and business partners. Fortum’s Board of Directors is responsible for the company’s mission and values and has approved the Fortum Code of Conduct. The Supplier Code of Conduct, based on the 10 principles of the UN Global Compact, has been approved by the Head of Procurement and purchasing steering group. Compliance risks are managed as part of Fortum's operational risk management framework and control procedures . This process also includes risks related to sustainability and business ethics. A systematic compliance risk assessment is included in the annual business planning process, and follow-up is a part of the quarterly performance review. Line management regularly reports on the business ethical compliance activities to the Fortum Executive Management Team and further to the Audit and Risk Committee. Fortum’s compliance process includes a grievance mechanism. The same mechanism is used for reporting any suspected misconduct relating to the environment, labour practices, decent work or human rights violations. “The Raise a concern” channel is available for all stakeholders and may also be used by suppliers and partners to report cases of suspected misconduct related to the procurement process. In Russia, Fortum has a separate compliance organisation in place and employees are encouraged to use the channels provided by the compliance organisation. They may, however, also use the “Raise a concern” channel should they so wish. In 2014, altogether 225 concerns were raised. The vast majority of the concerns, 197, were received via the channels provided in Russia. During the reporting period, 113 cases led to an investigation and 98 investigations were closed. At the end of the year, there were 15 investigations ongoing, 11 of which in Russia. Two concerns by suppliers were raised via the “Raise a concern” channel. Both were related to a possible conflict of interest; the investigations were still ongoing at year-end. Roughly half of the investigated cases were related to non-compliance either with company rules or with laws and regulations. In these cases, corrective action was taken by reviewing and developing existing processes and instructions and by providing training to employees. Fortum has zero tolerance towards alcohol and drug use. Some 19% of the cases were related to alcohol abuse during working hours. As the result of the investigations, nine employment contracts were terminated either by immediate dismissal or by mutual agreement, and 11 written warnings were given. The number of cases reported to police was 4; these have advanced to court proceedings. In 23 of the cases investigated, there was no cause for actions to be taken. No cases of suspected corruption or bribery were detected in 2014. At the end of 2014, the local district court in Sweden issued a decision on a matter that was reported in Fortum’s Sustainability Report 2013, relating to a possible malpractice of a person employed by the joint venture Fortum Värme. The person was found guilty of accepting bribes and condemned to conditional imprisonment and fines. The parties have appealed the decision. The employment contract was terminated in 2013. In addition, a suspected case of bribery targeting a former Fortum employee and originating from the year 2006 is due in court in Sweden in March 2015. The employment contract was terminated in 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://annualreport2014.fortum.com/ 295 Annual Report 2014 Assurance Assurance Assurance Fortum reports on sustainability as part of the Annual Report. The 2014 Annual Report is published in Finnish and English on our website at annualreport2014.fortum.com. Information about sustainability has been compiled in accordance with the GRI G4 Reporting Guidelines. The reporting takes into consideration the Electric Utility Sector Disclosures. In our own assessment, our reporting follows the core option of the GRI G4 Reporting Guidelines. We have also adhered to the AA1000 Accountability Principles Standard (AA1000APS) in our reporting. Fortum Oyj’s auditor Deloitte & Touche Oy has provided limited assurance for the sustainability information presented on Fortum’s Finnish language website with the boundaries presented in the assurance statement. Deloitte & Touche Oy has also provided limited assurance for emissions calculations (Scope 1-3) based on the GHG protocol according to the requirements published by CDP (Verification of Climate Data). The assurance statement will be delivered to CDP as part of Fortum’s CDP reporting. The report content is not updated after assurance, and any amendments to the content will be reported the following year. Read more about Read more about • Assurance statement Assurance statement Assurance statement Independent assurance Independent assurance report on Fortum’s report on Fortum’s sustainability reporting sustainability reporting To the Management of Fortum To the Management of Fortum Corporation Corporation We have been engaged by Fortum Corporation (hereafter: Fortum) to provide limited assurance on Fortum’s sustainability reporting for the reporting period of January 1, 2014 to December 31, 2014. The information subject to the assurance engagement is the sustainability performance data in sections “This is Fortum”, “Business”, “In Society” and “GRI” of the Annual Report 2014 (hereafter: Sustainability reporting material). The information subject to the assurance engagement is the Finnish version of the reporting published in the website http://annualreport2014.fortum.com/fi Furthermore, the assurance engagement has covered Fortum’s adherence to the AA1000 AccountAbility Principles with moderate level of assurance. Management’s responsibility Management’s responsibility Management is responsible for the preparation of the Sustainability reporting material in accordance with the Reporting criteria as set out in Fortum’s reporting principles, the Sustainability Reporting Guidelines (G4 Core) of the Global Reporting Initiative and principles of inclusivity, materiality and responsiveness as set out in the AA1000 AccountAbility Principles (2008) (AA1000APS). This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the Sustainability reporting material that are free from material misstatement, selecting and applying appropriate criteria and making estimates that are reasonable in the circumstances. The scope of the Sustainability reporting material and the information included therein depends on the material sustainability aspects identified by Fortum’s as well as Fortum’s reporting principles. Auditor’s responsibility Auditor’s responsibility Our responsibility is to express a limited (moderate) assurance conclusion on the Fortum’s Sustainability reporting material based on our engagement. This assurance report has been prepared in accordance with the terms of our engagement. We do not accept, or assume responsibility to anyone else, except to Fortum for our work, for this report, or for the conclusions we have reached. We conducted our engagement in accordance with International Standard on Assurance Engagements (ISAE) 3000 to provide public limited assurance on performance data within the Fortum´s Sustainability reporting material. In addition, we have used the criteria in AA1000 Assurance Standard (2008) to evaluate the adherence to principles as set out in AA1000APS (2008) for type 1 moderate level assurance. This requires that we plan and perform the engagement to obtain required level of assurance about whether any matters come to our attention that cause us to believe that the Sustainability reporting material has not been prepared, in all material respects, in accordance with the Reporting criteria. We did not perform any assurance procedures on the prospective information, such as targets, expectations and ambitions, disclosed in the Sustainability reporting material. Consequently, we draw no conclusion on the prospective information. A limited (moderate) assurance engagement with respect to sustainability reporting involves performing procedures to obtain evidence about the information disclosed in the Sustainability reporting material. The procedures performed depend on the practitioner’s judgment, but their nature is different from, and their extent is less than, a reasonable assurance engagement. It does not include detailed testing of source data or the operating effectiveness of processes and internal controls and consequently they do not enable us to obtain the assurance necessary to become aware of all significant matters that might be identified in a reasonable assurance engagement. Our procedures on this engagement included: • Assessing the suitability of the reporting policies and criteria used by management and the consistent application of such policies, the inclusiveness of the stakeholders as well as the responses on the stakeholder dialogue and the overall presentation of these in the Sustainability reporting material; • Conducting interviews with senior management responsible for sustainability at Fortum to gain an understanding ofFortum’s targets for sustainability 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://annualreport2014.fortum.com/ 296 Annual Report 2014 Assurance to affect, our independence and impartiality and from any involvement in the preparation of the Sustainability reporting material. We have confirmed to Fortum that we have maintained our independence and objectivity throughout the year and in particular that there were no events or prohibited services provided which could impair our independence and objectivity. This engagement was conducted by a multidisciplinary team including assurance and sustainability expertise with professional qualifications. Our team is experienced in providing sustainability reporting assurance. Conclusion Conclusion On the basis of the procedures we have performed, nothing has come to our attention that causes us to believe the Sustainability reporting material for the year from January 1, 2014 to December 31, 2014, is not prepared, in all material respects, in accordance with the AA1000APS (2008) AccountAbility Principles or that the Sustainability reporting material is not reliable, in all material respects, with regard to the reporting criteria. Espoo 24.3.2015 Deloitte & Touche Oy Jukka Vattulainen Authorized Public Accountant Lasse Ingström Authorized Public Accountant part of the business strategy and operations; • Reviewing internal and external documentation to verify to what extent these documents and data support the information included in the Sustainability reporting material and evaluating whether the information presented in the Sustainability reporting material is in line with our overall knowledge of sustainability targets and management at Fortum; • Conducting interviews with employees responsible for the collection and reporting of sustainability information and reviewing of the processes and systems for data gathering, including the aggregation of the data for the Sustainability reporting material; • Performing analytical review procedures and testing data on a sample basis to assess the reasonability of the presented sustainability information; • Performing a site visit to selected sites in Nyagan, Russia to review compliance to reporting policies, to assess the reliability of the sustainability data reporting process aswell as to test the data collected for sustainability reporting purposes on a sample basis; • Evaluating the application of the AA1000APS (2008) principles of stakeholder inclusivity, materiality and responsiveness; We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Observations & Recommendations Observations & Recommendations Based on our limited (moderate) assurance engagement, we provide the following recommendations in relation to the AA1000APS (2008) principles. The recommendations are to improve Fortum´s management and reporting of sustainability in the future and they do not affect our conclusion: • Inclusivity • Materiality Inclusivity – Fortum has a comprehensive stakeholder inclusiveness process in place and throughout this processFortum has identified the relevant key stakeholder groups for its operations. We recommend Fortum to continue regular stakeholder engagement through different channels and to continue to participate in open discussion with the general public. Materiality – Fortum has a process in place to determine important and material issues for Fortum´s stakeholders. In 2014 Fortum has utilized the GRI G4 guidelines and reviewed the sustainability aspects that are material for Fortum’s business and its stakeholders. We recommend Fortum to continue concentrating on the most material aspects in its sustainability reporting. Responsiveness – Fortum has adequate procedures in place to respond to issues that are material to its stakeholder and Fortum is committed to communicate responses in a manner that meets the needs and expectations of its stakeholders so they can take informed decisions. We recommend Fortum to further develop the open communication in an integrated manner to support Fortum’s business. • Responsiveness Our independence and Our independence and competences in providing competences in providing assurance to Fortum assurance to Fortum We complied with Deloitte’s independence policies which address and, in certain cases, exceed the requirements of the Code of Ethics of the International Ethics Standards Board for Accountants (IESBA) in their role as independent auditors and in particular preclude us from taking financial, commercial, governance and ownership positions which might affect, or be perceived 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://annualreport2014.fortum.com/ 297 Annual Report 2014 GRI index GRI index GRI index GENERAL STANDARD DISCLOSURES Code Description Section Further information / Omission and reason for omission Assurance 1) Global Compact STRATEGY AND ANALYSIS G4-1 G4-2 Statement from the most senior decision-maker Description of key impacts, risks and opportunities This is Fortum/CEO's review This is Fortum/CEO's review This is Fortum/Strategy/Sustainability embedded in the strategy This is Fortum/Operating environment and market development ORGANISATIONAL PROFILE G4-3 G4-4 Name of the organisation Name of the organisation: Fortum Oyj Primary brands, products, and services Business/Group Business structure G4-5 Location of headquarters In Society/Stakeholders/Main stakeholder groups/Customers This is Fortum/Operations and market areas G4-6 Countries where the organisation operates This is Fortum/Operations and market areas G4-7 Nature of ownership and legal form G4-8 Markets served Business/Group Business structure Financials/Operating and financial review/Fortum share and shareholders This is Fortum/Operations and market areas Business/Group Business structure G4-9 Scale of the organisation Business/Group Business structure G4-10 Workforce Financials/Operating and financial review/Fortum share and shareholders Financials/Notes to the consolidated financial statements/5. Segment reporting/5.7 Group-wide disclosures GRI/Social/Labour Practices and Decent work/Employment/G4-10 This is Fortum/Year 2014 in figures/ Social summary X Only total working hours of contractors is reported. We do not track contractors’ working hours with the accuracy required by the sector supplement breakdown. X X X X X X X X X X G4-11 Coverage of collective bargaining agreements GRI/Social/Labour Practices and Decent work/Employment/G4-11 Sector-specific requirements not reported. We do not track X X 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://annualreport2014.fortum.com/ 298 Annual Report 2014 GRI index which of our contractors are within the sphere of collective bargaining agreements. G4-12 Supply chain G4-13 Significant changes during the reporting period regarding size, structure, ownership or supply chain G4-14 Addressing the precautionary principle In Society/Stakeholders/Main stakeholder groups/Suppliers of goods and services In Society/Generating economic value/ Distribution of added value 2014 GRI/Standard disclosures/Report content Financials/Operating and financial review/Fortum share and shareholders In Society/Stakeholders/Main stakeholder groups/Suppliers of goods and services Financials/Operating and financial review/Risk management/Risk management framework and objectives GRI/Standard disclosures/Management approach G4-15 External charters, principles or initiatives endorsed GRI/Standard disclosures/Management approach G4-16 Memberships in associations IDENTIFIED MATERIAL ASPECTS AND BOUNDARIES G4-17 Entities included in the organisation's consolidated financial statements G4-18 Process for defining report content G4-19 Material aspects identified In Society/Stakeholders/Main stakeholder groups/Authorities and energy industry organisations A list of collaboration partners on Fortum's website Financials/Notes to the consolidated financial statements/42. Subsidiaries by segment GRI/Standard disclosures/Report content GRI/Standard disclosures/Report content GRI/Standard disclosures/Material aspects G4-20 G4-21 G4-22 G4-23 Aspect boundary for each material aspect within the organisation GRI/Standard disclosures/Material aspects Aspect boundary for each material aspect outside the organisation GRI/Standard disclosures/Material aspects Restatements of information provided in previous reports GRI/Standard disclosures/Report content Significant changes from previous reporting periods in the scope and aspect boundaries GRI/Standard disclosures/Report content STAKEHOLDER ENGAGEMENT G4-24 List of stakeholder groups engaged In Society/Stakeholders/Main stakeholder groups In Society/Stakeholders/Stakeholder collaboration G4-25 Identification and selection of stakeholders In Society/Stakeholders/Stakeholder collaboration X X X X 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://annualreport2014.fortum.com/ 299 Annual Report 2014 GRI index G4-26 G4-27 Approaches to stakeholder engagement In Society/Stakeholders/Stakeholder collaboration Key topics and concerns raised through stakeholder engagement In Society/Stakeholders/Stakeholder collaboration In Society/Stakeholders/Main stakeholder groups Business/Our operations/Hydropower/ Stakeholder views Business/Our operations/Nuclear power/Stakeholder views GRI/Standard disclosures/Report content GRI/Standard disclosures/Report content GRI/Standard disclosures/Report content Contact information GRI/GRI-index GRI/Assurance REPORT PROFILE G4-28 Reporting period G4-29 Date of the previous report G4-30 Reporting cycle G4-31 G4-32 Contact information GRI content index G4-33 Approach regarding external assurance GRI/Assurance GOVERNANCE G4-34 Governance structure and committees G4-35 Delegating authority G4-36 Positions with responsibility G4-37 Consultation with stakeholders G4-38 Composition of the Board of Directors G4-39 Position of the Chair of the Board G4-40 Selection of the Board G4-41 Avoiding conflicts of interest Governance/Corporate Governance Statement/Governing bodies of Fortum Governance/Corporate Governance Statement/Governing bodies of Fortum GRI/Standard disclosures/Management approach (Subtopics) Governance/Corporate Governance Statement/Governing bodies of Fortum GRI/Standard disclosures/Management approach (Subtopics) Governance/Corporate Governance Statement/Governing bodies of Fortum In Society/Stakeholders Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors Governance/Corporate Governance Statement/Governing bodies of Fortum/ Shareholders' Nomination Board Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors G4-42 Board's role in setting the organisation's purpose, values and strategy Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors Governance/Corporate Governance Statement/Internal controls in relation to financial reporting/Compliance Management and Code of Conduct X X X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 300 Annual Report 2014 GRI index G4-43 Board's knowledge G4-44 Board's performance evaluation Financials/Operating and financial review/Financial performance and position/Sustainability Governance/Corporate Governance Statement/Governing bodies of Fortum/ Shareholders' Nomination Board Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors G4-45 Board's role in the identification and management of risks Financials/Operating and financial review/Risk management In Society/Stakeholders G4-46 Reviewing the effectiveness of risk management Financials/Operating and financial review/Risk management G4-47 Frequency of risk reviews G4-48 Approval of the sustainability report G4-49 Communicating critical concerns Financials/Operating and financial review/Risk management Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors Working order of the Board on Fortum's website GRI/Standard disclosures/Ethics and integrity Governance/Corporate Governance Statement/Internal controls in relation to financial reporting/Compliance Management and Code of Conduct G4-50 Critical concerns reported to the Board Governance/Corporate Governance G4-51 G4-52 G4-53 Remuneration policies for the Board and senior executives Remuneration Inclusiveness of stakeholders’ views regarding remuneration ETHICS AND INTEGRITY G4-56 Values and business principles G4-57 Advice on ethical and lawful behaviour G4-58 Reporting concerns about unethical or unlawful behaviour Statement/Governing bodies of Fortum/ Board Committees Governance/Remuneration Governance/Remuneration Governance/Remuneration Governance/Corporate Governance Statement/Governing bodies of Fortum/ Shareholders' Nomination Board Governance/Corporate Governance Statement/Internal controls in relation to financial reporting/Compliance Management and Code of Conduct Governance/Corporate Governance Statement/Internal controls in relation to financial reporting/Compliance Management and Code of Conduct Governance/Corporate Governance Statement/Internal controls in relation to financial reporting/Compliance Management and Code of Conduct GRI/Standard disclosures/Ethics and integrity GENERAL STANDARD DISCLOSURES FOR SECTOR (ELECTRIC UTILITY) EU1 Installed capacity GRI/Environmental/Energy/EN3 X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 301 Annual Report 2014 GRI index EU2 Net energy output This is Fortum/Year 2014 in figures/ Sales and production We do not disclose a country-specific breakdown of production volumes. EU3 Number of customer accounts EU4 EU5 Length of transmission and distribution lines Allocation of CO2 emission allowances Business/Our operations/Power and heat distribution/Power distribution GRI/Economic/System efficiency/EU12 GRI/Economic/Economic performance/ EC2 1) X = Externally assured SPECIFIC STANDARD DISCLOSURES Code Description Section 2) DISCLOSURES ON MANAGEMENT APPROACH G4-DMA Management approach ECONOMIC RESPONSIBILITY GRI/Standard disclosures/Management approach G4-DMA Management approach to economic responsibility GRI/Standard disclosures/Management approach/Economic Economic performance G4-EC1 G4-EC2 Direct economic value generated and distributed Financial implications and other risks and opportunities due to climate change EC1 EC2 Financials/Operating and financial review/Risk management Fortum's CDP-raporting G4-EC3 Coverage of the organization's defined benefit plan obligations EC3 Financials/Notes to the consolidated financial statements/32. Pension obligations G4-EC4 Financial assistance received from government EC4 Plant decommissioning G4-DMA Management approach Plant decommissioning Financials/Notes to the consolidated financial statements/30. Nuclear related assets and liabilities Further information / Omission and reason for omission Assurance 1) Global Compact X X X X X X Costs of managing climate change risks and opportunities are not reported. Management of risks and opportunities is an integral part of Fortum’s strategy and therefore classified as business-confidential information. Assistance by type and by country is not reported. The total amount of assistance received is not significant. 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://annualreport2014.fortum.com/ 302 Annual Report 2014 GRI index Transmission and distribution losses and technical and non-technical losses are not itemised; they are reported as a whole. Data is not collected at this level of detail. More detailed information on management approach to environmental responsibility is disclosed in conjunction with some aspects and the description of their indicators. PCB inventory is not reported. The information is not available. The aim is to have an inventory by 2020. System efficiency EU11 Average generation efficiency of thermal plants EU11 EU12 Transmission and distribution losses EU12 ENVIRONMENTAL RESPONSIBILITY G4-DMA Management approach to environmental responsibility GRI/Standard disclosures/Management approach/Environment Materials G4-EN1 Use of materials G4-EN2 Recycled materials used Energy G4-EN3 Energy consumption within the organisation G4-EN5 Energy intensity G4-EN6 Reduction of energy consumption EN1 EN2 EN3 EN5 EN6 Business/Our operations/Electricity and heat sales/Energy-efficiency services Water G4-EN8 Total water withdrawal by source EN8 Biodiversity G4-EN13 Habitats protected or restored EU13 Emissions G4-EN15 Biodiversity of offset habitats compared to the biodiversity of the affected areas Direct greenhouse gas (GHG) emissions (Scope 1) EN13 EU13 EN15 This is Fortum/Year 2014 in figures/ Environmental summary G4-EN16 G4-EN17 G4-EN18 Indirect greenhouse gas (GHG) emissions (Scope 2) Other indirect greenhouse gas (GHG) emissions (Scope 3) Greenhouse gas (GHG) emissions intensity EN18 EN16 EN17 EN18 G4-EN21 NOX, SOX, and other significant air emissions EN21 This is Fortum/Year 2014 in figures/ Environmental summary X X X X X X X X X X X X X X X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 303 Annual Report 2014 GRI index This is Fortum/Year 2014 in figures/ Environmental summary Effluents and waste G4-EN22 Total water discharge by quality and destination EN22 G4-EN23 Total weight of waste by type and disposal method EN23 Business/Our operations/Nuclear power/Nuclear waste management This is Fortum/Year 2014 in figures/ Environmental summary G4-EN24 Total number and volume of significant spills EN24 Compliance G4-EN29 Significant fines and non-monetary sanctions for noncompliance with environmental laws and regulations EN29 Supplier environmental assessment G4-EN32 Percentage of new suppliers that were screened using environmental criteria GRI/Social/Labour Practices and Decent work/Supplier assessment: Environment, labour practices and human rights G4-EN33 Significant actual and potential negative environmental impacts in the supply chain and actions taken EN33 Environmental grievance mechanisms G4-EN34 Number of grievances about environmental impacts filed, addressed, and resolved through formal grievance mechanisms EN34 GRI/Standard disclosures/Ethics and integrity SOCIAL RESPONSIBILITY: LABOUR PRACTICES AND DECENT WORK G4-DMA Management approach to social responsibility, labour practices and decent work GRI/Standard disclosures/Management approach/Labour practices and decent work Employment G4-LA1 New employee hires and employee turnover LA1 This is Fortum/Year 2014 in figures/ Social summary G4-LA2 Employee benefits by significant operating countries EU18 Contractor and subcontractor employees that have undergone relevant health and safety training LA2 EU18 Emissions are not broken down by effluent treatment method. The aim is to have a breakdown by 2018. More detailed information on management approach to social responsibility is disclosed in conjunction with some aspects and the description of their indicators. Breakdown of employee benefits is not done by country. The aim is to have a breakdown by 2018. The number of trained contractors is reported as a whole, not by contractor group. All contractors are trained. The breakdown is not material. X X X X X X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 304 Annual Report 2014 GRI index Labour/Management relations G4-LA4 Minimum notice periods regarding operational changes Occupational health and safety G4-LA5 G4-LA6 Workforce represented in formal health and safety committees Type of injury and rates of injury, occupational diseases, lost days, and absenteeism, and total number of work related fatalities LA4 LA5 LA6 Training and education G4-LA9 Average hours of training per employee LA9 This is Fortum/Year 2014 in figures/ Social summary G4-LA10 G4-LA11 Programmes for skills management and lifelong learning Percentage of employees receiving regular performance and career reviews LA10 LA11 Diversity and equal opportunity G4-LA12 Composition of governance bodies and breakdown of employees LA12 Governance/Corporate Governance Statement/Governing bodies of Fortum/ Board of Directors This is Fortum/Year 2014 in figures/ Social summary Equal remuneration for women and men G4-LA13 Ratio of basic salary and remuneration of women to men LA13 Supplier assessment for labour practices G4-LA14 G4-LA15 Percentage of new suppliers that were screened using labour practices criteria GRI/Social/Labour Practices and Decent work/Supplier assessment: Environment, labour practices and human rights Significant actual and potential negative impacts for labour practices in the supply chain and actions taken GRI/Social/Labour Practices and Decent work/Supplier assessment: Environment, labour practices and human rights Labour practices grievance mechanisms G4-LA16 Number of grievances about labour practices filed, addressed, and resolved through formal grievance mechanisms LA16 GRI/Standard disclosures/Ethics and integrity Not broken down by contractors’ lost workdays by region and gender. The information is not tracked at this level of detail. Not reported for all countries. The information is not available. The aim is to get the information for all countries by 2020. Not reported by employee group. The information is not available. The aim is to get the information and to report by employee group by 2020. Reporting doesn’t cover the "labourers" employee group because of the small size of the group. X X X X X X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 305 Annual Report 2014 GRI index SOCIAL RESPONSIBILITY: HUMAN RIGHTS G4-DMA Management approach to social responsibility, human rights GRI/Standard disclosures/Management approach/Human rights Investment G4-HR1 Human rights screening or clauses included in significant investment agreements G4-HR2 Employee training on human rights policies or procedures Non-discrimination G4-HR3 Incidents of discrimination and corrective actions taken Freedom of association and collective bargaining G4-HR4 Supporting the right to freedom of association and collective bargaining in risk areas Child labour G4-HR5 Measures taken to eliminate child labour in risk areas and in operations of significant suppliers Forced or compulsory labour G4-HR6 Measures taken to eliminate forced and compulsory labour in risk areas and in operations of significant suppliers HR1 HR2 HR3 HR4 HR5 HR6 Assessment G4-HR9 Operations that have been subject to human rights reviews or impact assessments HR9 Supplier human rights assessment G4-HR10 Percentage of new suppliers that were screened using human rights criteria GRI/Social/Labour Practices and Decent work/Supplier assessment: Environment, labour practices and human rights G4-HR11 Significant actual and potential negative human rights impacts in the supply chain and actions taken GRI/Social/Labour Practices and Decent work/Supplier assessment: Environment, labour practices and human rights Human rights grievance mechanisms G4-HR12 Number of grievances about human rights impacts filed, addressed, and resolved through formal grievance mechanisms HR12 GRI/Standard disclosures/Ethics and integrity More detailed information on management approach to social responsibility is disclosed in conjunction with some aspects and the description of their indicators. Percentage of human rights assessments and agreements that have human rights-related terms is not reported. The aim is to obtain this information by 2020. Country-specific breakdown is business confidential and is not reported. X X X X X X X X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 306 More detailed information on management approach to social responsibility is disclosed in conjunction with some aspects and the description of their indicators. Not reported because our projects have no significant displacements of people, and information on total amounts of compensation is not available. For business partners, the most material types of collaboration partners are reported without a complete breakdown by region. Annual Report 2014 SOCIAL RESPONSIBILITY: SOCIETY G4-DMA Management approach to social responsibility, society GRI / Standard disclosures / Management approach / Society Local communities G4-SO2 EU22 Operations with significant actual and potential negative impacts on local communities SO2 Number of people physically or economically displaced and compensation Anti-corruption G4-SO3 Operations assessed for risks related to corruption and the significant risks identified SO3 G4-SO4 Communication and training on anti-corruption policies and procedures SO4 G4-SO5 Confirmed incidents of corruption and actions taken SO5 Public policy G4-SO6 Total value of political contributions SO6 Anti-competitive behaviour G4-SO7 Total number of legal actions for anticompetitive behavior, anti-trust, and monopoly practices and their outcomes Compliance G4-SO8 Significant fines and non-monetary sanctions for non-compliance with laws and regulations Grievance mechanisms for impacts on society G4-SO11 Number of grievances about impacts on society filed, addressed, and resolved through formal grievance mechanisms SO7 SO8 SO11 Disaster/Emergency planning and response G4-DMA Management approach GRI/Standard disclosures/Ethics and integrity Disaster/Emergency planning and response SOCIAL RESPONSIBILITY: PRODUCT RESPONSIBILITY G4-DMA Management approach to social responsibility, product responsibility GRI/Standard disclosures/Management approach/Product responsibility Product and service labeling G4-PR3 Product and service information required by procedures PR3 GRI index X X X X X X X X X X X X X X X 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://annualreport2014.fortum.com/ 307 Annual Report 2014 GRI index G4-PR5 Results of surveys measuring customer satisfaction PR5 Marketing communications G4-PR7 Access EU28 EU29 EU30 Total number of incidents of noncompliance with regulations and voluntary codes concerning marketing communications PR7 Power outage frequency Average power outage duration Average plant availability factor EU28 EU29 EU30 1) X = Externally assured 2) If a path is not provided, the indicator is reported in conjunction with the relevant aspect. X X X X X We report the energy availability of our power plants, not the stoppage hours and time availability. Energy availability is more material in terms of impact. 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://annualreport2014.fortum.com/ 308 Annual Report 2014 Economic responsibility responsibility Economic responsibility Economic Economic performance Economic performance EC1 Direct economic EC1 Direct economic value generated and value generated and distributed distributed We analyse the economic impacts of our operations and the produced well-being on the different stakeholders in our operating countries and market areas. The key stakeholders include shareholders and investors, customers, personnel, suppliers of goods and services, and the public sector. In terms of suppliers of goods and services, we also assess the global impacts, paying particular attention to suppliers of goods and services operating in risk countries. In 2014, Monetary flows by stakeholder group in 2012-2014 EUR million Generation of added value Income from customers Divestments Purchases from suppliers Fortum produced added value Distribution of added value Employees compensation Funders compensation Public sector Distributed to stakeholders Retained in business Income from customers on the basis of products and services sold and financial income. Income from divestment of shares, business activities or plants Cash payments to suppliers of raw materials, goods and services Wages, salaries, remunerations and other indirect employee costs Dividends paid to investors, interest, realised foreign exchange gains and losses and other financial expenses Income and production taxes paid, support for society and donations 1) Comparative period information for 2013 has been restated due to the accounting change for Fortum Värme. 2) Comparative period information for 2012 has been restated due to the accounting change for pensions. The distribution of the economic added value generated by our operations to the most significant operating areas is reported in the following parts of the Annual Report: • Sales by country based on customer location • Employee costs by country • Taxes Investments are not included in the calculation of distributed added value in accordance with GRI, but we have included investments in our own assessment of economic impacts, as their annual volume and impact on the society is significant. Capital expenditure by country and by production type is presented in Financial Statements Note 19.2 Investments. Read more about Read more about • Our economic impacts the difference between added value generated and distributed to stakeholders was EUR 4,005 (2013: 869) million for the development of own operations. 2014 20131) 2012 4,901 5,630 6,398 3,219 -2,240 5,880 210 -2,766 3,073 -413 -460 -958 -504 -1,875 4,005 -1,212 -532 -2,204 869 -3,002 3,396 -5432) -1,514 -593 -2,650 746 EC2 Financial EC2 Financial implications and other implications and other risks and opportunities risks and opportunities due to climate change due to climate change Climate change poses financial, regulatory and physical risks as well as opportunities for Fortum. As energy production and use is the largest source of greenhouse gases, the energy sector has a central role in building a low-carbon future. The energy industry has established visions and roadmaps of the future energy system and is prepared 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://annualreport2014.fortum.com/ 309 Annual Report 2014 Economic responsibility invest in new climate-benign production capacity, provided that the related policy framework and preconditions of society are in place. The primary impact of climate regulation for Fortum is the price of carbon dioxide in EU emissions trading and the cost arising from it. This also determines the financial value for the reduction of emissions. The price of CO2 increases the production cost of fossil-based energy, but it also raises the prices of energy products. The best way to reduce the risk related to the price of carbon dioxide is to increase CO2-free and low-carbon production capacity. Our energy production in Finland, Poland and the Baltic countries is subject to the EU’s emissions trading scheme. In Russia there is no comparable control system for greenhouse gases. In 2014, about 94% (2013: 90%) of our electricity production in the EU was CO2-free. In 2014, we had a total of 49 (2013: 51) plants in six member states within the EU’s emissions trading scheme. About 98% of the CO2 emissions in the EU area were included in the emissions trading system. In 2014, Fortum was granted 1.4 (2013: 1.8) million tonnes in free emissions allowances. The company’s emissions in the EU emissions trading scheme were 3.6 (2013: 5.1) million tonnes. Thus, in terms of emissions allowances, Fortum showed a deficit. In the third, ongoing ETS period, 2013-2020, the volume of our free emissions allowances will decrease significantly, because electricity production has to purchase all allowances from the market or auctions. Only in Poland and the Baltic countries will our CHP plants receive free allowances also for electricity production on the basis of the derogation rules of the Emissions Trading Directive. In Russia, our CO2 emissions will grow in upcoming years as a result of the increasing energy production capacity. In Russia, carbon dioxide emissions do not yet have economic value. Fortum is participating in two international climate funds, the Prototype Carbon Fund (PCF) and the Testing Ground Facility (TGF). In 2014, we received a total 227,047 emission reduction units from these funds. All emission reduction units received were CER units. We have so far received a total of 999,077 emission reduction units, and we estimate that we will still receive about 200,000 units during the funds’ operating period. Fortum is exposed to physical risks of climate change, including changes in weather patterns that may change energy demand and supply from, e.g., hydropower plants. More frequent and intensive storms may impact the operation and maintenance of the distribution network. Higher precipitation and temperature may affect hydropower production, dam safety and bioenergy supply. In addition to climate change mitigation, we are also taking measures to adapt our operations to climate change and to take the impacts into consideration, e.g. in production planning and in evaluating growth projects. We expect the concern about climate change result in an increasing demand for low-carbon and energy-efficient energy products and solutions. Our know-how in Plant decommissioning Plant decommissioning CO2-free hydro and nuclear power and in energy-efficient CHP as well as research and development in the future energy system and technologies can prove to be a competitive advantage. We are investing in CO2-free production in Europe and see business opportunities in providing climate-benign energy solutions for sustainable urban living and the electrification of transport. Read more about Read more about • Risks and opportunities of climate change for Fortum EC3 Coverage of the EC3 Coverage of the organization's defined organization's defined benefit plan obligations benefit plan obligations Our pension arrangements conform to the local regulations and practices in each operating country; the arrangements are discussed in Financial Statements Note 32 Pension obligations. EC4 Financial assistance EC4 Financial assistance received from received from government government We received financial support from the public sector in the form of production-related subsidies, investments, R&D and other significant grants (over EUR 0.5 million) totalling EUR 3 (2013: 8) million. The figure excludes free emission allowances and electricity certificates. The Finnish State owns 50.8% of Fortum. Provisions related to nuclear power are covered in the financial statement, note 30, Nuclear related assets and liabilities. In Finland and Sweden, the producers of nuclear waste are responsible for management and final disposal of the nuclear waste and for the related costs. In Finland, nuclear waste management principles and timetables were decided on already back in the 1980s, and the construction of waste management solutions has advanced according to plans. The licence holders are responsible for the management of power plant waste generated during the operation of the Loviisa and Olkiluoto nuclear power plants and for the management of future decommissioning waste. The practical implementation of the final disposal of spent nuclear fuel from the companies is handled by Posiva Oy, which is co-owned by Fortum and TVO. Posiva Oy’s construction licence application for the spent nuclear fuel encapsulation plant and final disposal facility is currently under assessment by the Government and the Radiation and Nuclear Safety Authority STUK. The Radiation and Nuclear Safety Authority noted in its statement in February 2015 that the plant can be built to be safe. Preparedness to start final repository operations is estimated to be achieved around 2020. Svensk Kärnbränslehantering AB (SKB) handles the final disposal of the nuclear waste generated by Fortum’s co- owned nuclear power plants in Sweden. In March 2011, the company submitted a construction licence application to build an encapsulation and final disposal plant for spent fuel; the application is still being reviewed by the authorities. The final repository for spent fuel is planned to be built at Forsmark. After construction and a test-run period, disposal operations could start in the late 2020s. 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://annualreport2014.fortum.com/ 310 Annual Report 2014 Economic responsibility Read more about Read more about • Our nuclear power production System efficiency System efficiency EU11 Average generation EU11 Average generation efficiency of thermal efficiency of thermal plants plants Until the end of 2014, Fortum had a Group- level target (>70%) for overall efficiency of fuel-use as a 5-year average. Efficiency in 2014 was 64.0% (2013: 59.4%) and the 5-year rolling average 63.2% (2013: 63.6%). The calculation covers power plants and heat boilers. The accompanying table presents the average thermal efficiency of our power plants by country and by fuel. Co-firing covers various combinations of coal, natural gas, biomass, waste-derived fuels and peat. For CHP plants, the efficiency calculations take into account both electricity and heat production. Read more about Read more about • Combined heat and power production Average thermal efficiency by country and fuel type % Finland Russia Poland The Baltic countries Great Britain Coal 40 66 Gas Biomass Co-firing 95 69 82 59 62 74 61 84 81 EU12 Transmission and EU12 Transmission and distribution losses distribution losses At the end of 2014, Fortum had power transmission business only in Sweden. The total length of Fortum’s power distribution and transmission networks was about 71,600 km. Overhead lines accounted for 22,600 km and underground cables 49,000 km. Our electricity transmission and distribution losses in Sweden totalled 795 (2013: 813) GWh. The losses were 3.0% (2013: 3.2%) of the total amount of electricity transmitted and distributed. Guarantees of origin (CO2- free electricity) were acquired for all the electricity purchased to compensate for network 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://annualreport2014.fortum.com/ 311 Annual Report 2014 Environmental responsibility responsibility Environmental responsibility Environmental Materials Materials EN1 Use of materials EN1 Use of materials Our materials use mainly consists of fuels. In our operations, we aim to use natural resources efficiently and sparingly. Fuel consumption in 2012-2014 Non-renewable fuels Natural gas, million m3 Coal, 1,000 t Waste-derived fuel, fossil 1,000 t Peat, 1,000 t Fuel oil, 1,000 t Nuclear fuel, t Renewable fuels Biomass and bio liquids, 1,000 t Waste-derived fuel, renewable 1,000 t 2014 8,148 2,539 87 161 13 23 1,264 177 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Fuel consumption by country in 2014 Natural gas, million m3 Coal, 1,000 t Biomass and bio liquids, 1,000 t Waste-derived fuel, 1,000 t Peat, 1,000 t Fuel oil, 1,000 t Nuclear fuel, t Other fuels, 1,000 t Finland 84 800 321 122 98 11 23 Poland 6 402 193 Russia 7,805 1,336 2 2013 7,844 2,843 221 227 18 20 1,428 633 Other countries 254 751 141 63 2 20121) 7,844 2,536 320 269 49 21 1,790 486 Total 8,148 2,539 1,264 264 161 13 23 2 In 2014, we used 8.1 billion m3 of natural gas and 4.2 million tonnes of solid and liquid fuels. Natural gas and 68% (2013: 67%) of solid and liquid fuels were of non-renewable origin. Joint venture Fortum Värme used a total of 1.6 (2013: 1.7) million tonnes of fuel, of which various biomasses and bio liquids accounted for 451,000 (2013: 667,000) tonnes, waste derived fuels 930,000 (2013: 765,000) tonnes and coal 207,000 (2013: 249,000) tonnes. The reported volumes are based on measurements at the power plants and heat- only boilers. The energy content of the fuels is described in EN3. EN2 Recycled materials EN2 Recycled materials usedused We used 264,000 (2013: 221,000) tonnes of waste-derived fuels in Finland and Lithuania. Recycled input materials accounted for 6% (2013: 5%) of the total mass of solid and liquid fuels used. In Sweden, joint venture Fortum Värme used 930,000 (2013: 765,000) tonnes of 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://annualreport2014.fortum.com/ 312 Annual Report 2014 Environmental responsibility waste-derived fuels, which was 58% (2013: 45%) of total fuel use. Reported volumes are based on measurements at the power plants using waste-derived fuels. Energy Energy EN3 Energy consumption EN3 Energy consumption within the organisation within the organisation Fuel consumption Fuel consumption Fortum’s fuel consumption in own energy production was 117 terawatt-hours (TWh), or Fuel consumption in 2012-2014 petajoules Natural gas Nuclear fuel Coal Waste-derived fuel, fossil Peat Other fossil Non-renewable fuels total Biomass and bio liquids Waste-derived fuel, renewable Renewable fuels total 422 (2013: 419) petajoules (PJ). The most significant fuel was natural gas, which accounted for 65% (2013: 63%) of the total fuel consumption. The shares of uranium and coal were 19% (2013: 20%) and 11% (2013: 13%) correspondingly. 2014 276.1 81.6 46.8 0.8 1.6 0.6 407.5 12.5 1.5 14.0 2013 264.5 83.3 53.0 1.0 2.2 1.0 405.0 12.3 1.2 13.5 20121) 273.8 89.0 51.0 3.3 2.7 2.1 421.9 21.9 4.9 26.8 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Biomass and bio liquids accounted for 3.0% (2013: 3.1%) and waste-derived fuels 0.5% (2013: 0.5%) of our total fuel consumption. In Sweden, joint venture Fortum Värme used a total of 6.2 TWh, or 22 (2013: 26) PJ of fuels. Biomass and bio liquids accounted for 31% (2013: 44%) and waste-derived fuels 42% (2013: 29%) of total fuel consumption. Fuel consumption has been calculated based on the volumes and fuel-specific heat values measured at the power plants. Uranium consumption has been calculated as the thermal heat generation in the reactors. Consumption of electricity and Consumption of electricity and heatheat Our external electricity procurement for power plants and heat boilers was 401 (2013: 406) GWh. In addition, 795 (2013: 813) GWh was purchased to offset losses in electricity transmission and distribution in Sweden. In 2014, we did not buy heat or steam for own use from external suppliers. Joint venture Fortum Värme’s external electricity purchases totalled 839 (2013: 934) GWh. Reported electricity consumption is based on measurements at our sites. Electricity generation and heat Electricity generation and heat production production Corresponding to the fuel consumption and electricity production discussed above, we produced about 34,900 (2013: 31,100) GWh of electricity, 33,700 (2013: 31,900) GWh of heat and steam and 16 (2013: 12) GWh of cooling for sale at our own power plants and heat-only boilers. In addition, we generated about 22,300 (2013: 18,000) GWh of hydro, solar and wind power, including our power shares in the shared companies. Joint venture Fortum Värme produced 1,048 (2013: 1,207) GWh of electricity, 7,074 (2013: 8,164) GWh of district heat, 460 (2013: 455) GWh of cooling and 96 (2013: 106) GWh of town gas. In addition, Fortum Värme produced 263 GWh of wind power with leased wind turbines. Our total power generation and heat production by energy source are shown in the following tables. The tables have been consolidated in accordance with the boundaries applied in financial reporting. The figures for power generation include also power shares in the hydro, wind and nuclear power plants of shared companies. 64% of our total power generation was carbon-free and 32% was produced from renewable energy sources. 6% of our total heat production was produced from renewable, carbon-free energy sources. 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://annualreport2014.fortum.com/ 313 Annual Report 2014 Environmental responsibility Fortum's power production by energy source in 2012–2014 TWh Hydro power Nuclear power Natural gas Coal Biomass Peat Other Total 1) Includes joint venture AB Fortum Värme samägt med Stockholms stad Fortum's heat production by energy source in 2012-2014 TWh Natural gas Coal Biomass and bioliquids Heat pumps, electricity Waste-derived fuel Oil Peat Total 2014 22.3 23.8 22.5 3.6 0.9 0.1 0.2 73.4 2014 26.7 5.1 2.0 0.1 0.3 0.1 0.3 34.6 2013 18.0 23.7 20.0 4.0 1.1 0.1 0.5 67.4 2013 26.1 4.6 2.8 0.3 0.4 0.1 0.3 34.6 20121) 25.2 23.4 19.4 3.3 1.3 0.1 0.3 73.1 20121) 27.0 5.3 4.9 3.4 1.9 0.4 0.4 43.3 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Energy production capacity Energy production capacity Our power generation and heat production capacities on 31 December 2014 are shown in the following tables. The figures comply with the boundaries used in financial reporting and they include power shares from hydro, wind and nuclear power plants of shared companies. Total energy consumption within Total energy consumption within Fortum Fortum Our total energy consumption, calculated as the difference between the procured energy resources (fuels and electricity) and net production, was 167 (2013: 195) PJ. Power generation capacity by country and energy source MW Hydropower Nuclear power Wind and solar power Natural gas Coal Biomass and bioliquids Other fuels Total Finland Sweden Russia Poland Baltic countries 1,526 1,460 284 1,212 55 14 3,088 1,820 30 12 4,501 257 5 228 24 4,551 4,950 4,758 257 17 68 8 93 India 15 Total 4,615 3,279 45 4,807 1,697 147 34 15 14,624 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://annualreport2014.fortum.com/ 314 Annual Report 2014 Environmental responsibility Heat production capacity by country and energy source MW Natural gas Coal Biomass and bioliquids Peat Other fuels Total Russia 12,575 891 Finland 1,432 265 195 32 12 Poland Baltic countries 57 1,089 43 333 381 79 18 811 Total 14,397 2,245 619 111 30 17,402 1,936 13,466 1,189 EN5 Energy intensity EN5 Energy intensity In combustion-based energy production, we aim to utilise the fuel as efficiently as possible. Until 2014, we measured our energy efficiency with the overall efficiency of fuel use. This is calculated by dividing the energy (electricity and heat) produced with fuels by the heat energy of the fuels used. Our target was to achieve the efficiency of 70%, calculated as a five-year average. In 2014, the fuel use efficiency was 64% and the five-year average 63% (2013: 64%). The energy intensity of our own production was 1.37 (2013: 1.46). The intensity figure has been calculated by dividing the sum of fuel consumption and external electricity procurement by the total energy production, including hydro power and solar power. EN6 Reduction of energy EN6 Reduction of energy consumption consumption We apply the principle of continuous improvement in developing the energy efficiency of the existing power plant fleet. Out target is to achieve over 1,400 GWh of annual energy savings by the year 2020 as compared to 2012. This energy savings is equal to the annual heat energy need of more than 75,000 homes (18,500 kWh per home) or more than the annual production of over 200 wind turbines of 2.5 MW. During 2013 and 2014, we have already achieved 681 GWh or 49% of this target. The actions implemented in 2014 produced a total savings of 592 GWh (2 131 TJ). The most important measures have been • The integration of the district heat networks of the Chelyabinsk CHP-1 and CHP-2 power plants in 2014. This investment enables optimal operation of the power plants and maximal production of the new energy-efficient gas turbine units at CHP-1. The annual energy savings is an estimated 469 GWh. • The hydropower plant refurbishments produce 61 GWh of new hydropower annually; the improvements implemented in 2014 account for 20 GWh. • Heat recovery from sealing steam and other waste heat streams was implemented at Joensuu power plant, giving an annual fuel savings of 17.5 GWh. Read more about Read more about • Our products for reducing custumers' energy consumption • Hydropower refurbishments • Our other actions increasing energy efficiency WaterWater EN8 Total water EN8 Total water withdrawal by source withdrawal by source We withdrew a total of 2,178 (2013: 2,312) million cubic metres of water, of which the majority, 2,094 (2013: 2,231) million cubic metres, was used as cooling water for condensers in thermal power plants. The temperature of the water flowing through the condensers rises slightly but the volume of water remains unchanged when it is pumped back into the water system. Power plants in Russia and Poland also use cooling towers, in which part of the water evaporates into the atmosphere. The water added to the cooling towers’ water circulation was previously reported as cooling water. Since 2013, this water is reported as part of the process water because the volume and quality of the water change significantly in the cooling towers' water circulation. In Russia, water is used also for pumping ash from coal-fired power plants into ash ponds. Reported water withdrawal is based on water flow measurements at power plants and heat boilers. In hydropower production, all the water runs through turbines, so the water volume and quality remain unchanged. Hydropower production is not included in the above mentioned figures for water withdrawal. 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://annualreport2014.fortum.com/ 315 Annual Report 2014 Environmental responsibility Water withdrawal by source in 2012-2014 million m3 Sea water Fresh surface water Tap water Other source Total 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Water use in 2012-2014 million m3 Cooling water Process and auxiliary water Recycled water 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad 2) Cooling tower make-up water counted as process water starting from 2013 2014 1,573 594 6.1 5.8 2,178 2014 2,094 842) 14 2013 1,702 598 6.8 5.3 2,312 2013 2,231 822) 12 20121) 1,629 573 8.1 0.2 2,210 20121) 2,017 64 10 Biodiversity Biodiversity Fortum’s impacts on biodiversity are primarily related to hydropower production the company has in Finland and Sweden. Hydropower construction and the related regulating of water change the conditions in water systems and thus may impact the diversity of the aquatic habitat and, in particular, the fish population. Emissions of energy production based on fossil fuels may decrease local biodiversity especially in Russia. In addition, our electricity distribution operations and fuel procurement may have a negative impact in areas that are rich in biodiversity. Biodiversity aspects are taken into consideration in fuel procurement. Fortum’s Biodiversity guidelines set the principles for taking biodiversity into consideration and for managing the impacts of the company’s operations on biodiversity. In January 2014, we joined the Finnish Business & Society’s (FiBS) Corporations and Biodiversity programme. We also participated in the Master Class training within the framework of the programme. The main impacts on biodiversity are assessed in the pre-feasibility phase of a project, and, in bigger projects, also as part of the Environmental Impact Assessment (EIA) process. We offset and reduce the impacts of hydropower production on biodiversity by stocking fish and through voluntary environmental projects. In electricity network operations, underground cabling protects biodiversity and reduces the impact on the landscape and birds. The share of underground cables of our electricity network in Sweden is 68%. Measures to prevent bird collisions and electric shocks include isolation of the live parts of the network, mounting marker balls on overhead lines and installing landing perches on poles. New power lines are built in public areas and along roadsides whenever possible. During 2014, we started gathering data on the volume of certified wood fuel in Finland, Sweden, Poland and the Baltics. This kind of fuel originates from sustainable energy sources in which special attention is paid to biodiversity. EN13 Habitats protected EN13 Habitats protected or restored or restored River fish habitats, particularly for grayling and trout, were restored in four areas along the Vuoksi river in Finland in 2013-2014. The areas are located in the section of the river between the Tainionkoski and the Imatra power plants, and they are about 0.45 hectars in size; about 0.2 hectars of it was restored in 2014. We used Fortum’s habitat modelling in the restoration planning. In the restoration, the shoreline areas of the channels dredged during hydropower construction were shaped, gravelled and rocked to become spawning areas for grayling and trout. We implemented the project in partnership with the city of Imatra, the Finnish Association for Nature Conservation (FANC) and the Southeast Finland Centre for Economic Development, Transport and the Environment (ELY centre). A restoration expert from the ELY centre participated in the restoration planning and guidance. The follow-up study done by the ELY centre in 2014 found wild trout in two of the three restoration areas. So there are good signs of a successful restoration, but the final results can be seen in a few years. In Sweden, restoration opportunities to protect the Gullspång river’s unique salmon population were studied during the year. Restoration opportunities were also studied in the Rottan river. In the Bulsjöån river, the integration of the local endangered freshwater pearl mussel was monitored through a research project in collaboration with the local environmental authorities. 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://annualreport2014.fortum.com/ 316 Annual Report 2014 Environmental responsibility EU13 Biodiversity of EU13 Biodiversity of offset habitats compared offset habitats compared to the biodiversity of the to the biodiversity of the affected areas affected areas Eldbäcken biochannel Eldbäcken biochannel In conjunction with the construction of our new Eldforsen hydropower plant located on the Västerdalälven river in Sweden, in 2011 we released water into the old river bed as a voluntary environmental measure and built a 500-meter-long bypass, or biochannel, to support biodiversity. One purpose of the Eldbäcken biochannel was to offset the biodiversity lost in conjunction with the hydropower plant construction. However, another goal of the project is to study how different species colonise the channel habitat and how they can be used to replace the decreased biodiversity. Emissions Emissions EN15 Direct greenhouse EN15 Direct greenhouse gas (GHG) emissions gas (GHG) emissions (Scope 1) (Scope 1) Our direct greenhouse emissions were 20.5 (2013: 20.7) million CO2-equivalent tonnes. Direct GHG emissions in 2012-2014 MtCO2eq CO2 CH4 N2O HFCs SF6 Total The biochannel is a joint project of Fortum and Karlstad University, and the shaping of the channel and the studies are continuing. In 2014 the channel was widened and wood material was added to it to increase the diversity; habitats were also created for the endangered freshwater pearl mussel. The fish population in the channel has been studied with electro fishing and the results are promising: The studies in 2014 found burbot (Lota lota), minnows (Phoxinus phoxinus) and brown trout (Salmo trutta) in the channel. The biodiversity of the biochannel probably isn’t as high as the diversity in the pre- construction river channel, but it supports the biodiversity in the entire river and locally. Imatra’s urban brook Imatra’s urban brook In 2014, the city of Imatra built an urban brook bypassing the Imatra hydropower plant. The purpose of the brook is to act as a substitute habitat, particularly as an area for spawning and for juvenile fish, for the Vuoksi river’s rare trout population. We participated in the project by allowing the use of our land and the water bypassing our power plant for free. In particular, trout reproduction areas have decreased in the Vuoksi river as a consequence of hydropower plant construction. The fish reproduction area of the about kilometre-long brook is about 0.2 hectars. The biodiversity of a brook differs from the original habitat of a big river, and its value for juvenile fish production will be seen within some years. The brook channel was finished and water was released into it at the end of the year, so it will take a few years for it to evolve into a juvenile fish production area. The development is accelerated by introducing organic material and local trout to the channel. The share of carbon dioxide from direct greenhouse gas emissions was over 99%. The share of direct greenhouse gas emissions of our total greenhouse gas emissions was 80%. 2014 20.3 0.01 0.15 0.0 0.0 20.5 2013 20.5 0.01 0.14 0.008 0.001 20.7 20121) 20.7 0.1 0.2 0.005 0.001 21.0 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Of the carbon dioxide emissions, 82% (2013: 75%) originated from the Russian operations and 11% (2013: 17%) from Finland. Carbon dioxide emissions increased in Russia with the commissioning of the new capacity and decreased in Finland due to the decline in condensing power production. Fortum’s direct biogenic carbon dioxide emissions were 1.3 (2013: 1.2) million tonnes. Joint venture Fortum Värme’s direct greenhouse gas emissions were 1,0 (2013: 1,0) million tonnes and direct biogenic carbon dioxide emissions 1.3 (2013: 1.2) million tonnes. Carbon dioxide emissions as well as methane and nitrous oxide emissions have been calculated based on plant-specific fuel data. Specific CO2 emission factors are based on IPCC publications. The specific CO2 emissions from electricity generation, as requested by the document "Electric Utilities Sector Disclosures", are shown under the indicator EN18. EN16 Indirect greenhouse EN16 Indirect greenhouse gas (GHG) emissions gas (GHG) emissions (Scope 2) (Scope 2) Greenhouse gas emissions from the production of electricity purchased for our own use were 136,000 tonnes of carbon dioxide equivalent. Carbon dioxide emissions accounted for over 99% of this. The share of Scope 2 greenhouse gas emissions of our total greenhouse gas emissions was 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://annualreport2014.fortum.com/ 317 Annual Report 2014 Environmental responsibility Scope 2 greenhouse gases of joint venture Fortum Värme were 56,000 tonnes. The Scope 2 emissions have been estimated on the basis of country-specific breakdowns of electricity production. Fortum Markets buys the electricity sold to customers from the Nordic electricity exchange. Scope 2 greenhouse gas emissions are not known for the production of the electricity sold in the electricity exchange. Consequently, we can not estimate the share of Scope 2 greenhouse gas emissions in the electricity sold to customers. Indirect GHG emissions (Scope 2) by country in 2014 tCO2eq Finland Sweden Russia Other countries Total Indirect GHG emissions (Scope 2) in 2012-2014 tCO2eq CO2 CH4 N2O Total 2014 136,000 57 389 136,000 20131) 309,000 600 5,200 315,000 2014 5,000 2,000 119,000 10,000 136,000 20121) 143,000 300 3,300 147,000 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad EN17 Other indirect EN17 Other indirect greenhouse gas (GHG) greenhouse gas (GHG) emissions (Scope 3) emissions (Scope 3) Since 2013, we have reported the Scope 3 greenhouse emissions in accordance with requirements of the Corporate Value Chain (Scope 3) Accounting and Reporting standard. The majority of our Scope 3 emissions are caused by the production and transportation of fuels, purchases of goods and services, and investments. Other activities (e.g. employee travel and waste management) account for less than 1%. In 2014, our Scope 3 greenhouse gas emissions were an estimated 5.0 million tonnes. This was 19% of our total greenhouse gas emissions. We estimate that all of our Scope 3 greenhouse gases come from fossil energy sources. Indirect GHG emissions (Scope 3) in 2013-2014 tCO2eq Fuel procurement Purchased good and services Capital goods Other activities Total The Scope 3 greenhouse gas emissions of joint venture Fortum Värme were 260,000 tonnes. The volumes describing the scope of the various activities have been obtained from our monitoring and reporting system. The specific emission factors used in calculating the greenhouse gas emissions are based on different literature sources. 2014 4,800,000 112,000 51,000 21,000 4,984,000 20131) 4,919,000 286,000 196,000 61,000 5,462,000 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad EN18 Greenhouse gas EN18 Greenhouse gas (GHG) emissions (GHG) emissions intensity intensity Our specific CO2 emissions (Scope 1) from total energy production were 189 (2013: 204) g/kWh. The five-year average, including 2014, increased to 198 (2013: 197) g/kWh. The five-year average of the specific CO2 emissions from total energy production have been increasing during the last five years, although we are below the target level of <200 g/kWh. The increase in the specific emissions is a result of the increase in the relative share of our Russian energy production based on natural gas and coal in our total production. Our specific CO2 emissions (Scope 1) from power production in the EU were 39 (2013: 64) g/kWh and the five-year average, including 2014, was 60 (2013: 60) g/kWh. The specific CO2 emissions from our power 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://annualreport2014.fortum.com/ 318 Annual Report 2014 Environmental responsibility production are low compared to other European power producers. Our specific emissions in 2013 were about one-fifth of the 328 g/kWh average specific emissions of major European utilities. Including our Russian power production, our specific emissions were about 60% of the average level of European utilities. European reference data for 2014 is not yet available. The boundary for electricity production’s specific carbon dioxide emissions differs from other environmental reporting. Fortum’s production shares in associate companies are also included. This production is based on hydro and nuclear power, and it doesn’t cause any direct carbon dioxide emissions. The specific carbon dioxide emissions (Scope 1) by country from electricity production, as required by the document Electric Utilities Sector Disclosures, are presented in the following tables. In the calculation of electricity production’s specific emissions, CHP plant emissions have been allocated for electricity and heat using the efficiency method presented in the Greenhouse Gas Protocol guidelines, using heat production efficiency of 90% and electricity production efficiency of 40%. Specific CO2 emissions of total electricity generation in 2012-2014 Fortum Markets acquires all of the electricity it sells to end consumers from the Nordic electricity exchange. In 2014, a guarantee of origin was acquired for all the electricity (10.2 TWh) sold in Finland and Sweden, and the electricity was sold to the end user as carbon-free. In Norway, Fortum Markets sold 1.7 TWh of electricity, 0.3 TWh of which as carbon-free hydro electricity. The specific carbon dioxide emissions of the Nordic electricity exchange’s residual distribution for 2014 will be known in June 2015. In 2013 it was 258 g/kWh. g/kWh Finland Sweden Russia Poland Estonia Latvia Lithuania India Great Britain Fortum total 2014 57 0 464 675 69 75 154 0 365 177 Specific CO2 emissions of electricity generation from fossil fuels in 2012-2014 g/kWh Finland Russia Poland Latvia Great Britain Fortum total 2014 758 464 675 330 365 482 2013 115 0 506 631 103 182 286 0 359 209 2013 730 506 631 333 359 519 2012 48 0 508 659 167 337 - - 368 168 2012 675 508 659 337 368 515 EN21 NO , and EN21 NOXX, SO, SOXX, and other significant air other significant air emissions emissions In 2014, our thermal energy production emitted 28,700 (2013: 30,800) of nitrogen oxides (NOX), 20,400 (2013: 22,000) tonnes of sulphur dioxide (SO2) and 21,300 (2013: 20,800) tonnes of particles. Reduction in sulphur and nitrogen emissions was caused primarily by decrased condensing power production in Finland. and at most heat only boilers, emissions are calculated using fuel data and fuel specific emission factors. Emission factors can be based on measurements at regular intervals or information from the boiler manufacturer. Reporting of emissions from our European power plants is based on continuous measurement. At our Russian power plants 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://annualreport2014.fortum.com/ 319 Annual Report 2014 Environmental responsibility Fortum's SO2, NOX and particle emissions in 2012-2014 thousand tonnes SO2 NOX Particles 2014 20.4 28.7 21.3 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad 77% (2013: 70%) of the flue-gas emissions (SO2 and NOX) and 98% (2013: 96%) of the particle emissions originated from the Russian operations. The most significant source of particle emissions (14,800 tonnes in 2014) was the Argayash power plant in Russia. Our mercury emissions into air were 126 (2013: 122) kg. The specific emissions for sulphur oxide, nitrogen oxides and particles are presented in the following table in line with the document "Electric Utilities Sector Disclosures". Specific emissions of energy production in 2014 g/MWh Total energy production Energy production with fuels SO2 193 333 2013 22.0 30.8 20.8 NOX 271 468 20121) 19.8 29.4 16.0 Particles 201 348 Effluents and waste Effluents and waste EN22 Total water EN22 Total water discharge by quality and discharge by quality and destination destination Energy production’s impacts on water systems are caused by the thermal load of cooling water discharges and the impurities in wastewater effluents. All wastewater is conducted directly to municipal sewage treatment plants or cleaned on-site before being discharged into water systems. In 2014, we used a total of 2,094 million (2013: 2,231) cubic meters of cooling water, which was discharged back into water systems. The thermal load on the water systems was 18 (2013: 19) TWh. The biggest single user of cooling water was the Loviisa nuclear power plant, which withdrew from and discharged to the sea 1,377 million cubic meters of cooling water. The Loviisa nuclear power plant’s thermal load on the sea was 16 TWh. Temperature measurements indicate that the cooling water has increased the temperature of surface water by 1–2 ºC within a 1–2 kilometre distance from the discharge point. Our plants generated a total of 33 (2013: 34) million m3 of wastewater, of which 95% was released into the environment after being treated. The reported waste water volumes are based on flow measurements at our power plants and heat boilers. Waste water emissions by recipient in 2012-2014 million m3 Sea Fresh water system Municipal sewage Other recipient 2014 9.0 22.4 1.2 0.5 2013 9.6 22.3 1.6 0.1 20121) 9.1 22.9 2.7 0.3 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad During the year, about1.8 tonnes of oil was released into water systems with the wastewater discharges from our power plants. In addition, about 1.5 tonnes of oil was released into the environment in three separate oil spill incidents. Oil emission calculations are based on analyses of periodically taken water samples and flow measurements. In recent years there have been frequent violations of wastewater permits at Russian power plants. They have been examined in more detail in indicator EN29. 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://annualreport2014.fortum.com/ 320 Annual Report 2014 Environmental responsibility EN23 Total weight of EN23 Total weight of waste by type and waste by type and disposal method disposal method Our thermal power plants use millions of tonnes of solid fuels annually. Ash from incineration and gypsum from flue gas desulphurisation account for the clearly largest share, over 90% on average, of the by- products and wastes from our energy production. All energy production generates normal industrial waste, which is either recycled or disposed of at landfill sites. Some of the waste is classified as hazardous and is transported for treatment at licensed hazardous waste facilities. The volume of radioactive wastes generated in nuclear power production is small, but special solutions are needed in their treatment and disposal. The total volume of by-products and wastes was 697,000 (2013: 742,000) tonnes. Ash and gypsum Ash and gypsum About 659,000 (2013: 677,000) tonnes of ash, 9,800 (2013: 29,000) tonnes of gypsum and 9,800 (2013: 15,800) tonnes of other desulphurisation product were generated. About 56% of the ash was generated at Russian plants, 16% in Finland and 16% in Poland. Reduced volume of ash and gypsum was primarily caused by decreased condensing power production in Finland. In Europe, ash and gypsum from desulphurisation are utilised and recycled as efficiently as possible. In Russia, ash is stored in ponds because there are no other uses for it, with the exception of building embankments for ash ponds. In addition, the wet ash handling makes utilisation more difficult. The ash recycling rate at Fortum was 34% (2013: 38%) and the gypsum recycling rate 100% (2013: 99%). Gypsum was utilised as a raw material in the gypsum board industry. Fly ash was used in the construction material industry, in road Ash and gypsum handling in 2012-2014 construction and in backfilling mines. In Finland, the Joensuu power plant received an environmental permit for the construction of a noise barrier to be built from the plant’s ashes around the power plant site. The CE- marking for the bottom ash of our power plants was granted in 2014. Any remaining by-products that cannot be utilised are disposed of in landfills or put into intermediate storage. About 434,000 (2013: 420,000) tonnes of ash and 9,800 (2013: 15,800) tonnes of desulphurisation product from Suomenoja power plant were disposed of in landfill sites. The desulphurisation product from the Suomenoja power plant has no potential for utilisation. The reported volumes of ash and gypsum from our European power plants are based on weighing of the truckloads. At our Russian power plants ash volumes are calculated based on the ash contents of coal. thousand tonnes Ash utilisation Ash disposal Gypsum utilisation Gypsum disposal 2014 226 434 9.8 0 2013 257 420 28.8 0.3 20121) 369 351 8.1 1.0 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Nuclear waste Nuclear waste We used 22.7 (2013: 20.1) tonnes of uranium fuel at the Loviisa nuclear power plant and produced a corresponding amount of high-level radioactive nuclear waste. 2.88 (2013: 2.50) g/MWh of spent fuel was generated per produced energy unit. Until 1996, the spent fuel was returned to the fuel supplier in Russia. Since 1997, all spent fuel has been stored at the power plant site. At the end of 2014, the plant units’ fuel basins and the separate spent fuel storage facility had a total of 633 tonnes of spent nuclear fuel. The spent fuel will eventually be moved to the final repository, which Posiva Oy is planning in the Olkiluoto bedrock. In addition to spent fuel, about 141 (2013: 160) m3 of low- and intermediate-level radioactive waste was produced. Intermediate-level waste includes liquid evaporation waste and spent ion exchange resins. For now, they are stored in storage tanks in the plant area. At the end of 2014, the storage tanks had 658 m3 of evaporation waste and 566 m3 of ion exchange resins. The total radioactivity of the liquid waste at the end of 2014 was 15.8 TBq. Before final disposal, the liquid waste is solidified in concrete. The solidification plant is in the finishing phase and will be commissioned during 2016 at the latest. Dry, low-level radioactive waste consists mainly of slightly contaminated materials generated in conjunction with maintenance and repair work. After the level of radioactivity has been measured, some of the low-level radioactive waste can be classified as non-radioactive waste and released from control to be recycled or placed in ordinary landfills. 121 tonnes of metals, among other things, were released from control for recycling and 24 tonnes of mixed waste for transport to a landfill in 2014. Low- and intermediate-level nuclear waste is disposed of in the underground repository at the power plant site in Loviisa. During 2014, about 40 (2013: 38) m3 of low-level maintenance waste was disposed of in the repository. By the end of 2014, a total of 1,927 m3 of low-level waste had been placed in the repository. The total radioactivity of the low-level waste placed in the repository at the end of 2014 was 448 GBq. Other waste Other waste Our operations generated a total of 27,700 (2013: 33,800) tonnes of waste (excluding the gypsum and ash deposited in landfills); of this amount, 2,500 (2013: 5,000) tonnes was hazardous waste. The oils containing PCB were transported to hazardous waste treatment plants as part of hazardous waste. The reported volumes of other waste are based on the information provided by the waste companies. Read more about Read more about • Nuclear waste 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://annualreport2014.fortum.com/ 321 20121) 12.7 18.8 4.7 5.8 42.0 Quantity (l) 1,000 200 300 1,500 Annual Report 2014 Environmental responsibility Waste handling in 2012-2014 thousand tonnes Recycling/recovery Landfill Hazardous waste recovery Hazardous waste disposal Total 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad 2014 7.7 17.5 0.1 2.4 27.7 2013 8.8 21.3 1.3 4.0 35.3 environment. The total estimated volume of the oil spills was about 1,500 litres. The oil spills did not cause major environmental impacts. Description Fuel oil to soil Hydraulic oil to river Transformer oil to soil EN24 Total number and EN24 Total number and volume of significant volume of significant spills spills In 2014, there were three oil spills of more than 100 litres (2013: 9) into the Major spills in 2014 Location Joensuun power plant, Finland Skedvi hydropower plant, Sweden Edeforsen hydropower plant, Sweden Total Compliance Compliance EN29 Significant fines EN29 Significant fines andand non-monetary non-monetary sanctions for non- sanctions for non- compliance with compliance with environmental laws and environmental laws and regulations regulations There were no significant environmental non- compliances or permit violations in our European operations in 2014 (2013: 2). The total number of permit violations related to wastewater discharges in Russia was 15, i.e. slightly higher than the previous year (2013: 12). At the beginning of 2014 Fortum received a corporate fine of SEK 140,000 for an inadequate volume of water flow at the Ljunga hydropower plant in Sweden in 2011. An audit carried out by regulatory authorities at Chelyabinsk CHP-2 power plant lead to a total fine of RUB 12,000 for non-compliances in waste and wastewater management. Studies continued at the Russian plants on measures to reduce the discharge water permit violations. The technical malfunctions occurring during the year were repaired, but development projects requiring investments were not implemented. The permit violations were caused by high concentrations in the feed water, technical malfunctions at the plant, and problems stemming from the coal quality. Supplier environmental assessment Supplier environmental assessment rights. The assessment of suppliers is addressed as a whole in the section Supplier Assessment: Environment, labour practices and human rights. EN32 Percentage of new EN32 Percentage of new suppliers that were suppliers that were screened using screened using environmental criteria environmental criteria The assessment of our suppliers covers aspects related to environmental responsibility, labour practices and human EN33 Significant actual EN33 Significant actual and potential negative and potential negative environmental impacts in environmental impacts in the supply chain and the supply chain and actions taken actions taken The most significant environmental impacts of our supply chain are related mainly 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://annualreport2014.fortum.com/ 322 Annual Report 2014 Environmental responsibility fuels, particularly to coal and biomasses. We purchase fuels from international and local suppliers. We recognise that open-pit coal mining can be challenging in terms of environmental protection, and working conditions in underground mines can create occupational health and safety concerns. The acquisition of biomass involves environmental risks, such as illegal logging and loss of biodiversity, but there are also economical, social and reputational risks related to human rights, labour rights and land ownership. In 2014, we had 134 fuels suppliers, 11% of them operate in risk countries. We started the sustainability-related supplier audits in 2012 and we have aimed to increase the number of audits every year. In the audit, we assess the supplier's compliance with the requirements in Fortum's Supplier Code of Conduct. Audits are always done on-site and they include a production inspection, employee interviews, and a review of documents and records. In 2014, we audited 14 suppliers (2013:13), around 70% of which operate in risk countries. Out of audited suppliers, only one non-conformity related to environmental issues was found. The supplier has made a corrective action plan and we are monitoring the implementation of it. We are member of the Bettercoal initiative, and we use the Bettercoal Code and tools in assessing the sustainability of the coal supply chain. In 2014, a total of 14 coal suppliers conducted a self-assessment in line with the Bettercoal initiative and one mine was audited. At the end of the year, the approval of the self-assessment and auditing process of Fortum’s largest coal supplier was pending. We have recognised the challenges related to the origin of biomass and other biofuels, and we are developing measures to verify the traceability and sustainability of the fuels. The verification system in use at Fortum’s Joensuu bio-oil plant integrated with power plant is approved for bio-oil production by the Energy Authority. The joint venture Fortum Värme purchased biomass and bio-oil from Sweden, Finland, Russia, Brazil and Malaysia, among others. Fortum Värme conducted a total of nine audits of its own suppliers of biofuel and its biggest contractors. Fortum Värme is a participant in the WWF Global Forest & Trade Network (GFTN) through GFTN Sweden and became a member of the Forest Stewardship Council (FSC) in 2012. Additionally, Fortum Värme has been a member of the Roundtable of Sustainable Palm Oil (RSPO) since 2005 and in 2014 became a member of the Roundtable of Responsible Soy organisation. Read more about Read more about • Responsible fuel purchasing Environmental grievance mechanisms Environmental grievance mechanisms EN 34 Number of EN 34 Number of grievances about grievances about environmental impacts environmental impacts filed, addressed, and filed, addressed, and resolved through formal resolved through formal grievance mechanisms grievance mechanisms There was one grievance filed during the review period regarding noise nuisance experienced by some neighbours of the Jelgava power plant. The power plant’s night- time lighting was also considered a strong nuisance. The noise caused by the power plant’s operation does not exceed the permitted limits, but we have addressed the concern in the neighbourhood by, e.g., enclosing the equipment and by applying other technical solutions to reduce the noise level. The lighting in the power plant area is something that cannot be reduced because adequate lighting at night is a necessity for safe operations. Besides, there are other neighbours who consider the lighting of the plant as an improvement of urban environment and safety of the neighbourhood. There were no other grievances filed through formal grievance channels, nor were there any grievances carried over from a previous review 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://annualreport2014.fortum.com/ 323 Annual Report 2014 Social responsibility Social responsibility Social responsibility Labour practices and decent work Labour practices and decent work Employment Employment G4-10 Total workforce G4-10 Total workforce In 2014, an average of 8,821 (2013: 9,532) employees worked at Fortum. The biggest number of employees was in Russia, 4,196 (2013: 4,245) employees on average. The number of Fortum's permanent employees on 31 December 2014 was 8,260 (2013: 9,515), i.e. 96.1% (2013: 96.2%) of the personnel. From these the number of full- time employees was 8,078 (2013: 9,264) and part-time 182 (2013: 251). The percentage of fixed-term employees was 3.9% (2013: 3.8%). In general, Fortum does not use supervised employees. The joint venture Fortum Värme is included in the 2013 figures. Fortum uses contractors as needed. Contractors worked mainly in construction and maintenance work. The exact breakdown of hours is not reported. Contractor employees worked at Fortum sites for a total of approximately 1,359,000 (2013: 1,753,000) days during the year. The figure is based on contractors' hourly logs and on estimates based on job costs and average hourly rates. The figure has been calculated on the basis of an 8-hour work day. Workforce by employment contract and employment type, broken down by region and gender Finland Sweden Russia Poland Other countries Total M F M F M F M F M F M F Employment contract Permanent Fixed-term Employment type (permanently employed) Full-time Part-time 1,431 40 543 26 1,407 24 510 33 764 13 728 36 400 24 347 53 2,959 1,033 471 130 346 183 5,971 2,289 137 84 1 1 0 6 191 141 2,956 1,032 471 129 3 1 0 1 334 12 164 19 5,896 2,182 75 107 G4-11 Coverage of G4-11 Coverage of collective bargaining collective bargaining agreements agreements We respect our employees' freedom of association and collective bargaining, and we do not monitor the degree of unionisation of our employees. We apply local collective bargaining agreements in all countries where we operate, in compliance with the scope of each respective agreement. Collective agreements cover about 90% of Fortum's employees. In Latvia, Sweden and Russia, all personnel are within collective bargaining agreements. In Finland, all personnel except top management are within collective bargaining agreements. In Estonia, approximately 25% of the personnel are within the collective agreements, and in Poland, 32% of the personnel are within the national collective bargaining agreements. There are no collective agreements in Lithuania. Employment contracts are based on local legislation and on the company's human resources policy. LA1 New employee hires LA1 New employee hires and employee turnover and employee turnover During the year, 619 (2013: 552) new employees joined Fortum and 668 (2013: 910) employment relationships were terminated. Divestments and outsourcing reduced the number of personnel by a total of 468 (2013: 126). There were 34 (2013: 36) employees on international assignment. Departure turnover in 2014 was 8.1% (2013: 9.7%). The joint venture Fortum Värme is included in the 2013 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://annualreport2014.fortum.com/ 324 Annual Report 2014 Social responsibility Total number and rate of new employee hires and employee turnover by age group, gender and region New employee hires age group below 30 30-50 over 50 New recruits, %2) Employees leaving age group below 30 30-50 over 50 Departure turnover, %2) Employees leaving, employee's initiative age group below 30 30-50 0ver 50 Voluntary departure turnover, % 2) Average length of service for employees leaving age group below 30 30-50 over 50 Finland Sweden Russia Poland Other countries F no. 13 17 1 1.6 M no. 27 26 5 5.0 F no. 10 3 1 1.2 M no. 147 169 22 8.5 F no. 37 48 4 2.2 M no. 2 11 4 2.8 F no. 2 2 0 0.7 M no. 5 19 3 5.1 F no. 2 11 0 2.5 Finland Sweden Russia Poland Other countries F no. 4 14 3 1.1 M no. 11 28 7 4.0 F no. 12 27 8 4.0 M no. 65 118 88 6.8 F no. 29 41 34 2.6 M no. 3 19 26 8.0 F no. 1 5 3 1.5 M no. 2 13 16 5.9 F no. 2 12 1 2.8 Finland Sweden Russia Poland Other countries F no. 4 11 0 0.8 M no. 11 25 4 3.4 F no. 12 25 4 3.5 M no. 59 80 46 4.6 F no. 25 22 15 1.6 M no. 2 3 4 F no. 1 3 1 M no. 1 6 2 1.5 0.8 1.7 F no. 2 11 1 2.6 M no. 8 20 0 1.4 M no. 8 37 31 3.9 M no. 5 19 5 1.5 Finland Sweden Russia Poland Other countries1) M F M F M F M F M F years years years years years years years years years years 4 9 31 2 5 33 3 9 20 4 9 15 2 7 20 2 6 16 3 13 17 1 7 19 1 7 12 3 5 5 1) Data for Estonia is not complete 2) Percentage is calculated from country's number of employees Service years of the permanent employees in 2012-2014, % 0-5 yrs. 6-10 yrs. 11-15 yrs. 16-20 yrs. 21-26 yrs. 27-30 yrs. 31+ 2014 20131) 20121) 32 20 10 10 11 9 9 34 18 10 10 11 8 9 35 15 10 10 11 9 10 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad 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://annualreport2014.fortum.com/ 325 Annual Report 2014 Social responsibility benefits byby Employee benefits LA2LA2 Employee significant operating significant operating countries countries In principle, our employee benefits are applicable for all employee groups and working hours groups, for permanent and temporary and for full- or part-time employees. Our most significant operating countries are the Nordic countries, the Baltic countries, Russia and Poland. Employee benefits, like occupational health care, insurance, parental leaves and pensions are typically country-specific and comply with local legislation and the prevailing market situation. Typical fringe benefits may include, for example, car and mobile phone benefits. In addition to fringe benefits, we also provide various other employee benefits. These include, for example, longevity pay and gifts for years of service, discounted electricity prices and recreational and leisure activities. These benefits are generally for all employees. In Finland we participate in the Tekes EVE - Electric Vehicle Systems Programme. Employees choosing an electric company car receive a monthly monetary subsidy. The subsidy applies to battery electric vehicles (BEVs) and Plug-in Hybrid Electric Vehicles (PHEVs). Personnel in Finland have also the possibility to join the insurance fund Enerkemi. The purpose of Enerkemi is to grant benefits in accordance with the Sickness Insurance Act as well as certain additional benefits according to the rules of the Fund. The Fund operates as an employee sick fund. The additional benefits are significantly better than market practices. The benefits include additional compensation for medicine, dental care and various medical devices. We encourage our employees to exercise and to enjoy culture. In Finland, Sweden and Russia, all Fortum employees can join different personnel clubs offering activities related to sports, nature and the arts. In 2014, we supported employee recreational and leisure activities in our biggest operating countries with EUR 992,000. • In Finland, the support for clubs, fitness and culture vouchers, and activities related to vacation homes was EUR 315,549. • In Sweden, the support for clubs was EUR 107,890. • In Poland, the support for employee fitness was EUR 18,892. The support for other recreational and well-being activities, including support for leisure activities and donations to pensioners, was EUR 162,047. • In Russia, support for employee recreational activities, leisure camps and other social activities was about EUR 387,247. In Russia, recreational activities of employees' children (7-14 years) are also supported by contributing to the expenses of summer camps. In 2014, we conducted a survey on employee benefits in our biggest operating countries. In the next phase, the survey will be done also in the smaller operating countries. The aim of these surveys is to ensure the competitiveness of benefits compared to market practices and the compliance with regulations and decrees in all our operating countries. Based on the survey, we can state that our benefits in our most significant operating countries are in a good level. Incentive schemes Incentive schemes 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. In Poland and Russia there are other incentive schemes. In 2014, nearly EUR 13 million from year 2013, i.e. about 85% of the target level, was paid to individuals belonging to the Fortum's short-term incentive scheme. 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. Pensions Pensions Fortum's pension arrangements are presented in Financial Statements Note 32 Pension obligations, and in the Governance section Pensions. Fortum has taken life insurance to the top management. EU18 Contractor and EU18 Contractor and subcontractor employees subcontractor employees that have undergone that have undergone relevant health and safety relevant health and safety training training The safety of employees of subcontractors and contractors is as important to Fortum as the safety of own employees. Contractor safety targets are set based on a continuous improvement principle. Safety incidents and accidents are reported, accidents are investigated, and safety performance indicators are monitored on a monthly basis. Contractor and subcontractor safety is considered in all work phases – from the selection of subcontractors for the actual work to the post-performance evaluation. Requirements are set forth in the corporate- level safety instructions and the procurement organisation's instructions, and they are further specified in local instructions. One of the key elements in the instructions is the requirement to provide proper induction training and on-site orientation to all workers, including contractors, before starting the work. Effective induction training ensures a good understanding of site-specific risks, procedures and safety requirements. Induction training is valid only for a limited period, typically, not more than three years. Induction training includes, at minimum, site- specific safety requirements, rules, instructions, work permit procedures, the main risks of the site and how to prepare for them, the required personnel protective equipment, near-miss and incident reporting, emergency response, inspections, housekeeping, fire protection, first-aid systems, evacuation plans, and the contact data for the individuals responsible for these tasks. Induction training including safety training is provided for all contractors and subcontractors who work at Fortum's sites and facilities. Local organisations are responsible for implementing the training. Verification that the safety requirements presented in the induction training are understood is ensured by using interpreters, when needed, and by testing. 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://annualreport2014.fortum.com/ 326 Annual Report 2014 Social responsibility Labour/Management Relations Labour/Management Relations Collaboration between employees and employer is based on local legislation, local agreements and Fortum’s Code of Conduct. In Finland, Fortum's employee representation system is site-, company- and division-specific, and representatives in the cooperation bodies are chosen by the employee representatives from amongst themselves. Group collaboration meetings in Finland are held at least twice a year in conjunction with the Group's financial statements and interim reports. In addition to Group collaboration meetings, there are also division- or function- level cooperation bodies that meet a few times per year. The cooperation and employment group is comprised of seven representatives chosen from amongst the delegates. This group holds meetings approximately five times per year under the supervision of the Senior Vice President of Human Resources. It is the decision-making body in Finland-level collaboration issues, and it appoints personnel representatives for the preparation of various development projects. In Sweden, the system is fundamentally identical to Finland. In Sweden, collaboration between personnel representatives and Fortum management at the central level takes place in the Council (Sverigerådet) that convenes twice a year. The collaboration forms are based on the agreement made between the company and personnel representatives. Additionally, there are a significant number of meetings held locally during the year. In Estonia, the Working Councils of various functions convened three times during 2014. A council is for cooperation between an employer and the employee representatives; the focus is on resolving, for example, occupational health and safety issues in the enterprise. Additionally, there are meetings between personnel representatives and employer representatives on an as-needed basis. In Poland, some 30 meetings were arranged with the local labour union. The meetings focused on salary- and benefits-related issues, occupational safety, improving collaboration, and harmonisation of benefits. In Russia, in line with local legislation, the collective bargaining agreement and the Fortum Code of Conduct, division management closely collaborates with union representatives within the labour relations board and veteran council. These bodies meet on an as-needed basis to resolve various matters related to management and employee relations. As a rule, the Fortum European Council (FEC) convenes once a year. FEC is a Europe-wide cooperation body in which employees and employer representatives meet to discuss Fortum matters. In 2014, the Fortum European Council (FEC) held a meeting in May in Estonia, and personnel Occupational health and safety Occupational health and safety representatives from Finland, Sweden, Poland, and Estonia participated. Issues on the Council's agenda included the CEO's review; themed workshops included occupational health and safety, well-being and reviews of Fortum's Estonian operations. LA4 Minimum notice LA4 Minimum notice periods regarding periods regarding operational changes operational changes In situations of organisational restructuring, we negotiate with personnel representatives in compliance with each country's local legislation and contractual procedures. In situations involving personnel reductions, Fortum aims primarily to support the re- employment of its personnel. In Finland, the minimum notice period depends on the scale of upcoming changes and it varies from three to seven weeks. In Poland, Latvia and Estonia, the minimum notice period is four weeks. In Russia, minimum notice period varies from nine and eleven weeks. In Sweden, Norway and Lithuania, there is no regulated minimum notice period. In India, the minimum notice period varies from 30 days to 90 days. The minimum notice period is based on local legislation, collective agreements or employment contracts, which are in harmony with the local legislation and agreements. LA5 Workforce LA5 Workforce represented in formal represented in formal health and safety health and safety committees committees Workplace well-being and work safety are regularly addressed in local-level occupational safety committees, which operate in line with local legislative requirements and represent all personnel groups. The committees exist in all our significant operating countries. All our employees are within the sphere of occupational health care. Our occupational health care is organised in all countries of operation in accordance with local laws and regulations. We emphasise the significance of preventive activities in promoting well-being in the company as well as employee counselling for work-related or serious illnesses. Fortum conducts regular examinations in accordance with local laws; employees who in their work are exposed to e.g. noise, dust, radiation or perform shift work are within the sphere of the examinations. Occupational health care participates also in various discussions and assessments in the work community. The occupational health care professionals support supervisors by providing information on preventive actions as well as alternatives when the ability to work decreases. Occupational health care also offers methods and tools for these situations. In 2014, there were, on average, 2,096 (2013: 2,412) employees in Finland within the sphere of Fortum's occupational health care. About 83% (2013: 90%) of them used Fortum's own occupational health care services and about 17% (2013: 10%) used contracted health clinics. The total costs of Fortum's own occupational health care in Finland were about EUR 0.94 (2013: 1.2) million. The occupational health care costs per person in Finland, calculated from the share paid by Fortum, were EUR 542 (2013: 569). Preventive activities accounted for 53% (2013: 45%) of occupational health care visits. In Sweden, all employees are within the sphere of occupational health care services. 318 (2013: 439) employees used the services. Occupational health care 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://annualreport2014.fortum.com/ 327 Annual Report 2014 Social responsibility Sweden were EUR 335 per person (2013: 113). The figures for 2013 also include the joint venture Fortum Värme's data. In Russia, employees are within the sphere of a medical expenses insurance plan and can use private medical services. Also each production plant in Russia has a healthcare station with nursing-level first-aid services. LA6 Type of injury and LA6 Type of injury and rates of injury, rates of injury, occupational diseases, occupational diseases, lost days, and lost days, and absenteeism, and total absenteeism, and total number of work related number of work related fatalities fatalities In reporting injuries we comply with the principles of the United States Occupational Safety & Health Administration (OSHA) and ILO's Practices on Recording and Notification of Occupational Accidents and Diseases to the extent they conform to the legislation in Fortum's countries of operation. Our performance in occupational safety for own personnel further improved in 2014. The lost workday injury frequency (LWIF) per million working hours for Fortum's own personnel remained at the previous year's good level of 1.0 (2013: 1.0). There were 15 (2013: 16) work-related injuries resulting in an absence, and the country breakdown was: Finland 6, Russia 5, Poland 4. There were no injuries resulting in an absence in other countries. 13 of the injuries occurred with male employees. Two of the injuries occurred to female employees; one in Russia and one in Poland. Fortum personnel's total recordable injury frequency (TRIF) per million working hours, which includes also minor injuries that do not lead to an absence, improved to 2.0 (2013: 2.5). There were no work-related fatalities to own personnel during 2014. There were 6 (2013: 3) serious occupational injuries resulting in an absence of more than 30 days to own personnel. Personnel absence days resulting from work-related injuries increased compared to 2013 and was 590 days (2013: 499). In calculating lost days, the lost work days starting from the injury are counted, based on the Group instructions. Safety management at Fortum also encompasses contractors and service providers working at Fortum sites. The LWIF per million working hours for contractors improved and was 3.2 in 2014 (2013: 3.9). There were a total of 35 (2013: 54) contractor injuries resulting in an absence. The country breakdown of contractor injuries resulting in an absence was: Russia 13, Finland 13, Sweden 6, Poland 1, Germany 1, Great Britain 1. There were no injuries resulting in an absence in other countries. All of the injuries happened to males. The fatalities and serious injuries during the year were a big disappointment. Three work- related fatalities involving contractor employees occurred in 2014. Two were in Sweden and one in Russia, and all of the perished were men. There were 9 (2013: 10) serious injuries, i.e. resulting in an absence of more than 30 days, to contractor employees. We strive to ensure safe and healthy work conditions for personnel and support the maintenance and development of working capacity. The monitoring of sickness-related absences is defined at the Group-level, and the rate of absence due to sickness was 2.4% (2013: 2.5%); the rate of absence due to sickness was 2.2% (2013: 2.3%) for males and 2.9% (2013: 3.3%) for females. The sickness rate is calculated based on the reported theoretical working hours of the permanent employees. The figures for 2013 also include the joint venture Fortum Värme. In 2014, there were 8 (2013: 4) cases of suspected occupational diseases in Finland. The suspected occupational diseases are related to noise and asbestos. One of the suspected noise-related cases has been determined to be non-occupational; investigations are still under way for the other suspected cases. All the cases of suspected occupational diseases involved males. Joint venture Fortum Värme Joint venture Fortum Värme In terms of safety, the joint venture Fortum Värme had a very mixed year. There were no injuries resulting in an absence for own personnel (2013: 4). The total recordable injury frequency (TRIF) per million working hours, which includes also minor injuries that do not lead to an absence, improved and was 3.7 (2013: 6.9). The lost workday injury frequency per million working hours for contractors improved in 2014 and was 10.8 (2013: 13.2). There were a total of 20 (2013: 22) contractor employee work-related injuries resulting in an absence. One of the injuries occurred to a female worker. Contractor injuries in plant maintenance work reduced clearly in 2014 to 4 (2013: 14), but the serious accidents in the CHP8 construction project were a very big disappointment. Two male employees of a contractor perished in an accident at the project work site. Improving contractor safety Improving contractor safety Contractor safety remains a major challenge and will continue to be a focus area in 2015. The biggest challenges are still the construction and upgrade projects in Russia and Sweden. To improve the situation, several ongoing initiatives have been extended and new development projects have been started. To emphasise the importance of contractor safety, the contractor LWIF was made a Group-wide sustainability key indicator in 2014. Contractor safety is also more closely linked to the short-term incentive systems. In 2015, we will improve operating models for construction projects to enhance safety, and intensify the use of the contractor management model – from contractor selection to final assessment of performance. 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://annualreport2014.fortum.com/ 328 Annual Report 2014 Social responsibility Key safety figures in 2012-2014 Lost workday injury frequency (LWIF)1), own personnel Lost workday injuries, own personnel Lost workday injury frequency (LWIF)1), contractors Lost workday injuries, contractors Total recordable injury frequency, own personnel 2) Fatalities, own personnel Fatalities, contractors3) 1) LWIF = Lost workday injury frequency per one million working hours 2) TRIF = Total recordable injury frequency per one million working hours 3) Additionally two contractor fatalities in joint venture Fortum Värme 4) Includes joint venture AB Fortum Värme samägt med Stockholms Stad 2014 2013 20124) 1.0 15 3.2 35 2.0 0 3 1.0 16 3.9 54 2.5 0 1 1.5 29 3.8 57 3.4 0 1 Occupational accidents, accident frequencies and absense days due to occupational accidents in 2014 by region and gender Finland Sweden Russia Poland Great Britain Germany Estonia Latvia Lithuania India Own personnel Occupational accidents causing absence, men Occupational accidents causing absence, women LWIF, men LWIF, women Absence from work due to occupational accidents for men, days Absence from work due to occupational accidents for women, days Contractors1) Occupational accidents causing absence, men Occupational accidents causing absence, women 6 0 2.3 0 80 0 13 0 0 0 0 0 0 0 6 0 LWIF, men LWIF, women 12.5 0 4.9 0 1) The number of contractor absense days due to occupational accidents not available 4 1 0.7 0.5 3 1 3.6 4.4 257 225 7 21 1 0 13 0 1.7 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 1 0 1.9 35.5 0 0 6.9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Sickness absence rate of the permanent employees in 2012-2014 Finland Sweden Russia Poland Other countries 2014 2013 2012 Male Female 2.3 2.0 2.0 3.6 2.0 3.7 4.1 2.0 4.7 2.2 Male 2.7 2.31) 2.0 2.6 2.3 Female 3.1 3.71) 1.9 4.6 2.9 Male 2.8 2.21) 2.1 3.5 2.9 Female 3.2 3.91) 2.2 5.0 3.0 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad Read more about Read more about • Occupational and plant safety 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://annualreport2014.fortum.com/ 329 Annual Report 2014 Social responsibility Training and education Training and education time being, registered in Finland, Sweden, Poland and Norway. LA9 Average hours of LA9 Average hours of training per employee training per employee In 2014, the total number of training hours was 9,810. Courses and licenses are, for the Training hours 2014 Total number of training hours for employees Average training hours per employee Total number of training hours for females Average training hours per female Total number of training hours for males Average training hours per male Finland Blue-collar White-collar Other countries 1) Blue-collar White-collar Grand Total 8,992 1,918 7,074 818 144 674 9,810 4.41 4.98 4.27 0.31 0.30 0.31 2.10 2,055 29 2,026 260 1 259 2,315 3.61 3.22 3.61 0.35 0.25 0.35 1.78 6,937 1,889 5,048 558 143 415 7,495 4.72 5.02 4.61 0.29 0.30 0.29 2.22 1) Other countries: Sweden, Poland, Norway LA10 Programmes for LA10 Programmes for skills management and skills management and lifelong learning lifelong learning We offer our employees support in their professional development needs based on a 70/20/10 approach in learning and development: through on-the-job learning, learning through others and through training. Training includes both internal training programmes and, on a needs basis, external training. In 2014, training costs totalled approximately EUR 3.6 (2013: 4.6) million. All our new employees go through an induction programme, such as Fortum Passport, the online on-boarding programme. It covers several topics, including the Code of Conduct, sustainability principles and safety. In addition, Fortum arranges an induction day, Fortum Day, which is a face-to-face event with the new recruits in different countries. In 2014, 136 (2013: 107) employees learned about Fortum's operations through the Fortum Passport programme. Fortum Day had 74 employee participants in Finland and Sweden. As part of Leading Performance and Growth initiative launched in 2010, we have continued to develop a culture of leadership and coaching through the coaching training offered for employees and by developing team activities. By the end of 2014, around one thousand Fortum supervisors had participated in the initiative-based training for supervisors and over a hundred people in the coaching training. Fortum offers MASTER courses for the new managers to ensure they have the skills needed to perform in their managerial role. In addition, the intention is to harmonise and develop the way of operating in HR processes in Fortum. The main themes of the MASTER courses in 2014 were performance and development discussions, recruitment, labour law, remuneration, leadership growth, working environment and a new theme, workforce administration. There was a total of 16 MASTER training days with 134 participants. In 2014, a total of 25 young supervisors from different Fortum countries started in the new, four-module Navigator Programme. The main aim of the programme is to build internal capabilities and develop leaders for future business. We aim to keep the skills and competencies of our personnel at a level that maintains and improves their value in the job market. In case of redundancies, we offer outplacement services and, case by case, investigate the possibilities to arrange vocational training in co-operation with local unemployment authorities or vendors. Retraining for employees who continue working is arranged based on organisational and individual needs. In case of redundancies, the content of the severance package that we offer is decided on the basis of local needs. The financial compensation is usually based on the years of employment at Fortum. For employees nearing retirement age, we arrange training regarding pension-related issues and practicalities. Intended retirees have the possibility to talk about and get support for pre-retirement planning from occupational health, if needed. They also have the possibility to use the services offered by retirement insurance companies. 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://annualreport2014.fortum.com/ 330 Annual Report 2014 Social responsibility Level of education of the permanent employees in 2012-2014 % Doctorate University Lower university College Vocational Compulsory Not indicated 2014 20131) 20121) 1 41 6 26 22 4 0 1 37 7 26 22 3 4 1 35 7 26 22 3 6 1) Includes joint venture AB Fortum Värme samägt med Stockholms Stad LA11 Percentage of LA11 Percentage of employees receiving employees receiving regular performance and regular performance and career reviews career reviews Our permanent employees in all operating countries are within the scope of the performance and development discussion processes, which are implemented in all employee groups, and on a personal and/or team level. The annual performance and development reviews support the employee/ supervisor dialogue about goals, achievements and opportunities for professional development. The discussions aim to commit and motivate employees, engage them in the implementation of the strategy, business goals and operating plans, and improve operational planning, the workplace atmosphere and the flow of information, as well as promote performance and growth at the individual and corporate level. Personal and/or team-specific targets aligned with Fortum's strategy are set at the beginning of the year. At the same time, the needed competence is verified and last year's performance is assessed. The achievement of targets forms the basis for incentives to be paid. Permanent employees who have a minimum of three months of employment in Fortum are within the scope of Fortum's incentive plan. Diversity and equal opportunity Diversity and equal opportunity LA12 Composition of LA12 Composition of governance bodies and governance bodies and breakdown of employees breakdown of employees We promote equal treatment and opportunities in recruiting, remuneration, development and career advancement, regardless of the employee's race, religion, political views, gender, age, nationality, language, sexual orientation, marital status or disabilities. We do not track the proportion of minorities in our personnel. Any form of harassment is forbidden and addressed immediately. In Finland and Sweden, there are separate guidelines in place for workplace harassment and discrimination. In 2014, there were two alleged cases of discrimination reported (2013: 0). The average age of our permanent employees was 44 years (2013: 44), and the share of employees over 50 years was 33% (2013: 36%). Women accounted for 28% (2013: 28%) The performance and development process applies to all permanent employees, however, the electronic tool used in the process in 2014 covered about 67% (2013: 67%) of the personnel globally, out of which the performance and development process was conducted for 93% (2013: 97%). The performance and development process was nearly equally completed among female employees 95% (2013: 95%) and male employees 92% (2013: 98%). The company- wide completion rate will be available when all countries and employee groups are covered by the electronic tool. of our total personnel. Women accounted for 33% (2013: 31%) of the Group- and division- level management teams. The Board of Directors comprised eight members, three of them, including the Chairman, were women. 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://annualreport2014.fortum.com/ 331 Annual Report 2014 Social responsibility Personnel age distribution of permanent employees by age group, gender and personnel group Finland Sweden Russia Poland Other countries Male Female Male Female Male Female Male Female Male Female b 37 w 65 187 610 151 381 b 0 6 1 w 48 305 183 b 10 56 72 w 63 324 239 b 0 0 1 w 53 b w b w 370 130 25 107 b 1 w 6 240 997 587 207 399 126 119 106 592 283 164 131 110 109 b 0 0 2 w 8 74 46 b 24 84 83 w 14 102 b 0 8 w 25 103 39 10 37 age group below 30 30-50 over 50 b = blue-collars w = white-collars Group- and division-level management, by age and gender age group below 30 30-50 over 50 Men 0 40 14 Women 0 13 14 Equal remuneration for women and men Equal remuneration for women and men LA13 Ratio of basic salary LA13 Ratio of basic salary and remuneration of and remuneration of women to men women to men In line with our remuneration policy, we offer a fair, transparent and competitive compensation portfolio to our employees. Salaries and wages are compliant with established practices in each country and based on local legislation and labour market agreements. Salary level is based on personal work performance, on defined competence requirements, and on the market situation in each country. The comprehensive implementation of our human resources data management system enables the reporting of pay equality in all our operating countries. In addition to the centralised HR data management system, a separate, local, data system is also used in Russia and therefore the data on Russia’s pay equality is reported separately. Our reporting covers all personnel groups except “workers”. A comparison in this group is not possible because of the small group sizes. Likewise, the number of personnel in some of our operating countries is so small that a country-specific comparison is not reliable. We have reported these countries collectively under “Other countries”. In our operating countries, the base salaries of female employees were, on average, 10% less than the male base salaries in all personnel groups. The total number of personnel included in the comparison was 3,770 of which 1,294 (34%) are female. The differences varied between countries; years of service and job grade levels had the most impact on the differences. The relative number of females in terms of these comparison factors affected the salary differences. Fortum’s short-term incentive (STI) system includes a personal performance indicator. We have included the STI in the pay equality comparison for the personal bonus multiplier. The difference between male and female in personal bonus multiplier was 0.4%. In Russia, the difference between female and male salaries and wages was +0.6% for comparable grade levels (1,728 individuals). There was no comparison made for the personal bonus multiplier. The basic salary, remuneration and other key factors of women compared to men, % Basic salary and personal bonus Job grades Service years Basic salaries Personal bonus coefficient Roles until middle management and specialists Jobs with tactical or strategical role Average service years -15 -19 10 -22 -10 -0.80 2.20 6.20 -3.30 0.40 -6.96 -9.66 10.84 0.93 -3.36 -0.46 0.33 -0.44 -1.37 -0.41 -14 -17 -27 -24 -20 Country Finland Sweden Poland Other countries 1) Total 1) 1) Do not include Russia 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://annualreport2014.fortum.com/ 332 Annual Report 2014 Social responsibility Supplier assessment: Environment, labour practices and Supplier assessment: Environment, labour practices and human rights human rights EN32, LA14 and HR10 EN32, LA14 and HR10 Percentage of new Percentage of new suppliers that were suppliers that were screened using screened using environmental criteria, environmental criteria, labour practices andand labour practices human rights criteria human rights criteria We expect our business partners to act responsibly and to comply with the Fortum Code of Conduct and Fortum Supplier Code of Conduct. In 2014, approximately half of our total volume of purchases was purchased from suppliers operating in Europe, mostly in Finland, Sweden and Poland. 15% of Fortum’s purchases, excluding the Russia Division's purchases, came from risk countries. When the Russia Division's local purchases are included, our purchases from risk countries accounted for 50% of the total volume of purchases. Fortum's Supplier Code of Conduct is implemented in all of Fortum's operating countries and it is included in all purchase agreements exceeding EUR 50,000. With the Supplier Code of Conduct, Fortum aims to ensure, among other things, that the supplier provides safe working conditions for its employees, complies with rules and regulations, and reduces the environmental impacts caused by its operations. We assess the level of operations of our business partners through pre-selection and supplier audits. Pre-selection includes a supplier questionnaire and verification of credit. We use the supplier questionnaire to identify general and sustainability-related practices, and it covers issues related to labour practices, human rights, health and safety, and environment. The supplier questionnaire also helps to identify high-risk suppliers and the need for any further actions. The questionnaire also helps suppliers to understand our expectations for compliance with the Supplier Code of Conduct. We perform pre-selection when the volume of the purchase exceeds EUR 50,000 and, in the case of a Nordic supplier, EUR 100,000. Majority of our purchases is from the Nordic countries and remain below EUR 100,000. In 2014, Fortum conducted pre-selection on 150 (2013: 200) suppliers and it covered 7% of the new suppliers. This figure does not include the Russia Division's suppliers, as they have their own pre-selection. The Russia Division conducts the pre- selection in accordance with Russian procurement law, and bidding is open to all companies. In the Russian operations, we set supplier requirements for business principles and ethics, and we pay special attention to anti-corruption and conflicts of interest. Participating in bidding requires the potential suppliers to also endorse their commitment to compliance with Fortum’s Supplier Code of Conduct. Fortum is a member of the Bettercoal initiative, and uses the Bettercoal Code and tools in assessing the sustainability of the coal supply chain. We started the sustainability-related supplier audits in 2012 and we have aimed to increase the number of audits every year. In the audit, we assess the supplier's compliance with the requirements in Fortum's Supplier Code of Conduct. Audits are always done on-site and they include a production inspection, employee interviews and a review of documents and records. If non-compliances are found, the supplier makes a plan for corrective actions and we monitor the implementation of it. The suppliers we select to be audited are from risk countries or they have a significant supply contract. In 2014, we conducted a total of 14 (2013: 13) audits of suppliers operating in risk and in non-risk countries in Bulgaria, China, Poland, Czech Republic, Sweden and Russia. The most significant non-compliances identified in the audits were related to occupational safety, overtime hours, working hours of young workers, and management of the suppliers’ own subcontractors The joint venture Fortum Värme conducted a total of nine audits of its own suppliers of biofuel and its biggest contractors. Our goal in 2015 is to audit 15 suppliers or contractors. The joint venture Fortum Värme has set its own goal of ten audits. Our goal is also to update the supplier selection criteria to be based on a systematic comprehensive risk assessment and to take into use a simplified, lighter auditing model. The lighter model will enable also the buyer to verify a supplier’s practices. Read more about Read more about • Responsible supply chain management LA15 andand HR11HR11 LA15 Significant actual Significant actual andand potential negative potential negative impacts for labour impacts for labour practices and human practices and human rights in the supply rights in the supply chain and actions taken chain and actions taken The majority of our purchases are from countries, where the local regulation related to labour practices is strong and well implemented. In 2014, excluding the Russia Division's suppliers, we had 125 suppliers operating in risk countries and, when included, 1,448 suppliers. Our risk country classification is based on the ILO Decent Work Agenda, the Human Development Index of the United Nations and the Corruption Perceptions Index by Transparency International. Violations related to labour practices and human rights are more probable in risk countries than in no-risk countries. In terms of reviewing labour practices, the focus is on health and safety issues and on compliance with working hours and remuneration legislation. In human rights, the elimination of child and forced labour and discrimination are important, as is freedom of association. If non-compliances are found, we require the supplier to make a plan for corrective actions and we monitor the implementation of it. In 2014, we conducted a total of 14 (2013:13) audits of suppliers, around 70% of which operate in risk countries. Out of the audited suppliers, we found non-compliances related to labour practices with seven (50%) of them. The majority of the non-compliances were related to health and safety, but there were non-compliances related to working hours legislation as well. Out of the audited suppliers, we found non-compliances related to human rights with three (21%) of them. The observed non-compliances were related 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://annualreport2014.fortum.com/ 333 Annual Report 2014 Social responsibility the working hours of young employees. Young employees are above the minimum age, but under 18 years. Suppliers with observed non-compliances have provided corrective action plans and we are monitoring the implementation of them. The joint venture Fortum Värme conducted a total of nine audits of its own suppliers of biofuel and its biggest contractors. Labour practices grievance mechanisms Labour practices grievance mechanisms LA16 Number of LA16 Number of grievances about labour grievances about labour practices filed, addressed, practices filed, addressed, and resolved through and resolved through formal grievance formal grievance mechanisms mechanisms There was one grievance filed during the review period regarding the labour practices of contractor employees at a power plant Human rights Human rights Investment Investment HR1 Human rights HR1 Human rights screening or clauses screening or clauses included in significant included in significant investment agreements investment agreements A sustainability assessment is carried out for all of our investment projects and it takes into consideration the environmental, occupational health and safety, and social impacts of the project. Projects requiring approval by the Fortum Executive Management Team are additionally subject to an assessment and approval by Group-level sustainability experts. The sustainability assessment includes a human rights evaluation, especially in new operating areas. A human rights assessment is also part of the systematic assessment of country and counterparty risk when planning a project. In 2014, one significant investment project outside the EU and Russia was implemented when a new solar power plant was built in India. Fortum’s human rights assessment construction site in Russia. The social areas at the source of the grievance were repaired. There were no other grievances filed through formal grievance channels, nor were there any grievances carried over from a previous review period. model was used in this project. Additionally, a lighter version of the model was used in the assessment of projects under planning in 30 different countries. Fortum's Supplier Code of Conduct is implemented in all of Fortum's operating countries and it is included in all purchase agreements exceeding EUR 50,000. HR2 Employee training HR2 Employee training on human rights policies on human rights policies or procedures or procedures The online course for Fortums's Code of Conduct includes training in human rights- related issues and the Code of Conduct e- learning is part of the induction programme of new Fortum employees. Our own personnel are responsible for conducting the sustainability-related supplier audits, which cover the most important human rights aspects related to purchases. By conducting the audits on our own, we gain a better idea of the supplier’s practices while increasing the supplier’s understanding of human rights issues. Fortum’s auditors each receive 1.5 days of internal training, during which they review the requirements of the Supplier Code of Conduct, the sub-areas to be audited, and the tools to be used to verify compliance with the requirements. After the training, supplier audits are started together with an experienced auditor. In 2014, we trained nine auditors from Russia and Sweden. The total number of training hours was 108 and less than 1% of our personnel participated in the training. In 2015, we will continue training auditors and developing competence in different divisions and countries.Those who have completed the internal training are recommended to also complete auditor training on the Social Accountability (SA8000) standard. With the exception of one auditor, the SA8000 auditor training has been completed by all of the trained auditors who regularly conduct audits. 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://annualreport2014.fortum.com/ 334 Annual Report 2014 Social responsibility Non-discrimination Non-discrimination HR3HR3 Incidents of Incidents of discrimination and discrimination and corrective actions taken corrective actions taken There were two incidents of alleged discrimination reported in 2014 (2013: 0); one was handled internally and the other will go to court proceedings in 2015. The incident handled internally resulted in termination of employment for the employee who was guilty of discrimination. Freedom of association and collective bargaining, child labour Freedom of association and collective bargaining, child labour and forced and compulsory labour and forced and compulsory labour and forced labour inin HR4 Supporting the right HR4 Supporting the right to freedom of association to freedom of association and collective bargaining and collective bargaining in risk areas in risk areas HR5 and HR6 Measures HR5 and HR6 Measures taken to eliminate taken to eliminate child and forced labour child risk areas and in risk areas and in operations of significant operations of significant suppliers suppliers We respect employees’ right to freedom of association and collective bargaining as well as the inviolability and integrity of labour union representatives. In our operating countries, freedom of association and collective bargaining are guaranteed by law. The exception to this is India, which has not ratified the International Labour Organisation’s (ILO) Convention on the right to freedom of association and collective bargaining. In India, we comply with the same practices as in other countries of operation, and we do not limit or prohibit the right to freedom of association. All forms of child labour are strictly prohibited and in violation of Fortum’s Code of Conduct. Of our operating countries, India has not ratified the International Labour Organisation’s (ILO) Convention on the minimum age and the worst forms of child labour. Our functions in India require job applicants to be of adult age. All forms of forced labour are strictly prohibited and in violation of Fortum’s Code of Conduct. We have not identified risks related to the use of forced labour in our own operations. In 2014, about half of the total volume of our procurements was purchased from Europe, mainly from suppliers operating in Finland, Sweden and Poland. Our purchases from risk countries accounted for 15%, excluding the Russia Division’s purchases. If the Russia Division’s local procurements are included in the calculation, our purchases from risk countries were 50% of the total volume of procurements. Our risk country classification is based on the ILO’s Decent Work Agenda, the Human Development index published by the UN, and the Corruption Perceptions index published by Transparency International. In these countries, violations related to human Assessment Assessment HR9HR9 Operations that have Operations that have been subject to human been subject to human rights reviews or impact rights reviews or impact assessments assessments We have a process in place for country and partner risk assessment. The process has two parts: a light and a deep assessment, and it also covers human rights reviews and impact assessments. A light assessment is done for all new countries in where our business unit is planning the sales of operation or maintenance services, for example, and it is based on publically available sources. In 2014, thirty of these assessments were made. A deep assessment was done for two countries. We consider the breakdown by rights and social issues are more likely than in non-risk countries. In 2014, we continued sustainability-related supplier audits, and we audited a total of 14 (2013: 13) suppliers. About 70% of the audited suppliers operate in risk countries. The audits assess how effectively the supplier meets the requirements of Fortum’s Supplier Code of Conduct. The audits also assess what kinds of guidelines the supplier has in place to prevent the use of child and forced labour as well as how the right to freedom of association is realised by the supplier. In conjunction with material supplier audits conducted in China, we found non- compliances related to working hours of young workers. The suppliers with the non- compliances have made a plan for corrective measures, and we are monitoring the implementation of the plan. The audits conducted did not reveal non-compliances related to freedom of association and collective bargaining, but we did give a recommendation to two material suppliers to improve the communication between personnel and management. The joint venture Fortum Värme conducted a total of nine audits of its own suppliers of biofuel and its biggest contractors. country required by the indicator as a business secret and we do not report it. 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://annualreport2014.fortum.com/ 335 Annual Report 2014 Social responsibility Supplier human rights assessment Supplier human rights assessment HR10 Percentage of new HR10 Percentage of new suppliers that were suppliers that were screened using human screened using human rights criteria rights criteria Our supplier assessments cover aspects related to environmental responsibility, work conditions and human rights, and the supplier assessments are reviewed as a whole in section Supplier assessment: Environment, labour practices and human rights. HR11 Significant actual HR11 Significant actual and potential negative and potential negative human rights impacts in human rights impacts in the supply chain and the supply chain and actions taken actions taken The actual and potential negative impacts related to working conditions and human rights are reviewed as a whole in the section Supplier assessment: Environment, labour practices and human rights. Human rights grievance mechanisms Human rights grievance mechanisms HR12 Number of HR12 Number of grievances about human grievances about human rights impacts filed, rights impacts filed, addressed, and resolved addressed, and resolved through formal grievance through formal grievance mechanisms mechanisms There were two grievances filed during the review period regarding cases of alleged Society Society Local communities Local communities We communicate openly, honestly and proactively, and we engage in a dialogue with the influential stakeholder groups located in the vicinity of our power plants. We carry out collaboration projects with local communities. We conduct environmental impact assessments (EIA) for our projects in accordance with legislative requirements. Hearing of stakeholders is part of the EIA process. The environmental impact assessments and reports are publicly available. In addition, relevant stakeholders are heard in all licensing procedures. discrimination, which are reported on under indicator HR3. There were no other grievances filed through formal grievance channels, nor were there any grievances carried over from a previous review period. SO2 Operations with SO2 Operations with significant actual and significant actual and potential negative potential negative impacts on local impacts on local communities communities In the future, the construction of large solar power plants in India may have an impact on the livelihoods, land use and transport routes of the local population. Minimising local impacts and collaborating with stakeholders is taken into consideration in the project planning phase. Our hydropower production in Sweden and Finland has positive and negative impacts on local communities. Hydropower production and water regulation may alter the flow rate and the range and rhythm of the water level in waterways, compared to their natural state. Hydropower construction and use may weaken the reproduction and living habitats for fish. The changes may have also negative impacts on local communities. The most significant negative impacts are related to the recreational use of water systems, particularly on the shores of lakes that are strongly regulated, and the impacts on fishing. Power plant dams also form an obstacle to boating. We mitigate and compensate the adversities through numerous measures, such as stocking fish and building boat launch ramps. Read more about Read more about • Local collaboration 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://annualreport2014.fortum.com/ 336 Annual Report 2014 Social responsibility Anti-corruption Anti-corruption SO3 Operations assessed SO3 Operations assessed for risks related to for risks related to corruption and the corruption and the significant risks significant risks identified identified In all our countries of operation and business units, corruption-related risks are managed as part of operative risk management and control procedures. The assessment of corruption-related risks is carried out on a regular basis, is documented, and covers the entire company. We use procedures to ensure the prevention, oversight, reporting and enforcement based on the requirements prescribed in international legislation. We have included a systematic compliance risk assessment in business plans, and risk monitoring is part of the business performance review. Line management regularly reports its activities to the Fortum Management Team and further to the Board of Directors’ Audit and Risk Committee to ensure compliance with regulations. The significant risks we have identified include bribery and corruption, fraud and embezzlement, non-compliance with legislation or company guidelines, conflicts of interest, improper use of company assets, and working under the influence of alcohol or drugs. Read more about Read more about • Compliance Management and Code of Conduct SO4 Communication and SO4 Communication and training on anti- training on anti- corruption policies and corruption policies and procedures procedures Anti-corruption principles have been included in Fortum's Code of Conduct since 2007; all our employees and members of the Fortum Board of Directors have participated in the Code of Conduct training. Completing the Code of Conduct e-learning course is part of the induction programme of new employees. In 2014, we continued the extensive anti- corruption training for different functions. In planning the training, we took into consideration the risk profiles of the different functions, and we used purchasing authority of a certain monetary value as a special criterion. The Legal department arranged a total of 25 training events for people working e.g. with procurements and investments. Additionally, Russia’s compliance organisation arranged one division-level, seven regional and 20 plant-specific training events. The measures taken during the year are reported to the Board’s Audit and Risk Committee. We communicated about the Code of Conduct and ethical business practices via, e.g., the online personnel magazine and the intranet as part of Fortum Sound employee survey communications. We emphasised ethical business practices also in customer communication articles on the intranet. We append our Supplier Code of Conduct to all purchase agreements that have a value in excess of EUR 50,000. These agreements account for about 95% of our total purchase volume, and geographically they primarily target Finland, Sweden, Russia, Poland and Estonia. Collaboration partners in this group include fuel, material and service suppliers. SO5 Confirmed incidents SO5 Confirmed incidents of corruption and actions of corruption and actions taken taken We have internal procedures in place for dealing with potential cases of corruption in a professional manner, in accordance with applicable laws and with respect to the rights and personal integrity of all parties involved. We investigate each incident in accordance with these procedures, including a hearing of the relevant persons and parties, and, if needed, we decide on the appropriate consequences and corrective actions. Additionally, after each incident, we determined the need to increase awareness about Fortum's Code of Conduct. We can do this, e.g., through e-learning or by arranging in-person training to ensure that the employee is fully aware of what we consider appropriate business conduct and what the employee’s responsibility is in cases of non- compliance. No cases of suspected corruption or bribery were detected in 2014. At the end of 2014, the local district court in Sweden issued a decision on a matter that was reported in Fortum’s Sustainability Report 2013, relating to a possible malpractice of a person employed by the joint venture Fortum Värme. The person was found guilty of accepting bribes and condemned to conditional imprisonment and fines. The parties have appealed the decision. The employment contract was terminated in 2013. In addition, a suspected case of bribery targeting a former Fortum employee and originating from the year 2006 is due in court in Sweden in March 2015. The employment contract was terminated in 2006. Read more about Read more about • Ethics and integrity Public policy Public policy SO6 Total value of SO6 Total value of political contributions political contributions We do not award donations to political parties or to any kind of political activities, religious organisations, authorities, municipalities or local administrators. 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://annualreport2014.fortum.com/ 337 Annual Report 2014 Social responsibility Anti-competitive behavior Anti-competitive behavior SO7 Total number of legal SO7 Total number of legal actions for anti- actions for anti- competitive behavior, competitive behavior, anti-trust, and monopoly anti-trust, and monopoly practices and their practices and their outcomes outcomes In 2014, a court ruling in Russia found the Russia Division’s heat business guilty of abuse of a dominant position. We have appealed the decision to a higher court. According to the ruling, the Russia Division’s heat business had entered into a competition-restricting agreement in 2010 with the administration of the city of Tyumen and the heat distribution network operator. The agreement was terminated in 2013, and we have reported the incident in our 2013 Sustainability Report. According to the court’s ruling in 2014, the agreement restricted companies engaged in heat-only production from entering the heat market in some areas of Tyumen. The fines related to the court ruling are presented under indicator SO8. Compliance Compliance SO8SO8 Significant fines and Significant fines and non-monetary sanctions non-monetary sanctions for non-compliance with for non-compliance with laws and regulations laws and regulations In Russia, we paid fines totalling about RUB 33 million related to the court ruling presented in indicator SO7. There were no non-monetary sanctions imposed. Grievance mechanisms for impacts on society Grievance mechanisms for impacts on society there any grievances carried over from a previous review period. SO11 Number of SO11 Number of grievances about impacts grievances about impacts on society filed, on society filed, addressed, and resolved addressed, and resolved through formal grievance through formal grievance mechanisms mechanisms There were no grievances filed about impacts on society during the review period, nor were Disaster/Emergency planning and response Disaster/Emergency planning and response Contingency planning, Contingency planning, related plans and training related plans and training The main disaster and emergency situations we prepare for are related to our operations, such as power plant and dam safety and securing the uninterrupted distribution of electricity and heat. For dam and nuclear safety, emergency preparedness obligations in Finland and Sweden are based on regulatory provisions; likewise, there are terrorism-related preparedness obligations in Russia. Otherwise, emergency preparedness obligations prescribed by authorities are of a general nature. Based on its own risk assessment, Fortum independently defines the crisis and exceptional situations it prepares for and drafts action plans for. development, e.g. for organising rehearsals. Corporate Communications is responsible for crisis communication. Fortum’s crisis management and business continuity plans are prepared for the Group, division and local levels. The testing and updating of the crisis management and continuity plans are the responsibility of each division and line organisation. Crises impacting Group operations more broadly are managed at the Group level. Crisis communication instructions have been prepared for e.g. power and heat outages and for the Loviisa nuclear power plant. Corporate Security is responsible for crisis management In 2014, a crisis rehearsal was held for Fortum’s Executive Management Team. In Finland, the annual emergency exercise related to a nuclear power accident was held at the Loviisa power plant. Participants in the exercise included Loviisa power plant’s emergency preparedness organisation, Fortum’s Executive Management Team, Communications, and the Nuclear and Thermal Power division, as well as key authorities: emergency response centre, national rescue services, police and 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://annualreport2014.fortum.com/ 338 Annual Report 2014 Social responsibility Radiation and Nuclear Safety Authority. In late 2014, the emergency preparedness organisation held crisis preparedness rehearsals in Stockholm and Karlstad, Sweden. Among other things, the exercises tested the operation of alarm systems and the crisis preparedness team’s actions in a flood situation related to a dam accident. Fire safety and rescue rehearsals were held in Estonia and Latvia. Cyber security risks were addressed during the year by drafting a cyber security plan. A goal for 2015 in preparing for crises and exceptional situations is to improve the risk management related to data security, and fire and rescue operations. Product responsibility Product responsibility Product and service labeling Product and service labeling PR3 Product and service PR3 Product and service information required by information required by procedures procedures For our products, the most pertinent obligatory product information requirement is valid for all the electricity we produce in EU countries. We comply with EU legislation- based national legislation on the origin of electricity. This requiresthe electricity producer to disclose the origin of the produced electricity, the carbon dioxide emissions and the amount of radioactive waste. In 2014, Fortum Markets sold electricity to private and business customers in Finland, Sweden and Norway. Electricity was acquired from the Nord Pool electricity exchange. Depending on the type of electricity agreement, customers receive electricity generated from different energy sources. The origin of the electricity is verified in Customer satisfaction1) in 2012-2014 Finland Sweden Norway accordance with the European Guarantee of Origin system. Sources used to produce the electricity sold by Fortum Markets in 2013: • 37% renewable energy (35% was sold as eco-labelled electricity) • 58% nuclear power • 5% fossil fuels Emissions generated in the production of electricity sold by Fortum: • Accumulation of spent nuclear fuel: 1.6 mg/kWh • Carbon dioxide: 32 g CO2/kWh Due to the Nordic reporting practice, figures for 2014 will be available in summer 2015. PR5 Results of surveys PR5 Results of surveys measuring customer measuring customer satisfaction satisfaction The international and independent EPSI Rating annually surveys the customer satisfaction of electricity companies in Finland, Sweden and Norway. According to 2014 EPSI survey, the general electricity sector customer satisfaction remained at the same level in Finland, decreased slightly in Sweden, and improved in Norway. Fortum’s customer satisfaction improved in Finland and Norway, but decreased in Sweden. According to the EPSI survey, Fortum’s customer loyalty improved the most of all electricity companies in Finland. Customer loyalty and customer willingness to recommend Fortum were also visible in the growing customer base. Customer assessment of the quality of Fortum’s products and services also improved. 2014 74 63 70 2013 71 65 69 2012 68 64 69 1) In Finland and Norway research method was EPSI, in Sweden Svenskt Kvalitetsindex We measure customer satisfaction and development of the company’s reputation and the factors impacting it among the different stakeholder groups annually with the extensive One Fortum survey. The survey covers customers, public administration, capital markets, non-governmental organisations and opinion makers, and Fortum’s personnel. In Finland and Sweden, we also survey the views of the general public. As in the previous year, in 2014 we conducted the survey in Finland, Sweden, Norway, Poland, the Baltic countries and Russia. Our reputation has remained strong amongst the most important stakeholder groups and, despite a small decline, is still the strongest among stakeholder groups within the capital markets. Among public administration representatives, our reputation improved for the third consecutive year. Our reputation improved in Finland among all stakeholder groups and especially among customers. Customer satisfaction improved the most in the heat business. Satisfaction slightly decreased among private electricity customers, but improved among business customers in all market areas. Customers of the Power Solutions unit continue to be very satisfied and more loyal and willing to recommend Fortum than previously. Our reputation is still the weakest among the general public and decreased from 2013, as our reputation weakened in Sweden. Opinion makers and non-governmental organisations 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://annualreport2014.fortum.com/ 339 Annual Report 2014 Social responsibility have a more positive attitude towards Fortum than previously. Marketing communications Marketing communications PR7 Total number of PR7 Total number of incidents of non- incidents of non- compliance with compliance with regulations and voluntary regulations and voluntary codes concerning codes concerning marketing marketing communications communications There were no violations of regulations and voluntary principles observed in 2014. Access Access We apply international indicators (SAIFI, SAIDI and CAIDI) to measure electricity distribution reliability. EU28 Power outage EU28 Power outage frequency frequency The number of fault-based power outages per customer (SAIFI) in our Swedish electricity network in 2014 was 1.15 (2013: 1.01). EU29 Average power EU29 Average power outage duration outage duration The average duration of power outages per customer (SAIDI) in our Swedish electricity network in 2014 was 97 (2013: 103) minutes. The average duration of power outages caused by faults (CAIDI) was 81 (2013: 92) minutes. The average duration of power outage per customer (SAIDI) target set for 2014 was a maximum of 100 minutes. this is considered a fault, which decreases the availability. For hydropower plants, outages due to faults and unplanned or prolonged outages decrease the availability factor only if they lead to spillage. EU30 Average plant EU30 Average plant availability factor availability factor We measure the availability of our CHP and hydropower plants with an energy availability indicator. It is calculated by dividing the power plant’s actual production with the theoretical maximum production in the period under review. The calculation excludes planned maintenance outages. However, if an outage of a CHP plant is longer than planned, The average energy availability of our CHP plants in 2014 was 94.7%; the target was 95%. The average energy availability of our hydropower plants was 99.96%. The load factor describing the energy availability of the Loviisa nuclear power plant was 90.9% (2013: 92.5%), which is high by international standards. 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://annualreport2014.fortum.com/ 340 Annual Report 2014 Acronyms and units Acronyms and units Acronyms and units Acronyms used in the report Acronym Term Definition GRI EHS CHP LWIF TRIF SAIDI CAIDI SAIFI CER ERU IUCN Global Reporting Initiative Environment, Health and Safety Combined Heat and Power International organisation promoting sustainability reporting - - Lost Workday Injury Frequency Frequency of injuries that lead to absence from work for one or more days Total Recordable Injury Frequency Frequency of all injuries that require medical treatment System Average Interruption Duration Index Cumulative duration of power outages per customer in a specified time interval Customer Average Interruption Duration Index Average duration of power outages in a specified time interval System Average Interruption Frequency Index Number of power outages per customer in a specified time interval Certified Emission Reduction Emission Reduction Unit Emission reduction unit in projects under Clean Development Mechanisms Emission reduction unit in Joint Implementation projects International Union for Conservation of Nature - Quantities and units used in the report Energy 1 terawatt hour (TWh) = 1,000 gigawatt hours (GWh) = 1,000,000 megawatt hours (MWh) = 1,000,000,000 kilowatt hours (kWh) 1 terawatt hour (TWh) = 3,600 terajoules (TJ) 1 terajoule (TJ) = 278 megawatt hours (MWh) 1 petajoule (PJ) = 1000 terajoules (TJ) Capacity 1 megawatt (MW) = 1,000 kilowatts (kW) = 1,000,000 watts (W) Volume 1 cubic metre (m3) = 1,000 litres (l) 1 normal cubic metre (Nm3) = 1 m3 of gas in normal atmospheric pressure (1.0 bar) and temperature 0 oC Mass 1 tonne (t) = 1,000 kilograms (kg) 1 megatonne (Mt) = 1,000,000 tonnes (t) = 1,000,000,000 kilograms (kg) Activity 1 becquerel (Bq) = 1 nuclear transformation per second 1 terabecquerel (TBq) = 1 000 gigabecquerels (GBq) = 1 000 000 000 000 becquerels 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://annualreport2014.fortum.com/ 341 Annual Report 2014 Contact information 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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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://annualreport2014.fortum.com/ 342 Annual Report 2014 Contact information Contact information Contact information Investor relations Investor relations 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 Marja Mäkinen Marja Mäkinen Manager, Investor Relations (SRI) tel. +358 10 45 23338, marja.makinen@fortum.com Financial Financial communications communications Kati Suurmunne Kati Suurmunne Vice President, Financial Communications tel. +358 10 45 23379, kati.suurmunne@fortum.com Anna Eskelinen Anna Eskelinen Manager, Financial Communications tel. +358 10 45 23350, anna.eskelinen@fortum.com Sustainability Sustainability Ulla Rehell Ulla Rehell Vice President, Sustainability tel. +358 10 45 29251, ulla.rehell@fortum.com Minna Torsner Minna Torsner Project Manager, Sustainability tel. +358 10 45 34776, minna.torsner@fortum.com 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://annualreport2014.fortum.com/ 343
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