Teollisuuden Voima Oyj’s Interim Report January–September 2015

​Stock Exchange Release October 20, 2015

Full TVO Interim Report January 1–September 30, 2015 (pdf)

Teollisuuden Voima’s electricity generation at Olkiluoto 1 and Olkiluoto 2 plant units continued safely through the first three quarters of the year. A generator failure in OL2 had a negative effect on production in February. Co-operation negotiations were held in January–February. In June, Teollisuuden Voima’s General Meeting decided, as proposed by the Board of Directors, not to apply for a construction license for the Olkiluoto 4 nuclear power plant unit during the validity of the decision-in-principle made in 2010. The factory acceptance testing of the Olkiluoto 3 process control and instrumentation (I&C) system was completed in the plant supplier's testing environment in Germany in July, and the system was delivered to Olkiluoto in August. According to the plant supplier, regular electricity production at the OL3 plant unit will commence by the end of 2018.

Operating Environment

From January to September, the use of electricity in Finland decreased by 0.8 per cent compared to the corresponding period of the previous year.

In March, Parliament passed a bill to amend the Finnish Nuclear Energy Act and the Radiation Act. The Radiation and Nuclear Safety Authority (STUK) received a wider mandate to issue binding regulations on the safe use of radiation. The nuclear safety research fee collected from nuclear plant holders and the fees charged to licensees under their waste management obligation will be increased for a fixed term. For TVO, the fees charged will increase by approximately EUR 2 million per year, over the period 2016–2020.

The Program of Prime Minister Sipilä’s Government was finalized at the end of May. The Government’s objective includes replacing imported fossil fuel-based energy and achieving the 2020 climate objectives during the government term.

In the early part of the year, the European Commission released a communication on the proposed EU Energy Union. According to the communication, diversification of the supply of nuclear fuel is important to ensure supply security. In July, the Commission released another communication on the electricity market and launched the related stakeholder consultation. Legislative initiatives are expected from the Commission in 2016.

In July, the European Commission published a proposal for new legislation to reform the EU emissions trading scheme. Over the long term, the Commission aims to improve the system so that in future, the emissions trading scheme could be used as the primary control system to reach the climate objectives.

In September, the Finnish Government issued a legislative proposal to increase the maximum limit of the power plant property tax. The proposal entails an increase of the maximum property tax rate from 2.85 per cent to 3.10 per cent starting from 2016. The proposal will be next processed by the Parliament.

Financial Performance

TVO operates on a cost-price principle (Mankala principle). TVO’s goal is not to make profit or pay dividends. The shareholders are charged incurred costs on the price of electricity and thus in principle the profit/loss for the period under review is zero. The shareholders pay variable costs based on the volumes of energy supplied and fixed costs in proportion to their ownership, regardless of whether they have made any use of their share of the output or not. Key indicators based on financial performance will not be presented due to the Company’s operating principle.

The consolidated turnover for the period under review January 1–September 30, 2015 was EUR 217.1 (January 1–September 30, 2014: 262.3) million. The amount of electricity delivered to shareholders was 10,416.9 (11,183.2) GWh. The drop in the amount of electricity delivered to shareholders was mainly caused by a near three-week shutdown in OL2 due to water leakage in the generator in February, as well as the decreased supply of electricity from the Meri-Pori coal-fired power plant.

The consolidated profit/loss was EUR 18.3 (9.9) million.

Financing and Liquidity

TVO’s financial situation has developed as planned.

TVO’s liabilities (non-current and current) at the end of the period under review, excluding the loan from the Finnish State Nuclear Waste Management Fund relent to shareholders, totaled EUR 3,912.2 (December 31, 2014: 3,727.3) million, of which EUR 379.3 (439.3) million were subordi-nated shareholder loans. During the period under review, TVO raised a total of EUR 500.0 (697.0) million in non-current liabilities. Repayments during the period under review amounted to EUR 152.9 (554.5) million, of which EUR 60.0 (0.0) million were subordinated shareholder loans.

In January, Japan Credit Rating Agency (JCR) lowered its AA rating for TVO to AA- and deemed the outlook to be stable. In May, Fitch Ratings reinstated its rating to BBB/F3 with a stable out¬look. Standard & Poor’s lowered its rating for TVO in May from BBB/A-2 to BBB-/A-3 with a continued negative outlook.

In February, TVO issued a EUR 500 million 10-year bond with an annual coupon of 2.125 per cent under its Euro Medium Term Note (EMTN) Program. In June, the value of the EMTN Program was increased from EUR 3.5 billion to EUR 4 billion.

The OL3 project’s share of financing costs has been capitalized in the balance sheet.

TVO uses its right to borrow funds back from the Finnish State Nuclear Waste Management Fund within the framework of legal regulations. On September 30, 2015, the amount of the loan was EUR 1,009.1 (December 31, 2014: 982.8) million, which has been re-lent to the Company’s A-series shareholders. The loan from the Finnish State Nuclear Waste Management Fund was increased by EUR 26.3 (51.1) million on March 31, 2015.

Nuclear Power

Olkiluoto 1 and Olkiluoto 2

The electricity production of the Olkiluoto power plant units Olkiluoto 1 (OL1) and Olkiluoto 2 (OL2) during the period under review was 10,356 (10,861) GWh. The combined load factor of the two plant units was 90.0 (94.4) per cent.

The plant units operated safely during the period under review. OL1’s net production was 5,451 (5,322) GWh and the load factor 94.8 (92.6) %. OL2’s net production was 4,905 (5,539) GWh and the load factor 85.3 (96.3) %.

Olkiluoto 1
Average electrical power MW
October 1, 2014–September 30, 2015

Olkiluoto 2
Average electrical power MW
October 1, 2014–September 30, 2015

OL2 was out of production nearly three weeks in February. On February 4, a water leak was detected in the water-cooled generator of the plant unit, and the generation of electricity was interrupted. After examination by TVO experts and the generator supplier, TVO decided to replace the rotor of the generator. Generation of electricity recommenced on February 24.

Annual Outages

The annual outages of 2015 at the Olkiluoto nuclear power plant were carried out from May 3 to June 5, 2015. OL1 underwent a refueling outage that lasted more than 10 days, and OL2 had a mainte¬nance outage taking more than 17 days.

In addition to refueling, maintenance, repair work and tests were carried out in OL1, and a mixing unit in the feedwater system was replaced.

Apart from refueling, the major activities carried out in OL2 included equipment work in two sub-systems, one of them comprising the replacement of low-voltage equipment. Both feedwater mixing units were also replaced.

Apart from TVO’s own personnel, up to 800 subcontractor employees were involved in the annual outage work.

Olkiluoto 3

Olkiluoto 3 (OL3), currently under construction, 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. Originally, commercial electricity production was scheduled to start at the end of April 2009.

According to the schedule updated by the Supplier in September 2014, regular electricity production in the unit will commence at the end of 2018.

Most of the construction works for the plant unit have been completed. The installation of the electrical systems, the instrumentation and control system (I&C), and mechanical systems is still in progress. Factory acceptance testing of the process I&C system was completed, and the system was transferred to Olkiluoto in August. The factory testing of the safety I&C systems is still unfinished.

The first phase of the commissioning of the turbine plant has been completed. Some of the systems and components will be kept in operation; the rest will be preserved in accordance with a separate plan.

During the period under review, the workforce at the site has increased by approximately 500 people, amounting to approximately 1,600 at the end of the period. Occupational safety at the site remained at a good level.

The pending disputes concerning the plant unit are described in the paragraph ‘Pending Court Cases and Disputes’

All realized costs of the OL3 project that can be recognized in the cost of the asset have been entered as property, plant and equipment in the Group balance sheet.

Olkiluoto 4

On July 1, 2010, Parliament approved the favorable decision-in-principle made by the Government on May 6, 2010 regarding TVO’s application to construct a fourth nuclear power plant unit (Olki¬luo-to 4) in Olkiluoto. According to the decision-in-principle, it will expire unless an application for a construction license is submitted a maximum of five years after the date of Parliament’s decision to approve the decision-in-principle.

On May 20, 2014, TVO submitted an application to the Government asking for a new time limit for submitting the construction license application, and for a decision addressing the fact that despite changes to the timing of the project, the construction of the OL4 plant unit is still in accordance with the overall good of society. On September 25, 2014, the Government rejected TVO’s application.

TVO’s Extraordinary General Meeting on June 24, 2015 decided, as proposed by the Company's Board of Directors, not to apply for a construction license for OL4 during the validity of the decision-in-principle and not to carry out the project referred to in the contractual undertaking which the shareholders and TVO signed earlier for the bidding and engineering phase.

The value of property, plant and equipment relating to the OL4 project, amounting to EUR 58.2 million, was recognized as an asset write-down in TVO’s balance sheet and recorded as impairment charge to the profit and loss statement. The impairment charge does not affect TVO’s consolidated profit/loss, as TVO has invoiced the impairment charge form the shareholders in proportion to their shareholder loans to OL4. The impairment charge invoiced from the shareholders is presented under other income. TVO has settled the invoices against the OL4 shareholder loans and has refunded EUR 1.8 million to the shareholders. On September 30, 2015, there are no remaining OL4 shareholder loans or shareholder loan commitments.

TVO will remain prepared for applying for a new decision-in-principle for OL4. The application is subject to a separate decision.

Nuclear Fuel

During the period under review, nuclear fuel purchases amounted to EUR 46.4 (32.6) million and the amount consumed to EUR 39.3 (37.7) million.

The nuclear fuel and uranium stock carrying value on September 30, 2015 was EUR 218.5 (December 31, 2014: 211.4) million.

Nuclear Waste Management

Under the Finnish Nuclear Energy Act, the Company is responsible for the measures related to nuclear waste management and the related costs. Posiva Oy, jointly owned by TVO and Fortum Power and Heat Oy, is responsible for taking care of the final disposal of TVO’s spent nuclear fuel.

The Government is expected to issue a decision on the construction license for Posiva's encapsulation plant and final repository during the Parliament's fall session of 2015.

The construction works for the second phase of the hoist building of ONKALO were completed in July 2015. After the completion of the construction project, a personnel hoist to underground facilities may be installed to the hoist building. Work also continues in the underground research facility ONKALO, where installation tests for the bentonite buffer were completed during the summer.

Posiva's owners have submitted a nuclear waste management program to the Ministry of Employment and the Economy (MEE) at the end of September 2015. The program includes the main objectives and tasks for nuclear waste management for 2016–2021.

The liabilities in the consolidated financial statement show a provision related to nuclear waste management liability of EUR 953.6 (December 31, 2014: 930.3) million, calculated according to the international IFRS accounting principles. A corresponding amount, under assets, represents the Company’s share in the Finnish State Nuclear Waste Management Fund.

In order to cover the costs of nuclear waste management, TVO makes contributions to the Finnish State Nuclear Waste Management Fund. In December 2014, MEE set TVO’s liability for nuclear waste management at EUR 1,349.1 (1,317.8) million at the end of 2014 and the Company’s funding target for 2015 at EUR 1,345.4 (1,310.4) million.

In March 2015, the Finnish State Nuclear Management Fund confirmed TVO’s nuclear waste management fee for 2014 at EUR 20.8 (56.1) million, which was paid into the Fund on March 31, 2015 (March 31, 2014). The nuclear waste management fee for 2015 will be confirmed in March 2016.

Coal Power

Meri-Pori

The amount of electricity produced by TVO’s share at the Meri-Pori coal-fired power plant on January 1–September 30, 2015 was 80.1 (339.3) GWh requiring 29.3 (123.5) thousand tons of coal and 66.5 (283.6) thousand tons of carbon dioxide emission rights.

TVO’s share of Meri-Pori’s production
Average electrical power MW
October 1, 2014–September 30, 2015

Acquisitions of Tangible and Intangible Assets and Shares

Investments during the period under review were EUR 186.9 (252.5) million. Investments of the parent company were EUR 184.8 (253.0) million, of which EUR 150.9 (220.4) million was allocated to the OL3 project.

TVO continued to carry out modernization projects in the operating plant units.

In May 2013, TVO signed an agreement with Wärtsilä Finland Oy for the delivery of emergency diesel generators and associated auxiliary systems to Olkiluoto. A total of nine generators will be delivered, and TVO is in charge of the construction work required for the project, as well as for the connection of the diesel generators to TVO’s other systems. The emergency diesel generators of OL1 and OL2 are to be replaced by 2022. This is the largest plant modification project ever carried out in Olkiluoto.

In July 2014, TVO signed a contract with Westinghouse Electric Sweden (WSE) for the replacement of the main circulation pumps at OL1 and OL2. The contract covers 12 main circulation pumps. The replacement of the pumps takes place under a turnkey contract. WSE is responsible for the installation of the pumps and for the manufacture of special tools, as well as for the design and engineering of the pumps in collaboration with their manufacturer. TVO’s scope of the delivery covers the provision of the supporting services specified in the contract during the erection period. The main circulation pumps will be replaced during the annual outages of 2016–2018.

Carbon dioxide emission allowances have been relinquished to the Energy Market authority worth EUR 1.9 (2.7) million. During the period under review, emission allowances have been acquired worth EUR 0.5 (1.6) million. The Company’s need for carbon dioxide emission allowances for the period under review are covered by acquired emission allowances.

Pending Court Cases and Disputes

In 2012, TVO submitted a claim and defense in the International Chamber of Commerce (ICC) arbitration proceedings concerning the delay and the ensuing costs incurred at the Olkiluoto 3 project. In July 2015, TVO updated its quantification estimate of its costs and losses to amount to approximately EUR 2.6 billion until December 2018, which, according to the schedule submitted by the OL3 Supplier in September 2014, is the estimated start of regular electricity production of OL3.

The proceedings were initiated in December 2008 by the OL3 Supplier. The Supplier’s monetary claim, updated in July 2015, is approximately EUR 3.4 billion in total. The claim covers events that occurred during the construction period until the end of June 2011. The sum includes penalty interest (calculated until July 2015) and payments delayed by TVO under the plant contract amounting to a total of approximately EUR 1.4 billion, as well as approximately EUR 140 million in alleged loss of profit. Having considered and found the earlier claims by the Supplier to be without merit, TVO will scrutinize the updated claim and respond to it in due course.

The Supplier consortium companies (AREVA GmbH, AREVA NP SAS and Siemens AG) are jointly and severally liable for the plant contract obligations.

The arbitration proceedings may continue for several years, and the claimed amounts may be updated.

TVO has not recorded any receivables or provisions on the basis of claims presented in the arbitration proceedings.

Personnel

The total number of personnel in the Group at the end of the period under review was 760 (December 31, 2014: 809; September 30, 2014: 829). The number of permanent employees at the end of the period under review was 734 (December 31, 2014: 754; September 30, 2014: 758). During summer 2015, TVO employed a total of 76 (2014: 129) vocational students for a period of one to three months.

TVO’s co-operation negotiations initiated in the beginning of January 2015 concluded at the end of February. The negotiations focused on reorganizing functions and improving cost efficiency with the view to secure TVO’s competitive edge on the challenging electricity supply market. The aim was to generate savings of EUR 15 million per year. Prior to the negotiations, the estimated maximum need of personnel reductions was 110 man-years. Through the negotiations, the number of personnel was cut by 42 employees, including 11 terminated contracts. Other personnel reductions will be achieved through voluntary arrangements so that the total amount of reductions will be approximately 100 man-years. According to estimates, the total reductions will be achieved by the end of the year. The co-operation negotiations concerned the near-entire TVO personnel of approximately 700 employees.

Annual General Meeting

TVO’s Annual General Meeting was held on March 20, 2015. The AGM approved the financial statements for the year 2014, confirmed the consolidated income statement and balance sheet and discharged the members of the Board of Directors, along with the President and CEO and his deputy from liability.

Nine Board members were re-elected. Markus Mannström was elected as a new member to replace Juha Taavila. At its organization meeting held on the same day as the AGM, the Board elected Lauri Virkkunen as Chairman and Matti Ruotsala as Deputy Chairman. The Board also chose the members and chairmen of the Board Committees from among its members.

Extraordinary General Meeting

TVO’s Extraordinary General Meeting was held on June 24, 2015. The EGM decided, as proposed by the Board of Directors, not to apply for a construction licence for the Olkiluoto 4 nuclear power plant unit during the validity of the decision-in-principle made in 2010.

Auditing

The Interim Report is unaudited.

Risks and Uncertainty Factors in the Near Future

The major risks and uncertainty factors in TVO’s operations have been presented in the 2014 Report of the Board of Directors.

During the period under review, no remarkable new risks connected with the Company’s operation have arisen.

Assessment of Year-End Developments

Electricity production is expected to continue as in previous years. The prerequisites for nuclear power production at Olkiluoto are good. Nuclear fuel availability is guaranteed by long-term agreements.

Realization of the OL3 nuclear power plant project and preparing the plant unit for production use will be continued. TVO continues to support the Supplier to finalize the project.

The Meri-Pori coal-fired power plant capacity will be used in accordance with the former principles.

Posiva is preparing to start the construction projects of the encapsulation plant and final repository after the construction license has been granted.

Events after the Period under Review

No major events have taken place after the end of the interim report period.

October 19, 2015

Teollisuuden Voima Oyj
Board of Directors

For more information, please contact:
Anja Ussa, Senior Vice President, Finance, tel. +358 2 8381 6100