presentation for investors - fortum · presentation for investors november 2006. 2 disclaimer ......

- a leading energy companyin the Nordic area

Presentation for investorsNovember 2006

2

Disclaimer

This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Fortum shares.

Past performance is no guide to future performance,and persons needing advice should consult an independent financial adviser.

3

• Fortum today• Nordic power market• Russia• Financials / outlook• Supplementary material

4

Fortum is a leading Nordic Power & Heat (“P&H”) company

Focus entirely on power and heat following the spinn-off of the downstream oilbusiness in 2005

Geographical focus on the Baltic rim area: Nordic countries, Poland, Baltic countries, NW Russia

Strong cash generation supported by leading operational efficiency

Operations spanning the entire P&H value chain

Majority ownership by Finnish Government (51.1%)

Market capitalisation of around €19 billion

Fortum investment highlights

€19bn

Market capitalisation

€4,159m€1,887m€4,349m

Net debtEBITDARevenues

Key performance figures as of LTM in Q3/2006

5

#1 Electricity #1 Distribution#1 Heat#2 Power Generation

MarketsDistributionHeat/VärmeServicePortfolio

Management and Trading

Generation

Leading efficiency14% Nordic market share

Best-in-class physical and financial market operations

1.3 mio. business and private electricity sales customers

€12m (1%)

€1,774m

Markets

Leading Nordic distribution company1.6 mio.customers

€249m (16%)

€739m

Distribution

€1,212m€2,370m

HeatPower Generation

Nordic leader in district heatingDeveloping presence in the Baltics and Poland

Efficient operation and maintenance services

€255m (17%)€993m (66%)

Revenues

Operating profit (comparable)

Nordic market position

Businesses

Fortum provides leadership in core businesses

Business unit

LTM numbers in Q3/2006

6

Fortum's strategy

Become the leadingpower and heat

company

Become theenergy supplier

of choice

Benchmark business performance

Fortum focuses on the Nordic and Baltic Rim markets as a platform for profitable growth

7

Baltic countriesHeat sales 1.2 TWhDistribution cust. 22,000Poland

Heat sales 3.9 TWhElectricity sales 20 GWh

NW Russia(in associated companies)Power generation ~6 TWhHeat production ~7 TWh

NordicGeneration 51.2 TWhElectricity sales 58.2 TWhDistribution cust. 1.6 mill.Electricity cust. 1.3 mill.Heat sales 19.4 TWh

Presence in focus market areas

8

Large customers

Market Structure - Business Value Chain

Small customers

Retail marketRetail

marketRetail companies

Deregulated

DistributionRegulated Transmission

and system services

Nordic wholesale

market

Nordic wholesale

market

Nord Pool and bilateral

Generation

Independent TSO Independent DSO

9

Fortum Markets

Large customers

Fortum Business structure

Small customers

Other retail companies

Fortum Distribution

Transmission and system services

Nordic wholesale

market

Nordic wholesale

market

Nord Pool and bilateral

FortumPower

Generation

Power Generation

62 %Heat 18 %

Distribution18 %

Markets 2 %

Fortum's operating profit in 2005

EUR 1,334 million

Deregulated

Regulated

10

Strong dividend growth

Fortum's aim is to pay a dividend corresponding to an average payout ratio of 50% to 60%

Total ~ 2,750 MEUR

* 0.58 from continuing operations

1999 2001 20032000 2002 2004

0.18 0.23 0.26 0.310.42

0.58

2005*

1.12

Dividend per shareEUR

0.13

19980.

580.

54

11


12

1990s2000 -

2010 -

Today- regional Nordic

Tomorrow- European

Yesterday - national

Towards a functioning European power market

Benefiting customers and

societies

• Market-based development• Increased competition• Increased efficiency

Directives:Market liberalisationStrategy:Market integration

13

Nordic market becoming more integratedinto Europe

• In 2005, Nord Pool introduced aspot market area "KONTEK" to facilitate market coupling on the Kontek cable

• NorNed (Norway - The Netherlands)by 2008

• Estlink (Estonia - Finland) by 2007• Nordel priority projects enhance

Nordic power market integration

2750 1500

1300

300

5060

900

2200

900

1200600

1000 200

125

600

10001600

2500

35001700

1500800

500

2050

70

1040630 (490)+901600

550600

1200

3800

700

350

600

+100

100+ 200

1000

600

600

+200

1000

550

+300

+800

1000

PresentUnder construction

DiscussedPlanned

14

2005 figures; the effects of the structural changes in Finland and in Denmark have been taken into account.

Fortum

Dong Energy

Vattenfall

others

E.ON53%HafslundPlusenergi

SEAS-NVEHelsinki

FjordkraftÖstkraft

Fortum

Vattenfall

Dong Energy

others

Hafslund

E.ON51%

HelsinkiSEAS-NVE

StatkraftGöteborg

BKK

Fortum

Vattenfall

Dong Energy

others

Statkraft

29%

E.ON

PVO

E-CO Energi

Helsinki

Norsk Hydro

BKK

Still a highly fragmented Nordic power market

Distribution

14 million customers~ 500 companies

Retail

14 million customers > 450 companies

Generation

395 TWh> 350 companies

15

... in the UK and Germany ...

... in Nordic countries ...

Source: Fortum

~50 TWh

0100200300400500

2005 2010 2020

TWh

DemandSupply

0200

400

600TWh

2005 2010 2020

~180 TWh

Source: Eurprog 10/2005: 2005 generation, capacity closures by 2010 and 2020 included

0200

400

600

2005 2010 2020

TWh

~170 TWh

New capacity will be needed ...

... and in Russia

Source: Ministry of Energy; Russian Energy Strategy 2020

Demand growth~300-400+ TWh before 2020

16

... also in Nordic countries

• Electricity demand is expected to increase around 50 TWh by 2020

• Committed plans of new capacity approx. 30-35 TWh

• Additionally:– Possible closures of current

capacity may take away up to 10 TWh by 2020

– Upgrade of Swedish nuclear capacity requires a licence

Demand and capacity development in the Nordic market

Existing/remaining capacityCommitted new capacity

0

100

200

300

400

500

2000 2004 2005 2010 2015 2020

TWh

17

New capacity will require a price

0

10

20

30

40

50

60

70

80

1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: Nord Pool, FortumSource: NEA & IEA "Projected Cost of Generating Electricity", 2005 update (average of European projects); Elforsk: "El från nya anläggningar", 2003.

*) Large variations in costs for new hydro and wind due to location and conditions

EUR/MWh

Coal Gas Nuclear Hydro Wind0

10

20

30

40

50

60

70

80Fuel costs, excl. CO2 costs

Fixed costs( variation *)

EUR/MWh

Futures30 October

2006

18

Nordic capacity structure

1) incl. power plants producing 100% of condensing in Denmark. The rest condensing power is included in CHP, district heatingSource: Nordel

MW

1)

Total 91 300 MW (31 Dec 2005)

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

Denmark Norway Sweden Finland

Wind powerGas turbines, etc.Condensing powerCHP, industryCHP, district heatingNuclear powerHydro power

19

Power and heat production in Fortum

20.6 TWh in 2005Total production capacity 8,252 MW

Fortum’s Nordic heat production

Oil 10%

Peat 7%

Heat pumps, electricity16%

Waste 6%

Biomass fuels 24%

Natural gas 9%

Other 11%

Coal 17%Hydro power 42%

Peat 1%

Coal 3%

Other 2%

Nuclear power 50%

Biomass 2%

51.2 TWh in 2005Total generation capacity 11,136 MW

Fortum’s Nordic power generation

20

Investments in organic growth

Value of the investment program around EUR 2,700* million

Total~ 1,200 MW

* Incl. smaller capacity upgrades and refurbishments in various plants

• Olkiluoto 3• Swedish nuclear• Suomenoja• Värtan• Refurbishing of existing hydro assets

In addition• Automated meter management (EUR 240 million)• Security of supply in distribution (EUR 700 million)

21

The schedule for projects

OL 1&2

OL 3

2002 2003 2004 2006 2010 20152005 2007

Done~100 MW

Ongoing~1,200 MW Värtan CHP

Suomenoja CHP

Automation at Loviisa

Refurbishingof hydro

Refurbishing of hydro

Swedish nuclear

2008 2009 ....

Högdalen CHP

Forsmark 1&2

22

Spot history and forwards in Europe

Source: Reuters, OMEL

UK

Dutch

German

Nord Pool

Spanish

EUR/MWhYearly moving average spot price Forwards

EUR/MWh

October 27, 20060

10

20

30

40

50

60

70

80

90

100

2001 2003 2004 2005 2006 2007 2008 20092002

23

Development of the European Emission Trading System

Future challenges• EU committed to emission trading• Improving the market by increasing

market transparency– information available to all

market participants at the same time

– common procedures -harmonisation

– stability and predictability• Expansion of emission trading

during the Kyoto period– JI and CDM utilisation– National allocation plans for

second trading period (NAP 2)

0

35

5

10

15

20

25

30

€/tCO2

Q1 Q4 Q1 Q42004 2005

Q2 Q3 Q2 Q3 Q12006

Q2 Q3

ETS Prices 2004-2006

24

Nordic water reservoirs

Source: Nord Pool

0

20

40

60

80

100

120

1 5 9 13 17 21 25 29 33 37 41 45 49week

rese

rvoi

r con

tent

(TW

h)

2003 2005 2006 reference level20001996

25

2004 2005 2006Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Q1 Q3 Q424

262830323436384042444648505254565860

Year 05 Year 06 Year 07 Year 08 Year 09 Year 10 Year 11€/MWhOctober 27, 2006

Nord Pool year forwards

26


27

• Power and heat sector reform

• Need for huge investments

• Need for efficiency improvement

• Strong growth potential

From a western industry actor's perspective Russia is an emerging opportunity

0

200

400

600

800

1000

1200

1400

1990 1995 2000 2005 2010 2015 2020

Electricity production, TWh

LowHigh

Russian Energy Strategy

28

"Power industry law" approvedRestructuring of regional energos (P&H companies)Formation of new companiesEstablishment of Russian power exchange (ATS) Launch of the free-trade sector of the wholesale marketIntroduction of vested bilateral contracts for a transitional period to replace the regulated sector of the wholesale marketLaunch of balancing power marketCompetitive market of ancillary services and generating capacityGradual liberalisation of the retail market

Pricing model reform – from tariff regulation to competitive pricing

Market liberalisation in competitive businesses

TransmissionDistribution

GenerationSales

Regulated monopolies

Competitive businesses

Unbundling of businesses by type of activity

Key steps in the reformA Nordic/Western analogy

Russian power industry reform

29

Fortum's current operations in Russia

• A ~1/3 stake in companies spun-off from OAO Lenenergo, the largest utility company in northwest Russia;

• Operation & maintenance services

• Electricity imports

• Nuclear fuel and coal imports

30

TGC-1 operating as of 1 October 2005

Finland 16,600

Installed capacity(MW)

Norway 28,800

Sweden 33,200

Denmark 12,700

Territorial Generating Company TGC-1• Production capacity ~ 6,070 MW,

of which hydro 2,874 MW • Third largest territorial generation

company in Russia• Started operation on 1 October 2005

based on a leasing model• Transfer of assets into TGC-1's owner-

ship targeted at the beginning of 2007• Fortum's calculated share ~25%• Fortum has 3 members of 11 in total

on TGC-1's Board of Directors

Nordel figures 31 Dec 2005

31


32

MEUR I-III/2006 I-III/2005 2005 LTMPower Generation 696 557 854 993Heat 158 156 253 255Distribution 173 168 244 249Markets 4 22 30 12Other -34 -29 -47 -52Comparable operating profit 997 874 1 334 1 457Non-recurring items 23 20 30 33Other items effecting comparability -20 -21 -17 -16OP from continuing operations 1 000 873 1 347 1 474

Comparable operating profit

33

Comparable and reported operating profit

Operating profit III/2006 Operating profit III/2005Comparable Reported Diff. Comparable Reported Diff.

Power Generation 195 184 11 161 181 -20Heat -3 -15 12 12 13 -1Distribution 39 42 -3 47 48 -1Markets 2 6 -4 7 7 0Other -8 -1 -7 -7 -9 2Total 225 216 9 220 240 -20

34

MEUR I-III/2006 I-III/2005

Sales 3 237 2 765Expenses -2 237 -1 892

Operating profit 1 000 873Share of profit of associates and joint ventures 51 28Financial expenses, net -78 -100

Profit before taxes 973 801Income tax expense -214 -206

Profit for the period from continuing operations 759 595Profit for the period from discontinued operations - 474Net profit for the period 759 1 069

Of which minority interest 26 31

EPS, Total Fortum Group (EUR) 0.83 1.19EPS, continuing operations (EUR) 0.83 0.65EPS, discontinued operations (EUR) - 0.54

Income statement

35

MEUR I-III/2006 I-III/2005 2005

Operating profit before depreciations, continuing operations 1 311 1 178 1 754Non-cash flow items and divesting activities -21 -13 15Financial items and taxes -233 -288 -405

Funds from operations, continuing operations (FFO) 1 057 877 1 364Change in working capital 2 -30 -93

Net cash from operating activities, continuing operations 1 059 847 1 271Net cash from operating activities, discontinued operations - 133 133Total cash from operating activities 1 059 980 1 404Capital expenditures -297 -207 -346Acquisition of shares -755 -7 -127Other investing activities 0 57 75Investing activities, discontinued operations - 1 155 1 155Cash flow before financing activities 7 1 978 2 161

Cash flow statement

36

MEUR Sept 30 Dec 312006 2005

Non-current assets 14 632 13 075Current assets 2 272 2 055ASSETS 16 904 15 130

Total equity 7 246 7 411 of which minority interest 223 260Interest-bearing liabilities 4 970 3 946Non-interest bearing liabilities 4 688 3 773EQUITY AND LIABILITIES 16 904 15 130

Net debt / EBITDA 2.4 1.8Equity per share (EUR) 7.97 8.17Net debt, (MEUR) 4 159 3 158

Balance sheet

37

Wholesale prices for electricity

Source:

EUR/MWh Spot prices Forward prices

UK

German

Nordic

0

10

20

30

40

50

60

70

80

90

100

2004 2005 2006 2007 2008 2009October 27, 2006

38

2004 2005 2006Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2Q1 Q3 Q424

262830323436384042444648505254565860

Year 05 Year 06 Year 07 Year 08 Year 09 Year 10 Year 11€/MWhOctober 27, 2006

Nord Pool year forwards

39

Hedging of Power Generation's Nordic sales

October to December 2006

Hedge ratio Hedge price

~ 90 % ~ EUR 37 per MWh

Calendar year 2007

~ 75 % ~ EUR 42 per MWh

Calendar year 2008 ~ 35 % ~ EUR 41 per MWh

Status at the beginning of October 2006:

40


41

International investors 35.5%Finnish State 51.1%

Other Finnish investors 6.9%

Households 4.8% Financial and insurance institutions 1.7%

• Leading power and heat company in Nordic• Founded and listed at the Helsinki Stock Exchange 1998• More than 50,000 shareholders• Among the most traded shares in Helsinki stock exchange• Market cap ~19 billion euros

A leading Nordic power and heat company

30 October 2006

42

Capital structure

• Fortum wants to have a prudent and efficient capital structure, which at the same time allows the implementation of its strategy

• Access to flexible funding sources is key

• Dividend policy of 50 - 60% payout on the average for Fortum continuing operations' results

• In the medium term, allowing the implementation of strategy and the returns of capital, Fortum expects to have its net debt to EBITDA around 3.0x

Beased on Q3/'06: Net debt/EBITDA 2.4

43

Excellent share performance

Market valueEUR billion

4.05.3

6.9

11.8

31 Dec2001

31 Dec 2004

31 Mar2005

Neste Oil as

dividends

30 Oct2006

13.1

-3.3

31 Dec2000

3.4

31 Dec2002

31 Dec2003

19.0Share priceIndex

2001 2002 2003 2004 2005 2006

Dow Jones 600Utilities Index

Fortum

100

200

300

400

500

600

700

30 Oct 2006, adjusted for Neste spin-off

44

Distribution regulation differ country by country

Finland

Maximum allowed rate ofreturn based on actualdefined cost data

Sweden Norway

Maximum annual income limitbased on historical or definedcost data

Regulation authority has supervised 41 areas for 2003 and 55 areas for 2004 due to claimed overpricing. All companies that have received a decision to reimburse customers have appealed to court.

Status

Regulation principle

Allowed return

New model for period 2005 - 2007

New regulatory model is being applied to 2003 and 2004 tariffs

The regulator has proposed a model for the next 5-year period starting in 2007.

Rate of return,ex-post regulation

Yardstick, ex-post regulation, with benchmarking based on hypothetical efficient company

Revenue cap, ex-ante regulation

Actual operation vs.fictious network parametersdefines return

45

Fortum in Poland and the Baltic countries

• District heat to 30 cities and towns• Energy sales

district heat 3.9 TWhelectricity 19 GWh

• Own production 0.9 TWhheat plants 96CHP 1

• Personnel: 1,200

Operations of Fortum HeatWrocław

Płock

• Energy sales in Estoniaheat 1.2 TWh; gas 80 GWh

• Energy sales in Lithuaniaheat 60 GWh; fuels 50 Gwh

• Production capacity118 heat plants1 CHP plant

• Personnel: 440

46

Fortum Espoo

2005

Generation 1.0 TWhElectricity sales 2.7 TWhElectricity distribution 2.6 TWhHeat sales 2.5 TWh

Distribution customers 161,500Electricity customers 167,500

M€ Q1/05 Q2/05 Q3/05 Q4/05 2005Sales 77 48 40 69 234EBITDA 30 25 8 29 92EBIT 23 18 1 22 64

According to E.ON Finland accounts

presentation for investors - fortum · presentation for investors november 2006. 2 disclaimer ......

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