Saturday, February 20, 2010

Fortum and the Nordic power play

Approximately 91% of power generation in EU countries by the Finnish utility company Fortum was carbon dioxide (CO2) free in 2009. This can be explained with the fact that 97% of its power generation in Nordic countries is based on either hydropower or nuclear power. Elsewhere, it uses primarily thermal plants for power generation. Some thermal plants, however, are also used to generate heat which doubles the efficiency of the plants and waste heat generation is minimised.

Picture: Fortum’s Loviisa nuclear power plant from air.

The cash cows

In Finland and Sweden, Fortum has 260 wholly or partially owned hydropower plants, two wholly owned nuclear power plants and several partially owned ones. These assets are the backbone of the company and deliver spectacular profits. Operating profit of the power division was over 51% out of its sales in 2009. Although the power division accounts only 48% of company sales it delivers 75% of all profits.

Fortum is well positioned to increase it’s share of CO2-free production capacity in Nordic countries as it owns 26,6% share in Teollisuuden Voima (TVO) that is currently building a 1600 MW nuclear reactor that is scheduled to go online 2012. It will be a significant addition as the existing four reactors in Finland have output of roughly 2700 MW. Two of the existing reactors are owned by Fortum and two by TVO. Therefore, Fortum either fully or partially owns all of the nuclear power plants in Finland.

The race for more nuclear power plants

Both Fortum and TVO have submitted an application for a decision-in-principle for the construction of one more reactor each. There is also a new player in the game applying for a reactor license: Fennovoima. Behind it are various Finnish entities with 66% stake and the world’s largest privately owned energy company E.ON from Germany with 34% stake.

The Finnish parliament is supposed to make a decision on the matter by summer recess. So far the political discussion inside the Cabinet of Finland has included all options from granting license to all three to granting none. The two extremes in the discussion are The National Coalition Party and The Green League latter of which opposes nuclear power in general. To me, currently the most likely outcome seems to be 1-2 new reactor licenses.

The proposed plants range from 1000 MW to 2500 MW in electrical output. Therefore, any positive decision will mean major increase of nuclear power generation capacity in Finland and in the Nordic region in general as only Finland and Sweden have nuclear power plants. In addition, Sweden did have a nuclear phase out policy in place for ending all nuclear power generation by 2010, but this turned out to be unrealistic and last year a decision was made to allow for replacement of existing reactors.

The need for additional power generation capacity comes from the chronic deficit in Finnish power generation capacity. At the time of writing this article, 18% of demand (2371 MW) was covered by importing electricity from Russia, Estonia and Sweden according to Finngrid. Going forward, the deficit is expected to grow larger.

Finland, Sweden, Norway and Denmark form a single power market. In cold winter days the demand is at its peak and the price of electricity in the Nord Pool spot market surges. Lately, production stalls at Swedish nuclear power plants have also contributed to higher than average energy prices. The Nordic power grid is also connected to Germany and in fourth quarter higher prices in German market resulted in net export from the Nordic area to Germany.

Solid dividend payer

Fortum operates in Nordic countries, Russia and in the Baltic Rim area. Activities cover the generation, distribution and sale of electricity and heat and the operation and maintenance of power plants. 74% of power generation and 39% of heat generation by Fortum occured in the Nordic countries in 2009.

With market cap of EUR 16.74 billion it ranks as second out of all Finnish companies. This makes it a “must have” for many mutual funds and index funds exposed to Finland, Nordic countries or the utility sector in Europe. The Finnish state owns 50.76% of Fortum shares and considers it as strategic investment.

Group sales in 2009 were EUR 5435 million and operating profit totalled EUR 1351 million. Earnings per share were EUR 1.48 having been 1.74 the year before. P/E (2009) is 12,7. With the proposed dividend of EUR 1.00, the dividend yield is 5,3%.

Picture: Fortum’s past dividends.

Note: Market cap, P/E and proposed dividend yield are calculated using Friday 2/19/2010 closing price 18.84 EUR per share at Nasdaq OMX Nordic Helsinki market.

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