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Rating Action:

Moody's affirms Fortum's Baa1 ratings; stable outlook

13 Feb 2016

London, 13 February 2016 -- Moody's Investors Service, ("Moody's") has today affirmed the Baa1 senior unsecured ratings of Fortum Oyj (Fortum). The outlook on all the ratings is stable.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

The rating affirmation follows a review by the rating agency of Fortum's exposure to a weakening power price environment and reflects the company's strong financial flexibility following the networks divestments, which will allow it to withstand a prolonged period of low power prices despite market-exposed generation activities representing the majority of its earnings.

One-year forward power prices in the Nordics have declined by 22% in the last three months, reflecting a decline in commodity prices, primarily, but also exceptionally high inflow and high hydro power production in 2015. Current one-year forward baseload prices of around EUR18/MWh are below Moody's estimates published in June 2015 of a EUR25-30/MWh range.

Moody's estimates market exposed power generation accounted for around 70% of Fortum's comparable EBITDA from continuing operations in 2015. Its power generation fleet in Europe is almost all fixed cost in nature, with around 95% of installed capacity at 31 December 2015 represented by hydro (58%) and nuclear (37%) making it particularly exposed to movements in wholesale power prices. As Fortum's hedges roll off, lower prices will likely result in a further reduction in EBITDA for its power and technology business in the next two to three years.

However, the rating affirmation reflects the very significant financial flexibility that the company enjoys following the divestment of its Swedish electricity distribution business in June 2015. The total consideration from the distribution divestments in Finland, Sweden and Norway was EUR9.3 billion on a debt- and cash-free basis and means that Fortum is net cash positive (reported) to the tune of EUR2.1 billion at 31 December 2015. Absent significant shareholder returns which are not anticipated, this will allow the company to absorb cash flow pressures at the current rating levels.

On 3 February 2016, Fortum announced an updated strategy. Although its long-term financial target of comparable net debt to EBITDA of around 2.5x remains, the group is now focusing on renewables, solar and wind, and smart cities for future growth. Moody's considers these activities will provide greater stability to earnings than under its prior expectation that proceeds from the distribution divestments would be invested in hydro, nuclear and combined heat and power.

The Baa1 rating continues to reflect as positives (1) the company's low cost and flexible hydro- and nuclear-based generating portfolio in Finland and Sweden; (2) low CO2 emissions compared with many European peers; and (3) the contribution from its lower risk heat businesses. However, the rating reflects as negatives (1) a difficult operating and sovereign environment in Russia (Ba1 stable); (2) exposure to new nuclear construction risk at the long-delayed Olkiluoto 3 plant, through its stake in TVO, the Finnish nuclear generator; (3) challenging market conditions for power companies in Europe; and (4) a relatively high dividend payout ratio of 50-80% compared with peers, although the sale of the grid businesses provides Fortum with significant financial flexibility.

Fortum's Baa1 rating incorporates a one-notch uplift to its standalone baseline credit risk assessment (BCA) of baa2 under Moody's Methodology for Government-Related Issuers as a result of potential support from its 51% shareholder, the Government of Finland (Aaa negative).

Moody's guidelines for the current rating are for funds from operations (FFO)/net debt in the mid twenties in percentage terms, which are likely to be broadly consistent with the company's comparable net debt to EBITDA long-run target of 2.5x. (Moody's debt metrics also include adjustments, primarily for Fortum's exposure to Olkiluoto 3.) However, the current situation is dynamic and Moody's will assess any large acquisition for its impact on the business risk mix of the company. The ratio guidance may be revised up or down depending on the evolution of the company's business profile, taking into account the risk characteristics of any such investments, once they are known.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects that the company has financial flexibility to accommodate a range of reasonable investment scenarios at the current rating level.

WHAT COULD CHANGE THE RATING UP/DOWN

Given the company's stated intention to pursue acquisitions and the likelihood of a deterioration in its business risk profile, Moody's does not expect positive rating pressure to develop in the near term.

Negative rating pressure could develop if Fortum were to make a significant investment in assets that (1) resulted in a weaker financial profile than indicated by our guidelines without prospect of a speedy recovery, and/or (2) carried a very risky or complex business profile; and/or (3) Fortum continued to pay out high levels of dividends at a time of heavy investments, resulting in weaker protection to bondholders through consistently low retained cash flow/ net debt metrics.

Moody's would not expect Fortum's ratings to be affected by a limited notch downgrade to the Government of Finland ratings under the rating agency's Government-Related Issuers methodology. However, ratings may be affected by changes in our assessment of default dependence and support, which could be the result of a change in the government's ownership levels or strategy for the group, neither of which are foreseeable in the next 12 to 24 months.

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Unregulated Utilities and Unregulated Power Companies published in October 2014, and Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

LIST OF AFFECTED RATINGS

Affirmations:

....LT Issuer Rating, Affirmed Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

....Senior Unsecured MTN, Affirmed (P)Baa1

Outlook Actions:

....Outlook, Remains Stable

Headquartered in Espoo, Finland, Fortum Oyj is an energy producer and supplier which operates in the Nordic countries, Russia, Poland and the Baltics. As at financial year end 2015, it had gross operating revenues of around EUR3.46 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, the rated entity or its agent(s) is considered to be a participating entity. The rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Helen Francis
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neil Griffiths-Lambeth
Associate Managing Director
Infrastructure Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Fortum's Baa1 ratings; stable outlook
No Related Data.
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