Teollisuuden Voima Oyj’s Interim Report January 1–September 30, 2017

23.10.2017

Teollisuuden Voima’s (TVO) electricity generation at Olkiluoto 1 and Olkiluoto 2 plant units continued safely and reliably through the first three quarters of 2017. At Olkiluoto 3 EPR, the installation works and process system tests continued. The cold functional testing of the plant unit was completed in early July. The excavation works of Posiva’s final disposal facility proceeded.
Full TVO Interim Report January–September 2017 (pdf)

Operating environment

Electricity consumption in Finland in January
August was at the same level as in the corresponding period of the previous year.

The Government's bill to Parliament for amending the Nuclear Energy Act was issued in August.
The act is to enter into force as from the beginning of 2018. Changes will be made to meet the requirements of the directives adopted under the EURATOM framework. In preparation for the Act, some change requirements related to national legislation, e.g. to decommissioning of nuclear facilities and nuclear waste management, have been examined. During the consultation phase in the spring, the draft proposal included changes to the safety arrangements, but they are no longer in the Government’s proposal.

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 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, and regulation on the governance of the Energy Union. The legislative process is estimated to last until summer 2018.

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–September 30, 2017 was EUR 240.3 (January 1–September 30, 2016: EUR 252.4 million). The amount of electricity delivered to shareholders was 9,818.4 (10,774.1) GWh. The lower delivery volume to shareholders was mainly due to prolonged maintenance and refurbishment work at Olkiluoto 2 plant unit and lower delivery volume of Meri-Pori coal-fired power plant compared to the previous year.

The consolidated profit/loss was EUR -3.2 (-9.6) 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 4,495.0 (December 31, 2016: 4,521.8) million, of which EUR 579.3 (479.3) million were subordinated shareholder loans. During the period under review, TVO raised a total of EUR 100.0 (300.0) million in non-current liabilities. Repayments during the period under review amounted to EUR 175.9 (287.9) million.

In February 2016, TVO signed a new syndicated revolving credit facility of EUR 1.3 billion. The facility consists of two tranches: EUR 1,000 million 5-year tranche and EUR 300 million 3-year tranche. Both tranches included two one-year extension options, and in January 2017, both of them were extended by one year. In March, TVO signed bilateral revolving credit facilities totaling EUR 200 million and in April, bilateral credit facilities totaling EUR 80 million. Both syndicated and bilateral facilities are undrawn. In August, TVO raised EUR 100.0 million of subordinated shareholder loans. Shareholder loan commitments worth EUR 200.0 million are still undrawn.

In January, Japan Credit Rating Agency (JCR) affirmed TVO’s long term rating at AA- and assessed the outlook as stable. In May, Fitch Ratings downgraded TVO’s long term issuer rating from BBB to BBB-. The outlook Fitch Ratings assessed as stable. In addition, TVO has Standard & Poor’s (S&P) credit rating BB+. TVO’s outlook S&P has assessed 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 June 30, 2017 the amount of the loan was EUR 655.5 (December 31, 2016: 1,027.1) million and it has been relent to the Company's A-series shareholders. On March 31, 2017 loan from the Finnish State Nuclear Waste Management Fund was decreased by EUR 371.5 (March 31, 2016: increase 18.0) 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 9,719 (10,550) GWh. The total load factor was 84.5 (91.4) %.

The plant units operated safely and reliably during the period under review. OL1’s net production was 5,430 (5,112) GWh and the load factor 94.5 (88.6) %. OL2’s net production was 4,289 (5,438) GWh and the load factor 74.5 (94.2) %.

Olkiluoto 1
Average electrical power
October 1, 2016–September 30, 2017

OL1_2016-10-01_2017-09-30_en.gif
Olkiluoto 2
Average electrical power
October 1, 2016–September 30, 2017
OL2_2016-10-01_2017-09-30_en.gif
On January 26, 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 from the Government until the end of 2038. The 20-year operating license currently in force must be renewed by the end of 2018.

Annual outages

The 2017 annual outages of the Olkiluoto nuclear power plant were started on April 26 with a refueling outage at OL1. In addition to refueling, the OL1 outage also included annually recurring maintenance work. The outage lasted more than 10 days.

At OL2, the annual outage commenced on May 10 and was completed on July 14. The OL2 outage was prolonged due to large and complex maintenance and refurbishment work and took more than 64 days.

The major works carried out during the OL2 maintenance outage included replacement of the recirculation pumps and their frequency converters, renewal of the neutron flux calibration system, repair work of the reactor pressure vessel nozzles as well as preparation work for installing a new, ac-independent high and low pressure water supply system for reactor cooling, and modernization of the heating system contributing to residual heat removal. In addition, the turbine condenser was renewed and the high pressure feed water preheaters were replaced. Modifications for pumping the condensate forward were also made.

In addition to TVO’s own personnel, up to 1,100 contractor employees took part in the 2017 annual outage works.

The refueling and maintenance outages carried out at the plant units on alternating years are designed to ensure that a good level of operability and production is maintained at the Olkiluoto nuclear power plant at all times.

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.

According to the schedule updated by the Supplier in September 2014, regular electricity production in the unit was to commence at the end of 2018. TVO received information on the Supplier’s schedule rebaseline review for the OL3 EPR project completion after the reporting period in October 2017. According to the information the start of regular electricity production at the OL3 EPR will take place 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.

In 2016, AREVA Group announced a restructuring of its business. The restructuring involves a transfer of the operations of AREVA NP to a company called NEW NP, the majority owner of which is going to be EDF. The transaction is aimed to be completed by the end of 2017, and thereafter more than half of the shares of New NP would be transferred to EDF. OL3 EPR project and the means required to complete the project, as well as certain other liabilities will remain within AREVA NP and AREVA GmbH, within the scope of AREVA SA. In January 2017, the EU Commission made a decision on the state aid, and in May 2017, the Commission accepted the merger. In September 2017, TVO filed an appeal to the General Court of the European Union of the Commission decision on French state aid to the AREVA Group. TVO requires that the restructuring of the French nuclear industry will not compromise the completion of the OL3 EPR project within the Supplier’s schedule and that all liabilities of the plant contract are respected.

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. In June, the cold functional testing to ensure the integrity of the primary circuit started, and it was completed in early July.

The first phase of the commissioning of the turbine plant is completed. Some of the systems and components will be kept in operation; the rest has been preserved by the Supplier in accordance with a separate plan. In January 2017, de-preservation was started at the turbine plant.

The workforce at the site at the end of the period under review was about 2,600 persons. 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 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 46.4 (42.4) million and the amount consumed to EUR 38.3 (40.2) million.

The nuclear fuel and uranium stock carrying value on September 30, 2017 was EUR 239.1 (December 31, 2016: 231.0) 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 973.0 (December 31, 2016: 954.6) 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 2016, MEAE set TVO's liability for nuclear waste management at EUR 1,450.1 (1,369.4) million to the end of 2016 and the Company's funding target for 2017 at EUR 1,428.4 (1,369.4) million.

In March 2017, the Finnish State Nuclear Management Fund confirmed TVO’s nuclear waste management fee for 2016 at EUR 49.1 (11.4) million, which was paid into the Fund on March 31, 2017 (March 31, 2016). The nuclear waste management fee for 2017 will be confirmed in March 2018.

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 are completed. The second phase of construction work in the ventilation building has also been completed, as well as fire compartmentation of the access ramp. During the summer, the reinforcement work of the personnel shaft was commenced with tests of work method.

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. The excavation of the first shaft connections of the canister shaft have been completed. The injection work of the canister shaft in the final disposal facility is ongoing. The first excavation works of the final disposal facility are estimated to take two and a half years.

At the end of March, Posiva’s owners submitted the Nuclear Waste Management Annual Report for 2016 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–September 30, 2017 was 122.1 (242.2) GWh requiring 43.6 (86.6) thousand tons of coal and 107.9 (207.1) thousand tons of carbon dioxide emission rights.

TVO’s share of Meri-Pori’s production
Average electrical power MW
October 1, 2016–September 30, 2017

Meri-Pori_2016-10-01_2017-09-30_en.gif

Acquisitions of tangible and intangible assets and shares

Investments during the period under review were EUR 225.3 (199.8) million. Investments of the parent company were EUR 223.0 (196.2) million, of which EUR 160.4 (157.7) 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.

Carbon dioxide emission rights have been relinquished to the Energy Market authority worth EUR 2.7 (1.2) million. During the period under review, emission rights were acquired worth EUR 0.5 (1.1) 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

In 2012, TVO submitted a claim and defence in the International Chamber of Commerce (ICC) arbitration proceedings concerning the delay and the ensuing costs incurred at the Olkiluoto 3 EPR 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, was 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, as last updated in April 2017, is now approximately EUR 3.59 billion in total. The sum is based on the Supplier’s updated analysis of events that occurred through September 2014, with certain claims quantified to December 31, 2014. The sum includes penalty interest (calculated to June 30, 2017) and payments allegedly delayed by TVO under the plant contract amounting to a combined total of approximately EUR 1.58 billion, as well as approximately EUR 132 million in alleged loss of profit.

In November 2016, the ICC Tribunal made a final and binding partial award. In the partial award, the ICC Tribunal addressed the early period of the project (time schedule, licensing and licensability, and system design). This comprised many of the facts and matters that TVO relies upon in its main claims against the Supplier, as well as certain key matters that the Supplier relies upon in its claims against TVO. In doing so, the partial award finally resolved the great majority of these facts and matters in favour of TVO, and conversely rejected the great majority of the Supplier’s contentions in this regard. The partial award did not take a position on the claimed monetary amounts.

The ICC Tribunal made another final and binding partial award in July 2017. This partial award addresses the preparation, submittal, review, and approval of design and licensing documents on the project. This comprises the key facts and matters that the supplier relies upon in its main claims against TVO, as well as certain matters that TVO relies upon in its claims against the Supplier. In doing so, the partial award has finally resolved the great majority of these facts and matters in favour of TVO. Conversely, it has also rejected the great majority of the Supplier’s contentions in this regard. Although the partial award did not take a position on the claimed monetary amounts, it has conclusively rejected the analytical method used by the Supplier to support its principal monetary claims against TVO.

The arbitration proceeding is still going on with at least one partial award to come before the final award where the Tribunal will declare liabilities to pay compensation.

TVO considers its claims to be well-founded and has considered and found the claims of the Supplier to be without merit. The November 2016 partial award and the July 2017 partial award provide further material confirmation of this position, and reinforce TVO’s view that the balance of the claims is in TVO’s favour.

On September 29, 2016, TVO summoned Areva in an urgent interim proceeding before the President of the Commercial Court of Nanterre in order to obtain information about the restructuring of French nuclear industry and the potential consequences on the performance of the OL3 contract. Discussions between the parties enabled TVO to withdraw from this action on May 18, 2017. The continuation of discussions is expected to favour completion of the OL3 EPR project and the start-up of the plant.

In January 2017, the EU Commission made a decision on the French state aid to the AREVA Group. In September 2017, TVO filed an appeal to the General Court of the European Union of the Commission decision. TVO requires that the restructuring of the French nuclear industry will not compromise the completion of the OL3 EPR project within the Supplier’s current schedule and that all liabilities of the plant contract are respected.

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

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 794 (December 31, 2016: 747, September 30, 2016: 744). The number of permanent employees in the Group at the end of the period under review was 779 (December 31, 2016: 721, September 30, 2016: 720).

As the operational phase of OL3 EPR is approaching, the Engineering & Expert Services and Electricity Production organizations will be strengthened with dozens of technical experts and professionals. During the first part of the year, personnel training to support the Olkiluoto integration has been significantly increased, and the number of completed training days doubled compared to the corresponding period of the previous year.

The Hyvinvointi ja tulokselliset tekijät 2020 (“Wellbeing and profitability factors 2020”) program developing the workplace culture was continued with the second stage development program focusing on measures related to the work of every individual, the immediate work community and the whole Group.

The simulator training for OL3 operating personnel and shift supervisors commenced in February with normal operation training and continued in June with operation training in disruption situations. OL3 plant knowledge training is given to the personnel in different ways in cooperation with the Supplier.

The collective agreements for different groups of personnel in the energy industry are in force in accordance with the so called framework agreement of labor confederations until January 31, 2018.

In June the Board of Directors appointed two new members to the Management Group: Pekka Frantti responsible for ensuring the financial interests and conditions of OL3 and Jaana Isotalo responsible for HR, training, and communications. The appointments entered into force as of August 1, 2017.

Annual general meeting

TVO's Annual General Meeting on March 31, 2017 approved the financial statements for 2016, confirmed the consolidated income statement and balance sheet, and discharged the members of the Board of Directors and the President and CEO from liability.

Eight Board members were re-elected. Two new members, Esa Kaikkonen and Anders Renvall, were elected to the Board. At its organization meeting, the Board elected Lauri Virkkunen as Chairman and Matti Ruotsala 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 2016 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. Testing of the process systems continue, and the next important milestone is the hot functional testing scheduled for the fall. TVO will continue to support the Supplier to complete the project.

The Meri-Pori coal-fired power plant capacity will be used in accordance with the former principles. Fortum’s share of the Meri-Pori power plant has been accepted into the reserve capacity, and TVO is examining the use of its own share in the future.

The ongoing HVACE works in the Posiva ventilation building are estimated to be completed by the end of 2017. The reinforcement work of the personnel shaft is planned to be completed during early 2018.

Events after the period under review

After the end of the interim report period in October 2017, TVO received information on the Supplier’s schedule rebaseline review for the OL3 EPR project completion. According to the information the start of regular electricity production at the OL3 EPR will take place in May 2019. More information in the paragraph ‘Olkiluoto 3 EPR’.

In October 2017, Standard & Poor’s placed TVO’s long-term corporate credit rating on CreditWatch Negative.

October 20, 2017

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.