Teollisuuden Voima Oyj's Interim Report January–March 2018
20.4.2018
Teollisuuden Voima’s (TVO) electricity generation at Olkiluoto 1 and Olkiluoto 2 plant units continued safely and reliably through the first quarter of 2018. At Olkiluoto 3 EPR, the installation works, process system tests and hot functional testing continued. In March, TVO and the plant supplier consortium companies signed and brought into force a comprehensive settlement agreement concerning the completion of the OL3 EPR project and related disputes. The excavation works of Posiva’s final disposal facility proceeded according to plan.
Operating Environment
From January to February, the electricity consumption in Finland increased by 5.0 percent compared to the corresponding period of the previous year.
In January 2018, the Ministry of Finance requested an opinion on a draft bill aimed at amending the provision in the legislation on taxation of business income, which limits the right to deduct interest. In its opinion, TVO has proposed amendments to the draft bill to avoid additional burden to nuclear power. The bill is to enter into force at the beginning of 2019.
A set of legislative measures on energy, so called “Clean Energy for all Europeans” package published by the European Commission in November 2016 is currently being dealt with by the European Parliament and the Council. From the nuclear industry’s perspective, the most relevant legislative proposals of the Clean Energy package are energy efficiency directive, renewable energy directive, electricity directive & regulation, and regulation on the governance of the Energy Union. An agreement on the legislative package was reached by the Council in December 2017 and by the European Parliament in January 2018. The trilogue negotiations between the Commission, Parliament and Council started in February 2018. The legislative process is estimated to last until early 2019.
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, unless specific circumstances dictate otherwise. 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. Because of the Company's operating principle, key indicators based on financial performance will not be presented.
The consolidated turnover for the period under review January 1–March 31, 2018 was EUR 89.1 (January 1–March 31, 2017: EUR 82.4 million). The amount of electricity delivered to shareholders was 4,095.9 (3,827.5) GWh. The slightly higher delivery volume to shareholders was mainly due to higher delivery volume of the Meri-Pori coal-fired power plant compared to the previous year.
The consolidated profit/loss was EUR 5.0 (-0.7) 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 in review, excluding the loan from the Finnish State Nuclear Waste Management Fund relent to shareholders, totaled EUR 4,577.0 (December 31, 2017: 4,412.0) million, of which EUR 579.3 (579.3) million were subordinated shareholder loans. During the period under review, no new non-current liabilities were raised (EUR 100.0 million) and no repayments were made (EUR 160.7 million). A total of EUR 165.0 (0.0) million in current liabilities were raised during the period under review.
In February, Japan Credit Rating Agency downgraded TVO’s long term rating from AA- to A+ and assessed the outlook as stable. In October 2017, Standard & Poor’s (S&P) placed TVO’s long term issuer rating (BB+) on CreditWatch with negative outlook. In March 2018, S&P removed the rating from CreditWatch Negative and assessed TVO’s outlook as stable.
The OL3 EPR 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 March 31, 2018 the amount of the loan was EUR 666.2 (December 31, 2017: 655.5) million and it has been relent to the Company's A-series shareholders. On March 31, 2018, the loan from the Finnish State Nuclear Waste Management Fund was increased by EUR 10.7 (-371.5) million.
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 3,829 (3,804) GWh. The total load factor was 100.0 (100.0) %.
The plant units operated safely and reliably during the period under review. OL1’s net production was 1,902 (1,886) GWh and the load factor 100.0 (99.5) %. OL2’s net production was 1,928 (1,918) GWh and the load factor 100.0 (100.0) %.
Olkiluoto 1
Average electrical power MW
April 1, 2017-March 31, 2018
Olkiluoto 2
Average electrical power MW
April 1, 2017–March 31, 2018
In January 2017, TVO filed with the Ministry of Economic Affairs and Employment an application for the renewal of the operating license of OL1 and OL2. The renewal of the operating license is applied for until the end of 2038. The 20-year operating license currently in force must be renewed by the end of 2018.
Olkiluoto 3 EPR
Olkiluoto 3 EPR (OL3 EPR), 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.
In accordance with the Supplier’s schedule updated in October 2017, regular electricity generation at the plant unit will commence in May 2019. The Supplier’s schedule review for the project completion had reached a phase where the Supplier confirmed the main milestones. According to the Supplier, the first connection to the grid takes place in December 2018, and the start of regular electricity production will take place in May 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.
After the reporting period under review, in April 2018 the Supplier informed that due to some delays in the hot functional testing phase it will perform a schedule review in a few weeks' time and provide TVO with an overall rebaseline schedule for the final phases of the project. TVO cannot estimate whether or not the schedule will influence the start of the regular electricity production in May 2019 or the preceding production of electricity with varying power levels during the test program currently scheduled to start in December 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. Simulator training for the operating personnel commenced in February 2017. The commissioning of the plant unit has now reached the hot functional testing phase that will take several months during which time the plant systems are tested as a whole, but without the fuel. In the hot functional testing, the first integrated systems tests of the reactor and turbine plant are carried out. The workforce at the site at the end of the period under review was about 2,100 persons. Occupational safety at the site remained at a good level.
The business restructuring plan announced by Areva in 2016 was implemented at the beginning of 2018. The majority of Areva NP’s business was transferred to a company named Framatome, of which 75.5 percent is owned by Electricité de France (EDF). The OL3 EPR project and the means required to complete the project, as well as certain other liabilities remained within Areva NP and Areva GmbH, within the scope of Areva SA.
A comprehensive settlement agreement between TVO and the OL3 EPR plant supplier consortium companies was signed and came into force in March 2018. The settlement agreement concerns the completion of the OL3 EPR project and related disputes.
The pending disputes concerning the plant unit are described in the paragraph “Pending Court Cases and Disputes”.
All realized costs of the OL3 EPR project that can be recognized in the cost of the asset have been entered as property, plant and equipment in the Group balance sheet.
Nuclear Fuel
During the period under review, nuclear fuel purchases amounted to EUR 28.0 (15.2) million and the amount consumed to EUR 15.3 (14.0) million.
The nuclear fuel and uranium stock carrying value on March 31, 2018 was EUR 254.4 (December 31, 2017: 241.7) 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.
The liabilities in the consolidated financial statement show a provision related to nuclear waste management liability of EUR 959.7 (December 31, 2017: 953.1) 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 2017, MEAE set TVO's liability for nuclear waste management at EUR 1,481.6 (1,450.1) million to the end of 2017 and the Company's funding target for 2018 at EUR 1,470.8 (1,428.4) million.
In March 2018, the Finnish State Nuclear Management Fund confirmed TVO’s nuclear waste management fee for 2017 at EUR 33.6 (49.1) million, which was paid into the Fund on March 31, 2018 (March 31, 2017). The nuclear waste management fee for 2018 will be confirmed in March 2019.
Final Disposal of Spent Nuclear Fuel
Posiva Oy is in charge of executing in Olkiluoto the final disposal of the spent nuclear fuel generated by its owners, TVO at its power plant in Olkiluoto and Fortum at its power plant in Loviisa.
The excavation works to prepare the ground for the encapsulation plant that were started in October 2016 were completed in autumn 2017. Light masts have been erected in the encapsulation site and their connections are under way. The underground HVAC works of the ventilation building’s second phase are in progress. Tests of work method for the reinforcement of the personnel shaft have been conducted, and the reinforcement solution is still under investigation.
The excavation work of the final disposal facility itself was launched in December 2016 and is progressing with excavations of the vehicle access tunnels leading to the final disposal facility as well as with excavation of the central tunnel of the integrated systems test. The first excavation works of the final disposal facility are estimated to take two and a half years. The raise boring of the canister shaft has been started. Preparation for the full-scale in-situ system test (FISST) has been going on during the first part of the year.
At the end of March, Posiva’s owners submitted the Nuclear Waste Management Annual Report for 2017 to the Ministry of Economic Affairs and Employment (MEAE).
Coal Power
Meri-Pori
The amount of electricity produced by TVO’s share at the Meri-Pori coal-fired power plant on January 1–March 31, 2018 was 273.1 (29.3) GWh requiring 98.8 (10.1) thousand tons of coal and 222.1 (24.3) thousand tons of carbon dioxide emission rights.
TVO’s share of Meri-Pori’s production
Average electrical power MW
April 1, 2017–March 31, 2018
Acquisitions of Tangible and Intangible Assets and Shares
Investments during the period under review were EUR 103.4 (67.7) million. Investments of the parent company were EUR 103.00 (66.3) million, of which EUR 91.4 (55.2) million were allocated to the OL3 project.
At present, several plant modifications are planned and implemented in Olkiluoto to prepare the OL1 and OL2 plant units for the renewal of the operating license in 2018.
During the period under review, emission rights were acquired worth EUR 2.3 (0.1) million. The Company's need for carbon dioxide emission rights for the period under review are covered by acquired emission rights.
Pending Court Cases and Disputes
TVO was a party to 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. The arbitration had begun in December 2008 at the Supplier's initiative.
TVO's estimated quantum of costs and losses in respect of the period ending in late 2018 (which was the Supplier's earlier estimate for the start of regular electricity production at OL3 EPR), which it had counter-claimed from the Supplier, was approximately EUR 2.6 billion, including TVO's actual claim and an estimated part.
The Supplier had submitted claims to the ICC for an aggregate amount of approximately EUR 3.59 billion, which included a total amount of approximately EUR 1.58 billion in penalty interest (calculated up to 30 June 2017) and payments allegedly delayed by TVO under the plant contract, as well as approximately EUR 132 million of alleged loss of profit.
In 2016 and 2017, the ICC tribunal made three final and binding partial awards on the initial key issue areas in the arbitration. The partial awards resolved the great majority of the facts and matters covered in these proceedings in favor of TVO, and rejected the great majority of the Supplier's contentions in this regard. The partial awards did not take a position on the claimed monetary amounts.
TVO signed a comprehensive settlement agreement with 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. The settlement agreement concerns the completion of the OL3 EPR project and related disputes, and it entered into force late March.
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 notes the plant supplier’s most recent schedule 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.
The parties withdraw all on-going legal actions related to OL3 EPR, including the ICC arbitration and appeals 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 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 31 December 2019 at the latest. TVO has made a provision of EUR 150 million reflecting the maximum amount of the incentive payment payable to the supplier consortium companies for timely completion of the OL3 EPR project. These settlement payments to TVO, any incentive payment by TVO and any penalty payable to TVO due to any additional project delay have all been taken into account in calculating the final cost of the OL3 EPR project. The amount corresponding to the settlement amount and the incentive fee to be paid by TVO have been entered as property, plant and equipment in the Group balance sheet.
Personnel
The total number of personnel in the Group at the end of the period under review was 832 (December 31, 2017: 807, March 31, 2017: 759). The number of permanent employees in the Group at the end of the period under review was 800 (December 31, 2017: 784, March 31, 2017: 740).
As the operating phase of OL3 EPR is approaching, electricity production organization is being strengthened with several dozens of technical professionals.
The Group’s management and operational culture is being developed with the help of the Better workplace project. The goals of the project include improving efficiency of operations and securing good preconditions for operations by developing issues related to the work of each individual, the immediate work community and the entire Group. The progress of the project is monitored on a regular basis and the project’s effectiveness is measured with e.g. regular personnel surveys.
The collective agreements for different groups of personnel in the energy industry ended on January 31, 2018, and new agreements are in force in accordance with the so called framework agreement of labor confederations until March 2020/January 2021 depending on the personnel group.
Annual General Meeting
TVO's Annual General Meeting on March 31, 2018 approved the financial statements for 2017, confirmed the consolidated income statement and balance sheet, and discharged the members of the Board of Directors and the President and CEO from liability.
All Board members were re-elected. At its organization meeting, the Board elected Matti Ruotsala as Chairman and Lauri Virkkunen as Deputy Chairman. The Board also chose from among its members the members and chairmen of the Board Committees.
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 2017 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 EPR nuclear power plant project and preparing the plant unit for production will be continued. The hot functional testing launched in December 2017 will take several months. Following successful completion of the hot functional testing, OL3 has the prerequisites to receive an operating license and proceed to nuclear commissioning. TVO will continue to support the Supplier to complete the project.
The Meri-Pori coal-fired power plant capacity will be used in 2018 in accordance with the former principles. Fortum’s share of the Meri-Pori power plant has been accepted into the reserve capacity.
The concept and cost optimization phase of Posiva’s final disposal project will continue until the end of 2018. The full-scale in-situ system test (FISST) in ONKALO is to be conducted during 2018.
Events after the Period under Review
In April 2018, the Supplier informed that due to some delays in the hot functional testing phase it will perform a schedule review in a few weeks' time and provide TVO with an overall rebaseline schedule for the final phases of the project. TVO cannot estimate whether or not the schedule will influence the start of the regular electricity production in May 2019 or the preceding production of electricity with varying power levels during the test program currently scheduled to start in December 2018.
April 20, 2018
Teollisuuden Voima Oyj
Board of Directors
For more information, please contact:
Jarmo Tanhua, President and CEO, Tel. +358 2 8381 2000
Anja Ussa, Senior Vice President, Finance, Tel. +358 2 8381 6100
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