Weeks Into New Job, Fortum CEO Faces $10 Billion Question

  • Hard to beat returns of disposed grids, Alfred Berg says
  • Investment options include nuclear, wind, CHP in Nordic region

One of Pekka Lundmark’s first jobs as Fortum Oyj’s new chief executive officer is to decide how to spend the $9.7 billion cash pile at Finland’s richest company.

Lundmark took over the helm at the utility on Sept. 7. Investors and analysts are seeking answers on how he plans to spend funds generated from selling power grids from Norway to Sweden and Finland. The sales of the networks, which provided returns of about 4 percent to 5 percent per year, defined the strategy of his predecessor Tapio Kuula. He planned to transform the 16-year-old utility into a generator of mainly low-carbon electricity. Fortum declined to comment on strategy, citing the short time Lundmark has been in his new role.

Pekka Lundmark

Source: Fortum Oyj

Fortum has a long-term target to produce electricity only from carbon-free plants, compared with 64 percent now. As much as 98 percent of its power is generated in Sweden, Finland and Russia. Alfred Berg Asset Management Holding AB, OP-Pohjola, and Seligson & Co. Phoebus and Nordea Bank AB say finding assets with the same or better returns than the grids will be a challenge amid decade-low prices, a glut of electricity, and a slide in European demand.

“It is hard to find assets that suit their strategy and offer a good yield,” said Kaisa Kivipelto, a money manager at Alfred Berg, which owns Fortum shares. “We would rather see Fortum pay higher dividends than invest the funds, as we see the most probable investment options as value-destroying choices. Assets with good yields are extremely pricey.”

The Finnish state owns 51 percent of Fortum, which is based in Espoo outside Helsinki. Jukka Ohtola, ministerial adviser at Finland’s Government Ownership Steering Department, referred questions about strategy back to Fortum.

Below is a list of assets the company may be looking at.

EON’s Oskarshamn Nuclear Plant in Sweden?

Fortum is a minority shareholder with a 45 percent stake in the facility in southeast Sweden. It disagrees with majority owner EON SE’s plan to shutter the two oldest reactors by 2019 at the latest. Fortum confirmed its commitment to Nordic nuclear by this year taking a 6 percent share in Finland’s planned Fennovoima plant.

The company is concerned about Sweden increasing taxes on atomic power production, said Henri Parkkinen, head of equity research at OP-Pohjola in Helsinki. The European Court of Justice will on Oct. 1 rule whether a Swedish excise duty is in line with European Union policy. A favorable ruling could remove an annual cost of about 4.6 billion kronor ($540 million) for the nation’s nuclear industry.

“Fortum is asking the Swedish government for a more predictable cost environment if it is to take full control of Oskarshamn,” Parkkinen said.

EON’s Swedish Hydro Plants?

EON earlier this year sold 16 hydro stations in Italy. It has 76 plants in Sweden with a total capacity of 1,700 megawatts, enough to power 1.4 million Swedish households last year. They would fit into Fortum’s strategy as the electricity is emission free and not dependent on the weather factors, including wind.

Fortum could probably afford the portfolio, but it would cost most of the money it has available for investments, according to Karri Rinta, an analyst at Handelsbanken in Stockholm.

“If Fortum buys EON hydro assets the money would basically be gone,” he said. “It’s a huge step, and with these low power prices it is one that I do not wish them to make.”

Nordic Wind Power?

Fortum has so far resisted building or buying renewable energy assets that rely on subsidies. It only has 32 megawatts of wind power, while Vattenfall AB, the biggest Nordic utility has about 740 megawatts in operation in the region.

It would be surprising if Fortum changed strategy in the next three to five years, Parkkinen said. Finland and Denmark plan to curb renewable subsidies, while Sweden’s government this year lost a parliamentary vote to increase the target of renewable power in a joint market with Norway.

Fortum have invested in a 30-megawatt solar park in India and continues to
invest in research and development into wave power and other green sources. It’s a strategy shareholders support.

“Wind power is mechanical while sun power is based on transistor technology, and transistor technology always gets cheaper, so I think its a good call,” said
Anders Oldenburg, a money manager at Seligson & Co Phoebus, which holds Fortum shares.

New Combined Heat and Power plants?

Plants that generate both power and heat are central to Fortum’s business, with expansions into Poland and the Baltic states in the past ten years. Its strategy of reducing emissions means it is trying to trade combined-heat-and-power units in Russia for hydro plants while also building the world’s biggest combined bio-fueled unit in Stockholm next year. Fortum has said it would rather build new plants rather than buying old ones.

”It would take a very long time if Fortum wants to invest all its money in organic growth,” Rinta said.

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