Fortum Oyj Annual Report 2018

Plain-text annual report

CEO’s Business Review 2018 Highlights 2018 Comparable operating profit EUR 987 million, +22% Strategy updated to strengthen competitiveness and ensure a benchmark portfolio for the 2020s Automation modernisation project in Loviisa NPP Close to 3 GW solar and wind portfolio (including associates) Uniper ownership 49.99% 31 December 2018 1 Fortum’s 2018 reporting entity CEO’s Business Review 2018 Financials 2018 CEO's Business Review Financials Governance 2018 Remuneration 2018 Governance Remuneration Tax Footprint 2018 Sustainability 2018 Tax Footprint Sustainability To be published in week 11 at the latest Materiality process: Our reporting for the year 2018 includes material information on topics we estimate to have a significant effect on Fortum’s value creation. Our understanding of stakeholder views is based on the results of the One Fortum Survey, customer satisfaction surveys, the stakeholder sustainability survey, as well as information gained through daily stakeholder collaboration. 2 CEO’s Business Review 2018 Dear stakeholders, 2018 was an eventful year for Fortum. We continued our strategy implementation with the integration and development of our Hafslund and Ekokem acquisitions, further investments in renewables, and most significantly; closing the Uniper tender offer. Our long-term belief in the need for large-scale decarbonisation took a leap forward with the decision to strengthen the Market Stability Reserve and subsequent tripling of emission allowance prices, having a clear positive impact on power prices. Determined strategy implementation and updated strategy Driving the change for a cleaner world is at the heart of Fortum’s strategy and our role is to accelerate this change by reshaping the energy system, improving resource efficiency, and providing smart solutions. Over the previous years we have worked hard to deliver on our strategy announced in early 2016. As a result, we now have a portfolio of businesses with good profit potential for coming years. After taking significant steps in the capital redeployment that began in 2016, we updated Fortum’s strategy in November 2018. The updated strategy is a natural continuation of the previous one and builds on four priorities. Our first strategic priority is to pursue operational excellence and increased flexibility in order to ensure benchmark performance of our existing businesses and improve our long-term competitiveness. After the large investments done during previous years it is only natural that the second priority is to ensure value creation from these investments. We will also continue to optimise our business portfolio, considering the ongoing transformation and decarbonisation of the sector. As our third priority, we will continue to drive focused growth in the power value chain. We will build on our long-standing expertise with the strategic focus on CO2-free power generation – For a cleaner world. Foreseeing the market development towards the end of the 2020s will be increasingly challenging, but we believe that the uncertainty will also provide new business opportunities. Consequently, as our fourth priority, we aim to build on our existing competences and emerging technologies to create new businesses, independent of power prices, that have the potential for sizeable profit contribution. One example of initiatives in this area is our commitment to invest in Valo Ventures, a new global venture capital fund. Valo Ventures invests in digital start- ups focusing on key global megatrends that are central to Fortum’s strategy. Fortum launched Valo Ventures together with Scott Tierney, former Google Capital co-founder. The operating environment in 2018 The urgent need to decarbonise society is perhaps the greatest challenge of our time. The EU Commission published its long-term climate vision in November. Fortum supports the net zero emission target for 2050, as proposed in the most ambitious scenario. Cost-efficient emission reduction pathways should be established for all sectors. The EU emission trading scheme currently covers less than half of EU’s CO2 emissions. Therefore, strengthening and broadening the scope of the EU ETS to e.g. heating, cooling, and transport should be a key tool to drive decarbonisation. Fortum also supports the UN Global Compact and Caring for Climate initiatives, and is committed to the principles of these initiatives. The market conditions in 2018 were characterised by the increasing CO2 emission allowance price, volatile commodity and power prices, as well as the dry Nordic hydrology. Following the decision in late 2017 to strengthen the EU emission trading scheme by increasing the linear reduction factor and introducing the market stability reserve, the CO2 price increased from EUR 8 per tonne in the beginning of 2018. The CO2 price was volatile during the year was at EUR 25 per tonne at the end of the year, more than three times higher than a year earlier. This resulted in 50% higher power prices than a year earlier and the average system spot price for 2018 was EUR 44 per megawatt-hour. The Nordic water reservoirs were slightly above the long-term average in the beginning of the year and decreased to very low levels in the third quarter, which reduced Fortum’s third quarter hydropower production to historically low levels. The year ended at 9 terawatt-hours below average. Strong financial performance The impact of the higher power prices is reflected in our full-year comparable operating profit, which increased by 22%. The investment in Uniper only had a marginal effect on Fortum’s 2018 results, as they include only Fortum’s share of Uniper’s third-quarter results. In the future, Uniper’s profit and dividends will contribute to Fortum’s earnings per share and cash flow. Our continued investments in wind and solar are starting to have a positive impact on our results. Commissioned in the beginning of 2018 and the first of its kind in Russia, the 35-MW Ulyanovsk wind park is one example of this. The sale of a 54% stake in our 185-MW solar power plants in India freed up capital for further investments, and in June Fortum won a 250-MW auction for an Indian solar park with a fixed tariff for 25 years. Our total wind and solar portfolio has grown substantially during 2018. Together with our associated companies, we have a portfolio of close to three gigawatts of solar and wind parks and development projects in the Nordics, Russia, and India. Highlight of the year for the Generation division was the clearly improved results, driven by higher market prices. During the year we also finalised the automation modernisation project at the Loviisa nuclear power plant, the biggest single project since the construction of the plant. Following strong improvement in Russia over the past years, the 2018 results in roubles improved slightly. In the City Solutions and Consumer Solutions divisions, 2018 was characterised by the integration of Hafslund, which proceeded well. Unfortunately, the financial results for these two divisions have not yet reached satisfactory levels. We will continue the integration work, and expect the synergies to materialise gradually during 2019 and 2020. Based on the results of 2018 and the outlook for future years, Fortum’s Board of Directors is proposing an unchanged dividend of EUR 1.10 per share for the calendar year 2018. The Uniper investment Closing the offer on Uniper shares in June 2018 was the most significant milestone during the year and at the end of December, Fortum held 49.99% of Uniper shares and voting rights. The strategic rationale of our investment in Uniper is just as valid today as it was when we launched our offer in 2017. Together Fortum and Uniper have the strategic mix of assets – both clean and secure – as well as the expertise required to successfully and affordably drive Europe’s transition towards a low carbon energy system. Out of Uniper’s 38 GW generation capacity approximately 50% is based on gas, 30% based on coal, and 20% is hydro and nuclear power. While coal-fired generation must be phased out over time, we have a responsibility to ensure security of supply and affordable power and heat for Europeans during the transition and here gas will play a crucial role. Uniper’s declared role as a provider of security of supply is an excellent match with Fortum’s ambition to accelerate the energy transition with increasing renewable generation and innovative solutions. Building on this base we have a clear vision for how Fortum and Uniper can jointly build ‘The Utility of the Future’, and we want to work with the company to explore how to best make this vision a reality for the benefit of all shareholders and stakeholders of both companies. To our disappointment, talks with Uniper did not proceed as anticipated during 2018. However, in early February 2019, the Chairman of the Supervisory Board of Uniper voiced the need for decisive action to enable a fresh start to the relationship. We are delighted that Uniper is now committed to work with us in order to establish in earnest how the companies can work together strategically and operationally. Clearly, it is in the interest of everybody that we now rapidly advance to create value for the stakeholders of both companies. 3 Continued focus on decarbonisation Fortum is one of Europe’s cleanest power producers. Our CO2-free production capacity has grown substantially over the last few decades and we will continue to focus on increasing it. To the extent we have fossil-based power production, our goal and strategy is, of course, to make it as efficient as possible. In 2018, 96% of our power generation in the European Union was CO2-free and our specific CO2 emissions measured by grams of CO2 per kilowatt-hour produced were 26 gCO2/kWh. Including the Russian power generation, which is mainly gas-based, and our Indian solar power we are still in the category of one of the cleanest utilities with 57% CO2-free and specific CO2 emissions of 186 gCO2/kWh. Decarbonising the power sector will play an essential role in combatting climate change, but it will not be sufficient in order for the EU to meet the targets of the Paris agreement or the 1.5 degree target of the recent IPCC report. Reaching these targets will require decarbonising transportation, heating, and industry, as well as increasing the use of carbon sinks in order to reach carbon neutrality by 2050. Fortum has focused on this in the updated strategy and will develop new products and services to help our customers reduce their carbon footprint, and by building new energy ventures that we believe will play an important role in the future low-emission energy system. Finally, I would like to thank all our employees for their commitment and hard work during the year and our customers and all other stakeholders for their continued trust in us. Pekka Lundmark President and CEO Three main drivers are shaping the future electricity markets The world we live in is changing at an ever-increasing pace. Staying competitive requires companies to be very aware of the underlying drivers and to take an active role in driving the change for a better future. Looking forward, Fortum is well positioned for the ongoing transition in the energy sector towards a decarbonised world, both in terms of asset base and performance. The main drivers influencing the ongoing energy sector transformation are regarded to be: Climate and environment Climate change and global warming is one of the largest challenges facing mankind. The problem is global, and global efforts and commitment are required in order to solve it. Discussions about climate change have been ongoing for decades, but actions have not been sufficient, due to lack of commitment, although positive developments have been seen in some regions. With the adoption of the Paris Agreement in December 2015, mitigation of climate change rose to the top of the agenda all over the world. The commitment to mitigate climate change in order to limit global warming is now so widely spread that it affects every industry. The effects can be seen everywhere, e.g. the increase in low- or zero- emission housing, better fuel efficiency, the increase in the number of electric vehicles, the rapid growth in solar and wind power production, fuel switches to more environmentally friendly fuels, increased resource efficiency, and waste recycling. In 2018, the United Nations International Panel on Climate Change (IPCC) released its special report on limiting global warming to 1.5°C. According to the IPCC, this requires “rapid and far-reaching transitions” including carbon dioxide removal from the atmosphere. Global net CO2 4 emissions have to decline by 45% from 2010 to 2030 and be net-zero by 2050. According to the report, the power sector should reduce emissions by 100% well before 2050. 70–85% of electricity should be produced from renewable sources and the contribution of nuclear power increases in all scenarios. The IPCC makes explicit references to carbon pricing as a tool to help balance out the impact of higher energy prices in a carbon- constrained world. The whole energy industry is very heavily affected by this driver. This can be seen in the transition to low-carbon and renewable generation, which increases the share of intermittent power production and the need for demand response and flexible generation capacity. The increased need for resource efficiency paves the way for circular economy solutions. Politics and regulation In a global perspective, the relationships between economic powers have recently developed in a way which does not ease reaching broad consensus on climate change measures. The increasing fragmentation in the international political scene increases the regulatory uncertainty. Companies have to be prepared for a possible future where national rather than international market-based mechanisms drive the development of our operating environment. The energy business is heavily influenced by national and EU-level energy policies and regulations, and Fortum’s strategy has been developed based on scenarios of the future development of the regulatory environment in both existing and potential new businesses and market areas. The overall complexity and possible regulatory changes in Fortum’s various operating countries pose a risk if we are not able to anticipate, identify, and manage those changes efficiently. Fortum maintains an active dialogue with the bodies involved in the development of laws and regulations in order to manage these risks and proactively contribute to the development of the energy policy and regulatory framework. Technology development Technology development has always been a driver for change. Rapid technological development and high adoption rates quickly drive down the costs for new technologies. Digitalisation is further fuelled by the accelerated pace of commercialisation and adoption of new technologies, such as artificial intelligence. The processing power of devices is increasing and the amount of connected devices is growing exponentially. This in combination with an ever-increasing amount of data readily available for consumers and businesses creates the perfect breeding ground for innovation. In the energy sector the cost of wind and solar power is decreasing. This development leads to an increasing share of intermittent power production and fewer running hours for traditional baseload power. This challenges the way the energy system has been functioning, where production has been able to adapt to the changing power demand of customers. Digitalisation opens up for new storage and demand response solutions, which will change the way the customer interacts with the market. There will be new ways to produce, market, sell, and deliver products and services offered by utilities, start-ups, and new market entrants. Through these services, customers can take an active part in balancing a future power system that is heavily dependent on intermittent power production. In addition to power generation and usage, the technology development is also rapid within the field of transportation. Electric mobility is fast gaining ground as a result of the development of battery technology and processing power. The increasing production volumes are creating economies of scale and reducing production costs of electrical vehicles. Smart charging solutions for the growing amount of electrical vehicles create an opportunity for substantial demand response solutions. Power and emission allowance prices 2018 Power EUR/MWh 50 45 40 35 30 25 20 5 Emission allowance, EUR/tonne CO2 30 25 20 15 10 5 0 Jan Feb March April May June July Aug Sept Oct Nov Dec Power (Nordic 2019 forward) Emission allowance (EUA DEC 2018) Source: Bloomberg Spot price development 2017 & 2018, EUR/MWh 60 50 40 30 20 10 0 Jan Feb March April May June July Aug Sept Oct Nov Dec System 2018 System 2017 Helsinki 2018 Helsinki 2017 Stockholm 2018 Stockholm 2017 Source: Nord Pool 6 The decision to tighten the EU emission trading scheme by increasing the linear reduction factor and introducing the market stability reserve caused the CO2 price to triple during 2018. Nordic water reservoirs, energy content, TWh 120 100 80 60 40 20 0 Q1 Q2 Q3 Q4 2000 2003 2017 2018 Reference level Source: Nord Pool Market Development Whereas the main driver for the Nordic power price in 2016 and 2017 was the price of coal, the CO2 emission allowance price clearly had the greatest impact on Nordic power prices in 2018. The decision to tighten the EU emission trading scheme by increasing the linear reduction factor and introducing the market stability reserve caused the CO2 price to triple from EUR 8 per tonne at the beginning of the year to EUR 25 per tonne at the end of 2018. During 2018, the CO2 price reached levels that did enable switching from low efficiency coal-fired to high efficiency gas-fired power production, eventhough the amount of switching was limited. The hydrological situation in the Nordic area weakend in the beginning of 2018. During early fall water reservoirs initially reached very low levels compared to the long-term average, which resulted in Fortum’s third quarter hydro power production being historically low. Precipitation increased thereafter, but there was still a deficit in the water reservoirs at the end of the year. Strategy The transition towards a cleaner world The entire energy sector is undergoing a transformation. Our vision is “For a cleaner world” and reflects our ambition to drive the transformation towards a low-emissions energy system and optimal resource efficiency. Our mission is to engage our customers and society to drive the change towards a cleaner world. Our role is to accelerate this change by reshaping the energy system, improving resource efficiency, and providing smart solutions. This way we deliver excellent shareholder value. Sustainability is an integral part of Fortum’s strategy in answering to these challenges. Business and responsibility are interconnected, underlining the role of sustainable solutions as a competitive advantage. In our operations, we give balanced consideration to economic, social, and environmental responsibility. We assess our impacts and address sustainability throughout the value chain. At the beginning of 2018, the Nordic water reservoirs were at 86 TWh, Our values – curiosity, responsibility, integrity, and respect – form the which is 3 TWh above the long-term average and 11 TWh higher than one year earlier. At the end of 2018, the reservoirs were at 74 TWh, which is 9 TWh below the long-term average and 12 TWh lower than one year earlier. The average system spot price in Nord Pool for the year 2018 was EUR 44.0 (29.4) per MWh, an increase of 50%. In Finland the average area price was EUR 46.8 (33.2) per MWh and in Sweden SE3 (Stockholm) EUR 44.5 (31.2) per MWh. The dry hydrological situation combined with the clearly higher marginal cost for coal condense, due to the higher CO2 price, were the main reasons for the price increase. According to preliminary statistics electricity consumption in the Nordic countries increased by 2% during 2018 and was 399 (392) TWh. The higher consumption was mainly driven by colder weather during the first quarter of 2018 and the somewhat higher industrial consumption. foundation for all our activities. Fortum’s strategy The ongoing transition towards CO2-free energy, driven by climate change concerns, politics and regulation, as well as technology development, brings significant opportunities for a company with competences in clean energy. Fortum is well positioned fort this transition. At the same time, the future market environment is increasingly uncertain. As a response to this development, Fortum’s updated strategy has four strategic priorities: 1. Pursue operational excellence and increased flexibility 2. Ensure value creation from investments and portfolio optimisation 3. Drive focused growth in the power value chain 4. Build options for significant new businesses 7 Pursue operational excellence and increased flexibility Benchmark performance is essential for long-term competitiveness. For the next 2–3 years, Fortum prioritises profit creation from the current business portfolio. This will be achieved through operational excellence and increased flexibility. All sources of flexibility, both flexible generation assets and the demand response of large customers and consumers, will be needed to balance the high degree of volatile renewable generation. Operational excellence and increased flexibility will contribute to improving Fortum’s financial performance and cash flows to create additional financial headroom. In addition, Fortum will continue to prioritise and scrutinize capital expenditure. Through these measures, the target is to steer leverage from current net debt to EBITDA ratio towards the long-term target ratio of around 2.5 times. Having a solid investment grade rating is a key priority for Fortum. In addition, Fortum continues to review its business portfolio in line with its strategic priorities emphasising CO2-free assets, flexibility, and low operating cost to fit the changing business environment. Ensure value creation from investments and portfolio optimisation Over the recent years Fortum has made several sizeable investments and aims to further improve its financial performance by ensuring value creation from them. The investment in Uniper, currently accounted for as an associated company, contributes to Fortum’s financial performance both through Fortum’s share of Uniper’s result and its dividend. As Uniper’s largest shareholder, Fortum’s ambition is to increase value for both companies and their stakeholders. Drive focused growth in the power value chain Fortum will build on its long-standing expertise to grow in CO2-free power generation. When it comes to solar and wind investments, Fortum aims to grow by utilising partnerships and other forms of co-operation for a more asset-light structure. The business of the future utility will be increasingly relying on technology, digitalisation, software, and services. Consequently Fortum will continue to develop value-adding offerings and services for customers both in the consumer and industrial sectors. Proﬁtability Illustrative 4. Build options for signiﬁcant new businesses 3. Drive focused growth in the power value chain Build options for significant new businesses Foreseeing the development of the power markets and regulatory environment will be increasingly challenging towards the end of the 2020s. However, the uncertainty will create new business opportunities. Fortum aims to build on existing expertise and emerging technologies to create new businesses, independent of power prices, with potential for sizeable profit contribution. Circular economy meets these criteria, especially in the areas of waste and recycling as well as bio economy. Furthermore, Fortum will focus on investments in start-up ventures with disruptive potential. 2. Ensure value creation from investments and portfolio optimisation 1. Pursue operational excellence and increased ﬂexibility Increasing uncertainty Competitive benchmark portfolio Today 2020s Time 2030s 8 Value-creating strategy Input Human and intellectual capital • More than 8,000 energy sector professionals, focus on diversity • Certiﬁed environment, health and safety management • Corporate culture that encourages innovation and R&D investments totalling EUR 56 million in 2018 • Robust corporate governance and ethical business conduct Supply chain • Purchases EUR 3.7 billion, including investments • Long-standing relationships with ~14,000 suppliers worldwide Sources of energy • Hydro, solar, wind • Natural gas, nuclear fuel, coal, waste, peat, biomass Assets • Core operations in 10 countries • ~13,700 MW power generation capacity • ~15,000 MW heat production capacity • 124 own hydro power plants and 27 own CHP, condensing and nuclear power plants; growing in solar and wind • Supplying heat in 23 cities and towns • 5 major waste treatment facilities Financial • Capital employed EUR 18,170 million • Net debt EUR 5,509 million • Total assets EUR 22,409 million Fortum Vision For a cleaner world Mission We engage our customers and society to drive the change towards a cleaner world. Our role is to accelerate this change by reshaping the energy system, improving resource efficiency and providing smart solutions. This way we deliver excellent shareholder value. Strategy • Pursue operational excellence and increased ﬂexibility • Ensure value creation from investments and portfolio optimisation • Drive focused growth in the power value chain • Build options for signiﬁcant new businesses Impact Economic impact • Proﬁtability • Increased shareholder value • Dividends to shareholders • Investments • Taxes to the public sector • Wages and beneﬁts to employees • Payments to suppliers and partners • Interest to creditors Social impact • Reliable supply of electricity and heat • New, smart energy solutions for customers • More active customer participation • New partnership opportunities for cities, start-ups, research institutions • Safe work environment and wellbeing for employees and suppliers • Opportunities in career development for employees Environmental impact • Energy and resource efficiency • Contribution to climate change mitigation and circular economy • Investments in renewable energy production • Flexible generation enabling increasing use of intermittent renewable energy sources • Higher degree of resource efficiency and recycling through circular economy services • Sustainable treatment and ﬁnal disposal of hazardous waste Output Products • 75 TWh electricity • 30 TWh heat • 96% of electricity production CO2 free in Europe, 57% in all operations • 660,000 tonnes recovered materials of the waste received from our customers Services and solutions • Power, heat and steam sales • Electricity retail sales • District heating and cooling • Power solutions • Electricity trading services • Nuclear expert services • Energy efficiency services • Electric vehicle charging services • Bio-oil to replace fossil fuels • Environmental management and material efficiency services Emissions • CO2: 20.1 million tonnes, 192 g CO2/kWh • SO2: 16,800 tonnes • NOX: 26,100 tonnes • Particles: 9,600 tonnes • Ashes: 730,000 tonnes ash, 51% reused • 20 tonnes of spent high-level radioactive fuel in an interim storage and 14 tonnes of low-level radioactive waste for ﬁnal disposal Sustainability at Fortum In Fortum business and responsibility are tightly linked, underlining the role of sustainable solutions as a competitive advantage. Our renewed strategy steers us towards decarbonisation of the sector and the society at large. Our specific CO2 emissions from electricity production are one of the smallest among European major electricity utilities, and we support the EU Commission’s long-term climate target of net zero emissions for 2050, as proposed in the most ambitious scenario. We annually improve the energy efficiency of our power and heat production. In 2018 our annual energy-efficiency improvement was 135 GWh in total. We contribute to circular economy by receiving and treating large amounts of waste from customers. As much of the waste stream as possible is recycled, reused or recovered as material which shows our strong commitment to smart and efficient use of resources. Concurrently we safely take hazardous waste out of circulation. In 2018, the material recovery rate of waste received from our customers was 59%. We continuously grow our wind and solar power production. Our strategy is targeting to a multi-gigawatt wind and solar portfolio. In 2018, we made several new investment decisions and investments in wind and solar power in the Nordics, Russia and India. In 2018 we started the supply of the biggest portfolio of a roof-top solar electricity system in the Nordic countries. We also commissioned 123 MW of new wind power in Norway, Sweden and Russia. In addition, the Fortum-Rusnano investment fund has been granted the right to build Fortum’s sustainability focus areas 9 almost 2 GW of new wind power in Russia; the wind parks are to be commissioned during the years 2019–2023. 2018 was a year of outstanding performance improvements, but also a year of challenges in terms of occupational safety. Four severe occupational accidents took place in our operations. In order to improve our safety performance we organised training for division managers, key individuals leading safety and procurement work, and the most challenging business areas. We cherish workplace wellbeing and organize activities to promote the health of our employees and the functionality of the work community. In 2018 our Energise Your Day wellbeing programme expanded to new sites and is currently under way in ten operating countries. Nuclear and dam safety remain at the top of our operational safety priority list. The successfully completed large automation modernisation project at our Loviisa nuclear power plant in 2018 further improves our nuclear safety. Dam safety was improved through upgrading activities at our existing dams to fulfil the current structural dam safety requirements, and activities to ensure safe water management also in extreme hydrological conditions. Fortum’s responsibility towards the society includes providing secure supply of energy and sustainable solutions for customers as well as acting responsibly towards local communities and the environment. In 2018, our support for activities promoting the common good totalled about EUR 3.8 million. Our commitment to advance social sustainability is also shown in Fortum’s new membership in the Work does not discriminate campaign that promotes workplace equality, and in the Equal by 30 campaign that promotes gender equality. This all paves the way towards a more equal and diverse work environment at Fortum. Long-term value and growthSustainable supply chainEnergy and resource efficiencyEconomic beneﬁts to our stakeholdersClimate-benign energy production and systemsReduction of environmental impactsSecure energy supply for customersSolutions for sustainable citiesOperational and occupational safety Business ethics and complianceCustomersatisfactionPersonnel wellbeingPersonnel and societyClimate and resources10 heating, cooling, waste-to-energy, biomass, and other circular economy solutions as well as solar power production. The business operations are located in the Nordics, the Baltic countries, and Poland. The division also includes Fortum’s 50% holding in Stockholm Exergi (formerly Fortum Värme), which is a joint venture and is accounted for using the equity method. Consumer Solutions Consumer Solutions is responsible for the electricity and gas retail businesses in the Nordics and Poland, including the customer service, invoicing, and debt collection business. Fortum is the largest electricity retail business in the Nordics, with approximately 2.5 million customers across different brands in Finland, Sweden, Norway, and Poland. The business provides electricity and related value added products as well as new digital services. Russia Russia division comprises power and heat generation and sales in Russia. The division also includes Fortum’s over 29% holding in TGC-1, which is an associated company and is accounted for using the equity method. Business model Fortum’s business activities cover the production and sales of electricity and heat, waste-to-energy and circular economy solutions, as well as energy-sector expert services and various consumer solutions. Fortum is the third largest power generator and the largest electricity retailer in the Nordic countries. Globally, the company is one of the leading heat producers. As two thirds of Fortum’s power production is hydro and nuclear, the company is also among the lowest-emitting generators in Europe. Fortum’s organisation consists of four business divisions: Generation, City Solutions, Consumer Solutions, and Russia. Until November 2018, there were two development units focusing on growing new businesses: M&A and Solar & Wind Development as well as Technology and New Ventures. In November Fortum announced the reorganisation of the solar and wind businesses. The wind operations became a business area within the Generation division and the solar operations within the City Solutions division. The Russian wind and solar operations continued as a part of the Russia division. With core operations in 10 countries, Fortum employs a diverse team of more than 8,000 energy-sector professionals. Fortum has 124 hydro power plants, 27 combined heat and power (CHP), condensing, and nuclear power plants, as well as three wind power parks and three solar power plants. Globally, the company supplies heat in 23 cities and towns and has five main waste treatment facilities. Fortum’s key markets are the Nordic and Baltic countries, Russia, Poland, and India. Generation Generation is responsible for Nordic power production. The division comprises nuclear, hydro, wind, and thermal power production, as well as power portfolio optimisation, trading, industrial intelligence, and nuclear services globally. City Solutions City Solutions is responsible for developing sustainable solutions for urban areas into a growing business for Fortum. The division comprises 11 support better utilisation of the current asset base and that can create new markets and products for Fortum. The company is continuously looking for emerging clean energy solutions and for solutions that increase resource and system efficiency. In December 2018, Fortum committed to invest EUR 150 million in Valo Ventures over a period of 10 years. It is an independent fund investing in digital and cloud-scale technology start-ups in North America and Europe. Valo Ventures is aligned with Fortum’s vision ‘For a cleaner world’ and strategy. Fortum launched Valo Ventures together with Scott Tierney, former Google Capital co-founder. Future challenges and opportunities Climate change We believe that the growing awareness and concern about climate change will increase the demand for low-carbon and resource- and energy-efficient energy products and services. We are leveraging our know how in carbon dioxide-free hydro, nuclear, wind, and solar power as well as in energy-efficient CHP production by offering our customers low-carbon energy solutions. We also believe that the electrification of transportation, industry and services will increase the consumption of low-carbon electricity in particular. Our strategy is targeting to a multi-gigawatt wind and solar portfolio. Our circular economy services also respond to this demand by utilising waste stream materials as efficiently as possible and by reducing the formation of greenhouse gases generated from biodegradable waste at landfills. Additionally, the use of non-recyclable and non-recoverable waste in energy production replaces fossil fuel. Our operations are exposed to the physical risks caused by climate change, including changes in weather patterns that could alter energy production volumes and energy demand. Fluctuating precipitation, flooding, and extreme temperatures may affect e.g. hydropower production, dam safety, availability of cooling water, and the price and availability of biofuels. Hydrological conditions, precipitation, temperatures, and wind conditions also affect the short-term electricity price in the Nordic power market. In addition to climate change mitigation, we also aim to adapt our operations and we take climate change into consideration in, among other things, the assessment of growth projects and investments as well as in operation and maintenance planning. Power price development 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, the prices of fuel and CO2 emission allowances, and the hydrological situation. The overall economic growth impacts commodity and CO2 emission allowance prices, which has an effect on the Nordic wholesale price of electricity. Regulatory environment In the Nordic countries, the regulatory and fiscal environment for the energy and environmental management sectors has also added risks for companies. The main strategic risk is that the regulatory and market environment develops in a way that we have not been able to foresee and prepare for. In response to these uncertainties, Fortum has analysed and assessed a number of future energy market and regulation scenarios, including the impact of these on different generation forms and technologies. As a result, Fortum’s strategy includes broadening the base of revenues and diversification into new businesses, technologies, and markets. The environmental management business is based on the framework and opportunities created by environmental regulation. Being able to respond to customer needs created by the tightening regulation is a key success factor. Research and development Sustainability is at the core of Fortum’s strategy and, alongside Fortum’s current businesses, the company is carefully exploring and developing new sources of growth within renewable energy production. Fortum’s goal is to be at the forefront of energy technology and application development. To accelerate innovation and the commercialisation of new offerings, Fortum is strengthening its in-house innovation and digitalisation efforts and building partnerships with leading global suppliers, promising technology and service companies, and research institutions. Fortum makes direct and indirect investments in start-ups that have promising new innovations focused on connectivity, have disruptive potential and accelerate the transition towards a circular economy. Fortum also invests in technologies that 12 Market position Fortum is the third largest power generator and the largest electricity retailer in the Nordic countries. Globally, we are one of the leading heat producers. As two thirds of our power production is hydro and nuclear, Fortum is also among the lowest-emitting generators in Europe. Nordic power generation, 402 TWh, over 350 companies Agder Energi Ørsted BKK Others Vattenfall Statkraft Fortum Uniper E-CO Energi PVO Norsk Hydro Largest heat producers globally, TWh 150 120 90 60 30 0 l s u P T m o r p z a G S E U O A R r e t n I F D E a i l o e V o r d y H s u R o g r e n E b S o r u E i o g n e g b S i m u t r o F a r d a u Q 2 - C G T H D g n i j i e B a e r o K , C H D K l l a f n e t t a V O C E B S I o g r e n e k s n M i E G P l i o k u L i G N G P o r g e n e t a T K E T D d e t s r Ø N O E . H P E Z E C l n e e H 4 1 - C G T i g r e x E m o h k c o t S l Source: Fortum, company information, 2017 figures pro forma. EPH incl. LEAG. Chinese data incomplete. Largest power generators in Europe and Russia, TWh Source: Fortum, company information, 2017 figures pro forma Nordic electricity retail, 15 million customers, ~350 companies SE – Syd Energi Din El, Göteborg Jämtkraft Others Fortum Vattenfall Ørsted E.ON Fjordkraft SEAS-NVE Helen 600 500 400 300 200 100 0 F D E m o t a o g r e n e s o R E W R l e n E m o r p z a G o r d y H s u R r e p n U i I E G N E H P E m u t r o F l l a f n e t t a V C G E N N m o t a o g r e n E S E U O A R r e t n I o g r e n E b S o r u E i E G P Z E C t f a r k t a t S l a o r d r e b I l s u P T W B n E P D E K E T D o g n e g b S i S P E E S S N O E . I E D d n u b r e V Source: Fortum, company information, 2017 figures pro forma Source: Fortum, company information, 2017 figures pro forma. EPH incl. LEAG Fortum’s power generation, TWh 80 70 60 50 40 30 20 10 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 CO2-free Other Specific CO2 emissions of major utilities in Europe, g CO2/kWh electricity, 2017 1,000 800 600 400 200 0 I E D H P E E W R P D E A 2 A Z E C l e n E r e p n U i y g r u t a N W B n E x a r D E S S i e g n E 174 l a t o t m u t r o F l l a f n e t t a V o c e n E d e t s r Ø l a o r d r e b I F D E O V P N O E . Average 290 28 U E m u t r o F d n u b r e V t f a r k t a t S Note: All figures, except ”Fortum total”, include only European power generation. Fortum’s specific emissions of the power generation in 2018 in the EU were 26 g/kWh and in total 186 g/kWh. Source: PwC, December 2018, Climate Change and Electricity, Fortum 13 Long-term focus on no- or low-CO2 power production Sustainability and CO2-free power generation have been part of Fortum’s strategy for several decades. We believe that the energy system needs to transform to a system with substantially lower emissions, higher resource efficiency, and a higher share of power generation based on renewables. The transformation will not happen overnight and we must provide customers with a secure energy supply at a competitive price during the transition towards lower emissions. In implementing our strategy we have worked to increase our CO2-free power generation. We also have generation capacity based on fossil fuels, located mainly in Russia, and we have worked to increase its efficiency and reduce its specific emissions. We continue to focus on increasing our solar and wind power capacity over the coming years, and we are targeting a multi- gigawatt solar and wind portfolio. Increasing the CO2-free power generation Over the past decades Fortum has been working for a more sustainable world. We have increased our annual CO2-free power generation from around 15 TWh in 1990 to 43 TWh in 2018. The development has not always been linear, as annual variations in hydropower production have a significant impact. Among the lowest specific emissions We were among the early proponents for a market-based price on CO2. We are advocating for market-based solutions and a strong EU ETS to drive the necessary change in the energy system. In our own operations we have invested in CO2-free power generation, and the carbon exposure of our production in Europe is among the lowest at 26 gCO2/kWh in 2018. The respective figure for Fortum overall was 186 gCO2/kWh in 2018. 14 Fortum’s wind and solar power generation capacity, MW 1,750 1,500 1,250 1,000 750 500 250 0 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Wind Solar Projects under development planned Includes Fortum’s capacities and Fortum’s share of the capacities of associates and joint ventures Grow in solar and wind In addition to CO2-free hydro and nuclear power production, we believe that solar and wind power will play an essential role in the future. Solar power is becoming one of the most competitive forms of new power generation in many parts of the world, and we are targeting investments totalling EUR 200–400 million in solar power in India. During 2018 we divested a 54% stake in our 185-MW solar power plants in India to free up capital for further investments, and in June 2018 Fortum won a 250-MW auction for a new Indian solar plant. The market conditions in the Nord Pool area and in Russia are more suitable for wind power, and Fortum is increasing its investments heavily. In January 2018, Fortum commissioned the country’s largest wind farm in Russia and in January 2019 we commissioned a further 50-MW wind farm together with our partner Rusnano. In Norway, Fortum commissioned the 50-MW Ånstablåheia wind farm and the 97-MW Sørfjord wind farm is due to be commissioned in 2019. Although the solar and wind capacity is still small compared to Fortum’s current total power generation capacity of close to 14,000 MW, our total wind and solar portfolio has grown substantially during 2018. Together with our associated companies, we have a portfolio of close to three gigawatts (Fortum’s share 1,686 MW) of solar and wind parks and development projects in the Nordics, Russia, and India. Financials 2018 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 1 Financials 2018 – Reader’s guide This report consists of the operating and financial review and the consolidated financial statements of Fortum Group, including the parent company financial statements. Other parts of Fortum’s reporting entity include CEO’s business review, corporate governance statement, remuneration statement as well as tax footprint, which are published on Fortum’s webpage. Sustainability reporting is an integrated part of Fortum’s annual reporting and additional information on sustainability operations can be found on Forum’s website in sustainability section. Operating and financial review This section includes description of Fortum’s financial performance during 2018. Here you will also find a description of the risk management as well as information on sustainability and Fortum share performance. Consolidated financial statements Primary statements include Fortum’s consolidated income statement, statement of comprehensive income, balance sheet, statement of changes in total equity and cash flow statement. Notes The notes to the consolidated financial statements are grouped to six sections based on their nature. Use the note number list on the right side of the notes pages to navigate in the financial statements. Key figures Key figures consist of financial key figures, share key figures and operational key figures for 2017–2018. The financial key figures derive mainly from the primary statements. Segment key figures include information on segments. Parent company financial statements Here you can read the parent company financial statements including the primary statements, cash flow and notes to the financial statements. Proposal for the use of profit shown on the balance sheet The Board of Directors proposal for the dividend in 2018 is disclosed in this section. Auditor’s report This section includes the audit report issued by Fortum Oyj’s auditor, Deloitte Oy. Key figures 2009–2018 and quarterly financial information Look here for financial key figures, share key figures, operational key figures and volume related key figures for 2009–2018 and quarterly financial information for the years 2017 and 2018. Investor information Here you will find information on Fortum’s Annual General Meeting, dividend payment, basic share information as well as details of the financial information available to shareholders in 2019. Notes 1–3 Basis of preparation These notes describe the basis of preparing the consolidated financial statements and consist of the accounting policies, critical accounting estimates and judgements and information about acquisitions and disposals. 4–5 Risks In the Risks section you will find notes that disclose how Fortum manages financial risks and capital risks. 6–14 Income statement These notes provide supporting information for the income statement. 15–33 Balance sheet These notes provide supporting information for the balance sheet. 34–37 Off balance sheet items The notes in this section provide information on items that are not included in the balance sheet. 38–40 Group structure and related parties This section includes information on related party transactions, events after balance sheet date and the subsidiaries of Fortum group. The following symbols show which amounts in the notes reconcile to the items in income statement, balance sheet and cash flow statement. IS = Income statement BS = Balance sheet CF = Cash flow Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 2 Financials 2018 Reader’s guide �� 1 OPERATING AND FINANCIAL REVIEW �� 3 Financial performance and position �� 3 Sustainability �� 20 Risk management �� 25 Fortum share and shareholders �� 31 FINANCIAL STATEMENTS �� 34 Consolidated financial statements �� 34 Consolidated income statement �� 34 Consolidated statement of comprehensive income �� 35 Consolidated balance sheet �� 36 Consolidated statement of changes in total equity �� 37 Consolidated cash flow statement �� 38 Notes to the consolidated financial statements �� 40 1 Accounting policies �� 40 2 Critical accounting estimates and judgements �� 47 3 Acquisitions and disposals �� 47 Financial risk management �� 50 4 5 Capital risk management �� 57 Segment reporting �� 59 6 Items affecting comparability �� 64 7 Fair value changes of derivatives and underlying items 8 in income statement �� 65 9 Other income and other expenses �� 66 10 Materials and services �� 67 11 Employee benefits �� 67 Finance costs – net �� 71 12 13 Income tax expense �� 72 14 Earnings and dividend per share �� 74 Financial assets and liabilities by categories �� 75 15 Financial assets and liabilities by fair value hierarchy �� 79 16 17 Intangible assets �� 82 18 Property, plant and equipment �� 85 19 Participations in associated companies and joint ventures �� 89 20 Other non-current assets �� 94 Interest-bearing receivables �� 95 21 22 Inventories �� 95 23 Trade and other receivables �� 96 Liquid funds �� 97 24 Share capital �� 97 25 26 Non-controlling interests �� 98 Interest-bearing liabilities �� 98 27 28 Income taxes in balance sheet �� 101 29 Nuclear related assets and liabilities �� 104 30 Other provisions �� 107 31 Pension obligations �� 108 32 Other non-current liabilities �� 111 33 Trade and other payables �� 112 Lease commitments �� 112 34 35 Capital commitments �� 113 36 Pledged assets and contingent liabilities �� 114 37 Legal actions and official proceedings �� 115 38 Related party transactions �� 117 39 Events after the balance sheet date �� 118 Subsidiaries by segment on 31 December 2018 �� 119 40 Key figures �� 121 Financial key figures �� 121 Share key figures �� 122 Segment key figures �� 123 Definitions of key figures �� 125 Parent company financial statements �� 128 Income statement �� 128 Balance sheet �� 128 Cash flow statement �� 129 Notes �� 130 Proposal for the use of the profit shown on the balance sheet �� 137 Auditor’s report �� 138 Key figures 2009–2018 �� 142 Financial key figures �� 142 Share key figures �� 144 Segment key figures �� 145 Operational key figures �� 151 Quarterly financial information �� 154 Investor information �� 156 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 3 3 Financial performance and position Sustainability Risk management Fortum share and shareholders Financial performance and position Improved 2018 results on higher market prices – New phase in strategy implementation started Key financial ratios 1) Return on capital employed,% Comparable net debt/EBITDA 1) See Definitions of key figures. Key figures EUR million IS Sales Comparable EBITDA IS Comparable operating profit IS Operating Profit - of sales% IS Share of profits from associates and joint ventures IS Profit before income tax - of sales% IS Earnings per share, EUR CF Net cash from operating activities Shareholders’ equity per share, EUR Interest-bearing net debt (at end of period)* Return on shareholders' equity,% Equity-to-assets ratio,% * Net cash in 2016 2018 6.7 3.6 2017 7.1 0.8 2016 4.0 0.0 2018 5,242 1,523 987 1,138 21.7 38 1,040 19.8 0.95 804 13.33 5,509 6.8 54 2017 4,520 1,275 811 1,158 25.6 148 1,111 24,6 0.98 993 14.69 988 6,6 61 2016 3,632 1,015 644 633 17.4 131 595 16.4 0.56 621 15.15 -48 3,7 62 Change 18/17 16% 19% 22% -2% -74% -6% -3% -19% -9% 2018 was an eventful year for Fortum� We continued our strategy implementation with the integration and development of our Hafslund and Ekokem acquisitions, further investments in renewables, and most significantly; closing the Uniper tender offer� Our long-term belief in the need for large-scale decarbonisation took a leap forward with the strengthening of the Market Stability Reserve and subsequent tripling of emission allowance prices, having a clear positive impact on power prices� Over the previous years we have worked hard to deliver on our strategy announced in early 2016� As a result, we now have a portfolio of businesses with good profit potential for coming years� After taking significant steps in the capital redeployment that we began in 2016, we updated Fortum’s strategy in November 2018� The updated strategy is a natural continuation of the previous one and builds on four priorities� Our first strategic priority is to pursue operational excellence and increased flexibility in order to ensure benchmark performance of our existing businesses and improve our long-term competitiveness� After the large investments done during previous years it is only natural that the second priority is to ensure value creation from these investments� We will also continue to optimise our business portfolio, considering the ongoing transformation and decarbonisation of the sector� Despite the significant capital redeployment already made, we will, as our third priority, continue to drive focused growth in the power value chain� We will build on our long-standing expertise with the strategic focus on CO2-free power generation – For a cleaner world� Foreseeing the market development towards the end of the 2020s will be increasingly challenging, but we believe that the uncertainty will also provide new business opportunities� Consequently, as our fourth priority, we aim to build on our existing competences and emerging technologies to create new businesses, independent of power prices, that have the potential for sizeable profit contribution� One example of initiatives in this area is our commitment to invest in Valo Ventures, a new global venture capital fund� Valo Ventures invests in digital start-ups focusing on key global megatrends that are central to Fortum’s strategy� Fortum launched Valo Ventures together with Scott Tierney, former Google Capital co-founder� The urgent need to decarbonise society is perhaps the greatest challenge of our time� The EU Commission published its long-term climate vision in November� Fortum supports the net zero emission target for 2050, as proposed in the most ambitious scenario� Cost-efficient emission reduction pathways should be established for all sectors� The EU emission trading scheme currently covers less than half of EU CO2 emissions� Therefore, strengthening and broadening the scope of the EU ETS to e�g� heating, cooling, and transport should be a key tool to drive decarbonisation� Our continued investments in wind and solar are starting to have a positive impact on our results� Commissioned in the beginning of 2018 and the first of its kind in Russia, the 35-MW Ulyanovsk wind park is one example of this� The sale of a 54% stake in our 185-MW solar power plants in India freed up capital for further investments, and in June Fortum won a 250-MW auction for an Indian solar park with a fixed tariff for 25 years� Our total wind and solar portfolio has grown substantially during 2018� Together with our associated companies, we have a portfolio of close to three gigawatts of solar and wind parks and development projects in the Nordics, Russia, and India� Closing the offer on Uniper shares in June 2018 was the most significant milestone during the year� We have a clear vision for how Fortum and Uniper can jointly build ‘The Utility of the Future’, and we want to work with the company to explore how to best make this vision a reality for the benefit of all shareholders and stakeholders of both companies� To our disappointment, talks with Uniper have not yet proceeded as Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 4 4 Financial performance and position Sustainability Risk management Fortum share and shareholders anticipated, but the fundamentals of our investment case are intact and we remain committed� Since the closing of the offer, we have increased our shareholding in Uniper in order to further secure Fortum’s voting position in any future Uniper General Meeting� At the end of 2018, Fortum held 49�99% of Uniper shares and voting rights� Fortum’s fourth quarter results improved, mainly as a result of higher power prices and increased nuclear production, due to improved availability� The results were still burdened by lower than average hydropower generation volumes, due to low inflows and reservoir levels, although the situation improved from the record low volumes seen in the third quarter� The impact of the higher power prices is reflected in our full-year comparable operating profit, which increased by 22%� The investment in Uniper only had a marginal effect on Fortum’s 2018 results, as they include only Fortum’s share of Uniper’s third-quarter results� In the future, Uniper’s profit and dividends will contribute to Fortum’s earnings per share and cash flow� Highlight of the year for the Generation division was the clearly improved results, driven by higher market prices� During the year we also finalised the automation modernisation project at the Loviisa nuclear power plant, the biggest single project since the construction of the plant� Following on the strong improvement in Russia over the past years, the 2018 results in roubles improved slightly� In the City Solutions and Consumer Solutions divisions, 2018 was characterised by the integration of Hafslund, which proceeded well� Unfortunately the financial results for these two divisions has not yet reach satisfactory levels� We will continue the integration work, and expect the synergies to materialise gradually during 2019 and 2020� Based on the results of 2018 and the outlook for future years, Fortum’s Board of Directors is proposing an unchanged dividend of EUR 1�10 per share for the calendar year 2018� Strategy update in November 2018 On 12 November 2018, Fortum announced its updated strategy� The update is a continuation of the strategy execution towards Fortum’s vision “For a cleaner world”� At the same time Fortum reconfirmed its dividend policy and long-term financial targets� The strategy aims at strengthening Fortum’s competitiveness and ensuring a benchmark portfolio for the 2020’s� Pursuing operational excellence and increased flexibility as well as ensuring value creation from investments and portfolio optimisation are the key priorities� Fortum will also drive focused growth in the power value chain and seek to build options for significant new businesses for the future� The updated strategy was presented in more details on Fortum’s Capital Markets Day on 13 November 2018� Uniper investment In September 2017, Fortum announced it had signed a transaction agreement with E�ON under which E�ON had the right to decide to tender its 46�65% shareholding in Uniper SE into Fortum’s public takeover offer (PTO)� In November 2017, Fortum launched a voluntary public takeover offer to all Uniper shareholders at a total value of EUR 22 per share, implying a premium of 36% to the price prior to intense market speculation on a potential transaction at the end of May 2017� In February 2018, Fortum announced that shareholders representing 47�12% of the shares in Uniper had accepted the offer� The PTO was conditional to regulatory and merger control approvals in several countries� During the second quarter 2018, Fortum received the required clearances in Russia under the Strategic Investment Law as well as Competition Law� The clearances allow Fortum the acquisition of up to 50% of shares and voting rights in Uniper� During the second quarter, Fortum also received an unconditional merger clearance decision from the European Commission� Clearances in the United States and South Africa had already been granted earlier� On 26 June 2018, Fortum closed the offer and became the largest shareholder in Uniper with 47�35% of the shares� Fortum paid a total consideration of EUR 3�7 billion for all shares tendered (EUR 21�31 per share)� The total consideration was financed with existing cash resources of EUR 1�95 billion and bridge loan financing of EUR 1�75 billion from committed credit facilities� Since June 2018 Fortum has increased its shareholding in Uniper in order to further secure its voting position in any future Uniper General Meeting� On 31 December 2018, Fortum owned 49�99% of the shares in Uniper� The share of Uniper’s profit will contribute to the EPS and dividends to the cash flow of Fortum� As a result of this transaction, Fortum’s leverage rose above Fortum’s long-term target level for net debt/EBITDA ratio of around 2�5x� Over time, however, Fortum expects its cash generation in combination with the dividend from Uniper to reduce this ratio towards the stated target� Fortum has consolidated Uniper as an associated company from 30 June 2018� The total acquisition cost, including direct costs relating to the acquisition, is reported in ‘Participations in associated companies and joint ventures’� The purchase price allocation will be completed within the one-year window from the acquisition date, according to IFRS� As Uniper publishes its interim reports later than Fortum, Fortum’s share of Uniper’s results will be accounted for with a time-lag of one quarter, with potential adjustments� Fortum’s Financial Statements 2018 only includes Fortum’s share of Uniper’s third-quarter results, amounting to EUR -2 million ( Note 3)� Uniper will report its full-year 2018 results on 12 March 2019� Financial results Sales by segment EUR million Generation City Solutions Consumer Solutions Russia Other Netting of Nord Pool transactions 1) Eliminations IS Total Change 18/17 10% 8% 60% -3% 26% 2018 1,837 1,094 1,759 1,069 129 -516 -130 5,242 2017 1,677 1,015 1,097 1,101 102 -367 -103 4,520 1) Sales and purchases with Nord Pool 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. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 5 5 Financial performance and position Sustainability Risk management Fortum share and shareholders Comparable EBITDA by segment EUR million Generation City Solutions Consumer Solutions Russia Other operations IS Total 2018 762 284 110 417 -50 1,523 Comparable operating profit by segment EUR million Generation City Solutions Consumer Solutions Russia Other operations IS Total Operating profit by segment EUR million Generation City Solutions Consumer Solutions Russia Other operations IS Total 2018 631 113 53 271 -79 987 2018 738 109 75 273 -57 1,138 2017 603 262 57 438 -83 1,275 2017 478 98 41 296 -102 811 2017 501 102 39 295 221 1,158 Change 18/17 26% 8% 93% -5% 40% 19% Change 18/17 32% 15% 29% -8% 23% 22% Change 18/17 47% 7% 92% -7% -126% -2% For further information see Note 6 Segment reporting� Fortum has reassessed the assumptions for all nuclear related assets and liabilities as of 31 December 2018� The increase in the nuclear provision for the Loviisa nuclear power plant in Finland leads to recognition of an additional share of the Finnish nuclear fund� As of 31 December 2018, Fortum still has EUR 254 million in unrecognised nuclear waste fund assets for Loviisa ( Note 29)� The increase in the provision and the additional share in the fund are both included in items affecting comparability� The changes in assumptions had a positive impact on interests presented in other financial expenses� The assumptions have also been changed for the respective balances of the co-owned nuclear companies in Finland and Sweden i�e� Teollisuuden Voima Oyj (TVO), Oskarshamn Kraftgrupp AB (OKG), and Forsmarks Kraftgrupp AB� The total impact of the change to share of profit from associated companies and joint ventures was EUR -37 million, net of tax, and including additional nuclear waste liability related to legacy waste obligations for Swedish nuclear� The net profit impact from all these nuclear related adjustments is close to zero� Fortum’s sales increased by 16%, mainly reflecting the consolidation of Hafslund and higher power prices� Comparable operating profit increased by 22%, mainly as a result of the higher achieved power price, the positive impact from the consolidation of the acquired Hafslund businesses, lower real-estate and capacity taxes in Swedish hydro and nuclear power plants, higher received Capacity Supply Agreement (CSA) payments in Russia, as well as the profit from the sale of a 54% share of Fortum’s Indian solar power plants� The result improvement was partly offset by the very low hydropower production volumes in the third quarter and the weaker Russian rouble� Operating profit for the period was positively impacted by EUR 151 (347) million of items affecting comparability, mainly due to the fair value change of non-hedge accounted derivatives, capital gains, and nuclear related adjustments� In 2017, the items affecting comparability included a one-time capital gain of EUR 324 million from the divestment of Hafslund ASA ( Note 6)� The share of profit from associates and joint ventures decreased to EUR 38 (148) million, mainly due to nuclear related adjustments of EUR -37 million and other items relating to nuclear decommissioning of EUR -33 million, mainly from OKG� The decrease was also due to that the comparison period included the share of profit from Hafslund ASA of EUR 39 million, divested in August 2017� Uniper accounted for EUR -2 (0) million, Stockholm Exergi (formerly Fortum Värme) for EUR 61 (66) million, and TGC-1 for EUR 40 (32) million� The share of profit from TGC-1 is based on the company’s published fourth-quarter 2017 and January–September 2018 interim reports� The share of profit from Uniper is based on the company’s published third-quarter 2018 interim report ( Note 19)� Net finance costs amounted to EUR 136 (195) million� The decline was mainly due to nuclear related adjustments of EUR 49 million� Profit before income taxes was EUR 1,040 (1,111) million� Taxes for the period totalled EUR 181 (229) million� The effective income tax rate, according to the income statement, was 17�5% (20�6%)� The comparable effective income tax rate, excluding the impact of the share of profit from associated companies and joint ventures, non- taxable capital gains, tax rate changes and other major one-time income tax effects was 22�0% (18�8%) ( Note 13)� The profit for the period was EUR 858 (882) million� Earnings per share were EUR 0�95 (0�98), of which EUR 0�15 (0�38) per share was related to items affecting comparability, including capital gains of EUR 0�09 from the sale of the 10% stake in Hafslund Produksjon� In the comparison period in 2017, the sales gain from the Hafslund transaction was EUR 0�36 and the impact from a Swedish income tax case was EUR -0�14� Financial position and cash flow EUR million Interest expense Interest income Fair value gains and losses on financial instruments Other financial expenses - net IS Finance costs - net Interest-bearing liabilities Less: Liquid funds Interest-bearing net debt 2018 -148 34 -8 -15 -136 6,093 584 5,509 2017 -164 32 -12 -50 -195 4,885 3,897 988 Change 18/17 10% 6% 33% 70% 30% 25% -85% 458% Cash flow In 2018, net cash from operating activities decreased by EUR 189 million to EUR 804 (993) million, mainly impacted by an increase in comparable Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 6 6 Financial performance and position Sustainability Risk management Fortum share and shareholders EBITDA of EUR 248 million, an increase of realised foreign exchange gains and losses of EUR 314 million, and the negative effect of a EUR 751 million increase in working capital� The foreign exchange gains and losses of EUR 231 (-83) million relate to the rollover of foreign exchange contract hedging loans to Russian and Swedish subsidiaries� The EUR -670 (81) million change in working capital mainly resulted from the daily cash settlements for futures on Nasdaq Commodities (Additional cash flow information)� Capital expenditure decreased by EUR 78 million to EUR 579 (657) million, and was below the 2018 guidance of EUR 600–700 million� Acquisition of shares was EUR 4,088 (972) million, mainly related to the Uniper transaction ( Note 3)� The impact of divestment of shares was EUR 259 (741) million, mainly resulting from the sale of the 10% stake in Hafslund Produksjon and a 54% share of a solar power company� Acquisitions and divestments in 2017 were mainly related to the Hafslund transaction� Net cash used in investing activities increased to EUR 4,398 (807) million� Cash flow before financing activities was EUR -3,594 (187) million� Proceeds from long-term liabilities were EUR 1,764 (35) million, of which the main part is related to the bridge loan financing from committed credit facilities for the acquisition of Uniper shares� Payments of long-term liabilities totalled EUR 586 (543) million� The dividends paid for 2017 amounted to EUR 977 million� The net decrease in liquid funds was EUR 3,268 (1,241) million� Assets and capital employed At the end of the reporting period, total assets amounted to EUR 22,409 (21,753) million� Liquid funds at the end of the period decreased to EUR 584 (3,897) million, impacted by the Uniper transaction� Capital employed was EUR 18,170 (18,172) million� Equity Equity attributable to owners of the parent company totalled EUR 11,841 (13,048) million� The decrease of EUR 1,207 million was mainly due to the dividends of EUR 977 million paid for 2017, the EUR -599 million impact from fair valuation of cash flow hedges, and translation differences of EUR -518 million, partly offset by the net profit for the period of EUR 843 million� The dividend of EUR 1�10 per share for 2017 was approved by the 2018 Annual General Meeting on 28 March 2018 and paid on 10 April 2018� Financing Net debt increased by EUR 4,521 million to EUR 5,509 (988) million, mainly due to the closing of the Uniper offer in the latter part of the second quarter� At the end of 2018, the Group’s liquid funds totalled EUR 584 (3,897) million� Liquid funds include cash and bank deposits of EUR 317 (246) million held by PAO Fortum� In addition to liquid funds, Fortum’s undrawn committed credit facilities totalled EUR 1�8 (1�8) billion ( Note 24)� Net financial expenses totalled EUR 136 (195) million, of which net interest expenses were EUR 114 (132) million� Net financial expenses included the impact of EUR 49 million from nuclear related adjustments ( Note 29)� In 2017, net financial expenses included costs relating to financing arrangements of the Uniper transaction� On 12 September 2018, Fortum received information from Nasdaq Commodities that it had closed-out the positions of a clearing member and that the funds from the commodity member default fund had been utilised to cover the loss� Fortum is trading on Nasdaq Commodities and is a member of the default fund� On 13 September, Nasdaq requested the members of the default fund to replenish their contribution in the fund� Fortum’s participation in the default fund was approximately EUR 30 million and the requested replenishment was approximately EUR 20 million� Consequently, Fortum booked Change in net debt during 2018, EUR million 6,000 5,000 4,000 3,000 2,000 1,000 0 -1,000 988 1,523 90 138 94 0 1 7 b l e E b t 2 a r a p A D n - c B I T o N s a m s n h it e e t fi N N e m e t d o C e s x o r ki n s t e t a m o e i n w a g c a P o c g e c c a i d i n n a h n C 4,521 579 298 29 4,088 977 47 5,509 670 p it a l c A q s n u isiti o g n a h C p a C x e D iv e i n i n t. b e n t s g r e e iv c b l e s a e D ivi d s p d n a i d X a F n e r e t d d o t h N 0 1 8 b t 2 e e s t m a ri n e Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 7 7 Financial performance and position Sustainability Risk management Fortum share and shareholders approximately EUR 20 million as a financing cost in its 2018 results� In November 2018, a legally binding agreement for a consensual arrangement was finalised between the defaulting member and the creditors of the defaulted member in order to recover part of the losses arising from the default� In January 2018, Standard & Poor’s downgraded Fortum’s long-term credit rating from BBB+ to BBB with Negative Outlook� The short-term rating was affirmed at level A-2� In June 2018, Fitch Ratings downgraded Fortum’s long-term credit rating from BBB+ to BBB with Stable Outlook� The short-term rating was downgraded to level F3� Having a solid investment grade rating is a key priority for Fortum� Key figures At the end of 2018, the comparable net debt to EBITDA ratio for the last 12 months was 3�6x (0�8x), which is above the long-term over-the-cycle target of approximately 2�5x� Gearing was 46% (7%) and the equity-to-assets ratio 54% (61%)� Equity per share was EUR 13�33 (14�69)� Return on capital employed (ROCE) for the last twelve months was 6�7% (7�1%)� Fortum targets a long-term over-the-cycle return on capital employed of at least 10%� Operating and regulatory environment Nordic countries According to preliminary statistics, electricity consumption in the Nordic countries was 399 (392) TWh� The higher consumption was mainly driven by colder weather during the first quarter of 2018 and the somewhat higher industrial consumption� At the beginning of 2018, the Nordic water reservoirs were at 86 TWh, which is 3 TWh above the long-term average and 11 TWh higher than one year earlier� At the end of 2018, the reservoirs were at 74 TWh, which is 9 TWh below the long-term average and 12 TWh lower than one year earlier� In 2018, the average system spot price in Nord Pool was EUR 44�0 (29�4) per MWh, the average area price in Finland was EUR 46�8 (33�2) per MWh and in Sweden SE3 (Stockholm) EUR 44�5 (31�2) per MWh� In Germany, the average spot price was EUR 44�5 (34�2) per MWh in 2018� The market price of CO2 emission allowances (EUA) increased from EUR 8 per tonne at the beginning of the year to EUR 25 per tonne at the end of 2018� Russia Fortum operates mainly in the Tyumen and Khanty-Mansiysk area of Western Siberia, where industrial production is dominated by the oil and gas industries, and in the Chelyabinsk area of the Urals, which is dominated by the metal industry� The Russian market is divided into two price zones and Fortum operates in the First Price Zone (European and Urals part of Russia)� According to preliminary statistics, Russian electricity consumption was 1,056 (1,035) TWh and the corresponding figure for the First Price Zone was 810 (799) TWh in 2018� In 2018, the average electricity spot price, excluding capacity price, increased by 3�6% to RUB 1,247 (1,204) per MWh in the First Price Zone and increased by 0�2% to RUB 1,043 (1,041) per MWh in the Urals hub� 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. 2018 399 1,055 92 35 260 2018 44,0 46,8 44,5 44,2 1,247 609 44,5 3,801 148 1,075 1,043 16 92 72 2017 392 1,035 95 33 261 2017 29.4 33.2 31.2 30.8 1,204 535 34.2 3,685 148 899 1,041 6 84 55 2016 390 1,027 94 35 259 2016 26.9 32.4 29.2 29 1,204 481 29 3,614 140 815 1,054 5 59 45 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 8 8 Financial performance and position Sustainability Risk management Fortum share and shareholders 31 Dec 2018 31 Dec 2017 31 Dec 2016 75 83 86 83 74 83 Water reservoirs TWh Nordic water reservoirs level Nordic water reservoirs level, long-term average Nordic water reservoirs, energy content, TWh 120 100 80 60 40 20 0 Q1 Q2 Q3 Q4 2000 2003 2017 2018 Reference level Source: Nord Pool 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 2018 -10 8 -2 2017 -15 6 -9 2016 -10 6 -4 European regulatory environment COP24 agreed on the operational rules of the Paris Agreement On 15 December, the United Nation’s climate conference (COP24) in Poland approved the rules of the implementation of the Paris Agreement� The Agreement will come into force in 2020� The rules include monitoring and reporting of greenhouse gas emissions, reporting on climate finance, and the process for increasing the climate ambition in the future� However, rules on market mechanisms and global carbon markets are pending and will be negotiated late 2019� The Paris Agreement asks countries to submit their long-term climate strategies and revisions of the existing emission reduction commitments by early 2020� The current aggregated commitments are far from enough to meet the global goal of keeping the temperature increase below 1�5°C� According to the International Panel on Climate Change (IPCC), this requires “rapid and far-reaching transitions” including carbon dioxide removal from the atmosphere� Global net carbon dioxide emissions have to decline by 45% from 2010 to 2030 and be net-zero by 2050� According to the IPCC, the power sector should reduce emissions by 100% well before 2050� The EU 2050 climate strategy sets the long-term framework On 28 November, the European Commission published the proposal “A Clean Planet for All”, establishing a strategic vision for 2050� The Commission foresees a 30–50% decline in energy consumption and a significantly growing role of electricity by 50–200%� Concrete proposals for the EU targets and policies post 2030 are expected from the next Commission� Fortum considers the proposed strategy as ambitious and balanced� The carbon neutrality target for 2050 and the intermediate targets for 2030–2050 should be confirmed by the EU as soon as possible� In Fortum’s view, carbon pricing will be the key measure for reaching carbon neutrality, and the EU should develop a market mechanism to reward also the capture of CO2 directly from the air or from flue gases� The German Coal Commission adopts its final report The Coal Commission suggests in its report to the German Government that coal would be phased out from the German energy mix by 2038� In 2032, there will be an assessment on the option to phase-out coal already in 2035� The report suggests that after 2022, 30 GW of coal capacity could be online meaning that 12�5 GW of coal capacity would have to be closed down compared to 2017� In 2030, only 17 GW of coal capacity would remain� Closing down nuclear and coal at the same time underlines the important role of gas in the energy mix� The report proposes compensations for coal plant operators� A compensation to customers should be offered through lower grid fees or lowered electricity tax rates, as the Commission expects the power price to increase as a result of the closures� Also the regions suffering from the coal phase-out should receive compensation in order to mitigate the resulting negative structural effects on their economies� Furthermore, it is suggested that a consequent amount of CO2 allowances would be cancelled so that the national policy measure would not water down the operation of the EU Emission Trading Scheme (ETS)� Fortum hopes that the German Government will give its opinion on the report as soon as possible, and that the preparations for the respective laws and regulations will start swiftly� Detailed rules on compensations would be necessary for the operators to make decisions on their production capacities� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 9 9 Financial performance and position Sustainability Risk management Fortum share and shareholders Sustainable financing rules affect the whole EU financing sector In May 2018, the EU Commission presented the first set of legislative proposals based on the strategy and action plan of sustainable financing� This includes a proposal to develop an EU-wide taxonomy system to help investors assess the sustainability and impact of economic activities� In addition, the guidelines on non-financial reporting will be revised and EU labels for green financial products will be developed� The risk related to the taxonomy development is, among other things, that it will take a negative view on certain low-carbon technologies (e�g� waste-to-energy and nuclear) which can increase the financing costs of future investments� In Fortum’s view, while supporting the overall objective of the Commission proposals, initiatives to promote sustainable investments in the energy sector have to be technology neutral and aim for low-carbon fossil-free solutions� It is also essential to ensure that the planned taxonomy is developed in a transparent manner with a market-based approach� EU waste package entered into force The EU waste package, expected to effectively promote a circular economy, was officially published in June 2018 and member states are to implement the legislation by July 2020� The recycling targets for municipal solid waste and packaging waste will be increased and the landfilling of municipal waste will be further limited by 2030� Further, the quality and comparability of waste statistics will be improved, the calculation methods for recycling targets will be aligned, and e-registers for hazardous waste will be established� Rules on sustainable plastics use In January 2018, the EU Commission published a communication for an EU plastics strategy� The target is to transform the way plastic products are designed, produced, used, and recycled in the EU� Better design of plastic products, higher recycling rates, and better quality recyclates will help boost the markets for secondary raw material plastics with greater added value for a competitive European plastics industry� All Nordic countries have developed their own roadmaps on sustainable plastics use� Fortum welcomes the initiative to boost the markets for recycled plastics� The plastics strategy is expected to result in business opportunities for Fortum’s recycling and waste solutions� Unexpected end-user price freeze in Poland On 1 January 2019, the new Act on the Excise Tax and changes in other laws suddenly and unexpectedly came into effect in Poland, freezing end-user electricity prices at the level of 30 June 2018, with a proposed governmental mechanism to compensate suppliers for potential losses� The price freeze is a response to rapidly increased electricity prices, caused by the higher CO2 price� The law is expected to be challenged by the European Commission as the planned compensation to power companies can be regarded as illegal state aid and the measure should have been notified to the Commission before implementing it� Fortum will continue to monitor the situation closely and will work jointly with the relevant bodies to seek improved understanding and clarification of the new legislation� Segment reviews Fortum’s business activities cover the production and sales of electricity and heat, waste-to-energy and circular economy solutions, as well as energy-sector expert services and various consumer solutions� Fortum is the third largest power generator and the largest electricity retailer in the Nordic countries� Globally, the company is one of the leading heat producers� As two thirds of Fortum’s power production is hydro and nuclear, the company is also among the lowest-emitting generators in Europe� With core operations in 10 countries, Fortum employs a diverse team of more than 8,000 energy-sector professionals� Fortum has 124 hydro power plants, 27 CHP (combined heat and power), condensing, and nuclear power plants as well as three wind power parks and three solar power plants� Globally, the company supplies heat in 23 cities and towns and has five main waste treatment facilities� Fortum’s key markets are the Nordic and Baltic countries, Russia, Poland, and India� Fortum’s reportable segments under IFRS are Generation, City Solutions, Consumer Solutions, and Russia� M&A and Solar & Wind Development, Technology and New Ventures as well as corporate functions are reported under Other Operations� Fortum’s participation in Uniper SE is also reported as part of Other Operations� In November 2018, Fortum announced that the solar and wind businesses were reorganised as they have grown beyond the initial development phase� The wind operations became a business area within the Generation division and the solar operations a business within the City Solutions division� The Russian wind and solar operations continues as a part of the Russia division� The segment reporting will be changed as of 2019 and 2018 figures will be restated accordingly� Generation The Generation segment comprises power production in the Nordics including nuclear, hydro and thermal power production, power portfolio optimisation, trading and industrial intelligence, and nuclear services globally. EUR million Sales - power sales of which Nordic power sales 1) - other sales Comparable EBITDA Comparable operating profit Operating profit Share of profits from associates and joint ventures 2) Comparable net assets (at period-end) Comparable return on net assets,% Capital expenditure and gross investments in shares Number of employees 2018 1,837 1,767 1,401 70 762 631 738 -72 6,295 11,1 194 1,075 2017 1,677 1,649 1,342 28 603 478 501 -1 5,672 8.4 264 1,035 Change 18/17 10% 7% 4% 150% 26% 32% 47% -7,100% 11% 32% -27% 4% 1) The Nordic power sales income and volume includes hydro and nuclear generation, excluding minorities. It does not include thermal generation, minorities, customer business or other purchases. 2) Power plants are often built jointly with other power producers, and owners purchase electricity at cost including interest cost and production taxes. The share of profit/loss is mainly IFRS adjustments (e.g. accounting for nuclear-related assets and liabilities) and depreciations on fair-value adjustments from historical acquisitions ( Note 19). Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 10 10 Financial performance and position Sustainability Risk management Fortum share and shareholders The Generation segment’s total power generation in the Nordic countries decreased due to lower hydropower volumes caused by low inflows and low reservoir levels in the third and fourth quarters and slightly lower nuclear power generation resulting from the closure of Oskarshamn 1 in June 2017� The CO2-free production accounted for 100% (99%) of the total power production� The achieved power price in the Generation segment increased by EUR 2�8, +9% due to higher spot prices� Comparable operating profit increased by 32%, driven by the higher achieved power price and lower real-estate and capacity taxes in Swedish hydro and nuclear power plants, partly offset by lower hydro production volumes� Operating profit was positively affected by EUR 108 (23) million of capital gains, fair value change of non- hedge accounted derivatives, nuclear related adjustments, and impairment charges ( Note 6)� The negative result contribution from associates and joint ventures was mainly due to nuclear related adjustments� The adjustments had a positive impact on other financial expenses and the total impact on Fortum’s net profit was marginal ( Note 19)� Nord Pool, power price, 2014–2018, EUR/MWh 80 60 40 20 0 2014 2015 2016 2017 2018 In June 2018, Fortum sold its 10% ownership in Hafslund Produksjon and booked a one-time tax-free capital Fortum achieved Spot average Spot price gain of EUR 77 million in the Generation segment’s 2018 results� Source: Nord Pool, Fortum Power generation by source TWh Hydropower, Nordic Nuclear power, Nordic Thermal power, Nordic Total Nordic sales volume TWh Nordic sales volume of which Nordic Power sales volume 1) 2018 19.1 22.8 0.1 42.0 2018 48.4 40.5 2017 20.7 23.0 0.5 44.2 Change 18/17 -8% -1% -80% -5% 2017 51.8 42.2 Change 18/17 0% -4% 1) The Nordic power sales income and volume includes hydro and nuclear generation, excluding minorities. It does not include thermal generation, minorities, customer business or other purchases. Sales price EUR/MWh Generation’s Nordic power price 2) 2018 34.6 2017 31.8 Change 18/17 9% 2) Generation’s Nordic power price includes hydro and nuclear generation, excluding minorities. It does not include thermal generation, minorities, customer business or other purchases. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 11 11 Financial performance and position Sustainability Risk management Fortum share and shareholders City Solutions City Solutions develops sustainable city solutions into a growing business for Fortum. The segment comprises heating and cooling, waste-to-energy, biomass and other circular economy solutions. The business operations are located in the Nordics, the Baltic countries and Poland. 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 - waste treatment sales 1) - other sales 2) Comparable EBITDA Comparable operating profit Operating profit Share of profits from associates and joint ventures Comparable net assets (at period-end) Comparable return on net assets,% Capital expenditure and gross investments in shares Number of employees 2018 1,094 604 119 211 161 284 113 109 74 3,743 5.0 222 1,956 2017 1,015 523 121 195 175 262 98 102 80 3,728 5.5 556 1,907 Change 18/17 8% 15% -2% 8% -8% 8% 15% 7% -8% 0% -9% -60% 3% 1) Waste treatment sales comprise gate fees at waste treatment plants and environmental construction services. 2) Other sales comprise mainly operation and maintenance services and fuel sales. On 4 August 2017, Fortum concluded the restructuring of its ownership in Hafslund� As of 1 August 2017, Fortum’s 50% ownership in Fortum Oslo Varme (the combined company of Hafslund’s Heat business area and Klemetsrudanlegget) has been consolidated as a subsidiary to Fortum in the results of City Solutions� Heat sales volumes increased by 8% mainly driven by the consolidation of Fortum Oslo Varme� The negative impact of the warm weather in the second quarter offset the positive effects of the cold weather in the first quarter� Comparable operating profit increased by 15%� The positive effect of EUR 37 (15) million of the consolidation of Fortum Oslo Varme was partly offset by the weaker result in the recycling and waste business� The seasonality of the City Solutions business has increased, due to the consolidation of Fortum Oslo Varme and the new seasonal pricing� On average, the annual effect of the seasonal pricing is neutral� The consolidation of Fortum Oslo Varme had a positive effect of EUR 70 (29) million on the comparable EBITDA� Operating profit was negatively affected by EUR -4 (4) million of fair- value change of non-hedge-accounted derivatives ( Note 6)� Heat sales by country TWh Finland Poland Norway Other countries Total Power sales by country TWh Finland Poland Other countries Total 2018 3.8 3.5 1.6 1.9 10.8 2018 1.4 0.5 0.8 2.7 2017 3.9 3.7 0.7 1.8 10.0 2017 1.5 0.4 0.7 2.6 Change 18/17 -3% -5% 129% 6% 8% Change 18/17 -7% 25% 14% 4% Consumer Solutions Consumer Solutions comprises electricity and gas retail businesses in the Nordics and Poland, including the customer service, invoicing, and debt collection business. Fortum is the largest electricity retailer in the Nordics with approximately 2.5 million customers across different brands in Finland, Sweden, Norway, and Poland. The business provides electricity and related value-added products as well as new digital customer solutions. EUR million Sales - power sales - other sales Comparable EBITDA Comparable operating profit Operating profit Comparable net assets (at period-end) Capital expenditure and gross investments in shares Number of employees 2018 1,759 1,547 212 110 53 75 648 47 1,399 2017 1,097 862 235 57 41 39 638 493 1,543 Change 18/17 60% 79% -10% 93% 29% 92% 2% -90% -9% On 4 August 2017, Fortum concluded the restructuring of its ownership in Hafslund� As of 1 August 2017, Hafslund Markets has been consolidated into the results of Consumer Solutions� The consolidation of Hafslund and the cold weather in February and March increased electricity sales volumes and, consequently, sales for the segment� Increasing spot power prices during the year also had a positive impact� The competition and customer churn in the Nordic market continued to be a challenge� Comparable operating profit increased by 29%, due to the consolidation of Hafslund, partly offset by lower sales margins and the amended service agreements for the divested electricity distribution companies� The effect of the consolidation of Hafslund was EUR 31 (13) million� The consolidation of Hafslund had a positive effect of EUR 54 (22) million on the comparable EBITDA� Due to the capitalisation of sales commissions, the implementation of IFRS 15 had a positive effect of EUR 32 million on the comparable EBITDA� EUR 22 million of the IFRS 15 effect was related to the Hafslund operations� Operating profit was positively affected by EUR 22 (-2) million of fair- value change of non-hedge-accounted derivatives ( Note 6)� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 12 12 Financial performance and position Sustainability Risk management Fortum share and shareholders Sales volumes TWh Electricity Gas* * Not including wholesale volumes. Number of customers Thousands * Electricity Gas Total * Rounded to the nearest 10,000. 2018 30.3 4.1 2017 20.5 4.0 Change 18/17 48% 2% Russia The Russia segment comprises 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. 2018 2,440 30 2,470 2017 2,470 20 2,490 Change 17/16 -1% 50% -1% EUR million Sales - power sales - heat sales - other sales Comparable EBITDA Comparable operating profit Operating profit Share of profits from associates and joint ventures Comparable net assets (at period-end) Comparable return on net assets,% Capital expenditure and gross investments in shares Number of employees 2018 1,069 872 193 4 417 271 273 36 2,789 10.3 117 2,941 2017 1,101 837 258 6 438 296 295 31 3,161 10.1 277 3,495 Change 18/17 -3% 4% -25% -33% -5% -8% -7% 16% -12% 2% -58% -16% Power generation volumes increased, due to the commissioning of the Chelyabinsk GRES unit 3 and good availability� Heat production volumes increased, due to cold weather, partly offset by the transfer of the heat- only boilers in Chelyabinsk to the Yustek joint venture� Power generation volumes in the first quarter of 2017 were lower due to a maintenance outage at the Nyagan power plant� Sales declined due to the weaker Russian rouble and the transfer of the heat business in Tyumen to the Yustek joint venture� The decline was partly offset by higher received CSA payments and higher power and heat sales volumes� Comparable operating profit decreased by 8%� The new production units and higher received CSA payments had a positive effect on the results� The result was negatively impacted by the change in the Russian rouble exchange rate, bad-debt provisions, and lower electricity margins� The increase in CSA payments was related to Nyagan 1 and Nyagan 2 receiving higher payments for the last years of the CSA period, positive spot market corrections, and contributions from renewable generation� The increase in CSA payments was partly offset by the corrections arising from lower bond yields� The result for the comparison period in 2017 was positively affected by a one-time item from improved bad-debt collections� The effect of the change in the Russian rouble exchange rate was EUR -32 million� 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 and other, tRUB/MW/month 1) 2) Average capacity price for CSA, tRUB/ MW/month 2) Average capacity price, tRUB/MW/ month Achieved power price for Fortum in Russia, RUB/MWh Achieved power price for Fortum in Russia, EUR/MWh 3) 2018 2017 1,043 1,041 3,801 3,685 148 1,075 609 148 899 535 1,888 1,813 25.6 27.5 Change 18/17 0% 3% 0% 20% 14% 4% -7% 1) Including capacity receiving payments under “forced mode status”, regulated tariffs, and bilateral agreements. 2) Capacity prices paid for the capacity volumes, excluding unplanned outages, repairs, and own consumption. 3) Translated using the average exchange rate. Russian power generation and heat production TWh Russian power generation Russian heat production 2018 29.6 20.4 2017 26.3 20.0 Change 18/17 13% 2% The Chelyabinsk GRES unit 3 was commissioned in November 2017� Fortum’s 35-MW wind power plant was commissioned in January 2018, and the 35-MW solar plants have been consolidated since December 2017� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 13 13 Financial performance and position Sustainability Risk management Fortum share and shareholders more investments into building new renewable capacity� Profits from the capital recycling business model are recorded in comparable operating profit because the business results are realised through divesting the shareholding, either partially or totally� Capital expenditures, divestments and investments in shares EUR million Capital expenditure Intangible assets Property, plant and equipment Total 53 532 584 2018 Gross investments in shares Subsidiaries Associated companies and joint ventures Other investments Total 36 4,041 11 4,088 2017 18 672 690 982 135 8 1,125 In 2018, capital expenditures and investments in shares totalled EUR 4,672 (1,815) million, mainly related to the purchase of Uniper shares� Capital expenditures were EUR 584 (690) million ( Note 6), below the 2018 guidance of EUR 600–700 million� Capital expenditures for 2018 were below the guidance level due to the timing of some capital expenditures being shifted to 2019� See also Note 18.2 Capital expenditure� Fortum expects to start the supply of power and heat from new power plants and to upgrade existing plants as follows: Other Operations Other Operations comprises the two development units ‘M&A and Solar & Wind Development’ and ‘Technology and New Ventures’ as well as corporate functions. Other Operations also includes Fortum’s shareholding in Uniper, which is consolidated as an associated company as of 30 June 2018 ( Note 3). The total acquisition cost for Uniper, including direct costs relating to the acquisition, is reported in ‘Participations in associated companies and joint ventures’� The purchase price allocation will be completed within the one-year window from the acquisition date, according to IFRS� As Uniper publishes its interim reports later than Fortum, Fortum’s share of Uniper’s results will be accounted for with a time-lag of one quarter, with potential adjustments� Fortum’s Financial Statements 2018 only includes Fortum’s share of Uniper’s third-quarter results amounting to EUR -2 million ( Note 3)� Uniper will report its full-year 2018 results on 12 March 2019� In December 2018, Fortum committed to invest EUR 150 million in Valo Ventures over a period of 10 years� Valo Ventures is a new global venture capital fund launched by former Google Capital co-founder, Scott Tierney� It is an independent fund investing in digital and cloud- scale technology start-ups in North America and Europe� Valo Ventures is aligned with Fortum’s vision ‘For a cleaner world’ and strategy� One of Fortum’s strategic priorities to drive decarbonisation is building options for significant new innovative businesses� Becoming a digital leader is a critical enabler to achieve these goals� In June 2018, Fortum agreed to sell a 54% share of its solar power company operating four solar power plants in India� The transaction was closed in August 2018� The total consideration from the divestment on a debt- and cash-free basis, including the effect of deconsolidating Fortum’s minority part of the net debt, was EUR 147 million� The positive impact on Fortum’s 2018 comparable operating profit was EUR 26 million� Fortum’s capital recycling business model enables Fortum to efficiently utilise its key competences to develop, construct, and operate power plants while utilising partnerships and other forms of cooperation to create a more asset-light structure and thereby enable Type Electricity capacity MW Heat capacity MW Nuclear Hydro Hydro Generation Loviisa, Finland Hydro plants in Sweden and Finland Hydro plants in Sweden and Finland City Solutions Zabrze, Poland Kivenlahti, Finland Russia Ulyanovsk Solar 2) Other Operations Ånstadblåheia, Norway Wind Wind Sørfjord, Norway Solar Pavagada 2, India Wind Solar CHP Bio HOB 1) 5 5 ~15 75 35 110 50 97 250 Supply starts 2018 2018 2019 145 Q1/2019 2020 58 Jan 2018 2021–2022 Q4/2018 2019 2019 1) Biofuel-fired heat-only boiler (HOB). 2) Separate investment decision needed Generation Through its interest in TVO, Fortum is participating in the building of Olkiluoto 3 (OL3), a 1,600-MW nuclear power plant unit in Finland� OL3 is funded through external loans, share issues and shareholder loans according to shareholder agreements between the owners and TVO� As a 25% shareholder in OL3, Fortum has committed to funding of the project pro rata� At the end of 2018, Fortum’s outstanding receivables regarding OL3 were EUR 170 million and the outstanding commitment was EUR 63 million ( Note 19)� In March 2018, TVO and the supplier consortium companies signed a comprehensive settlement agreement whereby the arbitration concerning the delay of OL3 is settled by financial compensation of EUR 450 million to be paid to TVO� Based on the project schedule of March 2018 and the effect of the settlement agreement, TVO estimated the total investment in OL3 to be approximately EUR 5�5 billion� According to the time plan updated by Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 14 14 Financial performance and position Sustainability Risk management Fortum share and shareholders plant supplier Areva-Siemens Consortium in November 2018, the plant is expected to start regular electricity production in January 2020� In June 2018, Fortum sold its 10% ownership in Hafslund Produksjon Holding AS to Svartisen Holding AS� As part of the restructuring of the Hafslund ownership in 2017, Fortum acquired the ownership in Hafslund Produksjon� The sales price for the shares was EUR 160 million� Fortum booked a capital gain of EUR 77 million in the Generation segment 2018 results� City Solutions In October 2018, Fortum announced it is replacing part of its fossil- based heat production by building a biofuel-fired heating facility in Kivenlahti, Finland� The construction of the plant is a significant step towards carbon neutral district heating production in Espoo, as the plant will allow for the decommissioning of the old coal-fired heating boiler in Suomenoja� The value of the investment is approximately EUR 40 million� The new facility will have a maximum heat output of 58 MW� Construction started in November 2018 and heat production is expected to begin in 2020� The joint venture Kauno Kogeneracinė Jėgainė, owned by Fortum and Lietuvos Energija, is building a waste-to-energy CHP plant in Kaunas, Lithuania� The electricity capacity of the Kaunas plant will be 24 MW and the thermal capacity approximately 70 MW� Fortum’s ownership in the joint venture is 49%� The CHP plant is expected to be commissioned in mid-2020� In 2015, Fortum decided to build a new multi-fuel CHP plant in Zabrze, Poland, which primarily will be fuelled by refuse derived fuel (RDF) and coal but can also use biomass and a mixture of fuels� The new plant replaces the existing purely coal-fired units in Zabrze and Bytom� It will have a production capacity of 145 MW of heat and 75 MW of electricity and the planned start of commercial operations is during the first quarter of 2019� Russia In June 2018, Fortum won the right to build 110 MW of solar capacity in a CSA auction� The power plants are to be commissioned during the years 2021–2022� In June 2018, the Fortum-Rusnano wind investment fund (Fortum’s ownership 50%) won the right to build 823 MW of wind capacity in a CSA auction� The wind parks were to be commissioned during the years 2019–2023� During the fourth quarter 2018, the wind investment fund made an investment decision on a 100-MW wind farm� Power production is expected to start during the first half of 2020� In June 2017, the Fortum-Rusnano wind investment fund won the right to build 1,000 MW of wind capacity in a CSA auction� The wind parks were to be commissioned during the years 2018–2022� In October 2017 and October 2018, the wind investment fund made investment decisions on 50-MW and a 200-MW wind farm, respectively� On 1 January 2019, the 50-MW wind farm started operation� Power production at the 200-MW wind farm is expected to start during the first half of 2020� The investment decisions related to the renewable capacities won by Fortum and the Fortum-Rusnano wind investment fund in 2017 and 2018 are made on a case-by-case basis� Fortum’s maximum equity commitment is RUB 15 billion� In the longer term, Fortum seeks to maintain an asset-light structure by forming potential partnerships and other forms of co-operation� Other Operations In December 2018, Fortum committed to invest EUR 150 million in Valo Ventures over a period of 10 years� It is an independent fund investing in digital and cloud-scale technology start-ups in North America and Europe� In December 2018, Fortum won the right from Gujarat Urja Vikas Nigam Ltd� to build a 250-MW solar power plant in Raghanesda solar park in District Banaskhata, Gujarat, India� In January 2019, the Government of Gujarat cancelled the result of the auction on the grounds that it considers the winning tariffs to be too high� The Government of Gujarat has indicated that there will be a new auction, for which they intend to reduce the solar park charges to operators, in order to lower the costs for the bidders and enable lower bids� In June 2018, Fortum won the right to build a 250-MW solar power plant in the Pavagada solar park in Karnataka, India� The capital expenditure is estimated to be approximately EUR 120 million� Commissioning of the plant is expected in 2019� In June 2018, Fortum signed an agreement to sell a 54% share of its solar power company operating four solar power plants in India to UK Climate Investments (40%) and Elite Alfred Berg (14%)� Elite Alfred Berg has the option to buy up to an additional 16% from Fortum� The total capacity of this portfolio is 185 MW� Fortum aims to retain a significant minority ownership in the solar power company and to continue to provide operation and maintenance services based on a long-term agreement� The total consideration from the divestment on a debt- and cash-free basis, including the effect of deconsolidating Fortum’s minority part of the net debt, was EUR 147 million� The positive impact on Fortum’s third quarter comparable operating profit was EUR 26 million� The transaction was closed in August 2018� In January 2017, Fortum finalised the acquisition of three wind power projects from the Norwegian company Nordkraft� The transaction consisted of the already operational Nygårdsfjellet wind farm as well as the fully-permitted Ånstadblåheia and Sørfjord projects� The Ånstadblåheia wind farm was commissioned during the fourth quarter of 2018 and the Sørfjord wind farm is expected to be commissioned in 2019� The total installed capacity of the three wind farms will be approximately 180 MW� In 2016, Fortum made the final investment decision on the 75-MW Solberg wind park project in northern Sweden� Skellefteå Kraft is participating in the project with a 50% share� The wind park was taken into operation in the first quarter of 2018� Research and development Sustainability is at the core of Fortum’s strategy and, alongside Fortum’s current businesses, the company is carefully exploring and developing new sources of growth within renewable energy production� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 15 15 Financial performance and position Sustainability Risk management Fortum share and shareholders Fortum’s goal is to be at the forefront of energy technology and application development� To accelerate innovation and the commercialisation of new offerings, Fortum is strengthening its in-house innovation and digitalisation efforts and building partnerships with leading global suppliers, technology and service companies, and research institutions� Fortum makes direct and indirect investments in start-ups that have promising new innovations focused on connectivity, have disruptive potential and accelerate the transition towards a circular economy� Fortum also invests in technologies that support better utilisation of the current asset base and that can create new markets and products for Fortum� The company is continuously looking for emerging clean energy solutions and for solutions that increase resource and system efficiency� The Group reports its R&D expenditure on a yearly basis� In 2018, Fortum’s R&D expenditure was EUR 56 (53) million, or 1�1% (1�2%) of sales� R&D expenditure, EUR million R&D expenditure, % of sales 2018 2017 2016 56 1.1 53 1.2 52 1.4 Change 18/17 6% Changes in Fortum’s Management On 29 August 2018, Fortum announced that Mr� Kari Kautinen, Senior Vice President, Solar & Wind Development and M&A, had resigned� He left Fortum at the end of September 2018� On 3 September 2018, Fortum announced that Mr� Arun Aggarwal, M�Sc� (Eng�), 49, was appointed Senior Vice President, Business Technology and member of Fortum’s Executive Management� This is a new position at Fortum� Mr� Aggarwal has Group-wide responsibility to lead Fortum’s strategic IT, as well as digital innovation and transformation� He assumed this position in mid-October 2018 and reports to the President and CEO� Annual General Meeting 2018 Fortum Corporation’s Annual General Meeting, held in Helsinki on 28 March 2018, adopted the Financial Statements and the Consolidated Financial Statements for the financial period 1 31 December 2017 and discharged from liability the members of the Fortum Board of Directors and the President and CEO for the year 2017� The Annual General Meeting decided to pay a dividend of EUR 1�10 per share for the financial year that ended on 31 December 2017� The record date for the dividend payment was 3 April 2018, and the dividend payment date was 10 April 2018� The Annual General Meeting confirmed the remuneration of EUR 75,000 per year to the Chairman, EUR 57,000 per year to the Deputy Chairman, EUR 40,000 per year to each member of the Board, as well as EUR 57,000 per year to the Board member acting as the Chairman of the Audit and Risk Committee if he or she is not at the same time acting as Chairman or Deputy Chairman of the Board� In addition, a EUR 600 meeting fee is paid for Board meetings as well as for committee meetings� The meeting fee is doubled for Board members who live outside Finland in Europe and tripled for members living outside Europe� For Board members living in Finland, the fee for each Board and Board Committee meeting is doubled for meetings held outside Finland and tripled for meetings outside Europe� For Board and Committee meetings held as a telephone conference, the basic meeting fee is paid to all members� No fee is paid for decisions made without a separate meeting� The Annual General Meeting also confirmed the number of members in the Board of Directors to be eight� Mr� Matti Lievonen was elected as Chairman, Mr� Klaus-Dieter Maubach as a new member and Deputy Chairman, Mr� Heinz-Werner Binzel, Ms� Eva Hamilton, Mr� Kim Ignatius, Ms� Anja McAlister, and Mr� Veli-Matti Reinikkala were re-elected as members, and Ms� Essimari Kairisto was elected as a new member� In addition, Deloitte Oy was re-elected as auditor, with Authorised Public Accountant Ms Reeta Virolainen as the principal auditor� The auditor’s fee is paid pursuant to an invoice approved by the company� The Annual General Meeting authorised the Board of Directors to decide on the repurchase and disposal of the company’s own shares up to a maximum number of 20,000,000 shares, which corresponds to approximately 2�25 per cent of all the shares in the company� It was also decided that own shares could be repurchased or disposed of in connection with acquisitions, investments or other business transactions, or be retained or cancelled� The repurchases or disposals could not be made for the purposes of the company’s incentive and remuneration schemes� The authorisation cancelled the authorisation resolved by the Annual General Meeting of 2017 and it will be effective until the next Annual General Meeting and, in any event, for a period of no longer than 18 months� The Annual General Meeting decided on the following amendments to the Articles of Association of the company: The first sentence of Art� 6 is amended in order to set the maximum number of members of the Board of Directors of the company at ten members instead of the current eight members, as follows: “The Board of Directors shall have a Chairman, a Deputy Chairman, and a minimum of three (3) and a maximum of eight (8) ordinary members who are elected at the General Meeting�” Art� 6 is otherwise unchanged� Due to the new Auditing Act (1141/2015) which entered into force on 1 January 2015, the reference to approval by the Central Chamber of Commerce set forth in the first sentence of Art� 11 shall be deleted and replaced with a reference to an auditing firm referred to in the Auditing Act, as follows: “The company shall have one regular auditor who must be an Auditing Firm referred to in the Auditing Act�” Art� 11 is otherwise unchanged� Due to the amendment of the Limited Liability Companies Act that entered into force on 21 June 2017, the reference to Chapter 4, Section 2, Subsection 2 of the Finnish Limited Liability Companies Act set forth in the last sentence of Art� 12 shall be replaced with a reference to Chapter 5, Section 6 a of the Limited Liability Companies Act, as follows: “However, the notice of GM must in any event be delivered at least nine (9) days prior to the General Meeting Record Date referred to in Chapter 5, Section 6 a of the Finnish Limited Liability Companies Act�” Art� 12 is otherwise unchanged� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 16 16 Financial performance and position Sustainability Risk management Fortum share and shareholders The Annual General Meeting of Fortum Corporation decided, in accordance with Chapter 3, Section 14 a (3) of the Finnish Companies Act, that the rights to all such shares entered in the Joint Account and to the rights attached to such shares that had not been requested to be registered in the book-entry system in accordance with Chapter 6, Section 3 of the Act on the Book-Entry System and Clearing Operations prior to the decision by the Annual General Meeting, are forfeited� In the merger of Länsivoima Oyj (former Lounais-Suomen Sähkö Oy) to Fortum Corporation in 2000, those shareholders of Länsivoima Oyj that had not produced their share certificates and had not requested their rights to be registered in the book-entry system, received their respective shares of Fortum Corporation as merger consideration to a joint book- entry account opened on their behalf (the “Joint Account”)� In addition to the shares, the rights attached to such shares, such as undrawn dividends, are forfeited� The provisions applicable to treasury shares held by the company will apply to the forfeited shares� At the meeting held after the Annual General Meeting, Fortum’s Board of Directors elected, from among its members, to the Nomination and Remuneration Committee Matti Lievonen as Chairman and Eva Hamilton, Klaus-Dieter Maubach and Anja McAlister as members� Furthermore, the Board elected to the Audit and Risk Committee Kim Ignatius as Chairman and Heinz-Werner Binzel, Essimari Kairisto and Veli-Matti Reinikkala as members� Shareholders Nomination Board On 5 October 2018, Mr� Kimmo Viertola, Director General, Prime Minister’s Office, Ownership steering department (Chairman), Mr� Risto Murto, President and CEO, Varma Mutual Pension Insurance Company, and Mr� Jouko Pölönen, President and CEO, Ilmarinen Mutual Pension Insurance Company were appointed to Fortum’s Shareholders’ Nomination Board� In addition, the Chairman of Fortum’s Board of Directors Mr� Matti Lievonen, is a member of the Shareholders’ Nomination Board� On 29 January 2019, Fortum’s Shareholders’ Nomination Board submitted its proposals to Fortum’s Board of Directors for the 2019 Annual General Meeting concerning the number of the Board members, the members to be nominated to the Board of Directors, and the election of the Chairman and Deputy Chairman� The Shareholders’ Nomination Board did not reach a unanimous proposal, and consequently did not make a proposal for the remuneration paid to the Board of Directors for their following term of office� Other events during the reporting period The Board of Directors of Fortum Corporation has decided to commence the 2019–2021 long-term incentive (LTI) plan for key employees and executives� The 2019–2021 LTI plan is part of Fortum’s ongoing LTI programme and follows the same principles as the previous plan� The performance measure applied to the 2019–2021 LTI plan will be based on the total shareholder return measured relative to the peer group comprising selected European utility companies� The 2019–2021 LTI plan will comprise approximately 130 participants, including the members of Fortum Executive Management� Events after the balance sheet date On 1 January 2019, Fortum acquired all remaining C-shares of TVO entitling to the power production of the Meri-Pori coal condensing power plant� Fortum is now entitled to 100% of the power production of the plant, an increase from 67% previously� The Meri-Pori power plant is mainly used in Fingrid’s capacity reserve and as back-up capacity� See more information in Note 19 Participations in associated companies and joint ventures� Key drivers and risks Fortum’s financial results are exposed to a number of economic, strategic, energy policy and regulation, financial, and operational risks� Fortum is exposed to these risks both directly and indirectly through its associated companies� Some of the key factors influencing Fortum’s business performance are the European commodity and electricity wholesale prices� The key short-term drivers behind the electricity wholesale price development in the Nordic region are the prices of fuels and CO2 emission allowances, the hydrological situation, temperature, economic development, and the electricity import-export balance� Global economic growth impacts commodity and CO2 emission allowance prices, which, in turn, impact the Nordic wholesale price of electricity� In all regions, fuel prices and power plant availability also impact profitability� In addition, increased volatility in exchange rates could have both translation and transaction effects on Fortum’s financials, especially through the Russian rouble and Swedish krona� In the Nordic countries, changes in the regulatory and fiscal environment add risks for the energy and environmental management sectors� The main strategic risk is that the regulatory and market environment develops in a way that we have not been able to foresee and prepare for� In response to these uncertainties, Fortum has analysed and assessed a number of future energy market and regulation scenarios, including the impact of these on different generation forms and technologies� As a result, Fortum’s updated strategy includes broadening of the revenue base and diversification into new businesses, technologies, and markets� The environmental management business is based on the framework and opportunities created by environmental regulation� Being able to respond to customer needs created by the tightening regulation is a key success factor� For Fortum’s Russian business, the key drivers are economic growth, the rouble exchange rate, regulation of the heat business, and the further development of the electricity and capacity markets� A key profitability driver is the received capacity payment based on the CSA contracts and Competitive Capacity Selection (CCS) auctions� The main part of Fortum’s generation capacity built after 2007 is entitled to CSA payments for approximately 10 years after commissioning of each new unit (approximately 15 years for renewable generation)� The received capacity payments vary, depending on the age, location, type, and size of the plant as well as on seasonality and availability� The CSA payments are adjusted for, among other factors, the weighted average cost of capital (WACC), the consumer price index (CPI), and re-examination of earnings from the electricity-only (spot) market (done every three and six years after commissioning of a unit)� In addition, thermal power Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 17 17 Financial performance and position Sustainability Risk management Fortum share and shareholders plants are entitled to clearly higher CSA payments starting approximately six years after commissioning� For further details on Fortum’s risks and risk management, see the Risk management section of the Operating and financial review and Note 4 Financial risk management� Outlook Hedging At the end of 2018, approximately 75% of the Generation segment’s estimated Nordic power sales volume was hedged at EUR 31 per MWh for 2019, and approximately 45% at EUR 29 per MWh for 2020� 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 electricity derivatives quoted on Nasdaq Commodities� Capital expenditure and divestments Fortum currently estimates its capital expenditure, including maintenance but excluding acquisitions, to be in the range of EUR 600–650 million in 2019� This includes solar and wind investments, which can be divested through the capital recycling business model� The maintenance capital expenditure in 2019 is estimated at approximately EUR 300 million, well below the level of depreciation� In 2020, capital expenditure is expected to decline� Nordic market Electricity is expected to continue to gain a higher share of total energy consumption� Electricity demand in the Nordic countries is expected to grow by approximately 0�5% on average, while the growth rate for the next few years will largely be determined by the macroeconomic development in Europe and especially in the Nordic countries� During the fourth quarter of 2018, oil and coal prices started to decrease, while EUA prices still increased� In late January 2019, the forward quotation for coal (ICE Rotterdam) for the remainder of 2019 was around USD 84 per tonne and the market price for EUAs for 2019 at the level of EUR 23 per tonne� The Nordic system electricity forward price at Nasdaq Commodities for the remainder of 2019 was around EUR 48 per MWh and for 2020 around EUR 39 per MWh� In Germany, the electricity forward price for the remainder of 2019 was around EUR 51 per MWh and for 2020 around EUR 49 per MWh� The Nordic water reservoirs were about 10 TWh below the long-term average and were 8 TWh lower than one year earlier� Generation The Generation segment’s achieved Nordic power price typically depends on factors such as hedge ratios, hedge prices, spot prices, availability and utilisation of Fortum’s flexible production portfolio, as well as currency fluctuations� Excluding the potential effects from changes in the power generation mix, a 1 EUR/MWh change in the Generation segment’s Nordic power sales achieved price will result in an approximately EUR 45 million change in Fortum’s annual comparable operating profit� The achieved power price also includes the results of optimisation of Fortum’s hydro and nuclear production as well as operations in the physical and financial commodity markets� As a result of the nuclear stress tests in the EU, the Swedish Radiation Safety Authority (SSM) has decided on new regulations for Swedish nuclear reactors� For the operators, this means that safety investments should be in place no later than 2020� The process to review the Swedish nuclear waste fees is done in a three-year cycle� In March 2017, the Swedish Government decided on the new nuclear waste fees for years 2018–2020� In October 2017, the Swedish Parliament decided on changes in the legal framework, impacting calculations of nuclear waste fees and the investment of the nuclear waste fund� In the revised legal framework, the assumed operating time for calculating the waste fee is 50 years, as opposed to the previous assumption of 40 years� The fund is now also allowed to invest in other financial instruments in addition to bonds� Based on these changes, the annual waste fees for Fortum increased by EUR 8 million in 2018� On 19 June 2018, the Swedish parliament adopted new hydro time hydropower shall be protected to be able to play a key role in the future energy system� In order to protect hydropower, all exemptions of the Water Framework Directives shall be utilised when classifying water bodies� In the new legislation it is stated that the industry shall create a joint hydropower fund to finance major parts of the environmental actions needed� A fund has been established with a total financial cap of SEK 10 billion to be paid over a 20-year period� The major utilities will contribute to the fund based on their share of hydropower production� Fortum’s share is expected to be 20–25% of the fund’s total financing� In addition to the new legislation, the government has issued an ordinance to establish a national prioritisation plan for the revision of hydropower permits (valid from 11 January 2019)� On 11 June 2018, the Swedish Administrative Court of Appeal gave its decisions on Fortum Sverige AB’s hydropower production-related real-estate tax assessments for the years 2009–2014� The court decisions were not in Fortum’s favour� Fortum applied for the right to appeal from the Supreme Administrative Court, but did not receive permission to appeal� As the Administrative Court, the Administrative Court of Appeal in Stockholm, and the Supreme Administrative Court have handled only the arguments concerning state aid, the case concerning the other legal documents is now transferred back to the Administrative Court� The disputed amount, excluding interest for the time period, totals approximately SEK 510 million (approximately EUR 50 million)� Moreover, Fortum’s Swedish companies have appeals for 2011–2016 pending in the Administrative Court relating to the property tax rate for their hydropower plants referring to the same legal grounds� Fortum has paid the real-estate tax in accordance with the legislation� If the final court decision is unfavourable to Fortum, it will not impact Fortum’s results� In December 2018, Fortum Sverige AB filed a complaint to the EU Commission regarding the Swedish property tax for hydropower plants regarding 2017 and prior years� Fortum has asked the Commission to investigate whether the Swedish legislation regarding the property tax for hydropower plants and the Swedish court decisions are in line with EU state aid rules� legislation to come into force on 1 January 2019� According to the new legislation all hydropower shall apply for updated permits� At the same In September 2016, the Swedish Government presented the budget proposal for the coming years, according to which the nuclear capacity Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 18 18 Financial performance and position Sustainability Risk management Fortum share and shareholders tax will be reduced to 1,500 SEK/MW per month from 1 July 2017 and abolished on 1 January 2018� In 2017, Fortum’s Swedish nuclear capacity tax was EUR 44 million� In 2018, there is no capacity tax� Further, the Swedish hydropower real-estate tax will decrease from 2�8% to 0�5%� The tax is being reduced in four steps: in January 2017 to 2�2%; in January 2018 to 1�6%; in January 2019 to 1�0%; and in January 2020 to 0�5%� In 2018, the tax for Fortum decreased by EUR 20 million to EUR 65 million� In addition to the decrease in the tax rate, the hydropower real- estate tax values, which are linked to electricity prices, will be updated in 2019� The real-estate tax values are updated every six years� With the current electricity prices, the tax values for the 2019–2024 period would be lower than they are today� In 2015, the Swedish OKG decided to permanently discontinue electricity production at Oskarshamn’s nuclear plant units 1 and 2� Unit 1 was shut down on 17 June 2017 and unit 2 has been out of operation since June 2013� The closing processes for both units are estimated to take several years� City Solutions In City Solutions, stable growth, cash flow and earnings are achieved through investments in new plants and through acquisitions� Fuel cost, availability, flexibility, efficiency, as well as gate fees are key drivers for profitability, but also the power supply/demand balance, electricity prices, and weather conditions affect profitability� The development of Fortum Oslo Varme’s business operations is estimated to require integration-related one-time costs and increased investments over the coming years� The realisation of cost synergies is estimated to gradually start materialising from 2019 onwards, with targeted annual synergies of EUR 5–10 million expected to be achieved by the end of 2020� Consumer Solutions After the acquisition of Hafslund Markets in August 2017, a new business strategy for Consumer Solutions was approved by the Fortum Board of Directors in December 2017� The strategic objective is to establish Consumer Solutions as the leading consumer business in the Nordics, with a customer-centric, multi-brand structure� Competition in the Nordic electricity retail market is expected to remain challenging, with continued pressure on sales margins and customer churn� To counter the market challenges and create a solid foundation for competitive operations, Consumer Solutions will continue its cost spend in developing new digital services for consumers� The combined Hafslund Markets and Fortum Markets business, while largely complementary, has identified synergy potential, in terms of both revenue and costs� The short-term priority will be on achieving identified revenue synergies by leveraging established best practices and providing additional products and services to the whole customer base� The realisation of cost synergies will start materialising once the integration of Hafslund Markets is completed, expected in 2019, with cost synergy realisation gradually increasing over the coming years and targeted annual synergies of approximately EUR 10 million to be achieved by the end of 2020� Russia In the Russia segment, capacity payments based on CSA contracts are a key driver for earnings growth, as it receives considerably higher capacity payments than through the CCS auctions� Currently Fortum’s CSA capacity amounts to 2,368 MW� In February 2018, the System Administrator of the wholesale market published data on the WACC and the CPI for 2017, which were used to calculate the 2018 CSA price� The CSA payments were revised downwards accordingly to reflect the lower bond rates� The regulator also reviewed the guaranteed CSA payments by re-examining earnings from the electricity-only market and revised the CSA payments upwards due to the lower earnings from the electricity- only market� Fortum’s other Russian generation capacity, totalling 2,544 MW, is allowed to participate in the CCS auctions� The long-term CCS for the years 2017–2019 was held at the end of 2015, the CCS for the year 2020 in September 2016, and the CCS for the year 2021 in September 2017� All Fortum plants offered in the auction were selected� Fortum also obtained “forced mode status”, i�e� it receives payments for the capacity at a higher rate for some of the units at the Argayash power plant� For the years 2017–2019, “forced mode status” was obtained for 195 MW; for the year 2020 for 175 MW, and for the year 2021 for 105 MW� The date of the CCS auction for 2022 has been postponed from 15 September 2018 to 1 May 2019� In June 2018, Fortum won the right to build 110 MW of solar capacity in a CSA auction� The power plants are to be commissioned during the 2021–2022 and will receive a guaranteed CSA price corresponding to approximately RUB 14,000 per MWh for a period of 15 years� In June 2018, the Fortum-Rusnano wind investment fund (Fortum’s ownership 50%) won the right to build 823 MW of wind capacity in a CSA auction� The wind parks were to be commissioned during 2019–2023 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000–8,000 per MWh for a period of 15 years� In December 2018, the wind investment fund made an investment decision on a 100-MW wind farm� As of January 2018, Fortum’s Ulyanovsk wind farm is listed in the registry of capacity� The 35-MW power plant is Russia’s first industrial wind park� It will receive CSA payments for a period of approximately 15 years after commissioning� The CSA price currently corresponds to approximately RUB 11,000 per MWh� In June 2017, the Fortum-Rusnano wind investment fund won the right to build 1,000 MW of wind capacity in a CSA auction� The wind parks were to be commissioned during 2018–2022 and will receive a guaranteed CSA price corresponding to approximately RUB 7,000–9,000 per MWh for a period of 15 years� In October 2017 and October 2018, the wind investment fund made investment decisions on a 50-MW and a 200-MW wind farm, respectively� The Russian annual average gas price growth was 3�1% in 2018� Fortum estimates the Russian annual average gas price growth to be 3% in 2019� Other Operations For information on the financial impact of the Uniper shareholding, please see the Uniper investment section of Note 3� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 19 19 Financial performance and position Sustainability Risk management Fortum share and shareholders favourable decisions issued by the Administrative Court of Appeal in October 2018 and by the Administrative Court in November 2018 did not have any impact on profits� The amount of additional tax claimed by the Swedish tax authority was originally SEK 273 million (EUR 26 million) for the year 2013, SEK 282 million (EUR 27 million) for the year 2014, and SEK 200 million (EUR 19 million) for the year 2015� The additional tax cost for 2013 was paid in 2017 and was refunded to Fortum in 2018� Additional taxes and interest for the years 2014 and 2015 had not been paid by Fortum� In June 2018, the Swedish government decided to lower the Swedish corporate tax in two steps, from the current 22�0% to 21�4% from January 2019 and to 20�6% from January 2021� In March 2018, the Swedish Supreme Administrative Court decided not to grant leave to appeal to Fortum with respect to the interest deduction cases relating to the years 2009–2012� The unfavourable decision of the Administrative Court of Appeal from June 2017 therefore remains in force� The additional tax and interest, in total SEK 1,175 million (EUR 122 million), was paid in 2016 and booked as a cost in the 2017 results� There are strong grounds to argue that these decisions of the Administrative Court of Appeal and the Supreme Administrative Court violate EU law and fundamental rights under EU law� On these grounds, Fortum filed a summons application in December 2018 to the District Court of Stockholm in which damages are claimed from the Swedish state in these cases� Fortum also filed a request to initiate a mutual agreement procedure between Sweden and the Netherlands for the year 2012 ( Note 37)� In December 2018, Fortum won the right from Gujarat Urja Vikas Nigam Ltd� to build a 250-MW solar power plant in Raghanesda solar park in District Banaskhata, Gujarat, India� In January 2019, the Government of Gujarat cancelled the result of the auction on the grounds that it considers the winning tariffs to be too high� The Government of Gujarat has indicated that there will be a new auction, for which they intend to reduce the solar park charges to operators, in order to lower the costs for the bidders and enable lower bids� In June 2018, Fortum won the right to build a 250-MW solar power plant in the Pavagada solar park in Karnataka, India� The capital expenditure is estimated to be approximately EUR 120 million, and the solar park will be entitled to a fixed tariff of 2�85 INR/kWh for 25 years� Commissioning of the plant is expected in 2019� Income taxation In 2019, the effective corporate income tax rate for Fortum is estimated to be 19–21%, excluding the impact of the share of profits of associated companies and joint ventures, non-taxable capital gains, as well as tax rate changes� Fortum has received income tax assessments in Sweden for the years 2013, 2014, and 2015 concerning the loans given by Fortum’s Dutch financing company to Fortum’s subsidiaries in Sweden� The interest income for these loans was taxed in the Netherlands� After Fortum received a negative decision from the Administrative Court in Stockholm in 2017, Fortum filed an appeal to the Administrative Court of Appeal in Stockholm� In October 2018, the Administrative Court of Appeal in Stockholm, Sweden, announced its decision relating to the income tax assessment for the year 2013� The decision was favourable to Fortum� The Administrative Court of Appeal confirmed that Fortum had sufficient business reasons for the loans and accepted Fortum’s appeal� The decision regarding the year 2013 is final� The Administrative Court in Stockholm announced its decisions in the cases for 2014 and 2015 in November 2018� Also these decisions were favourable to Fortum� The decisions became non-appealable by the end of January 2019� Fortum had not made provisions for the cases regarding the years 2013–2015, as Fortum considers the additional tax unjustified� Therefore, the Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 20 20 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders Sustainability Sustainability approach Fortum strives for balanced management of economic, social and environmental responsibility in the company’s operations, emphasising the following focus areas: Economic responsibility Economic benefits to stakeholders Long-term value and growth Social responsibility Operational and occupational safety Secure energy supply for customers Sustainable supply chain Personnel wellbeing Business ethics and compliance Customer satisfaction Environmental responsibility Energy and resource efficiency Reduction of environmental impacts Climate-benign energy production and systems Solutions for sustainable cities The Group-level sustainability targets are linked to the main sustainability focus areas and emphasise Fortum’s role in society� They measure not only environmental and safety targets, but also Fortum’s reputation, customer satisfaction, employee wellbeing, and the security of power and heat production� Targets are set annually and are based on continuous operational improvement� The achievement of the sustainability targets is monitored in monthly, quarterly and annual reporting� Fortum publishes a yearly Sustainability Report with additional information on the company’s sustainability performance� Group sustainability targets and performance 2018 Economic responsibility Reputation index, based on One Fortum Survey Customer satisfaction index (CSI), based on One Fortum Survey Net Promoter Score (NPS) in Consumer Solutions division Environmental responsibility Specific CO2 emissions from total energy production as a five-year average, g/kWh Energy-efficiency improvement by 2020, base-line 2012, GWh/a Major EHS incidents, no. Social responsibility Energy availability of CHP plants, % Lost workday injury frequency (LWIF), own personnel and contractors Severe occupational accidents, no. Quality of investigation process of occupational accidents, major EHS incidents and near misses GAP index, implementation of EHS minimum requirements Sickness-related absences, % * Scaling revised ** Excluding DUON and Hafslund Target 2018 2017 73.0 72.5 72.3 70–74 63–83 64–76 -6 -18 - <200 186 188 >1,900 ≤20 1,637 18 1,502 20 >95.0 96.4 96.1 ≤2.1 0 Level 3.0 Level 3.0 ≤2.2 1.8 4 Level 3.0 Level 2.0 2.8 2.4 1 Level 2.0 * - 2.2 ** Fortum is listed on the Nasdaq Helsinki exchange and is included in the STOXX Global ESG Leaders, OMX Sustainability Finland, ECPI®, Euronext Vigeo Eurozone 120, Euronext Vigeo Europe 120, MSCI ESG Ratings, and Equileap Gender Equality indices� Fortum is also ranked in category B in the annual CDP Climate Change rating 2018, and it has received a Prime Status (B-) rating by ISS-oekom Corporate Rating� Fortum’s sustainability reporting covers all functions under Fortum’s operational control, including subsidiaries in all countries of operation� The figures for power and heat generation, capacities and investments include also figures from Fortum’s share in associated companies and joint ventures that sell their production to the owners at cost� In the Financial Statements, Uniper is treated as an associated company and Stockholm Exergi as a joint venture, and both companies are consolidated with the equity method� Stockholm Exergi and Uniper are not included in Fortum’s sustainability targets and indicators nor in the descriptions of management practices� Stockholm Exergi’s and Uniper’s sustainability information are available in the companies’ sustainability reports that can be found on the companies’ own web pages� The Meri-Pori power plant is included fully in Fortum’s sustainability figures, as Fortum holds the environmental permit� Sustainability risks Fortum’s operations are exposed to risks, which if materialised can have adverse effects on the environment and on the safety and security of employees, contractors and neighbouring societies� Key sustainability risks are presented in the Risk management section in the Operating and financial review� Climate change and the need for decarbonisation and resource efficiency are changing the energy industry in a profound way, and these changes also create new business opportunities for Fortum� Sustainability governance and policies Sustainability management at Fortum is strategy-driven and is based on the company’s Values, the Code of Conduct, the Supplier Code of Conduct, the Sustainability Policy and other Group policies and their specifying instructions� As sustainability is an integral part of Fortum’s strategy, the highest decision making for these issues falls within the duties of the Board of Directors, who share joint responsibility on sustainability matters� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 21 21 Financial performance and position Sustainability Risk management Fortum share and shareholders Fortum’s main internal policies and instructions guiding sustainability Values Code of Conduct Supplier Code of Conduct Disclosure Policy Group Risk Policy Sustainability Policy (including environmental, and health and safety policies) Minimum Requirements for EHS Management Biodiversity Manual Group Manual for Sustainability Assessment Human Resources Policy Leadership Principles Accounting Manual Investment Manual Group Instructions for Anti-Bribery Group Instructions for Safeguarding Assets Group Instructions for Conflicts of Interest Anti-Money-Laundering Manual Compliance Guidelines for Competition Law Security Guidelines Policy for Sponsoring and Donations Group Instructions for Compliance Management Economic responsibility x x x x x x x x x x x x x x x Environmental responsibility x x x x x x x x x x x x Social and employee matters x x x x x x x x x x x x x x x x x x x x Social responsibility Human rights x x x Anti-corruption and bribery x x x x x x x x x x x x x x x x x x x x x x x Fortum Executive Management decides on the sustainability approach and Group-level sustainability targets that guide annual planning� The targets are ultimately approved by Fortum’s Board of Directors� Fortum’s line management is responsible for the implementation of the Group’s policies and instructions and for day-to-day sustainability management� Realisation of the safety targets is a part of Fortum’s short-term incentive system� Fortum is a participant of the UN Global Compact initiative and the UN Caring for Climate initiative� Fortum respects and supports the International Bill 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� Business ethics The Fortum Code of Conduct and Fortum Supplier Code of Conduct define how we treat others, engage in business, safeguard corporate assets, and how Fortum expects suppliers and business partners to operate� Fortum’s Board of Directors is responsible for the company’s mission and values and has approved the Fortum Code of Conduct� Fortum has zero tolerance for corruption and fraud and does not award donations to political parties or political activities, religious organisations, authorities, municipalities or local administrations� In addition to internal reporting channels, Fortum employees and partners can report suspicions of misconduct confidentially to Fortum’s Head of Internal Audit via the “raise-a-concern channel” on Fortum’s internal and external web pages� Suspected misconduct and measures related to ethical business practices and compliance with regulations are regularly reported to the Audit and Risk Committee� No cases of suspected corruption or bribery related to Fortum’s operations were reported in 2018� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 22 22 Financial performance and position Sustainability Risk management Fortum share and shareholders Economic responsibility Fortum’s goal is to achieve excellent financial performance in strategically selected core areas through strong competence and responsible ways of operating� Fortum measures financial performance with return on capital employed (long-term target: at least 10%) and capital structure (long-term target: comparable net debt/EBITDA around 2�5x)� Fortum is a significant economic actor in its operating countries� The most significant direct monetary flows of Fortum’s operations come from revenue from customers, procurements of goods and services from suppliers, compensation to lenders, dividends to shareholders, growth and maintenance investments, employee wages and salaries, and taxes paid� In 2018, investments in CO2-free production were EUR 278 (375) million� Investments were a total of EUR 180 (291) million in hydro, wind and solar power and bioenergy� Fortum supports social development and wellbeing in its operating countries by e�g� paying taxes� The tax benefits Fortum produces to society include not only corporate income taxes, but also several other taxes� In 2018, Fortum’s taxes borne were EUR 299 (445) million� Fortum publishes its tax footprint annually� Targets for reputation and customer satisfaction are monitored annually� In the One Fortum Survey in 2018, company reputation among key stakeholder groups was 72�5 (72�3) points, which did not meet the target of 73�0 points� The Group-level target (70–74 points, on a scale of 0–100) for customer satisfaction was achieved among all business areas with two exceptions: retail electricity sales to major customers and EV charging solutions for consumers and businesses� The Consumer Solutions division also used the Net Promoter Score (NPS) method to measure the satisfaction of electricity sales customers; the score was -18, which did not meet the target of -6� Fortum’s total purchasing volume in 2018 was EUR 3�7 (3�2) billion and Fortum had about 14,000 suppliers of goods and services� Fortum expects its business partners to act responsibly and to comply with the Fortum Code of Conduct and the Fortum Supplier Code of Conduct� Fortum assesses the performance of its business partners with supplier qualification and supplier audits� In 2018, Fortum conducted a total of 13 (11) supplier audits in Finland, Lithuania, Poland, Netherlands, Russia, Vietnam, and India� Most of the non-compliances identified in the audits in 2018 were related to occupational safety, working hours and remuneration� In addition, two of Fortum’s Russian coal suppliers were audited against the Bettercoal Code by a third party� Environmental responsibility Fortum’s Group-level environmental targets are related to CO2 emissions, energy efficiency, and major environmental, health and safety (EHS) incidents� The Group Sustainability Policy together with the Minimum Requirements for EHS Management steer Fortum’s environmental management� Investments, acquisitions and divestments are assessed based on the sustainability assessment criteria defined in the Group’s Investment Manual� Operational-level activities follow the requirements set forth in the ISO 14001 environmental management standard, and 99�9% (99�8%) of Fortum’s power and heat production worldwide has ISO 14001 certification� Circular economy Fortum’s aim is to promote resource efficiency improvements and the transition towards a more extensive circular economy� Resource efficiency and maximising the added value of waste and biomass are key priorities in the environmental approach, as defined in the Group Sustainability Policy� In 2018, Fortum received a total of 1�6 million tonnes of non- hazardous waste and about 600,000 tonnes of hazardous waste from customers� As much of the waste stream as possible is recycled, recovered or reused� Waste that is unsuitable for recycling or reuse as a material is incinerated in Fortum’s waste-to-energy plants in the Nordic countries and Lithuania� Sustainable energy production Fortum’s energy production is primarily based on carbon dioxide-free hydropower and nuclear power and on energy-efficient combined heat and power (CHP)� In line with the strategy, Fortum is targeting a multi- gigawatt solar and wind portfolio� In 2018, Fortum’s power generation was 74�6 (73�2) TWh and heat production 29�8 (28�6) TWh� 57% (61%) of the total power generation was CO2-free� In the EU area, 96% (96%) of the power generation was CO2-free� The main fuels that Fortum uses to produce electricity and heat are natural gas, nuclear fuel, coal, waste-derived fuels and biomass fuels� The most significant fuel was natural gas, which accounted for 63% (62%) of the total fuel consumption� The next highest fuel use was uranium 21% (21%)� Coal accounted for 8% (10%) of the total fuel use, and waste-derived fuels and biomass fuels 4% (3%) and 3% (3%), respectively� Russia accounted for 98% of the use of natural gas and 56% of the use of coal� Climate change mitigation Fortum expects the concern about climate change to increase the demand for low-carbon production and energy-efficient solutions and products� Fortum aims to mitigate climate change by investing in CO2- free energy production and by improving energy and resource efficiency� Fortum is also adapting its operations to climate change in production planning and in the assessment of growth projects and investments� In 2018, Fortum’s direct CO2 emissions were 20�1 (18�4) Mt� 84% of CO2 emissions originated from Russian power plants� Direct CO2 emissions increased due to the increase in power production in Russia� Of the total CO2 emissions, 2�5 (2�4) Mt were within the EU’s emissions trading scheme (ETS)� The estimate for Fortum’s free emission allowances is 0�8 (1�0) Mt� Fortum’s direct CO2 emissions Fortum’s total CO2 emissions (million tonnes, Mt) Total emissions Emissions subject to ETS Free emissions allowances Emissions in Russia 2018 2017 20.1 18.4 * 2.4 * 1.0 15.4 2.5 0.8 16.9 2016 18.6 2.7 1.0 15.5 * The figure has been revised from the one presented in the Financial Statements bulletin 2017, Financials 2017 and Sustainability 2017. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 23 23 Financial performance and position Sustainability Risk management Fortum share and shareholders In 2018, Fortum’s specific carbon dioxide emissions from total energy production were 192 (184) g/kWh� The specific CO2 emissions from total energy production as a five-year average were 186 (188) g/kWh, which is better than Fortum’s Group target of 200 g/kWh� Fortum has a Group-level target to achieve annual energy-efficiency improvements of more than 1,900 GWh by 2020 compared to 2012� Fortum achieved 1,637 GWh/a by the end of 2018� Decreasing environmental impact Emissions into air Fortum’s activities cause various emissions to air� In addition to carbon dioxide (CO2) emissions, these include flue-gas emissions, such as sulphur dioxide (SO2), nitrogen oxide (NOx) and particle emissions� All power plants operate in compliance with their air emission limits� Fortum’s flue-gas emissions into air Fortum’s flue-gas emissions into air (1,000 tonnes) Sulphur dioxide emissions Nitrogen oxide emissions Particle emissions 2016 2017 2018 22.5 18.8 16.8 26.1 26.4 * 24.9 * 16.8 15.8 9.6 * Figure revised Water withdrawal Fortum uses large volumes of water at various types of power plants and in district heat networks� In most cases, power plants do not consume water – the water is discharged back to the same water system from where it was withdrawn� Fortum withdrew a total of 2,100 (2,100) million m3 of water in power and heat production; 94% of this amount was used as cooling water� Radioactive waste In 2018, 20�3 (23�4) tonnes of spent nuclear fuel was removed from Loviisa power plant’s reactors in Finland� High-level radioactive spent fuel is stored in an interim storage at the Loviisa power plant site� The final disposal of the high-level radioactive waste is scheduled to begin at Olkiluoto in Eurajoki in the 2020s� 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 2018 was 8,286 (8,785)� Biodiversity Fortum’s main impacts on biodiversity are related to hydropower production� Fuel procurement and flue-gas emissions may also have a negative impact on biodiversity� On the other hand, increasing CO2-free production mitigates the biodiversity loss caused by climate change� Fortum’s Biodiversity Manual, revised in 2017, and the first Biodiversity Action Plan, published in 2018, define the company’s approach in biodiversity management� Environmental incidents Fortum’s target regarding major EHS incidents is to have no more than 20 major EHS incidents annually� Major EHS incidents are monitored, reported and investigated, and corrective actions are implemented� In 2018, there were 18 (20) major EHS incidents in Fortum’s operations� The major EHS incidents included 11 fires, two environmental non- compliances, four leaks, and one dam safety incident� The growth in circular economy services increases the risk of EHS incidents and especially the risk of fires� The major EHS incidents did not have significant environmental impacts� Social responsibility Fortum’s social responsibility targets are related to the secure supply of electricity and heat for customers, operational and occupational safety, as well as employee wellbeing� Employees The Group Human Resources Policy is based on the company’s Values, Leadership Principles and Code of Conduct� The HR Policy guides the daily work in the company, and the implementation of the policy is followed up regularly through the employee engagement survey, the annual performance and development discussions, as well as other feedback practices� Group employee statistics Number of employees, 31 December Average number of employees Total amount of employee benefits, EUR million Departure turnover, % Permanent employees, % Full-time employees, % (of permanent employees) Female employees, % Females in management, % 2018 2016 2017 8,286 8,785 8,108 8,767 8,507 7,994 334 423 13.0 10.5 96.1 95.2 98.5 98.1 29 32 25 29 459 16.1 95.9 98.2 32 30 Occupational safety For Fortum, excellence in safety is the foundation of the company’s business and an absolute prerequisite for efficient and interruption-free production� Fortum strives to be a safe workplace for the employees, contractors and service providers who work for the company� The Group Sustainability Policy, the Minimum Requirements for EHS Management and more detailed Group-level EHS manuals steer the work� A certified OHSAS 18001 or ISO 45001 safety management system covers 97�0% (98�4%) of Fortum’s power and heat production worldwide� In 2018, the combined lost-workday injury frequency (LWIF) for own personnel and contractors was 1�8 (2�4), which was better than the set target level (≤2�1)� Unfortunately, 4 (1) severe occupational accidents took place in the company’s operations in 2018; one in Sweden, one in Lithuania and two in Russia� The severe accident in Sweden and in Lithuania resulted in the fatality of a contractor employee� The Group target in 2018 was zero severe occupational accidents� Fortum continues its efforts to improve contractor safety� In 2018, the company implemented tools to assess contractor safety performance as part of the supplier qualification process and also evaluated their safety practices in a more systematic manner during work� For 2019, Fortum has defined a new Group target: Contractor safety improvement index, focusing on identified actions that are based on the Group’s Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 24 24 Financial performance and position Sustainability Risk management Fortum share and shareholders requirements for contractor management to enhance safety (target level 2�0)� In 2018, the quality of investigation process of occupational accidents, major EHS incidents, and serious near misses was at the level of 3�0, achieving the set target level (3�0)� The GAP index, describing the implementation of the Group’s EHS minimum requirements at the power plant level, was at the level 2�0, which did not meet the set target level (3�0)� The most significant deviations were detected in companies that Fortum has acquired in recent years and in the sites operated by contractors� Fortum introduced a safety training programme, provided by an external safety service provider, for both the management level and key individuals leading safety and procurement work as well as the most challenging business areas� Special attention was paid to the prevention of unsafe behaviour, problem solving, the provision of positive feedback, and the establishment of a safety leadership team� Open leadership, personnel development and wellbeing In 2018, more than 800 supervisors participated in the Strategy & Open Leadership events that focused on strategy communications and more in-depth open leadership� Additionally, training programmes on the circular economy, the utilisation of data, communication skills, wellbeing and stress management were arranged during the year for management, supervisors and experts� Fortum’s goal of workplace wellbeing activities is to promote the health and occupational safety of employees and the functionality of the work community� In 2018, the Energise Your Day wellbeing programme was expanded to Fortum Recycling and Waste Solutions’ sites in Finland, Sweden and Denmark, and is now under way in ten operating countries� In 2018, the percentage of sickness-related absences was 2�8 (2�2), which did not meet the target level of ≤2�2� Respect for human rights Fortum’s goal is to operate in accordance with the UN Guiding Principles on Business and Human Rights and to apply these principles in company’s own operations as well as in country and partner risk assessments and supplier audits� A sustainability assessment, including a human rights evaluation, is carried out for investment projects – especially in new operating areas – and also for new countries where Fortum plans to expand the sales of products and services� In 2018, seven (15) of these assessments were made� In 2018, there were no grievances related to human rights filed through Fortum’s formal grievance channels, nor were there any grievances carried over from the previous year� Society An uninterrupted and reliable energy supply is critical for society to function� With planned preventive maintenance and condition monitoring, Fortum ensures that the power plants operate reliably to produce the electricity and heat customers need� The energy availability of the company’s CHP plants in 2018 was, on average, 96�4% (96�1%), outperforming the target of >95�0%� Fortum’s operations impact the local communities where the power plants are located, and the company engages in many kinds of collaboration with local stakeholders� According to Fortum’s Policy for Sponsoring and Donations, the company’s sponsoring focuses on the wellbeing of children and youth, renewable energy projects, R&D and innovations supporting Fortum’s strategy, recycling, recovery and reuse� Fortum also engages in collaboration with universities through different research and development projects� In 2018, Fortum’s support for activities promoting the common good totalled about EUR 3�8 (4�9) million� In addition, the grants awarded by Fortum Foundation, not part of Fortum Group, were about EUR 680,000 (696,000)� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 25 25 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders Risk management Risk management framework and objectives Fortum’s Risk Management framework is described in the Group Risk Policy and supporting documents� The Group Risk Policy includes an overview of Fortum’s risk management systems consisting of the general principles of risk management and the main features of the risk management process� The objective of the risk management systems are to; • support the development of the Group strategy, • support strategy execution, • support the achievement of agreed targets within acceptable risk levels so that the Group’s ability to meet financial commitments is not compromised, • ensure the understanding of material risks and uncertainties affecting Fortum, and • support the prevention of accidents that can have a severe effect on the health and safety of employees or third parties, and from incidents that can have a material impact on Fortum’s assets, reputation or the environment� Risk management organisation The main principle is that risks are managed at source meaning that each Division and Corporate Function Head is responsible for managing risks that arise within their business operations� However, in order to take advantage of synergies, certain risks are managed centrally� For example, Group Treasury is responsible for managing currency, interest rate, liquidity and refinancing risks and cyber and information security risks are managed by Corporate Security� The Audit and Risk Committee (ARC) is responsible for monitoring the efficiency of the company’s risk management systems and for annually reviewing the Group Risk Policy and the material risks and uncertainties� Corporate Risk Management, a function headed by the Chief Risk Officer (CRO) reporting to the CFO, provides instructions and tools which support the Group in running an efficient risk management Corporate Risk Policy Structure Approving body Board of Directors President and CEO Group Risk Policy Group Risk Instructions Division / Corporate Function Head Division / Corporate Function Risk manuals and Guidelines Reviewing Body Audit and Risk Committee CFO CRO process� Corporate Risk Management is responsible for assessing and reporting maturity of risk management in Divisions and Corporate Functions and for providing independent monitoring and reporting of material risk exposures to Group Management, the ARC and the Board of Directors� Risk control functions and controllers in the business monitor and report risks to the CRO� Risk management process Identify Root causes and consequences Assess Impact and likelihood Respond Accept, avoid, mitigate or transfer Control Monitor and report Fortum’s risk management process is designed to support the achievement of agreed targets by ensuring that risk management activities are consistent with the general principles of risk management and that risks are monitored and followed-up in a prudent manner� The main features of risk management process consist of event identification, risk assessment, risk response and risk control� Identification is regularly carried out according to a structured process and risks are assessed in terms of impact and likelihood according to a Group-common methodology� Impact is assessed not only in monetary terms, but also in terms of health and safety, environment and reputation� All risks have risk owners who are responsible for implementing actions to respond to the risk� Risk responses can be to accept, avoid, mitigate or transfer the risk� Risk control processes, which include monitoring and reporting of risks, are designed to support compliance with approved instructions, manuals and guidelines and to ensure that risk exposures remain within approved limits and mandates� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 26 26 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders Fortum’s Board of Directors approves the Group Risk Policy and the Fortum Risk Map CEO approves Group Risk Instructions covering commodity market risks, counterparty credit risks, and operational risks� Fortum also has other Group policies and instructions covering e�g� compliance, privacy, sustainability, treasury and cyber and information security risks which are aligned with the Group Risk Policy� There are risk mandates or limits defined for commodity market risks, counterparty credit risks and financial risks� Divisions and Corporate Functions issues risk manuals and guidelines as needed which detail how the Group Risk Instructions are implemented� Risk factors Strategic risks The main strategic risks are that energy policy, regulation, technology or the business environment develop in ways that we have not been able to foresee and prepare for� Future energy market and regulation scenarios, including the impact of these to Fortum’s business, are continuously assessed and analysed� It is part of Fortum’s strategy to, in the long- term, broaden the base of revenues and diversify into new businesses, technologies and markets� Risks which could hinder Fortum in executing its strategy are continuously assessed, monitored and reported as part of the strategy work� These risks include an inability to identify and carry out successful investments and acquisitions with the related project and integration risks� Business Environment Fortum operates in a global business environment and is therefore exposed to political and other risks which affect the macroeconomic development and consumer behaviour in the markets where we operate� As we increase operations to new geographical regions, this risk may also increase� The current trend of increasingly nationalistic policies and protectionism may lead to increased trade restrictions which in turn could affect demand for our products and services� Fortum monitors the development in order to react quickly to market shifts and changes in consumer behaviour� Investments & Acquisitions EHS & Social Business Environment Business Ethics & Compliance Technology Energy Policy & Regulations Strate g ic Sustain a b i l i t y Fortum’s Risks Property, Plant & Equipment O p e r a tio nal F in a ncial Commodity Markets & Fuels Currency & Interest Rates Systems & Processes Cyber & Information Security Counter- party & Credit Liquidity & Reﬁnancing Investment and acquisition risks Fortum’s strategy includes growth of operations in new businesses, technologies and geographies� This includes an increasing number of associated companies and joint ventures where we do not exercise control, including the Uniper investment and a joint-venture with Rusnano for wind development in Russia� These recent investments as well as any future investment or acquisition, including possible future partnerships, entail risk such as: • increased overall operating complexity and requirements for management, personnel and other resources, Taxation • the need to understand the value drivers and their uncertainties in investments or potential acquisition targets, • the need to manage complex integrations of companies with different culture and infrastructure, • the need to understand and manage new markets with different cultural, ethical and legal frameworks, • the need to understand and manage risks related to sustainability and safety issues related to new businesses, markets and technologies� These risks are managed as part of the investment process which includes requirements for risk identification and assessment and action plans before investment decisions are made, and also sets requirements to follow-up risks in projects and acquisitions� Risks in large projects are mitigated through contract structures and insurance coverage� Partner risk assessments are performed before entering into joint ventures or other material partnership agreements, and there is also a country entry process which includes a country risk assessment before decisions to enter into a new market can be made� Energy policy and regulation risks The energy business is heavily influenced by national and EU-level energy policies and regulations, and Fortum’s strategy has been developed based on scenarios of the future development of the regulatory environment in both existing and potential new businesses and market areas� The overall complexity and possible regulatory Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 27 27 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders changes in Fortum’s various operating countries pose a risk if we are not able to anticipate, identify and manage those changes efficiently� end-customers which could be driven by an increase of national or local political steering in this sector, Fortum maintains an active dialogue with the bodies involved in the • Introduction of a national plastic tax aiming to reduce the use of development of laws and regulations in order to manage these risks and proactively contribute to the development of the energy policy and regulatory framework� plastics, • Emergence of windfall tax discussions following possible increasing electricity and carbon price development� Nordic/EU Fortum’s strategy in the power and heat sectors is based on a market- driven development, which would mean more interconnections and competition supported by increasing policy harmonization� Even if the Nordic power market has a long tradition of harmonization, national policies vary considerably when it comes to e�g� taxation, permitting, subsidies and market model meaning that we have to manage risks related to both EU regulation and national regulation� Potential risks related to the future energy and climate policy framework include; • Increasing policy costs and uncoordinated national mechanisms delaying the development towards an integrated, flexible and dynamic power market, • Overlapping national carbon policies diluting the EU ETS and carbon price despite the ETS reform, • Increasing cost burden for hydro power in Finland, driven by fish obligations, grid costs and real estate taxation and unbalanced implementation of the EU Water Framework directive in Sweden leading to lower production volumes, • Stricter sustainability requirements for forest biomass leading to reduced availability and increasing costs, • Implementation of national waste incineration taxes or restrictive measures affecting the operational environment or the competitiveness of the waste-to-energy business as part of overall recycling promotion, • Substantial retroactive changes and/or discontinuation of prevailing CHP support schemes in Baltic countries and Poland or deteriorating competitiveness of CHP due to fuel tax increases, • Undue heavy-touch price-regulation of district heating in order to enhance the affordability and other social aspects of protecting the The inter-linkage of these issues create uncertainty as changes in policies in one area could undermine the effects of policy changes in other areas� Russia Our business in Russia is exposed to political, economic and social uncertainties and risks resulting from changes in regulation, legislation, economic and social upheaval and other similar factors� The current economic sanctions may be enlarged and/or extended having direct and indirect impacts on the business environment� The main energy policy- related risks in Russia are linked to the development of the whole energy sector, part of which, like the wholesale power market, is liberalised while other parts, like gas, heat, and retail electricity, are not� Regulated sectors are inherently exposed to a risk of regulatory changes which could affect Fortum’s operations� Technology risks Fortum’s strategy includes developing or acquiring new technologies, as well as digitalizing the business� Fortum’s R&D and innovation activities focus on the development of the energy system towards a future solar economy� Fortum is, for example, developing circular economy, bio-economy and other renewable energy concepts as well as innovative solutions for its customers� New technologies expose Fortum to risks related to intellectual property rights, data privacy and viability of technologies� Technology risks are managed primarily through developing a diversified portfolio of projects consisting of different technologies� Sustainability risks Corporate social responsibility and sustainable development are integral parts of Fortum’s strategy� Fortum gives balanced consideration to economic, environmental and social responsibility� Changes to laws, regulations and the business environment can pose a risk if not identified and managed effectively and the same applies to changes in views of our main stakeholders� In order to identify and manage these risks, Fortum endorses a number of international voluntary charters, standards and guidelines in the area of sustainability, conducts stakeholder surveys annually and has defined internal policies and instructions on how to conduct business� Divisions and Corporate Functions identify and assess sustainability risks related to their operations and define mitigation measures annually� Corporate Sustainability executes oversight as part of the Group’s risk management process� Environmental, health and safety and social risks Operating power and heat generation plants, circular economy services and waste management involves use, storage and transportation of fuels and materials, including hazardous waste, that can have adverse effects on the environment and expose personnel, contractors and third parties to safety risks� Assessment of environmental risks and preparedness to operate in exceptional and emergency situations follows legislative requirements as well as the requirements in the environmental management standard (ISO 14001)� The same approach, based on the requirements in the operational health and safety standard (OHSAS 18001 or ISO 45001), applies to risks related to occupational health and safety and actions in emergency situations� Environmental, health and safety (EHS) risks as well as social risks related to Fortum’s supply chain are evaluated through supplier qualification, internal and external audits and risk assessments including partner and country risk assessment� Corrective and preventive actions are implemented when necessary� EHS and social risks related to investments are evaluated in accordance with Fortum’s Investment manual� Environmental risks and liabilities in relation to past actions Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 28 28 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders have been assessed and provisions have been made for future remedial costs� certain countries may be affected by future changes to local laws and regulations� Fortum’s operations are exposed to physical risks caused by climate change, including changes in weather patterns that could alter energy demand and, for instance, hydropower production volumes� Changes in precipitation and temperatures may affect hydropower production, dam safety, and also bioenergy supply and availability� Fortum adapts its operations to the changing climate and takes it into consideration, for example, in production and maintenance planning and in evaluating growth and investment projects� Tax risk Fortum operates in a number of countries and is therefore exposed to changes in taxation and how tax authorities interpret tax laws� Political pressure has resulted in numerous new laws and rules which have created a tax environment that is leading to new or increased taxes and new interpretations of existing tax laws� Clarity and predictability around how our operations are taxed have decreased due to the changing regulation� In addition, new regulation creates material volume of new complex compliance work� Fortum aims to identify simple and cost-efficient solutions to manage taxes in a sustainable manner� Fortum’s tax principle is that tax is a consequence of business and that compliance with tax rules and legislation and transparency result in a correct tax contribution� This principle leaves no room for artificial or other aggressive solutions� Fortum is continuously following the development of tax related issues and their impact on the Group and maintains an active dialogue with tax authorities in unclear cases� Tax-related issues are communicated openly both internally and externally and Fortum’s tax footprint is published annually� Business ethics and compliance risks Fortum’s operations are subject to laws, rules and regulations set forth by the relevant authorities, exchanges, and other regulatory bodies in all markets in which Fortum operates� Fortum’s ability to operate in Fortum’s Code of Conduct enhances the understanding of the importance of business ethics for all Fortum employees, contractors and partners� Prevention of corruption is one of the Code of Conduct’s focus areas� Fortum has procedures for anti-corruption including prevention, oversight, reporting and enforcement based on the requirements prescribed in international legislation� Fortum’s supplier code of conduct sets sustainability requirements for suppliers of goods and services� The Supplier Code of Conduct is based on the principles of the United Nations Global Compact and is divided into four sections: business principles including anti-corruption, human rights, labour standards and environment� Fortum systematically identifies, assesses, mitigates and reports compliance risks including risks related to business ethics� Internal controls are implemented to prevent the possibilities of unauthorised activities or non-compliance with Group policies and instructions� Fortum’s rolling compliance programme includes a risk-based prioritisation of the development and mitigating actions� Training and communications plays a central role in increasing the awareness in the organisation� Financial risks Commodity market and fuel risks Fortum’s business is exposed to fluctuations in prices and availability of commodities used in the production and sales of energy products� The main exposure is toward electricity prices and volumes, prices of emissions and prices and availability of fuels� Fortum hedges its exposure to commodity market risks in accordance with approved Hedging Guidelines and Mandates� For further information on hedge ratios, exposures, sensitivities and outstanding derivatives contracts, see Note 4 Financial risk management� Electricity price and volume risks In competitive electricity markets, such as the Nordpool spot market exchange in the Nordic region, the wholesale price of electricity is determined as the balance between supply and demand� The short-term factors affecting electricity prices and volumes on the Nordic market include hydrological conditions, temperature, wind, CO2 allowance prices, fuel prices, economic development, transmission capacity and the import/export situation� Electricity price risks are mainly hedged by entering into electricity derivatives contracts on the Nasdaq Commodities exchange� The ability to implement hedging strategies is dependent on a well-functioning and liquid derivatives market� There is a risk of decreasing liquidity on the Nasdaq Commodities exchange, and alternatives including use of OTC derivative contracts and proxy products traded on other exchanges are used to mitigate this risk� Hedging strategies are continuously evaluated as electricity and other commodity market prices, the hydrological balance and other relevant parameters change� Hedging of the Generation segment’s power sales is performed in EUR on a Nordic level covering both Finland and Sweden, and the currency component of these hedges in the Swedish entity is currently not hedged� In Russia, electricity prices and capacity sales are the main sources of market risk� The electricity price is highly correlated with the gas price� Exposure is partly mitigated through regulated fixed-price bilateral agreements, but the majority of electricity sales is exposed to spot price risk� In India, the electricity price received from solar production are fixed through long-term power-purchasing agreements� Emission and environmental value risks The European Union has an emissions trading scheme to reduce the amount of CO2 emissions� In addition to the emissions trading scheme, there are other trading schemes in environmental values in place in Sweden, Norway and Poland� Part of Fortum’s power and heat generation is subject to requirements of these schemes� There is currently no trading scheme in Russia for emissions or other environmental values� The main factors influencing the prices of CO2 allowances and other environmental values are political decisions and the supply and demand Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 29 29 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders balance� Fortum hedges its exposure to these prices and volumes through the use of CO2 futures and environmental certificates� Fuel price and volume risks Power and heat generation requires use of fuels that are purchased on global or local markets� The main fuels used by Fortum are natural gas, uranium, coal, various biomass-based fuels and waste� The main risk factor for fuels that are traded on global markets such as coal and natural gas, is the uncertainty in price� 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� For fuels traded on local markets, such as bio-fuels, the volume risk in terms of availability of 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, there are also risks related to imported fuels from Russia� In the Nordic market, exposure to fuel prices is limited due to Fortum’s flexible generation capacity which allows for switching between different fuels according to prevailing market conditions� The remaining exposure to fuel price risk is mitigated through fixed-price physical delivery contracts or derivative contracts� The main fuel source for heat and power generation in Russia is natural gas� Natural gas prices are partially regulated, so the price risk exposure is limited� Liquidity and refinancing risks Fortum’s business is capital intensive and there is a regular need to raise financing� Fortum maintains a diversified financing structure in terms of debt maturity profile, debt instruments and geographical markets� Liquidity and refinancing risks are managed through a combination of cash positions and committed credit facility agreements with its core banks� The credit risk of cash positions has been mitigated by diversifying the deposits to high-credit quality financial institutions and issuers of corporate debt� Currency and interest rate risks Fortum’s debt portfolio consists of interest-bearing liabilities and derivatives on a fixed- and floating-rate basis with differing maturity profiles� Fortum manages the duration of the debt portfolio through use of different types of financing contracts and interest rate derivative contracts such as interest rate swaps� 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)� The main principle is that material transaction exposures should be hedged while translation exposures are not hedged, or are hedged selectively� An exception is the Generation segment’s hedging of power sales in Sweden where the currency component is currently not hedged� The main translation exposures toward the EUR/RUB, EUR/SEK and EUR/NOK are monitored continuously� Changes in these currency rates affect Fortum’s profit level and equity when translating results and net assets to euros� Counterparty & credit risks Fortum is exposed to counterparty risk whenever there is a contractual arrangement with an external counterparty including customers, suppliers, partners, banks, clearing houses and trading counterparties� Credit risk exposures relating to financial derivative instruments are often volatile� The majority of commodity derivatives are exchange- traded and cleared through clearing houses such as Nasdaq Clearing AB or through clearing banks� The recent default of a trader active on Nasdaq Commodities has shown that there is also credit risk toward clearing houses� The trend toward more use of futures contracts instead of forward contracts is decreasing the credit exposure toward clearing houses� Derivatives contracts are also entered into directly with external counterparties and such contracts are limited to high-credit-quality counterparties active on the financial or commodity markets� Due to the financing needs and management of liquidity, Fortum has counterparty credit exposure to a number of banks and financial institutions� The majority of the exposure is toward Fortum’s key relationship banks, which are highly creditworthy institutions, but also 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� Deposits in Russia have been concentrated to the most creditworthy state-owned or controlled banks� Credit risk exposures relating to customers is 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, Poland and Russia� The risk of non-payment in the electricity and heat sales business in Russia is higher than in the Nordic market� In order to manage counterparty credit risk, Fortum has routines and processes to identify, assess and control exposure� Credit checks are performed before entering into commercial obligations and exposure limits are set for larger individual counterparties� Creditworthiness is monitored through the use of internal and external sources so that mitigating actions can be taken when needed� Mitigating actions include demanding collateral, such as guarantees, managing payment terms and contract length, and the use of netting agreements� Operational risks Operational risks are unexpected events which can lead to negative monetary, safety, environmental or reputational impacts as a result of inadequate or failed internal processes, systems or equipment, or from external events� Systems and Process Risks System and process risks are mainly caused by design failures or human errors� Mitigation includes process automation, testing and education� Process-related risks are assessed and controls for the most relevant risks are defined and implemented as part of the internal controls framework� IT-system risk management is based on an IT Service Lifecycle Model, and related processes and practices� ITIL and CobIT are the main frameworks which have been used as reference for the model� Business continuity plans are created for most critical processes� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 30 30 Financial performance and position Financial performance and position Sustainability Risk management Fortum share and shareholders Property, plant and equipment Property, plant and equipment risks are primarily managed through monitoring and maintenance planning� In addition, all Fortum’s industrial assets are covered by a Group Master Policy covering property damage and business interruption risks which mitigates the impact of internal and external events� Combined heat and power (CHP) and recycling and waste Operational events at CHP and recycling and waste facilities, or in the storage and transportation of fuels, waste and materials can lead to physical damages, business interruption, and environment, health and safety and social impacts� Leakage and contamination of the surrounding environment could lead to clean-up costs and third-party liabilities� An explosion or fire at a facility could cause damages to the plant or third-parties and lead to possible business interruption� Requirements for waste are clearly specified and samples are tested for selected incoming waste deliveries� These risks are mitigated by condition monitoring, preventive maintenance and other operational improvements as well as competence development of personnel operating the plants� Hydro power Operational events at hydro power generation facilities can lead to physical damages, business interruptions, and third-party liabilities� A long-term program 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 program in place that covers Swedish dam failure liabilities up to SEK 10,000 million� Nuclear power Fortum owns the Loviisa nuclear power plant, and has minority interests in two 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)� under the guidance of the Data Privacy Office and in accordance with the Group Instructions for Privacy� IT functions in the business, support functions and outsourcing partners are responsible for identifying and mitigating operational IT security related risks as well as managing IT security incidents� IT functions are also responsible for IT service continuity� 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) and the same type of insurance policies are in place for the operators where Fortum has a minority interest� Wind and Solar Fortum is involved in the construction, development and operations of several wind and solar projects in the Nordics, Russia and in India� Operational incidents during both construction and operational phases can lead to accidents, delays in commissioning and business interruption� These risks are mitigated as part of the project planning and through maintenance and continuous training of personnel operating the plants� Cyber and information security risks Fortum’s business operations and customer related services are dependent on well-functioning IT and information management systems and processes� Due to the nature of the business, large amounts of data are processed, often in real-time, and used for decision-making, serving customers and in internal and external communication and reporting� Securing information and availability of the systems are essential for Fortum� Cyber security risks, including risks related to information, industrial control systems (ICS), digitalization and privacy, are managed centrally by Corporate Security in collaboration with business� Group instructions and procedures set requirements for managing and mitigating cyber security risks� General Data Protection Regulation became applicable on 25th of May 2018� The regulation contains a number of requirements related to processing personal data� Fortum established a Group-wide program to ensure the fulfilment of the requirements� The program was to a large extent implemented during 2018 and the future work continues Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 31 31 Financial performance and position Sustainability Risk management 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 FORTUM (until 25 January 2017: 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 capital Share capital Share key figures EUR Earnings per share Cash flow per share Equity per share Dividend per share Payout ratio, % Dividend yield, % 1) Board of Directors’ proposal for the Annual General Meeting 26 March 2019. 2018 0.95 0.91 13.33 1.10 1) 115.8 1) 5.8 1) 2017 0.98 1.12 14.69 1.10 112.2 6.7 2016 0.56 0.7 15.15 1.10 196.4 7.5 EUR million Registered shares at 1 January Cancellation of treasury shares Registered shares at 31 December 2018 Number of shares 888,367,045 72,580 888,294,465 Share capital 3,046 - 3,046 Fortum Corporation has one class of shares� By the end of 2018, a total of 888,294,465 shares (2017: 888,367,045) 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 2018, Fortum Corporation’s share capital, paid in its entirety and entered in the trade register, was EUR 3,046,185,953�00� For full set of share Key figures 2009–2018, see the section Key figures in the Financial Statements� In the merger of Länsivoima Oyj (former Lounais-Suomen Sähkö Oy) to Fortum Corporation in 2000, those Shareholders value, share price performance and volumes Fortum’s mission is to deliver excellent value to its shareholders� Fortum’s share price has appreciated approximately 17% during the last five years, while Dow Jones European Utility Index has increased 3%� During the same period Nasdaq Helsinki Cap index has increased 27%� During 2018, Fortum’s share price appreciated approximately 16%, while Dow Jones European Utility index decreased 3% and Nasdaq Helsinki Cap index decreased 8%� In 2018, a total of 474�7 million (2017: 582�9) Fortum Corporation shares, totalling EUR 9,065 million, were traded on the Nasdaq Helsinki� The highest quotation of Fortum Corporation shares during 2018 was EUR 22�91, the lowest EUR 16�43, and the volume-weighted average EUR 19�09� The closing quotation on the last trading day of the year 2018 was EUR 19�10 (2017: 16�50)� Fortum’s market capitalisation, calculated using the closing quotation of the last trading day of the year, was EUR 16,966 million (2017: 14,658)� In addition to the Nasdaq Helsinki, Fortum shares were traded on several alternative market places, for example at Boat, Cboe and Turquoise, and on the OTC market� In 2018, approximately 68% (2017: 61%) of Fortum’s shares were traded on markets other than the Nasdaq Helsinki Ltd� shareholders of Länsivoima Oyj that did not produce their share certificates and did not request their rights to be registered in the book-entry system, received their respective shares of Fortum Corporation as merger consideration to a joint book-entry account opened on their behalf (the “Joint Account”)� The Annual General Meeting 2018 of Fortum Corporation decided, that the rights to all such shares entered in the Joint Account and to the rights attached to such shares that had not been requested to be registered in the book-entry system prior to the decision by the Annual General Meeting 2018, were forfeited� In addition to the shares, the rights attached to such shares, such as undrawn dividend, were forfeited� The provisions applicable to treasury shares held by the company were applied to the forfeited shares� On 17 December 2018, Board of Directors decided to cancel all these 72,580 Fortum shares owned by the company without decreasing the share capital� The cancellation was entered in the Trade Register on 21 December 2018� Shareholders At the end of 2018, 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� The proportion of nominee registrations and direct foreign shareholders was 30�8 % (2017: 30�6%)� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 32 32 Financial performance and position Sustainability Risk management Fortum share and shareholders Shareholders, 31 December 2018 Shareholders Finnish State Ilmarinen Mutual Pension Insurance Company Varma Mutual Pension Insurance Company The Finnish Social Insurance Institution Kurikan Kaupunki The State Pension Fund Elo Mutual Pension Insurance Company OP-Finland The Local Government Pensions Institution Schweizerische Nationalbank Danske Finnish Institutional Equity Fund OP-Henkivakuutus Ltd. Kauhajoen Kaupunki Seligson & Co OMX 25 fund Nominee registrations and direct foreign ownership 1) Other shareholders in total Total number of shares 1) Excluding Schweizerische Nationalbank By shareholder category Finnish shareholders Corporations Financial and insurance institutions General government Non-profit organisations Households Non-Finnish shareholders Total No. of shares 450,932,988 8,955,600 8,575,167 7,030,896 6,203,500 4,600,000 4,420,000 2,710,654 2,568,955 2,010,237 1,080,000 962,467 902,640 837,941 271,655,835 114,847,585 888,294,465 Holding % 50.76 1.01 0.97 0.79 0.70 0.52 0.50 0.31 0.29 0.23 0.12 0.11 0.10 0.09 30.58 12.93 100.00 % of total amount of shares 1.14 1.67 55.78 1.14 9.46 30.81 100.00 Breakdown of share ownership, 31 December 2018 Number of shares owned 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 In the joint book-entry account and in special accounts on 31 December Nominee registrations Total No. of shareholders 37,557 47,199 18,498 18,684 949 70 10 1 122,968 % of shareholders 30.54 38.38 15.04 15.19 0.77 0.06 0.01 0.00 100.00 No. of shares 1,980,752 12,546,537 13,621,769 48,637,140 20,834,163 22,060,974 48,155,009 450,932,988 618,769,332 596 269,524,537 888,294,465 % of total amount of shares 0.22 1.41 1.53 5.48 2.35 2.48 5.42 50.76 69.66 0.00 30.34 100.00 Management shareholding 31 December 2018 At the end of 2018, the President and CEO and other members of the Fortum Executive Management owned 193,227 shares (2017: 200,667) representing approximately 0�02% (2017: 0�02%) 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 other members of the Fortum Executive Management is shown in Note 11 Employee benefits� Authorisations from the Annual General Meeting 2018 In 2018, the Annual General Meeting decided to authorise the Board of Directors to decide on the repurchase and disposal of the company’s own shares up to a maximum number of 20,000,000 shares, which corresponds to approximately 2�25% of all the shares in the company� The authorisation is effective for a period of 18 months from the resolution of the General Meeting� The authorisation had not been used by the end of 2018� 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� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 33 33 Financial performance and position Sustainability Risk management Fortum share and shareholders Dividend distribution proposal The distributable funds of Fortum Corporation as at 31 December 2018 amounted to EUR 4,991,388,741�37 including the profit of the financial period 2018 of EUR 797,840,404�43� The company’s liquidity is good and the dividend proposed by the Board of Directors will not compromise the company’s liquidity� The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 1�10 per share be paid for 2018� Based on the number of registered shares as at 31 January 2019 the total amount of dividend would be EUR 977,123,911�50� The Board of Directors proposes, that the remaining part of the distributable funds be retained in the shareholders’ equity� The Annual General Meeting will be held on 26 March 2019 at 11:00 EET at Finlandia Hall in Helsinki� Market capitalisation, EUR billion 25 20 15 10 5 0 2014 2015 2016 2017 2018 Share quotations, index 100 = quote on 2 January 2014 Total shareholder return, EUR 200 150 100 50 0 2014 2015 2016 2017 2018 50 45 40 35 30 25 20 15 10 5 0 Fortum OMXHCap DJ STOXX 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fortum’s share price, (EUR 19.10) Fortum’s total shareholder return, EUR 37.04 (dividends reinvested) Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 34 Income statement Statement of comprehensive income Balance sheet Statement of changes in total equity Cash flow statement Consolidated income statement EUR million Comparable operating profit Impairment charges Capital gains and other Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment Items affecting comparability Operating profit See Definitions for key figures Note 8 6 6, 7 2018 987 -4 102 98 -45 151 1,138 2017 811 6 326 14 1 347 1,158 EUR million Sales Other income Materials and services Employee benefits Depreciation and amortisation 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 for profit attributable to the equity owners of the company (EUR per share) Basic Note 6 9 10 11 6, 17, 18 9 6 7 6 6, 19 8 12 13 14 2018 5,242 130 -2,795 -459 -536 -594 987 151 1,138 38 -148 34 -8 -15 -136 1,040 -181 858 843 15 858 2017 4,520 55 -2,301 -423 -464 -576 811 347 1,158 148 -164 32 -12 -50 -195 1,111 -229 882 866 16 882 0.95 0.98 As Fortum currently has no dilutive instruments outstanding, diluted earnings per share is the same as basic earnings per share� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 35 Income statement Statement of comprehensive income Balance sheet Statement of changes in total equity Cash flow statement Consolidated statement of comprehensive income 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 Deferred taxes Net investment hedges Fair value gains/losses in the period Deferred taxes Exchange differences on translating foreign operations Share of other comprehensive income of associates and joint ventures 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 and joint ventures Other comprehensive income for the period, net of deferred taxes Total comprehensive income for the year Total comprehensive income attributable to: Owners of the parent Non-controlling interests Notes 2018 858 2017 882 4.6 19 31 31 -778 15 -2 162 32 -6 -525 -37 0 -1,141 3 43 46 -1,094 -236 -239 3 -236 22 76 -4 -19 23 -5 -372 -10 -2 -291 -13 6 -7 -298 584 571 13 584 Other comprehensive income (OCI) includes 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 items is recognised. OCI also includes gains and losses on fair valuation of other investments, actuarial gains and losses from defined benefit plans, items on comprehensive income in associated companies and translation differences. Fair valuation of cash flow hedges mainly relates to fair valuation of derivatives, such as futures and forwards, hedging electricity price for future transactions, where hedge accounting is applied. When electricity price is higher (lower) than the hedging price, the impact on equity is negative (positive). Translation differences from translation of foreign entities, mainly RUB and SEK. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 36 Income statement Statement of comprehensive income Balance sheet Statement of changes in total equity Cash flow statement 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 Short-term interest-bearing receivables Income tax receivables Trade and other receivables Deposits and securities (maturity over three months) Cash and cash equivalents Liquid funds Total current assets Total assets Note 31 Dec 2018 31 Dec 2017 17 18 19 29 20 28 4 21 22 4 21 28 23 24 1,087 9,981 5,978 899 139 70 229 683 19,065 233 326 409 172 1,620 29 557 584 3,344 1,064 10,510 1,900 858 140 73 281 1,010 15,835 216 240 395 172 997 715 3,182 3,897 5,918 22,409 21,753 EUR million 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 Total current liabilities Total liabilities Total equity and liabilities Note 31 Dec 2018 31 Dec 2017 25 26 27 4 28 29 30 31 32 27 4 33 3,046 73 9,232 -510 11,841 236 12,077 3,046 73 9,875 54 13,048 239 13,287 5,007 362 720 899 91 98 182 7,358 1,086 829 1,058 2,973 4,119 214 819 858 100 102 175 6,388 766 200 1,112 2,078 10,332 8,466 22,409 21,753 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 37 Income statement Statement of comprehensive income Balance sheet Statement of changes in total equity Cash flow statement Consolidated statement of changes in total equity Retained earnings Other equity components EUR million BS Total equity 31 December 2017 Impact from change in accounting principle (IFRS 9 and 15) Total equity 1 January 2018 Net profit for the period Translation differences Other comprehensive income Total comprehensive income for the period Cash dividend Other BS Total equity 31 December 2018 BS Total equity 31 December 2016 Net profit for the period Translation differences Other comprehensive income Total comprehensive income for the period Cash dividend Other BS Total equity 31 December 2017 Note Share capital 3,046 Share premium 73 Retained earnings and other funds 12,062 Translation of foreign operations Cash flow hedges Other OCI items 70 -2,187 -40 3,046 73 3,046 3,046 73 73 3,046 73 7 12,069 843 0 843 -977 2 11,937 12,186 866 -9 857 -977 -4 12,062 -2,187 -519 -519 -2,705 -1,817 -369 -369 -2,187 14 14 -40 0 -599 -598 -638 -115 1 74 75 -40 70 1 28 29 99 58 1 11 11 70 OCI items associated companies and joint ventures 24 Owners of the parent 13,048 Non-controlling interests 239 Total equity 13,287 24 -1 6 6 30 27 -1 -2 -3 24 7 13,055 843 -518 -564 -239 -977 2 11,841 13,459 866 -369 73 571 -977 -4 13,048 239 15 -7 -5 3 -6 0 236 84 16 -3 0 13 -2 145 239 7 13,295 858 -525 -569 -236 -983 2 12,077 13,542 882 -372 74 584 -979 141 13,287 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 -518 million during 2018 (2017: -369)� Translation differences are mainly related to RUB and SEK� Part of this translation exposure has been hedged and the foreign currency hedge result, amounting to EUR 24 million (2017: 28), 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 4.6 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 -598 million (2017: 75), mainly relates to fair valuation of derivatives, such as futures and forwards, hedging electricity price for future transactions, where hedge accounting is applied� When electricity price is higher (lower) than the hedging price, the impact on equity is negative (positive)� Non-controlling interests Non-controlling interests increased with EUR 155 million during 2017 mainly due to the acquisition of Fortum Oslo Varme AS, which is consolidated as a subsidiary with 50% non-controlling interest� See also Note 3 Acquisitions and disposals� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 38 Income statement Statement of comprehensive income Balance sheet Statement of changes in total equity Cash flow statement Consolidated cash flow statement EUR million Cash flow from operating activities Profit for the period Adjustments: Income tax expenses Finance costs - net Share of profit of associates and joint ventures Depreciation and amortisation Operating profit before depreciations (EBITDA) Items affecting comparability Comparable EBITDA Non-cash flow items Interest received Interest paid Dividends received Realised foreign exchange gains and losses Income taxes paid Other items Funds from operations Change in working capital Net cash from operating activities Cash flow from investing activities Capital expenditures Acquisitions of shares Proceeds from sales of fixed assets Divestments of shares Shareholder loans to associated companies and joint ventures Change in cash collaterals and restricted cash Change in other interest-bearing receivables Net cash used in investing activities Note 17, 18 2018 858 181 136 -38 536 1,674 -151 1,523 -90 23 -171 61 231 -94 -9 1,474 -670 804 -579 -4,088 38 259 -24 -36 31 -4,398 2017 882 229 195 -148 464 1,623 -347 1,275 -76 35 -187 58 -83 -83 -28 912 81 993 -657 -972 8 741 43 -3 34 -807 EUR million 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 Net cash used in financing activities Total net increase(+)/decrease(-) in liquid funds Liquid funds at the beginning of the year 1) Foreign exchange differences in liquid funds Liquid funds at the end of the period Note 2018 -3,594 2017 187 1,764 -586 135 -977 -9 326 35 -543 68 -977 -12 -1,428 -3,268 -1,241 3,896 -43 584 5,155 -16 3,897 14 24 1) Opening balance 1 January 2018 adjusted EUR -1 million due to adoption of IFRS 9, see Note 1.6 New IFRS standards adopted from 1 Jan 2018. Realised foreign exchange gains and losses relate mainly to financing of Fortum’s Russian and Swedish subsidiaries and the fact that the Group’s main external financing currency is EUR. The foreign exchange gains and losses arise from rollover of foreign exchange contracts hedging these internal loans as major part of the forwards are entered into with short maturities i.e. less than twelve months. Capital expenditures in cash flow do not include not yet paid investments. Capitalised borrowing costs are presented in interest paid. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 39 Income statement Statement of comprehensive income Balance sheet Statement of changes in total equity Cash flow statement Change in net debt EUR million Net debt 1 January Impact from change in accounting principle (IFRS 9) Foreign exchange rate differences Comparable EBITDA Non-cash flow items Paid net financial costs Income taxes paid Change in working capital Capital expenditures Acquisitions 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, amortised cost valuation, acquired debt and other Net debt 31 December Additional cash flow information Change in working capital EUR million Change in settlements for futures, decrease(+)/increase(-) Change in interest-free receivables, decrease(+)/increase(-) Change in inventories, decrease(+)/increase(-) Change in interest-free liabilities, decrease(-)/increase(+) CF Total 2018 988 1 15 1,523 -90 138 -94 -670 -579 -4,088 298 -24 -5 -977 -12 -4,580 -75 5,509 2018 -524 -186 -3 43 -670 2017 -48 -15 1,275 -76 -199 -83 81 -657 -972 749 43 31 -977 -17 -802 248 988 2017 141 -94 19 15 81 In Fortum’s cash flow statement the daily cash settlements for futures are shown as change in working capital whereas the changes in cash collaterals for forwards are included in cash flow from investing activities� The cash collaterals are included in the short-term interest-bearing receivables and the daily cash settlements are included in the other receivables, see Note 21 Interest-bearing receivables and Note 23 Trade and other receivables� Capital expenditure in cash flow EUR million Capital expenditure Change in not yet paid investments, decrease(+)/increase(-) Capitalised borrowing costs CF Total Note 6, 17, 18 2018 584 5 -10 579 2017 690 -17 -16 657 Capital expenditures for intangible assets and property, plant and equipment were in 2018 EUR 584 million (2017: 690)� Capital expenditure in cash flow in 2018 EUR 579 million (2017: 657) is including payments related to capital expenditure made in previous year i�e� change in trade payables related to investments EUR 5 million (2017: -17) and excluding capitalised borrowing costs EUR -10 million (2017: -16), which are presented in interest paid� See also information about the investments by segments and countries in Note 6 Segment reporting and the investment projects by segment in Note 18.2 Capital expenditure� Acquisition of shares in cash flow Acquisition of shares, net of cash acquired, amounted to EUR 4,088 million during 2018 (2017: 972)� Acquisition of shares during 2018 include mainly the acquisition of shares in Uniper SE� During 2018 Fortum also acquired 100% of the shares in the Fincumet Group metal recycling companies, three Latvian heat producing companies and other smaller companies� Fortum also invested in the wind investment fund owned 50/50 by Fortum and RUSNANO� For further information see Note 3 Acquisitions and disposals� Divestment of shares in cash flow EUR million Proceeds from sales of subsidiaries, net of cash disposed Proceeds from sales of associates and joint ventures CF Total Note 3 2018 88 171 259 2017 54 687 741 Proceeds from sales of subsidiaries during 2018 include mainly the sale of the 54% share of Fortum’s solar power company in accordance with the capital recycling business model� Proceeds from sales of associated companies and joint ventures during 2018 include the sale of Fortum’s 10% ownership in Hafslund Produksjon Holding AS� For further information see Note 3 Acquisitions and disposals� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 40 40 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 1 Accounting policies 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 Nordic and Baltic countries, Russia and Poland� Fortum’s activities cover generation and sale of electricity, generation, distribution and sale of heat, and energy-related expert services� In addition Fortum has major shareholdings including a 49�99% participation in Uniper SE� These financial statements were approved by the Board of Directors on 31 January 2019� 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 financial assets and financial liabilities (including derivative instruments) at fair value through profit and loss or other comprehensive income� The figures in the consolidated financial statements have been rounded and consequently the sum of individual figures may deviate from the sum presented� Key figures have been calculated using exact figures� 1.2.1 Measures for performance According to the ESMA Guidelines on Alternative Performance Measures, an Alternative Performance Measure (APM) is understood as a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework� Fortum uses Alternative performance measures (APMs) in the financial target setting and forecasting, management’s follow up of financial performance of segments and the group as well as allocation of resources in the group’s performance management process� The business performance of the operations cannot be compared from one period to another without adjusting for items affecting comparability and therefore they are excluded from Comparable operating profit and Comparable EBITDA� The main business performance measurements have been used consistently since 2005� Definitions are presented in the section Definitions of key figures� 1.2.2 Classification of current and 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, except financial derivatives, 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 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 (current Neste Oyj) 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 Subsidiaries are defined as companies in which Fortum has control� Control exists when Fortum is exposed to, or has rights 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� 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 41 41 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 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 40 Subsidiaries by segment on 31 December 2018� 1.3.2 Associates Associated companies are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights� The Group’s interests in associated companies are accounted for using the equity method of accounting� 1.3.3 Joint ventures Joint ventures are arrangements in which the Group has joint control� Joint ventures are accounted for using the equity method of accounting� 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� 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 and translation The key exchange rates applied in the Fortum Group accounts: Sweden Norway Poland Russia Currency SEK NOK PLN RUB Average rate 2018 10.2591 9.6432 4.2614 73.8035 2017 9.6392 9.3497 4.2556 66.0349 Balance sheet date rate 31 Dec 2018 10.2548 9.9483 4.3014 79.7153 31 Dec 2017 9.8438 9.8403 4.1770 69.3920 1.4.1 Functional and presentation 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� 1.4.4 Associates and joint ventures The Group’s interests in associated companies and joint 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� 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 financial assets through other comprehensive income are included in Other equity components section of the equity� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 42 42 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 1.5 Other accounting policies Fortum describes the other accounting principles in conjunction with the relevant note information� The table below lists the significant accounting policies and the note where they are presented as well as the relevant IFRS standard� Note 6 Segment reporting 6, 23 Segment reporting and Trade and other receivables 18 Property, plant and equipment 11 Employee benefits 28 Income taxes in balance sheet 19 Participations in associated companies and joint ventures 19 Participations in associated companies and joint ventures 15, 20 Financial assets and liabilities by categories and Other non-current assets 17 Intangible assets 18 Property, plant and equipment 34 Lease commitments 22 Inventories 14 Earnings and dividend per share 31 Pension obligations IFRS standard IFRS 8, IFRS 15 IFRS 15 IAS 20 IFRS 2 IAS 12 IFRS 11, IAS 28, IFRS 12 IAS 28, IFRS 12 IAS 16, IAS 36, IFRS 9 IAS 38 IAS 16, IAS 36, IAS 40 IAS 17 IAS 2 IAS 33 IAS 19 29 Nuclear related assets and liabilities IFRIC 5 Accounting principle Segment reporting Revenue recognition Government grants Share-based payments Income taxes Joint arrangements Investments in associates Other shares and participations Intangible assets Tangible assets Leases Inventories Earnings per share Pensions and similar obligations Decommissioning obligation Provisions Contingent liabilities Financial instruments 30 Other provisions 36 Pledged assets and contingent liabilities 4, 15, 16 Financial risk management, Financial assets and liabilities by categories and Financial assets and liabilities by fair value hierarchy IAS 37 IAS 37 IAS 32, IFRS 7, IFRS 9, IFRS 13 IAS 7 IFRS 9 Liquid funds Borrowings 24 Liquid funds 27 Interest-bearing liabilities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 43 43 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018 Fortum has adopted the following new or amended standards on 1 January 2018: IFRS 9 Financial instruments Nature of change The standard has new requirements for the classification and measurement of financial assets, hedge Date of adoption and transition method accounting and impairment of financial assets. Fortum has applied the new rules retrospectively, but utilises the transition relief for not restating the comparative figures and thus the transition effect is recognised as an adjustment to the retained earnings as of 1 January 2018. Adjustments to opening balances on 1 January 2018 from IFRS 9 are presented in the table ‘Opening balance adjustments from adoption of IFRS 9 and IFRS 15’. Impact Changes to hedge accounting requirements are however implemented prospectively and therefore have no impact on the prior year figures nor presentation. Hedging IFRS 9 simplifies the hedge accounting requirements and aligns them with the company’s risk management strategy and objectives. This have had the biggest impact on Fortum’s electricity price risk hedging, as majority of the non-hedge accounted electricity derivatives qualified for hedge accounting under IFRS 9. Fortum’s profit and loss volatility from commodity derivatives hedging future cash flows is reduced as all fair value changes of the hedge accounted commodity derivatives are fully recognised in other comprehensive income. Income statement volatility is reduced gradually due to prospective implementation. All Fortum’s derivatives (electricity, currency and interest rate) that have qualified for hedge accounting under IAS 39 continued to do so also under IFRS 9. In addition the electricity system price products that have previously failed to meet the rule-based criteria of IAS 39 have qualified for hedge accounting under IFRS 9. The new possibility in IFRS 9 to apply hedge accounting for one or several risk components, separately or in aggregation, has allowed Fortum to expand the scope of hedge accounting to electricity price area differential (EPAD) commodity derivatives and FX derivatives, both of them being perfect hedges for corresponding electricity price risk components. Impairment The new impairment requirements are based on an expected credit loss (“ECL”) model and replaced the incurred loss model of IAS 39. The new impairment model contains financial assets such as trade receivables, loan receivables and liquid funds. The implementation of new ECL models resulted in minor increase in bad debt provision, that was recognised as an adjustment of EUR 3 million (net of tax) in the retained earnings as of 1 January 2018. Future impacts will fluctuate due to seasonality and the amount of the trade receivables. Classification and measurement Most of Fortum’s financial assets such as interest-bearing receivables and liquid funds are classified under “Held-to-Collect” business model. These assets are measured at Amortised cost as they meet the SPPI criteria (contractual terms define solely payments of principal and interest on specified dates). When the SPPI criteria is not met, financial assets are classified to Fair value through profit or loss-category. Reclassification of financial assets into the IFRS 9 categories had no impact on their respective measurement basis and therefore no adjustment to retained earnings as of 1 January 2018 was recognised. Certain investments (shareholder loan to Teollisuuden Voima Oyj, EUR 145 million, and shareholding in Lapin Sähkövoima Oy, EUR 20 million) have been reclassified as Participation in associated company and joint venture. Impacts to the 2018 classifications are presented below: Measurement category Assets Loans and other receivables Other financial assets IAS 39 Loans and receivables at amortised cost Available-for-sale financial assets Deposits and securities Available-for-sale financial assets IFRS 9 Amortised cost or fair value through profit and loss Fair value through other comprehensive income Amortised cost Accounting policies Accounting policies related to IFRS 9 are presented in Note 15 Financial assets and liabilities by categories. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 44 44 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties IFRS 15 Revenue from Contracts with Customers Nature of change IFRS 15 Revenue from Contracts with Customers introduces a comprehensive five-step model for Date of adoption and transition method Impact recognising revenue. As a result of applying the five steps, revenue will be recognised when goods are transferred or services performed at the price that the company expects to be entitled to. Fortum has adopted the new standard from 1 January 2018 onwards by applying the modified retrospective approach, which means that comparative information from 2017 is not restated. In the modified retrospective approach the cumulative effect of transition is booked as an adjustment to the retained earnings as of 1 January 2018. Adjustments to opening balances on 1 January 2018 from IFRS 15 are presented in the table ‘Opening balance adjustments from adoption of IFRS 9 and IFRS 15’. IFRS 15 transition did not have a significant impact to Fortum’s financial statements and accounting policies. The biggest change relates to treatment of sales commission costs for obtaining customers in Consumer Solutions segment. Under IFRS 15 the sales commissions are capitalised and depreciated over the expected contract term. Before adoption of IFRS 15 the sales commissions were mostly expensed and the adoption of the new accounting standard thus impacts the timing and classification of sales commission expenses. The change is mainly impacting Comparable EBITDA and capital expenditure of Consumer Solutions segment. In addition to the changed treatment of sales commissions, there are certain reclassification changes in income statement and balance sheet, which mostly arise from IFRS 15 scope and principal versus agent considerations. Accounting policies related to IFRS 15 are presented in Note 6 Segment reporting. Impact to the 2018 income statement and balance sheet is presented below: Impact to income statement EUR million Sales Other income Materials and services Depreciation and amortisation Other expenses Comparable operating profit Income tax expense Profit for the period Comparable EBITDA Impact to balance sheet EUR million Intangible assets Other non-current assets Inventories Trade and other receivables Total assets Retained earnings Deferred tax liabilities Trade and other payables Total equity and liabilities 2018 without IFRS 15 5,590 101 -3,114 -505 -626 986 -181 857 1,491 December 31, 2018 without IFRS 15 1,062 147 225 1,632 22,395 9,221 722 1,053 22,395 Sales commissions Reclassifications -348 29 319 -31 32 1 0 1 32 0 0 0 2018 as reported 5,242 130 -2,795 -536 -594 987 -181 858 1,523 Sales commissions 25 -8 Reclassifications -4 14 11 -2 5 14 8 -8 0 0 0 December 31, 2018 as reported 1,087 139 233 1,620 22,409 9,232 720 1,058 22,409 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 45 45 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 1 Jan 2018 (IAS 39 and 18) Change in hedge accounting status Change of measurement basis Re mea surement Capitalisation of sales commission Other 1 Jan 2018 (IFRS 9 and 15) Opening balance adjustments from adoption of IFRS 9 and IFRS 15 The following table presents the impact of applying IFRS 9 and 15 to the opening balance sheet as of 1 January 2018� EUR million ASSETS Intangible assets Participations in associates and joint ventures Long-term interest-bearing receivables Measured at amortised cost Measured at fair value through profit and loss Other non-current assets Total non-current assets Derivative financial instruments Cash flow hedges Non-hedge accounting Short-term interest-bearing receivables Measured at amortised cost Measured at fair value through profit and loss Other current assets Total current assets Total assets EQUITY Total equity LIABILITIES Derivative financial instruments Cash flow and fair value hedges Non-hedge accounting Other non-current liabilities Total non-current liabilities Derivative financial instruments Cash flow hedges Non-hedge accounting Other current liabilities Total current liabilities Total liabilities 1,064 1,900 969 11,902 15,835 106 134 395 5,282 5,918 21,753 13,287 68 146 6,174 6,388 44 156 1,879 2,078 8,466 Total equity and liabilities 21,753 -77 77 0 -32 32 0 0 0 0 0 0 0 0 14 -14 0 0 0 70 -70 0 82 -82 0 0 0 -2 -2 -3 0 -3 -3 0 0 0 -3 20 -5 15 -3 -3 12 10 3 3 0 3 12 1,084 2,066 746 75 11,877 15,848 121 120 363 32 5,279 5,915 21,763 13,295 138 76 6,176 6,390 126 74 1,879 2,078 8,469 21,763 165 -145 -20 1 0 1 1 0 0 0 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 46 46 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties IFRIC 23 specifies how to reflect uncertainty in accounting for income taxes IFRIC 23 Uncertainty over Income Tax Treatment Nature of change Date of adoption Impact 1 January 2019 The systemically identified positions are analysed based on facts, circumstances, existing tax rules, court praxis, expert statements and tax authority policy statements. Based on the analysis Fortum does not expect that the interpretation will have any material effect on Fortum’s financial statements. Other new standards effective from 1 January 2019 Other new standards issued by the balance sheet date and effective from 1 January 2019 or later do not have a material impact on Fortum’s financial statements� 1.7 Adoption of new IFRS standards from 1 Jan 2019 or later Fortum will apply the following new or amended standards and interpretations starting from 1 January 2019 or later: IFRS 16 Leases Nature of change Date of adoption Impact New standard regarding lease accounting that will replace IAS 17. The new lease standard will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance lease is removed. 1 January 2019 Currently under IAS 17, lessees recognise leases either as operating leases or finance leases. The new standard no longer distinguishes between operating and finance leases from a lessees point of view, and most right-of-use assets are recognised in the balance sheet. For lessors, there are no significant changes. In brief, IFRS 16 requirements contain the following: • A lessee shall recognise all leases, except for short-term and low value leases, in the balance sheet. • For lessees, both the value of the right-of-use asset and the corresponding liability shall be recognised in the balance sheet. Fortum has assessed the impact of the new standard to its statement of financial position. Assessment has included: • Reviewing current lease contracts reported as operating lease commitments • Going through supplier lists and identifying potential lease arrangements • Determining incremental borrowing rates • Calculation of accounting impacts • Implementing and integrating the new IFRS 16 software Contracts have been gathered and reviewed. No material new leases have been identified. Majority of the current operating leases are for the use of land and office buildings. Fortum will apply the standard using the modified retrospective method, which means the comparative figures will not be restated. Right-of-use assets will be initially recognised equal to the value of lease liabilities, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet before the initial application. In addition, Fortum will apply the exemption of not recognising short-term leases and leases of low-value assets in the balance sheet. The implementation of IFRS 16 will add right-of-use assets and corresponding lease liabilities approximately EUR 100 million. The impact to the consolidated statement of income will not be material. Further details on the impact will be disclosed in the Q1/2019 interim report. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 47 47 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 2 Critical accounting estimates and judgements 3 Acquisitions and disposals 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 above-mentioned estimates and judgements� Critical accounting estimates and judgements Assigned values and useful lives determined for intangible assets and property, plant and equipment acquired in a business combination Assumptions related to impairment testing of property, plant and equipment and intangible assets as well as associated companies and joint ventures Judgement used when assessing the nature of Fortum’s interest in its investees and when considering the classification of Fortum’s joint arrangements as well as commitments arising from these arrangements Assumptions and estimates regarding future tax consequences Assumptions made to determine long-term cash flow forecasts of estimated costs for provision related to nuclear production Assumptions made when estimating provisions Assumptions used to determine future pension obligations Note 17 Intangible assets 17 Intangible assets 19 Participations in associated companies and joint ventures 28 Income taxes in balance sheet 29 Nuclear related assets and liabilities 30 Other provisions 31 Pension obligations 3.1 Acquisitions EUR million Gross investments in shares in subsidiary companies Gross investments in shares in associated companies and joint ventures Gross investments in available for sale financial assets Gross investments in shares 2018 36 4,041 11 4,088 2017 982 135 8 1,125 Uniper investment In September 2017, Fortum signed a transaction agreement with E�ON under which E�ON had the right to decide to tender its 46�65% shareholding in Uniper SE into Fortum’s public takeover offer� In November 2017, Fortum launched a voluntary public takeover offer (“offer”) to all Uniper shareholders� On 8 January 2018, E�ON decided to tender its shares to Fortum’s offer� In February 2018, Fortum announced that shareholders representing 47�12% of the shares in Uniper had accepted the offer� The completion of Fortum’s offer was subject to several competition and regulatory approvals� The final regulatory decisions were received 15 June 2018� In line with the Russian regulatory approvals, Fortum is allowed to purchase additional shares up to the 50% of shares and voting rights in Uniper� The final settlement of the offer took place on 26 June 2018� The shareholders who tendered their shares to Fortum’s offer were paid EUR 21�31 per share� The shareholders also benefitted from Uniper’s dividend that was paid following the Annual General Meeting in early June� Fortum paid a total consideration of EUR 3�7 billion for all shares tendered� The total consideration was financed with existing cash resources of EUR 1�95 billion and bridge loan financing from committed credit facilities of EUR 1�75 billion� On 26 June 2018, Fortum closed the Uniper offer and became the company’s largest shareholder with 47�35% of the shares� Since then Fortum has acquired additional shares in Uniper and holds 49�99% of the shares as of 31 December 2018� Uniper is an international energy company with activities in Europe, Russia and other markets worldwide� Uniper’s businesses are well aligned with Fortum’s core competencies� The company operates power plants in Europe and Russia, with a total installed generation capacity of around 36 gigawatts, and it runs extensive energy trading operations as well as maintains gas storage facilities in Germany, Austria and the UK� In 2017, Uniper’s sales totalled EUR 72�2 billion and adjusted EBITDA was EUR 1�7 billion� Uniper employs around 12,000 people and had total assets of EUR 43 billion at the end of 2017� Uniper is listed on the Frankfurt stock exchange� Fortum consolidates Uniper as an associated company from 30 June 2018� The total acquisition cost including direct costs relating to the acquisition, approximately EUR 4�0 billion as of 31 December 2018, is reported in the ‘Participations in associated companies and joint ventures’� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 48 48 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Fortum uses Uniper’s balance sheet as of 30 June 2018 (published 7 August 2018) as the starting point for the purchase price allocation� Purchase price allocation is still on-going and Fortum is evaluating potential fair value adjustments for the acquired assets and liabilities and identifying potential differences in order to align the accounting principles� The purchase price allocation will take time due to the size of transaction and will be completed within the one-year window from the acquisition date according to IFRS� Fortum Oslo Varme, which is consolidated as a subsidiary with 50% non-controlling interest into the results of City Solutions segment� Hafslund Produksjon Holding was treated as an associated company and reported in the Generation segment until the divestment in June 2018, see further information in 3�2 below� The initial purchase price allocation as of 31 July 2017 was finalised during Q3 2018� No material changes were made compared to the information disclosed in the consolidated financial statements for 2017� As Uniper publishes its interim reports later than Fortum, Fortum’s share of Uniper’s results will be accounted In December 2017 Fortum acquired three solar power companies from Hevel Group� The Pleshanovskaya (10 MW) for with a time-lag of one quarter with potential adjustments� The share of profits of associates in Fortum’s financial statements 2018 includes Fortum’s share of Uniper’s third quarter results amounting to EUR -2 million� 3.1.1 Acquisitions of subsidiary companies 2018 In August 2018 Fortum acquired all shares of three independent Latvian heat producers SIA BK Enerģija, SIA Energy & Communication and SIA Sprino as well as the shares of SIA Lake Development� The acquired production companies will continue to deliver heat to Daugavpil’s municipal district heating company PAS Daugavpils Siltumtikli� In October 2018 Fortum acquired the metal recycling business in Fincumet Group� In the transaction Fortum acquired shares in three companies: Fincumet Oy, Niemen Romukauppa Oy and NJS-Patentti Oy� There were no other material acquisitions during 2018� 3.1.2 Acquisitions of subsidiary companies 2017 In January 2017 Fortum completed the acquisition of 100% of the shares in three wind power companies from the Norwegian company Nordkraft� The transaction consists of the Nygårdsfjellet wind farm, which is already operational, as well as the fully-permitted Ånstadblåheia and Sørfjord projects� The Ånstadblåheia wind farm was commissioned during the fourth quarter of 2018 and the Sørfjord wind farm is expected to be commissioned in 2019� The total installed capacity of the three wind farms will be approximately 180 MW� Fortum started a redemption process for the remaining shares of Ekokem Corporation (renamed as Fortum Waste Solution Oy) in October 2016� The process was finalised in March 2017 after which Fortum owns 100% of the shares in the company� On 4 August Fortum concluded the restructuring of the ownership in Hafslund together with City of Oslo� Fortum sold its 34�1% stake in Hafslund ASA to the City of Oslo� Fortum acquired 100% of Hafslund Markets AS, 50% of Hafslund Varme AS including the City of Oslo’s waste-to-energy company Klemetsrudanlegget AS (KEA), currently Fortum Oslo Varme AS, and 10% of Hafslund Produksjon Holding AS� The total debt-free price of the acquisition was approximately EUR 940 million� The combined net cash investment of the transactions, including the dividend received in May 2017, was approximately EUR 230 million� Hafslund Markets and Fortum Oslo Varme are consolidated into Fortum Group from 1 August 2017� Hafslund Markets is consolidated as a part of the Consumer Solutions segment� Fortum has operational responsibility of and Grachevskaya (10 MW) solar power plants are located in the Orenburg region and the Bugulchanskaya (15 MW) solar power plant in the Republic of Bashkortostan� All three power plants are operational and will receive capacity Supply Agreement (CSA) payments for approximately 15 years after commissioning at an average CSA price corresponding to approximately EUR 400/MWh� The plants were commissioned in 2016 and 2017� EUR million Consideration paid in cash Unpaid consideration Total consideration Fair value of the acquired net assets Translation difference Goodwill Hafslund Markets AS Fortum Oslo Varme AS 152 0 152 589 0 589 374 1 215 84 0 69 Other 70 9 79 77 2 1 Fortum total 811 9 820 535 2 286 EUR million Fair value of the acquired net identifiable assets Cash and cash equivalents Intangible assets Property, plant and equipment Other assets Deferred tax liabilities Other non-interest bearing liabilities Interest-bearing liabilities Net identifiable assets Non-controlling interests Total Hafslund Markets AS Fortum Oslo Varme AS Fortum total 1) Acquired book values Allocated fair value Total fair value Acquired book values Allocated fair value Total fair value Acquired book values Allocated fair value Total fair value 158 12 5 179 -19 -176 0 158 0 158 284 -68 216 0 216 158 296 5 179 -88 -176 0 374 0 374 37 0 526 21 -21 -39 -445 79 51 29 37 0 733 21 -71 -39 -445 237 153 84 201 17 604 206 -46 -217 -489 275 51 225 334 208 -129 413 102 310 201 352 811 206 -175 -217 -489 688 153 535 207 -50 157 102 55 1) Including acquired book values and allocated fair values from the acquisition of Norwegian wind park companies, Russian solar power companies as well as other smaller acquisitions. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 49 49 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties EUR million Gross investment Purchase consideration settled in cash Cash and cash equivalents in acquired subsidiaries Translation difference Cash outflow in acquisition Unpaid consideration Interest-bearing debt in acquired subsidiaries of which loans given by Fortum Transaction adjustments to debt-like items Translation difference Total gross investment in acquired subsidiaries Hafslund Markets AS Fortum Oslo Varme AS Other Fortum total 589 158 1 432 54 0 486 152 37 0 116 445 -213 26 1 375 70 6 2 65 9 44 0 2 121 811 201 3 613 9 489 -213 80 4 982 3.1.3 Other share transactions In April 2017, Fortum and RUSNANO, a Russian state-owned development company, signed a 50/50 investment partnership in order to secure the possibility of a Russian Capacity Supply Agreement (CSA) wind portfolio in Russia� The wind investment fund 50/50 owned by Fortum and RUSNANO was awarded 1,000 MW wind capacity in Russian wind CSA auction in June 2017� The investments decisions will be made on a case-by-case basis within the total mandate of the wind investment fund� Fortum’s equity stake in the wind investment fund totals a maximum of RUB 15 billion� The amount is invested over time (within approximately 5 years) as it is subject to positive investment decisions� During 2018 Fortum invested EUR 61 million (2017: 43) in the fund� In October 2017 Fortum and SUENKO established a joint venture, JSC Ural-Siberian Heat and Power Company (YUSTEK), for the heat supply in Tyumen, Russia� Fortum will continue as CHP owner and selling heat to YUSTEK� 3.2 Disposals EUR million Gross divestments of shares in subsidiary companies Gross divestments of shares in associated companies and joint ventures Gross divestments of shares 2018 147 160 306 2017 55 687 742 3.2.1 Disposals of subsidiary companies On 31 August 2018, Fortum sold a 54% share of its solar power company operating four solar power plants in India to UK Climate Investments (40%) and Elite Alfred Berg (14%)� In line with Fortum’s ‘capital recycling’ business model, the result from the transaction, EUR 26 million, is recognised in Other operations’ Comparable operating profit� The total consideration from the divestment on a debt- and cash-free basis, including the effect of deconsolidating Fortum’s minority part of the net debt, is EUR 147 million� In addition, Elite Alfred Berg has an option to buy up to an additional 16% from Fortum� In July 2017 Fortum sold 100% of its shares in the Polish gas infrastructure company DUON Dystrybucja S�A� to Infracapital, the infrastructure investment arm of M&G Investments� DUON Dystrybucja S�A� is transporting grid gas and LNG in Poland� The company was acquired as part of the acquisition of the electricity and gas sales company Grupa DUON S�A� (currently Fortum Markets Polska S�A�) in 2016� Fortum booked in 2017 a one-time pre-tax sales gain in Consumer Solution segment totalling EUR 2 million� In November 2017 Fortum sold its 51% stake in the Norwegian electricity sales company Røyken Kraft AS to the minority shareholder Røyken Energiverk AS� The company was acquired as part of the Hafslund Markets AS group in the restructuring of the ownership in Hafslund� Divestments of shares in subsidiaries – Impact on financial position EUR million Gross divestments of shares in subsidiary companies Intangible assets and property, plant and equipment Other non-current and current assets Liquid funds Interest-bearing loans Other liabilities and provisions Net assets divested Reclassified to participations in associates and joint ventures Result from transaction 2018 147 138 7 12 -108 -4 45 20 26 2017 55 58 6 5 -3 -7 59 - 2 3.2.2 Other disposals In June 2018 Fortum sold its 10% ownership in Hafslund Produksjon Holding AS to Svartisen Holding AS, a Norwegian company owned by the Finnish energy companies Vantaan Energia Oy, Oy Turku Energia – Åbo Energi Ab and Oulun Seudun Sähkö� As part of the restructuring of the Hafslund ownership in 2017, Fortum acquired the ownership in Hafslund Produksjon� The sales price for the shares was EUR 160 million and Fortum booked a sales gain of EUR 77 million in the Generation segment 2018 results� On 3 August 2017 Fortum sold its 34�1% stake in Hafslund ASA to the City of Oslo in connection with the restructuring of the ownership in Hafslund� Fortum booked a one-time tax-free sales gain in Other segment in the 2017 results totalling approximately EUR 324 million including transaction costs, corresponding EUR 0�36 earnings per share� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 50 50 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 4 Financial risk management Risk management framework and objectives, organisation and processes as well as description of risks i�e� strategic, sustainability, financial and operational risks are described in the Risk management part in the Operating and financial review (OFR)� 4.1 Commodity market and fuel risks Fortum’s business is exposed to fluctuations in prices and volume of commodities used in the production and sales of energy products� The main exposure is toward electricity prices and volumes, prices of emissions and prices and availability of fuels� Fortum hedges its exposure to commodity market risks in accordance with approved Hedging Guidelines and Mandates� 4.2 Electricity price and volume risk Electricity price risk is mainly hedged by entering into electricity derivatives contracts on Nasdaq Commodities exchange� The main objective of hedging is to reduce the effect of electricity price volatility on earnings� Hedging strategies cover several years in the short to medium term and are executed within approved mandates� These hedging strategies are continuously evaluated as electricity and other commodity market prices, the hydrological balance and other relevant parameters change� Hedging of the Generation segment’s power sales is performed in EUR on a Nordic level covering both Finland and Sweden, and the currency component of these hedges in the Swedish entity is currently not hedged� In Russia, electricity prices and capacity sales are the main sources of market risk� The electricity price is highly correlated with the gas price� Exposure is partly mitigated through regulated fixed-price bilateral agreements, but the majority of electricity sales is exposed to spot price risk� Fortum’s sensitivity to electricity market price is dependent on the hedge level for a given time period� As per 31 December 2018, approximately 75% of the Generation segment’s estimated Nordic power sales volume was hedged for the calendar year 2019 with a price 31 EUR/MWh and approximately 45% for the calendar year 2020 with a price 29 EUR/MWh� 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 2019 comparable operating profit by approximately EUR 11 million and for 2020 by approximately EUR 25 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 Generation 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, wind, CO2 allowance prices, fuel prices, economic development, transmission capacity and the import/export situation all affect the electricity price on short-term basis and effects of individual factors cannot be separated� 4.2.1 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 2018 (31 December 2017) 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 purchases are not included� Sensitivity is calculated with the assumption that electricity forward quotations in Nasdaq Commodities and in EEX would change 1 EUR/MWh for the period Fortum has derivatives� Sensitivity according to IFRS 7 +/- 1 EUR/MWh change in electricity forward quotations, EUR million Effect on Profit before income tax Effect on Equity Effect -/+ -/+ 2018 1 56 2017 22 28 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 51 51 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 4.2.2 Electricity derivatives The tables below disclose the Group’s electricity derivatives used mainly for hedging electricity price risk� The fair values represent the values disclosed in the balance sheet� See also Note 15 Financial assets and liabilities by categories for accounting principles and basis for fair value estimations and Note 8 Fair value changes of derivatives and underlying items in income statement� Electricity derivatives by instrument 2018 Volume, TWh Fair value, EUR million Maturity analysis of commodity derivatives Amounts in the table are fair values� EUR million Electricity derivatives, liabilities Electricity derivatives, assets Other commodity derivatives, liabilities Other commodity derivatives, assets 2018 Under 1 year 706 94 77 116 1–5 years 305 53 13 24 Over 5 years Total 0 1,011 0 147 0 90 0 140 Under 1 year 162 90 13 36 2017 1–5 years 123 35 3 6 Over 5 years 0 0 0 0 Total 285 126 16 43 Electricity derivatives Total Netting against electricity exchanges 1) Total Under 1 year 29 1–5 years 26 Over 5 years 0 Total 55 Positive 848 848 Negative 1,712 1,712 -701 147 -701 1,011 Electricity derivatives by instrument 2017 Volume, TWh Fair value, EUR million Electricity derivatives Total Netting against electricity exchanges 1) Total Under 1 year 26 1–5 years 24 Over 5 years 0 Total 50 Positive 360 360 Negative 519 519 -234 126 -234 285 1) Receivables and liabilities against electricity exchanges arising from standard derivative contracts with same delivery period are netted. Net -864 -864 0 -864 Net -159 -159 0 -159 4.3 Fuel price risks Exposure to fuel prices is limited due to Fortum’s flexible generation capacity, which allows for switching between different fuels according to prevailing market conditions� The remaining exposure to fuel price risk is mitigated through fixed-price physical delivery contracts or derivative contracts, such as coal and gas derivatives included in the table above as part of “Other commodity derivatives”� 4.4 Emission allowance price and volume risk Part of Fortum’s power and heat generation is subject to requirements of emission trading schemes� Fortum hedges its exposure to these prices and volumes through the use of CO2 futures� Most of these CO2 futures are own use contracts valued at cost and some are treated as derivatives in the accounts included in the table above as part of “Other commodity derivatives”� 4.5 Liquidity and refinancing risk Fortum’s business is capital intensive and the Group 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� 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 2018, 95% (2017: 90%) of the Group’s total external financing was raised by the parent company Fortum Corporation� On 31 December 2018, the total interest-bearing debt was EUR 6,093 million (2017: 4,885) and the interest- bearing net debt was EUR 5,509 million (2017: 988)� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 52 52 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 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 2018, loan maturities for the coming twelve-month period amounted to EUR 1,086 million (2017: 766)� Liquid funds amounted to EUR 584 million (2017: 3,897) and the total amount of committed and undrawn credit facilities amounted to EUR 1,800 million (2017: 1,800)� Maturity of interest-bearing liabilities EUR million 2019 2020 2021 2022 2023 2024 and later Total Loan maturities per loan type, EUR million as of 31 December 2018 2018 1,086 33 2,267 1,042 100 1,565 6,093 2,500 2,000 1,500 1,000 500 0 1) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029+ Bonds Financial institutions Other long-term debt CPs Other short-term debt Liquid funds, major credit lines and debt programmes 2018 EUR million Liquid funds Cash and cash equivalents Deposits and securities over 3 months Total of which in Russia (PAO Fortum) Committed credit lines EUR 1,750 million syndicated credit facility Bilateral overdraft facilities Total Debt programmes (uncommitted) Fortum Corporation, CP programme EUR 1,000 million Fortum Corporation, CP programme SEK 10,000 million Fortum Corporation, EMTN programme EUR 8,000 million Total Liquid funds, major credit lines and debt programmes 2017 EUR million Liquid funds Cash and cash equivalents Deposits and securities over 3 months Total of which in Russia (PAO Fortum) Committed credit lines EUR 1,750 million syndicated credit facility Bilateral overdraft facilities Total 1) Debt programmes (uncommitted) Fortum Corporation, CP programme EUR 500 million Fortum Corporation, CP programme SEK 5,000 million Fortum Corporation, EMTN programme EUR 8,000 million Total 1) Excluding committed credit facilities for Fortum’s offer for Uniper shares Total facility Drawn amount Available amount 556 29 584 317 1,750 50 1,800 820 948 5,552 7,320 1,750 50 1,800 1,000 975 8,000 9,975 - - 0 180 27 2,448 2,655 Total facility Drawn amount Available amount 3,182 715 3,897 246 1,750 50 1,800 500 508 5,057 6,065 1,750 50 1,800 500 508 8,000 9,008 - - 0 - - 2,943 2,943 1) In addition Fortum has received EUR 75 million based on Credit Support Annex agreements with several counterparties. This amount has been booked as a short-term liability. Liquid funds amounted to EUR 584 million (2017: 3,897), including PAO Fortum’s bank deposits amounting to EUR 316 million (2017: 231)� See also Note 24 Liquid funds� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 53 53 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 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� The average interest rate on deposits and securities excluding Russian deposits on 31 December 2018 was -0�11% (2017: -0�27%)� Liquid funds held by PAO Fortum amounted to EUR 317 million (2017: 246) and the average interest rate for this portfolio was 6�9% at the balance sheet date� EUR million Interest-bearing liabilities Interest rate and currency derivatives liabilities Interest rate and currency derivatives receivables Total 2018 2017 Under 1 year 1,212 1–5 years 3,616 Over 5 years 1,792 Total 6,620 Under 1 year 895 1–5 years 2,723 Over 5 years 1,869 Total 5,487 3,665 682 16 4,363 3,210 1,005 4 4,219 -3,736 1,141 -726 3,572 -20 -4,482 -3,319 -1,092 2,636 6,501 785 1,788 -1 -4,413 5,293 1,871 On the balance sheet date the average rate of outstanding currency and interest rate derivatives done in SEK and RUB was 9�90 and 74�86 respectively� For further information regarding loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj, see Note 29 Nuclear related assets and liabilities� 4.6 Interest rate risk and currency risk 4.6.1 Interest rate risk Fortum risk mandates state that the average duration of the net debt portfolio shall always be kept within a range of 12 and 36 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 2018, the average duration of the net debt portfolio (including derivatives) was 1�6 years (2017: gross debt 1�5)� Approximately 79% (2017: 65%) of the debt portfolio was on a floating rate basis or fixed rate loans maturing within the next 12-month period� The flow risk, measured as the difference between the base case net interest cost estimate and the worst-case scenario estimate for Fortum’s net debt portfolio for the coming 12 months, was EUR 13 million (2017: gross debt 4)� The average interest rate for the portfolio consisting mainly of EUR and SEK loans was 1�7% at the balance sheet date (2017: 2�4%)� Part of the external loans EUR 686 million (2017: 773) have been swapped to RUB and the average interest cost for these loans, including cost for hedging the RUB, was 8,3% at the balance sheet date (2017: 9�5%)� The average interest rate on loans and derivatives on balance sheet date, 31 December 2018, was 2�4% (2017: 3�6%)� Average cumulative interest rate on loans and derivatives for 2018 was 3�0% (2017: 3�6%)� 4.6.2 Currency risk Fortum’s policy is to hedge major transaction exposures on a local level in the reporting currency of each legal entity in order to avoid exchange differences in the profit and loss statement� These exposures are mainly hedged with forward contracts� An exception is the Generation segment’s hedging of power sales in Sweden where the currency component is currently not hedged� 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 absolute EUR equivalent amounts from each currency� The mandate for the open transaction exposure is EUR 50 million� On 31 December 2018 the open transaction exposure, excluding Generation segment’s EUR/SEK exposure, was EUR 6 million (2017: 13)� Translation exposure on 31 December 2018 was EUR 7,723 million (2017: 8,212)� Had EUR been 5% weaker/stronger on closing date, then the impact from transaction exposure to profit and loss statement would have been EUR +0�3/-0�3 million (2017: +0�7/-0�7 million) and impact from translation exposure to group’s equity EUR +386/-386 million (2017: +411/-411 million)� Group Treasury’s transaction exposure EUR million RUB SEK PLN NOK INR USD Other Total Net Position 541 969 366 296 93 -117 -16 2,132 2018 Hedge -541 -969 -365 -290 -93 116 16 -2,126 Net Position 589 277 310 451 117 -118 -41 1,585 2017 Hedge -589 -264 -310 -451 -117 118 41 -1,572 Open 0 0 0 6 0 0 0 6 Open 0 13 0 0 0 0 0 13 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 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 54 54 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties or contracted currency flows in foreign currency deriving from business activities such as sales, purchases or investments� Net foreign exchange 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 non-euro 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 translation exposure EUR million RUB SEK NOK PLN Other Total Net Investment 2,364 3,704 1,625 291 128 8,111 2018 Hedge -144 -244 - - - -388 Open 2,220 3,460 1,625 291 128 7,723 Net Investment 2,673 4,769 1,600 294 136 9,472 2017 Hedge -173 -1,087 - - - -1,260 Open 2,500 3,682 1,600 294 136 8,212 Translation exposure position includes net investments in foreign subsidiaries and associated companies� 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 and SEK was EUR -518 million in 2018 (2017: -369)� Part of this translation exposure has been hedged and the foreign currency hedge result amounted to EUR 24 million in 2018 (2017: 28)� Interest rate and currency derivatives by instrument 2018 EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Total Of which long-term Short-term Under 1 year 3,240 1,515 383 5,137 2018 Notional amount Remaining lifetimes 1–5 years Over 5 years 2018 Fair value Total Positive Negative 310 2,242 265 2,817 - 225 - 225 3,550 3,982 648 8,179 43 159 66 268 152 116 20 70 - 90 44 46 Interest rate and currency derivatives by instrument 2017 EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Total Of which long-term Short-term Under 1 year 2,864 305 311 3,480 2017 Notional amount Remaining lifetimes 1–5 years Over 5 years 2017 Fair value Total Positive Negative 266 3,421 580 4,267 102 102 3,130 3,827 892 7,849 56 205 92 353 238 114 19 90 3 112 88 24 Net 23 88 66 178 108 70 Net 37 115 89 241 151 90 4.7 Credit risk Fortum is exposed to counterparty risk whenever there is a contractual arrangement with an external counterparty� Credit risk exposures relating to financial derivative instruments are often volatile� The majority of commodity derivatives are exchange-traded and cleared through clearing houses such as Nasdaq Clearing AB or through clearing banks� Derivatives contracts are also entered into directly with external counterparties and such contracts are limited to high-credit-quality counterparties active on the financial or commodity markets� 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 Credit Support Annex agreements, are in place with most of these counterparties� Commodity derivative counterparties are limited to 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 55 55 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties those considered to be creditworthy� Master agreements, such as ISDA, FEMA and EFET, which include netting clauses, are in place with the majority of the counterparties� Due to the financing needs and management of liquidity, Fortum has counterparty credit exposure toward a number of banks and financial institutions� The majority of the exposure is toward Fortum’s key relationship banks, which are highly creditworthy institutions, but also 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� Deposits in Russia have been concentrated to the most creditworthy state-owned or controlled banks� The creditworthiness of banks and financial institutions are monitored so that mitigating actions can be taken as ratings or the financial situation changes� The development of economic sanctions against Russia is followed as part of the monitoring process� Credit risk relating to customers is 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, Poland and Russia� The risk of non-payment in the electricity and heat sales business in Russia is higher than in the Nordic market� 4.7.1 Credit quality of major financial assets Fortum recognises the loss allowance for expected credit losses on financial assets classified to amortised cost category at each reporting date� Impairment requirements are based on an expected credit loss (“ECL”) model which replaces the incurred loss model of IAS 39� The new impairment model is applied to financial assets such as trade receivables, loan receivables and restricted cash given as collateral for commodity exchanges� Expected credit loss is calculated on individual contract basis for deposits, commercial papers and loan receivables� No impairment loss is recognised on cash in bank accounts� The expected credit losses according to this model are based on assessment of the individual counterparty’s risk of default� The risk of default is evaluated at each reporting date based on credit ratings to determine if credit risk has increased significantly� A change of credit rating from investment to non-investment grade constitutes a significant increase in credit risk� If the credit risk on the financial asset has not increased significantly since the initial recognition, loss allowance equals to 12 month ECL� If the credit risk on the financial asset has increased significantly since initial recognition, loss allowance equals to the lifetime expected credit losses� There have been no significant increases in credit risk during 2018� The loss allowance for deposits, commercial papers and loan receivables totalled EUR 1 million on December 31, 2018� Amounts for interest-bearing receivables including bank deposits and derivative financial instruments recognised as assets are presented by counterparties� Credit quality of major financial assets EUR million Investment grade receivables Deposits, commercial papers and cash in bank accounts Fair values of interest rate and currency derivatives Fair values of electricity and other commodity derivatives Total investment grade receivables Energy exchange receivables Fair value of derivatives on Nasdaq Commodities Fair value of derivatives on European Energy Exchange AG Fair value of derivatives on the Polish Power Exchange Total energy exchange receivables Associated companies and joint venture receivables Loan receivables Finance lease receivable Fair values of electricity and other commodity derivatives Total associated companies and joint venture receivables Other receivables Investments in commercial papers Russian deposits with non-investment grade banks Restricted cash mainly given as collateral for commodity exchanges Receivable from SIBUR related to divested shares of OOO Tobolsk CHP Loan and other interest-bearing receivables Fair values of electricity and other commodity derivatives Total other receivables Total 2018 2017 Carrying amount of which past due Carrying amount of which past due 168 268 58 494 76 4 75 155 641 0 22 663 46 260 379 70 2 53 810 2,122 - - - - - - - - - - - - - - - - - - - - 3,348 353 56 3,757 37 2 13 52 864 41 9 914 249 141 363 102 35 51 941 5,664 - - - - - - - - - - - - - - - - - - - - 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 56 56 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Deposits and securities The following tables present bank deposits, commercial papers and fair values of derivatives by rating classes� Interest rate and currency derivatives EUR million Counterparties with external credit rating from Standard & Poor’s, Fitch 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, Fitch or Moody’s Total 2018 2017 Netted Receivables amount 1) Receivables Netted amount 1) - 46 180 42 268 - - 268 - 26 59 24 109 - - 109 - 51 292 10 353 0 - 353 - 30 100 9 140 0 - 140 1) The netted amount includes the cash received in accordance with Credit Support Annex agreements EUR 75 million (2017: 113). EUR million Counterparties with external credit rating from Standard & Poor’s, Fitch 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, Fitch 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 2018 2017 - 62 30 76 168 260 - - 260 - 46 - - - - - 46 - 324 2,835 189 3,348 141 - - 141 - 249 - - - - - 249 Total 474 3,738 In addition, cash in other bank accounts totalled EUR 110 million on 31 December 2018 (2017: 159)� See Note 24 Liquid funds� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 57 57 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Electricity, coal, gas and oil derivatives and CO2 emission allowances treated as derivatives EUR million Counterparties with external credit rating from Standard & Poor’s, Fitch and/or Moody’s Investment grade ratings AAA AA+/AA/AA- A+/A/A- BBB+/BBB/BBB- Total investment grade ratings Non-investment grade ratings BB+/BB/BB- B+/B/B- Below B- Total non-investment grade ratings Total associated companies and joint ventures Counterparties without external credit rating from Standard & Poor’s, Fitch 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 2018 2017 Receivables Netted amount Receivables Netted amount - - 56 2 58 0 - - 0 22 12 12 13 3 3 - 10 53 133 - - 60 2 62 0 - - 0 0 0 1 5 1 3 - 3 13 75 - 1 53 2 56 1 0 - 1 9 0 15 19 16 0 - 1 51 117 - 1 53 1 55 0 0 - 0 0 0 10 12 12 0 - 1 35 90 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� scale is for Standard & Poor’s and Fitch rating categories� For those counterparties only rated by Moody’s, the rating has been translated to the equivalent Standard and Poor’s and Fitch rating category� For counterparties rated by more than one rating agency, the lowest of the ratings is used� In the commodity derivatives and commercial paper market, there are a number of counterparties not rated by Standard & Poor’s, Fitch 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 Bisnode is used for Nordic 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� 5 Capital risk management Fortum updated its strategy and reconfirmed the dividend policy and long-term financial targets in November 2018� The update was a continuation of the strategy execution towards Fortum’s vision “For a cleaner world”� The strategy aims at strengthening Fortum’s competitiveness and ensuring a benchmark portfolio for the 2020’s� Fortum has undergone a remarkable transformation in recent years, starting with the exit from the regulated power distribution business� This has enabled stronger focus on power and heat generation, through the strategic investment in Uniper, and growth in sustainable bio and waste-based combined heat and power generation� Furthermore, Fortum has created a solid base in solar and wind power, expanded in the consumer sector, and into the recycling and waste business� Pursuing operational excellence and increased flexibility as well as ensuring value creation from investments and portfolio optimization are the key priorities� Benchmark performance is essential for long-term competitiveness� For the next 2–3 years, Fortum prioritises profit creation from the current business portfolio� This will be achieved through operational excellence and increased flexibility� All sources of flexibility, both flexible generation assets and the demand response of large customers and consumers, will be needed to balance the high degree of volatile renewable generation� Operational excellence and increased flexibility will contribute to improving Fortum’s financial performance and cash flows to create additional financial headroom� In addition, Fortum will continue to prioritise and scrutinize capital expenditure� Through these measures, the target is to steer leverage from current net debt to EBITDA ratio towards the long-term target ratio of around 2�5 times� Having a solid investment grade rating is a key priority for Fortum� Over the recent years Fortum has made several sizeable investments and aims to further improve its financial All counterparties for currency and interest rate derivatives and the majority of counterparties for bank deposits have an external rating from Standard & Poor’s, Fitch and/or Moody’s credit agencies� The above rating performance by ensuring value creation from them� The investment in Uniper, currently accounted for as an associated company, will contribute to Fortum’s financial performance both through Fortum’s share of 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 58 58 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Uniper’s result and its dividend� As Uniper’s largest shareholder, Fortum’s ambition is to increase value for both companies and their stakeholders� In addition, Fortum continues to review its business portfolio in line with its strategic priorities emphasising CO2-free assets, flexibility, and low operating cost to fit the changing business environment� Fortum will also drive focused growth in the power value chain and seek to build options for significant new businesses for the future� Financial targets give guidance on Fortum’s view of the company’s long-term value creation potential, its growth strategy and business activities� The long-term over-the-cycle financial targets are Return on capital employed, ROCE at least 10% and Comparable net debt to EBITDA around 2�5 times� These measures are considered as Alternative Performance Measures� 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� In January 2018, Standard & Poor’s downgraded Fortum’s long-term credit rating from BBB+ to BBB with Negative Outlook� The short-term rating was affirmed at level A-2� In June 2018, Fitch Ratings downgraded Fortum’s long-term credit rating from BBB+ to BBB with Stable Outlook� The short-term rating was downgraded to level F3� Return on capital employed, % EUR million Profit before income tax Interest expenses Other financial expenses 1) +Interest and other financial expenses Profit before taxes + interest and other financial expenses 1) Other financial expenses, see also Note 12 Finance costs-net Capital employed Total assets Total liabilities - Interest-bearing liabilities - Total interest-free liabilities Capital employed Capital employed at the end of previous period Average capital employed Note 2018 1,040 148 26 174 1,214 22,409 10,332 6,093 4,239 18,170 18,172 18,171 2017 1,111 164 25 189 1,300 21,753 8,466 4,885 3,581 18,172 18,649 18,411 Return on capital employed, % 6.7% 7.1% See Definitions of key figures� Comparable net debt/EBITDA ratio EUR million Interest-bearing liabilities BS Less: Liquid funds Net debt Operating profit Add: Depreciation and amortisation EBITDA Less: Items affecting comparability Comparable EBITDA Comparable net debt/EBITDA Note 27 24 2018 6,093 584 5,509 1,138 536 1,674 151 1,523 2017 4,885 3,897 988 1,158 464 1,623 347 1,275 3.6 0.8 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 59 59 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 6 Segment reporting ACCOUNTING POLICIES REVENUE RECOGNITION Fortum’s operations comprise electricity, heating, cooling and waste management services. The revenue streams can be divided into four groups: power sales to wholesale markets, power sales to retail customers, heating sales and waste treatment sales. Fortum has adopted the new IFRS 15 Revenue from Contracts with Customers standard from 1 January 2018 onwards by applying the modified retrospective approach, which means that comparative information from 2017 is not restated. IFRS 15 transition does not have a significant impact on Fortum’s financial statements and accounting policies. See additional information on the transition impacts in Note 1 Accounting policies. Revenue is recognized when goods are transferred or services are performed, i.e. when (or as) a performance obligation is satisfied and control of the good or service underlying the particular performance obligations is transferred to the customer. Revenue is shown at the price that Fortum expects to be entitled to and is presented net of rebates, discounts, value-added tax and selective taxes such as electricity tax. The accounting policies for the different revenue streams are described below. POWER SALES TO WHOLESALE MARKETS Physical electricity trades to Nord Pool or to other wholesale markets are made either during the same day or day before the delivery and the duration of the contract is thus very short. The transaction price is the spot price and there are no variable elements. Electricity sales are recognized upon delivery at the price defined in Nordpool or in other wholesale market. When Fortum is acting as an agent in the power trades by granting access to the Nord Pool power trading system, Fortum presents the bilateral trades between Fortum and the customer on a net basis, and only the fee from the service is recorded as revenue. POWER SALES TO RETAIL CUSTOMERS Fortum’s contracts with the consumer and business customers cover the electricity sales, while the distribution service is delivered by the transmission company operating the local network. There is only one performance obligation, which is to stand-ready to supply electricity to the customer. The transaction price generally includes both a fixed monthly fee and a variable fee that depends on the volume of electricity supplied. As Fortum’s promise is to stand ready to deliver electricity, the fixed and variable components are recognised based on the fees chargeable from the customer. If automated meter reading is not available, the electricity consumption between the last meter reading and end of the month is estimated. HEATING SALES In many areas the district heating service covers both the distribution and sale of heat. Even if heat is produced by a third party, Fortum is usually responsible for delivering the whole service and is acting as a principal for the heat sales as well. Fortum has concluded that the distribution and sale of heat are not separate performance obligations and are both covered by the promise to stand-ready to supply heat to the customer. The fees charged from the customer generally comprise a fixed monthly charge and a variable component that is determined based on the volume of heat supplied. In accordance with the IFRS 15 principles, the fixed charge and the variable heat volume charge are allocated and recognised in line with the fees chargeable from the customer. In Russia, Baltics and Poland there are also areas, where Fortum operates only the heat production facilities while some third party is responsible for the distribution of heat. In these areas the performance obligation is to supply heat and revenue is recognised based on the volume of heat that Fortum is entitled to charge from the customer. WASTE TREATMENT SALES A majority of the revenues from waste management services arises from the fees charged for receiving the waste from customers (i.e. gate fees). The fee is usually determined based on the volume of waste received and there are no variable elements in the pricing. Fortum is required to treat the waste and this performance obligation is satisfied when the treatment is performed. Transportation of the waste forms another performance obligation. The fees for waste treatment and transportation services are separately agreed in the contract and correspond to the price that would be charged for these services separately. Revenue for transportation service is recognised when service is provided. Waste treatment business sales includes also various types of soil and landfill site projects which mostly take place at the customer site. The fees charged from the customers are invoiced based on payment schedules agreed with the customer. The customer obtains the benefits of the construction work simultaneously when the construction work proceeds and therefore the projects are recognised over time. The progress of the construction is best measured through the costs incurred or the completed area of the construction site. COSTS FOR OBTAINING CUSTOMERS Incremental costs for obtaining new customers as well as renewing existing customer contracts in Consumer Solutions division are capitalised as intangible assets and amortised over the expected contract duration. The sales commission costs were mostly expensed until end of 2017, but are capitalised from 1 January 2018 onwards due to adoption of IFRS 15 Revenue from contracts with customers. See additional information on impact of transition to IFRS 15 in Note 1 Accounting policies. NETTING AND INTER-SEGMENT TRANSACTIONS Generation segment sells its production to Nord Pool and Consumer Solutions buys its electricity from Nord Pool. Eliminations of sales include eliminations of sales and purchases with Nord Pool 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 intragroup deliveries, which are eliminated on consolidation. Inter-segment transactions are based on commercial terms. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 60 60 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 6.1 Fortum’s business structure Fortum’s business divisions are Generation, City Solutions, Consumer Solutions, Russia and Other Operations, which includes M&A and Solar & Wind Development, Technology and New Ventures as well as corporate functions� Fortum’s participation in Uniper SE is also reported as part of Other Operations� In November 2018, Fortum announced that the solar and wind businesses were reorganised and the wind operations became a business area within the Generation division and the solar operations within the City Solutions division� The Russian wind and solar operations continue as a part of the Russia division� The management and segment reporting will be changed from 2019 onwards and 2018 figures will be restated accordingly� Below is the description of the reportable segments: 6.2 Segment structure in Fortum Fortum discloses segment information in a manner consistent with internal reporting to Fortum’s Board of Directors and to Fortum Executive Management led by the President and CEO� Fortum has segments based on type of business operations, combined with one segment based on geographical area� Fortum’s reportable segments under IFRS are the business divisions Generation, City Solutions, Consumer Solutions and Russia� 6.3 Definitions for segment information Fortum’s segment information discloses the financial measurements used in financial target setting and forecasting, management’s follow up of financial performance and allocation of resources in the group’s performance management process� These measurements that are considered as Alternative Performance Measures, such as Comparable operating profit and Comparable return on net assets, have been used consistently since 2005� Generation City Solutions Consumer Solutions Russia Group s n o i s i v D i Generation City Solutions Consumer Solutions Russia s The Generation segment comprises power production t n e m g e s in the Nordics, including nuclear, hydro, and thermal power production, power portfolio optimisation, trading, industrial intelligence, as well as nuclear services globally. g n i t r o p e R City Solutions develops sustainable solutions for urban areas into a growing business for Fortum. The segment comprises heating and cooling, waste-to-energy, operation and maintenance services, biomass, and other circular economy solutions. The business operations are located in the Nordics, the Baltic countries, and Poland. The segment also includes Fortum’s 50% holding in Stockholm Exergi (formerly Fortum Värme), which is a joint venture and is accounted for using the equity method. Consumer Solutions comprises electricity and gas retail businesses in the Nordics and Poland, including the customer service, invoicing and debt collection business. Fortum is the largest electricity retailer in the Nordics, with approximately 2.5 million customers across different brands in Finland, Sweden, Norway and Poland. The business provides electricity and related value-added products as well as new digital customer solutions. The Russia segment comprises 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. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 61 61 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Items affecting comparability are disclosed separately in Fortum’s income statement to support the understanding of business performance when comparing results between periods� Items classified as Items affecting comparability include accounting effects from valuation according to IFRS that are not arising from the performance of the business operations� Such items include fair valuation of financial derivatives hedging future cash-flows where hedge accounting is not applied according to IFRS 9 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 provisions according to IFRIC interpretation 5� The business performance of the operations cannot be compared from one period to another without adjusting for one-time items relating to capital gains, major impairment related items and transaction costs arising from acquisitions� Therefore such items have also been treated as Items affecting comparability� Transaction costs arising from acquisitions of subsidiary shares are included in capital gains and other within items affecting comparability� According to IFRS 3 transaction costs related to the acquisitions of subsidiary shares are recognised in the income statement� Segment reporting is based on the same accounting principles as the Fortum Group� See Definition of key figures� 6.4 Segment information Income statement EUR million Power sales 3) Heat sales Waste treatment sales Other sales IS Sales Internal eliminations Netting of Nord Pool transactions 2) External sales Comparable EBITDA IS Depreciation and amortisation IS Comparable operating profit Impairment charges Capital gains and other Changes in fair values of derivatives hedging future cash-flow Nuclear fund adjustment IS Items affecting comparability IS Operating profit IS Share of profit of associated companies and joint ventures IS Finance costs - net IS Income taxes IS Profit for the year Generation 1) City Solutions 1) Consumer Solutions Russia Other Operations Total Note 7 7 7, 8 7, 29 7 19, 29 2018 1,767 0 0 70 1,837 -2 1,835 762 -131 631 -4 77 79 -45 108 738 -72 2017 1,649 0 0 28 1,677 -15 1,662 603 -125 478 6 1 15 1 23 501 -1 2018 119 604 211 161 1,094 -37 1,057 284 -171 113 0 0 -4 0 -4 109 74 2017 121 523 195 175 1,015 -19 996 262 -163 98 0 1 3 0 4 102 80 2018 1,547 0 0 212 1,759 -11 1,748 110 -57 53 0 0 22 0 22 75 0 2017 862 0 0 235 1,097 -3 1,094 57 -16 41 0 2 -4 0 -2 39 0 2018 872 193 0 4 1,069 0 1,069 417 -147 271 0 2 0 0 2 273 36 2017 837 258 0 6 1,101 0 1,101 438 -142 296 0 0 0 0 0 295 31 2018 26 0 0 102 129 -80 49 -50 -30 -79 0 23 0 0 23 -57 0 2017 15 0 0 87 102 -67 35 -83 -18 -102 0 322 0 0 322 221 38 2018 4,331 797 211 549 5,888 -130 -516 5,242 1,523 -536 987 -4 102 98 -45 151 1,138 38 -136 -181 858 2017 3,483 782 195 531 4,991 -103 -367 4,520 1,275 -464 811 6 326 14 1 347 1,158 148 -195 -229 882 1) Sales, both internal and external, include effects from realised hedging contracts. Effect on sales can be negative or positive depending on the average contract price and realised spot price. 2) Netting and eliminations include eliminations of internal sales and netting of Nord Pool transactions. Sales and purchases with Nord Pool, EUR -516 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. 3) Power sales contains realised result from commodity derivatives, EUR +70 million, which have not had hedge accounting status under IFRS 9, but have been considered operatively as hedges. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 62 62 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Segment assets and liabilities EUR million Non-interest-bearing assets BS Participations in associated companies and joint ventures Eliminations Total segment assets Interest-bearing receivables BS Deferred tax assets Other assets BS Liquid funds Total assets Segment liabilities Eliminations Total segment liabilities BS Deferred tax liabilities Other liabilities Total liabilities included in capital employed Interest-bearing liabilities BS Total equity Total equity and liabilities Gross investments / divestments EUR million Gross investments in shares Capital expenditure of which capitalised borrowing costs Gross divestments of shares Note 19, 29 Generation 2018 6,669 846 2017 6,097 785 2018 3,555 613 2017 3,517 611 2018 1,044 0 City Solutions Consumer Solutions Russia Other Operations Total 2017 923 0 923 2018 2,408 495 2017 2,812 472 2018 395 4,024 2,903 3,284 4,419 2017 452 32 483 7,515 6,882 4,168 4,128 1,044 21 28 28 27 1,220 1,210 425 400 396 285 114 124 155 207 2018 14,072 5,978 -117 19,933 1,092 70 731 584 22,409 2,311 -117 2,194 720 1,325 4,239 6,093 12,077 22,409 2017 13,801 1,900 -19 15,682 1,406 73 696 3,897 21,753 2,227 -19 2,208 819 554 3,581 4,885 13,287 21,753 Note 19, 3 17, 18 3 Generation 2018 8 186 3 160 2017 90 174 3 0 City Solutions Consumer Solutions Russia Other Operations Total 2018 32 190 4 0 2017 386 170 2 0 2018 0 47 0 0 2017 486 7 0 55 2018 63 54 0 0 2017 125 152 7 0 2018 3,985 108 3 147 2017 39 187 4 687 2018 4,088 584 10 306 2017 1,125 690 16 742 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 63 63 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Comparable operating profit including share of profits from associates and joint ventures and Comparable return on net assets EUR million Comparable operating profit Share of profit of associated companies and joint ventures Adjustment for Share of profit of associated companies and joint ventures Comparable operating profit including share of profits from associates and joint ventures Segment assets at the end of the period Segment liabilities at the end of the period Comparable net assets Comparable net assets average 1) Comparable return on net assets, % 1) Average net assets are calculated using the opening balance and end of each quarter values. Employees Number of employees 31 Dec Average number of employees Note 11 Generation 2018 631 -72 94 653 7,515 1,220 6,295 5,868 2017 478 -1 0 482 6,882 1,210 5,672 5,753 City Solutions Consumer Solutions Russia Other Operations 2018 113 74 0 186 4,168 425 3,743 3,700 2017 98 80 0 178 4,128 400 3,728 3,218 2018 53 0 0 53 1,044 396 648 671 2017 41 0 0 41 923 285 638 348 2018 271 36 0 307 2,903 114 2,789 2,976 2017 296 31 0 327 3,284 124 3,161 3,248 2018 -79 0 -38 -117 4,419 155 4,264 2,619 2017 -102 38 0 -63 483 207 276 475 11.1 8.4 5.0 5.5 7.8 11.7 10.3 10.1 -4.5 -13.3 Generation 2018 1,075 1,087 2017 1,035 1,036 City Solutions Consumer Solutions Russia Other Operations Total 2018 1,956 1,940 2017 1,907 1,807 2018 1,399 1,473 2017 1,543 1,180 2018 2,941 3,378 2017 3,495 3,710 2018 915 888 2017 805 774 2018 8,286 8,767 2017 8,785 8,507 6.5 Group-wide disclosures The Group’s operating segments operate mainly in the Nordic countries, Russia, Poland and other parts of the Baltic Rim area� Generation operates mainly in Finland and Sweden, Consumer Solutions operates mainly in Nordic countries and Poland, whereas City Solutions operates in all of these geographical areas except Russia� Other countries are mainly Estonia, Latvia, Lithuania and India� The home country is Finland� The information below is disclosing 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� Sales by product area is presented in Income statement by segment� 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 Other countries IS Total 2018 3,619 1,069 331 223 5,242 2017 2,827 1,102 452 139 4,520 The Nordic power production is not split by countries since Nordic power production is mainly sold through Nord Pool� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 64 64 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Capital expenditure by location EUR million Finland Sweden Norway Russia Poland Other countries Total Segment assets by location EUR million Finland Sweden Norway Russia Poland Other countries and eliminations Non-interest bearing assets BS Participations in associates and joint ventures Total Segment assets in Finland include EUR 590 million (2017: 85) settlements paid for futures� Number of employees on 31 December by location Finland Sweden Norway Russia Poland Other countries Total 2018 215 89 97 54 86 43 584 2018 4,589 4,202 1,622 2,408 645 488 13,955 5,978 19,933 2017 179 104 46 152 92 115 690 2017 3,882 4,304 1,533 2,812 559 692 13,781 1,900 15,682 2018 2,238 981 667 2,941 754 705 8,286 2017 2,165 968 654 3,494 827 677 8,785 7 Items affecting comparability EUR million Impairment charges Capital gains and other Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustments IS Total 2018 -4 102 98 -45 151 2017 6 326 14 1 347 Fortum uses Alternative performance measures (APMs) in the financial target setting and forecasting, management’s follow up of financial performance of segments and the group as well as allocation of resources in the group’s performance management process� The business performance of the operations cannot be compared from one period to another without adjusting for items affecting comparability and therefore they are excluded from Comparable operating profit and Comparable EBITDA� The main business performance measurements have been used consistently since 2005� Definitions are presented in the section Definitions of key figures� Impairment charges and capital gains EUR million Impairment charges Change in dismantling provision for the Finnish coal-fired power plant Inkoo Other impairment charges Total Capital gains and other Hafslund Produksjon Holding AS, associated company Espoo head office Hafslund ASA, associated company Transaction costs Other non-recurring items Total Segment 2018 2017 Generation Generation Other Operations Other Operations Other Operations Other Operations -3 -1 -4 77 26 -4 2 101 6 6 324 -4 6 326 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� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 65 65 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Nuclear waste management 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� In addition adjustments are made for accounting effects from valuation according to IFRS� Fortum has reassessed assumptions used for all nuclear related assets and liabilities as of 31 December 2018� The increase of the nuclear provision for the Loviisa nuclear power plant in Finland leads to recognition of an additional share of the Finnish nuclear fund� The increase of the provision due to the reassessment and the additional share in the fund are both included in Items affecting comparability� The net profit impact from all these nuclear related adjustments is close to zero� For additional information see Note 29 Nuclear related assets and liabilities For more information regarding disposals of shares, see Note 3 Acquisitions and disposals� For more information regarding fair value changes of derivatives, see Note 8 Fair value changes of derivatives and underlying items in income statement� For more information regarding nuclear waste management, see Note 29 Nuclear related assets and liabilities� 8 Fair value changes of derivatives and 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 IFRS 9 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 IFRS 9, because they are natural hedges of loans and receivables� Fair value change of interest rate hedges without hedge accounting is EUR -8 million (2017: -7)� EUR million In operating profit Fair value changes from derivatives not getting hedge accounting status 2018 2017 Electricity derivatives Currency derivatives Other commodity derivatives Ineffectiveness from cash flow hedges Total effect in operating profit In finance costs Exchange gains and losses on loans and receivables 1) Fair value changes of derivatives not getting hedge accounting status Cross currency interest rate derivatives 1) Foreign currency derivatives 1) 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 2) Total effect in finance costs Total effect on profit before income tax 77 3 17 0 98 -100 8 91 3 102 -8 -24 24 94 -6 92 -20 -1 25 11 14 -51 6 47 -4 49 -7 -31 31 42 -10 4 1) Exchange gains and losses on loans, receivables and derivatives totalling EUR -1 million (2017: 2). 2) Including fair value gains and losses on hedged financial instruments and foreign currency and interest rate derivatives EUR -5 million (2017: -12). See also Note 12 Finance costs - net. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 66 66 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 9 Other income and other expenses ACCOUNTING POLICIES OTHER INCOME Revenue from activities outside normal operations is reported in other income. This includes recurring items such as rental income and subsidies and non-recurring items such as insurance compensation. In addition, profits from the capital recycling business model are presented in other income, because the business results are realised through divesting the shareholding, either partially or totally. 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. 9.1 Other income EUR million Rental income Insurance compensation Subsidies Other items IS Total 2018 12 1 47 71 130 2017 6 2 17 28 55 Increase in subsidies is due to reclassification from sales to other income according to IFRS 15� Other items include a profit of EUR 26 million from the partial sale of Fortum’s solar power company in India according to the ’capital recycling’ business model� See also Note 3 Acquisitions and disposals� 9.2 Other expenses EUR million Operation and maintenance costs Property taxes IT and telecommunication costs Other items IS Total 2018 130 109 77 278 594 2017 125 115 60 276 576 The major components recorded in other expenses are the external operation and maintenance costs of power and heat plants� Property taxes include taxes relating to directly owned hydropower production EUR 65 million (2017: 81)� Other items include expenses relating to properties and other operative expenses� Principal auditors’ fees EUR million Audit fees Audit related assignments Tax assignments Other assignments Total 2018 1.7 0.2 0.0 1.6 3.5 2017 1.4 0.2 0.0 1.0 2.6 Deloitte Oy is the appointed auditor until the next Annual General Meeting, to be held in 2019� 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 Corporation 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� Other assignments consist of advisory services� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 67 67 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 10 Materials and services EUR million Materials Materials purchased from associated companies and joint ventures Transmission costs External services IS Total 2018 2,296 372 41 86 2,795 2017 1,769 431 39 63 2,301 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) and purchased steam� Total materials and services include production taxes EUR 62 million (2017: 109), of which nuclear related capacity and property taxes EUR 4 million (2017: 48) and hydro power related property taxes EUR 13 million (2017: 14)� Nuclear capacity tax in Sweden was abolished from 1 January 2018 in accordance with the energy agreement adopted by the Swedish Parliament� Taxes related to nuclear and hydro production are included in taxes paid through purchases from associated companies� See Note 19 Participations in associated companies and joint ventures� 11 Employee benefits EUR million Wages and salaries Pensions Defined contribution plans Defined benefit plans Social security costs Share-based incentives Other employee costs IS Total 2018 345 34 7 48 3 23 459 2017 312 32 8 44 4 23 423 The compensation package for Fortum employees consists of salaries, fringe benefits, short-term incentives, profit sharing paid to the Personnel Fund (in Finland) and share-based long-term incentives for selected key individuals� The remuneration policy is determined by the Board of Directors� The Nomination and Remuneration Committee of the Board of Directors discusses, assesses and makes recommendations and proposals to the Board of Directors on the remuneration policy, remuneration of the President and CEO and the Fortum Executive Management and company-wide incentive arrangements for senior management and key personnel as well as monitors these plans annually� Additionally, the Committee contributes to the Group’s nomination issues by proposing to the Board of Directors any nominations regarding the members of Fortum Executive Management� For further information on pensions see Note 31 Pension obligations 11.1 Short-term incentives (STI) Fortum’s STI programme is designed to support the achievement of the company’s financial and other relevant targets on an annual basis� As a main principle, all employees are covered by the programme or alternatively by a business specific or a comparable local variable pay arrangement� The Board of Directors determines the performance criteria and award levels for the Fortum Executive Management� The awards are based on the achievement of Group financial performance, divisional targets and individual targets� The target incentive opportunity is 20% and the maximum incentive opportunity is 40% of the annual base salary� The Board of Directors assesses the performance of the President and CEO and the members of the Fortum Executive Management on a regular basis� Awards for other employees are based on a combination of Group, divisional, functional and personal targets� The targets are set in annual performance discussions held at the beginning of the year� Awards under the STI programme are paid solely in cash� 11.2 Share-based long-term incentives (LTI) The purpose of Fortum’s share-based long-term incentive programme is to support the delivery of sustainable long-term performance, align the interests of management with those of shareholders and support in committing and retaining key individuals� Fortum’s LTI programme provides participants with the opportunity to earn company shares� Under the LTI programme and subject to the decision of the Board of Directors, a new LTI plan commences annually� The Board of Directors approves participation of the Fortum Executive Management members in each annually commencing 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 68 68 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties LTI plan� Subject to a decision by the Board of Directors the President and CEO is authorised to decide on individual participants and potential maximum awards for other participants than the Fortum Executive Management in accordance with the nomination guidelines approved by the Board of Directors� Participation in the LTI plan precludes the individual from being a member in the Fortum Personnel Fund� Each LTI plan begins with a three-year earnings period, during which participants may earn share rights if the performance criteria set by the Board of Directors are fulfilled� If the minimum performance criteria are not exceeded, no shares will be awarded� If performance is exceptionally good and the targets approved by the Board of Directors are achieved, the combined gross value of all variable compensation cannot exceed 120% of the person’s annual salary in any calendar year� After the earnings period has ended and the relevant taxes and other employment-related expenses have been deducted, participants are paid the net balance in the form of shares� For LTI plans commencing in 2013 onwards, any shares awarded to Fortum Executive Management members are subject to a three-year lock-up period� Subject to a decision by the Board of Directors, the lock-up period can be reduced to one year for those Fortum Executive Management members whose aggregate ownership of Fortum shares is greater than or equal to their annual salary� For other participants the lock-up period is one year� For LTI plans commencing prior to 2013, the lock-up period is three years for all LTI plan participants� If the value of the shares decreases or increases during the lock-up or retention period, the participant will carry the potential loss or gain� For LTI plans commencing in 2017 and later, the share awards will not be subject to a minimum lock-up period� However, Fortum Executive Management members whose aggregate ownership of Fortum shares does not yet fulfil the shareholding requirement are required to retain at least 50% of the shares received until the required level of shareholding is met� The Board of Directors has the right to revise the targets set in the incentive plans, deviate from the payment based on achievement of the set earnings criteria, or to discontinue any ongoing incentive plan� The share plans under the LTI arrangement are accounted for as partly equity- and partly cash-settled arrangements� The earned reward that the participants receive in shares is accounted for as an equity-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 earnings 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� The LTI liability including social charges at the end of the year 2018 was EUR 14 million (2017: 18), including EUR 8 million (2017: 4) recorded in equity� At year end 2018 approximately 120 key employees are participants in at least one of the six on-going annual LTI plans (plans 2013–2018, 2014–2019, 2015–2020, 2016–2021, 2017–2019 and 2018–2020)� Plans 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2012–2017 1 2013–2018 2014–2019 2015–2020 2016–2021 2017–2019 2018–2020 2 1 3 2 1 4 3 2 1 5 4 3 2 1 6 5 4 3 2 1 Earnings period Lock-up period Additional lock-up period for FEM Share delivery 6 5 4 3 2 1 6 5 4 3 2 6 6 5 3 Shares granted Grant date Grant price, EUR Plan 2015–2020 13 Feb 2018 17.04 Plan 2014–2019 13 Feb 2017 14.28 Plan 2013–2018 12 Feb 2016 12.18 Number of shares granted Number of shares subsequently forfeited or released from lock-up and other changes Number of shares under lock-up at the end of the year 2018 73,377 -8,974 64,403 92,321 152,200 -84,807 7,514 -150,475 1,725 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 2018 for plan 2015–2020 was 72,284, for plan 2014–2019 17,793 and for plan 2013–2018 32,066 share rights� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 69 69 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties The annual contribution for the President and CEO Pekka Lundmark’s pension arrangement is 25% of the annual salary� The annual salary consists of base salary and fringe benefits� The President and CEO’s retirement age is 63� In case his assignment is terminated before the retirement age, the President and CEO is entitled to retain the benefits accrued in the arrangement� For the other members of the FEM the retirement age varies between 62 and 65� According to group policy all new supplementary pension arrangements are defined contribution plans� For the members of the FEM that have defined contribution arrangements, the maximum pension premium percentage can be 25% of the annual salary� Members, who have joined Fortum prior 1 January 2009, are participating in defined benefit pension arrangements, where the benefit is 60–66% of the final pensionable salary with the pension provided by an insurance company or Fortum’s Pension Fund� A pension liability of EUR 624 thousand (2017: 693) related to the defined benefit plans for FEM 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 the salary for the notice period (6 months) and a severance pay equal to 12 months’ salary� Other FEM members’ termination compensation is equal to 6 to 12 months’ salary� Number of shares delivered to the management The table below shows the number of shares delivered during 2018 and 2017 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� 11.3 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� The fund’s latest financial year ended at 30 April 2018 and the fund then had a total of 2,233 members (2017: 2,320)� At the end of April 2018 Fortum contributed EUR 2�0 million (2017: 2�8) to the personnel fund as an annual profit-sharing bonus based on the financial results of 2017� The combined amount of members’ shares in the fund was EUR 19 million (2017: 21)� The contribution to the personnel fund is expensed as it is earned� 11.4 The President and CEO and the Fortum Executive Management remuneration The Fortum Executive Management (FEM) consists of ten members, including the President and CEO� The following table presents the total remuneration of the President and CEO and the FEM and takes into account the changes in FEM during the year� The expenses are shown on accrual basis� Management remuneration EUR thousand Salaries and fringe benefits Performance bonuses 1) Share-based incentives 1) Pensions (statutory) Pensions (voluntary) Social security expenses Total 1) Based on estimated amounts. 2018 2017 Pekka Lundmark, President and CEO 1,048 228 297 250 252 36 2,112 Other FEM members 3,101 658 1,431 677 596 254 6,716 Pekka Lundmark, President and CEO 998 187 334 231 229 41 2,019 Other FEM members 3,387 589 1,030 665 712 257 6,640 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 70 70 Basis of preparation Risks Income statement Income statement Balance sheet Off balance sheet items Group structure and related parties FEM members at 31 December 2018 Pekka Lundmark, CEO Arun Aggarwal (member of FEM from 17 Oct 2018) Alexander Chuvaev 1) Per Langer Risto Penttinen Markus Rauramo Arto Räty Mikael Rönnblad (member of FEM from 15 May 2017) Sirpa-Helena Sormunen Tiina Tuomela Former FEM members Timo Karttinen (member of FEM until 28 February 2017) Kari Kautinen (member of FEM until 30 September 2018) Matti Ruotsala (member of FEM until 31 October 2017) Total 2018 2) 2017 3) 6,453 - 15,930 1,621 1,767 2,103 - - 1,879 2,117 N/A 2,059 N/A 33,929 4,463 - 15,480 2,358 1,793 4,185 - - 1,777 2,563 3,626 2,274 4,176 42,695 1) Estimated number of shares after local tax and tax related deductions. Due to local legislation, share rights will be paid in cash instead of shares after the three-year lock-up period. 2) Share delivery based on share plan 2015–2020. 3) Share delivery based on share plan 2014–2019. 11.5 Board of Directors and management shareholding On 31 December 2018, the members of the Board of Directors owned a total of 8,540 shares (2017: 9,200), which corresponds to 0�00% (2017: 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 2018 Matti Lievonen, Chairman Klaus-Dieter Maubach, Deputy Chairman Heinz-Werner Binzel Eva Hamilton Kim Ignatius Essimari Kairisto Anja McAlister Veli-Matti Reinikkala Former Board member Sari Baldauf Total 2018 2017 1,500 - - 40 4,000 - - 3,000 N/A 8,540 1,500 N/A - - 2,400 N/A - 3,000 2,300 9,200 The President and CEO and other members of the FEM owned a total of 193,227 shares (2017: 200,667) which corresponds to approximately 0�02% (2017: 0�02%) of the company’s shares and voting rights� Number of shares held by members of the Fortum Executive Management FEM members at 31 December 2018 Pekka Lundmark Arun Aggarwal Alexander Chuvaev Per Langer Risto Penttinen Markus Rauramo Arto Räty Mikael Rönnblad Sirpa-Helena Sormunen Tiina Tuomela Former FEM member Kari Kautinen Total 2018 2017 67,166 - 22,053 33,191 12,355 34,135 - - 6,656 17,671 60,713 N/A 14,713 31,570 10,588 32,032 - - 4,777 15,554 N/A 193,227 30,720 200,667 11.6 Board remuneration The Board of Directors comprises five to ten 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 end of 2018 the Board of Directors consists of eight members� 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 11 thousand (2017: 14) have been recorded for the fees in accordance with local legislation in respective countries� Fees for the Board of Directors EUR thousand Chairman Deputy Chairman Chairman of the Audit and Risk Committee 1) Members 1) If not Chairman or Deputy Chairman simultaneously. 2018 75 57 57 40 2017 75 57 57 40 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 71 71 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Every member of the Board of Directors receives a fixed yearly fee and additional fees for each meeting attended� A meeting fee of EUR 600 is paid for board and committee meetings� For board members living outside Finland in Europe, the meeting fee is EUR 1,200; for board members living outside Europe, the meeting fee is EUR 1,800� For board and committee meetings held as a telephone conference, the meeting fee is paid as EUR 600 to all members� No fee is paid for decisions made without a separate meeting� Board members are entitled to travel expense compensation in accordance with the company’s travel policy� Compensation for the Board of Directors EUR thousand Board members at 31 December 2018 Matti Lievonen, Chairman from 28 March 2018 Klaus-Dieter Maubach, Deputy Chairman from 28 March 2018 Heinz-Werner Binzel Eva Hamilton Kim Ignatius, Chairman of the Audit and Risk Committee Essimari Kairisto (member of the board from 28 March 2018) Anja McAlister (member of the board from 4 April 2017) Veli-Matti Reinikkala Former Board members Sari Baldauf (Chairman until 28 March 2018) Minoo Akhtarzand (member of the board until 4 April 2017) Tapio Kuula (member of the board until 7 November 2017) Jyrki Talvitie (member of the board until 4 April 2017) Total 2018 80 54 54 54 65 42 60 54 20 N/A N/A N/A 483 2017 49 N/A 57 54 67 N/A 47 58 84 16 43 17 492 12 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 Note 18 Fair value gains and losses on financial instruments 8 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 Fair value gains and losses on other investments Total Exchange gains and losses Loans and receivables Cross currency interest rate derivatives Foreign currency derivatives Write down of loan receivables Interest income on share of State Nuclear Waste Management Fund Unwinding of discount on nuclear provisions Unwinding of discount on other provisions Other financial income Other financial expenses Total IS Finance costs - net 8 8 8 23 29 29 30, 31 2018 -155 -3 10 -148 31 3 34 -8 -24 24 3 -3 -3 -8 -100 8 91 -13 7 11 -3 11 -26 -15 -136 2017 -170 -10 16 -164 28 3 32 -7 -31 31 -4 - -12 -51 6 47 0 6 -45 -3 14 -25 -50 -195 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� Other interest expenses for 2017 include the interest expense of SEK 69 million (EUR 7 million) relating to the Swedish income tax assessment for 2009–2012� See Note 37 Legal actions and official proceedings� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 72 72 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Interest income includes EUR 12 million (2017: 12) from shareholders’ loans to co-owned Finnish and Swedish nuclear companies, and EUR 17 million (2017: 10) from deposits and commercial papers� 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� Fortum has reassessed the assumptions used for all nuclear related assets and liabilities as of 31 December 2018� Unwinding of discount rate on nuclear provisions, EUR 11 million, includes positive effect from changes in assumptions of EUR 49 million� This represents the adjustment to past unwinding of interest� The net profit impact from all the nuclear related adjustments is close to zero� For additional information see Note 29 Nuclear related assets and liabilities� Other financial income includes EUR 10 million from SIBUR receivable (2017: 14)� Other financial expenses includes 20 million replenishment to Nasdaq default fund and 2017 includes EUR 16 million financial cost related to financing commitment for Uniper acquisition� 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 2018 2017 27 8 -32 3 -52 91 3 42 45 21 6 -38 -11 -68 47 -4 -25 -36 1) Fair value gains and losses on financial instruments include fair value changes from interest rate swaps not getting hedge accounting amounting to EUR -8 million (2017: -7) and fair value change of hedging derivatives in fair value hedge relationship EUR -24 million (2017: -31), totalling EUR -32 million (2017: -38). 13 Income tax expense 13.1 Profit before tax EUR million Finnish companies Swedish companies Russian companies Other companies IS Total 2018 113 396 261 270 1,040 2017 76 240 269 526 1,111 Profit before tax split by country represents the respective countries’ part of the profit before tax for Fortum Group according to International Financial Reporting Standards (IFRS), i�e� based on the same accounting principles as for the Consolidated Financial Statements� This means that the respective country profits include such items as for example share of profits from associates and effects of accounting for nuclear provisions, which are not included in taxable profits in the local subsidiaries� 13.2 Major components of income tax expense by major countries EUR million Current taxes Finnish companies Swedish companies Russian companies Other companies Total Deferred taxes Finnish companies Swedish companies Russian companies Other companies Total Adjustments recognised for current tax of prior periods Finnish companies Swedish companies 1) Russian companies Other companies Total IS Income tax expense 2018 2017 -7 -3 -38 -46 -94 -18 -73 -11 15 -87 -1 0 0 0 -1 -181 -15 2 -11 -34 -58 11 -34 -43 24 -42 -13 -115 0 -1 -129 -229 1) Income tax expense 2017 from the unfavourable decisions in the Administrative Court of Appeal in Sweden relating to the income tax assessments for 2009–2012. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 73 73 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Fortum has had tax audits ongoing during 2018� Based on earlier audits Fortum has received income tax assessments in Belgium for the years 2008–2012� In previous years, Fortum has appealed all assessments received� Based on legal analysis, no provision has been accounted for in the financial statements related to Belgium 2008–2012 tax audits� For further information regarding the ongoing tax appeals see Note 37 Legal actions and official proceedings� During 2018 entities primarily in Sweden and Russia used a portion of the deferred tax asset relating to tax loss carry forwards� 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 asset’s lifetime and higher tax payments at the end of its lifetime� This difference results in a deferred tax liability� See also Note 28 Income taxes in the balance sheet� 13.3 Income tax rate The table below explains the difference between the theoretical enacted tax rate in Finland compared to the tax rate in the consolidated 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 IS Income tax expense 2018 1,040 -208 17 6 1 15 -13 7 -14 11 -3 0 -181 % 20.0 -1.6 -0.6 -0.1 -1.5 1.3 -0.7 1.4 -1.0 0.3 0.0 17.5 2017 1,111 -222 6 5 0 77 -3 33 -10 -2 3 -117 -229 % 20.0 -0.6 -0.4 0.0 -6.9 0.3 -2.9 0.9 0.2 -0.3 10.5 20.6 Key tax indicators: • The weighted average applicable income tax rate for 2018 is 19�4% (2017: 21�7%) • The effective income tax rate in the income statement for 2018 is 17�5% (2017: 20�6%) • The comparable effective income tax rate (excluding the share of profits from associates, joint ventures as well as tax exempt capital gains, tax rate changes and other major one-time income tax effects) for 2018 is 22�0% (2017: 18�8%)� See Definitions of key figures� The major items affecting the effective income tax rate are as follows: The one-time tax-free capital gain (EUR 100 million) in Ireland and Netherlands 2018 from the sale of Hafslund Produksjon Holding AS and Fortum Sun BV reduced the effective income tax rate with 1�5%� Tax rate changes mainly in Sweden and Norway during 2018 reduced the effective income tax rate with 1�6%� Effective income tax rate impacted by gains or losses on sale of shares� In many countries like in Finland, Sweden, Netherlands and Norway income on capital gains and losses is treated as tax exempt� The purpose of this is 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� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 74 74 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties As Fortum currently has no dilutive instruments outstanding, diluted earnings per share is the same as basic earnings per share� 14.2 Dividend per share Dividends proposed by the Board of Directors are not recognised in the financial statements until they have been approved by the Company’s shareholders at the Annual General Meeting� A dividend in respect of 2018 of EUR 1�10 per share, amounting to a total dividend of EUR 977 million based on the amount of shares registered as at 31 January 2019, is to be proposed at the Annual General Meeting on 26 March 2019� These Financial statements do not reflect this dividend� A dividend for 2017 of EUR 1�10 per share, amounting to a total of EUR 977 million, was decided in the Annual General Meeting on 28 March 2018 and the dividend was paid on 10 April 2018� A dividend for 2016 of EUR 1�10 per share, amounting to a total of EUR 977 million, was decided in the Annual General Meeting on 4 April 2017� The dividend was paid on 13 April 2017� 14 Earnings and dividend per share ACCOUNTING POLICIES EARNINGS PER SHARE Basic earnings per share is calculated by dividing the net profit attributable to the owners of the parent company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the Group and held as treasury shares. 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. 14.1 Earnings per share Earnings per share, basic IS Profit attributable to owners of the parent (EUR million) Weighted average number of shares (thousand) Basic earnings per share (EUR) 2018 843 888,312 2017 866 888,367 0.95 0.98 In the merger of Länsivoima Oyj (former Lounais-Suomen Sähkö Oy) to Fortum Corporation in 2000, those shareholders of Länsivoima Oyj that did not produce their share certificates and did not request their rights to be registered in the book-entry system, received their respective shares of Fortum Corporation as merger consideration to a joint book-entry account opened on their behalf (the “Joint Account”)� The Annual General Meeting 2018 of Fortum Corporation decided, that the rights to all such shares entered in the Joint Account and to the rights attached to such shares that had not been requested to be registered in the book-entry system prior to the decision by the Annual General Meeting 2018, were forfeited� In addition to the shares, the rights attached to such shares, such as undrawn dividend, were forfeited� The provisions applicable to treasury shares held by the company were applied to the forfeited shares� On 17 December 2018, Board of Directors decided to cancel all these 72,580 Fortum shares owned by the company without decreasing the share capital� The cancellation was entered in the Trade Register on 21 December 2018� In 2018 these shares had minor impact on weighted average number of shares� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 75 75 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 15 Financial assets and liabilities by categories ACCOUNTING POLICIES FINANCIAL ASSETS Fortum classifies its financial assets in the following categories according to IFRS 9: financial assets at amortised cost, financial assets at fair value through profit and loss and financial assets at fair value through other comprehensive income. The classification is made at initial recognition and depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. In order for the financial asset to be classified and measured at amortised cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely payments of the principal and interest on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. When the SPPI criteria is not met, financial assets are classified to fair value through profit and loss category. Financial assets are presented as non-current assets unless they are held for trading, expected to be realized within 12 months at the closing date or they have a maturity of under 12 months at closing date. These are classified as current assets. FINANCIAL ASSETS AT AMORTISED COST Fortum measures financial assets at amortised cost when the financial asset is included in the held-to-collect business model with fixed or determinable payments that are payments of amount outstanding or interest on it. They arise when the Group provides money, goods or services directly to a debtor. Financial assets at amortised cost include non- derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets at amortised cost are subject to impairment. Gains and losses from derecognition of the asset are recognised in profit and loss. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS Financial assets at fair value through profit and loss include financial assets held for trading in the short term, financial assets designated upon initial recognition irrevocably as fair value through profit and loss and financial assets mandatorily recognised at fair value through profit and loss according to IFRS 9. Fortum has also elected to classify equity investments (i.e. other investments) irrevocably as financial assets at fair value through profit and loss. These are mainly comprised of shares in unlisted companies. Derivatives are classified as held for trading unless they are designated as effective hedging instruments. Gains and losses arising from changes in the fair value are included in the income statement in the period in which they arise. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME Other investments designated at fair value through other comprehensive income are not subject to impairment assessment and are never recycled to profit and loss. Dividends received are recognised in profit and loss. Fortum currently does not have material other investments that have been irrevocably classified as financial assets at fair value through other comprehensive income. DERECOGNITION Fortum derecognises financial assets when the rights to receive cash flows from the assets have expired or when it has substantially transferred the risks and rewards of the assets outside of the Group. IMPAIRMENT Fortum recognizes an allowance for expected credit losses (“ECL”) according to IFRS 9 for financial assets measured at amortised cost. See further information on ECL in Note 4.7.1 Credit quality of major financial assets and in Note 23 Trade and other receivables. Financial assets measured at fair value through profit or loss are not included in ECL assessment as they are already measured at fair value which takes into account expected credit losses. A financial asset is written-off when there is no reasonable expectation of recovering the contractual cash flows. FINANCIAL LIABILITIES All financial liabilities are recognised initially at fair value. In the case of loans and borrowings and payables, incurred transaction costs are deducted. In subsequent periods, all non-derivative financial liabilities 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 rate method. Derivative financial instruments entered into by the Group, that are not designated as hedging instruments are classified as liabilities at fair value through profit and loss. Amortisation of the effective interest rate and gains and losses of liabilities are recognised in the statement of profit and loss. Group’s financial liabilities include trade and other payables, loans and borrowings and derivative financial instruments. Borrowings or portion of borrowings being hedged with a fair value hedge are recognised at fair value through profit and loss. Derecognition of financial liabilities takes place when the Group has fulfilled the contractual obligations. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 76 76 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES Within the ordinary course of business the Group routinely enters into sale and purchase transactions for commodities. The majority of these transactions take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the commodity in accordance with the Group’s expected sale, purchase or usage requirements. Such contracts are not within the scope of IFRS 9. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument eligible for hedge accounting, 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 (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, whether the hedged item is one or several risk components separately or in aggregation, as well as its risk management objective and strategy for undertaking various hedge transactions. When applying hedge accounting the Group also documents its assessment, of whether the derivatives that are used in hedging transactions are meeting the hedge accounting effectiveness criteria: (1) there is an economic relationship between the hedged item and the hedging instrument, (2) the effect of credit risk does not dominate the value changes that result from that economic relationship; and (3) the hedge ratio of the hedging relationship is the same as applied in the risk management. 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 by assessing the prospective capacity of the derivatives in offsetting changes in fair values or cash flows of hedged items. Hedge accounting is discontinued only when the hedging relationship ceases to meet the hedge effectiveness criteria. 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. 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 and 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. Fortum hedges its exposure to commodity market risks and applies hedge accounting by risk components. Hedge accounting is applied to Nordic electricity price risk, where the Nordic area priced physical electricity delivery is commonly divided into three risk components: (1) system price risk, (2) electricity price area difference risk (EPAD) and (3) currency risk. For each of these separate risk components there are specific derivative contracts available, which each are being a perfect hedge without any ineffectiveness for the associated risk component. 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 and loss for the period to maturity. NET INVESTMENT HEDGING IN FOREIGN OPERATIONS Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. DERIVATIVES THAT DO NOT QUALIFY FOR HEDGE ACCOUNTING Certain derivative instruments hedging future cash flows do not qualify for hedge accounting. Fair value changes of commodity derivative instruments are recognised in items affecting comparability in the income statement, whereas fair value changes of interest rate and currency derivative instruments are recognised in finance costs - net. Financial assets and liabilities in the tables below are split into categories in accordance with IFRS 9. The categories are further divided 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. In the comparative period ending 31.12.2017, financial assets and liabilities are split in accordance with IAS 39. See Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018 for more information. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 77 77 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Financial assets by categories 2018 according to IFRS 9 Amortised cost Fair value through profit and loss Fair value through other comprehensive income Hedge accounting, fair value hedges Non-hedge accounting Other investments Cash flow hedges Total financial assets EUR million Financial instruments in non-current assets Other non-current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Long-term interest-bearing receivables Financial instruments in current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Trade receivables Other short-term interest-bearing receivables Liquid funds Total Note 20 4 21 4 23 21 24 Financial assets by categories 2017 according to IAS 39 EUR million Financial instruments in non-current assets Other non-current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Long-term interest-bearing receivables Financial instruments in current assets Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Trade receivables Other short-term interest-bearing receivables Liquid funds Total 20 4 21 4 23 21 24 74 969 638 395 1,928 4,004 90 642 800 379 584 2,495 122 122 52 4 24 41 84 97 116 30 448 49 49 Available-for-sale financial assets 65 140 35 85 7 69 29 36 0 13 21 85 0 140 261 119 1,968 2,033 1 26 10 19 0 56 139 53 152 24 683 94 116 116 800 409 584 3,170 Finance lease Total financial assets 140 35 238 7 1,010 90 114 36 638 395 3,897 6,600 41 41 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 Loans and receivables Fair value through profit and loss Fair value through other comprehensive income Note Amortised cost Hedge accounting, fair value hedges Non-hedge accounting Cash flow hedges 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 78 78 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Financial liabilities by categories 2018 according to IFRS 9 Amortised cost Fair value through profit and loss Fair value through other comprehensive income MEUR Financial instruments in non-current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Financial instruments in current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Trade payables Other liabilities Total 1) Fair valued part of bond in fair value hedge relationship. Financial liabilities by categories 2017 according to IAS 39 MEUR Financial instruments in non-current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Financial instruments in current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Interest rate and currency derivatives Other commodity future and forward contracts Trade payables Other liabilities Total Note 27 4 27 4 33 33 Note 27 4 27 4 33 33 Non-hedge accounting Cash flow hedges Total financial liabilities Hedge accounting, fair value hedges 930 1) 25 70 2 13 65 45 77 995 272 4,077 1,086 334 212 5,709 235 16 641 1 0 893 5,007 305 44 13 1,086 706 46 77 334 212 7,830 Fair value through profit and loss Fair value through other comprehensive income Other financial liabilities Hedge accounting, fair value hedges Non-hedge accounting Cash flow hedges Amortised costs Fair value Total financial liabilities 26 26 100 43 3 131 12 13 302 23 19 31 12 0 85 3,082 1,037 766 318 208 4,374 1,037 4,119 123 88 3 766 162 24 13 318 208 5,824 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 79 79 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 16 Financial assets and liabilities by fair value hierarchy ACCOUNTING POLICIES Fair value measurements are classified using a fair value hierarchy i.e. Level 1, Level 2 and Level 3 that reflects the significance of the inputs used in making the measurements. FAIR VALUES UNDER LEVEL 1 MEASUREMENT HIERARCHY The fair value of some commodity derivatives traded in active markets (such as publicly traded electricity options, coal, gas and oil futures) are market quotes at the closing date. FAIR VALUES UNDER LEVEL 2 MEASUREMENT HIERARCHY The fair value of financial instruments including electricity derivatives traded in active markets 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 Commodities and financial derivatives done with creditworthy financial institutions with investment grade ratings. FAIR VALUES UNDER LEVEL 3 MEASUREMENT HIERARCHY Investments in unlisted shares classified as other investments for which the fair value can’t be reliably measured. Fair value gains and losses of other investments are booked through profit and loss. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 80 80 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Financial assets EUR million In non-current assets Other investments 1) Derivative financial instruments Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Other commodity future and forward contracts Non-hedge accounting Interest-bearing receivables In current assets Derivative financial instruments Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Other commodity future and forward contracts Non-hedge accounting Interest-bearing receivables Total Note 20 4 4 Level 1 2018 2017 Level 2 2018 2017 Netting 2) 2018 2017 Total 2018 Level 3 2018 49 2017 65 0 29 2 0 0 8 8 203 234 186 202 23 146 149 4 93 585 19 97 5 66 153 85 28 253 85 29 1 -22 -94 -5 -30 41 76 -5 -1 -83 -502 -7 -192 -87 -793 -151 -386 1,116 705 30 120 32 173 2017 65 0 35 153 85 7 76 21 69 85 29 36 32 694 49 1 52 149 4 24 41 10 84 19 97 116 30 675 1) Other investments, i.e. shares which are not classified as associated companies or joint ventures, consist mainly of shares in unlisted companies of EUR 49 million (Dec 31, 2017: 65). This includes Fortum’s indirect shareholding in Fennovoima of EUR 33 million (Dec 31, 2017: 25). Fair value gains and losses of other investments are booked through profit and loss. Other investments at fair value through other comprehensive income are immaterial. Other investments include listed shares at fair value of EUR 0 million (2017: 0). The cumulative fair value change booked in Fortum’s equity was EUR -2 million (2017: -3). 2) Receivables and liabilities against electricity and other commodity exchanges arising from standard derivative contracts with same delivery period are netted. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 81 81 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Financial liabilities EUR million In non-current liabilities Interest-bearing liabilities Derivative financial instruments Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Other commodity future and forward contracts Non-hedge accounting In current liabilities Derivative financial instruments Electricity derivatives Hedge accounting Non-hedge accounting Interest rate and currency derivatives Hedge accounting Non-hedge accounting Other commodity future and forward contracts Non-hedge accounting Total Note 27 4 4 Level 1 2018 2017 Level 2 2018 2017 Level 3 2018 2017 Netting 2) 2018 2017 Total 2018 2017 930 1) 1,037 1) 930 1,037 257 163 42 2 0 724 566 1 45 28 131 45 43 1 39 315 12 12 18 1 3 7 -22 -94 -5 -30 -5 -1 -83 -502 -7 -192 235 70 42 2 13 641 65 1 45 23 100 45 43 3 31 131 12 12 158 177 160 170 7 2,737 4 1,667 0 0 -87 -793 -151 -386 77 2,121 13 1,451 1) Fair valued part of bonds in fair value hedge relationship. 2) Receivables and liabilities against electricity and other commodity exchanges arising from standard derivative contracts with same delivery period are netted. Net fair value amount of interest rate and currency derivatives is EUR 178 million, including assets EUR 268 million and liabilities EUR 90 million� Fortum has cash collaterals based on Credit Support Annex agreements with some counterparties� At the end of December 2018 Fortum had received EUR 75 million from Credit Support Annex agreements� The received cash has been booked as short-term interest-bearing liability� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 82 82 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 17 Intangible assets ACCOUNTING POLICIES Intangible assets, except goodwill, are stated at the historical cost less accumulated amortisation and impairment losses. They are amortised on a straight-line method over their expected useful lives. 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 or joint venture at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets and tested yearly for impairment. Goodwill on acquisition of associates and joint ventures is included in investments in associates and joint ventures and is tested for impairment as part of the overall balance. 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. COMPUTER SOFTWARE Acquired computer software licences are capitalised on the basis of the costs incurred when bringing the software into use. Costs associated with developing or maintaining computer software are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the software development employee costs and an appropriate portion of relevant overheads. Computer software costs recognised as assets are amortised over their estimated useful lives (three to five years). TRADEMARKS AND LICENSES Trademarks and licences are shown at historical cost less accumulated amortisation and impairment losses, as applicable. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and licences over their estimated useful lives (15–20 years). CONTRACTUAL CUSTOMER RELATIONSHIPS Contractual customer relationships acquired in a business combination are recognised at fair value on acquisition date. The contractual customer relations have a finite useful life and are carried at costs less accumulated amortisation. Amortisation is calculated using the straight-line method over the expected duration of the customer relationship. COSTS FOR OBTAINING CUSTOMERS Incremental costs for obtaining new customers as well as renewing existing customer contracts are capitalised as intangible assets and amortised over the expected contract duration. The sales commission costs were mostly expensed until end of 2017, but are capitalised from 1 January 2018 onwards due to adoption of IFRS 15 Revenue from contracts with customers. See additional information on adoption of IFRS 15 in Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018 and Note 6 Segment reporting. 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. For CO2 emissions from power and heat production, a provision is recognised. CO2 emission costs are settled by returning emission allowances. To the extent that the Group already holds allowances to cover emission costs, 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 emission cost is recognised in the income statement within materials and services. The sales gains and losses of emission allowances not used for covering the obligation from CO2 emissions, are reported in other income. IMPAIRMENT TESTING OF NON-FINANCIAL ASSETS The individual assets’ carrying values are reviewed continuously 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. In addition, impairment needs are assessed and documented once a year in connection with the long-term forecasting 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. Value in use is determined by discounting the future cash flows expected to be derived from an asset. If it’s not possible to estimate the cash flows generated by an individual asset, the impairment testing is performed on a cash- generating unit level. Fortum defines the cash-generating unit as the smallest business area where the tested assets 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 83 83 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties generate cash flows that are independent of the cash flows generated by other assets in other business areas. Goodwill is allocated to the cash-generating unit or lowest level of groups of cash-generating units that benefit from the synergies of the acquired goodwill. Cash flow projections are based on the most recent long-term forecast 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. Non-financial assets other than goodwill that suffered an impairment charge are reviewed for possible reversal of the impairment at each reporting date. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS: ASSIGNED VALUES AND USEFUL LIVES IN ACQUISITIONS In an acquisition acquired intangible and tangible assets are fair valued and their remaining useful lives are determined. Management believes that the assigned values and useful lives, as well as the underlying assumptions, are reasonable. Different assumptions and assigned lives could have a significant impact on the reported amounts. The Group has significant carrying values in property, plant and equipment, intangible assets and participations in associated companies and joint ventures which are tested for impairment according to the accounting policy described above. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS: ASSUMPTIONS RELATED TO IMPAIRMENT TESTING The Group has significant carrying values in property, plant and equipment, intangible assets and participations in associated companies and joint ventures 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 long-term forecast. 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 that are used in calculating the present value. Estimates are also made in an acquisition when determining the fair values and remaining useful lives of acquired intangible and tangible assets. EUR million Cost 31 December Impact from change in accounting principle (IFRS 15) 1) Cost 1 January Translation differences and other adjustments Acquisition of subsidiary companies Capital expenditure Changes in emissions rights Disposals Sale of subsidiary companies Reclassifications Cost 31 December Accumulated depreciation 31 December Impact from change in accounting principle (IFRS 15) 1) Accumulated depreciation 1 January Translation differences and other adjustments Acquisition of subsidiary companies Disposals Sale of subsidiary companies Reclassifications Depreciation for the period Accumulated depreciation 31 December BS Carrying amount 31 December Goodwill 2018 613 0 613 -27 0 0 0 0 0 3 588 0 0 0 0 0 0 0 0 0 0 588 2017 353 0 353 -27 286 0 0 0 0 0 613 0 0 0 0 0 0 0 0 0 0 613 Other intangible assets 2017 386 2018 764 32 796 -21 22 53 16 -24 -6 35 869 313 12 325 -12 0 -24 0 0 81 370 499 0 386 -20 381 18 0 -14 -2 15 764 273 0 273 -6 30 -14 -1 2 30 313 451 Total 2018 1,377 32 1,409 -49 22 53 16 -24 -6 37 1,457 313 12 325 -12 0 -24 0 0 81 370 1,087 2017 739 0 739 -47 667 18 0 -14 -2 15 1,377 273 0 273 -6 30 -14 -1 2 30 313 1,064 1) See additional information in Note 1 Accounting policies and Note 6 Segment reporting Goodwill Total goodwill in the balance sheet as of 31 December 2018 amounted to EUR 588 million (2017: 613)� In 2018 Fortum finalised the purchase price allocation of Hafslund Markets Group and Fortum Oslo Varme Group acquired in 2017� The acquisitions enable scale benefits and combination of competences that support Fortum’s strategic growth and cash flow ambitions in the Nordic retail electricity and district heating markets and will also enhance the development of new and greener technologies and services� Hafslund Markets is 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 84 84 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties integrated in Consumer Solutions segment and Fortum Oslo Varme in City Solutions segment� The goodwill from the acquisition is allocated to these segments� See more information on the acquisitions in Note 3 Acquisitions and disposals� Goodwill in groups of cash-generating units EUR million Consumer Solutions City Solutions Russia Total carrying amount 31 December 2018 226 207 154 588 2017 228 208 177 613 Other intangible assets Other intangible assets include capitalised sales commissions for customer acquisition with a carrying amount totalling EUR 63 million at the end of 2018� The carrying amount consists of capitalised sales commission costs totalling EUR 111 million and accumulated depreciations totalling EUR 49 million� The sales commissions were mostly expensed until end of 2017, but are capitalised from 1 January 2018 onwards due to adoption of IFRS 15 Revenue from contracts with customers� See additional information on adoption of IFRS 15 in Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018 and Note 6 Segment reporting� Other items in other intangible assets include customer contracts, 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� 17.1 Impairment testing The impairment testing of the allocated goodwill in 2018 is described below� Key assumptions Power market development, recycling and waste solutions market development Regulation framework Utilisation of power plants and treatment facilities Forecasted maintenance investments Discount rate Basis for determining the value for key assumptions Historical analysis and prospective forecasting Current market setup and prospective forecasting (e.g. CSA mechanism in Russia) Past experience, technical assessment and forecasted market development Past experience, technical assessment and planned maintenance work Mostly market-based information The cash flows used in determining the value in use for each cash generating unit are based on the most recent long-term forecasts 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 were: City Solutions 7�3%, Consumer Solutions 6�9% and Russia 11�4%� The net operating assets of the CGUs and group of CGUs with allocated goodwill are tested yearly for possible impairment� The tested net operating assets include both the goodwill and fair value adjustments arising from the acquisition� As of 31 December 2018, the recoverable values were greater than their carrying values and therefore no impairments were booked� 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 EBITDA levels and changes in discount rate� Key assumptions used in impairment testing are presented below as well as the basis for determining the value Management estimates that a reasonably possible change in the discount rate used or in future earnings would 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 long-term forecasting process for the Fortum Group� not cause the carrying amount to exceed its recoverable amount in any of the tested units� Based on the sensitivity analysis done, if the estimated future EBITDA 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 tested items� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 85 85 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 18 Property, plant and equipment ACCOUNTING POLICIES Property, plant and equipment comprise mainly power and heat producing buildings and machinery buildings, waterfall rights, district heating network and buildings and machinery as well as landfill sites and treatment areas used in waste treatment operations. 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 capitalised borrowing costs. 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 expenses 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 30 Other provisions for information about asset retirement obligations and Note 29, Nuclear related 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. See further information on the impairment testing in Note 17 Intangible assets. GOVERNMENT GRANTS Grants from the government are recognised at their fair value when there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Government grants relating to the purchase of property, plant and equipment are deducted from the acquisition cost of the asset and are recognised as income by reducing the depreciation charge of the asset they relate to. BORROWING COSTS Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale. assets and liabilities, for information about provisions for decommissioning nuclear power plants. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. Land, water areas and waterfall rights are not depreciated since they have indefinite useful lives. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: Hydro power plant buildings, structures and machinery Thermal power plant buildings, structures and machinery Nuclear power plant buildings, structures and machinery CHP power plant buildings, structures and machinery Recycling and waste treatment facility buildings, structures and machinery Solar and Wind power plant structures and machinery District heating network Other buildings and structures Other tangible assets Other machinery and equipment Other non-current investments 40–50 years 25 years 25 years 15–25 years 15–40 years 25 years 30–40 years 20–40 years 20–40 years 3–20 years 5–10 years 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 86 86 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties EUR million Cost 1 January Translation differences and other adjustments Acquisition of subsidiary companies Capital expenditure Nuclear asset retirement cost Disposals Sale of subsidiary companies Reclassifications Cost 31 December Accumulated depreciation 1 January Translation differences and other adjustments Acquisition of subsidiary companies Disposals Sale of subsidiary companies Depreciation for the period Reclassifications Accumulated depreciation 31 December Land and waterfall rights 2018 2,694 -104 0 1 0 0 -1 1 2,591 0 0 0 0 0 0 0 0 2017 2,765 -89 15 2 0 -1 0 3 2,694 0 0 0 0 0 0 0 0 Buildings, plants and structures 2018 3,805 -208 3 5 0 -33 -3 281 3,851 2017 3,621 -154 161 15 0 -21 -49 232 3,805 Machinery and equipment 2018 8,335 -328 8 3 16 -30 -132 107 7,979 2017 7,147 -237 900 139 -6 -40 -14 445 8,335 1,629 -86 0 -33 0 113 54 1,550 -38 52 -17 -9 112 -21 3,349 -177 0 -29 0 340 -55 2,898 -72 244 -36 -3 317 1 1,678 1,629 3,427 3,349 BS Carrying amount 31 December 2,591 2,694 2,173 2,175 4,552 4,986 Other tangible assets 2018 163 -3 0 0 0 0 0 9 170 133 -2 0 0 0 3 1 135 35 2017 135 -2 0 0 0 -1 0 31 163 114 -2 0 -1 0 4 18 133 29 Advances paid and construction in progress 2017 824 -18 32 516 0 1 -2 -726 627 2018 626 -82 1 522 0 0 0 -436 631 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 Total 2018 15,623 -725 14 532 16 -64 -136 -37 15,222 5,113 -265 0 -62 0 455 0 2017 14,492 -500 1,109 672 -6 -62 -65 -15 15,623 4,562 -112 297 -54 -12 434 -2 5,241 5,113 631 626 9,981 10,510 The decrease in property, plant and equipment arises mainly from translation differences and divestment of a 54% share in a solar power company� See additional information on the divestment in Note 3 Acquisitions and disposals� Property, plant and equipment that are subject to restrictions in the form of real estate mortgages amount to EUR 158 million (2017: 318)� See Note 36 Pledged assets and contingent liabilities� 18.1 Capitalised borrowing costs EUR million 1 January Translation differences and other adjustments Increases / disposals Sale of subsidiary companies Reclassification Depreciation 31 December Buildings, plants and structures 2018 59 -6 0 0 3 0 56 2017 55 -3 0 0 10 -2 59 Machinery and equipment 2018 175 -20 0 -4 6 -11 146 Advances paid and construction in progress 2017 41 -1 6 0 -34 0 12 2018 12 -1 10 0 -9 0 12 2017 162 -11 10 0 22 -8 175 Total 2018 245 -26 10 -4 0 -11 214 2017 258 -16 16 0 -3 -10 245 Borrowing costs of EUR 10 million were capitalised in 2018 (2017: 16)� The interest rate used for capitalisation varied between 2%–6% (2017: 2%–13%)� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 87 87 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 18.2 Capital expenditure 1) EUR million Generation Hydropower Nuclear power Fossil-based electricity Other renewable-based electricity Other Total Generation City Solutions Fossil-based heat Fossil-based electricity Renewable, of which waste biofuels other District heat network Other Total City Solutions Consumer Solutions Other Total Consumer Solutions Russia Fossil-based electricity Fossil-based heat Renewable-based electricity, wind Total Russia Other Renewable-based electricity, wind Renewable-based electricity, solar Other Total Other Total Of which investments in CO2 free production Finland 2018 20 99 8 126 5 34 20 15 0 14 7 60 9 9 2 17 19 215 135 2017 24 84 3 111 2 23 17 6 0 11 4 41 2 2 25 25 179 115 Sweden 2018 59 2017 62 59 62 0 6 6 0 0 0 1 6 14 14 9 1 9 89 67 1 1 10 11 2 2 22 7 28 104 84 1) Includes capital expenditure to both intangible assets and property, plant and equipment. Russia 2018 2017 Poland 2018 2017 Norway 2018 Other countries 2017 2018 2017 Total 2018 7 52 52 0 0 18 1 78 8 8 0 0 86 0 3 0 72 72 13 1 90 1 1 92 0 0 9 9 0 0 16 0 26 16 16 51 4 55 97 51 13 13 13 2 2 24 7 31 46 24 0 5 5 0 0 11 3 19 0 19 5 24 43 19 0 0 4 3 0 8 3 15 0 99 3 102 115 99 28 22 5 54 54 5 81 18 53 152 152 53 79 99 8 186 12 106 92 15 0 60 12 190 47 47 28 22 5 54 62 19 26 108 584 278 2017 87 84 0 0 3 174 6 0 112 106 7 0 32 19 170 7 7 81 18 53 152 45 99 42 187 690 375 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 88 88 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Fortum classifies investments in four main categories, EUR million 400 350 300 250 200 150 100 50 0 367 206 148 152 86 95 131 88 Maintenance investments Investments required by legislation Investments increasing productivity Growth investments 2017 2018 18.2.1 Generation In Finland, Fortum invested EUR 99 million (2017: 84) into the Loviisa nuclear power plant� Fortum invested additionally EUR 79 million (2017: 87) into hydro production, mainly maintenance, legislation and productivity investments� The biggest of these were Åsen refurbishment EUR 10 million in Sweden and Imatra dam safety EUR 10 million in Finland� Investments in CO2 free production were EUR 178 million (2017: 171)� 18.2.2 City Solutions Growth investments in City Solutions totalled EUR 100 million (2017: 107) in year 2018� The largest investment project in 2018 was the new CHP plant in Zabrze, Poland� Maintenance, legislation and productivity investments totalled EUR 89 million (2017: 62)� 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� Investments in CO2 free production were EUR 15 million (2017: 7) 18.2.3 Consumer Solutions Investments in Consumer solutions totalled EUR 47 million (2017: 7)� The amount consists mainly of sales commissions for customer acquisition that are capitalised starting from the implementation of IFRS 15 in 2018 (see Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018) and new product development costs� 18.2.4 Russia Growth investments in Russia totalled EUR 10 million (2017: 96)� Additionally, EUR 44 million (2017: 56) was invested in maintenance, legislation and productivity projects� Investments in CO2 free production were EUR 5 million (2017:53)� 18.2.5 Other Other Division’s investments include solar investments in India EUR 19 million (2017: 99) and investments in wind power production EUR 62 million (2017: 45)� Wind investments include Solberg wind park in Sweden, as well as Ånstadblåheia and Sørfjord wind parks in Norway� Other Division invested also in Charge and Drive EUR 9 million (2017: 13), mainly charging poles in Norway� Investments in CO2 free production were EUR 81 million (2017: 144)� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 89 89 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 19 Participations in associated companies and joint ventures ACCOUNTING POLICIES The Group’s interests in associated companies and jointly controlled entities are accounted for using the equity method of accounting. Assets acquired and liabilities assumed in the investment in associates or joint ventures are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the associate or joint venture acquired, the difference is recognised directly in the income statement. The Group’s share of its associates or joint ventures post-acquisition profits or losses after tax and the expenses related to the adjustments to the fair values of the assets and liabilities assumed are recognised in the income statement. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. The Group's share of post-acquisition adjustments to associates or joint ventures equity that has not been recognised in the associates or joint ventures income statement, is recognised directly in Group's shareholder's equity and against the carrying amount of the investment. When the Group’s share of losses in an associate or a joint venture equals or exceeds its interest in the associate or joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate or joint venture. Unrealised gains on transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group’s interest in the associate or joint venture. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates or joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. 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. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS 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. 19.1 Principal associated companies and joint ventures OKG AB Nature of the relationship Co-owned nuclear company Kraftgrupp AB Kemijoki Oy Co-owned hydro company Co-owned nuclear company Forsmarks Classification Segment Associated company Generation Associated company Associated company Generation Generation Uniper SE International energy company (listed) Associated company Other TGC-1 Energy company (listed) TVO Oyj Co-owned nuclear company Stockholm Exergi AB Power and heat company Associated company Joint venture Russia Generation Joint venture City Solutions Sweden 50 50 Domicile Ownership interest, % 1) Votes, % Sweden 46 46 Sweden 26 26 Finland 58 27 Germany 49.99 49.99 Russia 29 29 Finland 25 25 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 2017 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))� Management judgement is required when testing the carrying amounts for participations in associated companies In Sweden nuclear production company shareholdings are 45�5% ownership of the shares in OKG AB and 25�5% and joint ventures for impairment. See Note 17 Intangible assets for more information. 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� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 90 90 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Summarised financial information of the principal associated companies and joint ventures Impact of different accounting principles presented in the tables below on the line Fair values on acquisitions and different accounting principles include mainly IFRS adjustments for Nuclear liabilities and assets and capitalised borrowing costs in Swedish associates� Fortum records its share of nuclear related assets and liabilities in its nuclear associated companies according to equity method� The basis for recognition is similar as for Loviisa power plant, see accounting principles in Note 29 Nuclear related assets and liabilities� The purchase price allocation for Uniper acquisition is still on-going and Fortum is evaluating potential fair value adjustments and identifying potential differences in order to align the accounting principles� The purchase price allocation will take time due to the size of transaction and will be completed within the one-year window from the acquisition date according to IFRS� Difference between the acquisition price and Fortum’s share of Uniper’s net book value acquired is presented below on line ‘Difference compared to acquisition price’� 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 coal condensing power plant Meri-Pori, and Fortum’s ownership in this share series is 26�6%� The Meri-Pori power plant is accounted for as a joint operation in Fortum� Fortum increased its ownership in Series C of TVO to 100% on 1 January 2019, see Note 39 Events after the balance sheet date� See also Associated companies in Note 37 Legal actions and official proceedings and Joint operations in the accounting principles in Note 18 Property, plant and equipment� The most significant hydro production company shareholding is 63�8% of the hydro shares and 28�27% of the monetary shares in Kemijoki Oy� Each owner of hydro shares is entitled to the hydropower production in proportion to its hydro shareholding� Shareholdings in other principal associated companies and joint ventures During 2018 Fortum has acquired 49�99% of the shares in Uniper, see Note 3 Acquisitions and disposals� As Uniper is a listed company and publishes its interim reports later than Fortum, Fortum’s share of Uniper’s results will be accounted for with a time-lag of one quarter with potential adjustments� Fortum’s financial statements 2018 includes Fortum’s share of Uniper’s third quarter results� Fortum has also other shareholdings in listed companies such as Territorial Generating Company 1 (TGC-1)� The shareholding in TGC-1 is accounted for as an associated company as Fortum has representatives in the Board of Directors of the company� The share of profit of TGC-1 is accounted for based on previous quarter information since updated interim information is not normally available� In Sweden Fortum has a 50% ownership in Stockholm Exergi AB (publ) (previously AB Fortum Värme Holding samägt med Stockholms stad) that is co-owned with the City of Stockholm through Stockholms Stadshus AB� Stockholm Exergi produces district heating, district cooling and electricity and supplies heat and cooling to customers in the Stockholm area� In August 2017 Fortum sold its 34�1% stake in Hafslund ASA to the City of Oslo in connection with the restructuring of the ownership in Hafslund� Hafslund ASA was accounted for as an associated company and the share of profits was accounted for according to the latest quarter information available� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 91 91 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Summarised financial information of the principal associated companies in 2018 Summarised financial information of the principal associated companies in 2017 EUR million Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities Equity Attributable to the owners of the parent Attributable to NCI Statement of comprehensive income Sales Profit or loss Attributable to the owners of the parent Attributable to NCI Total comprehensive income Attributable to the owners of the parent Attributable to NCI Reconciliation to carrying amount in the Fortum group Group's interest in the equity of the associate at 1 January 2018 Change in share of profit and OCI items Dividends received Acquired net assets Translation differences and other adjustments Group's interest in the equity of the associate at 31 December 2018 Fair values on acquisitions and different accounting principles Difference compared to acquisition price Carrying amount at 31 December 2018 Market value for listed shares 1) OKG AB 31 Dec 2017 581 273 760 82 13 13 0 1 Jan 2017– 31 Dec 2017 426 1 1 0 1 1 0 6 0 0 0 0 6 -6 - 0 Forsmarks Uniper SE Kraftgrupp AB Kemijoki Oy 31 Dec 2017 2,336 412 2,603 112 34 34 0 1 Jan 2017– 31 Dec 2017 637 -1 -1 0 -1 -1 0 9 0 0 0 0 9 82 - 90 group TGC-1 group 31 Dec 2017 30 Sept 2018 30 Sept 2018 1,730 258 309 138 1,540 1,429 112 33,213 27,311 21,070 27,819 11,635 11,027 608 472 8 352 71 57 57 0 1 Jan 2017– 31 Dec 2017 42 -11 -11 0 -11 -11 0 1 July 2018– 30 Sept 2018 17,091 1 -4 5 -10 1 -11 1 Oct 2017– 30 Sept 2018 1,229 132 127 5 130 125 5 41 -7 0 0 0 33 155 - 188 - 0 0 5,512 0 5,512 - -1,544 3,968 4,135 454 40 -7 0 -66 421 -18 - 403 114 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 2018 trading volumes of TGC-1 shares in relation to the number of shares of the company were approximately 11% (2017: 10%). EUR million Balance sheet Non-current assets Current assets Non-current liabilities Current liabilities Equity Attributable to the owners of the parent Attributable to NCI Forsmarks OKG AB 31 Dec 2016 628 428 961 82 13 13 0 Kraftgrupp AB Kemijoki Oy 31 Dec 2016 465 12 264 144 69 69 0 31 Dec 2016 2,367 466 2,599 198 36 36 0 Hafslund ASA group 1) 30 June 2017 2,329 325 1,091 585 978 978 0 TGC-1 group 30 Sept 2017 1,938 312 420 168 1,663 1,540 123 Statement of comprehensive income Revenue Profit or loss from continuing operations Other comprehensive income Total comprehensive income Attributable to the owners of the parent Attributable to NCI 1 Jan 2016– 31 Dec 2016 430 1 0 1 1 0 1 Jan 2016– 31 Dec 2016 756 0 0 0 0 0 1 Jan 2016– 31 Dec 2016 55 -10 0 -10 -10 0 1 Oct 2016– 30 June 2017 1,240 118 -12 105 105 0 1 Oct 2016– 30 Sept 2017 1,289 81 1 82 83 -1 Reconciliation to carrying amount in the Fortum group Group's interest in the equity of the associate at 1 January 2017 Change in share of profit and OCI items Dividends received Divestments Translation differences and other adjustments Group's interest in the equity of the associate at 31 December 2017 Fair values on acquisitions and different accounting principles Carrying amount at 31 December 2017 Market value for listed shares 1) 6 0 0 0 0 6 16 22 10 0 0 0 -1 9 92 101 48 -6 0 0 0 41 157 197 349 36 -23 -363 1 0 0 0 471 32 -5 0 -44 454 -25 429 196 1) Divested in August 2017, see also Note 3 Acquisition and disposals. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 92 92 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Summarised financial information of the principal joint ventures in 2018 and 2017 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 Attributable to the shareholders of the company Attributable to NCI 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 the shareholders of the company Attributable to NCI Reconciliation to carrying amount in the Fortum group Group's interest in the equity of the joint venture at 31 December Impact from change in accounting principle (IFRS 9) 1) Group's interest in the equity of the joint venture at 1 January Change in share of profit and from OCI items Dividends received Investments Divestments and capital returns 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 2) Carrying amount at 31 December 2018 TVO Oyj group Stockholm Exergi AB group 31 Dec 2018 2,581 313 15 1,271 903 418 246 1,205 1,205 0 30 Sept 2018 7,231 420 115 5,108 4,033 776 603 1,767 1,767 0 2017 TVO Oyj group Stockholm Exergi AB group 31 Dec 2017 2,642 266 15 1,461 1,071 230 112 1,216 1,216 0 30 Sept 2017 6,900 606 192 5,159 4,186 673 484 1,674 1,674 0 1 Oct 2017–30 Sept 2018 338 -55 12 -44 0 -10 7 -2 -2 0 1 Jan 2018–31 Dec 2018 683 -138 0 -17 -5 113 2 116 116 0 1 Oct 2016–30 Sept 2017 343 -56 14 -46 0 -4 9 5 5 0 1 Jan 2017–31 Dec 2017 689 -139 0 -17 -35 125 -7 118 117 0 280 145 425 -1 0 25 -2 0 448 -9 439 608 0 608 58 -39 0 0 -25 602 -68 535 279 - 279 0 0 - 0 0 280 -11 269 588 - 588 59 -21 - 0 -18 608 -75 533 1) See additional information in Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018. 2) Impact of different accounting principles include mainly IFRS adjustments for Nuclear liabilities and assets and capitalised borrowing costs. Fortum records its share of nuclear related assets and liabilities in its nuclear associated companies according to equity method. The basis for recognition is similar as for Loviisa power plant, see accounting principles in Note 29 Nuclear related assets and liabilities. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 93 93 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 19.2 Participations and shares of profits in associated companies and joint ventures Participations in associated companies and joint ventures in the balance sheet EUR million Principal associates Principal joint ventures Other associates Other joint ventures BS Carrying amount 31 December 2018 4,649 973 60 295 5,978 2017 749 802 121 229 1,900 Changes in participation during the year EUR million Historical cost Historical cost 31 December Impact from change in accounting principle (IFRS 9) 1) Historical cost 1 January Translation differences and other adjustments Investments Reclassifications 2) Divestments and capital returns Historical cost 31 December Equity adjustments Equity adjustments 1 January Translation differences and other adjustments Share of profits of associates and joint ventures Reclassifications 2) Divestments Dividends received OCI items associated companies and joint ventures Equity adjustments 31 December 2018 2017 Associated companies Joint ventures Associated companies Joint ventures 680 20 699 -33 3,969 -3 -83 4,549 190 -29 -32 41 0 -10 1 160 598 145 743 -17 97 20 -12 831 432 -19 71 0 0 -51 5 437 864 864 -30 83 -1 -236 680 289 -18 73 1 -128 -29 2 190 636 636 -8 52 -81 0 598 324 -13 75 81 0 -29 -5 432 Carrying amount at 31 December 4,709 1,269 870 1,031 1) See additional information in Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018. 2) On 31 August 2018, Fortum sold a 54% share of its solar power company and as a consequence the subsidiary was reclassified as a joint venture. During 2018 Fortum received EUR 61 million (2017: 58) in dividends from associates and joint ventures of which EUR 39 million (2017: 21) was received from Stockholm Exergi� Dividends received during 2017 include EUR 23 million from Hafslund ASA� For information about investments and divestments of shares in associated companies, see Note 3 Acquisitions and disposals� Share of profit of associates and joint ventures EUR million Principal associates OKG AB Forsmarks Kraftgrupp AB Kemijoki Oy Uniper SE TGC-1 Hafslund ASA (divested in August 2017) Principal associates, total Principal joint ventures Stockholm Exergi AB TVO Oyj Principal joint ventures, total Other associates Other joint ventures IS Total 2018 2017 -58 -7 -9 -2 40 - -35 61 1 62 3 9 38 8 2 -9 0 32 39 73 66 -4 63 0 12 148 There are no unrecognised share of losses of associated companies and joint ventures� Fortum has reassessed assumptions used for all nuclear related assets and liabilities as of 31 December 2018� Assumptions have been changed for the respective balances of the co-owned nuclear companies in Finland and Sweden, i�e� Teollisuuden Voima Oyj (TVO), Oskarshamn Kraft Grupp AB (OKG), and Forsmarks Kraftgrupp AB� The total impact of the change to share of profit from these associated companies and joint ventures was EUR -37 million, net of tax, and including additional nuclear waste liability related to legacy waste obligations for Swedish nuclear� The net profit impact from all these nuclear related adjustments is close to zero� For additional information see Note 29 Nuclear related assets and liabilities� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 94 94 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 19.3 Transactions and balances Associated company transactions EUR million Sales to associated companies Interest income on loan receivables to associated companies Purchases from associated companies 2018 0 12 256 2017 1 12 319 Purchases from associated companies 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 Finance lease receivables from joint ventures Trade receivables Other receivables Liabilities to joint ventures Long-term loan payables Trade payables Other payables 2018 60 0 53 18 293 31 14 2017 208 41 23 17 285 19 7 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 2018 581 1 0 0 2 For more info about receivables from associated companies, see Note 21 Interest-bearing receivables� Joint venture transactions EUR million Sales to joint ventures Interest income on joint venture loan receivables Purchases from joint ventures 2018 39 0 124 2017 656 1 1 2 0 2017 109 1 153 Purchases from joint ventures include mainly purchases of nuclear and hydro power at production cost including interest costs and production taxes� Change in long-term interest-bearing loan receivables, see Note 1.6 Implementation of IFRS 9 and IFRS 15 from 1 January 2018� For more info about interest-bearing receivables from joint ventures, see Note 21 Interest-bearing receivables� 20 Other non-current assets EUR million Other investments Interest-free receivables BS Total 2018 49 90 139 2017 65 74 140 Other investments, i�e� shares which are not classified as associated companies or joint ventures, consist mainly of shares in unlisted companies of EUR 49 million (2017: 65)� This includes Fortum’s indirect shareholding in Fennovoima of EUR 33 million (Dec, 31 2017: 25)� Fair value gains and losses of Other investments are booked through profit and loss� Other investments at fair value through other comprehensive income are immaterial� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 95 95 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 21 Interest-bearing receivables 22 Inventories EUR million Long-term loan receivables from associated companies Long-term loan receivables from joint ventures Finance lease receivables from joint ventures Other long-term interest-bearing receivables BS Total long-term interest-bearing receivables Other short-term interest-bearing receivables Total short-term interest-bearing receivables Total 2018 2017 Carrying amount 581 60 0 43 683 409 409 1,092 Fair value 601 68 0 43 712 409 409 1,121 Carrying amount 656 208 41 106 1,010 395 395 1,406 Fair value 689 229 41 111 1,071 395 395 1,466 Long-term interest-bearing receivables include receivables from associated companies and joint ventures EUR 641 million (Dec 31, 2017: 905)� These receivables include EUR 575 million (Dec 31, 2017: 638) from Swedish nuclear companies, OKG AB and Forsmarks Kraftgrupp AB, which are mainly funded with shareholder loans, pro rata each shareholder’s ownership� Finance lease relating to heat pipelines in Tyumen area, which are leased to joint venture YUSTEK, has been ACCOUNTING POLICIES Inventories mainly consist of fuels consumed in the production process or in the rendering of services. Inventories are stated at the lower of cost and net realisable value being the estimated selling price for the end product, less applicable variable selling expenses and other production costs. Cost is determined using the first-in, first-out (FIFO) method. Inventories which are acquired primarily for the purpose of trading are stated at fair value less selling expenses. EUR million Nuclear fuel Coal Oil Biofuels Materials and spare parts Other inventories BS Total 2018 72 52 7 4 56 43 233 2017 83 45 7 3 54 25 216 reassessed and classified as operating lease� Write-downs in inventories amounted to EUR 6 million (2017: 0)� Interest-bearing receivables includes also EUR 70 million (2017: 102) from SIBUR, a Russian gas processing and petrochemicals company regarding divested shares of OOO Tobolsk CHP� Short-term interest-bearing receivables include EUR 379 million (2017: 363) restricted cash mainly given as collateral for commodity exchanges� The new European Market Infrastructure Regulation (EMIR) came into force in 2016 requiring fully-backed guarantees� For further information regarding credit risk management, see Note 4.7 Credit risk� Interest-bearing receivables EUR million Long-term loan receivables Short-term receivables Total interest-bearing receivables Effective interest rate, % 2.5 0.4 1.7 Carrying amount 2018 683 409 1,092 Repricing Under 1 year 1–5 years 4 - 4 633 409 1,042 Over 5 years 45 - 45 Fair value 2018 712 409 1,121 Carrying amount 2017 1,010 395 1,406 Fair value 2017 1,071 395 1,466 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 96 96 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 23 Trade and other receivables ACCOUNTING POLICIES Trade receivables include revenue based on an estimate of electricity, heat and cooling already delivered but not yet measured and not yet invoiced. Impairment losses for trade receivables are calculated according to the expected credit loss (“ECL”) model. For large trade receivables, ECL is calculated for the individual customer based on the probability of default and expected recovery rate. These estimates are based on the customer’s rating and adjusted if there are indications of decreased creditworthiness, e.g. based on payment behaviour. ECL for trade receivables from small customers are calculated on portfolio basis by country and business segment. The impairment reservations are based on historical analysis of losses when possible, or on average default rates for customers based on externally available information. These rates be adjusted if there are any forward-looking indicators showing changes in expected credit losses. Trade receivables overdue more than 180 days are generally considered to be credit-impaired and reservations are made for the full amount, adjusted for expected recovery rates. EUR million Trade receivables Accrued interest income Accrued income and prepaid expenses Cash settlements for futures Other receivables BS Total 2018 800 1 59 592 168 1,620 2017 743 1 29 85 139 997 Cash settlements for futures has increased mainly due to higher electricity prices for the hedging period� Futures are cash settled daily on Nasdaq Commodities exchange� 23.1 Trade receivables Ageing analysis of trade receivables EUR million Not past due Past due 1–30 days Past due 31–90 days Past due 91–180 days Past due more than 181 days Total 2018 Expected credit loss allowance 2 2 4 11 66 85 Expected credit loss rate, % 0 3 24 73 86 10 Gross 712 63 17 15 77 885 2017 Gross 632 54 36 19 68 809 Impaired 2 2 3 3 57 66 Changes in expected credit loss allowance EUR million Closing balance 31 December 2017 under IAS 39 Impact from change in accounting principle Opening balance 1 January 2018 under IFRS 9 Expected credit loss allowance recognised during the period Write-offs Recovery of previously recognised expected credit loss allowance Translation differences and other changes Closing balance 31 December 2018 under IFRS 9 2018 66 -1 64 27 -9 -5 7 85 On 31 December 2018, EUR 61 million of the expected credit loss allowance refers to the Russia segment� Trade receivables by currency (Gross) EUR million EUR SEK RUB NOK PLN Other Total 2018 234 137 197 217 84 16 885 2017 206 137 207 177 69 13 809 Trade receivables are arising from a large number of customers mainly in EUR, SEK, RUB and NOK 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 4.7 Credit risk� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 97 97 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 24 Liquid funds ACCOUNTING POLICIES 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. Deposits and securities with maturity more than 3 months include fixed term deposits and commercial papers with maturity more than three months but less than twelve months. Deposits and securities are measured at amortised cost. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. Cash collaterals or otherwise restricted cash are treated as short-term interest-bearing receivables. EUR million Cash at bank and in hand Deposits and securities with maturity under 3 months Cash and cash equivalents Deposits and securities with maturity more than 3 months BS Total 2018 203 353 556 29 584 2017 1,928 1,253 3,182 715 3,897 Liquid funds consist of deposits and cash in bank accounts amounting to EUR 518 million and commercial papers EUR 66 million� The average interest rate on deposits and securities excl� Russian deposits on 31 December 2018 was -0�11% (2017: -0�27%)� Liquid funds held by PAO Fortum amounted to EUR 317 million (2017: 246), of which EUR 316 million (2017: 231) was held as bank deposits� The average interest rate for this portfolio was 6�9% at the balance sheet date� Liquid funds totalling EUR 168 million (2017: 3,348) are placed with counterparties that have an investment grade rating� In addition, EUR 416 million (2017: 549) have been placed with counterparties separately reviewed and approved by the Group’s credit control department� The committed and undrawn credit facilities amounted to EUR 1,800 million (2017: 1,800)� For further information regarding credit risk management and credit risks, see Note 4.7 Credit risk� 25 Share capital EUR million Registered shares at 1 January Cancellation of Treasury shares Registered shares at 31 December 2018 2017 Number of shares 888,367,045 72,580 888,294,465 Share capital Number of shares 888,367,045 3,046 - - 888,367,045 3,046 Share capital 3,046 - 3,046 Fortum Corporation has one class of shares� By the end of 2018, a total of 888,294,465 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 2018 Fortum Corporation’s share capital, paid in its entirety and entered in the trade register, was EUR 3,046,185,953�00� In the merger of Länsivoima Oyj (former Lounais-Suomen Sähkö Oy) to Fortum Corporation in 2000, those shareholders of Länsivoima Oyj that did not produce their share certificates and did not request their rights to be registered in the book-entry system, received their respective shares of Fortum Corporation as merger consideration to a joint book-entry account opened on their behalf (the “Joint Account”)� The Annual General Meeting 2018 of Fortum Corporation decided, that the rights to all such shares entered in the Joint Account and to the rights attached to such shares that had not been requested to be registered in the book-entry system prior to the decision by the Annual General Meeting 2018, were forfeited� In addition to the shares, the rights attached to such shares, such as undrawn dividend, were forfeited� The provisions applicable to treasury shares held by the company were applied to the forfeited shares� On 17 December 2018, Board of Directors decided to cancel all these 72,580 Fortum shares owned by the company without decreasing the share capital� The cancellation was entered in the Trade Register on 21 December 2018� Fortum Corporation’s shares are listed on Nasdaq Helsinki� The trading code is FORTUM (FUM1V before 25 January 2017)� 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 11 Employee benefits� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 98 98 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 25.1 Authorisations from the Annual General Meeting 2018 On 28 March 2018, the Annual General Meeting decided to authorise the Board of Directors to decide on the repurchase and disposal of the company’s own shares up to a maximum of 20,000,000 shares, which corresponds to approximately 2�25% of all the shares in the company� It was also decided that own shares could be repurchased or disposed of in connection with acquisitions, investments or other business transactions, or be retained or cancelled� The repurchases or disposals could not be made for the purposes of the company’s incentive and remuneration schemes� The authorisation cancelled the authorisation resolved by the Annual General Meeting of 2017� The authorisation is effective until the next Annual General Meeting and, in any event, for a period no longer than 18 months� The authorisation had not been used by the end of 2018� 25.2 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� 26 Non-controlling interests Principal non-controlling interests EUR million PAO Fortum Group AS Fortum Tartu Group Fortum Oslo Varme AS Group Other BS Total Russia Estonia Norway 2018 33 37 152 14 236 2017 37 34 150 18 239 27 Interest-bearing liabilities Net debt EUR million Interest-bearing liabilities Liquid funds Net debt 2018 6,093 584 5,509 2017 4,885 3,897 988 Net debt is calculated as interest-bearing liabilities less liquid funds without deducting interest-bearing receivables amounting to EUR 1,092 million (Dec 31,2017: 1,406)� Interest-bearing receivables mainly consist of shareholder loans to partly owned nuclear companies regarded as long-term financing� For more information see Note 21 Interest-bearing receivables� Interest-bearing debt EUR million Bonds Loans from financial institutions Reborrowing from the Finnish State Nuclear Waste Management Fund Other long-term interest-bearing debt BS 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 paper debt Other short-term interest-bearing debt BS Total short-term interest-bearing debt Total interest-bearing debt 2018 1,746 1,799 1,158 303 5,007 750 48 5 207 76 1,086 6,093 2017 2,521 155 1,129 314 4,119 422 129 10 0 206 766 4,885 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 99 99 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Reconciliation of interest-bearing liabilities Non-cash changes EUR million Bonds Loans from financial institutions Reborrowing from the Finnish State Nuclear Waste Management Fund Other interest-bearing debt Total interest-bearing debt 1) Repayments and borrowings. 31 Dec 2017 2,943 283 1,129 530 4,885 EUR million Bonds Loans from financial institutions Reborrowing from the Finnish State Nuclear Waste Management Fund Other interest-bearing debt Total interest bearing debt 1) Repayments and borrowings. 31 Dec 2016 3,329 393 1,094 291 5,107 Cash flow from financing activities 1) Divestments Exchange rate differences -13 -10 Fair value changes and amortised cost 31 Dec 2018 2,496 -21 1,848 4 -58 -58 -6 -29 -17 1,158 592 6,093 -413 1,571 29 126 1,313 Non-cash changes Cash flow from financing activities 1) Acquisitions -343 -144 35 13 -439 42 233 275 Exchange rate differences -16 -8 Fair value changes and amortised cost 31 Dec 2017 2,943 -27 283 -8 -31 -27 1,129 530 4,885 Interest-bearing debt EUR million Bonds Loans from financial institutions Reborrowing from the Finnish State Nuclear Waste Management Fund Other long-term interest-bearing debt 1) Total long-term interest-bearing debt 2) Commercial paper debt Other short-term interest-bearing debt Total short-term interest-bearing debt Total interest-bearing debt 3) Repricing Effective interest rate, % 3.7 0.9 Carrying amount 2018 2,496 1,847 Under 1 year 1–5 years 1,552 - 847 1,847 Over 5 years 97 - Fair value 2018 2,629 1,901 Carrying amount 2017 2,943 283 Fair value 2016 3,143 303 0.5 3.6 2.2 0.1 -0.3 0.0 2.1 1,158 1,158 309 208 - - 5,810 207 4,060 207 1,552 - - 1,218 1,129 1,192 101 198 - 351 324 373 6,099 207 4,679 - 5,011 - 76 76 - - 76 206 207 283 6,093 283 4,343 - 1,552 - 198 283 6,382 206 4,885 207 5,218 1) Includes loans from Finnish pension institutions EUR 38 million (2017: 48) and other loans EUR 270 million (2017: 276). 2) Including current portion of long-term debt EUR 803 million (Dec 31,2017: 560). 3) The average interest rate on loans and derivatives on 31 December 2018 was 2.4% (2017: 3.6%) The interest-bearing debt increased in 2018 by EUR 1,208 million to EUR 6,093 million (2017: 4,885)� The amount of short-term financing increased with EUR 77 million, and at the end of the year the amount of short-term financing EUR 283 million (2017: 206) included 75 million (2017: 113) from Credit Support Annex agreements� During the first quarter of 2018 Fortum increased the amount of reborrowing from the Finnish State Nuclear Waste Management Fund and TVO by EUR 29 million to EUR 1,158 million� In March Fortum repaid two SEK bonds equivalent to EUR 413 million (SEK 4�15 billion)� In June Fortum Oyj made a bridge loan drawdown of EUR 1�75 billion from existing committed credit facilities for Fortum’s offer for Uniper shares� No major financing transactions during last quarters� The average interest rate for the portfolio consisting mainly of EUR and SEK loans was 1�7% at the balance sheet date (2017: 2�4%)� Part of the external loans EUR 686 million (2017: 773) have been swapped to RUB and the average interest cost for these loans including cost for hedging the RUB was 8�3% at the balance sheet date (2017: 9�5%)� The average interest rate on total loans and derivatives at the balance sheet date was 2�4% (2017: 3�6%)� For more information please see Note 4 Financial risk management and Note 36 Pledged assets and contingent liabilities� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 100 100 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 27.1 Bond issues Issued/Maturity Fortum Corporation EUR 8,000 million EMTN Programme 1) 2009/2019 2011/2021 2012/2022 2013/2023 2013/2043 Total outstanding carrying amount 31 December 2018 1) EMTN = Euro Medium Term Note Interest basis Interest rate, % Effective interest, % Currency Nominal value million Fixed Fixed Fixed Floating Fixed 6.000 4.000 2.250 Stibor 3M+1.13 3.500 6.095 4.123 2.344 3.719 EUR EUR EUR SEK EUR 750 500 1,000 1,000 100 Carrying amount EUR million 750 513 1,039 98 97 2,496 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 101 101 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 28 Income taxes in balance sheet ACCOUNTING POLICIES The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement, because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. 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 Assumptions and estimates regarding uncertain tax positions are supported by external legal counsel or expert Deferred tax is provided in full, using the balance sheet approach on temporary differences arising between the opinion. 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 be reversed in the foreseeable future. The Group recognises liabilities for anticipated tax dispute issues based on estimates of whether additional taxes will be due. No provision will be recognised in the financial statements if Fortum considers the claims unjustifiable. Therefore, if taxes regarding ongoing tax disputes have to be paid before final court decisions, they will be booked as a receivable. 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. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS: ASSUMPTIONS AND ESTIMATES REGARDING FUTURE TAX CONSEQUENCES Fortum has deferred tax assets and liabilities which are expected to be realised through the income statement over the extended periods of time in the future. In calculating the deferred tax items, Fortum is required to make certain assumptions and estimates regarding the future tax consequences attributable to differences between the carrying amounts of assets and liabilities as recorded in the financial statements and their tax basis. 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 11 million as of 31 December 2018. For additional information regarding tax disputes, see Note 37 Legal actions and official proceedings. 28.1 Deferred income taxes in the balance sheet EUR million BS Deferred tax assets BS Deferred tax liabilities 1) Net deferred taxes 2018 1 Jan Change -3 100 97 73 -822 -749 31 Dec 70 -720 -651 2017 1 Jan Change 7 -203 -197 66 -616 -550 31 Dec 73 -819 -747 1) 1 January 2018 opening balance includes EUR -3 million of impact from change in accounting principle, IFRS 15. See additional information in Note 1 Accounting policies and Note 6 Segment reporting. 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� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 102 102 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Movement in deferred tax assets and liabilities 2018 EUR million Closing balance 31 Dec Impact from change in accounting principle (IFRS 15) 1) 1 Jan 2018 Charged to income statement Charged to other comprehensive income Exchange rate differences, reclassifications and other changes Acquisitions and disposals 31 Dec 2018 1) See additional information in Note 1 Accounting policies and Note 6 Segment reporting. Intangible assets -101 -3 -104 0 0 3 -5 -106 Property, plant and equipment -806 Pension obligations 21 Provisions 7 Derivative financial instruments 35 Tax losses and tax credits carry-forward 116 -806 -24 0 41 1 -788 21 0 -2 -1 0 20 7 -23 0 1 0 -15 35 -7 159 -18 0 169 116 -42 0 -3 0 70 -20 Other Net deferred taxes -747 -3 -749 -87 162 28 -5 -651 -20 10 5 4 0 -1 Retained earnings when distributed as dividends are subject to withholding tax (e�g� Russia) or distribution tax (e�g� Estonia)� Provision has been made for these taxes only to extent that it is expected that these earnings will be remitted in the foreseeable future� At the end of the year deferred income tax liabilities of EUR 32 million (2017: 28) have been recognised for the withholding tax and other taxes that would be payable on the distributions� Change in deferred taxes 2018 are mainly related to change in derivative financial instruments through other comprehensive income� Movement in deferred tax assets and liabilities 2017 EUR million 1 Jan 2017 Charged to income statement Charged to other comprehensive income Exchange rate differences, reclassifications and other changes Acquisitions and disposals 31 Dec 2017 Intangible assets -12 7 0 2 -98 -101 Property, plant and equipment -717 -38 0 29 -79 -806 Pension obligations 14 1 3 1 2 21 Provisions 20 -10 0 -2 0 7 Derivative financial instruments 36 16 -18 1 0 35 Tax losses and tax credits carry-forward 100 8 0 -2 10 116 Other Net deferred taxes -550 -42 -15 22 -161 -747 8 -26 0 -6 4 -20 Deferred tax assets and liabilities from acquisitions and disposals in 2017 are mainly related to restructuring of the ownership in Hafslund together with the City of Oslo, acquisition of Solar power plants in Russia and wind power companies in Norway� In addition, the deferred tax asset relating to tax loss carry forwards increased net in 2017 mainly because of the additional taxable losses in the Netherlands partly offset by the usage of losses carry forwards in Russia� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 103 103 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Deferred income tax assets recognised for tax loss carry-forwards 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� In Belgium, Fortum has in previous years received income tax assessments for the years 2008–2012� The additional taxes have been paid during prior years, in total EUR 114 million and based on supporting legal opinions booked as an income tax receivable� See Note 37 Legal actions and official proceedings� EUR million Losses without expiration date Losses with expiration date Total 2018 2017 Tax losses 197 110 307 Deferred tax asset 43 28 70 Tax losses 413 103 516 Deferred tax asset 90 26 116 Deferred tax assets of EUR 10 million (2017: 20) 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� Tax loss carry-forwards decreased in 2018 mainly because of use of losses carry forwards in Russia and Sweden� 28.2 Income tax receivables EUR million Sweden Belgium Other Total Income tax receivables 2018 41 114 17 172 2017 28 114 30 172 Income tax receivables reflect payments of corporate income tax done in relation to the year 2018 as well as payments according to received tax audit assessments in relation to previous years� In October 2018 the Administrative Court of Appeal in Sweden announced its decision relating to the income tax assessment for the year 2013� The decision was favorable to Fortum� The additional taxes claimed 2013 have been paid during prior year, in total EUR 26 million and based on supporting legal opinion booked as an income tax receivable� Due to the favorable decision the amount was refunded to Fortum in 2018� The income tax receivable in Sweden 2018 of EUR 41 million relate to overpayment of preliminary income tax� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 104 104 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 29 Nuclear related assets and liabilities ACCOUNTING POLICIES Fortum owns Loviisa nuclear power plant in Finland. In Fortum’s consolidated balance sheet, Share in the State Nuclear Waste Management Fund and the Nuclear provisions relate to Loviisa nuclear power plant. 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. For power plant units taken from use the increase is taken to income statement. The provision for spent fuel covers the future disposal costs for fuel used until the end of the accounting period. Costs for disposal of spent fuel are expensed during the operating time based on fuel usage. The impact of the possible changes in the estimated future cash flow for related costs is recognised immediately in the income statement based on the accumulated amount of fuel used until the end of the accounting period. The related interest costs due to unwinding of the provision is recognised in the corresponding period. 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 a very long time horison, 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 interests in nuclear power companies, i.e. Teollisuuden Voima Oyj (TVO) in Finland and OKG Aktiebolag (OKG) and Forsmarks Kraftgrupp AB (Forsmark) in Sweden. The minority shareholdings are classified as associated companies and joint ventures and are consolidated with equity method. Both the Finnish and the Swedish companies are non-profit making, i.e. electricity production is invoiced to the owners at cost including depreciations, interest costs and production taxes accounted for according to local GAAP. Accounting policies of the associates regarding nuclear assets and liabilities have been changed where necessary to ensure consistency with the policies adopted by the Group. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS: ASSUMPTIONS MADE WHEN ESTIMATING PROVISIONS RELATED TO NUCLEAR PRODUCTION The provision for future obligations for nuclear waste management including decommissioning of Fortum’s nuclear power plant and related spent fuel is based on long-term cash flow forecasts of estimated future costs. The main assumptions are technical plans, timing, cost estimates and discount rate. The technical plans, timing and cost estimates are approved by governmental authorities. Any changes in the assumed discount rate would affect the provision. If the discount rate used would be lowered, the provision would increase. Fortum has contributed cash to the State Nuclear Waste Management Fund based on a non-discounted legal liability, which leads to that the increase in provision would be offset by an increase in the recorded share of Fortum’s part of the State Nuclear Waste Management Fund in the balance sheet. The total effect on the income statement would be positive since the decommissioning part of the provision is treated as an asset retirement obligation. This situation will prevail as long as the legal obligation to contribute cash to the State Nuclear Waste Management Fund is based on a non-discounted liability and IFRS is limiting the carrying value of the assets to the amount of the provision since Fortum does not have control or joint control over the fund. Based on the Nuclear Energy Act in Finland, Fortum has a legal obligation to fully fund the legal liability decided by the governmental authorities, for decommissioning of the power plant and disposal of spent fuel through the State Nuclear Waste Management Fund. Both in Finland and in Sweden nuclear operators are legally obligated for the decommissioning of the plants and the disposal of spent fuel (nuclear waste management). In both countries the nuclear operators are obligated to secure the funding of nuclear waste management by paying to government operated nuclear waste funds. The nuclear operators also have to give securities to guarantee that sufficient funds exist to cover future expenses of decommissioning of the power plant and disposal of spent fuel. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 105 105 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Fortum has reassessed the assumptions used for all nuclear related assets and liabilities as of 31 December 2018� The increase in the nuclear provision for the Loviisa nuclear power plant in Finland leads to recognition of an additional share of the Finnish nuclear fund� As of 31 December 2018, Fortum still has EUR 254 million in unrecognised nuclear waste fund assets for Loviisa� The increase in the provision and the additional share in the fund are both included in Items affecting comparability� The changes in assumptions also had a positive impact on interests presented in other financial expenses� The assumptions have also been changed for the respective balances of the co-owned nuclear companies in Finland and Sweden, i�e� TVO, OKG and Forsmark� The total impact of the change to share of profit from these associated companies and joint ventures was EUR -37 million, net of tax, and including additional nuclear waste liability related to legacy waste obligations for Swedish nuclear� The net profit impact from all these nuclear-related adjustments is close to zero� 29.1 Nuclear related assets and liabilities for 100% owned nuclear power plant, Loviisa EUR million Carrying values in the balance sheet BS Nuclear provisions BS Fortum’s share of 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 Share of the fund not recognised in the balance sheet 2018 899 899 1,180 1,180 1,153 254 2017 858 858 1,161 1,153 1,125 267 Legal liability for Loviisa nuclear power plant The legal liability on 31 December 2018, decided by the Ministry of Economic Affairs and Employment in November 2018, was EUR 1,180 million� The legal liability is based on a cost estimate, which is done every year, and a technical plan, which is made every third year� The current technical plan was updated in 2016� The legal liability is determined by assuming that the decommissioning would start at the beginning of the year following the assessment year� Fortum’s share in the State Nuclear Waste Management Fund According to Nuclear Energy Act, Fortum is obligated to contribute funds in full to the State Nuclear Waste Management Fund to cover the legal liability� Fortum contributes funds to the Finnish State Nuclear Waste Management Fund based on the yearly funding obligation target decided by the governmental authorities in connection with the decision of size of the legal liability� The current funding obligation target decided in November 2018 is EUR 1,180 million� Nuclear provisions EUR million BS 1 January Additional provisions Provision used Unwinding of discount BS 31 December Fortum’s share in the State Nuclear Waste Management Fund 2018 858 29 -26 38 899 899 2017 830 4 -21 45 858 858 Nuclear provision and fund accounted according to IFRS Nuclear provisions include the provision for decommissioning and the provision for disposal of spent fuel� The carrying value of the nuclear provisions, calculated according to IAS 37, increased by EUR 41 million compared to 31 December 2017, totalling EUR 899 million on 31 December 2018� The provisions are based on the same cash flows for future costs as the legal liability, but the legal liability is not discounted to net present value� The increase is mainly arising from the change in the assumptions used for the provisions� The carrying value of the Fund in the balance sheet cannot exceed the carrying value of the nuclear provisions according to IFRIC Interpretation 5� The Fund is from an IFRS perspective overfunded with EUR 254 million, since Fortum’s share of the Fund on 31 December 2018 was EUR 1,153 million and the carrying value in the balance sheet was EUR 899 million� Fortum’s share of the Finnish Nuclear Waste Management Fund in Fortum’s balance sheet can in maximum be equal to the amount of the provisions according to IFRS� As long as the Fund is overfunded from an IFRS perspective, the effects to 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� This accounting effect is not included in Comparable operating profit in Fortum financial reporting� For more information see Note 7 Items affecting comparability� Borrowing from the State Nuclear Waste Management Fund Participants in the Finnish 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 shares in Kemijoki Oy as security for the loans� The loans are renewed yearly� See Note 27 Interest-bearing liabilities and Note 36 Pledged assets and contingent liabilities� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 106 106 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 29.2 Nuclear power plants in associated companies and joint ventures OKG, Forsmark and TVO are non-profit making companies, i�e� electricity production is invoiced to the owners at cost including depreciations, interest costs and production taxes� Invoiced cost is accounted for according to local GAAP� In addition to the invoiced electricity production cost, Fortum makes IFRS adjustments to comply with Fortum’s accounting principles� These adjustments include also Fortum’s share of the companies’ nuclear waste funds and nuclear provisions� The tables below present the 100% figures relating to nuclear funds and provisions for the companies as well as Fortum’s net share� TVO’s total nuclear related assets and liabilities (100%) EUR million Carrying values in TVO’s balance sheet Nuclear provisions Share of the State Nuclear Waste Management Fund of which Fortum’s net share consolidated with equity method TVO’s legal liability and actual share of the State Nuclear Waste Management Fund Liability for nuclear waste management according to the Nuclear Energy Act Share of the State Nuclear Waste Management Fund Share of the fund not recognised in the balance sheet 2018 1,016 1,016 0 1,506 1,471 455 2017 953 953 0 1,482 1,437 484 TVO’s legal liability, provision and share of the fund are based on the same principles as described above for Loviisa nuclear power plant and includes in 2018 the impact from adjustments following the reassesment� TVO’s share of the Finnish State Nuclear Waste Management Fund is from an IFRS perspective overfunded with EUR 455 million (of which Fortum’s share EUR 121 million), since TVO’s share of the Fund on 31 December 2018 was EUR 1,471 million and the carrying value in the balance sheet was EUR 1,016 million� Participants in the Finnish State Nuclear Waste Management Fund are allowed to borrow from the fund according to certain rules� Fortum is using the right to reborrow funds through TVO based on its ownership� See more information in Note 27 Interest-bearing liabilities� OKG’s and Forsmark’s total nuclear related assets and liabilities (100%) EUR million OKG’s and Forsmark’s nuclear related assets and liabilities 1) Nuclear provisions Share in the State Nuclear Waste Management Fund Net amount of which Fortum’s net share consolidated with equity method 2018 2017 3,930 3,230 -701 3,398 3,105 -293 -242 -114 1) Accounted for according to Fortum’s accounting principles. Companies’ statutory financial statements are not prepared according to IFRS. In Sweden Svensk Kärnbränslehantering AB (SKB), a company owned by the nuclear operators, takes care of all nuclear waste management related activities on behalf of nuclear operators� SKB receives its funding from the Swedish State Nuclear Waste Management Fund, which in turn is financed by the nuclear operators� Nuclear waste fees and guarantees are updated every third year by governmental decision after a proposal from Swedish Radiation Safety Authority (SSM)� The proposal is based on cost estimates done by SKB� A new technical plan for nuclear waste management was decided by SKB during 2016� In 2017 SKB submitted the cost estimates based on the revised technical plan to SSM� In December 2017 the Swedish government decided the waste fees and guarantees for years 2018–2020� Nuclear waste fees are currently based on future costs with the assumed lifetime of 50 years (40 years in previous decision) for each unit of a nuclear power plant� In addition to nuclear waste fees nuclear power companies provide guarantees for any uncovered liability and unexpected events� For more information regarding Fortum’s guarantees given on behalf of nuclear associated companies, see Note 36 Pledged assets and contingent liabilities� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 107 107 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 30 Other provisions ACCOUNTING POLICIES Provisions for environmental obligations, asset retirement obligations, restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events to a third party, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as interest expense. ENVIRONMENTAL PROVISIONS Environmental provisions are recognised, based on current interpretation of environmental laws and regulations, when it is probable that a present obligation has arisen and the amount of such liability can be reliably estimated. Environmental expenditures resulting from the remediation of an existing condition caused by past operations, and which do contribute to current or future revenues, are expensed as incurred. Environmental provisions include provisions for obligations to cover landfills and clean-up obligations for contaminated land areas. Provisions are determined based on the surface area of the landfill site, remaining land area to be landscaped or otherwise cleaned-up, and the unit cost of conducting the coverage and clean-up activities in the future. Environmental provisions are also booked for aftercare and monitoring obligations arising from landfill permit holder’s requirement to take into account potential danger to health or the environment posed by a landfill site for a period of at least 30 (up to 60) years after the coverage. The aftercare and monitoring provision is determined on the basis of estimated costs and estimated number of years of filling the landfill. 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, plant and equipment when the asset is put in service. The costs will be depreciated over the remainder of the asset’s useful life. 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 employee termination payments and lease termination costs. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS: ASSUMPTIONS MADE WHEN ESTIMATING PROVISIONS Provisions for present obligations require management to assess the best estimate of the expenditure needed to settle the present obligation at the end of the reporting period. The actual amount and timing of the expenditure might differ from estimates made. EUR million 1 January Acquisitions Provisions for the period Provisions used Provisions reversed Exchange rate differences and other changes 31 December Of which current provisions 1) BS Of which non-current provisions 2018 2017 Environ- mental 43 0 0 0 0 -1 41 0 41 Other 79 0 25 -33 -4 -3 65 14 50 Total 122 0 25 -33 -4 -4 106 14 91 Environ- mental 47 0 0 0 0 -4 43 0 43 Other 82 7 31 -35 -10 4 79 22 57 Total 129 7 31 -35 -10 0 122 22 100 1) Included in trade and other payables in the balance sheet, see Note 33 Trade and other payables. Environmental provisions include mainly provisions for obligations to cover and monitor landfills as well as to clean contaminated land areas� Main part of the provisions are estimated to be used within 10–15 years� Dismantling provisions for the Finnish coal fired power plants are included in Other provisions� Regarding provisions for decommissioning and provision for disposal of spent fuel for nuclear production, see Note 29 Nuclear related assets and liabilities� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 108 108 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 31 Pension obligations ACCOUNTING POLICIES The Group companies have various pension schemes in accordance with the local conditions and practises in the countries in which they operate. The schemes are generally funded through payments to insurance companies or the Group’s pension funds as determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. The Group’s contributions to defined contribution plans are charged to the income statement in the period to which the contributions relate. For defined benefit plans, pension costs are assessed using the projected unit credit method. The cost of providing pensions is charged to the income statement as to spread the service cost over the service lives of employees. The net interest is presented in financial items and the rest of the income statement effect as pension cost. The defined benefit obligation is calculated annually on the balance sheet date and is measured as the present value of the estimated future cash flows using interest rates of high-quality corporate bonds that have terms to maturity approximating to the terms of the related pension liability. In countries where there is no deep market in such bonds, market yields on government bonds are used instead. The plan assets for pensions are valued at market value. The liability recognised in the balance sheet is the defined benefit obligation at the closing date less the fair value of plan assets. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss related to a curtailment is recognised immediately in profit or loss. Gains or losses on settlements of defined benefits plans are recognised when the settlement occurs. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS: ASSUMPTIONS USED TO DETERMINE FUTURE PENSION OBLIGATIONS The present value of the pension obligations is based on actuarial calculations that use several assumptions. Any changes in these assumptions will impact the carrying amount of pension obligations. Fortum’s pension arrangements Finland In Finland statutory pension benefits (as determined in Employee’s Pension Act /TyEL) provide the employees pension coverage for old age, disability and death of a family provider� The benefits are insured with an insurance company and determined to be defined contribution plans� In addition the Group has additional old-age and survivors pension benefits arranged with the Fortum Pension Fund� The Fortum Pension Fund is a closed fund managed by a Board, consisting of both employers’ 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 payable 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 the ten last years’ salaries, which are indexed with a common salary index to the 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 fulfil 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 employers’ 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 does not have to 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� Norway Group companies operate both defined contribution and defined benefit plans� Some defined benefit schemes offer benefits common for municipalities in Norway and some are private pension schemes� Benefits include old 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 109 109 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 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� The majority of the defined benefit plans are closed, either private plans or public plans, that are operated by the Fortum Pension Fund� The Fortum Pension Fund was established in 2018 and the participants were transferred there from the Hafslund and Infratek’s Pension Fund� The Group has also a closed public defined benefit plan operated by Oslo Pensjonsforsikring AS� In addition, the Group has defined benefit plans with various insurance companies� Pension arrangements in other countries Pension arrangements in Russia include payments made to the state pension fund� These arrangements are treated as defined contribution plans� The Russian (in addition to the defined contribution plans) 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 honoured workers and pensioners� In other countries the pension arrangements are done in accordance with the local legislation and practice, mostly being defined contribution plans� Main risks relating to defined benefit plans – Finland and Sweden Overall risks Finland – If the return of the 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� 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� Change in discount rate 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 an 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� Sweden – The pension fund operation is regulated by law and supervised by central administrative authorities (Finansinspektionen and the County Administrative Board)� The pension fund board decides yearly on a policy for asset allocation and a risk management model that stipulates a maximum acceptable market value decrease of the assets� The major assets are fixed income instruments, stock index funds and cash� Risks relating to assumptions used Actuarial calculations use assumptions for future inflation and salary levelrs and longevity� Should the actual outcome differ from these assumptions, this might lead to higher liability� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 110 110 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 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 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 Acquisitions of subsidiary companies Balance at 31 December 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 Pension assets included in other non- current assets in the balance sheet BS Pension obligations in the balance sheet Defined benefit obligation 2018 501 2017 452 Fair value of plan assets 2017 -378 2018 -401 Net defined benefit asset(-)/liability(+) 2018 101 2017 74 8 -1 -4 9 13 -8 -12 4 -7 -15 -17 0 483 6 0 -3 9 12 10 16 -6 -5 5 -18 50 501 2 -7 -4 2 2 5 7 -1 13 0 -386 5 -7 -2 7 7 4 11 -3 14 -43 -401 9 -1 -1 2 9 -6 -12 4 2 -2 -8 -1 -4 0 97 480 -386 94 3 97 1 98 7 0 2 2 10 17 16 -6 7 -1 16 -3 -3 7 101 497 -401 96 4 101 2 102 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 in the staff cost specification in Note 11 Employee benefits). 2) The unfunded obligation relates to arrangements in Russia and Poland. At the end of 2018 a total of 833 (2017: 985) Fortum employees are included in defined benefit plans providing pension benefits� During 2018 pensions or related benefits were paid to a total of 3,375 (2017: 3,160) persons� Contributions expected to be paid during year 2019 are EUR 3 million� Fair value of plan assets EUR million Equity instruments Debt instruments Cash and cash equivalents Real estate, of which EUR 1 million (2017: 42) occupied by the Group Investment funds Company’s own ordinary shares Other assets Total 2018 129 173 51 12 1 5 16 386 2017 126 156 48 47 1 5 18 401 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, Sweden and Norway totalled EUR 5 million (2017: 0)� Amounts recognised in the balance sheet by country 2018 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 Pension asset included in non-current assets BS Pension obligations in the balance sheet Finland 269 -233 37 Sweden 147 -102 45 Norway 64 -52 12 37 0 37 45 0 45 12 1 13 Amounts recognised in the balance sheet by country 2017 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 Pension asset included in non-current assets BS Pension obligations in the balance sheet Finland 295 -245 50 Sweden 141 -105 36 Norway 61 -51 10 50 0 50 36 1 37 10 1 11 Other countries 0 0 0 3 3 0 3 Other countries 0 0 0 4 4 0 4 Total 480 -386 94 3 97 1 98 Total 497 -401 96 4 101 2 102 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 111 111 Basis of preparation Risks Income statement Balance sheet Balance sheet Off balance sheet items Group structure and related parties The principal actuarial assumptions used % Discount rate Future salary increases 1) Future pension increases 2) Rate of inflation Finland 1.60 1.70 1.80 1.50 2018 Sweden 2.30 2.90 1.90 1.90 Norway 2.60 2.75 1.33 1.50 Finland 1.50 1.90 2.00 1.70 2017 Sweden 2.40 2.80 1.80 1.80 Norway 2.30 2.50 1.34 1.50 1) The percentage in Finland for 2017 has been corrected to 1.90% from 2.90%. 2) The percentage in Sweden for 2017 has been corrected to 1.80% from 2.80%. 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 is based on yields on Swedish covered bonds with maturity that best reflects the estimated term of the defined benefit pension plans� The covered bonds in Sweden are considered high quality bonds as they are secured with assets� 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 the net liability in Finland, Sweden and Norway with EUR 17 million (19%)� Maturity profile of the undiscounted defined benefit obligation for Finland, Sweden and Norway as of 31 December 2018 EUR million Maturity under 1 year Maturity between 1 and 5 years Maturity between 5 and 10 years Maturity between 10 and 20 years Maturity between 20 and 30 years Maturity over 30 years Future benefit payments 17 72 89 172 135 107 The life expectancy is the expected number of years of life remaining at a given age Longevity at age 65 45 - male 45 - female 65 - male 65 - female Sweden 23 25 22 24 Finland 22 27 21 25 The weighted average duration of defined benefit obligation in Finland, Sweden and Norway at the end of year 2018 is 14 years� Norway 23 27 22 25 32 Other non-current liabilities 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 2018, holding all other assumptions stable, are presented in the table below� EUR million Connection fees Other liabilities BS Total Sensitivity of defined benefit obligation to changes in assumptions 2018 109 73 182 2017 109 66 175 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 -7% 7% 6% -6% 1% -1% Sweden -11% 11% 10% -9% 2% -3% Norway -10% 11% 7% -7% 4% -3% Fees paid by the customer when connected to district heating network in Finland were refundable until 2013� These connection fees have not been recognised in the income statement and are included in other liabilities in the balance sheet� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 112 112 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 33 Trade and other payables 34 Lease commitments EUR million Trade payables Accrued expenses and deferred income Accrued personnel expenses Accrued interest expenses Contract liabilities Other accrued expenses and deferred income Other liabilities VAT-liability Current tax liability Energy taxes Advances received Current provisions 1) Other liabilities BS Total 1) See also Note 30 Other provisions. 2018 334 103 98 40 80 34 30 2 110 14 212 1,058 2017 318 97 113 - 174 43 25 15 98 22 209 1,112 ACCOUNTING POLICIES 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. 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. Based on IFRS 15 a contract liability is presented for an obligation to transfer goods or services to a customer when payment has already been received� Contract liabilities on 31 December 2018 are comprised mainly of project and waste management services that are invoiced but not delivered at the reporting date� Fortum has adopted the new IFRS 15 “Revenue from Contracts with Customers” standard from 1 January 2018 onwards and comparative information 2017 has not been restated� See additional information on adoption of IFRS 15 in Note 1 Accounting policies and Note 6 Segment reporting� The management considers that the amount of trade and other payables approximates fair value� 34.1 Leases as a lessor Operating leases The operating rental income recognised in income statement was EUR 12 million (2017: 6)� Finance leases Fortum does not have material finance lease arrangements where the Group is acting as a lessor� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 113 113 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 34.2 Leases as lessee Operating leases Fortum leases mainly land and office buildings 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 32 million (2017: 33) are included in the income statement in other expenses� 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 2018 30 88 98 216 2017 23 72 65 160 Finance leases Fortum does not have material finance lease arrangements where the Group is acting as a lessee� 35 Capital commitments EUR million Property, plant and equipment 2018 322 2017 362 Capital commitments are capital expenditures contracted for at the balance sheet date but not recognised in the financial statements� The decrease in capital commitments compared to previous year comes mainly from progressing of the automation investment in Loviisa nuclear power plant and Zabrze CHP investments, partly offset by the new Kivenlahti Bio-HOB investment� For more information regarding capital expenditure, see Note 18 Property, plant and equipment� Other commitments Fortum has committed to provide a maximum of EUR 85 million to Voimaosakeyhtiö SF, for its participation in the Fennovoima nuclear power project in Finland� Furthermore, Fortum’s remaining direct commitment regarding the construction of a waste-to-energy combined heat and power plant (CHP) in Kaunas, Lithuania is EUR 7 million at maximum� The investment is made through Kauno Kogeneracinė Jėgainė (KKJ), a joint venture owned together with Lietuvos Energija� Fortum has also committed to provide a maximum of EUR 12 million to a joint venture with Numaligarh Refinery Limited (NRL) and Chempolis to build and operate a biorefinery in Assam, India� Teollisuuden Voima Oyj (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� As of January 1, 2018 TVO shareholder loans EUR 145 million has been classified as participation in joint ventures, which is described in Note 1.6 New IFRS standards adopted from 1 Jan 2018� At end of December 2018 Fortum had EUR 170 million (2017: 145) outstanding receivables regarding Olkiluoto 3 and is additionally committed to provide at maximum EUR 63 million� In June 2018 the Swedish Government approved the legislation regarding Sweden’s national strategy for implementation of the EU’s Water Framework Directive� The largest hydro industry companies will create a common hydro-power fund to finance large parts of the environmental actions needed� The fund will have a total financial cap of SEK 10 billion to be paid over a 20-year period, and the largest operators will contribute to the fund proportionately based on their respective market share of hydro-power production� Fortum’s share is expected to be 20–25% of the fund’s total financing� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 114 114 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 36 Pledged assets and contingent liabilities ACCOUNTING POLICIES 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. 36.2 Pledged assets for other commitments Pledges also include restricted cash given as trading collateral of EUR 346 million (2017: 346) for trading of electricity and CO2 emission allowances in Nasdaq Commodities, in Intercontinental Exchange (ICE), European Energy Exchange (EEX) and Polish Power Exchange (TGE)� See also Note 21 Interest-bearing receivables� Fortum has given real estate mortgages in power plants in Finland, total value of EUR 21 million in December 2018 (2017: 141), as a security to the Finnish State Nuclear Waste Management Fund for the uncovered part of the legal liability and unexpected events relating to future costs for decommissioning and disposal of spent fuel in Loviisa nuclear power plant� According to the Nuclear Energy Act, Fortum is obligated to contribute the funds in full to the State Nuclear Waste Management Fund to cover the legal liability� Any uncovered legal liability relates to periodising of the payments to the fund� The size of the securities given is updated yearly in Q2 based on the decisions regarding the legal liabilities and the funding target determined at the end of the previous year� Due to the yearly update, the amount of real estate mortgages given as a security decreased by EUR 120 million� 2018 2017 See also Note 29 Nuclear related assets and liabilities� EUR million Pledged assets on own behalf For debt Pledges Real estate mortgages For other commitments Pledges Real estate mortgages Pledged assets on behalf of others Pledges Contingent liabilities on own behalf Other contingent liabilities On behalf of associated companies and joint ventures Guarantees 36.1 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 was EUR 269 million on 31 December 2018 (2017: 269)� Fortum Tartu in Estonia (60% owned by Fortum) has given real estate mortgages for a value of EUR 96 million (2017: 96) as a security for an external loan� Real estate mortgages have also been given for loan from Fortum’s pension fund for EUR 41 million (2017: 41)� The mortgage for loans of Russian solar plants was released during the beginning of 2018 (2017: 41)� Regarding the relevant interest-bearing liabilities, see Note 27 Interest-bearing liabilities� 288 137 346 21 31 167 622 300 177 346 141 12 161 598 Pledged assets on behalf of others Pledged assets on behalf of others consist of restricted cash EUR 31 million (2017: 12) posted as collateral toward Nasdaq Clearing AB covering Fortum’s required contribution to the Commodity Market Default Fund (default fund)� The default fund is a mutualised fund whereby all participants on the Nordic power exchange (Nasdaq Commodities) post collateral in relation to their exposure on the market in order to cover potential defaults by members which may cause losses exceeding the members’ own collateral� The increase in the pledged amount is due to the replenishment given in September 2018� See also Note 21 Interest-bearing receivables� 36.3 Contingencies on own behalf Fortum owns 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%� Based on the participation agreement Fortum has to give a guarantee to TVO against breach in contract� The amount of the guarantee is set to EUR 125 million (2017: 125)� The guarantee was released on 1 January 2019, see Note 39 Events after the balance sheet date� 36.4 Contingencies 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� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 115 115 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties In Finland, Fortum has given a guarantee on behalf of TVO to the Finnish State Nuclear Waste Management Fund to cover Fortum’s share 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 36 million (2017: 50)� The guarantee covers the unpaid legal liability due to periodisation as well as risks for unexpected future costs� 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� Guarantees for the period of 2015–2017 has been given on behalf of Forsmarks Kraftgrupp AB and OKG AB amounting to SEK 5,393 million (EUR 526 million) at 31 December 2018 (2017: EUR 548 million)� There are two types of guarantees given on behalf of Forsmarks Kraftgrupp AB and OKG AB� The Financing Amount is given to cover Fortum’s share of the uncovered part in the Nuclear Waste Fund, assuming no further production and that no further nuclear waste fees are paid in� The uncovered amount is calculated by the authorities and is based on the difference between the expected costs and the funds to cover these costs at the time of the calculation� The amounts for the guarantees are updated every third year by governmental decision� The Supplementary Amount constitutes a guarantee for deficits that can arise as a result of unplanned events� The Financing Amount given by Fortum on behalf of Forsmarks Kraftgrupp AB and OKG AB was SEK 3,843 million (EUR 375 million) and the Supplementary Amount was SEK 1,550 million (EUR 151 million) at 31 December 2018� Fortum has given guarantees to secure bank loans obtained by WEDF Second Wind Farm LLC and WEDF Third Wind Farm LLC, which are subsidiaries of the 50–50 Wind-fund with Rusnano� The guarantees given on pro rata basis are security for loans relating to wind farms’ development and amount to RUB 3,840 million (EUR 48 million) at 31 December 2018� 36.5 Other contingent liabilities Fortum’s 100% owned subsidiary Fortum Heat and Gas Oy has a collective contingent liability with Neste 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� 37 Legal actions and official proceedings 37.1 Group companies Tax cases in Finland No tax cases with material impact in Finland� Tax cases in Sweden Cases relating to Swedish interest deductions In March 2018 the Swedish Supreme Administrative Court decided not to grant leave to appeal to Fortum with respect to the interest deduction cases relating to the years 2009–2012� The unfavourable decision of the Administrative Court of Appeal from June 2017 therefore remains in force� The additional tax and interest claimed, in total SEK 1,175 million (EUR 122 million), was paid in 2016 and booked as a cost in 2017� There are strong grounds to argue that the aforementioned decisions of the Administrative Court of Appeal and the Supreme Administrative Court violate EU law and fundamental rights under EU law� On these grounds Fortum has in December 2018 filed a summons application to the District Court of Stockholm in which damages are claimed from the Swedish state in these cases� Moreover, Fortum has filed a request to initiate a mutual agreement procedure between Sweden and the Netherlands for the year 2012� Fortum has received income tax assessments in Sweden for the years 2013, 2014 and 2015 in December 2015, December 2016 and October 2017, respectively� The assessments concern the loans given in 2013, 2014 and 2015 by Fortum’s Dutch financing company to Fortum’s subsidiaries in Sweden� The interest income for these loans was taxed in the Netherlands� The tax authorities considered, based on 2013 tax regulation, over a half of the interest relating to each loan as deductible, i�e� deriving from business needs� The rest of the interest is seen as non-deductible� After Fortum received a negative decision from the Administrative Court in Stockholm in 2017, Fortum filed an appeal to the Administrative Court of Appeal in Stockholm� In October 2018 the Administrative Court of Appeal in Stockholm, Sweden announced its decision relating to the income tax assessment for the year 2013� The decision was favorable to Fortum� The Administrative Court of Appeal confirmed that Fortum had sufficient business reasons for the loans and accepted Fortum’s appeal� The decision regarding the year 2013 is final� The Administrative Court of Stockholm announced its decisions in the cases for 2014 and 2015 in November 2018� Also these decisions, like the decision from the Administrative Court of Appeal for 2013, were favorable to Fortum and in line with the tax authorities’ changed opinion based on the year 2013 decision� The decisions will become non-appealable by the end of January 2019� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 116 116 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Off balance sheet items Group structure and related parties Fortum had not made provisions for the cases regarding the years 2013–2015� Therefore, the favorable decisions issued by the Administrative Court of Appeal in October 2018 and by the Administrative Court in November 2018 do not have any impact on profits� The amount of additional tax claimed by the Swedish tax authority has originally been SEK 273 million (EUR 26 million) for the year 2013, SEK 282 million (EUR 27 million) for the year 2014, and SEK 200 million (EUR 19 million) for the year 2015� The additional tax for 2013 was paid in 2017 and was refunded to Fortum due to the favorable decision from the Administrative Court of Appeal in the fourth quarter of 2018� Additional taxes and interest for the years 2014 and 2015 have not been paid by Fortum� Cases relating to the Swedish hydro real estate tax Fortum Sverige AB has through an appeal process in Swedish courts claimed that the property tax rate for hydropower plants shall be lowered to the normal 0,5 percent of the tax assessment value� The case concerns the years 2009–2014 and includes several legal arguments for the claim including state aid arguments� Fortum Sverige AB did not receive a permission to appeal from the Supreme Administrative Court in this matter� As the Administrative Court, the Administrative Court of Appeal in Stockholm and the Supreme Administrative Court have handled only the arguments concerning state aid, the case is now transferred back to the Administrative Court concerning the other legal arguments� The disputed amount, excluding interest for the time period, totals approximately SEK 510 million (approximately EUR 50 million)� Moreover, Swedish Fortum companies have appeals for 2011–2016 pending in the Administrative Court relating to the property tax rate for their hydropower plants referring to the same legal grounds� Fortum has paid the real estate tax in accordance with the legislation� If the final court decision would be unfavorable to Fortum, this would not have any result impact for Fortum� Fortum Sverige AB has in December 2018 filed a complaint to the EU commission regarding the Swedish property tax for hydropower plants regarding 2017 and prior years� Fortum has asked the commission to investigate whether the Swedish legislation regarding the property tax for hydropower plants and the Swedish court decisions are in line with EU state aid rules� Tax cases in Belgium Fortum has received income tax assessments in Belgium for the years 2008, 2009, 2010 and 2011� The 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 found the decision unjustifiable and appealed to the Court of Appeal� In January 2016 Fortum received a favourable decision from the Court of Appeal in which the Court disagreed with the tax authorities’ interpretation and the tax assessment for 2008 was nullified� The tax authorities disagreed with the decision and filed an appeal to Hof van Cassatie (Supreme Court) in March 2016� Fortum’s appeals concerning 2009–2011 are still pending and Fortum expects the remaining years to follow the final decision for 2008� Based on legal analysis and a supporting legal opinion, no provision has been accounted for� The amount of additional tax claimed is 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� In November 2015 Fortum received an income tax assessment from the Belgian tax authorities for the year 2012� The tax authorities disagree with the tax treatment of Fortum Project Finance NV� Fortum finds the tax authorities’ interpretation not to be based on the local regulation and has filed an objection against the tax adjustment� In line with treatment of the cases concerning 2008–2011, no provision has been accounted for� The amount of additional tax claimed is approximately EUR 15 million for the year 2012� The tax has already been paid� For critical accounting estimates regarding uncertain tax positions, see Note 28 Income taxes in balance sheet� See also Note 13 Income tax expense� 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� 37.2 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� OL3 was procured as a fixed-price turnkey project from a consortium (Supplier) formed by AREVA GmbH, AREVA NP SAS and Siemens AG� As stipulated in the plant contract, the consortium companies have joint and several liability for the contractual obligations� In accordance with the Supplier’s schedule updated in November 2018, regular electricity generation at the plant unit will commence in January 2020� According to the Supplier, nuclear fuel will be loaded into the reactor in June 2019 and the first connection to the grid takes place in October 2019� According to the Supplier’s plant ramp-up program the unit will produce 2–4 TWh of electricity, at varying power levels, during the period of time between the first connection to the grid and the start of regular electricity production� According to the comprehensive settlement agreement signed in March 2018, TVO and the Supplier jointly withdrew the pending arbitration proceedings under the International Chamber of Commerce (ICC) rules with respect to costs and losses incurred in relation to delays in the construction of the OL3 EPR project� In June 2018, the ICC tribunal confirmed the arbitration settlement by a consent award, and the arbitration proceedings were terminated� The parties also withdrew the pending appeals in the General Court of the European Union� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 117 117 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties The settlement agreement between TVO and the plant supplier consortium companies Areva NP, Areva GmbH and Siemens AG as well as with Areva Group parent company Areva SA, a company wholly owned by the French State, concerning the completion of the OL3 EPR project and related disputes entered into force late March 2018� The settlement agreement stipulates that: • In order to provide and maintain adequate and competent technical and human resources for the completion of the OL3 EPR project, Areva will source the necessary additional resources from Framatome S�A�S�, whose majority owner is Electricité de France (EDF)� The supplier consortium companies undertake that the funds dedicated to the completion of the OL3 EPR project will be adequate and will cover all applicable guarantee periods, including setting up a trust mechanism funded by Areva companies to secure the financing of the costs of completion of the OL3 EPR project� • The turnkey principle of the OL3 EPR plant contract and the joint and several liability of the supplier consortium companies remain in full force� The agreement also noted the plant supplier’s schedule at the time the agreement was signed, according to which regular electricity production in the unit will commence in May 2019� The ICC arbitration concerning the costs and losses caused by the delay of the OL3 EPR project is settled by financial compensation of EUR 450 million to be paid to TVO in two installments by the supplier consortium companies� 38 Related party transactions 38.1 The Finnish State and companies owned by the Finnish State At the end of 2018, the Finnish State owned 50�76% of the Company’s shares (2017: 50�76%)� 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� All transactions between Fortum and other companies owned by the Finnish State are on arm’s length basis� 38.2 Board of Directors and Fortum Executive Management The key management personnel of the Fortum Group are the members of Fortum Executive Management 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� No loans exist to any member of the Board of Directors or Fortum Executive Management at 31 December 2018� The total compensation (including pension benefits and social costs) for the key management personnel for 2018 was EUR 9 million (2017: 9)� See Note 11 Employee benefits for further information on the Board of Directors and Fortum Executive • The parties withdraw all on-going legal actions related to OL3 EPR, including the ICC arbitration and appeals Management remuneration and shareholdings� in the General Court of the European Union� • The supplier consortium companies are entitled to receive an incentive payment, in a maximum amount of EUR 150 million, upon timely completion of the OL3 EPR project� • In the event that the supplier consortium companies fail to complete the OL3 EPR project by the end of 2019, they will pay a penalty to TVO for such delay in an amount which will depend on the actual time of completion of the OL3 EPR project and may not exceed EUR 400 million� TVO received the first payment of EUR 328 million of the settlement amount in March 2018 at the entry into force of the settlement agreement� The second payment of EUR 122 million is payable upon completion of the OL3 EPR project or, in any event, on December 31, 2019 at the latest� The amount corresponding to the total settlement amount has been entered as property, plant and equipment in the TVO Group balance sheet� 38.3 Associated companies and joint ventures 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� 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� In addition to the litigations described above, some Group companies are involved in other routine tax and For further information on transactions and balances with associated companies and joint ventures, 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� see Note 19 Participations in associated companies and joint ventures� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 118 118 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 38.4 Pension fund The Fortum pension funds in Finland, Sweden and Norway are stand-alone legal entities which manage pension assets related to part of the pension coverage in Finland, Sweden and Norway� In 2018 Fortum paid a capital contribution of EUR 3 million to the newly established pension fund in Norway� Fortum has not paid contributions to the pension funds in Finland and Sweden neither in 2018 nor in 2017� The assets in the pension fund in Finland include Fortum shares representing 0�04% (2017: 0�04%) of the company’s outstanding shares� Real estate mortgages have also been given for a loan from Fortum’s Finnish pension fund for EUR 41 million (2017: 41)� 39 Events after the balance sheet date On 1 January 2019, Fortum acquired all remaining C-shares of TVO entitling to the power production of the Meri-Pori coal condensing power plant� Fortum is now entitled to 100% of the power production of the plant, an increase from 67% previously� The Meri-Pori power plant is mainly used in Fingrid’s capacity reserve and as back-up capacity� See more information in Note 19 Participations in associated companies and joint ventures� 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 119 119 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties 40 Subsidiaries by segment on 31 December 2018 C = City Solutions CS = Consumer Solutions 2) Shares held by the parent company G = Generation R = Russia O = Other Operations 1) New company Company name Ekopartnerit Turku Oy Fincumet Oy 1) Fortum Asiakaspalvelu Oy 2) Fortum Assets Oy Fortum C&H Oy Fortum Environmental Construction Oy Fortum Growth Oy Fortum Heat and Gas Oy 2) Fortum Markets Oy 2) Fortum Norm Oy 2) Fortum Power and Heat Holding Oy Fortum Power and Heat Oy 2) Fortum Real Estate Oy 2) Fortum Waste Solutions Oy 2) Kiinteistö Oy Espoon Energiatalo Koillis-Pohjan Energiantuotanto Oy Kotimaan Energia Oy Niemen Romukauppa Oy 1) NJS-Patentti Oy 1) Oy Pauken Ab Oy Tersil Ab Oy Tertrade Ab Vindin Böle Ab/Oy Vindin Kalax Ab/Oy Vindin Molpe Ab/Oy Vindin Pjelax Ab/Oy Vindin Poikel Norra Ab/Oy Vindin Pörtom Ab/Oy Fortum Project Finance N.V. 2) Barry Danmark ApS 1) Fortum Energi A/S Fortum Waste Solutions A/S Domicile Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Belgium Denmark Denmark Denmark Segment Group holding, % 51.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 C C CS O O C O C, O CS O G C, G, O, R O C O G CS C C O O O O O O O O O O O CS C Company name Fortum Waste Solutions OW A/S AS Anne Soojus AS Fortum Tartu AS Tartu Joujaam AS Tartu Keskkatlamaja Fortum CFS Eesti OU Fortum Eesti AS Fortum France S.A.S Fortum Deutschland SE Fortum Service Deutschland GmbH Plugsurfing GmbH 1) Fortum Carlisle Limited Fortum Energy Ltd Fortum Glasgow Limited Fortum O&M (UK) Limited IVO Energy Limited Fortum Insurance Ltd Fortum India Private Limited 2) Fortum Solar India Private Limited Fortum Solar Plus Private Limited 1) Fortum Finance Ireland Designated Activity Company 2) Fortum P&H Ireland Limited Fortum Participation Ltd Fortum Jelgava, SIA Fortum Latvia SIA SIA BK Energija 1) SIA Energy & Communications 1) SIA Lake Development 1) SIA Sprino 1) UAB Fortum Heat Lietuva UAB Fortum Klaipeda UAB Joniskio energija UAB Svencioniu energija Fortum Consumer Solutions AS Fortum Forvaltning AS Fortum Hedging AS Fortum Kundesenter AS Domicile Denmark Estonia Estonia Estonia Estonia Estonia Estonia France Germany Germany Germany Great Britain Great Britain Great Britain Great Britain Great Britain Guernsey India India India Ireland Ireland Ireland Latvia Latvia Latvia Latvia Latvia Latvia Lithuania Lithuania Lithuania Lithuania Norway Norway Norway Norway Segment Group holding, % 100.0 100.0 60.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 96.0 66.2 50.0 100.0 100.0 100.0 100.0 C C C C C O C O O C O C O C C G O O O O O O O C C C C C C C C C C CS O CS CS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 120 120 Basis of preparation Risks Income statement Balance sheet Off balance sheet items Group structure and related parties Company name Fortum Markets AS Fortum Oslo Varme AS Fortum Tellier AS Fortum Waste Solutions Norway AS FOV OT AS 1) Fredrikstad EnergiSalg AS Hafslund Strøm AS Hallingkraft AS Mitt Hjem Norge AS NorgesEnergi AS Nygårdsfjellet Vindpark AS Oslo Energi AS Solvencia AS Sørfjord Vindpark AS Ånstadblåheia Vindpark AS AMB Energia Sprzedaż Sp. z o.o. Fortum Customer Services Polska Sp. z o.o. Fortum Marketing and Sales Polska S.A. Fortum Markets Polska S.A. Fortum Network Częstochowa Sp. z o.o. Fortum Network Płock Sp. z o.o. Fortum Network Wrocław Sp. z o.o. Fortum Power and Heat Polska Sp. z o.o. Fortum Silesia SA Fortum Sprzedaż Sp. z o.o. Rejonowa Spółka Ciepłownicza Sp. z o.o. Fortum New Generation 1 LLC 1) Fortum New Generation LLC Joint Stock Company Chelyabenergoremont LLC Bugulchanskaya Solar power station LLC Grachevskaya Solar power station LLC Pleshanovskaya Solar power station PAO Fortum Ural Heat Networks Company Joint Stock Company HQ Services Limited 1) Escandinava de Electricidad S.L.U Blybergs Kraftaktiebolag Brännälven Kraft AB Bullerforsens Kraft Aktiebolag Energibolaget i Sverige Holding AB Domicile Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Poland Poland Poland Poland Poland Poland Poland Poland Poland Poland Poland Russia Russia Russia Russia Russia Russia Russia Russia Rwanda Spain Sweden Sweden Sweden Sweden Segment Group holding, % 100.0 50.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 98.2 100.0 49.0 100.0 66.7 67.0 88.0 100.0 CS C CS C C CS CS CS CS CS O CS CS O O CS CS CS CS C C C C, CS C CS C R R R R R R R R C CS G G G CS Company name Energikundservice Sverige AB Fortum 1 AB Fortum Fastigheter AB Fortum Markets AB Fortum Produktionsnät AB Fortum Sweden AB 2) Fortum Sverige AB Fortum Waste Solutions AB Fortum Waste Solutions Holding AB Fortum Vind Norr AB Göta Energi AB Hafslund Energi AB LPN Transformator AB 1) Mellansvensk Kraftgrupp Aktiebolag Nordgroup Waste Management AB Oreälvens Kraftaktiebolag SverigesEnergi Elförsäljning AB Sävar Vindkraft AB 1) Tellier Service AB Uddeholm Kraft Aktiebolag VG Power Tools AB VG Power Turbo AB Värmlandskraft-OKG-delägarna Aktiebolag FB Generation Services B.V. Fortum 2 B.V. Fortum 3 B.V. Fortum Charge & Drive B.V. Fortum Finance B.V. Fortum Holding B.V. 2) Fortum Hydro B.V. Fortum India B.V. Fortum Power Holding B.V. Fortum Russia B.V. Fortum Russia Holding B.V. Fortum SAR B.V. Fortum Star B.V. Fortum Wave Power B.V. PolarSolar B.V. RPH Investment B.V. Valo Ventures I LP Fund 1) Domicile Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden 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 USA 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 86.9 100.0 65.0 100.0 100.0 100.0 100.0 100.0 100.0 73.3 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 99.0 CS R O CS G O C, G, O C C O CS CS G G C G CS O CS G C C G O O O O O C, G, O, CS O O O R O O O O O R O 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 12345678 910111213141516171819202122232425262728293031323334353637383940Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 121 121 Financial key figures Share key figures Segment key figures Definitions of key figures Financial key figures Fortum has adopted the IFRS 9 and IFRS 15 standards from 1 January 2018 onwards� Fortum has applied the transition relief for not restating the comparative figures from 2017� See additional information in Note 1 Accounting policies For information of Alternative Performance Measures used by Fortum, see Definitions of key figures and Note 1 Accounting policies� EUR million or as indicated Income statement Sales EBITDA 1) Comparable EBITDA Operating profit - of sales % Comparable operating profit Share of profit/loss of associates and joint ventures Profit before income tax - of sales % Profit for the period - of which attributable to owners of the parent Financial position and cash flow Capital employed Interest-bearing net debt Capital expenditure and gross investments in shares - of sales % Capital expenditure Net cash from operating activities 2018 5,242 1,674 1,523 1,138 21.7 987 38 1,040 19.8 858 843 18,170 5,509 4,672 89.1 584 804 2017 4,520 1,623 1,275 1,158 25.6 811 148 1,111 24.6 882 866 18,172 988 1,815 40.2 690 993 Change 18/17 % 16 3 19 -2 22 -74 -6 -3 -3 0 -458 157 -15 -19 EUR million or as indicated Key ratios Return on capital employed, % Return on shareholders' equity, % Interest coverage Interest coverage including capitalised borrowing costs Funds from operations/interest-bearing net debt, % Gearing, % Comparable net debt/EBITDA Equity-to-assets ratio, % Other data Dividends Research and development expenditure - of sales % Average number of employees 1) EBITDA is defined as Operating profit + Depreciation and amortisation. 2) Board of Directors’ proposal for the planned Annual General Meeting on 26 March 2019. 2018 6.7 6.8 10.0 9.2 26.8 46 3.6 54 977 2) 56 1.1 8,767 Change 18/17 % 0 6 2017 7.1 6.6 8.7 7.8 83.9 7 0.8 61 977 53 1.2 8,507 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 122 122 Financial key figures Share key figures Segment key figures Definitions of key figures Share key figures EUR million or as indicated Data per share Earnings per share Cash flow per share Equity per share Dividend per share Payout ratio, % Dividend yield, % Price/earnings ratio (P/E) Share prices At the end of the period Average Lowest Highest Other data Market capitalisation at the end of the period, EUR million Trading volumes 2) 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 Change 18/17 % -3 -19 -9 0 2018 0.95 0.91 13.33 1.10 1) 115.8 1) 5.8 1) 20.1 19.10 19.10 16.43 22.91 2017 0.98 1.12 14.69 1.10 112.2 6.7 16.8 16.50 15.28 12.69 18.94 16,966 14,658 474,705 53.4 888,294 N/A 888,312 888,312 582,873 65.6 888,367 N/A 888,367 888,367 1) Board of Directors’ proposal for the Annual General Meeting on 26 March 2019. 2) 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, Cboe and Turquoise, and on the OTC market as well. In 2018, approximately 68% (2017: 61%) of Fortum’s shares were traded on markets other than the Nasdaq Helsinki Ltd. See Definitions of key figures� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 123 123 Financial key figures Share key figures Segment key figures Definitions of key figures Segment key figures Sales by segment, EUR million Generation - of which internal City Solutions - of which internal Consumer Solutions - of which internal Russia - of which internal Other Operations - of which internal Eliminations and Netting of Nord Pool transactions Total Comparable operating profit by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Comparable operating profit Impairment charges Capital gains and other Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment Operating profit Comparable EBITDA by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total 2018 1,837 2 1,094 37 1,759 11 1,069 0 129 80 -646 5,242 2018 631 113 53 271 -79 987 -4 102 98 -45 1,138 2018 762 284 110 417 -50 1,523 2017 1,677 15 1,015 19 1,097 3 1,101 0 102 67 -470 4,520 2017 478 98 41 296 -102 811 6 326 14 1 1,158 2017 603 262 57 438 -83 1,275 Depreciation and amortisation, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total Share of profit of associates and joint ventures by segment, EUR million Generation City Solutions Russia Other Operations Total Capital expenditure by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total Gross investments in shares by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total 2018 131 171 57 147 30 536 2018 -72 74 36 0 38 2018 186 190 47 54 108 584 2018 8 32 0 63 3,985 4,088 2017 125 163 16 142 18 464 2017 -1 80 31 38 148 2017 174 170 7 152 187 690 2017 90 386 486 125 39 1,125 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 124 124 Financial key figures Share key figures Segment key figures Definitions of key figures Gross divestments of shares by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total Comparable net assets by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total Comparable return on net assets by segment, % Generation City Solutions Consumer Solutions Russia Other Operations Average number of employees Generation City Solutions Consumer Solutions Russia Other Operations Total 2018 160 0 0 0 147 306 2018 6,295 3,743 648 2,789 4,264 17,739 2018 11.2 5.0 7.8 10.3 -4.5 2018 1,087 1,940 1,473 3,378 888 8,767 2017 0 0 55 0 687 742 2017 5,672 3,728 638 3,161 276 13,474 2017 8.4 5.5 11.7 10.1 -13.3 2017 1,036 1,807 1,180 3,710 774 8,507 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 125 125 Financial key figures Share key figures Segment key figures Definitions of key figures Definitions of key figures Alternative performance measures Business performance Definition Comparable EBITDA Operating profit + depreciations and amortisations - items affecting comparablity Comparable operating profit Operating profit - items affecting comparability Items affecting comparability Impairment charges + capital gains and other + changes in fair values of derivatives hedging future cash flow + nuclear fund adjustment Impairment charges Impairment charges and related provisions (mainly dismantling), which are adjusted from depreciation and amortisation. Capital gains and other Capital gains and transaction costs from acquisitions, which are adjusted from other income and other expenses respectively. Profits from the capital recycling business model are presented in comparable operating profit because the business results are realised through divesting the shareholding, either partially or totally. Reason to use the measure Comparable EBITDA is representing the underlying cash flow generated by the total Group and segments. Used as a component in the capital structure target of Comparable net debt /EBITDA. Comparable operating profit is used in financial target setting and forecasting, management’s follow up of financial performance and allocation of resources in the group’s performance management process. Component used in calculating comparable operating profit and comparable EBITDA. Component used in calculating comparable operating profit and comparable EBITDA. Component used in calculating comparable operating profit and comparable EBITDA. Income statement Income statement Income statement Business performance Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment Reference to reconciliation Note 5 Capital risk management Definition Effects from financial derivatives hedging future cash- flows where hedge accounting is not applied according to IFRS 9, which are adjusted from other income. Reason to use the measure Component used in calculating comparable operating profit and comparable EBITDA. Reference to reconciliation Income statement 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, which are adjusted from materials and services. In addition adjustments are made for accounting effects from valuation according to IFRS. Component used in calculating comparable operating profit and comparable EBITDA. Income statement Income statement Comparable return on net assets, % Comparable operating profit + share of profit (loss) in associated companies and joint ventures + adjustment for share of profit of associated companies and joint ventures x 100 Comparable net assets average Note 6 Segment reporting Note 6 Segment reporting Comparable return on net assets is used in financial target setting and forecasting, management’s follow up of financial performance and allocation of resources in the group’s performance management process. Share of profit of associates and joint ventures is included in profit component in the comparable RONA calculation and the adjustments are done based on similar components as in Items affecting comparability. Adjustment for material items affecting comparability. Adjustment for Share of profit of associated companies and joint ventures Comparable net assets 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 used for hedging future cash flows). Comparable net assets is a component in Comparable return on net assets calculation where return on capital allocated directly to the businesses is measured. Note 6 Segment reporting Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 126 126 Financial key figures Share key figures Segment key figures Definitions of key figures Capital structure Definition Reason to use the measure Reconciliation Other key figures Share based key figures Note 5 Capital risk management Earnings per share (EPS) Profit for the period - non-controlling interests Average number of shares during the period Comparable net debt / EBITDA Interest-bearing net debt Comparable EBITDA Interest-bearing net debt Interest-bearing liabilities - liquid funds Return on capital employed (ROCE), % Profit before taxes + interest and other financial expenses x 100 Capital employed average Financial targets give guidance on Fortum’s view of the company’s long-term value creation potential, its growth strategy and business activities. Comparable net debt to EBITDA is one of the Fortum’s long- term over-the-cycle financial targets measuring the capital structure of the Group. Interest-bearing net debt is used in the follow-up of the indebtedness of the group i.e. capital structure especially as a component in the long-term over-the-cycle financial target of Comparable net debt / EBITDA in the Group. Return on capital employed (ROCE) is a long-term over the cycle financial ratio measuring the profitability and how efficiently invested capital is used. It gives guidance on company’s long-term value creation potential, its growth strategy and business activities. Note 27 Interest-bearing liabilities Note 5 Capital risk management Capital employed Total assets - total non- interest bearing liabilities Capital employed is the book value of the invested capital and it is used as a component when calculating the Return of capital employed in the group. Note 5 Capital risk management Cash flow per share Net cash from operating activities Average number of shares during the period Equity per share Shareholders’ equity Number of shares at the end of the period Payout ratio, % Dividend per share Earnings per share Dividend yield, % Dividend per share Share price at the end of the period Price/earnings (P/E) ratio Share price at the end of the period Earnings per share x 100 x 100 Average share price Amount traded in euros during the period Number of shares traded during the period Market capitalisation Number of shares at the end of the period x share price at the end of the period Trading volumes Number of shares traded during the period in relation to the weighted average number of shares during the period Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 127 127 Financial key figures Share key figures Segment key figures Definitions of key figures Net cash from operating activities before change in working capital Effective income tax rate, % = Income tax expense Definitions for tax figures Profit before income tax Comparable effective income tax rate, % = Income tax expense - effects from tax rate changes and major one time income tax effects Profit before income tax decreased by profits from associated companies and joint ventures as well as tax exempt capital gains or losses Weighted average applicable income tax rate = Sum of the proportionately weighted share of profits before taxes of each group operating country multiplied with an applicable nominal tax rate of the respective countries. x 100 x 100 Other key figures Funds from operations (FFO) Capital expenditure 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 investments improve 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. Gross investments in shares Investments in subsidiary shares, shares in associated companies and other investments. Investments in subsidiary shares are net of cash and grossed with interest-bearing liabilities in the acquired company. x 100 x 100 x 100 Return on shareholders’ equity (ROE), % Profit for the year Total equity average Gearing, % Interest-bearing net debt Total equity Equity-to-assets ratio, % Total equity including non-controlling interests Total assets Interest coverage Operating profit Interest coverage including capitalised borrowing costs Net interest expenses Operating profit Net interest expenses - capitalised borrowing costs Average number of employees Based on monthly average for the whole period Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 128 Parent company financial statements, Finnish GAAP (FAS) Income statement EUR million Sales Other income Employee costs Depreciation, amortisation and write-downs Other expenses Operating profit Financial income and expenses Profit before appropriations Group contributions 1) Profit before income tax Income tax expense Profit for the period 1) Taxable profits transferred from Finnish subsidiaries. Balance sheet EUR million ASSETS Non-current assets Intangible assets Property, plant and equipment Shares in Group companies Participations in associated companies Interest-bearing receivables from Group companies Interest-bearing receivables from associated companies Other non-current assets Derivative financial instruments Deferred tax assets Total non-current assets Current assets Other current receivables from Group companies Other current receivables from associated companies Derivative financial instruments Note 2 3 4 8 6 7 2018 82 8 -36 -8 -78 -33 751 719 85 803 -5 798 2017 73 6 -32 -6 -79 -38 823 785 157 943 -10 933 Note 31 Dec 2018 31 Dec 2017 8 8 8 8 8 8 8 13, 14 9 9 13, 14 23 10 16,725 0 2,954 1 0 157 1 19,870 99 0 167 10 21 16,725 2 212 15 0 242 0 17,226 173 0 132 EUR million Other current receivables Deposits and securities (maturity over three months) Cash and cash equivalents Liquid funds Total current assets Total assets EQUITY Shareholders’ equity Share capital Share premium Hedging reserve Retained earnings Profit for the period Total shareholders’ equity Note 9 10 31 Dec 2018 10 27 132 159 435 20,305 31 Dec 2017 14 714 2,792 3,506 3,825 21,052 3,046 2,822 -11 4,205 798 10,859 3,046 2,822 -11 4,249 933 11,038 Provisions for liabilities and charges 0 0 LIABILITIES Non-current liabilities External interest-bearing liabilities Interest-bearing liabilities to Group companies Interest-bearing liabilities to associated companies Derivative financial instruments 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 Derivative financial instruments Trade and other current payables Total current liabilities Total liabilities Total equity and liabilities 11, 13, 14 13, 14 11 12 12 13, 14 12 4,386 3,400 293 51 35 8,165 1,074 13 2 103 88 1,281 9,446 20,305 3,448 3,290 285 94 44 7,160 657 1,991 4 102 100 2,854 10,014 21,052 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 129 EUR million Cash flow from financing activities Proceeds from long-term liabilities Payment of long-term liabilities Change in cash pool 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 2018 1,762 -530 110 -1,810 -977 -1,444 2017 35 -482 967 -2,038 -977 -2,495 -3,347 -1,429 3,506 159 4,935 3,506 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 (EBITDA) Non-cash flow items Interest and other financial income Interest and other financial expenses paid Dividend income Group contribution received Realised foreign exchange gains and losses Income taxes paid 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 other shares Capital returns Proceeds from sales of fixed assets Change in interest-bearing receivables and other non-current assets Net cash used in investing activities Cash flow before financing activities 2018 798 5 -85 -751 8 -24 0 18 -104 796 157 16 -6 853 9 -4 4 857 -16 0 0 0 0 -2,744 -2,760 -1,903 2017 933 10 -157 -823 6 -32 0 6 -101 944 145 -28 23 957 -12 12 0 957 -15 -380 0 - 0 504 109 1,066 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 130 Notes to the Parent Company Financial Statements, FAS 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 in Fortum Group� Accounting principles of financial derivatives, see Note 4 Financial risk management, Note 15 Financial assets and liabilities by categories and Note 16 Financial assets and liabilities by fair value hierarchy in the Consolidated financial statements� 1.4 Income taxes Income taxes presented in the income statement consist of accrued taxes for the financial year and tax adjustments for prior years� 1.5 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 possible impairments� Property, plant and equipment are depreciated using straight-line depreciation based on the expected useful life of the asset� The depreciation is based on the following expected useful lives: Buildings and structures Machinery and equipment Other intangible assets 15–40 years 3–15 years 5–10 years 1.7 Pension expenses Statutory pension obligations are covered through a compulsory pension insurance policy or Group’s own pension fund� Costs for pension fund are recorded in the income statement based on contributions paid pursuant to the Finnish pension laws and regulations� 1.8 Long-term incentive schemes Costs related to the Fortum long-term incentive plans are accrued over the earnings 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� 1.10 Presentation of the primary statements and notes Information presented in the notes is given separately for Fortum Group companies and for associated companies of the Group� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 131 2 Sales by market area EUR million Finland Other countries Total 3 Other income EUR million Rental and other income Total 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 thousand Compensation for the President and CEO Salaries and fringe benefits Performance bonuses 1) Share-based incentives 1) Pensions (statutory) Pensions (voluntary) Social security expenses Total 1) Based on estimated amounts. EUR thousand Compensation for the Board of Directors The compensation above is presented on accrual basis� Paid salaries and remunerations for the President and CEO Pekka Lundmark were EUR 1,594 thousand (2017: 1,405)� For the President and CEO Pekka Lundmark 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 STI or LTI programme, nor does Fortum have a pension plan that they can opt to take part in� The compensation of the board members is not tied to the sustainability performance of the Group� See Note 11 Employee benefits and Note 31 Pension obligations in the Consolidated financial statements� Average number of employees 5 Auditor’s fees EUR thousand Audit fees Audit related assignments Tax assignments Other assignments Total 2018 265 2018 364 58 0 0 422 2017 258 2017 295 64 0 81 440 Deloitte Oy is the appointed auditor until the next Annual General Meeting, to be held in 2019� 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� 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� Other assignments consist of advisory services� 2018 52 30 82 2018 8 8 2018 26 6 1 3 36 2017 46 27 73 2017 6 6 2017 25 5 1 1 32 2018 Pekka Lundmark, President and CEO 2017 Pekka Lundmark, President and CEO 1,048 228 297 250 252 36 2,112 2018 483 998 187 334 231 229 41 2,019 2017 492 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 132 6 Financial income and expenses EUR million Dividend income from group companies Dividend income from associated companies and other companies Interest and other financial income from group companies Write-downs of participations in group companies Write-downs of participations in associated companies Write-downs on loan receivables Interest and other financial income Exchange rate differences Changes in fair values of derivatives Interest and other financial expenses to group companies Interest and other financial expenses Total Interest income Interest expenses Interest costs - net 7 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 2018 796 0 16 0 -2 -17 0 37 1 -2 -78 751 17 -75 -58 2018 -12 17 5 5 0 0 5 2017 944 0 12 -35 -3 -1 0 22 -16 -1 -99 823 13 -81 -68 2017 -21 31 10 6 0 3 10 8 Non-current assets Intangible assets total EUR million Cost 1 January 2018 Additions Disposals Cost 31 December 2018 Accumulated depreciation 1 January 2018 Disposals Depreciation for the period Accumulated depreciation 31 December 2018 Carrying amount 31 December 2018 Carrying amount 31 December 2017 Property, plant and equipment EUR million Cost 1 January 2018 Additions and transfers between categories Disposals Cost 31 December 2018 Accumulated depreciation 1 January 2018 Disposals Depreciation for the period Accumulated depreciation 31 December 2018 Carrying amount 31 December 2018 Carrying amount 31 December 2017 Intangible assets total 39 20 11 48 30 -11 6 25 23 10 Total 27 5 18 14 6 -4 2 4 10 21 Buildings and structures 1 0 1 0 Machinery and equipment 7 5 3 10 1 -1 0 0 0 0 5 -3 2 4 5 2 Advances paid and construction in progress 18 14 4 0 0 4 18 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 133 Investments EUR million Cost 1 January 2018 Additions 1) Disposals Cost 31 December 2018 Accumulated write-downs 1 January 2018 Impairment charges Accumulated write- downs 31 December 2018 Carrying amount 31 December 2018 Carrying amount 31 December 2017 Shares in Group companies 17,847 Participation in associated companies 6 0 Receivables from Group companies 212 2,742 Receivables from associated companies 16 0 Other non-current assets 8 0 17,847 1,123 1,123 16,725 16,725 6 3 2 6 0 2 2,954 0 0 2,954 212 17 1 14 15 1 15 8 8 8 0 0 Total 18,089 2,742 0 20,831 1,135 17 1,152 19,680 16,954 1) Additions regarding shares comprise acquisitions of shares and capital contributions and reclassification between other non-current assets and shares in Group companies. 10 Changes in shareholders’ equity EUR million Total equity 31 December 2017 Cash dividend Change in hedging reserve Profit for the period Total equity 31 December 2018 Total equity 31 December 2016 Cash dividend Change in hedging reserve Profit for the period Total equity 31 December 2017 EUR million Distributable funds Retained earnings 31 December Hedging reserve Distributable funds 31 December Share capital 3,046 Share premium 2,822 Hedging reserve -11 3,046 2,822 3,046 2,822 3,046 2,822 1 -11 -23 11 -11 2018 5,002 -11 4,991 Retained earnings 5,182 -977 798 5,002 5,226 -977 933 5,182 Total 11,038 -977 1 798 10,859 11,072 -977 11 933 11,038 2017 5,182 -11 5,170 9 Other current receivables EUR million Other current receivables from group companies Trade receivables Group contribution and other receivables Accrued income and prepaid expenses Total Other current receivables from associated companies Accrued income and prepaid expenses Total Other current receivables Trade receivables Other receivables Accrued income and prepaid expenses Total 2018 10 85 5 99 0 0 0 0 10 10 2017 9 157 6 173 0 0 0 0 14 14 See Note 4.5 Liquidity and refinancing risk in the Consolidated financial statements� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 134 11 Interest-bearing liabilities EUR million External interest-bearing liabilities 1) 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 Other short-term interest-bearing debt Total short-term interest-bearing debt Total external interest-bearing debt Maturity of external interest-bearing liabilities 1) EUR million 2019 2020 2021 2022 2023 2024 and later Total 2018 1,746 1,775 865 4,386 750 42 283 1,074 5,460 2017 2,521 82 844 3,448 422 122 114 657 4,105 2018 1,074 27 2,261 1,039 98 962 5,460 See Note 4.5 Liquidity and refinancing risk and Note 27 Interest-bearing liabilities in the Consolidated financial statements� EUR million External interest-bearing liabilities due after five years 1) Bonds Other long-term liabilities Total EUR million Other interest-bearing liabilities due after five years Interest-bearing liabilities to associated companies Total 1) Does not include liabilities to group and associated companies. 2018 97 865 962 2018 293 293 2017 198 844 1,042 2017 285 285 Non-discounted cash flows of interest-bearing liabilities and their maturities, see Note 13 Financial derivatives� 12 Trade and other payables EUR million Trade and other payables to group companies Trade payables Deposits from group companies and other liabities 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 Financial derivatives 2018 3 10 0 13 2 2 11 5 73 88 Interest rate and currency derivatives by instrument 2018 EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Total Of which long-term Short-term Under 1 year 0 1,515 383 10,420 Notional amount Remaining lifetimes 1–5 years Over 5 years Fair value Total Positive Negative 786 2,242 265 3,293 0 225 225 9,309 3,982 648 13,938 99 159 66 324 157 167 83 70 0 154 51 103 2017 3 1,987 0 1,991 4 4 21 2 76 100 Net 15 88 66 170 106 64 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 135 Interest rate and currency derivatives by instrument 2017 EUR million Forward foreign exchange contracts Interest rate swaps Interest rate and currency swaps Total Of which long-term Short-term Notional amount Remaining lifetimes Under 1 year 7,790 305 311 8,406 1–5 years 517 3,421 580 4,518 Over 5 years 102 102 Total 8,307 3,827 892 13,025 Fair value Positive Negative 104 90 3 196 94 102 77 205 92 373 242 132 Net -27 115 89 177 148 29 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� EUR million Interest-bearing liabilities Interest rate and currency derivatives liabilities Interest rate and currency derivatives receivables Total 2018 2017 Under 1 year 1,192 1–5 years 3,582 Over 5 years 1,437 Total 6,211 Under 1 year 2,752 1–5 years 2,613 Over 5 years 1,509 Total 6,875 8,946 1,159 16 10,121 8,132 1,256 4 9,392 -9,037 1,101 -1,203 3,538 -21 -10,260 6,072 1,433 -8,191 2,693 -1,341 2,529 -1 1,511 -9,534 6,733 Interest-bearing liabilities include loans from the State Nuclear Waste Management Fund and Teollisuuden Voima Oyj of EUR 1,158 million (2017: 1,129)� These loans are renewed yearly and the related interest payments are calculated for ten years in the table above� 14 Derivatives and 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� For further information look accounting principles in Fortum consolidated accounts Note 16 Financial assets and liabilities by fair value hierarchy� Derivatives in financial assets EUR million In non-current assets Derivative financial instruments Interest rate and currency derivatives Hedge accounting Non-hedge accounting In current assets Derivative financial instruments Interest rate and currency derivatives Hedge accounting Non-hedge accounting Total Level 1 Level 2 Level 3 Total 2018 2017 2018 2017 2018 2017 2018 2017 149 8 154 87 149 8 154 87 - - 21 146 324 88 44 373 - - 21 146 324 88 44 373 Derivatives and liabilities at fair value in financial liabilities EUR million In non-current liabilities Interest-bearing liabilities 1) Derivative financial instruments Interest rate and currency derivatives Hedge accounting Non-hedge accounting In current liabilities Derivative financial instruments Interest rate and currency derivatives Hedge accounting Non-hedge accounting Total Level 1 Level 2 Level 3 Total 2018 2017 2018 2017 2018 2017 2018 2017 930 1,037 930 1,037 43 8 47 47 43 8 47 47 5 98 1,083 14 88 1,233 - - 5 98 1,083 14 88 1,233 - - 1) Fair valued part of bond in the fair value hedge relationship. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 136 Net fair value amount of interest rate and currency derivatives is EUR 170 million (2017: 177), including assets EUR 324 million (2017: 373) and liabilities EUR 154 million (2017: 196)� Fortum Corporation has cash collaterals based on Credit Support Annex agreements with some counterparties� At the end of December 2018 Fortum Corporation had received EUR 75 million (2017: 113) from Credit Support Annex agreements� The received cash has been booked as a short-term interest-bearing liability� 15 Contingent liabilities EUR million On own behalf Other contingent liabilities On behalf of group companies Guarantees On behalf of associated companies Guarantees on behalf of Swedish associated companies Contingent liabilities total Operating leases EUR million Operating lease commitments Due within a year Due after one year and within five years Due after 5 years Total 2018 2 113 532 647 2018 8 28 14 49 2017 2 221 548 771 2017 7 28 18 54 16 Related party transactions See Note 38 Related party transactions in the Consolidated financial statements� Investments in group companies, associated companies and other holdings No. of shares units Holding % Investments in group companies Fortum Waste Solutions Oy Fortum Asiakaspalvelu Oy Fortum Heat and Gas Oy Fortum Markets Oy Fortum Norm Oy Fortum Power and Heat Oy Fortum Real Estate Oy Fortum Project Finance N.V. Fortum Holding B.V. Fortum India Private Ltd Fortum Finance Ireland Designated Activity Company Fortum Sweden AB Investments in associated companies AW-Energy Oy Wello Oy Other holdings Clic Innovation Oy East Office of Finnish Industries Oy Prototype Carbon Fund Finland Finland Finland Finland Finland Finland Finland Belgium The Netherlands India Ireland Sweden Finland Finland Finland Finland USA 3,520,800 10,010 2,000,000 24,039 250 91,197,543 2,000,000 727,820 61,062 1 25,000 1,000 806 1,100,00 100 1 N/A 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.99 100.00 0.10 100.00 100.00 13.60 18.60 3.80 5.88 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 137 Proposal for the use of the profit shown on the balance sheet The distributable funds of Fortum Corporation as at 31 December 2018 amounted to EUR 4,991,388,741�37 including the profit of the financial period 2018 of EUR 797,840,404�43� The company’s liquidity is good and the dividend proposed by the Board of Directors will not compromise the company’s liquidity� Based on the number of registered shares as at 31 January 2019 the total amount of dividend would be EUR 977,123,911�50� The Board of Directors proposes, that the remaining part of the distributable funds be retained in the shareholders’ equity� The Board of Directors proposes to the Annual General Meeting that a dividend of EUR 1�10 per share be paid for 2018� Signatures for the operating and financial review and financial statements Espoo, 31 January 2019 Matti Lievonen Klaus-Dieter Maubach Heinz-Werner Binzel Eva Hamilton Kim Ignatius Essimari Kairisto Anja McAlister Veli-Matti Reinikkala Pekka Lundmark President and CEO Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 138 Auditor’s report To the Annual General Meeting of Fortum Oyj Report on the Audit of Financial Statements Opinion We have audited the financial statements of Fortum Oyj (business identity code 1463611-4) for the year ended 31 December, 2018� The financial statements comprise the consolidated balance sheet, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in total equity, consolidated cash flow statement and notes to the consolidated financial statements, including a summary of significant accounting policies, as well as the parent company’s balance sheet, income statement, cash flow statement and notes to the financial statements� In our opinion • the consolidated financial statements give a true and fair view of the group’s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, • the financial statements give a true and fair view of the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements� Our opinion is consistent with the additional report submitted to the Audit Committee� Basis for opinion We conducted our audit in accordance with good auditing practice in Finland� Our responsibilities under good auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report� We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements� In our best knowledge and understanding, the non-audit services that we have provided to the parent company and group companies are in compliance with laws and regulations applicable in Finland regarding these services, and we have not provided any prohibited non-audit services referred to in Article 5(1) of regulation (EU) 537/2014� The non-audit services that we have provided have been disclosed in Note 9 to the consolidated financial statements We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion� Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period� These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters� We have also addressed the risk of management override of internal controls� This includes consideration of whether there was evidence of management bias that represented a risk of material misstatement due to fraud� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 139 Key audit matter Uniper Acquisition Refer to Notes 3 and 19. • On 26 June 2018, Fortum closed the Uniper SE (Uniper) offer and became the company’s largest shareholder. Fortum holds 49.99% of the shares as of 31 December 2018. • Fortum consolidates Uniper as an associated company from 30 June 2018. The total acquisition cost approximately EUR 4.0 billion, is reported in the ‘Participations in associated companies and joint ventures’. • As a listed company, Uniper publishes its interim reports later than Fortum, Fortum’s share of Uniper’s results will be accounted for with a timelag of one quarter with potential adjustments. Fortum’s financial statements 2018 includes Fortum’s share of Uniper’s third quarter result. • Purchase price allocation is still ongoing and it will be completed within the oneyear window from the acquisition date according to IFRS. • The assessment of the nature of interest in investee as well as the classification of joint arrangements requires management judgement. Due to the size, the Uniper acquisition may have significant effect on Fortum´s financial reporting. How our audit addressed the key audit matter • We have reviewed the relevant agreements and minutes of the board of directors to recognize the material terms affecting the accounting treatment in the financial statements. • We have assessed management´s approach according to which the acquisition has been accounted in the financial statements as well as methods applied in making the significant judgements relating to the acquisition in line with IFRS. • We have challenged the management judgement relating to the classification of the acquisition as joint arrangements and assessed the classification, the reporting of the share of profit/loss of associates and joint ventures as well as the accounting treatment of the ongoing purchase price allocation in line with IFRS. • We assessed the adequacy of related disclosures in the financial statements. Key audit matter Valuation of fixed assets and goodwill Refer to Notes 2, 17 and 18. • The consolidated balance sheet includes property, plant and equipment amounting to EUR 9,981 million and goodwill amounting to EUR 588 million. • The main assumptions used in the valuation of energy production property, plant and equipment and goodwill relate to the estimated future operating cash flows and the discount rates. • In acquisition the assumptions relates to determining the fair values and remaining useful lives of acquired intangible and tangible assets. • The potential indicators for impairment are among other things changes in electricity and fuel prices, regulatory/ political changes relating to energy taxes and price regulations. • The assumptions used in the valuation of the balances in question require management judgment. How our audit addressed the key audit matter • We have evaluated the process how management has assessed the indicators for potential impairment. We have performed audit procedures on impairment models relating to material cash generating units. • We obtained entity’s impairment testing documentation for goodwill and energy production assets when tested and evaluated the rationale of key assumptions applied by management, including commodity price forecasts, profit and cash flow forecasts, terminal values, foreign exchange rates and the selection of discount rates. • We have compared, that the forecasts used in the impairment testing calculations are based on long term forecast approved by management. • We challenged management’s assumptions and judgments with reference to historical data and, where applicable, external benchmarks. • This matter is a significant risk of material misstatement referred to in EU Regulation No 537/241, point (c) of Article 10(2). • We assessed the models used in the impairment testing and carried out our testing for the sensitivity calculations. • We assessed the adequacy of related disclosures in the financial statements. Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 140 Key audit matter Fair value measurement of derivatives and hedge accounting Refer to Notes 4, 7, 8, 15 and 16. • In Fortum’s consolidated financial statements total derivative assets amounts to EUR 555 million and total derivative liabilities amounts to EUR 1,191 million. The net effect of changes in fair values of derivatives hedging future cash flow amounts to EUR 98 million in items affecting comparability in the consolidated income statement and the cash flow hedges in other equity components amount to EUR -638 million. • The fair value and changes in fair values of derivative financial instruments may have significant impacts on Fortum´s financial statements. Fortum’s business is exposed to fluctuations in prices and volume of commodities used in the production and sales of energy products. The main exposure is toward energy prices. Electricity price risk is hedged by entering into electricity derivative contracts. Fortum uses derivative instruments to reduce the effect of electricity price volatility. Key audit matter Nuclear related assets and liabilities Refer to Notes 2 and 29. • Nuclear related assets and liabilities in consolidated balance sheet amount to EUR 858 million. • Fortum’s nuclear related provisions and the related part of the Finnish State Nuclear Waste Management Fund are both presented separately as disclosed in note 29. • Fortum’s share in the Finnish State Nuclear Waste Management Fund is accounted for according to IFRIC 5 which states that the fund assets are measured at the lower of fair value or the value of the related liabilities. How our audit addressed the key audit matter • Our audit procedures included an assessment of internal controls over the hedge accounting documentation and effectiveness testing, measurement of fair value measures, and evaluating the methodologies, inputs, judgments made and assumptions used by management in determining fair values. • For Fortum’s fair valuation models, we evaluated rationale of the models and accounting treatment applied. We have compared the assumptions used by management in valuation against externally available market data. • We have assessed the existence and completeness of outstanding derivative contracts as of 31 December 2018 by requesting confirmations from the counterparties. • We have assessed that financial instruments included in hedge relationships are accounted for in accordance with IFRS 9. • We have assessed the adequacy of the presentation for derivative financial instruments and hedge accounting applied in the financial statements. How our audit addressed the key audit matter • We have assessed Fortum’s accounting manual and principles for Nuclear Decommissioning Accounting, whether they are in line with IFRS accounting principles. • We have assessed the assumptions and judgments made and adopted by the management in the accounting for the nuclear waste provisions and share in state nuclear waste management fund have been based on current legislation and decisions set by Finnish State Nuclear Waste Management Fund. • Due to complexity and materiality, the accounting • We assessed the adequacy of related disclosures in the treatment for nuclear decommissioning is complex and requires application of special accounting practice and management judgment when forming estimates for the basis of accounting such as technical plans, timing, cost estimates and discount rate. financial statements. Responsibilities of the Board of Directors and the President and CEO for the financial statements 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, and of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements� The Board of Directors and the President and CEO are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error� In preparing the financial statements, the Board of Directors and the President and CEO are responsible for assessing the parent company’s and the group’s ability to continue as going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting� The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or cease operations, or there is no realistic alternative but to do so� Auditor’s responsibilities in the audit of financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion� Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists� Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements� As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional skepticism throughout the audit� We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion� The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control� • Obtain an understanding of internal control relevant to the audit 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 parent company’s or the group’s internal control� • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management� • Conclude on the appropriateness of the Board of Directors’ and the President and CEO use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 141 related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability to continue as a going concern� If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion� Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report� However, future events or conditions may cause the parent or the group to cease to continue as a going concern� • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view� • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements� We are responsible for the direction, supervision and performance of the group audit� We remain solely responsible for our audit opinion� We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit� We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards� From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters� We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication� Other Reporting Requirements does not include the financial statements and our auditor’s report thereon� We have obtained the Operating and Financial Review prior to the date of this auditor’s report, and the Financials is expected to be made available to us after that date� Our opinion on the financial statements does not cover the other information� In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated� With respect to Operating and Financial Review, our responsibility also includes considering whether the Operating and Financial Review has been prepared in accordance with the applicable laws and regulations� In our opinion, the information in the Operating and Financial Review is consistent with the information in the financial statements and the Operating and Financial Review has been prepared in accordance with the applicable laws and regulations� If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact� We have nothing to report in this regard� Other opinions We support that the financial statements should be adopted� The proposal by the Board of Directors regarding the use of the profit shown on the balance sheet 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, 31 January 2019 Deloitte Oy Audit Firm Information on our audit engagement We were first appointed as auditors by the Annual General Meeting on 16�3�2006, and our appointment represents a total period of uninterrupted engagement of 12 years� Reeta Virolainen Authorised Public Accountant (KHT) Other information The Board of Directors and the President and CEO are responsible for the other information� The other information comprises the Operational and Financial Review and the information included in the Financials, but Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 142 142 Financial key figures Financial key figures Share key figures Segment key figures Operational key figures Financial key figures Comparability of information presented in tables and graphs Fortum announced the sale of Swedish Distribution business in March 2015� After the divestment of the Swedish Distribution business Fortum has no electricity distribution operations and therefore Distribution segment was treated as discontinued operations in 2015, with restatement of year 2014, according to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 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 Stockholm Exergi AB (publ) (previously AB Fortum Värme Holding samägt med Stockholms stad) in the consolidated financial statements� From 1 January 2014 onwards Stockholm Exergi is treated as a joint venture and thus consolidated with equity method� Before the change the company was consolidated as a subsidiary with 50% minority interest� Fortum has adopted the IFRS 9 and IFRS 15 standards from 1 January 2018 onwards� Fortum has applied the transition relief for not restating the comparative figures from 2017� See additional information in Note 1 Accounting policies� For information of Alternative Performance Measures used by Fortum, see Definitions of key figures and Note 1 Accounting policies� EUR million or as indicated Income statement Sales total Fortum Sales continuing operations EBITDA total Fortum 1) EBITDA continuing operations Comparable EBITDA total Fortum Comparable EBITDA continuing operations Operating profit total Fortum - of sales % Operating profit continuing operations - of sales % Comparable operating profit total Fortum Comparable operating profit continuing operations Share of profit/loss of associates and joint ventures total Fortum Profit before income tax total Fortum - of sales % Profit before income tax continuing operations - of sales % Profit for the period total Fortum - of which attributable to owners of the parent Profit for the period continuing operations - of which attributable to owners of the parent 2009 5,435 2,292 2,398 1,782 32.8 2010 6,296 2,271 2,396 1,708 27.1 2011 6,161 3,008 2,374 2,402 39.0 2012 6,159 2,538 2,416 1,874 30.4 2013 5,309 2,129 1,975 1,508 28.4 1,888 1,833 1,802 1,752 1,403 21 1,636 30.1 1,351 1,312 62 1,615 25.7 1,354 1,300 91 2,228 36.2 1,862 1,769 23 1,586 25.8 1,512 1,416 178 1,398 26.3 1,212 1,204 2014 4,751 4,088 3,954 1,673 1,873 1,457 3,428 72.2 1,296 31.7 1,351 1,085 149 3,360 70.7 1,232 30.1 3,161 3,154 1,089 1,081 2015 3,702 3,459 4,640 196 1,265 1,102 4,245 114.7 -150 -4.3 922 808 20 4,088 110.4 -305 -8.8 4,142 4,138 -228 -231 2016 3,632 3,632 1,006 1,006 1,015 1,015 633 17.4 633 17.4 644 644 131 595 16.4 595 16.4 504 496 504 496 2017 4,520 4,520 1,623 1,623 1,275 1,275 1,158 25.6 1,158 25.6 811 811 148 1,111 24.6 1,111 24.6 882 866 882 866 2018 5,242 5,242 1,674 1,674 1,523 1,523 1,138 21.7 1,138 21.7 987 987 38 1,040 19.8 1,040 19.8 858 843 858 843 Change 18/17 % 16 16 3 3 19 19 -2 -2 22 22 -74 -6 -6 -3 -3 -3 -3 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 143 143 Financial key figures Financial key figures Share key figures Segment key figures Operational key figures EUR million or as indicated Financial position and cash flow Capital employed total Fortum Interest-bearing net debt 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 total Fortum Capital expenditure continuing operations Net cash from operating activities total Fortum Net cash from operating activities continuing operations Key ratios Return on capital employed total Fortum, % Return on shareholders’ equity total Fortum, % Interest coverage total Fortum Interest coverage including capitalised borrowing costs total Fortum Funds from operations/interest-bearing net debt total Fortum, % Funds from operations/interest-bearing net debt without Värme financing total Fortum, % Gearing, % Comparable net debt/EBITDA total Fortum Comparable net debt/EBITDA without Värme financing Equity-to-assets ratio, % Other data Dividends Research and development expenditure - of sales % Average number of employees total Fortum Average number of employees continuing operations 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 15,350 5,969 16,124 6,826 17,931 7,023 19,420 7,814 929 17.1 862 2,264 12.1 16.0 12.4 10.3 37.6 70 2.5 43 1,249 19.8 1,222 1,437 11.6 15.7 13.7 10.0 20.5 78 2.8 40 1,482 24.1 1,408 1,613 14.8 19.7 10.5 8.5 21.5 69 3.0 44 1,574 25.6 1,558 1,382 10.2 14.6 7.6 5.7 19.9 73 3.2 43 888 30 0.5 13,278 888 30 0.5 11,156 888 38 0.6 11,010 888 41 0.7 10,600 19,183 7,793 6,658 1,020 19.2 1,005 1,548 9.0 12.0 6.7 5.3 18.8 22.1 77 3.9 3.4 43 977 49 0.9 9,532 17,918 4,217 3,664 843 17.7 695 774 626 1,762 1,406 19.5 30.0 19.9 15.7 42.9 49.3 39 2.3 2.0 51 1,155 41 1.0 8,821 8,329 19,870 -2,195 N/A 669 18.1 625 626 582 1,381 1,228 22.7 33.4 27.6 21.5 18,649 -48 N/A 1,435 39.5 1,435 591 591 621 621 4.0 3.7 4.6 4.1 -59.7 -1,503.4 N/A -16 -1.7 N/A 61 977 47 1.4 8,193 8,009 N/A 0 0.0 N/A 62 977 52 1.4 7,994 7,994 18,172 988 N/A 1,815 40.2 1,815 690 690 993 993 7.1 6.6 8.7 7.8 83.9 N/A 7 0.8 N/A 61 977 53 1.2 8,507 8,507 18,170 5,509 N/A 4,672 89.1 4,672 584 584 804 804 6.7 6.8 10.0 9.2 26.8 N/A 46 3.6 N/A 54 977 2) 56 1.1 8,767 8,767 Change 18/17 % 0 -458 157 157 -15 -15 -19 -19 0 6 1) EBITDA is defined as Operating profit + Depreciation and amortisation. 2) Board of Directors’ proposal for the planned Annual General Meeting on 26 March 2019. See Definitions of key figures� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 144 144 Financial key figures Share key figures Share key figures Segment key figures Operational key figures Share key figures EUR million or as indicated Data per share 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 Extra dividend Payout ratio, % Dividend yield, % Price/earnings ratio (P/E) Share prices At the end of the period Average Lowest Highest Other data Market capitalisation at the end of the period, EUR million Trading volumes 2) 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 Change 18/17 % -3 -3 -3 -3 -19 -19 -9 0 2009 1.48 - 1.48 - 2.55 9.04 1.00 67.6 5.3 12.8 18.97 15.91 12.60 19.20 2010 1.46 - 1.46 - 1.62 9.24 1.00 68.5 4.4 15.4 22.53 19.05 17.18 22.69 2011 1.99 - 1.99 - 1.82 10.84 1.00 50.3 6.1 8.3 16.49 19.77 15.53 24.09 2012 1.59 - 1.59 - 1.56 11.30 1.00 62.9 7.1 8.9 14.15 15.66 12.81 19.36 2013 1.36 - 1.36 - 1.74 11.28 1.10 80.9 6.6 12.2 16.63 15.11 13.10 18.18 2014 3.55 1.22 2.33 3.55 1.22 2.33 1.98 1.38 12.23 1.10 0.20 36.6 7.2 5.1 17.97 17.89 15.13 20.32 2015 4.66 -0.26 4.92 4.66 -0.26 4.92 1.55 1.38 15.53 1.10 - 23.6 7.9 3.0 13.92 16.29 12.92 21.59 2016 0.56 0.56 - 0.56 0.56 - 0.70 0.70 15.15 1.10 - 196.4 7.5 26.1 14.57 13.56 10.99 15.74 2017 0.98 0.98 - 0.98 0.98 - 1.12 1.12 14.69 1.10 - 112.2 6.7 16.8 16.50 15.28 12.69 18.94 2018 0.95 0.95 - 0.95 0.95 - 0.91 0.91 13.33 1.10 1) 115.8 1) 5.8 1) 20.1 19.10 19.10 16.43 22.91 16,852 20,015 14,649 12,570 14,774 15,964 12,366 12,944 14,658 16,966 580,899 65.4 888,367 N/A 888,230 888,230 493,375 55.5 888,367 N/A 888,367 888,367 524,858 59.1 888,367 N/A 888,367 888,367 494,765 55.7 888,367 N/A 888,367 888,367 465,004 52.3 888,367 N/A 888,367 888,367 454,796 51.2 888,367 N/A 888,367 888,367 541,858 61.0 888,367 N/A 888,367 888,367 611,572 68.8 888,367 N/A 888,367 888,367 582,873 65.6 888,367 N/A 888,367 888,367 474,705 53.4 888,294 N/A 888,312 888,312 1) Board of Directors’ proposal for the Annual General Meeting on 26 March 2019. 2) 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, Cboe and Turquoise, and on the OTC market as well. In 2018, approximately 68% (2017: 61%) of Fortum’s shares were traded on markets other than the Nasdaq Helsinki Ltd. See Definitions of key figures� Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 145 145 Financial key figures Share key figures Segment key figures Segment key figures Operational key figures Segment key figures 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 were combined into one segment: Heat, Electricity Sales and Solutions� 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 Stockholm Exergi AB (publ) (previously AB Fortum Värme Holding samägt med Stockholms stad), that is treated as a joint venture and thus consolidated with equity method from 1 January 2014 onwards� Before the change Stockholm Exergi was consolidated as a subsidiary with 50% minority interest� Fortum announced the sale of Swedish Distribution business in March 2015� After the divestment of the Swedish Distribution business Fortum does not have any distribution operations and therefore Distribution segment has been treated as discontinued operations in 2015 with restatement of year 2014, according to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations� Fortum reorganised its operating structure as of 1 April 2016� The business divisions are: Generation (mainly the former Power and Technology); City Solutions (mainly the former Heat, Electricity Sales and Solutions) and Russia� Because of the minor financial impact, the comparable segment information for 2015 was not restated� As of 1 March 2017, the City Solutions division was divided into two divisions: City Solutions and Consumer Solutions, both reported as separate reporting segments� Fortum has restated its 2016 comparison segment reporting figures in accordance with the new organisation structure� See more information in Note 6 Segment reporting� Fortum has adopted the IFRS 9 and IFRS 15 standards from 1 January 2018 onwards� Fortum has applied the transition relief for not restating the comparative figures from 2017� See additional information in Note 1 Accounting policies� Sales by segment, EUR million Generation - of which internal City Solutions - of which internal Heat - of which internal Consumer Solutions - of which internal Electricity Sales - of which internal Russia - of which internal Other Operations - of which internal Distribution - of which internal Eliminations and Netting of Nord Pool transactions Total for continuing operations Discontinued operations Eliminations 1) Total 1) Sales to and from discontinued operations. 2009 2,531 254 1,399 23 1,449 67 632 - 71 -5 800 13 -1,447 5,435 2010 2,702 -281 1,770 -8 1,798 158 804 - 51 169 963 18 -1,792 6,296 2011 2,481 -24 1,737 8 900 95 920 - 108 115 973 15 -958 6,161 2012 2,415 296 1,628 18 722 55 1,030 - 137 -66 1,070 37 -843 6,159 2013 2,252 69 1,516 87 1,119 - 63 54 1,064 19 -706 5,309 2014 2,156 85 1,332 34 1,055 0 58 44 -513 4,088 751 -89 4,751 2015 1,722 83 1,187 -13 893 0 114 75 -458 3,459 274 -31 3,702 2016 1,657 15 782 1 668 2 896 0 92 61 -463 3,632 2017 1,677 15 1,015 19 1,097 3 1,101 0 102 67 -470 4,520 2018 1,837 2 1,094 37 1,759 11 1,069 0 129 80 -646 5,242 3,632 4,520 5,242 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 146 146 Financial key figures Share key figures Segment key figures Segment key figures Operational key figures Comparable operating profit by segment, EUR million Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Other Operations Distribution Comparable operating profit Impairment charges Capital gains and other Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment Other items affecting comparability 1) Operating profit, continuing operations Discontinued operations Operating profit 2009 1,454 231 22 -20 -61 262 1,888 29 -135 1,782 2010 1,298 275 11 8 -66 307 1,833 93 -218 1,708 1) Other items affecting comparability comprise Changes in fair values of derivatives hedging future cash flow and Nuclear fund adjustment. Comparable EBITDA by segment, EUR million Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Other Operations Distribution Total for continuing operations Discontinued operations Total 2009 1,547 393 28 55 -51 426 2,398 2010 1,398 462 13 94 -56 485 2,396 2011 1,201 278 27 74 -73 295 1,802 284 316 2,402 2011 1,310 471 29 148 -66 482 2,374 2012 1,146 271 39 68 -92 320 1,752 155 -33 1,874 2012 1,260 481 40 189 -83 529 2,416 2013 859 109 156 -54 332 1,403 61 45 1,508 2013 1,007 211 258 -49 548 1,975 2014 877 104 161 -57 1,085 305 -94 1,296 2,132 3,428 2014 998 204 304 -49 1,457 416 1,873 2015 561 108 201 -63 808 -918 22 -62 -150 4,395 4,245 2015 680 209 267 -53 1,102 163 1,265 2016 417 64 48 191 -77 644 27 38 -65 -11 633 633 2016 527 186 55 312 -64 1,015 1,015 2017 478 98 41 296 -102 811 6 326 14 1 1,158 1,158 2016 603 262 57 438 -83 1,275 1,275 2018 631 113 53 271 -79 987 -4 102 98 -45 1,138 1,138 2018 762 284 110 417 -50 1,523 1,523 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 147 147 Financial key figures Share key figures Segment key figures Segment key figures Operational key figures Depreciation and amortisation, EUR million Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Other Operations Distribution Total for continuing operations Discontinued operations Total Share of profit of associates and joint ventures by segment, EUR million Generation City Solutions Heat Electricity Sales Russia Other Operations Distribution Total for continuing operations Discontinued operations Total Capital expenditure by segment, EUR million Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Other Operations Distribution Total for continuing operations Discontinued operations 2009 93 162 6 75 10 164 510 2009 -35 30 0 20 -4 10 21 2009 96 358 1 215 4 188 862 2010 100 187 2 86 10 178 563 2010 -25 31 1 8 28 19 62 2010 97 304 0 599 9 213 1,222 2011 109 193 2 108 7 187 606 2011 3 19 2 30 23 14 91 2011 131 297 5 670 16 289 1,408 2012 114 210 1 121 9 209 664 2012 -12 20 0 27 -20 8 23 2012 190 464 1 568 11 324 1,558 2013 148 102 150 5 216 621 2013 4 91 46 32 4 178 2013 179 123 435 12 255 1,005 2014 121 100 147 8 377 150 526 2014 -14 88 35 37 146 3 149 2014 197 86 340 3 626 147 2015 118 101 117 10 346 50 395 2015 -111 59 32 40 20 0 20 2015 187 105 285 6 582 44 2016 110 121 7 123 13 373 373 2016 -34 76 38 51 131 131 2016 196 109 3 201 83 591 2017 125 163 16 142 18 464 464 2017 -1 80 31 38 148 148 2017 174 170 7 152 187 690 2018 131 171 57 147 30 536 536 2018 -72 74 36 0 38 38 2018 186 190 47 54 108 584 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 148 148 Financial key figures Share key figures Segment key figures Segment key figures Operational key figures Total Gross investments in shares by segment, EUR million Generation City Solutions Heat Consumer Solutions Russia Other Operations Distribution Total for continuing operations Discontinued operations Total Gross divestments of shares by segment, EUR million Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Other Operations Distribution Total for continuing operations Discontinued operations Total Comparable net assets by segment, EUR million Generation City Solutions Consumer Solutions Russia Other Operations Total for continuing operations 2009 57 1 3 1 5 67 2009 10 1 - - 2 1 14 2010 25 1 - 1 0 27 2010 0 52 - 43 6 46 147 2011 17 32 24 1 - 74 2011 3 203 16 23 0 323 568 2012 - 10 - 6 - 16 2012 102 269 2 - 0 37 410 2013 2 11 0 2 0 15 2013 79 11 - - 52 142 774 2014 2 37 27 4 69 0 69 2014 67 446 0 2 515 2,681 3,196 2009 2010 2011 2012 2013 2014 626 2015 16 23 0 4 43 0 43 2015 0 27 0 - 27 6,369 6,395 2015 5,931 2,182 2,561 258 10,932 591 2016 7 698 117 0 22 844 844 2016 0 33 1 127 0 161 161 2016 5,815 2,873 154 3,284 514 12,641 690 2017 90 386 486 125 39 1,125 1,125 2017 0 0 55 0 687 742 742 2017 5,672 3,728 638 3,161 276 13,474 584 2018 8 32 0 63 3,985 4,088 4,088 2018 160 0 0 0 147 306 306 2018 6,295 3,743 648 2,789 4,264 17,739 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 149 149 Financial key figures Share key figures Segment key figures Segment key figures Operational key figures Fortum is disclosing Comparable net assets instead of Net assets from 2016 onwards� Net assets until 2015 are disclosed below� Net assets by segment, EUR million Generation City Solutions Heat Electricity Sales Russia Other Operations Distribution Total for continuing operations Net assets related to discontinued operations Total 1) Fortum is disclosing Comparable net assets instead of Net assets from 2016 onwards. Comparable return on net assets by segment, % Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Distribution 1) 1) Classified as discontinued operations from 2014 onwards. Return on net assets by segment, % Generation City Solutions Heat Electricity Sales Russia Distribution 2) 1) Fortum is disclosing Comparable net assets instead of Net assets from 2016 onwards. 2) Classified as discontinued operations from 2014 onwards. 2009 5,494 3,787 125 2,260 382 3,299 15,347 2009 26.4 7.6 18.6 0.0 8.6 2009 24.5 7.9 28.9 0.0 8.7 2010 5,806 4,182 210 2,817 29 3,683 16,727 2011 6,247 4,191 11 3,273 208 3,589 17,519 2010 22.3 7.7 9.3 0.7 9.3 2010 19.5 8.4 38.4 2.4 9.7 2011 19.9 7.4 33.5 3.5 8.6 2011 24.6 9.9 4.2 3.5 13.7 2012 6,389 4,286 51 3,848 158 3,889 18,621 2012 18.5 7.0 203.1 2.7 8.8 2012 18.7 8.8 152.3 3.0 9.1 2013 6,355 2,295 3,846 295 3,745 16,537 2013 13.8 8.7 5.2 8.8 2013 14.5 9.7 5.2 9.3 2014 6,001 2,112 2,597 496 11,206 2,615 13,820 2014 14.2 8.7 5.6 9.3 2014 13.6 19.1 5.6 73.6 2015 1) 5,913 2,170 2,561 291 10,934 10,934 2015 9.5 7.9 8.2 2015 1) -8.5 7.7 8.3 2016 6.9 5.9 44.3 8.0 2017 8.4 5.5 11.7 10.1 2018 11.2 5.0 7.8 10.3 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 150 150 Financial key figures Share key figures Segment key figures Segment key figures Operational key figures Average number of employees Generation City Solutions Heat Consumer Solutions Electricity Sales Russia Other Operations Distribution Total for continuing operations Discontinued operations Total 2009 2,068 2,652 629 6,170 593 1,166 13,278 2010 1,891 2,482 538 4,555 592 1,098 11,156 2011 1,873 2,682 510 4,436 607 902 11,010 2012 1,896 2,354 515 4,301 661 873 10,600 2013 1,900 2,051 4,245 550 786 9,532 2015 1,389 1,458 4,180 983 8,009 2016 1,064 1,529 877 3,814 711 7,994 2017 1,036 1,807 1,180 3,710 774 8,507 2018 1,087 1,940 1,473 3,378 888 8,767 2014 1,685 1,913 4,196 536 8,329 492 8,821 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 151 151 Financial key figures Share key figures Segment key figures Operational key figures Operational key figures Note: Operational key figures are unaudited 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 Stockholm Exergi AB (publ) (previously AB Fortum Värme Holding samägt med Stockholms stad) in the the consolidated financial statements� From 1 January 2014 onwards Stockholm Exergi is treated as a joint venture and thus consolidated with equity method� Before the change the company was consolidated as a subsidiary with 50% minority interest� Production Fortum’s total power and heat production in EU and Norway, TWh Power generation Heat production Fortum’s total power and heat production in Russia, TWh Power generation Heat production Fortum’s power generation by source, total in the Nordic area, TWh Hydro and wind power Nuclear power Thermal power Total Fortum’s power generation by source, total in the Nordic area, % Hydro and wind power Nuclear power Thermal power Total 2009 49.3 23.2 2009 16.0 25.6 2009 22.1 21.4 4.6 48.1 2009 46 44 10 100 2010 53.7 26.1 2010 16.1 26.0 2010 22.0 22.0 8.3 52.3 2010 42 42 16 100 2011 55.3 22.0 2011 17.4 25.4 2011 21.0 24.9 7.2 53.1 2011 40 47 13 100 2012 53.9 18.5 2012 19.2 24.8 2012 25.2 23.4 3.0 51.6 2012 49 45 6 100 2013 47.4 10.4 2013 20.0 24.2 2013 18.1 23.7 3.4 45.2 2013 40 52 8 100 2014 50.1 8.2 2014 23.3 26.4 2014 22.4 23.8 1.8 48.0 2014 46 50 4 100 2015 50.2 6.4 2015 25.7 25.8 2015 25.1 22.7 1.0 48.8 2015 51 47 2 100 2016 47.5 7.1 2016 25.5 20.7 2016 20.8 24.1 1.4 46.2 2016 45 52 3 100 2017 46.6 8.6 2017 26.3 20.0 2017 20.9 23.0 1.6 45.4 2017 46 51 3 100 2018 44.7 9.4 2018 29.6 20.4 2018 19.4 22.8 1.3 43.5 2018 45 52 3 100 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 152 152 Financial key figures Share key figures Segment key figures Operational key figures Power generation capacity by segment, MW Generation Heat City Solutions Russia Other Operations Total Heat production capacity by segment, MW Generation Heat City Solutions Russia Total Fortum’s power generation capacity by type and area, MW Hydropower Nuclear power Combined heat and power Condensing power Wind power Solar power Total Fortum’s heat production capacity by area, MW Heat 2009 9,709 1,446 2,785 2010 9,728 1,600 2,785 2011 9,752 1,670 3,404 2012 9,702 1,569 3,404 2013 9,475 793 4,250 2014 9,063 803 4,758 2015 8,046 743 4,903 13,940 14,113 14,826 14,675 14,518 14,624 13,692 2016 8,039 760 4,482 53 13,334 2017 7,862 775 4,794 292 13,722 2018 7,867 788 4,912 157 13,724 2009 250 10,284 13,796 24,330 2010 250 10,448 13,796 24,494 2011 250 10,375 14,107 24,732 2012 250 8,785 13,396 22,431 2013 250 4,317 13,466 18,033 2014 0 3,936 13,466 17,402 2015 2016 2017 2018 3,915 12,696 16,611 3,818 9,920 13,738 4,671 10,094 14,765 Finland Sweden Russia Poland Other Total 2018 1,548 1,485 452 376 0 0 3,860 Finland 2018 1,993 2017 1,547 1,480 452 376 0 0 3,854 2017 1,941 2018 3,124 1,334 9 0 75 0 4,542 Sweden 2018 35 2017 3,125 1,334 9 0 75 0 4,543 2017 0 0 4,760 0 0 35 4,794 2018 0 0 4,843 0 35 35 4,912 Russia 2017 35 2018 10,229 2017 10,094 2018 0 0 186 0 0 0 186 Poland 2018 782 2017 0 0 186 0 0 0 186 2017 786 2018 0 0 139 0 84 0 223 Other 2018 1,971 2017 0 0 128 0 32 185 345 2018 4,672 2,819 5,629 376 194 35 13,724 Total 2017 1,909 2018 15,009 2017 14,765 4,780 10,229 15,009 2017 4,672 2,814 5,534 376 107 220 13,722 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 153 153 Financial key figures Share key figures Segment key figures Operational key figures Sales Fortum’s total power and heat sales in EU and Norway, EUR million Power sales Heat sales Fortum’s total power and heat sales in Russia, EUR million Power sales Heat sales Fortum’s total power sales by area, TWh Finland Sweden Norway Russia Other countries Total Fortum’s total heat sales by area, TWh Finland Russia Sweden Poland Other countries Total Volume of distributed electricity in distribution networks, TWh Finland Sweden Norway Estonia Total 2009 2,802 1,095 2010 3,110 1,309 2011 2,868 1,278 2012 2,700 1,201 2013 2,462 538 2014 2,344 468 2015 1,921 423 2016 1,893 449 2017 2,244 524 2009 390 219 2009 26.1 26.9 19.5 3.2 75.7 2009 8.0 25.6 9.8 3.7 3.5 50.6 2009 9.4 14.0 2.3 0.2 25.9 2010 505 287 2010 30.7 28.3 18.7 3.2 80.9 2010 9.6 26.8 10.9 4.0 3.6 54.9 2010 10.0 15.2 2.5 0.2 27.9 2011 590 324 2011 24.6 29.4 20.2 3.6 77.8 2011 8.5 26.7 8.5 4.3 3.4 51.4 2011 9.5 14.2 2.3 0.1 26.1 2012 713 300 2012 21.6 30.1 23.3 3.8 78.8 2012 5.8 26.4 8.5 4.3 2.9 47.9 2012 9.8 14.4 2.4 0.0 26.6 2013 822 290 2013 23.4 23.3 25.6 4.3 76.6 2013 5.5 24.1 - 4.1 3.1 36.8 2013 9.5 14.1 2.5 - 26.1 2014 758 285 2014 21.6 28.2 26.5 3.8 80.1 2014 3.2 26.0 - 3.4 2.8 35.4 2014 2.8 13.7 1.1 - 17.6 2015 661 228 2015 22.3 29.8 29.4 2.8 84.3 2015 3.1 25.4 - 3.4 1.2 33.2 2015 - 6.4 - - 6.4 2016 691 199 2016 22.8 28.8 1.5 29.5 2.1 84.7 2016 3.6 20.7 0.1 3.6 1.4 29.4 2016 - - - - - 2017 837 258 2017 22.5 30.8 7.2 30.5 2.9 93.9 2017 3.9 19.8 0.3 3.7 2.2 29.9 2017 - - - - - 2018 2 922 615 2018 872 193 2018 23.1 29.7 15.3 34.1 1.8 104.0 2018 3.8 20.7 0.3 3.5 3.2 31.5 2018 - - - - - Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 154 154 Quarterly financial information Note: Quarterly financial information is unaudited� Selected data based on quarterly consolidated income statement EUR million IS Sales Comparable EBITDA IS Comparable operating profit IS Operating profit IS Share of profit/loss of associates and joint ventures IS Finance costs - net IS Profit before income tax IS Income tax expense IS Profit for the period IS Non-controlling interests IS Profit for the period, owners of the parent Q1/2017 1,232 423 313 389 59 -36 412 -72 340 -5 335 Q2/2017 937 219 109 66 35 -52 49 -118 -69 0 -70 Q3/2017 919 210 94 387 21 -58 351 4 355 2 357 Q4/2017 1,432 424 295 315 34 -49 300 -43 257 -12 244 2017 4,520 1,275 811 1,158 148 -195 1,111 -229 882 -16 866 Q1/2018 1,585 538 405 482 47 -36 493 -94 400 -16 384 Q2/2018 1,087 282 153 256 24 -39 241 -25 215 1 216 Q3/2018 971 230 96 91 12 -58 45 1 46 5 51 Q4/2018 1,599 473 333 309 -44 -4 261 -64 197 -5 192 2018 5,242 1,523 987 1,138 38 -136 1,040 -181 858 -15 843 Earnings per share for profit attributable to the equity owners of the company (EUR per share) Basic 0.38 -0.08 0.40 0.28 0.98 0.43 0.24 0.05 0.22 0.95 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 155 155 Quarterly sales by segment EUR million Generation 1) City Solutions 1) Consumer Solutions Russia Other Operations 1) Netting of Nord Pool transactions 2) Eliminations IS Total Q1/2017 474 290 242 349 24 -118 -29 1,232 Q2/2017 402 205 164 238 24 -73 -23 937 Q3/2017 367 179 238 200 25 -73 -17 919 Q4/2017 433 340 453 314 30 -103 -34 1,432 2017 1,677 1,015 1,097 1,101 102 -367 -103 4,520 1) Sales, both internal and external, includes effects from realised hedging contracts. Effect on sales can be negative or positive depending on the average contract price and realised spot price. 2) Sales and purchases with Nord Pool Spot is 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. Quarterly comparable operating profit by segments EUR million Generation City Solutions Consumer Solutions Russia Other Operations IS Comparable operating profit Impairment charges Capital gains and other Changes in fair values of derivatives hedging future cash flow Nuclear fund adjustment IS Operating profit Q1/2017 136 56 12 132 -24 313 0 1 74 2 389 Q2/2017 78 1 6 53 -28 109 0 1 -46 4 66 Q3/2017 104 -20 5 26 -21 94 0 317 -19 -5 387 Q4/2017 160 61 18 84 -28 295 6 8 5 1 315 2017 478 98 41 296 -102 811 6 326 14 1 1,158 The first and last quarters of the year are usually the strongest quarters for power and heat businesses� Q1/2018 497 375 547 336 32 -161 -41 1,585 Q1/2018 220 87 17 104 -23 405 0 26 54 -4 482 Q2/2018 425 187 326 228 33 -92 -20 1,087 Q2/2018 152 -21 11 37 -27 153 0 76 49 -22 256 Q3/2018 359 174 332 200 30 -105 -18 971 Q3/2018 70 -22 7 40 1 96 0 1 -8 2 91 Q4/2018 555 358 555 305 34 -157 -52 1,599 Q4/2018 189 68 17 89 -30 333 -4 -1 2 -21 309 2018 1,837 1,094 1,759 1,069 129 -516 -130 5,242 2018 631 113 53 271 -79 987 -4 102 98 -45 1,138 Operating and financial review Consolidated financial statements Notes Key figures Parent company financial statements Proposal for the use of the profit shown on the balance sheet Auditor’s report Key figures 2009–2018 Quarterly financial information Investor information 156 Investor information Fortum 2018 reporting entity comprises CEO’s Business Review, Financials, Corporate Governance Statement and Remuneration Statement, Tax Footprint as well as Sustainability� Annual General Meeting 2019 The Annual General Meeting 2019 of Fortum Corporation will be held on Tuesday, 26 March 2019, starting at 11:00 EET at Finlandia Hall, address: Mannerheimintie 13 e, Helsinki, Finland� The reception of shareholders who have registered for the meeting will commence at 9�30 EET� 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 for 2018, totalling approximately EUR 977 million based on the registered shares as of 31 January 2019� The possible dividend related dates planned for 2019 are: • the ex-dividend date 27 March 2019, • the record date for dividend payment 28 March 2019 and • the dividend payment date 4 April 2019� Financial information in 2019 Fortum will publish three interim reports in 2019: • January–March interim report on 26 April • January–June half year financial review on 19 July, and • January–September on 24 October� The reports are published at approximately 9:00 EET in Finnish and English, and are available on Fortum’s website at www.fortum.com/investors� Fortum’s management hosts regular press conferences, targeted at analysts and the media� Webcasts of these conferences are available online at www.fortum.com/investors� Management also gives interviews on a one- on-one and group basis� Fortum observes closed and silent period of 30 days prior to publishing its results� Fortum share basics Listed on Nasdaq Helsinki Trading ticker: FORTUM Number of shares, 31 January 2019: 888,294,465 Sector: Utilities Fortum’s activities in capital markets during 2018 Fortum’s Investor Relations 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� The key task of Investor Relations is to provide correct, adequate and up-to-date information regularly and equally to all market participants� By doing this, Investor Relations aims to minimise the investor’s risk and reduce the share’s volatility� Investors and analysts primarily are met on a regular basis in Europe and North America� In 2018, Fortum met approximately 500 professional equity investors individually or in group meetings and at investor conferences and maintained regular contact with equity research analysts at investment banks and brokerage firms� Interim Report January– September 2019, 24 October Financial Statements Bulletin 2018, 1 February Financial Statements 2018, 4 February Financials 2018, Week 8 Q 4 Q 3 2019 Q 1 Q 2 Interim Report January–June 2019, 19 July Annual General Meeting, 26 March Interim Report January–March 2019, 26 April

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